FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
-----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
--------------- -------------------
Commission File Number 0-24674
---------------
SWVA BANCSHARES, INC
--------------------
VIRGINIA 54-1721629
- ------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 Second Street, SW, Roanoke Virginia 24011-1597
- --------------------------------------- -----------
(Address of Principal executive offices) (Zip Code )
Registrant's telephone number, including area code (540) 343-0135
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 and 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of common
stock, as of February 10, 1998: $0.10 par value - 510,984 common shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
---- ----
SWVA BANCSHARES, INC. & SUBSIDIARIES
INDEX
================================================================================
PART I. FINANCIAL INFORMATION PAGE
===================== ====
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at December 31, 1997 and June 30, 1997
(unaudited) 1
Consolidated Statements of Income for the
Three and Six Months Ended December 31, 1997
and June 30, 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1997 and June
30, 1997 (unaudited) 3
Notes to Unaudited Interim Consolidated
Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
PART II. OTHER INFORMATION 12
=================
SWVA BANCSHARES, INC & SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
Assets Dec 31 June 30
1997 1997
--------------------
(Unaudited)
Cash and cash equivalents $ 4,835 $ 1,276
Interest-bearing deposits 5,685 5,304
Investment & Mortgage Backed Securities:
Held to Maturity, at amortized cost 332 365
Available for Sale, at fair value 14,713 8,748
Restricted at cost 961 961
Loans held for sale 726 727
Loans receivable, net 48,620 50,982
Property and equipment, net 1,641 1,666
Accrued interest receivable 487 437
Prepaid expenses and other assets 282 287
-------- --------
Total assets $ 78,282 $ 70,753
======== ========
Liabilities and Stockholders' Equity
Deposits $ 64,813 $ 57,933
Advances Federal Home Loan Bank 4,500 3,500
Advances from borrowers
for taxes and insurance 216 205
Other liabilities and deferred income 338 513
-------- --------
Total liabilities 69,867 62,151
-------- --------
Stockholders' Equity
Preferred Stock, 275,000 shares
authorized, no shares issued or
outstanding
Common stock, $.10 par value, 2,225,000 shares authorized,
510,984 outstanding as of December 31, 1997 and 510,984
outstanding as of June 30, 1997 51 51
Additional paid-in capital 4,310 4,286
Dividends declared and paid (536) (143)
Less unearned ESOP shares (31,951 shares) (319) (319)
Less unearned MSBP shares (17,537 shares) (305) (349)
Retained earnings
(substantially restricted) 5,135 5,047
Valuation allowance
Investments Available for Sale 79 29
-------- --------
Total Stockholders' Equity 8,415 8,602
-------- --------
Total Liabilities
and Stockholders' Equity $ 78,282 $ 70,753
======== ========
1
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)
Three Months Six Months
Ended
December 31
-------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Unaudited)
Interest income
Loans $1,041 $1,101 $2,136 $2,109
Mortgage-backed and related securities 43 123 89 243
U. S. Government obligations
including agencies 182 18 289 36
Municipal bonds 1 0 1 0
Other investments, including
overnight deposits 157 104 302 213
------ ------ ------ ------
Total interest income 1,424 1,346 2,817 2,601
------ ------ ------ ------
Interest expense
Deposits 719 634 1,390 1,269
Borrowed funds 70 50 117 59
------ ------ ------ ------
Total interest expense 789 684 1,507 1,328
------ ------ ------ ------
Net interest income 635 662 1,310 1,273
Provision for credit losses 3 0 27 0
------ ------ ------ ------
Net interest income after
provision for credit losses 632 662 1,283 1,273
------ ------ ------ ------
Noninterest income
Loan and other customer service fees 31 36 63 73
Gain on sale of mortgage loans 28 31 74 57
Gross rental income 25 24 50 48
Net gain on sale of investments,
available for sale 0 39 (17) 39
