U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998
----------------
Commission File Number 0-16587
--------
South Branch Valley Bancorp, Inc.
----------------------------------------
(Exact name of small business issuer as
specified in its charter)
West Virginia 55-0672148
----------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
310 North Main Street
Moorefield, West Virginia 26836
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
(304) 538-2353
--------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required by Section 13 or
15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ----
State the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
596,265 common shares were outstanding as of April 30, 1998 which includes
183,438 shares issued in April, 1998 to effect the merger with The Capital State
Bank, Inc.
Transitional Small Business Disclosure Format (Check one):
Yes No X
----- ----
This report contains 20 pages.
1
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
INDEX
Page
I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets
March 31, 1998 (unaudited) and
December 31, 1997 3
Condensed consolidated statements of
income for the three months ended March 31,
1998 and 1997 (unaudited) 4
Condensed consolidated statements of
comprehensive income for the three months
ended March 31, 1998 and 1997 (unaudited) 5
Condensed consolidated statements of
cash flows for the three months ended
March 31, 1998 and 1997 (unaudited) 6-7
Condensed consolidated statements of
shareholders' equity for the three months
ended March 31, 1998 and 1997 (unaudited) 8
Notes to condensed consolidated financial
statements (unaudited) 9-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12-17
II. OTHER INFORMATION
Item 2. Changes in Securities 18
Item 4. Submissions of Matters to a Vote of Security Holders18-19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
2
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited) *
-------------- --------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 2,843,169 $ 3,945,099
Interest bearing deposits with other banks 1,166,000 1,256,000
Federal funds sold 725,400 5,806,717
Securities available for sale 28,932,153 27,547,094
Marketable equity securities 5,363,946 5,273,481
Loans, net 96,211,018 92,572,652
Bank premises and equipment, net 3,013,744 3,071,064
Accrued interest receivable 888,572 864,083
Other assets 346,612 311,435
-------------- --------------
Total Assets $139,490,614 $140,647,625
============== ==============
LIABILITIES
Non-interest bearing deposits $ 10,121,028 $ 9,693,915
Interest bearing deposits 96,806,365 97,290,882
-------------- --------------
Total deposits 106,927,393 106,984,797
-------------- --------------
Short-term borrowings 5,715,635 7,145,010
Long-term borrowings 10,329,457 10,395,848
Other liabilities 1,078,278 1,061,418
-------------- --------------
Total Liabilities 124,050,763 125,587,073
-------------- --------------
SHAREHOLDERS' EQUITY
Common stock, $2.50 par value, authorized
1,200,000 shares, issued 416,942 shares
1998; 382,625 shares 1997 1,042,355 1,042,355
Surplus 2,089,709 2,089,709
Net unrealized gain (loss) on securities 190,547 197,038
Retained earnings 12,284,210 11,898,420
Less cost of shares acquired for the
treasury 1998 and 1997, 4,115 (166,970) (166,970)
-------------- -------------
Total Shareholders' Equity 15,439,851 15,060,552
-------------- -------------
Total Liabilities and Shareholders' Equity $139,490,614 $140,647,625
============== =============
</TABLE>
* December 31, 1997 financial information has been extracted from audited
financial statements.
