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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
---------------------
Commission File Number 0-16587
---------------------
South Branch Valley Bancorp, Inc.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
-----------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 N. Main Street
Moorefield, West Virginia 26836
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(304) 538-2353
-----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- -------------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common
----------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K [229.405 of this chapter] is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $10,149,000
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate Market Value Based Upon Reported
of Voting Stock Closing Price on
----------------------- -------------------
$11,611,200 March 1, 1997
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 1, 1996
--------- --------------------------------
Common Stock ($2.50 par value) 378,510 shares
Documents Incorporated by Reference
The following lists the documents which are incorporated by reference in the
Annual Report Form 10-KSB, and the Parts and Items of the Form 10-KSB into which
the documents are incorporated.
Part of Form 10-KSB
Into Which Document
Document is Incorporated
South Branch Valley Bancorp, Inc. Part II
Annual Report to Shareholders
for the year ended December 31, 1996
Reports filed on Form 8-K Part III
This form 10-KSB is comprised of 64 pages. The exhibit index is located on page
17.
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SOUTH BRANCH VALLEY BANCORP, INC
FORM 10-KSB
INDEX
Page
Part I.
Item 1. Business...................................................4-6
Item 2. Properties.................................................6-7
Item 3. Legal Proceedings............................................7
Item 4. Submission of Matters to a Vote of Shareholders..............7
Part II.
Item 5 Market for the Registrant's Common
Stock and Related Shareholder Matters......................8-9
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations and Related Statistical Disclosures...............9
Item 7. Financial Statements ........................................9
Item 8. Changes in and Disagreements with Accounts
on Accounting and Financial Disclosure.......................9
Part III.
Item 9. Directors and Executive Officers of the
Registrant...............................................10-12
Item 10. Executive Compensation...................................13-14
Item 11. Security Ownership of Certain Bene-
ficial Owners & Management...............................15-16
Item 12. Certain Relationships and Related
Transactions................................................16
Item 13. Exhibits, Financial Statement Schedules
and Reports on Form 8-K..................................17-18
Signatures.................................................................19-20
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PART I
ITEM 1. BUSINESS
- ----------------
Organized in 1987 as a West Virginia Corporation, South Branch Valley Bancorp,
Inc. ("SBVB"), is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended. At the close of business on December 31, 1987,
SBVB merged its wholly owned subsidiary, South Branch Valley National Bank Inc.,
with South Branch Valley National Bank of Moorefield, a commercial bank with its
principal place of business located at 310 N. Main Street, Moorefield, West
Virginia. SBVB's business activities are conducted through the Bank. The Bank
presently accounts for substantially all of the consolidated assets, revenues
and net income of SBVB.
South Branch Valley National Bank
The South Branch Valley National Bank of Moorefield was originally chartered by
the Office of the Comptroller of the Currency on August 15, 1883. For purposes
of effecting the 1987 merger, South Branch Valley National Bank Inc. was
organized and chartered on October 2, 1987. The surviving Bank is currently
operating as South Branch Valley National Bank of Moorefield. The Bank is a full
service, FDIC insured, national banking association engaged in the commercial
and retail banking business. At December 31, 1996 the Bank employed
approximately 62 people.
The Bank offers a wide variety of banking services to its customers. The Bank
accepts deposits and has a night depository and an automated teller machine for
the convenience of its customers. The Bank offers its customers various deposit
arrangements with various maturities and yields, including non-interest bearing
and interest bearing demand deposits, savings deposits, time certificates of
deposit, Christmas Club accounts, and individual retirement accounts.
The Bank offers a full spectrum of lending services to its customers, including
commercial loans and lines of credit, residential real estate loans, consumer
installment loans and other personal loans. Loan terms, including interest
rates, loan to value ratios, and maturities are tailored as much as possible to
meet the needs of the borrower. Commercial loans are generally secured by
various collateral including commercial real estate, accounts receivable and
business machinery and equipment. Residential real estate loans consist
primarily of mortgages on the borrower's personal residence, and are typically
secured by a first lien on the subject property. Consumer and personal loans are
generally secured, often by first liens on automobiles, consumer goods or
depository accounts. A special effort is made to keep loan products as flexible
as possible within the guidelines of
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prudent banking practices in terms of interest rate risk and credit risk. Bank
lending personnel adhere to established lending limits and authorities based on
each individual's lending expertise and experience.
When considering loan requests, the primary factors taken into consideration by
the Bank are the cash flow and financial condition of the borrower, the value of
the underlying collateral, if any, and the character and integrity of the
borrower. These factors are evaluated in a number of ways including an analysis
of financial statements, credit reviews and visits to the borrower's place of
business.
The Bank also serves as trustee where appointed by a court or under a private
trust agreement. As trustee, the Bank invests the trust assets and makes
disbursements according to the terms and conditions of the governing trust
document and state and Federal law. For the year ended December 31, 1996, fees
generated from the operation of the Bank's Trust Department comprised less than
one percent of gross revenues earned during the year.
Supervision and Regulation
SBVB is a holding company subject to the provisions of the Bank Holding Company
Act of 1956 and is registered with the Board of Governors of the Federal Reserve
System. Under the Bank Holding Company Act, holding companies are prohibited,
with certain exceptions, from engaging in or acquiring the voting stock of any
company engaging in activities other than banking. However, the Bank Holding
Company Act authorizes the Board of Governors to permit holding companies to
engage in, and to acquire the stock of companies that engage in, activities
which the Board of Governors has determined to be so closely related to banking
as to be a proper incident thereto.
The Company's subsidiary bank is a national banking association chartered under
the laws of the United States. As such, the operations of the Bank are subject
to the regulations of the Comptroller of the Currency, the Board of Governors of
the Federal Reserve System, the Federal Deposit Insurance Corporation, and West
Virginia law. As a member of the Federal Deposit Insurance Corporation, the
Bank's deposits are insured as provided by law.
The primary supervisory authority over the Bank is the Comptroller of the
Currency who regularly examines such areas as reserves, loans, investments,
management practices, and other aspects of the Bank's operations.
On September 29, 1994, the Bank Holding Company Act was amended by the
Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate
bank acquisition anywhere in the country, effective one year after the date of
enactment and interstate branching by acquisition and consolidation, effective
June 1, 1997
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in those states that have not opted out by that date. The impact of this
amendment on the Company cannot be measured at this time.
The United States Congress and numerous states, including West Virginia, have
periodically considered and enacted legislation which has resulted in the
deregulation of banks and other financial institutions. As additional
legislation is enacted, certain geographical restrictions on banks and bank
holding companies or certain prohibitions against banks engaging in certain
non-banking activities may be modified or eliminated. Such legislation could
have the effect of placing the Bank in more direct competition with other
financial institutions.
The Bank's monetary policy is directly affected by the Federal Reserve Board
whose actions directly affect the money supply, and affect banks' lending
ability by increasing or decreasing the cost and availability of funds to banks.
In addition, deregulation of interest rates paid by banks on deposits and the
types of deposits that may be offered by banks have eliminated or altered
minimum balance requirements and rate ceilings on various types of time deposit
accounts. The effect of these actions and the deregulation of interest rates
have increased banks' costs of funds and have made the profitability of banks
more sensitive to fluctuations in market rate conditions.
Competition
The Bank competes primarily with seven commercial banks over a four county area:
Hardy County, Hampshire County, Grant County, and Pendleton County.
Additionally, Farmers' Home Administration and the Federal Land Bank are
competitors for loans. According to the latest Sheshunoff Bank Quarterly, dated
September 1996, the Bank had assets representing approximately 17% of total
assets for the seven commercial banks serving its primary market area.
It can be expected that with the liberalization of the branch banking laws in
West Virginia, additional financial institutions may compete with the Bank. The
Bank has taken an aggressive posture with the establishment of the Mathias,
Franklin and Petersburg branches, and intends to continue vigorously competing
for its share of the market within its service area by offering competitive
rates and terms on both loans and deposits.
Employees
At December 31, 1996, the Bank employed 52 full time employees and 10 part time
employees.
ITEM 2. PROPERTIES
- -------------------
In 1911 the Bank acquired the property now known as the "Old Bank" building
located at 107 South Main Street, Moorefield, West Virginia. In 1963 the Bank
acquired property adjacent to that same building which is now being used as a
parking lot. In December
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1994 the Bank acquired property on Winchester Avenue that adjoins the Old Bank
building and the parking lot. The completion of the renovation and addition to
the main office has allowed the Bank's bookkeeping and operations departments to
move into the main office. Therefore, the Winchester Ave. parcel as well as the
property located at 107 S. Main St. will be offered for sale.
In 1974 the Bank acquired 5.82 acres of land located on the west side of U.S.
Route 220 of Main Street in Moorefield, West Virginia. On June 29, 1976 the Bank
received the approval of the Office of the Comptroller of the Currency to change
the location of its main office to this site. This is the present location of
the Bank's principal banking offices. In April 1994 the Bank acquired
approximately one acre of real estate on the west side of U.S. Route 220
adjoining the main office.
On April 5, 1983 the Bank acquired property located in the town of Mathias, West
Virginia. Since December 28, 1984 the Bank has operated its Mathias branch bank
from this site.
By deeds dated May 31, 1986 and July 14, 1986 the Bank acquired two parcels of
land located on the east side of U.S. Route 220 in the town of Franklin, West
Virginia. On October 3, 1986 the Bank received preliminary approval from the
Office of the Comptroller of the Currency to establish a branch bank at this
location. The Bank's Franklin branch was opened for banking operations on
January 1, 1987.
During 1995, the Bank acquired a parcel of land and branch office located on the
north side of U.S. Route 220 in the town of Petersburg, West Virginia. This
property was purchased from Blue Ridge Bank and began operating as a branch of
South Branch Valley National Bank on November 15, 1995.
At December 31, 1996, various parcels of real estate with an aggregate book
value of $28,955 are maintained by the Bank as a result of foreclosure
proceedings on loans collateralized by such real estate.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Bank is involved in various pending legal proceedings, all of which are
regarded by management as normal litigation incident to the business of banking
and are not expected to have a materially adverse effect on the business or
financial condition of the Bank or the Holding Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
- --------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth quarter of
the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The Company acts as its own registrar and transfer agent. Its shares are not
publicly traded on any exchange or over the counter market. Shares of the
Company's common stock are occasionally bought and sold by private individuals,
firms or corporations. In many instances, the Company does not have knowledge of
the purchase price or the terms of the purchase. No definitive records of bids
and ask or sale prices are available. However, the average sales price for the
shares that have voluntarily been reported to the Company in the last 60 days is
$44.25 per share.
The approximate number of stockholders of record for SBVB's common stock as of
March 1, 1997 was 640.
The following sets forth quarterly cash dividends declared per share for the
prior two years.
Quarterly Common Stock Dividends
--------------------------------
Quarter 1996 1995
------- ---- ----
First $ - $ -
Second .38 .33
Third - -
Fourth .39 .35
Dividends paid by SBVB to its stockholders are based on dividends it receives
from its subsidiary bank. The ability of the Bank to pay dividends to SBVB is
subject to certain limitations of the national banking laws. In general, these
limitations provide that no bank can pay dividends if the total of all
dividends, including any proposed dividend declared by a bank in any calendar
year, exceeds net income for that year when combined with net income for the
preceding two years, less dividends for all three years. This restriction may be
waived if the approval of the Office of the Comptroller of the Currency is
obtained for such distribution. The Comptroller of the Currency may also
prohibit a bank's dividend payments if such payment is deemed to be an unsafe or
unsound banking practice. The foregoing summary is not a complete statement of
applicable limitations and is qualified by reference to Sections 56 and 60 of
Title 12 of the United States Code.
Additional information related to dividend restrictions is included in Note 13
of the Notes to Consolidated Financial Statements included on pages 33 through
34 of the 1996 Annual Report which is incorporated herein by reference under
Part II, Item 7 of this filing.
Cash dividends rose 13.2% to $.77 per share in 1996. It is the intention of
management and the Board of Directors to continue to pay dividends on the same
schedule during 1996. However, future
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cash dividends will depend on the earnings, financial condition and the business
of the Bank as well as general economic conditions; however, management is not
presently aware of any reason why dividend payments should not continue.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS AND RELATED STATISTICAL DISCLOSURES
- -------------------------------------------------
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 4 through 16 of the 1996 Annual Report is incorporated
herein by reference.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The report of the independent auditors and consolidated financial statements and
notes thereto are included on pages 17 through 37 of the 1996 Annual Report and
are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
There has been no Form 8-KSB filed within 24 months prior to the date of the
most recent financial statements reporting a change of accountants and/or
reporting disagreements on any matter of accounting principle or financial
statement disclosure.
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PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- ------------------------------------------------------------
CURRENT BOARD OF DIRECTORS.
- ---------------------------
The Board of Directors of the Company may consist of not less than nine (9) nor
more than fifteen (15) persons in accordance with the Company's Articles of
Incorporation. The number of directors may be fixed by the Board of Directors as
deemed appropriate. Currently, the Board of Directors has fixed the number of
directors at fourteen (14).
The current Board of Directors of the Company is comprised of the individuals
listed below. Directors of the Company are divided into three classes and serve
a staggered three (3) year term. All current directors of the Company are also
directors of the Company's subsidiary, South Branch Valley National Bank
("Bank").
Directors of the Bank serve for a one (1) year term. The table below sets forth
information concerning each director as of March 1, 1997.
Date
Current Term
as Director
of Company Positions & Principal Occupation or
Name and Age Expires Employment Last Five Years
- ------------ ------------- ---------------------------------------
Oscar M. Bean (46) 1998 Chairman of the Board since February
1995; Director of Company since 1987;
Director of Bank since 1978; Managing
Partner of Bean & Bean Attorneys.
Donald W. Biller (65) 1999 Director and Vice Chairman of the Board
since 1987; Director of Bank since 1975;
President of D.W. Biller, Inc.; Director
of WV Farm Credit ACA; Farmer.
James M. Cookman (42) 1997 Director of Bank since 1994; President
of Cookman Insurance Center, Inc.,
President of Cookman Realty Group, Inc.
and President of Transcover, Inc.
John W. Crites (56) 1999 Director of Company and Bank since 1989;
President of Allegheny Wood Products,
Inc.; Partner, JPC, Limited Liability
Company; Partner, Allegheny Dimension;
Principal Stockholder, KJV Aviation.
Thomas J. Hawse, III (51) 1997 Director of Company since 1988;
President of Hawse Food Market, Inc.
Phoebe F. Heishman (55) 1998 Secretary of Company since 1995;
Director of Company since 1987;
Director of Bank since 1973; Editor and
Publisher of Moorefield Examiner;
President of R.E. Fisher Co., Inc.
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Gary L. Hinkle (47) 1997 Director the Company since 1993;
President of Hinkle Trucking, Inc.,
Dettinburn Transport, Inc., and Mt.
Storm Fuel Corporation.
Jeffrey E. Hott (46) 1999 Director of Company and Bank since 1990;
Vice President of Hott's Ag Services,
E.E. Hott, Inc., and Franklin Oil Co.
H. Charles Maddy, III,(33) 1997 Director of Company since 1993; Has served
as the Bank's President and Chief
Executive Officer since 1993. He served as
Chief Financial Officer of the Company
from 1988 to 1994 when he became
President.
Harold K. Michael (53) 1997 Director of the Company since 1994
Owner/ agent of H.K. Michael & Son
Insurance and a member of the West
Virginia House of Delegates.
Mary Ann Ours (63) 1998 Director of Company and Bank since 1994;
President of Ours Valley View Poultry
Farm, Inc.
Russell F Ratliff, Jr.(46) 1999 Director of Company and Bank since 1994;
Treasurer of the Company, 1987 to
present; Vice President and Cashier of
the Bank, 1993 to present; CEO and
Cashier of the Bank, 1988 to 1993.
Harry C. Welton (67) 1999 Director of Company since 1987;
Director of Bank since 1986;
Retired farmer.
Renick C. Williams (62) 1998 Director of Company since 1987;
President and Chairman of the Board of
Company, 1987 to 1995; Director of Bank
since 1967; President of South Branch
Inn, Inc.; President of Fort Pleasant
Farms, Inc.; President of Hampshire S&J
Co., Inc.
