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 March 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from to
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Commission File Number 0-24674
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SWVA BANCSHARES, INC
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VIRGINIA 54-1721629
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
302 Second Street, SW, Roanoke Virginia 24011-1597
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(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code (540) 343-0135
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 and 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares outstanding of each of the issuer's classes of common
stock, as of May 11, 1998: $0.10 par value - 506,284 common shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
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SWVA BANCSHARES, INC. & SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Statements of Financial Condition
at March 31, 1998 and June 30, 1997 (unaudited) 1
Consolidated Statements of Income for the
Three and Nine Months Ended March 31, 1998 and
March 31, 1997 (unaudited) 2
Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 1998 and
March 31, 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 5
PART II. OTHER INFORMATION 10
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SWVA BANCSHARES, INC & SUBSIDIARY
Consolidated Statements of Financial Condition
(In thousands)
Assets Mar 31 June 30
1998 1997
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(Unaudited)
Cash and cash equivalents $ 1,436 $ 1,276
Interest-bearing deposits 6,291 5,304
Investment & Mortgage Backed Securities:
Held to Maturity, at amortized cost 325 365
Available for Sale, at fair value 20,185 8,748
Restricted at cost 961 961
Loans held for sale 1,780 727
Loans receivable, net 47,891 50,982
Property and equipment, net 1,626 1,666
Accrued interest receivable 672 437
Prepaid expenses and other assets 297 287
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Total assets $ 81,464 $ 70,753
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Liabilities and Stockholders' Equity
Deposits $ 68,666 $ 57,933
Advances Federal Home Loan Bank 3,500 3,500
Advances from borrowers for taxes and insurance 431 205
Other liabilities and deferred income 480 513
Total liabilities 73,077 62,151
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Stockholders' Equity
Preferred Stock, 275,000 shares
authorized, no shares issued or
outstanding
Common stock, $.10 par value, 2,225,000 shares authorized, 506,284 outstanding
as of March 31, 1998 and 510,984
outstanding as of June 30, 1997 51 51
Additional paid-in capital 4,226 4,286
Dividends declared and paid (612) (143)
Less unearned ESOP shares (31,951 shares) (319) (319)
Less unearned MSBP shares (17,537 shares) (305) (349)
Retained earnings
(substantially restricted) 5,288 5,047
Valuation allowance
Investments Available for Sale 58 29
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Total Stockholders' Equity 8,387 8,602
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Total Liabilities
and Stockholders' Equity $ 81,464 $ 70,753
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1
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands)
Three Months Nine Months
Ended
March 31
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1998 1997 1998 1997
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(Unaudited)
Interest income
Loans $ 1,035 $ 1,101 $ 3,171 $ 3,210
Mortgage-backed and related securities 97 89 186 332
U. S. Government obligations
including agencies 224 18 513 54
Municipal bonds 10 11
Other investments, including
overnight deposits 154 133 456 346
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Total interest income 1,520 1,341 4,337 3,942
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Interest expense
Deposits 785 622 2,175 1,891
Borrowed funds 65 42 182 101
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Total interest expense 850 664 2,357 1,992
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Net interest income 670 677 1,980 1,950
Provision for credit losses 3 0 30 0
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Net interest income after
provision for credit losses 667 677 1,950 1,950
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Noninterest income
Loan and other customer service fees 34 35 97 108
Gain on sale of mortgage loans 63 16 137 73
Gross rental income 24 25 74 73
Net gain on sale of investments,
available for sale 0 0 (17) 39
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Total noninterest income 121 76 291 293
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Noninterest expenses
Personnel 325 319 942 932
Office occupancy and equipment 72 74 220 214
Data processing 47 37 120 103
Federal insurance of accounts 9 9 27 421
Other 94 90 319 289
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Total noninterest expenses 547 529 1,628 1,959
