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 September 30, 1997
------------------
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
-----------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
310 North Main Street
Moorefield, West Virginia 26836
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(304) 538-2353
------------------------------------------------
(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 November 7, 1997.
Transitional Small Business Disclosure Format (Check one):
Yes No X
----- ------
This report contains 20 pages.
1
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
INDEX
Page
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets
September 30, 1997 (unaudited) and
December 31, 1996 3
Condensed consolidated statements of income
for the three months and nine months ended
September 30, 1997, and 1996 (unaudited) 4
Condensed consolidated statements of
cash flows for the nine months ended
September 30, 1997 and 1996 (unaudited) 5-6
Condensed consolidated statements of
shareholders' equity for the three months
and nine months ended September 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 4. Submissions of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18-19
Signatures 20
2
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
ASSETS (Unaudited) *
-------------- ----------------
<S> <C> <C>
Cash and due from banks $2,099,501 $3,162,552
Interest bearing deposits with other banks 1,256,000 1,553,000
Federal funds sold 2,261,337 723,734
Securities available for sale 29,350,704 29,351,998
Marketable equity securities 5,203,025 --
Loans, net 91,074,875 82,414,205
Bank premises and equipment, net 3,116,311 3,121,892
Accrued interest receivable 921,421 928,642
Other assets 284,687 857,582
-------------- ----------------
TOTAL ASSETS $135,567,861 $122,113,605
============== ================
LIABILITIES
Non-interest bearing deposits $8,712,892 $9,075,059
Interest bearing deposits 96,698,014 91,866,353
-------------- ----------------
Total deposits 105,410,906 100,941,412
Short-term borrowings 4,974,030 4,377,397
Long-term borrowings 9,246,188 3,514,652
Other liabilities 1,107,532 976,351
-------------- ----------------
Total Liabilities 120,738,656 109,809,812
-------------- ----------------
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 165,838 117,199
Less cost of shares acquired for the
treasury 1997, 4,115; and 1996, 4,115 (166,970) (166,970)
Retained earnings 11,698,273 10,711,468
-------------- ----------------
Total Shareholders' Equity 14,829,205 12,303,793
-------------- ----------------
TOTAL LIABILITIES
AND SHAREHOLDERS' EQUITY $135,567,861 $122,113,605
============== ================
</TABLE>
* December 31, 1996 financial information has been extracted from
audited financial statement.
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months and Nine Months ended September 30, 1997 and 1996
(Unaudited)
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
------------- ---------- ----------- -----------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $2,202,059 $1,912,956 $6,343,404 $5,546,873
Interest on securities:
Taxable 411,729 466,236 1,247,813 1,419,388
Tax-exempt 80,455 70,454 236,864 179,672
Interest on federal funds sold 21,460 5,293 49,626 41,084
------------- ---------- ----------- -----------
Total interest income 2,715,703 2,454,939 7,877,707 7,187,017
------------- ---------- ----------- -----------
Interest expense:
Interest on deposits 1,186,673 1,158,061 3,420,304 3,458,129
Interest on short-term borrowings 58,710 23,470 191,456 31,985
Interest on long-term borrowings 153,663 32,810 388,457 72,776
------------- ---------- ----------- -----------
Total interest expense 1,399,046 1,214,341 4,000,217 3,562,890
------------- ---------- ----------- -----------
Net interest income 1,316,657 1,240,598 3,877,490 3,624,127
Provision for loan losses 45,000 15,000 110,000 40,000
------------- ---------- ----------- -----------
Net interest income after
provision for loan losses 1,271,657 1,225,598 3,767,490 3,584,127
------------- ---------- ----------- -----------
Non-interest income:
Insurance commissions 32,681 30,741 67,990 79,465
Trust department income --- 501 --- 493
Service fee income 79,404 58,490 202,645 167,635
Securities gains (losses) 6,104 (3,912) 6,104 30,000
Gain on sales of assets 83,608 6,318 96,067 6,318
Other income 11,240 11,008 37,458 37,076
------------- ---------- ----------- -----------
Total other income 213,037 103,146 410,264 320,987
------------- ---------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 439,661 428,579 1,315,522 1,294,552
Net occupancy expense of premises 52,952 46,458 144,723 147,045
Equipment expense 75,019 47,198 217,853 190,945
FDIC insurance premiums 3,168 500 9,168 2,000
Other expenses 261,310 243,340 802,264 731,744
------------- ---------- ----------- -----------
