U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1997
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Commission File Number 0-16587
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South Branch Valley Bancorp, Inc.
------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
West Virginia 55-0672148
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
310 North Main Street
Moorefield, West Virginia 26836
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(Address of principal executive offices) (Zip Code)
(304) 538-2353
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(Issuer's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required by Section 13 or
15(d) of the Exchange Act of 1934 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
---- -----
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
412,827 common shares were outstanding as of August 11, 1997.
Transitional Small Business Disclosure Format (Check one):
Yes No X
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This report contains 20 pages.
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
INDEX
Page
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets
June 30, 1997 (unaudited) and
December 31, 1996 3
Condensed consolidated statements of
income for the three months and six
months ended June 30, 1997, and
1996 (unaudited) 4
Condensed consolidated statements of
cash flows for the six months ended
June 30, 1997 and 1996 (unaudited) 5-6
Condensed consolidated statements of
shareholders' equity for the three
months and six months ended June 30,
1997 and 1996 (unaudited) 7
Notes to condensed consolidated financial
statements (unaudited) 8-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-17
II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
2
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
ASSETS (Unaudited) *
-------------- ----------------
<S> <C> <C>
Cash and due from banks $3,109,149 $3,162,552
Interest bearing deposits with other banks 1,553,000 1,553,000
Federal funds sold 184,359 723,734
Securities available for sale 30,139,999 29,351,998
Marketable equity securities 5,188,905 --
Loans, net 89,165,594 82,414,205
Bank premises and equipment, net 3,156,334 3,121,892
Accrued interest receivable 935,929 928,642
Other assets 294,468 857,582
-------------- ----------------
Total Assets $133,727,737 $122,113,605
============== ================
LIABILITIES
Non-interest bearing deposits $9,380,448 $9,075,059
Interest bearing deposits 95,253,128 91,866,353
-------------- ----------------
Total deposits 104,633,576 100,941,412
Short-term borrowings 5,432,468 4,377,397
Long-term borrowings 8,471,236 3,514,652
Other liabilities 876,403 976,351
-------------- ----------------
Total Liabilities 119,413,683 109,809,812
-------------- ----------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, authorized
600,000 shares, issued 1997, 416,942 shares;
and 1996, 382,625 shares 1,042,355 956,562
Surplus 2,089,709 685,534
Net unrealized gain (loss) on securities 83,653 117,199
Less cost of shares acquired for the
treasury 1997, 4,115; and 1996, 4,115 (166,970) (166,970)
Retained earnings 11,265,307 10,711,468
-------------- ----------------
Total Shareholders' Equity 14,314,054 12,303,793
-------------- ----------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $133,727,737 $122,113,605
============== ================
* December 31, 1996 financial information has been extracted from
audited financial statement.
See Notes to Condensed Consolidated Financial Statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Six Months ended June 30, 1997 and 1996
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------- ---------- ----------- -----------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $2,130,325 $1,836,100 $4,141,345 $3,633,917
Interest on securities:
Taxable 424,128 481,174 836,084 953,152
Tax-exempt 81,874 61,434 156,409 109,218
Interest on federal funds sold 14,862 12,534 28,166 35,791
------------- ---------- ----------- -----------
Total interest income 2,651,189 2,391,242 5,162,004 4,732,078
------------- ---------- ----------- -----------
Interest expense:
Interest on deposits 1,133,228 1,159,445 2,233,631 2,300,068
Interest on short-term borrowings 90,578 1,346 132,746 1,596
Interest on long-term borrowings 131,547 25,910 234,794 46,885
------------- ---------- ----------- -----------
Total interest expense 1,355,353 1,186,701 2,601,171 2,348,549
------------- ---------- ----------- -----------
Net interest income 1,295,836 1,204,541 2,560,833 2,383,529
Provision for loan losses 35,000 15,000 65,000 25,000
------------- ---------- ----------- -----------
Net interest income after
provision for loan losses 1,260,836 1,189,541 2,495,833 2,358,529
------------- ---------- ----------- -----------
Non-interest income:
Insurance commissions 25,387 26,161 35,309 48,724
Trust department income --- --- --- (8)
Service fee income 66,237 59,240 123,241 109,145
Securities gains (losses) --- --- --- 33,912
Other income 9,318 11,331 38,677 26,068
------------- ---------- ----------- ----------
Total other income 100,942 96,732 197,227 217,841