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31, March 31,
1998 1997
----------- ------------
Interest income:
<S> <C> <C>
Interest and fees on loans $ 2,204,688 $ 2,011,020
Interest on securities:
Taxable 393,480 411,956
Tax-exempt 78,097 74,535
Interest on Federal funds sold 49,132 13,304
----------- ------------
Total interest income 2,725,397 2,510,815
----------- ------------
Interest expense:
Interest on deposits 1,162,201 1,100,403
Interest on short-term borrowings 64,835 57,631
Interest on long-term borrowings 167,121 87,784
Total interest expense 1,394,157 1,245,818
----------- ------------
Net interest income 1,331,240 1,264,997
Provision for loan losses 45,000 30,000
----------- ------------
Net interest income after
provision for loan losses 1,286,240 1,234,997
----------- ------------
Non-interest income:
Insurance commissions 23,455 9,922
Trust department income 70 --
Service fee income 88,778 57,004
Other income 18,005 29,359
----------- ------------
Total other income 130,308 96,285
----------- ------------
Non-interest expense:
Salaries and employee benefits 468,822 447,877
Net occupancy expense 50,619 42,642
Equipment expense 81,032 67,903
FDIC insurance premiums 3,260 2,780
Other expenses 250,339 260,442
----------- -----------
Total other expense 854,072 821,644
----------- -----------
Income before income tax expense 562,476 509,638
Income tax expense 176,685 171,057
----------- -----------
Net Income $ 385,791 $ 338,581
=========== ===========
Basic earnings per common share $ 0.93 $ 0.89
=========== ===========
Dividends per common share $ --- $ ---
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
4
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31, March 31,
1998 1997
------------ -----------
Net income $ 385,791 $ 338,581
Other comprehensive income:
Unrealized gains on securities:
Gain (loss) arising during the year 309,832 (85,066)
Reclassification adjustment -- --
--------- ----------
Other comprehensive income before tax 309,832 (85,066)
Income tax expense(benefit) related to
other comprehensive income 119,285 (32,750)
--------- ----------
Other comprehensive income, net of tax 190,547 (52,316)
Comprehensive income $ 576,338 $ 286,265
========= ===========
See Notes to Condensed Consolidated Financial Statements
5
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31, March 31,
1998 1997
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 385,791 $ 338,581
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 64,958 56,307
Provision for loan losses 45,000 30,000
Securities (gains) -- --
Provision for deferred income tax expense (benefit) (8,015) 41,150
(Increase) in accrued income receivable (24,489) (44,293)
Amortization of security premiums and (accretion of discounts), net (28,426) 4,985
(Increase) decrease in other assets (9,393) 462,723
Increase (decrease) in other liabilities 20,924 (96,696)
(Gain) on sale of other assets (1,660) (7,344)
------------ -----------
Net cash provided by operating activities 444,690 785,413
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale -- --
Proceeds from maturities of securities available for sale 2,325,000 250,000
Purchases of securities available for sale (4,292,235) (1,416,430)
Purchase of non-subsidiary bank stock (90,465) (512,500)
Amounts deposited into escrow for purchase
of non-subsidiary bank stock -- (4,671,480)
Principal payments received on securities available for sale 600,047 422,662
(Increase) decrease in Federal funds sold, net 5,081,317 (1,012,715)
Principal collected on (loans to customers), net (3,713,886) (3,798,929)
Proceeds from interest bearing deposits with other banks 90,000 --
Purchase of Bank premises and equipment (7,638) (41,273)
Proceeds sales of other assets 14,410 22,900
------------ ---------------
Net cash provided by (used in) investing activities 6,550 (10,757,765)
------------ ---------------
</TABLE>
Continued
See Notes to Condensed Consolidated Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS - Continued
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31, March 31,
1998 1997
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C>
Net increase in demand deposits, NOW and savings accounts 436,091 200,726
Proceeds from sales of (purchase of) time deposits, net (493,495) 687,946
Net increase (decrease) in short-term borrowings (1,429,375) 2,395,951
Proceeds from long-term borrowings -- 5,500,000
Repayment of long-term borrowings (66,391) (23,650)
Proceeds from common stock subscribed -- 1,492,790
Net cash provided by (used in) financing activities (1,553,170) 10,253,763
-------------- --------------
Increase (decrease) in cash and due from banks (1,101,930) 281,411
Cash and due from banks:
Beginning 3,945,099 3,162,552
-------------- ---------------
Ending $2,843,169 $3,443,963
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid $1,365,665 $402,591
============== ===============
Income taxes $0 $4,600
============== ===============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $30,520 $0
============== ================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
7
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months ended March 31, 1998 and 1997
(Unaudited)
Three Months Ended
March 31, March 31,
1998 1997
----------- -------------
<S> <C> <C>
Balance, beginning of period $15,060,552 $12,303,793
Net income 385,791 338,581
Change in net unrealized gain (loss)
on securities (6,492) (169,515)
------------ --------------
Balance, March 31 $15,439,851 $12,472,859
============ ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
8
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods.
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
materially from these estimates.
The results of operations for the three month period ended March 31,
1998 are not necessarily indicative of the results to be expected for
the full year. The Condensed Consolidated Financial Statements and
notes included herein should be read in conjunction with the Company's
1997 audited financial statements and Form 10-KSB.
For the period ended March 31, 1998, the Company was required to adopt
Statement of Financial Accounting Standard No. 130 (SFAS No. 130),
"Reporting of Comprehensive Income". Comprehensive income includes any
change in equity of the Company during the period resulting from
transactions and other events and circumstances from nonowner sources.
