U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended June 30, 1999
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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Commission File Number: 0-24674
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SWVA BANCSHARES, INC.
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(Name of Small Business Issuer in Its Charter)
Virginia 54-1721629
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
302 Second Street, S.W., Roanoke, Virginia 24011-1597
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(Address of Principal Executive Offices) (Zip Code)
(540) 343-0135
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10- KSB. [ ]
State issuer's revenues for its most recent fiscal year. $6.3 million
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the average bid and asked prices of such stock as of
August 31, 1999, was $3.6 million.
As of September 1, 1999, the registrant had 423,612 shares of Common
Stock outstanding.
Transitional Small Business Disclosure Format (check one)
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of the registrant's Annual Report to Stockholders for
the fiscal year ended June 30, 1999.
2. Part III -- Portions of the registrant's Proxy Statement for Annual Meeting
of Stockholders to be held on October 13, 1999.
<PAGE>
PART I
SWVA Bancshares, Inc. (the "Company") may from time to time make
written or oral "forward- looking statements", including statements contained in
the Company's filings with the Securities and Exchange Commission (including
this annual report on Form 10-KSB and the exhibits to the Form 10- KSB), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company pursuant to the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System (the "FRB"), inflation, interest rate, market and
monetary fluctuations; the timely development of and acceptance of new products
and services of the Company and the perceived overall value of these products
and services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; disruption in data processing caused by
computer malfunctions associated with the Year 2000 problem, acquisitions;
changes in consumer spending and saving habits; and the success of the Company
at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business.
Business of the Company
SWVA Bancshares, Inc. (the "Company") is a Virginia-chartered
corporation organized in June of 1994 at the direction of Southwest Virginia
Savings Bank, FSB (the "Bank") to acquire all of the capital stock that the Bank
issued in its conversion from the mutual to stock form of ownership (the
"Conversion"). On October 7, 1994, the Bank completed the Conversion and became
a wholly owned subsidiary of the Company. In connection with the Conversion, the
Company issued 570,590 shares of its Common Stock, par value $.10 per share (the
"Common Stock"). The Company is a unitary savings and loan holding company
which, under existing laws, generally is not restricted in the types of business
activities in which it may engage provided that the Bank retains a specified
amount of its assets in housing-related investments. At June 30, 1999, the
Company had total assets of $81.7 million and stockholders' equity of $6.8
million.
During the year ended June 30, 1996, the Company repurchased 27,400
shares of its Common Stock at an aggregate purchase price of approximately
$466,000. The amount repurchased represented approximately 4.5% of the Company's
total shares outstanding prior to the repurchase.
During the year ended June 30, 1997, the Company repurchased 32,206
shares of its Common Stock at an aggregate purchase price of approximately
$495,000. The amount repurchased represented approximately 5.9% of the Company's
total shares outstanding prior to the repurchase.
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During the year ended June 30, 1998, the Company repurchased 14,097
shares of its Common Stock at an aggregate purchase price of approximately
$293,000. The amount repurchased represented approximately 2.8% of the Company's
total shares outstanding prior to the repurchase.
During the year ended June 30, 1999, the Company repurchased 73,275
shares of its Common Stock at an aggregate purchase price of approximately $1.2
million. The amount repurchased represented approximately 14.75% of the
Company's total shares outstanding prior to the repurchase.
Business of the Bank
General. The Bank is primarily engaged in attracting deposits from the
general public and using those funds to originate real estate loans on one- to
four-family residences and, to a lesser extent, construction, multi-family and
non-residential real estate loans, commercial loans and consumer loans. In
addition, the Bank invests in investment securities and mortgage-backed
securities. The Bank offers its customers both ARMs and fixed-rate mortgage
loans. ARMs are originated for retention in the Bank's portfolio. Generally, the
Bank sells fixed rate mortgage loans upon origination in the secondary market.
Depending on the level of prevailing interest rates, the Bank may retain fixed
rate mortgage loans in its portfolio. Management of the Bank determines whether
to retain fixed rate mortgage loans in its portfolio on the basis of whether the
interest rate received on the loan would possibly be beneficial to the
profitability of the Bank's loan portfolio over the average life of the loan.
All commercial and consumer loans are retained in the Bank's portfolio and
management anticipates that the future focus on these types of loans will
generate new business that will enable the Bank to reduce its dependence on
mortgage activity.
The principal sources of funds for the Bank's lending activities are
deposits and the amortization, repayment and maturity of loans, investments and
mortgage-backed securities. The Bank's primary sources of income are interest
and fees on loans, interest on investments and mortgage-backed securities and
customer service fees. The Bank's primary expense is interest paid on deposits.
Market Area. The Bank's primary market area consists of Roanoke County,
the City of Roanoke, the City of Salem, and the County of Botetourt. The Bank
regards this area as its "basic" lending area, but loans are also made in the
adjoining counties of Bedford and Franklin.
The Bank's main office is located at 302 Second Street, S.W., in the
City of Roanoke, Virginia. The Bank has one branch office located in the City of
Roanoke. The Bank has another branch and a loan production office located in
Roanoke County, as well as branch offices in Vinton and Salem, Virginia.
The Roanoke Valley is equidistant from New York and Atlanta, 230 miles
south of Washington, D.C. and 250 miles west of the Port of Hampton Roads,
Virginia. The population in the Roanoke Valley area has remained relatively
stable over the past thirty years and was 269,100 according to the 1990 U.S.
Census. The Roanoke Valley area enjoys a diversified economy comprised of
services, retail, manufacturing, government offices, finance, insurance, real
estate, wholesale trade, transportation, public utilities, construction, and
agriculture.
The outlying region of the Bank's market area is rural in nature and
may represent limited opportunities for lending and investment growth which
could adversely affect the Bank's ability to achieve asset growth. The Bank is
the only savings bank headquartered in the Roanoke Valley area. This area is
also served by branch offices of regional commercial banks and various community
banks and credit unions.
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<PAGE>
Lending Activities
General. The principal lending activity of the Bank is the origination
of adjustable-rate mortgage loans, fixed rate mortgage loans and short-term
loans secured by one- to four-family residences. These fixed-rate and adjustable
rate loans are generally underwritten to conform to standards required for the
sale of such loans in the secondary mortgage market. A majority of these loans
are sold in the secondary market at the time of origination. The Bank also
originates some nonconforming first mortgage loans to serve community needs
which are retained in the Banks's portfolio. Adjustable-rate mortgage ("ARMs")
loans comprised 88.86% of total loans outstanding on June 30, 1999. For the
fiscal year ended June 30, 1999 adjustable-rate loans represented 16.49% of
total mortgage loan originations. The Bank also originates nonresidential and
multi-family real estate loans as well as construction loans, commercial loans,
home equity loans and consumer loans. The Bank will focus on increasing its
commercial and consumer lending in fiscal 2000. These loans offer income
enhancement through higher yields and shorter terms and tend to reprice on a
more frequent basis than long-term mortgage loans. The Bank is making these
types of loans on what management believes is a conservatively underwritten
basis. Going forward, management intends to emphasize these types of lending to
meet the area's credit needs as well as provide the Bank with better returns in
it's loan portfolio.
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and in percent of the respective portfolios at the
dates indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
1999 1998
------------------------------------- ---------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans
Residential, one to four family........... $32,342 68.94% $38,596 77.03%
Residential, multifamily.................. 4,187 8.92 4,033 8.05
Nonresidential and land................... 2,071 4.41 2,513 5.02
Construction.............................. 4,024 8.58 2,980 5.95
Non-mortgage loans
Consumer loans
Secured personal........................ 1,483 3.16 725 1.45
Unsecured personal...................... 92 .20 39 .08
Auto.................................... 177 .38 34 .07
Home Improvement........................ 38 .08 35 .07
Equity line............................. 2,316 4.94 1,023 2.04
Other................................... 80 .17 59 .11
Commercial
Secured................................. 105 .22 26 .05
Unsecured............................... - - 43 .08
------ -------- ------- --------
Total loans receivable................ 46,915 100.00% 50,106 100.00%
======== ========
Less
Deferred loan fees........................ 42 71
Undisbursed loans in process.............. 1,087 1,617
Allowance for credit losses............... 210 207
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Loans receivable, net .................... $45,576 $48,211
====== =======
</TABLE>
3
<PAGE>
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 1999. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $25.1 million and $20.1 million, for the fiscal years ended June 30,
1999 and 1998, respectively. ARMs are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
Residential Non- Consumer
1-4 Multi- residential and
Real Estate(1) Family and Land Construction Other Total
-------------- ------ ------------- ------------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 3 months....................... $ - $ - $ - $ 840 $ 590 $ 1,430
3 months to 1 Year.................... 7 - - 849 100 956
------ ------ ----- --- --- -----
Total due in one year or less...... 7 - - 1,689 690 2,386
------ ------ ----- ----- ---- -----
After 1 year:
1 to 3 years........................ 117 - 8 1,435 351 1,911
3 to 5 years........................ 413 - 99 900 289 1,701
5 to 10 years....................... 3,127 990 601 - 392 5,110
10 to 20 years...................... 7,153 2,565 1,363 - 2,569 13,650
Over 20 years....................... 21,525 632 - - - 22,157
------ ------ ----- ----- ----- ------
Total due after one year........... 32,335 4,187 2,071 2,335 3,601 44,529
------ ----- ----- ----- ----- ------
Total amount due................... $32,342 $4,187 $2,071 $4,024 $4,291 $46,915
====== ===== ===== ===== ===== ======
Less:
Allowance for loan loss............... 210
Loans in process...................... 1,087
Deferred loan fees.................... 42
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Loans receivable, net............... $45,576
=======
</TABLE>
The following table sets forth the dollar amount at June 30, 1999 of
all loans due after June 30, 2000, which have pre-determined interest rates and
which have adjustable interest rates.
Adjustable
Fixed Rates Rates Total
----------- ----- -----
(In Thousands)
Residential one- to four-family...... $ 7,566 $24,769 $32,335
Multi-family......................... 3,182 1,005 4,187
Nonresidential and land ............. 1,658 413 2,071
Construction......................... 1,435 900 2,335
Consumer and other................... 1,285 2,316 3,601
------- ------ ------
Total(1)........................... $15,126 $29,403 $44,529
======= ====== ======
(1) Before deductions for unearned discounts, deferred loan costs, net and
allowances for loan losses.
One- to Four-Family Residential Loans. The Bank's primary lending
activity consists of the origination of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Bank's primary
market area. At June 30, 1999, the Bank had $32.3 million, or 68.94%, of its
loan portfolio invested in these loans. The Bank also offers home equity lines
of credit secured by one- to four-family residential properties which are
discussed below under "-- Consumer and Other Loans." Management believes that
this policy of focusing on one- to four-family lending has been effective in
contributing to net interest income while reducing credit risk by keeping loan
delinquencies and losses to a minimum.
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<PAGE>
The Bank offers ARMs that adjust every year and have terms of up to 30
years. Generally, the interest rate adjustments on ARMs are based on the one
year Treasury bill index. These ARMs have interest rate floors of 6%, so that
the interest rate on such loans cannot adjust below such floors. However, during
the fiscal year ended June 30, 1999, the Bank originated some ARMs at interest
rates up to 1.00% below such floors, although the initial rates are not below
the Bank's costs of funds and do not lead to negative amortization of the
balance on such loans. The ARMs originated for the Bank's portfolio carry
interest rate ceilings up to 5.00% above the initial interest rate on the loans.
The Bank considers the market factors and competitive rates on loans as well as
its own cost of funds when determining the rates on the loans that it offers.
The retention of ARMs in the Bank's portfolio greatly helps to reduce
the Bank's exposure to changes in interest rates. However, there are
unquantifiable credit risks which could result from potential loan payment
increases to the borrower as a result of the repricing of ARMs. It is possible
that during periods of rapidly rising interest rates, the risk of default on
ARMs may increase due to the upward adjustment of interest cost to the borrower.
Currently, the ARMs originated by the Bank provide for initial rates of interest
less than the fully indexed rates that would prevail were the index used for
repricing applied initially. These loans are subject to increased risk of
delinquency or default when the higher, fully- indexed rate of interest
subsequently comes into effect and replaces the lower initial rate.
Generally, during periods of rising interest rates, the risk of default
on ARMs is considered to be greater than the risk of default on a fixed-rate
loan due to the upward adjustment of interest costs to the borrower. To help
reduce such risk, the Bank qualifies loans above 80% loan-to-value at the
maximum second year rate, as opposed to the original interest rate. ARMs may be
made at up to 95% of the loan to value ratio. The Bank does not originate ARMs
with negative amortization.
The Bank also offers conventional fixed-rate mortgage loans with terms
from 15 to 30 years. A majority of the 15 to 30 year fixed-rate mortgages are
sold in the secondary mortgage market.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. The Bank's lending policies, however, generally
limit the maximum loan-to-value ratio to 80% of the appraised value of the
property, based on an independent appraisal. When the Bank makes a mortgage loan
in excess of 80% of the appraised value or purchase price, private mortgage
insurance is required for at least the amount of the loan in excess of 80% of
the appraised value.
The loan-to-value ratio, maturity and other provisions of the
residential real estate loans made by the Bank reflect the policy of making
loans generally below the maximum limits permitted under applicable regulations.
The Bank requires an independent appraisal, title insurance or an attorney's
opinion, flood hazard insurance (if applicable), and fire and casualty insurance
on all properties securing real estate loans made by the Bank. The Bank reserves
the right to approve the selection of which title insurance companies' policies
are acceptable to insure the real estate title in the loan transactions.
While one- to four-family residential real estate loans are normally
originated with 15-30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon refinancing
the original loan. In addition, substantially all of the mortgage loans in the
Bank's loan portfolio contain due-on-sale clauses providing that the Bank may
declare the unpaid amount due and payable upon the sale of the property securing
the loan. The Bank enforces these due-on-sale clauses to the extent permitted by
law.
5
<PAGE>
Thus, average loan maturity is a function of, among other factors, the level of
purchase and sale activity in the real estate market, prevailing interest rates
and the interest rates payable on outstanding loans.
Multi-Family and Non-residential Real Estate Loans. The Bank in the
past has originated non-residential real estate and multi-family loans. This
type of lending represents a small portion of the Bank's lending activities
although management anticipates growth in the respective portfolio as we
actively seek quality projects. There were $300,000 in non-residential real
estate loans originated during the fiscal year ended June 30, 1999. During the
same period, the bank originated $781,000 in multi-family loans.
Non-residential real estate loans consist of permanent loans secured by
small office buildings, churches, shopping centers, and other non-residential
buildings. Non-residential real estate and multi-family secured loans are
generally originated in amounts up to 75% of the appraised value of the
property. Such appraised value is determined by an independent appraiser which
has been previously approved by the Bank. Multi-family loans are generally
secured by apartment buildings of 36 or fewer units.
Non-residential real estate and multi-family loans are generally
originated on an adjustable-rate basis with the interest rate adjusting
annually. Some of these loans have an interest rate that is fixed for two to
three years and then adjusts annually. The Bank also makes some fixed rate
non-residential real estate and multi-family mortgages.
Loans secured by multi-family and non-residential real estate generally
involve a greater degree of risk than one- to four-family mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by non-residential and
multi-family real estate is typically dependent upon the successful operation or
management of the related real estate project. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired. The Bank
seeks to minimize these risks in a variety of ways, including limiting the size
of such loans and strictly scrutinizing the financial condition of the borrower,
the quality of the collateral and the management of the property securing the
loan. The Bank may also obtain personal guarantees. Substantially all of the
properties securing the Bank's non-residential and multi-family real estate
loans are inspected by the Bank's lending personnel before the loan is made. The
Bank generally obtains appraisals on each property in accordance with applicable
regulations. At June 30, 1999, the largest non-residential or multi-family real
estate loan had a balance of $1.1 million and was secured by multi-family real
estate and was performing. See "-- Loans to One Borrower."
Construction Lending. The Bank engages in construction lending
involving loans to qualified borrowers for construction of one- to four-family
residential properties and, on a limited basis, involving non-residential and
multi-family properties. These properties are located in the Bank's market area.
Construction loans are made to builders on a speculative basis and to
owners for construction of their primary residence. Loans for speculative
housing construction are made to area builders after a background check has been
made. The Bank usually will have no more than four construction loans
outstanding at any time to any single builder. Construction loans on one- to
four-family properties are generally limited to a maximum loan-to-value ratio of
80% and have a maximum maturity of 12 months. Construction loans on
non-residential and multi-family properties are generally limited to a maximum
loan-to-value ratio of 75% and have a maximum maturity of 18 months. Loan
proceeds are disbursed in increments as construction progresses and only after a
physical inspection of the project is made by a representative of the Bank.
Accrued interest on loan disbursements is paid monthly. At June 30, 1999, the
Bank had $2.3 million in construction loans outstanding to builders on a
speculative basis, with
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<PAGE>
$552,000 in loans in process (funds being held for construction progress)
outstanding and attributed to these loans.
Construction loans to owners have either fixed or adjustable rates and
are underwritten in accordance with the same terms and requirements as the
Bank's permanent mortgages on existing properties except that the builder must
qualify as an approved contractor by the Bank, and the loans generally provide
for disbursement of loan proceeds in stages during the construction period. An
approved contractor is one who has been approved by a title insurance company
that will insure the Bank against mechanics' liens or whose credit, financial
statements and experience have been approved by the Bank. Borrowers are required
to pay accrued interest on the outstanding balance monthly during the
construction phase. At June 30, 1999, there was $658,000 outstanding in
construction loans to owners with $289,000 outstanding in loans in process
allocated to these projects. There were $553,000 in construction loans
originated on nonresidential and multi-family properties during the fiscal year
ended June 30, 1999.
Construction financing is generally considered to involve a higher
degree of risk of loss than long-term financing on improved, occupied real
estate. Risk of loss on a construction loan is dependent largely upon the
accuracy of the initial estimate of the property's value at completion of
construction or development and the estimated cost (including interest) of
construction. During the construction phase, a number of factors could result in
delays and cost overruns. If the estimate of construction cost proves to be
inaccurate, it may be necessary for the Bank to advance funds beyond the amount
originally committed to permit completion of the construction. If the estimate
of value proves to be inaccurate, the Bank may be confronted, at or prior to the
maturity of the loan, with collateral having a value which is insufficient to
assure full repayment. As a result of the foregoing, construction lending often
involves the disbursement of substantial funds with repayment dependent, in
part, on the success of the project. If the Bank is forced to foreclose on a
property prior to or at completion due to a default, there can be no assurance
that the Bank will be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as related foreclosure and holding costs. The Bank
has sought to minimize this risk by limiting construction lending to qualified
borrowers in the Bank's market area and by limiting the number of construction
loans outstanding at any time.
Consumer and Other Loans. The Bank views consumer lending as an
important component of its lending operations because consumer loans generally
have shorter terms and higher yields, thus reducing exposure to changes in
interest rates. In addition, the Bank believes that offering consumer loans
helps to expand and create stronger ties to its customer base. Consequently, the
Bank has increased its consumer lending by marketing home equity loans and all
other types of consumer loans to existing and potential customers. Regulations
permit federally-chartered savings associations to make secured and unsecured
consumer loans up to 35% of the Bank's assets. In addition, the Bank has lending
authority above the 35% limit for certain consumer loans, such as home
improvement loans and loans secured by savings accounts.
Consumer loans consist of personal secured and unsecured loans,
automobile, boat and recreational vehicle loans, savings account loans, home
improvement and home equity loans.
The Bank also offers a home equity line of credit, which is a revolving
line of credit secured by a first or second mortgage, and which is accessible to
the customer by either writing a check or requesting an advance at a branch
office of the Bank. The rate on such loans is adjustable monthly.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary
7
<PAGE>
consideration; however, the underwriting process also includes a comparison of
the value of the security, if any, in relation to the proposed loan amount.
The Bank is allowed to make secured and unsecured loans for
nonresidential, corporate, business and agricultural purposes (including the
issuance of letters of credit) secured by real estate, business equipment,
inventories, accounts receivable and cash equivalents in amounts not exceeding
10% of the Bank's assets. Non-real estate commercial lending by the Bank has
been limited, however, it has significant focus in our forward game plan as we
expand our loan product offerings. These loans have generally been made to
building contractors and small business operations. Letters of credit have
mostly been provided to contractors for use in land development. The letters of
credit have generally been secured by real estate and generally contain personal
guarantees of the principals of the borrowing entity.
The aggregate amount of commercial business loans outstanding may not
exceed 20% of the Bank's assets, and amounts in excess of 10% of such total
assets may be used only for small business loans. As of June 30, 1999, $105,000
or 0.22% of the Bank's loan portfolio was categorized as commercial business
loans.
Consumer and commercial loans entail greater credit risk than do
residential mortgage loans, particularly in the case of consumer and commercial
loans which are unsecured or secured by assets that depreciate rapidly, which in
the case of consumer loans include automobiles, mobile homes, boats and
recreational vehicles and in the case of commercial loans include business
equipment, inventories and accounts receivable. In such cases, repossessed
collateral for a defaulted consumer or commercial loan may not provide an
adequate source of repayment for the outstanding loan and the remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. In particular, amounts realizable on the sale of repossessed
automobiles or business equipment may be significantly reduced based upon the
condition of the collateral and the lack of demand for used automobiles or
business equipment.
Loan Solicitation, Approval and Processing. The Bank's sources of loan
applications are referrals from existing or past customers, real estate brokers,
call-in and walk-in customers, builders and the result of advertising. Going
forward, mortgage originators, branch managers, consumer and commercial lenders
will be proactive in solicitation of new business.
Specified officers have individual loan authority for approval of all
types of credit. A combination of the President and two other officers have
authority up to and including $250,000. The management loan committee has
authority up to and including $500,000. All contruction loans, all letters of
credit, and lines of credit over $25,000 must be approved by the management Loan
Committee. The Board of Directors Loan Committee has authority up to and
including $750,000. All credits over $750,000 must be approved by the Board of
Directors. The Bank uses Office of Thrift Supervision (the "OTS") guidelines as
to legal loan limits.
All loan authorities represent total direct and indirect obligations
owing to Bank to include unfunded commitments and to exclude debt on primary
residence secured by First Deed of Trust to the Bank. Debt on primary residence
secured by First Deed of Trust to the Bank is included in total liability recap
for determination on limit to loans to one borrower.
The Bank uses independent fee appraisers on all real estate related
transactions. Each fee appraiser used must be state licensed or certified and
approved by the Bank's Board of Directors. It is the Bank's policy to obtain
title insurance or an attorney's opinion and certification of title and fire and
casualty insurance for all mortgage loans. Flood insurance is required for
properties located in flood zones.
8
<PAGE>
Loan Originations, Purchase, Sales and Repayments. The following table
sets forth the Bank's loan originations, sales, and principal repayments for the
periods indicated.
Year Ended June 30,
---------------------------
1999 1998
-------- --------
(In Thousands)
Total gross loans receivable at
beginning of period........................... $50,106 $52,884
Loans originated:
One- to four-family residential............... 38,319 27,544
Multi-family residential...................... 781 100
Non-residential and land...................... 300 567
Construction loans............................ 4,713 3,391
Consumer loans................................ 1,796 526
------ ------
Total loans originated...................... 45,909 32,128
------ ------
Loans purchased:
One- to four-family residential............... - 28
Multi-family residential...................... - -
Non-residential and land...................... 1,313 315
------ -------
Total loans purchased......................... 1,313 343
------ -------
Loans sold...................................... (30,742) (19,796)
------- -------
Other loan activity:
Loan principal repayments..................... (25,125) (20,061)
Other (net)................................... 5,454 4,608
------- -------
Net other loan activity....................... (19,671) (15,453)
------- -------
Total gross loans receivable at
end of period............................... $46,915 $50,106
======= =======
Loan Purchases and Sales. Prior to 1990 the Bank's loan sales were
insignificant. Any loans sold were individual loans with other financial
institutions. The Bank began originating loans to sell in the secondary market
in 1990. In March 1992, the Bank opened a loan production office separate from
its banking facilities to concentrate more activity for loan sales in the
secondary market. The Bank originates mostly fixed-rate loans for sale in the
secondary market. These loans include 15 to 30 year, 80% loan-to-value
conventional loans (the portion of the loans above 80% are insured with private
mortgage insurance), Federal Housing Administration ("FHA") and Veteran's
Administration ("VA") loans. The Bank uses standard Federal Home Loan Mortgage
Corporation("FHLMC")/Federal National Mortgage Association ("FNMA")
documentation for its conventional loans.
