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, 2000
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[ ] 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
---------------------------------------
(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 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. $6.4 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, 2000, was $7.0 million.
As of September 25, 2000, 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, 2000.
<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; 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, 2000, the
Company had total assets of $84.0 million and stockholders' equity of $6.7
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.
<PAGE>
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.
During the year ended June 30, 2000, the Company did not repurchase any
shares of stock.
Business of the Bank
General. The Bank is primarily engaged in attracting deposits from the
general public and reinvesting those funds to originate real estate loans on
one- to four-family residences, multi-family and non-residential real estate
loans, construction, 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. The Bank originates
mortgages for retention in the Bank's portfolio as well as originations for sale
in the secondary market. Depending on the level of prevailing interest rates,
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 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 the focus on these types of loans is generating new
business that is enabling 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.
2
<PAGE>
Lending Activities
General. The traditional 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 secondary market
standards and a portion 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 50.34% of total loans
outstanding on June 30, 2000. For the fiscal year ended June 30, 2000,
adjustable-rate loans represented 30.00% 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 continues its 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. Management intends
to continue emphasizing these types of lending to meet the area's credit needs
as well as provide the Bank with better returns in its 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,
--------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
Amount Percent Amount Percent
--------------------------------- ---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage loans
Residential, one to four family $33,872 61.25% $32,342 68.94%
Residential, multifamily 4,014 7.26 4,187 8.92
Nonresidential and land 5,459 9.87 2,071 4.41
Construction 4,781 8.64 4,024 8.58
Non-mortgage loans
Consumer loans
Secured personal 1,774 3.21 1,483 3.16
Unsecured personal 165 .30 92 .20
Auto 568 1.03 177 .38
Home Improvement 19 .03 38 .08
Equity line 3,262 5.90 2,316 4.94
Other 120 .21 80 .17
Commercial
Secured 202 .37 105 .22
Unsecured 1,068 1.93 - -
------ ------- ------- ------
Total loans receivable 55,304 100.00% 46,915 100.00%
======= ======
Less
Deferred loan fees 27 42
Undisbursed loans in process 1,449 1,087
Allowance for credit losses 218 210
------ ------
Loans receivable, net $53,610 $45,576
====== ======
</TABLE>
3
<PAGE>
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 2000. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $23.3 million and $25.1 million, for the fiscal years ended June 30,
2000 and 1999, respectively. ARMs are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
Residential
1-4 Multi- Non-residential Consumer and
Real Family and Land Construction Other Total
Estate(1)
--------- ------- --------------- ------------ ------------ --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts Due:
Within 3 months $ - $ - $ - $ 1,295 $ 672 $ 1,967
3 months to 1 Year 4 - - 2,331 478 2,813
------ ------ ------ ------ ------ -------
Total due in one year or less 4 - - 3,626 1,150 4,780
------ ------ ------ ------ ------ -------
After 1 year:
1 to 3 years 151 - 104 905 963 2,123
3 to 5 years 322 - 2,135 250 539 3,246
5 to 10 years 3,024 749 1,735 - 1,034 6,542
10 to 20 years 7,432 2,643 1,390 - 3,492 14,957
Over 20 years 22,939 622 95 - - 23,656
------ ------ ------ ------ ------ -------
Total due after one year 33,868 4,014 5,459 1,155 6,028 50,524
------ ------ ------ ------ ------ -------
Total amount due $33,872 $ 4,014 $ 5,459 $ 4,781 $ 7,178 $ 55,304
====== ====== ====== ====== ====== =======
Less:
Allowance for loan loss 218
Loans in process 1,449
Deferred loan fees 27
------
Loans receivable, net $ 53,610
=======
</TABLE>
The following table sets forth the dollar amount at June 30, 2000 of
all loans due after June 30, 2001, which have pre-determined interest rates and
which have adjustable interest rates.
<TABLE>
<CAPTION>
Adjustable
Fixed Rates Rates Total
----------- ------------ --------
(In Thousands)
<S> <C> <C> <C>
Residential one- to four-family $ 8,165 $25,703 $33,868
Multi-family 3,031 983 4,014
Nonresidential and land 5,235 224 5,459
Construction 255 900 1,155
Consumer and other 2,384 3,644 6,028
------ ------ ------
Total(1) $19,070 $31,454 $50,524
====== ====== ======
</TABLE>
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(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, 2000, the Bank had $33.9 million, or 61.25%, 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 production of one- to four-family loans has been effective in contributing
to net interest income while reducing credit risk by keeping loan delinquencies
and losses to a minimum.