A Statement of Comprehensive income has been included in these
condensed consolidated financial statements to comply with SFAS No.
130. Prior interim periods have been reclassified to provide
comparative information.
Certain accounts in the consolidated financial statements for 1997 as
previously presented have been reclassified to conform to current year
classifications.
Note 2. Earnings Per Share
Basic earnings per common share are computed based upon the weighted
average shares outstanding. The weighted average shares outstanding
for the three month periods ended March 31, 1998 and March 31, 1997
were 412,827 and 378,510, respectively. During the periods ended March
31, 1998 and 1997, the Company did not have any dilutive securities.
Note 3. Acquisitions and Subsequent Events
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 certain
loans and assumed certain 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 condensed 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 (goodwill) approximated
$186,000 and is being amortized over five years. At March 31, 1998,
the unamortized portion was approximately $99,000.
9
<PAGE>
On March 24, 1998 and March 25, 1998, the shareholders of The Capital
State Bank, Inc. and South Branch Valley Bancorp, Inc. respectively,
approved the merger of Capital State into Capital Interim Bank, Inc.,
a wholly owned subsidiary of South Branch. The merger was consummated
at the close of business on March 31, 1998. The merger will be treated
using the purchase method of accounting; accordingly, the assets and
liabilities and results of operations of Capital State will be
reflected on the Company's consolidated statements of operations from
April 1, 1998 forward. Based upon preliminary estimates and
assumptions, the excess purchase price over the fair value of the net
assets acquired as of the consummation date is approximately
$2,300,000. This goodwill recognized is expected to be amortized over
a period of 15 years using the straight line method.
The following tables set forth certain pro forma condensed
consolidated financial information of South Branch, using the purchase
method of accounting, after giving effect to the merger as if it had
been consummated, with respect to the Statement of Operation, at the
beginning of the period presented, and with respect to the Balance
Sheet, as of the date presented.
The pro forma information has been included for comparative purposes
only and may not be indicative of the combined financial position or
results of operations that actually would have occurred had the
transaction been consummated during the period or as of the date
indicated, or which will be attained in the future.
Pro Forma Reflecting South Branch Valley Bancorp Inc.
After Giving Effect to the Merger with the Capital State Bank Inc.
(In thousands, except for per share data)
As of March 31, 1998
--------------------
Condensed Consolidated Balance Sheet Data As Reported Pro Forma
-----------------------------------------------------------------------------
Total assets $ 139,491 $ 180,833
Investment securities $ 28,932 $ 39,399
Net loans $ 96,211 $ 120,699
Total deposits $ 106,927 $ 139,822
Shareholders' equity $ 15,440 $ 23,419
Book value per common share $ 37.40 $ 39.28
For the Three Month Period
Ended March 31, 1998
--------------------------
Condensed Consolidated Statement of Operations Data As Reported Pro Forma
------------------------------------------------------------------------------
Total interest income $ 2,725 $3,459
Total interest expense $ 1,394 $1,784
Net interest income $ 1,331 $1,675
Provision for possible loan losses $ 45 $ 75
Net income $ 386 $ 390
Per common share:
Net income $ .93 $ .66
Dividends per share $ .00 $ .00
Weighted average shares outstanding 412,827 596,265
10
<PAGE>
For the Twelve Month Period
Ended December 31, 1997
---------------------------
Condensed Consolidated Statement of Operations Data As Reported Pro Forma
------------------------------------------------------------------------------
Total interest income $ 10,590 $ 13,121
Total interest expense $ 5,407 $ 6,673
Net interest income $ 5,183 $ 6,448
Provision for possible loan losses $ 155 $ 275
Net income $ 1,520 $ 1,208
Per common share:
Net income $ 3.83 $ 2.03
Dividends per share $ .84 $ .56
Weighted average shares outstanding 397,032 596,265
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION AND SUMMARY
The following is management's discussion and analysis of the financial
condition and financial results of operations for South Branch Valley Bancorp,
Inc.(hereafter referred to as the Company) and its wholly owned subsidiary,
South Branch Valley National Bank, (hereafter referred to as the Bank) as of
March 31, 1998. This discussion may contain forward looking statements based on
management's expectations and actual results may differ materially. Since the
primary business activities of South Branch Valley Bancorp, Inc. are conducted
through its wholly owned subsidiary (the Bank), the following discussion focuses
primarily on the financial condition and operations of the Bank. All amounts and
percentages have been rounded for this discussion.
