<PAGE>
As filed with the Securities and Exchange Commission on _____________, 1999
Registration No. 333-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
SOUTH BRANCH VALLEY BANCORP, INC.
(Exact name of registrant as specified in its charter)
West Virginia 6711 55-0672148
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
or organization)
310 North Main Street
Moorefield, West Virginia 26836
(304) 538-1000
-----------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
H. Charles Maddy, III, President
South Branch Valley Bancorp, Inc.
P. O. Box 680
310 North Main Street
Moorefield, West Virginia 26836
(304) 538-1000
--------------------------------
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
with copies to:
Sandra M. Murphy, Esq. Charles D. Dunbar, Esq.
Bowles Rice McDavid Graff & Love, PLLC Elizabeth Osenton Lord, Esq.
600 Quarrier Street Jackson & Kelly, PLLC
P. O. Box 1386 1600 Laidley Tower
Charleston, West Virginia 25325-1386 P. O. Box 553
Charleston, West Virginia 25322
Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after the effective date of this
registration statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered (1) offering price per unit aggregate offering price registration fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock................. 320,000 shares $37.31(2) $11,937,600(2) $3,318.65
par value $2.50 per share
===========================================================================================================================
</TABLE>
(1) The number of shares of common stock, par value $2.50 per share of South
Branch Valley Bancorp, Inc. to be registered pursuant to this Registration
Statement is based upon the number of shares of common stock, par value
$10.00 per share of Potomac Valley Bank presently outstanding multiplied by
the exchange ratio of 3.319 shares of South Branch common stock which would
have resulted had the proposed transaction been consummated on June 30,
1999.
(2) Pursuant to Rule 457(f), based upon the book value in the amount of $132.64
per share of the common stock of Potomac Valley Bank as of June 30, 1999.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
________________________________________________________________________________
<PAGE>
POTOMAC VALLEY BANK
4 North Main Street
P. O. Box 1079
Petersburg, West Virginia 26847
------------------------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _____________________, 1999
------------------------------------------
TO THE SHAREHOLDERS OF POTOMAC VALLEY BANK:
Potomac will hold a special meeting of shareholders at its principal
executive offices, 4 North Main Street, Petersburg, West Virginia, at 9:00 a.m.
local time on ______________________________, 1999, to vote on:
1. A proposal to approve the Agreement and Plan of Merger, dated as of
July 16, 1999, among South Branch Valley Bancorp, Inc. and the parties
to the Agreement and Plan of Merger, Potomac Valley Bank and Potomac
Interim Bank, Inc. a wholly-owned subsidiary of South Branch Valley
Bancorp, Inc. Attached as Annex I to the accompanying joint proxy
statement/prospectus is a copy of the merger agreement.
2. Any other matters that properly come before the special meeting, or
any adjournments or postponements of the special meeting.
Shareholders of Potomac of record at the close of business on
________________________, 1999, are entitled to notice of and to vote at the
meeting. You are cordially invited to attend the meeting in person; however,
whether or not you plan to attend, we urge you to complete, date and sign the
accompanying proxy card and to return it promptly in the enclosed postage
prepaid envelope.
BY ORDER OF THE BOARD OF DIRECTORS
______________________________
G. R. Ours, Jr.
Petersburg, West Virginia Chairman of the Board
__________, 1999
Please complete, sign, date and return the enclosed proxy card promptly
whether or not you plan to attend the meeting. Failure to return a properly
executed proxy or to vote at the meeting will have the same effect as a vote
against the merger. Please do not send in any certificates for your shares at
this time.
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC.
310 North Main Street
P. O. Box 680
Moorefield, West Virginia 26836
__________________________________________________________
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ___________________________, 1999
__________________________________________________________
TO THE SHAREHOLDERS OF SOUTH BRANCH VALLEY BANCORP, INC.:
Notice is hereby given that, pursuant to the call of the Board of
Directors, a Special Meeting of Shareholders of South Branch Valley Bancorp,
Inc. will be held at Moorefield, West Virginia on ________ __, 1999, at ______
p.m., local time, for the purpose of considering and voting upon the following
matters:
1. Approval of an amendment to the Articles of Incorporation of South
Branch Valley Bancorp, Inc. to change the name of South Branch to
"Summit Financial Group, Inc." The text of the proposed amendment is
attached as Annex III to the accompanying Prospectus/Joint Proxy
Statement.
2. Authorization for the issuance of up to 320,000 shares of Summit stock
in connection with an Agreement and Plan of Merger dated as of July
16, 1999, among South Branch Valley Bancorp, Inc., and the parties to
the Agreement and Plan of Merger, Potomac Valley Bank and Potomac
Interim Bank, Inc., a wholly owned subsidiary of South Branch Valley
Bancorp, Inc. A copy of the merger agreement is attached as Annex I to
the accompanying Prospectus/Joint Proxy Statement.
The close of business on _____________, 1999, has been fixed by the Board
of Directors as the record date for determining shareholders entitled to notice
of and to vote at this Special Meeting.
The Board of Directors of South Branch Valley Bancorp, Inc. has unanimously
determined the Merger to be fair to and in the best interests of South Branch
Valley Bancorp, Inc. and its shareholders and unanimously recommends that
shareholders vote "FOR" approval of the authorization for the issuance of the
shares and the name change.
BY ORDER OF THE BOARD OF DIRECTORS
___________________________
Oscar M. Bean
Chairman of the Board
Moorefield, West Virginia
__________________, 1999
Your Vote is Very Important
To Vote Your Shares, Please Complete, Date and Sign the Enclosed Proxy Card and
Mail it Promptly in the Enclosed Return Envelope
<PAGE>
PROXY STATEMENT OF
POTOMAC VALLEY BANK
PROSPECTUS OF
SOUTH BRANCH VALLEY BANCORP, INC.
SPECIAL MEETING OF SHAREHOLDERS
MERGER PROPOSAL - YOUR VOTE IS VERY IMPORTANT
The board of directors of Potomac Valley Bank has unanimously approved a
merger combining Potomac Interim Bank, Inc., a wholly-owned subsidiary of South
Branch Valley Bancorp, Inc. and Potomac Valley Bank. We anticipate that South
Branch will change its name to "Summit Financial Group, Inc." In the merger,
Potomac shareholders will receive shares of Summit common stock depending upon
South Branch's and Potomac's respective book values. Potomac shareholders
generally will not recognize federal income tax gain or loss for the Summit
stock they receive. However, each shareholder should consult his or her own tax
advisor for information concerning how the merger will affect his or her own tax
situation.
At the meeting, you will consider and vote on the merger agreement. The
merger cannot be completed unless holders of at least a majority of Potomac
common stock approve it. The Potomac board believes the merger is in the best
interests of Potomac shareholders and unanimously recommends that shareholders
vote to approve the merger agreement.
On June 30, 1999, the book value of Potomac was $132.63 and the book value
of South Branch was $39.96. If these were the book values just before the merger
occurred, Potomac's shareholders would receive 3.319 shares of Summit stock for
each share of Potomac stock owned by them. The book values will, however,
fluctuate between now and the merger.
The date, time and place of the meeting are:
_____________, 1999
9:00 a.m.
Potomac Valley Bank
4 North Main Street
Petersburg, West Virginia
This joint proxy statement/prospectus provides you with detailed
information about the proposed merger. We encourage you to read this entire
document carefully. You can also obtain other information about South Branch
from documents it files with the Securities and Exchange Commission.
Whether or not you plan to attend the meeting, if you are a holder of
Potomac stock please take the time to vote by completing and mailing the
enclosed proxy card to us. If you fail to return your card or vote in person,
the effect will be a vote against approval of the merger agreement. You can
revoke your proxy by writing to Potomac's corporate secretary any time before
the meeting or by attending the meeting and voting in person.
On behalf of the Board of Directors of Potomac, I urge you to vote "FOR"
approval and adoption of the merger agreement.
_____________________
G. R. Ours, Jr.
Chairman of the Board
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have approved the Summit stock to be issued in the merger or
determined if this proxy statement/prospectus is accurate or adequate. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
This proxy statement/prospectus is dated ___________, 1999, and is expected to
be first mailed to shareholders of Potomac and South Branch on ___________,
1999.
<PAGE>
PROXY STATEMENT
SOUTH BRANCH VALLEY BANCORP, INC.
SPECIAL MEETING OF SHAREHOLDERS
MERGER PROPOSAL - YOUR VOTE IS VERY IMPORTANT
The board of directors of South Branch Valley Bancorp, Inc. has unanimously
approved a merger combining Potomac Interim Bank, Inc. a wholly-owned subsidiary
of South Branch, and Potomac Valley Bank. It is anticipated that upon your
approval, South Branch will change its name to "Summit Financial Group, Inc." In
the merger, Potomac shareholders will receive shares of Summit common stock
depending upon South Branch's and Potomac's respective book values. Potomac
shareholders generally will not recognize federal income tax gain or loss for
the Summit stock they receive. However, each shareholder should consult his or
her own tax advisor for information concerning how the merger will effect his or
her own tax situation.
At the meeting, you will consider and vote on the issuance of stock and
change of name to "Summit Financial Group, Inc." contemplated by the merger
agreement. These items cannot be completed unless holders of at least a majority
of South Branch common stock approve it. The South Branch Board believes the
merger, the issuance of shares and the name change are in the best interests of
South Branch shareholders and unanimously recommends that shareholders vote to
approve the issuance of shares of stock and the change of South Branch's name.
On June 30, 1999, the book value of South Branch was $39.96 and the book
value of Potomac was $132.63. If these were the book values just before the
merger occurred, the Potomac shareholders would receive 3.319 shares of Summit
stock for each share of Potomac stock owned by them. The book values will,
however, fluctuate between now and the merger.
The date, time and place of the meeting are:
______________, 1999
9:00 a.m.
South Branch Valley Bank, Inc.
310 North Main Street
Moorefield, West Virginia
This proxy statement/prospectus provides you with detailed information
about the proposals. We encourage you to read this entire document carefully.
Whether or not you plan to attend the meeting, if you are a holder of South
Branch stock please take the time to vote by completing and mailing the enclosed
proxy card to us. You can revoke your proxy by writing to South Branch's
corporate secretary any time before the meeting or by attending the meeting and
voting in person.
On behalf of the Board of Directors of South Branch, I urge you to vote
"FOR" approval and adoption of the proposals.
_______________________
Oscar M. Bean
Chairman of the Board
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulators have determined if this proxy statement is accurate or adequate.
Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
This proxy statement/prospectus is dated __________, 1999, and is expected to be
first mailed to shareholders of South Branch and Potomac on _______________,
1999.
<PAGE>
A WARNING ABOUT FORWARD-LOOKING INFORMATION
Potomac and South Branch have made forward-looking statements in this
document and in certain documents that we refer to in this document that are
subject to risks and uncertainties. These statements are based on the beliefs
and assumptions of the management of Potomac and management of South Branch, and
on information currently available to them or, in the case of information that
appears under the heading "The Merger" at page 27, information that was
available to management as of the date of the merger agreement. Forward-looking
statements include the information concerning possible or assumed future results
of operations of Potomac and South Branch set forth under "Summary," "The
Merger-Background of the Merger," "The Merger-South Branch Reasons for the
Merger," "The Merger-Potomac Reasons for the Merger" and statements preceded by,
followed by or that include the words "believes," "expects," "anticipates,"
"intends," "plans," "estimates" or similar expressions.
We caution you that these statements are not guarantees of future
performance and involve risks and uncertainties. In addition, many of these
forward-looking statements are based on assumptions about the future that may be
inaccurate. Accordingly, actual results may differ materially from those
expressed in the forward-looking statements.
Moreover, any statements in this document about the anticipated performance
in future periods are subject to risks relating to, among other things, the
following:
1. expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
2. deposit attrition, customer loss or revenue loss following the merger
may be greater than expected;
3. competitive pressures among depository and other financial institutions
may increase significantly;
4. costs or difficulties related to the integration of the businesses of
South Branch and Potomac may be greater than expected;
5. changes in the interest rate environment may reduce margins;
6. general economic or business conditions, either nationally or in the
states or regions in which Potomac and South Branch do business, may be
less favorable than expected, resulting in, among other things, a
deterioration in credit quality or a reduced demand for credit;
7. legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses in which Potomac and South
Branch are engaged; and
8. competitors of Potomac and South Branch may have greater financial
resources and develop products that enable those competitors to compete
more successfully than Potomac and South Branch.
Management of each of Potomac and South Branch believes the forward-looking
statements about its respective companies are reasonable; however, shareholders
should not place undue reliance on them. Forward-looking statements are not
guarantees of performance. They involve risks, uncertainties and assumptions.
The future results and shareholder values of Summit following completion of the
merger may differ materially from those expressed or implied in these forward-
looking statements. Many of the factors that will determine these results and
values are beyond Potomac's and South Branch's ability to control or predict.
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Common Questions and Answers about the Merger....................... 1
Summary............................................................. 3
The Merger....................................................... 3
Federal Income Tax Consequences.................................. 3
Dissenters' Rights............................................... 4
The Companies.................................................... 4
The Special Meeting.............................................. 4
Voting at the Special Meeting.................................... 4
Ownership of Potomac Common Stock by South Branch................ 5
Regulatory Approvals............................................. 5
Effective Date of the Merger..................................... 5
Conditions to the Merger......................................... 5
Termination of the Merger Agreement.............................. 6
Accounting Treatment............................................. 6
Comparative Per Share Market Price Information................... 6
Risk Factors..................................................... 6
Comparison of Shareholder Rights................................. 6
South Branch Selected Financial Data................................ 8
Potomac Valley Bank Selected Financial Data......................... 9
Pro Forma Combined Financial Information............................ 10
Pro Forma Combined Balance Sheet................................. 12
Pro Forma Combined Income Statements............................. 13
Notes to Pro Forma Financial Information......................... 18
Comparative Per Share Data.......................................... 19
South Branch Common Stock Dividend Policy........................ 22
Potomac Common Stock Dividend Policy............................. 22
The Potomac Special Meeting......................................... 23
General.......................................................... 23
Date, Time and Place of the Special Meeting...................... 23
Record Date; Voting at the Special Meeting....................... 23
The South Branch Special Meeting.................................... 25
General.......................................................... 25
Date, Time and Place of the Special Meeting...................... 25
Record Date; Voting at the Special Meeting....................... 25
The Merger.......................................................... 27
Background of the Merger............................................ 27
Recommendation of the Potomac Board................................. 27
Potomac Reasons for the Merger...................................... 27
South Branch Reasons for the Merger................................. 29
Interest of Certain Persons in the Merger........................... 29
Effects of the Merger; The Surviving Corporation.................... 30
Government Approvals................................................ 33
Rights of Potomac Shareholders Who Dissent from the Merger.......... 33
Resale Restrictions................................................. 35
Accounting Treatment................................................ 36
Certain Federal Income Tax Consequences of the Merger............... 36
The Merger Agreement................................................ 38
The Merger....................................................... 39
Conversion of Securities......................................... 39
Representations and Warranties................................... 40
Mutual Covenants................................................. 41
Additional Covenants of South Branch and Potomac................. 42
Conditions to Obligations of the Parties......................... 43
Conditions to Obligations of South Branch........................ 44
Conditions to Obligations of Potomac............................. 44
Termination; Expenses............................................ 45
Amendment or Waiver.............................................. 46
Comparative Rights of Shareholders.................................. 46
Description of South Branch Capital Stock........................ 46
Description of Potomac Capital Stock............................. 46
Comparison of Rights of South Branch and Potomac Shareholders.... 47
Differences in Rights............................................ 47
Advantages of South Branch Anti-Takeover Provisions.............. 48
Disadvantages of South Branch Anti-Takeover Provisions........... 48
Information with Respect to Potomac................................. 49
History and Operations........................................... 49
Competition...................................................... 50
Security Ownership of Certain Beneficial Owners and Management... 50
Directors and Executive Officers................................. 51
Compensation of President and Chief Executive Officer............ 52
Information with Respect to South Branch............................ 53
History and Operations........................................... 53
Supervision and Regulation.......................................... 54
General.......................................................... 54
Permitted Non-banking Activities................................. 55
Credit and Monetary Policies and Related Matters................. 56
Capital Requirements............................................. 57
Federal Deposit Insurance Corporation Improvement Act of 1991.... 59
Reigle-Neal Interstate Banking Bill.............................. 60
Community Reinvestment Act....................................... 60
Deposit Acquisition Limitation................................... 61
Competition...................................................... 61
Employees........................................................ 61
Properties....................................................... 61
Security Ownership of Certain Beneficial Owners and Management... 62
Related Transactions................................................ 66
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
Indemnification..................................................... 66
Fees and Benefit Plans for Directors................................ 66
Monthly Cash Retainer Fees....................................... 66
Meeting Fees..................................................... 66
Executive Compensation........................................... 67
Change of Control Agreements........................................ 67
South Branch Employee Benefit Plans................................. 69
Defined Contribution Plan........................................ 69
Company ESOP..................................................... 70
Incentive Compensation Program................................... 70
Stock Option Plan................................................ 70
Proposal to Amend Articles of Incorporation of South Branch......... 70
Legal Matters....................................................... 70
Experts............................................................. 71
Shareholder Proposals............................................... 71
Other Matters....................................................... 71
Where You Can Find More Information About South Branch.............. 71
</TABLE>
Annex I--Agreement and Plan of Merger dated as of July 16,
1999, by and between South Branch and Potomac
Annex II--Section 31-1-123 of the West Virginia Code
relating to Dissenters' Rights
Annex III--Proposed amendment to Articles of Incorporation
of South Branch Valley Bancorp, Inc.
ii
<PAGE>
Common Questions and Answers about the Merger
Q: What am I being asked to vote on?
A: Potomac shareholders are being asked to vote on the merger with Potomac
Interim Bank, Inc., a wholly-owned subsidiary of South Branch which will change
its name to "Summit Financial Group, Inc." The merger is structured between
Potomac and this interim subsidiary of South Branch instead of South Branch
directly in order to permit the merger to be treated as a tax-free transaction
for Potomac shareholders. We cannot complete the merger unless the holders of a
majority of Potomac's common stock vote to approve the merger.
South Branch shareholders are being asked to vote to change the company's
name to "Summit Financial Group, Inc."
South Branch shareholders are also being asked to vote on the issuance of
stock by Summit in connection with the merger.
Q: If the merger is completed, what will I receive?
A: If the merger is completed, each share of Potomac common stock owned by you
will be converted into a number of shares of Summit common stock.
Q: How many shares of Summit common stock will I receive in the merger?
A: If you are a Potomac shareholder, you will receive shares of Summit common
stock based on the book values of South Branch and Potomac. If the merger were
completed as of June 30, 1999, you would receive 3.319 shares of Summit
Common Stock for each share of Potomac Common Stock you own.
Q: How will I be affected by the merger?
A: If you are a Potomac shareholder, after the merger you will own shares in
Summit. Summit is a bank holding company, and there are different regulatory
requirements applicable to it. You should carefully review these differences,
which are discussed beginning on page 54.
If you are a South Branch shareholder, you will continue to hold your
shares of South Branch stock, but if South Branch's shareholders approve the
amendment of its Articles of Incorporation, South Branch's name will be changed
and new certificates will be issued.
Q: What are the tax consequences to Potomac shareholders from the merger?
A: We expect that the merger will be a tax-free transaction for federal income
tax purposes for Potomac shareholders. However, you will have to pay taxes on
any cash received for dissenters' shares and any cash received in lieu of
fractional shares. The tax consequences of the merger to you will depend on your
own situation. Therefore, you should consult your tax advisor for a full
understanding of the tax consequences of the merger.
Q: When will the merger be completed?
A: Assuming we receive the required approvals, we expect the merger to be
completed during the last quarter of 1999.
1
<PAGE>
Q: How can I vote if I do not plan to attend the special meeting?
A: You should read this document carefully and then mail your signed proxy
card approving or disapproving the merger in the enclosed return envelope as
soon as possible. A failure to vote or turn in a proxy card has the same effect
as voting against the merger.
Q: Should I send in my stock certificates now?
A: No. If the merger is completed, we will send written instructions for
exchanging Potomac common stock for Summit common stock. If the shareholders of
South Branch approve the name change, South Branch shareholders will receive new
certificates for the shares of South Branch they own.
Q: Where can I get more information about South Branch and the merger?
A: You may obtain more information about South Branch and the merger in this
document and in the other sources listed on page 71.
2
<PAGE>
Summary
You are urged to read the entire proxy statement/prospectus before deciding
how to vote your shares. In this proxy statement/prospectus, the words "we" and
"us" refer to Summit, South Branch and Potomac together. In addition, we
anticipate South Branch will change its name to "Summit Financial Group, Inc.",
so you will see the words "Summit" and "South Branch" used interchangeably.
The Merger (Pages 27 and 30)
The merger agreement provides that the merger is intended to be a merger of
equals. We propose a merger between Potomac Interim Bank, Inc., a wholly-owned
subsidiary of Summit, and Potomac, with Potomac continuing as the surviving
corporation and becoming a wholly-owned subsidiary of South Branch, which will
change its name to "Summit Financial Group, Inc." Therefore, the exchange ratio
is based on the book values of Potomac and South Branch. Not only does the
merger agreement provide for the change of South Branch's name to that of
Summit, it includes a number of provisions about the operations of the combined
company. For example, Potomac will retain its officers and directors, except
that two individuals of South Branch will be appointed to serve on the Board of
Directors of Potomac when the merger is completed.
Similarly, two individuals of Potomac will be appointed to serve on the
Board of Directors of South Branch Valley National Bank, a wholly-owned
subsidiary of Summit located in Moorefield, West Virginia.
In the merger, for each share of Potomac common stock you own, you will
receive a number of shares of Summit common stock based on the book values per
share of Potomac and South Branch plus cash instead of any fractional share at
the value referred to below.
You will receive a check in payment for any fractional shares based on the
average market value of a share of Summit common stock during a specified period
prior to the merger.
Your shares of Potomac common stock will be canceled as a result of the
merger. However, unless you properly exercise dissenters' rights, you will
receive shares of a larger and more diversified company, as more fully described
in this proxy statement/prospectus.
Federal Income Tax Consequences (Page 36)
We intend the merger to be a reorganization for federal income tax
purposes. If we obtain this treatment, you will not recognize any gain or loss
for federal income tax purposes upon receipt of shares of Summit common stock in
exchange for your shares of Potomac common stock. However, you will have to pay
taxes on any cash received in lieu of fractional shares.
Because of the complexity of the tax laws and the individual nature of the
tax consequences of the merger to a shareholder, you should consult your own tax
advisor concerning all federal, state, local and foreign tax consequences of the
merger that may apply to you.
3
<PAGE>
Dissenters' Rights (Page 33)
South Branch shareholders do not have dissenters' rights on the proposals
regarding the issuance of shares or the name change to "Summit".
In connection with the merger, Potomac shareholders may be entitled to
dissenters' rights under West Virginia law. If you properly exercise your
dissenters' rights, you will be entitled to receive in cash the fair value of
your shares determined as of the day prior to the date of the special meeting,
without regard to any appreciation or depreciation in anticipation of the
merger. See "The Merger--Rights of Dissenting Shareholders" beginning on page
____.
The Companies (Pages 49 and 53)
Potomac
Potomac is located in Grant County, West Virginia, and provides general
banking services, including personal lines of credit, commercial, agricultural,
real estate and installment loans, checking, savings, NOW and money market
accounts, certificates of deposit and individual retirement accounts. The
offices of Potomac are located at 4 North Main Street, P. O. Box 1079,
Petersburg, West Virginia 26847. Its telephone number is (304) 257-1244.
South Branch
South Branch is a bank holding company with banking subsidiaries located in
West Virginia and Virginia. Through these subsidiaries, South Branch conducts a
general banking, commercial and trust business. The principal executive offices
of South Branch are located at 310 North Main Street, Moorefield, West Virginia
26836. Its telephone number is (304) 538-1000.
The Special Meetings (Pages 23 and 25)
Potomac
Potomac's special meeting will be held on _______, __________, 1999 at
_____ a.m., local time at the offices of Potomac at 4 North Main Street,
Petersburg, West Virginia. At the meeting you will vote on the merger agreement
and will conduct any other business that properly arises.
South Branch
The South Branch special meeting will be held on __________, ___________,
1999, at ________ a.m. local time at the offices of South Branch at 310 North
Main Street, Moorefield, West Virginia 26836.
There are two purposes for the South Branch special meeting. The first
purpose of the South Branch special meeting is to vote upon the issuance of
stock in connection with the Merger. The second purpose of the South Branch
special meeting is to vote upon an amendment to South Branch's Articles of
Incorporation to change South Branch's name to "Summit Financial Group, Inc."
Voting at the Special Meetings (Pages 23 and 25)
You may vote at the Potomac special meeting only if you owned shares of
Potomac common stock at the close of business on ______, __________, 1999. You
may cast one vote for each share of Potomac common stock owned at that date. To
approve the merger, the holders of a majority of the outstanding shares of
Potomac common stock must vote in favor of the merger. As of September 30, 1999
4
<PAGE>
there were 90,000 shares of Potomac common stock outstanding, held by
approximately 323 holders of record.
You may vote at the South Branch special meeting only if you owned shares
of South Branch common stock at the close of business on __________________,
_____________________, 1999. You may cast one vote for each share of South
Branch common stock you owned at that date.
To approve the issuance of shares or the name change, the holders of a
majority of the outstanding shares of South Branch common stock must vote in
favor of each proposal. As of September 30, 1999, there were 591,292 shares of
South Branch common stock outstanding held by approximately 1,014 shareholders
of record.
You can vote your shares by attending the special meeting and voting in
person, or by marking the enclosed proxy card with your vote, signing it and
mailing it in the enclosed return envelope.
You can change your vote as late as the date of the special meeting either
by sending in a new proxy card received prior to the special meeting or by
attending the special meeting and voting in person.
Ownership of Potomac Common Stock by South Branch (Page 29)
South Branch and parties related to South Branch own a total of 500 shares
of Potomac common stock, representing less than 1% of the outstanding shares.
See "The Special Meeting--Record Date; Voting at the Special Meeting" on page 25
for more information about South Branch's ownership of Potomac common stock.
Potomac and parties related to Potomac own a total of 232 shares of South Branch
common stock representing less than 1% of the outstanding shares.
Government Approvals (Page 33)
In addition to your approval, the merger is subject to the approval of the
Board of Governors of the Federal Reserve System and the West Virginia Board of
Banking and Financial Institutions. We have applied for the approval of the
Federal Reserve Board and the West Virginia Board of Banking and Financial
Institutions, and we expect to receive these approvals prior to the special
meeting. We cannot guarantee, however, that the Federal Reserve Board or the
West Virginia Board of Banking and Financial Institutions will approve the
merger or, if approved, whether we will receive the approvals in the time frame
contemplated by the merger agreement. We also cannot predict whether conditions
will be attached to these approvals. South Branch believes it will be required
to sell its branch located in Petersburg, West Virginia, in order to obtain
approval from The Federal Reserve Board.
Effective Date of the Merger (Pages 27 and 39)
We expect the merger to occur as soon as practicable after shareholder and
regulatory approvals have been received, and all applicable regulatory waiting
periods have expired. We expect this to occur during the last quarter of 1999.
Conditions to the Merger (Pages 43 and 44)
Several conditions must be satisfied or waived before the merger can be
completed, including approval of the merger by the shareholders of Potomac and
approval of the issuance of shares by the shareholders
5
<PAGE>
of South Branch. Please see "The Merger Agreement--Conditions to Obligations of
the Parties" beginning on page 43 for a complete list of the conditions that
must be satisfied.
Termination of the Merger Agreement (Page 45)
By mutual consent, we may agree to terminate the merger agreement at any
time without completing the merger, even after you have approved it.
There are several other grounds for termination. First, either of us may
decide, without the consent of the other, to terminate the merger agreement if
the merger has not occurred by January 31, 2000. If the shareholders of Potomac
fail to approve the merger, or if shareholders of South Branch fail to approve
the issuance of shares, the Agreement may be terminated. Failure to obtain
regulatory approval or certain breaches of this merger agreement by either party
are also reasons for termination. For a description of other circumstances in
which either of us may terminate the merger agreement, see "The Merger
Agreement--Termination; Expenses" beginning on page 45.
Accounting Treatment (Page 36)
It is anticipated that the merger will be treated as pooling of interests
for accounting purposes.
Comparative Per Share Market Price Information (Page 21)
Shares of South Branch trade on the OTC Bulletin Board under the symbol
"SBVB". On March 19, 1999, the last trading day before we signed the merger
agreement, the closing price per share as reported on the OTC Bulletin Board was
$42.75. Potomac common stock is not actively traded. The last trade prior to
announcement of the merger known to Potomac management occurred on October 2,
1998 and the buyer paid $130.00.
Risk Factors (Pages 33 and 44)
Potomac shareholders who do not exercise their dissenters' rights will be
exchanging their Potomac stock for Summit Stock. Many of the risks associated
with holding Potomac Stock will be similar to the risks of holding South Branch
common stock. There are risks inherent in any equity investment. Both
companies are subject to substantial state and federal regulation, including
regulation of business opportunities and the ability to pay dividends.
As to the proposed merger, there is a risk that the required regulatory
approval, shareholder approvals, or other conditions to consummation will not be
met. See "Government Approvals" page 33 and "Conditions to Consummation of the
Merger" page 44.
Comparison of Shareholder Rights (Pages 46 and 47)
The rights of the shareholders of South Branch and Potomac are governed by
the articles of incorporation and bylaws of the respective organizations and by
West Virginia law, and are similar in many respects. Important differences do
exist including certain antitakeover provisions contained in South Branch's
Articles of Incorporation. These provisions will be a part of Summit's Articles
of Incorporation after the name change. Please see
6
<PAGE>
"Comparative Rights of Shareholders" beginning on page 46 for a complete
description of these differences.
7
<PAGE>
South Branch Valley Bancorp, Inc.
Selected Financial Data
(dollars in thousands, except per share data)
The following selected financial data is not covered by the independent
auditor's report appearing in this document. However, the annual information is
based upon the audited consolidated financial statements. You should read this
information together with its notes and with the consolidated financial
statements and their related notes included in this document.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, --- Year ended December 31, ---
1999 1998 1997 1996
----------------------------------------------
<S> <C> <C> <C> <C>
PERIOD END BALANCES
Assets $271,866 $192,999 $140,648 $122,114
----------------------------------------------
Loans $171,635 $144,142 $ 93,468 $ 83,273
----------------------------------------------
Deposits $209,628 $146,373 $106,985 $100,941
----------------------------------------------
Long term debt $ 20,803 $ 16,469 $ 10,396 $ 3,515
----------------------------------------------
Shareholders equity $ 23,631 $ 24,145 $ 15,061 $ 12,304
----------------------------------------------
INCOME FOR THE PERIOD
Interest income $ 8,264 $ 13,879 $ 10,590 $ 9,692
Interest expense 4,206 7,043 5,407 4,764
----------------------------------------------
Net interest income 4,058 6,836 5,183 4,928
Provision for loan losses 160 270 155 95
Other income 364 609 524 456
Other expense 2,909 4,475 3,342 3,156
----------------------------------------------
Net income (loss) from operations $ 862 $ 1,733 $ 1,520 $ 1,490
----------------------------------------------
PER SHARE DATA ON COMMON STOCK
Net income (loss) from operations $ 1.46 $ 3.16 $ 3.83 $ 3.94
----------------------------------------------
Cash dividends declared $ 0.47 $ 0.89 $ 0.84 $ 0.77
----------------------------------------------
Shareholders equity $ 39.96 $ 40.83 $ 36.48 $ 32.51
----------------------------------------------
</TABLE>
8
<PAGE>
Potomac Valley Bank
Selected Financial Data
(dollars in thousands, except per share data)
The following selected financial data is not covered by the independent
auditor's report appearing in this document. However, the annual information is
based upon the audited consolidated financial statements. You should read this
information together with its notes and with the consolidated financial
statements and their related notes included in this document.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, ------Year ended December 31,------
1999 1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
PERIOD END BALANCES
Assets $90,718 $94,297 $94,593 $94,262
--------------------------------------------------
Loans $52,405 $51,135 $51,599 $50,907
--------------------------------------------------
Deposits $78,664 $81,968 $83,066 $82,945
--------------------------------------------------
Long term debt $ 0 $ 0 $ 0 $ 0
--------------------------------------------------
Shareholders equity $11,937 $11,812 $11,129 $10,407
--------------------------------------------------
INCOME FOR THE PERIOD
Interest income $ 3,202 $ 6,759 $ 6,768 $ 6,484
Interest expense 1,354 3,245 3,473 3,554
--------------------------------------------------
Net interest income 1,848 3,514 3,295 2,930
Provision for loan losses 0 345 399 330
Other income 120 143 50 119
Other expense 1,116 2,163 1,914 1,754
--------------------------------------------------
Net income (loss) from operations $ 565 $ 869 $ 780 $ 921
--------------------------------------------------
PER SHARE DATA ON COMMON STOCK
Net income (loss) from operations $ 6.28 $ 9.65 $ 8.67 $ 10.24
--------------------------------------------------
Cash dividends declared $ 1.50 $ 3.00 $ 3.00 $ 3.00
--------------------------------------------------
Shareholders equity $132.63 $131.24 $123.66 $115.63
--------------------------------------------------
</TABLE>
9
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Pro Forma Selected Financial Data
(dollars in thousands, except per share data)
The following selected financial data reflects the pro forma combined data
for South Branch and Potomac assuming the transaction had been completed at a
book-to-book exchange rate as of June 30, 1999. This exchange rate was used for
all years because the difference for the other periods would have not been
material.
<TABLE>
<CAPTION>
Six Months
Ended
June 30, -----Year ended December 31,-----
1999 1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C> <C>
PERIOD END BALANCES
Assets $362,584 $287,296 $235,241 $216,376
-----------------------------------------------
Loans $224,040 $195,277 $145,067 $134,180
-----------------------------------------------
Deposits $288,292 $228,341 $190,051 $183,886
-----------------------------------------------
Long term debt $ 20,803 $ 16,469 $ 10,396 $ 3,515
-----------------------------------------------
Shareholders equity $ 35,568 $ 35,957 $ 26,190 $ 22,711
-----------------------------------------------
INCOME FOR THE PERIOD
Interest income $ 11,466 $ 20,638 $ 17,358 $ 16,176
Interest expense 5,560 10,288 8,880 8,318
-----------------------------------------------
Net interest income 5,906 10,350 8,478 7,858
Provision for loan losses 160 615 554 425
Other income 484 752 574 575
Other expense 4,025 6,638 5,256 4,910
-----------------------------------------------
Net income (loss) from operations $ 1,427 $ 2,602 $ 2,300 $ 2,411
-----------------------------------------------
PER SHARE DATA ON COMMON STOCK
Net income (loss) from operations $ 1.68 $ 3.19 $ 2.64 $ 2.64
-----------------------------------------------
Cash dividends declared $ 0.47 $ 0.89 $ 0.84 $ 0.77
-----------------------------------------------
Shareholders equity $ 39.96 $ 40.40 $ 29.26 $ 26.39
-----------------------------------------------
</TABLE>
10
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Financial Statements
Following are unaudited pro forma financial statements and related notes
reflecting the consummation of the transaction between South Branch Valley
Bancorp, Inc. and Potomac. The merger agreement dated July 16, 1999 calls for
Potomac to receive shares of Summit based upon a book-to-book exchange as
calculated using the respective book values of Summit and Potomac at the date of
closing. For comparability, all of the pro forma statements reflect the exchange
ratio of 3.319 shares of the combined company for each Potomac share which would
have been the exchange ratio had the transaction closed on June 30, 1999. A
review of the exchange ratio in other periods indicates that any variances would
not have been material. The transaction is to be structured as a pooling of
interests and accordingly the following statements are prepared on that basis.
In two transactions on April 22, 1999, South Branch acquired three branch
banking facilities in Greenbrier County, West Virginia. On April 1, 1998, South
Branch acquired Capital State Bank, Inc. Both these transactions were treated as
purchases for accounting purposes and their balance sheets and results of
operations were included from the dates of the respective acquisitions forward.
These pro forma financial statements have been adjusted to give affect to both
of these transactions as though they been completed at the beginning of the
various periods presented.
The following unaudited pro forma financial statements are not necessarily
indicative of the results of future operations of the combined entities and you
should read them in conjunction with the various financial statements and notes
thereto for the individual entities, which are included elsewhere in this proxy
statement.
11
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Balance Sheet
June 30, 1999
(dollars in thousands)
The following unaudited pro forma combined condensed balance sheet combines
the balance sheets of South Branch and Potomac as of June 30, 1999 and has been
prepared to give effect to the exchange of all the outstanding shares of Potomac
for common stock of the combined entity on the basis of a book-to-book exchange
as of June 30, 1999. The transaction is to be accounted for as a pooling of
interests. Accordingly, the only adjustments required is to reflect the
reclassifications between common stock and surplus to reflect the par value of
the new shares to be issued with regards to this transaction. Because the
transaction will be based upon a book-to-book exchange at closing, the amounts
of shares issued, etc. will change based upon both the timing of closing as well
as the individual performances of both South Branch and Potomac. You should read
this statement in conjunction with the other financial statements and notes
thereto included elsewhere in this proxy statement
<TABLE>
<CAPTION>
South Pro Forma
Branch Potomac Adjustments Combined
--------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 5,118 $ 2,324 $ 7,442
Interest bearing deposits with other banks 6,597 6,597
Federal funds sold 10,007 900 10,907
Securities available for sale 64,513 31,992 96,505
Securities held to maturity 1,297 1,297
Investment in affiliate 0
Loans less allowance 170,169 51,673 ($1,000) (B-2) 220,842
Bank premises and equipment 6,968 1,699 8,667
Accrued Interest receivable 1,493 739 2,232
Other assets 7,001 94 0 7,095
--------- -------- ------------ ---------
Total assets $271,866 $90,718 ($1,000) $361,584
--------- -------- ------------ ---------
Liabilities and shareholders equity
Liabilities
Non interest bearing deposits $ 17,921 $ 8,087 $ 26,008
Interest bearing deposits 191,707 70,577 $ 0 262,284
--------- -------- ------------ ---------
Total deposits 209,628 78,664 0 288,292
Short term borrowings 16,313 16,313
Long term borrowings 20,803 (1,000) (B-2) 19,803
Other liabilities 1,491 117 0 1,608
--------- -------- ------------ ---------
Total liabilities 248,235 78,781 (1,000) 326,016
--------- -------- ------------ ---------
Shareholders equity
Common stock, par value 1,501 900 (153) (B-1) 2,248
Surplus 9,612 1,500 153 (B-1) 11,265
Retained earnings 13,688 9,686 23,374
Less treasury stock (385) 0 (385)
Accumulated other comprehensive income (785) (149) 0 (934)
--------- -------- ------------ ---------
Total shareholders' equity 23,631 11,937 0 35,568
--------- -------- ------------ ---------
Total liabilities and shareholders equity $271,866 $90,718 ($1,000) $361,584
--------- -------- ------------ ---------
</TABLE>
See notes to unaudited pro forma combined financial statements
12
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Income Statements
(dollars in thousands)
The following unaudited pro forma combined statements of income combine the
historical income statements of South Branch and Potomac for the six months
ended June 30, 1999, as well as for the years ended December 31, 1998, 1997 and
1996 using the pooling of interests method of accounting. Although the exchange
ratio would have been slightly different had the transaction actually closed at
those earlier dates, because any variances in pro forma earnings per share would
have been immaterial, the exchange ratio for shares was left the same for all
periods. The exchange ratio used was the 3.319 shares for each Potomac share
that would have been the exchange ratio had the transaction occurred on June 30,
1999. In addition, adjustments have been included as appropriate to reflect both
the Capital State Bank acquisition and the Greenbrier branch acquisition (both
accounted for using the purchase method of accounting) as if they had occurred
at the beginning of each period presented.
The unaudited pro forma combined income statements are not necessarily
indicative of future operations. These statements should be read in conjunction
with the other financial statements and notes thereto included elsewhere in this
proxy statement.
13
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Income Statements
Six Months Ended June 30,1999
(dollars in thousands)
<TABLE>
<CAPTION>
Adjustments
for Green- Adjusted
South brier (I-2) South Pro Forma
Branch Greenbrier Branch Potomac Adjustments Combined
--------------------- ------------------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $6,658 $250 $6,908 $2,175 ($10) (I-1) $ 9,073
Interest and dividends on securities:
Taxable 1,381 632 2,013 840 2,853
Tax-exempt 158 158 109 267
Interest on interest bearing deposits 0 0
Interest on federal funds sold 67 0 67 78 0 145
---------------------- ----------------------------- --------
Total interest income 8,264 882 9,146 3,202 (10) 12,338
---------------------- ----------------------------- --------
Interest expense
Interest on deposits 3,518 476 3,994 1,354 5,348
Interest on short-term borrowings 172 172 0 172
Interest on long-term borrowings 516 0 516 0 (10) (I-1) 506
---------------------- ----------------------------- --------
Total interest expense 4,206 476 4,682 1,354 (10) 6,026
---------------------- ----------------------------- --------
Net interest income 4,058 406 4,464 1,848 0 6,312
Provision for loan losses 160 0 160 0 0 160
---------------------- ----------------------------- --------
Net interest income after provision 3,898 406 4,304 1,848 0 6,152
---------------------- ----------------------------- --------
Other income
Insurance commissions 33 33 12 45
Trust services income 0 0
Service fees 258 56 314 88 402
Securities gains 0 0
Gain on sales of assets 0 0
Other 73 5 78 20 0 98
---------------------- ----------------------------- --------
Total other income 364 61 425 120 0 545
---------------------- ----------------------------- --------
Other expenses
Salaries and employee benefits 1,390 108 1,498 642 2,140
Net occupancy expense 193 29 222 70 292
Equipment rentals, depreciation
and maintenance 252 4 256 91 347
Other 1,074 209 1,283 313 0 1,596
---------------------- ----------------------------- --------
Total other expenses 2,909 350 3,259 1,116 0 4,375
---------------------- ----------------------------- --------
Income before income tax expense 1,353 117 1,470 852 0 2,322
Income tax expense 491 45 536 287 0 823
---------------------- ----------------------------- --------
Net income $ 862 $ 72 $ 934 $ 565 $ 0 $ 1,499
---------------------- ----------------------------- --------
Basic earnings per share $ 1.46 $ 1.58 $ 1.68
------- ------- --------
Diluted earnings per share $ 1.46 $ 1.58 $ 1.68
------- ------- --------
Shares outstanding - basic 591 591 299 890
------- ---------------- --------
Shares outstanding - diluted 591 591 299 890
------- ---------------- --------
</TABLE>
See notes to unaudited pro forma combined financial statements
14
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Income Statement
For the year ended December 31, 1998
(dollars amounts in thousands)
<TABLE>
<CAPTION>
Adjustments Adjustments Adjusted
South for Green- for Capital South Pro Forma
Branch brier (I-2) State (I-3) Branch Potomac Adjustments Combined
------------------------------------ -------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $11,437 $ 816 $507 $12,760 $4,402 $17,162
Interest and dividends on securities:
Taxable 1,813 2,058 129 4,000 1,709 5,709
Tax-exempt 321 321 229 550
Interest on interest bearing deposits 72 72 72
Interest on federal funds sold 236 0 99 335 419 $0 754
----------------------------------- ---------------------------- ---------
Total interest income 13,879 2,874 735 17,488 6,759 0 24,247
----------------------------------- ---------------------------- ---------
Interest expense
Interest on deposits 6,093 1,551 388 8,032 3,245 11,277
Interest on short-term borrowings 231 231 0 231
Interest on long-term borrowings 719 0 0 719 0 0 719
----------------------------------- ---------------------------- ---------
Total interest expense 7,043 1,551 388 8,982 3,245 0 12,227
----------------------------------- ---------------------------- ---------
Net interest income 6,836 1,323 347 8,506 3,514 0 12,020
Provision for loan losses 270 0 30 300 345 0 645
----------------------------------- ---------------------------- ---------
Net interest income after provision 6,566 1,323 317 8,206 3,169 0 11,375
----------------------------------- ---------------------------- ---------
Other income
Insurance commissions 83 83 21 104
Trust services income 4 4 4
Service fees 431 184 9 624 87 711
Securities gains 8 8 0 8
Gain on sales of assets 18 18 18
Other 65 15 3 83 36 0 119
----------------------------------- ---------------------------- ---------
Total other income 609 199 12 820 144 0 964
----------------------------------- ---------------------------- ---------
Other expenses
Salaries and employee benefits 2,214 353 89 2,656 1,218 3,874
Net occupancy expense 300 94 26 420 156 576
Equipment rentals, depreciation
and maintenance 389 14 23 426 156 582
Other 1,572 681 142 2,395 633 0 3,028
----------------------------------- ---------------------------- ---------
Total other expenses 4,475 1,142 280 5,897 2,163 0 8,060
----------------------------------- ---------------------------- ---------
Income before income tax expense 2,700 380 49 3,129 1,150 0 4,279
Income tax expense 967 146 36 1,149 281 0 1,430
----------------------------------- ---------------------------- ---------
Net income $ 1,733 $ 234 $ 13 $ 1,980 $ 869 $0 $ 2,849
----------------------------------- ---------------------------- ---------
Basic earnings per share $ 3.16 $ 3.34 $ 3.19
-------- --------- ---------
Diluted earnings per share $ 3.16 $ 3.34 $ 3.19
-------- --------- ---------
Shares outstanding - basic 548 45 593 299 892
-------- -------- ------------------ ---------
Shares outstanding - diluted 548 45 593 299 892
-------- -------- ------------------ ---------
</TABLE>
See notes to unaudited pro forma combined financial statements
15
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Income Statement
For the year ended December 31, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Adjustments Adjustments Adjusted
South for Green- for Capital South Pro Forma
Branch brier (I-2) State (I-4) Branch Potomac Adjustments Combined
-------------------------------------- -------------------------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 8,558 $ 816 $1,767 $11,141 $4,536 $15,677
Interest and dividends on securities:
Taxable 1,541 2,058 500 4,099 1,654 5,753
Tax-exempt 315 315 372 687
Interest on interest bearing deposits 96 9 105 105
Interest on federal funds sold 80 0 271 351 206 $0 557
------------------------------------ ------------------------------- ---------
Total interest income 10,590 2,874 2,547 16,011 6,768 0 22,779
------------------------------------ ------------------------------- ---------
Interest expense
Interest on deposits 4,607 1,551 1,160 7,318 3,473 10,791
Interest on short-term borrowings 256 256 0 256
Interest on long-term borrowings 544 0 544 0 0 544
------------------------------------ ------------------------------- ---------
Total interest expense 5,407 1,551 1,160 8,118 3,473 0 11,591
------------------------------------ ------------------------------- ---------
Net interest income 5,183 1,323 1,387 7,893 3,295 0 11,188
Provision for loan losses 155 0 120 275 399 0 674
------------------------------------ ------------------------------- ---------
Net interest income after provision 5,028 1,323 1,267 7,618 2,896 0 10,514
------------------------------------ ------------------------------- ---------
Other income
Insurance commissions 91 91 29 120
Trust services income 4 4 4
Service fees 280 184 29 493 82 575
Securities gains 10 10 (82) (72)
Gain on sales of assets 90 90 90
Other 50 15 14 79 21 0 100
------------------------------------ ------------------------------- ---------
Total other income 525 199 43 767 50 0 817
------------------------------------ ------------------------------- ---------
Other expenses
Salaries and employee benefits 1,772 353 563 2,688 1,059 3,747
Net occupancy expense 196 94 138 428 145 573
Equipment rentals, depreciation
and maintenance 290 14 100 404 151 555
Other 1,084 681 685 2,450 559 0 3,009
------------------------------------ ------------------------------- ---------
Total other expenses 3,342 1,142 1,486 5,970 1,914 0 7,884
------------------------------------ ------------------------------- ---------
Income before income tax expense 2,211 380 (176) 2,415 1,032 0 3,447
Income tax expense 691 146 40 877 252 0 1,129
------------------------------------ ------------------------------- ---------
Net income $ 1,520 $ 234 ($216) $ 1,538 $ 780 $0 $ 2,318
------------------------------------ ------------------------------- ---------
Basic earnings per share $ 3.83 $ 2.65 $ 2.64
-------- -------- ---------
Diluted earnings per share $ 3.83 $ 2.65 $ 2.64
-------- -------- ---------
Shares outstanding - basic 397 183 580 299 879
-------- --------- ----------------- ---------
Shares outstanding - diluted 397 183 580 299 879
--------- --------- ----------------- ---------
</TABLE>
See notes to unaudited pro forma combined financial statements.
16
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Unaudited Pro Forma Combined Income Statement
For the year ended December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
Adjustments Adjustments Adjusted
South for Green- for Capital South Pro Forma
Branch brier (I-2) State (I-4) Branch Potomac Adjustments Combined
--------------------------------------- ------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income
Interest and fees on loans $7,552 $ 816 $ 777 $ 9,145 $4,335 $13,480
Interest and dividends on securities:
Taxable 1,711 2,058 330 4,099 1,605 5,704
Tax-exempt 255 255 470 725
Interest on interest bearing deposits 126 12 138 138
Interest on federal funds sold 49 0 314 363 74 $0 437
------------------------------------- ------------------------------- ----------
Total interest income 9,693 2,874 1,433 14,000 6,484 0 20,484
------------------------------------- ------------------------------- ----------
Interest expense
Interest on deposits 4,590 1,551 474 6,615 3,540 10,155
Interest on short-term borrowings 69 69 14 83
Interest on long-term borrowings 106 0 0 106 0 0 106
------------------------------------- ------------------------------- ----------
Total interest expense 4,765 1,551 474 6,790 3,554 0 10,344
------------------------------------- ------------------------------- ----------
Net interest income 4,928 1,323 959 7,210 2,930 0 10,140
Provision for loan losses 95 0 124 219 330 0 549
------------------------------------- ------------------------------- ----------
Net interest income after provision 4,833 1,323 835 6,991 2,600 0 9,591
------------------------------------- ------------------------------- ----------
Other income
Insurance commissions 111 111 29 140
Trust services income 6 6 6
Service fees 233 184 15 432 82 514
Securities gains 30 30 (13) 17
Gain on sales of assets 7 7 7
Other 69 16 6 91 21 0 112
------------------------------------- ------------------------------- ----------
Total other income 456 200 21 677 119 0 796
------------------------------------- ------------------------------- ----------
Other expenses
Salaries and employee benefits 1,728 353 443 2,524 1,027 3,551
Net occupancy expense 189 94 103 386 139 525
Equipment rentals, depreciation
and maintenance 222 14 86 322 137 459
Other 1,017 681 562 2,260 452 0 2,712
------------------------------------- ------------------------------- ----------
Total other expenses 3,156 1,142 1,194 5,492 1,755 0 7,247
------------------------------------- ------------------------------- ----------
Income before income tax expense 2,133 381 (338) 2,176 964 0 3,140
Income tax expense 643 147 39 829 43 0 872
------------------------------------- ------------------------------- ----------
Net income $1,490 $ 234 ($377) $ 1,347 $ 921 $0 $ 2,268
------------------------------------- ------------------------------- ----------
Basic earnings per share $ 3.94 $ 2.40 $ 2.64
--------- -------- ----------
Diluted earnings per share $ 3.94 $ 2.40 $ 2.64
--------- -------- ----------
Shares outstanding-basic 379 183 562 299 861
--------- --------- ----------------- ----------
Shares outstanding-diluted 379 183 562 299 861
--------- --------- ----------------- ----------
</TABLE>
See notes to unaudited pro forma combined financial statements
17
<PAGE>
South Branch Valley Bancorp, Inc. and
Potomac Valley Bank
Notes to Unaudited Pro Forma Combined Financial Statements
B-1- These adjustments are to reflect the reclassification out of par value into
surplus of the amount to bring par value to the level needed to include
South Branch and the 298,695 shares anticipated to be issued with regards
to this transaction assuming it had closed on June 30, 1999.
B-2- To eliminate the intercompany borrowing between South Branch and Potomac.
I-1- To eliminate the interest income and expense included in the combined
numbers for the six months ended June 30, 1999 that relates to the
intercompany loan between Potomac and South Branch.
I-2- Since the Greenbrier purchase consisted of three branch banks and not a
full entity, historical data was not available. Accordingly, in order to
show the pro forma affects of this transaction as if it had been in place
at the beginning of the period, current performance levels were used to
estimate what impact the transaction would have had.
I-3- Column includes the historical Capital State data for that portion of the
year Capital was not a part of South Branch, including the various
purchase accounting adjustments for a similar period so as to reflect
Capital State as if it had been a part of South Branch from the beginning
of the year.
I-4- Column includes the historical Capital State data for the year presented
net of the various purchase accounting adjustments made in order to
reflect Capital State as having been a part of South Branch for the entire
year.
18
<PAGE>
South Branch Valley Bancorp, Inc.
Potomac Valley Bank
Per Share and Equivalent Values
The following information reflects the per common share information for South
Branch and Potomac. The information is presented both on a historical and a pro
forma combined basis with regard to book value, dividends, market value and net
income per common share. Included in the pro forma net income are the
adjustments necessary to reflect prior transactions by South Branch that were
treated as purchases (see pro forma income statements for additional details).
Also presented is the equivalent per common share data for Potomac shareholders.
These amounts are computed based upon the book-to-book exchange ratio of 3.319
shares of the combined company for each Potomac share which was the ratio that
would have resulted had the transaction closed at June 30, 1999.
The calculations presented here are based upon the historical and pro forma
combined statements appearing elsewhere in this document and should be read in
conjunction with those statements and the notes thereto.
No assurances can be given that the pro forma results reflected in the pro forma
combined financial statements in this documents will be indicative of actual
future operations.
<TABLE>
<CAPTION>
Book Value Per Dividends Per Net Income Per
Common Share Common Share Common Share
-----------------------------------------------------------------------
Historical Pro Forma Historical Pro Forma Historical Pro Forma
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
For the six months ended
June 30, 1999
South Branch $ 39.96 $ 0.47 $ 1.46
Potomac $ 132.63 $ 1.50 $ 6.28
South Branch/Potomac/
Prior Transactions
Pro Forma $ 39.96 $ 0.47 $ 1.68
Equivalent per Potomac
common share $ 132.64 $ 1.56 $ 5.59
For the year ended
December 31, 1998
South Branch $ 40.83 $ 0.89 $ 3.16
Potomac $ 131.24 $ 3.00 $ 9.65
South Branch/Potomac/
Prior Transactions
Pro Forma $ 40.40 $ 0.89 $ 3.19
Equivalent per Potomac
common share $ 134.09 $ 2.95 $ 10.60
</TABLE>
19
<PAGE>
South Branch Valley Bancorp, Inc.
Potomac Valley Bank
Per Share and Equivalent Values
(continued)
<TABLE>
<CAPTION>
Book Value Per Dividends Per Net Income Per
Common Share Common Share Common Share
------------------------ ----------------------- ------------------------
Historical Pro Forma Historical Pro Forma Historical Pro Forma
------------ ----------- ------------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
For the year ended
December 31, 1997
South Branch $ 36.48 $ 0.84 $ 3.83
Potomac $ 123.66 $ 3.00 $ 8.67
South Branch/Potomac/
Prior Transactions
Pro Forma $ 29.26 $ 0.84 $ 2.64
Equivalent per Potomac
common share $ 97.12 $ 2.79 $ 8.75
For the year ended
December 31, 1996
South Branch $ 32.51 $ 0.77 $ 3.94
Potomac $ 115.63 $ 3.00 $ 10.24
South Branch/Potomac/
Prior Transactions
Pro Forma $ 26.39 $ 0.77 $ 2.64
Equivalent per Potomac
common share $ 87.58 $ 2.56 $ 8.75
</TABLE>
<TABLE>
<CAPTION>
Market Value Per
Common Share
------------------------
Historical Pro Forma
------------ -----------
(1)
<S> <C> <C>
South Branch $ 42.75
Potomac $ 130.00
Equivalent per Potomac
common share $ 141.88
</TABLE>
(1) Market value for South Branch is as of March 19, 1999, the last full
trading day prior to March 22, 1999, the announcement date of the letter of
intent regarding the transaction. The market value for Potomac is as of October
2, 1998, which was the last reported trade management was aware of prior to
March 22, 1999.
20
<PAGE>
Comparative Per Share Market Price Information
The following table presents the high and low prices of South Branch stock
and Potomac stock and the dividends declared per share during the periods
indicated. The information in this table is qualified by the following
factors. Neither South Branch nor Potomac is registered on an exchange and
therefore neither stock is widely-traded. South Branch has a market maker in
its shares, and since January 5, 1999, has been traded on the OTC Bulletin Board
under the symbol "SBVB". Accordingly, the stock prices indicated are based on
trades known either to the respective managements of South Branch and Potomac,
or with respect to South Branch during the three quarters of 1999, its market
makers or trades on the OTC Bulletin Board. However, many times trades are made
without the price being known to the respective managements of South Branch and
Potomac.
<TABLE>
<CAPTION>
South Branch Common Stock Potomac Common Stock
------------------------- ---------------------------
High Low Dividends High Low Dividends
------ ------ --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
1997
First Quarter $45.40 $40.00 $0.00 $ 0.00 $ 0.00 $0.00
Second Quarter $46.02 $39.00 $0.41 $110.00 $100.00 $1.00
Third Quarter $43.50 $43.50 $0.00 $ 0.00 $ 0.00 $0.00
Fourth Quarter $43.50 $43.50 $0.43 $ 0.00 $ 0.00 $2.00
1998
First Quarter $45.00 $40.00 $0.00 $ 0.00 $ 0.00 $0.00
Second Quarter $45.00 $42.75 $0.44 $122.22 $122.22 $1.00
Third Quarter $44.00 $42.00 $0.00 $130.00 $130.00 $0.00
Fourth Quarter $43.50 $40.00 $0.45 $ 0.00 $ 0.00 $2.00
1999
First Quarter $44.75 $41.25 $0.00 $130.00 $130.00 $0.00
Second Quarter $43.88 $40.25 $0.47 $130.00 $130.00 $1.50
Third Quarter $42.50 $40.19 $0.00 $135.00 $130.00 $0.00
Fourth Quarter
(through __________, 1999)
</TABLE>
On March 19, 1999, the last full trading day prior to the execution of
the merger agreement, the closing price per share of South Branch common stock
as reported on the OTC Bulletin Board was $42.75. On ______________, the most
recent practicable date prior to the printing of this proxy
statement/prospectus, the closing price per share of South Branch common stock
as reported on the OTC Bulletin Board was $_______.
21
<PAGE>
We urge you to obtain current market quotations for South Branch common
stock. Prices at which South Branch common stock may trade prior to the merger
may not be indicative of prices at which South Branch common stock may trade
following the merger.
Potomac common stock is not listed on any exchange, quotation system or
over-the-counter market and is not actively traded. However, since October 1,
1998, a total of 1,120 shares of Potomac common stock have been traded in
approximately 13 transactions known to Potomac. In each of these transactions,
the buyer paid $130 for each share of Potomac common stock.
South Branch Common Stock Dividend Policy
South Branch has historically declared and paid cash dividends on a semi-
annual basis. South Branch anticipates that, after the merger, Summit will
initially declare semi-annual dividends on shares of Summit common stock of $.50
per share. You are cautioned, however, that the Summit Board of Directors may,
at any time and without notice, stop declaring dividends or reduce the amount of
the dividend.
Whether Summit pays a dividend, and the amount of any dividend, will depend
upon Summit's results of operations, financial condition, cash requirements,
future prospects, limitations imposed by credit agreements or senior securities
and other factors deemed relevant by the Summit board of directors. Because
Summit's principal source of income will be dividends from its subsidiaries, its
ability to pay future dividends will depend upon the financial condition and
earnings of its subsidiaries. It is anticipated that under federal regulatory
requirements, regulatory approval will be required prior to South Branch Valley
National Bank's payment of dividends to South Branch.
Summit will be able to pay dividends at the discretion of its board of
directors out of any funds legally available for the payment of dividends under
West Virginia law. Under the West Virginia Corporation Act, dividends may be
paid out of unreserved and unrestricted earned surplus, and, additionally, in
certain circumstances and with the affirmative vote of holders of a majority of
its outstanding shares, out of capital surplus. Summit may never pay a dividend,
however, if, at the time of or after payment of the dividend, it is or would be
insolvent.
Potomac Common Stock Dividend Policy
Potomac anticipates that prior to the merger it will declare a dividend on
shares of Potomac common stock of $1.50 per share. You are cautioned, however,
that the Potomac board of directors may, at any time and without notice, stop
declaring dividends or reduce the amount of dividends.
Potomac has historically declared and paid dividends on a semi-annual
basis. Potomac may pay dividends at the discretion of its board of directors
out of any funds legally available for the payment of dividends under West
Virginia law.
22
<PAGE>
Under the West Virginia Corporation Act, dividends may be paid out of
unreserved and unrestricted earned surplus, and, additionally, in certain
circumstances and with the approval of holders of a majority of its outstanding
shares, out of capital surplus. Potomac may never pay a dividend, however, if
at the time of or after payment of the dividend, it is or would be insolvent.
The Potomac Special Meeting
General
The Potomac board of directors is soliciting proxies from the holders of
Potomac common stock to be voted at the special meeting. At the meeting,
Potomac shareholders will vote upon the merger agreement providing for the
merger of Potomac Interim Bank, Inc. into Potomac, and the exchange of each
outstanding share of Potomac common stock for shares of Summit common stock.
The Potomac board of directors unanimously has approved the merger
agreement and recommends that you vote FOR approval thereof.
A copy of the merger agreement is attached to this proxy
statement/prospectus as Annex I and is incorporated by reference into this
document in its entirety. You should read this agreement carefully.
Date, Time and Place of the Special Meeting
The Potomac special meeting will be held on _________, __________, 1999, at
_________ a.m., local time, in the principal executive offices of Potomac, at 4
North Main Street, Petersburg, West Virginia.
Record Date; Voting at the Special Meeting
Potomac common stockholders of record on __________, 1999, will be entitled
to notice of and to vote at the special meeting and any adjournments or
postponements of the special meeting. On that date, there were 90,000 shares of
Potomac common stock outstanding and entitled to vote at the special meeting.
Each share is entitled to one vote. As of September 30, 1999, there were
approximately 323 holders of record of Potomac common stock.
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Potomac common stock is necessary to constitute a quorum
at the special meeting. The holders of at least a majority of the outstanding
shares of Potomac common stock must vote in favor of the merger in order to
approve it. Abstentions and broker non-votes will have the effect of a vote
against approval of the merger agreement and the merger.
Each director and executive officer of Potomac who owns or has control over
shares of Potomac common stock has advised Potomac that he or she will vote FOR
adoption and approval of the merger agreement. As of September 30, 1999, the
directors, executive officers and
23
<PAGE>
affiliates of Potomac owned or controlled the vote of 36,420 shares of Potomac
common stock, constituting approximately 40.5% of the outstanding shares of
Potomac common stock.
John W. Crites, a director of South Branch, directly owns 500 shares of
Potomac common stock, representing approximately 0.6% of the outstanding shares.
The named proxies will vote all shares of Potomac common stock represented
at the special meeting by properly executed proxies received prior to or at the
special meeting, and not revoked in accordance with the instructions on the
proxies. If you properly execute a proxy but include no voting instructions, the
proxies will vote your shares to approve the merger agreement and authorize the
merger.
The Potomac board of directors does not know of any matters, other than as
described in the notice of special meeting, which are to come before the special
meeting. If any other matters are properly presented at the special meeting for
action, the persons named in the enclosed form of proxy will have the authority
to vote on those matters in their discretion.
If you give a proxy, you have the right to revoke it at any time before it
is voted. You may revoke your proxy by 1) filing with the Secretary of Potomac a
written notice of revocation bearing a later date than the proxy, 2) duly
executing a later dated proxy relating to the same shares and delivering it to
the Secretary of Potomac before the taking of the vote at the special meeting,
or 3) attending the special meeting and voting in person. Any written notice of
revocation or subsequent proxy should be sent so as to be delivered to Potomac
Valley Bank, 4 North Main Street, P.O. Box 1079, Petersburg, West Virginia
26847, Attention: Corporate Secretary, or hand delivered to the foregoing
representative of Potomac, at or before the taking of the vote at the special
meeting.
Potomac will bear the cost of the solicitation of proxies, except that the
parties will share the costs of preparing, printing and mailing this proxy
statement/prospectus in proportion to their respective book values as of June
30, 1999. In addition to soliciting by mail, directors, officers and employees
of Potomac may solicit proxies in person or by telephone, telegram or other
means of communication. Potomac will not compensate these directors, officers
and employees for soliciting proxies but it may reimburse them for out-of-pocket
expenses they incur in connection with the solicitation. Potomac will also make
arrangements with custodians, nominees and fiduciaries for the forwarding of
solicitation materials to the beneficial owners of Potomac common stock held of
record by such persons. Potomac may reimburse these custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses they incur in connection
therewith.
Do not send your stock certificates with your proxy card.
24
<PAGE>
The South Branch Special Meeting
General
The South Branch board of directors is soliciting proxies from the holders
of South Branch common stock to be voted at the special meeting. There are two
purposes for the South Branch special meeting. The first purpose of the South
Branch special meeting is to vote upon the issuance of stock in connection with
the merger. The second purpose of the South Branch special meeting is to vote
upon an amendment to South Branch's Articles of Incorporation to change South
Branch's name to "Summit Financial Group, Inc."
Approval of the merger agreement is not required under West Virginia law or
the Articles of Incorporation of South Branch. However, South Branch will be
issuing approximately 50% of the number of shares it has issued and outstanding
in connection with the transaction with Potomac. In consideration of the
magnitude of the proposed transaction, the Board of Directors of South Branch,
in its discretion, has elected to present for approval by South Branch's
shareholders, the issuance of up to 320,000 shares of South Branch common stock,
the maximum number of shares that could be exchanged. Shareholder approval has
been made a condition to consummation of the transaction. If the maximum number
of shares is exchanged, former holders of Potomac Stock will hold approximately
35% of the total issued and outstanding shares of Summit Stock. The merger
agreement requires that South Branch take all steps necessary to effect the name
change to "Summit Financial Group, Inc." prior to the effective date of the
merger.
The South Branch board of directors unanimously has approved the issuance
of shares and the name change and recommends that you vote FOR approval thereof.
A copy of the merger agreement is attached to this proxy
statement/prospectus as Annex I and is incorporated by reference into this
document in their entirety. You should read these agreements carefully.
Date, Time and Place of the Special Meeting
The South Branch special meeting will be held on _________, __________,
1999, at ______ a.m., local time, in the principal executive offices of South
Branch, at 310 North Main Street, Moorefield, West Virginia.
Record Date; Voting at the Special Meeting
Only holders of record of South Branch common stock on __________, 1999,
will be entitled to notice of and to vote at the special meeting and any
adjournments or postponements of the special meeting. On that date, there were
591,292 shares of South Branch common stock outstanding and entitled to vote at
the special meeting. Each share is entitled to one vote. As of September 30,
1999, there were approximately 1,014 holders of record of South Branch common
stock.
25
<PAGE>
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of South Branch common stock is necessary to constitute a
quorum at the special meeting. The holders of at least a majority of the voting
shares of South Branch common stock must vote in favor of the two proposals to
approve them.
Each director and executive officer of South Branch who owns or has control
over shares of South Branch common stock has advised South Branch that he or she
will vote FOR adoption and approval of the issuance of shares and the name
change. As of September 30, 1999, the directors, executive officers and
affiliates of South Branch owned or controlled the vote of 76,562 shares of
South Branch common stock, constituting approximately 24.2% of the outstanding
shares of South Branch common stock.
G. R. Ours, Jr., Chairman of the Board of Potomac and F. Richard Thompson,
a director of Potomac, each own 110 shares of South Branch stock, and James Paul
Geary owns 12 shares of South Branch stock, less than 1% of the outstanding
shares.
All shares of South Branch common stock represented at the special meeting
by properly executed proxies received prior to or at the special meeting, and
not revoked, will be voted at the special meeting in accordance with the
instructions on the proxies. If you properly execute a proxy but include no
voting instructions, your shares will be voted to approve the merger agreement
and authorize the merger.
The South Branch board of directors does not know of any matters, other
than as described in the notice of special meeting, which are to come before the
special meeting. If any other matters are properly presented at the special
meeting for action, the persons named in the enclosed form of proxy will have
the authority to vote on those matters in their discretion.
If you give a proxy, you have the right to revoke it at any time before it
is voted. You may revoke your proxy by 1) filing with the Secretary of South
Branch a written notice of revocation bearing a later date than the proxy, 2)
duly executing a later dated proxy relating to the same shares and delivering it
to the Secretary of South Branch before the taking of the vote at the special
meeting, or 3) attending the special meeting and voting in person. Any written
notice of revocation or subsequent proxy should be sent so as to be delivered to
South Branch Valley Bancorp, Inc., 310 North Main Street, P. O. Box 680,
Moorefield, West Virginia 26836, Attention: Corporate Secretary, or hand
delivered to the foregoing representative of South Branch, at or before the
taking of the vote at the special meeting.
South Branch will bear the cost of the solicitation of proxies, except that
the parties will share the costs of preparing, printing and mailing this proxy
statement/prospectus in proportion to their respective book values as of June
30, 1999. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of South Branch in person or by
telephone, telegram or other means of communication. These directors, officers
and employees will not be additionally compensated but may be reimbursed for
out-of-pocket expenses they incur in connection with the solicitation.
Arrangements will also be made with custodians, nominees and fiduciaries for the
forwarding of solicitation materials to the beneficial owners of South Branch
common stock held of record by such persons. South Branch may
26
<PAGE>
reimburse these custodians, nominees and fiduciaries for reasonable out-of-
pocket expenses they incur in connection therewith.
Do not send your stock certificates with your proxy card.
The Merger
The following description of the terms of the merger is qualified in its
entirety by reference to the provisions of the merger agreement which is
attached to this proxy statement/prospectus as Annex I and incorporated into
this document by reference. We strongly encourage you to read the merger
agreement for a more complete description of the terms of the merger.
Background of the Merger
Several years ago, representatives of South Branch contacted Potomac
representatives inquiring into the possibility of a merger. At that time,
Potomac was not interested in combining with another entity. Since that time,
the parties engaged in numerous informal discussions regarding the possibility
of a potential business combination. In the Fall of 1997, Potomac's Board of
Directors, at regularly scheduled director meetings, regularly discussed the
possibility of a transaction with South Branch. The Board, however, did not
pursue any other alternatives because a transaction with South Branch was the
only opportunity that presented itself, and because the Board of Directors
desired for Potomac to maintain its independence and autonomy. As the parties
continued to discuss the proposed transaction, negotiations led to what Potomac
directors believed to be a transaction that would be in the best interests of
Potomac's shareholders, because South Branch and Potomac began discussing the
possibility of a "merger of equals." With such a transaction, Potomac could
retain significant autonomy and remain a community bank providing the level of
personal services which the shareholders, community and customers had
historically received. As it became apparent that a merger of equals was also
contemplated by South Branch, Potomac's Board of Directors began seriously
considering such a proposal. As discussed below, in Potomac's Reasons for the
Merger, Potomac's directors decided to enter into the merger agreement with
South Branch.
Recommendation of the Potomac Board
The Potomac board of directors has unanimously approved the merger
agreement and recommends that you vote FOR approval and adoption of the merger
agreement. The Potomac board of directors has determined that the merger is in
your best interests and in the best interests of Potomac's employees and
customers.
Potomac Reasons for the Merger
Potomac's board believes that the merger is in the best interests of
Potomac and its shareholders. Accordingly, Potomac's board has unanimously
approved and adopted the merger agreement and recommends approval of the
agreement by Potomac's shareholders. In reaching its
27
<PAGE>
decision to approve the agreement, the board considered several factors but did
not assign any relative or specific weights to the factors it considered.