Currently, the Bank sells loans to other lenders who sell directly to
FHLMC, FNMA and Government National Mortgage Association ("GNMA"). The Bank
sells the majority of its loans with servicing released. These loans are sold
without recourse.
Loan Commitments. The Bank issues loan commitments for 60 days or less.
No points are normally charged for these commitments. The Bank will consider
extended commitment periods and may charge fees based on the length and type of
commitment. At June 30, 1999, the Bank had $2.5 million of
9
<PAGE>
commitments to finance real estate acquisitions and construction and had
contracted to sell $486,000 of such loans.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Bank recognizes fees and service charges which consist primarily of
fees charged for loan originations and loans serviced for others and late
charges. The Bank recognized loan servicing fees of $6,000 for the fiscal year
ended June 30, 1999. As of June 30, 1999, the Bank had no loan fees deferred
under GAAP. As of June 30, 1999, loans serviced for the Virginia Housing
Development Authority ("VHDA") totaled $800,000 and loans serviced for FHLMC
totaled $292,000.
Loans to One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The amount is calculated according to the capital
at the time of the loan and may differ from current calculations. The Bank's
maximum loan-to-one borrower limit was approximately $981,000 as of June 30,
1999.
The Bank's largest group of loans to one borrower at June 30, 1999 was
$1.1 million which consisted of loans secured by apartment buildings. The second
largest group of loans to one borrower was $995,000 which consisted of loans
secured by duplex apartment buildings. The next largest group of loans to one
borrower was $983,000 which consisted of loans secured by single family homes
for sale and developed building lots.
Loan Delinquencies. Loans past due more than 90 days are individually
examined for potential losses and the ultimate collectibility of funds due.
Loans are deemed to have no loss exposure if the value of the property securing
the loan exceeds the receivable balance on the loan or collection is probable.
Such loans are kept on an accruing status pending monthly review. Loans that are
deemed to contain a potential loss exposure to the Bank are placed on
non-accrual status by the Bank and all interest past due on such loans is
reserved. Specific reserves are established to recognize losses on non-accruing
loans on a case-by-case basis.
Real estate acquired by the Bank as a result of foreclosure or by deed
in lieu of foreclosure is classified as foreclosed real estate until such time
as it is sold. When foreclosed real estate is acquired, it is recorded at the
lower of fair value or cost. Valuations are periodically performed by management
and subsequent charges to income are taken when it is determined that the
carrying value of the property exceeds the fair value less estimated costs to
sell.
10
<PAGE>
Non-Performing Assets. The following table sets forth information
regarding loans which are 90 days or more delinquent but on which the Bank is
accruing interest at the dates indicated. At June 30, 1999, the Bank had no
loans accounted for on a non-accrual basis and no restructured loans within the
meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
-----------------
1999 1998
------ ------
(In Thousands)
<S> <C> <C>
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by one-to four- family dwelling units ... $ 61 $ 102
All other mortgage loans ........................................ - -
---- -------
Total ............................................................. $ 61 $ 102
==== =======
Total non-accruing loans past due 90 days or more ................. $ - $ -
---- -------
Foreclosed real estate ............................................ $ - $ -
---- -------
Total non-performing assets ....................................... $ - $ -
==== =======
Total non-performing loans past due 90 days or more to total loans .00% .00%
Total non-performing loans past due 90 days or more to total assets .00% .00%
==== =======
Total non-performing assets to total assets ....................... .00% .00%
==== =======
</TABLE>
Classified Assets. The Office of Thrift Supervision ("OTS") regulations
provide for a classification system for problem assets of insured institutions
which covers all problem assets. Under this classification system, problem
assets of insured institutions are classified as "substandard," "doubtful," or
"loss." An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
designated "special mention" by management are assets included on the Bank's
internal watch list because of potential weakness but which do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for credit losses
in an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
provision for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which may recommend the establishment of
additional general or specific loss allowances. A portion of general loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for credit losses
generally do not qualify as regulatory capital.
11
<PAGE>
The following table provides further information regarding the Bank's
classified assets and allowances for credit losses at June 30, 1999.
(In Thousands)
Special Mention................... $ -
Substandard....................... 179
Doubtful assets................... 4
Loss assets....................... -
General loss allowance............ 210
Specific loss allowance........... -
Charge-offs....................... 10
All loans classified as substandard and were on single family mortgage
loans. The doubtful loan is on an unsecured consumer loan.
Foreclosed Real Estate. Real estate acquired by the Bank as a result of
foreclosure, judgment or by deed in lieu of foreclosure is classified as
foreclosed real estate until it is sold. When property is acquired it is
recorded at the lower of the cost or fair value. The Bank held no foreclosed
real estate at June 30, 1999.
Allowances for Credit Losses. The Bank provides valuation allowances
for estimated losses from uncollectible loans. Management's periodic evaluation
of the adequacy of the allowance for credit losses is based on loss experience,
known and inherent risk in the portfolio, prevailing market conditions, and
management's judgment as to collectibility. The allowance for credit losses is
increased by charges to earnings and decreased by charge-offs (net of
recoveries).
The following table sets forth the Bank's allowance for credit losses
and related ratios.
<TABLE>
<CAPTION>
At June 30,
---------------------
1999 1998
-------- ---------
(Dollars in Thousands)
<S> <C> <C>
Total loans .............................................. $ 46,915 $ 50,106
======== ========
Allowance balances (at beginning of period) .............. $ 207 $ 217
Provision ................................................ 13 33
Net Charge-offs .......................................... (10) (43)
-------- --------
Allowance balance (at end of period) ..................... $ 210 $ 207
======== ========
Allowance for credit losses as a percentage of total loans .45% .41%
======== ========
</TABLE>
12
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of the Bank's allowance for loan losses by loan category and the
percent of loans in each category to total loans receivable, net, at the dates
indicated. The portion of the loan loss allowance allocated to each loan
category does not represent the total available for future losses which may
occur within the loan category since the total loan loss allowance is a
valuation reserve applicable to the entire loan portfolio.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------
1999 1998
---------------------------- -----------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential, one-four family..... $ 145 68.94% $ 142 77.03%
Residential, multifamily......... 19 8.92 20 8.05
Nonresidential and land.......... 9 4.41 16 5.02
Construction..................... 18 8.58 14 5.95
Consumer......................... 18 8.93 14 3.82
Commercial....................... 1 0.22 1 0.13
---- ------ ---- ------
$ 210 100.00% $ 207 100.00%
=== ====== === ======
</TABLE>
Investment and Mortgage-backed Securities Activities
Investment Securities. The Bank is required under federal regulations
to maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The Bank has generally
maintained a liquidity portfolio well in excess of regulatory requirements.
Liquidity levels may be increased or decreased depending upon the yields on
investment alternatives and upon management's judgment as to the attractiveness
of the yields then available in relation to other opportunities and its
expectation of future yield levels, as well as management's projections as to
the short-term demand for funds to be used in the Bank's loan origination and
other activities. At June 30, 1999, the Bank had an investment securities
portfolio of approximately $30.1 million, consisting primarily of U.S.
government and agency obligations, interest bearing deposits, FHLB stock, and
marketable equity securities. The Bank will continue to seek high quality
investment securities for liquidity purposes. The Bank seeks high quality
investment securities up to 30 years in maturity.
Effective July 1, 1994, the Bank adopted Financial Accounting Standards
Board Statement 115 ("FASB 115"), "Accounting for certain Investments in Debt
and Equity Securities," which resulted in the reclassification of investment
securities and mortgage-backed securities into those which are available for
sale and those which are intended to be held to maturity. The unrealized gain or
loss on the securities classified as available for sale, along with those of the
marketable equity securities, are recognized, net of the expected income tax
effect, as a separate component of retained earnings.
Beginning in 1992, the Bank expanded its investment portfolio to
incorporate ARM Mutual Funds, primarily short-term investments. These funds,
which primarily invest in adjustable rate mortgage-backed securities, are
available for sale and marked to market at the end of each month with all
adjustments in value reported to the Board of Directors monthly. At June 30,
1999, the Bank had no funds in the ARM Mutual Funds.
13
<PAGE>
Mortgage-backed Securities. The Bank has in the past purchased
mortgage-backed securities guaranteed by participation certificates issued by
the FHLMC and secured by interests in pools of conventional mortgages originated
by the Bank. These mortgage backed securities are classified as "held to
maturity".
Mortgage-backed securities are secured by interest in pools of
conventional mortgages or government backed mortgage loans originated by other
mortgage lenders. The Bank may purchase mortgage-backed securities from FNMA,
GNMA and FHLMC and generally classifies them as "available for sale". During the
year ended June 30, 1999, the Bank purchased $6.5 million in GNMA
mortgage-backed securities.
Mortgage-backed securities provide for monthly payments of principal
and interest and generally have contractual maturities ranging from five to
thirty years. However, due to expected repayment terms being significantly less
than the underlying mortgage loan pool contractual maturities, the estimated
lives of these securities could be significantly shorter.
As of June 30, 1999, mortgage-backed securities amounted to $9.6
million or 11.69% of total assets.
Investment and Mortgage-Backed Securities Portfolio
The following table sets forth the carrying value of the Bank's
investment securities portfolio, short-term investments, FHLB stock, and
mortgage backed and related securities at the dates indicated. At June 30, 1999,
the fair value of the Bank's investment portfolio was $31.7 million.
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
US Government & Agency Bonds ........................................... $12,000 $11,476 $ 9,750 $ 9,812
Federal Home Loan Bank
of Atlanta Stock ............................................. 600 600 961 961
FNMA mortgage-backed securities ........................................ 681 700 1,324 1,369
GNMA mortgage-backed securities ........................................ 8,591 8,412 9,509 9,490
Municipal Bonds ........................................................ 2 442 2,346 930 936
------- ------- ------- -------
24,314 23,534 22,474 22,568
------- ------- ------- -------
Held to maturity securities:
Interest-bearing deposits (1) .......................................... 7,878 7,878 7,840 7,840
FHLMC participation certificates ....................................... 283 292 318 327
------- ------- ------- -------
8,161 8,170 8,158 8,167
------- ------- ------- -------
Total investment securities ........ $32,475 $31,704 $30,632 $30,735
======= ======= ======= =======
</TABLE>
- ---------------------
(1) Includes time and overnight deposits which are also cash equivalents.
14
<PAGE>
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
portfolio at June 30, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years More than Five Years Total Investment Portfolio
------------------- ------------------- -------------------- ---------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Fair
Cost Yield Cost Yield Cost Yield Cost Yield Value
----------- ------- ---------- -------- ---------- --------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits.. $ 7,581 5.55% $ 297 5.68% $ - -% $ 7,878 5.55% $ 7,878
US Government &
agency bonds.............. - - - - 12,000 6.92 12,000 6.92 11,476
Mortgage-backed
securities............... - - - - 9,555 7.15 9,555 7.15 9,404
FHLB Stock................. 600 7.50 - - - - 600 7.50 600
Municipal Bonds............ - - - - 2,442 4.66 2,442 4.66 2,346
------- ------ ------- ------ ------- ---- ------- ----- -------
Total.................... $ 8,181 5.69% $ 297 5.68% $ 23,997 6.78% $32,475 5.69% $31,704
======= ====== ======= ====== ======= ===== ======= ===== =======
</TABLE>
Sources of Funds
General. The major source of the Bank's funds for lending and other
investment purposes are deposits, amortization and prepayment of loans and
mortgage-backed securities, maturities of investment securities and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions. The Bank has also
utilized advances from the FHLB of Atlanta.
Deposits. Customer deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments including noninterest-bearing demand deposit accounts, negotiable
order of withdrawal ("NOW") accounts, regular savings, money market deposit
accounts, term certificate accounts, individual retirement accounts ("IRAs")
with fixed and variable rates of interest and club accounts. Deposit account
terms vary according to the minimum balance required, the time period the funds
must remain on deposit and the interest rate.
The interest rates paid by the Bank on deposits are set at the direction of
the asset/liability committee which consists of senior management. The interest
rates on deposit account products are determined by evaluating the following
factors: (I) the Bank's anticipated need for cash and the timing of that desired
cash flow; (ii) the interest rates offered by other local financial
institutions, and the degree of competition the Bank wishes to maintain; (iii)
the cost of borrowing from other sources versus the cost of acquiring funds
through customer deposits; and (iv) the Bank's anticipation of future economic
conditions and related interest rates.
The Bank relies primarily on its service and longstanding relationship with
customers to obtain deposits and does not accept brokered deposits. It is the
intent of the Bank's management to increase deposits through advertising and
marketing. Products emphasized are checking accounts and certificates of
deposit.
Noninterest-bearing demand deposit accounts, NOW accounts, money market
accounts, regular savings and club accounts constituted $18.6 million, or 30.02%
of the Bank's deposit portfolio at June 30, 1999. At that date, certificates of
deposit constituted $43.5 million or 69.98% of the deposit portfolio, including
certificates of deposit with principal amounts of $100,000 or more, which
constituted $5.6
15
<PAGE>
million or 9.09% of the deposit portfolio. The Bank generally negotiates retail
rates for certificates of deposit of $95,000 or more.
The following table sets forth the distribution of the Bank's deposit
accounts for the periods indicated and the weighted average interest rates on
each category presented.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------
1999 1998
---------------------------------------- ----------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
------ -------- ---- ------ -------- ----
(Dollars in Thousands)
Demand accounts:
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposit.. $1,284 2.07% .00% $ 953 1.40% .00%
NOW................................. 5,434 8.75 1.49 4,768 6.98 1.74
Money market........................ 3,233 5.21 2.52 3,168 4.64 2.96
Regular savings..................... 8,626 13.89 3.00 7,421 10.87 3.00
Club................................ 62 0.10 2.00 60 0.08 2.00
------ ----- ------ -----
Total............................ 18,639 30.02 16,370 23.97
------ ----- ------ -----
Certificate accounts:
Fixed rates of interest:
7 to 91 days..................... 87 0.14 3.00 87 0.12 3.00
Over 91 to 180 days.............. 2,505 4.03 3.99 2,920 4.28 4.65
Over 181 to 365 days............. 15,121 24.35 4.63 23,491 34.40 5.53
Over 1 year to 3 years........... 11,506 18.53 5.09 12,162 17.81 5.33
Over 3 years and up.............. 254 .41 5.15 250 .37 5.19
Other............................ 7,475 12.04 5.24 6,133 8.98 5.55
Variable rates of interest
Up to 1 year..................... - .00 .00 - .00 .00
Over 1 year...................... 6 229 10.03 4.79 6,532 9.57 5.42
Negotiable rate....................... 278 .45 5.05 343 .50 5.56
------ ------ ------ ------
Total........................ 43,455 69.98 51,918 76.03
------ ------ ------ ------
Total deposits............... $62,094 100.00% 4.07% $68,288 100.00% 4.70%
====== ====== ====== ======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 1999.
Amount Due
-------------------------------------------------
After
June 30, June 30, June 30, June 30,
2000 2001 2002 2003 Total
------- ------- ------- ------- -------
(In Thousands)
3.00-4.00% ............. $ 1,489 $ -- $ -- $ -- $ 1,489
4.01-5.00% ............. 19,935 3,094 320 18 23,367
5.01-6.00% ............. 17,597 756 10 36 18,399
6.01-7.00% ............. 200 -- -- -- 200
------- ------- ------- ------- -------
Total ................ $39,221 $ 3,850 $ 330 $ 54 $43,455
======= ======= ======= ======= =======
16
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit and other time deposits $100,000 or more by time remaining until
maturity as of June 30, 1999.
Certificates
of Deposits
(In Thousands)
Within three months......................... $1,662
Three through six months.................... 1,053
Six through twelve months................... 2,585
Over twelve months.......................... 344
------
$5,644
======
Borrowings. Deposits are the primary source of funds of the Bank's
lending and investment activities and for its general business purposes. The
Bank may also obtain advances from the FHLB of Atlanta to supplement its supply
of lendable funds and to use for investment activities. Advances from the FHLB
of Atlanta would typically be secured by a pledge of the Bank's stock in the
FHLB of Atlanta and a portion of the Bank's first mortgage loans and certain
other assets. The Bank, if the need arises, may also access the FRB discount
window to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. At June 30, 1999, the Bank had $12.0 million in outstanding
advances from FHLB. The Bank had a $375,000 outstanding balance on a note
payable to the Company as of June 30, 1999.
Competition
The Bank encounters strong competition both in the attraction of
deposits and origination of real estate and other loans. Competition for
deposits comes primarily from numerous credit unions, commercial banks and
savings institutions with offices in the Bank's market area. Competition for
loans comes primarily from branches of commercial banks and mortgage companies
that operate in the areas which comprise the Bank's primary market area. Due to
their size, many of the Bank's competitors possess greater financial and
marketing resources. The Bank competes for savings accounts by offering
depositors competitive interest rates and a high level of personal service. The
Bank competes for loans primarily through the interest rates and loan fees it
charges and the efficiency and quality of services it provides borrowers, real
estate brokers and contractors.
Thrift institutions can offer a wide range of services to the public,
such as demand deposits, trust services and consumer and commercial lending.
These factors, combined with increasingly sophisticated depositors, have
dramatically increased competition for savings dollars among thrift institutions
and other types of investment entities, as well as with commercial banks in
regard to loans, checking accounts and other types of financial services. In
addition, large conglomerates and investment banking firms compete in the market
for financial services.
17
<PAGE>
Subsidiary Activity
The Bank is permitted to invest up to 2% of its assets in the capital
stock of, or secured or unsecured loans to, subsidiary corporations, with an
additional investment of 1% of assets when such additional investment is
utilized primarily for community development purposes. Under such limitations,
as of June 30, 1999, the Bank was authorized to invest up to approximately $1.7
million in the stock of, or loans to, service corporations (based upon the 2%
limitation). As of June 30, 1999, the net book value of the Bank's investment in
its service corporation was approximately $21,000.
The Bank has one subsidiary, Southwest Virginia Service Corporation,
Inc. which was incorporated in 1975 in the Commonwealth of Virginia and is
engaged in the sale of annuities, credit life and disability insurance to the
borrowers of the Bank. The income from this subsidiary was $5,000 for the fiscal
year ended June 30, 1999.
Employees
As of June 30, 1999, the Bank had 38 full-time employees. None of the
Bank's employees are represented by a collective bargaining group. The Bank
believes that its relationship with its employees is good.
Regulation
Set forth below is a brief description of certain laws which are
related to the regulation of the Company and the Bank. The following description
does not purport to be complete and is qualified in its entirety by reference to
all applicable laws and regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. The Company files reports with the
OTS and is subject to regulation and examination by the OTS. In addition, the
OTS has enforcement authority over the Company and its non- savings association
subsidiaries, should such subsidiaries be formed, which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association. This regulation and oversight is intended
primarily for the protection of the depositors of the Bank and not for the
benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
savings association insured by the Savings Association Insurance Fund (SAIF")
would become subject to restrictions applicable to bank holding companies unless
such other associations each also qualify as a QTL and were acquired in a
supervisory acquisition.
18
<PAGE>
Bank Regulation
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation (the "FDIC"). Lending activities and other investments
must comply with various federal statutory and regulatory requirements. The Bank
is also subject to certain reserve requirements promulgated by the FRB.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
U.S. Congress could have a material adverse impact on the Company, the Bank, and
their operations.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund ("BIF"), which primarily insures
commercial bank deposits. Effective September 30, 1995, the FDIC lowered the
insurance premium of BIF insured deposits to a range of between 0.04% and 0.31%
of deposits with the result that most commercial banks would pay the lowest rate
of 0.04%. Effective January 1, 1996, the annual insurance premium for most BIF
members was lowered to $2,000. These reductions in insurance premiums for BIF
members placed SAIF members at a competitive disadvantage to BIF members.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Savings Bank recorded a $355,000
pre-tax expense for this assessment at September 30 1996. Beginning January 1,
1997, the deposit insurance assessment for most SAIF members was reduced to
approximately .065% of deposits on an annual basis through the end of 1999.
During this same period, BIF members will be assessed approximately .013% of
deposits. After 1999, assessments for BIF and SAIF members may be the same. It
is expected that these continuing assessments for both SAIF and BIF members will
be used
19
<PAGE>
to repay outstanding Financing Corporation bond obligations. As a result of
these changes, beginning January 1, 1997, the rate of deposit insurance assessed
the Bank declined by approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect of the dividend would be to reduce the regulatory capital of the
Bank below the amount required for the liquidation account established in
connection with the Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger, and other distributions charged against capital. An
institution that exceeds all capital requirements before and after a proposed
capital distribution and has not been advised by the OTS that it is in need of
more than the normal supervision can, after prior notice to the OTS, make
capital distributions during a calendar year equal to its net income to date
during the calendar year plus retained net income for the preceding two years.
Any additional capital distributions require prior regulatory approval. In the
event the Bank's capital fell below its requirements or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be further restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.
Qualified Thrift Lender Test. Savings institutions must meet a QTL test
or the definition of a domestic building and loan association under Section 7701
of the Internal Revenue Code (the "Code"). If the Bank maintains an appropriate
level of qualified thrift investments (primarily residential mortgages and
related investments, including certain mortgage-related securities) and
otherwise qualifies as a QTL or a domestic building and loan association, it
will continue to enjoy full borrowing privileges from the FHLB of Atlanta. The
required percentage of qualified thrift investments is 65% of assets while the
Code requires investments of 60% of assets.
Federal Reserve System. The FRB requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW, and Super NOW checking accounts)
and non-personal time deposits.
Item 2. Description of Property.
(a) Properties.
The Bank conducts its business through a main office, four branch
offices and one loan origination office. The Bank believes that the current
facilities are adequate to meet the present and immediately foreseeable needs of
the Bank.
20
<PAGE>
The Bank obtains rental income through the leasing of space in its main
office building. During the fiscal year ended June 30, 1999, such rental income
was $102,000.
In the opinion of the management of the Bank, all properties listed are
adequately covered by insurance.
(b) Investment Policies. See "Item 1. Description of Business" above
for a general description of the Bank's investment policies and any regulatory
or Board of Directors' percentage of assets limitations regarding certain
investments. All of the Bank's investment policies are reviewed and approved by
the Board of Directors of the Bank, and such policies, subject to regulatory
restrictions (if any), can be changed without a vote of stockholders. The Bank's
investments are primarily acquired to produce income.
(1) Investments in Real Estate or Interests in Real Estate.
See "Item 1. Description of Business -- Lending Activities," "Item 1.
Description of Business -- Regulation -- Bank Regulation" and "Item 2.
Description of Property -- (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1.
Description of Business -- Lending Activities" and "Item 1. Description of
Business -- Regulation -- Bank Regulation."
(3) Investments in Securities of or Interests in Persons
Primarily Engaged in Real Estate Activities. See "Item 1. Description of
Business -- Lending Activities," "Item 1. Description of Business -- Regulation
- -- Bank Regulation" and "Item 1. Description of Business -- Subsidiary
Activity."
(C) Description of Real Estate and Operating Data.
Not Applicable.
Item 3. Legal Proceedings.
The Bank, from time to time, is a party to ordinary routine litigation,
which arises in the normal course of business, such as claims to enforce liens,
condemnation proceedings on properties in which the Bank holds security
interests, claims involving the making and servicing of real property loans and
other issues incident to the business of the Bank. In the opinion of management,
the resolution of these lawsuits would not have a material adverse effect on the
financial condition or results of operations of the Bank or the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
21
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The information contained under the section captioned "Stock Price
Information" on page 1of the Company's Annual Report to Stockholders for the
fiscal year ended June 30, 1999 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation. The
information contained in the section captioned "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 6 and 7 of
the Annual Report is incorporated herein by reference.
Item 7. Financial Statements.
The following report and financial statements of the Company are
incorporated by reference from the Annual Report.
Report of Independent Auditors
Statement of Financial Condition as of the Fiscal Years Ended
June 30, 1999 and 1998
Statement of Operations for the Fiscal Years Ended
June 30, 1999, 1998 and 1997
Statement of Changes in Stockholders' Equity for the Fiscal Years Ended June 30,
1999, 1998 and 1997
Statement of Cash Flows for the Fiscal Years
Ended June 30, 1999, 1998 and 1997
Notes to Financial Statements
The remaining information appearing in the Annual Report is not deemed
to be filed as part of this report, except as expressly provided herein.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There were no changes in or disagreements with accountants on
accounting and financial disclosure during the last fiscal year.