Total other expense 832,110 766,075 2,489,530 2,366,286
------------- ---------- ----------- -----------
Income before income tax expense 652,584 562,669 1,688,224 1,538,828
Income tax expense 219,618 181,825 546,230 510,630
------------- ---------- ----------- -----------
Net Income $432,966 $380,844 $1,141,994 $1,028,198
============= ========== =========== ===========
Earnings per common share (Note 2) $1.05 $1.01 $2.92 $2.72
============= ========== =========== ===========
Dividends per common share $--- $--- $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 Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Nine Months Ended
September 30, September 30,
1997 1996
-------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $1,141,994 $1,028,198
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 173,038 167,528
Provision for loan losses 110,000 40,000
Securities (gains) losses (6,104) (30,000)
Provision for deferred income tax expense 72,422 3,682
Decrease in accrued income receivable 7,221 50,353
Amortization of security premiums and
(accretion of discounts), net 7,289 42,472
Decrease in other assets 524,542 74,465
(Decrease) in other liabilities 43,595 43,547
(Gain) on sale of fixed assets (91,507) --
(Gain) on sale of other assets (4,559) (6,318)
------------- ------------
Net cash provided by operating activities 1,977,931 1 ,413,927
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale -- 6,235,258
Proceeds from maturities of securities available for sale 3,063,700 3,425,000
Purchases of securities available for sale (4,004,774) (9,708,744)
Purchase of non-subsidiary bank stock (5,203,025) --
Principal payments received on securities available for sale 1,077,408 453,490
(Increase) decrease in Federal funds sold, net (1,537,603) 1,355,920
Principal collected on (loans to customers), net (8,805,180) (9,024,397)
Proceeds form interest bearing deposits with other banks 297,000 481,919
Purchase of Bank premises and equipment (221,130) (105,800)
Proceeds sales of fixed assets 145,180 --
Proceeds sales of other assets 15,000 19,000
------------- ------------
Net cash provided by (used in) investing activities (15,173,424) (6,868,354)
------------- ------------
</TABLE>
Continued
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS Continued For the Nine Months Ended September 30, 1997
and 1996
(Unaudited)
Nine Months Ended
September 30, September 30,
1997 1996
-------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW and
<S> <C> <C>
savings accounts (1,439,996) 1,214,514
Proceeds from sales of time deposits, net 5,909,490 2,163,998
Net increase in short-term borrowings 596,633 1,862,465
Proceeds from long-term borrowings 6,500,000 1,000,000
Repayments of long-term borrowings (768,464) (43,405)
Net proceeds from common stock sold 1,489,968 ---
Dividends paid (155,189) (143,835)
------------- ------------
Net cash provided by (used in) financing activities 12,132,442 6,053,737
------------- ------------
Increase (decrease) in cash and due from banks (1,063,051) 599,310
Cash and due from banks:
Beginning 3,162,552 2,191,647
------------- ------------
Ending $2,099,501 $2,790,957
============== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $3,379,938 $3,412,237
============== =============
Interest paid on borrowings $541,258 $104,761
============== =============
Income taxes $375,271 $435,313
============== =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $34,510 $--
============== =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the
Three Months and Nine Months ended September 30, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
September 30, September 30,
1997 1996
--------------- ----------------
<S> <C> <C>
Balance, beginning of period $14,314,054 $11,300,153
Net income 432,966 380,844
Change in net unrealized gain (loss)
on securities 82,185 374,354
-------------- ----------------
Balance, September 30 $14,829,205 $12,055,351
============== ================
Nine Months Ended
---------------------------------------
September 30, September 30,
1997 1996
---------------- ----------------
Balance, beginning of period $12,303,793 $11,328,660
Net income 1,141,994 1,028,198
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 48,639 (157,673)
---------------- ----------------
Balance, September 30 $14,829,205 $12,055,351
================ ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
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
materially from these estimates.
The results of operations for the nine month period ended September
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 for the
nine month periods ended September 30, 1997 and September 30, 1996
were 391,709 and 378,510, respectively. The weighted average shares
for the quarters ended September 30, 1997 and 1996 were 412,827, and
378,510 respectively.