------ ------ ------- ------
Total noninterest income 84 130 170 217
------ ------ ------ ------
Noninterest expenses
Personnel 299 308 617 613
Office occupancy and equipment 74 72 148 140
Data processing 42 34 73 66
Federal insurance of accounts 13 23 18 412
Other 103 101 225 199
------ ------ ------ ------
Total noninterest expenses 531 538 1,081 1,430
------ ------ ------ ------
Income before income taxes 185 254 372 60
Provision for income taxes 70 30 141 30
------ ------ ------ ------
Net income $ 115 $ 224 $ 231 $ 30
====== ====== ====== =======
Per common share:
Basic earnings per share .24 .46 .48 .07
Diluted earnings per share .24 .46 .48 .07
2
SWVA BANCSHARES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flow
(In Thousands)
Six Months Ended
Dec 31
------------------
1997 1996
Operating Activities (Unaudited)
Net Income $ 231 $ 30
Adjustments to Reconcile Net Income to Net Cash
Provided by (used in) operating activities
MSBP Shares Allocated 44 0
Provision for credit losses 27 0
Provision for depreciation and amortization 49 42
Provision for Deferred Income Tax 0 2
Loans Originated for Sale (6,527) (3,516)
Proceeds from sales of loans originated for sale 6,602 4,329
Gain on Sale of Loans, from fees (74) (57)
Gain on Sale of Real Estate 0 0
Loss (Gain) on Disposal of Property and Equipment 1 0
Net gain on sale of investments, available for sale (17) 39
Net (increase) decrease in Other Assets (34) (44)
Net increase (decrease) in Other Liabilities (164) (130)
------- -------
Net cash provided by (used in) operating activities 138 695
Investing activities
Proceeds from sale of property and equipment 0 0
Proceeds from maturity of investments
and interest-bearing deposits 3,271 1,572
Proceeds from sale of available for sale investments 3,257 2,062
Purchase of investments and interest-bearing deposits (3,652) (2,558)
Purchase of available for sale investments (9,271) (1,992)
Purchase of property and equipment (23) (28)
Net (increase) decrease in loans 2,335 (4,468)
Purchase of loans 0 (22)
Principal repayments on Mortgage Backed Securities 160 46
------- -------
Net cash provided by (used in) investing activities (3,923) (5,388)
------- -------
Financing activities
Curtailment of advances and other borrowings (1,500) 0
Proceeds from advances and other borrowings 2,500 3,500
Net increase (decrease) in savings deposits 6,879 (399)
Proceeds from sale of stock 0 0
Repurchase of stock 0 (341)
Dividends paid (535) (70)
------- -------
Net cash used in financing activities 7,344 2,690
------- -------
Increase (decrease) in cash and cash equivalents 3,559 (2,003)
Cash and cash equivalents at beginning of period 1,276 5,262
------- -------
Cash and cash equivalents at end of period $ 4,835 $ 3,259
======== =======
3
SWVA BANCSHARES, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
The accompanying consolidated financial statements include the accounts of SWVA
Bancshares, Inc. ("Company") and its wholly-owned subsidiary, Southwest Virginia
Savings Bank, FSB ("Bank") and its wholly-owned subsidiary, Southwest Virginia
Service Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for fair presentation have been included.
Operating results for the three and six months ended December 31, 1997, are not
necessarily indicative of the results that may be expected for the year ending
June 30, 1998.
NOTE 2 - STOCK REPURCHASE
The Company has adopted a stock repurchase program that allows for the
repurchase, from time to time, of up to 30,000 (5.9%) shares of common stock.
The stock repurchase program that the Company had previously adopted had expired
during 1997. The current plan to repurchase up to 30,000 shares doe not state an
expiration date. Any shares repurchased may be used for general and other
corporate purposes, including the issuance of shares upon the exercise of stock
options.
NOTE 3 -- RECENT ACCOUNTING PRONOUNCEMENTS
FASB Statement on Earnings Per Share.
In March, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS) No. 128. The Statement
establishes standards for computing and presenting earnings per share and
applies to entities with publicly held common stock or potential common stock.
