FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
{X} QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO 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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VIRGINIA 54-1721629
- ------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 Second Street, SW, Roanoke Virginia 24011-1597
- --------------------------------------- ----------
(Address of Principal executive offices) (Zip Code )
Registrant's telephone number, including area code (540) 343-0135
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 and 15 (d) of the Securities Exchange Act of 1934
during the preceding 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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The number of shares outstanding of each of the issuer's classes of common
stock, as of May 10, 1999: $0.10 par value - 423,612 common shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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<PAGE>
SWVA BANCSHARES, INC. & SUBSIDIARIES
INDEX
================================================================
PART I. FINANCIAL INFORMATION PAGE
===================== ====
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at March 31, 1999 and June 30, 1998
(unaudited) 1
Consolidated Statements of Income for the Three
and Nine Months Ended March 31, 1999 and
March 31, 1998 (unaudited) 2
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended March 31, 1999
and March 31, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1999 and
March 31, 1998 (unaudited) 4
Notes to Unaudited Interim Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 12
=================
<PAGE>
SWVA BANCSHARES, INC & SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
<TABLE>
<CAPTION>
Assets
Mar 31 June 30
--------- ---------
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 4,059 $ 3,193
Interest-bearing deposits 5,775 5,897
Investment & Mortgage Backed Securities:
Held to Maturity, at amortized cost 290 318
Available for Sale, at fair value 21,099 21,607
Restricted at cost 961 961
Loans held for sale 732 1,608
Loans receivable, net 45,322 48,211
Property and equipment, net 1,634 1,662
Accrued interest receivable 512 565
Prepaid expenses and other assets 353 365
----------- -----------
Total assets $ 80,737 $ 84,387
=========== ===========
Liabilities and Stockholders' Equity
Deposits $ 63,832 $ 68,288
Advances from Federal Home Loan Bank 9,000 7,000
Advances from borrowers
for taxes and insurance 393 243
Other liabilities and deferred income 414 529
----------- -----------
Total liabilities 73,639 76,060
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Stockholders' Equity
Preferred Stock, 275,000 shares
authorized, no shares issued or
outstanding
Common stock, $.10 par value, 2,225,000
shares authorized, 423,612 outstanding
as of March 31, 1999 and 496,887
outstanding as of June 30, 1998 42 50
Additional paid-in capital 2,854 4,050
Less unearned ESOP shares (27,385 shares) (274) (274)
Less unearned MSBP shares (14,895 shares) (254) (299)
Dividends declared and paid (172) (623)
Retained earnings
(substantially restricted) 5,002 5,365
Valuation allowance
marketable equity securities (100) 58
----------- -----------
Total Stockholders' Equity 7,098 8,327
----------- -----------
Total Liabilities
and Stockholders' Equity $ 80,737 $ 84,387
=========== ===========
</TABLE>
1
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended
March 31
-------------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Interest Income
Loans $ 934 $1,035 $2,936 $3,171
Mortgage-backed and related securities 137 97 448 186
U.S. Government obligations including agencies 158 224 472 513
Municipal Bonds 17 10 40 11
Other investments, including overnight deposits 162 154 482 456
------- ------- ------- -------
Total interest income 1,408 1,520 4,378 4,337
------- ------- ------- -------
Interest expense
Deposits 676 785 2,206 2,175
Borrowed funds 119 65 342 182
------- ------- ------- -------
Total interest expense 795 850 2,548 2,357
------- ------- ------- -------
Net interest income 613 670 1,830 1,980
Provision for credit losses 3 3 9 30
------- ------- ------- -------
Net interest income after
provision for credit losses 610 667 1,821 1,950
------- ------- ------- -------
Noninterest income
Loan and other customer service fees 40 34 114 97
Gain on sale of mortgage loans 60 63 267 137
Gross rental income 25 24 76 74