Earnings Summary
- ----------------
Net income for the first three months of 1998 totaled $386,000, a $47,000
or a 13.9% increase from the $339,000 earned during the same period of 1997.
Annualized return on average assets at March 31, 1998 was 1.12% as compared to
1.09% at March 31, 1997, an increase of 2.75%. Earnings per share totaled $.93
at March 31, 1998 compared to $.89 March 31, 1997, representing a 3.37%
increase. Details concerning the significant events or changes in the components
impacting the results of operations are addressed in the following sections.
RESULTS OF OPERATIONS
Net Interest Income
- -------------------
For the three months ended March 31, 1998, the Company's net interest
income, as adjusted to a tax equivalent basis, increased $69,000 or 5.4% to
$1,350,000 as compared with $1,281,000 for the three months ended March 31,
1997. However, the Company's net interest yield on earning assets (net interest
margin) decreased 12 basis points from 4.40% at March 31, 1997 to 4.28% for the
three months ended March 31, 1998. Management feels that this decrease is due
primarily to a competitive local market for loans and deposits which has caused
a general lowering of rates on loans and an increase in the cost of borrowed
funds, which have been primarily used to fund the loan growth. Pressures on the
net interest yield remain a concern. A detailed analysis of the net interest
yield by component is shown on Table I. No significant fluctuations were noted
and the Company does not expect any significant change in the Company's net
yield during the remainder of 1998 given no significant changes in the present
interest rate environment. Management continues to monitor the net interest
margin through GAP analysis to minimize the potential for any significant
negative impact.
12
<PAGE>
<TABLE>
<CAPTION>
South Branch Valley Bancorp, Inc. and Subsidiary
Table I - Average Distribution of Assets, Liabilities and Shareholders'
Equity, Interest Earnings & Expenses, and Average Rates
March 31, 1998 March 31, 1997
--------------- --------------
(In thousands of dollars) AverageEarnings/ Yield/AverageEarnings/Yield/
- ------------------------- Balances Expense Rate Balance Expense Rate
ASSETS Interest earning assets:
Loans, net of unearned
<S> <C> <C> <C> <C> <C> <C>
interest (1) $94,235 $2,205 9.36% $84,607 $2,011 9.51%
Securities
Taxable 21,435 372 6.94% 23,719 386 6.51%
Tax-exempt (2) 5,987 97 6.48% 5,718 91 6.37%
Interest bearing deposits
with other banks 1,236 21 6.80% 1,553 26 6.70%
Federal funds sold 3,332 49 5.88% 833 13 6.24%
-------- -------- ------ -------- ----- -----
Total interest earning assets 126,225 2,744 8.70% 116,430 2,527 8.68%
Noninterest earning assets:
Cash & due from banks 3,083 2,882
Bank premises & equipment 3,048 3,116
Other assets 6,791 2,755
Allowance for loan losses (920) (869)
-------- ---------
Total assets $138,227 $124,314
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits $17,379 $131 3.02% $19,201 $148 3.08%
Regular savings 13,973 113 3.23% 13,799 108 3.13%
Time savings 64,591 918 5.69% 59,083 845 5.72%
Federal funds purchased and securities
sold with agreements to repurchase 5,197 54 4.16% 4,054 42 4.14%
Other borrowings 11,120 178 6.40% 6,552 103 6.29%
----------- ------- ------- ---------- ---- -----
112,260 1,394 4.97% 102,689 1,246 4.85%
Noninterest bearing liabilities:
Demand deposits 9,490 9,333
Other liabilities 1,136 933
----------- ----------
Total liabilities 122,886 112,955
Shareholders' equity 15,341 11,359
----------- ----------
Total liabilities and
shareholders' equity $138,227 $124,314
=========== ==========
NET INTEREST EARNINGS $1,350 $1,281
====== ======
NET INTEREST YIELD ON EARNING ASSETS 4.28% 4.40%
====== =====
</TABLE>
(1) For purposes of this table, non-accrual loans are included in average loan
balances. Included in interest and fees on loans are loan fees of $47,000 and
$36,000 for the periods ended March 31, 1998 and 1997 respectively.
(2) For purposes of this table, interest income on tax-exempt securities has
been adjusted assuming an effective combined federal and state tax rate of 39%
for both periods presented. The tax equivalent adjustment results in an increase
in interest income of $19,000 and $16,000 for the periods ended March 31, 1998
and 1997 respectively.