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 The 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
39.4%. At September 30, 1997, the Company's total investment in
Capital State of $5,203,025, is recorded as Marketable Equity
Securities in the accompanying condensed consolidated financial
statements. As a result of the Company's increase in control of
Capital State's voting shares, the Company should change it's method
of accounting from the cost method to the equity method, effective
July 1, 1997. However, due to (1) the Company's pending acquisition of
100% of the outstanding common stock of Capital State which is to be
accounted for using the purchase method of accounting and (2) the
insignificance of the results of operations of Capital State since the
Company's investment in Capital State, this change in accounting
method was not recorded as
8
<PAGE>
of September 30, 1997 due to its insignificant impact on the Company's
consolidated results of operations and financial position.
On August 8, 1997, the Company executed a definitive merger agreement
(Merger Agreement) with the Board of Directors of Capital State
whereby the Company would acquire the remaining 60.6% of Capital
State's outstanding common stock. Pursuant to the terms of the Merger
Agreement and upon the effective date of the proposed merger,
shareholders of Capital State will be entitled to receive one (1)
share of South Branch common stock in exchange for each 3.95 shares of
Capital State common stock they own, plus cash in lieu of any
fractional share interest. In addition, the Merger Agreement provides
that the merger is contingent on approval of the increase in South
Branch's authorized $2.50 par value common stock from 600,000 to
2,000,000 shares. The proposed merger is subject to approval by the
respective shareholders of each institution and regulatory
authorities.
A summary of significant captions of Capital State's unaudited balance
sheet and results of operations as of and for the nine month period
ended September 30, 1997, in thousands of dollars, is as follows:
Total assets $39,571
Net loans $22,624
Total deposits $28,015
Total shareholders' equity $11,241
Total interest income $ 1,776
Net interest income $ 935
Net income $ 6
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 and form S-4 filed October 15, 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 $6,403,000 and
$1,707,000 as of September 30, 1997 and September 30, 1996,
respectively, which consisted of advances from the Federal Home Loan
Bank of Pittsburgh to fund local mortgage loan growth.
9
<PAGE>
The Company's total long-term borrowings bear an average interest rate
of 6.42% as of September 30, 1997 and mature in varying amounts
through the year 2010. A summary of the maturities of all long term
borrowings for the next five years and thereafter is as follows:
1998 $ ----
1999 340,000
2000 500,000
2001 500,000
2002 5,150,000
Thereafter 2,756,188
----------
Total $9,246,188
==========
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 unaudited proforma information as if
the issuance of common stock would have occurred as of January 1 of
each period presented.
September 30, 1997
As Reported Proforma
Earnings per Share $2.92 $2.77
Book Value per Share $35.92 $35.92
September 30, 1996
As Reported Proforma
Earnings per Share $2.72 $2.49
Book Value per Share $31.85 $32.81
December 31, 1996
As Reported Proforma
Earnings per Share $3.94 $3.61
Book Value per Share $32.51 $33.42
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
September 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 nine months of 1997 totaled $1,142,000, a $114,000
or an 11.1% increase from the $1,028,000 earned during the same period of 1996.
For the nine months ended September 30, 1997, the Company's only subsidiary,
South Branch Valley National Bank, had an increase in net income of $228,000, or
21.9% to $1,269,000 as compared with $1,041,000 for the same period ended
September 30, 1996.
Annualized return on average assets at September 30, 1997 was 1.29% as
compared to 1.20% at September 30, 1996 an increase of 7.5%. Earnings per share
totaled $2.92 at September 30, 1997 compared to $2.72 at September 30, 1996
representing a 7.35% 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 $59,000 in 1997 and $39,000 in 1996.
For the nine months ended September 30, 1997, the Company's net interest
income, as adjusted, increased $273,000 or 7.5% to $3,936,000 as compared with
$3,663,000 for the nine months ended September 30, 1996. However, the Company's
net interest yield on earning assets (net interest margin) decreased 7 basis
points from 4.45% at September 30, 1996 to 4.38% for the nine months ended
September 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. 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.