22
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The information contained under the section captioned "Proposal I --
Election of Directors" in the Company's definitive proxy statement for the
Company's Annual Meeting of Stockholders to be held on October 13, 1999 (the
"Proxy Statement") is incorporated herein by reference.
Additional information concerning executive officers is included in the
Proxy Statement in the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance."
Item 10. Executive Compensation.
The information contained in the section captioned "Proposal I --
Election of Directors -- Executive Compensation" in the Proxy Statement is
incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the chart in the section captioned "Voting
Securities and Principal Holders Thereof" and to the first
chart in the section captioned "Proposal I -- Election of
Directors" in the Proxy Statement.
(c) Management of the Company knows of no arrangements, including
any pledge by any person of securities of the Company, the
operation of which may at a subsequent date result in a change
in control of the Company.
Item 12. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by
reference to the section captioned "Proposal I -- Election of Directors --
Certain Relationships and Related Transactions" in the Proxy Statement.
23
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K.
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
3.1 Articles of Incorporation of SWVA Bancshares, Inc.*
3.2 Bylaws of SWVA Bancshares, Inc.**
10.1 Consultant Agreement with B. L. Rakes
10.2 Employment Agreement with D. W. Shilling
10.3 Employment Agreement with Barbara C. Weddle
10.4 Supplemental Executive Retirement Plan for B.L. Rakes***
10.5 Supplemental Executive Retirement Plan for Barbara C. Weddle***
10.6 1994 Stock Option Plan****
10.7 Management Stock Bonus Plan****
10.8 1998 Directors Stock Compensation Plan*****
10.9 Payment and Release Agreement with B. L. Rakes
10.10 Stock Option Agreement with B. L. Rakes
13 Annual Report to Stockholders for the fiscal year ended June 30, 1999
21 Subsidiaries of the Registrant***
23 Consent of Cherry Bekaert & Holland L.L.P.
27 Financial Data Schedule
</TABLE>
* Incorporated by reference to Exhibit 3.1 of the Registration Statement on
Form S-1 (SEC File No. 33-80434) filed with the SEC on June 17, 1994.
** Incorporated by reference to Exhibit 3.2 of the Registrant's Form 10-QSB
(SEC File No. 0-24674) filed with the SEC for the fiscal quarter ended
December 31, 1997.
*** Incorporated by reference to the identically numbered exhibit to the
Registrant's Form 10-KSB (SEC File No. 0-24674) filed with the SEC for the
fiscal year ended June 30, 1995.
**** Incorporated by reference to the identically numbered exhibit to the
Registrant's Form 10-KSB (SEC File No. 0-24674) for the fiscal year ended
June 30, 1997.
***** Incorporated by reference to Exhibit 10.1 of the Registrant's Form 10-QSB
(SEC File No. 0-24674) filed with the SEC for the fiscal quarter ended
March 31, 1998.
(b) In the last quarter of the fiscal year ended June 30, 1999, no
reports on Form 8-K were filed by the Registrant with the SEC.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SWVA BANCSHARES, INC.
By: /s/ D. W. Shilling
-------------------------------------
D. W. Shilling
President, Chief Executive Officer,
Chief Financial Officer, and Director
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of September 27, 1999.
<TABLE>
<CAPTION>
<S> <C>
/s/ Barbara C. Weddle /s/ D. W. Shilling
- ----------------------------------- --------------------------------------------
Barbara C. Weddle D. W. Shilling
Senior Vice President and Secretary President, Chief Executive Officer,
Chief Financial Officer, and Director
(Principal Executive and Financial Officer)
/s/ Mary G. Staples /s/ B. L. Rakes
- ----------------------------------- --------------------------------------------
Mary G. Staples B. L. Rakes
Principal Accounting Officer Chairman of the Board
/s/ F. Courtney Hoge /s/ James H. Brock
- ----------------------------------- --------------------------------------------
F. Courtney Hoge James H. Brock
Director Director
/s/ Glen C. Combs /s/ Michael M. Kessler
- ----------------------------------- --------------------------------------------
Glen C. Combs Michael M. Kessler
Director Director
</TABLE>
EXHIBIT 10.1 Consultant Agreement with B. L. Rakes
<PAGE>
Consulting Agreement
This Consulting Agreement ("Agreement") is entered into this 1st day of
July 1999 ("Effective Date") by and between Southwest Virginia Savings Bank,
FSB, a federal savings bank (the "Company") with its place of business
headquartered at Roanoke, Virginia and B. L. Rakes ("Consultant").
WHEREAS, the Company recognize the specialized knowledge and expertise
of the Consultant related to the business affairs of the industry and the
Company, and that upon retirement of the Consultant as the President and Chief
Executive Officer, the Company wishes to enter into a consulting relationship
with Consultant; and
WHEREAS, Consultant has previously served the Company and its parent
corporation, SWVA Bancshares, Inc. ("Parent") as President and Chief Executive
Office;
WHEREAS, Consultant and the Company desire to enter into such a
consulting relationship upon the terms and conditions hereinafter contained;
NOW, THEREFORE, in consideration of the covenants and terms contained
in this Agreement as set forth herein and of the mutual benefits accruing to
Company and to Consultant from the consulting relationship to be established
between the parties by the terms of this Agreement, Company and Consultant agree
as follows:
1. Consulting Relationship
Company hereby retains Consultant, and Consultant hereby agrees to be
retained by Company, as an independent contractor, and not as an employee. The
Consultant hereby acknowledges that he has resigned as an employee of the
Company and the Parent on or before the Effective Date.
2. Consulting Service
Consultant agrees that during the term of this Agreement:
A. Consultant will devote his best efforts to his position as an
independent contractor and will perform such duties and
execute the policies of Company as determined by its board of
directors and its President as the Company and Consultant may
mutually agree upon from time to time; provided that said
duties performed by Consultant shall not be inconsistent with
the nature and character of the duties
1
<PAGE>
performed by Consultant for the Company when serving as the
President and Chief Executive Officer. As an independent
contractor, Consultant shall not be an officer or employee of
the Company and shall not be subject to the direct control or
supervision of the Company or its President with respect to
the time spent, research undertaken, or procedures followed in
the performance of consulting services rendered hereunder.
During the Term of the Agreement, Consultant agrees to consult
with the Company on matters related to the business affairs
and operations of the Company, including matters that relate
to compliance with applicable banking laws and regulations and
merger and acquisition planning. It is estimated that such
activities will encompass approximately 8 to 10 business days
per month.
B. Consultant shall exercise a reasonable degree of skill,
prudence and care in performing the services referred to in
Paragraph A above;
C. Except as may be limited by Section 6 hereinafter, Consultant
may be an employee, officer or director of other companies or
entities and may provide consulting services for other
companies or organizations; provided that such activities do
not conflict with the services and activity that the
Consultant is actually rendering to the Company or any of its
subsidiaries or the services or activities of the Company and
its subsidiaries;
D. Consultant shall be available to render services to Company
under this Agreement as requested by the Board of Directors or
the President of the Company commencing on the first date of
the initial Term of this Agreement as contained in Section 5
herein. Consultant shall not be obligated to render any
services under this Agreement during such period when he is
unable to do so due to illness, disability or injury, subject
to the terms of Section 5(b) hereof;
E. Consultant shall be available for service hereunder upon
receipt of no less than (5) five days' written notice from
Company; and
F. Consultant shall not enter into agreements or make commitments
on behalf of the Company without prior written consent or
approval of the Company or its President.
3. Compensation
A. Company agrees to pay Consultant for his services performed
under this Agreement and for his commitments and agreements as
contained herein, including Section 6 herein, at the rate of
$40,000 per year payable no less than monthly at the rate of
$3,333 per month throughout the Term of the Agreement.
Consultant shall not be entitled to participate in or receive
benefits under any Company
2
<PAGE>
programs maintained for its employees, except as specifically
agreed to by the parties. During the Term of the Agreement,
the Company will also reimburse the Consultant for the monthly
premium expense related to Consultant maintaining Medicare
Supplement Insurance (medi-gap).
B. Other Compensation. In the event that Consultant serves as a member
of the Board of Directors of the Company, its parent or any of its subsidiaries,
Consultant shall be paid the fee normally paid for such service to other
non-employee directors and any fees as Chairman of the Board of the Company or
the Parent without regard to any other compensation paid under this Agreement.
4. Other Conditions
Consultant shall have no authority over any employee or
officer of Company, except as may be necessary in the routine
performance of his duties hereunder, nor shall Company be required in
any manner to implement any plans or suggestions Consultant may
provide.
5. Term and Termination
The term of this Agreement shall begin on the Effective Date
and shall continue for a period of one year thereafter ("Term"), unless
extended or terminated in accordance with the provisions set forth
below.
(a) Termination for Cause. The Company may terminate
this Agreement at any time for "Just Cause." Termination for
"Just Cause" shall be defined as termination because of the
Consultant's personal dishonesty, willful misconduct, breach
of fiduciary duty involving personal profit, or willful
violation of any law, rule or regulation related to the
business or operations of the Company or its subsidiaries.
(b) Death or Disability. In the event of Consultant's
death or permanent disability as determined by the President
of the Company, this Agreement shall terminate and all rights
to receive payments under the remaining term of the Agreement
shall cease.
6. Non-Competition and Confidential Business
Consultant, during the term of the Agreement, will not,
without the express written consent of Company, directly or indirectly
communicate or divulge to, or use for his own benefit or for the
benefit of any other person, firm, association, or corporation, any of
the Company's, or its subsidiaries' or affiliates', trade secrets,
proprietary data or other confidential information communicated to or
otherwise learned or acquired by Consultant
3
<PAGE>
from the Company during the Term of this Agreement, except that
Consultant may disclose such matters to the extent that disclosure is
required (a) in the course of the consulting relationship with Company
or (b) by a court or other governmental agency of competent
jurisdiction.
During the term of this Agreement, Consultant will not contact
(with a view toward selling any product or service competitive with any
product or service sold or proposed to be sold by Company or any
subsidiary or affiliate of Company) any person, firm, association or
corporation (a) to which Parent or Company or any subsidiary or
affiliate of Parent sold any product or service, (b) which Consultant
solicited, contacted or otherwise dealt with on behalf of Parent or
Company or any subsidiary or affiliate of Parent, or (c) which
Consultant was otherwise aware was a client of Parent, Company or its
parent or subsidiary or affiliate of Parent. During such period,
Consultant will not directly or indirectly make any such contact,
either for his own benefit or for the benefit of any other person,
firm, association, or corporation.
During the term of this Agreement, Consultant will not serve
as an employee, officer, consultant, director or in any other advisory
capacity, whether compensated or uncompensated, for any financial
services organization, corporation or entity (including but not limited
to an insured depository institution within the meaning of the Federal
Deposit Insurance Act, a federal or state chartered credit union, an
insurance company, a mortgage brokerage or mortgage banking firm, an
investment advisory or investment brokerage firm, or other financial
services entity with offices in Virginia.
7. Independent Contractor
The parties hereto agree and acknowledge that the relationship
between Company and Consultant shall be that of an independent
contractor and not that of employer-employee, master-servant or
principal-agent. Nothing in this Agreement, or its implementation,
shall be construed to be to the contrary.
8. The Complete Agreement
This Agreement, and any attachments or exhibits appended
hereto, shall represent the complete Agreement between Company and
Consultant concerning the subject matter hereof and supersedes all
prior agreements or understandings, written or oral. No attempted
modification or waiver of any of the provisions hereof shall be binding
on either party unless made in writing and signed by both Consultant
and Company.
9. Notices
Any notice required or permitted to be given hereunder shall
be in writing and shall be effective three business days after it is
properly sent by registered or certified mail, if
4
<PAGE>
to the Company to the President at the administrative offices of the
Company, or if to Consultant to the address set forth beneath his
signature to this Agreement, or to such other address as either party
may from time to time designate by notice.
10. Assignability
This Agreement may not be assigned by either party without the
prior written consent of the other party, except that no consent is
necessary for the Company to assign this Agreement to a corporation
succeeding to substantially all the assets or business of the Company
whether by merger, consolidation, acquisition or otherwise. This
Agreement shall be binding upon Consultant, his heirs and permitted
assigns and the Company, its successors and permitted assigns.
11. Severability
Each of the sections contained in this Agreement shall be
enforceable independently of every other section in this Agreement, and
the invalidity or nonenforceability of any section shall not invalidate
or render nonenforceable any other section contained herein. If any
section or provision in a section is found invalid or unenforceable, it
is the intent of the parties that a court of competent jurisdiction
shall reform the section or provisions to produce its nearest
enforceable economic equivalent.
12. Arbitration
Unless otherwise mutually agreed to by the Consultant and the
Company in writing, any controversy or claim arising out of or relating
to this Agreement or the breach thereof shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, with such arbitration hearing to be
held at the offices of the American Arbitration Association ("AAA") at
the AAA office nearest to the home office of the Company, and judgment
upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof. Either the Consultant or the Company
may file a request for such arbitration with the AAA.
13. Applicable Law
It is the intention of the parties hereto that all questions
and interpretations with respect to the construction and performance of
this Agreement and the rights and liabilities of the parties hereto
shall be determined in accordance with the laws of the Commonwealth of
Virginia, with respect to an matter or thing arising out of this
Agreement or pursuant thereto.
5
EXHIBIT 10.2 Employment Agreement with D. W. Shilling
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 19 th day of May 1999, ("Effective
Date") by and between Southwest Virginia Savings Bank, FSB (the "Savings Bank")
and Mr. D. W. Shilling (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Savings Bank
as the Chief Executive Officer and is experienced in all phases of the business
of the Savings Bank; and
WHEREAS, the Savings Bank desires to be ensured of the Executive's
continued active participation in the business of the Savings Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Savings Bank and in consideration of the Executive's agreeing to remain in
the employ of the Savings Bank, the parties desire to specify the continuing
employment relationship between the Savings Bank and the Executive;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Savings Bank hereby employs the Executive in the
capacity of President and Chief Executive Officer. The Executive hereby accepts
said employment and agrees to render such administrative and management services
to the Savings Bank and to SWVA Bancshares, Inc. ("Parent") as are currently
rendered and as are customarily performed by persons situated in a similar
executive capacity. The Executive shall promote the business of the Savings Bank
and Parent. The Executive's other duties shall be such as the Board of Directors
for the Savings Bank (the "Board of Directors" or "Board") may from time to time
reasonably direct, including normal duties as an officer of the Savings Bank.
2. Term of Employment. The term of employment of Executive under this
Agreement shall be for the period commencing on the Effective Date and ending
thirty-six (36) months thereafter ("Term"). Additionally, on, or before, each
annual anniversary date from the Effective Date, the Term of employment under
this Agreement shall be extended for up to an additional period beyond the then
effective expiration date upon a determination and resolution of the Board of
Directors that the performance of the Executive has met the requirements and
standards of the Board, and that the Term of such Agreement shall be extended.
References herein to the Term of this Agreement shall refer both to the initial
term and successive terms.
<PAGE>
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Savings Bank shall compensate and pay the
Executive during the Term of this Agreement a minimum base salary at the rate of
$105,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Savings Bank in discretionary bonuses that may be authorized and declared by
the Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Savings Bank which may be or may become applicable to senior management relating
to pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Savings Bank, to the extent commensurate with his then duties
and responsibilities, as fixed by the Board of Directors of the Savings Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Savings Bank which may be or may become applicable to
senior management relating to life insurance, short and long term disability,
medical, dental, eye-care, prescription drugs or medical reimbursement plans.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Savings Bank. The Executive shall not be entitled to receive any additional
compensation from the Savings Bank for failure to take a vacation or sick leave,
nor shall he be able to accumulate unused vacation or sick leave from one year
to the next, except to the extent authorized by the Board of Directors.
(f) Expenses. The Savings Bank shall reimburse the Executive or
otherwise provide for or pay for all reasonable expenses incurred by the
Executive in furtherance of, or in connection with the business of the Savings
Bank, including, but not by way of limitation, automobile and traveling
expenses, and all reasonable entertainment expenses, subject to such
2
<PAGE>
reasonable documentation and other limitations as may be established by the
Board of Directors of the Savings Bank. If such expenses are paid in the first
instance by the Executive, the Savings Bank shall reimburse the Executive
therefor.
(g) Changes in Benefits. The Savings Bank shall not make any
changes in such plans, benefits or privileges previously described in Section
3(c), (d) and (e) which would adversely affect the Executive's rights or
benefits thereunder, unless such change occurs pursuant to a program applicable
to all executive officers of the Savings Bank and does not result in a
proportionately greater adverse change in the rights of, or benefits to, the
Executive as compared with any other executive officer of the Savings Bank.
Nothing paid to Executive under any plan or arrangement presently in effect or
made available in the future shall be deemed to be in lieu of the salary payable
to Executive pursuant to Section 3(a) hereof.
4. Loyalty; Noncompetition.
(a) The Executive shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Savings Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Savings Bank or Parent,
or, solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform his duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Board of Directors may terminate the Executive's
employment at any time, but any termination by the Board of Directors other than
termination for Just Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Just Cause. The Board may within its sole discretion, acting in good faith,
terminate the Executive for Just Cause and shall notify such Executive
accordingly. Termination
3
<PAGE>
for "Just Cause" shall include termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Savings Bank shall be obligated to continue to
pay the Executive the salary provided pursuant to Section 3(a) herein, up to the
date of termination of the remaining Term of this Agreement, but in no event for
a period of less than twelve months, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)),
the Savings Bank's obligations under the Agreement shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Savings Bank may within its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate any of its obligations which were
suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(c) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his
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or her designee, at the time that the Federal Deposit Insurance Corporation
("FDIC") enters into an agreement to provide assistance to or on behalf of the
Savings Bank under the authority contained in Section 13(c) of FDIA; or (ii) by
the Director of the OTS, or his or her designee, at the time that the Director
of the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Savings Bank or when the Savings Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall receive the compensation and
benefits provided under the provisions of disability insurance coverage in
effect for Savings Bank employees. Upon returning to active full-time
employment, the Executive's full compensation as set forth in this Agreement
shall be reinstated as of the date of commencement of such activities. In the
event that the Executive returns to active employment on other than a full-time
basis, then his compensation (as set forth in Section 3(a) of this Agreement)
shall be reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Savings Bank or Parent,
or within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal to the product of 2.999 times the
Executive's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Executive, either in one
(1) lump sum within thirty (30) days of such termination of service or in
periodic payments over the next 36 months or the remaining term of this
Agreement, whichever is less, as if Executive's employment had not been
terminated, and such payments shall be in lieu of any other future payments
which the Executive would be otherwise entitled to receive under Section 6 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Executive by
the Savings Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "Change in Control" shall
refer to (i) the sale of all, or a material portion, of the assets of the
Savings Bank or the Parent; (ii) the merger or recapitalization of the Savings
Bank or the Parent whereby the Savings Bank or the Parent is not the surviving
entity; (iii) a change
5
<PAGE>
in control of the Savings Bank or the Parent, as otherwise defined or determined
by the Office of Thrift Supervision or regulations promulgated by it; or (iv)
the acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Savings Bank
or the Parent by any person, trust, entity or group. The term "person" means an
individual other than the Executive, or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate his employment during the term of
this Agreement following a Change in Control of the Savings Bank or Parent, or
within twenty-four months following such Change in Control, and Executive shall
thereupon be entitled to receive the payment described in Section 9(a) of this
Agreement, upon the occurrence, or within 120 days thereafter, of any of the
following events, which have not been consented to in advance by the Executive
in writing: (i) if Executive would be required to move his personal residence or
perform his principal executive functions more than fifty (50) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the
Savings Bank should fail to maintain Executive's base compensation in effect as
of the date of the Change in Control and the existing employee benefits plans,
including material fringe benefit, stock option and retirement plans, except for
changes impacting all employees generally; or (iii) if Executive would be
assigned duties and responsibilities inconsistent with his level of skill and
experience.
10. Withholding. All payments required to be made by the Savings Bank
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Savings Bank may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Savings Bank or Parent which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Savings Bank
or Parent.
(b) Since the Savings Bank is contracting for the unique and
personal skills of the Executive, the Executive shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Savings Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the Executive and such officer or officers as may be
specifically designated by the Board of Directors of the Savings Bank to sign on
its behalf. No waiver by any party hereto at any time of any breach
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by any other party hereto of, or compliance with, any condition or provision of
this Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the Commonwealth of
Virginia.
14. Nature of Obligations. Nothing contained herein shall create or
require the Savings Bank to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Savings Bank hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Savings Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except to the extent that the parties may otherwise reach
a mutual settlement of such issue. Further, the settlement of the dispute to be
approved by the Board of the Savings Bank may include a provision for the
reimbursement by the Savings Bank to the Executive for all reasonable costs and
expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, or the Board of the Savings Bank or the Parent may
authorize such reimbursement of such reasonable costs and expenses by separate
action upon a written action and determination of the Board following settlement
of the dispute. Such reimbursement shall be paid within ten (10) days of
Executive furnishing to the Savings Bank or Parent evidence, which may be in the
form, among other things, of a canceled check or receipt, of any costs or
expenses incurred by Executive.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Savings Bank and the Parent and its customers and
businesses ("Confidential Information"). The Executive agrees and covenants not
to disclose or use for his or her own benefit, or the benefit of any other
person or entity, any such Confidential Information, unless or until the Savings
Bank or the Parent consents to such disclosure or use or such information
becomes common knowledge in the industry or is otherwise legally in the public
domain. The Executive shall not knowingly disclose or reveal to any unauthorized
person any Confidential Information relating to the Savings
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Bank, the Parent, or any subsidiaries or affiliates, or to any of the businesses
operated by them, and the Executive confirms that such information constitutes
the exclusive property of the Savings Bank and the Parent. The Executive shall
not otherwise knowingly act or conduct himself (a) to the material detriment of
the Savings Bank or the Parent, or its subsidiaries, or affiliates, or (b) in a
manner which is inimical or contrary to the interests of the Savings Bank or the
Parent. Executive acknowledges and agrees that the existence of this Agreement
and its terms and conditions constitutes Confidential Information of the Savings
Bank, and the Executive agrees not to disclose the Agreement or its contents
without the prior written consent of the Savings Bank. Notwithstanding the
foregoing, the Savings Bank reserves the right in its sole discretion to make
disclosure of this Agreement as it deems necessary or appropriate in compliance
with its regulatory reporting requirements. Notwithstanding anything herein to
the contrary, failure by the Executive to comply with the provisions of this
Section may result in the immediate termination of the Agreement within the sole
discretion of the Savings Bank, disciplinary action against the Executive taken
by the Savings Bank, including but not limited to the termination of employment
of the Executive for breach of the Agreement and the provisions of this Section,
and other remedies that may be available in law or in equity.
19. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
8
EXHIBIT 10.3 Employment Agreement with Barbara C. Weddle
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT, is entered into this 19 th day of May 1999, ("Effective
Date") by and between Southwest Virginia Savings Bank, FSB (the "Savings Bank")
and Ms. Barbara Weddle (the "Executive").
WITNESSETH
WHEREAS, the Executive has heretofore been employed by the Savings Bank
as the Senior Vice President and is experienced in all phases of the business of
the Savings Bank; and
WHEREAS, the Savings Bank desires to be ensured of the Executive's
continued active participation in the business of the Savings Bank; and
WHEREAS, in order to induce the Executive to remain in the employ of
the Savings Bank and in consideration of the Executive's agreeing to remain in
the employ of the Savings Bank, the parties desire to specify the continuing
employment relationship between the Savings Bank and the Executive;
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereby agree as follows:
1. Employment. The Savings Bank hereby employs the Executive in the
capacity of Senior Vice President. The Executive hereby accepts said employment
and agrees to render such administrative and management services to the Savings
Bank and to SWVA Bancshares, Inc. ("Parent") as are currently rendered and as
are customarily performed by persons situated in a similar executive capacity.
The Executive shall promote the business of the Savings Bank and Parent. The
Executive's other duties shall be such as the Board of Directors for the Savings
Bank (the "Board of Directors" or "Board") may from time to time reasonably
direct, including normal duties as an officer of the Savings Bank.
2. Term of Employment. The term of employment of Executive under this
Agreement shall be for the period commencing on the Effective Date and ending
twelve (12) months thereafter ("Term"). Additionally, on, or before, each annual
anniversary date from the Effective Date, the Term of employment under this
Agreement shall be extended for up to an additional period beyond the then
effective expiration date upon a determination and resolution of the Board of
Directors that the performance of the Executive has met the requirements and
standards of the Board, and that the Term of such Agreement shall be extended.
