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 September 30, 1999
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from __________ to __________
Commission File Number 0-24674
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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
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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
----- -----
The number of shares outstanding of each of the issuer's classes of common
stock, as of November 5, 1999: $0.10 par value - 423,612 common shares.
Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----
SWVA BANCSHARES, INC. & SUBSIDIARIES
INDEX
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PART I. FINANCIAL INFORMATION PAGE
===================== ====
Item 1. Financial Statements
Consolidated Statements of Financial Condition
at September 30, 1999 (unaudited) and June 30, 1999 1
Consolidated Statements of Income for the
Three Months Ended September 30, 1999 and
September 30, 1998 (unaudited) 2
Consolidated Statements of Comprehensive Income
for the Three Months Ended September 30, 1999 and
September 30, 1998 (unaudited) 3
Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1999 and
September 30, 1998 (unaudited) 4
Notes to Unaudited Interim Consolidated
Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION 11
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SWVA BANCSHARES, INC & SUBSIDIARIES
Consolidated Statements of Financial Condition
(In thousands)
Assets
Sept 30 June 30
----------- ----------
1999 1999
----------- ----------
(Unaudited)
Cash and cash equivalents $ 2,135 $ 2,454
Interest-bearing deposits 5,909 6,278
Investment & Mortgage Backed Securities:
Held to Maturity, at amortized cost 275 283
Available for Sale, at fair value 22,434 22,934
Restricted at cost 516 600
Loans held for sale 812 476
Loans receivable, net 47,342 45,576
Property and equipment, net 1,683 1,688
Accrued interest receivable 604 594
Prepaid expenses and other assets 864 831
-------- --------
Total assets $82,574 $81,714
======== ========
Liabilities and Stockholders' Equity
Deposits $65,880 $62,094
Advances from Federal Home Loan Bank 9,000 12,000
Advances from borrowers
for taxes and insurance 388 210
Other liabilities and deferred income 607 619
-------- --------
Total liabilities 75,875 74,923
-------- --------
Stockholders' Equity
Preferred Stock, 275,000 shares
authorized, no shares issued or
outstanding
Common stock, $.10 par value, 2,225,000
shares authorized, 423,612 outstanding
as of September 30, 1999 and as of June 30, 1999 42 42
Additional paid-in capital 2,838 2,838
Dividends declared and paid (76) (180)
Less unearned ESOP shares (27,385 shares) (228) (228)
Less unearned MSBP shares (17,537 shares) (241) (254)
Retained earnings
(substantially restricted) 5,032 5,088
Valuation allowance
marketable equity securities (668) (515)
-------- --------
Total Stockholders' Equity 6,699 6,791
-------- --------
Total Liabilities
and Stockholders' Equity $82,574 $81,714
======== ========
Book Value Per Share (not in thousands) $15.81 $16.03
======== ========
1
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In thousands, except per share data)
Three Months Ended
Sept 30
------------------------
1999 1998
-------- ---------
(Unaudited)
Interest income
Loans $ 930 $1,001
Mortgage-backed and related securities 161 153
U. S. Government obligations including agencies 207 165
Municipal Bonds 30 12
Other investments, including overnight deposits 123 162
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Total interest income 1,451 1,493
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Interest expense
Deposits 632 790
Borrowed funds 157 99
------- -------
Total interest expense 789 889
------- -------
Net interest income 662 604
Provision for credit losses 3 3
------- -------
Net interest income after
provision for credit losses 659 601
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Noninterest income
Loan and other customer service fees 57 37
Gain on sale of mortgage loans 49 79
Gross rental income 25 25
Loss (gain) on Available for Sale Investments - -
Other - 7
------- -------
Total noninterest income 131 149
------- -------
Noninterest expenses
Personnel 349 352
Office occupancy and equipment 86 85
Data processing 58 55
Federal insurance of accounts 9 10
Other 106 111
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Total noninterest expenses 608 613
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Income before income taxes 182 137
Provision for income taxes 58 52
------- -------
Net income $ 124 $ 85
======= =======
Basic earnings per share .31 .18
Diluted earnings per share .31 .18