4
<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, 2000, the Bank originated some ARMs at interest
rates up to .50% 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 4.00% 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 $3.5 million in non-residential real
estate loans originated during the fiscal year ended June 30, 2000. During the
same period, the bank originated $163,000 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, 2000, the largest non-residential or multi-family real
estate loan had a balance of $1.0 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, 2000,
6
<PAGE>
the Bank had $2.2 million in construction loans outstanding to builders on a
speculative basis, with $735,000 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, 2000, there was $426,000 outstanding in
construction loans to owners with $322,000 outstanding in loans in process
allocated to these projects. There were $1.8 million in construction loans
originated on nonresidential and multi-family properties during the fiscal year
ended June 30, 2000.
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, home improvement loans, home
equity loans and lot 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. Available credit 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
7
<PAGE>
employment is considered during the underwriting process. Creditworthiness of
the applicant is of primary 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, business and agricultural purposes (including the issuance of
letters of credit) in amounts not exceeding 10% of the Bank's assets. On the
secured loans, collateral may include real estate, business equipment,
inventories, accounts receivable, cash equivalents and other types of acceptable
security. Non-real estate commercial lending by the Bank has been limited,
however it has significant focus in our game plan as we expand our loan product
offerings. 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, 2000, $1.3
million or 2.30% 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. Mortgage
originators, branch managers, consumer and commercial lenders are 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 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 of 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.
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------
2000 1999
--------------------------------
(In Thousands)
<S> <C> <C>
Total gross loans receivable at
beginning of period $46,915 $50,106
Loans originated:
One- to four-family residential 18,512 38,319
Multi-family residential 163 781
Non-residential and land 3,547 300
Construction loans 4,178 4,713
Consumer loans 4,379 1,796
------ ------
Total loans originated 30,779 45,909
------ ------
Loans purchased:
One- to four-family residential - -
Multi-family residential 1,300 -
Non-residential and land 600 1,313
------ ------
Total loans purchased 1,900 1,313
------ ------
Loans sold (9,931) (30,742)
----- ------
Other loan activity:
Loan principal repayments (23,285) (25,125)
Other (net) 8,926 5,454
------ ------
Net other loan activity (14,359) (19,671)
------ ------
Total gross loans receivable at
end of period $55,304 $46,915
====== ======
</TABLE>
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, 2000, the Bank had $2.0 million of
9
<PAGE>
commitments to finance real estate acquisitions and construction and had
contracted to sell $540,000 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 $1,000 for the fiscal year
ended June 30, 2000. As of June 30, 2000, the Bank had no loan fees deferred
under GAAP. During the year ended June 30, 2000, the Virginia Housing
Development Authority ("VHDA") repurchased the servicing rights on their loans.
Loans serviced for FHLMC totaled $244,000.
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 $993,000 as of June 30,
2000.
The Bank's largest group of loans to one borrower at June 30, 2000 was
$1.3 million which consisted of loans to finance an apartment complex including
rehabilitation. The second largest group of loans to one borrower was $1.0
million which consisted of loans secured by an apartment complex. The next
largest group of loans to one borrower was $981,000 which consisted of loans
secured by a group of duplexes.
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, 2000, the Bank had
$186,000 in foreclosed loans accounted for on a non-accrual basis. There were no
restructured loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At June 30,
------------------------
2000 1999
------------ ----------
(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
All other mortgage loans - -
----- -----
Total $ - $ 61
===== =====
Total non-accruing loans past due 90 days or more $ - $ -
----- -----
Foreclosed real estate $ 186 $ -
----- -----
Total non-performing assets $ 186 $ -
===== =====
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 .22% .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 obligator 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, 2000.
(In Thousands)
Special Mention $ -
Substandard 332
Doubtful assets 186
Loss assets -
General loss allowance 218
Specific loss allowance -
Charge-offs 4
All loans classified as substandard were on single family mortgage
loans. The doubtful loans are secured by real estate.
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 had $186,000 in
foreclosed real estate at June 30, 2000.
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 new emphasis on commercial and
consumer loans may add credit risk to the loan portfolio due to the risk
inherent nature of the loans. Policies are in place and practices are being
monitored in order to minimize potential loss which includes an appropriate
increase in the loan loss provision in the next fiscal year. 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.
At June 30,
-----------------------
2000 1999
-----------------------
(Dollars in Thousands)
Total loans $55,304 $46,915
====== ======
Allowance balances (at beginning of period) $ 210 $ 207
Provision 12 13
Net Charge-offs (4) (10)
------ ------
Allowance balance (at end of period) $ 218 $ 210
====== ======
Allowance for credit losses as a percentage of total loans .39% .45%
====== ======
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,
-----------------------------------------------------
2000 1999
-----------------------------------------------------
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 $134 61.25% $145 68.94%
Residential, multifamily 16 7.26 19 8.92
Nonresidential and land 21 9.87 9 4.41
Construction 19 8.64 18 8.58
Consumer 23 10.68 18 8.93
Commercial 5 2.30 1 0.22
--- ------- ---- ------
$218 100.00% $ 210 100.00%
=== ======= ==== ======
</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, 2000, the Bank had an investment securities
portfolio of approximately $26.5 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.