References herein to the Term of this Agreement shall refer both to the initial
term and successive terms.
<PAGE>
3. Compensation, Benefits and Expenses.
(a) Base Salary. The Savings Bank shall compensate and pay the
Executive during the Term of this Agreement a minimum base salary at the rate of
$80,000 per annum ("Base Salary"), payable in cash not less frequently than
monthly; provided, that the rate of such salary shall be reviewed by the Board
of Directors not less often than annually, and the Executive shall be entitled
to receive increases at such percentages or in such amounts as determined by the
Board of Directors. The base salary may not be decreased without the Executive's
express written consent.
(b) Discretionary Bonus. The Executive shall be entitled to
participate in an equitable manner with all other senior management employees of
the Savings Bank in discretionary bonuses that may be authorized and declared by
the Board of Directors to its senior management executives from time to time. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Executive's right to participate in such discretionary bonuses when and
as declared by the Board.
(c) Participation in Benefit and Retirement Plans. The Executive
shall be entitled to participate in and receive the benefits of any plan of the
Savings Bank which may be or may become applicable to senior management relating
to pension or other retirement benefit plans, profit-sharing, stock options or
incentive plans, or other plans, benefits and privileges given to employees and
executives of the Savings Bank, to the extent commensurate with her then duties
and responsibilities, as fixed by the Board of Directors of the Savings Bank.
(d) Participation in Medical Plans and Insurance Policies. The
Executive shall be entitled to participate in and receive the benefits of any
plan or policy of the Savings Bank which may be or may become applicable to
senior management relating to life insurance, short and long term disability,
medical, dental, eye-care, prescription drugs or medical reimbursement plans.
(e) Vacations and Sick Leave. The Executive shall be entitled to
paid annual vacation leave in accordance with the policies as established from
time to time by the Board of Directors, which shall in no event be less than
four weeks per annum. The Executive shall also be entitled to an annual sick
leave benefit as established by the Board for senior management employees of the
Savings Bank. The Executive shall not be entitled to receive any additional
compensation from the Savings Bank for failure to take a vacation or sick leave,
nor shall he be able to accumulate unused vacation or sick leave from one year
to the next, except to the extent authorized by the Board of Directors.
(f) Expenses. The Savings Bank shall reimburse the Executive or
otherwise provide for or pay for all reasonable expenses incurred by the
Executive in furtherance of, or in connection with the business of the Savings
Bank, including, but not by way of limitation, automobile and traveling
expenses, and all reasonable entertainment expenses, subject to such
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<PAGE>
reasonable documentation and other limitations as may be established by the
Board of Directors of the Savings Bank. If such expenses are paid in the first
instance by the Executive, the Savings Bank shall reimburse the Executive
therefor.
(g) Changes in Benefits. The Savings Bank shall not make any
changes in such plans, benefits or privileges previously described in Section
3(c), (d) and (e) which would adversely affect the Executive's rights or
benefits thereunder, unless such change occurs pursuant to a program applicable
to all executive officers of the Savings Bank and does not result in a
proportionately greater adverse change in the rights of, or benefits to, the
Executive as compared with any other executive officer of the Savings Bank.
Nothing paid to Executive under any plan or arrangement presently in effect or
made available in the future shall be deemed to be in lieu of the salary payable
to Executive pursuant to Section 3(a) hereof.
4. Loyalty; Noncompetition.
(a) The Executive shall devote her full time and attention to the
performance of her employment under this Agreement. During the term of the
Executive's employment under this Agreement, the Executive shall not engage in
any business or activity contrary to the business affairs or interests of the
Savings Bank or Parent.
(b) Nothing contained in this Section 4 shall be deemed to
prevent or limit the right of Executive to invest in the capital stock or other
securities of any business dissimilar from that of the Savings Bank or Parent,
or, solely as a passive or minority investor, in any business.
5. Standards. During the term of this Agreement, the Executive shall
perform her duties in accordance with such reasonable standards expected of
executives with comparable positions in comparable organizations and as may be
established from time to time by the Board of Directors.
6. Termination and Termination Pay. The Executive's employment under
this Agreement shall be terminated upon any of the following occurrences:
(a) The death of the Executive during the term of this Agreement,
in which event the Executive's estate shall be entitled to receive the
compensation due the Executive through the last day of the calendar month in
which Executive's death shall have occurred.
(b) The Board of Directors may terminate the Executive's
employment at any time, but any termination by the Board of Directors other than
termination for Just Cause, shall not prejudice the Executive's right to
compensation or other benefits under the Agreement. The Executive shall have no
right to receive compensation or other benefits for any period after termination
for Just Cause. The Board may within its sole discretion, acting in good faith,
terminate the Executive for Just Cause and shall notify such Executive
accordingly. Termination
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<PAGE>
for "Just Cause" shall include termination because of the Executive's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful violation
of any law, rule or regulation (other than traffic violations or similar
offenses) or final cease-and-desist order, or material breach of any provision
of the Agreement.
(c) Except as provided pursuant to Section 9 hereof, in the event
Executive's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Savings Bank shall be obligated to continue to
pay the Executive the salary provided pursuant to Section 3(a) herein, up to the
date of termination of the remaining Term of this Agreement, but in no event for
a period of less than twelve months, and the cost of Executive obtaining all
health, life, disability, and other benefits which the Executive would be
eligible to participate in through such date based upon the benefit levels
substantially equal to those being provided Executive at the date of termination
of employment.
(d) The voluntary termination by the Executive during the term of
this Agreement with the delivery of no less than 60 days written notice to the
Board of Directors, other than pursuant to Section 9(b), in which case the
Executive shall be entitled to receive only the compensation, vested rights, and
all employee benefits up to the date of such termination.
7. Regulatory Exclusions.
(a) If the Executive is suspended and/or temporarily prohibited from
participating in the conduct of the Savings Bank's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)),
the Savings Bank's obligations under the Agreement shall be suspended as of the
date of service, unless stayed by appropriate proceedings. If the charges in the
notice are dismissed, the Savings Bank may within its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended and (ii) reinstate any of its obligations which were
suspended.
(b) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Savings Bank's affairs by an order issued
under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA")
(12 U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Savings Bank under
this Agreement shall terminate, as of the effective date of the order, but the
vested rights of the parties shall not be affected.
(c) If the Savings Bank is in default (as defined in Section 3(x)(1) of
FDIA) all obligations under this Agreement shall terminate as of the date of
default, but this paragraph shall not affect any vested rights of the
contracting parties.
(d) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Savings Bank: (i) by the Director of the Office of
Thrift Supervision ("Director of OTS"), or his
4
<PAGE>
or her designee, at the time that the Federal Deposit Insurance Corporation
("FDIC") enters into an agreement to provide assistance to or on behalf of the
Savings Bank under the authority contained in Section 13(c) of FDIA; or (ii) by
the Director of the OTS, or his or her designee, at the time that the Director
of the OTS, or his or her designee approves a supervisory merger to resolve
problems related to operation of the Savings Bank or when the Savings Bank is
determined by the Director of the OTS to be in an unsafe or unsound condition.
Any rights of the parties that have already vested, however, shall not be
affected by such action.
(e) Notwithstanding anything herein to the contrary, any payments made
to the Executive pursuant to the Agreement, or otherwise, shall be subject to
and conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
8. Disability. If the Executive shall become disabled or incapacitated
to the extent that she is unable to perform her duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Executive shall receive the compensation and
benefits provided under the provisions of disability insurance coverage in
effect for Savings Bank employees. Upon returning to active full-time
employment, the Executive's full compensation as set forth in this Agreement
shall be reinstated as of the date of commencement of such activities. In the
event that the Executive returns to active employment on other than a full-time
basis, then her compensation (as set forth in Section 3(a) of this Agreement)
shall be reduced in proportion to the time spent in said employment, or as shall
otherwise be agreed to by the parties.
9. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the
event of the involuntary termination of Executive's employment during the term
of this Agreement following any Change in Control of the Savings Bank or Parent,
or within 24 months thereafter of such Change in Control, absent Just Cause,
Executive shall be paid an amount equal 1.00 times the total taxable
compensation paid to the Executive by the Bank and the Parent during the one
year period ending on the day prior to the date of such Change in Control, but
in no event in an amount in excess of the product of 2.999 times the Executive's
"base amount" as defined in Section 280G(b)(3) of the Internal Revenue Code of
1986, as amended (the "Code") and regulations promulgated thereunder. Said sum
shall be paid, at the option of Executive, either in one (1) lump sum within
thirty (30) days of such termination of service or in periodic payments over the
next 36 months or the remaining term of this Agreement, whichever is less, as if
Executive's employment had not been terminated, and such payments shall be in
lieu of any other future payments which the Executive would be otherwise
entitled to receive under Section 6 of this Agreement. Notwithstanding the
forgoing, all sums payable hereunder shall be reduced in such manner and to such
extent so that no such payments made hereunder when aggregated with all other
payments to be made to the Executive by the Savings Bank or the Parent shall be
deemed an "excess parachute payment" in accordance with Section 280G of the Code
and be subject to the excise tax provided at Section 4999(a) of the Code. The
term "Change in Control" shall refer to
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<PAGE>
(i) the sale of all, or a material portion, of the assets of the Savings Bank or
the Parent; (ii) the merger or recapitalization of the Savings Bank or the
Parent whereby the Savings Bank or the Parent is not the surviving entity; (iii)
a change in control of the Savings Bank or the Parent, as otherwise defined or
determined by the Office of Thrift Supervision or regulations promulgated by it;
or (iv) the acquisition, directly or indirectly, of the beneficial ownership
(within the meaning of that term as it is used in Section 13(d) of the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Savings Bank or the Parent by any person, trust, entity or
group. The term "person" means an individual other than the Executive, or a
corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Executive may voluntarily terminate her employment during the term of
this Agreement following a Change in Control of the Savings Bank or Parent, or
within twenty-four months following such Change in Control, and Executive shall
thereupon be entitled to receive the payment described in Section 9(a) of this
Agreement, upon the occurrence, or within 120 days thereafter, of any of the
following events, which have not been consented to in advance by the Executive
in writing: (i) if Executive would be required to move her personal residence or
perform her principal executive functions more than fifty (50) miles from the
Executive's primary office as of the signing of this Agreement; (ii) if the
Savings Bank should fail to maintain Executive's base compensation in effect as
of the date of the Change in Control and the existing employee benefits plans,
including material fringe benefit, stock option and retirement plans, except for
changes impacting all employees generally; or (iii) if Executive would be
assigned duties and responsibilities inconsistent with her level of skill and
experience.
10. Withholding. All payments required to be made by the Savings Bank
hereunder to the Executive shall be subject to the withholding of such amounts,
if any, relating to tax and other payroll deductions as the Savings Bank may
reasonably determine should be withheld pursuant to any applicable law or
regulation.
11. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding
upon any corporate or other successor of the Savings Bank or Parent which shall
acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Savings Bank
or Parent.
(b) Since the Savings Bank is contracting for the unique and
personal skills of the Executive, the Executive shall be precluded from
assigning or delegating her rights or duties hereunder without first obtaining
the written consent of the Savings Bank.
12. Amendment; Waiver. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing, signed by the
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<PAGE>
Executive and such officer or officers as may be specifically designated by the
Board of Directors of the Savings Bank to sign on its behalf. No waiver by any
party hereto at any time of any breach by any other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
13. Governing Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the United States
where applicable and otherwise by the substantive laws of the Commonwealth of
Virginia.
14. Nature of Obligations. Nothing contained herein shall create or
require the Savings Bank to create a trust of any kind to fund any benefits
which may be payable hereunder, and to the extent that the Executive acquires a
right to receive benefits from the Savings Bank hereunder, such right shall be
no greater than the right of any unsecured general creditor of the Savings Bank.
15. Headings. The section headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of the other
provisions of this Agreement, which shall remain in full force and effect.
17. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
and judgment upon the award rendered may be entered in any court having
jurisdiction thereof, except to the extent that the parties may otherwise reach
a mutual settlement of such issue. Further, the settlement of the dispute to be
approved by the Board of the Savings Bank may include a provision for the
reimbursement by the Savings Bank to the Executive for all reasonable costs and
expenses, including reasonable attorneys' fees, arising from such dispute,
proceedings or actions, or the Board of the Savings Bank or the Parent may
authorize such reimbursement of such reasonable costs and expenses by separate
action upon a written action and determination of the Board following settlement
of the dispute. Such reimbursement shall be paid within ten (10) days of
Executive furnishing to the Savings Bank or Parent evidence, which may be in the
form, among other things, of a canceled check or receipt, of any costs or
expenses incurred by Executive.
18. Confidential Information. The Executive acknowledges that during his
or her employment he or she will learn and have access to confidential
information regarding the Savings Bank and the Parent and its customers and
businesses ("Confidential Information"). The Executive agrees and covenants not
to disclose or use for his or her own benefit, or the benefit of any other
person or entity, any such Confidential Information, unless or until the Savings
Bank or the Parent consents to such disclosure or use or such information
becomes common knowledge
7
<PAGE>
in the industry or is otherwise legally in the public domain. The Executive
shall not knowingly disclose or reveal to any unauthorized person any
Confidential Information relating to the Savings Bank, the Parent, or any
subsidiaries or affiliates, or to any of the businesses operated by them, and
the Executive confirms that such information constitutes the exclusive property
of the Savings Bank and the Parent. The Executive shall not otherwise knowingly
act or conduct herself (a) to the material detriment of the Savings Bank or the
Parent, or its subsidiaries, or affiliates, or (b) in a manner which is inimical
or contrary to the interests of the Savings Bank or the Parent. Executive
acknowledges and agrees that the existence of this Agreement and its terms and
conditions constitutes Confidential Information of the Savings Bank, and the
Executive agrees not to disclose the Agreement or its contents without the prior
written consent of the Savings Bank. Notwithstanding the foregoing, the Savings
Bank reserves the right in its sole discretion to make disclosure of this
Agreement as it deems necessary or appropriate in compliance with its regulatory
reporting requirements. Notwithstanding anything herein to the contrary, failure
by the Executive to comply with the provisions of this Section may result in the
immediate termination of the Agreement within the sole discretion of the Savings
Bank, disciplinary action against the Executive taken by the Savings Bank,
including but not limited to the termination of employment of the Executive for
breach of the Agreement and the provisions of this Section, and other remedies
that may be available in law or in equity.
19. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
8
EXHIBIT 10.9 Payment and Release Agreement with B. L. Rakes
<PAGE>
PAYMENT AND RELEASE AGREEMENT
for benefits payable under the
DEFERRED COMPENSATION BENEFITS AGREEMENT
for B.L. Rakes, as amended
This Payment and Release Agreement (the "Agreement") is entered into
this 21st day of April, 1999, by and between Southwest Virginia Savings Bank,
FSB (the "Bank") and B.L. Rakes (the "Executive").
WHEREAS, the Executive is a participant in the Deferred Compensation
Benefits Agreement for B.L. Rakes, as amended (the "SERP"), and has accrued
benefits under the SERP; and
WHEREAS, the Bank has, coincident with the execution of this Agreement,
irrevocably assigned the life insurance contract between the Bank and
New York Life Ins. Co. ("Insurance Company") on the life of the Executive (the
"Contract") to the Executive, with such assignment to be effective as of January
1, 2000 (the "Payment") , in full settlement of all sums due and payable under
the SERP (which Payment is approximately equal to the present value of the
payments expected to be made to the Executive under the SERP) and in
consideration of the covenants and terms contained in this Agreement as set
forth herein and of the mutual benefits accruing to the Bank and the Executive.
NOW, THEREFORE, in consideration of the covenants and terms contained
in this Agreement as set forth herein and of the mutual benefits accruing to the
Bank and the Executive by the terms of this Agreement, the Bank and the
Executive agree as follows:
1. Release of Claims. Upon the acceptance of and in exchange for the Payment
made hereunder by the Bank, the Executive hereby agrees that he, or any person
acting by, through or on behalf of the Executive, releases the Bank and any
future successor and all employees and agents of such entities, from any and all
rights and claims the Executive has under the SERP against the Bank and any
other corporation, entity or person, and the Executive agrees that he will not
institute any action or actions, cause or causes of action (in law or in
equity), suits, debts, liens, claims, demands (known or unknown) in state or
federal court, or with any state, federal, or local governmental agency arising
from or attributable to settlement of claims under the SERP, or otherwise under
any employment practice of the Bank, its agents and all persons acting by,
through, under or in concert with the Bank. Nothing under this Agreement shall
be construed as limiting or waiving the rights of the Executive under the
Financial Institutions Retirement Fund Pension Plan maintained by the Bank.
<PAGE>
2. Transfer and Assignment. Effective as of January 1, 2000, the Bank hereby
irrevocably transfers and assigns all of its rights and interest in the Contract
to the Executive, including, but not limited to, the proceeds of the Contract
otherwise payable to the Bank upon the death of the Executive and any cash value
of the Contract as it exists as of January 1, 2000.
3. Payment of Premiums. The Bank shall continue to pay the premiums on the
Contract for the period June 30, 1999 through December 31, 1999, as such
premiums shall be due under the Contract.
4. Cash Payment. As of the date of transfer of the Contract to the Executive, on
January 1, 2000, the Bank shall pay to the Executive a cash payment equal to the
estimated tax savings of the Bank related to the tax deduction to be taken by
the Bank related to the transfer of the Contract to the Executive.
5. Arbitration. Any controversy or claim arising out of or relating to this
Agreement shall be settled by arbitration in accordance with the rules then in
effect of the district office of the American Arbitration Association ("AAA")
nearest to Roanoke, Virginia and judgment upon the award rendered may be entered
in any court having jurisdiction thereof, except to the extent that the parties
may otherwise reach a mutual settlement of such issue.
6. Complete Agreement. This Agreement, and any attachments or exhibits appended
hereto, shall represent the complete Agreement between the Bank and the
Executive concerning the subject matter hereof and supersedes all prior
agreements or understandings, written or oral. No attempted modification or
waiver of any of the provisions hereof shall be binding on either party unless
made in writing and signed by both the Executive and the Bank or any successor.
7. Severability. Each of the sections contained in this Agreement shall be
enforceable independently of every other section in this Agreement, and the
invalidity or nonenforceability of any section shall not invalidate or render
nonenforceable any other section contained herein. If any section or provision
in a section is found invalid or unenforceable it is the intent of the parties
that a court of competent jurisdiction shall reform the section or provisions to
produce its nearest enforceable economic equivalent.
8. Applicable Law. It is the intention of the parties hereto that all questions
and interpretations with respect to the construction and performance of this
Agreement and the rights and liabilities of the parties hereto shall be
determined in accordance with the laws of the Commonwealth of Virginia with
respect to any matter arising out of this Agreement or pursuant thereto.
9. Further Assurances. The Bank and the Executive shall take all other actions
deemed necessary or appropriate to implement this Agreement, including, but not
limited to execution of any documents required by the Insurance Company in order
to effectuate the assignment of the Contract.
EXHIBIT 10.10 Stock Option Agreement with B. L. Rakes
<PAGE>
SWVA BANCSHARES, INC.
STOCK OPTION AGREEMENT
This Agreement constitutes the award of STOCK OPTIONS for a total of
10,000 shares of Common Stock of SWVA Bancshares, Inc. (the "Corporation"), to
B. L. Rakes (the "Participant") on such terms and conditions as are set forth
hereinafter.
1. Definitions. As used herein, the following definitions shall
apply.
"Award" means the grant by the Board of the Corporation of a
Stock Option as detailed hereinafter.
"Bank" shall mean Southwest Virginia Savings Bank, FSB, or any
predecessor corporation thereto.
"Board" shall mean the Board of Directors of the Corporation,
or any successor or parent corporation thereto.
"Code" shall mean the Internal Revenue Code of 1986, as
amended.
"Committee" shall mean the Board or the Stock Option Committee
which may be appointed by the Board from time to time.
"Common Stock" shall mean common stock of the Corporation, or
any successor or parent corporation thereto.
"Corporation" shall mean SWVA Bancshares, Inc., the parent
corporation for the Bank, or any predecessor or Parent thereof.
"Director" shall mean a member of the Board of the
Corporation, or any successor or parent corporation thereto.
"Director Emeritus" shall mean a person serving as a director
emeritus, advisory director, consulting director or other similar position as
may be appointed by the Board of Directors of the Bank or the Corporation from
time to time.
"Disability" means any physical or mental impairment which
renders the Participant incapable of continuing in the employment or service of
the Bank or the Parent in his then current capacity as determined by the
Committee.
A-1
<PAGE>
"Date of Grant" shall mean June 29, 1999.
"Employee" shall mean a person employed by the Corporation or
any present or future Parent or Subsidiary of the Corporation.
"Fair Market Value" shall mean: (i) if the Common Stock is
traded otherwise than on a national securities exchange, then the Fair Market
Value per Share shall be equal to the mean between the last bid and ask price of
such Common Stock on such date or, if there is no bid and ask price on said
date, then on the immediately prior business day on which there was a bid and
ask price. If no such bid and ask price is available, then the Fair Market Value
shall be determined by the Committee in good faith; or (ii) if the Common Stock
is listed on a national securities exchange, then the Fair Market Value per
Share shall be not less than the average of the highest and lowest selling price
of such Common Stock on such exchange on such date, or if there were no sales on
said date, then the Fair Market Value shall be not less than the mean between
the last bid and ask price on such date.
"Option" or "Stock Option" shall mean an option to purchase
Shares awarded herein which option is not intended to qualify under Section 422
of the Code.
"Optioned Stock" shall mean Common Stock subject to an Option
granted pursuant to the Agreement.
"Parent" shall mean any present or future corporation which
would be a "parent corporation" as defined in Subsections 424(e) and (g) of the
Code.
"Participant" means B. L. Rakes.
"Share" shall mean one share of Common Stock.
"Subsidiary" shall mean any present or future corporation
which would be a "subsidiary corporation" as defined in Subsections 424(f) and
(g) of the Code.
2. Option Price. The Option exercise price for each Share shall be
equal to 100% of the Fair Market Value of the Common Stock on the Date of Grant
as determined by the Board of the Corporation, that being $13.00.
3. Exerciseability of Options.
(a) Schedule of Exercise. This Option shall be immediately
exercisable as of the Date of Grant for a period of not more that five years
thereafter, as noted herein.
(b) Method of Exercise. This Option shall be exercisable
by a written notice which shall:
(i) State the election to exercise the Option, the
number of Shares with respect to which it is being exercised, the
person in whose name the stock certificate or certificates for such
A-2
<PAGE>
Shares of Common Stock is to be registered, his address and Social
Security Number (or if more than one, the names, addresses and Social
Security Numbers of such persons);
(ii) Contain such representations and agreements as
to the Participant's investment intent with respect to such shares of
Common Stock as may be satisfactory to the Corporation's counsel;
(iii) Be signed by the person or persons entitled to
exercise the Option and, if the Option is being exercised by any person
or persons other than the Participant, be accompanied by proof,
satisfactory to counsel for the Corporation, of the right of such
person or persons to exercise the Option; and
(iv) Be in writing and delivered in person or by
certified mail to the Treasurer of the Corporation.
Payment of the purchase price of any Shares with respect to which the
Option is being exercised shall be by certified or bank cashier's or teller's
check. The certificate or certificates for shares of Common Stock as to which
the Option shall be exercised shall be registered in the name of the person or
persons exercising the Option.
(c) Restrictions on Exercise. This Option may not be exercised
if the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities or other law or valid regulation. As
a condition to the Participant's exercise of this Option, the Corporation may
require the person exercising this Option to make any representation and
warranty to the Corporation as may be required by any applicable law or
regulation.
4. Non-transferability of Option. This Option may not be transferred in
any manner otherwise than by will or the laws of descent or distribution and may
be exercised during the lifetime of the Participant only by the Participant. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Participant.
5. Recapitalization, Merger, Consolidation, and Similar Transactions.
(a) Adjustment. Subject to any required action by the
stockholders of the Corporation, within the sole discretion of the Committee,
the aggregate number of Shares of Common Stock for which Options may be granted
hereunder, the number of Shares of Common Stock covered by each outstanding
Option, and the exercise price per Share of Common Stock of each such Option,
shall all be proportionately adjusted for any increase or decrease in the number
of issued and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt of consideration by the Corporation (other than
Shares held by dissenting stockholders).