------------- ---------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 427,984 422,276 875,861 865,973
Net occupancy expense of premises 49,129 47,261 91,771 100,587
Equipment expense 74,931 52,236 142,834 141,717
FDIC insurance premiums 3,220 500 6,000 1,500
Other expenses 280,512 264,196 540,954 490,434
------------- ---------- ----------- -----------
Total other expense 835,776 786,469 1,657,420 1,600,211
------------- ---------- ----------- -----------
Income before income tax expense 526,002 499,804 1,035,640 976,159
Income tax expense 155,555 163,635 326,612 328,805
------------- ---------- ----------- -----------
Net Income $370,447 $336,169 $709,028 $647,354
============= ========== =========== ===========
Earnings per common share (Note 2) $0.97 $0.89 $1.86 $1.71
============= ========== =========== ===========
Dividends per common share $0.41 $0.38 $0.41 $0.38
============= ========== =========== ===========
See Notes to Condensed Consolidated Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
Six Months Ended
June 30, June 30,
1997 1996
-------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $709,028 $647,354
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 114,466 112,204
Provision for loan losses 65,000 25,000
Securities (gains) losses -- (33,911)
Provision for deferred income tax expense 45,881 70
(Increase) in accrued income receivable (7,287) (60,666)
Amortization of security premiums and
(accretion of discounts), net 5,631 32,521
Decrease in other assets 528,992 57,122
(Decrease) in other liabilities (78,947) (37,675)
(Gain) on sale of other assets (12,459) --
-------------------------------
Net cash provided by operating activities 1,370,305 742,019
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale -- 2,209,305
Proceeds from maturities of securities available for sale 1,283,700 2,800,000
Purchases of securities available for sale (3,004,774) (6,982,712)
Purchase of non-subsidiary bank stock (5,188,905) --
Principal payments received on securities available for sale 872,895 299,345
Decrease in Federal funds sold, net 539,375 2,100,968
Principal collected on (loans to customers), net (6,838,589) (4,552,596)
Proceeds form interest bearing deposits with other banks -- 185,919
Purchase of Bank premises and equipment (148,908) (62,717)
Proceeds sales of other assets 22,900 --
-------------------------------
Net cash provided by (used in) investing activities (12,462,306) (4,002,488)
-------------------------------
Continued
See Notes to Condensed Consolidated Financial Statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS - Continued For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
Six Months Ended
June 30, June 30,
1997 1996
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW and savings
<S> <C> <C>
accounts 319,037 (1,337,761)
Proceeds from sales of time deposits, net 3,373,127 1,349,827
Net increase in short-term borrowings 1,055,071 2,211,926
Proceeds from long-term borrowings 5,500,000 1,000,000
Repayments of long-term borrowings (543,416) (24,618)
Net proceeds from common stock sold 1,489,968 ---
Dividends paid (155,189) (143,834)
-------------------------------
Net cash provided by (used in) financing activities 11,038,598 3,055,540
-------------------------------
Increase (decrease) in cash and due from banks (53,403) (204,929)
Cash and due from banks:
Beginning 3,162,552 2,191,647
-------------------------------
Ending $3,109,149 $1,986,718
=============== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $2,222,602 $2,280,320
=============== ============
Income taxes $200,271 $243,063
=============== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $22,200 $0
=============== ============
See Notes to Condensed Consolidated Financial Statements
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the
Three Months and Six Months ended June 30, 1997 and 1996
(Unaudited)
Three Months Ended
---------------------------------------
June 30, June 30,
1997 1996
---------------- ----------------
<S> <C> <C>
Balance, beginning of period $12,472,859 $11,401,205
Net income 370,447 336,169
Cash dividends declared, $.41 and $.38
per share respectively (155,189) (143,834)
Net proceeds from the issuance of 34,317 shares of
$2.50 par value common stock during June 1997
at $43.50 per share 1,489,968 --
Change in net unrealized gain (loss)
on securities 135,969 (293,387)
-------------- ----------------
Balance, June 30 $14,314,054 $11,300,153
============== ================
Six Months Ended
---------------------------------------
June 30, June 30,
1997 1996
---------------- ----------------
Balance, beginning of period $12,303,793 $11,328,660
Net income 709,028 647,354
Cash dividends declared, $.41 and $.38 (155,189) (143,834)
per share respectively
Net proceeds from the issuance of 34,317 shares of
$2.50 par value common stock during June 1997
at $43.50 per share 1,489,968 --
Change in net unrealized gain (loss)
on securities (33,546) (532,027)
---------------- ----------------
Balance, June 30 $14,314,054 $11,300,153
================ ================
See Notes to Condensed Consolidated Financial Statements
</TABLE>
7
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from the estimates.