In considering the merger, the board recognized Potomac's strong tradition
as a small community bank in Grant County and believed that it was in the best
interests of the bank, shareholders, employees and the community to continue
that tradition. However, the board also recognized that to remain competitive
and to best serve the community and its shareholders the bank would need to
increase its earnings and market share. The board believes that a business
combination with South Branch allows Potomac to continue to provide the quality
of service it presently provides and also allows it to increase shareholder
value by combining with South Branch and thereby creating a larger financial
institution with a larger market share and shareholder base which should result
in increased earnings, greater convenience for Potomac's customers and enhanced
liquidity for Potomac's shareholders.
The Board found the proposed transaction particularly attractive for the
following reasons:
. The agreement provides that the transaction will result in a "merger
of equals;"
. Potomac will retain its bank charter and therefore will continue to
serve the community as "Potomac Valley Bank;"
. Potomac will retain its autonomy by keeping its current board of
directors;
. Potomac will appoint two current Potomac directors to serve on the
Board of Directors of South Branch Valley National Bank;
. South Branch will change its holding company name to "Summit Financial
Group, Inc." prior to the effective date of the merger;
. The Summit board will consist of 18 directors, six of which will be
Potomac representatives;
. Summit's bylaws will require that 75% of the board must approve any of
the following: (1) mergers and closures of banks and branches; (2) any
amendment to Summit's articles of incorporation or bylaws; (3) the
adoption of any agreement or plan of merger, consolidation,
liquidation, dissolution or the sale of Summit's shares of stock or
the sale, lease or exchange of all or substantially all of Summit's
assets; and (4) any change of Potomac's name;
. Four Potomac representatives will be appointed to Summit's nine member
executive committee; and
. A transaction with a larger financial institution could have a
negative impact on the quality of Potomac's customer service and could
result in decisions not being made at the local level.
28
<PAGE>
The board considered the exchange ratio and believes that it is fair to its
shareholders from a financial point of view. In the merger, Potomac's
shareholders will receive shares of Summit common stock based upon the parties'
respective book values. Because this consideration is based upon the book values
of the parties' respective institutions, Potomac's board did not believe that it
was necessary to hire a financial advisor to determine whether the consideration
was fair from a financial point of view.
Potomac's board believes that the combination with South Branch will allow
it to continue its tradition as a community bank serving Grant County and
serving the bank's loyal customer base. The board also believes that the
combination will allow it to enhance shareholder and customer value. Based on
the foregoing, Potomac's board recommends that Potomac's shareholders vote "FOR"
adoption of the agreement and the transactions that the agreement contemplates,
including the merger.
South Branch Reasons for the Merger
South Branch's board of directors believes that the combination of its
resources with those of Potomac will afford the resulting combined institution
better opportunities to compete with other financial and non-financial
institutions (including other commercial banks, thrift institutions, finance
companies, credit unions, money market mutual funds, brokerage firms, investment
companies, credit companies, insurance companies and retail stores that maintain
their own credit operations) in the markets in which Potomac and South Branch's
subsidiary banks conduct their business. The combined entity will also benefit
from the elimination of duplicative expenses.
The combined entity will be able to offer a broader range of services than
that currently available to Potomac and South Branch customers. These
additional services include, broader loan programs and, through participation by
affiliated banks, the ability to service larger loan transactions.
In summary, South Branch's board of directors believes that the merger will
enable both Potomac and South Branch to better serve the financial needs of
their communities. The South Branch board of directors also believes that South
Branch will obtain these benefits at a cost that, under all the facts and
circumstances, is reasonable.
Interest of Certain Persons in the Merger
As of September 30, 1999, directors and officers of Potomac beneficially
owned, in the aggregate, 29,942 shares of Potomac common stock, representing
approximately 33.3% of the outstanding shares of Potomac common stock.
All of Potomac's directors and officers will, as a result of the merger,
obtain an equity interest in Summit in exchange for their shares of Potomac
common stock. Each of them will receive the same number of shares of Summit
common stock for each share of Potomac common stock owned by him or her as every
other Potomac shareholder. Directors and officers of Potomac will be treated
the same as other Potomac shareholders, except that they may be subject
29
<PAGE>
to certain restrictions on any resale of Summit common stock received by them
pursuant to the merger. See "Resale Restrictions" below.
As of September 30, 1999, G. R. Ours, Jr., Chairman of the Board of
Potomac, and F. Richard Thompson, a director of Potomac, each owned 110 shares
of South Branch stock, and James Paul Geary owns 12 shares of South Branch stock
or a total of less than 1% of the outstanding shares.
Pursuant to the merger agreement, after the merger, G. R. Ours, Jr., James
Paul Geary, Duke A. McDaniel and Patrick N. Frye will become directors of Summit
and members of the executive committee of that Board. Dewey Bensenhaver, MD and
Gerald W. Huffman will become directors of Summit.
As of September 30, 1999, other than John W. Crites, who owns 500 shares,
no directors, executive officers or affiliates of South Branch own shares of
Potomac common stock.
No directors, officers or affiliates of Potomac or South Branch have any
special interest in the merger or are receiving any special consideration or
compensation as a result of the merger.
No outstanding transactions between Potomac or South Branch and their
respective affiliates, and any directors, officers, or principal shareholders of
Potomac or South Branch or their respective associates, including any
outstanding loans or trust relationships, will be affected by the merger.
Effects of the Merger; The Surviving Corporation
The merger will become effective at the time the Articles of Merger are
filed with, and the Certificate of Merger is issued by, the Secretary of State
of the State of West Virginia. At that time, the separate existence of Potomac
Interim Bank, Inc. the wholly-owned subsidiary of Summit will cease and Potomac
will be the surviving corporation. The assets, liabilities, and capital of
Potomac Interim Bank, Inc. will be merged into Potomac and those assets,
liabilities and capital will then constitute part of the consolidated assets,
liabilities and capital of Summit. Potomac will continue to operate under its
articles of incorporation and bylaws effective as of the date of the merger.
The articles of incorporation and bylaws and internal management of South
Branch will be affected by the merger. Specifically, the merger agreement
provides that the following changes will occur:
. Change of Name of South Branch. South Branch has agreed that it will
take all steps necessary to change its name to "Summit Financial Group, Inc."
prior to the effective time of the merger.
. Directorship of Summit; Formation of Executive Committee.
. Summit will initially have a Board of Directors consisting of 18
members, and Summit agrees to cause 6 current members of
Potomac's Board of Directors
30
<PAGE>
designated by Potomac 1) to be appointed to the Board of
Directors of Summit as of the Effective Time, and 2) to be
nominated and recommended for election at the next Annual Meeting
of Summit shareholders after the Effective Time if such director
is a member of a class whose terms are expiring at such Annual
Meeting.
. If the number of directors of Summit is different from 18 at the
Effective Time, the number of directors shall be divisible by 3,
and Potomac will be entitled to designate 1/3 of the directors.
. Directors designated by Potomac for the initial Board of
Directors of Summit shall be spread evenly among the classes of
directors of Summit. Upon the expiration of their initial terms,
Summit's directors designated by Potomac shall be eligible to be
nominated to serve for such additional terms as Summit shall
determine consistent with prudent banking practices and such
director's fulfillment, to Summit's satisfaction, of his or her
fiduciary duty to Summit.
. Summit will form an executive committee or other governing body
consisting of not more than 9 members, of which 5 individuals
shall be designated by South Branch and 4 individuals designated
by Potomac.
. The provisions of any resolution, bylaw or of the articles of
incorporation of Summit which state or set forth a mandatory
retirement age shall not apply to any person initially designated
by Potomac to serve on the Board of Directors of Summit who, as
of the Closing Date, is a director of Potomac and has attained
the age of 60 years ("Exempt Person"). Such Exempt Person will be
permitted to serve until he or she reaches the age of 80,
provided such Exempt Person's service as a director is consistent
with prudent banking practices and such Exempt Person fulfills,
to Summit's satisfaction, his or her fiduciary duty to Summit.
. Officers of Summit. Oscar M. Bean shall be retained as Chairman of
the Board of Summit. G. R. Ours, Jr. shall be appointed as Vice Chairman of the
Board of Summit. H. Charles Maddy, III shall be retained as President of
Summit.
. Members of the Board of Directors of Potomac and South Branch, Other
Matters.
. Two individuals of South Branch shall be appointed to serve on
the Board of Directors of Potomac. Two individuals of Potomac
shall be appointed by Potomac to serve on the Board of Directors
of South Branch Valley National Bank.
. The current members of the Board of Directors of Potomac shall
continue to serve as such after the Merger, and for a period of 5
years after the Merger, provided that such person continues to
fulfill his or her fiduciary duties to Potomac and Summit.
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. Vacancies and new board seats shall be filled by affirmative vote
of the current members of the Board of Directors of Potomac and
their successors. During the five-year period, the maximum size
of the Potomac Board of Directors shall not exceed 12 persons.
The requirements of this provision may be modified during the
five-year period only upon the affirmative vote of 3/4 of
Summit's Board of Directors.
. Location of Summit Offices. Summit's corporate offices shall be
located in Moorefield, West Virginia.
. Changes to Organizational Documents. Summit's bylaws shall include
provisions ensuring that the following actions by Summit's Board of Directors
shall require an affirmative vote of at least three-fourths (3/4) of the board:
. mergers and closures of banks and branches;
. any amendment to Summit's Articles of Incorporation or Bylaws;
. the adoption of any agreement or plan to merge, consolidate,
liquidate, dissolve or sell shares of stock or the sale, lease or
exchange of all or substantially all the assets of Summit; and
. any change of Potomac's name.
. Divestiture of Branch. South Branch shall take all action reasonably
necessary to divest its branch located in Petersburg, West Virginia, provided
that 1) such divestment is required for regulatory approval, and 2) South Branch
is not required to reflect a financial loss based on generally accepted
accounting principles. South Branch will use its best efforts to accomplish
such divestiture if divestiture is required for regulatory approval.
For information concerning South Branch's current management, see pages 63
and 71. See "Where You Can Find More Information About South Branch."
If the merger had occurred as of June 30, 1999, Potomac would have, on a
pro forma consolidated basis, constituted approximately 27% of deposits, 25% of
assets, and 33% of equity of South Branch, and its shareholders would have held
approximately 33% of the total outstanding shares of South Branch. In addition,
for the six months ended June 30, 1999, Potomac would have contributed
approximately 29% of net interest income and 38% of net income to South Branch
on a pro forma consolidated basis.
These percentages reflect the relative size of Potomac as of June 30, 1999
and may change with the normal variances in the rates of growth for deposits and
loans for all Summit affiliates. Additionally, it is contemplated that Summit
may combine with other financial institutions in the future and these mergers
may affect the percentages shown above. Summit is not presently involved in any
other material merger transactions for which definitive agreements or letters of
intent have been executed.
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Government Approvals
The completion of the merger is conditioned upon the approval of the merger
by the West Virginia Board of Banking and the Board of Governors of the Federal
Reserve System.
Applications for approval were filed with the Board of Governors of the
Federal Reserve System on September 24, 1999.
The merger cannot proceed in the absence of these regulatory approvals.
Although there can be no assurances, we believe that the required governmental
approval of the Board of Governors of the Federal Reserve System and the West
Virginia Board of Banking and Financial Institutions will be received.
Rights of Potomac Shareholders Who Dissent from the Merger
South Branch shareholders are not voting on the merger and, therefore, do
not have dissenters' rights.
Potomac shareholders will be voting on the merger. If you object to the
merger and comply with Section 31-1-123 of the West Virginia Corporation Act,
you are entitled to payment of the fair value of your shares. The fair value of
the shares will be determined as of the day prior to the date of the special
meeting without regard to any appreciation or depreciation in anticipation of
the merger.
The following is a brief summary of the steps you must take to perfect your
dissenters' rights under West Virginia law. This summary does not purport to be
complete and is subject in all respects to the provisions of, and is qualified
in its entirety by reference to, the provisions of Section 31-1-123 of the West
Virginia Corporation Act, which is reproduced in full as Annex II to this proxy
statement/prospectus.
You Must Object to the Merger in Writing. You must file written objection
to the proposed merger with the Secretary of Potomac prior to or at the special
meeting.
You Must Not Vote in Favor of the Merger. You must not vote your shares in
favor of the merger. You are not required to vote against the merger, but if you
vote for the merger you will lose your right to exercise dissenters' rights.
You Must Make Written Demand for Fair Value. You must make written demand
on Potomac or the surviving corporation for payment of the fair value of your
shares within 10 days after the vote is taken at the special meeting. Voting
against the merger does not constitute the demand for payment required by law.
If you fail to make written demand within the 10-day period, you will be bound
by the terms of the merger agreement. The written demand may be addressed to
Patrick N. Frye, President and Chief Executive Officer, Potomac Valley Bank, 4
North Main Street, P.O. Box 1079, Petersburg, West Virginia 26847. Once you
demand to be paid the fair value of your shares, you cannot withdraw your demand
without the permission of Potomac or the surviving corporation.
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Your Rights as a Dissenting Shareholder. If you make a demand, you shall
thereafter be entitled only to payment as a dissenting shareholder as provided
by law, and you shall not be entitled to vote or to exercise any other rights of
a shareholder of Potomac. Your right to be paid the fair value of your shares
will cease, and your status as a shareholder of Potomac will be restored,
without prejudice to any corporate proceedings which may have been taken during
the interim, if any of the following events occurs:
. your demand is withdrawn with the consent of Potomac or the surviving
corporation;
. the merger is abandoned or rescinded;
. the Potomac shareholders revoke the authority to effect the merger;
. no demand or petition for the determination of fair value by a court
of general civil jurisdiction has been made or filed within the time
provided by statute; or
. a court of general civil jurisdiction determines that you are not
entitled to relief as a dissenting shareholder.
You Must Surrender your Certificate(s). You must surrender your stock
certificates to Potomac or the surviving corporation within 20 days after
demanding payment for your shares so that a notation that such demand has been
made may be placed on your stock certificates. Your failure to surrender your
certificates shall, at Potomac's or the surviving corporation's option,
terminate your dissenters' rights unless a court, for good cause shown, directs
otherwise.
Surviving Corporation Must Make Offer. If you have demanded to be paid the
fair value of your shares, within 10 days after the merger becomes effective,
the surviving corporation must give you written notice of the merger and offer,
in writing, to purchase your shares at a price deemed by the surviving
corporation to be the fair value of your shares. The offer must be accompanied
by a balance sheet of Potomac as of the latest available date, which shall not
be more than twelve months prior to the making of the offer, and a profit and
loss statement of Potomac for the twelve month period ended on the date of that
balance sheet. If within 30 days after the merger becomes effective, you and the
surviving corporation agree upon the fair value, you will be entitled to receive
the agreed payment for your shares within 90 days after the merger becomes
effective upon surrender of your shares. Upon payment of the agreed value, you
shall cease to have any interest in your shares of Potomac common stock.
Filing Suit. If you and the surviving corporation fail to agree upon the
fair value within 30 days after the merger becomes effective then, within 30
days after receipt of written demand from any dissenting shareholder, which
written demand must be given within 60 days after the merger becomes effective,
the surviving corporation will file a complaint in the Circuit Court of Hardy
County, West Virginia, requesting that the fair value of the shares be found and
determined. If the surviving corporation fails to institute such a proceeding,
you or any other dissenting shareholder may do so in the name of the surviving
corporation.
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To exercise your dissenters' rights, strict adherence to the provisions of
West Virginia law is required. If you think you may exercise your dissenters'
rights, you should carefully review the statutory provisions attached to this
proxy statement/prospectus as Annex II. As in all legal matters, you should
seek an attorney's guidance.
If you receive cash for the fair value of your shares of Potomac common
stock, that cash will be subject to federal income taxes. The amount of gain or
loss and its character as ordinary or capital gain or loss will be determined in
accordance with Sections 302 and 1001 (and in certain cases, other provisions)
of the Internal Revenue Code of 1986 (the "IRC"). If you are contemplating the
possible exercise of dissenters' rights, we urge you to consult a tax advisor as
to the federal (and any applicable state and local) income tax consequences.
Resale Restrictions
The shares of Summit common stock that you will receive in the merger will
be registered under the Securities Act of 1933. Under current law, if you are
not an affiliate of South Branch or Potomac within the meaning of Rule 144 under
the Securities Act of 1933, you may sell or transfer any shares of Summit common
stock that you receive in the merger without need of further registration under
the Securities Act of 1933.
If you are an affiliate of Potomac before the merger or an affiliate of
South Branch after the merger, you may resell the shares of Summit common stock
issued to you in the merger only:
. in transactions permitted by Rules 144 and 145 under the Securities
Act of 1933;
. pursuant to an effective registration statement; or
. in transactions exempt from registration.
Generally, if you are an executive officer, director or a principal
shareholder or other control person of Potomac or South Branch, you may be
deemed to be an affiliate for these purposes. Other shareholders would not be
deemed to be affiliates. Rules 144 and 145, insofar as relevant to shares
acquired in the merger, impose restrictions on the manner in which affiliates
may make resales and also on the quantity of resales that such affiliates, and
others with whom they might act in concert, may make within any three-month
period.
It is a condition to South Branch's obligation to consummate the merger
that Potomac deliver to South Branch a schedule specifying the persons who may
be deemed to be affiliates of Potomac and use its best efforts to cause each
affiliate to deliver to South Branch, prior to the closing of the merger, an
affiliate's letter. An affiliate's letter is a letter that states that the
shares of Summit common stock issued to an affiliate pursuant to the merger will
not be sold or otherwise disposed of except:
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. in accordance with Rule 145 (where the affiliate has given South
Branch evidence of compliance with the rule reasonably satisfactory to
South Branch); or
. pursuant to an effective registration statement under the Securities
Act of 1933 unless such person has furnished to Summit a no-action or
interpretive letter from the SEC or an opinion of counsel reasonably
satisfactory to Summit that such transaction is exempt from or
otherwise complies with the registration requirements of the
Securities Act of 1933.
An affiliate's letter also acknowledges that the certificates representing
the shares of Summit common stock received by the affiliate may bear a legend
regarding these restrictions.
Accounting Treatment
The merger is anticipated to be accounted for as a pooling of interests by
Summit. The results of this accounting treatment are shown in the unaudited
combined pro forma financial data included on pages 10 through 18 of this proxy
statement/prospectus.
Certain Federal Income Tax Consequences of the Merger
The merger is conditioned upon receipt of legal opinion as to certain
federal income tax consequences expected to result from the merger. Counsel for
Potomac, Jackson & Kelly PLLC will provide this opinion to Potomac shareholders
and counsel for South Branch, Bowles Rice McDavid Graff & Love, PLLC will
provide this opinion to South Branch.
The following summary of certain federal income tax consequences expected
to result from the merger is qualified in its entirety by reference to the full
text of the opinions of Jackson & Kelly PLLC and Bowles Rice McDavid Graff &
Love, PLLC including the assumptions upon which their opinions are based. The
opinions are filed as Exhibit 8 to the registration statement of which this
proxy statement/prospectus is a part.
This summary applies only to Potomac shareholders, if any, who hold their
Potomac stock as a capital asset. This discussion does not address all aspects
of taxation that may be relevant to particular Potomac shareholders in light of
their personal investment or tax circumstances, or to ceratin types of Potomac
shareholders (including insurance companies, financial institutions, broker-
dealers, foreign corporations, persons who receive stock through the exercise of
stock options or otherwise as compensation for services rendered and persons who
are not citizens or residents of the United Sates) subject to special treatment
under the federal income tax laws, nor does it discuss any state, local or
foreign tax considerations. Accordingly, each Potomac shareholder is urged to
consult his or her own tax advisor as to the specific tax consequences of the
merger, including the applicable federal, state, local and foreign tax
consequences of the merger.
No rulings have been requested from the Internal Revenue Service as to the
federal income tax consequences of the merger. You should be aware that neither
the opinion of Jackson & Kelly, PLLC nor the opinion of Bowles Rice McDavid
Graff & Love, PLLC is
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binding on the IRS or any court, and neither the IRS nor any court is precluded
from taking a different position. You should also be aware that some of the
federal income tax consequences of the merger are governed by provisions of the
Internal Revenue Code as to which there are no final regulations and little or
no judicial or administrative guidance. Jackson & Kelly's and Bowles Rice
McDavid Graff & Love's opinions are based upon the federal income tax laws as in
effect on the date of the opinion and as those laws are currently interpreted.
There can be no assurance that future legislation, regulations, administrative
rulings or court decisions will not adversely affect the accuracy of the
statements contained herein or in the opinion.
The federal income tax consequences discussed below are conditioned upon,
and Jackson & Kelly's and Bowles Rice McDavid Graff & Love's opinions are based
upon, the accuracy, as of the date of this proxy statement/prospectus and at, as
of and after the time the merger becomes effective, of certain assumptions and
representations of fact provided by Potomac, Summit and Potomac Valley Bank,
Inc. Neither Jackson & Kelly PLLC nor Bowles Rice McDavid Graff & Love, PLLC
has independently verified these assumptions and representations. These
assumptions and representations include, but are not limited to, the following:
. that following the merger, Summit will continue the historic business
of Potomac or use a significant portion of Potomac's historic business
assets in a business;
. that a bona fide corporate business purpose exists for the merger; and
. that in the merger shares of stock of Potomac representing control of
Potomac will be exchanged solely for Summit common stock. For this
purpose, control means 80% of the total combined voting power of all
classes of stock entitled to vote and of at least 80% of the total
number of shares of each other class of stock of Potomac.
As of the date of this proxy statement/prospectus, South Branch and Potomac
believe that all of these assumptions are now, and will be at, as of and after
the time the merger becomes effective, accurate. If either South Branch or
Potomac learns before that time that the assumptions are false and that its
counsel therefore believes that the merger is unlikely to be treated as a tax-
free reorganization, then additional shareholder approval will be obtained
before consummation of the merger.
Subject to the limitations and assumptions described above, it is
anticipated that Jackson & Kelly, PLLC will render an opinion to Potomac and
Bowles Rice McDavid Graff & Love will render an opinion to Summit that the
merger will have the following federal income tax consequences:
. The merger will constitute a reorganization within the meaning of
Section 368(a)(2)(E) of the Internal Revenue Code of 1986.
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. No gain or loss will be recognized by the shareholders of Potomac as a
result of their exchange of Potomac common stock for Summit common
stock, except to the extent any shareholder receives cash in lieu of a
fractional share or as a dissenting shareholder;
. The holding period of the Summit common stock received in the merger
will include the period during which the stock of Potomac exchanged
therefor was held, provided such stock was a capital asset in the
hands of the holder on the date of exchange;
. The federal income tax basis of the Summit common stock received in
the merger will be the same as the basis of the Potomac common stock
exchanged therefor; and
. The payment of cash to Potomac shareholders in exchange for Potomac
common stock pursuant to the exercise of dissenter's rights will be
treated as having been received as a distribution in redemption of
such stockholder's Potomac common stock, subject to the provisions and
limitations of Section 302 of the Code. Where as a result of such
distribution a stockholder owns no Potomac common stock either
directly or through the application of section 318(a) of the Code, the
redemption will be a complete termination of interest within the
meaning of section 302(b)(3) of the Code and such cash will be treated
as a distribution in full payment in exchange for his or her Potomac
common stock, as provided in section 302(a) of the Code. Under
Section 1001 of the Code, gain or (subject to the limitations of
section 267 of the Code) loss will be realized and recognized to such
stockholders in an amount equal to the difference between the amount
of such cash and the adjusted basis of the Potomac common stock
surrendered, as determined under section 1011 of the Code. If a
Potomac stockholder has held his or her stock for more than one year,
the gain should be treated as long-term capital gain, provided that
the shares were held as a capital asset on the date of the exchange.
In addition, Bowles Rice will render an opinion that neither South Branch,
Potomac Interim Bank, Inc. nor Potomac will recognize any gain or loss as a
result of the merger.
The tax consequences of the merger may vary depending upon your particular
circumstances. You are urged to consult your own tax advisor to determine the
particular tax consequences of the merger to you, including the applicability
and effect of any state, local or foreign income, property, transfer and other
tax laws.
The Merger Agreement
The following summary of the merger agreement is qualified in its entirety
by reference to the Agreement and Plan of Merger, a copy of which is attached to
this proxy statement/prospectus as Annex I. We urge you to read this document
for a more complete description of the merger.
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The Merger
After approval and adoption of the merger agreement by the Potomac
shareholders, and the satisfaction or waiver of other conditions to the merger,
a wholly-owned subsidiary of Summit, will be merged into Potomac, with Potomac
continuing as the surviving corporation.
Conversion of Securities
In the merger, each share of Potomac common stock issued and outstanding
immediately prior to the time the merger becomes effective (subject to certain
exceptions) will be exchanged for and become, without action on the part of the
shareholder, the right to receive a certain number of shares of Summit common
stock.
In the merger agreement, the term "Exchange Ratio" refers to the number of
shares of Summit common stock that each share of Potomac common stock will be
exchanged for. The Exchange Ratio depends on the respective book values of
South Branch and Potomac common stock over a specified period of time. Based on
this formula, as of June 30, 1999, shareholders of Potomac would have received
3.319 shares of Summit stock for each share of Potomac they own.
Shares of Potomac common stock held by Potomac in its treasury or
beneficially owned by South Branch (other than in a fiduciary capacity by them
for others) will not be exchanged for shares of Summit common stock in the
merger. Instead, these shares will be canceled and retired. Shares of Potomac
common stock as to which dissenters' rights are properly exercised also will not
be exchanged for shares of Summit common stock in the merger.
No fractional shares of Summit common stock will be issued in the merger.
Cash will be paid in lieu of fractional shares.
Promptly after the merger becomes effective, Summit will mail transmittal
forms and exchange instructions to each holder of record of Potomac common stock
to be used to exchange shares of Potomac common stock for shares of Summit
common stock. These transmittal letters will be accompanied by instructions
specifying other details of the exchange. You should not send in your
certificates until you receive a transmittal form and instructions.
After the merger becomes effective, each certificate evidencing shares of
Potomac common stock will be deemed to evidence only the right to receive:
. the number of shares of Summit common stock that the holder is
entitled to receive by virtue of the merger; and
. the cash payment for any fractional share of Summit common stock which
the holder does not elect to purchase.
The holder of an unexchanged certificate will not be entitled to receive
any dividend or other distribution payable by Summit until the certificate has
been exchanged.
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Representations and Warranties
The merger agreement contains various customary representations and
warranties of Potomac and South Branch. These representations and warranties,
which will terminate when the merger becomes effective, relate to, among other
things:
. the corporate organization and qualification of Potomac, South Branch,
and South Branch's subsidiaries, and certain similar corporate
matters;
. the authorization, execution, delivery, and enforceability of the
merger agreement and related matters;
. the absence of any violation under the charters and bylaws of Potomac,
South Branch, or South Branch's subsidiaries, or under contracts or
laws;
. the absence of additional regulatory filings and approvals other than
those already discussed;
. the financial statements of each of Potomac and South Branch;
. the absence of undisclosed suits, actions, proceedings, claims, or
investigations against either Potomac, South Branch, or South Branch's
subsidiaries;
. the absence of regulatory orders, decrees, similar arrangements;
. the capital structure of Potomac and South Branch;
. material contracts;
. the absence of materially adverse contracts;
. the absence of undisclosed liabilities;
. title to properties;
. the accuracy of information provided in this proxy
statement/prospectus;
. taxes, tax returns and audits, and certain tax matters;
. the absence of certain materially adverse changes or events;
. the maintenance of fidelity bonds by Potomac, South Branch, and South
Branch's subsidiaries;
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. benefit matters;
. the absence of labor disputes;
. environmental matters;
. the adequacy of reserves for possible loan losses;
. the ownership by Potomac and South Branch of their subsidiaries;
. the filing and delivery of certain reports under the Securities
Exchange Act of 1934;
. the authority of Summit to issue shares of Summit common stock under
the merger agreement; and
. year 2000 compliance.
Mutual Covenants
Under the merger agreement, Potomac and South Branch have agreed that,
until the merger becomes effective or the merger agreement is terminated,
whichever occurs first, each will, with some exceptions:
. use its best efforts to take, or cause to be taken, all action
required under the merger agreement on its part to be taken so as to
permit the consummation of the merger at the earliest possible date;
. cooperate in furnishing information for the preparation and filing of
this proxy statement/prospectus;
. cooperate in the filing of any regulatory applications with respect to
the merger;
. advise the other of any materially adverse change in its financial
condition, assets, business, or operations, or of any material changes
or inaccuracies in data provided to the other party under the merger
agreement; and
. in addition, Potomac and South Branch have agreed to make certain
changes in the name, structure and management of South Branch. These
changes are described on page 30 under the heading "Effects of the
Merger; the Surviving Corporation."
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Additional Covenants of South Branch and Potomac
South Branch and Potomac have further agreed that, until the Effective Date
of the Merger:
. each will operate its business in the ordinary course;
. neither will make any change in its authorized capital stock;
. except as disclosed, neither will issue any shares of common stock;
. except as disclosed, neither will issue or grant any options, warrants,
or other rights to purchase shares of common stock;
. neither will declare or pay any dividends or other distributions on any
shares of common stock except its normal dividend;
. Potomac will not enter into or amend or renew any employment,
consulting, severance or similar arrangements with any director,
officer or employee;
. Potomac will not enter into, establish or adopt or amend any provision,
retirement stock option, stock purchase savings, profit sharing,
deferred compensation or similar plan;
. neither will sell its assets or properties, except in the ordinary
course of business;
. neither will acquire all or any portion of the assets, business
deposits or properties of any other business other than in the ordinary
course of business;
. neither will amend its governing documents;
. neither will implement or adopt any changes in its accounting
principles, practices or methods;
. neither will settle any claim, action or proceeding except in the
ordinary course of its business;
. except in the ordinary course of its business consistent with past
practice, neither will enter into or terminate any material contract;
. neither will solicit any acquisition proposal, including any proposal
to merge or consolidate with, or acquire all or any substantial portion
of the assets of, it, or any tender or exchange offer (or proposal to
make any tender or exchange offer) for any shares of stock of it;
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. take any action which would prevent or impede the merger from being
accounted for as a pooling of interests or from being treated as a
reorganization under Section 368 of the Internal Revenue Code;
. South Branch will notify Potomac prior to any acquisitions of any third
parties by it, and Potomac may, at its option, terminate this Agreement
after notice of any transaction in which South Branch is not the
surviving entity.
. neither party will incur indebtedness other than in the ordinary course
of business;
. neither party will implement or adopt any material change in its
interest rate and other risk management policies;
. neither party will fail to follow existing policies with respect to
managing exposure to risk; and
. neither party will fail to use commercially reasonable means to avoid
any material risk.
Conditions to Obligations of the Parties
The respective obligations of Potomac and South Branch to effect the merger
are subject to the following conditions, among others:
. the approval of the merger agreement by vote of a majority of the
shares of Potomac;
. the approval of the issuance of shares by vote of a majority of shares
voting at the meeting of South Branch;
. the absence of an order by the West Virginia Board of Banking and
Financial Institutions disapproving the transaction with Potomac and
South Branch and the merger of Potomac with and into Potomac Interim
Bank, Inc. pursuant to the merger agreement;
. the approval by the Federal Reserve System of the merger;
. the effective status of the registration statement on the date the
merger closes and a declaration of effectiveness regarding, or a
withdrawal of, all post-effective amendments thereto by that date;
. the absence of a pending or threatened stop order or proceedings
seeking a stop order suspending the effectiveness of the registration
statement or any amendments thereto;
. the receipt of all required state securities and "Blue Sky" permits or
approvals;
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. the absence of any order to restrain, enjoin, or otherwise prevent the
consummation of the merger entered by any court or administrative body
which remains in effect on the date the merger closes;
. the receipt of all other material governmental or other consents,
approvals, and permissions, including the filing of the registration
statement with the SEC;
. the expiration of all periods for review, objection, or appeal of or to
any consents, approvals or permissions required for the consummation of
the merger;
Conditions to Obligations of South Branch
In addition to the conditions discussed above, the consummation of the
merger by South Branch is conditioned upon:
. the accuracy in all material respects of the representations and
warranties of Potomac set forth in the merger agreement;
. the performance by Potomac of its obligations under the merger
agreement;
. the receipt of legal opinions from the parties' counsel;
. the delivery of certified copies of the resolutions duly adopted by the
boards of directors of Potomac and South Branch and the shareholders of
Potomac and South Branch, approving the merger agreement and
authorizing the transactions contemplated therein;
. the receipt of an opinion letter from its independent auditors that the
Merger will qualify for "pooling of interests" treatment;
. satisfaction of South Branch with the results of its due diligence
investigation of Potomac; and
. satisfaction of South Branch with Potomac's loan loss reserve provision
of charge-off's, funding of benefits and other reserve accounts.
Conditions to Obligations of Potomac
The consummation of the merger by Potomac is also conditioned upon:
. the accuracy in all material respects of the representations and
warranties of South Branch set forth in the merger agreement;
. the performance by South Branch of its obligation under the merger
agreement;
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. the receipt of legal opinions from the parties' counsel;
. the receipt of an opinion letter from its independent auditors that the
Merger will qualify for "pooling of interests" treatment;
. satisfaction of Potomac with the results of its due diligence
investigation of South Branch; and
. satisfaction of Potomac with South Branch's loan loss reserve provision
of charge-off's, funding of benefits and other reserve accounts.
Termination; Expenses
The merger agreement may be terminated at any time prior to the closing of
the merger, either before or after the special meeting:
. by mutual consent of Potomac and South Branch;
. by either Potomac or South Branch if any of the conditions to such
party's obligations to close under the merger agreement have not been
met as of the date the merger is to close and such conditions have not
been waived by the party adversely affected thereby;
. by either Potomac or South Branch if the merger has not closed by
January 31, 2000;
. by either Potomac or South Branch in the event that governmental
approvals will not be obtained in that the shareholders of Potomac vote
against consummation of the merger or the shareholders of South Branch
vote against the issuance of shares in connection with the Merger be
either Potomac or South Branch if the regulatory approvals are not
obtained; or
. by either Potomac or South Branch if the other company's board fails to
recommend or withdraws its recommendation of the Merger.
In the event of any termination of the merger agreement by either Potomac or
South Branch as provided above, all further obligations of Potomac and South
Branch under the merger agreement, except with respect to specified matters,
including without limitation those related to confidentiality and expenses, will
terminate without further liability of the parties.
Whether or not the merger is consummated, all legal and accounting fees, and
other costs and expenses incurred in connection with the merger agreement and
the transactions contemplated therein, will be paid by the party incurring such
expenses, except that expenses incurred in the printing of the registration
statement and joint proxy statement, and any Securities and Exchange Commission
fees will be shared in proportion to the respective book values of Potomac and
South Branch as of June 30, 1999.
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Amendment or Waiver
The provisions of the merger agreement may be waived at any time by the
party which is, or the shareholders of which are, entitled to the benefit of
those provisions, by action taken by the board of directors of that party. Any
of the terms of the merger agreement may be amended or modified in writing
before or after the special meeting at any time prior to the closing of the
merger. The Exchange Ratio and any other material terms of the merger will not
be amended after the special meeting unless the amended terms are resubmitted to
the shareholders of Potomac for approval.
Comparative Rights of Shareholders
Description of South Branch Capital Stock
The authorized capital stock of South Branch consists of 2,000,000 shares of
common stock, par value $2.50 per share. As of September 30, 1999, there were
591,292 shares of South Branch common stock outstanding, held of record by
approximately 1,014 holders.
In the event of any liquidation, dissolution or winding up of South Branch,
and subject to the application of state and federal laws, holders of South
Branch common stock are entitled to share ratably in the assets available for
distribution to stockholders remaining after payment of South Branch's
obligations.
Each share of South Branch common stock is entitled to one vote, and to
cumulate votes in the election of directors. No holder of shares of South Branch
common stock has any preemptive right to subscribe for or purchase any other
securities of South Branch, and there are no conversion rights or redemption or
sinking fund provisions applicable to South Branch common stock. However, South
Branch elects directors on a staggered basis by class with terms of three years.
This provision of its articles of incorporation requires a super-majority vote
of its shareholders to change it. See "Comparison of Rights of South Branch and
Potomac Shareholders" on page 47.
Description of Potomac Capital Stock
The authorized capital stock of Potomac consists of 90,000 shares of common
stock, par value of $10 per share. As of September 30, 1999, there were 90,000
shares of Potomac common stock outstanding, held of record by approximately 323
holders.
Each share of Potomac common stock is entitled to one vote. No holder of
shares of Potomac common stock has any preemptive right to subscribe for or
purchase any other securities of Potomac, and there are no conversion rights or
redemption or sinking fund provisions applicable to Potomac common stock.
Dividends may be paid on Potomac common stock at the discretion of the
Potomac board of directors out of any funds legally available therefor. For a
discussion of Potomac's dividend policy and restrictions on the payment of
dividends, see "Comparative Per Share Market Price Information" and "Potomac
Common Stock Dividend Policy."
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<PAGE>
In the event of a dissolution of Potomac, the liquidation of its assets, or
the winding up of its affairs, and subject to the application of state and
federal laws, the holders of Potomac common stock will be entitled to share
ratably in the assets of Potomac available for distributions to its shareholders
remaining after payment of Potomac's obligations.
Comparison of Rights of South Branch and Potomac Shareholders
The rights of the Potomac shareholders and the South Branch shareholders are
governed by the respective articles of incorporation and bylaws of each
corporation and West Virginia law. In many respects, the rights of Potomac
shareholders and South Branch shareholders are similar. For example:
. Holders of common stock of each corporation are entitled to one vote
for each share of common stock and to receive pro rata any assets
distributed to shareholders upon liquidation.
. Neither corporation's shareholders have preemptive rights.
. The shareholders of both corporations have the right under West
Virginia law to dissent from certain corporate transactions and to
elect dissenters' rights.
. The shareholders of both corporations have cumulative voting in the
election of directors.
. South Branch's Articles require that shareholders who intend to
nominate candidates for election to the board of directors must give
written notice of such intent at least 30 days prior to the date of any
shareholders meeting called for such purpose. Potomac's bylaws also
require prior written notice of shareholder nominations for directors.
. The directors of both South Branch and Potomac are elected for
staggered terms of three years, with no more than one-third of the
directors being elected in any one year.
Differences in Rights
There are, however, differences between the rights of Potomac shareholders
and South Branch shareholders. For example:
. South Branch's articles of incorporation contain certain "super
majority provisions." These provisions provide that the affirmative
vote of the holders of not less than 75% of the outstanding shares of
the voting stock of South Branch will be required to amend or repeal
the articles of incorporation provision dealing with the classification
of the board of directors into three separate classes, each to serve
for staggered terms of three years. Potomac's articles of incorporation
contain no such provision.
47
<PAGE>
. South Branch's articles of incorporation also has a fair price
provision which generally provides that if South Branch is to be
acquired, South Branch shareholders receive the same price for their
shares as the price paid by a person who has gained control of the
Company by acquiring 25% or more of South Branch's shares. Potomac's
articles of incorporation do not contain such a provision.
. South Branch's articles of incorporation permit its Board of Directors
to consider social and economic factors in evaluating a proposed
acquisition by another company. Potomac's articles of incorporation do
not contain such a provision.
In addition, Potomac, as a banking corporation, is subject to certain
restrictions on dividends under West Virginia law that South Branch, as a bank
holding company, is not subject to. Section 31A-4-25 of the West Virginia Code
provides that not less than one-tenth part of the net profits of the preceding
half year (in the case of quarterly or semi-annual dividends) or the preceding
two consecutive half-year periods (in the case of annual dividends) must be
carried to a bank's surplus fund until the surplus fund equals the amount of its
capital stock. The prior approval of the West Virginia Commissioner of Banking
is required if the total dividends declared by a state bank in any calendar year
will exceed the bank's net profits for that year combined with its retained net
profits for the preceding two years. Section 31A-4-12 of the West Virginia Code
provides that the outstanding shares of a bank may be assessed if its common
stock becomes impaired by losses or otherwise. However, South Branch's ability
to pay dividends are subject to funds available to it from its subsidiaries.
See "Comparative Per Share Market Price Information" and "South Branch Stock
Dividend Policy."
Advantages of South Branch Anti-Takeover Provisions
Some of the provisions of South Branch's articles of incorporation and
bylaws discussed above may constitute defensive measures in that they may
discourage or deter a third party from attempting to acquire control of South
Branch. These provisions will continue after the name change of South Branch to
Summit Financial Group, Inc. They are designed, in part, to discourage and to
insulate the corporation against hostile takeover efforts, which the South
Branch board of directors might determine are not in the best interests of South
Branch and its shareholders. The provisions are designed as reasonable
precautions to protect against, and to assure the opportunity to assess and
evaluate, such confrontations.
Disadvantages of South Branch Anti-Takeover Provisions
The classification of the board of directors makes it more difficult to
change directors since they are elected for terms of three years rather than one
year, and at least two annual meetings instead of one are required to change a
majority of the board of directors. Furthermore, due to the smaller number of
directors to be elected at each annual meeting, holders of a minority of the
voting stock may be in a less favorable position to elect directors through the
use of cumulative voting.
48
<PAGE>
The super majority provision makes it more difficult for shareholders to
effect changes in the classification of directors.
The ability of the board of directors to issue additional shares of common
and preferred stock also permits the board of directors to authorize issuances
of stock which may be dilutive and, in the case of preferred stock, which may
affect the substantive rights of shareholders without requiring an additional
shareholder vote.
Collectively, the provisions may be beneficial to management in a hostile
takeover attempt, making it more difficult to effect changes, and at the same
time, adversely affecting shareholders who might wish to participate in such a
takeover attempt.
The foregoing identification of specific differences between the rights of
South Branch and Potomac shareholders is not intended to indicate that other
equally or more significant differences do not exist. This summary is qualified
in its entirety by reference to the West Virginia Corporation Act and the
articles and bylaws of South Branch and Potomac.
Information With Respect To Potomac
History and Operations
Potomac is a West Virginia state-chartered bank which engages in general
banking business with the primary market area being Grant County, West Virginia.
The FDIC insures Potomac's deposits.
Potomac provides consumers, businesses and governments with a broad range of
banking services, including personal lines of credit, commercial, agricultural,
real estate and installment loans, checking, savings, NOW and money market
accounts, certificates of deposit and individual retirement accounts. At June
30, 1999, Potomac had total assets of approximately $90,718,000, deposits of
approximately $78,664,000 and shareholders' equity of approximately $11,937,000.
The FDIC insures all of Potomac's deposit accounts up to the maximum allowed
by law (generally $100,000 per depositor, subject to aggregation rules).
Potomac solicits these accounts from individuals, businesses, associations and
organizations, and governmental authorities.
Potomac also offers a full range of short-to-medium-term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements) and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal investments.
49
<PAGE>
Competition
For most of the services that Potomac performs, there is competition from
financial institutions other than commercial banks. For instance, credit unions
and issuers of commercial paper and money market funds actively compete for
funds and for various types of loans. In addition, personal and corporate trust
and investment counseling services are offered by insurance companies,
investment counseling firms and other business firms and individuals.
Due to the geographic location of Potomac's primary market area, the
existence of larger financial institutions in Petersburg, West Virginia,
influences the competition in the market area. In addition, larger regional and
national corporations continue to be increasingly visible in offering a broad
range of financial services to all types of commercial and consumer customers.
The principal competitive factors in the markets for deposits and loans are
interest rates, either paid or charged. The chartering of numerous new banks in
West Virginia has increased competition for Potomac. West Virginia law allows
state-wide branch banking and provides increased opportunities for Potomac, but
it also increases competition for Potomac in its service area. Additionally,
out-of-state banks may form denovo banks or may acquire existing branches of
West Virginia banks on a reciprocal basis.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of September 30, 1999, information with
respect to the securities holdings of all persons known to Potomac to be the
beneficial owners of more than 5% of the outstanding shares of Potomac common
stock. Also set forth in the table is the beneficial ownership of all shares of
Potomac common stock as of such date of all directors and named executive
officers, individually, and all directors and executive officers as a group.
Unless otherwise indicated, the address of each person in the following table is
4 North Main Street, Petersburg, West Virginia 26847.
50
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Name of Beneficial Owner Beneficial Ownership Percent of Class
- ------------------------ -------------------- ----------------
<S> <C> <C>
Patrick N. Frye 110 *
G. R. Ours, Jr. 7,921/1/ 8.8
Lysle T. Veach 1,200/1/ 1.3
Dewey F. Bensenhaver, M.D. 516/1/ *
James Paul Geary 7,350/1/ 8.2
Charles W. Halterman 6,778 7.5
George R. Halterman, II 6,478 7.2
126 Mountain View Street
Petersburg, West Virginia 26847
Gerald W. Huffman 1,100/1/ 1.2
F. Richard Thompson 1,182/1/ 1.3
Duke A. McDaniel 1,310/1/ 1.5
David P. Van Meter, IV 1,860/1/ 2.1
John A. Harper 550 *
Mary V. Bergdoll 20 *
Bobby A. Cooper 20 *
Jay P. Mongold 25 *
All directors and executive officers as
a group (14 individuals) 29,942 33.3
</TABLE>
* Beneficial ownership does not exceed one percent.
/1/ Includes shares owned jointly with other persons and/or shares controlled
by such person.
Directors and Executive Officers
After the merger, G. R. Ours, Jr., James Paul Geary, Duke A. McDaniel and
Patrick N. Frye will serve on the board of directors of Summit and on the
executive committee of that board. Dewey Bensenhaver, M.D. and Gerald W. Huffman
will become directors of Summit. G. R. Ours, Jr. and Patrick N. Frye will serve
as a directors of South Branch Valley National Bank. After the merger, Patrick
N. Frye will continue as President and Chief Executive Officer of Potomac.
Information concerning the background and experience of these individuals is set
forth in the chart which follows. As of the date of these proxy materials,
South Branch does not
51
<PAGE>
know which members of its current board will resign to create vacancies for
directors to be appointed by Potomac.
<TABLE>
<CAPTION>
======================================================================================
Name of Beneficial Owner Positions Held
======================================================================================
<S> <C> <C>
* G. R. Ours, Jr. 67 Retired President of Petersburg Oil Company,
Director of Potomac Valley Bank since 1974 and
Chairman of Potomac Valley Bank since 1995
- --------------------------------------------------------------------------------------
* James Paul Geary 73 Director of Potomac Valley Bank since 1961 and
Vice Chairman of Potomac Valley Bank since
1995. Managing partner in the law firm of Geary
and Geary.
- --------------------------------------------------------------------------------------
* Duke A. McDaniel 60 Director of Potomac Valley Bank since 1985.
Attorney at law.
- --------------------------------------------------------------------------------------
Dewey Bensenhaver, M.D. 52 Director of Potomac Valley Bank since 1998.
Physician-private family practice. Farming
operation since 1975.
- --------------------------------------------------------------------------------------
Gerald W. Huffman 54 Director of Potomac Valley Bank since 1998.
President of Potomac Trucking and Excavation,
Inc. and Huffman Logging, Inc.
- --------------------------------------------------------------------------------------
* Patrick N. Frye 40 President and Chief Executive Office of Potomac
Valley Bank since December, 1998. Chief
Financial Officer of Potomac Valley Bank from
March, 1998 to December, 1998. Director of
Potomac Valley Bank since 1999. Previously with
One Valley Bank from 1982 to 1998.
- --------------------------------------------------------------------------------------
</TABLE>
* to be appointed members of the Summit Financial Group, Inc. Executive
Committee
Compensation of President and Chief Executive Officer
During 1998, directors of Potomac received $100 per regular meeting and $75
per committee meeting for their service on the Potomac board of directors . In
addition, the directors are covered by Potomac's health insurance plan. During
1999, the directors have received $200 per regular meeting and $100 for
committee meetings. The Chairman has a retainer of $500 per meeting and the
Secretary of the Board has a retainer of $100 per month. Set forth below is
certain summary information concerning compensation paid to Patrick N. Frye,
Potomac's President and Chief Executive Officer during fiscal year 1998. Mr.
Frye began his employment with Potomac in March, 1998.
<TABLE>
<CAPTION>
Year Salary Bonus All Other Compensation
---- ------ ----- ----------------------
<S> <C> <C> <C>
1998 $63,462 $ 0 $ 0
</TABLE>
52
<PAGE>
On April 1, 1999, Potomac entered into an employment agreement with
Mr. Patrick N. Frye. The agreement is for a term of two years and nine months.
Under the agreement, the base compensation is $100,000 per year with bonuses
tied to the bank's performance. If Potomac terminates the agreement for other
than "cause" (as defined in the agreement), then Mr. Frye will be entitled to
receive payment from the bank equivalent to his base salary for the remainder of
the remaining term or severance pay equal to 12 months of base salary payments,
whichever is greater.
The agreement also provides that Mr. Frye may voluntarily terminate
employment for good reason (as defined) until 24 months after a change in
control (as defined). However, a change in control does not include the
transaction contemplated by the merger agreement. In the event of a change in
control, Potomac will pay Mr. Frye a cash payment equal to his salary being the
greater of $100,000 or the average of his full earnings for the two full years
prior to the change in control.
Information With Respect to South Branch
History and Operation
Organized in 1987 as a West Virginia corporation, South Branch Valley
Bancorp, Inc. is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended.
South Branch conducts its business through its three bank subsidiaries,
South Branch Valley National Bank, Capital State Bank, and Shenandoah Valley
National Bank. The bank subsidiaries constitute substantially all of the
consolidated assets, revenues and earnings of South Branch. South Branch Valley
National Bank was originally chartered by the Office of the Comptroller of the
Currency ("OCC") on August 15, 1883. Capital State Bank is a West Virginia
banking corporation and was chartered on December 8, 1995. Shenandoah Valley
National Bank is a national Bank located in Winchester, Virginia which was
chartered on May 14, 1999. South Branch Valley National Bank, Capital State
Bank, and Shenandoah National Bank are full service, FDIC insured institutions
engaged in the commercial and retail banking business.
At June 30, 1999, South Branch had total assets of approximately
$271,866,000, deposits of approximately $209,628,000 and shareholders equity of
approximately $23,631,000.
South Branch offers a wide variety of banking services to its customers.
South Branch accepts deposits and has night depositories and automated teller
machines for the convenience of its customers. South Branch offers its
customers various deposit arrangements with a variety of maturities and yields,
including non-interest bearing and interest bearing demand deposits, savings
deposits, time certificates of deposit, club accounts, and individual retirement
accounts.
South Branch also offers a full spectrum of loan products to its customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. South Branch offers credit
cards, the balances of which are insignificant to total loans. Loan terms,
including interest rates, loan to value ratios, and maturities are tailored
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<PAGE>
to meet the needs of the borrower. Commercial loans, which represented
approximately 32% of total loans at June 30, 1999, are generally secured by
various collateral including commercial real estate, accounts receivable and
business machinery and equipment. Residential real estate loans represented
approximately 50% of total loans as of June 30, 1999 and 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. Indirect lending represents less than 1.0% of the Company's total
loans. A special effort is made to keep loan products as flexible as possible
within the guidelines of prudent banking practices in terms of interest rate
risk and credit risk. Company lending personnel adhere to established lending
limits and authorities based on each individual's lending expertise and
experience. The Company does not currently originate loans for sale.
South Branch's subsidiary bank, South Branch Valley National Bank also has
trust powers which permits it to serve as trustee where appointed by a court or
under a private trust agreement. As trustee, SBVNB 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, 1998, fees
generated from the operation of the SBVNB's Trust Department comprised less than
one percent of gross revenues earned during the year.
Supervision and Regulation
General
South Branch, as a bank holding company, is subject to the restrictions of
the Bank Holding Company Act, as amended (BHCA). As a bank holding company,
South Branch is subject to the reporting requirements of the Federal Reserve
Board of Governors ("FRB"), and is subject to examination by the FRB.
The BHCA prohibits the acquisition by a bank holding company of direct or
indirect ownership of more than five percent of the voting shares of any bank
within the United States without prior approval of the FRB. With certain
exceptions, a bank holding company is prohibited from acquiring direct or
indirect ownership or control or more than five percent of the voting shares of
any company which is not a bank, and from engaging directly or indirectly in
business unrelated to the business of banking or managing or controlling banks.
The BHCA permits South Branch to purchase or redeem its own securities.
However, Regulation Y provides that prior notice must be given to the FRB if the
gross consideration for such purchase or consideration, when aggregated with the
net consideration paid by the company for all such purchases or redemptions
during the preceding 12 months is equal to 10 percent or more of the company's
consolidated net worth. Prior notice is not required if (i) both before and
immediately after the redemption, the bank holding company is well-capitalized;
(ii) the bank holding company is well-managed and (iii) the bank holding company
is not the subject of any unresolved supervisory issues.
54
<PAGE>
Bank holding companies may engage in non-banking activities closely related
to banking or managing or controlling banks. Approval of the FRB is necessary to
engage in these activities or to make acquisitions of corporations engaging in
these activities as the FRB determines whether these acquisitions or activities
are in the public interest. In addition, by order, and on a case by case basis,
the FRB may approve other non-banking activities.
As a bank holding company doing business in West Virginia, South Branch is
also subject to regulation by the West Virginia Board of Banking and Financial
Institutions and must submit annual reports to the West Virginia Division of
Banking.
Federal law restricts subsidiary banks of a bank holding company from
making certain extensions of credit to the parent bank holding company or to any
of its subsidiaries, from investing in the holding company stock, and limits the
ability of a subsidiary bank to take its parent company stock as collateral for
the loans of any borrower. Additionally, federal law prohibits a bank holding
company and its subsidiaries from engaging in certain tie-in arrangements in
conjunction with the extension of credit or furnishing of services.
The operations of South Branch Valley National Bank and Shenandoah Valley
National Bank, as a national banking associations, are subject to federal
statutes and regulations which apply to national banks, and are primarily
regulated by the OCC. Capital State Bank is subject to similar West Virginia
statutes and regulations, and is primarily regulated by the West Virginia
Division of Banking. South Branch Valley National Bank, Capital State Bank and
Shenandoah Valley National Bank are also subject to regulations promulgated by
the FRB and the FDIC. As members of the FDIC, the deposits of South Branch
Valley National Bank, Capital State Bank and Shenandoah Valley National Bank are
insured as required by federal law. Bank regulatory authorities regularly
examine revenues, loans, investments, management practices, and other aspects of
South Branch Valley National Bank, Capital State Bank and Shenandoah Valley
National Bank. These examinations are conducted primarily to protect depositors
and not shareholders. In addition to these regular examinations, South Branch's
subsidiary banks each must furnish to regulatory authorities quarterly reports
containing full and accurate statements of their affairs.
Permitted Non-banking Activities
The FRB permits, within prescribed limits, bank holding companies to engage
in non-banking activities closely related to banking or to managing or
controlling banks. Such activities are not limited to the state of West
Virginia. Some examples of non-banking activities which presently may be
performed by a bank holding company are: making or acquiring, for its own
account or the account of others, loans and other extensions of credit;
operating as an industrial bank, or industrial loan company, in the manner
authorized by state law; servicing loans and other extensions of credit;
performing or carrying on any one or more of the functions or activities that
may be performed or carried on by a trust company in the manner authorized by
federal or state law; acting as an investment or financial advisor; leasing real
or personal property; making equity or debt investments in corporations or
projects designed primarily to promote community welfare, such as the economic
rehabilitation and the development of low income areas; providing bookkeeping
services or financially oriented data processing services for
55
<PAGE>
the holding company and its subsidiaries; acting as an insurance agent or a
broker, to a limited extent, in relation to insurance directly related to an
extension of credit; acting as an underwriter for credit life insurance which is
directly related to extensions of credit by the bank holding company system;
providing courier services for certain financial documents; providing management
consulting advice to nonaffiliated banks; selling retail money orders having a
face value of not more than $1,000, traveler's checks and U. S. savings bonds;
performing appraisals of real estate; arranging commercial real estate equity
financing under certain limited circumstances; providing securities brokerage
services related to securities credit activities; underwriting and dealing in
government obligations and money market instruments; providing foreign exchange
advisory and transactional services; and acting under certain circumstances, as
futures commission merchant for nonaffiliated persons in the execution and
clearance on major commodity exchanges of futures contracts and options.
Credit and Monetary Policies and Related Matters
South Branch's subsidiary banks are affected by the fiscal and monetary
policies of the federal government and its agencies, including the FRB. An
important function of these policies is to curb inflation and control recessions
through control of the supply of money and credit. The operations of South
Branch's subsidiary banks are affected by the policies of government regulatory
authorities, including the FRB which regulates money and credit conditions
through open market operations in United States Government and federal agency
securities, adjustments in the discount rate on member bank borrowings, and
requirements against deposits and regulation of interest rates payable by member
banks on time and savings deposits. These policies have a significant influence
on the growth and distribution of loans, investments and deposits, and interest
rates charged on loans, or paid for time and savings deposits, as well as yields
on investments. The FRB has had a significant effect on the operating results of
commercial banks in the past and is expected to continue to do so in the future.
Future policies of the FRB and other authorities and their effect on future
earnings cannot be predicted.
The FRB has a policy that a bank holding company is expected to act as a
source of financial and managerial strength to each of its subsidiary banks and
to commit resources to support each such subsidiary bank. Under the source of
strength doctrine, the FRB may require a bank holding company to contribute
capital to a troubled subsidiary bank, and may charge the bank holding company
with engaging in unsafe and unsound practices for failure to commit resources to
such a subsidiary bank. This capital injection may be required at times when
South Branch may not have the resources to provide it. Any capital loans by a
holding company to any of the subsidiary banks are subordinate in right of
payment to deposits and to certain other indebtedness of such subsidiary bank.
In addition, the Crime Control Act of 1990 provides that in the event of a bank
holding company's bankruptcy, any commitment by such holding company to a
federal bank or thrift regulatory agency to maintain the capital of a subsidiary
bank will be assumed by the bankruptcy trustee and entitled to a priority of
payment.
In 1989, the United States Congress enacted the Financial Institutions
Reform, Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository
institutions insured by the FDIC may now be liable for any losses incurred by,
or reasonably expected to be incurred by, the FDIC after August 9, 1989, in
connection with (i) the default of a commonly controlled FDIC-insured
56
<PAGE>
depository institution, or (ii) any assistance provided by the FDIC to commonly
controlled FDIC-insured depository institution in danger of default. "Default"
is defined generally as the appointment of a conservator or receiver and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a "default" is likely to occur in the absence of regulatory
assistance. Accordingly, in the event that any insured bank or subsidiary of
South Branch causes a loss to the FDIC, other bank subsidiaries of South Branch
could be liable to the FDIC for the amount of such loss.
Under federal law, the OCC may order the pro rata assessment of
shareholders of a national bank whose capital stock has become impaired, by
losses or otherwise, to relieve a deficiency in such national bank's capital
stock. This statute also provides for the enforcement of any such pro rata
assessment of shareholders of such national bank to cover such impairment of
capital stock by sale, to the extent necessary, of the capital stock of any
assessed shareholder failing to pay the assessment. Similarly, the laws of
certain states provide for such assessment and sale with respect to the
subsidiary banks chartered by such states. South Branch as the sole stockholder
of its subsidiary banks, is subject to such provisions.
Capital Requirements
As a bank holding company South Branch is subject to FRB risk-based capital
guidelines. The guidelines establish a systematic analytical framework that
makes regulatory capital requirements more sensitive to differences in risk
profiles among banking organizations, takes off-balance sheet exposures into
explicit account in assessing capital adequacy, and minimizes disincentives to
holding liquid, low-risk assets. Under the guidelines and related policies,
bank holding companies must maintain capital sufficient to meet both a risk-
based asset ratio test and leverage ratio test on a consolidated basis. The
risk-based ratio is determined by allocating assets and specified off-balance
sheet commitments into four weighted categories, with higher levels of capital
being required for categories perceived as representing greater risk. South
Branch's subsidiary banks are subject to substantially similar capital
requirements adopted by its applicable regulatory agencies.
Generally, under the applicable guidelines, a financial institution's
capital is divided into two tiers. "Tier 1", or core capital, includes common
equity, noncumulative perpetual preferred stock (excluding auction rate issues)
and minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangibles. "Tier 2", or supplementary capital, includes,
among other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan losses, subject to certain limitations, less required
deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital. Bank
holding companies are subject to substantially identical requirements, except
that cumulative perpetual preferred stock can constitute up to 25% of a bank
holding company's Tier 1 capital.
Bank holding companies are required to maintain a risk-based ratio of 8%,
of which 4% must be Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when an institution's particular circumstances
warrant.
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<PAGE>
For purposes of the leverage ratio, the numerator is defined as Tier 1
capital and the denominator is defined as adjusted total assets (as specified in
the guidelines). The guidelines provide for a minimum leverage ratio of 3% for
bank holding companies that meet certain specified criteria, including excellent
asset quality, high liquidity, low interest rate exposure and the highest
regulatory rating. Bank holding companies not meeting these criteria are
required to maintain a leverage ratio which exceeds 3% by a cushion of at least
1 to 2 percent.
The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the FRB's guidelines
indicate that the FRB will continue to consider a "tangible Tier 1 leverage
ratio" in evaluating proposals for expansion or new activities. The tangible
Tier 1 leverage ratio is the ratio of an institution's Tier 1 capital, less all
intangibles, to total assets, less all intangibles.
On August 2, 1995, the FRB and other banking agencies issued their final
rule to implement the portion of Section 305 of FDICIA that requires the banking
agencies to revise their risk-based capital standards to ensure that those
standards take adequate account of interest rate risk. This final rule amends
the capital standards to specify that the banking agencies will include, in
their evaluations of a bank's capital adequacy, an assessment of the exposure to
declines in the economic value of the bank's capital due to changes in interest
rates.
Failure to meet applicable capital guidelines could subject the bank
holding company to a variety of enforcement remedies available to the federal
regulatory authorities, including limitations on the ability to pay dividends,
the issuance by the regulatory authority of a capital directive to increase
capital and termination of deposit insurance by the FDIC, as well as to the
measures described under the "Federal Deposit Insurance Corporation Improvement
Act of 1991" as applicable to undercapitalized institutions.
As of June 30, 1999, the regulatory capital ratios of South Branch and of
South Branch/Potomac Pro Forma Combined were as set forth in the table below:
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<PAGE>
South Branch and Potomac Pro Forma Regulatory Capital Ratios
June 30, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
South Branch/
Potomac
Pro Forma
Combined South Branch
------------------ ------------------
<S> <C> <C> <C> <C>
Tier 1 Risk-based Capital:
Actual Tier 1 $32,398 15.0% $20,312 12.7%
Regulatory Minimum - Tier 1 $ 8,653 4.0% $ 6,409 4.0%
Excess over Regulatory Minimum $23,745 11.0% $13,903 8.7%
Total Risk-based Capital
Actual Total $34,566 16.0% $21,778 13.6%
Regulatory Minimum - Total $17,307 8.0% $12,819 8.0%
Excess over Regulatory Minimum $17,259 8.0% $ 8,959 5.6%
Leverage Capital:
Actual $32,398 9.2% $20,312 7.9%
Regulatory Minimum $10,542 3.0% $ 7,717 3.0%
Excess over Regulatory Minimum $21,856 6.2% $12,595 4.9%
</TABLE>
Federal Deposit Insurance Corporation Improvement Act of 1991
In December, 1991, Congress enacted the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the
bank regulatory and funding provisions of the Federal Deposit Insurance
Corporation Act and made revisions to several other banking statues.
FDICIA establishes a new regulatory scheme, which ties the level of
supervisory intervention by bank regulatory authorities primarily to a
depository institution's capital category. Among other things, FDICIA authorizes
regulatory authorities to take "prompt corrective action" with respect to
depository institutions that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically under
capitalized.
By regulation, an institution is "well-capitalized" if it has a total risk-
based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6%
or greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a
regulatory order, agreement or directive to meet and maintain a
59
<PAGE>
specific capital level for any capital measure. The banking subsidiaries of
South Branch were "well capitalized" institutions as of June 30, 1999. As well-
capitalized institutions, they are permitted to engage in a wider range of
banking activities, including among other things, the accepting of "brokered
deposits," and the offering of interest rates on deposits higher than the
prevailing rate in their respective markets.
Another requirement of FDICIA is that federal banking agencies must
prescribe regulations relating to various operational areas of banks and bank
holding companies. These include standards for internal audit systems, loan
documentation, information systems, internal controls, credit underwriting,
interest rate exposure, asset growth, compensation, a maximum ratio of
classified assets to capital, minimum earnings sufficient to absorb losses, a
minimum ratio of market value to book value for publicly traded shares and such
other standards as the agency deems appropriate.
Reigle-Neal Interstate Banking Bill
In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the
"Interstate Bill"). The Interstate Bill permits certain interstate banking
activities through a holding company structure, effective September 30, 1995. It
permits interstate branching by merger effective June 1, 1997 unless states
"opt-in" sooner, or "opt-out" before that date. States may elect to permit de
novo branching by specific legislative election. In March, 1996, West Virginia
adopted changes to its banking laws so as to permit interstate banking and
branching to the fullest extent permitted by Interstate Bill. The Interstate
Bill will permit consolidation of banking institutions across state lines and,
perhaps, de novo entry. As its provisions become effective, it is likely that
the resulting restructurings and interstate activities will result in the
realization of economies of scale within those institutions with entities in
more than one state. One result could be increased competitiveness, due to the
realization of economies of scale and, where permitted, due to de novo market
entrants.
Community Reinvestment Act
Bank holding companies and their subsidiary banks are also subject to the
provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the
Federal Reserve Board (or other appropriate bank regulatory agency) is required,
in connection with its examination of a bank, to assess such bank's record in
meeting the credit needs of the communities served by that bank, including low
and moderate income neighborhoods. Further such assessment is also required of
any bank holding company which has applied to (i) charter a national bank, (ii)
obtain deposit insurance coverage for a newly chartered institution, (iii)
establish a new branch office that will accept deposits, (iv) relocate an
office, or (v) merge or consolidate with, or acquire the assets or assume the
liabilities of a federally-regulated financial institution. In the case of a
bank holding company applying for approval to acquire a bank or other bank
holding company, the Federal Reserve Board will assess the record of each
subsidiary of the applicant bank holding company, and such records may be the
basis for denying the application or imposing conditions in connection with
approval of the application. On December 8, 1993, the federal regulators jointly
announced proposed regulations to simplify enforcement of the CRA by
substituting the present twelve categories with three assessment categories for
use in calculating CRA ratings
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<PAGE>
(the "December 1993 Proposal"). In response to comments received by the
regulators regarding the December 1993 Proposal, the federal bank regulators
issued revised CRA proposed regulations on September 26, 1994 (the "Revised CRA
Proposal"). The Revised CRA Proposal, compared to the December 1993 Proposal,
would essentially broaden the scope of CRA performance examinations and more
explicitly consider community development activities. Moreover, in 1994, the
Department of Justice, became more actively involved in enforcing fair lending
laws.
In the most recent CRA examinations by the applicable bank regulatory
authorities, South Branch's bank subsidiaries were given "satisfactory" or
better CRA ratings.
Deposit Acquisition Limitation
Under West Virginia banking law, an acquisition or merger is not permitted
if the resulting depository institution or its holding company, including any
depository institutions affiliated therewith, would assume additional deposits
to cause it to control deposits in the State of West Virginia in excess of
twenty five percent (25%) of such total amount of all deposits held by insured
depository institutions in West Virginia. This limitation may be waived by the
Commissioner of Banking for good cause shown.
Competition
South Branch competes primarily with numerous other banks and financial
institutions within its primary market area of the Eastern Panhandle and South
Central counties of West Virginia. It can be expected that with the
liberalization of the branch banking laws in West Virginia, additional financial
institutions may compete with the Company. South Branch 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
As of September 30, 1999, the Company employed 100 full-time equivalent
employees.
Properties
In 1974 the South Branch Valley National Bank acquired 5.82 acres of land
located on the west side on U.S. Route 220 on Main Street in Moorefield, West
Virginia. On June 29, 1976 South Branch Valley National Bank received the
approval of the Office of the Comptroller of the Currency to locate of its main
office to this site. This is the present location of the South Branch Valley
National Bank's and the Company's principal offices. In April 1994 SBVNB
acquired approximately one acre of real estate on the west side of U.S. Route
220 adjoining the main office. During 1998, South Branch Valley National Bank
acquired an additional 5 acres of the land adjoining this site.
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<PAGE>
On April 5, 1983 the South Branch Valley National Bank acquired property
located in the town of Mathias, West Virginia. Since December 28, 1984 the South
Branch Valley National Bank has operated its Mathias branch bank from this site.
By deeds dated May 31, 1986 and July 14, 1986 the South Branch Valley
National 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 South
Branch Valley National Bank received preliminary approval from the Office of the
Comptroller of the Currency to establish a branch bank at this location. South
Branch Valley National Bank's Franklin branch was opened for banking operations
on January 1, 1987.
During 1995, South Branch Valley National 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.
In connection with the acquisition of Capital State Bank in March 1998,
South Branch acquired Capital State Bank's banking facility located in
Southridge Centre in Charleston, West Virginia. Southridge is a large shopping
center complex on U.S. Route 119 approximately eight miles south of the
Charleston downtown area. Capital State Bank's facility opened on December 16,
1995, and is constructed on land leased for an initial 50 year term expiring in
2045.
In connection with the formation of Shenandoah Valley National Bank, South
Branch purchased 1.15 acres of land in Winchester, Virginia on which the bank
will construct a permanent facility in the year 2000. Shenandoah currently
occupies leased premises across the street from its proposed permanent bank
location.
Security Ownership of Certain Beneficial Owners and Management
As of September 30, 1999, directors of South Branch and the named
executive officers of the company owned beneficially, directly or in-directly
the number of shares of common stock indicated. Each director is required to own
a minimum of 1000 shares of South Branch common stock. Ownership is defined as
shares held in the individual's own name, jointly with a spouse, or by a company
where the individual has a controlling interest. Directors who are also
employees of South Branch's subsidiary banks are exempt from this requirement.
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Amount of
Name of Beneficial Owner Positions Held Beneficial
Ownership
- ------------------------------------------------------------------------------------------------------------------
% of
Shares Class
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
John W. Crites ............. 59 President of Allegheny Wood Products, Inc. 57,287 9.7%
and a partner in Allegheny Dimension, LLC,
both involved in the wood products industry.
Principal stockholder of KJV Aviation, Inc.
Director of the Company and of South Branch
Valley National Bank since 1989.
- ------------------------------------------------------------------------------------------------------------------
Frank A. Baer, III ......... 38 President of Commercial Insurance Service, an 1,085 *
insurance brokerage. Vice President of M &
B Properties, a real estate company. Director
of Capital State Bank since 1995 - presently
serves on Bank's Executive Committee.
Director of the Company since March, 1998.
- ------------------------------------------------------------------------------------------------------------------
Donald W. Biller ........... 68 President of D.W. Biller, Inc., a farming 6,120 1.1%
operation in the Lost River Valley. Director of
the Company since 1987 and of South Branch
Valley National Bank since 1975 - Presently
serves on Bank's Compliance and Audit
Committee. Director of West Virginia Farm
Credit, ACA.
- ------------------------------------------------------------------------------------------------------------------
Jeffrey E. Hott ............ 48 Vice President of Franklin Oil Company, 22,585 3.8%
Hott's AG Services and E.E. Hott, Inc., in
Pendleton County, the latter two involved in
agricultural services and farming operations.
Director of the Company and South Branch
Valley National Bank since 1990.
- ------------------------------------------------------------------------------------------------------------------
Ronald F. Miller ........... 55 President of Shenandoah Valley National Bank 2,200 *
(in organization). Director of the Company
since October, 1998. President and Chief
Executive Officer of First State Bank of
Strasburg, Virginia from 1994 to April, 1998.