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, 2000, the Bank did not purchase any 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, 2000, mortgage-backed securities amounted to $8.7
million or 10.34% 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, 2000,
the fair value of the Bank's investment portfolio was $25.2 million.
<TABLE>
<CAPTION>
2000 1999
------------------------ --------------------------
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 $11,126 $12,000 $11,476
Federal Home Loan Bank
of Atlanta Stock 585 585 600 600
FNMA mortgage-backed securities 524 525 681 700
GNMA mortgage-backed securities 7,904 7,608 8,591 8,412
Municipal Bonds 2,446 2,258 2,442 2,346
------ ------ ------ ------
23,459 22,102 24,314 23,534
------ ------ ------ ------
Held to maturity securities:
Interest-bearing deposits (1) 2,818 2,818 7,878 7,878
FHLMC participation certificates 254 254 283 292
------ ------ ------ ------
3,072 3,072 8,161 8,170
------ ------ ------ ------
Total investment securities $26,531 $25,174 $32,475 $31,704
====== ====== ====== ======
</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, 2000.
<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 $2,619 6.44% $ 199 6.23% $ - -% $ 2,818 6.21% $2,818
US Government &
agency bonds - - - - 12,000 6.88 12,000 6.88 11,126
Mortgage-backed
securities - - - - 8,682 7.14 8,682 7.14 8,387
FHLB Stock 585 7.75 - - - - 585 7.75 585
Municipal Bonds - - 199 - 2,446 4.66 2,446 4.66 2,258
----- ------ ---- ----- ------ ----- ------ ----- ------
Total $3,204 6.68% $ 199 6.23% $23,128 6.74% $26,531 6.71% $25,174
===== ====== ==== ===== ====== ===== ====== ===== ======
</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 $19.2 million, or 29.64%
of the Bank's deposit portfolio at June 30, 2000. At that date, certificates of
deposit constituted $45.6 million or 70.36% of the deposit portfolio, including
certificates of deposit with principal amounts of $100,000 or more, which
constituted $6.9
15
<PAGE>
million or 10.66% 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,
---------------------------------------------------------------------
2000 1999
------------------------------- -----------------------------------
Weighted Weighted
Percent Average Percent Average
of Total Nominal of Total Nominal
Amount Deposits Rate Amount Deposits Rate
--------- ---------- -------- -------- ---------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts:
Noninterest-bearing demand deposit $ 1,840 2.84% .00% $1,284 2.07% .00%
NOW 6,576 10.16 1.68 5,434 8.75 1.49
Money market 2,668 4.12 2.52 3,233 5.21 2.52
Regular savings 8,042 12.42 3.00 8,626 13.89 3.00
Club 62 .10 2.00 62 0.10 2.00
------ ----- ------ -----
Total 19,188 29.64 18,639 30.02
------ ----- ------ -----
Certificate accounts:
Fixed rates of interest:
7 to 91 days 707 1.09 4.32 87 .14 3.00
Over 91 to 180 days 2,498 3.86 5.01 2,505 4.03 3.99
Over 181 to 365 days 22,506 34.76 5.67 15,121 24.35 4.63
Over 1 year to 3 years 7,616 11.76 4.99 11,506 18.53 5.09
Over 3 years and up 177 .27 5.00 254 .41 5.15
Other 5,664 8.75 5.77 7,475 12.04 5.24
Variable rates of interest
Over 1 year 5,745 8.87 6.59 6,229 10.03 4.79
Negotiable rate 647 1.00 6.00 278 .45 5.05
------ ------ ------ ------
Total 45,560 70.36 43,455 69.98
------ ------ ------ ------
Total deposits $64,748 100.00% 4.61% $62,094 100.00% 4.07%
====== ====== ====== ======
</TABLE>
The following table sets forth the amount and maturities of time
deposits at June 30, 2001.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------------------
After
June 30, June 30, June 30, June 30,
2001 2002 2003 2004 Total
--------------- -------------- --------------- ------------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
3.00-4.00% $ 80 $ - $ - $ - $ 80
4.01-5.00% 7,569 1,232 151 26 8,978
5.01-6.00% 15,897 301 36 - 16,234
6.01-7.00% 18,581 1,687 - - 20,268
------- ------ ------- ------- -------
Total $ 42,127 $ 3,220 $ 187 $ 26 $ 45,560
======= ====== ======= ======= =======
</TABLE>
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, 2000.
Certificates
of
Deposits
----------------
(In Thousands)
Within three months $2,601
Three through six months 826
Six through twelve months 3,014
Over twelve months 439
-----
$6,880
=====
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, 2000, the Bank had $11.7 million in outstanding
advances from FHLB. The Bank had a $250,000 outstanding balance on a note
payable to the Company as of June 30, 2000.