The results of operations for the six month period ended June 30, 1997
are not necessarily indicative of the results to be expected for the
full year. The Condensed Consolidated Financial Statements and notes
included herein should be read in conjunction with the Company's 1996
audited financial statements and Form 10-KSB.
Certain accounts in the consolidated financial statements for 1996 as
previously presented have been reclassified to conform to current year
classifications.
Note 2. Earnings Per Share
Earnings per common share are computed based upon the weighted average
shares outstanding. The weighted average shares outstanding were
381,164 at June 30, 1997 and 378,510 at June 30, 1996. The weighted
average shares for the quarters ended June 30, 1997 and 1996 were
383,790, and 378,510 respectfully.
Note 3. Investment in Marketable Equity Securities and Proposed Acquisition
During the first quarter of 1997, the Company acquired approximately
4.2% of the common stock of Capital State Bank, Inc.(Capital State), a
state banking corporation. On June 17, 1997, the Company received
approval from regulatory authorities and acquired 35.4% of Capital
State's outstanding stock bringing the total investment to 39.6%. At
June 30, 1997, the Company's total investment in Capital State of
$5,188,905, is recorded as Marketable Equity Securities in the
accompanying condensed
8
<PAGE>
consolidated financial statements. As a result of the Company's
increase in control of Capital State's voting shares, and the
insignificiance of the results of operations of Capital State, the
Company changed it's method of accounting from the cost method to the
equity method, effective July 1, 1997. Additionally, due to the
insignificance of the results of operations of Capital State since the
Company's investment in Capital State, this change in accounting
method was insignificant.
A summary of significant captions of Capital State's unaudited balance
sheet and results of operations as of and for the six month period
ended June 30, 1997, in thousands of dollars, is as follows:
Total assets $34,777
Net loans $20,331
Total deposits $23,262
Total shareholders' equity $11,205
Total interest income $ 1,094
Net interest income $ 597
Net income $ (3)
Reference can be made to Forms 8-K filed by the Company on January 15,
1997, February 7, 1997, March 27, 1997, June 17, 1997, July 8, 1997
and August 8, 1997 for further information related to the Company's
planned investment in Capital State. These documents are incorporated
herein by reference in their entirety.
Note 4. Long-term borrowings
On February 18, 1997 and March 14, 1997, the Company obtained two
long-term borrowings from two separate financial institutions in the
amounts of $3,000,000 and $500,000 respectively, to fund a portion of
it's investment in Capital State (see Note 3). Each of these loans
bear an interest rate of prime minus .25%, adjusted annually, with
interest payments due quarterly. Annual principal payments in the
amount of $600,000 are due on the $3,000,000 loan, while quarterly
principal payments in the amount of $20,833 are due on the $500,000
loan.
The $3,000,000 loan is collateralized by 291,410 shares of Capital
State stock that the Company owns. An additional 48,500 shares of
Capital State stock presently owned is pledged as collateral for the
$500,000 loan.
The subsidiary bank also had long-term borrowings of $5,447,000 and
$1,725,000 as of June 30, 1997 and June 30, 1996, respectively, which
consisted of advances from the Federal Home Loan Bank of Pittsburgh to
fund local mortgage loan growth.