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EXECUTIVE OFFICERS.
The following table identifies the executive officers of the Company, all of
whom were appointed in April 1996 to serve until the next annual meeting. Mr.
Pavan and Mr. Jennings are executive officers of the Company's only subsidiary,
South Branch Valley National Bank. Mr. Bean and Mrs. Heishman, who are also
directors of the Company, do not receive additional compensation for their
service as executive officers of the Company and thus are not listed in the
Executive Compensation Table.
Name, Year Appointed, Age Office, Experience covering the last
- ------------------------- five years
--------------------------------------
Oscar M. Bean, 1995 (46) Chairman of the Board of the Company
February 1995 to present; Chairman of
the Board of the Bank, February 1995 to
present; Secretary of the Company 1987
to February 1995.
Phoebe F. Heishman, 1995 (55) Secretary of the Company, February 1995
to present.
H. Charles Maddy, III, 1988 (33) President of the Company since 1994;
Chief Financial Officer of the Company,
1988 to 1994; President and Chief
Executive Officer of the Bank, April
1993 to present; Executive Vice
President of the Bank, 1992 to 1993;
Vice President and Controller, 1988 to
1992.
Russell F. Ratliff, Jr.,1986 (46) Treasurer of the Company, 1987 to present;
Vice President and Cashier of the
Bank, April 1993 to present; CEO and
Cashier of the Bank, 1988 to 1993.
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Jeffery L. Pavan, 1992 (35) Vice President of Loan administration,
1992 to present. Previously affiliated
with United Companies Lending
Corporation, Inc. in Fort Wayne,
Indiana.
Scott C. Jennings, 1994 (35) Vice President of Loan Review and
Compliance, 1994 to present; Loan Review
and Compliance Officer 1991 to 1994.
COMPLIANCE WITH REPORTING OF SECURITIES TRANSACTIONS
- ----------------------------------------------------
Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and Securities
and Exchange Commission (the "SEC") regulations, the Company's directors,
executive officers and greater than ten percent shareholders are required to
file reports of ownership and changes in ownership with the SEC and to furnish
the Company with copies of all such reports they file. Based solely upon
submissions of copies of reports to the Company, the Company is not aware of any
late filings.
ITEM 10. EXECUTIVE COMPENSATION
- --------------------------------
Cash Compensation.
- ------------------
Executive officers of the Company are not compensated for services rendered to
the Company. Executive officers of its subsidiary, South Branch Valley National
Bank, are compensated for services rendered to the Bank. The table below sets
forth the cash compensation of the Company's Chief Executive Officer and any
executive officer of South Branch Valley Bancorp, Inc. or its subsidiary earning
$100,000 or more for the years ended December 31, 1996, 1995 and 1994.
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and
Principal All Other
Position Year Salary Bonus Compensation
H. Charles Maddy, III 1996 $73,500 $26,667 $19,113 (1)
President & Chief
Executive Officer 1995 $70,000 $25,110 $19,432 (1)
1994 $60,000 $23,886 $17,427 (1)
(1) Amount includes payments made on behalf of the executive to the ESOP
($3,675)and 401(k) Profit Sharing Plan ($4,043), amounts taxable to the
executive for personal use of the Company vehicle ($6,141), excess life
insurance ($54) and fees received by the executive as a member of the Company's
subsidiary bank's board of directors, which
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totaled $5,200. Mr. Maddy received no compensation for his position as Director
of the Company.
SOUTH BRANCH VALLEY BANCORP, INC. PLANS.
- ----------------------------------------
The Company has a defined contribution profit-sharing and thrift plan with
401(k) provisions covering substantially all employees. Any employee who is at
least 21 years of age and is employed in a position requiring at least 1,000
hours of service per year is eligible to participate. Under the provisions of
the plan, the Company will make a matching contribution on behalf of each
participant of 25% of the participant's salary reduction contributions of up to
4% of such participant's compensation. These matching contributions shall be
fully vested at all times. The Company may also make additional contributions at
the discretion of the Company's Board of Directors. Vesting in discretionary
contributions occurs at the rate of 0% or the first two years of eligibility and
20% per year thereafter. Total Company contributions to the plan for the year
ended December 31, 1996, totaled $54,240. The trustees of the plan are also
members of the Company's Board of Directors.
The Company has an Employee Stock Ownership Plan (ESOP) covering substantially
all employees. Any employee who is at least 21 years of age and is credited with
at least 1,000 hours of service during the plan year is eligible to participate.
Vesting occurs at the rate of 0% for the first year of credited service and 20%
for each year thereafter. Under the provisions of the plan, employee
participants in the ESOP are not permitted to contribute to the plan, rather the
cost of the ESOP is borne by the Company through annual contributions in amounts
determined by the Company's Board of Directors. Contributions to the plan for
the year ended December 31, 1996, totaled $48,250. The trustees of the ESOP are
also members of the Company's Board of Directors.
In 1990, the Company adopted an incentive compensation program for its key
employees. Bonuses are awarded to key employees based on a prescribed formula
using the Company's return on assets as a base. For the year ended December 31,
1996, $137,000 was paid under the provisions of the incentive compensation
program. The amounts awarded to the Chief Executive Officer are shown in the
bonus column of the Compensation Table.
Neither the Company nor the Bank maintain any form of stock option, stock
appreciation rights, or other long term compensation plans. The Chief Executive
Officer has an employment contract with the Bank. The significant provisions of
this agreement and potential amounts involved are included in Note 12 of the
Consolidated Financial Statements included in Item 7 of this filing.
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The following table sets forth the amount of common stock beneficially owned by
each director and by all executive officers and directors of the Company and its
subsidiary, South Branch Valley National Bank, as a group of sixteen (16)
persons as of March 4, 1997.
Name of Qualifying Other Shares
Beneficial Shares Beneficially Owned Percent of
Owner Owned Direct Indirect Class**
Oscar M. Bean 1,000 5,961 1,738 (4) 2.0%
Donald W. Biller 1,000 --- 5,120 (9) 1.4%
James M. Cookman 1,000 --- 1,161 (7) .3%
John W. Crites 1,000 1,000 23,905 (2) 6.6%
Thomas J. Hawse, III 1,000 1,800 --- .5%
Phoebe F. Heishman 1,000 9,150 1,540 (5) 2.8%
Gary L. Hinkle 1,000 6,517 2,400 (8) 2.4%
Jeffrey E. Hott 1,000 1,000 16,975 (3) 4.8%
H. Charles Maddy, III * 202 783 (6) .3%
Harold K. Michael 1,000 38 --- .0%
Mary Ann Ours 1,000 3,615 --- 1.0%
Russell F. Ratliff, Jr. * 950 838 (6) .5%
Harry C. Welton, Jr. 1,000 1,840 9,465 (1) 3.0%
Renick C. Williams 1,000 130 --- .0%
32,203 63,925 25.6%
====== ====== =====
All directors and
executive officers as
a group (16 persons),
ESOP and Trust Department*** 32,231 71,879 27.5%
====== ====== =====
* Director/employee exempt from qualifying requirement
** Does not include qualifying shares.
*** Includes 510 shares held in the Trust Department and voted by the Trust
Officer and 6,864 shares owned by the Bank's ESOP and voted by
three Trustees, who are Directors of the Bank. This total excludes
Mr. Maddy's and Mr. Ratliff's shares held in the ESOP.
(1) All shares indirectly held are owned by the spouse.
(2) All shares indirectly held by Mr. Crites are owned by Allegheny Wood
Products, Inc. of which Mr. Crites is the president and majority
shareholder.
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(3) 150 shares are owned by Mr. Hott's minor children; 9,725 shares are owned
by E.E. Hott, Inc. and 7,100 shares are owned by Franklin Oil Co. (Mr.
Hott is vice president of both companies).
(4) 55 shares are owned by Mr. Bean's spouse; 493 shares are owned by Mr.
Bean's minor children; 1,190 shares are owned by Mr. Bean's mother for
whom he has power of attorney.
(5) 220 shares are owned by Ms. Heishman's spouse; 1320 shares are owned by
minor children.
(6) Fully vested shares held on behalf of named individual in the Company's
ESOP.
(7) 710 shares are owned by Mr. Cookman's minor children; 500 shares are owned
by Cookman Insurance Center, Inc. in which Mr. Cookman has a majority
interest, and 368 shares are owned by the Cookman Insurance Center, Inc.
Profit Sharing Plan.
(8) 2,400 shares are owned by Hinkle Trucking, Inc. of which Mr. Hinkle is the
president.
(9) All shares indirectly held by Mr. Biller are owned by D.W. Biller, Inc. of
which Mr. Biller is the president.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Directors and executive officers of South Branch Valley Bancorp, Inc. and
subsidiary, members of their immediate families, and business organizations and
individuals associated with them have been customers of, and have had normal
banking transactions with, South Branch Valley National Bank. All such
transactions were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than the normal risk of collectibility or present other
unfavorable features. It is anticipated that similar transactions will continue
in the future. The extent of significant transactions with related parties is
disclosed the Notes to the Consolidated Financial Statements included on pages
22 though 37 of the 1996 Annual Report and is incorporated herein by reference.
Director Oscar M. Bean is a partner in the law firm of Bean & Bean which has
served as counsel for South Branch Valley National Bank in a number of matters
during the year. It is anticipated that this relationship will continue in 1997.
Fees paid by the Bank to the law firm of Bean & Bean were less than 5% of the
law firm's gross revenues in 1996.
16
<PAGE>
17-64
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
All financial statements and financial statement schedules required to be filed
by this Form or by Regulation S-X, which are applicable to the registrant, have
been presented in the financial statements and notes thereto in Item 7 in
management's discussion and analysis of financial condition and results of
operation in Item 6 or elsewhere in this filing where appropriate. The listing
of exhibits follows:
INDEX TO EXHIBITS
A) Exhibits
Page(s) in
Exhibit Description Form 10-KSB or
Number Prior Filing
- ------- Reference
--------------
(3) Articles of Incorporation and By-laws
(i) Articles of Association of South
Branch Valley National Bank (a)
(ii) Articles of Incorporation of South (a)
Valley Bancorp, Inc., dated
March 3, 1987
(iii) By-laws of South Branch Valley (a)
Bancorp, Inc.
(10) Material Contracts
(i) Change of Control Agreement (b)
(12) Annual Report to Shareholders 21-61
(21) Subsidiaries of the Registrant 62
(23) Consent of Independent Certified 63
Public Accountants
(27) Financial Data Schedule 64
(a)Incorporated herein by reference to exhibits to South Branch Valley Bancorp,
Inc.'s registration statement on Form S-4 dated September 1, 1987, Registration
No. 33-16947 filed on or about September 1, 1987.
(b)Incorporated herein by reference to exhibits to South Branch Valley Bancorp,
Inc.'s Form 10-KSB for the fiscal year ended December 31, 1995 filed on or about
March 22, 1996.
17
<PAGE>
18-64
B) Reports on Form 8-K
No reports of Form 8-K were filed by the registrant during the fourth
quarter of the year ended December 31, 1996. However, prior to this filing
on or about January 15, 1997 and February 7, 1997, the Registrant filed
Form 8-K and related Form F-11 related to the execution of a stock purchase
agreement to acquire approximately 35.4% of the Capital State Bank, Inc. a
state non-member financial institution located in Charleston, West
Virginia. On March 27, 1997, the Registrant filed Form 8-K and related Form
F-11 related to the execution of a stock purchase agreement to acquire
approxmiately 50,000 shares of the Capital State Bank, Inc. This will give
the Registrant an ownership interest of approximately 40% in Capital State
Bank, Inc. These documents are incorporated herein by reference in their
entirety.
18
<PAGE>
19-64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
a West Virginia Corporation
(registrant)
By:/s/Oscar M. Bean 3/28/97 By:/s/H. Charles Maddy, III 3/28/97
- -------------------------------- ------------------------------------
Oscar M. Bean, Date H. Charles Maddy, III Date
Chairman of the Board President
By:/s/Russell F. Ratliff, Jr. 3/28/97
- ---------------------------------------
Russell F. Ratliff, Jr. Date
Treasurer
Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Title Date
----- ------
/s/ Oscar M. Bean Director March 28, 1997
- ---------------------------
Oscar M. Bean
/s/ Donald W. Biller Director March 28, 1997
- ------------------------
Donald W. Biller
/s/ James M. Cookman Director March 28, 1997
- ---------------------------
James M. Cookman
/s/ John W. Crites Director March 28, 1997
- ------------------------
John W. Crites
/s/ Thomas J. Hawse, III Director March 28, 1997
- ---------------------------
Thomas J. Hawse, III
/s/ Phoebe F. Heishman Director March 28, 1997
- ---------------------------
Phoebe F. Heishman
19
<PAGE>
20-64
SIGNATURES (cont'd)
/s/ Gary L. Hinkle Director March 28, 1997
- ------------------------
Gary L. Hinkle
/s/ Jeffrey E. Hott Director March 28, 1997
- ------------------------
Jeffrey E. Hott
/s/ H. Charles Maddy, III Director March 28, 1997
- ---------------------------
H. Charles Maddy, III
/s/ Harold K. Michael Director March 28, 1997
- ---------------------------
Harold K. Michael
/s/ Mary Ann Ours Director March 28, 1997
- ---------------------------
Mary Ann Ours
/s/ Russell F. Ratliff, Jr. Director March 28, 1997
- ---------------------------
Russell F. Ratliff, Jr.
/s/ Harry C. Welton, Jr. Director March 28, 1997
- ---------------------------
Harry C. Welton, Jr.
/s/ Renick C. Williams Director March 28, 1997
- ---------------------------
Renick C. Williams
20
<PAGE>
21-64
E X H I B I T (13)
SOUTH BRANCH VALLEY BANCORP,INC ANNUAL
REPORT TO SHAREHOLDERS FOR THE YEAR
ENDED DECEMBER 31, 1996
<PAGE>
22-64
1996
ANNUAL REPORT
-------------------
SOUTH BRANCH VALLEY
BANCORP, INC.
-----------------------------------------------------
CONTENTS
Message to Stockholders and Friends 2
Financial Highlights 3
Management's Discussion and Analysis 4
Independent Auditor's Report 17
Consolidated Balance Sheets 18
Consolidated Statements of Income 19
Consolidated Statements of Shareholders' Equity 20
Consolidated Statements of Cash Flows 21
Notes to Consolidated Financial Statements 22
Shareholder Informations 38
Directors of South Branch Valley Bancorp, Inc. 39
Operating Officers and Employees of the Bank 40
MAILING ADDRESS
South Branch Valley Bancorp, Inc.
P.O. Box 680
Moorefield, West Virginia 26836
<PAGE>
23-64
[South Branch Valley Bancorp, Inc. logo]
- -------------------------------------------------------------------------------
To Our Stockholders and Friends:
We are proud to present to you the 1996 Consolidated Annual Report of
South Branch Valley Bancorp, Inc. The past year was our ninth consecutive year
of realizing record earnings which totaled $1,490,000. This earnings strength
has enabled us to increase our dividends over 1995 by 13.2% to $.77 per share.
Meeting the challenge of a highly competitive market, South Branch Valley
achieved record levels of total assets and total capital. Once again, our entire
staff is to be commended for their excellent performance in responding to the
increasing demands of a competitive industry.
During 1996, we successfully upgraded our computer system and put the
finishing touches on our main office. In addition, our strong management team
and support staff should be commended for successfully guiding us through the
aftermath of a flood. Although the flood disrupted our daily routines, "it was
business as usual" at South Branch Valley National Bank.
Additionally, as most of you are aware, we have entered into an agreement
to purchase approximately a 35% interest in the Capital State Bank located in
Charleston, WV. We are confident that this transaction will help further our
goals in creating shareholder value for many years to come.
Our Board of Directors and management team wish to convey our deepest
appreciation for your continued support. We are proud of the performance of our
Company and hope you are as well. Your comments and suggestions are always
welcome and your friendship is appreciated.