President and Chief Executive Officer of First
National Holding Company from 1983 to
April, 1998.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Amount of
Name of Beneficial Owner Positions Held Beneficial
Ownership
- ------------------------------------------------------------------------------------------------------------------
% of
Shares Class
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Russell F. Ratliff ......... 49 Officer of South Branch Valley National Bank 1,745 *
since 1984 - presently serves as member of
Bank's Executive and Compliance and Audit
Committees. Treasurer of the Company since
its inception in 1987. Director of the Company
since 1994.
- ------------------------------------------------------------------------------------------------------------------
Harry C. Welton ............ 69 Retired from family farming operation. 10,136 1.7%
Director of the Company since 1987. Director as of
of South Branch Valley National Bank since 9/29/99
1986 - Currently serves on Bank's Compliance
& Audit Committee.
- ------------------------------------------------------------------------------------------------------------------
James M. Cookman ........... 45 Director of the Company and South Branch 3,552 *
Valley National Bank since 1994. President of
Cookman Insurance Center, Inc.. President of
Cookman Realty Group, Inc.
Secretary/Treasurer of Apex Developers, Inc.
Member of West Virginia Lottery Commission.
- ------------------------------------------------------------------------------------------------------------------
Georgette R. George ....... 38 Director of the Company since March, 1998. 1,861 *
Director of Capital State Bank since 1996.
Manager of E & G, Inc., d/b/a Ramada Inn.
Manager of Hospitality Ventures, d/b/a
Hampton Inn. Manager of Ridge- line, Inc., a
real estate development company.
- ------------------------------------------------------------------------------------------------------------------
Thomas J. Hawse, III ...... 54 Director of the Company and South Branch 3,100 *
Valley National Bank since 1988 - currently
serves as member of Bank's Executive
Committee. President of Hawse Food Market,
Inc.
- ------------------------------------------------------------------------------------------------------------------
Gary L. Hinkle ............. 49 Director of the Company and South Branch 22,342 3.8%
Valley National Bank since 1993. President of
Hinkle Trucking, Inc., Dettinburn Transport,
Inc., Mt. Storm Fuel Corporation and H. T.
Services, Inc.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Amount of
Name of Beneficial Owner Positions Held Beneficial
Ownership
- ------------------------------------------------------------------------------------------------------------------
% of
Shares Class
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Harold K. Michael .......... 55 Director of the Company and South Branch 1,189 *
Valley National Bank since 1994 - currently
serves on Bank's Compliance and Audit
Committee. Owner/Agent of H.K. Michael
Insurance Agency. Member of the West
Virginia House of Delegates.
- ------------------------------------------------------------------------------------------------------------------
Oscar M. Bean ............. 48 Director of the Company since 1987, 9,824 1.7%
Chairman of the Board since 1995. Director of
South Branch Valley National Bank since 1978
- currently serves on Bank's Executive and
Compliance and Audit Committees. Managing
partner of Bean & Bean Attorneys.
- ------------------------------------------------------------------------------------------------------------------
Phoebe F. Heishman ......... 58 Director of the Company since 1987, Secretary 11,690 2.0%
since 1995. Director of South Branch Valley
National Bank since 1973. Publisher and
Editor of Moorefield Examiner.
- ------------------------------------------------------------------------------------------------------------------
H. Charles Maddy, III ...... 36 Director of the Company and South Branch 1,624 *
Valley National Bank since 1993 - presently
serves on Bank's Executive and Compliance
and Audit Committees. President of the
Company since 1994. President and Chief
Executive Officer of South Branch since 1993.
Director of Capital State Bank since 1997 -
currently a member of Bank's Executive
Committee. Director of Shenandoah (in
organization) since 1998.
- ------------------------------------------------------------------------------------------------------------------
Charles S. Piccirillo ...... 44 Director of the Company since March, 1998. 1,388 *
Director of Capital State Bank since 1996,
Chairman of Capital State Bank, Inc. since
1997 - currently a member of Bank's
Executive Committee. Partner in the law firm
of Shaffer & Shaffer.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
All directors and executive officers as a group owned 76,562 shares or 24.2% of
the Company's common stock.
* Indicates director owns less than 1% of the Company's Common Stock.
65
<PAGE>
Related Transactions
Directors and executive officers of the Company and its subsidiaries,
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 and Capital State 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.
In connection with the organization of the new bank, the Company entered
into an Employment Agreement with one of its Directors, Ronald F. Miller, dated
August 1, 1998. Under the Agreement, Mr. Miller was paid a base salary of
$75,000 per year. As of May 17, 1999, Mr. Miller's base salary increased to
$100,000 per year. The Company also provides Mr. Miller an automobile which it
makes available to him for business and personal use.
Mr. Miller's agreement also contains change in control provisions. These
are discussed in detail under the heading "Change of Control Agreement".
Indemnification
We indemnify our Directors and officers to the fullest extent permitted by
law so that they will serve free from undue concern that they will not be
indemnified. This is required under our By-laws.
Fees and Benefit Plans for Directors
Directors of the Company do not receive a fee for their services except
Messrs. Baer and Picarillo and Ms. George who received $200 per meeting attended
to cover travel costs and expenses. Board fees are paid by our subsidiary banks.
Directors of South Branch Valley National Bank and Capital State Bank receive
the following compensation.
Monthly Cash Retainer Fees. Directors of South Branch Valley National Bank
receive a cash retainer fee of $400 per month. In addition, the Chair of the
Board of South Branch Valley National Bank receives an additional $900 per
month.
Directors of Capital State Bank, Inc. receive a fee of $100 per meeting.
Directors of Shenandoah receive a fee of $100 per meeting.
Meeting Fees. Non-employee Directors of South Branch Valley National Bank
also receive a fee of $100 for attending each Board meeting, committee meeting,
the Annual Meeting of Shareholders, and for attending any other business meeting
to which the Director is invited by the Board or the Executive Committee. Mr.
Maddy and Mr. Ratliff do not receive these payments.
66
<PAGE>
Prior to 1994, South Branch Valley National Bank paid major medical health
insurance premiums for all members of its Board of Directors. In 1994, the Board
elected to discontinue these payments on a forward going basis and individuals
elected to the Board after that date will not receive these payments. For those
still receiving payments, such payments will be eliminated upon retirement. The
following members of the board continue to receive these payments in the amounts
indicated. Oscar M. Bean - $5,670, Donald W. Biller -$5,646, John W. Crites -
$5,642, Phoebe F. Heishman - $5,751, Gary L. Hinkle -$5,649, Jeffrey E. Hott -
$5,746, and Harry C. Welton, Jr. - $5,649 for a total payment of $39,753.
Executive 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,
the only executive officer who earned $100,000 or more in salary for the years
ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
Summary Compensation Table
Annual Compensation
- -----------------------------------------------------------------
Name and All Other
Principal Position Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
H. Charles Maddy, III 1998 $104,379 $39,397 $21,209 /(1)/
President & Chief
Executive Officer 1997 $ 89,313 $32,808 $20,521 /(1)/
1996 $ 73,500 $26,667 $19,113 /(1)/
- -------------------------------------------------------------------
</TABLE>
(1) Amount includes payments made on behalf of the executive to the ESOP and
401(k) Profit Sharing Plan, amounts taxable to the executive for personal use of
the Company vehicle, and fees received by the executive as a member of the
Company's subsidiary banks' Boards of Directors.
Change of Control Agreements
Effective January 26, 1996, the Company entered into a Change in Control
Agreement with H. Charles Maddy, III, its Chief Executive Officer. In addition,
as we discussed above, Mr. Miller has an Employment Agreement with the Company
which has change in control provisions. Mr. Miller's Employment Agreement and
Mr. Maddy's Change in Control Agreement are referred to as the "Agreements". The
Board of Directors determined that such arrangements were appropriate,
especially in view of the recent entry of large regional bank holding companies
into West Virginia. The Agreements were not undertaken in the belief that a
change of control of the Company was imminent.
Generally, the Agreements provide severance compensation to Mr. Maddy and
Mr. Miller if their employment should end under certain specified conditions
after a change of control. Compensation is paid upon an involuntary termination
following a change of control unless either executive is terminated for cause.
In addition, compensation will be paid after a change of control if either Mr.
Maddy or Mr. Miller voluntarily terminates employment because of:
67
<PAGE>
. a decrease in the total amount of the executive's base salary below
the level in effect on the date of consummation of the change of
control, without the executive's consent;
. a material reduction in the importance of the executive's job
responsibilities without his consent;
. geographical relocation of the executive without his consent, to an
office more than twenty (20) miles from his location at the time of a
change of control;
. failure by the Company to obtain assumption of the contract by its
successor;
. failure of the Company to give notice of termination as required in
the Agreement; or
. any removal of the executive from, or failure to reelect the executive
to, any position with the Company or Bank that he held immediately
prior to the change in control without his prior written consent
(except for good cause, death, disability or retirement).
Under the Agreement, a "change of control" is deemed to occur in the event
of
. a change of ownership of the Company which must be reported to the
Securities and Exchange Commission as a change of control, including
but not limited to the acquisition by any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities and Exchange Act of
1934 (the "Exchange Act") of direct or indirect "beneficial ownership"
(as defined by Rule 13d-3 under the Exchange Act) of twenty-five
percent (25%) or more of the combined voting power of the Company's
then outstanding securities, or
. the failure during any period of three (3) consecutive years of
individuals who at the beginning of such period constitute the Board
for any reason to constitute at least a majority thereof, unless the
election of each director who was not a director at the beginning of
such period has been approved in advance by directors representing at
least two-thirds (2/3) of the directors at the beginning of the
period, or
. the consummation of a "Business Combination" as defined in the
Company's Articles of Incorporation.
In the case of Mr. Maddy, severance benefits include:
. cash payment equal to Mr. Maddy's monthly base salary in effect on
either (i) the date of termination; or (ii) the date immediately
preceding the change of control, whichever is higher, multiplied by
the number of full months between the date of
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<PAGE>
termination and the date that is twenty-four (24) months after the
date of consummation of the change of control;
. payment of cash incentive award, if any, under the Company's bonus
plan; continuing participation in employee benefit plans and programs
such as retirement, disability and medical insurance for a period of
twenty-four (24) months following the date of termination.
Mr. Maddy also has the right to terminate his employment without reason by
giving written notice of termination within six (6) months of consummation of
any change of control. In such event, Mr. Maddy will be entitled to receive a
lump sum equal to 75% of his salary, as defined in the Agreement.
In the case of Mr. Miller, severance benefits include:
. cash payment equal to Mr. Miller's monthly base salary in effect on
either (i) the date of termination; or (ii) the date immediately
preceding the change of control, whichever is higher, multiplied by
the number of full months between the date of termination and the date
that is eighteen (18) months after the date of consummation of the
change of control;
. payment of cash incentive award, if any, under the Company's bonus
plan; continuing participation in employee benefit plans and programs
such as retirement, disability and medical insurance for a period of
eighteen (18) months following the date of termination.
The Agreements do not effect the right of the Company to terminate Mr.
Maddy or Mr. Miller, or change the salary or benefits of Mr. Maddy or Mr.
Miller, with or without good cause, prior to any change of control. However,
any termination or change which takes place after discussions have commenced
which result in a change of control will be presumed to be a violation of the
Agreements and will entitle the executive to the benefits under the Agreements,
absent clear and convincing evidence to the contrary.
South Branch Employee Benefit Plans
Defined Contribution Plan. 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. Vesting in discretionary contributions occurs at the rate of 0%
for the first two years of eligibility and 20% per year thereafter. 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 optional
contributions at the discretion of the Company's Board of Directors. Total
Company contributions to the plan for the year ended December 31, 1998, totaled
$61,859. The trustees of the plan are also members of the Company's Board of
Directors.
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<PAGE>
Company ESOP. 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, 1998, totaled $54,559.
The trustees of the ESOP are also members of the Company's Board of Directors.
Incentive Compensation Program. 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, 1998, $161,060 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.
Stock Option Plan. At our 1998 Annual Meeting, our shareholders approved
an Officer Stock Option Plan. Under the Stock Option Plan, the Company may
award options for up to 120,000 shares of the Company's stock to qualified
officers of the Company and its subsidiaries. No options were awarded in 1998.
Proposal to Amend the Articles of Incorporation of South Branch
South Branch's Board of Directors at a meeting held on March 19, 1999,
unanimously adopted resolutions approving and recommending to the shareholders
for their adoption an amendment to South Branch's Articles of Incorporation.
The amendment would change South Branch's name to Summit Financial Group, Inc.
The text of the amendment is attached as Annex III. The primary reason for the
proposed change is to increase the marketability of the Company as it expands
and to take into account the intention that the merger be viewed as a merger of
equals.
The Board of Directors recommends a vote FOR the approval of the amendment
to the Articles of Incorporation changing South Branch's name.
An affirmative vote of a majority of the outstanding shares of South
Branch is required to approve the amendment. Shares voted "ABSTAIN" and shares
not voted will have the same effect as if the shares were voted "Against"
approval of the amendment.
Legal Matters
Certain matters will be passed upon for South Branch by its counsel,
Bowles Rice McDavid Graff & Love, PLLC, 600 Quarrier Street, Charleston, West
Virginia 25301. As of September 30, 1999, the members of Bowles Rice McDavid
Graff & Love, PLLC participating in the preparation of this proxy
statement/prospectus owned an aggregate of 100 shares of South Branch common
stock.
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<PAGE>
Experts
The consolidated financial statements of South Branch for the years ended
December 31, 1998 and 1997 and for each of the three years in the periods ended
December 31, 1998, 1997, and 1996, included in this proxy statement/prospectus,
have been audited by Arnett & Foster, PLLC, independent auditors as set forth in
their report thereon appearing elsewhere herein, and upon the authority of said
firm as experts in auditing and accounting.
The financial statements of Potomac as of December 31, 1998 and 1997, and
for each of the three years in the periods ended December 31, 1998, 1997 and
1996, included in this proxy statement/prospectus, have been so included in
reliance on the report of Arnett & Foster, PLLC, independent auditors, appearing
elsewhere herein, and upon the authority of said firm as experts in auditing and
accounting.
Shareholder Proposals
Shareholders of South Branch who intend to present proposals for
consideration at the 2000 Annual Meeting of South Branch shareholders are
advised that the Secretary of South Branch must receive any proposals no later
than the close of business on December 31, 1999, if the proposal is to be
considered for inclusion in the 2000 proxy materials of South Branch.
Other Matters
As of the date of this proxy statement/prospectus, we know of no matters
that will be presented for consideration at our respective special meetings
other than as we describe in this document. If any other matters shall properly
come before either meeting or any adjournments or postponements thereof and be
voted upon, the enclosed proxies will be deemed to confer discretionary
authority on the individuals named as proxies therein to vote the shares
represented by these proxies as to any such matters. The persons named as
proxies intend to vote or not to vote in accordance with the recommendation of
the respective managements of Potomac and South Branch.
Where You Can Find More Information About South Branch
South Branch files annual, quarterly and special reports, proxy statements
and other information with the Securities and Exchange Commission. These filings
are available over the Internet from the SEC's web site at www.sec.gov. You may
inspect and copy South Branch's filings at the public reference facilities of
the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549. You
may also obtain South Branch's filings from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C., 20549 at prescribed rates.
Please call the SEC at 1-800-SEC-0330 for further information about the public
reference rooms.
This proxy statement/prospectus is part of a registration statement on Form
S-4 that South Branch has filed under the Securities Act of 1933 with respect to
the South Branch common stock to be issued pursuant to the Merger Agreement. As
permitted by the SEC, this proxy statement/prospectus does not contain all of
the information set forth in the registration statement.
71
<PAGE>
If you would like to view the additional information contained in the
registration statement, you may do so in the manner discussed in the preceding
paragraph.
Statements in this proxy statement/prospectus that refer to the contents of
any omitted documents may be incomplete. In those cases, you are referred to the
omitted document for a more complete description. The reference modifies any
statements made in this proxy statement/prospectus.
The SEC allows South Branch to "incorporate by reference" the information
that South Branch files with the SEC, which means that South Branch can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this proxy
statement/prospectus, and information that South Branch files later with the SEC
will automatically update and supersede this information.
South Branch incorporates by reference its Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1999 and any future filings with the SEC
under Sections 13(a), 13(c), 14 or 14(d) of the Securities Exchange Act of 1934.
Future filings include filings made after the date of this proxy
statement/prospectus and prior to the date of the special meeting.
You may request a free copy of this information by writing or telephoning
South Branch at the following address or telephone number:
Carol A. Riggleman, Assistant Secretary
South Branch Valley Bancorp, Inc.
310 North Main Street
Moorefield, West Virginia 26836003
(304) 538-1000
In order to ensure timely delivery of any documents, you must make your request
no later than ________, ___________, 1999.
You should rely only on the information contained in this proxy
statement/prospectus or to which South Branch has referred you. We have not
authorized any person to give any information or to make any representations
that are different from those in this document.
This proxy statement/prospectus is not an offer to sell, and it is not
soliciting an offer to buy, any securities other than those offered in this
document. This proxy statement/prospectus also is not an offer to sell, and it
is not soliciting an offer to buy, any securities offered in this document in
any circumstances in which an offer or solicitation is unlawful.
You should not assume that the information in this proxy statement/
prospectus is accurate as of any date other than the date on the first page of
this proxy statement/prospectus.
All information concerning Potomac contained in this proxy
statement/prospectus has been supplied by Potomac and all information concerning
South Branch contained in this proxy statement/prospectus has been supplied by
South Branch.
72
<PAGE>
Index to Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
South Branch Valley Bancorp, Inc.
Audited Consolidated Financial Statements as of December 31, 1998 and 1997
and for the years ended December 31, 1998, 1997 and 1996
Independent Auditor's Report........................................................... F-1
Consolidated Balance Sheets............................................................ F-2
Consolidated Statements of Income...................................................... F-3
Consolidated Statements of Shareholders' Equity........................................ F-4
Consolidated Statements of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................. F-8
Management's Discussion and Analysis of Financial Condition and Results of Operations.. F-30
Unaudited Consolidated Financial Statements as of June 30, 1999
and for the three month and six month periods ended June 30, 1999
Consolidated Balance Sheets............................................................ F-42
Unaudited Consolidated Statements of Income............................................ F-43
Unaudited Consolidated Statements of Shareholders' Equity.............................. F-44
Unaudited Consolidated Statements of Cash Flows........................................ F-45
Notes to Unaudited Consolidated Financial Statements................................... F-47
Management's Discussion and Analysis of Financial Condition and Results of Operations.. F-55
Potomac Valley Bank
Audited Financial Statements as of December 31, 1998 and 1997
and for the years ended December 31, 1998, 1997 and 1996
Independent Auditor's Report........................................................... F-62
Balance Sheets......................................................................... F-63
Statements of Income................................................................... F-64
Statements of Comprehensive Income..................................................... F-65
Statements of Shareholders' Equity..................................................... F-66
Statements of Cash Flows............................................................... F-67
Notes to Financial Statements.......................................................... F-69
Management's Discussion and Analysis of Financial Condition and Results of Operations.. F-82
Unaudited Financial Statements as of June 30, 1999
and for the three month and six month periods ended June 30, 1999
Independent Accountant's Report........................................................ F-93
Balance Sheets......................................................................... F-94
Unaudited Statements of Income......................................................... F-95
Unaudited Statements of Comprehensive Income........................................... F-96
Unaudited Statements of Shareholders' Equity........................................... F-97
Unaudited Statements of Cash Flows..................................................... F-98
Notes to Unaudited Financial Statements................................................ F-100
Management's Discussion and Analysis of Financial Condition and Results of Operations.. F-107
</TABLE>
<PAGE>
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 subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1998.
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 subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
February 11, 1999, except for Note 15
as to which the date is March 22, 1999
F-1
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 4,239,721 $ 3,945,099
Interest bearing deposits with other banks 770,000 1,256,000
Federal funds sold 4,842,745 5,806,717
Securities available for sale 31,409,924 27,547,094
Investment in affiliate - 5,273,481
Loans, less allowance for loan losses of $1,371,886
and $895,281, respectively 142,770,127 92,572,652
Bank premises and equipment, net 5,170,858 3,071,064
Accrued interest receivable 1,059,990 864,083
Other assets 2,735,672 311,435
-------------- --------------
Total assets $ 192,999,037 $ 140,647,625
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 11,455,674 $ 9,693,915
Interest bearing 134,917,518 97,290,882
-------------- --------------
Total deposits 146,373,192 106,984,797
-------------- --------------
Short-term borrowings 4,644,143 7,145,010
Long-term borrowings 16,468,875 10,395,848
Other liabilities 1,367,698 1,061,418
-------------- --------------
Total liabilities 168,853,908 125,587,073
-------------- --------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value, authorized 1998 -
2,000,000 shares, 1997 - 600,000 shares;
issued 1998 - 600,407 shares,
1997 - 416,942 shares 1,501,018 1,042,355
Capital surplus 9,611,774 2,089,709
Retained earnings 13,103,264 11,898,420
Less cost of shares acquired for the treasury
1998-9,115 shares; 1997-4,115 shares (384,724) (166,970)
Accumulated other comprehensive income 313,797 197,038
-------------- --------------
Total shareholders' equity 24,145,129 15,060,552
-------------- --------------
Total liabilities and shareholders' equity $ 192,999,037 $ 140,647,625
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-2
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 11,437,432 $ 8,558,144 $ 7,551,735
Interest and dividends on securities
Taxable 1,813,205 1,540,530 1,711,158
Tax-exempt 320,769 314,596 254,988
Interest on interest bearing deposits
with other banks 71,624 96,549 125,604
Interest on Federal funds sold 236,157 79,971 48,811
------------- ------------- -------------
Total interest income 13,879,187 10,589,790 9,692,296
------------- ------------- -------------
Interest expense:
Interest on deposits 6,092,732 4,606,578 4,590,018
Interest on short-term borrowings 231,544 256,554 68,676
Interest on long-term borrowings 718,634 543,566 105,668
------------- ------------- -------------
Total interest expense 7,042,910 5,406,698 4,764,362
------------- ------------- -------------
Net interest income 6,836,277 5,183,092 4,927,934
Provision for loan losses 270,000 155,000 95,000
------------- ------------- -------------
Net interest income after provision
for loan losses 6,566,277 5,028,092 4,832,934
------------- ------------- -------------
Other income:
Insurance commissions 83,087 90,680 110,982
Trust services income 3,764 3,861 5,853
Service fees 430,840 280,442 232,845
Securities gains 8,160 9,789 29,999
Gain on sales of assets 17,751 89,919 7,202
Other 65,486 49,828 69,705
------------- ------------- -------------
Total other income 609,088 524,519 456,586
------------- ------------- -------------
Other expenses:
Salaries and employee benefits 2,214,419 1,772,344 1,727,839
Net occupancy expense 300,369 196,005 189,285
Equipment rentals, depreciation and maintenance 388,860 289,223 222,543
Other 1,571,873 1,084,117 1,016,603
------------- ------------- -------------
Total other expenses 4,475,521 3,341,689 3,156,270
------------- ------------- -------------
Income before income tax expense 2,699,844 2,210,922 2,133,250
Income tax expense 966,550 691,265 643,213
------------- ------------- -------------
Net income $ 1,733,294 $ 1,519,657 $ 1,490,037
============= ============= =============
Basic earnings per common share $ 3.16 $ 3.83 $ 3.94
============= ============= =============
Average common shares outstanding 548,331 397,032 378,510
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 956,562 $ 685,534 $ 9,512,884 $ (166,970) $ 340,650 $11,328,660
Comprehensive income:
Net income - - 1,490,037 - - 1,490,037
Other comprehensive income,
net of tax:
Net unrealized (loss) on
securities of $(205,002), net
of reclassification adjustment
for gains included in net
income of $18,449 - - - - (223,451) (223,451)
-----------
Total comprehensive income - - - - - 1,266,586
-----------
Cash dividends declared
on common stock
($.77 per share) - - (291,453) - - (291,453)
---------- ---------- ----------- ---------- ------------ -----------
Balance, December 31, 1996 956,562 685,534 10,711,468 (166,970) 117,199 12,303,793
Comprehensive income:
Net income - - 1,519,657 - - 1,519,657
Other comprehensive income,
net of tax:
Net unrealized gain on
securities of $85,859, net
of reclassification adjustment
for gains included in net
income of $6,020 - - - - 79,839 79,839
-----------
Total comprehensive income - - - - - 1,599,496
-----------
Net proceeds from issuance of
34,317 shares of common
stock at $43.50 per share 85,793 1,404,175 - - - 1,489,968
Cash dividends declared
on common stock
($.84 per share) - - (332,705) - - (332,705)
---------- ---------- ----------- ---------- ------------ -----------
Balance, December 31, 1997 1,042,355 2,089,709 11,898,420 (166,970) 197,038 15,060,552
</TABLE>
(Continued)
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - Continued
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
-------- --------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income - - 1,733,294 - - 1,733,294
Other comprehensive income,
net of tax:
Net unrealized gain on
securities of $121,777, net
of reclassification adjustment
for gains included in net
income of $5,018 - - - - 116,759 116,759
-----------
Total comprehensive income - - - - - 1,850,053
-----------
Issuance of 183,465 shares
of common stock at $43.50 per
share as consideration for the
acquisition of Capital State
Bank, Inc. 458,663 7,522,065 - - - 7,980,728
Cost of 5,000 shares of common
stock acquired for the treasury - - - (217,754 - (217,754)
Cash dividends declared
on common stock
($.89 per share) - - (528,450) - - (528,450)
------------ ------------ ------------- ----------- ----------- -----------
Balance, December 31, 1998 $ 1,501,018 $ 9,611,774 $ 13,103,264 $ (384,724 $ 313,797 $24,145,129
============ ============ ============= =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,733,294 $ 1,519,657 $ 1,490,037
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 330,091 235,488 212,383
Provision for loan losses 270,000 155,000 95,000
Deferred income tax (benefit) expense 17,288 47,839 (35,110)
Security (gains) losses (8,160) (9,789) (29,999)
(Gain) on disposal of Bank premises and equipment (9,709) (91,507) (23,176)
(Gain) loss on sale of other assets (8,043) 1,588 (7,202)
Amortization of securities premiums (accretion
of discounts), net (11,089) 10,069 50,141
Amortization of goodwill and purchase
accounting adjustments, net 98,460 - -
(Increase) decrease in accrued interest receivable (3,027) 64,559 55,199
(Increase) decrease in other assets 334,993 574,396 (455,720)
Increase (decrease) in other liabilities (264,044) (12,752) 167,700
-------------- -------------- --------------
Net cash provided by operating activities 2,480,054 2,494,548 1,519,253
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of interest bearing
deposits with other banks 486,000 297,000 581,919
Proceeds from maturities and calls of
securities available for sale 10,390,000 6,748,200 3,950,000
Proceeds from sales of securities
available for sale 613,160 1,539,666 6,735,258
Principal payments received on
securities available for sale 3,053,020 1,417,948 768,591
Purchases of securities available for sale (7,236,227) (7,771,371) (9,708,744)
Purchase of common stock of affiliate (90,465) (5,273,481) -
(Increase) decrease in Federal funds sold, net 7,180,972 (5,082,983) 1,438,011
Loans made to customers, net (26,083,150) (10,387,784) (11,950,307)
Purchases of Bank premises and equipment (934,885) (238,333) (223,759)
Proceeds from disposal of Bank premises and equipment 10,693 145,180 93,011
Proceeds from sales of other assets 84,350 44,500 22,000
Net cash and due from banks acquired in acquisition of
Capital State Bank, Inc. 985,617 - -
-------------- -------------- --------------
Net cash (used in) investing activities (11,540,915) (18,561,458) (8,294,020)
-------------- -------------- --------------
</TABLE>
(Continued)
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposit,
NOW and savings accounts 2,120,609 (100,161) (1,437,576)
Net increase (decrease) in time deposits 4,408,918 6,143,546 2,332,652
Net increase (decrease) in short-term borrowings (2,500,867) 2,767,613 4,377,397
Proceeds from long-term borrowings 9,636,337 7,700,000 2,840,000
Repayment of long-term borrowings (3,563,310) (818,804) (75,348)
Purchase of treasury stock (217,754) - -
Dividends paid (528,450) (332,705) (291,453)
Net proceeds from common stock sold - 1,489,968 -
--------------- -------------- --------------
Net cash provided by financing activities 9,355,483 16,849,457 7,745,672
--------------- -------------- --------------
Increase (decrease) in cash and due from banks 294,622 782,547 970,905
Cash and due from banks:
Beginning 3,945,099 3,162,552 2,191,647
--------------- -------------- --------------
Ending $ 4,239,721 $ 3,945,099 $ 3,162,552
=============== ============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 7,042,088 $ 5,351,175 $ 4,742,367
=============== ============== ==============
Income taxes $ 940,807 $ 604,871 $ 627,563
=============== ============== ==============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other assets acquired in settlement of loans $ 108,020 $ 74,337 $ 39,500
=============== ============== ==============
Acquisition of Capital State Bank, Inc.:
Prior acquisition of 40% of the outstanding common
shares purchased for cash $ 5,363,946 $ - $ -
Acquisition of 60% of the outstanding common
shares in exchange for 183,465 shares of
Company common stock 7,980,728 - -
--------------- -------------- --------------
$ 13,344,674 $ - $ -
=============== ============== ==============
Fair value of assets acquired
(principally loans and securities) $ 46,720,306 $ - $ -
Deposits and other liabilities assumed (33,375,632) - -
--------------- -------------- --------------
$ 13,344,674 $ - $ -
=============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Nature of business: South Branch Valley Bancorp, Inc. ("Company") is a
bank holding company with operations in Hardy, Grant, Pendleton and
Kanawha Counties of West Virginia. Through its two wholly owned bank
subsidiaries, South Branch Valley National Bank and Capital State
Bank, Inc., the Company provides retail and commercial loans, and
deposit and trust services principally to individuals and small
businesses.
Basis of financial statement presentation: The accounting and
reporting policies of South Branch Valley Bancorp, Inc., and its
subsidiaries conform to generally accepted accounting principles and
to general practices within the banking industry.
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.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of South Branch Valley Bancorp, Inc.,
and its subsidiaries, South Branch Valley National Bank and Capital
State Bank, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
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 consolidated 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.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 banks make continuous credit
reviews of the loan portfolio and consider 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. While management
uses the best information available to make its evaluation, future
adjustments may be necessary if there are significant changes in
conditions.
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 non-accrual
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.
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.
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
Company'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 of Financial Accounting Standards Board No.
91 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. The estimated useful lives employed
are on average 30 years for premises and 3 to 10 years for furniture and
equipment. 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 any period presented in the
accompanying financial statements.
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 write down 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.
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Expenses incurred in connection with operating these properties are
generally 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
$84,655 and $57,465, at December 31, 1998 and 1997, 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 bases of assets and liabilities
that will result in taxable or deductible amounts in the future 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.
Basic earnings per share: Basic earnings per common share are computed
based upon the weighted average shares outstanding. The weighted average
number of shares outstanding was 548,331, 397,032 and 378,510 for the
years ended December 31, 1998, 1997 and 1996, respectively. For the year
ended December 31, 1997, the Company adopted Financial Accounting
Standards Board Statement No. 128, Earnings Per Share. During the years
ended December 31, 1998, 1997 and 1996, the Company did not have any
potentially dilutive securities outstanding.
Employee benefits: The Company has a profit-sharing and thrift plan and
an employee stock ownership plan (ESOP) which covers substantially all
employees. The amount of the contributions to the plans are at the
discretion of the Company's Board of Directors.
Trust services: Assets held in an agency or fiduciary capacity are not
assets of the Company and are not included in the accompanying
consolidated balance sheets. Trust services 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 effect on net income.
Comprehensive income: During 1998, the Company adopted Financial
Accounting Standards Board Statement No. 130, Reporting Comprehensive
Income. This Statement establishes standards for reporting the
components of comprehensive income and requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be included in a financial statement that is
displayed with the same prominence as other financial statements.
Comprehensive income includes net income as well as certain items that
are reported directly within a separate component of shareholders' equity
and bypass net income.
Emerging accounting standards: In June 1998, the Financial Accounting
Standards Board issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in
years beginning after June 15, 1999. The Company expects to adopt the
new Statement effective December 31, 2000. The Statement will require
the Company to recognize all derivatives on the consolidated balance
sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities or firm
commitments through earnings or recognized in other comprehensive
income until the hedged items are recognized in earnings. The
ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. Management does not anticipate
that the adoption of the new Statement will have a significant impact
on the Company's earnings or financial position.
Reclassifications: Certain accounts in the consolidated financial
statements for 1997 and 1996, as previously presented, have been
reclassified to conform to current year classifications.
Note 2. Acquisition of Capital State Bank, Inc.
During the first half of 1997, the Company purchased approximately 40%
of the outstanding common shares of Capital State Bank, Inc ("Capital
State"). To facilitate the funding of this investment, the Company
issued and sold 34,317 shares of its common stock at $43.50 per share
to seven directors of the Company in a limited stock offering.
Additionally, the Company obtained two long-term borrowings from two
unaffiliated financial institutions totaling $3,500,000. The Company's
investment in Capital State as of December 31, 1997 totaled
$5,273,481, and is reflected as investment in affiliate in the 1997
accompanying consolidated balance sheet.
On August 6, 1997, the Company entered into an Agreement and Plan of
Merger with Capital State to acquire the remaining 60% of its
outstanding common shares. The Agreement, as amended on December 16,
1997, provided for the shareholders of Capital State to receive one
(1) share of the Company's common stock in exchange for each 3.95
shares of Capital State stock owned. To facilitate this transaction,
the Company issued a total of 183,465 shares of its common stock. On
March 24, 1998 and March 25, 1998, the shareholders of Capital State
and the Company respectively, approved the transaction and, it was
consummated at the close of business on March 31, 1998. This
acquisition was accounted for using the purchase method of accounting,
and accordingly, the assets and liabilities and results of operations
of Capital State are reflected in the Company's consolidated financial
statements beginning April 1, 1998. The excess purchase price over the
fair value of the net assets acquired as of the consummation date
totaled $1,979,430, which is included in other assets in the
accompanying consolidated balance sheet as of December 31, 1998. This
goodwill is being amortized over a period of 15 years using the
straight line method.
The following presents certain pro forma condensed consolidated
financial information of the Company, using the purchase method of
accounting, after giving effect to the merger as if it had been
consummated at the beginning of the periods presented (in thousands,
except per share data).
<TABLE>
<CAPTION>
For the Year Ended
---------------------------------------------------------------
December 31, 1998 December 31, 1997 December 31, 1996
------------------- ------------------- -------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $ 13,879 $ 14,614 $ 10,590 $ 13,137 $ 9,692 $ 11,125
Total interest expense 7,043 7,431 5,407 6,568 4,764 5,239
Net interest income 6,836 7,183 5,183 6,569 4,928 5,886
Net income 1,733 1,746 1,520 1,304 1,490 1,113
Basic earnings per share $ 3.16 $ 2.94 $ 3.83 $ 2.25 $ 3.94 $ 1.98
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This pro forma information has been included for comparative purposes
only and may not be indicative of the combined results of operations
that actually would have occurred had the transaction been consummated
at the beginning of the periods presented, or which will be attained
in the future.
Note 3. Cash Concentration
At December 31, 1998 and 1997, the Company had concentrations totaling
$4,626,123 and $8,514,792, respectively, with unaffiliated financial
institutions consisting of due from bank account balances and Federal
funds sold. Deposits with correspondent banks are generally unsecured
and have limited insurance under current banking insurance
regulations.
Note 4. Securities
The amortized cost, unrealized gains and losses, and estimated fair
values of securities at December 31, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available for Sale
Taxable:
U. S. Treasury securities $ 2,990,294 $ 68,354 $ - $ 3,058,648
U. S. Government agencies
and corporations 12,698,092 82,796 11,404 12,769,484
Small Business Administration
guaranteed loan participation
certificates 973,127 21,119 - 994,246
Mortgage-backed securities -
U. S. Government agencies and
corporations 6,334,380 86,483 - 6,420,863
Corporate debt securities 249,724 1,214 - 250,938
Federal Reserve Bank stock 44,300 - - 44,300
Federal Home Loan Bank stock 1,052,300 - - 1,052,300
Other equity securities 306,625 - - 306,625
------------ ------------ ------------ ------------
Total taxable 24,648,842 259,966 11,404 24,897,404
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 6,246,745 268,525 6,850 6,508,420
Federal Reserve Bank stock 4,100 - - 4,100
------------ ------------ ------------ ------------
Total tax-exempt 6,250,845 268,525 6,850 6,512,520
------------ ------------ ------------ ------------
Total $ 30,899,687 $ 528,491 $ 18,254 $ 31,409,924
============ ============ ============ ============
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997
---------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available for Sale
Taxable:
U. S. Treasury securities $ 2,988,064 $ 46,546 $ - $ 3,034,610
U. S. Government agencies
and corporations 9,523,135 71,935 8,850 9,586,220
Small Business Administration
guaranteed loan participation
certificates 1,470,915 16,522 - 1,487,437
Mortgage-backed securities -
U. S. Government agencies and
corporations 6,650,070 21,182 20,328 6,650,924
Corporate debt securities 249,082 3,296 - 252,378
Federal Reserve Bank stock 44,300 - - 44,300
Federal Home Loan Bank stock 722,400 - - 722,400
Other equity securities 6,625 - - 6,625
------------ ------------ ------------ ------------
Total taxable 21,654,591 159,481 29,178 21,784,894
------------ ------------ ------------ ------------
Tax-exempt:
State and political subdivisions 5,568,016 190,084 - 5,758,100
Federal Reserve Bank stock 4,100 - - 4,100
------------ ------------ ------------ ------------
Total tax-exempt 5,572,116 190,084 - 5,762,200
------------ ------------ ------------ ------------
Total $ 27,226,707 $ 349,565 $ 29,178 $ 27,547,094
============ ============ ============ ============
</TABLE>
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,
1998 and 1997. These obligations, having contractual maturities
ranging from 1 to 20 years, are reflected in the following maturity
distribution schedules based on their anticipated average life to
maturity, which ranges from 1 to 5 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, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Available for Sale
----------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 6,970,026 $ 7,043,402
Due from one to five years 13,792,274 14,009,639
Due from five to ten years 6,556,501 6,661,720
Due after ten years 2,173,561 2,287,838
Equity securities 1,407,325 1,407,325
------------- -------------
Total $ 30,899,687 $ 31,409,924
============= =============
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The proceeds from sales, calls and 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
----------------------------- ----- ---------- -------- ----- --------
<S> <C> <C> <C> <C> <C>
1998
Securities available for sale $ 613,160 $ 10,390,000 $ 3,053,020 $ 8,160 $ -
=========== ============ ============ ======== ========
1997
Securities available for sale $ 1,539,666 $ 6,748,200 $ 1,417,948 $ 9,789 $ -
=========== ============ ============ ======== ========
1996
Securities available for sale $ 6,735,258 $ 3,950,000 $ 768,591 $ 45,824 $ 15,825
=========== ============ ============ ======== ========
</TABLE>
At December 31, 1998 and 1997, securities with amortized costs of
$17,676,849 and $17,149,748, respectively, with estimated fair values of
$17,973,561 and $17,313,961, respectively, were pledged to secure public
deposits, and for other purposes required or permitted by law.
Note 5. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Commercial, financial and agricultural $ 41,956,586 $ 30,325,145
Real estate - construction 1,801,317 144,207
Real estate - mortgage 73,885,892 42,640,294
Installment 26,579,782 20,587,084
Other 409,382 468,980
--------------- ---------------
Total loans 144,632,959 94,165,710
Less unearned income 490,946 697,777
--------------- ---------------
Total loans net of unearned income 144,142,013 93,467,933
Less allowance for loan losses 1,371,886 895,281
--------------- ---------------
Loans, net $ 142,770,127 $ 92,572,652
=============== ===============
</TABLE>
Included in the net balance of loans are non-accrual loans amounting to
$297,291 and $141,735 at December 31, 1998 and 1997, respectively. If
interest on non-accrual loans had been accrued, such income would have
approximated $15,487, $14,200 and $30,978 for the years ended December
31, 1998, 1997 and 1996, respectively.
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents loan maturities at December 31, 1998:
<TABLE>
<CAPTION>
Within After 1 but After
1 Year Within 5 Years 5 Years
------------- -------------- -------------
<S> <C> <C> <C>
Commercial, financial and agricultural $ 8,958,628 $ 10,957,213 $ 22,040,745
Real estate - construction 1,723,368 - 77,949
Real estate - mortgage 2,476,797 9,048,985 62,360,110
Installment loans 3,347,660 19,629,580 3,602,542
Other 374,915 34,467 -
------------- ------------- -------------
Total $ 16,881,368 $ 39,670,245 $ 88,081,346
------------- ------------- -------------
Loans due after one year with:
Variable rates $ 41,111,653
Fixed rates 86,639,938
--------------
$ 127,751,591
--------------
</TABLE>
The Company 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, 1998, the Company's commercial loan portfolio
contained adjustable rate loans of approximately $20,375,879. The interest
rates on such loans ranged from 7.0% to 11.5%, and provided for future
interest rate changes at set intervals, ranging from one to sixty months.
Likewise, the Company's mortgage portfolio contained adjustable rate loans
of approximately $26,701,170 at December 31, 1998. The interest rates on
such loans ranged from 6.3% to 14.5%, and provided for future interest rate
changes at set intervals, ranging from monthly to fifteen years.
Concentrations of credit risk: The Company grants commercial, residential
-----------------------------
and consumer loans to customers primarily located in the Eastern Panhandle
and South Central counties of West Virginia. Although the Company strives
to maintain a diverse loan portfolio, exposure to credit losses can be
adversely impacted by downturns in local economic and employment
conditions. Major employment within the Company's market area is diverse,
but primarily includes the poultry, government, health care, education,
coal production and various professional, financial and related service
industries.
The Company 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.
Loans to related parties: The subsidiary banks have 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.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
1998 1997
------------ ------------
<S> <C> <C>
Balance, beginning $ 3,913,943 $ 4,318,097
Additions 2,185,541 1,651,121
Amounts collected (1,373,239) (1,483,575)
Other changes, net 784,133 (571,700)
------------ ------------
Balance, ending $ 5,510,378 $ 3,913,943
============ ============
</TABLE>
Note 6. Allowance for loan losses
An analysis of the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 895,281 $ 858,423 $ 859,681
Losses:
Commercial, financial and agricultural 4,063 - 10,194
Real estate - mortgage - 25,536 12,778
Installment 124,103 166,059 93,826
Other 24,638 8,444 9,951
----------- ------------ ------------
Total 152,804 200,039 126,749
----------- ------------ ------------
Recoveries:
Commercial, financial and agricultural 2,830 27,050 5,658
Real estate - mortgage 21,969 13,675 1,885
Installment 60,797 39,936 20,525
Other 2,011 1,236 2,423
----------- ------------ ------------
Total 87,607 81,897 30,491
----------- ------------ ------------
Net losses 65,197 118,142 96,258
Allowance of purchased subsidiary 271,802 - -
Provision for loan losses 270,000 155,000 95,000
----------- ------------ ------------
Balance, end of year $ 1,371,886 $ 895,281 $ 858,423
=========== ============ ============
</TABLE>
The Company's total recorded investment in impaired loans at December
31, 1998 and 1997, approximated $354,907 and $125,114, respectively, for
which the related allowance for loan losses determined in accordance
with generally accepted accounting principles approximated $51,000 and
$77,500, respectively. The Company's average investment in such loans
approximated $368,326 and $125,114 for the years ended December 31, 1998
and 1997, respectively. All impaired loans at December 31, 1998 and
1997, 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 Company considers groups of
smaller-balance, homogeneous loans to include: mortgage loans secured by
residential property, other than those which significantly exceed the
Company'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.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1998 and 1997, the Company recognized
approximately $29,760 and $12,272, respectively, in interest income on
impaired loans. Using a cash-basis method of accounting, the Company
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, 1998 and 1997, are summarized as follows:
1998 1997
------------- ------------
Land $ 1,174,679 $ 429,973
Buildings and improvements 3,928,162 2,681,707
Furniture and equipment 2,327,419 1,675,258
------------- ------------
7,430,260 4,786,938
Less accumulated depreciation 2,259,402 1,715,874
------------- ------------
Bank premises and equipment, net $ 5,170,858 $ 3,071,064
============= ============
Depreciation expense for the years ended December 31, 1998, 1997 and
1996 totaled $330,091, $235,488 and $212,383, respectively.
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of
December 31, 1998 and 1997:
1998 1997
------------- ------------
Demand deposits, interest bearing $ 27,510,717 $ 17,468,844
Savings deposits 14,748,928 14,890,934
Certificates of deposit 83,319,247 56,902,451
Individual retirement accounts 9,338,626 8,028,653
------------- ------------
Total $ 134,917,518 $ 97,290,882
============= ============
Time certificates of deposit and IRA's in denominations of $100,000 or
more totaled $22,262,990 and $10,726,460 at December 31, 1998 and 1997,
respectively. Interest paid on time certificates of deposit and
Individual Retirement Accounts in denominations of $100,000 or more was
$1,103,306, $565,000 and $501,754 for the years ended December 31, 1998,
1997 and 1996, 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, 1998:
Amount Percent
------------- ------------
Three months or less $ 2,719,367 12.2%
Three through six months 5,171,279 23.2%
Six through twelve months 7,982,333 35.9%
Over twelve months 6,390,011 28.7%
------------- -----
Total $ 22,262,990 100.0%
============= =====
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the scheduled maturities for all time deposits as of
December 31, 1998, follows:
1999 $ 61,542,656
2000 18,123,034
2001 5,925,183
2002 2,410,855
2003 3,692,763
Thereafter 963,382
------------
$ 92,657,873
============
At December 31, 1998, deposits of related parties including directors,
executive officers, and their related interests of the Company approximated
$7,880,000.
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 banks'
control and secure the total outstanding daily balances. Other
borrowings consist of lines of credit from the Federal Home Loan Bank
(FHLB) under its RepoPlus Program. The RepoPlus is limited to the
subsidiary banks' outstanding maximum borrowing capacity of
approximately $45,433,000 at December 31, 1998, less the current
outstanding balance of any long-term FHLB borrowings, and is subject to
annual renewal. Borrowings under this arrangement will be granted for
terms of 1 to 364 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 subsidiary
banks.
Additional details regarding short-term borrowings during the years
ended December 31, 1998 and 1997, are presented below:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Federal
Funds Repurchase Other
Purchased Agreements Borrowings
------------ ----------- -----------
<S> <C> <C> <C>
Outstanding at year end $ - $ 3,944,143 $ 700,000
Average amount outstanding 82,164 4,981,296 307,219
Maximum amount outstanding at
any month end 700,000 5,959,583 1,400,000
Weighted average interest rate 6.29% 4.20% 5.49%
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
Federal
Funds Repurchase Other
Purchased Agreements Borrowings
------------ ----------- -----------
<S> <C> <C> <C>
Outstanding at year end $ - $ 5,745,010 $ 1,400,000
Average amount outstanding 107,534 3,853,897 1,724,015
Maximum amount outstanding at
any month end - 5,745,010 2,400,000
Weighted average interest rate 5.33% 4.21% 5.14%
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term borrowing: On February 18, 1997 and March 14, 1997, the
Company obtained two long-term borrowings from two separate,
unaffiliated financial institutions in the amounts of $3,000,000 and
$500,000 respectively, to fund a portion of its investment in an
affiliate. Both of these borrowings were paid off in 1998.
The subsidiary banks also had long-term borrowings of $16,468,875 and
$7,558,348 as of December 31, 1998 and 1997, respectively, which
consisted of advances from the Federal Home Loan Bank of Pittsburgh to
fund local mortgage loan growth. These borrowings bear both fixed and
variable interest rates and mature in varying amounts through the year
2008. The average interest rate paid during 1998 and 1997 approximated
5.35% and 6.11%, respectively.
A summary of the maturities of all long-term borrowings for the next
five years and thereafter is as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Amount
---------------------------- --------------
<S> <C>
1999 $ 1,026,364
2000 856,611
2001 378,079
2002 3,150,840
2003 2,424,974
Thereafter 8,632,007
--------------
$ 16,468,875
==============
</TABLE>
Note 10. Income Taxes
The components of applicable income tax expense (benefit) for the
years ended December 31, 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Current
Federal $ 832,962 $ 563,735 $ 602,391
State 116,300 79,691 75,932
---------- --------- ----------
949,262 643,426 678,323
---------- --------- ----------
Deferred
Federal 19,359 39,640 (31,208)
State (2,071) 8,199 (3,902)
---------- --------- ----------
17,288 47,839 (35,110)
---------- --------- ----------
Total $ 966,550 $ 691,265 $ 643,213
========== ========= ==========
</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, 1998, 1997 and
1996 is as follows:
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at applicable
statutory rate $ 917,947 34 $ 751,713 34 $ 725,305 34
Increase (decrease) in taxes
resulting from:
Tax-exempt interest, net (92,251) (3) (94,460) (4) (80,961) (4)
State income taxes, net
of Federal income tax
benefit 75,391 3 58,007 3 47,540 2
Change in deferred tax
valuation allowance 61,965 2 15,758 1 5,237 -
Nondeductible amortization
of goodwill 33,415 1 - - - -
Noncash charitable
contribution - - (41,573) (2) (59,704) (3)
Other, net (29,917) (1) 1,820 - 5,796 1
---------- --------- --------- --------- -------- ---------
Applicable income taxes $ 966,550 36 $ 691,265 32 $643,213 30
---------- --------- --------- --------- -------- ---------
</TABLE>
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, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 380,420 $ 226,964
Deferred compensation 80,803 62,137
Other deferred costs and accrued expenses 65,558 -
Deductible goodwill 29,235 9,482
Net operating loss carryforwards 90,589 -
Charitable contribution carryforward 1,226 -
---------- ----------
647,831 298,583
Less valuation allowance (271,733) (209,768)
---------- ----------
376,098 88,815
---------- ----------
Deferred tax liabilities
Depreciation 115,432 51,225
Net unrealized gain on securities 196,440 123,349
Accretion on tax-exempt securities 6,120 2,519
Purchase accounting adjustments 106,126 -
Deferred gain on disposal of premises and equipment - 15,135
---------- ----------
424,118 192,228
---------- ----------
Net deferred tax assets (liabilities) $ (48,020) $ (103,413)
---------- ----------
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The income tax expense (benefit) on realized securities gains (losses)
was $3,142, $3,769 and $11,550, for the years ended December 31, 1998,
1997 and 1996, respectively. The Company has available for tax
purposes $194,818 and $249,674, respectively, in Federal and State net
operating loss carryforwards to offset future taxable income of
Capital State Bank, Inc. These carryforwards expire in varying amounts
through 2011.
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 $61,859, $53,417, and $54,240 for the
years ended December 31, 1998, 1997 and 1996, 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, 1998,
1997 and 1996 were $54,559, $51,047 and $48,250, respectively.
Dividends made by the Company to the ESOP are reported as a reduction
to retained earnings. The ESOP owns 11,560 shares of the Company's
common stock, all of which were purchased at the prevailing market
price and 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 Board of Directors.
Incentive Compensation Program: South Branch Valley National 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 equity as a base. Under the terms of the incentive
compensation program, bonuses charged to operations totaled $185,000,
$141,000 and $137,000 for 1998, 1997 and 1996, respectively.
Directors Deferred Compensation Plan: South Branch Valley National
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.
In December 1998, the Directors of South Branch Valley National Bank
voted in principle to amend and restate this plan by revoking all
units of Company common stock previously assigned to participants and
to invest all prior and future deferrals of fees in separate variable
life insurance contracts. The Company expects to complete the
amendment and restatement of this plan in 1999.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The liability for deferred directors' compensation at December 31,
1998 and 1997, approximated $211,250 and $162,450, respectively, which
is included in other liabilities in the accompanying consolidated
balance sheets.
Stock Option Plan: In April 1998, the Company's shareholders approved
the 1998 Officer Stock Option Plan. Under the terms of the plan, the
Company's Board of Directors or its designated committee may grant
options for up to 120,000 shares of common stock to officers employed
by the Company or its subsidiaries. Each option granted under the plan
shall have a term of no more than 10 years and an exercise price no
less than the fair market value of the Company's common stock as of
the date of grant. Options granted under the plan vest according to a
schedule designated at the grant date. The Company intends to account
for grants under this plan in accordance with APB Opinion No. 25. As
of December 31, 1998, no options had been granted under the plan.
In February 1999, the Company's Board of Directors voted to grant a
total of 7,500 options to certain of its officers. These options have
a term of 10 years, vest ratably over 5 years, and have an exercise
price of $41.65.
Note 12. Commitments and Contingencies
Financial instruments with off-balance sheet risk: The Company 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 Company has in this
class of financial instruments. The Company's total contract amount of
commitments to extend credit at December 31, 1998 and 1997,
approximated $9,155,179 and $5,715,032, respectively.
The Company'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 Company 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 Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company 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 Company 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 Agreements: The Company has various employment agreements
with its chief executive officer and certain other senior executive
officers. These agreements contain change in control provisions that
would entitle the officers to receive compensation in the event there
is a change in control in the Company (as defined) and a termination
of their employment without cause (as defined).
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year 2000 Readiness: The Year 2000 Issue ("Issue") relates to whether
computer and other electronic systems will properly recognize date-
sensitive information when the year changes from 1999 to 2000. Since
the Company and its suppliers, customers, and service providers are
heavily dependent on computer processing in the conduct of business, a
plan was developed to study, test and remedy the Issue. As a result, a
remediation plan and processes were developed and implemented and the
Company made expenditures approximating $131,000 during 1998, of which
$116,000 were capital expenditures for the replacement of computers
and other date dependent electronic devices and processes. To complete
the remediation plan, limited additional remediation will be completed
in the first half of 1999, the cost of which is not expected to exceed
$50,000.
Based on the actions taken and the processes implemented regarding
remediation of the Issue, management feels that risks from potential
Year 2000 business disruptions have been minimized to the extent
possible. Management will continue to analyze and monitor all systems
and processes over which it has control throughout 1999. Also,
contingency plans have been developed to minimize risks of Year 2000
disruptions from sources outside of the Company's control.
Note 13. Restrictions on Capital and Dividends
The primary source of funds for the dividends paid by South Branch
Valley Bancorp, Inc. is dividends received from its subsidiary banks.
Dividends paid by the subsidiary banks are subject to restrictions by
banking regulations. The most restrictive provision requires approval
by their regulatory agencies 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 1999, the net retained profits
available for distribution to South Branch Valley Bancorp, Inc. as
dividends without regulatory approval are approximately $730,000 plus
net retained income of the subsidiary banks for the interim periods
through the date of declaration.
The Company and its subsidiaries are subject to various regulatory
capital requirements administered by the banking regulatory agencies.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and each of its subsidiaries
must meet specific capital guidelines that involve quantitative
measures of the Company's and its subsidiaries' assets, liabilities
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company and each of its subsidiaries'
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 Company and each of its subsidiaries to maintain
minimum amounts and ratios 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, 1998, that the Company and each of its
subsidiaries met all capital adequacy requirements to which they were
subject.
The most recent notifications from the banking regulatory agencies
categorized the Company and each of its subsidiaries as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and each of
its subsidiaries must maintain minimum total risk-based, Tier I risk-
based, and Tier I leverage ratios as set forth in the table below.
The Company's and its subsidiaries', South Branch Valley National
Bank's ("SBVNB") and Capital State Bank, Inc.'s ("CSB"), actual
capital amounts and ratios are also presented in the following table
(dollar amounts in thousands).
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
---------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
Total Capital (to risk weighted assets)
Company $ 23,309 18.4% $ 10,126 8.0% $ 12,658 10.0%
SBVNB 13,510 14.0% 7,721 8.0% 9,652 10.0%
CSB 8,976 30.5% 2,356 8.0% 2,945 10.0%
Tier I Capital (to risk weighted assets)
Company 21,937 17.3% 5,063 4.0% 7,595 6.0%
SBVNB 12,468 12.9% 3,861 4.0% 5,791 6.0%
CSB 8,646 29.4% 1,178 4.0% 1,767 6.0%
Tier I Capital (to average assets)
Company 21,937 11.5% 5,702 3.0% 9,504 5.0%
SBVNB 12,468 8.7% 4,289 3.0% 7,148 5.0%
CSB 8,646 17.7% 1,464 3.0% 2,441 5.0%
As of December 31, 1997
Total Capital (to risk weighted assets)
Company $ 15,759 17.7% $ 7,126 8.0% $ 8,908 10.0%
SBVNB 12,779 14.4% 7,123 8.0% 8,904 10.0%
CSB * * * * * *
Tier I Capital (to risk weighted assets)
Company 14,864 16.7% $ 3,563 4.0% $ 5,345 6.0%
SBVNB 11,884 13.4% 3,562 4.0% 5,342 6.0%
CSB * * * * * *
Tier I Capital (to average assets)
Company 14,864 11.3% 3,941 3.0% 6,569 5.0%
SBVNB 11,884 9.2% 3,897 3.0% 6,494 5.0%
CSB * * * * * *
</TABLE>
* - No data presented relative to CSB for the year ended December 31, 1997, as
this subsidiary was acquired by the Company in March 1998.
Note 14. Pending Acquisition and New Subsidiary
On December 23, 1998, a subsidiary of the Company, Capital State Bank,
Inc. entered into an agreement to purchase three branch banking
facilities located in Greenbrier County, West Virginia. The
transaction is expected to be completed in April 1999, subject to
approval by the appropriate regulatory authorities, and will include
the branches' facilities and associated loan and deposit accounts. The
offices will be operated as branches of Capital State Bank, Inc. Total
deposits of the branches approximated $46.5 million and total loans
approximated $11 million as of December 31, 1998. Under the terms of
the purchase agreement, Capital State will assume the deposits and
acquire the loans of the branch offices. The total consideration to be
paid is anticipated to be approximately $3.4 million and will be
finally determined at closing based upon the total deposits assumed
plus the seller's net book value of the branch offices and equipment.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, the Company applied for and on January 25, 1999 received
preliminary approval from the Office of the Comptroller of the
Currency to begin organizing a new subsidiary bank, Shenandoah Valley
National Bank, to be located in Winchester, Virginia. This newly
chartered institution will be initially capitalized with $4 million,
to be funded by a special dividend in the amount of $3 million from
the Company's subsidiary bank, South Branch Valley National Bank, and
from a $1 million term loan from an unaffiliated bank. Shenandoah
Valley National Bank is expected to open in May 1999 pending final
regulatory approvals.
Note 15. Subsequent Event
On March 22, 1999, the Company entered into a letter of intent
("Letter") to affiliate with Potomac Valley Bank ("Potomac") in
Petersburg, West Virginia. Under the terms of the Letter, South Branch
and Potomac propose a merger whereby the shareholders of Potomac would
exchange all of their outstanding shares of common stock for shares of
South Branch common stock at a book-for-book exchange based on the
respective book values of South Branch and Potomac as of the closing
date. At December 31, 1998, the exchange ratio would have been 3.2143
shares of South Branch common stock for each share of Potomac's 90,000
outstanding shares of common stock. The terms of the Letter also
include, among others, that the merger is subject to negotiation of a
definitive merger agreement, South Branch changing its name to a name
mutually agreeable to both parties, and approval of the transaction by
all applicable regulatory authorities and the shareholders of South
Branch and Potomac. It is expected that the transaction will be
accounted for using the pooling of interests method of accounting. As
of December 31, 1998, Potomac's assets, loans, deposits and
shareholders' equity totaled $94,297,000, $50,393,000, $81,968,000 and
$11,813,000, respectively.
Note 16. 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.
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.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deposits: The estimated fair values of demand deposits (i.e. non
interest 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, 1998 December 31, 1997
---------------------------- ----------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 4,239,721 $ 4,239,721 $ 3,945,099 $ 3,945,099
Interest bearing deposits,
other banks 770,000 770,000 1,256,000 1,283,843
Investment in affiliate - - 5,273,481 5,273,481
Federal funds sold 4,842,745 4,842,745 5,806,717 5,806,717
Securities available for sale 31,409,924 31,409,924 27,547,094 27,547,094
Loans 142,770,127 145,033,585 92,572,652 93,668,853
Accrued interest receivable 1,059,990 1,059,990 864,083 864,083
------------- ------------- ------------- -------------
$ 185,092,507 $ 187,355,965 $ 137,265,126 $ 138,389,170
============= ============= ============= =============
Financial liabilities:
Deposits $ 146,373,192 $ 147,586,412 $ 106,984,797 $ 107,728,110
Short-term borrowings 4,644,143 4,644,143 7,145,010 7,145,000
Long-term borrowings 16,468,875 16,468,875 10,395,848 10,395,848
Accrued interest payable 677,171 677,171 483,857 483,857
------------- ------------- ------------- -------------
$ 168,163,381 $ 169,376,601 $ 125,009,512 $ 125,752,815
============= ============= ============= =============
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17. Condensed Financial Statements of Parent Company
The investment of the Company in its wholly-owned subsidiaries is
presented on the equity method of accounting. Information relative to
the Company's balance sheets at December 31, 1998 and 1997, and the
related statements of income and cash flows for the years ended
December 31, 1998, 1997 and 1996, are presented as follows:
Balance Sheets
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Assets
Cash and due from banks $ 223,555 $ 145,593
Investment in bank subsidiaries, eliminated in consolidation 23,388,502 12,189,418
Securities available for sale 306,625 206,625
Investment in affiliate - 5,273,481
Furniture and equipment 125,966
Other assets 100,481 109,374
------------- -------------
Total assets $ 24,145,129 $ 17,924,491
============= =============
Liabilities and Shareholders' Equity
Long-term borrowings $ - $ 2,837,500
Other liabilities - 26,439
------------- -------------
Total liabilities - 2,863,939
------------- -------------
Common stock, $2.50 par value,
authorized 1998-2,000,000 shares,
1997-600,000 shares; issued 1998-
600,407 shares, 1997-416,942 shares 1,501,018 1,042,355
Capital surplus 9,611,774 2,089,709
Retained earnings (consisting of undivided profits of
bank subsidiaries not yet distributed) 13,103,264 11,898,420
Less cost of shares acquired for the treasury
1998-9,115 shares; 1997-4,115 shares (384,724) (166,970)
Accumulated other comprehensive income 313,797 197,038
------------- -------------
Total shareholders' equity 24,145,129 15,060,552
------------- -------------
Total liabilities and shareholders' equity $ 24,145,129 $ 17,924,491
============= =============
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Income
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Income
Dividends from bank subsidiaries $ 1,300,000 $ 1,500,000 $ 600,000
Other dividends and interest income 7,454 9,225 2,797
Management fees from bank subsidiaries 55,000 - -
Securities gains 4,110 - -
------------ ------------ ------------
Total income 1,366,564 1,509,225 602,797
------------ ------------ ------------
Expense
Interest expense 56,689 214,790 -
Operating expenses 184,057 65,400 26,504
------------ ------------ ------------
Total expenses 240,746 280,190 26,504
------------ ------------ ------------
Income before income taxes and equity in
undistributed income of bank subsidiaries 1,125,818 1,229,035 576,293
Income tax (benefit) (72,200) (107,874) (10,204)
------------ ------------ ------------
Income before equity in undistributed income
of bank subsidiaries 1,198,018 1,336,909 586,497
Equity in undistributed income of bank subsidiaries 535,276 182,748 903,540
------------ ------------ ------------
Net income $ 1,733,294 $ 1,519,657 $ 1,490,037
============ ============ ============
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,733,294 $ 1,519,657 $ 1,490,037
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed net income of
bank subsidiaries (535,276) (182,748) (903,540)
Depreciation 1,396 - -
Securities gains (4,110) - -
(Increase) decrease in other assets 8,893 (96,170) (6,377)
Increase (decrease) in other liabilities (26,439) 26,439 -
------------ ------------ ------------
Net cash provided by operating activities 1,177,758 1,267,178 580,120
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities
available for sale 204,110 - -
Purchases of securities available for sale (300,000) - (200,000)
Purchase of common stock of affiliate (90,465) (5,273,481) -
Purchases of furniture and equipment (127,363) - -
------------ ------------ ------------
Net cash (used in) investing activities (313,718) (5,273,481) (200,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid to shareholders (528,450) (332,705) (291,453)
Net proceeds from common stock sold - 1,489,968 -
Purchase of treasury stock (217,754) - -
Proceeds from long-term borrowings - 3,500,000 -
Repayment of long-term borrowings (39,874) (662,500) -
------------ ------------ ------------
Net cash provided by (used in)
financing activities (786,078) 3,994,763 (291,453)
------------ ------------ ------------
Increase (decrease) in cash 77,962 (11,540) 88,667
Cash:
Beginning 145,593 157,133 68,466
------------ ------------ ------------
Ending $ 223,555 $ 145,593 $ 157,133
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 83,128 $ 188,351 $ -
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES
Issuance of 183,465 shares of Company common
stock in connection with acquisition of Capital
State Bank, Inc. $ 7,980,728 $ - $ -
------------ ------------ ------------
Long-term borrowings transferred to bank subsidiary $ 2,797,626 $ - $ -
------------ ------------ ------------
</TABLE>
F-29
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
December 31, 1998
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.
("Company" or "South Branch") and its wholly owned subsidiaries, South Branch
Valley National Bank ("SBVNB") and Capital State Bank, Inc. ("CSB") as of
December 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 bank subsidiaries, the following discussion focuses
primarily on the financial condition and operations of SBVNB and CSB. All
amounts and percentages have been rounded for this discussion. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and accompanying notes thereto of the Company as of December 31, 1998
and for each of the three years then ended.
ACQUISITION
At the close of business March 31, 1998, South Branch acquired 60% of the
outstanding common stock of CSB, a Charleston, West Virginia state chartered
bank with total assets approximating $44 million at the time of acquisition, in
exchange for 183,465 shares of South Branch's common stock. South Branch had
previously acquired 40% of CSB's outstanding common stock during 1997. This
acquisition was accounted for using the purchase method of accounting, and
accordingly, the assets and liabilities and results of operations of CSB are
reflected in the Company's consolidated financial statements beginning April 1,
1998. Refer to Note 2 of the accompanying consolidated financial statements for
additional information regarding this acquisition.
RESULTS OF OPERATIONS
Earnings Summary
Net income for the three years ended December 31, 1998, 1997, and 1996, was
$1,733,000, $1,520,000, and $1,490,000, respectively. On a per share basis, net
income was $3.16 in 1998 compared to $3.83 in 1997, and $3.94 in 1996. Return
on average total assets for the year ended December 31, 1998 was 0.98% compared
to 1.15% in 1997 and 1.27% in 1996. Return on average equity was 7.41% in 1998
compared to 11.09% in 1997. A summary of the significant factors influencing
the Company's results of operations and related ratios is included in the
following discussion.
Net Interest Income
The major component of the South Branch's net earnings is net interest income,
which is the excess of interest earned on earning assets over the interest
expense incurred on interest bearing sources of funds. Net interest income is
affected by changes in volume, resulting from growth and alterations of the
balance sheet's composition, fluctuations in interest rates and maturities of
sources and uses of funds. Management seeks to maximize net interest income
through management of its balance sheet components. 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.
Net interest income, adjusted to a fully tax equivalent basis, totaled
$7,001,000, $5,346,000 and $5,059,000 for the years ended December 31, 1998,
1997, and 1996 respectively resulting in a net interest margin of 4.3% for 1998
compared to 4.4% and 4.6% for 1997 and 1996, respectively. The net interest
margin recognizes earning asset growth by expressing net interest income as a
percentage of total average earning assets. Lower yields on interest earning
assets continued to negatively impact the Company's net interest margin. In
1998, the yield on interest earning assets decreased 20 basis points from 8.8%
in 1997 to 8.6% in 1998, primarily due to the acquisition of CSB which had a
lower yield on interest earning assets than that
F-30
<PAGE>
of SBVNB, while the cost of interest bearing liabilities remained unchanged at
5.0% during the same periods. The spread between interest earning assets and
interest bearing liabilities could continue to contract, thus negatively
impacting the Company's net interest income in 1999. Management continues to
monitor the net interest margin through simulation and GAP analyses to minimize
the potential for any significant negative impact. See the Interest Rate Risk
Management section for further discussion of the impact of changes in market
interest rates could have on the Company.
Net interest income on a fully tax equivalent basis, average balance sheet
amounts, and corresponding average yields on earning assets and costs of
interest bearing liabilities for the years 1998, 1997 and 1996 are presented in
Table I. Table II 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.
As identified in Table II, the change in net interest margin from 1998 to 1997
was primarily attributed to the change in volume of certain interest bearing
assets and liabilities, the reasons which are presented later in this discussion
under the appropriate balance sheet section.
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 for each of the years ended December 31, 1998, 1997 and 1996
totaled $270,000, $155,000 and $95,000, respectively. As further discussed in
the Loan Portfolio and Risk Elements section of this analysis, increases in
South Branch's provision for loan losses are primarily attributed to the
acquisition of CSB and the Company's continued, strong loan growth. An analysis
of the components comprising the allowance for loan losses for the years ended
December, 1998, 1997 and 1996, including charge offs and recoveries within each
significant loan classification, is included in Note 6 of the accompanying
consolidated financial statements.
Noninterest Income
Noninterest income totaled $609,000, $525,000 and $457,000 or 4.2%, 4.7%, and
4.5% of total income for each of the years ended December 31, 1998, 1997, and
1996, respectively. Excluding gains on the sale of Bank premises, equipment and
other assets recognized in 1998 and 1997, total other income increased
approximately $157,000 or 36.1% in 1998, as compared to 1997. The most
significant items contributing to this increase was service fee income, which
increased $151,000 from approximately $280,000 to $431,000, or 53.9%, which
resulted primarily from a change in SBVNB's deposit fee structure and the
acquisition of CSB.
Noninterest Expense
Noninterest expense totaled $4,476,000, $3,342,000 and $3,156,000 or 38.0%,
37.5% and 39.4% of total expense for each of the years ended December 31, 1998,
1997, and 1996, respectively. Total noninterest expense increased $1,134,000 or
33.9% from 1997 to 1998. Substantially all of this increase resulted from the
$940,000 in noninterest expenses that Capital State incurred from the date of
its acquisition on April 1, 1998 through December 31, 1998.
Income Tax Expense
Income tax expense (benefit) for the three years ended December 31, 1998, 1997,
and 1996 totaled $967,000, $691,000 and $643,000, respectively. Refer to Note
10 of the accompanying consolidated financial statements for further information
and additional discussion of the significant components influencing the
Company's effective income tax rates.