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Income before income taxes 241 224 613 284
Provision for income taxes 88 82 229 112
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Net income $ 153 $ 142 $ 384 $ 172
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Per common share:
Basic earnings per share .32 .29 .80 .37
Diluted earnings per share .31 .29 .79 .37
2
SWVA BANCSHARES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flow
(In Thousands)
Nine Months Ended
March 31
1998 1997
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Operating Activities (Unaudited)
Net Income $ 384 $ 172
Adjustments to Reconcile Net Income to Net Cash
Provided by (used in) operating activities
MSBP Shares Allocated 44 0
Provision for credit losses 30 0
Provision for depreciation and amortization 72 65
Provision for Deferred Income Tax 0 (27)
Loans Originated for Sale (14,464) (6,007)
Proceeds from sales of loans originated for sale 13,548 6,273
Gain on Sale of Loans, from fees (136) (74)
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 (280) (15)
Net increase (decrease) in Other Liabilities 206 278
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Net cash provided by (used in) operating activities (612) 704
Investing activities
Proceeds from sale of property and equipment 0 0
Proceeds from maturity of investments
and interest-bearing deposits 5,344 2,458
Proceeds from sale of available for sale investments 3,257 3,300
Purchase of investments and interest-bearing deposits (5,832) (3,838)
Purchase of available for sale investments (15,617) (1,992)
Purchase of property and equipment (30) (44)
Net (increase) decrease in loans 3,375 (4,167)
Purchase of loans (315) (22)
Principal repayments on Mortgage Backed Securities 566 81
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Net cash provided by (used in) investing activities (9,252) (4,224)
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Financing activities
Curtailment of advances and other borrowings (3,000) (2,500)
Proceeds from advances and other borrowings 3,000 3,500
Net increase (decrease) in savings deposits 10,733 868
Repurchase of stock (97) (341)
Dividends paid (612) (143)
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Net cash used in financing activities 10,024 1,384
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Increase (decrease) in cash and cash equivalents 160 (2,136)
Cash and cash equivalents at beginning of period 1,276 5,262
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Cash and cash equivalents at end of period $ 1,436 $ 3,126
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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 nine months ended March 31, 1998, 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 does 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.
During the quarter ended March 31, 1998, the Company repurchased 4,700 shares of
common stock in the open market at an aggregate purchase price of approximately
$98,000. The amount repurchased represented approximately 0.92% of the Company's
total shares outstanding prior to the repurchase.
NOTE 3 - DIRECTORS STOCK COMPENSATION PLAN
On March 18, 1998, the Company granted 10,122 options to purchase shares of
common stock to its Directors. The purchase price of common stock, under these
options, is $21.00 per share (market price at the date of grant). All of the
above options are exercisable at the date of grant and expire ten (10) years
from the date of grant.
4
NOTE 4 -- 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 statement simplifies the standards for computing earnings per share
previously found in Accounting Principles Board ("APS") 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 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 March 31, 1998 and June 30, 1997
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Total assets increased $10.7 million or 15.13% from $70.8 million at June 30,
1997 to $81.5 million at March 31, 1998 due to an increase in deposits and an
increase in Available for Sale Investments purchased. Net loans receivable
decreased $3.1 million or 6.06% from $51.0 million at June 30, 1997 to $47.9
million at March 31, 1998 due primarily to loan payoffs of adjustable rate
(ARM's) and fixed rate mortgage loans and a reduction in construction loans
outstanding.
Interest-bearing deposits increased $1.0 million or 18.61% from $5.3 million at
June 30, 1997 to $6.3 million at March 31, 1998 due mainly to an increase in
cash available to invest in interest-bearing deposits. Cash and cash equivalents
increased $160,000 or 12.54% from $1.3 million at June 30, 1997 to $1.4 million
at March 31, 1998 due mainly to increased cash received from loan payoffs and
funds received on savings deposits net of funds invested in investments and
mortgage backed securities. Available for Sale Investments increased $12.4
million from $8.7 million at June 30, 1997 to $21.1 million at March 31, 1998.