13
<PAGE>
Provision for Loan Losses and Loan Quality
- ------------------------------------------
An allowance for loan losses is maintained by the Company and is funded
through the provision for loan losses as a charge to current earnings. The
allowance for loan losses is reviewed by management on a quarterly basis to
determine that it is maintained at levels considered necessary to cover
potential losses associated with the Bank's current loan portfolio. The
Company's provision for loan losses for the first three months of 1998 totaled
$45,000 compared to $30,000 for the three months ended March 31, 1997. This
increase was primarily to provide for potential losses inherent in the Company's
loan portfolio due to its continued growth in net loans outstanding.
Net loan charge-offs for the first three months of 1998 were $4,000 as
compared to $99,000 for the first three months of 1997. Expressed as a
percentage of loans (net of unearned interest), net charge-offs were .01% for
the first three months of 1998 compared to .11% for the comparable period of
1997.
The total of non-performing assets and loans past due 90 days or more and
still accruing interest has remained relatively stable during the past 12
months, and management has no knowledge that would lead them to believe that
such assets will increase substantially during the remainder of 1998.
<TABLE>
<CAPTION>
Summary of Past Due Loans and Non-Performing Assets
(in thousands of dollars)
March 31 December 31
----------------------------------------------
1998 1997 1997
---- ---- ----
Loans contractually past due 90 days or
<S> <C> <C> <C>
more and still accruing interest $120 $272 $ 96
==== ==== ====
Non-performing assets:
Non-accruing Loans $154 $125 $142
Other Repossessed Assets 31 46 31
Other Real Estate Owned 47 21 47
----- ----- -----
$232 $192 $220
===== ===== =====
</TABLE>
Total loans past due 90 days or more plus non-performing assets have
decreased approximately $112,000 or 24.13% from the same period last year. This
decrease is primarily attributable to vigorous collection activity that resulted
in several loans being paid to current status during the first three months of
1998. While there may be some loans or portions of loans identified as potential
problem credits which are not specifically identified as either non-accrual or
accruing loans past due 90 or more days, they are considered by management to be
insignificant to the overall disclosure and are therefore not specifically
quantified within the Management's Discussion and Analysis.
Impaired loans remained insignificant at less than 1% of net loans at March
31, 1998. 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.
14
<PAGE>
At March 31, 1998, the allowance for loan losses totaled $936,000 or 1.0%
of net loans compared to $895,000 or 1.0% of net loans at December 31, 1997 and
$815,000 or .9% of net loans at March 31, 1997. The Company performs a quarterly
analysis of the allowance for loan losses. The calculation includes the use of a
moving average of charge-off history to estimate reserve requirements for
homogeneous loan pools and loans not individually reviewed on an ongoing basis.
Additionally, specific reserves are maintained for all known problem and watch
list loans. Large commercial loans receive special attention and receive a
thorough review twice annually. Using this methodology, the most recent review
conducted at March 31, 1998 showed adequate reserves. The allocated portion of
the subsidiary bank's allowance for loan losses is established on a loan-by-loan
and pool-by-pool basis. The unallocated portion is for inherent losses that
probably exist as of the evaluation date, but which have not been specifically
identified by the processes used to establish the allocated portion due to
inherent imprecision in the objective processes management utilizes to identify
probable and estimable losses. This unallocated portion is subjective and
requires judgement based on various qualitative factors in the loan portfolio
and the market in which the Company operates. At March 31, 1998 and December 31,
1997, respectively, the unallocated portion of the allowance approximated
$66,000 or 7.2% and $67,000 or 7.5% of the total allowance. This unallocated
portion of the allowance was considered necessary based on consideration of the
known risk elements in certain pools of loans in the loan portfolio and
management's assessment of the economic environment in which the Company
operates.
Non-interest Income
- -------------------
Total other income increased approximately $34,000 or 35.4% to $130,000
during the first three months of 1998, as compared to the first three months of
1997. A detailed discussion of non-interest income components follows.
The most significant item representing the change was service fee income
increased $32,000 from approximately $57,000 to $89,000 or 56.1% primarily
resulting in a change in fee structure and increased deposit activity.
Management believes the Company will be able to maintain levels of service fee
income on deposit accounts similar to this throughout the remainder of 1998.
Non-interest Expense
- --------------------
Total non-interest expense increased approximately $32,000 or 3.9% to
$854,000 during the first three months of 1998 as compared to the first three
months of 1997. This slight increase is a result of management's planned
emphasis on controlling non-interest expense.