/s/ OSCAR M. BEAN /s/ H. CHARLES MADDY, III
Oscar M. Bean H. Charles Maddy, III
Chairman of the Board President
P. O. Box 680-Moorefield, West Virginia 26836-Phone(304) 538-2353-Fax(304) 538-
7053
2
<PAGE>
24-64
FINANCIAL HIGHLIGHTS
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
DIVIDENDS PER SHARE EARNINGS PER SHARE
[CHART GOES HERE] [CHART GOES HERE]
1992 $0.42 1992 $2.97
1993 $0.48 1993 $3.06
1994 $0.61 1994 $3.26
1995 $0.68 1995 $3.49
1996 $0.77 1996 $3.94
1996 1995 % CHANGE
--------- --------- --------
FOR THE YEAR (IN THOUSANDS)
Net Income $ 1,490 $ 1,320 12.88%
Net Interest Income 4,928 4,542 8.50%
- ------------------------------------------------------------------------------
YEAR END BALANCES (IN THOUSANDS)
Total Assets $122,114 $113,118 7.95%
Total Loans 83,273 71,458 16.53%
Total Deposits 100,941 100,046 0.89%
Total Equity 12,304 11,329 8.61%
- ------------------------------------------------------------------------------
PER SHARE DATA
Earnings $ 3.94 $ 3.49 12.89%
Book Value $ 32.51 $ 29.93 8.62%
Cash Dividends $ 0.77 $ 0.68 13.24%
- ------------------------------------------------------------------------------
RATIOS
Return on Average Assets 1.27% 1.29% -1.55%
Return on Average Equity 12.97% 12.83% 1.09%
Dividend Pay-out 19.56% 19.50% 0.31%
Shareholders' Equity to Total Assets 10.08% 10.01% 0.70%
- ------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS TOTAL ASSETS
(before cumulative effect of accounting change)
[GRAPH GOES HERE] [GRAPH GOES HERE]
1992 1.22% 1992 $ 90.1
1993 1.27% 1993 $ 94.6
1994 1.29% 1994 $ 96.6
1995 1.29% 1995 $113.1
1996 1.27% 1996 $122.1
3
<PAGE>
25-64
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of the financial condition
and changes in financial condition and results of operations of South Branch
Valley Bancorp, Inc., and its wholly owned subsidiary, South Branch Valley
National Bank, (hereafter referred to as the Company) for the two years ended
December 31, 1996. Also presented is an analysis of the rate sensitivity of the
components of the Company's statement of condition.
RESULTS OF OPERATIONS
Net income for the three years ended December 31, 1996, 1995, and 1994, was
$1,490,000, $1,320,000, and $1,245,000 respectively. Return on average total
assets for the year ended December 31, 1996 was 1.27% compared to 1.29% in 1995
and 1.29% in 1994. On a per share basis, net income was $3.94 in 1996 compared
to $3.49 in 1995 and $3.26 in 1994. Dividends per share totaled $.77 in 1996
compared to $.68 in 1995 and $.61 per share in 1994.
NET INTEREST INCOME
The major component of the Company's net earnings is net interest income, which
is the excess of interest earned on earning assets over the interest expense for
sources of funds. Net interest income is affected by changes in volume,
resulting from growth and alterations of the balance sheet's composition, as
well as fluctuations in interest rates and maturities of sources and uses of
funds. Bank management seeks to maximize net interest income through management
of the balance sheet. This is accomplished by determining the optimal product
mix with respect to yields on assets and costs of funds in light of projected
economic conditions, while maintaining portfolio risk at an acceptable level.
Management uses GAP analysis to determine the optimal product mix.
Included in interest and fees on loans are loan fees earned of $181,000,
$180,000, and $175,000 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Interest income on securities which are exempt from Federal tax typically
provide a favorable impact on earnings through reduction of the Company's tax
liability. Consequently, for purposes of this discussion, interest income on tax
exempt securities has been adjusted to reflect the tax benefit derived, after
consideration of nondeductible interest expense related to these obligations,
assuming an effective tax rate of 34.0 percent for all the years presented. The
tax equivalent adjustment results in an increase of $52,000 in interest income
for 1996, $41,000 for 1995 and $45,000 for 1994.
Table I presents, for the periods indicated, the changes in interest income and
expense attributable to (a) changes in volume (changes in volume multiplied by
prior period rate) and (b) changes in rate (change in rate multiplied by prior
period volume). Changes in interest income and expense attributable to both rate
and volume have been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each. Net interest
income on a fully tax equivalent basis, average balance sheet amounts, and
corresponding average rates for the years 1994, 1995 and 1996 are presented in
Table II.
Net interest income, as adjusted, totaled $4,980,000, $4,583,000 and $4,531,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The net
interest margin, which recognizes earning asset growth by expressing net
interest income as a percentage of total average earning assets, decreased from
4.9% in 1994 to 4.7% in 1995 and to 4.5% in 1996. Lower loan yields and an
increase in the cost of funds, primarily time deposits and borrowed funds, which
have been used to primarily fund loan growth, continued to negatively impact the
Company's net interest margin. In 1996, the yield on interest earning assets
remained the same as 1995, while the cost of
4
<PAGE>
26-64
interest bearing liabilities rose 10 basis points. See Table II for a detailed
analysis of the Company's net interest yield on earning assets.
The spread between interest earning assets and interest bearing liabilities
could continue to contract, thus negatively impacting the Company's net interest
income in 1997. Management continues to monitor the net interest margin through
GAP analysis to minimize the potential for any significant negative impact. See
the "Liquidity and Interest Rate Sensitivity" section for further discussion of
the impact of changes in market interest rates on the Company.
Table I: Changes in Interest Margin Attributable to Rate and Volume
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1996 VERSUS 1995 1995 VERSUS 1994
---------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in: Due to Change in:
Volume Rate Net Volume Rate Net
----------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 1,091 $ (129) $ 962 $ 486 $ 309 $ 795
Securities
Taxable 33 27 60 23 (1) 22
Tax-exempt 121 (19) 102 39 (33) 6
Interest bearing deposits
with other banks (8) (4) (12) 9 (1) 8
Federal funds sold 8 (8) -- (14) 20 6
----------- ------------ ----------- ----------- ----------- -----------
Total interest earned on
interest-earning assets 1,245 (133) 1,112 543 294 837
----------- ------------ ----------- ----------- ----------- -----------
Interest paid on:
Interest bearing demand
deposits 64 (36) 28 72 113 185
Regular savings 64 13 77 (22) 34 12
Time savings 343 154 497 152 397 549
Federal funds purchased and
securities sold with agree-
ment to repurchase 60 -- 60 -- -- --
Borrowed funds 56 (3) 53 38 1 39
----------- ------------ ----------- ----------- ----------- -----------
Total interest paid on
liabilities 586 129 715 240 545 785
----------- ------------ ----------- ----------- ----------- -----------
Net interest income $ 659 $ (262) $ 397 $ 303 $ (251) $ 52
=========== ============ =========== =========== =========== ===========
</TABLE>
5
<PAGE>
27-64
Table II: Average Distribution of Assets, Liabilities and Shareholders' Equity,
Interest Earnings & Expenses, and Average Rates
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------- --------------------------------- --------------------------------
(In thousands Average Earnings/ Yield/ Average Earnings/ Yield/ Average Earnings/ Yield/
of dollars) Balances Expense Rate Balances Expense Rate Balances Expense Rate
--------------------------------- --------------------------------- --------------------------------
ASSETS
Interest earning
assets:
Loans, net of
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
unearned interest $ 76,797 $ 7,552 9.8% $ 66,148 $ 6,590 10.0% $ 61,175 $ 5,795 9.5%
Securities
Taxable 26,557 1,711 6.4% 26,059 1,651 6.3% 25,703 1,629 6.3%
Tax-exempt 4,757 307 6.5% 2,898 205 7.1% 2,390 199 8.3%
Interest bearing
deposits with
other banks 1,869 125 6.7% 1,997 137 6.9% 1,859 129 6.9%
Federal Funds sold 892 49 5.5% 756 49 6.5% 1,051 43 4.1%
---------- ---------- --------- ---------- ---------- -------- ---------- ---------- ---------
Total interest
earning assets 110,872 9,744 8.8% 97,858 8,632 8.8% 92,178 7,795 8.5%
Noninterest
earning assets:
Cash & due
from banks 2,419 2,157 2,694
Bank premises
& equipment 3,155 2,084 1,298
Other assets 1,298 1,052 1,032
Allowance for
loan losses (861) (930) (990)
---------- ---------- ----------
Total assets $ 116,883 $ 102,221 $ 96,212
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing
liabilities:
Interest bearing
demand deposits $ 19,761 $ 669 3.4% $ 17,825 $ 641 3.6% $ 15,579 $ 456 2.9%
Regular savings 15,048 523 3.5% 13,084 446 3.4% 13,757 434 3.2%
Time savings 57,756 3,398 5.9% 51,492 2,901 5.6% 48,486 2,352 4.9%
Federal funds
purchased and
securities sold with
agreement to
repurchase 1,422 60 4.2% -- -- -- -- -- --
Borrowed funds 1,960 114 5.8% 995 61 6.1% 377 22 5.8%
---------- ---------- --------- ---------- ---------- -------- ---------- ---------- ---------
95,947 4,764 5.0% 83,396 4,049 4.9% 78,199 3,264 4.2%
Noninterest bearing
liabilities
Demand deposits 8,532 7,819 8,009
Other liabilities 914 716 606
---------- ---------- ----------
Total liabilities 105,393 91,931 86,814
Shareholders'
equity 11,490 10,290 9,398
---------- ---------- ----------
Total liabilities
and shareholders'
equity $ 116,883 $ 102,221 $ 96,212
========== ========== =========
NET INTEREST EARNINGS $ 4,980 $ 4,583 $ 4,531
========== ========== ==========
NET INTEREST YIELD ON
EARNING ASSETS 4.5% 4.7% 4.9%
========= ======== =========
</TABLE>
6
<PAGE>
28-64
PROVISION FOR LOAN LOSSES
The provision for loan losses represents management's determination of the
amount necessary to be charged against the current period's earnings in order to
maintain the allowance for loan losses at a level which is considered adequate
in relation to the estimated risk inherent in the loan portfolio. The provision
for loan losses was $95,000, $55,000, and $120,000 for the years ended December
31, 1996, 1995, and 1994, respectively. Charge-offs, net of recoveries, for 1996
were $96,000 compared to $188,000 and $32,000 in 1995 and 1994, respectively.
See the "Risk Elements" section for further discussion of the allowance for loan
losses.
OTHER INCOME
Other income totaled $457,000, $379,000 and $342,000 or 4.5%, 4.2%, and 4.2% of
total income for each of the years ended December 31, 1996, 1995, and 1994,
respectively. The following table details the components of non-interest income
earned by the Company for the years ended December 31, 1996, 1995 and 1994 in
thousands of dollars, as well as the percentage increase (decrease) in each of
the components over the prior year.
<TABLE>
<CAPTION>
(In thousands of dollars)
1996 1995 1994
---------------------- ---------------------- ----------
Percent Percent
Amount Change Amount Change Amount
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Insurance commissions $ 111 0.1% $ 110 (0.1%) $ 111
Trust department income 6 20.0% 5 (68.8%) 16
Service fees 233 10.4% 211 1.0% 209
Securities gains (losses) 30 3100.0% (1) 50.0% (2)
Gain (loss) on sales of other assets 7 100.0% -- 100.0% (21)
Other 70 29.6% 54 86.2% 29
---------- ---------- ----------
$ 457 20.6% $ 379 10.8% $ 342
========== ========== ==========
</TABLE>
Non-interest income earned in 1996 increased $78,000 or 20.6%.This increase is
attributable to three items. Service fee income increased 10.4% from $211,000 in
1995 to $233,000 in 1996. Securities gains (losses) increased from a loss of
$1,000 in 1995 to a gain of $30,000 in 1996. Gain on sales of other assets
increased from $0 in 1995 to $7,000 in 1996. There were no significant
fluctuations or unusual items during 1996.
OTHER EXPENSES
Other expense totaled $3,156,000, $2,866,000, and $2,799,000 or 39.4%, 41.1%,
and 45.3% of total expense for each of the years ended December 31, 1996, 1995,
and 1994, respectively. The following table itemizes the primary components of
non-interest expense in thousands of dollars for the three years ended December
31, 1996 by dollar amount and percentage variance from the preceding year.
<TABLE>
<CAPTION>
(In thousands of dollars)
1996 1995 1994
---------------------- ---------------------- ----------
Percent Percent
Amount Change Amount Change Amount
---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 1,728 11.0% $ 1,557 7.5% $ 1,448
Net occupancy expense of premises 189 48.8% 127 7.6% 118
Equipment rentals, depreciation
and maintenance 181 11.7% 162 3.2% 157
Federal deposit insurance premiums 2 (98.0%) 100 (51.2%) 205
Other expense 1,056 14.8% 920 5.6% 871
---------- ---------- ----------
$ 3,156 10.1% $ 2,866 2.4% $ 2,799
========== ========== ==========
</TABLE>
7
<PAGE>
29-64
Non-interest expense increased $290,000 or 10.1% from 1995 to 1996. The most
significant component of non-interest expense, salaries and employee benefits,
increased 11.0% from $1,557,000 in 1995 to $1,728,000 in 1996. This is a result
of general merit raises and an increase in our employee health insurance
premiums. Net occupancy expense of premises totaled $189,000 for 1996 as
compared to $127,000 for 1995 for a 48.8% increase. A major portion of this
increase is the annual depreciation expense resulting from the purchase of the
Petersburg, West Virginia branch building and the new addition to the main
office in Moorefield, West Virginia. Equipment rentals, depreciation and
maintenance increased 11.7% from $162,000 in 1995 to $181,000 in 1996. A major
portion of this increase is the annual depreciation expense resulting from the
purchase of the equipment for the Petersburg branch and the new addition to the
main office. FDIC Insurance premiums decreased approximately $98,000 or (98.0%)
from 1995 to 1996. This decrease was a result of the FDIC's reduction of the
premiums for adequately capitalized banks from 4 cents per $100 of deposits to
$500 per quarter. These increases were expected and planned for by management.
INCOME TAX EXPENSE
Income tax expense (benefit) for the three years ended December 31, 1996, 1995,
and 1994 totaled $643,000, $680,000, and $665,000, respectively. See Note 10 of
the accompanying consolidated financial statements for further information
relating to the Company's income taxes.
CHANGES IN FINANCIAL POSITION
Table III illustrates the average composition of major balance sheet
classifications of the Company expressed in terms of dollar amounts and as a
percentage of total assets for each of the three years ended December 31, 1996,
1995 and 1994.
Total average assets for the year ended December 31, 1996 were $116,883,000, an
increase of 14.3% over 1995's average of $102,221,000. Total average assets
increased $6,009,000 or 6.2% from 1994 to 1995.
Total average interest earning assets, expressed as a percentage of total
assets, decreased slightly to 94.8% for 1996 as compared to 95.7% for 1995 and
95.8% for 1994.
Management has been making an effort to effectively leverage the Bank's capital
and has used the Federal Home Loan Bank of Pittsburgh to achieve that goal. The
Bank uses these funds to fund fixed rate, long term mortgage loans as well as
specific commercial loan projects. The Bank's total line of credit limit with
the Federal Home Loan Bank is approximately $35,000,000. During 1996 the Bank
borrowed a total of $2,840,000 from the Federal Home Loan Bank. See Note 9 of
the accompanying consolidated financial statements for further information
concerning the Bank's long term borrowings.
Total deposits at December 31, 1996 increased approximately 1.0% compared to
December 31, 1995. Average deposits increased approximately $11,000,000 or 12.3%
during 1996. Approximately 45.5% or $5,000,000 of the Company's average balance
growth in deposits in 1996 was the result of the deposits acquired at the time
of purchase of the Company's Petersburg branch, which was acquired in November
1995. This growth was within management's goals of consistent, controlled
deposit growth. See Table II for average deposit balances by type and their
related interest expense. Also see Note 8 of the accompanying consolidated
financial statements for a maturity distribution of certificates of deposit and
Individual Retirement Accounts in denominations of $100,000 or more as of
December 31, 1996.