The Company's total long-term borrowings bear an average interest rate
of 7.16% as of June 30, 1997 and mature in varying amounts through the
year 2010. A summary of the maturities of all long
9
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term borrowings for the next five years and thereafter is as follows:
1998 $ 0
1999 340,000
2000 0
2001 500,000
2002 5,310,000
Thereafter 2,321,236
----------
Total $8,471,236
==========
Note 5. Stock Issuance and Related Party Transaction
On June 17, 1997, the Company issued and sold 34,317 shares of common
stock to seven directors of the Company in a limited stock offering at
$43.50 per share, the estimated current market value of the Company's
common stock as of the sale date. The proceeds from the sale,
$1,489,968, net of $2,822 in issuance costs, were used to partially
fund the Company's investment in Capital State common stock.
The following represents certain unaduited proforma information as if
the issuance of common stock would have occurred as of January 1 of
each period presented.
June 30, 1997
As Reported Proforma
Earnings per Share $1.86 $1.72
Book Value per Share $34.67 $34.67
June 30, 1996
As Reported Proforma
Earnings per Share $1.71 $1.57
Book Value per Share $29.85 $27.37
December 31, 1996
As Reported Proforma
Earnings per Share $3.94 $3.61
Book Value per Share $32.51 $29.80
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION AND SUMMARY
The following is Management's discussion and analysis of the financial
condition and financial results of operations for South Branch Valley Bancorp,
Inc.(hereafter referred to as the Company) and its wholly owned subsidiary,
South Branch Valley National Bank, (hereafter referred to as the Bank) as of
June 30, 1997. This discussion may contain forward looking statements based on
management's expectations and actual results may differ materially. Since the
primary business activities of South Branch Valley Bancorp, Inc. are conducted
through its wholly owned subsidiary (the Bank), the following discussion focuses
primarily on the financial condition and operations of the Bank. All amounts and
percentages have been rounded for this discussion.
Earnings Summary
- ----------------
Net income for the first six months of 1997 totaled $709,000, a $62,000 or
a 9.6% increase from the $647,000 earned during the same period of 1996. For the
six months ended June 30, 1997, the Company's only subsidiary, South Branch
Valley National Bank, had an increase in net income of $145,000, or 22.0% to
$804,000 as compared with $659,000 for the same period ended June 30, 1996.
Annualized return on average assets at June 30, 1997 was 1.10% as compared
to 1.13% at June 30, 1996 a decrease of 5.3%. Earnings per share totaled $1.86
at June 30, 1997 compared to $1.71 at June 30, 1996 representing an 8.8%
increase.
RESULTS OF OPERATIONS
Net Interest Income
- --------------------
For purposes of this discussion, the "taxable equivalent basis" adjustment
has been included in interest income to reflect the level of income had income
on state and municipal obligations exempt from Federal income tax been taxable,
assuming a Federal tax rate of 34% in both 1997 and 1996. The amounts of tax
equivalent adjustments were $40,000 in 1997 and $25,000 in 1996.
For the six months ended June 30, 1997, the Company's net interest income,
as adjusted, increased $193,000 or 8.0% to $2,601,000 as compared with
$2,408,000 for the six months ended June 30, 1996. However, the Company's net
interest yield on earning assets (net interest margin) decreased 9 basis points
from 4.44% at June 30, 1996 to 4.35% for the six months ended June 30, 1997.
Management feels that this decrease is due primarily to a competitive local
market for loans and deposits which has caused a general lowering of rates on
loans while deposit rates exceed those of national average. Pressures on the net
interest yield remain a concern.
11
<PAGE>
A detailed analysis of the net interest yield by component is shown on Table I.
No significant fluctuations were noted and the Company does not expect any
significant change in the Company's net yield during the remainder of 1997 given
no significant changes in the present interest rate environment. Management
continues to monitor the net interest margin through GAP analysis to minimize
the potential for any significant negative impact.
Provision for Loan Losses and Loan Quality
- ------------------------------------------
An allowance for loan losses is maintained by the Company and is funded
through the provision for loan losses as a charge to current earnings. The
allowance for loan losses is reviewed by management on a quarterly basis to
determine that it is maintained at levels considered necessary to cover
potential losses associated with the Bank's current loan portfolio. The
Company's provision for loan losses for the first six months of this year
totaled $65,000 compared to $25,000 for the six months ended June 30, 1996. This
increase was primarily to provide for potential losses inherent in the Company's
loan portfolio due to its continued growth in net loans outstanding.