The increase in Available for Sale Investments were funded from growth in
deposits and borrowings from the FHLB. Deposits increased $10.8 million or
18.53%. This deposit growth came when loan demand for adjustable rate mortgage
loans (ARM's) had slowed. Therefore, the funds were invested in available for
sale investments such as FHLB notes, FHLMC notes, FNMA notes, GNMA II & FNMA
mortgage backed investments and municipal bonds. In addition, some of the
securities were purchased with funds borrowed from the FHLB in order to leverage
capital with the expectation of increasing return on equity. This approach could
increase interest rate risk.
Accrued interest receivable increased $235,000 or 53.55% from $437,000 at June
30, 1997 to $672,000 at March 31, 1998 due to an increase in accruals on
available for sale investments.
There were no non-performing assets at March 31, 1998 as compared to $60,000 in
non-performing assets at June 30, 1997. Classified assets totaled $302,000 at
March 31, 1998. Such assets were classified as substandard and were on single
family mortgage loans.
Deposits increased $10.8 million, or 18.53% from $57.9 million at June 30, 1997
to $68.7 million at March 31, 1998 due mainly to an increase in funds in
certificates of deposits. Core deposits were $16.9 million or 24.63% of total
deposits. 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.
At June 30, 1997 and March 31, 1998 there were $3.5 million outstanding in
advances from the Federal Home Loan Bank of Atlanta. Funds from advances have
been used to leverage investment purchases.
6
THE YEAR 2000 ISSUE
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The Bank's Board of Directors has adopted an action plan for addressing the
computer-related concerns raised by Year 2000. An internal committee has been
appointed by the Board to manage this effort.
A process is already underway to identify all equipment and systems that may
potentially be impacted. All outside servicers and major vendors have been
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. Currently, because the larger part of the Bank's data
processing is out-sourced, the remaining in-house systems can be made ready
without the need for external project management assistance.
Large loan customers have been contacted in order to both instill awareness and
to determine their state of readiness for Year 2000.
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, expenses will be closely monitored in conjunction with
periodic servicer and vendor status reports.
7
Results of Operations for the three months ended March 31, 1998 and March 31,
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1997
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Net Income Net income increased $11,000 or 7.75%, from $142,000 for the
three months ended March 31, 1997 to $153,000 for the three months ended March
31, 1998. The increase in net income was mainly due to an increase in gain on
sale of mortgage loans offset by increased non interest expenses.
Interest Income Interest income increased $179,000, or 13.35%, from
$1.3 million for the three months ended March 31, 1997 to $1.5 million for the
three months ended March 31, 1998. 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 $186,000 or 28.01% from
$664,000 for the three months ended March 31, 1997 to $850,000 for the three
months ended March 31, 1998. The increase was due mainly to an increase in
interest paid on deposits and an increase in interest paid on borrowed funds.
Net Interest Income Net interest income decreased by $7,000 or 1.03%
from $677,000 for the three months ended March 31, 1997 to $670,000 for the
three months ended March 31, 1998.
Provision for Credit Losses The Bank made an addition of $3,000 to the
provision for credit losses for the three months ended March 31, 1998. The
allowance for credit losses is $203,000. No provision for credit losses was made
during the quarter ending March 31, 1997.
Non-interest Income Non-interest income increased by $45,000, or 59.21%
from $76,000 for the three months ended March 31, 1997 to $121,000 for the three
months ended March 31, 1998. This was mainly the result of an increase in income
on loans sold in the secondary market for the three months ended March 31, 1998.
Non-interest Expense Non-interest expense increased by $18,000, or
3.40% from $529,000 for the three months ended March 31, 1997 to $547,000 for
the three months ended March 31, 1998, mainly due to a an increase in data
processing expenses and personnel expenses.
Provision for income taxes The provision for income taxes for the three
months ended March 31, 1998 was $88,000 as compared to $82,000 for the three
months ended March 31, 1997. The increase was due to increased pre-tax income.