LOAN PORTFOLIO
Total net loans averaged $76,797,000 in 1996 and comprised 65.7% of total
average assets compared to $66,148,000 or 64.7% of total average assets during
1995. This increase in the dollar volume of loans is primarily attributable to
increased loan demand experienced in 1996 as well as a
8
<PAGE>
30-64
more aggressive strategy taken by management to increase quality loan volume by
expanding the Bank's commercial and real estate portfolios.
The following table depicts loan balances at December 31, 1996 and 1995 by types
along with their respective percentage of total loans outstanding.
<TABLE>
<CAPTION>
(In thousands of dollars)
1996 1995
---------------------- ----------------------
Percent Percent
Amount of Total Amount of Total
---------- ---------- ---------- ---------
Commercial, financial,
<S> <C> <C> <C> <C>
and agricultural $ 20,451 24.6% $ 18,875 26.4%
Real estate--mortgage 43,468 52.2% 36,980 51.7%
Real estate--construction 154 .2% 103 .2%
Installment loans to individuals
(net of unearned interest) 18,584 22.3% 14,957 20.9%
Other 615 .7% 543 .8%
---------- ---------- ---------- ---------
Total loans (net of
unearned interest) $ 83,272 100.0% $ 71,548 100.0%
---------- ---------
Less allowance for loan losses 858 860
---------- ----------
Loans, net $ 82,414 $ 70,598
========== ==========
</TABLE>
No significant changes in the Company's loan portfolio composition occurred
during 1996. Refer to Note 5 of the accompanying consolidated financial
statements for the Company's loan maturities and a discussion of the Company's
adjustable rate loans as of December 31, 1996.
In the normal course of business, the Bank makes various commitments and incurs
certain contingent liabilities which are disclosed but not reflected in the
accompanying financial statements. These commitments and contingent liabilities
include various guarantees and commitments to extend credit and standby letters
of credit. At December 31, 1996, 1995, and 1994, such commitments approximated
$5,639,000, $4,463,000, and $3,445,000, respectively. The Bank does not
anticipate any material losses as a result of these commitments.
Interest on installment loans is recognized using methods which approximate the
simple interest method depending on the term of the loan and provisions of State
law on the date the loan was originated. For commercial and real estate mortgage
loans, interest income is computed using the simple interest method.
Certain loan fees and direct loan costs are recognized as income or expense when
incurred, whereas, generally accepted accounting principles require that such
fees and costs be deferred and amortized as adjustments of the related loan's
yield over the contractual life of the loan. The effects of this departure from
generally accepted accounting principles are not significant to the Company's
consolidated financial statements.
RISK ELEMENTS
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.
9
<PAGE>
31-64
South Branch Valley Bancorp, Inc. and Subsidiary
Table III: Average Balances (In thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- --------------------- ----------------------
Average Average Average
Balances Percent Balances Percent Balances Percent
---------- ---------- --------- ---------- --------- ---------
ASSETS
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned interest $ 76,797 65.7% $ 66,148 64.7% $ 61,175 63.6%
---------- ---------- --------- ---------- --------- ---------
Securities
Taxable 26,557 22.7% 26,059 25.5% 25,703 26.7%
Tax-exempt 4,757 4.1% 2,898 2.8% 2,390 2.5%
---------- ---------- ---------- ---------- --------- ---------
Total 31,314 26.8% 28,957 28.3% 28,093 29.2%
---------- ---------- ---------- ---------- --------- ---------
Interest bearing deposits with
other banks 1,869 1.6% 1,997 2.0% 1,859 1.9%
Federal Funds sold 892 0.7% 756 0.7% 1,051 1.1%
---------- ---------- ---------- ---------- --------- ---------
Total interest earning assets 110,872 94.8% 97,858 95.7% 92,178 95.8%
Noninterest earning assets:
Cash & due from banks 2,419 2.1% 2,157 2.1% 2,694 2.8%
Bank premises & equipment 3,155 2.7% 2,084 2.1% 1,298 1.3%
Other assets 1,298 1.1% 1,052 1.0% 1,032 1.1%
Allowance for loan losses (861) (0.7%) (930) (0.9%) (990) (1.0%)
---------- ---------- ---------- ---------- --------- ---------
Total assets $ 116,883 100.0% $ 102,221 100.0% $ 96,212 100.0%
========== ========== ========== ========== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits $ 19,761 16.9% $ 17,825 17.4% $ 15,579 16.2%
Regular savings 15,048 12.9% 13,084 12.8% 13,757 14.3%
Time savings 57,756 49.4% 51,492 50.4% 48,486 50.4%
Federal funds purchased and
securities sold with agreement
to repurchase 1,422 1.2% -- -- -- --
Borrowed funds 1,960 1.7% 995 1.0% 377 0.4%
---------- ---------- ---------- ---------- --------- ---------
95,947 82.1% 83,396 81.6% 78,199 81.3%
Noninterest bearing liabilities:
Demand deposits 8,532 7.3% 7,819 7.6% 8,009 8.3%
Other liabilities 914 0.8% 716 0.7% 606 0.6%
---------- ---------- ---------- ---------- --------- ---------
Total liabilities 105,393 90.2% 91,931 89.9% 86,814 90.2%
Shareholders' equity 11,490 9.8% 10,290 10.1% 9,398 9.8%
---------- ---------- ---------- ---------- --------- ---------
Total liabilities and
shareholders' equity $ 116,883 100.0% $ 102,221 100.0% $ 96,212 100.0%
========== ========== ========== ========== ========= =========
</TABLE>
10
<PAGE>
32-64
The following table presents a summary of restructured or nonperforming loans
for each of the three years ended December 31, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1996 1995 1994
---------- --------- ----------
(In thousands of dollars)
<S> <C> <C> <C>
Nonaccrual loans $ 343 $ 538 $ 675
Accruing loans past due 90 days or more 324 260 585
Restructured loans 55 230 366
---------- --------- ----------
Total $ 722 $ 1,028 $ 1,626
========== ========= ==========
Percentage of total loans net of unearned interest .9% 1.4% 2.5%
========== ========= ==========
</TABLE>
If interest on non-accrual loans had been accrued, such income would have
approximated $31,000, $37,000 and $6,000 for the years ended December 31, 1996,
1995 and 1994, respectively. Interest income previously accrued on non-accrual
loans and included as a part of the Company's interest income is not material.
The Company's subsidiary bank, on a quarterly basis, performs a comprehensive
loan evaluation which encompasses the identification of all potential problem
credits which are included on an internally generated watch list. The
identification of loans for inclusion on the watch list is facilitated through
the use of various sources, including past due loan reports, previous internal
and external loan evaluations, classified loans identified as part of regulatory
agency loan reviews and reviews of new loans representative of current lending
practices within the Bank. Once this list is reviewed to ensure it is complete,
the credit review department reviews the specific loans for collectibility,
performance and collateral protection. In addition, a grade is assigned to the
individual loans utilizing internal grading criteria, which is somewhat similar
to the criteria utilized by the Bank's primary regulatory agency. Based on the
results of these reviews, specific reserves for potential losses are identified
and the allowance for loan losses is adjusted appropriately. 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.
In addition, management feels these additional loans do not represent or result
from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity or capital resources. Also, these
loans do not represent material credits about which management is aware of any
information which would cause the borrowers to not comply with the loan
repayment terms.
Specific reserves are allocated to the non-performing loans based on the
quarterly evaluation of expected loan loss reserve requirements as determined by
Bank management. In addition, a portion of the reserve is determined through the
use of loan loss experience factors which do not provide for identification of
specific potential problem loans. As noted above, some of the loans, which are
not deemed significant, are included in the watch list of potential problem
loans and have specific reserves allocated to them.
At December 31, 1996, the Company's allowance for loan loss was $858,000 or 1.0%
of total loans compared to $860,000 or 1.2% at December 31, 1995.
11
<PAGE>
33-64
Table IV below presents an allocation of the expected allowance for loan losses
by major loan type.
Table IV: Allocation of the Allowance for Loan Losses (In thousands of dollars)
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- -------------------------- -------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------------ ---------- ----------- ---------- ----------- ----------
Commercial, financial,
<S> <C> <C> <C> <C> <C> <C>
and agricultural $ 204 24.3% $ 232 26.4% $ 364 27.7%
Real estate 333 51.8% 378 51.9% 488 52.3%
Installment 309 23.2% 241 20.9% 138 19.3%
Other 12 .7% 9 0.8% 3 0.7%
------------ --------- ----------- ---------- ----------- ----------
$ 858 100.0% $ 860 100.0% $ 993 100.0%
============ ========= =========== ========== =========== ==========
</TABLE>
At December 31, 1996, the Company had approximately $29,000 in other real estate
owned which was obtained as the result of foreclosure proceedings and $39,500 in
other repossessed assets which was obtained as the result of auto repossessions.
Management does not anticipate any material losses on any of the items currently
held in other real estate owned or other repossessed assets.
LOAN CONCENTRATIONS
The Company's subsidiary bank grants commercial, residential and consumer loans
to customers primarily located in Hardy, Grant, Hampshire and Pendleton Counties
of West Virginia. Although the Bank strives to maintain a diverse loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is indirectly dependent upon the poultry industry.
As of December 31, 1996 and 1995, the Bank had direct extensions of credit used
to build and operate poultry houses totaling approximately $4,564,000 and
$5,873,000, respectively. These loans are generally structured to be repaid over
periods ranging from 15 to 20 years, however, most also contain balloon
provisions which serve to require each loan's renewal every 1 to 5 years.
Further, interest rate risk is minimized by underwriting loans not subject to a
balloon provision with an adjustable interest rate feature. The security for
these loans generally consists of liens on the land, buildings and equipment
associated with each poultry house.
The Bank evaluates the credit worthiness of each of its customers on a
case-by-case basis and the amount of collateral it obtains is based upon
management's credit evaluation. Although, by definition, loan concentrations are
more susceptible to deteriorating economic conditions affecting the specific
areas and industries to which the concentrations are tied, the Company does not,
as of this writing, anticipate losses in this identified area that would be
materially different from the losses experienced in the loan portfolio taken as
a whole.
SECURITIES
All securities have been classified as available for sale as of December 31,
1996. The fair value of the Bank's available for sale portfolio totaled
$29,351,998, at December 31, 1996, which was 100.7% of the amortized cost. See
Note 4 of the accompanying consolidated financial statements for details of
amortized cost, the fair values, unrealized gains and losses as well as the
security classifications by type. Available for sale securities comprised
approximately 24.0% of total assets at December 31, 1996.
12
<PAGE>
34-64
At December 31, 1996, the Bank did not own securities of any one issuer that
exceeded ten percent of shareholders' equity. The maturity distribution of the
securities portfolio at December 31, 1996, excluding equity securities of
$394,425, together with the weighted average yields for each range of maturity
are summarized in Table V. The maturity distribution is based on contractual
maturities except for amortizing securities which are based on anticipated
average life to maturity, as discussed in Note 4 to the accompanying
consolidated financial statements. The stated average yields are actual yields
and are not stated on a tax equivalent basis.
Table V: Investment Security Maturity Analysis (In thousands of dollars)
<TABLE>
<CAPTION>
After One After Five
Securities Available Within but within but within After
for Sale One Year Five Years Ten Years Ten Years
--------------------- ---------------------- --------------------- ----------------------
Amount Yield Amount Yield Amount Yield Amount Yield
---------- ---------- ---------- ---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 1,259 5.54% $ 2,988 6.63% $ - - - - $ - - - -
U.S. Government agencies
and corporations 850 5.30% 8,734 6.61% 3,909 6.93% 200 6.45%
Mortgage backed securities:
U.S. Government agencies
and corporations 1,602 7.15% 2,835 6.22% 173 6.59% - - - -
State and political
subdivisions 285 5.52% 1,383 5.26% 2,181 5.05% 1,870 5.29%
Other 250 5.47% 248 7.00% - - - - - - - -
---------- ---------- ---------- ----------
Total $ 4,246 6.34% $ 16,188 6.46% $ 6,263 6.37% $ 2,070 5.26%
========== ========== ========== ==========
</TABLE>
SHORT TERM BORROWINGS
The Bank has a line of credit from the Federal Home Loan Bank of Pittsburgh.
Management uses this line to make additional funds available to customers in the
form of loans at competitive rates. Funds acquired through this program are
reflected on the consolidated balance sheet as short-term borrowings due to the
repayment terms of the debt agreement.
The Federal Home Loan Bank borrowings is a product known as Flexline. It is a
line of credit limited to 10% of the Bank's assets and is subject to annual
renewals that are effective the first business day of the new year. The line
bears interest at the Bank's overnight cost of funds rate, and may be paid off
at any time without prepayment penalty. The Bank's borrowing rate is subject to
change daily. The line of credit is secured by a blanket lien on all unpledged
and unencumbered assets of the Bank.
The Bank's management has recognized that the Bank has excess capital.
Management has been using the Federal Home Loan Bank's long term and short term
loan programs to effectively leverage this unused capital.
See note 9 to the accompanying consolidated financial statements for a summary
of the Company's short term borrowings, consisting of Federal funds purchased,
repurchase agreements and borrowings from the Federal Home Loan Bank, for the
years ended December 31, 1996 and December 31, 1995.
LONG TERM BORROWINGS
The Bank's long term borrowings of $3,514,652 at December 31, 1996 consist of
advances from the Federal Home Loan Bank of Pittsburgh. During 1996, borrowings
through the Community Investment Program totaled $2,090,000 with an average
weighted interest rate of 5.95% while borrowings through the regular long term
fixed rate program totaled $1,443,913 with an average weighted interest rate of
5.48%. The Bank used these funds to fund fixed rate, long term mortgage loans as
well as specific commercial loan projects.
See note 9 to the accompanying consolidated financial statements for a summary
of the Company's long term borrowings maturities for the year ended December 31,
1996.
13
<PAGE>
35-64
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 Bank uses ratio analysis to monitor the changes in its sources and
uses of funds so that an adequate liquidity position is maintained. At December
31, 1996, liquidity was available through cash, due from banks, Federal funds
sold, securities and interest bearing deposits with other banks maturing within
one year and totaled approximately $6,851,000 or 5.6% of total assets. Secondary
sources of liquidity are provided by all remaining available for sale
securities, Federal funds purchased, Federal Home Loan Bank lines of credit, and
correspondent banks lines of credit. Management believes that the liquidity of
the Company is adequate and foresees no demand or conditions that would
adversely affect it.
ASSET/LIABILITY MANAGEMENT
The principal objective of asset/liability management is to minimize interest
rate risk, which is the vulnerability of the Company's net interest income to
changes in interest rates and manage the ratio of interest rate sensitive assets
to interest rate sensitive liabilities within specified maturities or repricing
dates. The Company's actions in this regard are taken under the guidance of the
Subsidiary Bank's Asset/Liability Management Committee, which is comprised of
members of the Bank's senior management and members of the Board of Directors.
The Bank's Asset/Liability Management Committee is actively involved in
formulating the economic assumptions that the Bank uses in its financial
planning and budgeting process and establishes policies which control and
monitor the Bank's sources, uses and prices of funds.
Some amount of interest rate risk is inherent and appropriate to the banking
business. Several techniques are available to monitor and control the level of
interest rate risk. The Bank regularly performs modeling to project the
potential impact of future interest rate scenarios on net interest income.
Through such simulation analysis, interest rate risk is maintained within
established policy limits. Based upon the present mix of assets and liabilities
and management's assumptions with respect to growth and repricing, no
significant impact on the Company's 1997 net interest margin is expected given a
200 basis point change in interest rates during 1997.
Another means of analyzing an institution's interest rate risk is by monitoring
its interest rate sensitivity "gaps." An asset or liability is said to be
interest rate sensitive within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity "gap" is defined
as the difference between interest earning assets and interest bearing
liabilities maturing or repricing within a given time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds interest rate
sensitive assets. During a period of falling interest rates, a positive gap
would tend to adversely affect net interest income, while a negative gap would
tend to result in an increase in net interest income. During a period of rising
interest rates, a positive gap would tend to result in an increase in net
interest income while a negative gap would tend to affect net interest income
adversely.