Cash dividends per share .20 .20
2
SWVA BANCSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In thousands)
Three Months Ended
Sept 30
-----------------------
1999 1998
------ ------
(Unaudited)
Net Income $124 $ 85
Other comprehensive income, net of tax
Unrealized gains on securities (153) 32
----- ----
Comprehensive Income ($ 29) $117
===== ====
3
SWVA BANCSHARES, INC. & SUBSIDIARIES
Consolidated Statements of Cash Flow
(In Thousands)
Three Months Ended
Sept 30
--------------------------
1999 1998
------- -------
(Unaudited)
Operating Activities
Net Income $ 124 $ 85
Adjustments to Reconcile Net Income to Net Cash
Provided by (used in) operating activities
MSBP Shares Allocated 13
Provision for credit losses 3 3
Provision for depreciation and amortization 29 26
Provision for Deferred Income Tax 0 0
Loans Originated for Sale (3,998) (6,710)
Proceeds from sales of loans originated for sale 3,710 6,766
Gain on Sale of Loans, from fees (49) (79)
Gain on Sale of Real Estate - -
Gain on Disposal of Property and Equipment - -
Net gain on sale of investments, available for sale - -
Net (increase) decrease in Other Assets 40 50
Net increase (decrease) in Other Liabilities 167 132
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Net cash provided by (used in) operating activities 39 273
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Investing activities
Proceeds from sale of property and equipment - -
Proceeds from sale of FHLB Stock 109 -
Proceeds from maturity of investments
and interest-bearing deposits 1,856 1,871
Proceeds from sale of available for sale investments - 3,250
Purchase of investments and interest-bearing deposits (1,487) (2,370)
Purchase of available for sale investments - (3,000)
Proceeds from sale of foreclosed real estate - -
Purchase of FHLB Stock (25) -
Purchase of foreclosed real estate - -
Purchase of property and equipment (23) (5)
Net (increase) decrease in loans (1,169) 819
Purchase of loans (600) -
Principal repayments on Mortgage Backed Securities 271 546
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Net cash provided by (used in) investing activities (1,068) 1,111
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Financing activities
Curtailment of advances and other borrowings (4,000) -
Proceeds from advances and other borrowings 1,000 -
Net increase (decrease) in savings deposits 3,786 (2,586)
Repurchase of stock - (68)
Dividends paid (76) (99)
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Net cash used in financing activities 710 (2,753)
------- -------
Increase (decrease) in cash and cash equivalents (319) (1,369)
Cash and cash equivalents at beginning of period 2,454 3,193
------- -------
Cash and cash equivalents at end of period $ 2,135 $ 1,824
======= =======
4
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 months ended September 30, 1999, are not
necessarily indicative of the results that may be expected for the year ending
June 30, 2000.
NOTE 2 -- EARNINGS PER SHARE
The following table sets forth the reconciliation of the numerators and
denominators of the basic and diluted earnings per share (EPS) computations:
Three Months Ended
------------------------
September 30,
------------------------
1999 1998
--------- --------
Numerator:
(a) Net income available to shareholders $ 124 $ 85
======= =======
Denominator:
Weighed-average shares outstanding 423,612 495,899
Less: ESOP weighed-average shares outstanding (22,819) (27,385)
------- -------
(b) Basic EPS weighed-average shares outstanding 400,793 468,514
Effect of dilutive securities:
Incremental shares attributable to the Stock Option - 3,627
Plan and Management Stock Bonus Plan - 1,429
------- -------
(c) Diluted EPS weighed-average shares outstanding 400,793 473,570
======= =======
Basic earnings per share (a/b) $ .31 $ .18
======= =======
Diluted earnings per share (a/c) $ .31 $ .18
======= =======
5
NOTE 3 -- FASB Statement on Reporting Comprehensive Income
Effective July 1, 1998, the Company adopted FASB Statement No. 130, "Reporting
Comprehensive Income." Statement No. 130 requires the reporting of comprehensive
income in addition to net income from operations. Comprehensive income is a more
inclusive financial reporting methodology that includes certain disclosure of
certain financial information that has historically not been recognized in the
calculation of net income.
The Company had unrealized loss on securities held as available for sale, for
the three months ended September 30, 1999 of $153,000 after tax versus an
unrealized gain of $32,000 after tax for the three months ended September 30,
1998. The before tax and after tax amount, as well as the tax (expense) is
summarized below.