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.
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,
17
<PAGE>
as of June 30, 2000, 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, 2000, the net book value of the Bank's investment in
its service corporation was approximately $29,000.
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 $8,000 for the fiscal
year ended June 30, 2000.
Employees
As of June 30, 2000, 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 related to
the regulation of the Company and the Bank. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Recent Regulation
The Gramm-Leach-Bliley Act (the "Act") became effective March 11, 2000,
which permits qualifying bank holding companies to become financial holding
companies and thereby affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. The Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Board has
determined to be closely related to banking. A qualifying national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development, and real estate investment, through a
financial subsidiary of the bank.
The Act also prohibits new unitary thrift holding companies from
engaging in nonfinancial activities or from affiliating with an nonfinancial
entity. As a grandfathered unitary thrift holding company, the Company will
retain its authority to engage in nonfinancial activities. However, the Act will
have few direct effects on the operations or powers of federal savings
associations or of savings and loan holding companies.
The Act imposes significant new financial privacy obligations and
reporting requirements on all financial institutions, including federal savings
associations. Specifically, the statute, among other things, will require
financial institutions (a) to establish privacy policies and disclose them to
customers both at the commencement of a customer relationship and on an annual
basis and (b) to permit customers to opt out of a financial institution's
disclosure of financial information to nonaffiliated third parties. The Act
requires the federal financial regulators to promulgate regulations implementing
these provisions within six months of enactment, and the statute's privacy
requirements will take effect one year after enactment.
18
<PAGE>
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file 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.
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. The Act terminated the "unitary thrift holding
company exemption" for all companies that applied to acquire savings
associations after May 4, 1999. Since the Company is grandfathered under this
provision of the Act, its unitary holding company powers and authorities were
not affected. However, if the Company were to acquire control of an additional
savings association, its business activities would be subject to restriction
under the Home Owners' Loan Act. Furthermore, if the Company were in the future
to sell control of the Bank to any other company, such company would not succeed
to the Company's grandfathered status under the Act and would be subject to the
same business activity restrictions. See "- Regulation of the Bank - Qualified
Thrift Lender Test."
Regulation of the Bank
General. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and 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 Federal Reserve Board.
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.
Insurance of Deposit Accounts. The deposit accounts held by the Bank
are insured by the SAIF to a maximum of $100,000 for each insured member (as
defined by law and regulation). Insurance of
19
<PAGE>
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.
The Bank is required to pay insurance premiums based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the SAIF. The
FDIC also maintains another insurance fund, the Bank Insurance Fund ("BIF"),
which primarily insures commercial bank deposits. The FDIC has set the deposit
insurance assessment rates for SAIF-member institutions for the first six months
of 2000 at 0% to .027% of insured deposits on an annualized basis, with the
assessment rate for most savings institutions set at 0%.
In addition, all FDIC-insured institutions are required to pay
assessments to the FDIC at an annual rate of approximately .0212% of insured
deposits to fund interest payments on bonds issued by the Financing Corporation
("FICO"), an agency of the Federal government established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017.
Loans to One Borrower. A savings association may not make a loan or
extend credit to a single or related group of borrowers in excess of 15% of the
associations's unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of the unimpaired capital and surplus, under certain circumstances.
At June 30, 2000, the Registrant's lending limit for loans to one borrower was
approximately $993,000 and had no outstanding commitments that exceeded the
loans to one borrower limit at the time originated or committed.
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. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
The OTS may disapprove an application or notice if the proposed capital
distribution would: (i) make the savings association undercapitalized,
significantly undercapitalized, or critically undercapitalized; (ii) raise
safety or soundness concerns; or (iii) violate a statue, regulation, or
agreement with the OTS (or with the FDIC), or a condition imposed in an
OTS-approved application or notice. Further, a federal
20
<PAGE>
savings association, like the Bank, cannot distribute regulatory capital that is
needed for its liquidation account.
Qualified Thrift Lender Test. Federal savings institutions must meet
one of two Qualified Thrift Lender ("QTL") tests. To qualify as a QTL, a savings
institution must either (i) be deemed a "domestic building and loan association"
under the Internal Revenue Code by maintaining at least 60% of its total assets
in specified types of assets, including cash, certain government securities,
loans secured by and other assets related to residential real property,
educational loans and investments in premises of the institution or (ii) satisfy
the statutory QTL test set forth in the Home Owner's Loan Act by maintaining at
least 65% of its "portfolio assets" in certain"Qualified Thrift Investments"
(defined to include residential mortgages and related equity investments,
certain mortgage-related securities, small business loans, student loans and
credit card loans, and 50% of certain community development loans). For purposes
of the statutory QTL test, portfolio assets are defined as total assets minus
intangible assets, property used by the institution in conducting its business,
and liquid assets equal to 10% of total assets. A savings institution must
maintain its status as a QTL on a monthly basis in at least nine out of every 12
months. A failure to qualify as a QTL results in a number of sanctions,
including the imposition of certain operating restrictions and a restriction on
obtaining additional advances from its FHLB. At June 30, 2000, the Bank was in
compliance with its QTL requirement.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Atlanta, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Atlanta in an amount equal to at least 1% of its aggregate unpaid
residential mortgage loans, home purchase contracts or similar obligations at
the beginning of each year.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.