(b) Extraordinary Corporate Action. Subject to any required
action by the
A-3
<PAGE>
stockholders of the Corporation, in the event of any change in control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of
Common Stock subject to each Option, the exercise price per Share of Common
Stock, and the consideration to be given or received by the Corporation upon the
exercise of any outstanding Option;
(ii) cancel any or all previously granted Options,
provided that appropriate consideration is paid to the Participant in connection
therewith; and/or
(iii) make such other adjustments in connection with
the Agreement as the Committee, in its sole discretion, deems necessary,
desirable, appropriate or advisable.
7. Related Matters.
(a) Payment. Full payment for each Share of Common Stock
purchased upon the exercise of any Stock Option granted herein shall be made at
the time of exercise of each such Stock Option and shall be paid in cash (in
United States Dollars), Common Stock or a combination of cash and Common Stock.
Common Stock utilized in full or partial payment of the exercise price shall be
valued at its fair market value at the date of exercise. The Corporation shall
accept full or partial payment in Common Stock only to the extent permitted by
applicable law. No Shares of Common Stock shall be issued until full payment
therefor has been received by the Corporation, and no Participant shall have any
of the rights of a stockholder of the Corporation until Shares of Common Stock
are issued to him.
(b) Cashless Exercise. A Participant who has held a Stock
Option for at least six months may engage in the "cashless exercise" of the
Option. In a cashless exercise, a Participant gives the Corporation written
notice of the exercise of the Option together with an order to a registered
broker-dealer or equivalent third party, to sell part or all of the Optioned
Stock and to deliver enough of the proceeds to the Corporation to pay the Option
price and any applicable withholding taxes. If the Participant does not sell the
Optioned Stock through a registered broker-dealer or equivalent third party, he
can give the Corporation written notice of the exercise of the Option and the
third party purchaser of the Optioned Stock shall pay the Option price plus any
applicable withholding taxes to the Corporation.
(c) Transferability. Any Stock Option granted pursuant to the
Agreement shall be exercised during a Participant's lifetime only by the
Participant to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
(d) Effect of Termination of Service. Upon the termination of
the Participant's service with the Corporation and the Bank as an Employee,
Director or Director Emeritus, the Participant shall nevertheless continue to
exercise such Options for the remaining term of such Options. Such Options of a
deceased Participant may be exercised from the date of his or her death until
the date that such Options would otherwise expire.
A-4
<PAGE>
(e) Change in Applicable Law. Notwithstanding any other
provision contained in the Agreement, in the event of a change in any federal or
state law, rule or regulation which would make the exercise of all or part of
any previously granted Stock Option unlawful or subject the Corporation to any
penalty, the Committee may restrict any such exercise without the consent of the
Participant or other holder thereof in order to comply with any such law, rule
or regulation or to avoid any such penalty.
(f) Conditions Upon Issuance of Shares. Shares shall not be
issued with respect to any Option granted under the Agreement unless the
issuance and delivery of such Shares shall comply with all relevant provisions
of law, including, without limitation, the Securities Act of 1933, as amended,
the rules and regulations promulgated thereunder, any applicable state
securities law and the requirements of any stock exchange upon which the Shares
may then be listed.
The inability of the Corporation to obtain from any regulatory body or
authority deemed by the Corporation's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the Corporation of any
liability in respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Corporation may
require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities law.
(g) Withholding Tax. The Corporation shall have the right to
deduct from all amounts paid in cash with respect to the cashless exercise of
Options under the Agreement any taxes required by law to be withheld with
respect to such cash payments. Where a Participant or other person is entitled
to receive Shares pursuant to the exercise of an Option pursuant to the
Agreement, the Corporation shall have the right to require the Participant or
such other person to pay the Corporation the amount of any taxes which the
Corporation is required to withhold with respect to such Shares, or, in lieu
thereof, to retain, or to sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
(h) Governing Law. The Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia, except to
the extent that federal law shall be deemed to apply.
(i) Administration. All decisions, determinations and
interpretations of the Committee shall be final and conclusive on all persons
affected thereby.
8. Waiver of Employment Agreement Rights. Upon execution of this
Agreement, the Participant hereby irrevocably agrees to the cancellation and
expiration of the Employment Agreement between the Participant and the Bank,
dated September 17, 1997, and to the irrevocable and immediate waiver of any and
all rights, claims and obligations contained in such Employment Agreement that
the Participant may have as provided for under such Employment Agreement;
provided however, that the previously vested rights of the Participant shall not
be unaffected.
9. Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon any corporate or other successor of the Bank or Parent which
shall acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Bank or
Parent.
A-5
<PAGE>
10. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
11. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceablitiy of the other provisions hereof.
12. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
A-6
EXHIBIT 13 Annual Report to Stockholders for the fiscal year ended June 30, 1999
<PAGE>
SWVA BANCSHARES, INC.
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Corporate Profile and Related Information.................................... 1
Stock Market Information..................................................... 1
Selected Financial and Other Data............................................ 3
President's Message.......................................................... 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 7
Report of Independent Auditors............................................... 16
Consolidated Financial Statements............................................ 17
Notes to Consolidated Financial Statements................................... 23
Office Locations............................................................. 50
Directors and Executive Officers............................................. 50
Other Corporate Information.................................................. 50
i
<PAGE>
SWVA BANCSHARES, INC.
Corporate Profile and Related Information
SWVA Bancshares, Inc. (the "Company") is the parent company for
Southwest Virginia Savings Bank, FSB ("Southwest Virginia Savings" or the
"Savings Bank"). The Company was formed as a Virginia corporation in June 1994
at the direction of the Savings Bank to acquire all of the capital stock that
the Savings Bank issued upon its conversion from the mutual to the stock form of
ownership (the "Conversion") in connection with a $5.7 million initial public
offering completed on October 7, 1994. The Company is a unitary savings and loan
holding company which, under existing laws, generally is not restricted in the
types of business activities in which it may engage provided that the Savings
Bank retains a specified amount of its assets in housing-related investments. At
the present time, since the Company does not conduct any active business, the
Company does not intend to employ any person other than officers but utilizes
the support staff and facilities of the Savings Bank from time to time.
Southwest Virginia Savings is a federally chartered stock savings bank
headquartered in Roanoke, Virginia. The Savings Bank was founded in 1927 as
Southwest Virginia Building and Loan Association and originally chartered by the
Commonwealth of Virginia. In 1990, a federal charter was obtained and the name
was changed to Southwest Virginia Savings Bank, FSB. Its deposits have been
federally insured since 1945. The Savings Bank is a community oriented savings
institution offering a variety of financial services to meet the needs of the
communities that it serves. Southwest Virginia Savings conducts its business
from its main office in Roanoke, Virginia, four full service branch offices, one
of which is also located in the City of Roanoke, one in the City of Salem and
two in the County of Roanoke, and a loan production office in Roanoke County.
The Savings Bank is primarily engaged in the business of attracting
deposits from the general public and originating loans secured by first
mortgages on one- to four-family residences in the Savings Bank's market area.
The Savings Bank also makes nonresidential and multi-family real estate loans,
construction loans, consumer loans, commercial loans and other loans.
Stock Market Information
Since its issuance in October 1994, the Company's common stock has been
traded over-the-counter with trades reported in the National Quotation Bureau
"pink sheets" under the trading symbol of "SWVB". The following table reflects
high and low bid information as furnished by Wheat First Union, Roanoke,
Virginia. This information reflects inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual trades.
HIGH LOW
---- ---
July 1 - September 30, 1997 21.000 16.000
October 1 - December 31, 1997 21.000 19.000
January 1 - March 31, 1998 21.030 19.750
April 1 - June 30, 1998 21.000 20.250
July 1 - September 30, 1998 20.380 15.500
October 1 - December 31, 1998 17.250 10.000
January 1 - March 31, 1999 16.030 13.500
April 1 - June 30, 1999 15.500 13.000
1
<PAGE>
The number of shareholders of record of common stock as of August 15,
1999 was approximately 223. This does not reflect the number of persons or
entities who held stock in "street" name through various brokerage firms. At
August 15, 1999, there were 423,612 shares outstanding.
Declarations of dividends by the Board of Directors of the Company
depend upon a number of factors, including the amount of cash and liquid assets
held by the Company, investment opportunities available to the Company or the
Savings Bank, capital requirements, regulatory limitations, the Company's and
the Savings Bank's results of operations and financial condition, tax
considerations and general economic conditions. Certain of these restrictions
are discussed in notes 12 and 14 to the consolidated financial statements.
Dividends Declared and Paid
Amount Per
Date Declared Common Share Record Date Date Payable
- ------------- ------------ ----------- ------------
February 1, 1995 $0.15 March 1, 1995 March 31, 1995
July 28, 1995 $0.15 August 31, 1995 September 30, 1995
February 21, 1996 $0.15 March 11, 1996 March 31, 1996
August 21, 1996 $0.15 September 9, 1996 September 30, 1996
February 19, 1997 $0.15 March 14, 1997 March 31, 1997
August 20, 1997 $0.15 September 15, 1997 September 30, 1997
September 3, 1997 $1.00 September 15, 1997 September 30, 1997
February 18, 1998 $0.15 March 20, 1998 March 31, 1998
August 19, 1998 $0.20 September 15, 1998 September 30, 1998
February 25, 1999 $0.20 March 15, 1999 March 31, 1999
August 18, 1999 $0.20 September 15, 1999 September 30, 1999
2
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Financial Condition (Dollars in Thousands)
At June 30, 1999 1998 1997 1996 1995
- ------------------------------------------------- ---------------- ---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Total assets $ 81,714 $ 84,387 $70,753 $ 66,987 $ 66,265
Loans receivable, net 45,576 48,211 50,982 46,757 51,064
Mortgage-backed & investment securities 23,817 22,886 10,074 7,939 7,048
Interest-bearing deposits 6,278 5,897 5,304 3,841 3,061
Cash and cash equivalents 2,454 3,193 1,276 5,262 830
Savings deposits 62,094 68,288 57,933 57,643 54,642
Borrowed funds 12,000 7,000 3,500 -- 1,800
Equity capital/stockholders' equity 6,791 8,327 8,602 8,675 9,313
- ------------------------------------------------------------------ ---------------- --------------- ---------------- ---------------
Summary of Operations (Dollars in Thousands)
Year Ended June 30, 1999 1998 1997 1996 1995
- ------------------------------------------------- ---------------- ---------------- --------------- ---------------- ---------------
Interest income $5,791 $5,808 $ 5,310 $4,906 $4,539
Interest expense 3,338 3,226 2,673 2,622 2,314
Net interest income 2,453 2,582 2,637 2,284 2,225
Provision for credit losses 13 33 23 -- 1
----- ----- ------ ----- -----
Net interest income after provision
for credit losses 2,440 2,549 2,614 2,284 2,224
Noninterest income 575 428 398 455 315
----- ----- ------ ----- -----
Noninterest expense 2,493 2,198 2,392 2,242 2,045
----- ----- ----- ----- -----
Income before income taxes 522 779 620 497 494
Provision for income taxes 177 318 206 191 190
----- ----- ------ ----- -----
Net income $ 345 $ 461 $ 414 $ 306 $ 304
======= ======= ======= ======= =======
- ------------------------------------------------- ---------------- ---------------- --------------- ---------------- ---------------
Other Selected Data
Year Ended June 30, 1999 1998 1997 1996 1995
- ------------------------------------------------- ---------------- ---------------- --------------- ---------------- ---------------
Return on average assets 0.42% 0.59% 0.60% 0.46% 0.47%
Return on average equity 4.41 5.41 4.87 3.50 3.77
Interest rate spread 2.65 3.10 3.55 3.17 3.37
Non-performing loans to total loans 0.13 0.00 0.10 0.00 0.12
Non-performing loans to total assets 0.07 0.00 0.08 0.00 0.09
Allowance for credit losses to total loans 0.45 0.43 0.43 0.40 0.37
- ------------------------------------------------- ---------------- ---------------- --------------- ---------------- ---------------
Per share data
Year Ended June 30, 1999 1998 1997 1996 1995
- ------------------------------------------------- ---------------- ---------------- --------------- ---------------- ---------------
Basic earnings per share $ .78 $ .97 $ .85 $ .60 .57
Diluted earnings per share .78 .95 .85 .60 .57
Stockholders' equity 14.89 16.76 16.83 15.97 16.32
Dividends .40 1.30 .30 .30 .15
Dividend payout ratio 51% 134% 35% 50% 26%
Average equity to average assets ratio 9.43 10.98 12.26 13.08 12.38
</TABLE>
3
<PAGE>
President's Message
Dear Shareholder:
We are pleased to provide this Annual Report for 1999. This year was
marked by change . . . change in the management team and the beginning of change
in our corporate culture.
Our first change in management occurred on March 1st with the
transition of Mr. John L. Hart to Chairman Emeritus, elevation of Mr. B. L.
Rakes to Chairman and CEO, and the promotion of D. W. Shilling to President. In
April we were saddened by the death of Mr. Hart. Mr. Hart served your Bank
faithfully for nearly 40 years and is missed tremendously by all within the
Bank, his legal community and his family. In June, Mr. Rakes announced his
retirement and Mr. Shilling was elected Chief Executive Officer. Mr. Rakes will
remain as Chairman and will serve the Company as consultant for one year. Mr.
Rakes joined our Bank in 1959 and led us skillfully and diligently. Guiding us
through the difficult eighties when many thrifts did not survive, and directing
our conversion to a savings bank in the early nineties, stand as a couple of his
outstanding accomplishments.
Our change in culture has its beginnings in fiscal 1999, however, this
change will be more pronounced in Year 2000. The pace of change will quicken
throughout the year, gathering momentum as we go. This culture change is a
change in how we do business. Meeting the mortgage needs of our community will
continue to be our foundation, however, to compete effectively then we must
alter our role as a traditional thrift and become more mainstream as a financial
provider.
For over 70 years we have been primarily a mortgage lender and a
procurer of savings, both of which result in satisfied customers but leave us
with a narrow net interest margin and low financial returns. Our challenge is to
transition the balance sheet from this dependence on residential real estate and
time deposits to one balanced with commercial and consumer loans and lower cost
deposits such as checking accounts. Our commercial lending unit is in place and
actively seeking business. Our concentration is in the small business sector and
commercial real estate, and we are pleased that the incoming business has been
of good credit quality and competitively priced. Business lending will have
expanded focus in fiscal 2000 with loan and deposit products that fit the
financial needs of small business. As we seek new relationships our business ad
slogan says it best . . . "A community bank banking community business".
Change in culture must include change in our process of how we deliver
the right product to the right person. Historically our deposit customers have
been savers and a very loyal group to us over the years. Going forward we must
recognize that our customers and potential customers are increasingly becoming
investors and not savers, are more knowledgeable, and have fingertip 24 hour
access to financial alternatives. How we meet their needs and demands with the
right product, affordably priced, will be a determinant in our future growth and
viability as a bank of choice. How can we best package our products, what new
offerings can we extend, and how do we best deliver those products are all
topical projects at the present time. We plan to have new business and retail
products ready for our community soon. Part of our delivery needs have been met
with installation of ATMs at our Oak Grove and Vinton offices. These were
installed in June and early user feedback is all positive. ATMs at our other
locations will be considered as demand and conditions allow. Also, introduced in
early July is a new credit card product for both consumer and business, as well
as an enhanced merchant card program that will allow website transactions for
those merchants that sell over the Internet.
Any discussion of the last fiscal year and the upcoming fiscal year is
not complete without comment regarding our systems readiness for the New
Millennium. As for Y2K, your Bank is ready. During the past year a significant
amount of energy, time and resources have been extended as we tested, re-tested
and tested again. Contingency plans are in place and we are confident as to our
state of preparedness. We
4
<PAGE>
anticipate a smooth New Year transition, although there are no absolute
guarantees that there won't be any temporary disruptions. We are available to
help ensure an easy entry into the new century. In the meantime, we encourage
you to contact any of our branches if you want to know more about our readiness
and preparation.
Our commitment to the excellent quality service that we strive to
extend on your each and every visit or transaction will always be a priority. In
fact, as we improve our products, expand our financial menu, and improve our
delivery system, we are improving the quality of our service. We're very proud
of our staff as their measure of service is outstanding. It is our people in the
branches, in our mortgage department, in our support areas that must implement
change and they are up to the challenge. If you are not a customer of our bank,
then try us, I'm confident you'll like our responsive team.
We implement change to provide vehicles for both growth and
profitability, although our priority for the new fiscal year will be
profitability. Through profitability we will be able to afford, and to fund, our
future growth, and through profitability we will be able to provide enhanced
shareholder value. A full discussion and analysis or our financial condition is
included in your Annual Report.
On behalf of our Board of Directors, management and staff we thank you
for your past and continued support. You have a strongly capitalized community
bank that has an exciting future as we share in the vast resources of the
Roanoke Valley. Your investment in SWVA Bancshares, Inc. is an investment of
value.
Sincerely,
/s/D.W. Shilling
---------------------------------------------
D. W. Shilling
President & CEO
5
<PAGE>
In Memoriam
Picture
John L. Hart
Board of Directors
1960 - 1999
Sadly missed by all
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The business of the Savings Bank consists of receiving monetary
deposits from the general public and reinvesting those funds typically in its
primary market area in the form of mortgage loans secured by one- to four-family
residences. To a lesser extent, the Savings Bank originates nonresidential real
estate, multi-family, construction, commercial, and consumer loans. The Savings
Bank also purchases U.S. government and federal agency securities,
mortgage-backed and mortgage-related securities and invests in interest-bearing
deposits with other insured financial institutions.
Currently, the Savings Bank's primary market area consists of Roanoke
County, the City of Roanoke, the City of Salem, and the County of Botetourt. The
Savings Bank regards this area as its "basic" lending area, but loans are also
made in the adjoining counties of Bedford and Franklin.
The largest component of the Savings Bank's net income is net interest
income, which is the difference between interest income and interest expense.
Consequently, the Savings Bank's earnings are dependent on its net interest
income, which is determined by the difference ("interest rate spread") between
rates of interest earned on interest-earning assets and rates of interest paid
on interest-bearing liabilities, and the relative amounts of interest-earning
assets and interest-bearing liabilities. The Savings Bank's net income is also
affected by its provision for losses on loans and investments, as well as the
amount of noninterest income and noninterest expense, such as compensation and
related expenses, federal deposit insurance premiums, data processing costs,
occupancy expenses, and income taxes. Earnings of the Savings Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities and demand for financing of real estate and other
types of loans.
Management Strategy
The Savings Bank's goal is to serve its local community as an
independent community savings bank. Its consumer-oriented philosophy is
dedicated to financing home ownership and providing financial services to its
customers. The principal components of the Savings Bank's management strategy,
which are designed to achieve its goal, are discussed below.
The Savings Bank has been a traditional lender for one- to four-family
residential loans since its founding in 1927. This past fiscal year, the Bank
generated a total of $40.6 million in mortgage loans of which $28.4 million were
sold in the secondary market and $12.2 million were retained in the Savings
Bank's portfolio. These types of loans make up 68.94% of the Savings Bank's
total loan portfolio. Financing homes for its community continues to be the
Savings Bank's primary goal, however management has initiated a new focus in
commercial and consumer loans this past year for purposes of expanding the
Bank's financial menu, improving loan yields, and obtaining a better balance in
the loan portfolio. The Bank's commercial loan department was formed in
December, 1998 and is concentrating on the small business sector which is the
foundation of stable commerce in any thriving community. Excellent progress was
made in the first six months in introducing the Savings Bank to the commercial
market resulting in a growing pipeline of new business and prospects. The
consumer emphasis this past year has been in the home equity arena resulting in
an increase of home equity lines of credit from $2.2 million at June 30, 1998 to
$4.7 million at June 30, 1999, representing a 113% increase. Consumer loans for
other needs and purposes also increased as management and staff solicited new
business. Value-added use of media and enhanced cross-sell efforts led to
greatly improved results as non-real estate consumer loans outstanding increased
more than $1 million over the preceding year.
The Savings Bank historically has maintained good asset quality. Its
emphasis on one-to-four
7
<PAGE>
family mortgages and its underwriting policies and practices are intended to
maintain this quality. The new emphasis on commercial and consumer loans may add
credit risk to the loan portfolio due to the risk inherent nature of the loans.
However, policies are in place and practices are being monitored in order to
minimize credit risk. Further, the Savings Bank's loan loss provision and
capital adequacy justify and support the additional risk. At June 30, 1999, the
Savings Bank had $61,000 in non-performing assets. The Savings Bank's ratio of
non-performing loans to total assets at June 30, 1999 was .07%.
One of the reasons the Savings Bank converted to a stock Savings Bank
was to support growth in savings and lending activities as market conditions
warrant, which would also leverage the Savings Bank's existing branch network,
facilities, and personnel resources. The assets of the Company increased $26.8
million, or 48.82%, from $54.9 million at June 30, 1994, to $81.7 million at
June 30, 1999. The increase was due primarily to an increase in loans receivable
of $5.2 million and an increase of $16.7 million in mortgage backed and
investment securities.
The Bank expects to continue to put a reasonable portion of its
originated fixed-rate loans in its portfolio and to purchase mortgage-backed and
related securities during the fiscal year 1999-2000 to enhance asset growth. The
growth is expected to be funded with deposit growth or borrowings. The Savings
Bank expects that its asset growth policy of retaining fixed-rate loans will
increase its interest rate risk.
Asset and Liability Management
The Savings Bank continues to manage interest rate risk. It has managed
this risk on the asset side of its balance sheet with adjustable-rate mortgage
("ARM") loans and government-related securities. As regards the Savings Bank's
present and future portfolio of commercial loans, pricing will generally be of a
variable nature based on appropriate money market indexes. Commercial term loans
with longer maturities will generally reprice every 5 to 7 years. Consumer loans
generally have a maturity of 3 years or less while home equity lines of credit
are of a variable nature. On the liability side of its balance sheet, the
Savings Bank has emphasized certificates of deposit ("CDs") with terms of one
year and has managed interest rates paid for deposits. Historically, the Savings
Bank has relied primarily upon the cash flows from its savings deposits and
mortgage repayments as its primary source of funds. Beginning in fiscal
1997-1998, the Savings Bank used borrowings to leverage its growth and may
continue to do so in the future.
8
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the
Savings Bank's average balance sheet and reflects the average yield on assets
and average cost of liabilities for the periods indicated and the average yields
earned and rates paid. Such yields and costs are derived by dividing income or
expense by the average balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from daily average balances.
<TABLE>
<CAPTION>
For the Year Ended June 30
------------------------------------------------------------------------------------
1999 1998
------------------------------------------ ------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $47,834 $ 3,856 8.06% $49,531 $ 4,182 8.44%
Investments and mortgage-backed securities:
Held to maturity, at cost 298 23 7.84 337 26 7.87
Available for sale, FMV (2) 21,267 1,313 6.17 15,079 986 6.54
Other investments (3) 10,514 599 5.70 8,830 614 6.95
------- ----- ------ -----
Total interest-earning assets 79,913 5,791 7.25 73,777 5,808 7.87
----- -----
Non-interest earning assets 3,050 3,736
------- ------
Total assets $82,963 $77,513
======= =======
Interest-bearing liabilities:
Interest-bearing demand accounts $ 6,083 87 1.43 $ 5,039 92 1.83
Regular savings & club accounts 7,865 235 2.99 7,516 222 2.96
Money market deposit accounts 3,130 87 2.78 3,168 94 2.95
Certificates of deposit 46,555 2,439 5.24 47,487 2,560 5.39
Borrowed funds 9,043 490 5.42 4,400 258 5.87
------ ----- ------ -----
Total interest-bearing liabilities 72,676 3,338 4.59 67,610 3,226 4.77
----- -----
Non-interest-bearing demand accounts 1,398 450
Non-interest bearing liabilities 1,064 945
Equity 7,825 8,508
------- ------
Total liabilities and equity $82,963 $77,513
======= =======
Net-interest income $2,453 $2,582
===== =====
Interest rate spread (4) 2.65 3.10
Net yield on interest-earning assets (5) 3.07 3.50
Ratio of average interest-earning assets to
average interest-bearing liabilities 109.96 109.12
Average equity to average total assets 9.43 10.98
</TABLE>
(1) Includes loans held for sale and non-accrual loans.
(2) Calculations based on historical cost.