11
<PAGE>
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 nine months of 1997 totaled
$110,000 compared to $40,000 for the nine months ended September 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 nine months of 1997 were $134,000 as
compared to $50,000 for the first nine months of 1996. Expressed as a percentage
of loans (net of unearned interest), net charge-offs were .15% for the first
nine months of 1997 compared to .07% for the comparable period of 1996.
12
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiary
<TABLE>
<CAPTION>
Table I - Average Distribution Of Assets, Liabilities And Shareholders'
Equity, Interest Earnings & Expenses, And Average Rates
(In thousands of dollars)
September 30, 1997 September 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 $87,349 $6,343 9.68% $74,964 $5,547 9.87%
Securities
Taxable 23,899 1,173 6.54% 27,293 1,320 6.45%
Tax-exempt 6,028 296 6.55% 4,494 219 6.50%
Interest bearing deposits
with other banks 1,499 75 6.67% 1,967 99 6.71%
Federal Funds sold 1,106 49 5.91% 993 41 5.51%
--------- ------------- -------- ----------- ---------- ----------
Total interest
earning assets 119,881 7,936 8.83% 109,711 7,226 8.78%
Noninterest earning
assets 11,160 5,974
-------- ----------
Total assets $131,041 $115,685
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing
demand deposits $19,072 $444 3.10% $19,625 $505 3.43%
Regular savings 13,661 324 3.16% 15,507 410 3.53%
Time savings 61,385 2,652 5.76% 57,480 2,543 5.90%
Short-term borrowings 5,695 191 4.47% 959 32 4.45%
Long-term borrowings 7,300 389 7.11% 1,622 73 6.00%
--------- ------------- -------- ----------- ---------- ----------
107,113 4,000 4.98% 95,193 3,563 4.99%
Noninterest bearing
liabilities
Demand deposits 9,107 8,257
Other liabilities 1,537 889
--------- -----------
Total liabilities 117,757 104,339
Shareholders' equity 13,284 11,346
--------- -----------
Total liabilities and
shareholders'
equity $131,041 $115,685
========= ===========
NET INTEREST EARNINGS $3,936 $3,663
========== =========
NET INTEREST YIELD ON EARNING ASSETS 4.38% 4.45%
======= ========
</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)
September 30 December 31
----------------------------------
1997 1996 1996
---- ---- ----
Loans contractually past due
90 days or more and still
accruing interest $ 31 $238 $324
==== ==== ====
Non-performing assets:
Non-accruing Loans $125 $384 $343
Other Repossessed Assets 35 -- 40
Other Real Estate Owned 55 30 29
----- ---- ----
$215 $414 $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 $406,000 or 62.3% from the same period last year. Loans
contractually past due 90 days or more plus non-performing assets decreased
approximately 66.6% or $490,000 since December 31, 1996. These decreases are
primarily attributable to certain loans being charged to the reserve for loan
loss and vigorous collection activity that resulted in several loans, including
one with an approximate balance of $171,000 being paid to current status during
the first nine months of 1997. 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 $180,000 at September 30, 1997 and
$384,000 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 September 30, 1997, the allowance for loan losses totaled $835,000 or
.9% of net loans compared to $849,000 or 1.1% of net loans at September 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 increased approximately $89,000 or 27.7% to $410,000
during the first nine months of 1997, as compared to the first nine months of
1996. A detailed discussion of non-interest income components follows.
Insurance commissions decreased approximately $11,000 to $68,000 or 13.9%
for the nine months ended September 30, 1997 compared to the nine months ended
September 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 volume.
Service fee income increased $35,000 from approximately $168,000 to
$203,000 or 20.8%. Management believes the Company will be able to maintain
levels of service fee income similar to this throughout the remainder of 1997.
Sales of securities decreased $24,000 to $6,000 or 80.0% for the first nine
months of 1997 as compared to the first nine months of 1996. Few securities were
sold during the nine months ended September 30, 1997. During the same period in
1996 certain securities were sold to reinvest in similar securities with more
favorable rates and terms, which resulted in an approximate $30,000 gain on
sales of investment securities.
Gain on sale of assets increased approximately $90,000 or 1500% to $96,000
for the nine months ended September 30, 1997 as compared to the nine months
ended September 30, 1996. This is the result of the sale of the old bank
building that was no longer used for banking purposes.