Federal Reserve System. The Federal Reserve Board 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. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 2000, the Bank was in compliance with these Federal Reserve Board
requirements.
21
<PAGE>
Item 2. Description of Property.
(a) Properties.
The Bank conducts its business through a main office, four branch
offices and one mortgage loan origination office. The Bank believes that the
current facilities are adequate to meet the present and immediately foreseeable
needs of the Bank.
The Bank obtains rental income through the leasing of space in its main
office building. During the fiscal year ended June 30, 2000, 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, 2000.
22
<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 1 of the Company's Annual Report to Stockholders for the
fiscal year ended June 30, 2000 (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, 2000 and 1999
Statement of Operations for the Fiscal Years Ended
June 30, 2000, 1999 and 1998
Statement of Changes in Stockholders' Equity for the Fiscal Years Ended June 30,
2000, 1999 and 1998
Statement of Cash Flows for the Fiscal Years
Ended June 30, 2000, 1999 and 1998
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.
23
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The following table sets forth information with respect to the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Year First Current
Elected or Term to
Name Age (1) Position Appointed (2) Expire
---- ------- -------- ------------- ------
<S> <C> <C> <C> <C>
B. L. Rakes 67 Chairman 1977 2000
D.W. Shilling 54 President and CEO, Director 1999 2000
F. Courtney Hoge 59 Director 1979 2001
Barbara C. Weddle 63 Senior Vice President and Secretary, 1987 2001
Director
James H. Brock 58 Director 1985 2002
Glen C. Combs 53 Director 1987 2002
Michael M. Kessler 48 Director 1987 2002
Wayne F. Munden 56 Senior Vice President/ N/A N/A
Director of Lending(3)
Mary G. Staples 46 Treasurer/Controller(4) N/A N/A
</TABLE>
------------------
(1) At June 30, 2000.
(2) Refers to the year the individual first became a director of the Company or
the Bank. All directors of the Bank during June 1994 became directors of
the Company when it was incorporated in June 1994.
(3) Mr. Munden serves as an executive officer of the Bank.
(4) In addition to serving as Treasurer/Controller of the Company, Ms. Staples
serves as Vice President of Operations and as Treasurer/Controller of the
Bank.
Biographical Information. Set forth below is certain information with
respect to the executive officers and directors of the Company and executive
officers of the Bank. All directors have held their present positions for five
years unless otherwise stated.
James H. Brock is currently President of Rusco Window Company, Roanoke,
Virginia, a manufacturer and distributor of home improvement products which has
employed Mr. Brock since 1970. He is a member and past President of the Rotary
Club of Roanoke, past President of the Better Business Bureau, and a former
member of the board of directors of the Credit Marketing and Management
Association.
24
<PAGE>
Glen C. Combs is Vice President of Acosta Sales, a food brokerage
company. Mr. Combs is a former member of the Rotary Club of Roanoke and the
Roanoke Food Brokers Association and a past Board member of Inter-City Athletic
Association.
F. Courtney Hoge has been an insurance sales representative for New
York Life Insurance Company, Roanoke, Virginia since 1965. He is President and a
member of the board of the Life Line Foundation of the Rescue Mission, and
serves on the Personnel Committee of the Presbyterian Community Center. He is
past President of the E. Price Ripley Memorial Foundation, past President of the
Roanoke Association of Life Underwriters, past President of the Roanoke Valley
Estate Planning Council, and past President of the Rotary Club of Roanoke -
Downtown.
Michael M. Kessler has been the President and sole shareholder of
Kessler Associates, Ltd., a photo processing company, since 1983. He is also a
member and past President of the Rotary Club of Roanoke, past President of the
Virginia Professional Photographers Association, a past member of the Board of
Governors of the Southeastern Professional Photographers Association, past
chairman of the Specialist Group of the Professional Photographers of America
and a past Board Member of the Better Business Bureau.
B. L. Rakes became Chairman of the Boards of the Company and the Bank
in March 1999. At that time he resigned as President and Chief Financial Officer
of the Company and resigned as President, Chief Executive Officer and Chief
Financial Officer of the Bank. He resigned as Chief Executive Officer of the
Company and retired from the Bank at the end of June 1999. Mr. Rakes had been
President, Chief Executive Officer and Chief Financial Officer of the Bank since
1977 and of the Company since 1994 and has been employed by the Bank since 1959.