Gain (loss) on Available for Sale Investments 0 0 0 (17)
Other 0 0 9 0
------- ------- ------- -------
Total noninterest income 125 121 466 291
------- ------- ------- -------
Noninterest expenses
Personnel 372 325 1,072 942
Office occupancy and equipment 84 72 251 220
Data processing 57 47 167 120
Federal insurance of accounts 10 9 30 27
Other 108 94 345 319
------- ------- ------- -------
Total noninterest expenses 631 547 1,865 1,628
------- ------- ------- -------
Income before income taxes 104 241 422 613
Provision for income taxes 40 88 162 229
------- ------- ------- -------
Net Income $ 64 $ 153 $ 260 $ 384
====== ====== ====== ======
Basic earnings per share $ .14 $ .32 $ .56 $ .80
====== ====== ====== ======
Diluted earnings per share $ .14 $ .31 $ .56 $ .79
====== ====== ====== ======
Cash dividends per share $ .20 $ .15 $ .40 $ 1.30
====== ====== ====== ======
</TABLE>
2
<PAGE>
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended
March 31
-------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Net Income $ 64 $ 153 $ 260 $ 384
Other comprehensive income, net of tax
Unrealized gains (losses) on securities (143) (20) (158) 29
----- ----- ----- ---
Comprehensive Income $( 79) $133 $102 $413
====== ==== ===== ====
</TABLE>
3
<PAGE>
SWVA BANCSHARES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flow
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
Mar 31
---------------------
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Operating Activities
Net Income $ 260 $ 384
Adjustments to Reconcile Net Income to Net Cash
Provided by (used in) operating activities
MSBP Shares Allocated 45 44
Provision for credit losses 9 30
Provision for depreciation and amortization 79 72
Loans Originated for Sale (24,795) (14,464)
Proceeds from sales of loans originated for sale 25,937 13,548
Gain on Sale of Loans, from fees (267) (136)
Gain on Disposal of Property and Equipment 0 1
Net gain on sale of investments, available for sale 0 (17)
Net (increase) decrease in Other Assets 126 (280)
Net increase (decrease) in Other Liabilities 41 206
-------- --------
Net cash provided by (used in) operating activities 1,435 (612)
-------- --------
Investing activities
Proceeds from maturity of investments
and interest-bearing deposits 5,136 5,344
Proceeds from sale of available for sale investments 7,250 3,257
Purchase of investments and interest-bearing deposits (5,014) (5,832)
Purchase of available for sale investments (9,571) (15,617)
Purchase of property and equipment (51) (30)
Net (increase) decrease in loans 4,193 3,375
Purchase of loans (1,313) (315)
Principal repayments on Mortgage Backed Securities 2,639 566
-------- --------
Net cash provided by (used in) investing activities 3,269 (9,252)
-------- --------
Financing activities
Curtailment of advances and other borrowings (1,000) (3,000)
Proceeds from advances and other borrowings 3,000 3,000
Net increase (decrease) in savings deposits (4,456) 10,733
Repurchase of stock (1,209) (97)
Dividends paid (173) (612)
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Net cash used in financing activities (3,838) 10,024
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Increase (decrease) in cash and cash equivalents 866 160
Cash and cash equivalents at beginning of period 3,193 1,276
-------- --------
Cash and cash equivalents at end of period $ 4,059 $ 1,436
======== ========
</TABLE>
4
<PAGE>
SWVA BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The accompanying consolidated financial statements include the accounts of SWVA
Bancshares, Inc. ("Company") and its wholly-owned subsidiary, Southwest Virginia
Savings Bank, FSB ("Bank") and its wholly-owned subsidiary, Southwest Virginia
Service Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included.
Operating results for the nine months ended March 31, 1999, are not necessarily
indicative of the results that may be expected for the year ending June 30,
1999.
NOTE 2 - STOCK REPURCHASE
The Company adopted a stock repurchase program in 1998 that allowed for the
repurchase, from time to time, of up to 30,000 (5.9%) shares of common stock.
During the program, the Company repurchased 24,372 shares of common stock in the
open market at an aggregate purchase price of approximately $460,000. During the
quarter ended March 31, 1999, the Company repurchased 6,500 shares of common
stock in the open market under the 1998 program, at an aggregate purchase price
of approximately $98,000.