Table VI sets forth at December 31, 1996 the Company's interest rate sensitivity
gaps within the one year time horizon computed based upon contractual repricings
and maturities. As presented in the table, the Company has a one year cumulative
negative interest sensitivity gap of $35.0 million (or 30.6% of total earning
assets). However, included within the one year time period are $33.1 million of
interest bearing demand and savings deposits which on a contractual basis are
immediately repriceable. However, the actual repricing of these deposits tends
to lag well behind movements in market interest rates. Accordingly, the
sensitivity of such core deposits to changes in market interest rate may differ
significantly from their contractual terms. If interest bearing demand and
savings deposits are assumed to reprice beyond the one year time horizon, the
14
<PAGE>
36-64
Company's one year cumulative interest rate sensitivity gap at December 31,
1996 would be a negative $1.9 million or just 1.6% of interest earning assets.
<TABLE>
<CAPTION>
Table VI: Asset & Liability Rate Sensitivity Analysis, December 31, 1996 (In thousands of dollars)
Maturing or Repricing Within
-----------------------------------
0-90 91-180 181-365 Total
Days Days Days 1 Year
--------- ---------- ---------- ----------
Interest Earning Assets:
<S> <C> <C> <C> <C>
Loans $ 11,695 $ 10,815 $ 10,522 $ 33,032
Taxable Securities 284 805 1,294 2,383
Tax Exempt Securities - - 250 35 285
Other - - - - 297 297
--------- ---------- ---------- ----------
Total Earning Assets $ 11,979 $ 11,870 $ 12,148 $ 35,997
========= ========== ========== ==========
Interest Bearing Liabilities:
Certificates of Deposit $ 9,218 $ 10,611 $ 18,041 $ 37,870
Savings Deposits 12,939 - - - - 12,939
Interest Bearing Demand Deposits 20,140 - - - - 20,140
--------- ---------- ---------- ----------
$ 42,297 $ 10,611 $ 18,041 $ 70,949
--------- ---------- ---------- ----------
Static Interest Sensitivity Gap $(30,318) $ 1,259 $ (5,893) $ (34,952)
========= ========== ========== ==========
Cumulative Gap $(30,318) $ (29,059) $ (34,952)
========= ========== ==========
Gap/Total Earning Assets (30.6%)
==========
Gap/Total Earning Assets (excluding savings & demand deposits) (1.6%)
==========
</TABLE>
CAPITAL RESOURCES
The capital position of South Branch Valley Bancorp, Inc. has shown consistent
growth during the past three years. Stated as a percentage of total assets, the
Company's equity ratio was 10.1%, 10.0%, and 9.7% at December 31, 1996, 1995 and
1994, respectively. These increases can be attributed to a strong earnings base
during the past three years combined with controlled asset growth. The Company's
subsidiary bank's risk weighted tier I capital, total capital and leverage
capital ratios were approximately 14.8%, 15.9% and 9.9%, respectively, at
December 31, 1996, which is considered well capitalized under regulatory
guidelines for prompt corrective actions. The Bank is subject to minimum capital
ratios as further discussed in Note 13 of the accompanying consolidated
financial statements.
Management has established an objective to maintain a minimum 8.0% rate of
internal capital growth as a primary means of ensuring capital adequacy within
regulatory guidelines. The percent of return on average equity multiplied by the
percent of earnings retained equals the internal capital growth rate percentage.
The following table illustrates this relationship.
Relationship Between Significant Financial Ratios
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- --------
<S> <C> <C> <C>
Return on average equity 13.3% 12.8% 13.3%
times
Earnings retained 80.4% 80.5% 81.4%
equals
Internal capital growth rate 10.7% 10.3% 10.8%
</TABLE>
15
<PAGE>
37-64
Cash dividends rose 13.2% to $.77 in 1996. It is the intention of management and
the Board of Directors to continue to pay dividends on a similar schedule during
1997. However, future cash dividends will depend on the earnings, financial
condition and the business of the Bank as well as general economic conditions.
Management is not presently aware of any reason dividend payments should not
continue.
Dividends paid by the Bank are subject to restrictions by banking regulations.
The most restrictive provision requires approval by the regulatory agency if
dividends declared in any year exceed the year's net income, as defined, plus
the retained net profits of the two preceding years. During 1997, the net
retained profits available for distribution to South Branch Valley Bancorp, Inc.
as dividends without regulatory approval are approximately $1,970,000, plus net
income of the interim periods through the date of declaration.
EFFECTS OF CHANGING PRICES
The results of operations and the financial position of the Company have been
presented based on historical cost, unadjusted for the effects of inflation,
except for the recording of unrealized gains/losses on available for sale
securities. Inflation could significantly impact the value of the Company's
interest rate sensitive assets and liabilities and the cost of noninterest
expenses, such as salaries and occupancy expenses.
As a financial intermediary, the Company holds a high percentage of interest
rate sensitive assets and liabilities. Consequently, the estimated fair value of
a significant portion of the Company's assets and liabilities reprice more
frequently than those of non-banking entities. The Company's policies attempt to
structure its mix of financial instruments and manage its interest rate
sensitivity gap in order to minimize the potential adverse effects of inflation
or other market forces on its net interest income, earnings and capital. A
comparison of the carrying value of the Company's financial instruments to their
estimated fair value as of December 31, 1996 is disclosed in Note 14 to the
accompanying consolidated financial statements.
Indirectly, management of the money supply by the Federal Reserve to control the
rate of inflation has an impact on the earnings of the Company. Further, changes
in interest rates to control inflation may have a corresponding impact on the
ability of certain borrowers to repay loans granted by the Company.
OTHER
As disclosed in Note 15 to the accompanying consolidated financial statement, on
January 15, 1997, the Company executed a binding letter of intent to purchase
approximately 23% of the outstanding stock of a state chartered financial
institution located in Charleston, Kanawha County, West Virginia, subject to the
occurrence of certain events and regulatory approval. On February 7, 1997, the
Company amended its notification to regulatory authorities to acknowledge the
Company's execution of additional letters of intent with other parties which
will result in the total acquisition of 424,680 shares or 35.4% of this state
bank's outstanding common stock for approximately $4,671,480. The purpose of
this transaction is to permit the Company to obtain control of the state bank.
The source and amount of funds to be used in this acquisition are expected to be
(i) $178,000 in funds currently available to the Company: (ii) $3,000,000 from a
long-term borrowing to be obtained from another financial institution: and (iii)
$1,492,790 from the proceeds of the expected issuance of 34,317 shares of
Company common stock to certain directors at a price of $43.50 per share.
This proposed transaction remains subject to approval by state and federal
regulatory authorities.
16
<PAGE>
38-64
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
South Branch Valley Bancorp,Inc.
Moorefield, West Virginia
We have audited the accompanying consolidated balance sheets of South Branch
Valley Bancorp, Inc., and subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for the years ended December 31, 1996, 1995 and 1994. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of South Branch Valley
Bancorp, Inc. and subsidiary as of December 31, 1996 and 1995, and the results
of their operations and cash flows for the years ended December 31, 1996, 1995
and 1994, in conformity with generally accepted accounting principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
January 31, 1997
1000 Laidley Tower, 500 Lee Street, East, P.O. Box 2629
Charleston, West Virginia 25329
304/346-0441 o 800/642-3601
Certified Public Accountants
Member of the McGladrey Network
17
<PAGE>
39-64
<TABLE>
<CAPTION>
South Branch Valley Bancorp, Inc., and Subsidiary
Consolidated Balance Sheets
December 31, 1996 and 1995
1996 1995
----------------- ----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 3,162,552 $ 2,191,647
Interest bearing deposits with other banks 1,553,000 2,134,919
Federal funds sold 723,734 2,161,745
Securities available for sale 29,351,998 31,480,580
Loans, less allowance for loan losses of $858,423 and
$859,681, respectively 82,414,205 70,598,398
Bank premises and equipment, net 3,121,892 3,180,351
Accrued interest receivable 928,642 983,841
Other assets 857,582 386,377
----------------- ---------------
Total assets $ 122,113,605 $ 113,117,858
================= ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 9,075,059 $ 7,832,774
Interest bearing 91,866,353 92,213,562
----------------- ---------------
Total deposits 100,941,412 100,046,336
Short-term borrowings 4,377,397 - -
Long-term borrowings 3,514,652 750,000
Other liabilities 976,351 992,862
----------------- ---------------
Total liabilities 109,809,812 101,789,198
----------------- ---------------
Commitments and Contingencies
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, authorized 600,000 shares, issued 382,625 956,562 956,562
Capital surplus 685,534 685,534
Retained earnings 10,711,468 9,512,884
Less cost of shares acquired for the treasury
1996 and 1995, 4,115 shares (166,970) (166,970)
Net unrealized gain (loss) on securities 117,199 340,650
----------------- ---------------
Total shareholders' equity 12,303,793 11,328,660
----------------- ---------------
Total liabilities and shareholders' equity $ 122,113,605 $ 113,117,858
================= ===============
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE>
40-64
South Branch Valley Bancorp, Inc., and Subsidiary
- -------------------------------------------------
Consolidated Statements of Income
For The Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------------- --------------- --------------
Interest income
<S> <C> <C> <C>
Interest and fees on loans $ 7,551,735 $ 6,589,530 $ 5,795,517
Interest and dividends on securities:
Taxable 1,711,158 1,650,905 1,629,643
Tax-exempt 254,988 164,410 153,951
Interest on interest bearing deposits with other banks 125,604 136,696 128,561
Interest on Federal funds sold 48,811 49,297 43,322
---------------- --------------- --------------
Total interest income 9,692,296 8,590,838 7,750,994
---------------- --------------- --------------
Interest expense
Interest on deposits 4,590,018 3,987,850 3,242,307
Interest on short-term borrowings 68,676 55,994 21,772
Interest on long-term borrowings 105,668 5,095 - -
---------------- --------------- --------------
Total interest expense 4,764,362 4,048,939 3,264,079
---------------- --------------- --------------
Net interest income 4,927,934 4,541,899 4,486,915
Provision for loan losses 95,000 55,000 120,000
---------------- --------------- --------------
Net interest income after provision for loan losses 4,832,934 4,486,899 4,366,915
---------------- --------------- --------------
Other income (expense)
Insurance commissions 110,982 110,352 111,140
Trust department income 5,853 5,052 16,218
Service fees 232,845 211,379 208,439
Securities gains (losses) 29,999 (1,546) (1,607)
Gain (loss) on sales of other assets 7,202 -- (21,391)
Other 69,705 53,758 29,114
---------------- -------------- --------------
Total other income 456,586 378,995 341,913
---------------- -------------- --------------
Other expenses
Salaries and employee benefits 1,727,839 1,557,108 1,447,838
Net occupancy expense 189,285 126,315 118,479
Equipment rentals, depreciation and maintenance 181,119 162,277 157,315
Federal deposit insurance premiums 2,000 100,174 204,642
Other 1,056,027 920,188 871,162
---------------- -------------- --------------
Total other expenses 3,156,270 2,866,062 2,799,436
---------------- -------------- --------------
Income before income tax expense 2,133,250 1,999,832 1,909,392
Income tax expense 643,213 679,676 664,802
---------------- -------------- --------------
Net income $ 1,490,037 $ 1,320,156 $ 1,244,590
================ ============== ==============
Earnings per common share $ 3.94 $ 3.49 $ 3.26
================ ============== ==============
Average common shares outstanding 378,510 378,510 381,218
================ ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
19
<PAGE>
41-64
South Branch Valley Bancorp, Inc., and Subsidiary
- -------------------------------------------------
Consolidated Statements of Shareholders' Equity
For The Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Common Capital Retained Treasury Gain (Loss) on
Stock Surplus Earnings Stock Securities
-------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 $ 956,562 $ 685,534 $ 7,437,650 $ - - $ - -
Net income - - - - 1,244,590 - - - -
Cost of 4,115 shares acquired
for the treasury - - - - - - (166,970) - -
Cash dividends declared on
common stock
($.61 per share) - - - - (232,126) - - - -
Net unrealized gain (loss) on
securities upon adoption
of SFAS No. 115 - - - - - - - - 431,220
Change in net unrealized
gain (loss) on securities - - - - - - - - (978,320)
-------------- -------------- --------------- -------------- --------------
Balance, December 31, 1994 956,562 685,534 8,450,114 (166,970) (547,100)
Net income - - - - 1,320,156 - - - -
Cash dividends declared on
common stock
($.68 per share) - - - - (257,386) - - - -
Change in net unrealized gain
(loss) on securities - - - - - - - - 887,750
-------------- -------------- --------------- -------------- --------------
Balance, December 31, 1995 956,562 685,534 9,512,884 (166,970) 340,650
Net income - - - - 1,490,037 - - - -
Cash dividends declared on
common stock
($.77 per share) - - - - (291,453) - - - -
Change in net unrealized gain
(loss) on securities - - - - - - - - (223,451)
-------------- -------------- --------------- --------------- ----------------
Balance, December 31, 1996 $ 956,562 $ 685,534 $ 10,711,468 $ (166,970) $ 117,199
============== ============== =============== =============== ================
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE>
42-64
South Branch Valley Bancorp, Inc., and Subsidiary
- -------------------------------------------------
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------------- -------------- --------------
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net Income $ 1,490,037 $ 1,320,156 $ 1,244,590
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation 212,383 154,338 133,833
Provision for loan losses 95,000 55,000 120,000
Security (gains) losses (29,999) 1,546 1,607
(Gain) loss on sale of other assets (7,202) - - 21,391
(Gain) on disposal of Bank premises and equipment (23,176) - - - -
Deferred income tax expense (benefit) (35,110) 22,802 (8,259)
(Increase) decrease in accrued interest receivable 55,199 (96,329) (61,855)
Amortization of security premiums and (accretion of discounts) net 50,141 88,705 124,215
(Increase) decrease in other assets (455,720) (82,702) 52,515
Increase in other liabilities 167,700 146,024 59,920
---------------- -------------- --------------
Net cash provided by operating activities 1,519,253 1,609,540 1,687,957
---------------- -------------- --------------
Cash Flows from Investing Activities
(Purchase of) proceeds from interest bearing deposits with
other banks, net 581,919 (401,219) 575,800
Proceeds from maturities and calls of securities held to maturity - - 100,000 590,000
Proceeds from maturities and calls of securities available for sale 3,950,000 5,345,000 3,075,000
Proceeds from sales of securities available for sale 6,735,258 2,030,688 3,008,437
Principal payments received on securities held to maturity - - 313,701 1,038,080
Principal payments received on securities available for sale 768,591 170,994 132,666
Purchases of securities held to maturity - - (615,569) (248,703)
Purchases of securities available for sale (9,708,744) (10,917,720) (6,839,992)
(Increase) decrease in Federal funds sold 1,438,011 (2,161,745) 525,000
Loans made to customers, net (11,950,307) (6,147,361) (4,810,871)
Purchases of Bank premises and equipment (223,759) (1,427,803) (616,751)
Net cash acquired in purchase of Petersburg Branch - - 3,400,973 - -
Proceeds from sales of other assets 22,000 - - 139,500
Proceeds from disposal of Bank premises and equipment 93,011 - - - -
---------------- -------------- --------------
Net cash (used in) investing activities (8,294,020) (10,310,061) (3,431,834)
---------------- -------------- --------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and savings accounts (1,437,576) 4,987,833 1,010,167
Proceeds from sales of (payments for matured) time deposits, net 2,332,652 4,958,802 (1,023,399)
Net increase (decrease) in short-term borrowings 4,377,397 (1,700,000) 1,700,000
Proceeds from long-term borrowings 2,840,000 750,000 - -
Repayment of long-term debt (75,348) - - - -
Purchase of treasury stock - - - - (166,970)
Dividends paid (291,453) (257,386) (232,126)
---------------- -------------- --------------
Net cash provided by financing activities 7,745,672 8,739,249 1,287,672
---------------- -------------- --------------
Increase (decrease) in cash and due from banks 970,905 38,728 (456,205)
Cash and due from banks:
Beginning 2,191,647 2,152,919 2,609,124
---------------- -------------- --------------
Ending $ 3,162,552 $ 2,191,647 $ 2,152,919
================ ============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest, net of interest capitalized during construction $ 4,742,367 $ 3,943,067 $ 3,219,912
================ =============== ==============
Income taxes $ 627,563 $ 759,002 $ 605,411
================ =============== ==============
Supplemental Schedule of Noncash Investing and
Financing Activities
Other assets acquired in settlement of loans $ 39,500 $ 17,905 $ 38,800
================ =============== ==============
Acquisition of Petersburg Branch:
Net cash acquired in purchase $ - - $ 3,400,973 $ - -
================ =============== ==============
Fair value of assets acquired, net of cash and
cash equivalents (principally loans) $ - - $ 1,738,987 $ - -
Deposits and other liabilities assumed - - (5,139,960) - -
---------------- --------------- --------------
$ - - $ (3,400,973) $ - -
================ =============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
43-64
South Branch Valley Bancorp, Inc., And Subsidiary
- -------------------------------------------------
Notes to Consolidated Financial Statments
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of South Branch Valley Bancorp, Inc., and
its subsidiary conform to generally accepted accounting principles and to
general practices within the banking industry. The following is a summary of the
Company's more significant accounting policies.