The most significant component impacting this change was an increase of
approximately $21,000 or 4.7% in salaries and employee benefits, which
represents approximately 55% of total non-interest expense. This can be
attributed to a general increase in salaries.
15
<PAGE>
FINANCIAL CONDITION
Total Assets
- ------------
The overall composition of the Company's assets has not changed
significantly since year end 1997. The Company's total average assets have
decreased approximately 1.7% or $2.4 million from December 31, 1997 total
assets. The Company's total average interest earning assets, expressed as a
percentage of total average assets, remains high, although this ratio has
decreased slightly to 91.3% at March 31, 1998, as compared to 92.6% at December
31, 1997.
Securities and Federal Funds Sold
- ----------------------------------
Total securities and Federal funds sold have decreased approximately 11.1%
from $33,354,000 at December 31, 1997 to $29,658,000 at March 31, 1998. This
decrease is a result of loaning a portion of Federal funds sold at December 31,
1997 to customers during the first three months of 1998.
Loans
- -----
Total loans have remained relatively stable since December 31, 1997, by
increasing less than 5% to $96,211,000. There has been no significant change in
the components in the composition of total loans.
Deposits
- --------
Total deposits have remained steady at $106.9 million with no significant
fluctuation in the Company's deposit mix.
Borrowings
- ----------
Short term borrowings have decreased approximately $1,429,000 as a result
of repayment of a matured loan with the Federal Home Loan Bank.
Shareholders' Equity
- ---------------------
The Company's total shareholders' equity has increased approximately
$379,000 or 2.52% since December 31, 1997. This is the net result of an increase
in retained earnings of $386,000 from net income, and a
decrease of $7,000 in net unrealized gains on
securities available for sale. The Company's average equity to average total
assets ratio was 11.1% at March 31, 1998 and 10.7% at December 31, 1997. The
Company's subsidiary bank's total risk weighted capital ratio was approximately
14.8% at March 31,1998 and is well within Federal regulatory minimum guidelines
of 8.0%. The Company is not aware of any pending regulation which would have a
material negative impact on its operations or financial condition.
Liquidity
- ---------
Liquidity in commercial banking can be defined as the ability to satisfy
customer loan demand and meet deposit withdrawals while maximizing net interest
income. The Company's primary sources of funds are deposits and principal and
interest payments on loans. Additional funds are provided by maturities of
securities. The Company uses ratio analysis to monitor the changes in its
sources and uses of funds so that an adequate liquidity position is maintained.
At March 31, 1998 the loan to deposit ratio was 90.0% as compared to 86.5% at
March 31, 1997. Cash and due from banks coupled with Federal funds sold totaled
$3,595,000 or 2.6% of total assets. Additionally, securities and interest
bearing deposits with other banks maturing within one year approximated
$3,452,000 or 2.5% of total assets. Management believes that the liquidity of
the Company is adequate and foresees no demands or conditions that would
adversely affect it.
16
<PAGE>
Year 2000
- ---------
Except for securities record keeping, the significant electronic data
processing systems of the Company are operated in-house through software which
is purchased through third-party vendors. The Company has an ongoing program
designed to ensure that its operational and financial systems will not be
adversely affected by year 2000 software failures due to processing errors
arising from calculations using the year 2000 date. In 1997, management
established a committee to monitor the Company's plan in evaluating its
hardware, software and operating systems for Year 2000 issues. This committee
also monitors management's assessment of the potential impact on significant
customers, borrowers, suppliers and service organizations. While management
believes it is doing everything technologically possible to assure year 2000
compliance, it is in part dependent upon systems and software vendors to
represent that the products provided are, or will be, "Year 2000 Compliant".
Management is and has been in contact with its vendors and believes that all
upgrades needed to be "Year 2000 Compliant" have been affected or are in
process. Management continues to monitor this situation and take all appropriate
steps necessary to keep its operating systems compliant.
Although not quantified, based upon management's current assessment, the
costs expected to be incurred over the next two years on the Company's program
to redevelop, replace, or repair its computer applications to make them "Year
2000 Compliant" is not expected to be significant to the Company's financial
position or results of operations. In February 1998, the Company implemented a
program of testing for compliance.
Additionally, during the first quarter of 1998, the Bank has undergone an
examination by its primary regulator as to their progress on Year 2000
compliance and received a satisfactory rating.