He served as Vice President and Treasurer from 1973 to 1977, and as Secretary
from 1974 to 1977. He is a member and past President of the Rotary Club of
Roanoke. Mr. Rakes serves as a consultant to the Bank.
D. W. Shilling joined the Bank in April 1998, filling the position of
Executive Vice President and Chief Operations Officer. Between January 1995 and
April 1998, Mr. Shilling was a Senior Vice President and Area Manager for the
Roanoke, Virginia area of a Virginia-based commercial bank. Prior to that time,
Mr. Shilling was a Senior Vice President and Area Manager for the same bank in
the southwestern part of Virginia. Mr. Shilling became President and Chief
Executive Officer of the Bank and President of the Company in March 1999. In
June 1999, Mr. Shilling became Chief Executive Officer of the Company. On March
1, 1999, Mr. Shilling became a director of the Company and the Bank.
Barbara C. Weddle has been Senior Vice President of the Bank since
1985, in which capacity she oversees the savings, accounting and personnel
departments. She has served as Secretary of the Bank since 1977. She has been
employed by the Bank since 1965 in various capacities and served as a Vice
President from 1977 until 1985.
Wayne F. Munden has been a Senior Vice President since 1985 in which
capacity he is Director of Lending. He has been employed by the Bank since 1968
and served as Vice President from 1977 to 1985. He is a member of the Rotary
Club of Roanoke.
Mary G. Staples has been Vice President of Operations for the Bank
since 1997. She has served as Controller/Treasurer since 1990. She has been
employed by the Bank since 1972 in various capacities.
25
<PAGE>
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the 1934 Act requires the Company's officers and
directors, and persons who own more than ten percent of the Common Stock (10%
beneficial owners), to file reports of ownership and changes in ownership of the
Common Stock, on Forms 3, 4 and 5, with the Securities and Exchange Commission
("SEC") and to provide copies of those Forms 3, 4 and 5 to the Company. Based on
the Company's review of such ownership reports, to the best of the Company's
knowledge, no officer, director, or 10% beneficial owner of the Company failed
to file such ownership reports on a timely basis for the fiscal year ended June
30, 2000.
Item 10. Executive Compensation
--------------------------------
Director Compensation
The Company pays an annual fee of $3,600 to each member of its Board of
Directors. The Company paid a total of $25,200 in directors' fees during the
fiscal year ended June 30, 2000.
The Bank also pays Board of Director fees. Each director is paid $450
per meeting attended. Directors Shilling and Weddle did not receive fees for
attendance of meetings of the Board of Directors of the Bank or any of its
committees during the 2000 fiscal year. Each non-employee director attending a
meeting of the Executive Committee, Retirement Committee, the Compensation
Committee, or Loan Committee of the Bank receives a fee of $100 per meeting
attended. The Bank paid a total of $37,950 in board and committee fees to
members of the Board of Directors during the fiscal year ended June 30, 2000.
Stock Awards. On October 25, 1995, the shareholders of the Company
approved the SWVA Bancshares, Inc. 1994 Stock Option Plan ("1994 Stock Option
Plan") and the Southwest Virginia Savings Bank, FSB Management Stock Bonus Plan
("Management Stock Bonus Plan"). Directors Hoge, Brock, Combs, and Kessler each
received (as of the date of shareholder approval) options to purchase 2,852
shares of Common Stock under the 1994 Stock Option Plan and 1,141 shares of
restricted stock under the Management Stock Bonus Plan. The options granted to
these directors are exercisable at a rate of 20% annually. Restricted stock
granted to the above named directors vest at a rate of 14.28% annually. In March
1998, each Director of the Company was awarded immediately exercisable stock
options to purchase 1,446 shares of Common Stock.
26
<PAGE>
Executive Compensation
Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the Chief Executive Officer of the
Company during the year ended June 30, 2000. No other executive officers of the
Company had a salary and bonus during the fiscal year ended June 30, 2000 that
exceeded $100,000 for services rendered in all capacities to the Company.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation Awards
------------------- -------------------
Securities
Name and Restricted Underlying
Principal Fiscal Other Annual Stock Options/ All Other
Position Year Salary Bonus Compensation(1) Awards($) SARs(#) Compensation
-------- ---- ------ ----- --------------- --------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
D.W. Shilling 2000 $105,000 $-- $3,700 $-- $-- $ 5,824(2)
Chief Executive 1999 $95,000 $-- $1,300 $-- $-- $10,000(3)
Officer
</TABLE>
------------------------------
(1) Consists of board of director fees from the Company and Southwest Virginia
Service Corp. Does not include the value of certain other benefits, such as
automobile allowances, which do not exceed 10% of the total salary and
bonus of the individual.