(3) Includes FHLB Overnight Account.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
9
<PAGE>
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Savings Bank for the periods
indicated. For each category of interest-earning and interest-bearing
liabilities, information is provided on changes attributable to (i) changes in
volume (changes in average volume multiplied by old rate); (ii) changes in rate
multiplied by old average volume); (iii) and changes in rate volume (changes in
rate multiplied by the change in volume).
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
For the Year Ended June 30,
--------------------------------------- ---------------------------------
1999 vs. 1998 1998 vs. 1997
(In Thousands)
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable, net $(143) $(189) $ 6 $(326) $ (91) $ (46) $ 1 $(136)
Mortgage backed
securities and investments:
Held to maturity, at cost (3) -- -- (3) (6) -- -- (6)
Available for sale, FMV 404 (55) (22) 327 438 (10) (8) 420
Other investments 117 (111) (21) (15) 134 64 22 220
----- ----- ----- ----- ----- ----- ----- -----
Total interest-earning assets 375 (355) (37) (17) 475 8 15 498
----- ----- ----- ----- ----- ----- ----- -----
Interest expense:
Deposits:
Interest-bearing demand 19 (20) (4) (5) (4) (7) -- (11)
accounts
Regular savings & club 10 3 -- 13 5 (5) -- --
accounts
Money market deposit (1) (6) -- (7) (17) 1 -- (16)
accounts
Certificates of deposit (50) (72) 1 (121) 345 102 17 464
Borrowed funds 272 (20) (20) 232 113 2 1 116
----- ----- ----- ----- ----- ----- ----- -----
250 (115) (23) 112 442 93 18 553
----- ----- ----- ----- ----- ----- ----- -----
Change in net interest income $ 125 $(240) $ (14) $(129) $ 33 $ (85) $ (3) $ (55)
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
10
<PAGE>
Comparison of Financial Condition
and Results of Operations for
Fiscal Years Ended June 30, 1999 and June 30, 1998
Total assets at June 30, 1999 were $81.7 million as compared to $84.4
million at June 30, 1998, a decrease of $2.7 million. The decrease was due to a
decrease in cash and cash equivalents and in loans receivable offset by an
increase in investments and interest bearing deposits. Cash and cash equivalents
decreased from $3.2 million at June 30, 1998 to $2.5 million at June 30, 1999, a
decrease of $739,000. Interest bearing deposits and investments increased from
$28.8 million at June 30, 1998 to $30.1 million at June 30, 1999, an increase of
$1.3 million. The increases were due mainly to an increase in investment
securities purchased using borrowed funds. Net loans receivable decreased $2.6
million from $48.2 million at June 30, 1998 to $45.6 million at June 30, 1999,
due to decreased origination of mortgage loans, particularly in the last six
months as the refinance market declined. Prepaid expenses and other assets
increased $466,000 from $365,000 at June 30, 1998 to $831,000 at June 30, 1999
due to deferred tax adjustment on the unrealized loss on investment securities
and prepaid taxes due to decreased income in fiscal year 1999.
On the liability side, deposits decreased $6.2 million to $62.1 million
at June 30, 1999 from $68.3 million at June 30, 1998 as higher rate certificates
of deposit matured and were allowed to roll out in order to reduce the Savings
Bank's cost of funds. At June 30, 1999, there were $12.0 million in advances
outstanding from the Federal Home Loan Bank of Atlanta, an increase of $5.0
million from June 30, 1998. The increase was due to management taking
opportunity to obtain some long-term funding at reasonable costs.
The Savings Bank has generally depended on higher rate certificates of
deposits of 12 months or less over lower rate core deposits in order to fund its
lending operations. This was done to manage interest rate risk. This trend may
continue although management is actively seeking lower cost of funding primarily
through new deposit products to attract new checking account customers.
Management may also use borrowings rather than certificates of deposit to fund
operations if such borrowings are available at lower rates than certificates of
deposit.
Net Income. Net income for the year ended June 30, 1999 was $345,000 as
compared to $461,000 for the year ended June 30, 1998, a decrease of $116,000.
The decrease was mainly due to higher expenses for personnel, data processing,
increased interest on borrowings and Y2K expense. A decrease in income on
mortgage loans was somewhat offset by decreased interest paid on deposits. Basic
per share earnings for the year ended June 30, 1999 was $0.78.
Interest Income. Interest income decreased $17,000 for the year ended
June 30, 1999. Interest income was $5.8 million at June 30, 1999. The decrease
was mainly a result in the decrease in earnings on a smaller mortgage loan
portfolio, a reduction in rates earned on mortgage loans, offset by an increase
in earnings on a larger investment base.
Interest Expense. Interest expense for the year ended June 30, 1999 was
$3.3 million as compared to $3.2 million for the year ended June 30, 1998, an
increase of $112,000. The increase was due mainly to an increase in borrowed
funds partially offset by a decrease in deposit expense.
11
<PAGE>
Net Interest Income. Net interest income decreased $129,000. The
decrease was due mainly to a reduction in mortgage loans and an increase in
borrowed funds and an increase in investment securities offset by a reduction in
deposits.
Provision for Credit Losses. The Bank made an addition of $13,000 to
the provision for credit losses for the year ended June 30, 1999. During the
quarter ended March, 1999, a $9,000 loss on a consumer loan was charged to the
allowance for credit losses. The balance in the allowance for credit losses was
$207,000 on June 30, 1998 and $210,000 on June 30, 1999.
Noninterest Income. Noninterest income increased $147,000 from $428,000
for the year ended June 30, 1998 to $575,000 for the year ended June 30, 1999.
The increase was mainly due to an increase in gain of sale of mortgage loans.
Noninterest Expense. Noninterest expense increased from $2.2 million
for the year ended June 30, 1998 to $2.5 million for the year ended June 30,
1999, an increase of $295,000. This was mainly due to an increase in personnel
expense, data processing, advertising, office equipment, supply expenses and Y2K
expenses.
Management continues their efforts to expand the Banks products and
services as well as improve its delivery system to enhance quality service. This
years focus on increasing retail loan production has resulted in doubling the
volume of home equity lines outstanding and the new Commercial Loan Department
is now generating new business and has a significant amount of commitments to
fund as well as a growing pipeline of proposals. Management will also be
focusing on non-interest income through new revenue sources such as credit
insurance, title insurance, credit cards, ATM exchange fees and improved
activity analysis on commercial deposit accounts. Management expects
non-interest expense to continue to increase as new equipment and improved data
processing are necessary in order to provide a quality level of financial
services, for instance, new ATMs have been installed at the Oak Grove and Vinton
offices. During the year, all expense categories will be reviewed such as our
method of check clearing. The thrust on non-interest income/expenses is to
improve the Savings Bank's efficiency ratio and thereby increasing profitability
and enhancing shareholder value.
Comprehensive Income (Loss). Effective July 1, 1998, the Company
adopted FASB Statement No. 130, "Reporting Comprehensive Income." Statement No.
130 requires the reporting of comprehensive income in addition to net income
from operations. Comprehensive income is a more inclusive financial reporting
methodology that includes certain disclosure of certain financial information
that has historically not been recognized in the calculation of net income. For
the year ended June 30, 1999, unrealized losses on Investments Available for
Sale, net of tax effects, aggregated $573,000. These unrealized losses on
securities when combined with net operating income of $345,000 results in a
comprehensive loss of $228,000 net of the applicable tax effect. For additional
information, please refer to Management's Discussion on Liquidity and Capital
Resources.
Provision for Income Taxes. The provision for income taxes for the year
ended June 30, 1999 was $177,000 as compared to $318,000 for the year ended June
30, 1998. The decrease was due to decreased net income for the year and the
benefit of purchasing $1.5 million in municipal bonds during the year.
12
<PAGE>
Liquidity and Capital Resources
The Savings Bank's primary sources of funds are deposits and proceeds
from principal and interest payments on loans and mortgage-backed securities.
Additional sources of liquidity are advances from the FHLB of Atlanta and other
borrowings. The Savings Bank may utilize FHLB of Atlanta borrowing in the future
during periods when management of the Savings Bank believes that such borrowings
provide a lower cost source of funds than deposit accounts and the Savings Bank
desires liquidity in order to help expand its lending operations. Borrowings are
also used to purchase assets to leverage capital.
The Savings Bank's most liquid assets are cash and cash-equivalents,
which include investments in highly liquid, short-term investments, such as
overnight investments in the Federal Home Loan Bank of Atlanta. At June 30,
1999, cash and cash equivalents totaled $2.5 million.
At June 30, 1999, the Savings Bank had $39.2 million in certificates of
deposits due within one year and $4.3 million due in two to three years.
Management estimates that the Savings Bank will retain the deposits or replace
them with new deposits. At June 30, 1999, the Savings Bank had $2.5 million in
outstanding commitments to originate mortgages. The Savings Bank intends to fund
these commitments with present liquidity, proceeds from loan repayments, and
loan sales in the secondary market.
Regulations require that the Savings Bank maintain specified levels of
liquidity. The liquidity is measured as a ratio of cash and certain investments
to withdrawable savings. At June 30, 1999, the minimum level of liquidity
required by regulations was 4.00%. The Savings Bank's liquidity ratio at June
30, 1999 was 30.11% and at June 30, 1998 was 22.94%.
The Savings Bank is required to maintain specified amounts of capital
pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and regulations promulgated by the OTS. The capital standards
generally require the maintenance of regulatory capital sufficient to meet a
tangible capital requirement, a core capital requirement and a risk-based
capital requirement. At June 30, 1999, the Savings Bank's tangible and core
capital totaled $6.9 million. This amount exceeded the tangible capital
requirement of $1.2 million by $5.6 million and the core capital requirement of
$2.5 million by $4.4 million on that date. At June 30, 1999, the Savings Bank's
risk-based capital totaled $7.1 million, which exceeded its risk-based capital
requirement of $3.2 million by $3.9 million.
Pursuant to FASB No. 130 the Bank is required to record changes in the
value of its investment portfolio as regards unrealized gains or losses that may
result from movements in interest rates. As of June 30, 1999, the Savings Bank
shows unrealized losses, net of tax effect, totaling $573,000 due to the recent
upward surge in interest rates as the national money markets reacted to actions
by the Federal Open Market Committee. Management does not anticipate the
realization of the above loss. The unrealized loss does however negatively
impact the Bank's capital. The unrealized losses combined with net operating
income of $345,000 yields a net reduction in the Bank's capital of $228,000, net
of applicable taxes, and a corresponding reduction in the book value of common
stock from $16.76 on June 30, 1998 to $14.67 as of June 30, 1999. Despite this
reduction, the Bank's capital continues to exceed regulatory requirements as
discussed in the prior paragraph and continues to be adequate to support future
asset growth.
13
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and related data have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time caused by inflation.
Unlike industrial companies, nearly all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant impact on a financial institution's performance than
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services since such
goods and services are affected by inflation. In the current interest rate
environment, liquidity and the maturity structure of the Savings Bank's assets
and liabilities are critical to the maintenance of acceptable performance
levels.
The Year 2000 Issue
The Bank's Board of Directors has adopted an action plan for addressing
the computer-related concerns raised by Year 2000. An internal committee has
been appointed by the Board to manage this effort. The Year 2000 committee meets
on a regular basis to review and assess the current status of the Year 2000
project. The committee then prepares a status report for Management and the
Board of Directors.
Equipment
- ---------
A process to identify all equipment that may potentially be impacted has been
completed. All outside servicers and major vendors have been contacted in order
to ascertain their individual degree of readiness for Year 2000. This includes
items such as the vault, heating, ventilation and air conditioning controls and
telephones. All of the vendors have responded to these inquires. We have
received certifications of Year 2000 compliance for systems controlled by third
party providers or determined that the systems should not be impacted by the
Year 2000. The only upgrade needed was to our telephone system and this upgrade
has been completed.
Internal Computers
- ------------------
All internal computers have been tested for the Year 2000. At this time, we have
found no problems with the computers and software used on the computers. We have
completed testing with Bisys (our data services provider which processes the
Bank's major loan and deposit applications). This testing involved advancing the
date in a test environment through various critical dates during the millennium
change. Transactions were run on the test system to test the date handling
portions of the upgraded software. No problems were found during the testing.
With the extensive testing and lack of problems found, we are confident of our
ability to provide all services to our customers in the Year 2000 and beyond.
Computers used by our customers
- -------------------------------
Large loan customers have been contacted in order to both instill awareness and
to determine their state of readiness for Year 2000. All customers contacted
have responded. At this point, the Bank has no reason to doubt the ability of
any of these customers to continue to operate effectively in a Year 2000
environment. We believe that most of our residential borrowers and that none of
our commercial borrowers are so dependent on their computers that a Year 2000
problem would render them unable to collect revenue or rent and in turn hinder
their ability to make loan payments to the Bank. New large loan customers and
commercial customers (both loan and deposit) are asked to complete a form as to
their state of readiness for the Year 2000. We do not expect any material costs
to address this risk area.
14
<PAGE>
Cost
- ----
The committee has presented to the Board of
Directors, and the Board has approved a Year 2000 budget. The budget is
approximately $35,000. At June 30, 1999, total expenses paid were $30,000. The
major cost is an upgrade and testing surcharge paid to Bisys. (Bisys is a data
services provider which processes the Bank's major loan and deposit
applications.)
Contingency & Cash Plan
- -----------------------
Our data services provider has sponsored five meetings on their progress and
test plans for the Year 2000. Starting in November, 1998 and continuing until
April, 1999, a test facility was set up to provide for formal testing between
the Bank and Bisys. At this time, we find no reason to believe that Bisys will
not be able to operate properly in January, 2000.
The committee worked with senior management to develop, validate and implement a
Year 2000 liquidity or "Cash" plan. This plan has been completed and approved by
the Board of Directors.
A Contingency Plan has been prepared by the committee to facilitate the ability
of the Bank to continue providing an acceptable level of service to the Bank's
customers in the event that Bisys encounters problems in January, 2000 or we are
unable to communicate with Bisys. Procedures were already in place to
accommodate interruptions of online service for periods of short duration. These
procedures have been re-evaluated for effectiveness over a longer duration.
Appropriate adjustments have been made and additional procedures required for
longer duration "down-time" have been put into place. At the end of December,
1999, we will generate paper backup of all customer accounts and general ledger
accounts. In the plan, customer payments will be processed manually, and due to
the size of the Bank, we believe that we would be able to operate in this manner
indefinitely, until our existing data servicer, or a replacement, is able to
again provide data processing services. This procedure could require changing of
schedules and the hiring of temporary staff during this time, which would
increase our cost. Should it be necessary to change data service providers
during the beginning of the Year 2000, the cost could be material.
15
<PAGE>
- ------------------
Cherry
Bekaert &
Holland
CERTIFIED PUBLIC
ACCOUNTANTS &
CONSULTANTS
- -----------------
Report of Independent Auditors
The Board of Directors and Stockholders
SWVA Bancshares, Inc.
Roanoke, Virginia
We have audited the accompanying consolidated statements of financial condition
of SWVA Bancshares, Inc. and Subsidiaries (the "Company"), as of June 30, 1999
and 1998, and the related consolidated statements of income, comprehensive
income, changes in stockholders' equity, and cash flows for each of the years in
the three-year period ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SWVA Bancshares,
Inc. and Subsidiaries, as of June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1999 in conformity with generally accepted accounting principles.
Lynchburg, Virginia
August 10, 1999
16
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
June 30, 1999 and 1998
(In thousands)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Assets
Cash and cash equivalents $ 2,454 $ 3,193
Interest-bearing deposits 6,278 5,897
Investment and mortgage-backed securities
Held to maturity, at amortized cost (fair value of $292 in 1999 and $327 in 1998) 283 318
Available for sale, at fair value 22,934 21,607
Restricted at cost 600 961
Loans held for sale 476 1,608
Loans receivable, net 45,576 48,211
Property and equipment, net 1,688 1,662
Accrued interest receivable 594 565
Prepaid expenses and other assets 831 365
----------- -----------
Total assets $ 81,714 $ 84,387
=========== ===========
Liabilities and stockholders' equity
Liabilities
Deposits $ 62,094 $ 68,288
Advances from Federal Home Loan Bank 12,000 7,000
Advances from borrowers for taxes and insurance 210 243
Other liabilities and deferred income 619 529
----------- -----------
Total liabilities 74,923 76,060
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.10. Authorized 275,000 shares, none issued - -
Common stock, par value $.10. Authorized 2,225,000 shares, 423,612 and
496,887 shares outstanding for 1999 and 1998, respectively 42 50
Additional paid-in capital 2,838 4,050
Retained earnings, substantially restricted 4,908 4,742
Unrealized holding loss on securities, available for sale ( 515) 58
Less unearned ESOP shares, 22,819 for 1999 and 27,385 shares for 1998 ( 228) ( 274)
Less unearned MSBP shares, 14,895 for 1999 and 17,537 shares for 1998 ( 254) ( 299)
----------- -----------
Total stockholders' equity 6,791 8,327
----------- -----------
Total liabilities and stockholders' equity $ 81,714 $ 84,387
=========== ===========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE>
SWVA BANCSHARES, INC. AND
SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Years ended June 30, 1999, 1998 and 1997
(In thousands, except shares outstanding)
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss)
Common Stock Additional on Securities Unearned Unearned
Shares Paid-in Retained Available ESOP MSBP
Outstanding Amount Capital Earnings For Sale Shares Shares Total
----------- ------ ------- -------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 543,190 $ 54 $ 4,750 $ 4,636 $ (12) $ (365) $ (388) $ 8,675
Net income -- -- -- 414 -- -- -- 414
Change in unrealized gain on
available for sale securities -- -- -- -- 41 -- -- 41
Repurchase of common stock (32,206) (3) (492) -- -- -- -- (495)
Allocated/earned ESOP shares -- -- 28 -- -- 46 -- 74
Allocated/earned MSBP shares -- -- -- -- -- -- 39 39
Dividends declared and paid
($.30 per share) -- -- -- (146) -- -- -- (146)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1997 510,984 51 4,286 4,904 29 (319) (349) 8,602
Net income -- -- -- 461 -- -- -- 461
Change in unrealized gain on
available for sale securities -- -- -- -- 29 -- -- 29
Repurchase of common stock (14,097) (1) (292) -- -- -- -- (293)
Allocated/earned ESOP shares -- -- 47 -- -- 45 -- 92
Allocated/earned MSBP shares -- -- 9 -- -- -- 50 59
Dividends declared and paid
($1.30 per share) -- -- -- (623) -- -- -- (623)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1998 496,887 50 4,050 4,742 58 (274) (299) 8,327
Net income -- -- -- 345 -- -- -- 345
Change in unrealized gain on
available for sale securities -- -- -- -- (573) -- -- (573)
Repurchase of common stock (73,275) (8) (1,202) -- -- -- -- (1,210)
Allocated/earned ESOP shares -- -- 12 -- -- 46 -- 58
Allocated/earned MSBP shares -- -- (22) -- -- -- 45 23
Dividends declared and paid
($0.40 per share) -- -- -- (179) -- -- -- (179)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at June 30, 1999 423,612 $ 42 $ 2,838 $ 4,908 $ (515) $ (228) $ (254) $ 6,791
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended June 30, 1999, 1998 and 1997
(In thousands, except per-share data)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Interest income
Loans $ 3,856 $ 4,182 $ 4,318
Mortgage-backed and related securities 592 284 407
U.S. government obligations including agencies 675 705 122
Interest on municipal bonds 69 23 -
Other investments, including overnight deposits 599 614 463
---------- ---------- -----------
Total interest income 5,791 5,808 5,310
---------- ---------- -----------
Interest expense
Deposits 2,848 2,968 2,531
Borrowed funds 490 258 142
---------- ---------- -----------
Total interest expense 3,338 3,226 2,673
---------- ---------- -----------
Net interest income 2,453 2,582 2,637
Provision for credit losses 13 33 23
---------- ---------- -----------
Net interest income after provision for credit losses 2,440 2,549 2,614
---------- ---------- -----------
Noninterest income
Loan and other customer service fees 158 137 142
Gain on sale of mortgage loans 324 210 118
Gross rental income 102 98 98
Other ( 9) ( 17) 40
---------- ---------- -----------
Total noninterest income 575 428 398
---------- ---------- -----------
Noninterest expense
Personnel 1,435 1,285 1,155
Office occupancy and equipment 335 297 292
Data processing 232 179 132
Federal insurance of accounts 40 38 431
Advertising 90 63 64
Other 361 336 318
---------- ---------- -----------
Total noninterest expenses 2,493 2,198 2,392
---------- ---------- -----------
Income before income tax expense 522 779 620
Provision for income taxes 177 318 206
---------- ---------- -----------
Net income $ 345 $ 461 $ 414
========== ========== ===========
Basic earnings per share $ .78 $ .97 $ .85
Diluted earnings per share $ .78 $ .95 $ .85
</TABLE>
See notes to consolidated financial statements.
19
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended June 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income $ 345 $ 461 $ 414
Other comprehensive income, net of tax
Unrealized gains (losses) on securities ( 573) 29 41
---------- ---------- -----------
Comprehensive income $ ( 228) $ 490 $ 455
========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
Page 1
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities
Net income $ 345 $ 461 $ 414
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
ESOP shares allocated 46 92 74
MSBP shares allocated 45 59 39
Provision for credit losses 13 33 23
Provision for depreciation and amortization 106 96 87
Provision for deferred income tax 3 ( 19) ( 85)
Loans originated for sale ( 29,286) ( 20,467) ( 9,695)
Proceeds from sales of loans originated for sale 30,742 19,796 10,071
Gain on sale of loans ( 325) ( 210) ( 118)
Loss on disposal of fixed assets - 1 3
Net increase in other assets ( 64) ( 302) ( 77)
Net increase in other liabilities 44 35 49
Net gain on sale of investments, available for sale ( 18) ( 17) ( 43)
---------- ---------- ----------
Net cash provided by (used in) operating activities 1,651 ( 442) 742
---------- ---------- ----------
Investing activities
Proceeds from sale of FHLB stock 411 - -
Proceeds from maturity of investments and interest-bearing deposits 6,087 6,793 3,839
Proceeds from sale of investments, available for sale 11,490 6,257 4,300
Purchase of investments and interest-bearing deposits ( 6,468) ( 6,887) ( 5,302)
Purchase of investments, available for sale ( 17,527) ( 20,408) ( 6,488)
Purchase of FHLB stock ( 50) - -
Purchase of property and equipment ( 132) ( 91) ( 94)
Net (increase) decrease in loans 3,936 3,080 ( 4,226)
Purchase of loans ( 1,313) ( 343) ( 22)
Principal repayments on mortgage-backed securities 3,759 1,018 116
---------- ---------- ----------
Net cash provided by (used in) investing activities 193 ( 10,581) ( 7,877)
---------- ---------- ----------
Financing activities
Proceeds from advances 7,000 7,000 7,000
Curtailment of advances and other borrowings ( 2,000) ( 3,500) ( 3,500)
Net increase (decrease) in savings deposits ( 6,194) 10,356 290
Repurchase of stock ( 1,210) ( 293) ( 495)
Dividends paid ( 179) ( 623) ( 146)
---------- ---------- ----------
Net cash provided by (used in) financing activities ( 2,583) 12,940 3,149
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents ( 739) 1,917 ( 3,986)
Cash and cash equivalents at beginning of year 3,193 1,276 5,262
---------- ---------- ----------
Cash and cash equivalents at end of year $ 2,454 $ 3,193 $ 1,276
========== ========== ==========
</TABLE>
(continued)
21
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended June 30, 1999, 1998 and 1997
(In thousands)
Page 2
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for
Interest on deposits and borrowed funds $ 3,290 $ 3,193 $ 2,680
========== ========== ==========
Income taxes $ 330 $ 440 $ 172
========== ========== ==========
Other non-cash activities
Gross unrealized gain (loss) on securities, available for sale $ ( 780) $ 93 $ 44
Deferred income taxes 265 ( 35) ( 15)
---------- ---------- ----------
Net unrealized gain (loss) $ ( 515) $ 58 $ 29
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
SWVA Bancshares, Inc. (Parent Company), is a unitary thrift holding company
whose principal asset is its wholly-owned subsidiary, Southwest Virginia Savings
Bank, FSB (Bank). The Bank is a federally chartered stock savings bank as
provided by the United States Home Owner's Loan Act. The Bank has five locations
in Roanoke, Virginia and the surrounding area. In these financial statements the
consolidated group is referred to collectively as the "Company".