This State simplifies the standards for computing earnings per share previously
found in Accounting Principles Board ("APB") Opinion No. 15, Earnings per Share
("EPS"), and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and the denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. Basic EPS
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential
4
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shares in the earnings of the entity. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. This
statement supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of
Opinion 15. This statement is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. We do not
believe the impact of adopting SFAS No. 28 will be material to our financial
statements.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition at December 31, 1997 and June 30, 1997
- ------------------------------------------------------------------------
Total assets increased $7.5 million or 10.64% from $70.8 million at June 30,
1997 to $78.3 million at December 31, 1997. Net loans receivable decreased $2.4
million or 4.63% from $51.0 million at June 30, 1997 to $48.6 million at
December 31, 1997 due primarily to loan payoffs of adjustable rate mortgage
loans (ARM's) and a reduction in construction loans outstanding.
Interest-bearing deposits increased $400,000 or 7.18% to $5.7 million at
December 31, 1997 from $5.3 million at June 30, 1997 due mainly to an increase
in cash available to invest in interest-bearing deposits. Cash and cash
equivalents increased $3.5 million or 278.92% from $1.3 million at June 30, 1997
to $4.8 million at December 31, 1997 due mainly to increased cash received from
loan payoffs and funds received on savings deposits. Available for Sale
Investments increased $6.0 million from $8.7 million at June 30, 1997 to $14.7
million at December 31, 1997. The increase in investments were funded from
growth in deposits and borrowings from the FHLB. Deposits increased $6.9 million
or 11.88%. This growth came when loan demand had slowed. Therefore, the funds
were invested in available for sale investments such as FHLB notes, FHLMC notes,
FNMA notes, GNMA II mortgage backed investments and municipal bonds. In addition
some of the securities were purchased with funds borrowed from the FHLB. This
action was taken to leverage capital with the expectation of increasing return
on equity. This approach could increase interest rate risk.
Accrued interest receivable increased $50,000 or 11.44% from $437,000 at June
30, 1997 to $487,000 at December 31, 1997 due to an increase in accruals on
available for sale investments.
Non-performing assets at December 31, 1997 were $23,000 as compared to $60,000
in non-performing assets at June 30, 1997. The non-performing asset was on a
single family mortgage loan. Classified assets totaled $333,000. All were
classified as substandard. $6,000 was on a letter of credit and the remaining
were on single family mortgage loans.
Deposits increased $6.9 million, or 11.88% from $57.9 million at June 30, 1997
to $64.8 million at December 31, 1997 due mainly to an increase in funds in
certificates of deposits. Core deposits were $15.9 million or 24.49% of total
savings. This strong deposit growth was enhanced with new customers. There are
currently several mergers of other banks taking place in our market with out of
state banks which we feel has contributed directly to this growth. We believe
that this is an indication that local customers want to be served by home town
banks.
6
At December 31, 1997, there were $4.5 million outstanding in advances from the
Federal Home Loan Bank of Atlanta as compared to $3.5 million outstanding on
June 30, 1997, an increase of $1.0 million or 28.57%. The advances were used to
leverage investment purchases.
Other accrued expenses decreased $175,000 or 34.11% due to the accumulation of
accruals for calendar year expenses and tax deposits that were paid during the
quarter ended December 31, 1997.
THE YEAR 2000 ISSUE
- -------------------
The Bank's Board of Directors has adopted an action plan for addressing the
computer-related concerns raised by Year 2000. An internal committee has also
been appointed by the Board to manage this effort. At this time, because so much
of the Bank's data processing is out-sourced, it is felt that this project can
be managed internally. However, should major concerns emerge, external
assistance could be sought.
A process is already underway to identify all equipment and systems that may
potentially be impacted. Servicers, major vendors and large loan customers are
all being contacted in order to ascertain their individual degrees of readiness
for Year 2000. This will be an on-going effort to include documented equipment
and systems testing.
Although the Bank is already paying some additional surcharges to various
vendors for equipment and systems up-grading, it is currently estimated that the
amount of financial expenditure required to become Year 2000 compliant will not
be significant. However, this will be closely monitored in conjunction with
periodic servicer and vendor status reports.
7
Results of Operations for the three months ended December 31, 1997 and December
- --------------------------------------------------------------------------------
31, 1996
- --------
Net Income Net income decreased $109,000 or 48.66%, from $224,000 for the
three months ended December 31, 1996 to $115,000 for the three months ended
December 31, 1997. The decrease in net income was due to decreased net interest
income and noninterest income and an increase in the provision for income taxes.