On February 10, 1999, the Company signed a Standstill Agreement with Mr. Richard
Nelson and LaSalle Capital Management, Inc. Pursuant to the agreement, Mr.
Nelson sold all 28,000 shares of the Company's common stock that he owned to the
Company for approximately $480,000.
On March 12, 1999, the Company terminated the 1998 stock repurchase program and
authorized a repurchase agreement to repurchase up to 35,000 shares or 7.5% of
its outstanding shares of common stock. During the quarter ended March 31, 1999,
the Company repurchased the full 35,000 shares of common stock in the open
market at an aggregate purchase price of approximately $560,000.
All repurchased shares become authorized but unissued shares and are utilized
for general corporate and other purposes, including the issuance of shares in
connection with the exercise of stock options.
5
<PAGE>
NOTE 3 -- 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>
Three Months Nine Months
Ended
March 31,
-----------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
(Unaudited)
<S> <C> <C> <C> <C>
Numerator:
(a) Net income available to shareholders $ 64 $ 153 $ 260 $ 384
======= ======= ======= =======
Denominator:
Weighed-average shares outstanding 473,968 509,617 487,759 510,528
Less: ESOP weighed-average shares outstanding (27,385) (31,951) (27,385) (31,951)
------- ------- ------- -------
(b) Basic EPS weighed-average shares outstanding 446,583 477,666 460,374 478,577
Effect of dilutive securities:
Incremental shares attributable to the Stock Option 0 7,032 0 7,032
Plan and Management Stock Bonus Plan 0 2,101 0 2,101
------- ------- ------- -------
(c) Diluted EPS weighed-average shares outstanding 446,583 486,800 460,374 486,800
======= ======= ======= =======
Basic earnings per share (a/b) $ .14 $ .32 $ .56 $ .80
======= ======= ======= =======
Diluted earnings per share (a/c) $ .14 $ .31 $ .56 $ .79
======= ======= ======= =======
</TABLE>
NOTE 4 -- RECENT ACCOUNTING PRONOUNCEMENTS
FASB Statement on Reporting Comprehensive Income
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.
The before tax and after tax amount, as well as the tax (expense) is summarized
below.
Tax
Before (Expense) After
Tax Benefit Tax
--- ------- ---
Three months ended March 31, 1999:
Unrealized gains (losses) on securities ($144) $ 1 ($143)
Three months ended March 31, 1998:
Unrealized gains (losses) on securities ($ 31) $ 11 ($ 20)
Nine months ended March 31, 1999:
Unrealized gains (losses) on securities ($168) $ 10 ($158)
Nine months ended March 31, 1998:
Unrealized gains (losses) on securities $ 44 ($ 15) $ 29
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition at March 31, 1999 and June 30, 1998
- ---------------------------------------------------------------------
Total assets decreased $3.7 million or 4.33% from $84.4 million at June 30, 1998
to $80.7 million at March 31, 1999. Net loans receivable decreased $2.9 million
or 5.99% to $45.3 million at March 31, 1999 from $48.2 million at June 30, 1998
due primarily to the existing low interest rate environment in which management
elected to retain fewer new mortgage originations in the loan portfolio.
Cash and cash equivalents increased $866,000 or 27.13% from $3.2 million at June
30, 1998 to $4.1 million at March 31, 1999 due to increased cash flow from loan
payments and payoffs on mortgage loans and mortgage backed securities and a
decrease in funds in certificates of deposits. Interest bearing deposits
decreased $122,000 or 2.07% from $5.9 million at June 30, 1998 as compared to
$5.8 million at March 31, 1999, due to a decrease in jumbo certificates in the
Bank's portfolio which are matched with interest bearing deposits. Held to
Maturity Investments decreased $28,000 from $318,000 at June 30, 1998 to
$290,000 at March 31, 1999. Available for Sale Investments decreased $508,000 or
2.35% from $21.6 million at June 30, 1998 to $21.1 million at March 31, 1999 due
mainly to principal paybacks on Mortgage Backed Securities. Loans held for sale
decreased $876,000 from $1.6 million at June 30, 1998 to $732,000 at March 31,
1999 due to a reduction in the demand for mortgage loans.