8
Results of Operations for the nine months ended March 31, 1998 and March 31,
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1997
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Net Income Net income increased $212,000 or 123.26%, from $172,000 for
the nine months ended March 31, 1997 to $384,000 for the nine months ended March
31, 1998. The increase was mainly due to the one time SAIF Special Assessment
offset by the net gains on sale of available for sale of investments and
additional provisions for income taxes during the nine months ended March 31,
1997.
Interest Income Interest income increased $395,000, or 10.02%, from
$3.9 million for the nine months ended March 31, 1997 to $4.3 million for the
nine months ended March 31, 1998. 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 $365,000 or 18.32%, from
$2.0 million for the nine months ended March 31, 1997 to $2.4 million for the 9
months ended March 31, 1998. The increase was mainly the result of a increase in
the cost of deposits and an increase in the cost of funds borrowed.
Net Interest Income Net interest income increased by $30,000 or 1.54%.
This resulted mainly from an increase in the interest earned on Mortgage Backed
and related securities and other investments offset by increased cost of
deposits and borrowed money.
Provision for Credit Losses The Bank added $30,000 to the provision for
credit losses for the nine months ended March 31, 1998. The addition was made
due to a loss of $44,000 on a delinquent real estate loan. The allowance for
credit losses was $203,000 at March 31, 1998. No provision for credit losses
were made during the nine months ending March 31, 1997.
Non-interest Income Non-interest income decreased by $2,000 or 0.68%
from $293,000 for the nine months ended March 31, 1997 to $291,000 for the nine
months ended March 31, 1998. This resulted from a net gain of $39,000 on the
sale of investments during the nine months ended March 31, 1997, a net loss of
$17,000 on the sale of investments during the nine months ended March 31, 1998
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 $331,000, or
16.90% from $2.0 million for the nine months ended March 31, 1997 to $1.6
million for the nine months ended March 31, 1998, 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, an
increase in expenses associated with the annual meeting and increased personnel
expenses.
Provision for income taxes The provision for income taxes for the nine
months ended March 31, 1998 was $229,000 as compared to $112,000 for the nine
months ended March 31, 1997. Tax calculations for the nine months ended March
31, 1997 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 March 31,
1998:
Percent of
Amount Assets
GAAP Capital.................... $7,602 9.29%
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Tangible Capital................ $7,602 9.29%
Tangible Capital Requirement.... 1,228 1.50%
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Excess.......................... $6,374 7.79%
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Core Capital.................... $7,602 9.29%
Core Capital Requirement........ 2,456 3.00%
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Excess.......................... $5,146 6.29%
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Total Risk-Based Capital........ $7,805 20.36%
Risk-Based Capital Requirement.. 3,067 8.00%
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Excess.......................... $4,738 12.36%
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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, withdrawals of
deposits and other cash outflows in a cost effective manner. The Bank's primary
sources of funds are deposits and proceeds from principal and interest payments
on loan and mortgage backed securities. The Bank also obtains funds from sales
and maturities of investment securities, short-term investments and borrowings,
namely advances from the FHLB of Atlanta. The Bank uses such funds primarily to
meet commitments on existing and continuing loan commitments, to fund maturing
time deposits and savings withdrawals and to maintain liquidity. While loan
payments, maturing investments and mortgage-backed securities are a relatively
predictable source of funds,
10
Liquidity, cont.
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Bank's liquidity is also
influenced by the level of demand for funding loan originations.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments," which include certain United States government
obligations and other approved investments. During the quarter ending December
31, 1997, 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 24.08% at March 31, 1998. 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.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 10.1 SWVA Bancshares, Inc. 1998
Directors Stock Compensation Plan
Exhibit 99.1 Press releases issued by the registrant.
12
SWVA BANCSHARES, INC. & SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
SWVA Bancshares, Inc.
Date: May 14, 1998 By: /s/ B. L. Rakes
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B. L. Rakes
President, Chief Executive Officer,
Chief Financial Officer, and Director
Date: May 14, 1998 By: /s/ Mary G. Staples
---------------------
Mary G. Staples
Vice President/Treasurer
Principal Financial Officer
11