Interest Income Interest income increased $78,000, or 5.79%, from $1.3
million for the three months ended December 31, 1996 to $1.4 million for the
three months ended December 31, 1997. The increase was mainly a result of
interest earned on funds invested offset by a decrease in the interest received
on loans.
Interest Expense Interest expense increased $105,000 or 15.35% from
$684,000 for the three months ended December 31, 1996 to $789,000 for the three
months ended December 31, 1997. The increase was due mainly to an increase in
interest paid on borrowed funds and an increase in interest paid on deposits.
Net Interest Income Net interest income decreased by $27,000 or 4.08% from
$662,000 for the three months ended December 31, 1996 to $635,000 for the three
months ended December 31, 1997 due mainly to additional interest paid on
deposits, reduced interest income on loans offset by increased interest earned
on investments.
Provision for Credit Losses The Bank made an addition of $3,000 to the
provision for credit losses for the three months ended December 31, 1997. The
allowance for credit losses is $200,000. No provision for credit losses was made
during the quarter ending December 31, 1996.
Non-interest Income Non-interest income decreased by $46,000, or 35.38%
from $130,000 for the three months ended December 31, 1996 to $84,000 for the
three months ended December 31, 1997. This was mainly the result of a decrease
in net gains on the sale of available for sale investments during 1996.
Non-interest Expense Non-interest expense decreased by $7,000, or 1.30%
from $538,000 for the three months ended December 31, 1996 to $531,000 for the
three months ended December 31, 1997, mainly due to a reduction in Federal
Deposit Insurance Premiums.
Provision for income taxes The provision for income taxes for the three
months ended December 31, 1997 was $70,000 as compared to $30,000 for the three
months ended December 31, 1996. Tax calculations for the 3 months ended December
31, 1996 were affected by the loss recorded during the first quarter for the one
time SAIF Special Assessment.
8
Results of Operations for the six months ended December 31, 1997 and December
- --------------------------------------------------------------------------------
31, 1996
- --------
Net Income Net income increased $201,000 or 670.00%, from $30,000 for the
six months ended December 31, 1996 to $231,000 for the six months ended December
31, 1997. The increase was mainly due to the one time SAIF Special Assessment
offset by the net gains on sale of available for sale investments and additional
provisions for income taxes during the six months ended December 31, 1997.
Interest Income Interest income increased $216,000, or 8.30%, from $2.6
million for the six months ended December 31, 1996 to $2.8 million for the six
months ended December 31, 1997. The increase was mainly a result of additional
cash received on savings deposits which were invested and mortgage loans put in
the Bank's portfolio during the first quarter.
Interest Expense Interest expense increased $179,000 or 13.48% from $1.3
million for the six months ended December 31, 1996 to $1.5 million for the six
months ended December 31, 1997. The increase was due mainly to an increase in
interest paid on deposits and on borrowed funds.
Net Interest Income Net interest income increased by $37,000 or 2.91%.
This resulted mainly from an increase in the interest earned on investments
offset by the interest paid on savings deposits.
Provision for Credit Losses The Bank made an addition of $27,000 to the
provision for credit losses for the six months ended December 31, 1997. The
addition was made due to a loss of $44,000 on a delinquent real estate loan.
After the deduction of the loss, the allowance for credit losses was $200,000.
No provision for credit losses were made during the six months ending December
31, 1996.
Non-interest Income Non-interest income decreased by $47,000 or 21.66%
from $217,000 for the six months ended December 31, 1996 to $170,000 for the six
months ended December 31, 1997. This resulted from a net gain of $39,000 on the
sale of investments during the six months ended December 31, 1996, a net loss of
$17,000 on the sale of investments during the six months ended December 31, 1997
and an increase in gain on sale of mortgage loans and a reduction in loan and
other customer service fees.
Non-interest Expense Non-interest expense decreased by $349,000, or 24.41%
from $1.4 million for the six months ended December 31, 1996 to $1.1 million for
the six months ended December 31, 1997, due mainly to the one time SAIF Special
Assessment offset by an increase in data processing costs associated with the
start-up cost of the new ATM and Debit Card program and an increase in expenses
associated with the annual meeting.