The Office of Thrift Supervision (OTS) is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.
The Federal Deposit Insurance Corporation (FDIC) is the federal deposit
insurance administrator for both banks and savings associations. The FDIC has
specified authority to prescribe and enforce such regulations and issue such
orders as it deems necessary to prevent actions or practices by savings
associations that pose a serious threat to the Savings Association Insurance
Fund (SAIF).
The accounting and reporting policies of the Company conform with generally
accepted accounting principles (GAAP). A brief description of the Company's
significant accounting policies is presented as follows.
Note 1 - Summary of significant accounting policies
Basis of consolidation
The consolidated financial statements include the accounts of SWVA Bancshares,
Inc., Southwest Virginia Savings Bank, its wholly-owned subsidiary, and
Southwest Virginia Service Corporation, the wholly-owned subsidiary of the Bank.
All material intercompany accounts and transactions have been eliminated in the
consolidation. The Company also presents herein condensed Parent Company
financial information. Prior year amounts are reclassified when necessary to
conform with current year classifications.
Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for credit losses on loans. The
estimation process may include management obtaining independent appraisals for
significant collateral properties, but the ultimate collectibility and recovery
of carrying amounts are susceptible to changes in local real estate market and
other local economic conditions.
Management uses available information to recognize credit losses on loans and
real estate acquired in settlement of loans currently, while future additions to
the allowances may be necessary based on changes in local economic conditions.
In addition, regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for credit losses on loans.
Such agencies may require the Bank to recognize additions to the allowances
based on their judgments about information available to them at the time of
their examination. Because of these factors, it is possible that the allowances
for credit losses on loans could change materially.
23
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 1 - Summary of significant accounting policies (continued)
Cash equivalents
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities, when purchased, of three
months or less to be cash equivalents. Cash and cash equivalents for the three
years presented include cash on hand and demand deposits. Certificates of
deposit with initial maturities greater than three months are shown separately
as interest-bearing deposits.
Investment securities
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS 115), requires certain
securities to be classified as "held to maturity", "trading" or "available for
sale", according to management's intent and ability, at the time of purchase.
Debt securities classified as "held to maturity" are carried at cost, adjusted
for amortization of premium and accretion of discount over the terms of the
securities, as long as the Company has the ability and maintains the positive
intent to hold such securities to maturity. If such securities are sold prior to
maturity, gains or losses are recognized in the year of sale by the specific
identification method.
Trading securities, if any, are carried at fair value. Realized gains and losses
on sales and unrealized changes in fair values are included in noninterest
income.
Due to the nature of, and restrictions placed upon the Company's common stock
investment in the Federal Home Loan Bank of Atlanta, these securities have been
classified as restricted equity securities and carried at cost. These restricted
securities are not subject to the investment security classifications of SFAS
115.
Marketable equity securities not classified as "trading" or "restricted" and
debt securities not classified as "trading" or "held to maturity" are carried at
fair value, if marketable, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity. Realized
gains and losses on sales are included in noninterest income and are computed
under the specific identification method.
Mortgage-backed and related securities
Mortgage-backed securities, held to maturity, represent participating interests
in pools of long-term first mortgage loans originated and serviced by the
issuers of the securities. These securities are carried at unpaid principal
balances, adjusted for unamortized premiums and discounts as the Bank has the
ability and intent to hold such securities to maturity. Premiums and discounts
are amortized using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments. If such securities are sold
prior to maturity, gains and losses are determined using the specific
identification method.
Securities classified as available for sale are carried at their current market
value. The difference between the amortized cost and current market value, net
of deferred income tax, is reflected as a component of equity capital and is
designated as unrealized holding gain/loss on securities available for sale.
24
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 1 - Summary of significant accounting policies (continued)
Loans held for sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Net
unrealized losses are recognized in a valuation allowance by charges to
noninterest income. As of June 30, 1999 and 1998 and for each of the three years
ended June 30, 1999, 1998 and 1997, these loans were originated with firm
commitments from independent third parties to be acquired at fixed prices. As a
result, no unrealized gains or losses have been recognized.
Loans and allowances for credit losses
The Company adopted the provisions of Statements of Financial Accounting
Standards No.114, Accounting by Creditors for Impairment of a Loan (SFAS 114),
and Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures (SFAS 118), as of July 1, 1996. The adoption has had no material
effect on the financial position or operating results of the Company nor does it
have any effect on the comparability of financial statement information.
Loans receivable that management has the intent and ability to hold for the
foreseeable future, or until maturity or pay off, are carried at their face or
par values, net of unearned discounts, participation or whole-loan interests
owned by others, unearned loan fees, undisbursed loans in process, and an
allowance for credit losses.
Valuation allowances for estimated credit losses on loans are established by
charges to income when any material and estimable decline in value is deemed to
have occurred. The determination of the adequacy of the valuation allowance is
based on a detailed analysis of individual loans with known or anticipated
adverse performance characteristics, and includes consideration of historical
patterns, industry experience, current economic conditions, changes in
composition and risk characteristics of the loan portfolio, and other factors
deemed relevant to the collectibility of the loans currently outstanding. A loan
is considered impaired when, based on current information and events, it is
probable that all amounts due according to the contractual terms of the loan
agreement will not be collectible. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for credit losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
Loans that are 90 days or more past due are individually reviewed for ultimate
collectibility. Interest determined to be uncollectible on loans that are
contractually past due is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established by a charge to
interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are received
until, in management's judgment, the borrower's ability to make periodic
interest and principal payments is back to normal, in which case the loan is
returned to accrual status.
Foreclosed real estate
Foreclosed real estate owned, if any, consists of property acquired by
foreclosure on delinquent loans or by deed in lieu of foreclosure. Such property
is recorded initially at the lower of cost or fair value and is subsequently
maintained at the lower of cost or fair value minus the estimated costs to sell.
25
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 1 - Summary of significant accounting policies (continued)
Property, equipment and depreciation
The various classes of property are stated at cost and are depreciated by the
straight-line method over their estimated useful lives of 10 to 50 years for
buildings and improvements and 3 to 12 years for furniture, fixtures, and
equipment. Repairs are expensed as incurred. The cost and accumulated
depreciation of property are eliminated from the accounts upon disposal, and any
resulting gain or loss is included in the determination of net income.
Income taxes
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect of a change in tax rates
upon deferred taxes is recognized in income in the period that includes the
enactment date.
Prior to 1996, savings banks that met certain definitional tests and other
conditions prescribed by the Internal Revenue Code were allowed, within
limitations, to deduct from taxable income an allowance for bad debts based on
actual loss experience, a percentage of taxable income (8%) before such
deduction, or an amount based on a percentage of eligible loans. The cumulative
bad debt reserve, upon which no taxes have been paid, was approximately $1.7
million as of June 30, 1999.
As a result of 1996 tax legislation, the Company will compute its tax bad debt
deduction by use of the actual charge-off method, for tax years beginning with
July 1, 1996. According to the legislation, "applicable excess reserves" must be
recaptured as taxable income over five years beginning with fiscal year 1997.
Thrifts can delay those payments by two years if they meet a residential lending
requirement. The amount to be recaptured is the excess of the accumulated
reserves since 1987 over the amount allowed by use of the actual charge-off
method for those years. Since the Bank has provided deferred taxes on those bad
debt reserves accumulated since 1987, management does not believe that the
legislation will have a material effect on the Company's financial statements.
Loan origination fees, costs, discounts and premiums
Loan origination fees are accounted for in accordance with Statement of
Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases (SFAS 91). Under SFAS 91, loan origination and commitment fees and
certain direct loan origination costs are deferred. Upon the expiration of
unfunded commitments, the related fees are recognized into income as loan fees.
Loan origination fees on funded commitments and related direct costs are
amortized into income on loans as yield adjustments over the contractual life of
related loans using the level-yield method.
Discounts and premiums on loans purchased are recognized in interest income
using the level-yield method over the average life of the loan.
26
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 1 - Summary of significant accounting policies (continued)
Sales of mortgage loans, mortgage-related securities and foreclosed real estate
Gains and losses on the sales of loans, participation interest in loans, and
foreclosed real estate are accounted for by imputing gain or loss on those sales
where a yield rate guaranteed to the buyer is more or less than the contract
interest rate being collected, in the case of loans, and where foreclosed
property is sold on financing terms more or less favorable than the prevailing
market terms for similar property. Such gains or losses are recognized in the
financial statements for the year of sale. The Bank services loans that have
been sold with servicing retained. Such loan balances are not included in the
accompanying consolidated statements of financial condition.
Advertising
The Company expenses most advertising costs as incurred. Such expenses are shown
in the consolidated statements of income. As of June 30, 1999 and 1998, the
Company's statements of financial condition for each period included $6,000 of
prepaid advertising.
Fair values of financial instruments
The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:
Cash and short-term instruments - The carrying amounts of cash and
short-term instruments approximate their fair value.
o Available-for-sale and held-to-maturity securities - Fair values for
securities, excluding restricted equity securities, are based on quoted
market prices. The carrying values of restricted equity securities
approximate fair values.
o Loans receivable - Fair values are based on carrying values for
variable-rate loans that reprice frequently and have no significant change
in credit risk. Fair values for certain mortgage loans (for example,
one-to-four family residential) and other consumer loans are based on
quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial
loans are estimated using discounted cash flow analyses and interest rates
currently being offered for loans with similar terms to borrowers of
similar credit quality. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where
applicable.
o Deposit liabilities - The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date
(that is, their carrying amounts). The carrying amounts of variable-rate,
fixed-term money-market accounts and certificates of deposit (CDS)
approximate their fair values at the reporting date. Fair values for
fixed-rate CDS are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time deposits.
27
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 1 - Summary of significant accounting policies (continued)
o Short-term borrowings - The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowing are estimated using discounted cash flow analyses
based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements.
o Long-term debt - The fair values of the Company's long-term debt are
estimated using discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements.
o Accrued interest - The carrying amounts of accrued interest approximate
their fair values.
o Off-balance-sheet instruments - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
counterparties' credit standings.
Conversion to stock ownership
At a special meeting on July 20, 1994, the members of the Bank approved
management's plan to convert the Savings Bank from a Federal Mutual to a Federal
Stock Savings Bank. The plan called for the formation of SWVA Bancshares, Inc.
which would own the stock of the Bank upon its conversion to a stock form of
ownership. The stock of the Parent Company would then be offered through a
Subscription and Community Offering to the Bank's tax-qualified employee stock
plans, eligible account holders and others. The transaction was in the form of a
pooling of interests.
On October 7, 1994, the Parent Company issued 570,590 shares of $.10 par value
common stock at $10 per share and became the parent company of the Bank. Net
proceeds, after deducting conversion expenses and underwriters' discounts of
$469,000, were $5.2 million and are reflected as common stock and additional
paid-in capital in the accompanying consolidated statements of financial
condition. The Parent Company's Articles of Incorporation contain certain
limitations on voting rights and other "anti-takeover" provisions.
As part of the conversion to stock form, the Bank formed an Employee Stock
Ownership Plan (ESOP) for eligible employees. The ESOP purchased 45,647 common
shares of the Parent Company issued in the conversion, which purchase was funded
by a loan from the Parent Company. In accordance with generally accepted
accounting principles, the unpaid balance of the ESOP loan has been eliminated
on the Company's consolidated statements of financial condition. Stockholders'
equity has been reduced by the aggregate purchase price of the shares owned by
the ESOP net of the shares committed to be released. Contributions to the ESOP
by the Savings Bank are made to fund the principal and interest payments on the
debt of the ESOP. As of June 30, 1999, a total of 22,828 shares had been
released.
28
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 1 - Summary of significant accounting policies (continued)
Impact of new accounting standards
In February 1997, the FASB issued Earnings per Share (SFAS 128). This statement
is effective for financial statements, including interim periods issued for
periods ending after December 15, 1997. SFAS 128 provides for the calculation of
basic and diluted earnings per share, and requires comparative information for
prior periods to be restated to conform with this standard. Basic earnings per
share includes no dilution and is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities that could share in earnings of an entity, similar to fully diluted
earnings per share (see Note 15). All previously reported earnings per share
amounts have been restated to conform to the provisions of this new accounting
standard.
In June 1997, the FASB issued Reporting Comprehensive Income (SFAS 130), which
established standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS 130 is
effective for financial statements for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated. The
only component of comprehensive income to be disclosed under the provisions of
this statement is the changes in unrealized holding gains or losses on
securities available for sale.
In June 1997, the FASB also issued Disclosures about Segments of an Enterprise
and Related Information (SFAS 131), which changes the way public companies
report information about segments of their business in annual financial
statements and requires segment information in quarterly reports to
shareholders. It also requires that public business enterprises report certain
information about their products and services, the geographic areas in which
they operate, and their major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. SFAS 131 has not had a material effect on the
Company's financial statements.
In February 1998, the FASB issued Employers' Disclosures about Pensions and
Other Postretirement Benefits (SFAS 132), which revises employers' disclosures
about pension and other postretirement benefit plans. SFAS 132 does not change
the measurement or recognition of those plans, but requires additional
information on changes in benefit obligations and fair values of plan assets,
and eliminates certain disclosures previously required by SFAS Nos. 87, 88 and
106. SFAS 132 is effective for fiscal years beginning after December 15, 1997.
SFAS 132 has not had a material effect on the Company's financial statements.
Reclassifications
Certain items in the 1998 financial statements have been reclassified to afford
comparability with the 1999 financial statements.
29
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 2 - Investment securities
Investments consisting of U.S. government, mortgage-backed and other securities
at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------
Gross Unrealized
Amortized ----------------------------
Cost Gain Loss Fair Value
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Securities, held to maturity
FHLMC participation certificates $ 283 $ 9 $ - $ 292
----------- ----------- ----------- -----------
Securities, available for sale
Municipal bonds 2,442 - 96 2,346
U.S. Government and agency bonds 12,000 - 524 11,476
GNMA mortgage-backed securities 8,591 - 179 8,412
FNMA mortgage-backed securities 681 19 - 700
----------- ----------- ----------- -----------
23,714 19 799 22,934
----------- ----------- ----------- -----------
Total securities $ 23,997 $ 28 $ 799 $ 23,226
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
Gross Unrealized
Amortized ----------------------------
Cost Gain Loss Fair Value
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Securities, held to maturity
FHLMC participation certificates $ 318 $ 9 $ - $ 327
----------- ----------- ----------- -----------
Securities, available for sale
Municipal bonds 930 6 - 936
U.S. Government and agency bonds 9,750 62 - 9,812
GNMA mortgage-backed securities 9,509 - 19 9,490
FNMA mortgage-backed securities 1,324 45 - 1,369
----------- ----------- ----------- -----------
21,513 113 19 21,607
----------- ----------- ----------- -----------
Total securities $ 21,831 $ 122 $ 19 $ 21,934
=========== =========== =========== ===========
</TABLE>
30
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 2 - Investment securities (continued)
The amortized cost and estimated fair value of debt securities at June 30, 1999,
by contractual maturity, were as follows in thousands. Expected maturities of
mortgage-backed securities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Values of mutual fund shares are not guaranteed by any
government agency.
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------- ---------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due after one year through five years - - - -
Due after five years through ten years - - 2,500 2,468
Due after ten years - - 11,942 11,354
Mortgage-backed and related securities 283 292 9,272 9,112
----------- ----------- ----------- ------------
$ 283 $ 292 $ 23,714 $ 22,934
=========== =========== =========== ============
</TABLE>
Proceeds from maturities of interest-bearing deposits and investments were $6.1
million in 1999, $6.8 million in 1998, and $3.8 million in 1997. Gross realized
gains and losses on redemption of investments are summarized below in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- ----------------
<S> <C> <C> <C>
Gross realized gains $ - $ - $ 52
Gross realized losses ( 18) ( 17) ( 9)
----------- ----------- -----------
Net realized gains (losses) $ ( 18) $ ( 17) $ 43
=========== =========== ===========
</TABLE>
Cost was determined by the specific identification method.
31
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 3 - Loans receivable
Loans receivable at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Mortgage loans
Residential, one to four family $ 32,342 $ 38,596
Residential, multifamily 4,187 4,033
Nonresidential and land 2,071 2,513
Construction 4,024 2,980
----------- -----------
42,624 48,122
----------- -----------
Non-mortgage loans
Consumer loans
Secured personal 1,483 725
Unsecured personal 92 39
Auto 177 34
Home improvement 38 35
Equity line 2,316 1,023
Other 80 59
Commercial
Unsecured - 26
Secured 105 43
----------- -----------
4,291 1,984
----------- -----------
Total loans 46,915 50,106
----------- -----------
Less
Deferred loan fees 42 71
Undisbursed loans in process 1,087 1,617
Allowance for credit losses 210 207
----------- -----------
1,339 1,895
----------- -----------
Loans receivable, net $ 45,576 $ 48,211
=========== ===========
</TABLE>
Real estate loans pledged as collateral for Federal Home Loan Bank of Atlanta
advances totaled $12 million and $7 million as of June 30, 1999 and 1998,
respectively.
32
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 3 - Loans receivable (continued)
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of these loans
at June 30 of each year are summarized as follows in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Federal Home Loan Mortgage Corporation (FHLMC) $ 292 $ 321 $ 379
Virginia Housing Development Authority (VHDA) 800 614 583
----------- ----------- -----------
$ 1,092 $ 935 $ 962
=========== =========== ===========
</TABLE>
Custodial escrow balances at June 30 of each year maintained in connection with
the foregoing loans serviced are summarized as follows in thousands:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
FHLMC $ 7 $ 6
VHDA 6 6
----------- -----------
$ 13 $ 12
=========== ===========
</TABLE>
Activity in the allowance for credit losses for the years ended June 30, 1999,
1998 and 1997 is summarized as follows in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 207 $ 217 $ 194
Provision charged to operations 13 33 23
Charge-offs ( 10) ( 43) -
----------- ----------- -----------
Balance at end of year $ 210 $ 207 $ 217
=========== =========== ===========
</TABLE>
33
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 3 - Loans receivable (continued)
The following table sets forth the maturity of the loan portfolio at June 30,
1999 in thousands. The table does not include prepayments or scheduled principal
repayments.
<TABLE>
<CAPTION>
Residential
One to Four Multi- Nonresidential Consumer
Family Family and Land Construction and Other Total
------ ------ -------- ------------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Amounts due
Within 3 months $ - $ - $ - $ 840 $ 590 $ 1,430
3 months to 1 year 7 - - 849 100 956
----------- --------- --------------- ------------ ---------- -----------
Total due within 1 year 7 - - 1,689 690 2,386
----------- --------- --------------- ------------ ---------- -----------
After 1 year
1 to 3 years 117 - 8 1,435 351 1,911
3 to 5 years 413 - 99 900 289 1,701
5 to 10 years 3,127 990 601 - 392 5,110
10 to 20 years 7,153 2,565 1,363 - 2,569 13,650
Over 20 years 21,525 632 - - - 22,157
----------- --------- --------------- ------------ ---------- -----------
Total due after 1 year 32,335 4,187 2,071 2,335 3,601 44,529
----------- --------- --------------- ------------ ---------- -----------
Total due $ 32,342 $ 4,187 $ 2,071 $ 4,024 $ 4,291 46,915
=========== ========= =============== ============ ========== -----------
Less
Allowance for loan loss 210
Loans in process 1,087
Deferred loan fees 42
-----------
1,339
Loans receivable, net $ 45,576
===========
</TABLE>
The following table sets forth the dollar amount (in thousands) of all loans due
after June 30, 2000, which have predetermined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Adjustable
Rates Rates Total
----- ----- -----
<S> <C> <C> <C>
One to four family $ 7,566 $ 24,769 $ 32,335
Multifamily 3,182 1,005 4,187
Nonresidential and land 1,658 413 2,071
Construction 1,435 900 2,335
Consumer and other 1,285 2,316 3,601
----------- ----------- -----------
$ 15,126 $ 29,403 $ 44,529
=========== =========== ===========
</TABLE>
34
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 4 - Foreclosed real estate
There were no foreclosed real estate acquired in settlement of loans at June 30,
1999 and 1998.
The net loss on foreclosed real estate at June 30 of each year consisted of the
following in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net loss on sale of foreclosed real estate $ - $ 43 $ -
=========== =========== ===========
</TABLE>
Note 5 - Property, equipment and depreciation
Property and equipment at June 30 of each year were as follows in thousands:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Land $ 575 $ 575
Office buildings and improvements 1,794 1,788
Furniture, fixtures and equipment 1,057 1,017
----------- -----------
3,426 3,380
Less accumulated depreciation 1,738 1,718
----------- -----------
Property and equipment, net $ 1,688 $ 1,662
=========== ===========
</TABLE>
Accumulated depreciation at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
Office buildings and improvements $ 937 $ 899
Furniture, fixtures and equipment 801 819
----------- -----------
$ 1,738 $ 1,718
=========== ===========
</TABLE>
Depreciation expense for the years ended June 30, 1999, 1998 and 1997 was as
follows in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Office buildings and improvements $ 37 $ 37 $ 37
Furniture, fixtures and equipment 70 55 50
----------- ----------- -----------
$ 107 $ 92 $ 87
=========== =========== ===========
</TABLE>
35
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 6 - Accrued interest receivable
Accrued interest receivable at June 30 of each year was as follows in thousands:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Accrued interest on loans $ 261 $ 286
Accrued interest on investments 333 279
----------- -----------
$ 594 $ 565
=========== ===========
</TABLE>
Note 7 - Deposits
Savings deposits at June 30 of each year, summarized by interest rate, were as
follows in thousands:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ----------------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Negotiable order of withdrawal deposits
Non-interest bearing $ 1,284 2.07% $ 953 1.40%
1.49% 5,434 8.75 - 0.00
1.74% - 0.00 4,768 6.98
2.52% 3,233 5.21 - 0.00
2.96% - 0.00 3,168 4.64
----------- -------- ----------- --------
9,951 16.03 8,889 13.02
----------- -------- ----------- --------
Passbooks and statement deposits, 3.00% for each year 8,688 13.99 7,481 10.95
----------- -------- ----------- --------
Certificates of deposit and other term deposits
3.00% to 4.00% 1,489 2.40 240 .35
4.01% to 5.00% 23,367 37.63 3,082 4.51
5.01% to 6.00% 18,399 29.63 48,393 70.87
6.01% to 7.00% 200 .32 200 .29
7.01% to 8.00% - .00 3 .01
----------- -------- ----------- --------
Total term deposits 43,455 69.98 51,918 76.03
----------- -------- ----------- --------
Total deposits $ 62,094 $ 100.00% $ 68,288 $ 100.00%
=========== ========== =========== ==========
</TABLE>
The aggregate amounts of certificates of deposit with a denomination of $100,000
or more were $5.6 million, $5.8 million, and $5.1 million at June 30, 1999, 1998
and 1997, respectively.
Certain deposit accounts were pledged as collateral for $197,000, $207,000, and
$171,000 of consumer loans at June 30, 1999, 1998 and 1997, respectively.
36
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 7 - Deposits (continued)
Maturities of certificates of deposit are scheduled for each fiscal year
indicated as follows in thousands:
<TABLE>
<CAPTION>
2000 2001 2002 After 2003 Total
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
3.00% to 4.00% $ 1,489 $ - $ - $ - $ 1,489
4.01% to 5.00% 19,935 3,094 320 18 23,367
5.01% to 6.00% 17,597 756 10 36 18,399
6.01% to 7.00% 200 - - - 200
----------- ----------- ----------- ----------- -----------
$ 39,221 $ 3,850 $ 330 $ 54 $ 43,455
=========== =========== =========== =========== ===========
</TABLE>
Interest expense on deposits for the years ended June 30, 1999, 1998 and 1997 is
summarized as follows in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Money market $ 87 $ 93 $ 110
Passbook savings 234 224 219
NOW 87 92 102
Club accounts 1 1 1
Certificates of deposit 2,439 2,558 2,099
----------- ----------- -----------
$ 2,848 $ 2,968 $ 2,531
=========== =========== ===========
</TABLE>
Note 8 - Borrowed funds
The following table sets forth certain information regarding advances at the
dates or for the periods indicated in thousands:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
FHLB-Atlanta advances
Balance outstanding at end of year $ 12,000 $ 7,000
Average balance outstanding 9,043 4,400
Maximum amount outstanding at any month-end during the year 12,000 7,000
Weighted-average interest rate during the year 5.42% 5.87%
Weighted-average interest rate at end of year 5.37% 5.63%
</TABLE>
37
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 8 - Borrowed funds (continued)
The following table sets forth the repayment schedule at June 30, 1999, which
includes interest rates and amounts due by year, in thousands:
Year Due Interest Rate Amount
-------- ------------- ------
2000 6.00% $ 1,000
2002 5.68% 2,000
2003 5.52% 2,000
2008 5.02% 5,000
2009 5.47% 2,000
-----------
$ 12,000
===========
As of June 30, 1999, the line of credit approved by the Federal Home Loan Bank
was $16 million, of which $4 million remained unused.