Principles of consolidation:
- ----------------------------
The accompanying consolidated financial statements include the accounts of South
Branch Valley Bancorp, Inc., and its subsidiary, South Branch Valley National
Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of estimates:
- -----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts 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 those estimates.
Presentation of cash flows:
- ----------------------------
For purposes of reporting cash flows, cash and due from banks includes cash on
hand and amounts due from banks (including cash items in process of clearing).
Cash flows from demand deposits, NOW accounts, savings accounts and Federal
funds purchased and sold are reported net since their original maturities are
less than three months. Cash flows from loans and certificates of deposit and
other time deposits are reported net.
Securities:
- -----------
Debt and equity securities are classified as "held to maturity", "available for
sale" or "trading" according to management's intent. The appropriate
classification is determined at the time of purchase of each security and
re-evaluated at each reporting date.
Securities held to maturity--
-----------------------------
There are no securities classified as "held to maturity" in the
accompanying consolidated financial statements.
Securities available for sale--
-------------------------------
Securities not classified as "held to maturity" or as "trading" are
classified as "available for sale." Securities classified as "available for
sale" are those securities the Bank intends to hold for an indefinite
period of time, but not necessarily to maturity. "Available for sale"
securities are reported at estimated fair value net of unrealized gains or
losses, which are adjusted for applicable income taxes, and reported as a
separate component of shareholders' equity.
Trading securities--
--------------------
There are no securities classified as "trading" in the accompanying
financial statements.
Realized gains and losses on sales of securities are recognized on the specific
identification method.Amortization of premiums and accretion of discounts are
computed using the interest method.
Loans and allowance for loan losses:
- ------------------------------------
Loans are stated at the amount of unpaid principal, reduced by unearned discount
and an allowance for loan losses. The allowance for loan losses is maintained at
a level considered adequate to provide for losses that can be reasonably
anticipated. The allowance is increased by provisions charged to operating
expense and reduced by net charge-offs. The subsidiary bank makes continuous
credit reviews of the loan portfolio and considers current economic conditions,
historical loan loss experience, review of specific problem loans and other
factors in determining the adequacy of the allowance for loan losses. Loans are
charged against the allowance for loan losses when management believes that
collectibility is unlikely.
22
<PAGE>
44-64
Unearned interest on discounted loans is amortized to income over the life of
the loans, using methods which approximate the interest method. For all other
loans, interest is accrued daily on the outstanding balances.
A loan is impaired when, based on current information and events, it is probable
that the Company will be unable to collect all amounts due 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 required to be 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. The
method selected to measure impairment is made on a loan-by-loan basis, unless
foreclosure is deemed to be probable, in which case the fair value of the
collateral method is used.
Generally, after management's evaluation, loans are placed on nonaccrual status
when principal or interest is greater than 90 days past due based upon the
loan's contractual terms. Interest is accrued daily on impaired loans unless the
loan is placed on non-accrual status. Impaired loans are placed on non-accrual
status when the payments of principal and interest are in default for a period
of 90 days, unless the loan is both well-secured and in the process of
collection. Interest on non-accrual loans is recognized primarily using the
cost-recovery method.
Certain loan fees and direct loan costs are recognized as income or expense when
incurred, whereas, generally accepted accounting principles require that such
fees and costs be deferred and amortized as adjustments of the related loan's
yield over the contractual life of the loan. The subsidiary bank's method of
recognition of loan fees and direct loan costs produces results which are not
materially different from those that would be recognized had Statement Number 91
of the Financial Accounting Standards Board been adopted.
Bank premises and equipment:
- ----------------------------
Bank premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed primarily by the straight-line method for bank premises
and equipment over the estimated useful lives of the assets. Repairs and
maintenance expenditures are charged to operating expenses as incurred. Major
improvements and additions to premises and equipment, including construction
period interest costs, are capitalized. No interest was capitalized during 1996
and 1994. Interest capitalized during 1995 totaled $26,921.
Other real estate:
- ------------------
Other real estate consists primarily of real estate held for resale which was
acquired through foreclosure on loans secured by such real estate. At the time
of acquisition, these properties are recorded at fair value with any writedown
being charged to the allowance for loan losses. After foreclosure, valuations
are periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value less cost to sell. Expenses incurred in
connection with operating these properties are insignificant and are charged to
operating expenses. Gains and losses on the sales of these properties are
credited or charged to operating income in the year of the transactions.
Other real estate acquired through foreclosure with carrying values of $28,955
and $40,355, at December 31, 1996 and 1995, respectively, is included in other
assets in the accompanying consolidated balance sheets.
Income taxes:
- --------------
The consolidated provision for income taxes includes Federal and state income
taxes and is based on pretax net income reported in the consolidated financial
statements, adjusted for transactions that may never enter into the computation
of income taxes payable. Deferred tax assets and liabilities are determined
based on the differences between the financial statement and tax basis of assets
and liabilities that will result in taxable or deductible amounts in the future
23
<PAGE>
45-64
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. Valuation allowances are established when deemed necessary to
reduce deferred tax assets to the amount expected to be realized.
Earnings per share:
- -------------------
Earnings per common share are computed based upon the weighted average shares
outstanding. The weighted average number of shares outstanding was 378,510,
378,510, and 381,218 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Employee benefits:
- -------------------
The Company has a profit-sharing and thrift plan and an employee stock ownership
plan (ESOP) which cover substantially all employees. The amount of the
contributions to the plans are at the discretion of the Company's Board of
Directors.
Trust department:
- ------------------
Assets held in an agency or fiduciary capacity by the subsidiary bank'sTrust
Department are not assets of the subsidiary bank and are not included in the
accompanying consolidated balance sheets. Trust Department income is recognized
on the cash basis in accordance with customary banking practice. Reporting such
income on a cash basis rather than the accrual basis does not have a material
affect on net income.
Reclassifications:
- ------------------
Certain accounts in the consolidated financial statements for 1995 and 1994, as
previously presented, have been reclassified to conform to current year
classifications.
NOTE 2. ACQUISITION OF PETERSBURG BRANCH
On November 15, 1995, the Bank acquired a branch bank located in Petersburg,
West Virginia from an unaffiliated institution. In connection with this
acquisition, the Bank acquired the branch's assets including its land, banking
facility, equipment and loans and assumed its deposit liabilities. The
acquisition was accounted for as a purchase and the results of operations of the
Petersburg Branch since the date of its acquisition are included in the
accompanying consolidated financial statements. The Branch's purchase price and
the related excess of the purchase price over the fair value of the net assets
acquired was not significant.
NOTE 3. CASH CONCENTRATION
At December 31, 1996 and 1995, the subsidiary bank had a concentration totaling
$2,451,256 and $3,133,942, respectively, with Nationsbank, consisting of a due
from bank account balance and Federal funds sold.
NOTE 4. SECURITIES
During 1995, concurrent with the adoption of the Special Report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities" issued by the Financial Accounting Standards Board, the
subsidiary bank reassessed the classifications of its securities and transferred
securities with amortized cost of $3,358,274 and estimated fair value of
$3,410,711 from the held to maturity category to the available for sale
category. Accordingly, shareholders' equity was increased $32,410, net of
deferred income taxes of $20,027, to reflect the net unrealized holding gain on
such securities. This reclassification did not have an impact on the
accompanying statements of income.
The amortized cost, unrealized gains and losses, and estimated fair values of
securities at December 31, 1996 and 1995, are summarized as follows:
24
<PAGE>
46-64
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------
Carrying
Value
Amortized Unrealized (Estimated
Cost Gains Losses Fair Value)
--------------- --------------- --------------- ---------------
Available for sale:
Taxable:
<S> <C> <C> <C> <C>
U.S. Treasury Securities $ 4,246,582 $ 46,198 $ 12,270 $ 4,280,510
U.S. Government agencies and
corporations 12,013,602 75,012 46,518 12,042,096
Small Business Administration guaranteed
loan participation certificates 1,646,390 36,719 - - 1,683,109
Mortgage-backed securities -
U.S. Government agencies and
corporations 4,642,785 22,891 49,602 4,616,074
Corporate debt securities 498,476 3,688 672 501,492
Federal Reserve Bank stock 44,300 - - - - 44,300
Federal Home Loan Bank stock 339,400 - - - - 339,400
Other equity securities 6,625 - - - - 6,625
--------------- --------------- --------------- ---------------
Total taxable 23,438,160 184,508 109,062 23,513,606
--------------- --------------- --------------- ---------------
Tax-Exempt:
State and political subdivisions 5,719,170 129,004 13,882 5,834,292
Federal Reserve Bank stock 4,100 - - - - 4,100
--------------- --------------- --------------- ---------------
Total tax-exempt 5,723,270 129,004 13,882 5,838,392
--------------- --------------- --------------- ---------------
Total $ 29,161,430 $ 313,512 $ 122,944 $ 29,351,998
=============== =============== =============== ===============
1995
------------------------------------------------------------------------
Carrying
Value
Amortized Unrealized (Estimated
Cost Gains Losses Fair Value)
--------------- --------------- --------------- ---------------
Available for sale:
Taxable:
U.S. Treasury Securities $ 7,830,447 $ 115,362 $ 11,594 $ 7,934,215
U.S. Government agencies and
corporations 14,866,575 296,026 19,554 15,143,047
Small Business Administration guaranteed
loan participation certificates 1,680,257 33,838 - - 1,714,095
Mortgage-backed securities -
U.S. Government agencies and
corporations 2,381,926 24,146 5,637 2,400,435
Corporate debt securities 497,930 9,951 227 507,654
Federal Reserve Bank stock 44,300 - - - - 44,300
Federal Home Loan Bank stock 289,900 - - - - 289,900
Other equity securities 6,625 - - - - 6,625
--------------- --------------- --------------- ---------------
Total taxable 27,597,960 479,323 37,012 28,040,271
--------------- --------------- --------------- ---------------
Tax-Exempt:
State and political subdivisions 3,324,621 116,183 4,595 3,436,209
Federal Reserve Bank stock 4,100 - - - - 4,100
--------------- --------------- --------------- ---------------
Total tax-exempt 3,328,721 116,183 4,595 3,440,309
--------------- --------------- --------------- ---------------
Total $ 30,926,681 $ 595,506 $ 41,607 $ 31,480,580
=============== =============== =============== ===============
</TABLE>
25
<PAGE>
47-64
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities which are included in securities available for sale in the
accompanying consolidated financial statements. Such securities are carried at
cost, since they may only be sold back to the respective Federal Reserve Bank or
Federal Home Loan Bank or another member at par value.
Mortgage-backed obligations of U.S. Government agencies and corporations and
Small Business Administration guaranteed loan participation certificates are
included in securities at December 31, 1996 and 1995. These obligations, having
contractual maturities ranging from 1 to 22 years, are reflected in the
following maturity distribution schedules based on their anticipated average
life to maturity, which ranges from 1 to 7 years. Accordingly, discounts are
accreted and premiums are amortized over the anticipated average life to
maturity of the specific obligation.
The maturities, amortized cost and estimated fair values of securities at
December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
Available for Sale
----------------------------------
Carrying
Value
Amortized (Estimated
Cost Fair Value)
--------------- ---------------
<S> <C> <C>
Due in one year or less $ 4,245,875 $ 4,244,351
Due from one to five years 16,188,141 16,303,589
Due from five to ten years 6,263,038 6,311,374
Due after ten years 2,069,951 2,098,259
Equity securities 394,425 394,425
--------------- ---------------
Total $ 29,161,430 $ 29,351,998
=============== ===============
</TABLE>
The proceeds from sales, calls, maturities of securities, including principal
payments received on mortgage-backed obligations and the related gross gains and
losses realized are as follows:
<TABLE>
<CAPTION>
Proceeds From Gross Realized
--------------------------------------------- ------------------------------
Years Ended Calls and Principal
December 31, Sales Maturities Payments Gains Losses
- ------------------------- ------------- ------------- ------------- -------------- -------------
1996
<S> <C> <C> <C> <C> <C>
Securities available for sale $ 6,735,258 $ 3,950,000 $ 768,591 $ 45,824 $ 15,825
============= ============= ============= ============== =============
1995
Securities held to maturity $ - - $ 100,000 $ 313,701 $ - - $ - -
Securities available for sale 2,030,688 5,345,000 170,994 19,618 21,164
------------- ------------- ------------- -------------- -------------
$ 2,030,688 $ 5,445,000 $ 484,695 $ 19,618 $ 21,164
============= ============= ============= ============== =============
1994
Securities held to maturity $ - - $ 590,000 $ 1,038,080 $ - - $ - -
Securities available for sale 3,008,437 3,075,000 132,666 7,172 8,779
------------- ------------- ------------- -------------- -------------
$ 3,008,437 $ 3,665,000 $ 1,170,746 $ 7,172 $ 8,779
============= ============= ============= ============== =============
</TABLE>
At December 31, 1996 and 1995, securities carried at $16,120,939 and
$11,329,098, respectively, with estimated fair values of $16,240,924 and
$11,578,096, respectively, were pledged to secure public deposits, and for other
purposes required or permitted by law.
26
<PAGE>
48-64
NOTE 5. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
<S> <C> <C>
Commercial, financial and agricultural $ 20,450,598 $ 18,875,277
Real estate - construction 154,388 102,690
Real estate - mortgage 43,468,235 36,980,052
Installment 19,486,254 15,981,416
Other 614,818 542,519
---------------- ---------------
Total loans 84,174,293 72,481,954
Less unearned discount 901,665 1,023,875
---------------- ---------------
Total loans net of unearned income 83,272,628 71,458,079
Less allowance for loan losses 858,423 859,681
---------------- ---------------
Loans, net $ 82,414,205 $ 70,598,398
================ ===============
</TABLE>
Included in the net balance of loans are non-accrual loans amounting to $342,842
and $538,239 at December 31, 1996 and 1995, respectively. If interest on
non-accrual loans had been accrued, such income would have approximated $30,978,
$36,708 and $5,500 for the years ended December 31, 1996, 1995 and 1994,
respectively.
The following presents loan maturities at December 31, 1996:
<TABLE>
<CAPTION>
Within After 1 But After
1 Year Within 5 Years 5 Years
--------------- --------------- ---------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 6,828,525 $ 4,679,935 $ 8,942,138
Real estate - construction 154,388 - - - -
Real estate - mortgage 1,566,343 4,062,245 37,839,647
Installment loans 2,388,304 13,110,306 3,987,644
Other 357,875 - - 256,943
--------------- --------------- ---------------
Total $ 11,295,435 $ 21,852,486 $ 51,026,372
=============== =============== ===============
Loans due after one year with:
Variable rates $ 31,818,449
Fixed rates 41,060,409
---------------
$ 72,878,858
===============
</TABLE>
The Bank has made, and may be expected to make in the future, commercial and
mortgage loans that have adjustable rates. Such loan rates are generally indexed
to the Wall Street prime interest rate or to other common indices. At December
31, 1996, the Bank's commercial loan portfolio contained adjustable rate loans
of approximately $9,996,983. The interest rates on such loans ranged from 7.34%
to 12.00%, and provided for future interest rate changes at set intervals,
ranging from one to sixty months.