F-31
<PAGE>
Table I - Average Distribution of Assets, Liabilities and Shareholders'
Equity, Interest Earnings & Expenses, and Average Rates
(In thousands of dollars)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -------------------------------
Average Earnings/ Yield Average Earnings/ Yield Average Earnings/ Yield
Balances Expense Rate Balances Expense Rate Balances Expense Rate
---------- --------- ------- --------- ---------- ------ ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets
Loans, net of unearned
interest (1) $ 123,003 $ 11,437 9.3% $ 90,082 $ 8,558 9.5% $ 76,797 $ 7,552 9.8%
Securities
Taxable 27,567 1,813 6.6% 23,572 1,541 6.5% 26,557 1,711 6.4%
Tax-exempt (2) 6,213 486 7.8% 6,005 477 7.9% 4,757 386 8.1%
Interest bearing deposits
with other banks 1,056 72 6.8% 1,437 97 6.8% 1,869 125 6.7%
Federal funds sold 4,992 236 4.7% 1,388 80 5.8% 892 49 5.5%
--------- --------- --- --------- --------- --- ---------- -------- ----
Total interest earning assets 162,831 14,044 8.6% 122,484 10,753 8.8% 110,872 9,823 8.9%
Noninterest earning assets
Cash and due from banks 3,684 2,752 2,419
Bank premises and equipment 4,634 3,121 3,155
Other assets 6,653 4,773 1,298
Allowance for loan losses (1,190) (852) (861)
--------- --------- ----------
Total assets $ 176,612 $ 132,278 $ 116,883
--------- --------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Interest bearing liabilities
Interest bearing
demand deposits $ 24,085 $ 830 3.4% $ 18,725 $ 579 3.1% $ 19,761 $ 669 3.4%
Savings deposits 15,730 502 3.2% 13,349 424 3.2% 15,048 523 3.5%
Time deposits 82,479 4,760 5.8% 62,307 3,604 5.8% 57,756 3,398 5.9%
Short-term borrowings 5,371 232 4.3% 5,685 256 4.5% 1,579 68 4.3%
Long-term borrowings 13,004 719 5.5% 7,831 544 6.9% 1,803 106 5.9%
--------- --------- --- --------- --------- --- ---------- -------- ---
140,669 7,043 5.0% 107,897 5,407 5.0% 95,947 4,764 5.0%
Noninterest bearing liabilities
Demand deposits 11,012 9,213 8,532
Other liabilities 1,533 1,468 914
--------- --------- ----------
Total liabilities 153,214 118,578 105,393
Shareholders' equity 23,398 13,700 11,490
--------- --------- ----------
Total liabilities and
shareholders' equity $ 176,612 $ 132,278 $ 116,883
--------- --------- ----------
NET INTEREST EARNINGS $ 7,001 $ 5,346 $ 5,059
-------- --------- -------
NET INTEREST YIELD ON EARNING ASSETS 4.3% 4.4% 4.6%
--- --- ---
</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
$324,000, $173,000 and $181,000 for the years ended December 31, 1998,
1997 and 1996, 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
34% for all years presented.
The tax equivalent adjustment results in an increase in interest income of
$165,000, $162,000 and $131,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
F-32
<PAGE>
Table II - Changes in Interest Margin Attributable to Rate and Volume
(In thousands of dollars)
<TABLE>
<CAPTION>
1998 Versus 1997 1997 Versus 1996
----------------------------- -----------------------------
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>
Interest earned on:
Loans $ 3,065 $ (186) $ 2,879 $ 1,269 $ (263) $ 1,006
Securities
Taxable 263 9 272 (193) 23 (170)
Tax-exempt 17 (8) 9 99 (8) 91
Interest bearing deposits
with other banks (26) 1 (25) (29) 1 (28)
Federal funds sold 173 (17) 156 28 3 31
-------- ------- -------- -------- ------- --------
Total interest earned on
interest earning assets 3,492 (201) 3,291 1,174 (244) 930
-------- ------- -------- -------- ------- --------
Interest paid on:
Interest bearing demand
deposits 180 71 251 (36) (54) (90)
Savings deposits 76 2 78 (62) (37) (99)
Time deposits 1,164 (8) 1,156 264 (58) 206
Short-term borrowings (14) (10) (24) 185 3 188
Long-term borrowings 303 (128) 175 415 23 438
-------- ------- -------- -------- ------- --------
Total interest paid on
interest bearing liabilities 1,709 (73) 1,636 766 (123) 643
-------- ------- -------- -------- ------- --------
Net interest income $ 1,783 $ (128) $ 1,655 $ 408 $ (121) $ 287
-------- ------- -------- -------- ------- --------
</TABLE>
CHANGES IN FINANCIAL POSITION
Total average assets for the year ended December 31, 1998 were $176,612,000 an
increase of 33.5% over 1997's average of $132,278,000. This increase in total
average assets is primarily attributable to the CSB acquisition and growth in
deposits and borrowings and are detailed below in the discussions of changes in
significant components of the Company's balance sheet between December 31, 1997
and December 31, 1998. The Company's total average interest earning assets,
expressed as a percentage of total assets, remains high, although this ratio has
decreased slightly to 92.2% for 1998 as compared to 92.6% for 1997.
F-33
<PAGE>
Securities
Securities comprised approximately 16.3% of total assets at December 31, 1998
compared to 19.6% at December 31, 1997. All securities are classified as
available for sale to provide management with flexibility to better manage its
balance sheet structure and react to asset/liability management issues as they
arise. Average securities approximated $33,780,000 for 1998 or 14.2% more than
1997's average of $29,577,000. Refer to 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.
At December 31, 1998, the Company 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, 1998, together with the weighted average
yields for each range of maturity, are summarized in Table III. The stated
average yields are actual yields and are not stated on a tax equivalent basis.
Table III-Securities Maturity Analysis
(At amortized cost, in thousands of dollars)
<TABLE>
<CAPTION>
After one After five
Within but within but within After
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>
Available for sale
U.S. Treasury securities $ 1,499 6.6% $ 1,491 6.3% $ - - $ - -
U.S. Government agencies
and corporations 1,498 6.5% 6,477 6.1% 4,723 6.3% - -
Small Business Administration
guaranteed loan participation
certificates 394 6.4% 579 6.4% - - - -
Mortgage backed securities -
U.S. Government agencies
and corporations 2,916 6.7% 3,418 6.4% - - - -
State and political
subdivisions 413 3.5% 1,827 4.1% 1,834 4.9% 2,174 5.2%
Other 250 7.0% - - - - 1,408 6.5%
------- -------- -------- -------
$ 6,970 6.0% $ 13,792 5.7% $ 6,557 5.9% $ 3,582 5.7%
======= ======== ======== =======
</TABLE>
F-34
<PAGE>
Loan Portfolio
The following table depicts loan balances at December 31, 1998 and 1997 by types
along with their respective percentage of total loans outstanding.
<TABLE>
<CAPTION>
(In thousands of dollars)
1998 1997
------------------------- ------------------------
Percent of Percent of
Amount Total Amount Total
--------- ------------ -------- ----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 41,957 29.1% $ 30,325 32.4%
Real estate - construction 1,801 1.2% 144 0.2%
Real estate - mortgage 73,886 51.3% 42,640 45.6%
Installment loans to individuals
(net of unearned interest) 26,089 18.1% 19,890 21.3%
Other 409 0.3% 469 0.5%
--------- ----- -------- -----
Total loans 144,142 100.0% 93,468 100.0%
===== =====
Less allowance for loan losses 1,372 895
--------- --------
Loans, net $ 142,770 $ 92,573
========= ========
</TABLE>
Total net loans averaged $123,003,000 in 1998 and comprised 69.6% of total
average assets compared to $90,082,000 or 68.1% of total average assets during
1997. This increase in the dollar volume of loans is primarily attributable to
the CSB acquisition and to continuation of the Company's strategy which began in
1996 to more aggressively expand the Company's commercial and real estate loan
portfolios.
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, 1998.
In the normal course of business, the Company makes various commitments and
incurs certain contingent liabilities which are disclosed in Note 12 to the
accompanying consolidated financial statements but not reflected in the
accompanying consolidated financial statements. There have been no significant
changes in these type of commitments and contingent liabilities and the Company
does not anticipate any material losses as a result of these commitments.
Risk Elements
The following table presents a summary of restructured or non-performing loans
for each of the three years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
(In thousands of dollars)
December 31,
-------------------------
1998 1997 1996
----- ----- ------
<S> <C> <C> <C>
Nonaccrual loans $ 297 $ 142 $ 343
Accruing loans past due 90 days or more 355 96 324
Restructured loans - 55 55
----- ----- -----
Total $ 652 $ 293 $ 722
===== ===== =====
Percentage of total loans 0.5% 0.3% 0.9%
=== === ===
</TABLE>
F-35
<PAGE>
The increase in non-performing loans from year 1997 to 1998 is not deemed
significant relative to the growth in the size of the loan portfolio, as total
nonaccrual and restructured loans as a percentage of total outstanding loans
have remained at a low level of less than 1 percent for each of the three years
presented. Refer to Note 5 of the accompanying consolidated financial statements
for additional discussion of non-accrual loans and to Note 6 for a discussion of
impaired loans which are included in the above balances.
The Company's subsidiary banks, on a quarterly basis, perform 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 through a provision
for loan losses. 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 this discussion. 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 non-performing loans based on the quarterly
evaluation of expected loan loss reserve requirements as determined by Company
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, 1998 and 1997 respectively, the allowance for loan losses
represented 1.0% and 1.0% of gross loans or $1,372,000 and $895,000 and was
considered adequate to cover inherent losses in the subsidiary bank's loan
portfolio as of the respective evaluation date. The Company maintains an
allowance for loan losses at a level considered adequate to provide for losses
that can be reasonably anticipated. The Company performs a quarterly evaluation
of the loan portfolio to determine its adequacy. The evaluation is based on
assessments of specifically identified loans, loss experience factors, current
and anticipated economic conditions and other factors to identify and estimate
inherent losses from homogeneous pools of loans.
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
December 31, 1998 and 1997, respectively, the unallocated portion of the
allowance approximated $86,000 and $67,000, or 6.3% and 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. More specifically, while loan quality remains good,
the subsidiary banks have typically experienced greater losses within certain
homogeneous loan pools when the Company's market area has experienced economic
downturns or other significant negative factors or trends, such as increases in
bankruptcies, unemployment rates or past due loans.
F-36
<PAGE>
Table IV below presents an allocation of the expected allowance for loan losses
by major loan type.
<TABLE>
<CAPTION>
Table IV - Allocation of the Allowance for Loan Losses
(In thousands of dollars)
1998 1997 1996
----------------------- ----------------------- -----------------------
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
------- ------------ ------ ----------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial
and agricultural $ 377 29.1% $ 182 32.4% $ 182 32.9%
Real estate 363 52.5% 300 45.8% 303 44.1%
Installment 539 18.1% 339 21.3% 294 22.3%
Other 7 0.3% 7 0.5% 11 0.7%
Unallocated 86 - 67 - 68 -
------- ------------ ------ ----------- ------ ------------
$ 1,372 100.0% $ 895 100.0% $ 858 100.0%
======= ============ ====== ============ ====== ============
</TABLE>
At December 31, 1998, the Company had approximately $85,000 in other real estate
owned which was obtained as the result of foreclosure proceedings and $12,000 in
other repossessed assets which was obtained as the result of auto repossessions.
These repossessions have been insignificant throughout 1998 and management does
not anticipate any material losses on any of the items currently held in other
real estate owned or other repossessed assets.
Deposits
Total deposits at December 31, 1998 increased approximately $39,388,000 or 36.8%
compared to December 1997. Average deposits increased approximately $27,913,000
or 29.6% during 1998. This growth was primarily the result of the acquisition of
CSB.
See Note 8 of the accompanying consolidated financial statements for a maturity
distribution of time deposits as of December 31, 1998.
Borrowings
Lines of Credit: The Company has available lines of credit from the Federal Home
Loan Bank of Pittsburgh which totaled $28,264,000 at December 31, 1998.
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 part of short-term borrowings or
long-term borrowings, depending on the repayment terms of the debt agreement.
Refer to Note 9 of the accompanying consolidated financial statements for
additional discussion of short-term borrowings activity and long-term
borrowings.
Other lines of credit available, but unused, to the Company through
correspondent banks totaled $10,000,000 as of December 31, 1998.
Short-term Borrowings: Total short-term borrowings decreased $2,501,000 or 35.0%
from $7,145,000 at December 31, 1997 to $4,644,000 at December 31, 1998. See
Note 9 of the accompanying consolidated financial statements for a discussion of
short-term borrowings.
Long-term Borrowings: The Company's long-term borrowings of $16,469,000 at
December 31, 1998, compared to $10,396,000 at December 31, 1997, consisted
entirely of funds borrowed on available lines of credit from the Federal Home
Loan Bank to fund fixed rate local mortgage growth and specific commercial loan
projects. Refer to Note 9 of the accompanying consolidated financial statements
for a discussion of long-term borrowings.
F-37
<PAGE>
LIQUIDITY
Liquidity in commercial banking can be defined as the ability to satisfy
customer loan demand and meet deposit withdrawals while maximizing net interest
income. The Company uses ratio analysis to monitor the changes in its sources
and uses of funds so that an adequate liquidity position is maintained.
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 $16,896,000 and $11,799,000, or 8.5% and 8.4%of
total assets at December 31, 1998 and 1997, respectively. 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 demands or conditions that would adversely affect it.
INTEREST RATE RISK 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 banks' asset/liability management committees, which are comprised of
members of the Banks' senior management and members of each respective
institution's boards of directors. The Company's asset/liability management
committees actively formulate the economic assumptions that the Company uses in
its financial planning and budgeting process and establishes policies which
control and monitor the banks' 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 Company 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 1999 net interest margin is expected given a
200 basis point change, either upward or downward, in interest rates during
1999.
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 V sets forth the Company's interest rate sensitivity gaps within the one
year time horizon computed based upon contractual repricings and maturities at
December 31, 1998. As presented in the table, the Company has a one year
cumulative negative interest sensitivity gap of $59 million (or 33.0% of total
earning assets). However, included within the one year time period are $42
million of interest bearing demand and savings deposits which on a contractual
basis are immediately repriceable. 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
Company's one year cumulative interest rate sensitivity gap at December 31, 1998
would be a negative $17 million or just 9.5% of interest earning assets.
F-38
<PAGE>
Table V: Asset & Liability Rate Sensitivity Analysis, December 31,1998
(in thousands of Dollars)
<TABLE>
<CAPTION>
Maturing or Repricing Within
------------------------------------------------------------------------
0-90 91-180 181-365 Total
Days Days Days 1 Year
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest earning assets:
Loans $ 16,892 $ 11,117 $ 9,533 $ 37,542
Taxable securities 499 1,250 1,498 3,247
Mortgage-backed securities 1,716 797 797 3,310
Tax-exempt securities - 161 252 413
-------- ------------- ------------- --------
19,107 13,325 12,080 44,512
-------- ------------- ------------- --------
Interest bearing liabilities:
Certificates of deposit 14,868 17,592 29,083 61,543
Savings deposits 14,749 - - 14,749
Interest bearing demand deposits 27,511 - - 27,511
-------- ------------- ------------- --------
57,128 17,592 29,083 103,803
-------- ------------- ------------- --------
Static Interest Sensitivity Gap $(38,021) $ (4,267) $ (17,003) $(59,291)
======== ============= ============= ========
Cumulative Gap $(38,021) $ (42,288) $ (59,291)
======== ============= =============
Gap/Total Earning Assets -33.0%
=====
Gap/Total Earning Assets (excluding
savings & demand deposits) -9.50%
=====
</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 12.5%, 10.7%, and 10.1% at December 31, 1998, 1997
and 1996 respectively. These increases can be attributed to a strong earnings
base during the past three years combined with the impact of the acquisition of
CSB in 1998. The Company's risk weighted tier I capital, total capital and
leverage capital ratios were approximately 17.3%, 18.4% and 11.5%, respectively,
at December 31, 1998 which is considered well capitalized under regulatory
guidelines for prompt corrective action provisions. The Company's subsidiary
banks are also subject to minimum capital ratios as further discussed in Note 13
of the accompanying consolidated financial statements.
The percentage of earnings retained by the Company to fund future growth has not
significantly changed during the three years ended December 31, 1998. Cash
dividends per share rose 5.9% to $.89 in 1998 compared to $.84 in 1997,
representing dividend payout ratios of 28.2% and 21.9% for 1998 and 1997,
respectively. It is the intention of management and the Board of Directors to
continue to pay dividends on a similar schedule during 1999. Future cash
dividends will depend on the earnings, financial condition and the business of
the subsidiary banks as well as general economic conditions; however, management
is not presently aware of any reason dividend payments should not continue.
Dividends paid by the subsidiary banks 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 1999
the net retained profits available for distribution to South Branch as dividends
without regulatory approval are approximately $730,000, plus net income for the
interim periods through the date of declaration.
F-39
<PAGE>
PENDING ACQUISITION, NEW SUBSIDIARY AND SUBSEQUENT EVENT
On December 23, 1998, the Company's subsidiary bank, CSB entered into an
agreement to purchase three branch banking facilities located in Greenbrier
County, West Virginia. The transaction is expected to be completed in April
1999, subject to approval by the appropriate regulatory authorities, and will
include the branches' facilities and associated loan and deposit accounts. The
offices will be operated as branches of CSB. Total deposits of the branches
approximated $46.5 million and total loans approximated $11 million as of
December 31, 1998. Under the terms of the purchase agreement, CSB will assume
the deposits and acquire the loans of the branch offices. The total
consideration to be paid is anticipated to be approximately $3.4 million and
will be finally determined at closing based upon the total deposits assumed plus
the seller's net book value of the branch offices and equipment.
On January 25, 1999, the Company received preliminary approval from the Office
of the Comptroller of the Currency to begin organizing a new subsidiary bank,
Shenandoah Valley National Bank, to be located in Winchester, Virginia. This
newly chartered institution will be initially capitalized with $4,000,000, to be
funded by a special dividend in the amount of $3,000,000 from the Company's
subsidiary bank, SBVNB, and from a $1,000,000 term loan from an unaffiliated
bank. Shenandoah Valley National Bank is expected to open in May 1999 pending
final regulatory approvals.
On March 22, 1999, the Company entered into a letter of intent ("Letter") to
affiliate with Potomac Valley Bank ("Potomac") in Petersburg, West Virginia.
Under the terms of the Letter, South Branch and Potomac propose a merger whereby
the shareholders of Potomac would exchange all of their outstanding shares of
common stock for shares of South Branch common stock at a book-for-book exchange
based on the respective book values of South Branch and Potomac as of the
closing date. At December 31, 1998, the exchange ratio would have been 3.2143
shares of South Branch common stock for each share of Potomac's 90,000
outstanding shares of common stock. The terms of the Letter also include, among
others, that the merger is subject to negotiation of a definitive merger
agreement, South Branch changing its name to a name mutually agreeable to both
parties, and approval of the transaction by all applicable regulatory
authorities and the shareholders of South Branch and Potomac. It is expected
that the transaction will be accounted for using the pooling of interests method
of accounting. As of December 31, 1998, Potomac's assets, loans, deposits and
shareholders' equity totaled $94,297,000, $50,393,000, $81,968,000 and
$11,813,000, respectively.
Management does not anticipate that the above transactions will have any
significant adverse impact on the Company's financial position, results of
operations, liquidity or capital resources.
YEAR 2000
The Year 2000 Issue is the result of many existing computer programs and other
date dependent electronic devices using only the last two digits, as opposed to
four digits, to indicate the year. Such computer systems and devices may be
unable to recognize a year that begins with 20XX instead of 19XX. If not
corrected, the computer programs and devices could cause systems to fail or
other computer errors, leading to possible disruptions in operations or creation
of erroneous results. South Branch recognizes the significant potential risk
associated with the Year 2000 Issue and, in a Company-wide effort, is taking
steps to ensure that its internal systems are secure from such failure.
The Company's Year 2000 Plan ("Plan") addresses all its systems, software,
hardware, and infrastructure components. The Plan identifies and addresses
"Mission Critical" and "Non-mission Critical" components for Information
Technology ("IT") systems and Non-information Technology ("Non-IT") systems. IT
includes, for example, systems that service loan and deposit customers. Non-IT
systems include security systems, elevators, utilities and voice/data
communications. An application, system, or process is deemed "Mission Critical"
if it is vital to the successful continuance of a core business activity.
F-40
<PAGE>
South Branch's Plan follows a five phase approach recommended by bank regulatory
authorities. These phases are: Awareness, Assessment, Renovation,
Testing/Validation, and Implementation. During the Awareness Phase, management
gathered information and appointed a project steering committee to coordinate
the Company's Year 2000 efforts. In the Assessment Phase, South Branch
identified its Mission Critical IT and Non-IT systems and performed an inventory
of all systems, software, hardware, equipment and components that potentially
could be affected by the Year 2000 issue. The Renovation Phase involves
implementing program changes and new components, where applicable, to
accommodate identified Year 2000 issues. In the Testing/Validation Phase, the
Company is testing renovated applications and components to ensure they are Year
2000 compliant. During the Implementation Phase, applications, systems and other
components are fine-tuned and final programs and components are placed into
operation.
South Branch's estimated progress as of December 31, 1998 towards meeting the
Plan's goals for both IT and Non-IT systems by phase are as follows:
<TABLE>
<CAPTION>
Estimated Estimated
Percent Completion
Phase Complete Date
----- -------- ----
<S> <C> <C>
Mission Critical
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 95% 06/30/1999
Testing/Validation 95% 06/30/1999
Implementation 90% 06/30/1999
Non-mission Critical
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 90% 06/30/1999
Testing/Validation 90% 06/30/1999
Implementation 90% 06/30/1999
</TABLE>
South Branch depends on various third-party vendors, suppliers, and service
providers, and will be dependent on their continued service in order to avoid
business interruptions. Any interruption in a third party's ability to provide
goods and services, such as issues with telecommunication links and providers of
electricity, could interrupt South Branch's ability to meet its customer's
needs. South Branch has identified several third-party relationships considered
Mission Critical, and is presently working with each to test transactions and/or
interfaces between its processors, obtain appropriate information from each
party, or assess each party's readiness with regard to the Year 2000 Issue.
Identifiable costs for the Company's Year 2000 project during 1998 approximated
$131,000, of which $116,000 were capital expenditures for the replacement of
computers and other date dependent electronic devices. The cost to complete the
Plan in 1999 is not expected to exceed $50,000.
Major business risks associated with the Year 2000 problem include, but are not
limited to, infrastructure failures, disruptions to the economy in general,
excessive cash withdrawal activity, closure of government offices and clearing
houses, and increased problem loans and credit losses in the event that
borrowers fail to properly respond to the problem. These risks, along with the
unlikely risk of South Branch failing to adequately complete the remaining
phases of its Plan and the resulting possible inability to properly process
business transactions expose the Company to loss of revenues, litigation, and
asset quality deterioration.
The Year 2000 problem is unique in that it has never previously occurred; thus,
it is not possible to completely foresee or quantify the overall or any specific
financial or operational impacts to the Company or to third parties which
provide Mission Critical services to the Company. South Branch is in the
process of developing Year 2000 contingency plans in the event that Mission
Critical third-party vendors or other third parties fail to adequately address
Year 2000 issues. Such plans principally will involve internal remediation or
identifying alternative vendors.
F-41
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited) (*)
--------------------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,117,844 $ 4,239,721
Interest bearing deposits with other banks 6,596,773 770,000
Federal funds sold 10,006,943 4,842,745
Securities available for sale 64,512,851 31,409,924
Loans, net 170,169,354 142,770,127
Bank premises and equipment, net 6,967,713 5,170,858
Accrued interest receivable 1,492,790 1,059,990
Other assets 7,001,561 2,735,672
--------------------------- -----------------
Total assets $ 271,865,829 $ 192,999,037
=========================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 17,920,867 $ 11,455,674
Interest bearing 191,706,995 134,917,518
--------------------------- -----------------
Total deposits 209,627,862 146,373,192
=========================== =================
Short-term borrowings 16,312,904 4,644,143
Long-term borrowings 20,803,179 16,468,875
Other liabilities 1,491,245 1,367,698
--------------------------- -----------------
Total liabilities 248,235,190 168,853,908
=========================== =================
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value, authorized
2,000,000 shares, issued 600,407 shares 1,501,018 1,501,018
Capital surplus 9,611,774 9,611,774
Retained earnings 13,687,492 13,103,264
Less cost of 9,115 shares acquired for the treasury (384,724) (384,724)
Accumulated other comprehensive income (784,921) 313,797
--------------------------- -----------------
Total shareholders' equity 23,630,639 24,145,129
=========================== =================
Total liabilities and shareholders' equity $ 271,865,829 $ 192,999,037
=========================== =================
</TABLE>
(*) - December 31, 1998 financial information has been extracted from audited
consolidated financial statements
See Notes to Unaudited Consolidated Financial Statements
F-42
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------- ------------ --------------- ------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $ 3,502,911 $ 2,930,902 $ 6,657,718 $ 5,135,590
Interest on securities
Taxable 888,691 533,554 1,380,761 927,034
Tax-exempt 78,545 81,502 158,632 159,599
Interest on Federal funds sold 44,161 84,456 66,529 133,588
--------------- ------------ --------------- ------------
Total interest income 4,514,308 3,630,414 8,263,640 6,355,811
--------------- ------------ --------------- ------------
Interest expense
Interest on deposits 1,927,705 1,629,654 3,518,213 2,791,855
Interest on short-term borrowings 106,657 57,303 171,852 122,138
Interest on long-term borrowings 276,228 169,544 515,148 336,665
--------------- ------------ --------------- ------------
Total interest expense 2,310,590 1,856,501 4,205,213 3,250,658
--------------- ------------ --------------- ------------
Net interest income 2,203,718 1,773,913 4,058,427 3,105,153
Provision for loan losses 82,500 75,000 160,000 120,000
--------------- ------------ --------------- ------------
Net interest income after provision for loan losses 2,121,218 1,698,913 3,898,427 2,985,153
--------------- ------------ --------------- ------------
Other income
Insurance commissions 21,478 25,988 32,876 49,443
Service fees on deposits 150,343 97,439 258,144 175,836
Securities gains (losses) - 4,131 - 4,131
Other 38,936 28,789 73,369 57,245
--------------- ------------ --------------- ------------
Total other income 210,757 156,347 364,389 286,655
--------------- ------------ --------------- ------------
Other expenses
Salaries and employee benefits 754,807 552,169 1,389,773 1,020,991
Net occupancy expense 108,718 102,333 192,774 152,952
Equipment expense 142,597 99,769 251,667 180,801
Supplies 106,041 57,098 141,555 82,232
Amortization of intangibles 67,135 42,057 109,189 51,352
Other 513,627 360,266 824,738 579,436
--------------- ------------ --------------- ------------
Total other expense 1,692,925 1,213,692 2,909,696 2,067,764
--------------- ------------ --------------- ------------
Income before income tax expense 639,050 641,568 1,353,120 1,204,044
Income tax expense 224,785 229,462 490,985 406,147
--------------- ------------ --------------- ------------
Net income $ 414,265 $ 412,106 $ 862,135 $ 797,897
=============== ============ =============== ============
Basic earnings per common share $ 0.70 $ 0.69 $ 1.46 $ 1.58
=============== ============ =============== ============
Diluted earnings per common share $ 0.70 $ 0.69 $ 1.46 $ 1.58
=============== ============ =============== ============
Dividends per common share $ 0.47 $ 0.44 $ 0.47 $ 0.44
=============== ============ =============== ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
F-43
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $1,501,018 $9,611,774 $13,103,264 $(384,724) $ 313,797 $24,145,129
Six Months Ended June 30, 1999
Comprehensive income:
Net income - - 862,135 - - 862,135
Other comprehensive income,
net of tax:
Net unrealized (loss) on
securities of ($1,098,718), net
of reclassification adjustment
for gains (losses) included in net
income of $ - - - - - (1,098,718) (1,098,718)
------------
Total comprehensive income (loss) - - - - - (236,583)
------------
Cash dividends declared on
common stock ($.47 per share) - - (277,907) - - (277,907)
---------- ---------- ------------ ---------- ------------ ------------
Balance, June 30, 1999 $1,501,018 $9,611,774 $13,687,492 $(384,724) $ (784,921) $23,630,639
========== ========== ============ ========== ============ ============
Balance, December 31, 1997 $1,042,355 $2,089,709 $11,898,420 $(166,970) $ 197,038 $15,060,552
Six Months Ended June 30, 1998
Comprehensive income:
Net income - - 797,897 - - 797,897
Other comprehensive income,
net of tax:
Net unrealized gain on
securities of $4,335, net
of reclassification adjustment
for gains included in net
income of $2,541 - - - - 1,794 1,794
------------
Total comprehensive income - - - - - 799,691
------------
Issuance of 183,465 shares of
common stock at $43.50 per share
as consideration for the acquisition
of Capital State Bank, Inc. 458,663 7,522,065 - - - 7,980,728
Cost of 5,000 shares of common stock
acquired for the treasury - - - (217,754) - (217,754)
Cash dividends declared on
common stock ($.44 per share) - - (262,367) - - (262,367)
---------- ---------- ------------ ---------- ------------ ------------
Balance, June 30, 1998 $1,501,018 $9,611,774 $12,433,950 $(384,724) $ 198,832 $23,360,850
========== ========== ============ ========== ============ ============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
F-44
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1999 1998
------------ -------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income $ 862,135 $ 797,897
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 161,408 153,542
Provision for loan losses 160,000 120,000
Deferred income tax expense (benefit) 15,315 (5,953)
Security gains (losses) - (4,131)
Loss (gain) on disposal of other assets 1,200 (9,175)
Amortization of securities premiums (accretion
of discounts) net 12,609 (21,803)
Amortization of goodwill and purchase accounting
adjustments, net 59,079 37,716
(Increase) decrease in accrued interest receivable (381,821) (266,180)
(Increase) decrease in other assets (260,039) 188,608
Increase (decrease) in other liabilities 216,250 79,044
------------ -------------
Net cash provided by operating activities 846,136 1,069,565
------------ -------------
Cash Flows from Investing Activities
Proceeds from maturities of interest bearing deposits
with other banks (5,826,773) 99,100
Proceeds from maturities and calls of securities available for sale 4,835,324 3,825,000
Proceeds from sales of securities available for sale - 409,050
Principal payments received on securities available for sale 1,439,784 1,483,951
Purchases of securities available for sale (41,172,577) (6,077,235)
Purchase of common stock of affiliate - (90,465)
Net (increase) decrease in Federal funds sold (5,164,198) 10,880,802
Net loans made to customers (18,858,970) (12,471,958)
Purchases of Bank premises and equipment (709,526) (262,991)
Proceeds from sales of other assets - 8,411
Purchase of life insurance contracts (1,246,000) -
Net cash and cash equivalents received in acquisitions 35,071,460 976,517
------------ -------------
Net cash (used in) investing activities (31,631,476) (1,219,818)
------------ -------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 14,456,198 2,605,788
Net increase (decrease) in time deposits 1,482,107 386,254
Net increase (decrease) in short-term borrowings 11,668,761 (1,217,118)
Proceeds from long-term borrowings 4,500,000 2,000,000
Repayment of long-term borrowings (165,696) (3,429,303)
Purchase of treasury stock - (217,754)
Dividends paid (277,907) (262,367)
------------ -------------
Net cash provided by financing activities 31,663,463 (134,500)
------------ -------------
Increase (decrease) in cash and due from banks 878,123 (284,753)
Cash and due from banks:
Beginning 4,239,721 3,162,552
------------ -------------
Ending $ 5,117,844 $ 2,877,799
============ =============
</TABLE>
(Continued)
F-45
<PAGE>
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
Six Months Ended
----------------------------
June 30, June 30,
1999 1998
------------ -------------
<S> <C> <C>
Supplement Disclosures of Cash Flow Information
Cash payments for:
Interest $ 4,204,562 $ 3,148,449
============= =============
Income taxes $ 505,692 $ 406,807
============= =============
Supplemental Schedule of Noncash Investing and
Financing Activities
Other assets acquired in settlement of loans $ 112,040 $ -
============= =============
Acquisition of Greenbrier County branches
Net cash and cash equivalents received
in acquisition of Greenbrier County branches $(35,071,460) $ -
============= =============
Fair value of assets acquired
(principally loans and Bank premises) $ 12,382,196 $ -
Deposits and other liabilities assumed (47,453,656) -
------------- -------------
$(35,071,460) $ -
============= =============
Acquisition of Capital State Bank, Inc.
Prior acquisition of 40% of the outstanding common shares
purchased for cash $ - $ 5,363,946
Acquisition of 60% of the outstanding common shares in
exchange for 183,465 shares of Company common stock - 7,980,728
------------- -------------
$ - $ 13,344,674
============= =============
Fair value of assets acquired
(principally loans and securities) $ - $ 46,720,306
Deposits and other liabilities assumed - (33,375,632)
------------- -------------
$ - $ 13,344,674
============= =============
</TABLE>
See Notes to Unaudited Consolidated Financial Statements
F-46
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
These consolidated financial statements of South Branch Valley Bancorp, Inc. and
Subsidiaries ("South Branch" or "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for annual year end financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect 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 materially from these estimates.
The results of operations for the three month and six month periods ended June
30, 1999 are not necessarily indicative of the results to be expected for the
full year. The consolidated financial statements and notes included herein
should be read in conjunction with the audited consolidated financial statements
and notes related thereto included in the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1998.
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
management. This Quarterly Report on Form 10-QSB contains forward-looking
statements that involve risk and uncertainty. In order to comply with the terms
of the safe harbor, the Company notes that a variety of factors could cause
South Branch's actual results and experience to differ materially from the
anticipated results or other expectations expressed in those forward-looking
statements.
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 six month
periods ended June 30, 1999 and 1998 were 591,292 and 504,657, respectively.
The weighted average shares outstanding for the three month periods ended
June 30, 1999 and 1998 were 591,292 and 595,479, respectively.
In accordance Financial Accounting Standards Board Statement No. 128, Earning
per Share, diluted earnings per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce the loss or increase the income per common share from continuing
operations. At June 30, 1999, options totaling 7,500 shares of South Branch's
common stock had been granted under the Company's 1998 Officer Stock Option
Plan, which had the effect of increasing average shares outstanding for purposes
of computing diluted earnings per share by 124 and 0 shares, for the second
quarter of 1999 and 1998 respectively, and by 85 and 0 shares for the six months
ended June 30, 1999 and 1998, respectively.
F-47
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Acquisitions and New Subsidiary
On December 23, 1998, Capital State Bank, Inc., a subsidiary of the Company,
entered into an agreement to purchase three branch banking facilities located in
Greenbrier County, West Virginia. The transaction was completed on April 22,
1999, and includes the branches' facilities and associated loan and deposit
accounts. Total deposits assumed approximated $47.4 million and total loans
acquired approximated $8.9 million as of the transaction's closing. This
transaction was accounted for using the purchase method of accounting. The
excess purchase price over the fair value of the net assets acquired as of the
consummation date approximated $2,267,000, which is included in other assets in
the accompanying consolidated balance sheet as of June 30, 1999. This goodwill
is being amortized over a period of 15 years using the straight line method.
On March 24, 1998 and March 25, 1998, the shareholders of 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. This acquisition was accounted for using the purchase method of
accounting., and accordingly, the assets and liabilities and results of
operations of Capital State are reflected in the Company's consolidated
financial statements beginning April 1, 1998. The excess purchase price over
the fair value of the net assets acquired as of the consummation date
approximated $1,966,000, and is being amortized over a period of 15 years using
the straight line method.
The following presents certain pro forma condensed consolidated financial
information of South Branch, using the purchase method of accounting, after
giving effect to the acquisitions of Capital State Bank, Inc. and Greenbrier
County branches as if each transaction had been consummated at the beginning of
the periods presented.
<TABLE>
<CAPTION>
(In thousands, except per share data)
--------------------------------------------------------------------
Six Month Period Ended Six Month Period Ended
June 30, 1999 June 30, 1998
--------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income $ 8,264 $ 9,146 $ 6,356 $ 8,528
Total interest expense $ 4,205 $ 4,661 $ 3,251 $ 4,381
Net interest income $ 4,059 $ 4,485 $ 3,105 $ 4,147
Net income $ 862 $ 946 $ 798 $ 947
Basic earnings per common share $ 1.46 $ 1.60 $ 1.58 $ 1.59
Diluted earnings per common share $ 1.46 $ 1.60 $ 1.58 $ 1.59
</TABLE>
This pro forma information has been included for comparative purposes only and
may not be indicative of the combined results of operations that actually would
have occurred had the transactions been consummated at the beginning of the
periods presented, or which will be attained in the future.
During 1998, the South Branch applied for and on January 25, 1999 received
preliminary approval from the Office of the Comptroller of the Currency to begin
organizing a new subsidiary bank, Shenandoah Valley National Bank, to be located
in Winchester, Virginia. Shenandoah Valley National Bank was granted its
charter on May 14, 1999 and was initially capitalized with $4 million, funded by
a special dividend in the amount of $3 million from the Company's subsidiary
bank, South Branch Valley National Bank, and from a $1 million term loan from
Potomac Valley Bank. Shenandoah Valley National Bank opened for business on May
17, 1999. Start-up costs totaling $89,998 related to the organization of this
Institution were expensed during the second quarter of 1999.
F-48
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at June 30, 1999 and December 31, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
June 30, 1999
-------------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Available for Sale
Taxable:
U.S. Treasury securities $ 2,492,580 $ 18,983 $ - $ 2,511,563
U.S. Government agencies
and corporations 36,248,417 17,208 738,034 35,527,591
Small Business Administration
guaranteed loan participation
certificates 801,584 2,864 5,196 799,252
Mortgage-backed securities -
U.S. Government agencies and
corporations 17,561,283 14,662 635,194 16,940,751
Federal Reserve Bank stock 164,300 - - 164,300
Federal Home Loan Bank stock 2,126,600 - - 2,126,600
Other equity securities 306,625 - - 306,625
------------ --------- ------------ ------------
Total taxable 59,701,389 53,717 1,378,424 58,376,682
------------ --------- ------------ ------------
Tax-exempt:
State and political subdivisions 6,083,687 81,508 33,126 6,132,069
Federal Reserve Bank stock 4,100 - - 4,100
------------ --------- ------------ ------------
Total tax-exempt 6,087,787 81,508 33,126 6,136,169
------------ --------- ------------ ------------
Total $ 65,789,176 $ 135,225 $ 1,411,550 $ 64,512,851
============ ========= ============ ============
<CAPTION>
December 31, 1999
-------------------------------------------------------------
Amortized Unrealized Estimated
---------------------------
Cost Gains Losses Fair Value
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Available for Sale
Taxable:
U.S. Treasury securities $ 2,990,294 $ 68,354 $ - $ 3,058,648
U.S. Government agencies
and corporations 12,698,092 82,796 11,404 12,769,484
Small Business Administration
guaranteed loan participation
certificates 973,127 21,119 - 994,246
Mortgage-backed securities -
U.S. Government agencies and
corporations 6,334,380 86,483 - 6,420,863
Corporate debt securities 249,724 1,214 - 250,938
Federal Reserve Bank stock 44,300 - - 44,300
Federal Home Loan Bank stock 1,052,300 - - 1,052,300
Other equity securities 306,625 - - 306,625
------------ --------- ------------ ------------
Total taxable 24,648,842 259,966 11,404 24,897,404
------------ --------- ------------ ------------
Tax-exempt:
State and political subdivisions 6,246,745 268,525 6,850 6,508,420
Federal Reserve Bank stock 4,100 - - 4,100
------------ --------- ------------ ------------
Total tax-exempt 6,250,845 268,525 6,850 6,512,520
------------ --------- ------------ ------------
Total $ 30,899,687 $ 528,491 $ 18,254 $ 31,409,924
============ ========= ============ ============
</TABLE>
F-49
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The maturites, amortized cost and estimated fair values of securities at
June 30, 1999 and December 31, 1998, are summarized as follows:
<TABLE>
<CAPTION>
Available for Sale
--------------------------------
Amortized Estimated
Cost Fair Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 7,092,506 $ 7,022,157
Due from one to five years 24,934,074 24,522,213
Due from five to ten years 27,983,084 27,223,104
Due after ten years 3,177,887 3,143,752
Equity securities 2,601,625 2,601,625
------------- -------------
$ 65,789,176 $ 64,512,851
============= =============
</TABLE>
Note 5. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- --------------
<S> <C> <C>
Commercial, financial and agricultural $ 55,551,087 $ 41,956,586
Real estate - construction 1,055,136 1,801,317
Real estate - mortgage 85,344,066 73,885,892
Installment 29,580,605 26,579,782
Other 580,621 409,382
------------- --------------
Total loans 172,111,515 144,632,959
Less unearned income 476,108 490,946
------------- --------------
Total loans net of unearned income 171,635,407 144,142,013
Less allowance for loan losses 1,466,053 1,371,886
------------- --------------
Loans, net $ 170,169,354 $ 142,770,127
============= ==============
</TABLE>
The following presents loan maturities at June 30, 1999:
<TABLE>
<CAPTION>
Within After 1 but After
1 Year within 5 Years 5 Years
-------------- ---------------- --------------
<S> <C> <C> <C>
Commercial, financial and $ 10,078,238 $ 11,432,010 34,040,843
agricultural
Real estate - construction 978,139 - 76,997
Real estate - mortgage 2,533,658 8,415,338 74,395,071
Installment 3,497,251 21,876,301 4,207,049
Other 543,848 36,773 -
-------------- ---------------- --------------
Total $ 17,631,134 $ 41,760,422 $ 112,719,960
============== ================ ==============
Loans due after one year with:
Variable rates $ 47,235,748
Fixed rates 107,244,634
----------------
$ 154,480,382
================
</TABLE>
F-50
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The Company grants commercial, residential and consumer loans to customers
primarily located in the Potomac Highlands, South Central, and South Eastern
counties of West Virginia, and in Winchester-Frederick County, Virginia.
Although the Company strives to maintain a diverse loan portfolio, exposure to
credit losses can be adversely impacted by downturns in local economic and
employment conditions. Major employment within the Company's market area is
diverse, but primarily includes the poultry, government, health care, education,
coal production and various professional, financial and related service
industries.
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the six month periods ended
June 30, 1999 and 1998, is as follows: .
<TABLE>
<CAPTION>
Year Ended
Six Months Ended June 30, December 31,
------------------------------
1999 1998 1998
------------- ------------ -------------
<S> <C> <C> <C>
Balance, beginning of period $ 1,371,886 $ 895,281 $ 895,281
Losses:
Commercial, financial & agricultural 14,783 546 4,063
Real estate - mortgage 30,488 - -
Installment 33,384 68,881 124,103
Other 3,715 2,196 24,638
------------- ------------ -------------
Total 82,370 71,623 152,804
------------- ------------ -------------
Recoveries:
Commercial, financial & agricultural - 2,830 2,830
Real estate - mortgage 1,320 15,123 21,969
Installment 13,407 15,037 60,797
Other 1,810 169 2,011
------------- ------------ -------------
Total 16,537 33,159 87,607
------------- ------------ -------------
Net losses 65,833 38,464 65,197
Allowance of purchased subsidiary - 271,802 271,802
Provision for loan losses 160,000 120,000 270,000
------------- ------------ -------------
Balance, end of period $ 1,466,053 $ 1,248,619 $ 1,371,886
============= ============ =============
</TABLE>
Note 7. Bank Premises and Equipment
The major categories of Bank premises and equipment and accumulated depreciation
at June 30, 1999 and December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Land $ 1,734,978 $ 1,174,679
Buildings and improvements 5,018,094 3,928,162
Furniture and equipment 2,624,319 2,327,419
------------- ------------
9,377,391 7,430,260
Less accumulated depreciation 2,409,678 2,259,402
------------- ------------
Bank premises and equipment, net $ 6,967,713 $ 5,170,858
------------- ------------
</TABLE>
F-51
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of June 30,
1999 and December 31, 1998:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------- ------------------
<S> <C> <C>
Demand deposits, interest bearing $ 43,463,987 $ 27,510,717
Savings deposits 33,552,910 14,748,928
Certificates of deposit 104,151,394 83,319,247
Individual retirement accounts 10,538,704 9,338,626
------------------- ------------------
$ 191,706,995 $ 134,917,518
=================== ==================
</TABLE>
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of June 30, 1999:
<TABLE>
<CAPTION>
Amount Percent
------------------- ------------------
<S> <C> <C>
Three months or less $ 5,498,663 19.6%
Three through six months 5,763,148 20.6%
Six through twelve months 7,301,930 26.0%
Over twelve months 9,467,516 33.8%
------------------- ----
$ 28,031,257 100.0%
=================== =====
</TABLE>
A summary of the scheduled maturities for all time deposits as of June 30, 1999
is as follows:
<TABLE>
<S> <C>
1999 $ 46,515,568
2000 46,266,699
2001 11,176,497
2002 3,858,618
2003 3,673,247
Thereafter 3,199,469
-------------------
$ 114,690,098
===================
</TABLE>
Note 9. Restrictions on Capital
South Branch and its subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
South Branch and each of its subsidiaries must meet specific capital guidelines
that involve quantitative measures of South Branch's and its subsidiaries'
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. South Branch and each of its subsidiaries'
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 South Branch and each of its subsidiaries to maintain minimum amounts
and ratios 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 June 30, 1999, that South Branch
and each of its subsidiaries met all capital adequacy requirements to which they
were subject.
F-52
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The most recent notifications from the banking regulatory agencies categorized
South Branch and each of its subsidiaries as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, South Branch and each of its subsidiaries must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table below.
South Branch's and its subsidiaries', South Branch Valley National Bank's
("SBVNB"), Capital State Bank, Inc.'s ("CSB"), and Shenandoah Valley National
Bank's ("SVNB") actual capital amounts and ratios are also presented in the
following table (dollar amounts in thousands).
<TABLE>
<CAPTION>
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
----------------------- -------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------- ----------------- ------ ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999
Total Capital (to risk weighted assets)
South Branch $ 21,778 13.6% $ 12,819 8.0% $ 16,023 10.0%
SBVNB 12,059 11.5% 8,408 8.0% 10,511 10.0%
CSB 6,859 13.7% 4,014 8.0% 5,018 10.0%
SVNB 3,899 116.8% 267 8.0% 334 10.0%
Tier I Capital (to risk weighted assets)
South Branch 20,312 12.7% 6,409 4.0% 9,614 6.0%
SBVNB 10,152 9.7% 4,204 4.0% 6,306 6.0%
CSB 6,490 12.9% 2,007 4.0% 3,011 6.0%
SVNB 3,899 116.8% 134 4.0% 200 6.0%
Tier I Capital (to average assets)
South Branch 20,312 7.9% 7,717 3.0% 12,862 5.0%
SBVNB 10,152 6.7% 4,524 3.0% 7,540 5.0%
CSB 6,490 7.4% 2,624 3.0% 4,373 5.0%
SVNB 3,899 100.2% 117 3.0% 195 5.0%
As of December 31, 1998
Total Capital (to risk weighted assets)
South Branch $ 23,309 18.4% $ 10,126 8.0% $ 12,658 10.0%
SBVNB 13,510 14.0% 7,721 8.0% 9,652 10.0%
CSB 8,976 30.5% 2,356 8.0% 2,945 10.0%
SVNB * * * * * *
Tier I Capital (to risk weighted assets)
South Branch 21,937 17.3% 5,063 4.0% 7,595 6.0%
SBVNB 12,468 12.9% 3,861 4.0% 5,791 6.0%
CSB 8,646 29.4% 1,178 4.0% 1,767 6.0%
SVNB * * * * * *
Tier I Capital (to average assets)
South Branch 21,937 11.5% 5,702 3.0% 9,504 5.0%
SBVNB 12,468 8.7% 4,289 3.0% 7,148 5.0%
CSB 8,646 17.7% 1,464 3.0% 2,441 5.0%
SVNB * * * * * *
</TABLE>
* - No data presented relative to SVNB as of December 31, 1998, as this
subsidiary was capitalized by South Branch in April 1999.
F-53
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Pending Merger
On July 16, 1999, the Company entered into an Agreement and Plan of Merger
("Agreement") to affiliate with Potomac Valley Bank ("Potomac") in Petersburg,
West Virginia. Under the terms of the Agreement South Branch and Potomac
propose a merger whereby the shareholders of Potomac would exchange all of their
outstanding shares of common stock for shares of South Branch common stock at a
book-for-book exchange based on the respective book values of South Branch and
Potomac as of the closing date. At June 30, 1999, the exchange ratio would have
been 3.319 shares of South Branch common stock for each share of Potomac's
90,000 outstanding shares of common stock. The terms of the Agreement also
include, among others, that the merger is subject to South Branch changing its
name to Summit Financial Group, Inc. and approval of the transaction by all
applicable regulatory authorities and the shareholders of South Branch and
Potomac. It is expected that the transaction will be accounted for using the
pooling of interests method of accounting. As of June 30, 1999, Potomac's
assets, loans, deposits and shareholders' equity totaled $90,718,000,
$51,673,000, $78,664,000 and $11,937,000, respectively.
F-54
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
June 30, 1999
INTRODUCTION
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of South Branch Valley Bancorp,
Inc. ("Company" or "South Branch") and its wholly owned subsidiaries, South
Branch Valley National Bank ("SBVNB"), Capital State Bank, Inc. ("Capital
State"), and Shenandoah Valley National Bank ("SVNB") for the periods indicated.
This discussion and analysis should be read in conjunction with the Company's
1998 audited consolidated financial statements and Annual Report on Form 10-KSB.
This discussion may also contain forward-looking statements based on
management's expectations, and actual results may differ materially.
ACQUISITIONS AND NEW SUBSIDIARY
On May 14, 1999, SVNB, a newly organized bank subsidiary of South Branch, was
granted its charter by the Office of the Comptroller of the Currency. This
entity was initially capitalized with $4 million, funded by a special dividend
in the amount of $3 million from the Company's subsidiary bank, SBVNB, and from
a $1 million term loan from Potomac Valley Bank. SVNB opened for business on
May 17, 1999.
On December 23, 1998, Capital State entered into an agreement to purchase three
branch banking facilities located in Greenbrier County, West Virginia. The
transaction was completed on April 22, 1999, and includes the branches'
facilities and associated loan and deposit accounts. Total deposits assumed
approximated $47.4 million and total loans acquired approximated $8.9 million as
of the transaction's closing. This transaction was accounted for using the
purchase method of accounting and accordingly, the balances and results of
operations of the branches are included in the consolidated financial statements
of South Branch only from the date of purchase.
At the close of business March 31, 1998, South Branch acquired 60% of the
outstanding common stock of Capital State, a Charleston, West Virginia state
chartered bank with total assets approximating $44 million at the time of
acquisition, in exchange for 183,465 shares of South Branch's common stock.
South Branch had previously acquired 40% of Capital State's outstanding common
stock during 1997. This acquisition was accounted for using the purchase method
of accounting, and accordingly, the assets and liabilities and results of
operations of Capital State are reflected in the Company's consolidated
financial statements beginning April 1, 1998.
Refer to Note 3 of the accompanying consolidated financial statements for
additional information regarding these acquisitions.
RESULTS OF OPERATIONS
Earnings Summary
South Branch reported net income of $414,000 for the three months ended June 30,
1999 compared to $412,000 for the second quarter of 1998, representing an 0.5%
increase. For the six month period ended June 30, 1999, South Branch's net
income of $862,000, increased 8.0% from the $798,000 reported for the same
period of 1998. The increase in earnings for both the quarterly and six month
periods resulted primarily from growth in interest earning assets and improved
service fee revenues.
F-55
<PAGE>
Basic and diluted earnings per common share were $0.70 for the quarter ended
June 30, 1999, compared to the $0.69 reported for the second quarter of 1998.
For the six month period ended June 30, 1999, basic and diluted earnings per
common share totaled $1.46, compared to $1.58 for the same period of 1998. The
declines in year-to-date earnings per share are attributable to the dilution
arising from acquisition of Capital State. The dilutive effect of this
acquisition is expected to be offset in the future by improved earnings
performance of Capital State resulting from its continued asset growth and
planned cost control initiatives.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$4,141,000 for the six month period ended June 30, 1999 compared to $3,188,000
for the same period of 1998, representing an increase of $953,000 or 29.9%.
This increase resulted from growth in the volume of earning assets as result of
the acquisitions of Capital State and the Greenbrier County branches and as a
result of solid Company-wide loan growth. South Branch's net yield on interest
earning assets however decreased to 4.0% for the six month period ended June 30,
1999, compared to 4.3% for the same period in 1998. Growth in net interest
income is expected to continue due to anticipated continued growth in volumes of
interest earning asset, principally loans, over the near term. Conversely, the
Company's net yield on earning assets is anticipated to continue to contract
over the balance of 1999, primarily due to the declining yields on loans as
result of generally lower interest rates and an increasingly competitive market
for quality new credits.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Table I below.
F-56
<PAGE>
Table 1 - Average Balance Sheet and Net Interest Income Analysis
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------------------------------- --------------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
---------- --------- -------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets
Loans, net of unearned income $ 154,526 $ 6,658 8.6% $ 109,934 $ 5,136 9.3%
Securities
Taxable 38,020 1,230 6.5% 28,163 927 6.6%
Tax-exempt (1) 6,187 241 7.8% 6,083 242 8.0%
Federal Funds sold and interest
bearing deposits other banks 8,932 217 4.9% 4,648 134 5.8%
---------- --------- ---- ---------- ---------- ---
Total interest earning assets 207,665 8,346 8.0% 148,828 6,439 8.7%
--------- ---- ---------- ---
Noninterest earning assets
Cash & due from banks 4,253 3,547
Bank premises and equipment 6,312 3,879
Other assets 3,943 6,222
Allowance for loan losses (1,403) (1,079)
---------- ----------
Total assets $ 220,770 $ 161,397
========== ==========
Interest bearing liabilities
Interest bearing demand deposits $ 32,263 $ 515 3.2% $ 21,650 $ 355 3.3%
Savings deposits 21,391 293 2.7% 15,147 242 3.2%
Time deposits 100,693 2,710 5.4% 76,490 2,194 5.7%
Short-term borrowings 8,954 172 3.8% 5,637 122 4.3%
Long-term borrowings 18,314 515 5.6% 10,397 338 6.5%
---------- --------- ---- ---------- ---------- ---
Total interest bearing liabilities 181,615 4,205 4.6% 129,321 3,251 5.0%
--------- ---- ---------- ---
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 14,156 10,617
Other liabilities 1,510 1,325
Shareholders' equity 23,489 20,134
---------- ----------
Total liabilities and
shareholders' equity $ 220,770 $ 161,397
========== ==========
Net interest earnings $ 4,141 $ 3,188
========= ==========
Net yield on interest earning assets 4.0% 4.3%
=== ===
</TABLE>
(1) - Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for both periods presented. The tax equivalent
adjustment resulted in an increase in interest income of $82,000 and
$82,000 for the periods ended June 30, 1999 and 1998, respectively.
F-57
<PAGE>
Credit Experience
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Management's
determination of the appropriate level of the allowance is based on an ongoing
analysis of credit quality and loss potential in the loan portfolio, change in
the composition and risk characteristics of the loan portfolio, and the
anticipated influence of national and local economic conditions. The adequacy
of the allowance for loan losses is reviewed quarterly and adjustments are made
as considered necessary.
The Company recorded a $160,000 provision for loan losses for the first six
months of 1999, compared to $120,000 for the same period in 1998. This increase
reflects the acquisition of Capital State and continued growth of the loan
portfolio. Net loan charge-offs for the first half of 1999 were $66,000, as
compared to $38,000 over the same period of 1998. At June 30, 1999, the
allowance for loan losses totaled $1,466,000 or 0.9% of loans, net of unearned
income, compared to $1,249,000 or 1.0% of loans, net of unearned income at
December 31, 1998. See Note 6 of the notes to the accompanying consolidated
financial statements for an analysis of the activity in the Company's allowance
for loan losses for the six month periods ended June 30, 1999 and 1998 and for
the year ended December 31, 1998.
As illustrated in Table II below, the Company's non-performing assets and loans
past due 90 days or more and still accruing interest has increased from $749,000
at December 31, 1998. to $1,203,000 at June 30, 1999. This increase resulted
principally from a single borrower's credits totaling $400,000 that were past
due more than 90 days at June 30, 1999. These credits were paid off in full by
the borrower in July 1999.
Table II - Summary of Past Due Loans and Non-Performing Assets
(in thousands of dollars)
<TABLE>
<CAPTION>
June 30 December 31,
---------------------
1999 1998 1998
------ ----- ----
<S> <C> <C> <C>
Loans contractually past due 90 days or
more still accruing interest $ 698 $ 106 $ 355
Non-performing assets:
Non-accruing loans 310 139 297
Repossessed assets 17 11 12
Foreclosed properties 178 19 85
----- ----- -----
$1,203 $ 275 $ 749
====== ===== =====
Percentage of total loans 0.7% 0.2% 0.5%
====== ===== =====
</TABLE>
F-58
<PAGE>
Noninterest Income and Expense
Total other income increased approximately $78,000 or 27.1% to $364,000 during
the first six months of 1999, as compared to the first six months of 1998. The
most significant item contributing to this increase was service fees on
deposits, which increased $82,000 from approximately $176,000 to $258,000, or
46.8%. This resulted primarily from a change in SBVNB's deposit fee structure
and improved realization of fee income at Capital State during the first half of
1999. Management expects the Company will achieve similar levels of service fee
income throughout the remainder of 1999.
Total noninterest expense increased approximately $842,000, or 40.7% to
$2,910,000 during the first six months of 1999 as compared to $2,068,000 for the
first six months of 1998. This increase resulted due to: only one quarter of
Capital State's noninterest expenses being included in consolidated noninterest
expense for the first half of 1998 due to its acquisition on April 1, 1998, one
time acquisition costs as well as operating costs associated with the Greenbrier
County branches acquired April 22, 1999, and one time start up costs related to
the organization and opening of SVNB.
FINANCIAL CONDITION
Total assets of the Company were $271,866,000 at June 30, 1999, compared to
$192,999,000 at December 31, 1998, representing a 40.9% increase. Table III
below serves to illustrate significant changes in the Company's financial
position between December 31, 1998 and June 30, 1999.
Table III -
Summary of Significant Changes in
Financial Position
(in thousands of dollars)
<TABLE>
<CAPTION>
Balance Balance
December 31, Increase (Decrease) June 30,
---------------------------------
1998 Amount Percentage 1999
--------------- ------------ ----------- ---------------
<S> <C> <C> <C> <C>
Assets
Securities available for sale 31,410 33,103 105.4% 64,513
Loans, net of unearned income 144,142 27,493 19.1% 171,635
Liabilities
Noninterest bearing deposits $ 11,455 $ 6,466 56.4% $ 17,921
Interest bearing deposits 134,918 56,789 42.1% 191,707
Short-term borrowings 4,644 11,669 251.3% 16,313
Long-term borrowings 16,469 4,334 26.3% 20,803
</TABLE>
The increase in securities available for sale resulted primarily from the
purchase of U.S. government agency securities and mortgage backed securities
during the first half of 1999. Purchases of these securities were made
primarily to invest a significant portion of the $34.3 million in net funds the
Company realized in conjunction with the acquisition of three branch banks in
Greenbrier County, West Virginia in April 1999, and as part of South Branch's
ongoing asset/liability management strategy, which strives to minimize interest
rate risk while enhancing the financial position of the Company.
Growth in both noninterest bearing and interest bearing deposits reflects the
approximate $47.2 million in deposits acquired with the Greenbrier County
branches and SVNB's deposit growth to $10.4 million at June 30, 1999 following
the new Bank's opening in May 1999.
F-59
<PAGE>
Growth in loans during the first six months of 1999, occurring primarily in the
commercial and real estate portfolios, was funded principally by short- and
long-term borrowings from the Federal Home Loan Bank and by deposits acquired
with the Greenbrier County branches.
Refer to Notes 4, 5 and 8 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of the South Branch's securities, loans and deposits between June
30, 1999 and December 31, 1998.
LIQUIDITY
Liquidity reflects the Company's ability to ensure the availability of adequate
funds to meet loan commitments and deposit withdrawals, as well as provide for
other transactional requirements. Liquidity is provided primarily by funds
invested in cash and due from banks, Federal funds sold, securities and interest
bearing deposits with other banks maturing within one year, and lines of credit
with the Federal Home Loan Bank which totaled approximately $48.6 million at
June 30, 1999 versus $45.1 million at December 31, 1998. Further enhancing the
Company's liquidity is the availability as of June 30, 1999 of additional
securities totaling $64.5 million classified as available for sale in response
to an unforeseen need for liquidity.
The Company's liquidity position is monitored continuously to ensure that day-
to-day as well as anticipated funding needs are met. Management is not aware of
any trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to the South Branch's
liquidity.
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of Company
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth. Shareholders' equity at June 30,
1999 totaled $23,631,000 compared to $24,145,000 at December 31, 1998,
representing a decline of 2.1% which resulted primarily from the net unrealized
loss of $1,099,000 on available for sale securities during the first half of
1999.
See Note 9 of the notes to the accompanying consolidated financial statements
for information regarding regulatory restrictions on the Company's and its
subsidiaries' capital.
YEAR 2000
The Year 2000 Issue is the result of many existing computer programs and other
date dependent electronic devices using only the last two digits, as opposed to
four digits, to indicate the year. Such computer systems and devices may be
unable to recognize a year that begins with 20XX instead of 19XX. If not
corrected, the computer programs and devices could cause systems to fail or
other computer errors, leading to possible disruptions in operations or creation
of erroneous results. South Branch recognizes the significant potential risk
associated with the Year 2000 Issue and, in a Company-wide effort, is taking
steps to ensure that its internal systems are secure from such failure.
The Company's Year 2000 Plan ("Plan") addresses all its systems, software,
hardware, and infrastructure components. The Plan identifies and addresses
"Mission Critical" and "Non-mission Critical" components for Information
Technology ("IT") systems and Non-information Technology ("Non-IT") systems. IT
includes, for example, systems that service loan and deposit customers. Non-IT
systems include security systems, elevators, utilities and voice/data
communications. An application, system, or process is deemed "Mission Critical"
if it is vital to the successful continuance of a core business activity.
F-60
<PAGE>
South Branch's Plan follows a five phase approach recommended by bank regulatory
authorities. These phases are: Awareness, Assessment, Renovation,
Testing/Validation, and Implementation. During the Awareness Phase, management
gathered information and appointed a project steering committee to coordinate
the Company's Year 2000 efforts. In the Assessment Phase, South Branch
identified its Mission Critical IT and Non-IT systems and performed an inventory
of all systems, software, hardware, equipment and components that potentially
could be affected by the Year 2000 issue. The Renovation Phase involves
implementing program changes and new components, where applicable, to
accommodate identified Year 2000 issues. In the Testing/Validation Phase, the
Company is testing renovated applications and components to ensure they are Year
2000 compliant. During the Implementation Phase, applications, systems and other
components are fine-tuned and final programs and components are placed into
operation.
South Branch's estimated progress as of June 30, 1999 towards meeting the Plan's
goals for both IT and Non-IT systems by phase are as follows:
<TABLE>
<CAPTION>
Estimated
Percent Completion
Phase Complete Date
----- -------- ----
<S> <C> <C>
Mission Critical
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 100% 06/30/1999
Testing/Validation 100% 06/30/1999
Implementation 100% 06/30/1999
Non-mission Critical
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 100% 06/30/1999
Testing/Validation 100% 06/30/1999
Implementation 100% 06/30/1999
</TABLE>
South Branch depends on various third-party vendors, suppliers, and service
providers, and will be dependent on their continued service in order to avoid
business interruptions. Any interruption in a third party's ability to provide
goods and services, such as issues with telecommunication links and providers of
electricity, could interrupt South Branch's ability to meet its customer's
needs. South Branch has identified several third-party relationships considered
Mission Critical, and is presently working with each to test transactions and/or
interfaces between its processors, obtain appropriate information from each
party, or assess each party's readiness with regard to the Year 2000 Issue.
Identifiable costs for the Company's Year 2000 project during 1999 approximated
$20,000, substantially all of which were capital expenditures for the
replacement of computers and other date dependent electronic devices. The cost
to complete the Plan is not expected to exceed $20,000.
Major business risks associated with the Year 2000 problem include, but are not
limited to, infrastructure failures, disruptions to the economy in general,
excessive cash withdrawal activity, closure of government offices and clearing
houses, and increased problem loans and credit losses in the event that
borrowers fail to properly respond to the problem. These risks, along with the
unlikely risk of South Branch failing to adequately complete the remaining
phases of its Plan and the resulting possible inability to properly process
business transactions expose the Company to loss of revenues, litigation, and
asset quality deterioration.
The Year 2000 problem is unique in that it has never previously occurred; thus,
it is not possible to completely foresee or quantify the overall or any specific
financial or operational impacts to the Company or to third parties which
provide Mission Critical services to the Company. South Branch has developed
comprehensive Year 2000 contingency plans in the event that Mission Critical
third party vendors or other third parties fail to adequately address Year 2000
issues. Such plans principally involve internal remediation or utilization of
alternative vendors.
F-61
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Potomac Valley Bank
Petersburg, West Virginia
We have audited the accompanying balance sheets of Potomac Valley Bank as of
December 31, 1998 and 1997, and the related statements of income, comprehensive
income, shareholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Potomac Valley Bank as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
January 8, 1999
F-62
<PAGE>
POTOMAC VALLEY BANK
BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
Cash and due from banks $ 1,823,579 $ 1,998,871
Federal funds sold 5,900,000 7,300,000
Securities available for sale 32,029,950 23,875,637
Securities held to maturity (estimated fair
value 1998 $1,555,954; 1997 $7,669,962) 1,538,520 7,711,890
Loans, less allowance for loan losses of $741,315
and $593,836, respectively 50,393,404 51,005,642
Bank premises and equipment, net 1,607,049 1,688,425
Accrued interest receivable 695,244 677,315
Other assets 309,476 335,235
----------- -----------
Total assets $94,297,222 $94,593,015
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest bearing $ 9,098,263 $ 7,188,267
Interest bearing 72,869,583 75,877,809
----------- -----------
Total deposits 81,967,846 83,066,076
Accrued interest and other liabilities 516,442 398,083
----------- -----------
Total liabilities 82,484,288 83,464,159
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Common stock, $10 par value, authorized
and issued 90,000 shares 900,000 900,000
Capital surplus 1,500,000 1,500,000
Retained earnings 9,255,508 8,656,637
Accumulated other comprehensive income 157,426 72,219
----------- -----------
Total shareholders' equity 11,812,934 11,128,856
----------- -----------
Total liabilities and shareholders' equity $94,297,222 $94,593,015
=========== ===========
</TABLE>
See Notes to Financial Statements
F-63
<PAGE>
POTOMAC VALLEY BANK
STATEMENT OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans:
Taxable $4,281,293 $4,421,378 $4,210,977
Tax-exempt 120,307 114,406 124,230
Interest and dividends on securities:
Taxable 1,708,779 1,653,501 1,605,250
Tax-exempt 229,940 372,283 469,431
Interest on Federal funds sold 418,957 206,624 73,720
---------- ---------- ----------
Total interest income 6,759,276 6,768,192 6,483,608
---------- ---------- ----------
Interest expense:
Interest on deposits 3,245,052 3,472,810 3,540,151
Interest on Federal funds purchased - 59 13,863
---------- ---------- ----------
Total interest expense 3,245,052 3,472,869 3,554,014
---------- ---------- ----------
Net interest income 3,514,224 3,295,323 2,929,594
Provision for loan losses 345,000 399,281 330,000
---------- ---------- ----------
Net interest income after provision for
loan losses 3,169,224 2,896,042 2,599,594
---------- ---------- ----------
Other income:
Service fees 87,535 81,606 82,215
Insurance commissions 20,406 29,131 28,811
Securities gains (losses) - (81,982) (13,281)
Other 35,516 21,082 20,814
---------- ---------- ----------
Total other income 143,457 49,837 118,559
---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,217,778 1,059,335 1,026,769
Net occupancy expense 155,507 144,868 139,030
Equipment rentals, depreciation
and maintenance 156,722 150,792 137,225
Other 632,664 558,850 451,465
---------- ---------- ----------
Total other expenses 2,162,671 1,913,845 1,754,489
---------- ---------- ----------
Income before income tax expense 1,150,010 1,032,034 963,664
Income tax expense 281,139 251,981 42,375
---------- ---------- ----------
Net income $ 868,871 $ 780,053 $ 921,289
========== ========== ==========
Basic earnings per common share $ 9.65 $ 8.67 $ 10.24
========== ========== ==========
Average common shares outstanding 90,000 90,000 90,000
========== ========== ==========
</TABLE>
See Notes to Financial Statements
F-64
<PAGE>
POTOMAC VALLEY BANK
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
Net income $868,871 $780,053 $ 921,289
-------- -------- ---------
Other comprehensive income, net of tax:
Unrealized gains on investment securities:
Gain (loss) arising during the period 85,207 212,215 (171,625)
Reclassification adjustments (adjustments
for years ended December 31, 1997
and 1996 are not presented) - - -
-------- -------- ---------
Other comprehensive income 85,207 212,215 (171,625)
-------- -------- ---------
Comprehensive income $954,078 $992,268 $ 749,664
======== ======== =========
</TABLE>
See Notes to Financial Statements
F-65
<PAGE>
POTOMAC VALLEY BANK
STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated Total
Other Share-
Common Capital Retained Comprehensive holders'
Stock Surplus Earnings Income Equity
-------- ---------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $900,000 $1,500,000 $7,495,295 $ 31,629 $ 9,926,924
Net income - - 921,289 - 921,289
Cash dividends declared
on common stock
($3.00 per share) - - (270,000) - (270,000)
Change in net unrealized
gain (loss) on
securities - - - (171,625) (171,625)
-------- ---------- ---------- ------------- -----------
Balance, December 31, 1996 900,000 1,500,000 8,146,584 (139,996) 10,406,588
Net income - - 780,053 - 780,053
Cash dividends declared
on common stock
($3.00 per share) - - (270,000) - (270,000)
Change in net unrealized
gain (loss) on
securities - - - 212,215 212,215
-------- ---------- ---------- ------------- -----------
Balance, December 31, 1997 900,000 1,500,000 8,656,637 72,219 11,128,856
Net income - - 868,871 - 868,871
Cash dividends declared
on common stock
($3.00 per share) - - (270,000) - (270,000)
Change in net unrealized
gain (loss)
on securities - - - 85,207 85,207
-------- ---------- ---------- ------------- -----------
Balance, December 31, 1998 $900,000 $1,500,000 $9,255,508 $ 157,426 $11,812,934
======== ========== ========== ============= ===========
</TABLE>
See Notes to Financial Statements
F-66
<PAGE>
POTOMAC VALLEY BANK
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 868,871 $ 780,053 $ 921,289
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 150,077 152,268 151,100
Provision for loan losses 345,000 399,281 330,000
Provision for deferred income tax expense (benefits) (92,465) 8,730 (101,608)
Gain on sale of other real estate owned (14,074) - -
Securities (gains) losses - 81,982 13,281
(Accretion) amortization of securities
premiums and discounts, net 82,741 78,267 77,918
(Increase) decrease in accrued interest receivable (17,929) 76,304 34,021
(Increase) decrease in other assets 67,450 (15,479) (59,950)
Increase (decrease) in accrued interest and
other liabilities 118,359 (512,181) (18,466)
------------ ----------- ------------
Net cash provided by operating activities 1,508,030 1,049,225 1,347,585
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities
held to maturity 6,035,000 2,649,285 3,050,000
Principal payments received on securities held
to maturity 135,320 109,848 127,079
Purchases of securities held to maturity - - (699,180)
Proceeds from maturities and calls of securities available
for sale 2,725,000 2,150,000 395,000
Proceeds from sales of securities available for sale - 8,726,113 29,802,340
Principal payments received on securities
available for sale 2,633,727 1,821,166 1,410,736
Purchases of securities available for sale (13,453,047) (9,680,891) (33,119,313)
Principal collected on (loans made to) customers, net 207,535 (1,076,664) (3,049,954)
Purchases of bank premises and equipment (68,701) (138,746) (44,130)
(Increase) decrease in Federal funds sold 1,400,000 (6,800,000) (500,000)
Proceeds from sale of other real estate owned 70,074 - -
------------ ----------- ------------
Net cash (used in) investing activities (315,092) (2,239,889) (2,627,422)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in non interest bearing
demand deposits 1,909,996 (916,153) 2,160,067
Increase (decrease) in NOW and savings accounts (941,935) 1,955,071 1,837,801
Proceeds from sales of (payments for matured)
time deposits, net (2,066,291) (917,840) (586,424)
Increase (decrease) in Federal funds purchased - - (1,500,000)
Dividends paid (270,000) (270,000) (270,000)
------------ ----------- ------------
Net cash provided by (used in) financing
activities (1,368,230) (148,922) 1,641,444
------------ ----------- ------------
</TABLE>
Continued
F-67
<PAGE>
STATEMENTS OF CASH FLOWS - Continued
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ----------
<S> <C> <C> <C>
Increase (decrease) in cash and due from banks (175,292) (1,339,586) 361,607
Cash and due from banks:
Beginning 1,998,871 3,338,457 2,976,850
---------- ----------- ----------
Ending $1,823,579 $ 1,998,871 $3,338,457
========== =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest on deposits $3,267,530 $ 3,450,290 $3,573,653
========== =========== ==========
Interest on Federal funds purchased $ - $ 59 $ 13,863
========== =========== ==========
Income taxes $ 232,800 $ 224,533 $ 192,022
========== =========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 59,703 $ 70,000 $ -
========== =========== ==========
Purchases of securities available for sale
pending settlement $ - $ - $ 507,188
========== =========== ==========
</TABLE>
See Notes to Financial Statements
F-68
<PAGE>
POTOMAC VALLEY BANK
NOTES TO FINANCIAL STATEMENTS
Note 1.Significant Accounting Policies
Nature of business: Potomac Valley Bank is a commercial bank with
------------------
operations in Petersburg, West Virginia. The Bank provides retail and
commercial loans and deposit services, principally to individuals and
small businesses in Grant County and surrounding communities.