There were no non-performing assets at March 31, 1999 and June 30, 1998.
Classified assets totaled $266,000. An unsecured consumer loan for $4,000 was
classified as doubtful. The remaining classified loans were classified as
substandard and were on single family mortgage loans.
Deposits decreased $4.5 million, or 6.53% from $68.3 million at June 30, 1998 to
$63.8 million at March 31, 1999 due mainly to a decrease in funds in
certificates of deposits. This decrease was the result of lower repricing to
reflect downward movements in interest rates nationally and locally. Core
deposits were $18.9 million or 29.62% of total savings.
At March 31, 1999, there were $9.0 million outstanding in advances from the
Federal Home Loan Bank of Atlanta. The increase in advances of $2.0 million was
due to management taking opportunity to obtain some long-term funding at
reasonable costs.
Advances from borrowers for taxes and insurance increased $150,000 or 61.73% due
to the accumulation of funds to pay real estate taxes due during the quarter
ending June 30, 1999. Other liabilities and deferred income decreased $115,000
or 21.74% mainly due to decreased accrual for income taxes due to decreased
income.
Results of Operations for the three months ended March 31, 1999
- ---------------------------------------------------------------
and March 31, 1998
- ------------------
Net Income Net income decreased $89,000 or 58.17%, from $153,000 for
the three months ended March 31, 1998 to $64,000 for the three months ended
March 31, 1999. The decrease was mainly due to higher expenses for personnel,
data processing, increased interest on borrowings and a decrease in interest
income on mortgage loans offset by decreased interest paid on deposits.
Interest Income Interest income decreased $112,000, or 7.37%, from $1.5
million for the three months ended March 31, 1998 to $1.4 million for the three
months ended March 31, 1999. The decrease was mainly a result in the decrease in
earnings on a smaller mortgage loan portfolio.
Interest Expense Interest expense decreased $55,000 or 6.47% from
$850,000 for the three months ended March 31, 1998 to $795,000 for the three
months ended March 31, 1999. The decrease was due mainly to a decrease in
deposits offset by an increase in borrowed funds.
Net Interest Income Net interest income decreased by $57,000 or 8.51%
from $670,000 for the three months ended March 31, 1998 to $613,000 for the
three months ended March 31, 1999. The decrease was due mainly to a reduction in
mortgage loans and an increase in borrowed funds offset by a reduction in
deposits.
Provision for Credit Losses The Bank made an addition of $3,000 to the
provision for credit losses for the quarter ended March 31, 1999. A charge to
the provision for credit losses was made for a $9,000 loss on a consumer loan.
The allowance for credit losses was $207,000 at March 31, 1999. The Bank made an
addition of $3,000 to the provision for credit losses for the quarter ended
March 31, 1998. The allowance for credit losses was $203,000 at March 31, 1998.
7
<PAGE>
Results of Operations for the three months ended March 31, 1999
- ---------------------------------------------------------------
and March 31, 1998, cont.
- -------------------------
Non-interest Income Non-interest income increased by $4,000, or 3.31%
from $121,000 for the three months ended March 31, 1998 to $125,000 for the
three months ended March 31, 1999. The increase was mainly due to an increase in
loan and other service fees partially offset by a reduction in gains on the sale
of mortgage loans during the quarter ended March 31, 1999.
Non-interest Expense Non-interest expense increased by $84,000, or
15.36% from $547,000 for the three months ended March 31, 1998 to $631,000 for
the three months ended March 31, 1999, mainly due to an increase in personnel
expense, data processing, advertising, office equipment and supply expenses.
Provision for income taxes The provision for income taxes for the three
months ended March 31, 1998 was $88,000 as compared to $40,000 for the three
months ended March 31, 1999 due to decreased pre-tax income.