Net loan charge-offs for the first six months of 1997 were $101,000 as
compared to $33,000 for the first six months of 1996. Expressed as a percentage
of loans (net of unearned interest), net charge-offs (recoveries) were .11% for
the first six months of 1997 compared to .04% for the comparable period of 1996.
12
<PAGE>
<TABLE>
<CAPTION>
South Branch Valley Bancorp, Inc. and Subsidiary
- ------------------------------------------------------------------------
Table I - Average Distribution Of Assets, Liabilities And Shareholders'
Equity, Interest Earnings & Expenses, And Average Rates
(In thousands of dollars)
June 30, 1997 June 30, 1996
-------------------------------- ---------------------- ----------
AVERAGE EARNINGS/ YIELD/ AVERAGE EARNINGS/ YIELD/
BALANCES EXPENSE RATE BALANCES EXPENSE RATE
-------------------------------- ---------------------------------
ASSETS
Interest earning assets
Loans, net of unearned
<S> <C> <C> <C> <C> <C> <C>
interest $86,693 $4,141 9.55% $73,444 $3,634 9.90%
Securities
Taxable 24,510 784 6.40% 27,603 884 6.41%
Tax-exempt 5,979 197 6.59% 4,061 134 6.60%
Interest bearing
deposits with other banks 1,553 52 6.70% 2,052 69 6.73%
Federal Funds sold 893 28 6.27% 1,318 36 5.46%
--------- ----------- ------- ---------- --------- --------
Total interest
earning assets 119,628 5,202 8.70% 108,478 4,757 8.77%
Noninterest earning
assets 9,033 5,956
--------- ----------
Total assets $128,661 $114,434
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing
demand deposits $19,188 $297 3.10% $19,489 $331 3.40%
Regular savings 13,755 216 3.14% 15,972 285 3.57%
Time savings 59,888 1,720 5.74% 57,024 1,684 5.91%
Short-term borrowings 5,791 133 4.59% 68 2 5.88%
Long-term borrowings 6,561 235 7.16% 1,573 47 5.98%
----- ---- ----- ------- ----- -----
105,183 2,601 4.95% 94,126 2,349 4.99%
Noninterest bearing liabilities
Demand deposits 9,131 8,191
Other liabilities 1,772 866
--------- ----------
Total liabilities 116,086 103,183
Shareholders' equity 12,575 11,251
--------- ----------
Total liabilities and
shareholders'equity $128,661 $114,434
========= ==========
NET INTEREST EARNINGS $2,601 $2,408
=========== =========
NET INTEREST YIELD ON EARNING ASSETS 4.35% 4.44%
======= ========
</TABLE>
13
<PAGE>
The total of non-performing assets and loans past due 90 days or more and
still accruing interest has remained relatively stable during the past 12
months, and management has no knowledge that would lead them to believe that
such assets will increase substantially during the remainder of 1997.
Summary of Past Due Loans and Non-Performing Assets
(in thousands of dollars)
June 30 December 31
---------------- ------------
1997 1996 1996
Loans contractually past due
90 days or more and still $ 157 $ 159 $ 324
===== ===== =====
accruing interest
Non-performing assets:
Non-accruing Loans $ 125 $ 450 $ 343
Other Repossessed Assets 31 -- 40
Other Real Estate Owned 40 40 29
----- ---- -----
$ 196 $ 490 $ 412
===== ===== =====
The level of non-performing assets has decreased during the past year due
to management's continuing efforts to improve the quality of the Company's
assets. Total loans past due 90 days or more plus non-performing assets have
decreased approximately $296,000 or 45.6% from the same period last year. Loans
contractually past due 90 days or more plus non-performing assets decreased
approximately 52.0% or $383,000 since December 31, 1996. While there may be some
loans or portions of loans identified as potential problem credits which are not
specifically identified as either non-accrual or accruing loans past due 90 or
more days, they are considered by management to be insignificant to the overall
disclosure and are therefore not specifically quantified within the Management's
Discussion and Analysis.