Basis of financial statement presentation: The accounting and reporting
-----------------------------------------
policies of Potomac Valley Bank conform to generally accepted accounting
principles and to general practices within the banking industry.
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 deposits 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 - Debt securities for which the Bank has
---------------------------
the positive intent and ability to hold to maturity are reported at
cost, adjusted for amortization of premiums and accretion of
discounts.
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 and reduced by an allowance for loan losses.
Interest on loans is accrued daily using methods which approximate a
level yield on the outstanding principal balances.
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 Bank makes continuous credit reviews of
the loan portfolio and considers current economic conditions, historical
loan loss experience,
F-69
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 collectibility to be
unlikely. While management uses the best information available to make
its evaluation, future adjustments to the allowance may be necessary if
there are significant changes in conditions.
A loan is impaired when, based on current information and events, it is
probable that the Bank 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 non-accrual
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
Bank's method of recognition of loan fees and direct loan costs does not
produce results which are 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 are capitalized.
Income taxes: The provision for income taxes includes Federal and state
------------
income taxes and is based on pretax income reported in the 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 differences between the financial statement and
tax bases of assets and liabilities that will result in taxable or
deductible amounts in the future 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 it is determined to be more
likely than not that some portion or all of the deferred tax assets will
not be realized.
Basic earnings per share: Earnings per common share are computed based
------------------------
upon the weighted-average shares outstanding. The weighted average
number of shares used to calculate earnings per share was 90,000 for all
years presented. During the years ended December 31, 1998, 1997 and 1996,
the Bank did not have any potentially dilutive securities which had an
impact on the Bank's earnings per share computations.
F-70
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Emerging accounting standards: In June 1998, the Financial Accounting
-----------------------------
Standards Board issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in
years beginning after June 15, 1999. The Statement permits early
adoption as of the beginning of any fiscal quarter after its issuance.
The Bank expects to adopt the new Statement effective December 31,
1999. The Statement will require the Bank to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value
of derivatives will either be offset against the change in fair value
of the hedged assets, liabilities or firm commitments through earnings
or recognized in other comprehensive income until the hedged items is
recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings.
Management does not anticipate that the adoption of the new Statement
will have a significant impact on the Bank's earnings or financial
position.
Comprehensive Income: During the year ended December 31, 1998, the
--------------------
Bank adopted Financial Accounting Standards Board Statement No. 130,
Reporting Comprehensive Income. The Statement requires that financial
statements presented for earlier periods be reclassified. The
Statement allows the Bank to omit certain data regarding
reclassification adjustments for earlier periods. The Bank has elected
to omit data regarding reclassification adjustments for the years
ended December 31, 1997 and 1996, as permitted by the Statement.
Reclassifications: Certain accounts in the financial statements for
-----------------
1997 and 1996, as previously presented, have been reclassified to
conform to current year classifications.
Note 2. Cash Concentrations
At December 31, 1998 and 1997, the Bank had cash concentrations with
two separate correspondent banks which consisted of amounts totaling
$3,900,000 and $7,300,000 in Federal funds sold and $25,000 and
$452,813 in a "due from" bank account, respectively. Federal funds
sold are generally unsecured. Also "due from" bank account balances
have limited insurance under current banking insurance regulations.
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated
fair values of securities at December 31, 1998 and 1997, are
summarized as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Fair
----------------------
Cost Gains Losses Value)
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 1,771,808 $ 19,833 $ - $ 1,791,641
U.S. government agencies and
corporations 13,689,279 116,829 - 13,806,108
Mortgage backed securities -
U.S. government agencies
and corporations 9,986,840 131,456 149,797 9,968,499
Other 255,839 - - 255,839
Taxable state and political
subdivisions 1,400,028 43,656 - 1,443,684
Taxable Federal Reserve Bank
stock 69,850 - - 69,850
Federal Home Loan Bank stock 359,700 - - 359,700
----------- -------- -------- -----------
Total taxable 27,533,344 311,774 149,797 27,695,321
----------- -------- -------- -----------
</TABLE>
F-71
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998
---------------------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Fair
-----------------------
Cost Gains Losses Value)
----------- ---------- --------- -----------
<S> <C> <C> <C> <C>
State and political subdivisions 4,236,381 96,098 - 4,332,479
Tax-exempt Federal Reserve
Bank stock 2,150 - - 2,150
----------- ---------- -------- -----------
Total tax-exempt 4,238,531 96,098 - 4,334,629
----------- ---------- -------- -----------
Total $31,771,875 $ 407,872 $149,797 $32,029,950
=========== ========== ======== ===========
<CAPTION>
1998
---------------------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Fair
-----------------------
Cost) Gains Losses Value
----------- ---------- -------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. government agencies and
corporations $ 249,651 $ 3,474 $ - $ 253,125
Mortgage backed securities -
U.S. government agencies
and corporations 645,936 53 3,915 642,074
----------- ---------- -------- -----------
Total taxable 895,587 3,527 3,915 895,199
----------- ---------- -------- -----------
State and political subdivisions 642,933 17,822 - 660,755
----------- ---------- -------- -----------
Total tax-exempt 642,933 17,822 - 660,755
----------- ---------- -------- -----------
Total $ 1,538,520 $ 21,349 $ 3,915 $ 1,555,954
=========== ========== ======== ===========
</TABLE>
F-72
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1997
----------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Fair
-------------------
Cost Gains Losses Value)
----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 783,963 $ 5,179 $ - $ 789,142
U.S. government agencies and
corporations 3,775,108 15,455 9,555 3,781,008
Mortgage backed securities -
U.S. government agencies
and corporations 12,561,305 138,902 52,710 12,647,497
Other 298,497 - - 298,497
Taxable state and political
subdivisions 1,404,461 16,752 - 1,421,213
Taxable Federal Reserve Bank
stock 69,850 - - 69,850
Federal Home Loan Bank stock 359,700 - - 359,700
----------- -------- ------- -----------
Total taxable 19,252,884 176,288 62,265 19,366,907
----------- -------- ------- -----------
State and political subdivisions 4,471,272 36,407 1,099 4,506,580
Tax-exempt Federal Reserve
Bank stock 2,150 - - 2,150
----------- -------- ------- -----------
Total tax-exempt 4,473,422 36,407 1,099 4,508,730
----------- -------- ------- -----------
Total $23,726,306 $212,695 $63,364 $23,875,637
=========== ======== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------
Carrying
Value Estimated
(Amortized Unrealized Fair
-------------------
Cost) Gains Losses Value
----------- ---------- ------- -----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities $ 499,447 $ - $ 1,597 $ 497,850
U.S. government agencies and
corporations 5,746,239 2,727 30,815 5,718,151
Mortgage backed securities -
U.S. government agencies
and corporations 786,598 - 28,671 757,927
----------- -------- ------- -----------
Total taxable 7,032,284 2,727 61,083 6,973,928
----------- -------- ------- -----------
State and political subdivisions 679,606 16,428 - 696,034
----------- -------- ------- -----------
Total tax-exempt 679,606 16,428 - 696,034
----------- -------- ------- -----------
Total $ 7,711,890 $ 19,155 $61,083 $ 7,669,962
=========== ======== ======= ===========
</TABLE>
F-73
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity
securities which are included in securities available for sale in the
accompanying 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
are included in securities at December 31, 1998 and 1997, respectively.
These obligations having contractual maturities ranging from within 1
year to 28 years are reflected in the following maturity distribution
schedules based on their anticipated average life to maturity, which
generally ranges from within 3 months to 16 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, 1998, are summarized as follows.
<TABLE>
<CAPTION>
Held to maturity Available for sale
----------------------------- -------------------------
Carrying
Carrying Value
Value Estimated (Estimated
(Amortized Fair Amortized Fair
Cost) Value Cost Value)
---------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Due within 1 year $ 711,597 $ 708,637 $ 7,302,205 $ 7,104,166
Due after 1 but within 5 years 826,923 847,317 17,240,853 17,593,625
Due after 5 but within 10 years - - 6,265,314 6,356,345
Due after 10 years - - 531,803 544,114
Equity securities - - 431,700 431,700
---------------- ---------- ----------- -----------
Total $ 1,538,520 $1,555,954 $31,771,875 $32,029,950
================ ========== =========== ===========
</TABLE>
The maturity distribution above includes securities available for sale
with an estimated fair value of $3,970,382 and amortized cost of
$3,924,790 which are callable by their issuer prior to maturity.
The proceeds from sales, calls and maturities of securities, including
transactions related to the restructuring of the portfolio and principal
payments received on mortgage-backed securities and the related gross
gains and losses realized for the years ended December 31, 1998, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
Proceeds From Gross Realized
---------------------------------- ---------------
Calls and Principal
For the Years Ended Sales Maturities Payments Gains Losses
------------------- ---------- ---------- ---------- ------ -------
<S> <C> <C> <C> <C> <C>
December 31,
1998
Securities held
to maturity $ - $6,035,000 $ 135,320 $ - $ -
---------- ---------- ---------- ------ -------
Securities available
for sale - 2,725,000 2,633,727 - -
---------- ---------- ---------- ------ -------
$ - $8,760,000 $2,769,047 $ - $ -
========== ========== ========== ====== =======
1997
Securities held
to maturity $ - $2,649,285 $ 109,848 $ - $ -
---------- ---------- ---------- ------ -------
Securities
available for sale 8,726,113 2,150,000 1,821,166 1,283 83,265
---------- ---------- ---------- ------ -------
$8,726,113 $4,799,285 $1,931,014 $1,283 $83,265
========== ========== ========== ====== =======
</TABLE>
F-74
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Proceeds From Gross Realized
--------------------------------------- ----------------
Calls and Principal
For the Years Ended Sales Maturities Payments Gains Losses
------------------- ----------- ---------- -------------- ------- -------
<S> <C> <C> <C> <C> <C>
1996
Securities held
to maturity $ - $3,050,000 $ 127,079 $ - $ -
Securities
available for sale 29,802,340 395,000 1,410,736 67,851 81,132
----------- ---------- ---------- ------- -------
$29,802,340 $3,445,000 $1,537,815 $67,851 $81,132
=========== ========== ========== ======= =======
</TABLE>
At December 31, 1998 and 1997, securities carried at $5,614,154 and
$5,728,988, respectively, with estimated fair values of $5,700,087 and
$5,729,127, respectively, were pledged to secure public deposits and for
other purposes required or permitted by law.
Included in obligations of state and political subdivisions at December
31, 1998 and 1997, were certain obligations of the State of West
Virginia with total amortized costs of $2,051,498 and $2,214,163,
respectively, and estimated fair values of $2,114,238 and $2,252,839,
respectively. There are no significant concentrations to any one
political subdivision or agency within the state.
Note 4. Loans
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Commercial, financial and agricultural $12,402,095 $10,573,610
Real estate - mortgage 27,127,344 27,420,228
Installment loans 10,108,031 12,232,958
Other 1,497,249 1,372,682
----------- -----------
Total loans 51,134,719 51,599,478
Less allowance for loan losses (741,315) (593,836)
----------- -----------
Loans, net $50,393,404 $51,005,642
=========== ===========
</TABLE>
Included in the balance of net loans are non-accrual loans approximating
$485,866 and $77,817 at December 31, 1998 and 1997, respectively. Also,
if interest on non-accrual loans had been accrued, such income would
have approximated $27,500, $3,791 and $26,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
The following presents loan maturities at December 31, 1998, without
regard to scheduled periodic principal repayments on amortizing loans:
<TABLE>
<CAPTION>
Balance After One
Dec. 31, One Year Year to After Five
1998 or Less Five Years Years
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $12,402,095 $ 6,838,000 $ 4,971,000 $ 593,095
Real estate - mortgage 27,127,344 14,926,000 9,099,000 3,102,344
Installment loans 10,108,031 6,266,000 3,673,000 169,031
Other 1,497,249 1,497,249 - -
----------- ----------- ----------- ----------
Total $51,134,719 $29,527,249 $17,743,000 $3,864,470
=========== =========== =========== ==========
</TABLE>
F-75
<PAGE>
NOTES TO FINANCIAL STATEMENTS
At December 31, 1998, loans due after one year with fixed interest rates
approximated $20,872,171 and loans due after one year with variable
interest rates approximated $735,299.
In the past the Bank has made loans, in the normal course of business,
to its directors, officers and employees and will continue to make such
loans in the future. At December 31, 1998 and 1997, outstanding loans of
this nature totaled $5,775,805 and $3,927,566, respectively.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to any one related party. Other changes
represent loan lines paid below or extended above $60,000 during the
year.
1998 1997
------------ ------------
Balance, beginning $ 2,591,698 $ 2,016,163
Additions 1,658,700 1,778,388
Amounts collected (1,081,670) (1,202,853)
Other 1,387,790 -
----------- -----------
Balance, ending $ 4,556,518 $ 2,591,698
=========== ===========
Concentration of Credit Risk: The Bank generally grants agricultural,
----------------------------
commercial, residential and installment loans to customers within an
approximate twenty-five mile radius of Petersburg, West Virginia.
Included in total loans at December 31, 1998 and 1997, are loans to
individuals and businesses who are engaged in poultry farming. Such
loans approximated $1,432,631 and $2,505,352 at December 31, 1998 and
1997, respectively. These loans are generally secured by land and the
attached facilities.
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 593,836 $ 508,404 $ 654,184
--------- --------- ---------
Losses:
Commercial, financial and agricultural 178,454 92,650 380,446
Real estate - mortgage 1,057 5,000 -
Installment loans 80,312 204,804 103,413
Other 571 58,470 -
--------- --------- ---------
Total 260,394 360,924 483,859
--------- --------- ---------
Recoveries:
Commercial, financial and agricultural 200 25,000 749
Real estate - mortgage 250 1,000 -
Installment loans 57,199 20,075 7,330
Other 5,224 1,000 -
--------- --------- ---------
Total 62,873 47,075 8,079
--------- --------- ---------
Net (losses) recoveries (197,521) (313,849) (475,780)
--------- --------- ---------
Provision for loan losses 345,000 399,281 330,000
--------- --------- ---------
Balance, end of year $ 741,315 $ 593,836 $ 508,404
========= ========= =========
</TABLE>
F-76
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The Bank's total recorded investment in impaired loans at December 31,
1998 and 1997, was $446,137 and $33,659, for which the related allowance
for credit losses determined in accordance with Financial Accounting
Standards Board Statements Nos. 114 and 118 was $73,000 and $5,000,
respectively. The Bank's average investment in such loans approximated
$466,169 and $67,861 for the years ended December 31, 1998 and 1997,
respectively. The impaired loan at December 31, 1997, was collateral
dependent and accordingly, the fair value of the loan's collateral was
used to measure the impairment of the 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); credit
card and consumer loans under $30,000; and collateralized commercial
loans under $20,000.
For the years ended December 31, 1998 and 1997, the Bank recognized
approximately $5,990 and $0, 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 6. Bank Premises and Equipment
The major categories of bank premises and equipment and accumulated
depreciation at December 31, 1998 and 1997, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 414,223 $ 414,223
Building and improvements 1,645,362 1,641,862
Furniture and equipment 890,744 825,543
----------- -----------
2,950,329 2,881,628
Less accumulated depreciation 1,343,280 1,193,203
----------- -----------
Bank premises and equipment, net $ 1,607,049 $ 1,688,425
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and
1996, totaled $150,077, $152,268 and $151,100, respectively.
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of
December 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NOW and Super NOW accounts $ 9,238,815 $ 9,114,273
Money market accounts 7,572,434 5,973,801
Savings accounts 13,001,194 15,666,304
Certificates of deposit and other time deposits 43,057,140 45,123,431
----------- -----------
Total $72,869,583 $75,877,809
=========== ===========
</TABLE>
Time certificates of deposit in denominations of $100,000 or more
totaled $9,433,801, $10,455,477 and $9,996,692 at December 31, 1998,
1997 and 1996, respectively. Interest paid on such time certificates
totaled $402,848, $458,606 and $472,471 for the years ended December 31,
1998, 1997 and 1996, respectively.
F-77
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The following is a summary of the maturity distribution of certificates
of deposit in amounts of $100,000 or more as of December 31, 1998:
<TABLE>
<CAPTION>
Amount Percent
----------- -------
<S> <C> <C>
Three months or less $ 4,531,858 48.0
Three through six months 2,240,427 23.7
Six through twelve months 1,590,414 16.9
Over twelve months 1,071,102 11.4
----------- -----
Total $ 9,433,801 100.0
=========== =====
</TABLE>
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- -----------
<S> <C>
1999 $37,256,377
2000 4,281,171
2001 1,176,947
2002 342,645
-----------
$43,057,140
===========
</TABLE>
Note 8. Short-Term Borrowings
The Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB).
As a member, the Bank obtained a Flexline Commitment from the FHLB
during 1998 for $2,500,000 to finance loan growth and/or meet liquidity
needs as necessary. Any borrowing bears interest at the interest rate
posted by the FHLB on the day of the borrowing and is subject to change
daily. This line of credit is secured by a blanket lien on all unpledged
and unencumbered assets of the Bank. The line expired December 31, 1998,
and was renewed by the Bank for the next year. There were no amounts
outstanding during 1998.
Note 9. Income Taxes
The components of applicable income tax expense (benefit) for the years
ended December 31, 1998, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- ----------
<S> <C> <C> <C>
Current:
Federal $321,812 $181,161 $ 111,299
State 51,792 62,090 32,684
-------- -------- ---------
373,604 243,251 143,983
Deferred (Federal and state) (92,465) 8,730 (101,608)
-------- -------- ---------
Total $281,139 $251,981 $ 42,375
======== ======== =========
</TABLE>
A reconciliation between the amount of reported income tax expense and
the amount computed by multiplying the statutory income tax rate by book
pretax income for the years ended December 31, 1998, 1997 and 1996, is
as follows:
F-78
<PAGE>
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
--------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at
applicable
statutory rate $ 391,003 34.0 $ 350,892 34.0 $ 327,646 34.0
Increase (decrease)
in taxes
resulting from:
Tax-exempt income (119,084) (10.4) (165,474) (16.0) (201,845) (20.9)
Disallowed interest
expense 14,827 1.3 23,270 2.3 30,058 3.1
Increase (decrease)
in deferred tax
asset valuation
allowance - - - - (119,600) (12.4)
State income taxes,
net of Federal
tax benefit (34,183) (3.0) 27,463 2.7 21,571 2.2
Other, net (39,791) (3.5) 15,830 1.5 (15,455) (1.6)
--------- ------ --------- ------ --------- -------
Applicable
income
taxes $ 281,139 24.4 $ 251,981 24.5 $ 42,375 4.4
========== ====== ========= ====== ========= =======
</TABLE>
Deferred income taxes for 1998, 1997 and 1996 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.
The tax effects of temporary differences which create the Bank's
deferred tax assets and liabilities as of December 31, 1998 and 1997,
are as follows:
<TABLE>
<CAPTION>
Deferred tax assets: 1998 1997
-------- --------
<S> <C> <C>
Allowance for loan losses $183,238 $116,797
Depreciation 69,367 46,055
Alternative minimum tax credit carryforward 23,612 20,906
-------- --------
276,217 183,758
-------- --------
Deferred tax liabilities:
Net unrealized gain on securities 100,649 46,173
Discount accretion on tax exempt investments 257 263
-------- --------
100,906 46,436
-------- --------
Net deferred tax assets $175,311 $137,322
======== ========
</TABLE>
Note 10. Profit-Sharing Plan
The Bank maintains a discretionary, non-contributory profit-sharing
plan for substantially all full-time employees. The amount of the
Bank's annual contribution is determined by the Board of Directors,
subject to certain limitations as defined by the plan. Annual
contributions for each employee covered may not exceed 15 percent of
their respective annual salary. Profit-sharing expense was $75,769,
$87,683 and $87,310 for the years ended December 31, 1998, 1997 and
1996, respectively.
F-79
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 11. Financial Instruments With Off-Balance Sheet Risk
The Bank is a party of financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and credit cards. Those 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 those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
Financial instruments whose contract Contract Amount
----------------------
amounts represent credit risk 1998 1997
------------------------------------ ---------- ----------
Commitments to extend credit $1,922,369 $2,077,307
Credit cards 875,207 639,704
---------- ----------
$2,797,576 $2,717,011
========== ==========
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 and standby letters of 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;
property, plant and equipment; income-producing commercial properties
and residential real estate. Commitments to extend credit through
credit cards are considered unsecured, although the Bank subjects these
customers to the same credit analysis as other unsecured borrowers.
Note 12. Commitments and Contingencies
Litigation: Due to the nature of business of the Bank, which involves
----------
extensions of credit and collection of loans and the enforcement of
liens, security interests and mortgages, the Bank is plaintiff or
defendant in various legal proceedings from time to time. Management
does not anticipate the outcome of such claims or actions to have a
material effect on the Bank's financial position.
Regulatory Agreement: In May of 1997, the Board of Directors of the
--------------------
Bank entered into an agreement with the Federal Reserve Bank of
Richmond and the West Virginia Department of Banking which requires the
Bank to commit to specified corrective actions concerning the Bank's
operations and management of the investment securities and loan
portfolios. As of December 31, 1998, management believes the Bank is in
substantial compliance with the terms of the agreement.
F-80
<PAGE>
NOTES TO FINANCIAL STATEMENTS
"Year 2000 Compliant": A team was assembled to study, test and remedy
-------------------
Year 2000 issues ("Issue") because the Bank, as well as some of its
suppliers, customers and service providers is heavily dependent on
computers in the conduct of business activities. As a result, a
remediation plan was developed. The costs associated with this issue
were not significant and were capitalized or expensed, as appropriate,
during 1998. To complete the execution of the plan, additional testing
with the Bank's data processing systems is scheduled for the first half
of 1999. The anticipated costs of such are not expected to be
significant. Based on the actions taken to resolve the Bank's Year 2000
issue, management believes it will be Year 2000 compliant to meet the
needs of its customers, however there may be unforeseen external or
internal issues which could impact the Bank's status.
Note 13. Restrictions on Dividends and Capital
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.
The Bank is subject to various regulatory capital requirements
administered by Federal and state 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 classification 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) to
average assets (as defined). Management believes, as of December 31,
1998, that the Bank meets all capital adequacy requirements to which it
is subject.
As of December 31, 1998, the most recent notification from the
regulatory agency categorized the Bank as adequately capitalized under
the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
The Bank's actual capital amounts and ratios are also presented in the
table (in thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $12,237 26.3% $3,724 8.0% $4,656 10.0%
Tier I Capital
(to Risk Weighted Assets) 11,656 25.0% 1,862 4.0% 2,793 6.0%
Tier I Capital
(to Average Assets) 11,656 12.4% 3,774 4.0% 4,718 5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $11,650 24.1% $3,866 8.0% $4,833 10.0%
Tier I Capital
(to Risk Weighted Assets) 11,057 22.9% 1,933 4.0% 2,900 6.0%
Tier I Capital
(to Average Assets) 11,057 11.7% 3,777 4.0% 4,721 5.0%
</TABLE>
F-81
<PAGE>
Potomac Valley Bank
Management's Discussion and Analysis of Financial Condition
and Results of Operations
December 31, 1998
GENERAL
Potomac Valley Bank (the Bank) is a community bank located in Petersburg,
West Virginia. In June of 1999, the Bank's Board of Directors entered into an
agreement whereby Potomac Valley Bank would affiliate with South Branch Valley
Bancorp, Inc. (the Bancorp) through a book to book exchange of stock. The
proposed merger is subject to regulatory and shareholder approval. If the
appropriate approvals are received, the merger would be anticipated to be
completed late in the third quarter or during the fourth quarter of 1999.
You should read this discussion and analysis in conjunction with Potomac's
financial statements and the notes thereto at December 31, 1998 and 1997 and for
the years ended December 31, 1998, 1997 and 1996. Any forward looking
statements included in this analysis are subject to risks and uncertainties
including, but not limited to economic, competitive, governmental and
technological factors which could affect Potomac's operations, market, products
and services.
RESULTS OF OPERATIONS
- ---------------------
The following table reflects the financial highlights of Potomac's
performance for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Table I.- Selected Financial data
($ IN THOUSANDS)
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
YEAR END BALANCES
Assets $ 94,297 $ 94,593 $ 94,262
=========================================
Loans $ 51,135 $ 51,599 $ 50,907
=========================================
Deposits $ 81,968 $ 83,066 $ 82,945
=========================================
Long Term Debt $ 0 $ 0 $ 0
=========================================
Shareholders Equity $ 11,812 $ 11,129 $ 10,407
=========================================
INCOME FOR THE YEAR
Interest Income $ 6,759 $ 6,768 $ 6,484
Interest Expense 3,245 3,473 3,554
-----------------------------------------
Net Interest Income 3,514 3,295 2,930
Provision for Loan Losses 345 399 330
Other Income 143 50 119
Other Expense 2,163 1,914 1,754
-----------------------------------------
Net Income (loss) from operations $ 869 $ 780 $ 921
=========================================
Per Share data on Common Stock
Net Income (loss) from operations $ 9.65 $ 8.67 $ 10.24
=========================================
Cash Dividends declared $ 3.00 $ 3.00 $ 3.00
=========================================
Shareholders Equity $ 131.24 $ 123.66 $ 115.63
=========================================
</TABLE>
F-82
<PAGE>
The following paragraphs provide an analysis of the changes in the
financial performance for 1996 through 1998.
Performance Summary 1998 versus 1997
Potomac experienced net income for the year ended December 31, 1998 of
$868,871. The 1998 performance improved somewhat over the 1997 income of
$780,053. The earnings per share was $9.65 for 1998 up from the 1997 earnings
per share of $8.67. The earnings improvement was driven by several components.
Net interest margin for 1998 improved by $218,901 (6%) over the 1997 levels.
Provision expense was $345,000 for 1998 versus the $399,281 for 1997 showing a
decrease of $54,281. Other Income was up $93,620 from the 1997 level of $49,837.
Other expense increased by $248,826 for 1998 to come in at $2,162,671 versus
$1,913,845. Please see the following sections for more detailed analysis of
these major components.
Performance Summary 1997 Versus 1996
Potomac had net income of $780,053 for 1997 which was down from the net
income of $921,289 for 1996. Net Interest margin increased to $3,295,323 for
1997 from the 1996 level of $2,929,594. Provision was $399,281 for 1997, an
increase of $69,281 from the 1996 provision of $330,000. Other Income decreased
to $49,837 versus $118,559 for 1996. Other Expense increased by $159,356 to a
level of $1,913,845 versus the 1996 level of $1,754,489. Please see the
following sections for more detailed analysis of these major components.
Net Interest Margin
The two following tables reflect the major components of the net interest
margin. The first schedule details the average balances for each of the three
years ending December 31, 1998, 1997 and 1996 along with the average yields on
those balances. The second schedule (rate/volume) reflects on a summarized basis
the net interest margin for the years ended December 31, 1998, 1997 and 1996 as
well as a breakdown of the various components of the margin changes between the
various years. The changes are broken down to reflect the portions that are
attributable to rate changes and those attributable to volume changes. Because
the bank held tax exempt investments, adjustments to reflect tax equivalency
have been made. Loan fees are not included in the calculations of yield.
Interest on non accrual loans is recognized only to the extent payments are
received or the loan has otherwise been rehabilitated. Any interest included in
the schedules here would be immaterial.
F-83
<PAGE>
<TABLE>
<CAPTION>
TABLE II.- YIELD ANALYSIS
($ IN THOUSANDS)
1998 1997 1996
-------------------------- -------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest rate Balance Interest rate Balance Interest rate
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets
Loans:
Commercial, financial and Agriculture $ 8,339 $ 675 8.09% $ 7,126 $ 594 8.34% $ 6,313 $ 519 8.22%
Real Estate Mortgage 34,301 2,660 7.75% 36,715 2,921 7.96% 34,955 2,725 7.80%
Installment 6,813 907 13.31% 5,685 815 14.34% 5,995 840 14.01%
Other 1,404 160 11.40% 1,986 206 10.37% 2,786 251 9.01%
-------------------------- -------------------------- --------------------------
Total Loans 50,857 4,402 8.66% 51,512 4,536 8.81% 50,049 4,335 8.66%
-------------------------- -------------------------- --------------------------
Investments:
Taxable 28,366 1,708 6.02% 25,257 1,653 6.54% 26,124 1,605 6.14%
Tax Exempt 5,099 354 6.94% 10,193 572 5.61% 9,824 722 7.35%
-------------------------- -------------------------- --------------------------
Total Investments 33,465 2,062 6.16% 35,450 2,225 6.28% 35,948 2,327 6.47%
-------------------------- -------------------------- --------------------------
Federal Funds Sold 7,594 419 5.52% 3,700 207 5.59% 1,416 74 5.23%
-------------------------- -------------------------- --------------------------
Total Earning Assets 91,916 6,883 7.49% 90,662 6,968 7.69% 87,413 6,736 7.71%
Cash and Due From Banks 2,010 2,160 2,493
Premises and Equipment 1,660 1,702 1,774
Allowance for Loan Losses (639) (561) (654)
Other Assets 1,113 1,143 1,091
------- ------- -------
Total Assets $96,060 $95,106 $92,117
======= ======= =======
Liabilities and Shareholders Equity
Interest Bearing Deposits:
Demand $15,942 $ 416 2.61% $14,549 $ 403 2.77% $14,927 $ 412 2.76%
Savings 15,664 546 3.49% 15,785 615 3.90% 12,628 476 3.77%
Time 43,890 2,283 5.20% 45,579 2,455 5.39% 46,114 2,652 5.75%
-------------------------- -------------------------- --------------------------
Total Interest bearing Deposits 75,496 3,245 4.30% 75,913 3,473 4.57% 73,669 3,540 4.81%
-------------------------- -------------------------- --------------------------
Borrowings 0 0 0.00% 1 0 0.00% 263 14 5.32%
-------------------------- -------------------------- --------------------------
Total Interest Bearing Liabilities 75,496 3,245 4.30% 75,914 3,473 4.57% 73,932 3,554 4.81%
Non- Interest Bearing Deposits 8,255 7,752 7,420
Other Liabilities 711 819 824
Equity 11,598 10,621 9,941
------- ------- -------
Total Liabilities and Equity $96,060 $95,106 $92,117
======= ======= =======
Net Interest Margin $91,916 $3,638 3.96% $90,662 $3,495 3.85% $87,413 $3,182 3.64%
========================== ========================== ==========================
</TABLE>
F-84
<PAGE>
TABLE III.- RATE VOLUME ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1998 versus 1997
Interest Change due to
98 vs 97 --------------------------------------
Rate Volume Analysis 1998 1997 1996 Change Rate Volume Rate/Vol Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 675 $ 594 $ 519 $ 81 ($17) $ 101 ($3) $ 81
Real Estate Mortgage 2,660 2,921 2,725 (261) (74) (192) 5 (261)
Installment 907 815 840 92 (58) 162 (12) 92
Other 160 206 251 (46) 20 (60) (6) (46)
---------------------------------------------------------------------------
Total Loans 4,402 4,536 4,335 (134) (129) 10 (16) (134)
Investments:
Taxable 1,708 1,653 1,605 55 (132) 203 (16) 55
Tax Exempt 354 572 722 (218) 135 (286) (68) (218)
---------------------------------------------------------------------------
Total Investments 2,062 2,225 2,327 (163) 3 (82) (84) (163)
Federal Funds Sold 419 207 74 212 (3) 218 (3) 212
---------------------------------------------------------------------------
Total Earning Assets 6,883 6,968 6,736 (85) (129) 146 (102) (85)
Interest Bearing Deposits:
Demand 416 403 412 13 (23) 39 (2) 13
Savings 546 615 476 (69) (65) (5) 0 (69)
Time 2,283 2,455 2,652 (172) (84) (91) 3 (172)
---------------------------------------------------------------------------
Total Interest bearing Deposits 3,245 3,473 3,540 (228) (172) (57) 1 (228)
Borrowings 0 0 14 0 0 0 0 0
---------------------------------------------------------------------------
Total Interest Bearing Liabilities 3,245 3,473 3,554 (228) (172) (57) 1 (228)
---------------------------------------------------------------------------
Net Interest Income $3,638 $3,495 $3,182 $ 143 $ 44 $ 203 ($104) $ 143
===========================================================================
<CAPTION>
1997 versus 1996
Interest Change due to
97 vs 96 ---------------------------------
Rate Volume Analysis Change Rate Volume Rate/Vol Total
------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Commercial $ 75 $ 7 $ 67 $ 1 $ 75
Real Estate Mortgage 196 56 137 3 196
Installment (25) 19 (43) (1) (25)
Other (45) 38 (72) (11) (45)
------------------------------------------
Total Loans 201 120 89 (8) 201
Investments:
Taxable 48 105 (53) (3) 48
Tax Exempt (150) (171) 27 (6) (150)
------------------------------------------
Total Investments (102) (66) (26) (10) (102)
Federal Funds Sold 133 5 119 8 133
------------------------------------------
Total Earning Assets 232 59 182 (10) 231
Interest Bearing Deposits:
Demand (9) 1 (11) (0) (9)
Savings 139 16 119 4 139
Time (197) (168) (31) 2 (197)
------------------------------------------
Total Interest bearing Deposits (67) (151) 77 6 (67)
Borrowings (14) (14) (14) 14 (14)
------------------------------------------
Total Interest Bearing Liabilities (81) (165) 63 20 (81)
------------------------------------------
Net Interest Income $ 313 $ 224 $ 118 ($29) $ 313
==========================================
</TABLE>
As the schedules indicate, net interest margin showed increases for both
1998 versus 1997 and 1997 versus 1996. The 1998 versus 1997 improvement resulted
from improved volumes in earning assets, and slightly lower volumes in deposits
and lower overall rates paid on liabilities which more than offset the declines
in yields on earning assets. The 1997 versus 1996 improvement resulted from
modest yield improvement on earning assets and a significant decrease in the
deposit costs of time deposits. Also, increased volumes of earning assets
contributed to the margin increase.
Investments
As the table below shows, Potomac's investments are in United States
Government agencies. The majority of the portfolio (32.6 million of the total
33.6 million portfolio) matures in the category of from one to five years. The
weighted average yield on the total portfolio at December 31, 1998 was 6.16%.
TABLE IV.- INVESTMENT PORTFOLIO
($ IN THOUSANDS)
<TABLE>
<CAPTION>
States and
U. S. U. S. Political
Treasury Agencies Subdivisions Other Total
--------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1998 Book Balance $1,791 $14,056 $ 6,419 $11,302 $33,568
December 31, 1997 Book Balance $1,289 $ 9,527 $ 6,608 $14,164 $31,588
December 31, 1996 Book Balance $1,527 $11,368 $10,899 $13,385 $37,179
</TABLE>
<TABLE>
<CAPTION>
States and
Political
U.S. Treasury U.S. Agencies Subdivisions Other
----------------------------------------------------------------------------------
December 31, 1998 Balance Yield Balance Yield Balance Yield Balance Yield
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity:
Within One year $1,007 5.50% $ 3,443 5.66% $ 272 6.81% $ 3,094 6.69%
After one year through five years 9,741 5.56% 3,120 6.60% 5,309 6.89%
After five years through ten years 784 6.16% 872 5.81% 2,972 6.85% 1,978 6.86%
After ten years 0 0 55 7.89% 921 4.09%
-------- -------- ------- -------
Total Book Value $1,791 $14,056 $ 6,419 $11,302
======== ======== ======= =======
</TABLE>
Note that tax equivalent amounts for tax free investments were calculated using
a 35% tax rate
F-85
<PAGE>
Loans and Credit Risk
The following table reflects information regarding the bank's loan balances
by type, by maturity, rate structure, and past due and non performing loans.
<TABLE>
<CAPTION>
TABLE V.- LOAN PORTFOLIO
($ IN THOUSANDS)
Maturities and Rate Sensitivity
End of Period Balance December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Commercial, Financial and Other $12,402 $12,411 $11,605
Real Estate- Mortgage 27,128 26,515 28,153
Installment Loans 10,108 12,358 10,870
Other 1,497 315 279
-------------------------------------------
Total Loans $51,135 $51,599 $50,907
===========================================
</TABLE>
<TABLE>
<CAPTION>
Balance After One
December 31, One Year or Year to Five After Five
1998 Less Years Years
----------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, Financial and Other $12,402 $ 6,838 $ 4,971 $ 593
Real Estate- Mortgage 27,128 14,926 9,099 3,103
Installment Loans 10,108 6,266 3,673 169
Other 1,497 1,497 0 0
----------------------------------------------------------
Total $51,135 $29,527 $17,743 $ 3,865
==========================================================
Loans Due after one year with:
Floating Rates $ 736
Predetermined Rates 20,872
----------
Total $21,608
==========
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Risk Elements
Loans Contractually Past Due over
90 days and still accruing $ 76 $ 306 $ 221
===========================================
Non Accrual Loans $ 486 $ 78 $ 0
Restructured Loans 0 0 0
-------------------------------------------
Total Non performing Loans $ 486 $ 78 $ 0
===========================================
</TABLE>
As the schedule indicates, loans outstanding remained relatively flat at
the end of 1998 compared to 1997 with loans outstanding of $51,135,000 at year
end 1998 versus $51,599,000 at year end 1997. This slight decrease brought the
level of loans close to the 1996 year end level of $50,907,000. At December 31,
1998, the loan portfolio included several loans to individuals engaged in
poultry farming. These loans approximated $1,432,631 and $2,505,352 at December
F-86
<PAGE>
31, 1998 and 1997 respectively. Over 90% of the loan portfolio will mature in
five years or less making it imperative to continue volume growths for Potomac's
overall continued growth. Eighty-four percent or $20.9 of the loans that mature
after one year are fixed rate loans. Therefore, these loans are not subject to
repricing in the event of overall rate changes. Although Potomac's total past
due and non performing loans have increased over each of the three years
presented, the current levels of both past due and non performing loans are at
acceptable levels to management.
Non performing loans consist of loans on non accrual and loans renegotiated to
earn interest at a reduced rate. Loans on non accrual are those which either (a)
contain elements of principal or interest loss potential in which the principal
or interest is ninety days past due; or (b) are now current but management has
serious doubts as to the borrower's ability to comply with the present loan
repayment terms. Any unpaid interest amounts at risk and previously accrued on
these loans are reversed from income and thereafter interest is recognized only
to the extent payments are received or the loan has otherwise been
rehabilitated. Management considers immaterial the amount of interest included
in 1998 derived from nonaccrual loans. If all of these loans were current,
management would have considered as immaterial the amount of interest that would
have been added to income.
Deposits
Potomac's deposits declined in 1998 by 1.3% to a level of $81,967,846 at
December 31, 1998 versus $83,066,076 At December 31, 1997. In 1997, deposits
were up very slightly (0.14%) over the total deposits at December 31, 1996 of
$82,944,998. Of the deposits outstanding at December 31, 1998, $9,433,801
related to deposits of $100,000 or more. Management considers these deposits to
be more volatile than other deposits and more subject to leaving the bank upon
maturity. A schedule of the maturities periods of these deposits follows:
TABLE VI. TIME DEPOSITS OVER $100,000
($ IN THOUSANDS)
Maturity of Time Deposits $100,000
and over at December 31, 1998:
3 months or less $4,532
over 3 through 6 months 2,241
over 6 through 12 months 1,590
over 12 months 1,071
----------
Total Time deposits $100,000 and over $9,434
==========
Short Term Borrowings
Potomac had no short term borrowings during the periods reported.
F-87
<PAGE>
Summary Of Loan Loss Experience
Management continually monitors charge-off history, current charge-off
trends, economic trends for the geographic area and specific industries and
credit knowledge on specific credits when determining the level of loan loss
reserve it deems adequate to cover anticipated loan losses in the portfolio. A
summary of the reserve activity for 1998, 1997 and 1996 follows:
TABLE VII.- SUMMARY OF LOAN LOSS EXPERIENCE
($ IN THOUSANDS)
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Reserve Activity
Balance at beginning of period $594 $508 $654
Chargeoffs:
Commercial, Financial and Other 179 93 381
Real Estate Mortgage 1 5 0
Installment 80 205 103
Other 1 58 0
---------------------------------
Total Chargeoffs 261 361 484
---------------------------------
Recoveries:
Commercial, Financial and Other 0 25 1
Real Estate Mortgage 0 1 0
Installment 57 20 7
Other 6 1 0
---------------------------------
Total Recoveries 63 47 8
---------------------------------
Net Chargeoffs 198 314 476
---------------------------------
Provision Expense 345 400 330
=================================
Balance at end of period $741 $594 $508
=================================
Ratio of Net Chargeoffs to
Average Loans Outstanding 0.39% 0.61% 0.95%
=================================
</TABLE>
Reserve Allocation
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997 December 31, 1996
-----------------------------------------------------------------------------
Percent of Percent of Percent of
Allowance Total Allowance Total Allowance Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commercial $484 65.31% $402 67.73% $438 86.16%
Real Estate Mortgage 3 0.46% 2 0.36% 0 0.07%
Installment 200 26.92% 174 29.30% 70 13.77%
Other 54 7.31% 16 2.61% 0 0.00%
-----------------------------------------------------------------------------
Total $741 100.00% $594 100.00% $508 100.00%
=============================================================================
</TABLE>
Gross and net loan charge-offs have declined steadily in each of the last
three years, dropping from a high of $476,000 in 1996 to $400,000 in 1997 and
down to $198,000 for 1998. As the schedule indicates, the reserve is allocated
with a majority of the balance to Commercial and Installment loans based upon
management's reviews of potential for losses in the current loans.
F-88
<PAGE>
Non Interest Income
Non interest income reflected an increase for the year ended December 31,
1998 versus 1997 from $49,837 up to $143,457. This increase is somewhat
distorted due because 1997 had securities losses totaling $81,982. Excluding
those losses, non interest income was still ahead of 1997 by 8.8% due primarily
to the gain on sale of other real estate owned. Due to the security losses noted
above, non interest income for 1997 was shown to be down by $68,722 from the
1996 level of $118,559. However, excluding the securities losses in both years,
the non interest income was about equal for 1997 and 1996.
Non Interest Expense
Non interest expense increased in each of the three years. The 1998 non
interest expense totaled $2,162,671 and was up $248,826 over the 1997 level of
$1,913,845. Half of this variance was increased payroll and benefit costs with
the remainder spread throughout the various cost categories. The payroll
increase was due to increased benefit costs as well as staff additions and
promotions. The remainder of the other cost increase related to normal cost
increases as well as the settlement of some long outstanding litigation issues.
In 1997 expenses of $1,913,845 were up significantly from the $1,754,489 of
expenses for 1996. These added costs were in various accounts and were primarily
for added legal, accounting, consulting and systems costs Potomac incurred to
revise it's operational systems, polices and procedures to comply with
regulatory requirements.
Income Taxes
Potomac's income taxes are calculated factoring various items that are
treated differently for tax purposes. Over the last two years, the percentage of
pre tax dollars going to income taxes has remained constant at about 24.5%.
Year 2000
Historically, certain computerized systems have had two digits rather than
four to define the applicable year, which could result in the year 2000 being
recognized by those systems as the year 1900. This could result in failures or
miscalculations and is generally referred to as the year 2000 issue.
The Bank assembled a team to study, test, and remedy year 2000 issues
because the Bank as well as some of it's suppliers, customers and service
providers is heavily dependent on computers in the conduct of business
activities. As a result, a remediation plan was developed. The costs associated
with this issue were not significant and were capitalized or expensed, as
appropriate, during 1998. To complete the execution of the plan, additional
testing with the Bank's data processing systems is scheduled for the first half
of 1999. The anticipated costs of such are not expected to be significant. Based
upon the actions taken to resolve the Bank's Year 2000 issue, management
believes it will be Year 2000 compliant to meet the needs of its
F-89
<PAGE>
customers. However, there may be unforeseen external or internal issues which
could impact the Bank's status.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is Potomac's ability to generate the amount it needs to meet it's
cash requirements. Potomac constantly monitors it's ability to meet it's
anticipated liquidity needs over the next twelve months including in such
analysis the dividend requirements and limitations as well as other operational
funding needs. Included in those current reviews is the anticipated added cash
needed for excess withdrawals at year end 1999 out of year 2000 concerns by
customers. Based upon these reviews as well as current trends, management feels
the availability of funds should more than outweigh the anticipated needs for
liquidity. Should the bank's cash needs exceed it's cash generated, it has the
ability to borrow funds from the federal government and other financial
institutions to get the funds needed very quickly. Details of both the sources
and uses of cash are outlined in the statements of cash flows contained in the
financial statements.
The Bank also monitors the interest rate risk that it has from interest
rate changes. The bank uses analysis of maturity and rate sensitivity to ensure
that the bank does not develop mismatches in repricing of loans and deposits
that are at levels that would be unacceptable to the bank. As shown in table
VIII below, the bank currently has a cumulative negative gap in the one to
three year range of 9.2 million. This means that 9.2 million more deposits are
maturing or repricing during that period than assets. Accordingly, should
overall interest rates rise during that period, the bank's net interest margin
could be negatively affected. Alternatively, should rates fall during that same
period, the bank's net interest margin could be positively affected. In the
three to five year range and in total, the bank's gap position moves to only
slightly negative and in the over 5 years moves to a positive gap, which means
that if rates rise during that period net interest margin could be positively
affected and similarly, if rates should fall, the net interest margin could be
negatively affected. Management feels that such interest rate risks are at
acceptable levels.
F-90
<PAGE>
Table VIII- Asset and Liability Maturity and Rate Sensitivity
December 31, 1998
($ IN THOUSANDS)
<TABLE>
<CAPTION>
Three months 3-12 1 to 3 3 to 5 Over 5
or less Months Years Years Years Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 2,848 $ 3,990 $ 2,207 $ 1,833 $ 1,524 $12,402
Real Estate 7,725 7,201 4,363 2,120 5,718 27,127
Consumer and other 4,585 3,178 3,106 473 263 11,605
-------------------------------------------------------------------
Total Loans 15,158 14,369 9,676 4,426 7,505 51,134
Investments 299 7,627 10,576 3,441 11,625 33,568
Federal Funds sold and other 5,900 5,900
-------------------------------------------------------------------
Total Earning Assets $ 21,357 $ 21,996 $ 20,252 $ 7,867 $19,130 $90,602
===================================================================
Deposits:
Savings $ 29,812 $29,812
CD's 16,900 $ 20,357 $ 5,800 $ 0 $ 0 43,057
-------------------------------------------------------------------
Total Deposits 46,712 20,357 5,800 0 0 72,869
Borrowings 0 0 0 0 0 0
-------------------------------------------------------------------
Total Interest Bearing Liabilities $ 46,712 $ 20,357 $ 5,800 $ 0 $ 0 $72,869
===================================================================
Interest Sensitivity Gap ($25,355) $ 1,639 $ 14,452 $ 7,867 $19,130 $17,733
===================================================================
Cumulative Gap ($25,355) ($23,716) ($9,264) ($1,397) $17,733
========================================================
Cumulative Gap as a percent of
Earing Assets -27.99% -26.18% -10.22% -1.54% 19.57%
========================================================
</TABLE>
The Bank's performance with regards to key ratios was as follows
<TABLE>
<CAPTION>
TABLE IX. RETURNS ON EQUITY AND ASSETS
($ IN THOUSANDS)
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Return on Assets 0.90% 0.82% 1.00%
===========================================
Return on Equity 7.49% 7.34% 9.26%
===========================================
Dividend Payout ratio 31.07% 34.61% 29.31%
===========================================
Equity to Assets Percent 12.07% 11.17% 10.79%
===========================================
</TABLE>
As the chart shows, Potomac's return on assets and return on equity
improved for 1998 versus 1997. Further, Potomac held it's dividend rate
constant with increased earnings so that both the dividend payout ratio dropped
and the equity to assets percent increased. Potomac's equity to assets ratio
remains strong at 12.07 percent at the end of 1998. Further, for regulatory
purposes, the bank has a risk weighted total capital to assets ratio of 26.3%
which qualifies it as a
F-91
<PAGE>
well capitalized bank. The bank had no material outstanding capital expenditure
commitments at December 31, 1998. The bank's expenditures for premises and
equipment totaled $68,701 in 1998, $138,746 in 1997 and $44,130 in 1996. Potomac
is unaware of any trends or uncertainties, nor do any plans exist, which would
materially impair the bank's capital position.
IMPACT OF INFLATION
The Majority of assets and liabilities of a financial institution are
monetary in nature: therefore, an financial institution differs greatly from
most commercial and industrial companies, which have significant investments in
fixed assets or inventories. However, inflation does impact the growth in total
assets and thereby could require the bank to raise added equity to maintain
appropriate equity to assets ratios.
Management believes that the most significant impact of inflation on the
financial results of the company is the company's ability to react to interest
rate changes. As previously discussed, management constantly monitors its
overall rate sensitivity position to make sure that it's sensitivity to rate
swings either up or down are within acceptable levels.
F-92
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
Potomac Valley Bank
Petersburg, West Virginia
The accompanying balance sheet of Potomac Valley Bank as of June 30, 1999 and
the related statements of income, comprehensive income, shareholders equity, and
cash flows for the periods ended June 30, 1999 and 1998 were not audited by us
and, accordingly, we do not express an opinion on them.
The financial statements for the year ended December 31, 1998 were audited by us
and we expressed an unqualified opinion on them in our report dated January 8,
1999, but we have not performed any auditing procedures since that date.
/s/ ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
August 24, 1999
F-93
<PAGE>
POTOMAC VALLEY BANK
BALANCE SHEETS
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
ASSETS (Unaudited) Audited*
----------- ------------
<S> <C> <C>
Cash and due from banks $ 2,324 $ 1,824
Federal funds sold 900 5,900
Securities available for sale 31,992 32,030
Securities held to maturity (estimated fair
value 1999 $1,310; 1998 $1,556) Note 3 1,297 1,539
Loans, less allowance for loan losses of $732
and $741, respectively (Notes 4 and 5) 51,673 50,393
Bank premises and equipment, net 1,699 1,607
Accrued interest receivable 739 695
Other assets 94 309
----------- -----------
Total assets $ 90,718 $ 94,297
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest bearing $ 8,087 $ 9,098
Interest bearing 70,577 72,870
----------- -----------
Total deposits 78,664 81,968
Accrued interest and other liabilities 117 516
----------- -----------
Total liabilities 78,781 82,484
----------- -----------
Commitments and Contingencies
Shareholders' Equity
Common stock, $10 par value, authorized
and issued 90,000 shares 900 900
Capital surplus 1,500 1,500
Retained earnings 9,686 9,256
Accumulated other comprehensive income (149) 157
----------- -----------
Total shareholders' equity 11,937 11,813
----------- -----------
Total liabilities and shareholders' equity $ 90,718 $ 94,297
=========== ===========
</TABLE>
* From audited financial statements
The accompanying notes are an integral part of these financial statements
F-94
<PAGE>
POTOMAC VALLEY BANK
UNAUDITED STATEMENTS OF INCOME
(In thousands of dollars except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans:
Taxable $ 1,061 $ 1,098 $ 2,117 $ 2,211
Tax-exempt 29 - 58 -
Interest and dividends on securities:
Taxable 415 402 840 821
Tax-exempt 53 58 109 116
Interest on Federal funds sold 34 121 78 234
----------- ----------- ----------- -----------
Total interest income 1,592 1,679 3,202 3,382
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits 663 830 1,354 1,678
Interest on Federal funds purchased - - - -
----------- ----------- ----------- -----------
Total interest expense 663 830 1,354 1,678
----------- ----------- ----------- -----------
Net interest income 929 849 1,848 1,704
Provision for loan losses (20) 87 - 110
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 949 762 1,848 1,594
----------- ----------- ----------- -----------
Other income:
Service fees 45 24 88 43
Insurance commissions 9 10 12 12
Securities gains (losses) - - - -
Other 12 12 20 13
----------- ----------- ----------- -----------
Total other income 66 46 120 68
----------- ----------- ----------- -----------
Other expenses:
Salaries and employee benefits 321 297 642 588
Net occupancy expense 42 36 70 61
Equipment rentals, depreciation
and maintenance 47 40 91 79
Other 158 123 313 287
----------- ----------- ----------- -----------
Total other expenses 568 496 1,116 1,015
----------- ----------- ----------- -----------
Income before income tax expense 447 312 852 647
Income tax expense 159 136 287 241
----------- ----------- ----------- -----------
Net income $ 288 $ 176 $ 565 $ 406
=========== =========== =========== ===========
Basic earnings per common share $ 3.20 $ 1.96 $ 6.28 $ 4.51
=========== =========== =========== ===========
Average common shares outstanding 90,000 90,000 90,000 90,000
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-95
<PAGE>
POTOMAC VALLEY BANK
UNAUDITED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income $ 288 $ 176 $ 566 $ 406
----------- ----------- ----------- -----------
Other comprehensive income, net of tax:
Unrealized gains on investment securities:
Gain (loss) arising during the period (187) (51) (306) (40)
Reclassification adjustments (adjustments
for periods ended June 30, 1999
and 1998 are not presented) - - - -
----------- ----------- ----------- -----------
Other comprehensive income (187) (51) (306) (40)
----------- ----------- ----------- -----------
Comprehensive income $ 101 $ 125 $ 260 $ 366
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-96
<PAGE>
POTOMAC VALLEY BANK
UNAUDITED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 and 1998 (Unaudited)
----------------------------------------------------------------
Accumulated Total
Other Share-
Common Capital Retained Comprehensive holders'
Stock Surplus Earnings Income Equity
-------- --------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ 900 $ 1,500 $ 8,657 $ 72 $ 11,129
Net income - - 406 - 406
Cash dividends declared
on common stock
($1.00 per share) - - (90) - (90)
Change in net unrealized
gain (loss) on
securities - - - 110 110
-------- --------- ---------- ----------- ----------
Balance, June 30, 1998 $ 900 $ 1,500 $ 8,973 $ 182 $ 11,555
======== ========= ========== =========== ==========
Balance, January 1, 1999 $ 900 $ 1,500 $ 9,256 $ 157 $ 11,813
Net income - - 565 - 565
Cash dividends declared
on common stock
($1.50 per share) - - (135) - (135)
Change in net unrealized
gain (loss)
on securities - - - (306) (306)
-------- --------- ---------- ----------- ----------
Balance, June 30, 1999 $ 900 $ 1,500 $ 9,686 $ (149) $ 11,937
======== ========= ========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-97
<PAGE>
POTOMAC VALLEY BANK
UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Unaudited
-----------------------
Six Months Ended
June 30,
1999 1998
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 565 $ 406
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 79 71
Provision for loan losses - 110
Provision for deferred income tax expense
(benefits) - -
Gain on sale of other real estate owned - -
Securities (gains) losses - -
(Accretion) amortization of securities
premiums and discounts, net - 56
(Increase) decrease in accrued interest receivable 103 (58)
(Increase) decrease in other assets (43) 32
Increase (decrease) in current taxes 39 212
Increase (decrease) in accrued interest and
other liabilities (28) 46
---------- ---------
Net cash provided by operating activities 715 875
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and calls of securities
held to maturity 100 3,285
Principal payments received on securities held
to maturity 137 64
Purchases of securities held to maturity - -
Proceeds from maturities and calls of securities
available for sale 1,865 1,250
Principal payments received on securities
available for sale 1,061 1,698
Purchases of securities available for sale (3,488) (7,683)
Principal collected on (loans made to) customers, net (1,280) 1,298
Purchases of bank premises and equipment (171) (29)
(Increase) decrease in Federal funds sold 5,000 (1,100)
Proceeds from sale of other real estate owned - 12
---------- ---------
Net cash (used in) investing activities 3,224 (1,205)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in non interest bearing
demand deposits (1,012) 1,249
Increase (decrease) in NOW and savings accounts (1,440) 1,711
Proceeds from sales of (payments for matured)
time deposits, net (852) (1,913)
Increase (decrease) in Federal funds purchased - -
Dividends paid (135) (90)
---------- ---------
Net cash provided by (used in) financing
activities (3,439) 957
---------- ---------
</TABLE>
Continued
F-98
<PAGE>
UNAUDITED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
Unaudited
---------------------
Six Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
Increase (decrease) in cash and due from banks 500 627
Cash and due from banks:
Beginning 1,824 1,999
-------- --------
Ending $ 2,324 $ 2,626
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest on deposits $ 1,354 $ 1,678
======== ========
Interest on Federal funds purchased $ - $ -
======== ========
Income taxes $ 193 $ -
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ - $ -
======== ========
Purchases of securities available for sale
pending settlement $ - $ -
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-99
<PAGE>
POTOMAC VALLEY BANK
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
The accounting and reporting policies of Potomac Valley Bank "the
Bank" conform to generally accepted accounting principles and to
general policies within the financial services industry. The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
these estimates.
The information contained in the financial statements is unaudited
except where indicated. In the opinion of management, all adjustments
for a fair presentation of the results of the interim periods have
been made. All such adjustments were of a normal, recurring nature.
The results of operations for the six months ended June 30, 1999 are
not necessarily indicative of the results to be expected for the full
year. The financial statements and notes included herein should be
read in conjunction with those included in Potomac Valley Bank's
Audited Annual Report.
The Bank was required to adopt Statement of Financial Accounting
Standards No. 130, (SFAS No. 130) Reporting of Comprehensive Income
for fiscal year 1998. 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.
Note 2. Earnings Per Share
Earnings per share is based on the weighted average number of shares
outstanding during the period. The weighted average number of shares
were 90,000 for all periods presented.
Note 3. Securities
The amortized cost, unrealized gains, unrealized losses and estimated
fair values of securities at June 30, 1999 and December 31, 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------------
Carrying
Carrying Value
Value (Estimated
Amortized Unrealized Fair
-------------------
Cost Gains Losses Value)
--------- -------- ------- ----------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 2,290 $ 11 $ 23 $ 2,278
U.S. government agencies and
corporations 14,843 7 140 14,710
Mortgage backed securities -
U.S. government agencies
and corporations 8,918 13 94 8,837
Other 234 - - 234
Obligations of state and political
subdivisions - taxable 1,398 6 - 1,404
Federal Reserve Bank stock 72 - - 72
Federal Home Loan Bank stock 360 - - 360
--------- -------- ------- ----------
Total taxable 28,115 37 257 27,895
--------- -------- ------- ----------
</TABLE>
F-100
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Fair
------------------
Cost Gains Losses Value)
--------- ------- ------- ----------
<S> <C> <C> <C> <C>
State and political subdivisions 4,116 7 26 4,097
--------- ------- ------- ----------
Total tax exempt 4,116 7 26 4,097
--------- ------- ------- ----------
Total $ 32,231 $ 44 $ 283 $ 31,992
========= ======= ======= ==========
Held to maturity:
U.S. agencies and corporations $ 250 $ 1 $ - $ 251
Tax-exempt state and political
subdivisions 560 11 - 571
Mortgage backed securities -
U.S. government agencies
and corporations 487 1 - 488
--------- ------- ------- ----------
Total securities held
to maturity $ 1,297 $ 13 $ - $ 1,310
========= ======= ======= ==========
<CAPTION>
December 31, 1998
-----------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Fair
-----------------
Cost Gains Losses Value)
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 1,772 $ 20 $ - $ 1,792
U.S. government agencies and
corporations 13,689 117 - 13,806
Mortgage backed securities -
U.S. government agencies
and corporations 9,987 131 150 9,968
Other 256 - - 256
Taxable state and political
subdivisions 1,400 44 - 1,444
Taxable Federal Reserve Bank
stock 70 - - 70
Federal Home Loan Bank stock 359 - - 359
--------- ------- ------- -------
Total taxable 27,533 312 150 27,695
--------- ------- ------- -------
</TABLE>
F-101
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Carrying
Value
(Estimated
Amortized Unrealized Fair
------------------
Cost Gains Losses Value)
--------- ------- ------ ----------
<S> <C> <C> <C> <C>
State and political subdivisions 4,237 96 - 4,333
Tax-exempt Federal Reserve
Bank stock 2 - - 2
--------- ------- ------ ----------
Total tax-exempt 4,239 96 - 4,335
--------- ------- ------ ----------
Total $ 31,772 $ 408 $ 150 $ 32,030
========= ======= ====== ==========
<CAPTION>
December 31, 1998
-------------------------------------------
Carrying
Carrying Value
Value (Estimated
(Amortized Unrealized Fair
------------------
Cost) Gains Losses Value)
---------- ------- ------ ----------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. government agencies and
corporations $ 250 $ 3 $ - $ 253
Mortgage backed securities -
U.S. government agencies
and corporations 646 - 4 642
---------- ------- ------ ----------
Total taxable 896 3 4 895
---------- ------- ------ ----------
State and political subdivisions 643 18 - 661
---------- ------- ------ ----------
Total tax-exempt 643 18 - 661
---------- ------- ------ ----------
Total $ 1,539 $ 21 $ 4 $ 1,556
========== ======= ====== ==========
</TABLE>
The maturities, amortized cost and estimated fair values of the Bank's
securities at June 30, 1999 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
---------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
------------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Due within 1 year $ 895 $ 899 $ 5,955 $ 5,620
Due after 1 but within 5 years 402 411 17,224 17,382
Due after 5 but within 10 years - - 5,923 5,890
Due after 10 years - - 2,698 2,669
Equity securities - - 431 431
------------- ---------- ------------- ------------
$ 1,297 $ 1,310 $ 32,231 $ 31,992
============= ========== ============= ============
</TABLE>
F-102
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Mortgage backed and other securities not due at a single maturity date
have been allocated in the above maturity categories based on their
anticipated average lives to maturity. The Bank's equity securities
are required to be held for membership in the Federal Reserve and
Federal Home Loan Bank.
The proceeds from sales, calls and maturities of securities, including
principal payments received on mortgage backed securities, and the
related gross gains and losses realized for the six month periods
ended June 30, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Proceeds From Gross Realized
------------------------------ -----------------
Calls and Principal
For the Periods Ended Sales Maturities Payments Gains Losses
--------------------- ------- ---------- --------- ------- --------
<S> <C> <C> <C> <C> <C>
June 30,
1999
Securities held
to maturity $ - $ 100 $ 137 $ - $ -
------- ---------- --------- ------- --------
Securities available
for sale - 1,865 1,061 - -
------- ---------- --------- ------- --------
$ - $ 1,965 $ 1,198 $ - $ -
======= ========== ========= ======= ========
December 31,
1998
Securities held
to maturity $ - $ 6,035 $ 135 $ - $ -
------- ---------- --------- ------- --------
Securities
available for sale - 2,725 2,634 - -
------- ---------- --------- ------- --------
$ - $ 8,760 $ 2,769 $ - $ -
======= ========== ========= ======= ========
June 30,
1998
Securities held
to maturity $ - $ 3,285 $ 64 $ - $ -
------- ---------- --------- ------- --------
Securities
available for sale $ - $ 1,250 $ 1,698 $ - $ -
------- ---------- --------- ------- --------
$ - $ 4,535 $ 1,762 $ - $ -
======= ========== ========= ======= ========
</TABLE>
At June 30, 1999 and December 31, 1998 securities carried at (in
thousands) $5,429 and $5,614, respectively, with estimated fair values
of $5,245 and $5,700 respectively, were pledged to secure public
deposits, securities sold under agreements to repurchase, and for
other purposes required or permitted by law.
Included in obligations of state and political subdivisions at June
30, 1999 and December 31, 1998, were certain obligations of the State
of West Virginia with total amortized costs (in thousands) of $1,846
and $2,051, respectively, and estimated fair values of $1,866 and
$2,114 respectively. There are no significant concentrations to any
one political subdivision or agency within the state.
F-103
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 4. Loans
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998*
--------- ------------
<S> <C> <C>
Commercial, financial and agricultural $ 13,672 $ 12,402
Real estate - mortgage 26,890 27,127
Installment loans 10,160 10,108
Other 1,683 1,497
--------- ------------
Total loans 52,405 51,134
Less allowance for loan losses 732 741
--------- ------------
Loans, net $ 51,673 $ 50,393
========= ============
</TABLE>
<TABLE>
<CAPTION>
Balance After One
June 30, One Year Year to After Five
1999 or Less Five Years Years
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial, financial, and
Agricultural $13,672 $ 5,927 $ 4,523 $ 3,222
Real estate-mortgage 26,890 13,912 6,198 6,780
Installments 10,160 5,967 3,593 600
Other 1,683 1,683 - -
------- ------- ---------- -----------
Total $52,405 $27,489 $ 14,314 $ 10,602
======= ======= ========== ===========
Loans Due after one year with:
Floating Rates $ 459
Predetermined Rates 24,457
----------
Total $ 24,916
==========
</TABLE>
<TABLE>
<CAPTION>
June 30, June 30, December 31,
1999 1998 1998
-------- --------- ------------
<S> <C> <C> <C>
Risk Elements
Loans Contractually Past Due over
90 days and still accruing $ 3 $ 17 $ 76
======= ========== ===========
Non Accrual Loans $ 526 $ 468 $ 486
Restructured Loans 0 0 0
------- ---------- -----------
Total Non Performing Loans $ 526 $ 468 $ 486
======= ========== ===========
</TABLE>
* From Audited Financial Statements
F-104
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note 5. Allowance for Loan Losses
Analyses of the allowance for loan losses are presented below (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998 1998 *
---------- ---------- ------------
<S> <C> <C> <C>
Balance at beginning of
period $ 741 $ 594 $ 594
Loans charged off:
Commercial and industrial 0 3 179
Real estate - mortgage 0 1 1
Installment 18 78 80
Other 7 0 1
---------- ---------- ------------
Total charged off 25 82 261
---------- ---------- ------------
Recoveries:
Commercial and industrial 0 1 0
Real estate - mortgage 0 0 0
Installment 16 39 57
Other 0 3 6
---------- ---------- ------------
Total recoveries 16 43 63
---------- ---------- ------------
Net (recoveries) losses 9 39 198
Provision for loan losses 0 110 345
---------- ---------- ------------
Balance at end of period $ 732 $ 665 $ 741
========== ========== ============
</TABLE>
*From audited financial statements.
Note 6. Commitments and Contingencies
Litigation: Due to the nature of business of the Bank, which involves
----------
extensions of credit and collection of loans and the enforcement of
liens, security interests and mortgages, the Bank is plaintiff or
defendant in various legal proceedings from time to time. Management
does not anticipate the outcome of such claims or actions to have a
material effect on the Bank's financial position.
Regulatory Agreement: In May of 1997, the Board of Directors of the
--------------------
Bank entered into an agreement with the Federal Reserve Bank of
Richmond and the West Virginia Department of Banking which requires
the Bank to commit to specified corrective actions concerning the
Bank's operations and management of the investment securities and loan
portfolios. On March 4, 1999, the bank received notice that based upon
substantial compliance with the terms, the memorandum of understanding
was terminated.
F-105
<PAGE>
NOTES TO UNAUDITED FINANCIAL STATEMENTS
"Year 2000 Compliant": A team was assembled to study, test and remedy
---------------------
Year 2000 issues ("Issue") because the Bank, as well as some of its
suppliers, customers and service providers is heavily dependent on
computers in the conduct of business activities. As a result, a
remediation plan was developed. The costs associated with this issue
were not significant and were capitalized or expensed, as appropriate,
during 1998 and 1999. Substantially all testing and remediation actions
were completed during the first half of 1999. Based on the actions taken
to resolve the Bank's Year 2000 issue, management believes it will be
Year 2000 compliant to meet the needs of its customers, however there
may be unforeseen external or internal issues which could impact the
Bank's status.
Note 7. Subsequent Event
On July 16, 1999 the Bank signed a merger agreement to affiliate with
South Branch Valley Bancorp, Inc. (South Branch). Under the terms of the
agreement, Potomac and South Branch propose a merger whereby the
shareholders of Potomac would exchange all of their outstanding shares
of common stock for shares of South Branch which shall change its name
to Summit Financial Group, Inc. The agreement calls for a book to book
exchange based upon respective book values at the closing date. The
transaction is subject to approval by appropriate regulatory authorities
as well as the shareholders of Potomac and South Branch. It is expected
that the transaction will be accounted for using the Pooling of
Interests Method of Accounting. At March 31, 1999 South Branch had
assets, loans, deposits and shareholder's equity of $271,866, $171,635,
$209,628, and $23,631 respectively.
F-106
<PAGE>
Potomac Valley Bank
Management's Discussion and Analysis of Financial Condition
and Results of Operations
June 30, 1999
The following discusses changes in financial condition and the results of
operations of Potomac for the periods indicated. You should read this in
conjunction with Potomac's 1998 audited annual report. The discussion includes
forward looking statements based upon management's expectations. Actual results
may differ from those expectations.
RESULTS OF OPERATIONS
- ----------------------
Net income for the second quarter of 1999 was $288,000. This represents an
increase of $112,000 or 63.6% over the second quarter of 1998 of $176,000. On a
year to date basis, net income for the first six months of 1999 totaled $565,000
versus $406,000 for the same period in 1998 for an increase of 39.2%. Earnings
per share for the six month period totaled $6.28 versus $4.51 for the prior
year. We discuss the primary reasons for of the increases below.
NET INTEREST INCOME
Net interest income is the primary component of Potomac's earnings. It is
the difference between interest and fee income related to earning assets (such
as loans and investments) and interest expense incurred relating to interest
bearing liabilities (such as deposits and interest bearing borrowing). Changes
in volumes and mix of interest earning assets and interest bearing liabilities,
as well as interest rate changes, impact net interest margin. The following two
tables reflect the major components of net interest margin. The first schedule
(numbered Schedule II) details the average balances, interest earned or paid and
the average yields on those balances for the six months ended June 30, 1999 and
June 30, 1998. The second schedule (numbered Schedule III) reflects the changes
in net interest margin between the two years by major components and also shows
the portion relating to volume changes in assets and liabilities as well as the
portions relating to rate changes.
The schedules show interest income on tax exempt assets on a tax equivalent
basis using a 35% tax rate. Potomac recognizes interest on non accrual loans
only to the extent it receives payments or the loan has otherwise been
rehabilitated. Interest on these loans if included in the schedules would be
immaterial. As the schedules reflect, net interest income for the first six
months of 1999 on a tax equivalent basis totaled $1,907,000 and a yield of 4.29%
compared to a net interest income for the first six months of 1998 of $1,767,000
with a yield of 3.83%. As the schedules indicate, lower rates paid on deposits
in 1999 (3.77% versus 4.38% or a 61 basis point drop) more than offset drops in
yields of earning assets of 14 basis points (7.33% versus 7.47%).