Before Tax After
Tax Expense Tax
--- ------- ---
Three months ended September 30, 1999:
Unrealized gains on securities ($232) $79 ($153)
Three months ended September 30, 1998:
Unrealized gains on securities $40 ($ 8) $ 32
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Financial Condition at September 30, 1999 and June 30, 1999
- -------------------------------------------------------------------------
Total assets increased $860,000 or 1.04% from $81.7 million at June 30, 1999 to
$82.6 million at September 30, 1999. Net loans receivable increased $1.8 million
or 3.73% to $47.3 million at September 30, 1999 from $45.6 million at June 30,
1999 due to increased activity in small business loans and greater retention of
mortgage production in the loan portfolio.
Interest-bearing deposits decreased $369,000 or 5.88% from $6.3 million at June
30, 1999 to $5.9 million at September 30, 1999. The decrease was mainly due to a
decision by management to use funds on jumbo certificates to fund mortgage loans
instead of placing them in certificates of deposits with other financial
institutions. Cash and cash equivalents decreased $319,000 or 13.00% from $2.4
million at June 30, 1999 to $2.1 million at September 30, 1999 due mainly to
increased cash needed for funding loans. Held to Maturity Investments decreased
$8,000 from $283,000 at June 30, 1999 to $275,000 at September 30, 1999.
Available for Sale Investments decreased $500,000 from $22.9 million at June 30,
1999 to $22.4 million at September 30, 1999 due to principal paybacks on
Mortgage Backed Securities.
There were no non-performing assets at September 30, 1999 and June 30, 1999.
Classified assets totaled $282,000. $278,000 was classified as substandard with
$277,000 on single family mortgage loans and $1,000 on a consumer loan. A
consumer loan in the amount of $4,000 was classified as doubtful.
Deposits increased $3.8 million, or 6.10% from $62.1 million at June 30, 1999 to
$65.9 million at September 30, 1999 due mainly to special rates offered on
certificates of deposits. The funds received on these certificates was used to
fund loans and to decrease the amount of borrowed funds. Core deposits were
$18.5 million or 27.98% of total savings.
At September 30, 1999, there were $9.0 million outstanding in advances from the
Federal Home Loan Bank of Atlanta as compared to $12.0 million outstanding on
June 30, 1999.
Advances from borrowers for taxes and insurance increased $178,000 or 84.76% due
to the accumulation of escrow for real estate taxes to be paid during the
quarter ending December 31, 1999. Other liabilities and deferred income
decreased $12,000 or 1.94%.
Results of Operations for the three months ended September 30, 1999
- -------------------------------------------------------------------
and September 30, 1998
- ----------------------
Net Income Net income increased $39,000 or 45.88%, from $85,000 for the
three months ended September 30, 1998 to $124,000 for the three months ended
September 30, 1999. The increase was mainly due to a decrease in the cost of
deposits offset by an increase in the cost of borrowed funds and a decrease in
the gain on sale of mortgage loans.
Interest Income Interest income decreased $42,000, or 2.81%, from $1.5
million for the three months ended September 30, 1998 to $1.4 million for the
three months ended September 30, 1999. The decrease was mainly due to a decrease
in loan rates on adjustable rate mortgages.
Interest Expense Interest expense decreased $100,000 or 11.25% from
$889,000 for the three months ended September 30, 1998 to $789,000 for the three
months ended September 30, 1999. The decrease was due mainly to an decrease in
interest paid on deposits partially offset by an increase in interest on
borrowed funds.
Net Interest Income Net interest income increased by $58,000 or 9.60%
from $604,000 for the three months ended September 30, 1998 to $662,000 for the
three months ended September 30, 1999.
Provision for Credit Losses The Bank made additions of $3,000 to the
provision for credit losses for the quarters ended September 30,1998 and 1999.
The allowance for credit losses was $213,000 at September 30, 1999.
Non-interest Income Non-interest income decreased by $18,000, or 13.74%
from $149,000 for the three months ended September 30, 1998 to $131,000 for the
three months ended September 30, 1999. The decrease was mainly due to an
decrease in gains on the sale of mortgage loans during the quarter ended
September 30, 1999.
7
Results of Operations for the three months ended September 30, 1999
- -------------------------------------------------------------------
and September 30, 1998, cont.
- -----------------------------
Non-interest Expense Non-interest expense decreased by $5,000, or .82%
from $613,000 for the three months ended September 30, 1998 to $608,000 for the
three months ended September 30, 1999.