17
<PAGE>
PART II
Item 2 - Changes in Securities
- ------------------------------
During April 1998, as a result of the merger with Capital State Bank, the
Company exchanged 183,438 shares for all the remaining outstanding shares of
Capital State Bank, Inc. There was no change in the rights of the holders of any
class of securities.
(i) On October 15, 1997 the Registrant filed Form S-4 related to the
purchase of 100% of the common stock of Capital State. This document
is incorporated herein by reference in it's entirety.
(ii) On December 19, 1997 the Registrant filed an amended Form S-4
related to the purchase of 100% of the common stock of Capital
State. This document is incorporated herein by reference in it's
entirety.
(iii) On January 30, 1998 the Registrant filed an amended Form S-4
related to the purchase of 100% of the common stock of Capital
State. This document is incorporated herein by reference in it's
entirety.
Item 4 - Submissions of Matters to a Vote of Security Holders
- -------------------------------------------------------------
On March 25, 1998 the special meeting of South Branch Valley Bancorp, Inc.
was held to (1) approve the merger with The Capital State Bank Inc., (2) amend
the Articles of Incorporation to increase the number of shares of authorized
$2.50 par value common stock to 1,200,000 shares and (3) to transact such other
business to come before the meeting.
The total number of shares voted was 309,551 of which 308,841 were voted by
proxy and 710 were voted in person.
The merger was approved by a vote of 298,106 for (96.3%), 10,090 against
(3.3%), and 1,355 abstentions (.4%).
The amendment to the Articles of Incorporation was approved by a vote of
298,106 for (96.3%), 10,090 against (3.3%), and 1,355 abstentions (.4%).
There were no other matters to come before the special meeting.
On May 5, 1998 the annual meeting of South Branch Valley Bancorp, Inc. was
held to (1) elect one director for a one year term, elect one director for a two
year term and elect four directors for a three year term (2) adoption of the
Officer Stock Option Plan, (3) ratify the election of Arnett & Foster as the
Company's independent certified public accountants for the fiscal year ending
December 31, 1998, and (4) to transact such other business to come before the
meeting.
All nominees receiving votes were those recommended by the current board of
directors. The following persons received the number of votes opposite their
names for directors of the Company:
1. Election of Director to serve a one year term:
Frank A. Baer, III 278,756
18
<PAGE>
2. Election of Director to serve a two year term:
Georgette Rashid George 276,121
3. Election of Directors to serve a three year term:
Oscar M. Bean 285,715
Phoebe F. Heishman 285,448
H. Charles Maddy, III 278,760
Charles S. Piccirillo 276,181
Total number of shares voted was 284,024, of which all were voted by proxy
and none were voted in person.
The adoption of the Officer Stock Option Plan was approved by a vote of
271,511 for (95.6%), 8,955 against (3.2%) and 3,558 abstentions(1.2%).
The firm of Arnett & Foster was ratified to serve as the Company's
independent certified public accountants by a vote of 282,761 for (99.6%), 0
against, and 1,263 abstentions (.4%).
There were no other matters to come before the annual meeting.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
A. Exhibits (numbered in accordance with Item 601 of regulation S-B)
27. Financial Data Schedule
B. Reports on Form 8-K.
On April 3, 1998 and April 6, 1998 the Registrant filed Form 8-K and an amended
Form 8-K, respectively, related to the consummation of the previously reported
proposed purchase of 100% of the outstanding common stock of The Capital State
Bank, Inc., 2402 Mountaineer Boulevard, South Charleston, West Virginia. On
March 24, 1998 and March 25, 1998, the shareholders of Capital State and South
Branch respectively approved the merger. Effective April 1, 1998, the Registrant
consummated its acquisition of the shares. Pursuant to the merger agreement,
three members of the Board of Directors of Capital State became members of the
Board of Directors of South Branch Valley Bancorp. This document is incorporated
herein by reference in it's entirety.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
South Branch Valley Bancorp, Inc.
(registrant)
By: /s/ H. Charles Maddy, III
-------------------------------------
H. Charles Maddy, III, President and
Chief Financial Officer
By: /s/ Russell F. Ratliff, Jr.
--------------------------------------
Russell F. Ratliff, Jr.
Treasurer
Date: May 13, 1998
- -----------------------
<PAGE>
<TABLE> <S> <C>
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<CIK> 0000811808
<NAME> SOUTH BRANCH VALLEY BANCORP
<S> <C>
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<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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0
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<INCOME-PRETAX> 562,476
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