Likewise, the Bank's mortgage portfolio contained adjustable rate loans of
approximately $24,338,213 at December 31, 1996. The interest rates on such loans
ranged from 6.75% to 13.56%, and provided for future interest rate changes at
set intervals, ranging from monthly to fifteen years.
27
<PAGE>
49-64
Concentration of credit risk:
- -----------------------------
The subsidiary bank grants commercial, residential and consumer loans to
customers primarily located in Hardy, Grant, Hampshire and Pendleton Counties of
West Virginia. Although the Bank strives to maintain a diverse loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
indirectly dependent upon the poultry industry.
As of December 31, 1996 and 1995, the Bank had direct extensions of credit used
to build and operate poultry houses totaling approximately $4,563,919 and
$5,872,805, respectively. These loans are generally structured to be repaid over
periods ranging from 15 to 20 years, however, most also contain balloon
provisions which serve to require each loan's renewal every 1 to 5 years or are
written with an adjustable interest rate feature. The security for these loans
generally consists of liens on the land, buildings and equipment associated with
each poultry house.
The Bank evaluates the credit worthiness of each of its customers on a
case-by-case basis and the amount of collateral it obtains is based upon
management's credit evaluation.
The subsidiary bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to any one related party (other changes represent
additions to and changes in director and executive officer status):
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
<S> <C> <C>
Balance, beginning $ 5,176,398 $ 3,679,777
Additions 1,574,443 3,998,154
Amounts collected (1,658,303) (2,450,899)
Other changes, net (774,441) (50,634)
---------------- ---------------
Balance, ending $ 4,318,097 $ 5,176,398
================ ===============
</TABLE>
NOTE 6: ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, beginning of year $ 859,681 $ 993,023 $ 905,448
Losses:
Commercial, financial and agricultural 10,194 46,373 10,589
Real estate - mortgage 12,778 137,334 14,779
Installment loans 93,826 39,004 45,380
Other 9,951 10,909 11,609
--------------- --------------- ---------------
Total 126,749 233,620 82,357
--------------- --------------- ---------------
Recoveries:
Commercial, financial and agricultural 5,658 7,864 24,627
Real estate - mortgage 1,885 3,135 1,107
Installment loans 20,525 28,862 23,422
Other 2,423 5,417 776
--------------- --------------- ---------------
Total 30,491 45,278 49,932
--------------- --------------- ---------------
Net losses 96,258 188,342 32,425
Provision for loan losses 95,000 55,000 120,000
--------------- --------------- ---------------
Balance, end of year $ 858,423 $ 859,681 $ 993,023
=============== =============== ===============
</TABLE>
28
<PAGE>
50-64
The Bank's total recorded investment in impaired loans at December 31, 1996 and
1995, approximated $383,615 and $747,950, respectively, for which the related
allowance for loan losses determined in accordance with generally accepted
accounting principles approximated $91,518 and $153,560, respectively. The
Bank's average investment in such loans approximated $381,938 and $696,425 for
the years ended December 31, 1996 and 1995, respectively. All impaired loans at
December 31, 1996 and 1995, were collateral dependent, and accordingly, the fair
value of the loan's collateral was used to measure the impairment of each loan.
For purposes of evaluating impairment, the Bank considers groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed the Bank's
typical residential mortgage loan amount (currently those in excess of
$100,000): small balance commercial loans (currently those less than $50,000);
and installment loans to individuals, exclusive of those loans in excess of
$50,000.
For the years ended December 31, 1996 and 1995, the Bank recognized
approximately $46,779 and $85,398, respectively, in interest income on impaired
loans. Using a cash-basis method of accounting, the Bank would have recognized
approximately the same amount of interest income on such loans.
NOTE 7. BANK PREMISES AND EQUIPMENT
The major categories of Bank premises and equipment and accumulated depreciation
at December 31, 1996 and 1995, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
<S> <C> <C>
Land $ 435,473 $ 443,566
Building and improvements 2,805,616 2,793,282
Furniture and equipment 1,674,269 1,940,716
---------------- ---------------
4,915,358 5,177,564
Less accumulated depreciation 1,793,466 1,997,213
---------------- ---------------
Bank, premises and equipment, net $ 3,121,892 $ 3,180,351
================ ===============
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
totaled $212,383, $154,338 and $133,833, respectively.
NOTE 8. DEPOSITS
The following is a summary of interest bearing deposits by type as of December
31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
<S> <C> <C>
Demand deposits, interest bearing $ 20,139,983 $ 20,027,502
Savings deposits 12,938,812 15,731,154
Certificates of deposit 50,997,400 48,947,117
Individual Retirement Accounts 7,790,158 7,507,789
---------------- ---------------
Total $ 91,866,353 $ 92,213,562
================ ===============
</TABLE>
29
<PAGE>
51-64
Time certificates of deposit and IRA's in denominations of $100,000 or more
totaled $9,260,399 and $7,758,560 at December 31, 1996 and 1995, respectively.
Interest paid on time certificates of deposit and Individual Retirement Accounts
in denominations of $100,000 or more was $501,754, $392,641 and $290,030 for the
years ended December 31, 1996, 1995 and 1994, respectively.
The following is a summary of the maturity distribution of certificates of
deposit and IRA's in denominations of $100,000 or more as of December 31, 1996:
<TABLE>
<CAPTION>
Amount Percent
---------------- ---------------
<S> <C> <C>
Three months or less $ 844,555 9.12%
Three through six months 3,117,854 33.67%
Six through twelve months 2,908,004 31.40%
Over twelve months 2,389,986 25.81%
---------------- ---------
Total $ 9,260,399 100.00%
================ =========
</TABLE>
A summary of the scheduled maturities for all time deposits as of December 31,
1996, follows:
<TABLE>
<C> <C>
1997 $ 36,483,558
1998 12,327,751
1999 5,055,730
2000 1,193,387
2001 2,974,651
Thereafter 752,481
----------------
$ 58,787,558
================
</TABLE>
NOTE 9. OTHER BORROWINGS
Short-term borrowings:
- -----------------------
Federal funds purchased and securities sold under agreements to repurchase
mature the next business day. The securities underlying the repurchase
agreements are under the subsidiary bank's control and secure the total
outstanding daily balances. Other borrowings consist of lines of credit from the
Federal Home Loan Bank (FHLB) under its Flexline and RepoPlus Programs. The
Flexline is limited to 10% of the Bank's calculated maximum borrowing capacity
of approximately $2,900,000 at December 31, 1996, and is subject to annual
renewal. Borrowings under this arrangement bear interest at the rate posted by
the FHLB on the day of the borrowing and is subject to change daily. The
RepoPlus is limited to the Bank's outstanding maximum borrowing capacity of
approximately $35,000,000 at December 31, 1996, less the current outstanding
Flexline balance, and is subject to annual renewal. Borrowings under this
arrangement will be granted for terms of 1 to 120 days and will bear interest at
a fixed rate set at the time of the funding request. The lines of credit are
secured by a blanket lien on all unpledged and unencumbered assets of the Bank.
Additional details regarding short-term borrowings during the years ended
December 31, 1996 and 1995, are presented below:
<TABLE>
<CAPTION>
1996
-----------------------------------------------------
Federal
Funds Repurchase Other
Purchased Agreements Borrowings
--------------- --------------- ---------------
<S> <C> <C> <C>
Outstanding at year end $ - - $ 4,377,397 $ - -
Average amount outstanding 86,175 1,335,635 156,733
Maximum amount outstanding at
any month end 1,050,000 4,377,397 2,916,000
Weighted average interest rate 5.76% 4.13% 5.49%
30
</TABLE>
<PAGE>
52-64
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
Federal
Funds Repurchase Other
Purchased Agreements Borrowings
--------------- --------------- ---------------
<S> <C> <C> <C>
Outstanding at year end $ - - $ - - $ - -
Average amount outstanding 53,671 - - 1,075,000
Maximum amount outstanding at
any month end 750,000 - - 3,000,000
Weighted average interest rate 6.34% - - 6.06%
</TABLE>
Long-term borrowings:
- ----------------------
The subsidiary bank's long term borrowings of $3,514,652 and $750,000 at
December 31, 1996 and 1995, respectively, consisted of advances from the FHLB
under its Community Investment Program and other fixed rate loans. These
borrowings bear an average fixed interest rate of 5.81% and mature in varying
amounts through the year 2006. A summary of the maturities of these borrowings
for the next five years is as follows:
<TABLE>
<CAPTION>
<C> <C>
1997 $ - -
1998 - -
1999 340,000
2000 - -
2001 500,000
Thereafter 2,674,652
----------------
$ 3,514,652
================
</TABLE>
NOTE 10: INCOME TAXES
The components of applicable income tax expense(benefit) for the years ended
December 31, 1996, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ---------------
Current:
<S> <C> <C> <C>
Federal $ 602,391 $ 587,472 $ 611,581
State 75,932 69,402 61,480
--------------- --------------- ---------------
678,323 656,874 673,061
--------------- --------------- ---------------
Deferred:
Federal (31,208) 20,268 (7,342)
State (3,902) 2,534 (917)
--------------- --------------- ---------------
(35,110) 22,802 (8,259)
--------------- --------------- ---------------
Total $ 643,213 $ 679,676 $ 664,802
=============== =============== ===============
</TABLE>
A reconciliation between the amount of reported income tax expense and the
amount computed by multiplying the statutory income tax rates by book pretax
income for the years ended December 31, 1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- -------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
------------ ------------- ------------- ------------ ------------ -------------
Computed tax at applicable
<S> <C> <C> <C> <C> <C> <C>
statutory rate $ 725,305 34 $ 679,943 34 $ 649,193 34
Increase (decrease) in taxes resulting from:
Tax-exempt interest, net (80,961) (4) (55,982) (3) (51,525) (3)
State income taxes, net of
Federal tax benefit 47,540 2 45,802 2 40,577 2
Noncash charitable
contribution (59,704) (3) - - - - - - - -
Other, net 11,033 1 9,913 1 26,557 1
------------ ------------- ------------- ------------ ------------ -------------
Applicable income taxes $ 643,213 30 $ 679,676 34 $ 664,802 34
============ ============= ============= ============ ============ =============
</TABLE>
31
<PAGE>
53-64
Deferred income taxes reflect the impact of "temporary differences" between
amounts of assets and liabilities for financial reporting purposes and such
amounts as measured for tax purposes. Deferred tax assets and liabilities
represent the future tax return consequences of temporary differences, which
will either be taxable or deductible when the related assets and liabilities are
recovered or settled. Valuation allowances are established when deemed necessary
to reduce deferred tax assets to the amount expected to be realized. The tax
effects of temporary differences which give rise to the Company's deferred tax
assets and liabilities as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 217,199 $ 216,678
Deferred compensation 43,280 24,930
Charitable contribution carryover 44,327 - -
Goodwill 9,482 790
---------------- ---------------
314,288 242,398
Less valuation allowance (194,010) (188,773)
---------------- ---------------
120,278 53,625
---------------- ---------------
Deferred tax liabilities:
Depreciation 33,104 20,959
Net unrealized gain on securities 73,369 213,253
Accretion on tax-exempt securities 480 - -
Bank premises and equipment disposal 18,919 - -
---------------- ---------------
125,872 234,212
---------------- ---------------
Net deferred tax assets (liabilities) $ (5,594) $ (180,587)
================ ===============
</TABLE>
The income tax expense (benefit) on realized securities gains (losses) was
$11,550, $(595) and $(619), for the years ended December 31, 1996, 1995 and
1994, respectively.
NOTE 11. EMPLOYEE BENEFITS
Profit-Sharing and Thrift Plan:
- -------------------------------
The Company has a defined contribution profit-sharing and thrift plan with
401(k) provisions covering substantially all employees. Contributions to the
Plan are at the discretion of the Board of Directors. Contributions made to the
plan and charged to expense were $54,240, $50,475 and $45,106 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Employee Stock Ownership Plan:
- ------------------------------
The Company has an Employee Stock Ownership Plan (ESOP) which enables eligible
employees to acquire shares of the Company's common stock. The cost of the ESOP
is borne by the Company through annual contributions to an Employee Stock
Ownership Trust in amounts determined by the Board of Directors.
The expense recognized by the Company is based on cash contributed or committed
to be contributed by the Company to the ESOP during the year. Contributions to
the ESOP for the years ended December 31, 1996, 1995 and 1994 were $48,250,
$45,582 and $40,166, respectively. Dividends made by the Company to the ESOP are
reported as a reduction to retained earnings. The ESOP owns 9,065 shares of the
Company's common stock, all of which, are considered outstanding for earnings
per share computations.
The trustees of both the Profit-Sharing and Thrift Plan and ESOP are also
members of the Company's and subsidiary bank's Board of Directors.
32
<PAGE>
54-64
Incentive Compensation Program:
- -------------------------------
The subsidiary bank has an incentive compensation program for its key employees.
Bonuses are awarded to key employees based on a prescribed formula using the
Bank's return on assets as a base. Under the terms of the incentive compensation
program, bonuses charged to operations were $137,000, $120,000 and $112,000 for
1996, 1995 and 1994, respectively.
Directors Deferred Compensation Plan:
- -------------------------------------
The Bank has established a non-qualified deferred compensation plan for
directors who voluntarily elect to participate. Under that plan, a director, on
or before December 31, of any year, may elect to defer payment of all retainer,
meeting and committee fees earned during the calendar year following such
election and, unless such election is subsequently terminated, all succeeding
calendar years. Amounts deferred are periodically converted to units
representing shares of the Company's stock which are to be periodically
purchased by the plan at current market values when available on the open
market. The liability for deferred directors compensation at December 31, 1996
and 1995, was $113,150 and $66,850, respectively, which is included in other
liabilities in the accompanying consolidated balance sheets.
NOTE 12. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance sheet risk:
- ------------------------------------------------------
The subsidiary bank is a party of certain financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. Such financial instruments consist solely of commitments
to extend credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
statement of financial position. The contract amounts of these instruments
reflect the extent of involvement the Bank has in this class of financial
instruments. The Bank's total contract amount of commitments to extend credit at
December 31, 1996 and 1995, approximated $5,639,457 and $4,462,545,
respectively.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, equipment or real estate.
Litigation:
- -----------
The Bank is involved in various legal actions arising in the ordinary course of
business. In the opinion of counsel, the outcome of these matters will not have
a significant adverse effect on the consolidated financial statements.
Employment Agreement:
- ---------------------
The Company has an employment agreement with its chief executive officer. This
agreement contains change in control provisions that would entitle the officer
to receive compensation in the event there is a change in control in the Company
(as defined) and a termination of his employment without cause (as defined).
NOTE 13. RESTRICTIONS ON CAPITAL AND DIVIDENDS
The primary source of funds for the dividends paid by South Branch Valley
Bancorp, Inc. is divi-
33
<PAGE>
55-64
dends received from its subsidiary bank. Dividends paid by the subsidiary bank
are subject to restrictions by banking regulations. The most restrictive
provision requires approval by the regulatory agency if dividends declared in
any year exceed the year's net income, as defined, plus the net retained profits
of the two preceding years. During 1997, the net retained profits available for
distribution to South Branch Valley Bancorp, Inc. as dividends without
regulatory approval are approximately $1,970,000 plus net retained income of the
subsidiary bank for the interim periods through the date of declaration.
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
The most recent notification from the Office of the Comptroller of the Currency
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------- -------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------- ------------- ------------ ------------ -------------
As of December 31, 1996:
<S> <C> <C> <C> <C> <C> <C>
Total Capital $ 12,522 15.86% $ 6,315 8.0% $ 7,893 10.0%
(to Risk Weighted Assets)
Tier I Capital 11,664 14.78% 3,157 4.0% 4,736 6.0%
(to Risk Weighted Assets)
Tier I Capital 11,664 9.88% 3,540 3.0% 7,081 6.0%
(to Average Assets)
</TABLE>
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summarizes the methods and significant assumptions used by the
Company in estimating its fair value disclosures for financial instruments.
CASH AND DUE FROM BANKS: The carrying values of cash and due from banks
approximate their estimated fair value.