Comprehensive Income (Loss) Effective July 1, 1998, the Company adopted
FASB Statement No. 130, "Reporting Comprehensive Income." Statement No. 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes certain disclosure of certain financial information
that has historically not been recognized in the calculation of net income. For
the quarter ended September 30, 1999, unrealized losses on Investments Available
for Sale, net of tax effects aggregated $153,000. These unrealized losses on
securities when combined with net operating income of $124,000 results in a
comprehensive loss of $29,000, net of the applicable tax effect. For additional
information, please refer to Management's Discussion on Regulatory Capital
Requirements.
Provision for income taxes The provision for income taxes for the three
months ended September 30, 1999 was $58,000 compared to $52,000 for the three
months ended September 30, 1998. The increase was due to increased income for
the quarter ended September 30, 1999.
Regulatory Capital Requirements
OTS capital regulations require savings institutions to meet three capital
standards: (1) tangible capital equal to 1.5% of total adjusted assets, (2) a
leverage ratio (core capital) equal to at least 3.0% of total adjusted assets
and (3) a risk-based capital requirement equal to 8.0% of total risk-weighted
assets.
As shown below, the Bank's tangible, core and risk-based capital significantly
exceed all applicable regulatory capital requirements of the OTS at September
30, 1999:
Percent of
----------
Amount Assets
------ ----------
GAAP Capital.................... $7,001 8.38%
===== =====
Tangible Capital................ $7,001 8.38%
Tangible Capital Requirement.... 1,254 1.50%
----- -----
Excess.......................... $5,747 6.88%
===== =====
Core Capital.................... $7,001 8.38%
Core Capital Requirement........ 2,508 3.00%
----- -----
Excess.......................... $4,493 5.38%
===== =====
Total Risk-Based Capital........ $7,214 17.10%
Risk-Based Capital Requirement.. 3,374 8.00%
----- -----
Excess.......................... $3,840 9.10%
===== =====
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.
Pursuant to FASB No. 130 the Bank is required to record changes in the value of
its investment portfolio as regards unrealized gains or losses that may result
from movements in interest rates. As of September 30, 1999, the Savings Bank
shows unrealized losses, net of tax effect, totaling $153,000 due to higher
interest rates. Management does not anticipate the realization of the above
loss. The unrealized loss does however negatively impact the Bank's capital.
The unrealized losses combined with net operating income of $124,000 yields a
net reduction in the Bank's capital of $29,000, net of applicable taxes, and a
corresponding reduction in the book value of common stock from $16.03 on June
30, 1999 to $15.81 as of September 30, 1999. Despite this reduction, the Bank's
capital continues to exceed regulatory requirements as shown above and continues
to be adequate to support future asset growth.
Liquidity
The Bank's liquidity is a measure of its ability to fund loans, withdrawals of
deposits and other cash outflows in a cost effective manner. The Bank's primary
sources of funds are deposits and proceeds from principal and interest payments
on loan and mortgage backed securities. The Bank also obtains funds from sales
and maturities of investment securities, short-term investments and borrowings,
namely advances from the FHLB of Atlanta. The Bank uses such funds primarily to
meet commitments on existing and continuing loan commitments, to fund maturing
time deposits and savings withdrawals and to maintain liquidity. While loan
payments, maturing investments and mortgage-backed securities are a relatively
predictable source of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. The
Bank's liquidity is also influenced by the level of demand for funding loan
originations.
The Bank is required under federal regulations to maintain certain specified
levels of "liquid investments," which include certain United States government
obligations and other approved investments. Current regulations require the Bank
to maintain liquid assets of not
8
Liquidity, cont.
less than 4% of its net withdrawable accounts plus short term borrowings. Those
levels may be changed from time to time by the regulators to reflect current
economic conditions. The Bank's regulatory liquidity was 27.92% at September 30,
1999 and 30.11% as of June 30, 1999.
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with GAAP, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike most industrial
companies, nearly all the assets and liabilities of the Company are financial.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
The Year 2000 Issue
The Bank's Board of Directors has adopted an action plan for addressing the
computer-related concerns raised by Year 2000. An internal committee has been
apointed by the Board to manage this effort. The Year 2000 committee meets on a
regular basis to review and assess the current status of the Year 2000 project.