(2) Includes 613 shares of Common Stock allocated, in the 2000 fiscal year,
under the ESOP with a market value of as of June 30, 2000, of $9.50 per
share, for a total value of $5,824.
(3) Consists of funds provided with the specific requirement that they be used
by the officer to obtain an equity interest in the Company by purchasing
shares of Common Stock.
Employment Agreement. The Bank maintains an employment agreement with
D. W. Shilling, President and Chief Executive Officer of the Bank. The
employment agreement is for a term of three years at his then current salary
level. The employment agreement is terminable by the Bank for "just cause" as
defined in the employment agreement. If the Bank terminates Mr. Shilling without
just cause, he will be entitled to a continuation of his salary from the date of
termination through the remaining term of the employment agreement, but in no
event for a period of less than 12 months. The employment agreement contains a
provision stating that in the event of his involuntary termination of employment
in connection with, or within two years after, any change in control of the
Bank, Mr. Shilling will be paid in a lump sum an amount equal to 2.999 times his
average annual compensation for the prior five years. Following a change in
control, a termination of employment as of June 30, 2000 would have resulted in
a lump sum payment of approximately $315,000 to Mr. Shilling. The employment
agreement may be renewed annually by the Board of Directors upon a determination
of satisfactory performance.
Item 11. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The following table sets forth information, as of September 14, 2000,
regarding share ownership of (1) persons or groups who own more than 5% of the
outstanding shares of the Common Stock and (2) all
27
<PAGE>
directors and executive officers of the Company as a group. Other than as noted
below, the Company knows of no person or group that owns more than 5% of the
outstanding shares of the Common Stock as of September 14, 2000.
<TABLE>
<CAPTION>
Perecnt of Shares
Amount and Nature of of Common Stock
Name and Address of Beneficial Owner Beneficial Ownership Outstanding
------------------------------------ -------------------- -----------
<S> <C> <C>
Southwest Virginia Savings Bank, FSB 43,361 10.2%
Employee Stock Ownership Plan
302 Second Street, SW
Roanoke, Virginia 24011-1597
B. L. Rakes 42,118 (1) 9.4%
302 Second Street, S.W.
Roanoke, Virginia 24011-1597
</TABLE>
---------------------------------
(1) Includes 25,710 shares of Common Stock that the individual has a right to
acquire pursuant to exercisable options, and 815 shares of restricted
Common Stock that will vest within 60 days of September 14, 2000.
(b) Security Ownership of Management
<TABLE>
<CAPTION>
Shares of
Common Stock Percent
Name Beneficially Owned(1) of Class
---- ------------------------- --------
<S> <C> <C>
B. L. Rakes 42,118 (2) 9.4%
D.W. Shilling 5,128 1.2%
F. Courtney Hoge 8,612 (3)(4) 2.0%
Barbara C. Weddle 15,776 (5) 3.7%
James H. Brock 9,144 (3)(4)(6) 2.1%
Glen C. Combs 15,112 (3)(4)(6) 3.5%
Michael M. Kessler 9,966 (3)(4)(6) 2.3%
All Directors and Executive Officers 120,771 (4)(6)(7) 25.1%
as a Group (9 persons)
</TABLE>
-------------------------
(1) As of September 14, 2000
(2) Includes 25,712 shares of Common Stock that the individual has a right to
acquire pursuant to exercisable options, and 815 shares of restricted
Common Stock that will vest within 60 days of September 14, 2000.
(3) Includes 4,298 shares of Common Stock that the individual has a right to
acquire pursuant to exercisable options, and 163 shares of restricted
Common Stock that will vest within 60 days of September 14, 2000.
28
<PAGE>
(4) Excludes 11,767 shares of Common Stock held by the Southwest Virginia
Savings Bank, FSB Management Stock Bonus Plan ("Management Stock Bonus
Plan") as of the close of business on September 14, 2000. Directors Hoge,
Brock, Combs, and Kessler collectively serve as trustees to the Management
Stock Bonus Plan trust, and such individuals disclaim beneficial ownership
with respect to such shares held in a fiduciary capacity.
(5) Includes 8,863 shares of Common Stock that the individual has a right to
acquire pursuant to exercisable options and 424 shares of restricted Common
Stock that will vest within 60 days of September 14, 2000.
(6) Excludes 18,258 unallocated shares of Common Stock held under the Bank's
Employee Stock Ownership Plan ("ESOP") for which certain directors serve as
members of the ESOP Committee or as ESOP Trustees. Such individual
disclaims beneficial ownership with respect to such shares held in a
fiduciary capacity. The ESOP purchased shares for the exclusive benefit of
ESOP participants with funds borrowed from the Company. These shares are
held in a suspense account and are allocated among ESOP participants
annually on the basis of compensation as the ESOP debt is repaid. Messrs.