Impaired loans totaled approximately $384,000 at June 30, 1997 and
December 31, 1996. A loan is impaired when, based on current information and
events, it is probable that all amounts due will not be collected in accordance
with the contractual terms of the specific loan agreement. Impaired loans, other
than certain large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment, are reported at the present value of
expected future cash flows discounted using the loan's original effective
interest rate or, alternatively, at the loan's observable market price, or at
the fair value of the loan's collateral if the loan is collateral dependent.
At June 30, 1997, the allowance for loan losses totaled $822,000 or .9% of
net loans compared to $852,000 or 1.1% of net loans at June 30, 1996, and
$858,000 or 1.0% of net loans at December 31, 1996. Based on management's
quarterly loan review procedures, management believes the recorded allowance for
loan losses is adequate to cover potential losses identified or inherent in the
loan portfolio as of each of the dates presented.
14
<PAGE>
Non-interest Income
- -------------------
Total other income decreased approximately $21,000 or 9.6% to $197,000
during the first six months of 1997, as compared to the first six months of
1996. A detailed discussion of non-interest income components follows.
Insurance commissions decreased approximately $14,000 to $35,000 or 28.6%
for the six months ended June 30, 1997 compared to the six months ended June 30,
1996. Management recognizes that this revenue can be sporadic but does expect
the remainder of the year's insurance earnings to be more comparable to last
year's based on expected loan growth.
Service fee income increased $14,000 from approximately $109,000 to
$123,000 or 12.8%. Management believes the Company will be able to maintain
levels of service fee income similar to this throughout the remainder of
1997.
No sales of securities were originated during the six months ended June
30, 1997. For the six months ended June 30, 1996, certain securities were sold
to reinvest in similar securities with more favorable rates and terms, which
resulted in an approximate $34,000 gain on sales of investment securities.
Non-interest Expense
- --------------------
Total non-interest expense increased approximately $57,000 or 3.6% to
$1,657,000 during the first six months of 1997 as compared to the first six
months of 1996. This slight increase is a result of management's planned
emphasis on controlling non-interest expense. An increase of approximately
$10,000 or 1.2% in salaries and employee benefits, which represents
approximately 53% of total non-interest expense, can be attributed to a general
increase in salaries and a slight increase in insurance costs. Other expense
increased approximately $51,000 or 10.4% from $490,000 to $541,000 during the
first six months of 1997 compared to 1996. The major factors contributing to
this increase are as follows:
** Other insurance expense increased approximately $13,000 or 59.1%
from $22,000 to $35,000 for the first six months of 1997 as compared
to the first six months of 1996. This increase is due to revisions to
existing policies and additional coverage purchased in 1997.
** Legal, accounting, and asset/liability consulting services increased
approximately $29,000 or 52.7% from $55,000 at June 30, 1996 to
$84,000 at June 30, 1997.
Liquidity
- ---------
Liquidity in commercial banking can be defined as the ability to satisfy
customer loan demand and meet deposit withdrawals while maximizing net interest
income. The Company's primary sources of funds are deposits and principal and
interest payments on loans. Additional funds are provided by
15
<PAGE>
maturities of securities. The Company uses ratio analysis to monitor the changes
in its sources and uses of funds so that an adequate liquidity position is
maintained. At June 30, 1997 the loan to deposit ratio was 85.2% as compared to
75.1% at June 30, 1996. Cash and due from banks coupled with Federal funds sold
totaled $3,294,000 or 2.5% of total assets. Additionally, securities and
interest bearing deposits with other banks maturing within one year approximated
$1,708,000 or 1.3% of total assets. Management believes that the liquidity of
the Company is adequate and foresees no demands or conditions that would
adversely affect it.
FINANCIAL CONDITION
Total Assets
- ------------
The Company's total assets have increased approximately 9.5% or $11.6
million from December 31, 1996. The overall composition of the Company's assets
has not changed significantly since year end 1996 except for the Company's
investment in marketable equity securities which increased approximately
$5,189,000. This increase was due to the Company's investment in Capital State,
which was substantially funded through borrowings and proceeds received for the
issuance of additional common stock as discussed in Notes 3 and 5 to the
condensed consolidated financial statements.