Non-interest Expense
- ---------------------
Total non-interest expense increased approximately $124,000 or 5.2% to
$2,490,000 during the first nine months of 1997 as compared to the first nine
months of 1996. This slight increase is a result of management's planned
emphasis on controlling non-interest expense.
An increase of approximately $21,000 or 1.6% 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 $70,000 or 9.6% from $732,000 to
$802,000 during the first nine months of 1997 compared to 1996. The major
factors contributing to this increase are as follows:
** Other insurance expense increased approximately $16,000 or 48.51%
from $33,000 to $49,000 for the first nine months of 1997 as
compared to the first nine 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 $41,000 or 51.9% from $79,000 at September 30, 1996 to
$120,000 at September 30, 1997.
15
<PAGE>
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 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 September 30, 1997 the loan to deposit ratio was 86.4% as compared to 77.0%
at September 30, 1996. Cash and due from banks coupled with Federal funds sold
totaled $4,361,000 or 3.2% of total assets. Additionally, securities and
interest bearing deposits with other banks maturing within one year approximated
$1,856,000 or 1.4% 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 11.0% or $13.4
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
$5,203,000. 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 The 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 State's outstanding stock. This
acquisition will enable the Company to expand into a larger and rapidly growing
market area. For further discussion of the Company's current investment in
Capital State, see Note 3 to the condensed consolidated financial statement and
Form S-4 which was filed on October 15, 1997 and is incorporated herein by
reference. The Company is awaiting regulatory approval and expects shareholders
to approve this merger during the first quarter of 1998.
Liabilities
- -----------
Total deposits increased approximately 4.4% or $4.5 million from December
31, 1996, to $105,411,000 with no significant fluctuation in the Company's
deposit mix.
The Company's long term borrowings increased approximately $5,731,000 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 $597,000 and have been
used to fund additional loan growth.
16
<PAGE>
Shareholders' Equity
- --------------------
The Company's total shareholders' equity has increased approximately
$2,525,000 or 20.5% since December 31, 1996. This is the net result of an
increase in retained earnings of $987,000 from net income, net of the $155,000
cash dividend paid to shareholders in June 1997, $1,490,000 in net proceeds from
the issuance of 34,317 new shares of common stock during June 1997, and an
increase of $49,000 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 10.9% at September 30, 1997 and 10.1% at December 31, 1996. The
Company's subsidiary bank's total risk weighted capital ratio was approximately
14.5% at September 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 4 - Submissions of Matters to a Vote of Security Holders
- -------------------------------------------------------------
On October 21, 1997 the annual meeting of South Branch Valley Bancorp, Inc.
was held to (1) elect four directors for a three year term, (2) ratify the
election of Arnett & Foster as the Company's independent certified public
accountants for the fiscal year ending December 31, 1997, and (3) to transact
such other business to come before the meeting.
The following persons received the number of votes opposite their names for
directors of the Company:
James M. Cookman 292,163
Thomas J. Hawse, III 317,112
Gary L. Hinkle 292,904
Harold K. Michael 288,717
Mortimer W. Gamble, IV 10,360
Total number of shares voted was 300,314, of which all were voted by proxy
and none were voted in person.
The firm of Arnett & Foster was ratified to serve as the Company's
independent certified public accountants by a vote of 294,304 for, 5,520
against, and 490 abstentions.
There were no other matters to come before the annual meeting.
Item 6 - Exhibits and Reports on Form 8-K
- ------------------------------------------
A. Exhibits (numbered in accordance with Item 601 of regulation S-B)
2. Plan of purchase, sale, reorganization, liquidation or
succession.
On October 15, 1997 the Registrant filed Form S-4 related to
the purchase of 100% of the common stock of Capital State.
This document is incorporated herein by reference in it's
entirety.
27. Financial Data Schedule
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 or 35.4% of
the outstanding common stock of The Capital State Bank, Inc., 2402
Mountaineer Boulevard, South Charleston, West Virginia. On June 17, 1997,
the Registrant consummated its acquisition of the shares. This document is
incorporated herein by reference in it's entirety.
18
<PAGE>
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. This
document is incorporated herein by reference in it's 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.
19
<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: November 7, 1997
- ---------------------------
20
<PAGE>
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<NAME> SOUTH BRANCH VALLEY NATIONAL BANK
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