B. L. Rakes, Michael M. Kessler and F. Courtney Hoge serve on the ESOP
Committee and Michael M. Kessler, James H. Brock, and Glen C. Combs serve
as the ESOP Trustees. The ESOP Committee or the Board instructs the ESOP
Trustees regarding investment of ESOP plan assets. The ESOP Trustees must
vote all shares allocated to participant accounts under the ESOP as
directed by ESOP participants. Unallocated shares and shares for which no
timely voting direction is received will be voted by the ESOP Trustees as
directed by the ESOP Committee.
(7) Includes shares of Common Stock held directly as well as by spouses or
minor children, in trust and other indirect ownership, over which shares
the individuals effectively exercise sole voting and investment power,
unless otherwise indicated. Includes 57,469 shares of Common Stock that
executive officers and directors have a right to acquire pursuant to the
exercise of options within 60 days of September 14, 2000. Includes 10,680
shares of Common Stock allocated under the ESOP to executive officers or
directors, over which such individuals exercise shared voting and
investment power.
(c) Management of the Registrant knows of no arrangements, including any
pledge by any person of securities of the Registrant, the operation of
which may at a subsequent date result in a change in control of the
Registrant.
Item 12. Certain Relationships and Related Transactions
Except as noted below, no directors, executive officers, or immediate
family members of such individuals were engaged in transactions with the Bank or
any subsidiary involving more than $60,000 during the fiscal year ended June 30,
2000. Furthermore, the Bank had no "interlocking" relationships existing on or
after June 30, 2000 in which (i) any executive officer is a member of the Board
of Directors/Trustees of another entity, one of whose executive officers is a
member of the Bank's Board of Directors, or where (ii) any executive officer is
a member of the compensation committee of another entity, one of whose executive
officers is a member of the Bank's Board of Directors.
Setforth below is certain information as of June 30, 2000, relating to
mortgage and other loans given to executive officers and directors and their
immediate family who had aggregate outstanding loan balances with the Bank of
$60,000 or greater.
The Bank, like many financial institutions, has followed a policy of
granting various types of loans to officers, directors, and employees. Such
loans have been made in the ordinary course of business and on substantially the
same terms, including interest rates and collateral as those prevailing at the
time for comparable transactions with the Bank's other customers, and do not
involve more than the normal risk of collectability, nor present other
unfavorable features. However, as part of the Bank's compensation program, the
Bank makes adjustable-rate first mortgage loans to full-time employees,
officers, directors and related
29
<PAGE>
parties at 1% above the Bank's cost of funds while adjustable-rate second
mortgages and cash out refinances are made at 1.5% above the Bank's cost of
funds. Such rates are only effective while such persons are employees, officers,
directors (including loans to related parties of such individuals) of the Bank
and continue to occupy the real estate securing the loans as their primary
residence.
<TABLE>
<CAPTION>
Highest Unpaid
Balance
Outstanding
During Last Unpaid
Original Interest Prevailing Rate Two Fiscal Balance
Name of Officer Date Loan Rate at Time Loan Years Ended As Of
or Director Type of Loan Originated Amount Charged was Made June 30, 2000 June 30, 2000
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Wayne F. Munden Home Mortgage 05/30/97 $200,000 5.75%(1) 5.50% $193,557 $189,142
</TABLE>
-------------------------------------------
(1) The interest rate of 5.75% on the home mortgage loan is an adjustable rate
mortgage plan. The loan was modified at the time the loan was made to 1%
above the cost of Bank's funds rounded to the next one-quarter percent. The
rate on this loan adjusts annually. The loan was originated with a 5.5%
interest rate
Item 13. Exhibits, List and Reports on Form 8-K.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibits
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***
10.11 Agreement and Plan of Merger between SWVA Bancshares, Inc. and
FNB Corporation, dated August 7, 2000*******
13 Annual Report to Stockholders for the fiscal year ended June 30, 2000
21 Subsidiaries of the Registrant (See "Item I - Description of Business")
23 Consent of Cherry Bekaert & Holland, L.L.P.
27 Financial Data Schedule (electronic filing only)
</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, 1999.
**** 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, 1995.
30
<PAGE>
***** 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.
******* Incorporated by reference to Exhibit 99.1 of the Registrant's
Current Report on Form 8-K (SEC File No. 0-24674) filed with the SEC
on August 8, 2000.
(b) In the last quarter of the fiscal year ended June 30, 2000, no reports
on Form 8-K were filed by the Registrant with the SEC. Subsequent to
the quarter ended June 30, 2000, the Registrant filed a report on Form
8-K dated August 7, 2000 to report the execution of a merger agreement
providing for the merger of the Registrant with and into FNB
Corporation of Christiansburg, Virginia.
31
<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 26, 2000.
<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>
32