Results of Operations for the nine months ended March 31, 1999
- --------------------------------------------------------------
and March 31, 1998
- ------------------
Net Income Net income decreased $124,000 or 32.29%, from $384,000 for
the nine months ended March 31, 1998 to $260,000 for the nine months ended March
31, 1999. The decrease was mainly due to higher expenses for personnel, data
processing, increased interest expense on borrowings and a decrease in interest
income on mortgage loans offset by decreased interest paid on deposits and an
increase in gain on sale of mortgage loans.
Interest Income Interest income increased $41,000, or 0.95%, from $4.3
million for the nine months ended March 31, 1998 to $4.4 million for the nine
months ended March 31, 1999. The increase was mainly a result in the increase in
earnings on a larger investment base offset by a reduction in mortgage loans in
the Bank's portfolio.
Interest Expense Interest expense increased $191,000 or 8.10% from $2.4
million for the nine months ended March 31, 1998 to $2.5 million for the nine
months ended March 31, 1999. The increase was due mainly to an increase in
borrowed funds offset by a decrease in certificates of deposit. The decrease in
deposits was the result of lower repricing to reflect downward movements in
interest rates nationally and locally.
Net Interest Income Net interest income decreased by $150,000 or 7.58%
from $2.0 million for the nine months ended March 31, 1998 to $1.8 million for
the nine months ended March 31, 1999. The decrease was mainly due to an increase
in borrowed funds and a decrease in mortgage loans offset by increased income on
investment securities and a decrease in deposits.
Provision for Credit Losses The Bank made an addition of $9,000 to the
provision for credit losses for the nine months ended March 31, 1999. A charge
to the provision for credit losses was made for a $9,000 loss on a consumer
loan. The allowance for credit losses was $207,000 at March 31, 1999. The Bank
made an addition of $30,000 to the provision for credit losses for the quarter
ended March 31, 1998. The addition was made due to a loss of $44,000 on a
delinquent real estate loan. After the deduction of the loss, the allowance for
credit losses was $203,000 at March 31, 1998..
Non-interest Income Non-interest income increased by $175,000, or
60.14% from $291,000 for the nine months ended March 31, 1998 to $466,000 for
the nine months ended March 31, 1999. The increase was mainly due to an increase
in gains on the sale of mortgage loans and an increase in fee income offset by a
loss on investment securities during the quarter ended December 31, 1998.
Non-interest Expense Non-interest expense increased by $237,000, or
14.56% from $1.6 million for the nine months ended March 31, 1998 to $1.9
million for the nine months ended March 31, 1999, mainly due to an increase in
personnel expense, data processing expense, advertising, office equipment and
supply expenses.
Management continues their efforts to expand the Bank's products and
services as well as improve its delivery system to enhance quality service.
This year's focus on increasing retail loan production has resulted in doubling
the volume of home equity lines outstanding and the new Commercial Loan
Department has shown progress in terms of generation of new business. Management
fully expects non-interest expense to continue to increase by a material amount
over the next few quarters. These expenses, including expenses for new equipment
and personnel, will likely reduce net income compared to prior periods.
Management feels these expenses are necessary in order to provide the level of
financial services that is required to nurture growth and increase
profitability, thereby enhancing shareholder value. This statement
8
<PAGE>
Results of Operations for the nine months ended March 31, 1999
- --------------------------------------------------------------
and March 31, 1998, cont.
- -------------------------
concerning these changes is a forward looking statement. The Private Securities
Litigation Reform Act of 1995 (the "Act") provides protection to the Company in
making certain forward looking statements that are accompanied by the factors
that could cause actual results to differ materially from the forward looking
statement.
Provision for income taxes The provision for income taxes for the nine
months ended March 31, 1999 was $162,000 compared to $229,000 for the nine
months ended March 31, 1998. The decrease was due to decreased income for the
nine months ended March 31, 1999.
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 3.0% of total adjusted assets
and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted
assets.