F-107
<PAGE>
TABLE II.- YIELD ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
-------------------------------- ---------------------------------
Average Yield/ Average Yield/
Balance Interest rate Balance Interest rate
-------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans:
Commercial, financial and Agriculture $12,648 $ 506 8.00% $ 8,854 $ 358 8.09%
Real Estate Mortgage 27,258 1,114 8.17% 32,119 1,338 8.33%
Installment 10,064 491 9.76% 8,709 449 10.31%
Other 1,594 64 8.03% 1,503 66 8.78%
-------------------------------- ---------------------------------
Total Loans 51,564 2,175 8.44% 51,183 2,211 8.64%
Investments:
Taxable 29,339 840 5.73% 27,538 821 5.96%
Tax Exempt 4,872 168 6.90% 5,159 179 6.94%
-------------------------------- ---------------------------------
Total Investments 34,211 1,008 5.89% 32,697 1,000 6.11%
Federal Funds Sold 3,141 78 4.95% 8,298 234 5.64%
-------------------------------- ---------------------------------
Total Earning Assets 88,916 3,261 7.33% 92,178 3,445 7.47%
Cash and Due From Banks 1,904 2,136
Premises and Equipment 1,656 1,677
Allowance for Loan Losses (756) (634)
Other Assets 1,212 1,111
------------ ------------
Total Assets $92,932 $96,467
------------ ------------
Liabilities and Shareholders Equity
Interest Bearing Deposits:
Demand $16,412 $ 188 2.29% $15,309 $ 203 2.65%
Savings 12,747 159 2.49% 16,219 300 3.70%
Time 42,745 1,007 4.71% 45,008 1,175 5.22%
-------------------------------- ---------------------------------
Total Interest bearing Deposits 71,904 1,354 3.77% 76,536 1,678 4.38%
Borrowings 0 0 0.00% 0 0 0.00%
-------------------------------- ---------------------------------
Total Interest Bearing Liabilities 71,904 1,354 3.77% 76,536 1,678 4.38%
Non- Interest Bearing Deposits 8,402 7,864
Other Liabilities 631 651
Equity 11,995 11,416
------------ ------------
Total Liabilities and Equity $92,932 $96,467
============ ============
Net Interest Margin $88,916 $1,907 4.29% $92,178 $1,767 3.83%
================================ =================================
</TABLE>
F-108
<PAGE>
TABLE III.- RATE VOLUME ANALYSIS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
1999 versus 1998
99 vs 98 Interest Change due to
---------------------------------------
Rate Volume Analysis 1999 1998 Change Rate Volume Rate/Vol Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 506 $ 358 $ 148 ($4) $ 153 ($2) $ 148
Real Estate Mortgage 1,114 1,338 (224) (25) (202) 4 (224)
Installment 491 449 42 (24) 70 (4) 42
Other 64 66 (2) (6) 4 (1) (2)
------------------------------------------------------------------------------------
Total Loans 2,175 2,211 (36) (59) 25 (2) (36)
Investments:
Taxable 840 821 19 (32) 54 (2) 19
Tax Exempt 168 179 (11) (1) (10) 0 (11)
------------------------------------------------------------------------------------
Total Investments 1,008 1,000 8 (33) 44 (2) 8
Federal Funds Sold 78 234 (156) (29) (145) 18 (156)
------------------------------------------------------------------------------------
Total Earning Assets 3,261 3,445 (184) (121) (77) 14 (184)
Interest Bearing Deposits:
Demand 188 203 (15) (28) 15 (2) (15)
Savings 159 300 (141) (98) (64) 21 (141)
Time 1,007 1,175 (168) (114) (59) 6 (168)
------------------------------------------------------------------------------------
Total Interest bearing Deposits 1,354 1,678 (324) (240) (109) 25 (324)
Borrowings 0 0 0 0 0 0 0
------------------------------------------------------------------------------------
Total Interest Bearing Liabilities 1,354 1,678 (324) (240) (109) 25 (324)
Net Interest Income $ 1,907 $ 1,767 $ 140 $ 119 $ 32 ($11) $ 140
====================================================================================
</TABLE>
Investments
The Bank's investment portfolio average outstandings rose to a total of
$34,211,000 for the first six months of 1999 compared to an average of
$32,697,000 for the first six months of 1998 and an annual average for 1998 of
$33,465,000. However, the yields during the first six months of 1999 dropped
from 6.11% to 5.89% which left the overall interest income on investments about
the same for the year to year comparisons for both the second quarter and the
first six months of the year. The yield drops were primarily the result of
maturities of investments being reinvested in lower yielding instruments.
Loans
Loan balances at June 30, 1999 were 2% over the year end balance at
December 31, 1998. In terms of a year to year comparison, average balances were
slightly ahead of last year for the first six months of 1999. However,
maturities and repricings have resulted in lower yields for both the second
quarter and the first six months of 1999. Accordingly, total interest and fees
on loans for the second quarter of 1999 totaled $1,090,000 down from 1998 second
quarter interest of $1,098,000. The six months total for 1999 was $2,175,000
versus $2,211,000 for the first six months of 1998.
Deposits
As previously noted, lower interest expense was the primary driver in
increasing net interest income. Interest expense for the second quarter of 1999
was $663,000 versus $830,000 for the second quarter of 1998. For the six month
period interest expense was $1,354,000 for 1999 versus $1,678,000 for 1998. As
outlined in the preceding schedules, this was the result of
F-109
<PAGE>
lower average balances outstandings, particularly time deposits, and lower rates
paid as a result of both deposit mix changes and repricing.
LOAN LOSS RESERVE
Changes in the provision for loan loss expense primarily caused improvement
in net income for both the second quarter and the first six months of 1999. The
allowance for loan losses is maintained to absorb probable losses associated
with lending activities. The provision in the second quarter was a negative
$20,000 versus $87,000 for the second quarter of 1998. The provision for the
first six months of 1999 was zero versus $110,000 for the first six months of
1998. The schedule below outlines the activity in the loan loss reserve
account.
<TABLE>
<CAPTION>
TABLE VII.- SUMMARY OF LOAN LOSS EXPERIENCE
($ IN THOUSANDS)
For the six For the six For the year
months ended months ended ended
June 30, June 30, December 31,
1999 1998 1998
-------------------------------- -------------
<S> <C> <C> <C>
Reserve Activity
Balance at beginning of period $ 741 $ 594 $ 594
-------------------------------- -------------
Chargeoffs:
Commercial, Financial and Other 0 3 179
Real Estate Mortgage 0 1 1
Installment 18 78 80
Other 7 0 1
-------------------------------- -------------
Total Chargeoffs 25 82 261
-------------------------------- -------------
Recoveries:
Commercial , Financial and Other 0 1 0
Real Estate Mortgage 0 0 0
Installment 16 39 57
Other 0 3 6
-------------------------------- -------------
Total Recoveries 16 43 63
-------------------------------- -------------
Net Chargeoffs 9 39 198
Provision Expense 0 110 345
-------------------------------- -------------
Balance at end of period $ 732 $ 665 $ 741
================================ =============
Ratio of Net Chargeoffs to
Average Loans Outstanding 0.03% 0.15% 0.39%
================================ =============
Reserve Allocation
June 30, 1999 June 30, 1998 December 31, 1998
------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Allowance Total Allowance Total Allowance Total
------------------------------------------------------------------------------------------
Commercial $ 489 66.8% $399 60.0% $ 484 65.3%
Real Estate Mortgage 3 0.4% 5 0.8% 3 0.5%
Installment 184 25.1% 199 29.9% 200 26.9%
Other 56 7.7% 62 9.3% 54 7.3%
------------------------------------------------------------------------------------------
Total $ 732 100.0% $665 100.0% $ 741 100.0%
==========================================================================================
</TABLE>
F-110
<PAGE>
As the schedule indicates, the reserve declined from year end 1998 levels
although it is still ahead of the June 30, 1998 level. Management quarterly
reviews the adequacy of loan loss reserve given past due levels, current trends,
historical experience, etc. Based upon those reviews, management feels the
reserve is adequate at June 30, 1998. The schedule also indicates a breakdown of
the allowance among the various loan categories, with commercial loans having
the largest portion of the reserve followed by installment loans. Based upon
management's analysis, these are the areas which are felt to have the largest
loan loss exposure.
NON INTEREST INCOME
Non interest income for the second quarter of 1999 was $66,000 which was up
from the second quarter of 1998 which totaled $46,000. For the first six months
of 1999, non interest income totaled $120,000 up dramatically from the $68,000
for the first six months of 1998. These increases were both driven by increased
service fees which reflected an increase of $21,000 for the second quarter of
1999 over 1998 and an increase of $45,000 for the first six months of 1999
versus 1998. This increase in service fees is a result of added fees charged to
customers for various services relating to their deposit and loan accounts.
NON INTEREST EXPENSE
Non interest expense reflected increases for both the second quarter and
the first six months of 1999 versus 1998. The total non interest expense for the
second quarter of 1999 was $568,000 up 14.5% from the 1998 second quarter total
of $496,000. The first six months of 1999 reflected total non interest expense
of $1,116,000 versus $1,015,000 or an increase of 9.9%. Since a portion of the
second quarter increase would have related to timing, the focus of this
discussion is on the first six months. Of the six months increase, approximately
$26,000 relates to increased employee health insurance costs. The remaining
increase of 7.8% is the result of normal increases to various products and
services as well as some added costs relating to systems and operational changes
completed earlier this year.
INCOME TAXES
The Bank's income taxes are calculated factoring in various items that are
treated differently for tax purposes. The effective tax rate for the first six
months of 1999 was 33.6% of income before taxes while the 1998 six months
totaled 37.2%.
YEAR 2000
- ---------
Historically, certain computerized systems have had two digits rather than
four to define the applicable year, which could result in the year 2000 being
recognized by those systems as the year 1900. This could result in failures or
miscalculations and is generally referred to as the year 2000 issue.
F-111
<PAGE>
In 1998, the Bank assembled a team to study, test and remedy year 2000
issues because the bank as well as some of it's suppliers, customers and service
providers are heavily dependent upon computers in the conduct of business
activities. As a result a remediation plan was developed. The costs associated
with this issue have not been significant to the bank and have been capitalized
or expensed as appropriate. Anticipated remaining costs to be incurred with
regards to this issue should not be material. As of June 30, 1999 most of the
remediation tests and procedures have been completed. Based upon those tests and
procedures, the bank feels that any risks from the year 2000 issue should be
minimized and the bank should be able to meet the needs of it's customers in the
year 2000. However, there may be unforeseen external or internal issues which
could impact the Banks status.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is defined as Potomac's ability to generate the amount it needs
to meet it's cash requirements. Potomac constantly monitors it's ability to meet
it's anticipated liquidity needs over the next twelve months. This analysis
includes the dividend requirements and limitations as well as other operational
funding needs. Currently, Potomac has reviewed the anticipated cash needs that
may be created from customer's withdrawing funds at the end of 1999 out of fear
of the Year 2000 issue. Based upon these reviews as well as current trends,
management feels the availability of funds should more than outweigh the
anticipated needs for liquidity. Should the bank's cash needs exceed it's cash
generated, it has the ability to borrow funds from the federal government and
other financial institutions to get the funds needed very quickly. Details of
both the sources and uses of cash are outlined in the statements of cash flows
contained in the financial statements.
The bank also monitors the interest rate risk that it has from interest
rate changes. The bank uses analysis of maturity and rate sensitivity to ensure
that the bank does not develop mismatches in repricing of loans and deposits
that are at levels that would be unacceptable to the bank. As shown in the table
below, the bank currently has a cumulative negative gap in the one to three year
range of $8.1 million. This means that $8.1 million more deposits are maturing
or repricing during that period than are assets. Accordingly, should overall
interest rates rise during that period, the bank's net interest margin could be
negatively affected. Alternatively, should rates fall during that same period,
the bank's net interest margin could be positively affected. In the three to
five year range and in total, the bank's gap position moves to slightly positive
and in the over 5 years remains with a positive gap, which means that if rates
rise during that period net interest margin could be positively affected and
similarly, if rates should fall, the net interest margin could be negatively
affected. Management feels that these risks are within acceptable levels.
F-112
<PAGE>
<TABLE>
<CAPTION>
Table VIII- Asset and Liability Maturity and Rate Sensitivity
June 30, 1999
($ IN THOUSANDS)
Three months 3-12 1 to 3 3 to 5 Over 5
or less Months Years Years Years Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans:
Commercial $ 2,788 $ 3,139 $ 2,701 $1,822 $ 3,222 $13,672
Real Estate 7,623 6,289 4,186 2,012 6,780 26,890
Consumer and other 4,470 3,180 3,089 504 600 11,843
------------------------------------------------------------------------------------
Total Loans 14,881 12,608 9,976 4,338 10,602 52,405
Investments 8,038 5,629 9,730 4,598 5,294 33,289
Federal Funds sold and other 900 900
------------------------------------------------------------------------------------
Total Earning Assets $ 23,819 $ 18,237 $ 19,706 $8,936 $15,896 $86,594
====================================================================================
Deposits:
Savings $ 28,372 $ 0 $ 0 $ 0 $ 0 $28,372
CD's 6,480 27,578 7,472 198 477 42,205
------------------------------------------------------------------------------------
Total Deposits 34,852 27,578 7,472 198 477 70,577
Borrowings 0 0 0 0 0 0
------------------------------------------------------------------------------------
Total Interest Bearing Liabilities $ 34,852 $ 27,578 $ 7,472 $ 198 $ 477 $70,577
====================================================================================
Interest Sensitivity Gap ($11,033) ($9,341) $ 12,234 $8,738 $15,419 $16,017
====================================================================================
Cumulative Gap ($11,033) ($20,374) ($8,140) $ 598 $16,017
========================================================================
Cumulative Gap as a percent of
Earning Assets -12.74% -23.53% -9.40% 0.69% 18.50%
========================================================================
</TABLE>
The bank's equity continued to grow with equity totaling $11,937,000 at
June 30, 1999 compared to $11,555,000 at June 30, 1998 and $11,813,000 at
December 31, 1998. There were no material capital expenditure commitments
outstanding at June 30, 1999. Also, management knows of no trends or
uncertainties, nor do any plans exist which may materially impair the bank's
capital position.
IMPACT OF INFLATION
- -------------------
The majority of assets and liabilities of a financial institution are
monetary in nature; therefore, a financial institution differs greatly from most
commercial and industrial companies, which have significant investments in fixed
assets or inventories. However, inflation does impact the growth in total assets
and thereby could require the bank to raise added equity to maintain appropriate
equity to assets ratios.
Management believes that the most significant impact of inflation on the
financial results of the company is the company's ability to react to interest
rate changes. As previously discussed, management constantly monitors its
overall rate sensitivity position to make sure that it's sensitivity to rate
swings either up or down are within acceptable levels.
F-113
<PAGE>
ANNEX I
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
dated as of July 16, 1999
by and between
SOUTH BRANCH VALLEY BANCORP, INC.
and
POTOMAC VALLEY BANK
A-2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AGREEMENT AND PLAN OF MERGER...................................... A-6
ARTICLE I
Certain Definitions............................................... A-6
1.01 Certain Definitions.................................... A-6
ARTICLE II
The Merger........................................................ A-10
2.01 The Merger............................................. A-10
2.02 Effective Date and Effective Time...................... A-11
2.03 Closing................................................ A-11
ARTICLE III
Consideration; Exchange Procedures................................ A-11
3.01 Merger Consideration................................... A-11
3.02 Rights as Stockholders; Stock Transfers................ A-12
3.03 Fractional Shares...................................... A-12
3.04 Exchange Procedures.................................... A-12
3.05 Provisions Relating to Stock Splits, Stock Dividends,
Etc................................................ A-13
3.06 Provisions Relating to the Granting of Additional
Options............................................ A-13
ARTICLE IV
Actions Pending Merger............................................ A-13
4.01 Forebearances of Potomac............................... A-13
4.02 Forebearances of South Branch.......................... A-15
ARTICLE V
Representations and Warranties.................................... A-17
5.01 Disclosure Schedules................................... A-17
5.02 Standard............................................... A-17
5.03 Representations and Warranties of Potomac.............. A-17
5.04 Representations and Warranties of South Branch......... A-25
</TABLE>
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<TABLE>
<S> <C>
ARTICLE VI
Covenants.......................................................... A-34
6.01 Reasonable Best Efforts................................. A-34
6.02 Stockholder Approvals................................... A-34
6.03 Registration Statement.................................. A-35
6.04 Press Releases.......................................... A-36
6.05 Access; Information..................................... A-36
6.06 Acquisition Proposals................................... A-37
6.07 Affiliate Agreements.................................... A-37
6.08 Regulatory Applications................................. A-38
6.09 Benefit Plans and Arrangements.......................... A-38
6.10 Notification of Certain Matters......................... A-38
6.11 Dividend Coordination................................... A-39
6.12 Change of Name of South Branch.......................... A-39
6.13 Directorship of Summit; Formation of Executive
Committee........................................... A-39
6.14 Officers of Board and Summit............................ A-40
6.15 Members of the Board of Directors of Potomac and
South Branch, Other Matters......................... A-40
6.16 Location of Summit Offices.............................. A-40
6.17 Changes to Organizational Documents..................... A-40
6.18 Divestment of Branch.................................... A-40
6.19 Directors' and Officers' Protection..................... A-40
6.20 Other Transactions...................................... A-41
ARTICLE VII
Conditions to Consummation of the Merger........................... A-41
7.01 Conditions to Each Party's Obligation to Effect the
Merger.............................................. A-41
7.02 Conditions to Obligation of Potomac..................... A-42
7.03 Conditions to Obligation of South Branch................ A-44
ARTICLE VIII
Termination........................................................ A-46
8.01 Termination............................................. A-46
8.02 Effect of Termination and Abandonment................... A-47
ARTICLE IX
Miscellaneous...................................................... A-47
9.01 Survival................................................ A-47
9.02 Waiver; Amendment....................................... A-48
9.03 Counterparts............................................ A-48
</TABLE>
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<TABLE>
<S> <C>
9.04 Governing Law........................................ A-48
9.05 Expenses............................................. A-48
9.06 Notices.............................................. A-48
9.07 Entire Understanding; No Third Party Beneficiaries... A-49
9.08 Interpretation; Effect; Assignment; Successors....... A-49
</TABLE>
EXHIBIT A
EXHIBIT B
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AGREEMENT AND PLAN OF MERGER, dated as of June 16, 1999 (this
"Agreement"), by and between South Branch Valley Bancorp, Inc. ("South Branch")
and Potomac Valley Bank ("Potomac").
RECITALS
A. South Branch. South Branch is a West Virginia corporation,
having its principal place of business in Moorefield, West Virginia, which will
change its name pursuant to Section 6.12 hereof.
B. Potomac. Potomac is a West Virginia banking corporation, having
its principal place of business in Petersburg, West Virginia.
C. Intentions of the Parties. It is the intention of the parties to
this Agreement that the business combination contemplated hereby be considered a
merger of equals and be accounted for under the "pooling-of-interests"
accounting method and treated as a "reorganization" under Section 368 of the
Internal Revenue Code of 1986 (the "Code").
D. Board Action. The respective Boards of Directors of each of
South Branch and Potomac have determined that it is in the best interests of
their respective companies and their stockholders to consummate the strategic
business combination transaction provided for herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein the
parties agree as follows:
ARTICLE I
Certain Definitions
1.01 Certain Definitions. The following terms are used in this
Agreement with the meanings set forth below:
"Acquisition Proposal" means any tender or exchange offer, proposal
for a merger, consolidation or other business combination involving Potomac or
any proposal or offer to acquire in any manner a substantial equity interest in,
or a substantial portion of the assets or deposits of Potomac other than the
transactions contemplated by this Agreement.
"Agreement" means this Agreement, as amended or modified from time to
time in accordance with Section 9.02.
"Closing" has the meaning set forth in Section 2.03.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Disclosure Schedule" has the meaning set forth in Section 5.01.
"Effective Date" means the date on which the Effective Time occurs.
"Effective Time" means the effective time of the Merger, as provided
for in Section 2.02.
"Environmental Laws" means all applicable local, state and federal
environmental, health and safety laws and regulations, including, without
limitation, the Resource Conservation and Recovery Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the Clean Water Act,
the Federal Clean Air Act, and the Occupational Safety and Health Act, each as
amended, regulations promulgated thereunder, and state counterparts.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" has the meaning set forth in Section 5.03(l).
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
and the rules and regulations thereunder.
"Exchange Agent" has the meaning set forth in Section 3.04.
"Exchange Ratio" has the meaning set forth in Section 3.01.
"Governmental Authority" means any court, administrative agency or
commission or other federal, state or local governmental authority or
instrumentality.
"IRS" means the Internal Revenue Service.
"Lien" means any charge, mortgage, pledge, security interest,
restriction, claim, lien, or encumbrance.
"Material Adverse Effect" means, with respect to South Branch or
Potomac, any effect that (i) is material and adverse to the financial position,
results of operations or business of South Branch and its Subsidiaries taken as
a whole or Potomac respectively, or (ii) would materially impair the ability of
either South Branch or Potomac to perform its obligations under this Agreement
or otherwise materially threaten or materially impede the consummation of the
Merger and the other transactions contemplated by this Agreement; provided,
however, that Material Adverse Effect shall not be deemed to include the impact
of (a) changes in banking and similar laws of general applicability or
interpretations thereof by courts or Governmental Authorities, (b) changes in
generally accepted accounting principles or regulatory accounting requirements
applicable to banks or savings associations and their holding companies
generally, (c) actions or omissions of South
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Branch or Potomac taken with the prior written consent of Potomac and South
Branch, respectively, in contemplation of the transaction contemplated hereby,
(d) circumstances affecting banks or savings associations or their holding
companies generally and (e) the effects of the Merger and compliance by either
party with the provisions of this Agreement on the financial position, results
of operations or business of such party and its Subsidiaries, or the other party
and its Subsidiaries, as the case may be.
"Merger" has the meaning set forth in Section 2.01.
"Merger Consideration" has the meaning set forth in Section 3.01.
"Merger Sub" means one or more corporations to be organized by South
Branch prior to the Effective Time to facilitate the Merger.
"Multiemployer Plan" has the meaning set forth in Section 5.03(l).
"New Certificate" has the meaning set forth in Section 3.04.
"Old Certificate" has the meaning set forth in Section 3.04.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Pension Plan" has the meaning set forth in Section 5.03(l).
"Person" means any individual, bank, corporation, partnership,
association, joint-stock company, business trust, limited liability company or
unincorporated organization.
"Plans" has the meaning set forth in Section 5.03(l).
"Potomac" has the meaning set forth in the preamble to this Agreement.
"Potomac Affiliate" has the meaning set forth in Section 6.07(a).
"Potomac Articles" means the Certificate of Incorporation of Potomac.
"Potomac Bank" means Potomac Valley Bank.
"Potomac Board" means the Board of Directors of Potomac.
"Potomac Bylaws" means the Bylaws of Potomac.
"Potomac Common Stock" means the common stock, par value $10.00 per
share, of Potomac.
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<PAGE>
"Potomac Compensation and Benefit Plans" has the meaning set forth in
Section 5.03(l).
"Potomac Meeting" has the meaning set forth in Section 6.02.
"Previously Disclosed" by a party shall mean information set forth in
its Disclosure Schedule.
"Proxy Statement" has the meaning set forth in Section 6.03.
"Registration Statement" has the meaning set forth in Section 6.03.
"Regulatory Authority" has the meaning set forth in Section 5.03(h).
"Representatives" means, with respect to any Person, such Person's
directors, officers, employees, legal or financial advisors or any
representatives of such legal or financial advisors.
"Rights" means, with respect to any Person, securities or obligations
convertible into or exercisable or exchangeable for, or giving any person any
right to subscribe for or acquire, or any options, calls or commitments relating
to, or any stock appreciation right or other instrument the value of which is
determined in whole or in part by reference to the market price or value of,
shares of capital stock of such person.
"SEC" means the Securities and Exchange Commission.
"SEC Documents" shall mean South Branch's Annual Reports on Form 10-K
for the fiscal years ended December 31, 1996, 1997, and 1998 and all other
reports, registration statements, definitive proxy statements or information
statements filed or to be filed by South Branch subsequent to December 31, 1996
under the Securities Act, or under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"South Branch" has the meaning set forth in the preamble to this
Agreement. In addition, where the context so requires, "South Branch" shall
include "Summit" as defined in Section 6.12, and "Summit" shall include "South
Branch".
"South Branch Affiliates" has the meaning set forth in Section
6.07(a).
"South Branch Articles" means the Articles of Incorporation of South
Branch.
"South Branch Board" means the Board of Directors of South Branch.
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<PAGE>
"South Branch Common Stock" means the common stock, par value $2.50
per share, of South Branch.
"South Branch Compensation and Benefit Plans" has the meaning set
forth in Section 5.04(l).
"South Branch Meeting" has the meaning set forth in Section 6.02.
"Subsidiary" and "Significant Subsidiary" have the meanings ascribed
to them in Rule 1-02 of Regulation S-X of the SEC.
"Surviving Corporation" has the meaning set forth in Section 2.01.
"Tax" and "Taxes" means all federal, state, local or foreign taxes,
charges, fees, levies or other assessments, however denominated, including,
without limitation, all net income, gross income, gains, gross receipts, sales,
use, ad valorem, goods and services, capital, production, transfer, franchise,
windfall profits, license, withholding, payroll, employment, disability,
employer health, excise, estimated, severance, stamp, occupation, property,
environmental, unemployment or other taxes, custom duties, fees, assessments or
charges of any kind whatsoever, together with any interest and any penalties,
additions to tax or additional amounts imposed by any taxing authority whether
arising before, on or after the Effective Date.
"Tax Returns" means any return, amended return or other report
(including elections, declarations, disclosures, schedules, estimates and
information returns) required to be filed with respect to any Tax.
"Treasury Stock" shall mean shares of Potomac Common Stock held by
Potomac or by South Branch or any of its Subsidiaries, in each case other than
in a fiduciary capacity or as a result of debts previously contracted in good
faith.
"WVCA" means the West Virginia Corporation Act.
"West Virginia Secretary" means the Office of the Secretary of State
of the State of West Virginia.
ARTICLE II
The Merger
2.01 The Merger. (a) Prior to the Effective Time, South Branch shall take
any and all action necessary (i) to cause the Merger Sub to become a party to
this Agreement, to be evidenced by the execution by the Merger Sub of a
supplement to this Agreement in substantially the form of Annex A, and delivery
thereof to Potomac; and (ii) to cause the Merge Sub to take all actions
A-10
<PAGE>
necessary or proper to comply with the obligations of South Branch and the
Merger Sub to consummate the transactions contemplated hereby.
(b) At the Effective Time, the Merger Sub shall merge with and into
Potomac (the "Merger"), the separate corporate existence of the Merger Sub shall
cease and Potomac shall survive and continue to be governed by the laws of its
state of incorporation (Potomac, as the surviving corporation in the Merger,
sometimes being referred to herein as the "Surviving Corporation").
(c) Subject to the satisfaction or waiver of the conditions set forth
in Article VII, the Merger shall become effective upon the occurrence of the
filing in the office of the West Virginia Secretary of articles of merger in
accordance with the WVCA. The Merger shall have the effects prescribed in the
WVCA.
2.02 Effective Date and Effective Time. Subject to the satisfaction or
waiver of the conditions set forth in Article VII (other than the delivery of
certificates, opinions and other instruments and documents to be delivered at
the Closing), the parties shall cause the effective date of the Merger (the
"Effective Date") to occur on (i) on the last business day of the month in which
the conditions set forth in Article VII shall have been satisfied or waived or
(ii) such other date to which the parties may agree in writing. The time on the
Effective Date when the Merger shall become effective is referred to as the
"Effective Time."
2.03 Closing. A closing of the Merger (the "Closing") shall take place at
such place, at such time and on such date as is determined by the parties
pursuant to Section 2.02 hereof. At the Closing, there shall be delivered to
South Branch and Potomac the opinions, certificates and other documents required
to be delivered under Sections 7.02 and 7.03 hereof.
ARTICLE III
Consideration; Exchange Procedures
3.01 Merger Consideration. Subject to the provisions of this Agreement, at
the Effective Time, automatically by virtue of the Merger and without any action
on the part of any Person:
(a) Outstanding Potomac Common Stock. Each share, excluding Treasury
--------------------------------
Stock, of Potomac Common Stock issued and outstanding immediately prior to the
Effective Time shall become and be converted into the number of shares of Summit
resulting from a book-for-book exchange in which the book value of Potomac stock
is divided by the book value of South Branch stock with each book value
calculated in accordance with Generally Accepted Accounting Principles (subject
to adjustment as set forth herein, the "Exchange Ratio"). The Exchange Ratio
shall be subject to adjustment as set forth in Sections 3.05 and 3.06.
(b) Outstanding South Branch Stock. Each share of South Branch
------------------------------
Common Stock issued and outstanding immediately prior to the Effective Time
shall remain issued and outstanding,
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<PAGE>
provided, however, that commencing on the date which is one year after the
Effective Time, Summit shall begin to send or cause to be sent to each record
holder of South Branch Common Stock new certificates representing their Summit
shares.
3.02 Rights as Stockholders; Stock Transfers. At the Effective Time,
holders of Potomac Stock shall cease to be, and shall have no rights as,
stockholders of Potomac, other than to receive any dividend or other
distribution with respect to such Potomac Stock with a record date occurring
prior to the Effective Time and the consideration provided under this Article
III. After the Effective Time, there shall be no transfers on the stock transfer
books of Potomac or the Surviving Corporation of shares of Potomac Stock.
3.03 Fractional Shares. Notwithstanding any other provision hereof, no
fractional shares of Summit Common Stock and no certificates or scrip therefor,
or other evidence of ownership thereof, will be issued in the Merger; instead,
Summit shall pay to each holder of Potomac Common Stock who would otherwise be
entitled to a fractional share of Summit Common Stock (after taking into account
all Old Certificates delivered by such holder) an amount in cash (without
interest) determined by multiplying such fraction by the average of the last
sale prices of Summit Common Stock reported on the last five (5) business days
prior to the Effective Date on which Summit Common Stock is traded as reported
on the NASDAQ Over the Counter Bulletin Board.
3.04 Exchange Procedures. (a) Except for any shares of Potomac as to which
dissenters' rights are exercised pursuant to the WVCA (S) 31-1-122, each holder
of Potomac Common Stock ("Old Certificates") will, upon the surrender to Summit
which shall act as exchange agent ("Exchange Agent"), of the Old Certificates in
proper form, be entitled to receive a certificate or certificates representing
the number of whole shares of Summit Common Stock ("New Certificates") into
which the surrendered Old Certificates shall have been converted by reason of
the Merger.
(b) As promptly as practicable after the Effective Date, Summit shall
send or cause to be sent to each former holder of record of shares of Potomac
Common Stock immediately prior to the Effective Time transmittal materials for
use in exchanging such stockholder's Old Certificates for the consideration set
forth in this Article III. Summit shall cause the New Certificates into which
shares of a stockholder's Potomac Common Stock are converted on the Effective
Date and/or any check in respect of any fractional share interests or dividends
or distributions which such person shall be entitled to receive to be delivered
to such stockholder upon delivery to the Exchange Agent of Old Certificates
representing such shares of Potomac Common Stock (or indemnity reasonably
satisfactory to Summit and the Exchange Agent, if any of such certificates are
lost, stolen or destroyed) owned by such stockholder. No interest will be paid
on any such cash to be paid in lieu of fractional share interests or in respect
of dividends or distributions which any such person shall be entitled to receive
pursuant to this Article III upon such delivery.
(c) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of Potomac Stock for any
amount properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
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(d) No dividends or other distributions with respect to Summit Common
Stock with a record date occurring after the Effective Time shall be paid to the
holder of any unsurrendered Old Certificate representing shares of Potomac
Common Stock converted in the Merger into the right to receive shares of such
Summit Common Stock until the holder thereof shall be entitled to receive New
Certificates in exchange therefor in accordance with the procedures set forth in
this Section 3.04. After becoming so entitled in accordance with this Section
3.04, the record holder thereof also shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore had become payable with respect to shares of Summit Common Stock
such holder had the right to receive upon surrender of the Old Certificates.
3.05 Provisions Relating to Stock Splits, Stock Dividends, Etc. In the
event Summit changes (or a record date for any such change occurs prior to the
Effective Date) the number of, or provides for the exchange of, shares of Summit
Common Stock issued and outstanding prior to the Effective Date as a result of a
stock split, stock dividend, recapitalization or similar transaction with
respect to the outstanding Summit Common Stock and the record date therefor
shall be prior to the Effective Date, the Exchange Ratio shall be
proportionately adjusted.
3.06 Provisions Relating to the Granting of Additional Options. South
Branch and Potomac acknowledge and agree that South Branch has granted stock
options as set forth on disclosure Schedule A. In the event any new options
("New Options") are granted by South Branch following the date of this Agreement
and prior to the Effective Time, then for purposes of calculating South Branch's
book value as required under Section 3.01(a), the number of shares issued and
outstanding of South Branch shall equal the total of (i) issued and outstanding
shares of South Branch Common Stock as of the Effective Time and, (ii) with
respect to the New Options only, the incremental dilutive shares deemed issued
and outstanding for purposes of calculating diluted earnings per share in
accordance with Generally Accepted Accounting Principles.
ARTICLE IV
Actions Pending Merger
4.01 Forebearances of Potomac. From the date hereof until the Effective
Time, except as expressly contemplated by this Agreement, without the prior
written consent of South Branch, Potomac will not:
(a) Ordinary Course. Conduct the business of Potomac other than in
the ordinary and usual course or fail to use reasonable efforts to preserve
intact its business organizations and assets and maintain their rights,
franchises and existing relations with customers, suppliers, employees and
business associates, or take any action reasonably likely to have an adverse
affect upon Potomac's ability to perform any of its material obligations under
this Agreement.
(b) Capital Stock. Other than pursuant to rights disclosed and
outstanding on the date hereof, (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of,
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any additional shares of Potomac Stock or any Rights, (ii) enter into any
agreement with respect to the foregoing, or (iii) permit any additional shares
of Potomac Stock to become subject to new grants of employee or director stock
options, other Rights or similar stock-based employee rights.
(c) Dividends, Etc. (a) Make, declare, pay or set aside for payment
any dividend, other than semi-annual cash dividends on Potomac Stock in an
amount not to exceed $1.50 per share with record and payment dates consistent
with section 6.11 hereof, or declare or make any distribution on any shares of
Potomac Stock or (b) directly or indirectly adjust, split, combine, redeem,
reclassify, purchase or otherwise acquire, any shares of its capital stock.
(d) Compensation; Employment Agreements; Etc. Enter into or amend or
renew any employment, consulting, severance or similar agreements or
arrangements with any director, officer or employee of Potomac, or grant any
salary or wage increase or increase any employee benefit, (including incentive
or bonus payments) except (i) for normal individual increases in compensation to
employees in the ordinary course of business consistent with past practice, (ii)
for other changes that are required by applicable law, (iii) to satisfy
previously disclosed contractual obligations existing as of the date hereof, or
(iv) for grants of awards to newly hired employees consistent with past
practice. South Branch agrees that it will not unreasonably withhold its
consent with respect to requests made hereunder.
(e) Benefit Plans. Enter into, establish, adopt or amend (except as
may be required by applicable law) any pension, retirement, stock option, stock
purchase, savings, profit sharing, deferred compensation, consulting, bonus,
group insurance or other employee benefit, incentive or welfare contract, plan
or arrangement, or any trust agreement (or similar arrangement) related thereto,
in respect of any director, officer or employee of Potomac, or take any action
to accelerate the vesting or exercisability of stock options, restricted stock
or other compensation or benefits payable thereunder. South Branch agrees that
it will not unreasonably withhold its consent with respect to requests made
under this subparagraph (e).
(f) Dispositions. Except as previously disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its assets,
deposits, business or properties except in the ordinary course of business and
in a transaction that is not material to it.
(g) Acquisitions. Except as previously disclosed, acquire (other than
by way of foreclosures or acquisitions of control in a bona fide fiduciary
capacity or in satisfaction of debts previously contracted in good faith, in
each case in the ordinary and usual course of business consistent with past
practice) all or any portion of, the assets, business, deposits or properties of
any other entity.
(h) Governing Documents. Amend the Potomac Articles and Potomac
Bylaws.
(i) Accounting Methods. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required by
generally accepted accounting principles.
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(j) Contracts. Except in the ordinary course of business consistent
with past practice, enter into or terminate any material contract (as defined in
Section 5.03(j)) or amend or modify in any material respect any of its existing
material contracts.
(k) Claims. Except in the ordinary course of business consistent with
past practice, settle any claim, action or proceeding, except for any claim,
action or proceeding which does not involve precedent for other material claims,
actions or proceedings and which involve solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not material
to Potomac.
(l) Adverse Actions. (a) Take any action while knowing that such
action would, or is reasonably likely to, prevent or impede the Merger from
qualifying (i) for "pooling-of-interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the Code; or (b) knowingly
take any action that is intended or is reasonably likely to result in (i) any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the Effective Time,
(ii) any of the conditions to the Merger set forth in Article VII not being
satisfied or (iii) a material violation of any provision of this Agreement
except, in each case, as may be required by applicable law or regulation.
(m) Risk Management. Except as required by applicable law or
regulation, (i) implement or adopt any material change in its interest rate and
other risk management policies, procedures or practices which would materially
increase its aggregate exposure to interest rate risk; (ii) fail to follow its
existing policies or practices with respect to managing its exposure to interest
rate and other risk; or (iii) fail to use commercially reasonable means to avoid
any material increase in its aggregate exposure to interest rate risk.
(n) Indebtedness. Incur any indebtedness for borrowed money other
than in the ordinary course of business.
(o) Commitments. Agree or commit to do any of the foregoing.
4.02 Forebearances of South Branch. From the date hereof until the
Effective Time, except as expressly contemplated by this Agreement, South Branch
will not:
(a) Ordinary Course. Conduct the business of South Branch and its
Subsidiaries other than in the ordinary and usual course or fail to use
reasonable efforts to preserve intact their business organizations and assets
and maintain their rights, franchises and existing relations with customers,
suppliers, employees and business associates, or take any action reasonably
likely to have an adverse affect upon South Branch's ability to perform any of
its material obligations under this Agreement.
(b) Capital Stock. Other than pursuant to rights disclosed and
outstanding on the date hereof, (i) issue, sell or otherwise permit to become
outstanding, or authorize the creation of, any additional shares of South Branch
Stock or any Rights, (ii) enter into any agreement with respect
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to the foregoing, or (iii) permit any additional shares of South Branch Stock to
become subject to new grants of employee or director stock options, other Rights
or similar stock-based employee rights.
(c) Dividends, Etc. (a) Make, declare, pay or set aside for payment
any dividend, other than semi-annual cash dividends on South Branch Stock in an
amount not to exceed $.50 per share with record and payment dates consistent
with past practice on or in respect of, or declare or make any distribution on
any shares of South Branch Stock or (b) directly or indirectly adjust, split,
combine, redeem, reclassify, purchase or otherwise acquire, any shares of its
capital stock.
(d) Dispositions. Except as previously disclosed, sell, transfer,
mortgage, encumber or otherwise dispose of or discontinue any of its assets,
deposits, business or properties except in the ordinary course of business and
in a transaction that is not material to it.
(e) Governing Documents. Amend the South Branch Articles and South
Branch Bylaws.
(f) Accounting Methods. Implement or adopt any change in its
accounting principles, practices or methods, other than as may be required by
generally accepted accounting principles.
(g) Contracts. Except in the ordinary course of business consistent
with past practice, enter into or terminate any material contract (as defined in
Section 5.04(j)) or amend or modify in any material respect any of its existing
material contracts.
(h) Claims. Except in the ordinary course of business consistent with
past practice, settle any claim, action or proceeding, except for any claim,
action or proceeding which does not involve precedent for other material claims,
actions or proceedings and which involve solely money damages in an amount,
individually or in the aggregate for all such settlements, that is not material
to South Branch.
(i) Adverse Actions. (a) Take any action while knowing that such
action would, or is reasonably likely to, prevent or impede the Merger from
qualifying (i) for "pooling-of-interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the Code; or (b) knowingly
take any action that is intended or is reasonably likely to result in (i) any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any material respect at any time at or prior to the Effective Time,
(ii) any of the conditions to the Merger set forth in Article VII not being
satisfied or (iii) a material violation of any provision of this Agreement
except, in each case, as may be required by applicable law or regulation.
(j) Risk Management. Except as required by applicable law or
regulation, (i) implement or adopt any material change in its interest rate and
other risk management policies, procedures or practices which would materially
increase its aggregate exposure to interest rate risk; (ii) fail to follow its
existing policies or practices with respect to managing its exposure to interest
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rate and other risk; or (iii) fail to use commercially reasonable means to avoid
any material increase in its aggregate exposure to interest rate risk.
(k) Indebtedness. Incur any indebtedness for borrowed money other
than in the ordinary course of business.
(l) Commitments. Agree or commit to do any of the foregoing.
ARTICLE V
Representations and Warranties
5.01 Disclosure Schedules. On or prior to the date hereof, South Branch has
delivered to Potomac a schedule and Potomac has delivered to South Branch a
schedule (respectively, its "Disclosure Schedule") setting forth, among other
things, items the disclosure of which is necessary or appropriate in relation to
any or all of its representations and warranties contained in Section 5.03 or
5.04 or to one or more of its covenants contained in Article IV; provided, that
(a) no such item is required to be set forth in a Disclosure Schedule as an
exception to a representation or warranty if its absence would not be reasonably
likely to result in the related representation or warranty being deemed untrue
or incorrect under the standard established by Section 5.02, and (b) the mere
inclusion of an item in a Disclosure Schedule as an exception to a
representation or warranty shall not be deemed an admission by a party that such
item represents a material exception or fact, event or circumstance or that such
item is reasonably likely to result in a Material Adverse Effect on the party
making the representation. A party's representations, warranties and covenants
contained in this Agreement shall not be deemed to be untrue or breached as a
result of effects arising solely from actions taken in compliance with a written
request of the other party.
5.02 Standard. No representation or warranty of Potomac or South Branch
contained in Section 5.03 or 5.04 shall be deemed untrue or incorrect, and no
party hereto shall be deemed to have breached a representation or warranty, as a
consequence of the existence of any fact, event or circumstance unless such
fact, circumstance or event, individually or taken together with all other
facts, events or circumstances inconsistent with any representation or warranty
contained in Section 5.03 or 5.04 has had or is reasonably likely to have a
Material Adverse Effect. For purposes of this Agreement, "knowledge" shall mean,
with respect to a party hereto, actual knowledge of any officer of that party
with the title, if any, ranking not less than vice president and that party's
in-house counsel, if any.
5.03 Representations and Warranties of Potomac. Subject to Sections 5.01
and 5.02 and except as Previously Disclosed in a paragraph of its Disclosure
Schedule corresponding to the relevant paragraph below, Potomac hereby
represents and warrants to South Branch:
(a) Organization, Standing and Authority. Potomac is a corporation
------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of West Virginia.
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Potomac is duly qualified to do business and is in good standing in the State of
West Virginia and any jurisdictions where its ownership or leasing of property
or assets or the conduct of its business requires it to be so qualified.
(b) Potomac Stock. As of the date hereof, the authorized capital
-------------
stock of Potomac consists solely of 90,000 shares of Potomac Common Stock, of
which 90,000 shares were outstanding as of the date hereof. The outstanding
shares of Potomac Stock have been duly authorized and are validly issued and
outstanding, fully paid and nonassessable, and subject to no preemptive rights
(and were not issued in violation of any preemptive rights). As of the date
hereof, except as Previously Disclosed in its Disclosure Schedule, there are no
shares of Potomac Stock authorized and reserved for issuance, Potomac does not
have any Rights issued or outstanding with respect to Potomac Stock, and Potomac
does not have any commitment to authorize, issue or sell any Potomac Stock or
Rights, except pursuant to this Agreement. Potomac has Previously Disclosed all
issuances of Potomac Stock in the prior two years.
(c) Corporate Power. Potomac has the corporate power and authority to
---------------
carry on its business as it is now being conducted and to own all its properties
and assets; and Potomac has the corporate power and authority to execute,
deliver and perform its obligations under this Agreement and to consummate the
transactions contemplated hereby and thereby.
(d) Corporate Authority. Subject in the case of this Agreement to
-------------------
receipt of the requisite approval and adoption of this Agreement (including the
agreement of merger set forth herein) by the holders of more than a majority of
the outstanding shares of Potomac Common Stock entitled to vote thereon pursuant
to the WVCA (which is the only Potomac shareholder vote required thereon), this
Agreement and the transactions contemplated hereby and thereby have been
authorized by all necessary corporate action of Potomac and the Potomac Board
prior to the date hereof. This Agreement is a valid and legally binding
obligation of Potomac, enforceable in accordance with its terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles).
(e) Regulatory Filings; No Defaults. (i) No consents or approvals of,
-------------------------------
or filings or registrations with, any Governmental Authority or with any third
party are required to be made or obtained by Potomac in connection with the
execution, delivery or performance by Potomac of this Agreement or to consummate
the Merger except for (A) filings of applications or notices with federal and
state banking authorities, (B) filings with the SEC and state securities
authorities, (C) filings of applications or notices with the U.S. Department of
Justice, (D) the filing of the articles of merger with the West Virginia
Secretary pursuant to the WVCA, and (E) the adoption and approval of this
Agreement by the stockholders of Potomac, Merger Sub and the issuance of shares
by Summit. As of the date hereof, Potomac is not aware of any reason why the
approvals set forth in Section 7.01(b) will not be received without the
imposition of a condition, restriction or requirement of the type described in
Section 7.01(b).
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<PAGE>
(ii) Subject to the satisfaction of the requirements referred to
in the preceding paragraph, and expiration of related waiting periods, and
required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby and thereby do not and will not (A) constitute
a breach or violation of, or a default under, or give rise to any Lien, any
acceleration of remedies or any right of termination under, any law, rule or
regulation or any judgment, decree, order, governmental permit or license, or
agreement, indenture or instrument of Potomac or of any of or to which Potomac
or properties is subject or bound, (B) constitute a breach or violation of, or a
default under, the Potomac Articles or the Potomac Bylaws or (C) require any
consent or approval under any such law, rule, regulation, judgment, decree,
order, governmental permit or license, agreement, indenture or instrument.
(f) Financial Reports; Material Adverse Effect. (i) Each of the
------------------------------------------
balance sheets of Potomac for the years ended December 31, 1996, 1997 and 1998
(including the related notes and schedules thereto) fairly presents, or will
fairly present, the financial position of Potomac as of its date, and each of
the statements of income and changes in stockholders' equity and cash flows or
equivalent statements (including any related notes and schedules thereto) fairly
presents, or will fairly present, the results of operations, changes in
stockholders' equity and cash flows, as the case may be, of Potomac for the
periods to which they relate, in each case in accordance with generally accepted
accounting principles consistently applied during the periods involved, except
in each case as may be noted therein.
(ii) Since March 31, 1999, Potomac has not incurred any
liability other than in the ordinary course of business consistent with past
practice (excluding expenses incurred in connection with this Agreement and the
transactions contemplated hereby).
(iii) Since March 31, 1999, (A) Potomac has conducted its
business in the ordinary and usual course consistent with past practice
(excluding matters related to this Agreement and the transactions contemplated
hereby) and (B) no event has occurred nor circumstance arisen that, individually
or taken together with all other facts, circumstances and events (described in
any paragraph of Section 5.03 or otherwise), is reasonably likely to have a
Material Adverse Effect with respect to Potomac.
(g) Litigation. No litigation, claim or other proceeding before any
----------
Governmental Authority is pending against Potomac and, to the best of Potomac's
knowledge, no such litigation, claim or other proceeding has been threatened.
(h) Regulatory Matters. (i) Neither Potomac nor any of its
------------------
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, or extraordinary supervisory letter from, any federal
or state governmental agency or authority charged with the supervision or
regulation of financial institutions (or their holding companies) or issuers of
securities or engaged in the insurance of deposits (including, without
limitation, the Office of the Comptroller of the
A-19
<PAGE>
Currency, the Board of Governors of the Federal Reserve System and the Federal
Deposit Insurance Corporation) or the supervision or regulation of it
(collectively, the "Regulatory Authorities").
(ii) Potomac has not been advised by any Regulatory Authority
that such Regulatory Authority is contemplating issuing or requesting (or is
considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment letter, supervisory
letter or similar submission.
(i) Compliance with Laws. Potomac:
--------------------
(i) is in compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act
and all other applicable fair lending laws and other laws relating to
discriminatory business practices;
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to own or
lease their properties and to conduct their businesses as presently conducted;
all such permits, licenses, certificates of authority, orders and approvals are
in full force and effect and, to Potomac's knowledge, no suspension or
cancellation of any of them is threatened; and
(iii) has received, since December 31, 1996, no notification or
communication from any Governmental Authority (A) asserting that Potomac is not
in material compliance with any of the statutes, regulations, or ordinances
which such Governmental Authority enforces, (B) threatening to revoke any
license, franchise, permit, or governmental authorization (nor, to Potomac's
knowledge, do any grounds for any of the foregoing exist) or (C) as of the date
hereof, failing to approve any proposed acquisition, or stating its intention
not to approve acquisitions proposed to be effected by it within a certain time
period or indefinitely.
(j) Material Contracts; Defaults. Except for this Agreement and
----------------------------
those agreements set forth in its Disclosure Schedule, Potomac is not a party
to, bound by or subject to any agreement, contract, arrangement, commitment or
understanding (whether written or oral) (i) that is a "material contract" within
the meaning of Item 601(b)(10) of the SEC's Regulation S-K or (ii) that
restricts or limits in any way the conduct of business by it(including without
limitation a non-compete or similar provision). Potomac is not in default under
any contract, agreement, commitment, arrangement, lease, insurance policy or
other instrument to which it is a party, by which its respective assets,
business, or operations may be bound or affected, or under which it or its
respective assets, business, or operations receive benefits, and there has not
occurred any event that, with the lapse of time or the giving of notice or both,
would constitute such a default.
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<PAGE>
(k) No Brokers. No action has been taken by Potomac that would give
----------
rise to any valid claim against any party hereto for a brokerage commission,
finder's fee or other like payment with respect to the transactions contemplated
by this Agreement.
(l) Employee Benefit Plans. (i) Potomac's Disclosure Schedule
----------------------
contains a complete and accurate list of all existing bonus, incentive, deferred
compensation, pension, retirement, profit-sharing, thrift, savings, employee
stock ownership, stock bonus, stock purchase, restricted stock, stock option,
severance, welfare and fringe benefit plans, employment or severance agreements
and all similar practices, policies and arrangements in which any employee or
former employee (the "Employees"), consultant or former consultant (the
"Consultants") or director or former director (the "Directors") of Potomac
participates or to which any such Employees, Consultants or Directors are a
party with Potomac (the "Potomac Compensation and Benefit Plans"). Except as set
forth in the Disclosure Statement, Potomac does not have any material commitment
to create any additional Compensation and Benefit Plan or to modify or change
materially any existing Compensation and Benefit Plan.
(ii) Each Potomac Compensation and Benefit Plan has been operated
and administered in all material respects in accordance with its terms and with
applicable law, including, but not limited to, ERISA, the Code, the Securities
Act, the Exchange Act, the Age Discrimination in Employment Act, or any
regulations or rules promulgated thereunder, and all filings, disclosures and
notices required by ERISA, the Code, the Securities Act, the Exchange Act, the
Age Discrimination in Employment Act and any other applicable law have been
timely made. Each Potomac Compensation and Benefit Plan which is an "employee
pension benefit plan" within the meaning of Section 3(2) of ERISA (a "Pension
Plan") and which is intended to be qualified under Section 401(a) of the Code
has received a favorable determination letter (including a determination that
the related trust under such Potomac Compensation and Benefit Plan is exempt
from tax under Section 501(a) of the Code) from the IRS, and Potomac is not
aware of any circumstances likely to result in revocation of any such favorable
determination letter. There is no material pending or, to the knowledge of
Potomac, threatened legal action, suit or claim relating to the Potomac
Compensation and Benefit Plans. Potomac has not engaged in a transaction, or
omitted to take any action, with respect to any Potomac Compensation and Benefit
Plan that would reasonably be expected to subject Potomac to a tax or penalty
imposed by either Section 4975 of the Code or Section 502 of ERISA, assuming for
purposes of Section 4975 of the Code that the taxable period of any such
transaction expired as of the date hereof.
(iii) No liability (other than for payment of premiums to the
PBGC which have been made or will be made on a timely basis) under Title IV of
ERISA has been or is expected to be incurred by Potomac or with respect to any
ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or any single-employer plan of any entity (an "ERISA Affiliate") which is
considered one employer with Potomac under Section 4001(a)(14) of ERISA or
Section 414(b) or (c) of the Code (an "ERISA Affiliate Plan"). Potomac has not
been obligated to contribute, to a multiemployer plan under Subtitle E of Title
IV of ERISA at any time since September 26, 1980. No notice of a "reportable
event", within the meaning of Section 4043 of ERISA for which the 30-day
reporting
A-21
<PAGE>
requirement has not been waived, has been required to be filed for any Potomac
Compensation and Benefit Plan or by any ERISA Affiliate Plan within the 12-month
period ending on the date hereof, and no such notice will be required to be
filed as a result of the transactions contemplated by this Agreement. The PBGC
has not instituted proceedings to terminate any Pension Plan or ERISA Affiliate
Plan and, to Potomac's knowledge, no condition exists that presents a material
risk that such proceedings will be instituted. To the knowledge of Potomac,
there is no pending investigation or enforcement action by the PBGC, the U.S.
Department of Labor (the "DOL") or IRS or any other governmental agency with
respect to any Potomac Compensation and Benefit Plan.
(iv) All contributions required to be made under the terms of any
Potomac Compensation and Benefit Plan or ERISA Affiliate Plan or any employee
benefit arrangements under any collective bargaining agreement to which Potomac
is a party have been timely made or have been reflected on Potomac's financial
statements. Neither any Pension Plan nor any ERISA Affiliate Plan has an
"accumulated funding deficiency" (whether or not waived) within the meaning of
Section 412 of the Code or Section 302 of ERISA and all required payments to the
PBGC with respect to each Pension Plan or ERISA Affiliate Plan have been made on
or before their due dates. Potomac has not provided, or would reasonably be
expected to be required to provide, security to any Pension Plan or to any ERISA
Affiliate Plan pursuant to Section 401(a)(29) of the Code, and (y) has taken any
action, or omitted to take any action, that has resulted, or would reasonably be
expected to result, in the imposition of a lien under Section 412(n) of the Code
or pursuant to ERISA.
(v) Except as set forth in the Potomac disclosure schedule, Potomac
has no obligations to provide retiree health and life insurance or other retiree
death benefits under any Potomac Compensation and Benefit Plan, other than
benefits mandated by Section 4980B of the Code, and each such Potomac
Compensation and Benefit Plan authorizes Potomac to amend or terminate such plan
according to its terms. There has been no communication to Employees by Potomac
that would reasonably be expected to promise or guarantee such Employees retiree
health or life insurance or other retiree death benefits on a permanent basis.
(vi) Potomac does not maintain any Potomac Compensation and Benefit
Plans covering foreign Employees.
(vii) With respect to each Potomac Compensation and Benefit Plan, if
applicable, Potomac has provided or made available to South Branch, true and
complete copies of existing: (A) Potomac Compensation and Benefit Plan documents
and amendments thereto; (B) trust instruments and insurance contracts; (C) two
most recent Forms 5500 filed with the IRS; (D) most recent actuarial report and
financial statement; (E) the most recent summary plan description; (F) forms
filed with the PBGC (other than for premium payments); (G) most recent
determination letter issued by the IRS; (H) any Form 5310 or Form 5330 filed
with the IRS; and (i) most recent nondiscrimination tests performed under ERISA
and the Code (including 401(k) and 401(m) tests).
(viii) The consummation of the transactions contemplated by this
Agreement would not, directly or indirectly (including, without limitation, as a
result of any termination of
A-22
<PAGE>
employment prior to or following the Effective Time) reasonably be expected to
(A) entitle any Employee, Consultant or Director to any payment (including
severance pay or similar compensation) or any increase in compensation, (B)
result in the vesting or acceleration of any benefits under any Potomac
Compensation and Benefit Plan or (C) result in any material increase in benefits
payable under any Potomac Compensation and Benefit Plan.
(ix) Potomac does not maintain any compensation plan, programs or
arrangements the payments under which would not reasonably be expected to be
deductible as a result of the limitations under Section 162(m) of the Code and
the regulations issued thereunder.
(x) As a result, directly or indirectly, of the transactions
contemplated by this Agreement (including, without limitation, as a result of
any termination of employment prior to or following the Effective Time), none of
South Branch, Potomac or the Surviving Corporation, or any of their respective
Subsidiaries will be obligated to make a payment that would be characterized as
an "excess parachute payment" to an individual who is a "disqualified
individual" (as such terms are defined in Section 280G of the Code), without
regard to whether such payment is reasonable compensation for personal services
performed or to be performed in the future.
(m) Labor Matters. Potomac is not a party to nor bound by any
-------------
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is Potomac the subject of a
proceeding asserting that it has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel Potomac to
bargain with any labor organization as to wages or conditions of employment, nor
is there any strike or other labor dispute involving it pending or, to Potomac's
knowledge, threatened, nor is Potomac aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in other
organizational activity.
(n) Environmental Matters. To Potomac's knowledge, neither the
---------------------
conduct nor operation of Potomac nor any condition of any property presently or
previously owned, leased or operated by Potomac (including, without limitation,
in a fiduciary or agency capacity), or on which Potomac holds a Lien, violates
or violated Environmental Laws and to Potomac's knowledge, no condition has
existed or event has occurred with respect to Potomac or any such property that,
with notice or the passage of time, or both, is reasonably likely to result in
liability under Environmental Laws. To Potomac's knowledge, Potomac has not
received any notice from any person or entity that Potomac or the operation or
condition of any property ever owned, leased, operated, or held as collateral or
in a fiduciary capacity by Potomac is or was in violation of or otherwise are
alleged to have liability under any Environmental Law, including, but not
limited to, responsibility (or potential responsibility) for the cleanup or
other remediation of any pollutants, contaminants, or hazardous or toxic wastes,
substances or materials at, on, beneath, or originating from any such property.
(o) Tax Matters. (i) Potomac has filed all federal income tax
-----------
returns and all other federal, state, municipal and other tax returns which it
is required to file, has paid all Taxes shown to be due on such returns and, in
the opinion of its chief executive and has adequately reserved or recognized for
all current and deferred Taxes;
A-23
<PAGE>
(ii) Neither the IRS nor any other taxing authority is now
asserting against Potomac, or, to its knowledge, threatening to assert against
Potomac, any material deficiency or material claim for additional Taxes,
interest or penalties;
(iii) There is no pending or threatened examination of the
federal income tax returns of Potomac and, except for tax years still subject to
the assessment and collection of additional federal income taxes under the three
year period of limitations prescribed in IRC (S) 6501(a), no tax year of Potomac
remains open to the assessment and collection of additional federal income
taxes; and
(iv) There is no pending or threatened examination or
outstanding liability for any West Virginia state taxes, except for tax
liabilities not yet due and payable.
(v) Potomac has made available to South Branch true and correct
copies of the United States federal income Tax Returns filed by Potomac for each
of the three most recent fiscal years ended on or before December 31, 1998.
Potomac has no liability with respect to income, franchise or similar Taxes that
accrued on or before the end of the most recent period covered by Potomac's
Financial Reports described in Section 5.02(f) hereof in excess of the amounts
accrued with respect thereto that are reflected in the financial statements
included in Potomac's Financial Reports.
(vi) As of the date hereof, Potomac has no reason to believe
that any conditions exist that might prevent or impede the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
(p) Risk Management Instruments. All interest rate swaps, caps,
---------------------------
floors, option agreements, futures and forward contracts and other similar risk
management arrangements, whether entered into for Potomac's own account or the
account of its customers (all of which are listed on Potomac's Disclosure
Schedule), were entered into in accordance with applicable laws, rules,
regulations and regulatory policies and with counter parties believed to be
financially responsible at the time; and each of them constitutes the valid and
legally binding obligation of Potomac, enforceable in accordance with its terms
(except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent transfer and similar laws of general
applicability relating to or affecting creditors' rights or by general equity
principles), and is in full force and effect. Potomac is not, nor to Potomac's
knowledge any other party thereto, in breach of any of its obligations under any
such agreement or arrangement.
(q) Books and Records. The books and records of Potomac have been
-----------------
fully, properly and accurately maintained in all material respects, and there
are no material inaccuracies or discrepancies of any kind contained or reflected
therein and they fairly reflect the substance of events and transactions
included therein.
(r) Insurance. Potomac's Disclosure Schedule sets forth all of the
---------
insurance policies, binders, or bonds maintained by Potomac. Potomac is insured
with reputable insurers
A-24
<PAGE>
against such risks and in such amounts as the management of Potomac reasonably
has determined to be prudent in accordance with industry practices. All such
insurance policies are in full force and effect; Potomac is not in material
default thereunder; and all claims thereunder have been filed in due and timely
fashion.
(s) Accounting Treatment. As of the date hereof, Potomac is aware of
--------------------
no reason why the Merger will fail to qualify for "pooling-of-interests"
accounting treatment, assuming compliance by Potomac and South Branch with the
requirements of Section 6.17 hereof.
(t) Real Property. Potomac owns the real property set forth in the
-------------
Disclosure Schedule. Except as disclosed in the Disclosure Schedule, all real
property owned by Potomac is free and clear of liens and encumbrances except for
liens of record, liens which do not materially affect the use of the property or
liens for ad valorem taxes not yet due and payable.
(u) Year 2000 Compliance. Potomac is engaged in a company-wide Year
--------------------
2000 project to bring Potomac's computerized information systems to Year 2000
compliance so as to ensure better the ability of such systems to accurately
process information that is date sensitive. To the extent reasonably necessary,
Potomac has confirmed Potomac's vendor's and suppliers' progress toward Year
2000 compliance. Potomac knows of no reason that its computerized information
systems will fail to comply in any material respect with Year 2000 compliance
requirements.
(v) Disclosure. The representations and warranties contained in this
----------
Section 5.03 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 5.03 not misleading.
5.04 Representations and Warranties of South Branch. Subject to Sections
5.01 and 5.02 and except as Previously Disclosed in a paragraph of its
Disclosure Schedule corresponding to the relevant paragraph below, South Branch
hereby represents and warrants to Potomac as follows:
(a) Organization, Standing and Authority. South Branch is a
------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of West Virginia. South Branch is duly qualified to do business
and is in good standing in the State of West Virginia and foreign jurisdictions
where its ownership or leasing of property or assets or the conduct of its
business requires it to be so qualified.
(b) South Branch Stock. (i) As of the date hereof, the authorized
------------------
capital stock of South Branch consists solely of 2,000,000 shares of South
Branch Common Stock, of which no more than 591,292 shares were outstanding as of
the date hereof. As of the date hereof, except as set forth in its Disclosure
Schedule, South Branch does not have any Rights issued or outstanding with
respect to South Branch Stock and South Branch does not have any commitment to
authorize, issue or sell any South Branch Stock or Rights, except pursuant to
this Agreement. The outstanding shares of South Branch Common Stock have been
duly authorized and are validly issued and outstanding, fully paid and
nonassessable, and subject to no preemptive rights (and were not issued in
violation
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<PAGE>
of any preemptive rights). South Branch has previously disclosed all issuances
of South Branch Common Stock in the prior two years.
(ii) The shares of Summit Common Stock to be issued in exchange
for shares of Potomac Common Stock in the Merger, when issued in accordance with
the terms of this Agreement, will be duly authorized, validly issued, fully paid
and nonassessable and subject to no preemptive rights.
(c) Subsidiaries. Each of South Branch's Subsidiaries has been duly
------------
organized and is validly existing in good standing under the laws of the
jurisdiction of its organization, and is duly qualified to do business and is in
good standing in the jurisdictions where its ownership or leasing of property or
the conduct of its business requires it to be so qualified and it owns, directly
or indirectly, all the issued and outstanding equity securities of each of its
Significant Subsidiaries.
(d) Corporate Power. Each of South Branch and its Subsidiaries has
---------------
the corporate power and authority to carry on its business as it is now being
conducted and to own all its properties and assets; and South Branch has the
corporate power and authority to execute, deliver and perform its obligations
under this Agreement and to consummate the transactions contemplated hereby and
thereby.
(e) Corporate Authority. Subject in the case of this Agreement to
-------------------
receipt of the requisite approval by the holders of a majority of the
outstanding shares of South Branch Common Stock and Merger Sub common stock
entitled to vote thereon of the Merger, this Agreement and the transactions
contemplated hereby and thereby have been authorized by all necessary corporate
action of South Branch and the South Branch Board prior to the date hereof.
This Agreement is a valid and legally binding agreement of South Branch,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles).
(f) Regulatory Filings; No Defaults. (i) No consents or approvals of,
-------------------------------
or filings or registrations with, any Governmental Authority or with any third
party are required to be made or obtained by South Branch or any of its
Subsidiaries in connection with the execution, delivery or performance by South
Branch of this Agreement or to consummate the Merger except for (A) the filing
of applications and notices, as applicable, with the federal and state banking
and thrift authorities; (B) the adoption and approval of (i) the issuance of
shares in connection with this Agreement by the shareholders of South Branch and
(ii) an amendment to the Articles of Incorporation to change the name of South
Branch to Summit; (C) the filing and declaration of effectiveness of the
Registration Statement; (D) the filing of applications or notices with the U.S.
Department of Justice; (E) the filing of articles of merger with the West
Virginia Secretary; (F) such filings as are required to be made or approvals as
are required to be obtained under the securities or "Blue Sky" laws of various
states in connection with the issuance of Summit Stock in the Merger; and (G)
receipt of the approvals set forth in Section 7.01(b). As of the date hereof,
South Branch
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<PAGE>
is not aware of any reason why the approvals set forth in Section 7.01(b) will
not be received without the imposition of a condition, restriction or
requirement of the type described in Section 7.01(b).
(ii) Subject to the satisfaction of the requirements referred to
in the preceding paragraph and expiration of the related waiting periods, and
required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby do not and will not (A) constitute a breach or
violation of, or a default under, or give rise to any Lien, any acceleration of
remedies or any right of termination under, any law, rule or regulation or any
judgment, decree, order, governmental permit or license, or agreement, indenture
or instrument of South Branch or of any of its Subsidiaries or to which South
Branch or any of its Subsidiaries or properties is subject or bound, (B)
constitute a breach or violation of, or a default under, the certificate of
incorporation or by-laws (or similar governing documents) of South Branch or any
of its Subsidiaries, or (C) require any consent or approval under any such law,
rule, regulation, judgment, decree, order, governmental permit or license,
agreement, indenture or instrument.
(g) Financial Reports and SEC Documents; Material Adverse Effect. (i)
------------------------------------------------------------
South Branch's SEC Documents, as of the date filed, (A) complied or will comply
in all material respects with the applicable requirements under the Securities
Act or the Exchange Act, as the case may be, and (B) did not and will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading; and each
of the balance sheets contained in or incorporated by reference into any such
SEC Document (including the related notes and schedules thereto) fairly
presents, or will fairly present, the financial position of South Branch and its
Subsidiaries as of its date, and each of the statements of income or results of
operations and changes in stockholders' equity and cash flows or equivalent
statements in such SEC Documents (including any related notes and schedules
thereto) fairly presents, or will fairly present, the results of operations,
changes in stockholders' equity and cash flows, as the case may be, of South
Branch and its Subsidiaries for the periods to which they relate, in each case
in accordance with generally accepted accounting principles consistently applied
during the periods involved, except in each case as may be noted therein.
(ii) Since March 31, 1999, South Branch has not incurred any
liability other than in the ordinary course of business consistent with past
practice (excluding expenses incurred in connection with this Agreement and the
transactions contemplated hereby.)
(iii) Since March 31, 1999, (A) South Branch has conducted its
business in the ordinary and usual course consistent with past practice
(excluding matters related to this Agreement and the transactions contemplated
hereby) and (B) no event has occurred nor circumstance arisen that, individually
or taken together with all other facts, circumstances and events (described in
any paragraph of Section 5.04 or otherwise), is reasonably likely to have a
Material Adverse Effect with respect to South Branch.
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<PAGE>
(h) Litigation; Regulatory Action. (i) No litigation, claim or other
-----------------------------
proceeding before any Governmental Authority is pending against South Branch or
any of its Subsidiaries and, to the best of South Branch's knowledge, no such
litigation, claim or other proceeding has been threatened.
(ii) Neither South Branch nor any of its Subsidiaries or
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, or extraordinary supervisory letter from a Regulatory
Authority, nor has South Branch or any of its Subsidiaries been advised by a
Regulatory Authority that such agency is contemplating issuing or requesting (or
is considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment letter, supervisory
letter or similar submission.
(i) Compliance with Laws. Each of South Branch and its Subsidiaries:
--------------------
(i) is in compliance with all applicable federal, state, local
and foreign statutes, laws, regulations, ordinances, rules, judgments, orders or
decrees applicable thereto or to the employees conducting such businesses,
including, without limitation, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act, the Home Mortgage Disclosure Act
and all other applicable fair lending laws and other laws relating to
discriminatory business practices; and
(ii) has all permits, licenses, authorizations, orders and
approvals of, and has made all filings, applications and registrations with, all
Governmental Authorities that are required in order to permit them to conduct
their businesses substantially as presently conducted; all such permits,
licenses, certificates of authority, orders and approvals are in full force and
effect and, to the best of its knowledge, no suspension or cancellation of any
of them is threatened; and
(iii) has received, since December 31, 1996, no notification or
communication from any Governmental Authority (A) asserting that South Branch or
any of its Subsidiaries is not in material compliance with any of the statutes,
regulations, or ordinances which such Governmental Authority enforces, (B)
threatening to revoke any license, franchise, permit, or governmental
authorization (nor, to South Branch's knowledge, do any grounds for any of the
foregoing exist) or (C) as of the date hereof, failing to approve any proposed
acquisition, or stating its intention not to approve acquisitions proposed to be
effected by it within a certain time period or indefinitely.
(j) Material Contracts; Defaults. Except for this Agreement and those
----------------------------
agreements set forth in its Disclosure Schedule, South Branch is not a party to,
bound by or subject to any agreement, contract, arrangement, commitment or
understanding (whether written or oral) (i) that is a "material contract" within
the meaning of Item 601(b)(10) of the SEC's Regulation S-K or (ii) that
restricts or limits in any way the conduct of business by it (including without
limitation a non-compete or similar provision). Neither South Branch nor any of
its Subsidiaries is in default under any contract, agreement, commitment,
arrangement, lease, insurance policy or other instrument
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<PAGE>
to which it is a party, by which its respective assets, business, or operations
may be bound or affected, or under which it or its respective assets, business,
or operations receive benefits, and there has not occurred any event that, with
the lapse of time or the giving of notice or both, would constitute such a
default.
(k) No Brokers. No action has been taken by South Branch that would
----------
give rise to any valid claim against any party hereto for a brokerage
commission, finder's fee or other like payment with respect to the transactions
contemplated by this Agreement.
(l) Employee Benefit Plans. (i) South Branch' Disclosure Schedule
----------------------
contains a complete and accurate list of all existing bonus, incentive, deferred
compensation, pension, retirement, profit-sharing, thrift, savings, employee
stock ownership, stock bonus, stock purchase, restricted stock, stock option,
severance, welfare and fringe benefit plans, employment or severance agreements
and all similar practices, policies and arrangements in which any employee or
former employee (the "Employees"), consultant or former consultant (the
"Consultants") or director or former director (the "Directors") of South Branch
or any of its Subsidiaries participates or to which any such Employees,
Consultants or Directors are a party with South Branch (the "South Branch
Compensation and Benefit Plans"). Except as listed on the Disclosure Schedule,
neither South Branch nor any of its Subsidiaries has any commitment to create
any additional material Compensation and Benefit Plan or to modify or change
materially any existing Compensation and Benefit Plan.