The committee then prepares as status report for management and the Board of
Directors.
Equipment
- ---------
A process to identify all equipment that may potentially be impacted has been
completed. All outside servicers and major vendors have been contacted in order
to ascertain their individual degree of readiness for the Year 2000. This
includes items such as the vault, heating, ventilation and air conditioning
controls and telephones. All of the vendors have responded to these inquires. We
have received certifications of Year 2000 compliance for systems controlled by
third party providers or determined that the systems should not be impacted by
the Year 2000. The only upgrade needed was to our telephone system and this
upgrade has been completed.
Internal Computers
- ------------------
All internal computers have been tested for the Year 2000. At this time, we have
found no problems with the computers and software used on the computers. We have
completed testing with Bisys (our data services provider which processes the
Bank's major loan and deposit applications). This testing involved advancing the
date in a test environment through various critical dates during the millennium
change. Transactions were run on the test system to test the date handling
portions of the upgraded software. No problems were found during the testing.
With the extensive testing and lack of problems found, we are confident of our
ability to provide all services to our customer in the Year 2000 and beyond.
Computers used by our customers
- -------------------------------
Large loan customers have been contacted in order to both instill awareness and
to determine their state of readiness for Year 2000. All customers contacted
have responded. At this point, the Bank has no reason to doubt the ability of
any of these customers to continue to operate effectively in a Year 2000
environment. We believe that most of our residential borrowers and that none of
our commercial borrowers are so dependent on their computers that a Year 2000
problem would render them unable to collect revenue or rent and in turn hinder
their ability to make loan payments to the Bank. New large loan customers and
commercial customers (both loan and deposit) are asked to complete a form as to
their state of readiness for the Year 2000. We do not expect any material costs
to address this risk area.
Cost
- ----
The committee has presented to the Board of Directors, and the Board has
approved a Year 2000 budget. The budget is approximately $35,000. To date, total
expenses paid are $33,000. The major costs was an upgrade and testing surcharge
paid to Bisys. (Bisys is a data services provider which processes the Bank's
major loan and deposit applications.)
Contingency & Cash Plan
- -----------------------
Our data services provider has sponsored six meetings on their progress and test
plans for the Year 2000. Starting in November, 1998 and continuing until April,
1999, a test facility was set up to provide for formal testing between the Bank
and Bisys. At this time, we find no reason to believe that Bisys will not be
able to operate properly in January, 2000.
9
The Year 2000 Issue, cont.
The committee worked with senior management to develop, validate and implement a
Year 2000 liquidity or "Cash" Plan. This plan has been completed and approved by
the Board of Director.
A Contingency Plan has been prepared by the committee to facilitate the ability
of the Bank to continue providing an acceptable level of service to the Bank's
customers in the event that Bisys encounters problems in January, 2000 or we are
unable to communicate with Bisys. Procedures were already in place to
accommodate interruptions of online service for periods of short duration. These
procedures have been re-evaluated for effectiveness over a longer duration.
Appropriate adjustments have been made and additional procedures required for
longer duration "down-time" have been put into place. During September, 1999, we
tested our procedures, including operating two offices without electrical power.
The test was a success and shows our ability to handle various situations should
the need arise. At the end of December, 1999, we will generate paper backup of
all customer accounts and general ledger accounts. In the plan, customer
payments will be processed manually, and due to the size of the Bank, we believe
that we would be able to operate in this manner indefinitely, until our existing
data servicer, or a replacement, is able to again provide data processing
services. This procedure would require changing of schedules and the hiring of
temporary staff during this time, which would increase our cost. Should it be
necessary to change data service providers during the beginning of the Year
2000, the cost could be material.
During the weekend of January 1, 2000, we will verify with Bisys that all
systems are up and running prior to opening on January 3, 2000. This
verification will include telephone systems, electrical and computer operations.
10
SWVA BANCSHARES, INC. & SUBSIDIARIES
PART II
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Not applicable.
11
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: November 12, 1999 By: /s/ D. W. Shilling
---------------------------------
D. W. Shilling
President, Chief Executive Officer,
Chief Financial Officer, and Director
Date: November 12, 1999 By: /s/ Mary G. Staples
---------------------------------
Mary G. Staples
Controller/Treasurer
Principal Financial Officer
12