INTEREST BEARING DEPOSITS WITH OTHER BANKS: The fair values of interest bearing
deposits with other banks are estimated by discounting scheduled future receipts
of principal and interest at the current rates offered on similar instruments
with similar remaining maturities.
FEDERAL FUNDS SOLD: The carrying values of Federal funds sold approximate their
estimated fair values.
SECURITIES: Estimated fair values of securities are based on quoted market
prices, where available. If quoted market prices are not available, estimated
fair values are based on quoted market prices of comparable securities.
34
<PAGE>
56-64
LOANS: The estimated fair values for loans are computed based on scheduled
future cash flows of principal and interest, discounted at interest rates
currently offered for loans with similar terms to borrowers of similar credit
quality. No prepayments of principal are assumed.
ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying values of accrued interest
receivable and payable approximate their estimated fair values.
DEPOSITS: The estimated fair values of demand deposits (i.e. noninterest bearing
checking, NOW, Super NOW, money market and savings accounts) and other variable
rate deposits approximate their carrying values. Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities. Any intangible
value of long-term relationships with depositors is not considered in estimating
the fair values disclosed.
SHORT-TERM BORROWINGS: The carrying values of short-term borrowings approximate
their estimated fair values.
LONG-TERM BORROWINGS: The fair values of long-term borrowings are estimated by
discounting scheduled future payments of principal and interest at current rates
available on borrowings with similar terms.
OFF-BALANCE SHEET INSTRUMENTS: The fair values of commitments to extend credit
and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit standing of the counterparties. The amounts of
fees currently charged on commitments and standby letters of credit are deemed
insignificant, and therefore, the estimated fair values and carrying values are
not shown below.
The carrying values and estimated fair values of the Company's financial
instruments are summarized below:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------------------- --------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------------- --------------- -------------- ---------------
Financial assets:
<S> <C> <C> <C> <C>
Cash and due from banks $ 3,162,552 $ 3,162,552 $ 2,191,647 $ 2,191,647
Interest bearing deposits, other banks 1,553,000 1,596,273 2,134,919 2,199,418
Federal funds sold 723,734 723,734 2,161,745 2,161,745
Securities available for sale 29,351,998 29,351,998 31,480,580 31,480,580
Loans 82,414,205 82,296,508 70,598,398 70,757,154
Accrued interest receivable 928,642 928,642 983,841 983,841
-------------- --------------- -------------- ---------------
$ 118,134,131 $ 118,059,707 $ 109,551,130 $ 109,774,385
============== =============== ============== ===============
Financial liabilities:
Deposits $ 100,941,412 $ 101,317,554 $ 100,046,336 $ 100,603,254
Short-term borrowings 4,377,397 4,377,397 - - - -
Long-term borrowings 3,514,652 3,514,652 750,000 750,000
Accrued interest payable 428,334 428,334 406,339 406,339
-------------- --------------- -------------- ---------------
$ 109,261,795 $ 109,637,937 $ 101,202,675 $ 101,759,593
============== =============== ============== ===============
</TABLE>
NOTE 15. SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Corporation executed a binding Letter of
Intent to purchase 275,000 shares, or approximately 23%, of a state bank from an
individual for a purchase price of $11.00 per share. The Letter of Intent is
contingent on the happening of various events
35
<PAGE>
57-64
including the Corporation's purchase of an additional 149,680 shares of the same
state bank at a purchase price of $11.00 per share from six individuals who are
related to the aforementioned shareholder of the state bank and obtaining all
regulatory approvals.
NOTE 16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The investment of the Corporation in its wholly-owned subsidiary is presented on
the equity method of accounting. Information relative to the Corporation's
balance sheets at December 31, 1996 and 1995, and the related statements of
income and cash flows for the years ended December 31, 1996, 1995 and 1994 are
presented as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---------------- --------------
Assets
<S> <C> <C>
Cash $ 157,133 $ 68,466
Investment in bank subsidiary, eliminated in consolidation 11,926,831 11,246,742
Securities available for sale 206,625 6,625
Other assets 13,204 6,827
---------------- ---------------
Total assets $ 12,303,793 $ 11,328,660
================ ===============
Liabilities and shareholders' equity
Common stock, $2.50 par value, authorized 600,000
shares, issued 382,625 $ 956,562 $ 956,562
Capital surplus 685,534 685,534
Retained earnings (consisting of undivided profits of
bank subsidiary not yet distributed) 10,711,468 9,512,884
Less cost of shares acquired for the treasury 1996 and
1995, 4,115 shares (166,970) (166,970)
Net unrealized gain (loss) on securities 117,199 340,650
---------------- ---------------
Total shareholders' equity 12,303,793 11,328,660
---------------- ---------------
Total liabilities and shareholders' equity $ 12,303,793 $ 11,328,660
================ ===============
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ---------------- ---------------
Statements of Income
<S> <C> <C> <C>
Income - dividends from bank subsidiary $ 600,000 $ 264,000 $ 460,000
Other dividends 197 191 186
Tax-exempt interest 2,600 - - - -
Expenses--operating (26,504) (17,727) (17,729)
-------------- ---------------- ---------------
Income before income taxes and
undistributed income 576,293 246,464 442,457
Applicable income tax expense (benefit) (10,204) (6,826) (6,826)
-------------- ---------------- ---------------
Income before undistributed income 586,497 253,290 449,283
Equity in undistributed income of
bank subsidiary 903,540 1,066,866 795,307
-------------- ---------------- ---------------
Net income $ 1,490,037 $ 1,320,156 $ 1,244,590
============== ================ ===============
</TABLE>
36
<PAGE>
58-64
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ---------------- ---------------
Statements of Cash Flows
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,490,037 $ 1,320,156 $ 1,244,590
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income
of subsidiary (903,540) (1,066,866) (795,307)
(Increase) decrease in other assets (6,377) - - (1,247)
-------------- ---------------- ---------------
Net cash provided by operating activities 580,120 253,290 448,036
-------------- ---------------- ---------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of securities available for sale (200,000) - - (6,625)
-------------- ---------------- ---------------
Net cash (used in) investing
activities (200,000) - - (6,625)
-------------- ---------------- ---------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Purchase of treasury stock - - - - (166,970)
Dividends paid to shareholders (291,453) (257,386) (232,126)
-------------- ---------------- ---------------
Net cash (used in) financing
activities (291,453) (257,386) (399,096)
Increase (decrease) in cash 88,667 (4,096) 42,315
Cash:
Beginning 68,466 72,562 30,247
-------------- ---------------- ---------------
Ending $ 157,133 $ 68,466 $ 72,562
-------------- ---------------- ---------------
</TABLE>
South Branch Valley Bancorp, Inc., accounts for its investment in its bank
subsidiary by the equity method. During the years ended December 31, 1996, 1995
and 1994, changes were as follows:
Number of shares owned at December 31, 1996 - 60,000
Percent to total shares at December 31, 1996 - 100%
<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1993 $ 9,043,919
Add (deduct):
Equity in net income 1,255,307
Dividends declared (460,000)
Net unrealized gain (loss) on securities (547,100)
---------------
Balance at December 31, 1994 $ 9,292,126
Add (deduct):
Equity in net income 1,330,866
Dividends declared (264,000)
Change in net unrealized gain (loss) on securities 887,750
---------------
Balance at December 31, 1995 $ 11,246,742
Add (deduct):
Equity in net income 1,503,540
Dividends declared (600,000)
Change in net unrealized gain (loss) on securities (223,451)
---------------
Balance at December 31, 1996 $ 11,926,831
</TABLE>
37
<PAGE>
59-64
SHAREHOLDERS' INFORMATION
South Branch Valley Bancorp, Inc. files an annual report to the Securities and
Exchange Commission on Form 10-KSB. Copies of this report may be obtained
without charge upon written request to:
Carol A. Riggleman
South Branch Valley Bancorp, Inc.
Post Office Box 680
Moorefield, West Virginia 26836
COMMON STOCK DIVIDEND
Dividends on South Branch Valley Bancorp, Inc. stock are normally paid on the
15th day of June and December. The record date is normally the 1st day of the
same months.
The Company acts as its own registrar and transfer agent. Its shares are not
publicly traded on any exchange or over the counter market. Shares of the
Company's common stock are occasionally bought and sold by private individuals,
firms or corporations. In many instances, the Company does not have knowledge of
the purchase price or the terms of the purchase. No definitive records of bids
and ask or sale prices are available.
OFFICES OF SOUTH BRANCH VALLEY NATIONAL BANK
Main Bank Petersburg Branch
310 North Main Street 102 Virginia Avenue
Moorefield, WV 26836 Petersburg, WV 26847
(304) 538-2353 (304) 257-2122
Mathias Branch Franklin Branch
P.O. Box 40 P.O. Box 863
Mathias, WV 26812 Franklin, WV 26807
(304) 897-5997 (304) 358-2388
OFFICERS OF THE HOLDING COMPANY
SOUTH BRANCH VALLEY BANCORP, INC.
OSCAR M. BEAN H. CHARLES MADDY, III
Chairman of the Board President
DONALD W. BILLER PHOEBE F. HEISHMAN
Vice Chairman Secretary
RUSSELL F. RATLIFF, JR. CAROL A. RIGGLEMAN
Treasurer Assistant Secretary
38
<PAGE>
60-64
DIRECTORS
SOUTH BRANCH VALLEY BANCORP, INC.
AND
SOUTH BRANCH VALLEY NATIONAL BANK
OSCAR M. BEAN
Chairman of the Board
Managing Partner -- Bean & Bean Attorneys
H. CHARLES MADDY, III
President and Chief Executive Officer,
South Branch Valley National Bank
DONALD W. BILLER
Vice-Chairman
President -- D. W. Biller, Inc.
Director -- WV Farm Credit ACA
PHOEBE F. HEISHMAN
Secretary
Editor and Publisher -- Moorefield Examiner
President -- R.E. Fisher Co., Inc.
<TABLE>
<S> <C>
JAMES M. COOKMAN HAROLD K. MICHAEL
President -- Cookman Insurance Group Owner/Agent -- Nationwide Insurance
President -- Cookman Realty Group, Inc. Member -- WV House of Delegates
President -- Transcover, Inc.
MARY ANN OURS
President -- Ours Valley View Poultry Farms, Inc.
JOHN W. CRITES
President -- Allegheny Wood Products, Inc.
Partner -- JPC, Limited Liability Co. RUSSELL F. RATLIFF, JR.
Partner -- Allegheny Dimension, Limited Liability Co. Vice President & Cashier
Principal Stockholder - KJV Aviation, Inc. South Branch Valley National Bank
THOMAS J. HAWSE, III HARRY C. WELTON, JR.
President -- Hawse Food Market, Inc. Retired Farmer
RENICK C. WILLIAMS
GARY L. HINKLE President -- South Branch Inn, Inc.
President -- Hinkle Trucking, Inc. President -- Fort Pleasant Farms, Inc.
President -- Dettinburn Transport, Inc. President -- Hampshire S & J Co., Inc.
President -- Mt. Storm Fuel Corp.
JEFFREY E. HOTT J. ALECK WELTON
Vice-President -- Hott's Ag Services, Inc. Director Emeritus
Vice-President -- Franklin Oil Co.
Vice-President -- E. E. Hott, Inc.
</TABLE>
39
<PAGE>
61-64
OPERATING OFFICERS OF THE BANK
South Branch Valley National Bank
H. CHARLES MADDY, III
President and Chief Executive Officer
<TABLE>
<S> <C>
RUSSELL F. RATLIFF, JR. JEFFERY L. PAVAN
Vice President Operations, Cashier & Trust Officer Vice President Loan Administration
SCOTT C. JENNINGS CAROL A. RIGGLEMAN
Vice President, Loan Review & Compliance Community Reinvestment Officer
JULIE R. COOK DANYL FREEMAN
Assistant Controller & IRA Officer Assistant Vice President Operations
BARBARA GORENFLO KATHLEEN SIMERLY
Assistant Vice President Teller Operations Accounting Officer
DEBRA S. DAVIS MARK H. WRIGHT
Asst. VP Loan Administration & Senior Loan Officer Commercial Loan Officer
KENT SHIPE THOMAS G. KIMBLE
Mathias Branch Manager Franklin Branch Manager
MARLIN C. CASTO LARRY G. SMITH
Petersburg Branch Manager Assistant Branch Manager, Franklin
BELINDA L. TURNER DEBORAH HAMILTON
Assistant Branch Manager, Petersburg Assistant Branch Manager, Mathias
J. VANCE WILSON WILLIAM F. COOK
Loan Officer Loan Officer
</TABLE>
EMPLOYEES OF THE BANK
SOUTH BRANCH VALLEY NATIONAL BANK
STAFF
Main Bank
<TABLE>
<S> <C> <C> <C>
Teresa Barr Rebecca Bishoff Jonathan Bland Curt Boswell
Stacey Bowman Shirley Corsetti Gloria George Tracey Gochenour
Jean Griffith Jolene Johnson Amy Ketterman Fern Ludwick
Gail Malcolm Tina Martin Lindsay Metheny Tabitha Mongold
Bernadette Nesslerodt Sandra Ours Shelly Reel Angie Smith
Elizabeth Snyder Elaine Stickley Ramona Thorne Pamela Wilson
Mathias
Christine Delawder Teresa Halterman
Connie Landacre Helen May
Donna Shipe
Franklin
Tammy Clutter Amber-Jon Hanna
Kathy Hartman Lisa Roberson Renee Hedrick
Petersburg
Regina Burton Lisa Casto Stacy Vance
</TABLE>
40
62-64
Exhibit 21
SOUTH BRANCH VALLEY BANCORP, INC.
SUBSIDIARIES OF REGISTRANT
The following lists the subsidiary of the registrant, a West Virginia
Corporation.
South Branch Valley National Bank, a national
banking association organized under the laws
of the United States of America
<PAGE>
63-64
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the incorporation by reference in this Annual Report
on Form 10-KSB of our report dated January 31, 1997, on our audit of the
consolidated financial statements of South Branch Valley Bancorp, Inc. as of
December 31, 1996 and 1995, and for the three years in the period ended December
31, 1996, appearing in the 1996 Annual Report to Shareholders of South Branch
Valley Bancorp, Inc.
Arnett & Foster, P.L.L.C.
Charleston, West Virginia
March 28, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING PURSUANT TO RULE 901 (D) OF
REGULATION S-T.
</LEGEND>
<CIK> 0000811808
<NAME> SOUTH BRANCH VALLEY NATIONAL BANK
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,162,552
<INT-BEARING-DEPOSITS> 1,553,000
<FED-FUNDS-SOLD> 723,734
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,351,998
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 83,272,628
<ALLOWANCE> (858,423)
<TOTAL-ASSETS> 122,113,605
<DEPOSITS> 100,941,412
<SHORT-TERM> 4,377,397
<LIABILITIES-OTHER> 976,351
<LONG-TERM> 3,514,652
0
0
<COMMON> 956,562
<OTHER-SE> 11,347,231
<TOTAL-LIABILITIES-AND-EQUITY> 122,113,605
<INTEREST-LOAN> 7,551,735
<INTEREST-INVEST> 1,966,146
<INTEREST-OTHER> 174,415
<INTEREST-TOTAL> 9,692,296
<INTEREST-DEPOSIT> 4,590,018
<INTEREST-EXPENSE> 4,764,362
<INTEREST-INCOME-NET> 4,927,934
<LOAN-LOSSES> 95,000
<SECURITIES-GAINS> 29,999
<EXPENSE-OTHER> 3,156,270
<INCOME-PRETAX> 2,133,250
<INCOME-PRE-EXTRAORDINARY> 2,133,250
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,490,037
<EPS-PRIMARY> 3.94
<EPS-DILUTED> 3.94
<YIELD-ACTUAL> 4.50
<LOANS-NON> 342,842
<LOANS-PAST> 324,203
<LOANS-TROUBLED> 54,647
<LOANS-PROBLEM> 722,326
<ALLOWANCE-OPEN> 859,681
<CHARGE-OFFS> 126,749
<RECOVERIES> 30,491
<ALLOWANCE-CLOSE> 858,423
<ALLOWANCE-DOMESTIC> 858,423
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<PAGE>
</TABLE>