Provision for income taxes The provision for income taxes for the six
months ended December 31, 1997 was $141,000 as compared to $30,000 for the six
months ended December 31, 1996. Tax calculations for the 6 months ended December
31, 1996 were affected by the loss recorded during the first quarter for the one
time SAIF Special Assessment.
9
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to at least 3.0% of total adjusted assets
and (3) a risk-based capital requirement equal to 8.0% of total risk- weighted
assets.
As shown below, the Bank's tangible, core and risk-based capital significantly
exceed all applicable regulatory capital requirements of the OTS at December 31,
1997:
Percent of
Amount Assets
GAAP Capital.................... $7,447 9.47%
====== =====
Tangible Capital................ $7,447 9.47%
Tangible Capital Requirement.... 1,180 1.50%
------ -----
Excess.......................... $6,267 7.97%
====== =====
Core Capital.................... $7,447 9.47%
Core Capital Requirement........ 2,360 3.00%
------ -----
Excess.......................... $5,087 6.47%
====== =====
Total Risk-Based Capital........ $7,648 20.33%
Risk-Based Capital Requirement.. 3,010 8.00%
------ -----
Excess.......................... $4,638 12.33%
====== =====
During the quarter ending December 31, 1997, the Bank paid a cash dividend to
SWVA Bancshares, Inc. in the amount of $725,000.
Management believes that under current regulations, the Bank will continue to
meet its minimum capital requirements in the foreseeable future. Events beyond
the control of the Bank, such as increased interest rates or downturn in the
economy in areas in which the Bank operates could adversely affect future
earnings and as a result, the ability of the Bank to meet its future minimum
capital requirements.
Liquidity
The Bank's liquidity is a measure of its ability to fund loans, withdrawal of
deposits and other cash outflows in a cost effective manner. The Bank's primary
sources of funds are deposits and proceeds from principal and interest payments
on loan and mortgage backed securities. The Bank also obtains funds from sales
and maturities of investment securities, short-term investments and borrowings,
namely advances from the FHLB of Atlanta. The Bank uses such funds primarily to
meet commitments on existing and continuing loan commitments, to fund maturing
time deposits and savings withdrawals and to maintain liquidity. While loan
payments, maturing investments and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest
10
Liquidity, cont.
rates, economic conditions and competition. The Bank's liquidity is also
influenced by the level of demand for funding loan originations.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments," which include certain United States government
obligations and other approved investments. During the quarter, a change in
regulations changed the liquidity requirements for thrifts. Some of these
changes included reducing the liquid asset requirement from 5% to 4% of the
liquidity base and elimination of the 5 year maximum maturity limitation.
The Bank's regulatory liquidity was 27.42% at December 31, 1997. Had these
changes not been made, the regulatory liquidity would have been 12.00%. Using
the requirements set forth on June 30, 1997, the Bank's regulatory liquidity was
6.74%.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
11
SWVA BANCSHARES, INC. & SUBSIDIARIES
PART II
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual meeting of stockholders was held on October 7, 1997. At
that meeting, stockholders elected two directors and ratified the
appointment of the independent auditors. There were no broker
non-votes.
1. The following directors were elected:
Nominee Votes For Votes Withheld
------- --------- --------------
John L. Hart 381,563 59,134
B. L. Rakes 377,563 63,134
2. Ratification of appointment of Cherry Bekaert & Holland,
L.L.P. as independent auditors for 1998 fiscal year:
Votes For Votes Against Abstain
--------- ------------- -------
436,197 2,500 2,000
Item 5. Other Information
The Company has adopted a stock repurchase program that allows for
the repurchase, from time to time, of up to 30,000 (5.9%) shares of
common stock. The stock repurchase program that the Company had
previously adopted had expired during 1997. The current plan to
repurchase up to 30,000 shares does not state an
12
expiration date. Any shares repurchased may be used for general and
other corporate purchase, including the issuance of shares upon the
exercise of stock options.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.2 Bylaws of SWVA Bancshares, Inc.
(b) A form 8-K (items 5 & 7) was filed on August 27, 1997 to
announce semi-annual dividends and 4th quarter earnings.
13