Investment in Capital State Bank, Inc.
- --------------------------------------
The Company has signed a letter of intent with the board of directors of
Capital State to acquire 100% of Capital States outstanding stock. This
acquisition will enable the Company to expand into a larger and rapidly growing
market area. For futher discussion of the Company's current investment in
Capital State, see Note 3 to the condensed consolidated financial statement.
Liabilities
- -----------
Total deposits increased approximately 3.7% or $3.7 million from December
31, 1996, to $104,634,000 with no significant fluctuation in the Company's
deposit mix.
The Company's long term borrowings increased approximately $4,956,000
since December 31, 1996 to partially fund the purchase of Capital State stock
and to fund local mortgage loan growth. See Note 4 to the condensed consolidated
financial statements for additional information related to the Company's long
term borrowings.
Short term borrowings have increased approximately $1,055,000 and have
been used to fund additional loan growth.
Shareholders' Equity
- --------------------
The Company's total shareholders' equity has increased approximately
$1,990,000 or 16.2% since December 31, 1996. This is the net result of an
increase in retained earnings of $531,000 from net income, net of the
16
<PAGE>
$115,000 cash dividend paid to shareholders in June 1997, $1,489,968 in net
proceeds from the issuance of 34,317 new shares of common stock during June
1997, and a decrease of $34,000 in net unrealized gains on securities available
for sale. See Note 5 to the condensed consolidated financial statements for
additional information related to the issuance of this stock. The Company's
equity to total assets ratio was 10.7% at June 30, 1997 and 10.1% at December
31, 1996. The Company's subsidiary bank's total risk weighted capital ratio was
approximately 14.0% at June 30, 1997 and is well within Federal regulatory
minimum guidelines of 8.0%. The Company is not aware of any pending regulation
which would have a material negative impact on its operations or financial
condition.
17
<PAGE>
PART II
Item 6 - Exhibits and Reports on Form 8-K
- ------------------------------------------
A. Exhibit - Financial Data Schedule required by Part I Item 601 of
Regulation S-B.
B. Reports on Form 8-K.
On June 17, 1997 the Registrant filed Form 8-K related to the consummation
of the previously reported proposed purchase of 424,680 shares of the
common stock of Capital State Bank, Inc., 2402 Mountaineer Boulevard,
South Charleston, West Virginia. On June 17, 1997, the Registrant
consummated its acquisition of the shares.
On July 8, 1997, the Registrant filed a form 8-K related to the execution
of a non-binding letter of intent with Capital State Bank, Inc. Under the
terms of the Letter of Intent, the Registrant will exchange 3.95 shares of
Capital State stock for one share of South Branch Valley Bancorp, Inc.
stock. The Registrant anticipates a merger transaction whereby Capital
State will constitute a free standing subsidiary of South Branch. These
documents are incorporated herein by reference in their entirety.
On August 8, 1997, the Company filed Form 8-K related to the signed
definitive agreement with Capital State Bank. Under the terms of the
agreement, the Company will exchange one share of South Branch stock for
3.95 shares of Capital State stock. The Company anticipates a merger
transaction whereby Capital State will become a free standing subsidiary
of the Company. The offer to exchange stock of South Branch Valley
Bancorp, Inc. for all of the issued and outstanding shares of Capital
State is subject to approval by the respective shareholders of each
institution and is also subject to regulatory approval. This document is
incorporated herein by reference in it's entirety.
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
South Branch Valley Bancorp, Inc.
(registrant)
By: /s/ H. Charles Maddy, III
------------------------------------
H. Charles Maddy, III, President and
Chief Financial Officer
By: /s/ Russell F. Ratliff, Jr.
------------------------------------
Russell F. Ratliff, Jr.
Treasurer
Date: August 13, 1997
- --------------------------
19
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<NAME> SOUTH BRANCH VALLEY NATIONAL BANK
<S> <C>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
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<EPS-PRIMARY> 1.86
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