(ii) Each South Branch Compensation and Benefit Plan has been
operated and administered in all material respects in accordance with its terms
and with applicable law, including, but not limited to, ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment Act, or
any regulations or rules promulgated thereunder, and all filings, disclosures
and notices required by ERISA, the Code, the Securities Act, the Exchange Act,
the Age Discrimination in Employment Act and any other applicable law have been
timely made. Each South Branch Compensation and Benefit Plan which is an
"employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a
"Pension Plan") and which is intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter (including a
determination that the related trust under such South Branch Compensation and
Benefit Plan is exempt from tax under Section 501(a) of the Code) from the IRS,
and South Branch is not aware of any circumstances likely to result in
revocation of any such favorable determination letter. There is no material
pending or, to the knowledge of South Branch, threatened legal action, suit or
claim relating to the South Branch Compensation and Benefit Plans. Neither South
Branch nor any of its Subsidiaries has engaged in a transaction, or omitted to
take any action, with respect to any South Branch Compensation and Benefit Plan
that would reasonably be expected to subject South Branch or any of its
Subsidiaries to a tax or penalty imposed by either Section 4975 of the Code or
Section 502 of ERISA, assuming for purposes of Section 4975 of the Code that the
taxable period of any such transaction expired as of the date hereof.
(iii) No liability (other than for payment of premiums to the
PBGC which have been made or will be made on a timely basis) under Title IV of
ERISA has been or is expected
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<PAGE>
to be incurred by South Branch or any of its Subsidiaries with respect to any
ongoing, frozen or terminated "single-employer plan", within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any of them,
or any single-employer plan of any entity (an "ERISA Affiliate") which is
considered one employer with South Branch under Section 4001(a)(14) of ERISA or
Section 414(b) or (c) of the Code (an "ERISA Affiliate Plan"). None of South
Branch, any of its Subsidiaries or any ERISA Affiliate has contributed, or has
been obligated to contribute, to a multiemployer plan under Subtitle E of Title
IV of ERISA at any time since September 26, 1980. No notice of a "reportable
event", within the meaning of Section 4043 of ERISA for which the 30-day
reporting requirement has not been waived, has been required to be filed for any
South Branch Compensation and Benefit Plan or by any ERISA Affiliate Plan within
the 12-month period ending on the date hereof, and no such notice will be
required to be filed as a result of the transactions contemplated by this
Agreement. The PBGC has not instituted proceedings to terminate any Pension Plan
or ERISA Affiliate Plan and, to South Branch' knowledge, no condition exists
that presents a material risk that such proceedings will be instituted. To the
knowledge of South Branch, there is no pending investigation or enforcement
action by the PBGC, the U.S. Department of Labor (the "DOL") or IRS or any other
governmental agency with respect to any South Branch Compensation and Benefit
Plan.
(iv) All contributions required to be made under the terms of any
South Branch Compensation and Benefit Plan or ERISA Affiliate Plan or any
employee benefit arrangements under any collective bargaining agreement to which
South Branch or any of its Subsidiaries is a party have been timely made or have
been reflected on South Branch's financial statements. Neither any Pension Plan
nor any ERISA Affiliate Plan has an "accumulated funding deficiency" (whether or
not waived) within the meaning of Section 412 of the Code or Section 302 of
ERISA and all required payments to the PBGC with respect to each Pension Plan or
ERISA Affiliate Plan have been made on or before their due dates. None of South
Branch, any of its Subsidiaries or any ERISA Affiliate (x) has provided, or
would reasonably be expected to be required to provide, security to any Pension
Plan or to any ERISA Affiliate Plan pursuant to Section 401(a)(29) of the Code,
and (y) has taken any action, or omitted to take any action, that has resulted,
or would reasonably be expected to result, in the imposition of a lien under
Section 412(n) of the Code or pursuant to ERISA.
(v) Except as set forth by South Branch on the Disclosure
Schedule, neither South Branch nor any of its Subsidiaries has any obligations
to provide retiree health and life insurance or other retiree death benefits
under any South Branch Compensation and Benefit Plan, other than benefits
mandated by Section 4980B of the Code, and each such South Branch Compensation
and Benefit Plan authorizes South Branch to amend or terminate such Plan
according to its terms. There has been no communication to Employees by South
Branch or any of its Subsidiaries that would reasonably be expected to promise
or guarantee such Employees retiree health or life insurance or other retiree
death benefits on a permanent basis.
(vi) South Branch and its Subsidiaries do not maintain any South
Branch Compensation and Benefit Plans covering foreign Employees.
A-30
<PAGE>
(vii) With respect to each South Branch Compensation and Benefit
Plan, if applicable, South Branch has provided or made available to Potomac,
true and complete copies of existing: (A) South Branch Compensation and Benefit
Plan documents and amendments thereto; (B) trust instruments and insurance
contracts; (C) two most recent Forms 5500 filed with the IRS; (D) most recent
actuarial report and financial statement; (E) the most recent summary plan
description; (F) forms filed with the PBGC (other than for premium payments);
(G) most recent determination letter issued by the IRS; (H) any Form 5310 or
Form 5330 filed with the IRS; and (i) most recent nondiscrimination tests
performed under ERISA and the Code (including 401(k) and 401(m) tests).
(viii) The consummation of the transactions contemplated by this
Agreement would not, directly or indirectly (including, without limitation, as a
result of any termination of employment prior to or following the Effective
Time) reasonably be expected to (A) entitle any Employee, Consultant or Director
to any payment (including severance pay or similar compensation) or any increase
in compensation, (B) result in the vesting or acceleration of any benefits under
any South Branch Compensation and Benefit Plan or (C) result in any material
increase in benefits payable under any South Branch Compensation and Benefit
Plan.
(ix) South Branch does not maintain any compensation plan,
programs or arrangements, the payments under which would not reasonably be
expected to be deductible as a result of the limitations under Section 162(m) of
the Code and the regulations issued thereunder.
(x) As a result, directly or indirectly, of the transactions
contemplated by this Agreement (including, without limitation, as a result of
any termination of employment prior to or following the Effective Time), none of
South Branch, Potomac or the Surviving Corporation, or any of their respective
Subsidiaries will be obligated to make a payment that would be characterized as
an "excess parachute payment" to an individual who is a "disqualified
individual" (as such terms are defined in Section 280G of the Code), without
regard to whether such payment is reasonable compensation for personal services
performed or to be performed in the future.
(m) Labor Matters. South Branch is not a party to nor bound by any
-------------
collective bargaining agreement, contract or other agreement or understanding
with a labor union or labor organization, nor is South Branch the subject of a
proceeding asserting that it has committed an unfair labor practice (within the
meaning of the National Labor Relations Act) or seeking to compel South Branch
to bargain with any labor organization as to wages or conditions of employment,
nor is there any strike or other labor dispute involving it pending or, to South
Branch's knowledge, threatened, nor is South Branch aware of any activity
involving its employees seeking to certify a collective bargaining unit or
engaging in other organizational activity.
(n) Environmental Matters. To South Branch's knowledge, neither the
---------------------
conduct nor operation of South Branch or its Subsidiaries nor any condition of
any property presently or previously owned, leased or operated by any of them
(including, without limitation, in a fiduciary or agency capacity), or on which
any of them holds a Lien, violates or violated Environmental Laws and to South
Branch's knowledge no condition has existed or event has occurred with respect
to any
A-31
<PAGE>
of them or any such property that, with notice or the passage of time, or both,
is reasonably likely to result in liability under Environmental Laws. To South
Branch's knowledge, neither South Branch nor any of its Subsidiaries has
received any notice from any person or entity that South Branch or its
Subsidiaries or the operation or condition of any property ever owned, leased,
operated, or held as collateral or in a fiduciary capacity by any of them are or
were in violation of or otherwise are alleged to have liability under any
Environmental Law, including, but not limited to, responsibility (or potential
responsibility) for the cleanup or other remediation of any pollutants,
contaminants, or hazardous or toxic wastes, substances or materials at, on,
beneath, or originating from any such property.
(o) Tax Matters. (i) South Branch has filed all federal income tax
-----------
returns and all other federal, state, municipal and other tax returns which it
is required to file, has paid all Taxes shown to be due on such returns and, in
the opinion of its chief executive and chief financial officer, has adequately
reserved or recognized for all current and deferred Taxes;
(ii) Neither the IRS nor any other taxing authority is now
asserting against South Branch or its Subsidiaries, or, to its knowledge,
threatening to assert against either of them, any material deficiency or
material claim for additional Taxes, interest or penalties;
(iii) There is no pending or threatened examination of the federal
income tax returns of South Branch and, except for tax years still subject to
the assessment and collection of additional federal income taxes under the three
year period of limitations prescribed in IRC (S) 6501(a), no tax year of South
Branch remains open to the assessment and collection of additional federal
income taxes; and
(iv) There is not pending or threatened examination or
outstanding liability for any West Virginia state taxes, except for tax
liabilities not yet due and payable.
(v) Neither South Branch nor any of its Subsidiaries has any
liability with respect to income, franchise or similar Taxes that accrued on or
before the end of the most recent period covered by South Branch's SEC Documents
filed prior to the date hereof in excess of the amounts accrued with respect
thereto that are reflected in the financial statements included in South
Branch's SEC Documents filed on or prior to the date hereof. South Branch has
made available to Potomac true and correct copies of the United States federal
income Tax Returns filed by South Branch and its Subsidiaries for each of the
three most recent fiscal years ended on or before December 31, 1998.
(vi) As of the date hereof, neither South Branch nor any of its
Subsidiaries has any reason to believe that any conditions exist that might
prevent or impede the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code.
(p) Risk Management Instructions. All interest rate swaps, caps,
----------------------------
floors, option agreements, futures and forward contracts and other similar risk
management arrangements, whether entered into for South Branch's own account or
the account of its customers (all of which are listed
A-32
<PAGE>
on South Branch's Disclosure Schedule), were entered into in accordance with
applicable laws, rules, regulations and regulatory policies and with counter
parties believed to be financially responsible at the time; and each of them
constitutes the valid and legally binding obligation of South Branch,
enforceable in accordance with its terms (except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium,
fraudulent transfer and similar laws of general applicability relating to or
affecting creditors' rights or by general equity principles), and is in full
force and effect. South Branch is not, nor to South Branch's knowledge any other
party thereto, in breach of any of its obligations under any such agreement or
arrangement.
(q) Books and Records. The books and records of South Branch and its
-----------------
Subsidiaries have been fully, properly and accurately maintained in all material
respects, and there are no material inaccuracies or discrepancies of any kind
contained or reflected therein, and they fairly present the substance of events
and transactions included therein.
(r) Insurance. South Branch's Disclosure Schedule sets forth all of
---------
the insurance policies, binders or bonds maintained by South Branch. South
Branch and its Subsidiaries are insured with reputable insurers against such
risks and in such amounts as the management of South Branch reasonably has
determined to be prudent in accordance with industry practices. All such
insurance policies are in full force and effect; South Branch and its
Subsidiaries are not in material default thereunder; and all claims thereunder
have been filed in due and timely fashion.
(s) Accounting Treatment. As of the date hereof, South Branch is
--------------------
aware of no reason why the Merger will fail to qualify for "pooling-of-
interests" accounting treatment assuming compliance by Potomac and South Branch
with the requirements of Section 6.17 hereof.
(t) Real Property. South Branch and its Subsidiaries each own the
-------------
real property set forth in the Disclosure Schedule. Except as disclosed in the
Disclosure Schedule, all real property owned by South Branch and its
Subsidiaries is free and clear of liens and encumbrances except for liens of
record, liens which do not materially affect the use of the property or liens
for ad valorem taxes not yet due and payable.
(u) Year 2000 Compliance. South Branch is engaged in a company-wide
--------------------
Year 2000 project to bring South Branch's computerized information systems to
Year 2000 compliance so as to ensure better the ability of such systems to
accurately process information that is date sensitive. To the extent reasonably
necessary, South Branch has confirmed South Branch's vendors and suppliers
progress toward Year 2000 compliance. South Branch knows of no reason that its
computerized information systems will fail to comply in any material respect
with Year 2000 compliance requirements.
(v) Disclosure. The representations and warranties contained in this
----------
Section 5.04 do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Section 5.04 not misleading.
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<PAGE>
(w) Representations and Warranties of South Branch with Respect to
--------------------------------------------------------------
Merger Subs. South Branch represents and warrants to Potomac with respect to
- -----------
any Merger Sub that executes the supplement attached to this Agreement as Annex
A that, at the time of such execution and as of the Effective Date:
(i) Organization, Standing and Authority. Each Merger Sub has
been duly organized and is validly existing in good standing under the laws of
the State of its organization, and is duly qualified to do business and in good
standing in the jurisdictions where its ownership or leasing of property or the
conduct of its business requires it to be so qualified.
(ii) Power. Each Merger Sub has the power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby.
(iii) Authority. This Agreement and the transactions contemplated
hereby have been authorized by all requisite action on the part of each Merger
Sub and its respective shareholders or members. This Agreement is a valid and
legally binding agreement of each Merger Sub enforceable in accordance with its
terms (except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general applicability relating to or affecting creditors' rights or by general
equity principles).
ARTICLE VI
Covenants
6.01 Reasonable Best Efforts. Subject to the terms and conditions of this
Agreement, each of Potomac and South Branch agrees to use its reasonable best
efforts in good faith to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or desirable, or advisable under
applicable laws, so as to permit consummation of the Merger as promptly as
practicable and otherwise to enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other party hereto to
that end.
6.02 Stockholder Approvals. South Branch and Potomac agree to take, in
accordance with applicable law and its articles of incorporation and bylaws, all
action necessary to convene an appropriate meeting of its stockholders (which in
the case of South Branch or Potomac may be its regular annual meeting or a
special meeting) to consider and vote upon, in the case of South Branch,
approval of (i) the issuance of its stock as contemplated hereby and (ii) the
amendment to South Branch's Articles of Incorporation to change South Branch's
name (including any adjournment or postponement, the "South Branch Meeting")
and, in the case of Potomac, the approval and adoption of this Agreement
(including any adjournment or postponement, the "Potomac Meeting"), in each case
as promptly as practicable after the Registration Statement is declared
effective. South Branch agrees to vote all of the shares of capital stock issued
by Merger Sub in favor of the Merger. The South Branch Board will recommend that
the South Branch shareholders approve and adopt the
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<PAGE>
Articles Amendment and the issuance of stock contemplated hereby, provided that
the South Branch Board may fail to make such recommendation, or withdraw, modify
or change any such recommendation, if the South Branch Board, after having
consulted with and considered the advice of outside counsel, has determined that
the making of such recommendation, or the failure to withdraw, modify or change
such recommendation, would constitute a breach of the fiduciary duties of the
members of the South Branch Board under applicable law. The Potomac Board will
recommend that the Potomac stockholders approve and adopt the Agreement and the
transactions contemplated hereby, provided that the Potomac Board may fail to
make such recommendation, or withdraw, modify or change any such recommendation,
if the Potomac Board, after having consulted with and considered the advice of
outside counsel, has determined that the making of such recommendation, or the
failure to withdraw, modify or change such recommendation, would constitute a
breach of the fiduciary duties of the members of the Potomac Board under
applicable law.
6.03 Registration Statement. (a) Each of South Branch and Potomac agrees to
cooperate in the preparation of a registration statement on Form S-4 (the
"Registration Statement") to be filed by South Branch with the SEC in connection
with the issuance of Summit Common Stock in the Merger (including the joint
proxy statement and prospectus and other proxy solicitation materials of South
Branch and Potomac constituting a part thereof (the "Proxy Statement") and all
related documents). Provided that Potomac has cooperated as required above,
South Branch agrees to file the Proxy Statement in preliminary form with the SEC
as promptly as reasonably practicable, and to file the Registration Statement
with the SEC as soon as reasonably practicable after any SEC comments with
respect to the preliminary Proxy Statement are resolved. Each of Potomac and
South Branch agrees to use all reasonable efforts to cause the Registration
Statement to be declared effective under the Securities Act as promptly as
reasonably practicable after filing thereof. South Branch also agrees to use all
reasonable efforts to obtain, prior to the effective date of the Registration
Statement, all necessary state securities law or "Blue Sky" permits and
approvals required to carry out the transactions contemplated by this Agreement.
Potomac agrees to furnish to South Branch all information concerning Potomac,
officers, directors and stockholders as may be reasonably requested in
connection with the foregoing.
(b) Each of Potomac and South Branch agrees, as to itself and its
Subsidiaries, that none of the information supplied or to be supplied by it for
inclusion or incorporation by reference in the Registration Statement will, at
the time the Registration Statement and each amendment or supplement thereto, if
any, becomes effective under the Securities Act, contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and the Proxy
Statement and any amendment or supplement thereto will, at the date of mailing
to stockholders and at the time of the South Branch Meeting or the Potomac
Meeting, as the case may be, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or any statement which, in the light
of the circumstances under which such statement is made, will be false or
misleading with respect to any material fact, or which will omit to state any
material fact necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier statement in the
Proxy Statement or
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<PAGE>
any amendment or supplement thereto. Each of Potomac and South Branch further
agrees that if it shall become aware prior to the Effective Date of any
information furnished by it that would cause any of the statements in the Proxy
Statement to be false or misleading with respect to any material fact, or to
omit to state any material fact necessary to make the statements therein not
false or misleading, to promptly inform the other party thereof and to take the
necessary steps to correct the Proxy Statement.
(c) South Branch agrees to advise Potomac, promptly after South Branch
receives notice thereof, of the time when the Registration Statement has become
effective or any supplement or amendment has been filed, of the issuance of any
stop order or the suspension of the qualification of South Branch Stock for
offering or sale in any jurisdiction, of the initiation or threat of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information.
(d) South Branch and Potomac, each in consultation with the other, may
employ professional proxy solicitors to assist it in contacting stockholders in
connection with soliciting votes on the Agreement.
6.04 Press Releases. Each of Potomac and South Branch agrees that it
will not, without the prior approval of the other party, issue any press release
or written statement for general circulation relating to the transactions
contemplated hereby, except as otherwise required by applicable law or
regulation.
6.05 Access; Information. (a) Each of Potomac and South Branch agrees that
upon reasonable notice and subject to applicable laws relating to the exchange
of information, it shall afford the other party and the other party's officers,
employees, counsel, accountants and other authorized representatives, such
access during normal business hours throughout the period prior to the Effective
Time to the books, records (including, without limitation, tax returns and work
papers of independent auditors), properties, personnel and to such other
information as any party may reasonably request and, during such period, it
shall furnish promptly to such other party (i) a copy of each material report,
schedule and other document filed by it pursuant to the requirements of federal
or state securities or banking laws, and (ii) all other information concerning
the business, properties and personnel of it as the other may reasonably
request.
(b) Each agrees that it will not, and will cause its representatives
not to, use any information obtained pursuant to this Section 6.05 (as well as
any other information obtained prior to the date hereof in connection with the
entering into of this Agreement) for any purpose unrelated to the consummation
of the transactions contemplated by this Agreement. Subject to the requirements
of law, each party will keep confidential, and will cause its representatives to
keep confidential, all information and documents obtained pursuant to this
Section 6.05 (as well as any other information obtained prior to the date hereof
in connection with the entering into of this Agreement) unless such information
(i) was already known to such party, (ii) becomes available to such party from
other sources not known by such party to be bound by a confidentiality
obligation, (iii) is disclosed with the prior written approval of the party to
which such information pertains or
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<PAGE>
(iv) is or becomes readily ascertainable from published information or trade
sources. In the event that this Agreement is terminated or the transactions
contemplated by this Agreement shall otherwise fail to be consummated, each
party shall promptly cause all copies of documents or extracts thereof
containing information and data as to another party hereto to be returned to the
party which furnished the same. No investigation by either party of the business
and affairs of the other shall affect or be deemed to modify or waive any
representation, warranty, covenant or agreement in this Agreement, or the
conditions to either party's obligation to consummate the transactions
contemplated by this Agreement.
(c) During the period from the date of this Agreement to the Effective
Time, each party shall promptly furnish the other with copies of all monthly and
other interim financial statements produced in the ordinary course of business
as the same shall become available.
6.06 Acquisition Proposals. Potomac agrees that it shall not solicit or
encourage inquiries or proposals with respect to, or engage in any negotiations
concerning, or provide any confidential information to, or have any discussions
with, any person relating to, any Acquisition Proposal. It shall immediately
cease and cause to be terminated any activities, discussions or negotiations
conducted prior to the date of this Agreement with any parties other than South
Branch with respect to any of the foregoing and shall use its reasonable best
efforts to enforce any confidentiality or similar agreement relating to an
Acquisition Proposal. Potomac shall promptly (within 24 hours) advise South
Branch following the receipt by Potomac of any Acquisition Proposal and the
substance thereof (including the identity of the person making such Acquisition
Proposal), and advise South Branch of any developments with respect to such
Acquisition Proposal immediately upon the occurrence thereof. Notwithstanding
the foregoing, the directors of Potomac shall not be required to take any action
hereunder that, upon consultation with and the advice of outside counsel, the
Potomac Board has determined would constitute a breach of fiduciary duties of
the members of the Potomac Board under applicable law.
6.07 Affiliate Agreements. (a) Not later than the 15th day prior to the
mailing of the Proxy Statement, (i) South Branch shall deliver to Potomac a
schedule of each person that, to the best of its knowledge, is or is reasonably
likely to be, as of the date of the South Branch Meeting, deemed to be an
"affiliate" of South Branch (each, a "South Branch Affiliate") as that term is
used in SEC Accounting Series Releases 130 and 135; and (ii) Potomac shall
deliver to South Branch a schedule of each person that, to the best of its
knowledge, is or is reasonably likely to be, as of the date of the Potomac
Meeting, deemed to be an "affiliate" of Potomac (each, a "Potomac Affiliate") as
that term is used in Rule 145 under the Securities Act or SEC Accounting Series
Releases 130 and 135.
(b) Each of Potomac and South Branch shall use its respective
reasonable best efforts to cause each person who may be deemed to be a Potomac
Affiliate or a South Branch Affiliate, as the case may be, to execute and
deliver to Potomac and South Branch on or before the date of mailing of the
Proxy Statement an agreement in the form attached hereto as Exhibit A or Exhibit
B, respectively.
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6.08 Regulatory Applications. (a) South Branch, and its subsidiaries, and
Potomac shall cooperate and use their respective reasonable best efforts to
prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and Governmental
Authorities necessary to consummate the transactions contemplated by this
Agreement, and to comply with the terms and conditions of such permits,
consents, approvals and authorizations. Each of South Branch and Potomac shall
have the right to review in advance, and to the extent practicable each will
consult with the other, in each case subject to applicable laws relating to the
exchange of information, with respect to, all material written information
submitted to any third party or any Governmental Authority in connection with
the transactions contemplated by this Agreement. In exercising the foregoing
right, each of the parties hereto agrees to act reasonably and as promptly as
practicable. Each party hereto agrees that it will consult with the other party
hereto with respect to the obtaining of all material permits, consents,
approvals and authorizations of all third parties and Governmental Authorities
necessary or advisable to consummate the transactions contemplated by this
Agreement and each party will keep the other party apprised of the status of
material matters relating to completion of the transactions contemplated hereby.
(b) Each party agrees, upon request, to furnish the other party with
all information concerning itself, its Subsidiaries, directors, officers and
stockholders and such other matters as may be reasonably necessary or advisable
in connection with any filing, notice or application made by or on behalf of
such other party or any of its Subsidiaries to any third party or Governmental
Authority.
6.09 Benefit Plans and Arrangements. (a) Summit agrees that within a
reasonable period of time following the Effective Time (i) it will provide
employees of the Surviving Corporation with employee benefit plans substantially
similar in the aggregate to those provided to similarly situated employees of
South Branch, (ii) any such employees will receive credit for years of service
with Potomac prior to the Effective Time for the purpose of eligibility and
vesting, and (iii) Summit shall cause any and all pre-existing condition
limitations (to the extent such limitations did not apply to a pre-existing
condition under the Compensation and Benefit Plans) and eligibility waiting
periods under group health plans to be waived with respect to such participants
and their eligible dependents; provided, however, that with respect to Potomac's
-------- -------
group health plans, Potomac shall have a period of two (2) years in which to
conform the premium contributions of employees paid with respect to its health
plans with those maintained by Summit. During that two-year period, Potomac
agrees to make periodic incremental increases to the health insurance premiums
paid by its employees such that at the end of such period, the health insurance
premium contributions paid by Potomac employees conform to the level determined
by Summit management. This section shall apply only to employee benefit plans
available generally to employees and shall specifically not include plans
---
designed to compensate executive personnel of Summit and its Affiliates.
6.10 Notification of Certain Matters. Each of Potomac and South
Branch shall give prompt notice to the other of any fact, event or circumstance
known to it that (i) is reasonably likely, individually or taken together with
all other facts, events and circumstances known to it, to result in
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<PAGE>
any Material Adverse Effect with respect to it or (ii) would cause or constitute
a material breach of any of its representations, warranties, covenants or
agreements contained herein.
6.11 Dividend Coordination. The Potomac Board shall cause its regular semi-
annual dividend record dates and payment dates for Potomac Common Stock to be
the same as South Branch's regular semi-annual dividend record dates and payment
dates for South Branch Common Stock (e.g., Potomac shall move its next dividend
record and payment dates to the next dividend record and payment date for South
Branch Common Stock), and Potomac shall not thereafter change its regular
dividend payment dates and record dates (it being the intention of the parties
that the stockholders of Potomac shall not receive two dividends, or fail to
receive one dividend, for any single semi-annual period with respect to their
shares of Potomac Common Stock or the Summit Common Stock exchanged therefor in
the Merger). Notwithstanding the foregoing, nothing contained in this Section
6.11 shall require either of the parties to take any action that would
materially impair their ability to satisfy the conditions set forth in Sections
7.02(d) and 7.03(d) hereof.
6.12 Change of Name of South Branch. South Branch agrees that it will take
all steps necessary to change its name to Summit Financial Group, Inc.
("Summit") prior to the Effective Time.
6.13 Directorship of Summit; Formation of Executive Committee. (a) Summit
will initially have a Board of Directors consisting of eighteen (18) members,
and Summit agrees to cause six (6) current members of the Board of Directors of
Potomac designated by Potomac (i) to be appointed to the Board of Directors of
Summit as of the Effective Time, and (ii) to be nominated and recommended for
election at the next Annual Meeting of Summit shareholders after the Effective
Time if such director is a member of a class whose terms are expiring at such
Annual Meeting. If the number of directors of Summit is different from eighteen
(18) at the Effective Time, the number of directors shall be divisible by three
(3), and Potomac will be entitled to designate 1/3 of the directors. Directors
designated by Potomac for the initial Board of Directors of Summit shall be
spread evenly among the classes of directors of Summit. Upon the expiration of
their initial terms, Summit's directors designated by Potomac shall be eligible
to be nominated to serve for such additional terms as Summit shall determine
consistent with prudent banking practices and such director's fulfillment, to
Summit's satisfaction, of his or her fiduciary duty to Summit.
(b) Summit agrees to form an executive committee or other governing
body consisting of not more than nine (9) members, of which five (5) individuals
shall be designated by South Branch and four (4) individuals designated by
Potomac.
(c) The provisions of any resolution, bylaw or of the articles of
incorporation of Summit which state or set forth a mandatory retirement age
shall not apply to any person initially designated by Potomac to serve on the
Board of Directors of Summit pursuant to Section 6.13 hereof, who, as of the
Closing Date, is a director of Potomac and has attained the age of 60 years
("Exempt Person"). Such Exempt Person shall be permitted to serve until he or
she reaches the age of 80, provided such Exempt Person's service as a director
is consistent with prudent banking
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<PAGE>
practices and such Exempt Person fulfills, to Summit's satisfaction, his or her
fiduciary duty to Summit.
6.14 Officers of Board and Summit. Oscar M. Bean shall be retained as
Chairman of the Board of Summit. G. R. Ours, Jr. shall be appointed as Vice
Chairman of the Board of Summit. H. Charles Maddy, III shall be retained as
President of Summit.
6.15 Members of the Board of Directors of Potomac and South Branch, Other
Matters. (a) Two individuals of South Branch shall be appointed to serve on the
Board of Directors of Potomac. Two individuals of Potomac shall be appointed by
Potomac to serve on the Board of Directors of South Branch Valley National Bank.
(b) The current members of the Board of Directors of Potomac shall continue to
serve as such after the Merger, and for a period of five (5) years after the
Merger, provided that such person continues to fulfill his or her fiduciary
duties to Potomac and Summit. Vacancies and new board seats shall be filled by
affirmative vote of the current members of the Board of Directors of Potomac and
their successors. During the five-year period, the maximum size of the Potomac
Board of Directors shall not exceed twelve (12) persons. The requirements of
this provision may be modified during the five-year period only upon the
affirmative vote of three-fourths (3/4) of Summit's Board of Directors.
6.16 Location of Summit Offices. Summit's corporate offices shall be
located in Moorefield, West Virginia.
6.17 Changes to Organizational Documents. Summit's bylaws shall include
provisions ensuring that the following actions by Summit's Board of Directors
shall require an affirmative vote of at least three-fourths (3/4) of the board:
(i) mergers and closures of banks and branches; (ii) any amendment to Summit's
Articles of Incorporation or Bylaws; (iii) the adoption of any agreement or plan
to merge, consolidate, liquidate, dissolve or sell shares of stock or the sale,
lease or exchange of all or substantially all the assets of Summit; and (iv) any
change of Potomac's name.
6.18 Divestment of Branch. South Branch shall take all action reasonable
necessary to divest its branch located in Petersburg, West Virginia, provided
that (i) such divestment is required for regulatory approval, and (ii) South
Branch is not required to reflect a financial loss based on Generally Accepted
Accounting Principles. South Branch will use its best efforts to accomplish
such divestiture if divestiture is required for regulatory approval.
6.19 Directors' and Officers' Protection. Summit shall provide and keep in
force, for a period of three years after the Effective Time, directors' and
officers' liability insurance providing coverage to directors and officers of
Potomac for acts or omissions occurring prior to the Effective Time. Such
insurance shall provide at least the substantially equivalent coverage and
substantially equivalent amounts as contained in any Summit policy of insurance
on the date hereof; provided, that in no event shall the annual premium on such
policy exceed 150% of the annual premium payments on Potomac's policy in effect
as of the date hereof (the "Maximum Amount"). If the amount of the premiums
necessary to maintain or procure such insurance coverage exceeds the maximum
amount, Summit shall use its reasonable efforts to maintain the most
advantageous policies of directors' and
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<PAGE>
officers' liability insurance obtainable for a premium equal to the Maximum
Amount. Notwithstanding the foregoing, Summit further agrees to indemnify all
individuals who are or have been officers, directors or employees of Potomac
prior to the Effective Time from any acts or omissions in such capacities prior
to the Effective Time, to the extent that such indemnification is provided
pursuant to the Articles of Incorporation and Bylaws of Potomac on the date
hereof as permitted under the WVCA.
6.20 Other Transactions. South Branch agrees that it shall not solicit or
encourage inquiries or proposals with respect to, or engage in any negotiations
concerning, or provide any confidential information to or have any discussions
with, any person relating to any proposal pursuant to which South Branch would
be acquired by or merged with an entity without South Branch surviving
("Acquisition Transaction"). South Branch shall promptly (within 24 hours)
advise Potomac following the receipt by South Branch of a proposal relating to
such Acquisition Transaction, and the substance thereof (including the identity
of the person making the proposal), and advise Potomac of any developments with
respect to such proposal immediately upon the occurrence thereof.
Notwithstanding the foregoing, the directors of South Branch shall not be
required to take any action hereunder that, upon consultation with and the
advice of outside counsel, the South Branch Board has determined would
constitute a breach of fiduciary duties of the members of the South Branch Board
under applicable law. Nothing herein shall be construed to limit at any time the
ability of South Branch or any of its Subsidiaries from entering into other
agreements or transactions prior to the Effective Time pursuant to which it or
its subsidiaries may merge, consolidate or affiliate with any other entity, or
acquire or establish other branches or subsidiaries ("Other Transactions").
South Branch agrees to advise Potomac of such Other Transactions as and when
appropriate, but in any event prior to the submission of a transaction or
agreement to South Branch's Board of Directors for approval. If South Branch
notifies Potomac of an Other Transaction (as defined herein) in which South
Branch is not the surviving entity, then Potomac may terminate this Agreement on
notice to South Branch prior to the earlier of: (1) thirty days after receipt of
notice of the Other Transaction or (2) the Effective Time.
ARTICLE VII
Conditions to Consummation of the Merger
7.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each of South Branch and Potomac to consummate the
Merger is subject to the fulfillment or written waiver by South Branch and
Potomac prior to the Effective Time of each of the following conditions:
(a) Stockholder Approvals. This Agreement shall have been duly
---------------------
approved and adopted by the requisite vote of the stockholders of Potomac and
Merger Sub, and the issuance of shares in connection with this Agreement shall
have been approved by the requisite vote of the stockholders of South Branch,
and all corporate and shareholder action necessary to authorize the Merger shall
have been duly taken by South Branch and Potomac.
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<PAGE>
(b) Regulatory Approvals. All regulatory approvals required to
--------------------
consummate the transactions contemplated hereby, shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired and no such approvals shall contain (i) any
conditions, restrictions or requirements which either party reasonably
determines would either before or after the Effective Time have a Material
Adverse Effect on the Surviving Corporation and its Subsidiaries taken as a
whole or (ii) any conditions, restrictions or requirements that are not
customary and usual for approvals of such type and which either party's Board
reasonably determines would either before or after the Effective Date be unduly
burdensome.
(c) No Injunction. No Governmental Authority of competent
-------------
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, judgment, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and prohibits, restricts
or makes illegal consummation of the transactions contemplated by this
Agreement.
(d) Registration Statement. The Registration Statement shall have
----------------------
become effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC.
(e) Blue Sky Approvals. All permits and other authorizations under
------------------
state securities laws necessary to consummate the transactions contemplated
hereby and to issue the shares of Summit Common Stock to be issued in the Merger
shall have been received and be in full force and effect.
7.02 Conditions to Obligation of Potomac. The obligation of Potomac to
consummate the Merger is also subject to the fulfillment or written waiver by
Potomac prior to the Effective Time of each of the following conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of South Branch set forth in this Agreement shall be true and
correct, subject to Section 5.02, as of the date of this Agreement and as of
the Effective Date as though made on and as of the Effective Date (except that
representations and warranties that by their terms speak as of the date of this
Agreement or some other date shall be true and correct as of such date), and
Potomac shall have received a certificate, dated the Effective Date, signed on
behalf of South Branch by the Chief Executive Officer of South Branch to such
effect.
(b) Performance of Obligations of South Branch. South Branch shall
------------------------------------------
have performed in all material respects all obligations required to be performed
by them under this Agreement at or prior to the Effective Time, and Potomac
shall have received a certificate, dated the Effective Date, signed on behalf of
South Branch by the Chief Executive Officer of South Branch to such effect.
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<PAGE>
(c) Opinion of Tax Counsel. Potomac shall have received an opinion of
----------------------
Jackson & Kelly, LLP, special counsel to Potomac, dated the Effective Date, to
the effect that, on the basis of facts, representations and assumptions set
forth in such opinion, (i) the Merger constitutes a "reorganization" within the
meaning of Section 368 of the Code and (ii) no gain or loss will be recognized
by stockholders of Potomac who receive shares of Summit Common Stock in exchange
for shares of Potomac Common Stock, except that gain or loss may be recognized
as to cash received in lieu of fractional share interests.
(d) Accounting Treatment. Potomac shall have received from Arnett &
--------------------
Foster Accounts & Consultants, P.L.L.C., Potomac's independent auditors, a
letter, dated the Effective Date, stating its opinion that the Merger shall
qualify for "pooling-of-interests" accounting treatment.
(e) Counsel Opinion. Potomac shall have received an opinion of
---------------
counsel for South Branch date as of the Effective Date, to the effect that:
(i) South Branch is a bank holding company duly organized,
validly existing and in good standing under the laws of the State of West
Virginia;
(ii) The authorized capital stock and the number of shares issued
and outstanding of South Branch are as stated in the opinion. The issued and
outstanding shares are validly issued, fully paid and non-assessable, and were
not issued in violation of any preemptive rights of the shareholders of South
Branch. As of such date, except as previously disclosed by South Branch, to the
best of counsel's knowledge, there are no options, warrants, convertible
securities or similar items outstanding on behalf of South Branch.
(iii) South Branch has the corporate power and authority to
execute, deliver and perform its obligations under this Agreement. This
Agreement has been duly authorized, executed and delivered by South Branch and
constitutes the legal, valid and binding obligation of South Branch, enforceable
in accordance with its terms except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium, or
other laws affecting creditors' rights generally.
(iv) All necessary corporate proceedings have been duly and
validly taken by South Branch, to the extent required by law, its respective
articles of incorporation and bylaws, or otherwise, to authorize the execution
and delivery of this Agreement by South Branch and the consummation of the
transaction contemplated herein.
(v) Counsel has reviewed the proxy statement contemplated hereby
and, with respect to all information relating to South Branch contained therein,
counsel does not know of any misleading statement of any material fact or
failure to state a material fact which was necessary to be stated to prevent the
statements made from being false or misleading in any material respect, except
as to financial data, as to which counsel expresses no opinion.
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<PAGE>
(vi) The consummation of the transaction contemplated herein will
not violate or result in a breach of, or constitute a default under, the
articles of incorporation or bylaws of South Branch, or constitute a breach or
termination of, or default under, any agreement or instrument of which counsel
is aware and which would have a material adverse effect on the business of South
Branch, and to which it is a party or by which it or any of its property is
bound.
(f) Due Diligence. Potomac must have the opportunity to conduct a
-------------
due diligence investigation into various aspects of South Branch's operations.
Based on its investigation, which must be concluded by the end of the forty-
fifth (45th) business day following the date of this Agreement, Potomac, in its
discretion, may within five (5) calendar days after the close of the above due
diligence period (i) elect not to pursue consummation of the proposed
transactions or (ii) may notify South Branch of any objections or requirements
resulting therefrom. If Potomac elects not to pursue consummation of the
proposed transactions and properly notifies South Branch of the same, this
Agreement shall expire and parties hereto shall have no further obligations or
liabilities hereunder. If Potomac raises any objections as a result of its due
diligence and properly notifies South Branch of the same, South Branch must cure
or address the concerns to the satisfaction of Potomac or Potomac is not
obligated to continue to pursue consummation of the transactions contemplated
herein. Failure to provide notice under this paragraph shall not be construed
as a waiver by Potomac of any item required by or condition of this Agreement.
(g) Potomac Satisfaction with Loan Loss Reserve, Provision of Charge-
----------------------------------------------------------------
Offs, Funding of Benefits, Other Reserve Accounts, Etc. As of the Effective
- -------------------------------------------------------
Time, Potomac, in its reasonable discretion, must be satisfied with the adequacy
of the then existing level of South branch's loan loss reserve and with the
sufficiency of the write-downs and charge offs in the loan portfolio, such level
and sufficiency to be consistent with the requirements of any regulators and
prudent banking practices. In addition, South Branch must reserve for all
contingencies in a manner consistent with the requirements of the regulators and
prudent banking practices.
7.03 Conditions to Obligation of South Branch. The obligation of South
Branch to consummate the Merger is also subject to the fulfillment or written
waiver by South Branch prior to the Effective Time of each of the following
conditions:
(a) Representations and Warranties. The representations and
------------------------------
warranties of Potomac set forth in this Agreement shall be true and correct,
subject to Section 5.02, as of the date of this Agreement and as of the
Effective Date as though made on and as of the Effective Date (except that
representations and warranties that by their terms speak as of the date of this
Agreement or some other date shall be true and correct as of such date) and
South Branch shall have received a certificate, dated the Effective Date, signed
on behalf of Potomac by the Chief Executive Officer of Potomac to such effect.
(b) Performance of Obligations of Potomac. Potomac shall have
-------------------------------------
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Effective Time, and South Branch
shall have received a certificate, dated the Effective Date, signed on behalf of
Potomac by the Chief Executive Officer of Potomac to such effect.
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<PAGE>
(c) Opinion of South Branch Counsel. South Branch shall have received
-------------------------------
an opinion of Bowles Rice McDavid Graff & Love, PLLC, counsel to South Branch,
dated the Effective Date, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, the Merger
constitutes a reorganization under Section 368 of the Code. In rendering its
opinion, Bowles Rice McDavid Graff & Love, PLLC, may require and rely upon
representations contained in letters from South Branch, Potomac and others.
(d) Accounting Treatment. South Branch shall have received from
--------------------
Arnett & Foster, PLLC, South Branch's independent auditors, a letter, dated the
Effective Date, stating its opinion that the Merger shall qualify for "pooling-
of-interests" accounting treatment.
(e) Counsel's Opinion. South Branch shall have received an opinion of
-----------------
counsel for Potomac dated as of the Effective Date, to the effect that:
(i) Potomac is a state banking corporation duly organized,
validly existing and in good standing under the laws of the State of West
Virginia;
(ii) The authorized capital stock and the number of shares issued
and outstanding of Potomac are as stated in the opinion. The issued and
outstanding shares are validly issued, fully paid and non-assessable, and were
not issued in violation of any preemptive rights of the shareholders of Potomac.
As of such date, except as Previously Disclosed by Potomac, to the best of
counsel's knowledge, there are no options, warrants, convertible securities or
similar items outstanding on behalf of Potomac.
(iii) Potomac has the corporate power and authority to execute,
deliver and perform its obligations under this Agreement. This Agreement has
been duly authorized, executed and delivered by Potomac and constitutes the
legal, valid and binding obligation of Potomac, enforceable in accordance with
its terms except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium, or other laws
affecting creditors' rights generally.
(iv) All necessary corporate proceedings have been duly and
validly taken by Potomac, to the extent required by law, its respective articles
of incorporation and bylaws, or otherwise, to authorize the execution and
delivery of this Agreement by Potomac and the consummation of the transaction
contemplated herein.
(v) Counsel has reviewed the proxy statement contemplated hereby
and, with respect to all information relating to Potomac contained therein,
counsel does not know of any misleading statement of any material fact or
failure to state a material fact which was necessary to be stated to prevent the
statements made from being false or misleading in any material respect, except
as to financial data, as to which counsel expresses no opinion.
(vi) The consummation of the transaction contemplated herein will
not violate or result in a breach of, or constitute a default under, the
articles of incorporation or bylaws
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<PAGE>
of Potomac, or constitute a breach or termination of, or default under, any
agreement or instrument of which counsel is aware and which would have a
material adverse effect on the business of Potomac, and to which it is a party
or by which it or any of its property is bound.
(f) Due Diligence. South Branch must have the opportunity to
-------------
conduct a due diligence investigation into various aspects of Potomac's
operations. Based on its investigation, which must be concluded by the end of
the forty-fifth (45th) business day following the date of this Agreement, South
Branch, in its discretion, may within five (5) calendar days after the close of
the above due diligence period (i) elect not to pursue consummation of the
proposed transactions or (ii) may notify Potomac of any objections or
requirements resulting therefrom. If South Branch elects not to pursue
consummation of the proposed transactions and properly notifies Potomac of the
same, this Agreement shall expire and parties hereto shall have no further
obligations or liabilities hereunder. If South Branch raises any objections as a
result of its due diligence and properly notifies Potomac of the same, Potomac
must cure or address the concerns to the satisfaction of South Branch or South
Branch is not obligated to continue to pursue consummation of the transactions
contemplated herein. Failure to provide notice under this paragraph shall not be
construed as a waiver by South Branch of any item required by or condition of
this Agreement.
(g) South Branch Satisfaction with Loan Loss Reserve,
-------------------------------------------------
Provision of Charge-Offs, Funding of Benefits, Other Reserve Accounts, Etc. As
- --------------------------------------------------------------------------
of the Effective Time, South Branch, in its reasonable discretion, must be
satisfied with the adequacy of the then existing level of Potomac's loan loss
reserve and with the sufficiency of the write-downs and charge-offs in the loan
portfolio, such level and sufficiency to be consistent with the requirements of
any regulators and prudent banking practices. In addition, Potomac must reserve
for all contingencies in a manner consistent with the requirements of the
regulators and prudent banking practices.
ARTICLE VIII
Termination
8.01 Termination. This Agreement may be terminated, and the Merger may be
abandoned:
(a) Mutual Consent. At any time prior to the Effective Time, by the
--------------
mutual consent of South Branch and Potomac, if the Board of Directors of each so
determines by vote of a majority of the members of its entire Board.
(b) Breach. At any time prior to the Effective Time, by South Branch
------
or Potomac, if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event of either: (i) a breach by the other
party of any representation or warranty contained herein (subject to the
standard set forth in Section 5.02), which breach cannot be or has not been
cured within 30 days after the giving of written notice to the breaching party
of such breach; or (ii) a breach by the other party of any of the covenants or
agreements contained herein, which breach cannot be or has not been cured within
30 days after the giving of written notice to the breaching party of such
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<PAGE>
breach, provided that such breach (whether under (i) or (ii)) would be
reasonably likely, individually or in the aggregate with other breaches, to
result in a Material Adverse Effect.
(c) Delay. At any time prior to the Effective Time, by South Branch
-----
or Potomac, if its Board of Directors so determines by vote of a majority of the
members of its entire Board, in the event that the Merger is not consummated by
January 31, 2000, except to the extent that the failure of the Merger then to be
consummated arises out of or results from the willful failure of the party
seeking to terminate this Agreement to perform or observe the covenants and
agreements of such party set forth herein.
(d) No Approval. By South Branch or Potomac, if its Board of
-----------
Directors so determines by a vote of a majority of the members of its entire
Board, in the event (i) the approval of any Governmental Authority required for
consummation of the Merger and the other transactions contemplated by this
Agreement shall have been denied by final nonappealable action of such
Governmental Authority or (ii) any stockholder approval required by Section
7.01(a) herein is not obtained at the South Branch Meeting or the Potomac
Meeting, except in the case of clause (i) or clause (ii) that the failure of an
action specified therein arises out of or results from the willful failure of
the party seeking to terminate this Agreement to perform or observe the
covenants and agreements of such party set forth herein.
(e) Failure to Recommend, Etc. At any time prior to the South Branch
-------------------------
Meeting, by South Branch if the South Branch Board shall have failed to make its
recommendation referred to in Section 6.02, withdrawn such recommendation or
modified or changed such recommendation in a manner adverse in any respect to
the interests of South Branch; or at any time prior to the Potomac Meeting, by
Potomac, if the Potomac Board shall have failed to make its recommendation
referred to in Section 6.02, withdrawn such recommendation or modified or
changed such recommendation in a manner adverse in any respect to the interests
of Potomac.
8.02 Effect of Termination and Abandonment. In the event of termination of
this Agreement and the abandonment of the Merger pursuant to this Article VIII,
no party to this Agreement shall have any liability or further obligation to any
other party hereunder except (i) as set forth in Section 9.01 and (ii) that
termination will not relieve a breaching party from liability for any willful
breach of this Agreement giving rise to such termination.
ARTICLE IX
Miscellaneous
9.01 Survival. No representations, warranties, agreements and covenants
contained in this Agreement shall survive the Effective Time (other than
Sections 3.04, 6.09, 6.12, 6.13, 6.14, 6.15, 6.16, 6.17, 6.18, 6.19 and this
Article IX which shall survive the Effective Time) or the termination of this
Agreement if this Agreement is terminated prior to the Effective Time (other
than Sections 6.03(b), 6.04, 6.05(b), 8.02 and this Article IX which shall
survive such termination).
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9.02 Waiver; Amendment. Prior to the Effective Time, any provision of this
Agreement may be (i) waived by the party benefitted by the provision, to the
extent permitted by applicable law, or (ii) amended or modified at any time, by
an agreement in writing between the parties hereto executed in the same manner
as this Agreement, except that (A) after the Potomac Meeting, this Agreement may
not be amended if it would violate the WVCA and (B) after the South Branch
Meeting, this Agreement may not be amended if it would violate the WVCA.
9.03 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to constitute an original.
9.04 Governing Law. This Agreement shall be governed by, and interpreted in
accordance with, the laws of the State of West Virginia applicable to contracts
made and to be performed entirely within such State.
9.05 Expenses. Each party hereto will bear all expenses incurred by it in
connection with this Agreement and the transactions contemplated hereby, except
that expenses incurred in connection with the printing of the Registration
Statement and joint proxy statement and SEC fees shall be shared, in proportion
to the respective book values of each as of June 30, 1999, between South Branch
and Potomac. Notwithstanding the foregoing, if Potomac accepts an offer by
another person other than South Branch within the sixty (60) days after
execution of this Agreement, by and between South Branch and Potomac, Potomac
shall pay all of South Branch's expenses. If South Branch accepts an offer by
another person other than Potomac within sixty (60) days after execution of this
Agreement, South Branch shall pay all of Potomac's expenses provided that
Potomac elects to terminate as provided in Section 6.20 hereof. For purposes of
this provision, "person" shall mean any individual, corporation, partnership of
other entity.
9.06 Notices. All notices, requests and other communications hereunder to a
party shall be in writing and shall be deemed given if personally delivered,
telecopied (with confirmation) or mailed by registered or certified mail (return
receipt requested) to such party at its address set forth below or such other
address as such party may specify by notice to the parties hereto.
If to South Branch, to:
H. Charles Maddy, III
South Branch Valley Bancorp, Inc.
310 North Main Street
P. O. Box 680
Moorefield, West Virginia 26836
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<PAGE>
With a copy to:
Bowles Rice McDavid Graff & Love, PLLC
Attention: Sandra M. Murphy, Esq.
600 Quarrier Street
P. O. Box 1386
Charleston, West Virginia 25325-1386
If to Potomac, to:
Patrick N. Frye
Potomac Valley Bank
4 North Main Street
P. O. Box 1079
Petersburg, West Virginia 26847-1079
With a copy to:
Charles D. Dunbar, Esq.
Jackson & Kelley
1600 Laidley Tower
P. O. Box 553
Charleston, West Virginia 25322
9.07 Entire Understanding; No Third Party Beneficiaries. This Agreement
represents the entire understanding of the parties hereto with reference to the
transactions contemplated hereby and thereby and this Agreement supersedes any
and all other oral or written agreements heretofore made. Except for Sections
6.09, 6.11, 6.13, 6.14 and 6.15, nothing in this Agreement expressed or implied,
is intended to confer upon any person, other than the parties hereto or their
respective successors, any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
9.08 Interpretation; Effect; Assignment; Successors. (a) When a reference
is made in this Agreement to Sections, Exhibits or Schedules, such reference
shall be to a Section of, or Exhibit or Schedule to, this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Whenever the words "include," "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation." No provision of this Agreement shall be construed to require South
Branch, Potomac or any of their respective Subsidiaries, affiliates or directors
to take any action which would violate applicable law (whether statutory or
common law), rule or regulation.
(b) A party hereto may not assign any of its rights or obligations
under this Agreement to any other person without the prior written consent of
the other party. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in counterparts by their duly authorized officers, all as of the day
and year first above written.
SOUTH BRANCH VALLEY BANCORP, INC.
By: /s/ H. Charles Maddy, III
-------------------------------------------
Name: H. Charles Maddy, III
Title: President
POTOMAC VALLEY BANK
By: /s/ Patrick N. Frye
-------------------------------------------
Name: Patrick N. Frye
Title: President and Chief Executive Officer
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<PAGE>
EXHIBIT A
FORM OF POTOMAC AFFILIATE LETTER
____________, 1999
Potomac Valley Bank
4 North Main Street
P.O. Box 1079
Petersburg, West Virginia 26847
Attention: Patrick N. Frye
Summit Financial Group, Inc.
310 North Main Street
P. O. Box 680
Moorefield, West Virginia 26836
Attention: H. Charles Maddy, III
Ladies and Gentlemen:
I have been advised that I may be deemed to be, but do not admit that
I am, an "affiliate" of Potomac Valley Bank, a West Virginia corporation
("Potomac"), as that term is defined in Rule 145 promulgated by the Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "Securities Act"), and/or SEC Accounting Series Releases 130 and 135. I
understand that pursuant to the terms of the Agreement and Plan of Merger, dated
as of _____________, 1999 (the "Merger Agreement"), by and between South Branch
Valley Bancorp, Inc., a West Virginia corporation ("South Branch"), and Potomac,
a wholly owned subsidiary of South Branch will merge with and into Potomac (the
"Merger") and that the Merger is intended to be accounted for under the
"pooling-of-interests" accounting method.
I further understand that as a result of the Merger, I may receive
shares of common stock, par value $_____ per share, of Summit Financial Group,
Inc, ("Summit") in exchange for shares of common stock, par value $_____ per
share, of Potomac ("Potomac").
I have carefully read this letter and reviewed the Merger Agreement
and discussed their requirements and other applicable limitations upon my
ability to sell, transfer, or otherwise dispose of South Branch and Potomac
Stock, to the extent I felt necessary, with my counsel or counsel for Potomac.
I represent, warrant and covenant with and to Summit that in the event
I receive any Summit Stock as a result of the Merger:
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<PAGE>
Potomac Valley Bank
Summit Financial Group, Inc.
_______________, 1999
Page 52
1. I shall not make any sale, transfer, or other disposition of such
Summit Financial Group, Inc. Stock unless (i) such sale, transfer
or other disposition has been registered under the Securities
Act, (ii) such sale, transfer or other disposition is made in
conformity with the provisions of Rule 145 under the Securities
Act (as such rule may be amended from time to time), or (iii) in
the opinion of counsel in form and substance reasonably
satisfactory to Summit, or under a "no-action" letter obtained by
me from the staff of the SEC, such sale, transfer or other
disposition will not violate or is otherwise exempt from
registration under the Securities Act.
2. I understand that Summit is under no obligation to register the
sale, transfer or other disposition of shares of Summit Stock by
me or on my behalf under the Securities Act or to take any other
action necessary in order to make compliance with an exemption
from such registration available.
3. I understand that stop transfer instructions will be given to
Summit's transfer agent with respect to shares of Summit Stock
issued to me as a result of the Merger and that there will be
placed on the certificates for such shares, or any substitutions
therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities
Act of 1933 applies. The shares represented by this certificate
may be transferred only in accordance with the terms of a letter
agreement, dated __, 199_, between the registered holder hereof
and Summit, a copy of which agreement is on file at the principal
offices of Summit. This legend shall become null and void on and
after ______ _________, [two years after the Effective Time.]"
4. I understand that, unless transfer by me of the Summit Stock
issued to me as a result of the Merger has been registered under
the Securities Act or such transfer is made in conformity with
the provisions of Rule 145(d) under the Securities Act, Summit
reserves the right, in its sole discretion, to place the
following legend on the certificates issued to my transferee:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired
from a person who received such shares in a transaction to which
Rule 145 under
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<PAGE>
Potomac Valley Bank
Summit Financial Group, Inc.
_______________, 1999
Page 53
the Securities Act of 1933 applies. The shares have been acquired
by the holder not with a view to, or for resale in connection
with, any distribution thereof within the meaning of the
Securities Act of 1933 and may not be offered, sold, pledged or
otherwise transferred except in accordance with an exemption from
the registration requirements of the Securities Act of 1933. This
legend shall become null and void on and after _____________ [two
years after the effective time]."
It is understood and agreed that the legends set forth in paragraphs
(3) and (4) above shall be removed by delivery of substitute certificates
without such legends if I shall have delivered to Summit (i) a copy of a "no
action" letter from the staff of the SEC, or an opinion of counsel in form and
substance reasonably satisfactory to Summit, to the effect that such legend is
not required for purposes of the Act, or (ii) evidence or representations
satisfactory to Summit that the Summit Stock represented by such certificates is
being or has been sold in conformity with the provisions of Rule 145(d).
I further represent, warrant and covenant with and to Summit that I
will not sell, transfer or otherwise dispose of, or reduce my risk relative to,
any shares of Potomac Stock or South Branch Stock (whether or not acquired by me
in the Merger) during the period commencing 30 days prior to effective date of
the Merger and ending at such time as Summit notifies me that results covering
at least 30 days of combined operations of Potomac and Summit after the Merger
have been published by Summit. I understand that Summit is not obligated to
publish such combined financial results except in accordance with its normal
financial reporting practice.
I further understand and agree that this letter agreement shall apply
to all shares of Potomac Stock and Summit Stock that I am deemed to beneficially
own pursuant to applicable federal securities law.
I also understand that the Merger is intended to be treated as a
"pooling of Interests" for accounting purposes, and I agree that if Potomac or
Summit advises me in writing that additional
A-53
<PAGE>
Potomac Valley Bank
Summit Financial Group, Inc.
_______________, 1999
Page 54
restrictions apply to my ability to sell, transfer, or otherwise dispose of
Potomac Stock or Summit Stock in order for Summit to be entitled to use the
pooling of interests accounting method, I will abide by such restrictions.
Very truly yours,
By__________________________
Name:
Accepted this ____ day of
_______________, 1999.
Potomac Valley Bank
By________________________
Name:
Title:
Summit Financial Group, Inc.
By________________________
Name:
Title:
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<PAGE>
EXHIBIT B
FORM OF SUMMIT FINANCIAL GROUP, INC.
____________, 1999
Summit Financial Group, Inc.
310 North Main Street
P. O. Box 680
Moorefield, West Virginia 26836
Attention: H. Charles Maddy, III
Ladies and Gentlemen:
I have been advised that I may be deemed to be, but do not admit that
I am, an "affiliate" of South Branch Valley Bancorp, Inc., a West Virginia
corporation ("South Branch"), as that term is defined in the Securities and
Exchange Commission's Accounting Series Releases 130 and 135. I understand that
pursuant to the terms of the Agreement and Plan of Merger, dated as of ________
__, 1999 (the "Merger Agreement"), by and between South Branch and Potomac
Valley Bank, a West Virginia corporation ("Potomac"), wholly-owned subsidiary of
South Branch (the "Merger"), will merge with and into Potomac, and that the
Merger is intended to be accounted for under the "pooling-of-interests"
accounting method.
I have carefully read this letter and reviewed the Merger Agreement
and discussed their requirements and other applicable limitations upon my
ability to sell, transfer, or otherwise dispose of common stock of South Branch
and Potomac, to the extent I felt necessary, with my counsel or counsel for
Summit.
I hereby represent, warrant and covenant with and to Summit that:
1. I will not sell, transfer or otherwise dispose of, or reduce my
risk relative to, any shares of common stock of Potomac or Summit
(whether or not acquired by me in the Merger) during the period
commencing 30 days prior to the effective date of the Merger and
ending at such time as Summit notifies me that results covering
at least 30 days of combined operations of Potomac and Summit
after the Merger have been published by Summit. I understand
that Summit is not obligated to publish such combined financial
results except in accordance with its normal financial reporting
practice.
2. I further understand and agree that this letter agreement shall
apply to all shares of common stock of Potomac and Summit that I
am deemed to beneficially own pursuant to applicable federal
securities laws.
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<PAGE>
Summit Financial Group, Inc.
_______________, 1999
Page 56
3. If Summit advises me in writing that additional restrictions
apply to my ability to sell, transfer, or otherwise dispose of
common stock of Potomac or Summit in order for Summit to be
entitled to use the "pooling-of-interests" accounting method, I
will abide by such restrictions.
Very truly yours,
By__________________________
Name:
Accepted this ____ day of
_______________, 1999.
Summit Financial Group, Inc.
By________________________
Name:
Title:
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<PAGE>
ANNEX A
FORM OF SUPPLEMENT FOR MERGER SUB ACCESSION
TO MERGER AGREEMENT
SUPPLEMENT, dated as of the _______ day of ___________, 1999 (this
"Supplement"), to the Agreement and Plan of Merger, dated as of
________________, 1999 (as amended from time to time in accordance with the
terms thereof, the "Merger Agreement"), by and between South Branch Valley
Bancorp, Inc. ("South Branch") and Potomac Valley Bank ("Potomac").
WHEREAS, terms used but not otherwise defined herein have the meanings
specified in the Merger Agreement; and
WHEREAS, pursuant to Section 2.01 of the Merger Agreement, South
Branch has determined to consummate the Merger in part through the merger of
Merger Sub with and into Potomac.
NOW, THEREFORE, by its execution of this Supplement, as of the date
hereof, the undersigned (i) adopts and becomes a party to the Merger Agreement,
as required by Section 2.01 thereof and (ii) agrees to perform all its
obligations and agreements set forth therein.
IN WITNESS WHEREOF, this Supplement has been duly executed and
delivered by the undersigned, duly authorized thereunto as of the date first
hereinabove written.
[INSERT NAME OF MERGER SUB]
By:________________________________
Name:
Title:
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<PAGE>
ANNEX II
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<PAGE>
31-1-123. Rights of dissenting shareholders; procedure for purchasing of
dissenting shareholders' shares; civil action for determining value of shares;
procedure for transferring of such shares to corporation and payment therefor.
Statute text
(a) Any shareholder electing to exercise his right to dissent, pursuant to
section one hundred twenty-two [(S) 31-1-122] of this article, shall file with
the corporation, prior to or at the meeting of shareholders at which such
proposed corporate action is submitted to a vote, a written objection to such
proposed corporate action. If such proposed corporate action be approved by the
required vote and such shareholder shall not have voted in favor thereof, such
shareholder may, within ten days after the date on which the vote was taken or
if a corporation is to be merged without a vote of its shareholders into another
corporation, any of its shareholders may, within fifteen days after the plan of
such merger shall have been mailed to such shareholders, make written demand on
the corporation, or, in the case of a merger or consolidation, on the surviving
or new corporation, domestic or foreign, for payment of the fair value of such
shareholder's shares, and, if such proposed corporate action is effected, such
corporation shall pay to such shareholder, upon surrender of the certificate or
certificates representing such shares, the fair value thereof as of the day
prior to the date on which the vote was taken approving the proposed corporate
action, excluding any appreciation or depreciation in anticipation of such
corporate action. Any shareholder failing to make demand within the ten-day
period shall be bound by the terms of the proposed corporate action. Any
shareholder making such demand shall thereafter be entitled only to payment as
in this section provided and shall not be entitled to vote or to exercise any
other rights of a shareholder.
(b) No such demand may be withdrawn unless the corporation shall consent
thereto. If, however, such demand shall be withdrawn upon consent, or if the
proposed corporate action shall be abandoned or rescinded or the shareholders
shall revoke the authority to effect such action, or if, in the case of a
merger, on the date of the filing of the articles of merger the surviving
corporation, is the owner of all the outstanding shares of the other
corporations, domestic and foreign, that are parties to the merger, or if no
demand or petition for the determination of fair value by a court of general
civil jurisdiction have been made or filed within the time provided in
subsection (e) of this section, or if a court of general civil jurisdiction
shall determine that such shareholder is not entitled to the relief provided by
this section, then the right of such shareholder to be paid the fair value of
his shares shall cease and his status as a shareholder shall be restored,
without prejudice to any corporate proceedings which may have been taken during
the interim.
(c) Within ten days after such corporate action is effected, the
corporation, or, in the case of a merger or consolidation, the surviving or new
corporation, domestic or foreign, shall give written notice thereof to each
dissenting shareholder who has made demand as herein provided, and shall make a
written offer to each shareholder to pay for such shares at a specified price
deemed by such corporation to be fair value thereof. Such notice and offer shall
be accompanied by a balance sheet of the corporation the shares of which the
dissenting shareholder holds, as of the latest available date
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<PAGE>
and not more than twelve months prior to the making of such offer, and a profit
and loss statement of such corporation for the twelve months' period ended on
the date of such balance sheet.
(d) If within thirty days after the date on which such corporate action is
effected the fair value of such shares is agreed upon between any such
dissenting shareholder and the corporation, payment therefor shall be made
within ninety days after the date on which such corporate action was effected,
upon surrender of the certificate or certificates representing such shares. Upon
payment of the agreed value the dissenting shareholder shall cease to have any
interest in such shares.
(e) If within such period of thirty days, a dissenting shareholder and the
corporation do not so agree, then the corporation shall within thirty days after
receipt of written demand from any dissenting shareholder, which written demand
must be given within sixty days after the date on which such corporate action
was effected, file a complaint in a court of general civil jurisdiction
requesting that the fair value of such shares be found and determined, or the
corporation may file such complaint at any time within such sixty-day period at
its own election. Such complaint shall be filed in any court of general civil
jurisdiction in the county in which the principal office of the corporation is
situated, or, if there be no such office in this State, in the county in which
any dissenting shareholder resides or is found or in which the property of such
corporation, or any part of it, may be. If the corporation shall fail to
institute such proceedings, any dissenting shareholder may do so in the name of
the corporation. All dissenting shareholders wherever residing, may be made
parties to the proceedings as an action against their shares quasi in rem. A
copy of the complaint shall be served on each dissenting shareholder who is a
resident of this State in the same manner as in other civil actions. Dissenting
shareholders who are nonresidents of this State shall be served a copy of the
complaint by registered or certified mail, return receipt requested. In
addition, service upon such nonresident shareholders shall be made by
publication, as provided in Rule 4(e)(2) of the West Virginia Rules of Civil
Procedure. All shareholders who are parties to the proceeding shall be entitled
to judgment against the corporation for the amount of the fair value of their
shares. The court may, if it so elects, appoint one or more persons as
appraisers to receive evidence and recommend a decision on the question of fair
value. The appraisers shall have such power and authority as shall be specified
in the order of their appointment or any subsequent appointment. The judgment
shall be payable only upon and concurrently with the surrender to the
corporation of the certificate or certificates representing such shares. Upon
payment of the judgment, the dissenting shareholder shall cease to have any
interest in such shares.
The judgment shall include an allowance for interest at such rate as the
court may find to be fair and equitable in all the circumstances, from the date
on which the vote was taken on the proposed corporate action to the date of
payment.
The costs and expenses of any such proceeding shall be determined by the
court and shall be assessed against the corporation, but all or any part of such
costs and expenses may be apportioned and assessed as the court may deem
equitable against any or all of the dissenting shareholders who are parties to
the proceeding to whom the corporation shall have made an offer to pay for the
shares if the court shall find that the action of such shareholders in failing
to accept such offer was arbitrary
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<PAGE>
or vexatious or not in good faith. Such expenses shall include reasonable
compensation for and reasonable expenses of the appraisers, but shall exclude
the fees and expenses of counsel for and experts employed by any party; but if
the fair value of the shares as determined materially exceeds the amount which
the corporation offered to pay therefor, or if no offer was made, the court in
its discretion may award to any shareholder who is a party to the proceeding
such sum as the court may determine to be reasonable compensation to any expert
or experts employed by the shareholder in the proceeding. Any party to the
proceeding may appeal any judgment or ruling of the court as in other civil
cases.
(f) Within twenty days after demanding payment for his shares, each
shareholder demanding payment shall submit the certificate or certificates
representing his shares to the corporation for notation thereon that such demand
has been made. His failure to do so shall, at the option of the corporation,
terminate his rights under this section unless a court of general civil
jurisdiction, for good and sufficient cause shown, shall otherwise direct. If
shares represented by a certificate on which notation has been so made shall be
transferred, each new certificate issued therefor shall bear similar notation,
together with the name of the original dissenting holder of such shares, and a
transferee of such shares shall acquire by such transfer no rights in the
corporation other than those which the original dissenting shareholder had after
making demand for payment of the fair value thereof.
(g) Shares acquired by a corporation pursuant to payment of the agreed
value therefor or to payment of the judgment entered therefor, as in this
section provided, may be held and disposed of by such corporation as in the case
of other treasury shares, except that, in the case of a merger or consolidation,
they may be held and disposed of as the plan of merger or consolidation may
otherwise provide.
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ANNEX III
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<PAGE>
PROPOSED AMENDMENT TO
ARTICLES OF INCORPORATION OF
SOUTH BRANCH VALLEY BANCORP, INC.
CURRENT ARTICLE I
I. The undersigned agrees to become a corporation by the name of South Branch
Valley Bancorp, Inc.
PROPOSED ARTICLE I
I. The undersigned agrees to become a corporation by the name of Summit
Financial Group, Inc.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers.
A. Excerpts from Article VI of the Bylaws of South Branch:
Indemnification of Directors and Officers
Director and Officer Indemnification. Unless otherwise prohibited by law,
------------------------------------
each director and officer of the corporation now or hereafter serving as such,
and each director and officer of any majority or wholly owned subsidiary of the
corporation that has been designated as entitled to indemnification by
resolution of the board of directors of the corporation as may be from time to
time determined by said board, shall be indemnified by the corporation against
any and all claims and liabilities (other than an action by or in the right of
the corporation or any majority or wholly owned subsidiary of the corporation)
including expenses of defending such claim of liability to which he or she has
or shall become subject by reason of any action alleged to have been taken,
omitted, or neglected by him or her as such director or officer provided the
director or officer acted in good faith and in a manner which the director or
officer reasonably believed to be in or not opposed to the best interests of the
corporation. With respect to any criminal proceeding, a director or officer
shall be entitled to indemnification if such person had no reasonable cause to
believe his or her conduct was unlawful. The corporation shall reimburse each
such person as provided above in connection with any claim or liability brought
or arising by or in the right of the corporation provided, however, that such
person shall be not indemnified in connection with, any claim or liability
brought by or in the right of the corporation or any majority or wholly owned
subsidiary of the corporation as to which the director or officer shall have
been adjudged to be liable for negligence or misconduct in the performance of
his or her duty to the corporation or any majority or wholly owned subsidiary of
the corporation unless and only to the extent that the court in which such
action or proceeding was brought shall determine upon application that, despite
the adjudication of liability but in view of all circumstances of the case, such
person is fairly and reasonably entitled to indemnify for such expenses which
such court shall deem proper.
The determination of eligibility for indemnification shall be made by those
board members not party to the action or proceeding or in the absence of such
board members by a panel of independent shareholders appointed for such purpose
of a majority of the shareholders of the corporation or in any other manner
provided by law.
The right of indemnification hereinabove provided for shall not be
exclusive of any rights to which any director or officer of the corporation may
otherwise be entitled by law.
The board of directors may by resolution, by law or other lawful manner
from time to time as it shall determine extend the indemnification provided
herein to agents and employees of the
II-1
<PAGE>
corporation, to directors, officers, agents or employees of other corporations
or entities owned in whole or in part by the corporation. The corporation may
purchase and maintain insurance for the purposes hereof.
B. West Virginia Corporation Law, W. Va. Code (S) 31-1-9:
Section 31-1-9. Indemnification of officers, directors, employees and agents.
(a) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines, taxes and penalties and interest thereon, and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action or proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding, that such person did have
reasonable cause to believe that his conduct was unlawful.
(b) A corporation shall have power to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or proceeding by or in the right of the corporation to procure
judgment in its favor by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or proceeding if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made in respect of any claim, issue or matter, including, but not
limited to, taxes or any interest or penalties thereon, as to which such person
shall have been adjudged to be liable for negligence or misconduct in the
performance of his duty to the corporation unless and only to the extent that
the court in which such action or proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action or proceeding referred to in subsection
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<PAGE>
(a) or (b), or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsection (a) or (b) (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in subsection (a) or (b). Such determination shall be made
(1) by the board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action or proceeding, or (2) if such a
quorum is not obtainable, or even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or (3)
by the shareholders or members.
(e) Expenses (including attorney's fees) incurred in defending a civil or
criminal action or proceeding may be paid by the corporation in advance of the
final disposition of such action or proceeding as authorized in the manner
provided in Subsection (d) upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay such amount unless it shall
ultimately be determined that he is entitled to be indemnified by the
corporation as authorized in this section.
(f) The indemnification provided by this section shall not be deemed
exclusive of any other rights to which any shareholder or member may be entitled
under any bylaw, agreement, vote of shareholders, members or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of this section.
(1961,c.15; 1974,c.13; 1975,c.118.)
South Branch does provide indemnity insurance to its officers and directors.