Residential loans aggregating $12 million and $7 million were pledged as of June
30, 1999 and 1998, respectively, as collateral for the advances from
FHLB-Atlanta under a blanket floating lien agreement.
Note 9 - SAIF premium assessment
Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (Act), the
FDIC imposed a special assessment on SAIF members to capitalize the SAIF at the
designated reserve level of 1.25% of insured deposits as of September 30, 1996.
Based on the Company's deposits as of March 31, 1995, the date for measuring the
amount of the special assessment pursuant to the Act, the Company paid a special
assessment of $355,000 on November 27, 1996 to capitalize the SAIF. The FDIC has
lowered the premium for deposit insurance to a level necessary to maintain the
SAIF at its required reserve level. The Bank's premium for deposit insurance for
1999 is currently .0610% of assessable deposits and was .0625% in 1998.
Note 10 - Income taxes
The Bank's portion of the consolidated taxable income was computed by
application of Section 593(b)(2) of the U.S. Internal Revenue Code which
provides a special deduction for bad debts. The bad debt deduction may be a "tax
preference item" to which a minimum tax may apply.
The 1996 federal tax legislation repealed the benefits of Section 593(b)(2) of
the U.S. Internal Revenue Code. For ensuing fiscal years, the Bank will compute
its tax bad debt deduction by use of the "experience method" which is based on a
moving five-year average of actual loss experience. The legislation also
provides that "applicable excess reserves" must be recaptured as taxable income
over five years beginning in fiscal 1997. The amount to be recaptured is the
excess of the accumulated reserves since 1987 over the amount allowed by use of
the experience method for those years.
38
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 10 - Income taxes (continued)
The consolidated provision for income taxes for the years ended June 30, 1999,
1998 and 1997, consisted of the following elements in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Tax paid or payable currently
Federal $ 159 $ 304 $ 250
State 15 33 41
Income tax deferred, net 3 ( 19) ( 85)
----------- ----------- -----------
Total provision for income taxes $ 177 $ 318 $ 206
=========== =========== ===========
</TABLE>
The provision for income taxes differed from that computed at the statutory
corporate rate for the years ended June 30, 1999, 1998 and 1997 as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Tax at statutory rate 34.0% 34.0% 34.0%
Increases in taxes resulting from
State income tax, net of federal tax benefit 2.0 2.8 2.0
Other ( 6.9) 1.5 ( 4.2)
Permanent non-deductible expenses 4.3 2.5 2.2
-------- -------- --------
Total provision for income taxes 33.4% 40.8% 34.0%
======== ======== ========
</TABLE>
The significant components of the net deferred tax asset (liability) at June 30
of each year were as follows in thousands:
<TABLE>
<CAPTION>
Liability Method
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Components of the deferred tax asset
Loan fees $ 3 $ 9
Pension expense 76 76
Stock bonus plan 24 21
Accelerated depreciation - 12
Bad debts 13 -
Unrealized losses on securities, available for sale 265 -
----------- -----------
381 118
Valuation allowance - -
----------- -----------
Total deferred tax asset 381 118
----------- -----------
Components of the deferred tax liability
Bad debts - 8
Accelerated depreciation 10 -
Unrealized gains on securities, available for sale - 35
----------- -----------
Total deferred tax liability 10 43
----------- -----------
Net deferred tax asset $ 371 $ 75
=========== ===========
</TABLE>
39
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 10 - Income taxes (continued)
The Company's consolidated income tax returns for years not barred by the
statute of limitations are subject to review by tax authorities.
Note 11 - Comprehensive income
Effective July 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income, (SFAS
130). This statement requires the reporting of comprehensive income in addition
to net income from operations. Comprehensive income is a more inclusive
financial reporting methodology that includes certain disclosure of certain
financial information that has historically not been recognized in the
calculation of net income.
The before tax and after tax amount, as well as the tax (expense) is summarized
below:
<TABLE>
<CAPTION>
Tax
Before (Expense) After
Tax Benefit Tax
---------- ---------- ----------
<S> <C> <C> <C>
Year ended June 30, 1999
Unrealized gains (losses) on securities $ ( 868) $ 295 $ ( 573)
======= ======== =========
Year ended June 30, 1998
Unrealized gains (losses) on securities $ 44 $ ( 15) $ 29
======= ======= =========
Year ended June 30, 1997
Unrealized gains (losses) on securities $ 62 $ ( 21) $ 41
======= ======= =========
</TABLE>
Note 12 - Retirement plans and employee benefit programs
The Company has a multi-employer defined benefit pension plan with The Financial
Institution's Retirement Fund. Pension expense is the amount of the required
contribution, and a liability is recognized for such contributions which are
unpaid at the end of the fiscal year.
Pension expense for the three years ended June 30, 1999 was as follows in
thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Pension expense $ - $ - $ 49
=========== =========== ===========
</TABLE>
The multi-employer defined benefit plan covers substantially all employees who
have reached age 21 and who have completed one year of service. The benefits are
based on length of service and high five-year average earnings. However, in no
event will the benefits be less than those vested through June 30, 1992 under a
previous plan.
40
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 12 - Retirement plans and employee benefit programs (continued)
Supplemental executive retirement plan
The Company has deferred compensation agreements with two principal officers
which provide for retirement benefits supplementary to those of the pension
plan. As of June 30, 1999 and 1998, cumulative accruals under the contracts
totaled $230,000 and $201,000, respectively, and constituted general obligations
of the Company.
Employee stock ownership plan
At the time of the stock conversion, the Bank established an Employee Stock
Ownership Plan covering all full-time employees over the age of 21, with at
least 1,000 hours of service within a plan year. The ESOP borrowed funds from
the Company to purchase a total of 45,647 shares of the Company's common stock,
the loan being collateralized by the common stock. Contributions by the Bank,
along with dividends received on unallocated shares, are used to repay the loan
with shares being released from the Company's lien proportional to the loan
repayments. Annually on June 30, the released shares are allocated to the
participants in the same proportion that their wages bear to the total
compensation of all of the participants. The Company has released 22,828 shares
of the common stock as of June 30, 1999. The Company recognized $8,000 and
$12,000 as accrued compensation costs in 1999 and 1998, respectively. The fair
value of unearned ESOP shares totaled $296,647 and $558,000 at June 30, 1999 and
1998, respectively. There were no commitments to repurchase ESOP shares.
The Company accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares pledged as collateral are reported as a reduction of
stockholders' equity in the consolidated statements of financial condition. As
shares are released from collateral, the Company reports compensation expense
equal to the current market price of the shares, and the shares become
outstanding for earnings per share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt.
41
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 12 - Retirement plans and employee benefit programs (continued)
Recognition and retention plan
The stockholders approved the establishment of a Management Stock Bonus Plan and
Trust (MSBP) on October 25, 1995. The plan states that the Trust shall not
purchase more than 4% of the aggregate shares of common stock issued by the
Company in the mutual-to-stock conversion of the Bank (22,823 shares). During
1996, the Bank purchased 22,812 shares of the Company's common stock at an
average price of $17.02 per share to be awarded to directors, officers and
employees in accordance with the provision of the Recognition and Retention
Plan. The costs of the shares awarded under the plan are recorded as unearned
compensation, a contra equity account, and are recognized as an expense in
accordance with the vesting requirements under the plan. For the years ended
June 30, 1999 and 1998, the amounts included in compensation expense were
$42,000 and $63,000, respectively. The status of the shares in this plan at June
30, 1999 is shown as follows:
Unawarded Awarded
Shares Shares
------ ------
Balance at June 30, 1997 4,328 15,844
Granted - -
Vested - ( 2,635)
Forfeiture - -
----------- ----------
Balance at June 30, 1998 4,328 13,209
Granted - -
Vested - ( 2,642)
Forfeiture - -
----------- ----------
Balance at June 30, 1999 4,328 10,567
=========== ===========
Stock option plans
The stockholders also approved the establishment of a stock option plan on
October 5, 1995 for directors, officers and employees. The exercise price under
both plans is $17 per share, the fair market price on the date of the grant. One
is a non-incentive stock option plan, and the other is an incentive stock option
plan. Rights to exercise options granted vest at the rate of 20% per year,
beginning on the first anniversary of the grant. On March 18, 1998, the Board of
Directors approved the establishment of a stock option plan for directors. The
exercise price is $21 per share, the fair market price on the date of grant.
Rights to exercise options are 100% vested as of June 30, 1999.
On April 21, 1999, the Board of Directors approved the establishment of a stock
option plan for the former President. The exercise price is $13 per share, the
fair market price on the date of the grant. Rights to exercise options are 100%
vested as of June 30, 1999.
42
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 12 - Retirement plans and employee benefit programs (continued)
The weighted-average option price and weighted-average remaining term of stock
options awarded and not exercised were as follows as of June 30:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Weighted-average price $ 17.01 $ 17.01
Weighted-average term $ 6.45 $ 6.45
</TABLE>
A summary of the stock option activity is as follows:
<TABLE>
<CAPTION>
Available Options Vested and
for Grant Outstanding Exercisable
--------- ----------- -----------
<S> <C> <C> <C>
Balance at June 30, 1997 13,132 35,142 8,785
Granted - 10,122 10,122
Vested - ( 8,777) 8,777
Exercised - - -
Forfeiture - - -
-------------- ------------ -------------
Balance at June 30, 1998 13,132 36,487 27,684
Granted - 10,000 10,000
Vested - ( 8,792) 8,792
Exercised - - -
Forfeiture - - -
-------------- ------------ -------------
Balance at June 30, 1999 13,132 37,695 46,476
============== ============= =============
</TABLE>
The Company applies APB Opinion 25 in accounting for employee stock option
plans. Accordingly, no compensation cost has been recognized in 1999 and 1998.
Pro forma information regarding net income and earnings per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 5.65%; dividend yields of 3.08%; volatility factor of 11.5%;
and a weighted-average expected life of the option of 6.45 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
43
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 12 - Retirement plans and employee benefit programs (continued)
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1999 1998 1997
--------- --------- ---------
Pro forma net income $ 339 $ 446 $ 413
Pro forma earnings per share
Basic $ .76 $ .93 $ .86
Diluted $ .76 $ .88 $ .86
Note 13 - Financial instruments with off-balance-sheet risk
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend credit. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the statements of financial position. The contract or
notional amounts of those instruments reflect the extent of involvement the
Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to be drawn
upon, the total commitment amounts generally represent future cash requirements.
The Company evaluates each customer's credit-worthiness on a case-by-case basis.
The amount of collateral deemed necessary by the Company upon extension of
credit is based on management's credit evaluation of the counter-party.
Collateral normally consists of real property.
The Company's commitments to finance real estate acquisitions and construction
were $2.5 million at June 30, 1999, $4.1 million at June 30, 1998, and $3.0
million at June 30, 1997. As of June 30, 1999, the Company had contracted to
sell $486,000 of the loans to be financed. No loss is anticipated. At June 30,
1999, outstanding letters of credit totaled $521,000, and unfunded lines of
credit totaled $2.7 million. There were no loans sold with recourse in 1999 and
1998.
44
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 14 - Restricted retained earnings
In accordance with the regulations concerning conversion from a mutual to a
stock organization, the Bank was required to establish a liquidation account
equal to its net worth as of the latest statement of financial condition
contained in the final prospectus. Such liquidation account is to be maintained
as of the eligibility record date (March 31, 1993) or supplemental eligibility
record date (June 30, 1994) for the benefit of depositors who continue to
maintain their deposits in the Bank after the conversion in the event of a
complete liquidation of the Bank. If, however, on any annual closing date (June
30) of the Bank, the amount in any deposit account is less than the amount in
such deposit account on March 30, 1993 or June 30, 1994, then the interest in
the liquidation account relating to such deposit account would be reduced by the
amount of such reduction, and such interest will cease to exist if such deposit
account is closed. The Bank may not declare or pay a cash dividend or repurchase
any of its capital stock if the effect thereof would cause the net worth of the
Bank to be reduced below either the amount required for the liquidation account
or the minimum regulatory capital requirements. At June 30, 1999, the
liquidation account, unadjusted for customer withdrawals, totaled $4.2 million,
and minimum regulatory capital was $3.0 million. See Note 17 for Bank regulatory
capital requirements.
Note 15 - Earnings per share
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
Year Ended June 30
---------------------------------------------------
1999 1998 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Numerator:
(a) Net income available to shareholders $ 345 $ 461 $ 414
============= ============ ============
Denominator:
Weighted-average shares outstanding 471,766 509,008 522,884
Less: ESOP weighted-average shares ( 27,385) ( 31,951) ( 36,518)
------------- ------------ ------------
(b) Basic EPS weighted-average shares outstanding 444,381 477,057 486,366
Effect of dilutive securities:
Incremental shares attributable to the Stock Option - 7,500 -
Plan and Management Stock Bonus Plan - 2,255 -
------------- ------------ ------------
(c) Diluted EPS weighted-average shares outstanding 444,381 486,812 486,366
============= ============ ============
Basic earnings per share (a/b) $ .78 $ .97 $ .85
============= ============ ============
Diluted earnings per share (a/c) $ .78 $ .95 $ .85
============= ============ ============
</TABLE>
Earnings per share amounts for 1997 have been restated to comply with the
provisions of SFAS 128.
45
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 16 - Significant group concentrations of credit risk
The Company grants residential, commercial, and consumer loans to customers
mainly in the southwest region of Virginia. The Company has a loan portfolio
consisting principally of residential mortgage loans and is not dependent upon
any particular economic sector, although the portfolio as a whole may be
affected by general economic factors of the southwest Virginia region.
At June 30, 1999, the Company had commercial bank deposits of $1.0 million in
excess of the Federal Deposit Insurance Corporation insurance limit.
Note 17 - Bank regulatory matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The Office of Thrift Supervision's capital regulations require thrift
institutions to maintain capital at least sufficient to meet three requirements:
tangible capital, core capital, and risk-based capital. Management has
determined that the Bank's capital meets and exceeds all three capital
requirements as follows as of June 30, 1999 and 1998, in thousands. Tangible and
core capital levels are shown as a percentage of adjusted total assets.
Risk-based capital levels are shown as a percentage of risk-weighted assets:
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Capital
Regulatory capital computed $ 6,869 8.3% $ 6,869 8.3% $ 7,079 17.7%
Minimum capital requirement 1,238 1.5 2,476 3.0 3,205 8.0
-------- ----- --------- ------ --------- ------
Regulatory capital excess $ 5,631 6.8% $ 4,393 5.3% $ 3,874 9.7%
======== ======= ========= ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------
Tangible Core Risk-based
Capital Capital Capital
------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital computed $ 7,683 9.1% $ 7,683 9.1% $ 7,890 20.8%
Minimum capital requirement 1,271 1.5 2,542 3.0 3,042 8.0
-------- ----- --------- ------ --------- ------
Regulatory capital excess $ 6,412 7.6% $ 5,141 6.1% $ 4,848 12.8%
======== ======= ========= ======== ========= ========
</TABLE>
46
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 18 - Related-party transactions
The Company has made loans in the ordinary course of business to various
officers and directors. These loans are generally collateralized by the
individuals' personal residences or by savings accounts in the Company. The
aggregate balances of such loans which exceed $60,000 in aggregate outstanding
amount to any officer or director for the years ended June 30, 1999, 1998 and
1997 are summarized as follows in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance $ 197 $ 286 $ 49
Additions - - 285
Repayments ( 3) ( 89) ( 48)
----------- ----------- -----------
Ending balance $ 194 $ 197 $ 286
=========== =========== ===========
</TABLE>
Fees for foreclosures, titles and deeds of trust, paid to a law firm, of which a
director was a principal, aggregated $13,860, $2,575 and $6,625 for the years
ended June 30, 1999, 1998 and 1997, respectively. Insurance commissions received
by a director from business with or for the Company aggregated $4,000, $4,000
and $3,000 for the years ended June 30, 1999, 1998 and 1997, respectively.
Note 19 - Commitments and contingencies
Rental expenses paid under operating leases for a loan office at June 30 of each
year was as follows in thousands:
1999 1998 1997
------------- ----------- -----------
Rental expense $ 42 $ 25 $ 24
=========== =========== ===========
The Company entered into a three-year lease agreement for office space. The
lease terminates April 30, 2001.
The current minimum annual rental commitments under the noncancelable operating
lease in effect at June 30, 1999 are as follows in thousands:
Year Ending Amount
----------- ------
2000 $ 42
2001 36
-------------
$ 78
=============
47
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 20 - Disclosures about fair value of financial instruments
The estimated fair values of the Company's financial instruments as of June 30
of each year are as follows in thousands:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,454 $ 2,454 $ 3,193 $ 3,193
Interest-bearing deposits 6,278 6,278 5,897 5,897
Investment securities 14,442 13,822 11,641 11,709
Mortgage-backed securities 9,555 9,405 11,151 11,186
Loans receivable, net 45,576 45,729 48,211 59,620
Financial liabilities
Deposits 62,094 62,094 68,288 68,391
Advances from Federal Home Loan Bank 12,000 11,956 7,000 6,913
Unrecognized financial instruments
Commitments to purchase securities - - - -
Standby letters of credit issued 521 521 391 391
</TABLE>
Note 21 - Other noninterest expense
Other noninterest expense for the years ended June 30, 1999, 1998 and 1997 is
shown as follows in thousands:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Other noninterest expense
Contributions $ 5 $ 7 $ 5
Dues and subscriptions 18 14 12
Insurance 30 31 32
Office supplies, telephone and postage 136 113 101
Other expenses 38 41 46
Professional fees 101 100 91
Supervisory fees and assessments 33 30 31
----------- ----------- -----------
$ 361 $ 336 $ 318
=========== =========== ===========
</TABLE>
48
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999, 1998 and 1997
Note 22 - Selected quarterly financial data (unaudited)
Condensed consolidated financial data for the years ended June 30, 1999 and 1998
is shown as follows in thousands, except per-share data:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 1,493 $ 1,477 $ 1,408 $ 1,413
Total interest expense 889 864 795 790
----------- ----------- ----------- -----------
Net interest income 604 613 613 623
Provision for credit losses 3 3 3 4
----------- ----------- ----------- -----------
Net interest income after
provision for credit losses 601 610 610 619
Other noninterest income 149 193 125 108
Noninterest expense 613 622 631 627
----------- ----------- ----------- -----------
Income before income tax expense 137 181 104 100
Income tax expense 52 70 40 15
----------- ----------- ----------- -----------
Net income $ 85 $ 111 $ 64 $ 85
=========== =========== =========== ===========
Basic earnings per share $ .18 $ .24 $ .14 $ .21
Diluted earnings per share .18 .24 .14 .21
Cash dividends per share .20 - .20 -
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Total interest income $ 1,393 $ 1,424 $ 1,520 $ 1,471
Total interest expense 718 789 850 869
---------- ---------- ---------- ----------
Net interest income 675 635 670 602
Provision for credit losses 24 3 3 3
---------- ---------- ---------- ----------
Net interest income after
provision for credit losses 651 632 667 599
Other noninterest income 86 84 121 137
Noninterest expense ( 550) ( 531) ( 547) ( 570)
---------- ---------- ---------- ----------
Income before income tax expense 187 185 241 166
Income tax expense 71 70 88 89
---------- ---------- ---------- ----------
Net income $ 116 $ 115 $ 153 $ 77
========== ========== ========== ==========
Basic earnings per share $ .24 $ .24 $ .32 $ .17
Diluted earnings per share .24 .24 .31 .16
Cash dividends per share 1.15 - .15 -
</TABLE>
49
<PAGE>
OFFICE LOCATIONS
Corporate Office
SWVA Bancshares, Inc. and Southwest Virginia Savings Bank, FSB
302 Second Street, S.W.
Roanoke, VA 24011-1597
(540) 343-0135
Branch Offices - Southwest Virginia Savings Bank, FSB
1006 Hardy Road 1611 Hershberger Road
Vinton, VA Roanoke, VA
2133 Electric Road 40 W. Main Street
Roanoke, VA Salem, VA
Loan Production Office
Building D, Suite 101
2847 Penn Forest Blvd.
Roanoke, VA
<TABLE>
<CAPTION>
Board of Directors of SWVA Bancshares, Inc.
B. L. Rakes
Chairman of the Board
Consultant
<S> <C> <C>
F. Courtney Hoge James H. Brock Michael M. Kessler
Vice Chairman of the Board President, Rusco Window Co. President, Kessler Associates, LTD,
Insurance Sales Representative a photo processor
New York Life Insurance Co.
D. W. Shilling Barbara C. Weddle Glen C. Combs
Executive Officer Executive Officer Vice President, Acosta Sales,
a food brokerage company
Executive Officers of SWVA Bancshares, Inc.
D. W. Shilling Barbara C. Weddle Mary G. Staples
President and Chief Senior Vice President Controller and Treasurer
Executive Officer and Secretary
</TABLE>
Special Counsel: Independent Auditors:
Malizia, Spidi, & Fisch, PC Cherry Bekaert & Holland LLP
One Franklin Square 828 Main Street, 1700 CFB Building
1301 K Street, NW, Suite 700 East Lynchburg, VA 24505
Washington, D.C. 20005
Special Counsel for Transfer Agent and Registrar:
Southwest Virginia Savings Bank, FSB: Registrar & Transfer Company
Carter Brown & Osborne, P.C. 10 Commerce Drive
1401 Franklin Road SW Cranford, NJ 07106
Roanoke, VA 24016 (908) 272-8511
SWVA Bancshares, Inc.'s Annual Report for the year ended June 30, 1999 filed
with the Securities and Exchange Commission on Form 10-KSB is available without
charge upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call Barbara C. Weddle, Senior Vice President and
Secretary at the Company's Corporate Office in Roanoke, Virginia. The Annual
Meeting of Stockholders will be held on October 13, 1999 at 10:30 a.m. at the
Holiday Inn-Tanglewood, 4468 Starkey Road, Roanoke, Virginia.
50
EXHIBIT 23 Consent of Cherry Bekaert & Holland L.L.P.
<PAGE>
GRAPHIC OMITTED
INDEPENDENT ACCOUNTANT'S CONSENT
The Board of Directors and Stockholders
SWVA Bancshares, Inc.
We consent to incorporation by reference in the Registration Statement
on Form S-8, of our report dated August 10, 1999, relating to the consolidated
balance sheets of SWVA Bancshares, Inc. and subsidiary as of June 30, 1999 and
1998 and the related consolidated statements of income, stockholders' equity,
and cashflows for the years then ended, which report appears in the June 30,
1999 annual report on Form 10-KSB of SWVA Bancshares, Inc.
/s/ Cherry Bekaert & Holland
- -----------------------------
Lynchburg, Virginia
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,454
<INT-BEARING-DEPOSITS> 6,278
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 22,934
<INVESTMENTS-CARRYING> 283
<INVESTMENTS-MARKET> 290
<LOANS> 45,576
<ALLOWANCE> 210
<TOTAL-ASSETS> 81,714
<DEPOSITS> 62,094
<SHORT-TERM> 12,000
<LIABILITIES-OTHER> 829
<LONG-TERM> 0
0
0
<COMMON> 42
<OTHER-SE> 6,949
<TOTAL-LIABILITIES-AND-EQUITY> 81,714
<INTEREST-LOAN> 3,856
<INTEREST-INVEST> 1,935
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,791
<INTEREST-DEPOSIT> 2,848
<INTEREST-EXPENSE> 490
<INTEREST-INCOME-NET> 2,453
<LOAN-LOSSES> 13
<SECURITIES-GAINS> (9)
<EXPENSE-OTHER> 2,493
<INCOME-PRETAX> 522
<INCOME-PRE-EXTRAORDINARY> 522
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 345
<EPS-BASIC> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 3.07
<LOANS-NON> 0
<LOANS-PAST> 61
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 207
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 210
<ALLOWANCE-DOMESTIC> 210
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