As shown below, the Bank's tangible, core and risk-based capital significantly
exceed all applicable regulatory capital requirements of the OTS at March 31,
1999:
Percent of
Amount Assets
------ ------
GAAP Capital.................... $6,775 8.34%
===== =====
Tangible Capital................ $6,775 8.34%
Tangible Capital Requirement.... 1,219 1.50%
----- -----
Excess.......................... $5,556 6.84%
===== =====
Core Capital.................... $6,775 8.34%
Core Capital Requirement........ 2,438 3.00%
----- -----
Excess.......................... $4,337 5.34%
===== =====
Total Risk-Based Capital........ $6,981 17.86%
Risk-Based Capital Requirement.. 3,128 8.00%
----- -----
Excess.......................... $3,853 9.86%
===== ======
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
9
<PAGE>
Liquidity
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits and other cash outflows in a cost effective manner. The Bank's primary
sources of funds are deposits and proceeds from principal and interest payments
on loan and mortgage backed securities. The Bank also obtains funds from sales
and maturities of investment securities, short-term investments and borrowings,
namely advances from the FHLB of Atlanta. The Bank uses such funds primarily to
meet commitments on existing and continuing loan commitments, to fund maturing
time deposits and savings withdrawals and to maintain liquidity. While loan
payments, maturing investments and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank's liquidity is also influenced by the level of demand for funding loan
originations.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments," which include certain United States government
obligations and other approved investments. Current regulations require the Bank
to maintain liquid assets of not less than 4% of its net withdrawable accounts
plus short term borrowings. Those levels may be changed from time to time by the
regulators to reflect current economic conditions. The Bank's regulatory
liquidity was 26.25% at March 31, 1999 and 22.94% as of June 30, 1998.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
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 to 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 with 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 are not dependent
on their computers for income and that none of our commercial borrowers are so
large that a year 2000 problem would render them unable to collect revenue or
rent and in turn continue 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.
10
<PAGE>
Year 2000 Issue, cont.
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 March 31,
1999, total expenses paid were $25,000. 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 on January 3, 2000.
The committee is working with senior management to develop, validate and
implement a Year 2000 liquidity or "Cash" plan. This plan should be complete by
June 30, 1999 and will be presented to the Board for approval.
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 on January 3, 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. 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.
11
<PAGE>
SWVA BANCSHARES, INC. & SUBSIDIARIES
PART II
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
None.
12
<PAGE>
SWVA BANCSHARES, INC. & SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
SWVA Bancshares, Inc.
Date: May 12, 1999 By: /s/ D. W. Shilling
------------------------------------------------
D. W. Shilling
President, Chief Financial Officer, and Director
Date: May 12, 1999 By: /s/ Mary G. Staples
------------------------------------------------
Mary G. Staples
Controller/Treasurer
Principal Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,059
<INT-BEARING-DEPOSITS> 5,775
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,099
<INVESTMENTS-CARRYING> 290
<INVESTMENTS-MARKET> 290
<LOANS> 45,322
<ALLOWANCE> 207
<TOTAL-ASSETS> 80,737
<DEPOSITS> 63,832
<SHORT-TERM> 9,000
<LIABILITIES-OTHER> 807
<LONG-TERM> 0
0
0
<COMMON> 42
<OTHER-SE> 7,056
<TOTAL-LIABILITIES-AND-EQUITY> 7,098
<INTEREST-LOAN> 2,993
<INTEREST-INVEST> 1,442
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 4,387
<INTEREST-DEPOSIT> 2,206
<INTEREST-EXPENSE> 2,548
<INTEREST-INCOME-NET> 1,830
<LOAN-LOSSES> 9
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,865
<INCOME-PRETAX> 422
<INCOME-PRE-EXTRAORDINARY> 422
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 260
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
<YIELD-ACTUAL> 7.28
<LOANS-NON> 0
<LOANS-PAST> 61
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4
<ALLOWANCE-OPEN> 213
<CHARGE-OFFS> 9
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 207
<ALLOWANCE-DOMESTIC> 207
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