Such insurance will not, however, indemnify officers or directors for willful
misconduct or gross negligence in the performance of a duty to South Branch.
Item 21. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as exhibits to this registration
statement on form S-4:
II-3
<PAGE>
Exhibit
No. Description
------- -----------
2 Agreement and Plan of Merger dated as of July 16, 1999, between
Potomac Valley Bank and South Branch Valley Bancorp, Inc. (included as
Appendix I to the Proxy Statement/Prospectus)
5 Opinion of Bowles Rice McDavid Graff & Love, PLLC
8(a) Tax Opinion of Bowles Rice McDavid Graff & Love, PLLC
8(b) Tax Opinion of Jackson & Kelly, PLLC
10(b) Employment Agreement with Patrick N. Frye
15 Awareness Letter of Arnett & Foster, P.L.L.C.
21 Subsidiaries of South Branch Valley Bancorp, Inc.
23(a) Consent of Bowles, Rice, McDavid, Graff & Love, PLLC (included as
Exhibit 5)
23(b) Consent of Jackson & Kelly PLLC (included as Exhibit 8b)
23(c) Consent of Arnett & Foster, P.L.L.C.
23(d) Consent of Arnett & Foster, P.L.L.C.
99(a) Revocable Proxy Potomac Valley Bank
99(b) Revocable Proxy South Branch Valley Bancorp, Inc.
99(c) Form of Potomac Affiliate Letter
99(d) Form of Summit Financial Group, Inc.
Item 22. Undertakings
A. The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
II-4
<PAGE>
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information
set forth in the registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
B. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
D. The registrant undertakes that every prospectus (i) that is filed
pursuant to Paragraph (C) immediately preceding, or (ii) that purports to meet
the requirements of section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
E. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing
II-5
<PAGE>
provisions, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer of controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
F. The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
G. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Moorefield,
State of West Virginia, on October 13, 1999.
SOUTH BRANCH VALLEY BANCORP, INC.
By: /s/ H. Charles Maddy, III
----------------------------------------------
H. Charles Maddy, III
Its President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 has been signed by the following persons
in the capacities indicated on October 13, 1999.
/s/ H. Charles Maddy, III
/s/ Oscar M. Bean ------------------------------
- ------------------------------ Name: H. Charles Maddy, III
Name: Oscar M. Bean Title: President, Director
Title: Chairman, Director
II-6
<PAGE>
/s/ Robert S. Tissue /s/ Russell F. Ratliff, Jr.
- --------------------------------- ----------------------------------
Name: Robert S. Tissue Name: Russell F. Ratliff, Jr.
Title: Chief Financial Officer Title: Vice President, Director
/s/ John W. Crites /s/ James M. Cookman
- --------------------------------- ----------------------------------
Name: John W. Crites Name: James M. Cookman
Title: Director Title: Director
/s/ Frank A. Baer, III /s/ Georgette R. George
- --------------------------------- ----------------------------------
Name: Frank A. Baer, III Name: Georgette R. George
Title: Director Title: Director
/s/ Phoebe F. Heishman /s/ Thomas J. Hawse, III
- --------------------------------- ----------------------------------
Name: Phoebe F. Heishman Name: Thomas J. Hawse, III
Title: Director Title: Director
/s/ Jeffrey E. Hott /s/ Gary L. Hinkle
- --------------------------------- ----------------------------------
Name: Jeffrey E. Hott Name: Gary L. Hinkle
Title: Director Title: Director
/s/ Ronald F. Miller /s/ Harry C. Welton
- ---------------------------------- ----------------------------------
Name: Ronald F. Miller Name: Harry C. Welton
Title: Director Title: Director
/s/ Harold K. Michael /s/ Charles S. Piccirillo
- ---------------------------------- ----------------------------------
Name: Harold K. Michael Name: Charles S. Piccirillo
Title: Director Title: Director
/s/ Donald W. Biller
- ----------------------------------
Name: Donald W. Biller
Title: Vice Chairman, Director
II-7
<PAGE>
SOUTH BRANCH VALLEY BANCORP, INC.
FORM S-4
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
S-B Item 601 Sequential
Table Page
Description Reference Number (a)
----------- --------- ---------
<S> <C> <C>
Underwriting agreement (1) N/A
Agreement and Plan of Merger (2)
Articles of Incorporation and Bylaws: (3)
(a) Articles of Incorporation of South Branch Valley (b)
Bancorp, Inc. as last amended on March 25, 1998
(b) Bylaws of South Branch Valley Bancorp, Inc. (c)
as last amended, effective December 31, 1995
Instruments Defining the Rights of Security Holders (4) N/A
Opinions Re: Legality (5)
Opinion Re: Liquidation Preference (7) N/A
Opinion Re: Tax Matters and Consent (8)
Voting Trust Agreement (9) N/A
Material Contracts (10)
(a) Agreement with H. Charles Maddy, III (d)
(b) Agreement with Patrick N. Frye See Exhibit 10(b)
(c) Agreement with Ronald F. Miller (e)
(d) Agreement with C. David Robertson (f)
(e) 1998 Officer Stock Option Plan (g)
Statement Re: Computation of Per Share Earnings (11) (h)
Annual Report to Security Holders, et al. (13) N/A
Material Foreign Patents (14) N/A
Letter Re: Unaudited Interim Financial Information (15) See Exhibit 15
Letter Re: Changes in Certifying Accountant (16) N/A
Subsidiaries of the Registrant (21) See Exhibit 21
</TABLE>
<PAGE>
<TABLE>
Consents:
<S> <C> <C>
(a) Consent of Bowles Rice McDavid Graff & Love, PLLC (23) See Exhibit 5
and 8(a)
(b) Consent of Jackson & Kelly, PLLC See Exhibit 8(b)
(c) Consent of Arnett & Foster, P.L.L.C. See Exhibit 23(c)
(d) Consent of Arnett & Foster, P.L.L.C. See Exhibit 23(d)
Power of Attorney (24) See Exhibit 24
Statement of Eligibility of Trustee (25) N/A
Invitation for Competitive Bids (26) N/A
Financial Data Schedule (27) N/A
Information From Reports Furnished To State Insurance (28) N/A
Regulatory Authorities
Additional Exhibits: (29)
(a) Form of Proxy - Potomac See Exhibit 29(a)
South Branch 29(b)
(b) Form of Agreement Regarding
Affiliates - Potomac See Exhibit 29(c)
South Branch 29(d)
</TABLE>
Footnotes:
- ----------
(a) N/A = Not Applicable.
(b) Incorporated by reference to Exhibit 3(i) of South Branch's filing on
Form 10-QSB dated June 30, 1998.
(c) Incorporated by reference to Exhibit 3(b) of South Branch's filing on
Form S-4 dated December 22, 1997.
(d) Incorporated by reference to Exhibit 10 to South Branch's filing on Form
10-KSB dated December 31, 1995.
(e) Incorporated by reference to Exhibit 10(ii) to South Branch's filing on
Form 10-KSB dated December 31, 1998.
(f) Incorporated by reference to Exhibit 10 to South Branch's filing on Form
10-QSB dated June 30, 1999.
(g) Incorporated by reference to Exhibit 10 to South Branch's filing on Form
10-QSB dated June 30, 1998.
(h) Incorporated by reference to Exhibit 11 to South Branch's filing on Form
10-QSB dated June 30, 1999.
* Indicates document incorporated by reference.
<PAGE>
Exhibit 5
[LETTERHEAD OF BOWLES RICE MCDAVID GRAFF & LOVE]
October 12, 1999
Potomac Valley Bank
4 North Main Street
P.O. Box 1079
Petersburg, West Virginia 26947
Re: Form S-4 Registration Statement
-------------------------------
Gentlemen:
This opinion is rendered in connection with the Form S-4 Registration
Statement (the "Registration Statement") filed by South Branch Valley Bancorp,
Inc. (the "Registrant") with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, with respect to the proposed offering of
approximately 320,000 shares of common stock of Registrant, $2.50 par value
("Common Stock") issuable in connection with the proposed acquisition of Potomac
Valley Bank ("Potomac"), Petersburg, West Virginia, and Registrant, pursuant to
the terms of the Agreement and Plan of Merger dated July 16, 1999, between
Potomac and Registrant (the "Agreement").
We are of the opinion that if all the conditions set forth in the
Agreement are satisfied, the Common Stock, when issued in connection with the
Agreement in accordance with the terms set forth therein will be duly
authorized, validly issued, fully paid and nonassessable and will not be issued
in violation of any preemptive rights of any shareholder of Registrant.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our firm therein.
Very truly yours,
BOWLES RICE MCDAVID GRAFF & LOVE, P.L.L.C.
/s/ Sandra M. Murphy
---------------------------------
Sandra M. Murphy
SMM/jam
cc: Mr. H. Charles Maddy, III
<PAGE>
Exhibit 8(a)
[LETTERHEAD OF BOWLES RICE MCDAVID GRAFF & LOVE]
October 6, 1999
South Branch Valley Bancorp, Inc.
310 N. Main Street
Moorefield, West Virginia 26836
Gentlemen:
You have requested our opinion on certain federal income tax
consequences relating to the merger (the "Merger") of Potomac Interim Bank, Inc.
("Interim"), a wholly-owned subsidiary of South Branch Valley Bancorp, Inc.
("South Branch"), with and into Potomac Valley Bank ("Potomac").
The relevant facts concerning the Merger are set forth in the
Agreement and Plan of Merger dated July 16, 1999 ("Agreement"). A description
of the transaction set forth therein is incorporated herein by reference.
Representations
In addition to the general statement of facts set forth in the
Registration Statement, and exhibits attached thereto, you have made the
following representations concerning the proposed transaction:
(1) The Merger shall be consummated in compliance with the material
terms of the Agreement, and none of the material terms and conditions therein
have been waived or modified, and neither Potomac nor South Branch has any plan
or intention to waive or modify any material conditions of the Agreement.
(2) The ratio for the exchange of shares of South Branch Common Stock
in exchange for shares of Potomac Common Stock was negotiated by the parties
through arm's length bargaining. The fair market value of South Branch Common
Stock (including any fractional share interest) received by the stockholders of
Potomac will be, in each instance, approximately equal to the fair market value
of the Potomac Common Stock surrendered in the exchange;
(3) There is no plan or intention by the shareholders of Potomac who
own one percent (1%) or more of the Potomac stock, and to the best of the
knowledge of the management of Potomac, there is no plan or intention on the
part of the remaining shareholders of Potomac to sell, exchange or otherwise
dispose of a number of shares of South Branch stock received in the transaction
that would reduce the Potomac shareholders' ownership of South Branch stock to
a number of shares having value, as of the date of the transaction, of less than
fifty percent (50%)
<PAGE>
South Branch Valley Bancorp, Inc.
October 6, 1999
Page __
of the value of all of the formerly outstanding stock of Potomac as of the same
date. For purposes of this representation, shares of Potomac stock surrendered
by dissenters or exchanged for cash in lieu of fractional shares of South Branch
stock will be treated as outstanding Potomac stock on the date of the
transaction. Moreover, shares of Potomac stock and shares of South Branch stock
held by Potomac shareholders and otherwise sold, redeemed or disposed of prior
or subsequent to the transaction will be considered in making this
representation.
(4) Following the Merger, Potomac will hold at least ninety (90%) of
the fair market value of its net assets and at least 70% of the fair market
value of its gross assets (including assets disposed of by Potomac prior to or
subsequent to the merger and in contemplation thereof) (including without
limitation any asset disposed of by Potomac, other than in the ordinary course
of business, pursuant to a plan or intent existing during the period ending on
the Effective Date and beginning with the commencement of negotiations; whether
formal or informal, with South Branch regarding the Merger) and at least 90% of
the fair market value of Interim's net assets and at least seventy percent (70%)
of the fair market value of Interim's gross assets held immediately prior to the
Merger. For purposes of this representation, amounts paid by Potomac or Interim
to dissenters, amounts paid by Potomac or Interim to stockholders who receive
cash or other property, amounts used by Potomac or Interim to pay reorganization
expenses or other expenses incurred in connection with the Merger, amounts, if
any, used by Potomac to make payments to employees, for severance and
termination of employment contracts, and all redemptions and distributions
(except for regular, normal dividends) made by Potomac will be included as
assets of Potomac or Interim, respectively, immediately prior to the Merger;
(5) Prior to the Merger, South Branch will be in control of Interim
within the meaning of Section 368(c) of the Code;
(6) Potomac has no plan or intention to issue additional shares of
its stock that would result in South Branch losing control of Potomac within the
meaning of Section 368(c) of the Code;
(7) South Branch has no plan or intention to liquidate Potomac; to
merge Potomac with or into another corporation other than Interim; to sell or
otherwise dispose of the stock of Potomac except for transfers of stock to
corporations controlled by South Branch; or to cause Potomac to sell or
otherwise dispose of any of its assets or of any of the assets acquired from
Interim, except for dispositions made in the ordinary course of business or
transfers of assets to a corporation controlled by Potomac;
<PAGE>
South Branch Valley Bancorp, Inc.
October 6, 1999
Page __
(8) Interim will have no liabilities assumed by Potomac, and it will
not transfer to Potomac any assets subject to liabilities, in the Merger;
(9) At the time of the Merger, the only class of issued and
outstanding stock of Potomac will be the Potomac Common Stock;
(10) In the Merger, shares of Potomac stock representing control of
Potomac, as defined in Section 368(c) of the Code, will be exchanged solely for
South Branch Common Stock. For purposes of this representation, shares of
Potomac stock exchanged for cash or other property originating with South Branch
will be treated as outstanding Potomac stock on the date of the Merger;
(11) The Potomac Common Stock to be surrendered by each stockholder of
Potomac will not be subject to any liability, and neither Potomac nor South
Branch will assume any liability with respect to the surrendered Potomac Common
Stock;
(12) At the time of the Merger, Potomac will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in Potomac that, if exercised or
converted, would affect South Branch's acquisition or retention of control of
Potomac, as defined in Section 368(c) of the Code;
(13) South Branch does not own, directly or indirectly, nor has it or
owned during the past five years, any shares of the stock of Potomac;
(14) Following the Merger, Potomac will continue its historic business
or use a significant portion of its historic business assets in a business;
(15) South Branch, Interim, Potomac and the stockholders of Potomac
will pay their respective expenses, if any, incurred in connection with the
Merger;
(16) There is no intercorporate indebtedness existing between South
Branch and Potomac or between Interim and Potomac that was issued, acquired, or
will be settled at a discount;
(17) The payment of cash in lieu of fractional shares of South Branch
Common Stock is solely for the purpose of avoiding the expense and inconvenience
to South Branch of issuing fractional shares and does not represent separately
bargained-for consideration. The total cash consideration that will be paid in
the Merger to the Potomac stockholders in lieu of issuing fractional shares of
South Branch Common Stock will not exceed 1% of the total consideration
<PAGE>
South Branch Valley Bancorp, Inc.
October 6, 1999
Page __
that will be issued in the Merger to the Potomac stockholders in exchange for
their shares of Potomac Common Stock. The fractional share interests of each
Potomac stockholder will be aggregated, and no South Branch stockholder will
receive cash in an amount equal to or greater than the value of .9999 share of
South Branch Common Stock;
(18) None of the compensation received, or to be received, by any
stockholder-employees of Potomac will be separate consideration for, or
allocable to, any of their shares of Potomac Common Stock; none of the shares of
South Branch Common Stock or cash received, or to be received, by any
stockholder-employees of Potomac pursuant to the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any stockholder-employees of Potomac will be for services
actually rendered, or to be rendered, and will be commensurate with amounts paid
to third parties bargaining at arm's length for similar services;
(19) No two parties to the transaction are investment companies as
defined in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(20) On the date of the transaction, the fair market value of the
assets of Potomac will exceed the sum of its liabilities, plus the amount of
liabilities, if any, to which the assets are subject.
(21) Potomac is not under the jurisdiction of a court in a title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
(22) The only consideration to be received, directly or indirectly, by
holders of Potomac Common Stock in the Merger is South Branch Common Stock.
South Branch has not agreed to assume, nor will it, directly or indirectly,
assume any expense or liability, whether contingent or fixed, of any holder of
Potomac Common Stock. South Branch has no plan or intention to contribute any
additional capital to Potomac, to purchase additional Stock of Potomac or to
make any loans to Potomac following the Merger for the purpose of directly or
indirectly paying any additional consideration to any holders of Potomac Common
Stock. None of the Potomac Stock exchanged for South Branch Common Stock in the
Merger will be subject to any liabilities. No part of the consideration
exchanged for Potomac Common Stock will be received by a shareholder as a
creditor, employee, or in any capacity other than that of a stockholder of
Potomac;
(23) The Agreement and documents, agreements and other matters
specifically identified therein represent the entire understanding of South
Branch, Interim and Potomac with
<PAGE>
South Branch Valley Bancorp, Inc.
October 6, 1999
Page __
respect to the Merger contemplated thereby, and the Merger will be effected in
accordance with the Agreement;
(24) The Merger is being undertaken for one or more valid business
purposes, including those described herein;
(25) Interim is a corporation newly formed for the purpose of
participating in the Merger and at no time prior to the Merger has had assets or
business operations;
(26) Either (a) no shares of Potomac common stock, if any, that were
acquired in connection with the performance of services are subject to a
substantial risk of forfeiture within the meaning of section 83(c) of the Code
or (b) any shares of South Branch Common Stock received in exchange for shares
of Potomac Common Stock that were acquired in connection with the performance of
services and are subject to a substantial risk of forfeiture within the meaning
of section 83(c) of the Code will be subject to substantially the same risk of
forfeiture after the Merger; and
(27) South Branch has no plan or intention to reacquire any of its
stock issued in the transaction.
Opinion
-------
Based solely upon the information submitted and on the representations
set forth above, we are of the opinion that:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code. South Branch,
Interim and Potomac will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code;
(2) Neither South Branch, Interim nor Potomac will recognize any gain
or loss as a result of the Merger. Code Sections 361 and 1032;
(3) The holders of Potomac Common Stock will recognize no gain or
loss upon the exchange of their shares of Potomac Common Stock solely for shares
of Summit Common Stock (except for cash received in lieu of a fractional share
of Summit Common Stock). Code Section 354(a)(1);
<PAGE>
South Branch Valley Bancorp, Inc.
October 6, 1999
Page __
(4) The basis of the Summit Common Stock received by the holders of
Potomac Common Stock in the Merger will, in each case, be the same as the basis
of the Potomac Common Stock surrendered in exchange therefor. Code Section
358(a)(l);
(5) The holding period of the Summit Common Stock received by the
holders of Potomac Common Stock in the Merger will, in each case, include the
period during which the Potomac Common Stock surrendered in exchange therefor
was held by the exchanging stockholders, provided that the Potomac Common Stock
was held as a capital asset in the hands of the exchanging stockholders on the
date of the Merger. Code Section 1223(1);
(6) The payment of cash to holders of Potomac Common Stock in lieu of
fractional share interests of Summit Common Stock will be treated as if such
fractional shares were issued as part of the Merger and then were redeemed by
Summit. A Potomac stockholder receiving such cash payment will recognize gain
or loss measured by the difference (if any) between the amount of cash received
and the Stockholder's basis in such fractional share. Generally, any gain or
loss recognized upon such exchange will be capital gain or loss, provided the
fractional share would constitute a capital asset in the hands of the exchanging
stockholders at the Effective Time. Rev. Rul. 66-365, 1966-2 C.B. 116 and Rev.
Proc. 77-41, 1977-2 C.B. 574; and
(7) The payment of cash to Potomac stockholders in exchange for
Potomac Common Stock pursuant to the exercise of dissenter's rights will be
treated as having been received as a distribution in redemption of such
stockholder's Potomac Common Stock, subject to the provisions and limitations of
Section 302 of the Code.
It should be noted that the opinions expressed in this letter are
based upon statutory, judicial and administrative authority as of the date of
this opinion. There can be no assurance that such authority will not be changed
in the future, or that such changes will not be made retroactively applicable to
the transactions considered herein. Moreover, the above-stated opinions are
based upon the facts as we understand them and upon the representations provided
to us. If the facts turn out to be different in any material respect from the
facts or representations stated herein, or if the laws or regulations applicable
to the proposed transactions are changed or reinterpreted by competent
tribunals, some or all of the opinions expressed in this letter may become
inapplicable.
Please note further that Treas. Reg. Section 1.368-3 requires certain
records to be kept and information to be filed with the federal income tax
returns of each corporation which is a party to the reorganization. This same
regulation requires each Potomac shareholder who received South Branch shares in
connection with the reorganization to attached to his or her
<PAGE>
South Branch Valley Bancorp, Inc.
October 6, 1999
Page __
federal income tax return for the year in which such shares are received a
statement disclosing the exchange of Potomac stock for shares of South Branch
and reporting the cost or other basis of the Potomac stock given up and the
number and value of South Branch shares received.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and the reference of our firm in the Registration
Statement.
Sincerely,
BOWLES RICE McDAVID GRAFF & LOVE, P.L.L.C.
By /s/ Marc A. Monteleone
Marc A. Monteleone
MAM/ms
<PAGE>
Exhibit 8(b)
[LETTERHEAD OF JACKSON & KELLY PLLC]
October 12, 1999
Potomac Valley Bank
4 North Main Street
P. O. Box 1079
Petersburg, WV 26874-1079
Re: Certain Federal Income Tax Consequences of Merger of Potomac
Interim Bank, Inc., a wholly-owned Subsidiary of Summit Financial
Group, Inc., with and into Potomac Valley Bank
Ladies and Gentlemen:
We have acted as special counsel to Potomac Valley Bank ("Potomac
Bank"), in connection with the proposed merger (the "Merger") of Potomac Interim
Bank, Inc., a wholly-owned subsidiary ("Merger Sub") of Summit Financial Group,
Inc.; formerly known as South Branch Valley Bancorp, Inc. ("Summit") into
Potomac. The Merger will be effected pursuant to the Agreement and Plan of
Merger by and among Potomac, Summit and Merger Sub, dated as of July 16, 1999
(the "Agreement").
In our capacity as counsel to Potomac, our opinion has been requested
with respect to certain federal income tax consequences associated with the
proposed Merger. In rendering this opinion, we have examined (i) the Internal
Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations
promulgated thereunder, (ii) the legislative history of applicable sections of
the Code, and (iii) appropriate Internal Revenue Service and judicial
authorities. In addition, we have relied upon certain information made known to
us as more fully described below. All capitalized terms used herein without
definition shall have the respective meanings specified in the Agreement, and,
unless otherwise specified, all section references herein are to the Code.
In our capacity as counsel to Potomac in the Merger, and for purposes
of rendering the opinions expressed herein, we have examined and relied upon
such documents as we have deemed appropriate, including:
(1) the Agreement and exhibits thereto;
(2) the Registration Statement and Proxy Statement/Prospectus being
filed with the Securities and Exchange Commission regarding the
Merger; and
(3) such additional documents as we have considered relevant.
We have also obtained written certification letters (the
"Certification Letters") from Summit, Merger Sub and Potomac to verify certain
facts that we have assumed in rendering this opinion. Before rendering our
opinion in connection with the closing of the Merger, we intend to obtain
appropriate written certificates to confirm certain material facts that we have
assumed herein.
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Potomac Valley Bank
October 12, 1999
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In connection with our review of the Agreement, the written
certificates described above, and the other documents described herein, we have
assumed, with your consent, that all documents submitted to us as photocopies
faithfully reproduce the originals thereof, that such originals are authentic,
that all such documents have been or will be duly executed to the extent
required and that all statements set forth in such documents are accurate. We
also have assumed, without independent verification or investigation, that (i)
we have been provided with true, correct and complete copies of all such
documents, (ii) none of the documents has been amended or modified; (iii) all
such documents are in full force and effect in accordance with the terms
thereof; (iv) there are no other documents which affect the opinions hereinafter
set forth; and (v) the documents reviewed by us reflect the entire agreement of
the parties thereto with respect to the subject matter thereof. We have further
assumed that any representations or statements made "to the best knowledge of"
or similarly qualified, are true and correct without such qualification. With
your permission, we have also assumed certain other factual matters set forth
more fully below.
We have not made an independent investigation of the Registration
Statement. Consequently, we have relied upon your representation that the
information presented in the Registration Statement or otherwise furnished to us
accurately and completely describes all material relevant facts.
You have advised us that the proposed Merger will (i) allow Potomac to
continue its tradition as a community bank serving Grant County and will enhance
stockholder and customer value; (ii) will enable the combined institution of
Potomac and Summit better opportunities to compete with other financial and non-
financial institutions in the markets in which Potomac and Summit's subsidiary
banks conduct their business and (iii) will reduce costs by the elimination of
duplicate expense. To achieve these goals, the following will occur pursuant to
the Agreement:
(1) Prior to the Merger, South Branch Valley Bancorp, Inc. will take
all steps necessary to change its name to Summit Financial Group, Inc.
(2) Merger Sub will merge with and into Potomac pursuant to the terms
of the Agreement and the laws of the State of West Virginia. Merger Sub's
separate corporate existence will cease to exist, and Potomac will be the
surviving corporation. Thereafter, Potomac will be a wholly-owned subsidiary of
Summit, and will continue to operate the businesses of Potomac conducted prior
to the Merger;
(3) The only class of Potomac Stock outstanding is Common Stock, par
value of $10.00 per share ("Potomac Common Stock.") Each share of Potomac
Common Stock (excluding shares held by Potomac stockholders who perfect their
dissenters' rights of appraisal) issued and outstanding immediately prior to the
Effective Time of the Merger, as defined in the Agreement, (the "Effective
Time") shall, as of the Effective Time, by virtue of the Merger and without any
action on the part of the holders thereof, be converted into and exchanged for
the right to receive shares of Summit Common Stock (as defined in the Agreement)
in accordance with the Agreement;
(4) At the Effective Time the holders of certificates representing
Potomac Common Stock, including holders of Dissenting Shares, shall cease to
have any rights as stockholders of Potomac; and
(5) No fractional shares of Summit Common Stock will be issued as a
result of the proposed Merger. In lieu of the issuance of fractional shares,
each holder of shares of Potomac Common Stock who would otherwise have been
entitled to receive a fraction of a share of Summit Common Stock (after taking
into account all certificates delivered by such holder) shall receive cash
(without interest) in an amount equal to the value of such fractional part of a
share of Summit Common Stock in accordance with the Agreement
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Potomac Valley Bank
October 12, 1999
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at the Effective Time. No such holder shall be entitled to dividends, voting
rights or any other stockholder right in respect of any fractional share.
With your consent, and the consent of Summit and Merger Sub, we have
also assumed that the following statements are true as of the date hereof and
will be true as of the Effective Time and that you, Summit, and Merger Sub will
reaffirm these representations at the Effective Time. Jackson & Kelly PLLC has
not independently verified the completeness and accuracy of any of the following
representations. Jackson & Kelly PLLC is relying on these representations in
rendering the opinions contained herein:
(1) The Merger will be consummated in compliance with the material
terms of the Agreement, and none of the material terms and conditions therein
have been waived or modified, and neither Potomac nor Summit has any plan or
intention to waive or modify any material conditions of the Agreement.
(2) The ratio for the exchange of shares of Summit Common Stock in
exchange for shares of Potomac Common Stock was negotiated through arm's length
bargaining. The fair market value of Summit Common Stock (including any
fractional share interest) received by the stockholders of Potomac will be, in
each instance, approximately equal to the fair market value of the Potomac
Common Stock surrendered in exchange therefor;
(3) Following the Merger, Potomac will hold at least 90% of the fair
market value of its net assets and at least 70% of the fair market value of its
gross assets (including assets disposed of by Potomac prior to or subsequent to
the merger and in contemplation thereof) (including without limitation any asset
disposed of by Potomac, other than in the ordinary course of business, pursuant
to a plan or intent existing during the period ending on the Effective Date and
beginning with the commencement of negotiations; whether formal or informal,
with Summit regarding the Merger) and at least 90% of the fair market value of
Merger Sub's net assets and at least 70% of the fair market value of Merger
Sub's gross assets held immediately prior to the Merger. For purposes of this
representation, amounts paid by Potomac or Merger Sub to dissenters, amounts
paid by Potomac or Merger Sub to stockholders who receive cash or other
property, amounts used by Potomac or Merger Sub to pay reorganization expenses
or other expenses incurred in connection with the Merger, amounts, if any, used
by Potomac to make payments to employees, for severance and termination of
employment contracts, and all redemptions and distributions (except for regular,
normal dividends) made by Potomac will be included as assets of Potomac or
Merger Sub, respectively, immediately prior to the Merger;
(4) Prior to the Merger, Summit will be in control of Merger Sub
within the meaning of Section 368(c) of the Code which means ownership of stock
possessing at least 80% of the total combined voting power of all classes of
stock entitled to vote and of least 80% of the total number of shares of each
other class of stock of the corporation;
(5) Potomac has no plan or intention to issue additional shares of
its stock that would result in Summit losing control of Potomac within the
meaning of Section 368(c) of the Code;
(6) Except for cash paid in lieu of fractional shares of Summit
Common Stock pursuant to the Merger, during the five year period beginning on
the Effective Date, neither Summit nor any "Summit Related Person" (as defined
below) has (i) any plan or intention to purchase, redeem or otherwise acquire
any of the Summit Common Stock that will be issued pursuant to the Merger or
(ii) participated in or will participate in any purchase, redemption or other
acquisition of Potomac Common Stock in contemplation or as part of the Merger.
For purposes of this paragraph, any arrangement that would result in a reduction
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Potomac Valley Bank
October 12, 1999
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of the risk of loss with respect to the holding of any interest in the shares of
Summit Common Stock or Potomac Common Stock as the case may be shall constitute
an acquisition of such shares.
"Summit Related Person" is (i) a member of its affiliated group within
the meaning of Section 1504 of the Code, (ii) a corporation as to which Summit
owns, actually or constructively, fifty percent or more of the total voting
power or total value of the shares of all classes of stock outstanding, (iii) a
corporation which owns, actually or constructively, fifty percent or more of the
total voting power or total value of the shares of all classes of stock of
Summit, or (iv) any other person related to Summit within the meaning of
Treasury Regulation Section 1.368-1(e)(3). A person will be related to Summit
for this purpose if such relationship exists either immediately before or
immediately after such acquisition or arises in connection with the Merger, and
a person that is a partner in a partnership will be deemed to own or have
acquired stock that such partnership acquired in accordance with the partner's
interest in the partnership;
(7) During the five-year period ending on the Effective Date, neither
Potomac nor any "Potomac Related Person" (as defined below) has (i) purchased,
redeemed or otherwise acquired any Potomac Common Stock in contemplation or as
part of the Merger or (ii) will acquire any Potomac Common Stock prior to the
Merger. During the five-year period ending on the Effective Date, neither
Potomac nor any Potomac Related Person has made any extraordinary distribution
with respect to Potomac Stock. For purposes of this paragraph, any arrangement
that would result in a reduction of the risk of loss with respect to the holding
of any interest in the shares of Potomac Common Stock shall constitute an
acquisition of such shares.
A "Potomac Related Person" is (i) a corporation as to which Potomac
owns actually or constructively fifty percent or more of the total voting power
or total value of the shares of all classes of stock outstanding, or (ii) a
corporation which owns actually or constructively fifty percent or more of the
total voting power or total value of all shares of all classes of stock of
Potomac. A person will be deemed related to Potomac for this purpose if such
relationship exists either immediately before or immediately after such
acquisition, and a person that is a partner in a partnership will be deemed to
own or have acquired any stock that such partnership acquired in accordance with
the partner's interest in the partnership;
(8) Summit has no plan or intention to liquidate Potomac; to merge
Potomac with or into another corporation other than Merger Sub; to sell or
otherwise dispose of the stock of Potomac except for transfers of stock to
corporations controlled by Summit; or to cause Potomac to sell or otherwise
dispose of any of its assets or of any of the assets acquired from Merger Sub,
except for dispositions made in the ordinary course of business or transfers of
assets to a corporation controlled by Potomac;
(9) Merger Sub will have no liabilities assumed by Potomac, and it
will not transfer to Potomac any assets subject to liabilities, in the Merger;
(10) At the time of the Merger, the only class of issued and
outstanding stock of Potomac will be the Potomac Common Stock;
(11) In the Merger, shares of Potomac stock representing control of
Potomac, as defined in Section 368(c) of the Code, will be exchanged solely for
Summit Common Stock. For purposes of this representation, shares of Potomac
stock exchanged for cash or other property originating with Summit will be
treated as outstanding Potomac stock on the date of the Merger;
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Potomac Valley Bank
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(12) The Potomac Common Stock to be surrendered by each stockholder of
Potomac will not be subject to any liability, and neither Potomac nor Summit
will assume any liability with respect to the surrendered Potomac Common Stock;
(13) At the time of the Merger, Potomac will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in Potomac that, if exercised or
converted, would affect Summit's acquisition or retention of control of Potomac,
as defined in Section 368(c) of the Code;
(14) Neither Summit nor any Summit Related Person owns, directly or
indirectly, nor has it or any Summit Related Person owned during the past five
years, directly or indirectly, any shares of the stock of Potomac;
(15) Following the Merger, Potomac will either continue its historic
business or use a significant portion of its historic business assets in a
business;
(16) Summit, Merger Sub, Potomac and the stockholders of Potomac will
pay their respective expenses, if any, incurred in connection with the Merger;
(17) There is no intercorporate indebtedness existing between Summit
and Potomac or between Merger Sub and Potomac that was issued, acquired, or will
be settled at a discount;
(18) The payment of cash in lieu of fractional shares of Summit Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Summit of issuing fractional shares and does not represent separately bargained-
for consideration. The total cash consideration that will be paid in the Merger
to the Potomac stockholders in lieu of issuing fractional shares of Summit
Common Stock will not exceed 1% of the total consideration that will be issued
in the Merger to the Potomac stockholders in exchange for their shares of
Potomac Common Stock. The fractional share interests of each Potomac stockholder
will be aggregated, and no Summit stockholder will receive cash in an amount
equal to or greater than the value of .9999 share of Summit Common Stock;
(19) None of the compensation received, or to be received, by any
stockholder-employees of Potomac will be separate consideration for, or
allocable to, any of their shares of Potomac Common Stock; none of the shares of
Summit Common Stock or cash received, or to be received, by any stockholder-
employees of Potomac pursuant to the Merger will be separate consideration for,
or allocable to, any employment agreement; and the compensation paid to any
stockholder-employees of Potomac will be for services actually rendered, or to
be rendered, and will be commensurate with amounts paid to third parties
bargaining at arm's length for similar services;
(20) The only consideration to be received, directly or indirectly, by
holders of Potomac Common Stock in the Merger is Summit Common Stock. Summit
has not agreed to assume, nor will it, directly or indirectly, assume any
expense or liability, whether contingent or fixed, of any holder of Potomac
Common Stock. Summit has no plan or intention to contribute any additional
capital to Potomac, to purchase additional Stock of Potomac or to make any loans
to Potomac following the Merger for the purpose of directly or indirectly paying
any additional consideration to any holders of Potomac Common Stock. None of
the Potomac Common Stock exchanged for Summit Common Stock in the Merger will be
subject to any liabilities. No part of the consideration exchanged for Potomac
Common Stock will be received by a shareholder as a creditor, employee, or in
any capacity other than that of a stockholder of Potomac;
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Potomac Valley Bank
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(21) The Agreement and documents, agreements and other matters
specifically identified therein represent the entire understanding of Summit,
Merger Sub and Potomac with respect to the Merger contemplated thereby, and the
Merger will be effected in accordance with the Agreement;
(22) The Merger is being undertaken for one or more valid business
purposes, including those described herein;
(23) Merger Sub is a corporation newly formed for the purpose of
participating in the Merger and at no time prior to the Merger has had assets or
business operations; and
(24) Either (a) no shares of Potomac Common Stock, if any, that were
acquired in connection with the performance of services are subject to a
substantial risk of forfeiture within the meaning of Section 83(c) of the Code
or (b) any shares of Summit Common Stock received in exchange for shares of
Potomac Common Stock that were acquired in connection with the performance of
services and are subject to a substantial risk of forfeiture within the meaning
of Section 83(c) of the Code will be subject to substantially the same risk of
forfeiture after the Merger.
In addition to the mutual representations you, Summit and Merger Sub
have made to us, with your consent, we have also assumed that the following
statements are true as of the date hereof and will be true as of the Effective
Time and that you will reaffirm these representations at the Effective Time.
Jackson & Kelly PLLC has not independently verified the completeness and
accuracy of any of the following representations. Jackson & Kelly PLLC is
relying on these representations in rending the opinions contained herein:
(1) For Potomac, not more than 25% of the fair market value of its
adjusted total assets consists of stock and securities of any one issuer, and
not more than 50% of the fair market value of its adjusted total assets consists
of stock and securities of five or fewer issuers. For purposes of the preceding
sentence, (i) a corporation's adjusted total assets exclude cash, cash items
(including accounts receivable and cash equivalents), and United States
government securities, (ii) a corporation's adjusted total assets exclude stock
and securities issued by any subsidiary at least 50% of the voting power or 50%
of the total fair market value of the stock of which is owned by the
corporation, but the corporation is treated as owning directly a ratable share
(based on the percentage of the fair market value of the subsidiary's stock
owned by the corporation) of the assets owned by any such subsidiary, and (iii)
all corporations that are members of the same "controlled group" within the
meaning of Section 1563(a) of the Code are treated as a single issuer.
(2) Potomac is not under the jurisdiction of a court in a case under
Title 11 of the United States Code, a receivership, foreclosure, or similar
proceeding in a federal or state court.
(3) At the Effective Time, the fair market value of the assets of
Potomac will exceed the liabilities plus the amount of liabilities, if any, to
which the assets are subject.
(4) At all times during the five-year period ending on the Effective
Date, the fair market value of all of Potomac's United States real property
interests was and will have been less than 50 percent of the total fair market
value of, (a) its United States real property interests, (b) its interests in
real property located outside the United States and (c) its other assets used or
held for use in a trade or business. For purposes of the preceding sentence,
(x) United States real property interests include all interests (other than an
interest solely as a creditor) in real property and associated personal property
(such as movable walls and
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furnishings) located in the United States or the Virgin Islands and interests in
any corporation (other than a controlled corporation) owning any United States
real property interest, (y) Potomac is treated as owning its proportionate share
(based on the relative fair market value of its ownership interest to all
ownership interests) of the assets owned by any controlled corporation or any
partnership, trust, or estate in which Potomac is a partner or beneficiary, and
(z) any such entity in turn is treated as owning its proportionate share of the
assets owned by any controlled corporation or any partnership, trust, or estate
in which the entity is a partner or beneficiary. As used in this paragraph,
"controlled corporation" means any corporation at least 50 percent of the fair
market value of the stock of which is owned by Potomac, in the case of a first-
tier subsidiary of Potomac, or by a controlled corporation, in the case of a
lower-tier subsidiary.
(5) Potomac will not take any position on any Federal, state or local
income tax return or franchise tax return, or take any other action or reporting
position, that is inconsistent with the treatment of the Merger as a
reorganization with the meaning of Section 368(a) of the Code or with the
representations made herein.
(6) No outstanding Potomac Common Stock acquired in connection with
the performance of services was or will have been acquired within six months
before the Effective Date by any person subject to section 16(b) of the
Securities Exchange Act of 1934 other than pursuant to an award (a) granted
under a plan that satisfies the requirements under S.E.C. Rule 16b-3 or (b)
granted more than six months before the Effective Date.
(7) Potomac has not filed, and does not hold any asset subject to, a
consent pursuant to Section 341(f) of the Code and regulations thereunder.
(8) Potomac is not a party to, and does not hold any asset subject
to, a "safe harbor lease" under former Section 168(f)(8) of the Code and
regulations thereunder.
(9) There is no plan or intention by the stockholders of Potomac who
own 1% or more of the Potomac Common Stock, and to the best of the knowledge of
management of Potomac, there is no plan or intention by the remaining
stockholders of Potomac to sell, exchange or otherwise transfer ownership
(including by derivative transactions such as an equity swap which would have
the economic effect of a transfer of ownership) to Summit or any Summit Related
Person, directly or indirectly, of a number of Summit shares received in the
Merger that would reduce the stockholders' ownership of Summit Common Stock to a
number of shares having a value, as of the date of the Merger, of less than 50%
of the value of all of the formerly outstanding Potomac Common Stock as of the
same date. For purposes of this representation, Potomac Common Stock exchanged
for cash or other property and Potomac Common Stock exchanged for cash in lieu
of fractional Summit Common Stock will be treated as outstanding Potomac Common
Stock at the date of the Merger. Moreover, Potomac Common Stock and Summit
Common Stock held by the stockholders of Potomac and otherwise sold, redeemed,
or disposed of prior or subsequent to the Merger are considered in making this
representation.
(10) During the five-year period prior to the Effective Time, Potomac
did not declare any dividends with respect to its outstanding stock other than
regular, normal dividends consistent in amount and effect with prior dividend
distributions.
Also, in addition to the mutual representations you, Summit and Merger
Sub have made to us, and the specific representations that you have made to us,
with the consent of Summit and Merger Sub, we have also assumed that the
following statements are true as of the date hereof and will be true as of the
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Effective Time and that Summit and Merger Sub will reaffirm these
representations at the Effective Time. Jackson & Kelly PLLC has not
independently verified the completeness and accuracy of any of the following
representations. Jackson & Kelly PLLC is relying on these representations in
rending the opinions contained herein:
(1) For each of Summit and Merger Sub, not more than 25% of the fair
market value of its adjusted total assets consists of stock and securities of
any one issuer, and not more than 50% of the fair market value of its adjusted
total assets consists of stock and securities of five or fewer issuers. For
purposes of the preceding sentence, (i) a corporation's adjusted total assets
exclude cash, cash items (including accounts receivable and cash equivalents),
and United States government securities, (ii) a corporation's adjusted total
assets exclude stock and securities issued by any subsidiary at least 50% of the
voting power or 50% of the total fair market value of the stock of which is
owned by the corporation, but the corporation is treated as owning directly a
ratable share (based on the percentage of the fair market value of the
subsidiary's stock owned by the corporation) of the assets owned by any such
subsidiary, and (iii) all corporations that are members of the same "controlled
group" within the meaning of Section 1563(a) of the Code are treated as a single
issuer.
(2) Neither Summit nor Merger Sub is under the jurisdiction of a
court in a case under Title 11 of the United States Code, a receivership,
foreclosure, or similar proceeding in a federal or state court.
(3) At the Effective Time, the fair market value of the assets of
Summit will exceed the sum of its liabilities plus the amount of liabilities, if
any, to which the assets are subject. At the Effective Time, the fair market
value of the assets of Merger Sub will exceed the sum of its liabilities plus
the amount of liabilities, if any, to which the assets are subject.
(4) Currently, Summit has no ongoing stock repurchase program where
it acquires its own stock through repurchases in the open market. No such stock
repurchase program will be created in connection with the Merger.
(5) Neither Summit nor Merger Sub will take any position on any
Federal, state or local income tax return or franchise tax return, or take any
other action or reporting position, that is inconsistent with the treatment of
the Merger as a reorganization within the meaning of Section 368(a) of the Code
or with the representations made herein.
(6) Cumulatively, shareholders, officers and directors of South
Branch own (directly or through related parties) no more than five percent (5% )
of the issued and outstanding stock of Potomac. For purposes of this
representation related parties mean persons who are related within the meaning
of Code (S)267(b).
(7) There is no plan or intention by the stockholders of Potomac who
own 1% or more of the Potomac Common Stock, and to the best of the knowledge of
management of Summit, there is no plan or intention by the remaining
stockholders of Potomac to sell, exchange or otherwise transfer ownership
(including by derivative transactions such as an equity swap which would have
the economic effect of a transfer of ownership) to Summit or any Summit Related
Person, directly or indirectly, of a number of Summit shares received in the
Merger that would reduce the stockholders' ownership of Summit Common Stock to a
number of shares having a value, as of the date of the Merger, of less than 50%
of the value of all of the formerly outstanding Potomac Common Stock as of the
same date. For purposes of this representation, Potomac Common Stock exchanged
for cash or other property and Potomac Common Stock exchanged for
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cash in lieu of fractional Summit Common Stock will be treated as outstanding
Potomac Common Stock at the date of the Merger. Moreover, Potomac Common Stock
and Summit Common Stock held by the stockholders of Potomac and otherwise sold,
redeemed, or disposed of prior or subsequent to the Merger are considered in
making this representation.
On the basis of the foregoing in reliance upon the representations and
assumptions described herein, and assuming that (a) with respect to any
nonresident alien or foreign entity that is a shareholder of Potomac, Potomac
will comply with all applicable statement and notification requirements (if any)
of Treasury Regulation (S) 1.897-2(g) & (h) and the Merger will be consummated
in accordance with the Plan of Merger, therefore, we are of the opinion that for
federal income tax purposes:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code. Summit and Potomac
will be a "party to a reorganization" within the meaning of Section 368(b) of
the Code;
(2) The holders of Potomac Common Stock will recognize no gain or loss
upon the exchange of their shares of Potomac Common Stock solely for shares of
Summit Common Stock (except for cash received in lieu of a fractional share of
Summit Common Stock). Code Section 354(a)(1);
(3) The tax basis of the Summit Common Stock received by the holders
of Potomac Common Stock in the Merger will, in each case, be the same as the
basis of the Potomac Common Stock surrendered in exchange therefor. Code Section
358(a)(l);
(4) The holding period of the Summit Common Stock received by the
holders of Potomac Common Stock in the Merger will, in each case, include the
period during which the Potomac Common Stock surrendered in exchange therefor
was held by the exchanging stockholders, provided that the Potomac Common Stock
was held as a capital asset in the hands of the exchanging stockholders on the
date of the Merger. Code Section 1223(1);
(5) The payment of cash to holders of Potomac Common Stock in lieu of
fractional share interests of Summit Common Stock will be treated as if such
fractional shares were issued as part of the Merger and then were redeemed by
Summit. A Potomac stockholder receiving such cash payment will recognize gain
or loss measured by the difference (if any) between the amount of cash received
and the Stockholder's basis in such fractional share. Generally, any gain or
loss recognized upon such exchange will be capital gain or loss, provided the
fractional share would constitute a capital asset in the hands of the exchanging
stockholders at the Effective Time. Rev. Rul. 66-365, 1966-2 C.B. 116 and Rev.
Proc. 77-41, 1977-2 C.B. 574; and
(6) The payment of cash to Potomac stockholders in exchange for
Potomac Common Stock pursuant to the exercise of dissenter's rights will be
treated as having been received as a distribution in redemption of such
stockholder's Potomac Common Stock, subject to the provisions and limitations of
Section 302 of the Code. Where as a result of such distribution a stockholder
owns no Potomac Common Stock either directly or through the application of
section 318(a) of the Code, the redemption will be a complete termination of
interest within the meaning of section 302(b)(3) of the Code and such cash will
be treated as a distribution in full payment in exchange for his or her Potomac
Common Stock, as provided in section 302(a) of the Code. Under Section 1001 of
the Code, gain or (subject to the limitations of section 267 of the Code) loss
will be realized and recognized to such stockholders in an amount equal to the
difference between the amount of such cash and the adjusted basis of the Potomac
Common Stock
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surrendered, as determined under section 1011 of the Code. If a Potomac
stockholder has held his or her stock for more than one year, the gain should be
treated as long-term capital gain, provided that the shares were held as a
capital asset on the date of the exchange.
Our opinion represents our best judgement of how a court would decide,
if presented with the issues addressed herein and is not binding on the Internal
Revenue Service or any court. Our opinion is not the equivalent of a ruling
from the Internal Revenue Service and may upon audit be challenged by the
Internal Revenue Service. Thus, no assurances can be given that a position
taken in reliance on our opinion will not be challenged by the IRS or rejected
by a court.
Our opinion is based on the understanding that the relevant facts are,
and will be at the Effective Time, as set forth in this letter. It is also
based on the Code, Treasury Regulations, case law and Internal Revenue Service
rulings as they now exist. These authorities are all subject to change and such
change may be made with retroactive effect. Were there to be such changes
either before or after the Effective Time, or should the relevant facts prove to
be other than as we have reviewed, our opinion could be affected. We can give
no assurance that after any such change our opinion would not be different. We
do not undertake to advise you of matters that may come to our attention
subsequent to the date hereof and that may affect the opinions expressed herein,
including, without limitation, future changes in applicable law.
Also, our opinion is based on the assumption, and we have assumed with
your permission that the cash paid to Potomac stockholders pursuant to the
Merger (including, pursuant to a shareholder's statutory dissent) will not
exceed twenty percent (20%) of the value of all rights to shares of Potomac
outstanding as of the Effective Time.
In addition, our opinions are based solely on the documents that we
have examined, the additional information that we have obtained (including, by
way of example, but not limitation, the representations) and the statements set
out herein, which we have assumed and you, Summit and Merger Sub have confirmed
to be true on the date hereof and the date the Merger is consummated. Our
opinions cannot be relied upon if any of the facts contained in such documents
or if such additional information is, or later becomes, inaccurate, or if any of
the statements set out herein is, or later becomes, inaccurate.
Our opinions do not address the tax consequences to certain Potomac
stockholders in light of their particular circumstances, including, by way of
example, but not limitation, some or all of the following: Potomac stockholders
who hold their Potomac Common Stock other than as a capital asset, foreign
stockholders, stockholders who are not United States citizens, tax exempt
organizations, financial institutions, persons subject to the alternative
minimum tax, insurance companies, retirement plans, and persons who acquired
their Potomac Common Stock as compensation. Finally, our opinions are limited
to the federal income tax matters specifically covered hereby, and we have not
been asked to address, nor have we addressed, any other tax consequences of the
Merger to any party, whether federal, state, local or foreign including, by way
of example, but not limitation, tax consequences of a required change in
accounting method, if any, or the termination of a bad debt reserve, if any.
The opinions expressed herein are solely for your benefit and are
being furnished only to you in connection with the Merger and solely for your
benefit in connection therewith and may not be used or relied upon in any manner
or for any purpose by any other person nor any copies published, communicated,
quoted or otherwise made available in whole or in part to any other person or
entity without our express prior written consent. This letter is our opinion as
to certain legal conclusions as specifically set forth herein and is not and
shall not be deemed to be a representation or opinion as to any factual matters.
<PAGE>
Potomac Valley Bank
October 12, 1999
Page __
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. We also consent to the references to Jackson & Kelly
PLLC under the heading "Certain Federal Income Tax Consequences" in the
Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required by Section 7 of the
Securities Act or other rules and regulations of the Securities and Exchange
Commission thereunder.
Respectfully,
JACKSON & KELLY PLLC
/s/ Jackson & Kelly PLLC
----------------------------------
<PAGE>
Exhibit 10(b)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made in duplicate originals
and effective this 1st day of April, 1999, is between POTOMAC VALLEY BANK, INC.,
a West Virginia corporation, ("Company") and PATRICK N. FRYE, ("Employee").
WHEREAS, the Company offers the terms and conditions of employment
hereinafter set forth and the Employee has indicated his willingness to accept
such terms and conditions in consideration of his employment with the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants made
in this Agreement, the parties agree as follows:
1. Employment. The Company hereby employs Employee and Employee hereby
accepts employment with the Company as President, Chief Executive Officer and
member of the Board of Directors of the Company upon the terms and conditions
set forth herein.
2. Term. The term of this Agreement shall be for two (2) years and nine
(9) months, unless one of the parties terminates this Agreement as provided
herein. Upon expiration of the original term of this Agreement, the Board of
Directors of the Company shall review the Agreement at least annually, and may,
with the consent of the Employee, extend this term of employment for additional
one (1) year term(s), in which case such term shall end one (1) year from the
date on which it is last renewed.
3. Duties. Employee shall perform and have all of the duties and
responsibilities that may be assigned to him from time to time by the Board of
Directors of the Company. Employee shall devote his best efforts on a full-time
basis to the performance of such duties.
4. Compensation and Benefits. During the term of employment, the Company
agrees to pay Employee a base salary and to provide benefits as set forth in
Exhibit A, which is attached hereto and incorporated herein by reference.
5. Termination by the Company or Employee. The employment of Employee
with the Company may be terminated by any one of the following means, in which
case Employee shall be entitled to such compensation as is described below:
A. Mutual Agreement: The Employee's employment may be termination by
mutual agreement of the parties upon such terms and conditions as they may
agree.
B. For Cause.
(1) The Employee's employment may be terminated by the Company for
cause consisting of one or more of the reasons specified in
Paragraph 5(B)(2)(a)-(e) below; provided, however, that if the
cause of termination is for a reason specified in Paragraph
5(B)(2)(a) below, and if in the reasonable judgment of the Board
of Directors of the Company the damage incurred by the company as
a result of Employee's conduct constituting cause is damage of a
type that is capable of being substantially reversed and
corrected, the Company shall give Employee thirty (30) days
advance notice of the Company's intention to terminate his
employment for cause and a reasonable opportunity to cure the
cause of the possible termination to the satisfaction of the
Company.
<PAGE>
(2) For purposes of this Agreement, the term "cause" shall be defined
as follows:
(a) Employee's repeated negligence, malfeasance or misfeasance
in the performance of Employee's duties that can reasonably
be expected to have an adverse impact upon the business and
affairs of the Company;
(b) Employee's commission of any act constituting theft,
intentional wrongdoing or fraud;
(c) The conviction of the Employee of a felony criminal offense
in either state or federal court;
(d) Any single act by Employee constituting gross negligence or
which causes material harm to the reputation, financial
condition or property of the Company; or
(e) The death of Employee during the term of this Agreement, in
which event the Company shall pay to the estate of the
Employee any compensation for services rendered but unpaid
prior to the Employee's date of death.
(3) The Board of Directors of the Company shall determine, in its
sole discretion, whether any acts and/or omissions on the part of
Employee constitute "cause" as defined above. Notwithstanding the
foregoing, Employee shall be entitled to arbitrate a finding of
the Board of Directors of "cause" in accordance with Paragraph 10
hereof.
(4) In the event that Company terminates Employee's employment for
cause as defined above, Employee shall be entitled to be paid his
regular salary and benefits up to the effective date of the
termination, but not any additional compensation.
C. Not for Cause. Employee's employment may be terminated by the Company
for any reason permitted under applicable law so long as Employee is
given thirty (30) days advance written notice (or payment in lieu
thereof). In the event of a termination pursuant to this subparagraph,
Employee shall be entitled to payment from the Company equivalent to
the base salary compensation set forth in this Agreement for the
remaining term of the Agreement or severance pay equal to twelve (12)
months of base salary payments, whichever is greater.
D. Employee Resignation. Employee recognizes and understands the vital
role he plays in the Company's operation, growth and development, and
therefore agrees not to resign from employment during the initial term
of this Agreement except in the event of his disability. If the
Employee resigns in violation of this commitment, Employee agrees to
comply with the restrictions set forth in Paragraph 6 below.
E. Change in Control. Exhibit B hereto sets forth the rights and
responsibilities of the parties in the event of a change in control,
as defined therein, and is incorporated herein by reference.
6. Noncompetition and Nonsolicitation. In consideration of the covenants
set forth herein, including but not limited to the severance pay set
forth in Paragraph 5(E) and Exhibit B, Employee agrees as follows:
A. For a period of three (3) years after Employee's employment with the
Company is terminated by Employee for any reason other than Employee's
disability, Employee shall not, directly or indirectly, engage in the
business of banking in the City of Petersburg or the counties of
Pendleton, Grant, Hardy, Mineral or Hampshire, West Virginia. For
purposes
<PAGE>
of this Paragraph 6(A), being engaged in the business of banking shall
mean Employee's presence or work in a bank office in the specified
geographic area or Employee's solicitation of business from clients
with a primary or principle office in the specified geographic area.
B. During Employee's employment by the Company and for three (3) years
after Employee's employment with the Company is terminated by Employee
for any reason other than Employee's disability, Employee shall not,
on his own behalf or on behalf of any other person, corporation or
entity, either directly or indirectly, solicit, induce, recruit or
cause another person in the employ of the Company or its affiliates to
terminate his or her employment for the purpose of joining,
associating or becoming an employee with any business which is in
competition with any business or activity engaged in by the Company or
its affiliates.
C. Employee further recognizes and acknowledges that in the event of the
termination of Employee's employment with the Company for any reason
other than Employee's disability, (1) a breach of the obligations and
conditions set forth herein will irreparably harm and damage the
Company; (2) an award of money damages may not be adequate to remedy
such harm; and (3) considering Employee's relevant background,
education and experience, Employee believes that he will be able to
earn a livelihood without violating the foregoing restrictions.
Consequently, Employee agrees that, in the event that Employee
breaches any of the covenants set forth in this Paragraph 6, the
Company and/or its affiliates shall be entitled to both a preliminary
and permanent injunction in order to prevent the continuation of such
harm and to recover money damages insofar as they can be determined,
including, without limitation, all costs and attorneys' fees incurred
by the Company in enforcing the provisions of this Paragraph 6. Such
relief may be sought notwithstanding the arbitration provision set
forth in Paragraph 10 below.
7. Definition of Disability. For the purposes of the Agreement, the term
"disability" shall mean a physical or mental condition rendering Employee
substantially and permanently unable to perform the duties of an officer and
director of a banking organization.
8. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by registered or certified
mail listed herein. In the case of Employee to the following address:
__________________________________________________________________________
__________________________________________. In the case of the Company to the
Chairman addressed to P. O. Box 1079, Petersburg, West Virginia 26847. Any
notice sent pursuant to this paragraph shall be effective when deposited in the
mail.
9. Confidential Information. Employee shall not, during the term of this
Agreement or at any time thereafter, directly or indirectly, publish or disclose
to any person or entity any confidential information concerning the assets,
business or affairs of the Company, including but not limited to any trade
secrets, financial data, employee or customer/client information or
organizational structure.
10. Arbitration. Any dispute between the parties arising out of or with
respect to this Agreement or any of its provisions or Employee's employment with
the Company shall be resolved by the sole and exclusive remedy of binding
arbitration. Arbitration shall be conducted in Petersburg, West Virginia, or
such other place as might be mutually agreed between the parties, in accordance
with the rules of the American Arbitration Association ("AAA"). The parties
agree to select one arbitrator from an AAA employment panel. The arbitration
shall be conducted in accordance with the West Virginia Rules of Evidence and
all discovery issues shall be decided by the arbitrator. The arbitrator shall
supply a written opinion and analysis of the matter submitted for arbitration
along with the decision. The arbitration decision shall be final and subject to
enforcement in the local circuit court.
<PAGE>
11. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and shall supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and may not be changed or amended except by an instrument in writing to
be executed by each of the parties hereto.
12. Severability. If any provision hereof, or any portion of any provision
hereof, is held to be invalid, illegal or unenforceable, all other provisions
shall remain in force and effect as if such invalid, illegal or unenforceable
provision or portion thereof has not been included herein. If any provision or
portion of any provision of this Agreement is so broad as to be unenforceable,
such provision or a portion thereof shall be interpreted to be only so broad as
is enforceable.
13. Headings. The headings contained in this Agreement are included for
convenience or reference only and shall have no effect on the construction,
meaning or interpretation of this Agreement.
14. Governing Law. The laws of the State of West Virginia shall govern the
interpretation and enforcement of this Agreement.
15. Amendments. Any amendments to this Agreement must be in writing and
signed by all parties hereto except that extensions of the term of this
Agreement under Paragraph 2 above, may be evidenced by minutes of a meeting of
the Board of Directors.
16. Waiver of Breach. No requirement of this Agreement may be waived
except by a written document signed by the party adversely affected. A waiver of
a breach of any provision of the Agreement by any party shall not be construed
as a waiver of subsequent breaches of that provision.
17. Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same Agreement and each of which shall be
deemed an original.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
its corporate name by its corporate officer thereunto duly authorized, and
Employee has hereunto set his hand and seal, as of the day and year first above
written:
POTOMAC VALLEY BANK, INC.
By: /s/ G. R. Ours
---------------------------
Its: Chairman
---------------------------
/s/ Patrick N. Frye
-------------------------------
Patrick N. Frye
<PAGE>
EXHIBIT A
COMPENSATION AND BENEFITS
A. Base Salary. Employees starting base salary shall be $100,000 per
calendar year. Commencing April 1, 1999, and through the remaining months of
1999, Employee shall receive $8,333.33 per month as a base salary. Employee
shall then be considered for salary increases on the basis of merit beginning
January 1, 2000, the second full year of his employment.
B. Bonus. In addition to the base salary provided for herein, Employee
shall be eligible for an incentive bonus subject to the goals and criteria
information and data attached hereto and made a part of this Exhibit A.
C. Vacation. Employee shall be entitled to all paid vacation and holidays
and other paid leave as provided by the Company to other employees; providing,
however, commencing the year 1999, Employee shall be entitled to paid vacation
of three weeks.
D. Fringe Benefits. The Company shall afford to Employee the benefit of
all fringe benefits afforded to all other Company officers, including but not
limited to retirement plans, life insurance, disability, health and accident
insurance benefits and any other fringe benefit plan now existing or hereinafter
adopted by the Company.
E. Business Expenses. The Company shall reimburse Employee for all
reasonable expenses incurred by Employee in carrying out his duties and
responsibilities, including, but not limited to, reimbursing civic club
organization dues, Valley View Golf Club membership dues and reasonable expenses
for customer entertainment.
F. Automobile. The Company shall provide Employee with the use of an
automobile for the Employee's business and personal use. The Company shall be
responsible for expenses associated with the vehicle including but not limited
to taxes, gasoline, licenses, maintenance, repair, insurance and reasonable
cellular phone charges. Employee shall be subject to tax for his personal use of
vehicle in accordance with the Internal Revenue Code and any applicable state
law. Upon approval of the Company, appropriate replacement vehicles may be
provided in the future.
<PAGE>
G. Director's Fees. The Company shall pay Employee the same Director's
fees for attendance of Board meetings as are provided to other members of the
Board of Directors.
<PAGE>
Exhibit 15
INDEPENDENT ACCOUNTANT'S AWARENESS LETTER
We hereby acknowledge that we are aware of the inclusion in this Form
S-4 of our report dated August 24, 1999, on the unaudited financial statements
of Potomac Valley Bank as of June 30, 1999, and the related unaudited
statements of income, comprehensive income, shareholders' equity, and cash flows
for the periods ended June 30, 1999 and 1998.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
October 12, 1999
<PAGE>
Exhibit 21
SUBSIDIARIES OF SOUTH BRANCH VALLEY BANCORP, INC.
South Branch Valley National Bank
Potomac Interim Bank, Inc.
(formed to facilitate the merger with Potomac Valley Bank)
Capital State Bank, Inc.
Shenandoah Valley National Bank
<PAGE>
Exhibit 23(c)
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Form S-4 of our report
dated February 11, 1999, except for note 15 to which the date is March 22, 1999,
on the consolidated financial statements of South Branch Valley Bancorp, Inc. as
of December 31, 1998 and 1997, and the related consolidated statements of
income, comprehensive income, shareholders' equity and cash flows for the years
ended December 31, 1998, 1997 and 1996.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
October 12, 1999
<PAGE>
Exhibit 23(d)
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Form S-4 of our report
dated January 08, 1999, on the financial statements of Potomac Valley Bank as
of December 31, 1998 and 1997, and the related statements of income,
comprehensive income, shareholders' equity and cash flows for the years ended
December 31, 1998, 1997 and 1996.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
October 12, 1999
<PAGE>
Exhibit 24
POWER OF ATTORNEY
Each of the undersigned, being a director and/or officer of South Branch
Valley Bancorp, Inc. (the "Company"), hereby nominates, constitutes and appoints
H. Charles Maddy, III to be his or her true and lawful attorney-in-fact and to
sign in his or her name and on his or her behalf in any and all capacities
stated below, and to file with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on form S-4 (the "Registration
Statement") relating to the issuance of shares of the Company's common stock,
$2.50 par value per share, in connection with the merger by the Company with
Potomac Valley Bank, and to file any and all amendments, including post-
effective amendments on Form S-4 or other applicable form, to the Registration
Statement, making such changes in the Registration Statement as such attorney-
in-fact deems appropriate, and generally to do all such things on his or her
behalf in any and all capacities stated below to enable the Company to comply
with the provisions of the Securities Act of 1933, as amended, and all
requirements of the Commission.
This Power of Attorney has been signed by the following persons in the
capacities indicated on October 13, 1999.
/s/ Oscar M. Bean /s/ Donald W. Biller
- ------------------------------- -------------------------------
Name: Oscar M. Bean Name: Donald W. Biller
Title: Chairman, Director Title: Vice Chairman, Director
/s/ H. Charles Maddy, III /s/ Russell F. Ratliff, Jr.
- ------------------------------- -------------------------------
Name: H. Charles Maddy, III Name: Russell F. Ratliff, Jr.
Title: President, Director Title: Vice President, Director
/s/ John W. Crites /s/ James M. Cookman
- ------------------------------- -------------------------------
Name: John W. Crites Name: James M. Cookman
Title: Director Title: Director
/s/ Frank A. Baer, III /s/ Georgette R. George
- ------------------------------- -------------------------------
Name: Frank A. Baer Name: Georgette R. George
Title: Director Title: Director
/s/ Phoebe F. Heishman /s/ Thomas J. Hawse, III
- ------------------------------- -------------------------------
Name: Phoebe F. Heishman Name: Thomas J. Hawse, III
Title: Director Title: Director
/s/ Jeffrey E. Hott /s/ Gary L. Hinkle
- ------------------------------- -------------------------------
Name: Jeffrey E. Hott Name: Gary L. Hinkle
Title: Director Title: Director
/s/ Ronald F. Miller /s/ Harry C. Welton
- ------------------------------- -------------------------------
Name: Ronald F. Miller Name: Harry C. Welton
Title: Director Title: Director
/s/ Harold K. Michael /s/ Charles S. Piccirillo
- ------------------------------- -------------------------------
Name: Harold K. Michael Name: Charles S. Piccirillo
Title: Director Title: Director
<PAGE>
Exhibit 99(a)
REVOCABLE PROXY
POTOMAC VALLEY BANK
SPECIAL MEETING OF SHAREHOLDERS
___________________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints John A. Harper and Gregory A. Rotruck, and
either one of them, with full power of substitution in each, proxies to vote all
the shares of common stock of Potomac Valley Bank ("Potomac") that the
undersigned is entitled to vote, at the Special Meeting of Shareholders of
Potomac to be held on ___________________, ___________________________, 1999, at
9:00 a.m., and at any and all adjournments thereof.
1. To approve an Agreement and Plan of Merger, dated as of July 16, 1999
(the "Merger Agreement"), by and between Potomac and South Branch Valley
Bancorp, Inc. ("South Branch"), and a related Plan of Merger (the "Plan of
Merger"), pursuant to which each share of common stock of Potomac will be
converted into the right to receive shares of common stock of Summit and cash in
lieu of any fractional share, in amounts to be determined as described in the
accompanying Proxy Statement/Prospectus. A copy of the Merger Agreement set
forth therein is attached to the Proxy Statement/Prospectus as Appendix I.
[_] For [_] Against [_] Abstain
PLEASE CHECK BOX IF YOU PLAN TO ATTEND THE MEETING: [_]
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder(s). If no direction is made, this proxy
will be voted "FOR" Item 1.
Please sign exactly as your name appears hereon. Joint owners should each
sign. When signing as Executor, Administrator, Attorney, Trustee or Guardian,
please give full title as such. If a corporation, please sign in full corporate
name by President, or other authorized officer, giving full title. If a
partnership, please sign in partnership name by an authorized person, giving
full title.
Please be sure to sign and date this proxy in the box below.
- --------------------------------------------------------------------------------
Date ___________________________
________________________________
Shareholder sign above
________________________________
Co-holder (if any) sign above
- --------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
<PAGE>
Exhibit 99(b)
REVOCABLE PROXY
SOUTH BRANCH VALLEY BANCORP, INC.
SPECIAL MEETING OF SHAREHOLDERS
________________, 1999
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS
The undersigned hereby appoints ________________and______________and either
one of them, with full power of substitution in each, proxies to vote all the
shares of common stock of South Branch Valley Bancorp, Inc. ("South Branch")
that the undersigned is entitled to vote, at the Special Meeting of Shareholders
of South Branch to be held on ____________, ________________, 1999, at 9:00
a.m., and at any and all adjournments thereof.
1. Authorization for the issuance of up to 320,000 shares of South Branch
stock in connection with an Agreement and Plan of Merger dated as of July 16,
1999, among South Branch Valley Bancorp, Inc., and the parties to the Agreement
and Plan of Merger, Potomac Valley Bank and Potomac Valley Interim Bank, Inc., a
wholly owned subsidiary of South Branch Valley Bancorp, Inc. A copy of the
Merger Agreement is attached as Annex I to the accompanying Prospectus/Joint
Proxy Statement.
[_] For [_] Against [_] Abstain
2. Approval of an amendment to the Articles of Incorporation of South
Branch Valley Bancorp, Inc. to change the name of South Branch to "Summit
Financial Group, Inc." The text of the proposed amendment is attached as Annex
III to the accompanying Prospectus/Joint Proxy Statement.
[_] For [_] Against [_] Abstain
PLEASE CHECK BOX IF YOU PLAN TO ATTEND THE MEETING: [_]
This proxy when properly executed will be voted in the manner directed
herein by the undersigned shareholder(s). If no direction is made, this proxy
will be voted "FOR" Item 1.
Please sign exactly as your name appears hereon. Joint owners should each
sign. When signing as Executor, Administrator, Attorney, Trustee or Guardian,
please give full title as such. If a corporation, please sign in full corporate
name by President, or other authorized officer, giving full title. If a
partnership, please sign in partnership name by an authorized person, giving
full title.
Please be sure to sign and date this proxy in the box below.
- --------------------------------------------------------------------------------
Date__________________________
______________________________
Shareholder sign above
______________________________
Co-holder (if any) sign above
- --------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
SOUTH BRANCH VALLEY BANCORP, INC.
PLEASE ACT PROMPTLY
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
<PAGE>
POTOMAC VALLEY BANK
PLEASE ACT PROMPTLY
SIGN, DATE AND MAIL YOUR PROXY CARD TODAY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement on Form S-4 has been signed by the following persons
in the capacities indicated on ____________, 1999.
Signature Title
--------- -----
_____________________ _____________________
_____________________ _____________________
_____________________ _____________________
<PAGE>
Exhibit 99(c)
FORM OF POTOMAC AFFILIATE LETTER
__________, 1999
Potomac Valley Bank
4 North Main Street
P. O. Box 1079
Petersburg, West Virginia 26847
Attention: Patrick N. Frye
Summit Financial Group, Inc.
310 North Main Street
P. O. Box 680
Moorefield, West Virginia 26836
Attention: H. Charles Maddy, III
Ladies and Gentlemen:
I have been advised that I may be deemed to be, but do not admit that
I am, an "affiliate" of Potomac Valley Bank, a West Virginia corporation
("Potomac"), as that term is defined in Rule 145 promulgated by the Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
(the "Securities Act"), and/or SEC Accounting Series Releases 130 and 135. I
understand that pursuant to the terms of the Agreement and Plan of Merger, dated
as of _____________, 1999 (the "Merger Agreement"), by and between South Branch
Valley Bancorp, Inc., a West Virginia corporation ("South Branch"), and Potomac,
a wholly owned subsidiary of South Branch will merge with and into Potomac (the
"Merger") and that the Merger is intended to be accounted for under the
"pooling-of-interests" accounting method.
I further understand that as a result of the Merger, I may receive
shares of common stock, par value $_______ per share, of Summit Financial Group,
Inc. ("Summit") in exchange for shares of common stock, par value $______ per
share, of Potomac ("Potomac").
I have carefully read this letter and reviewed the Merger Agreement
and discussed their requirements and other applicable limitations upon my
ability to sell, transfer, or otherwise dispose of South Branch and Potomac
Stock, to the extent I felt necessary, with my counsel or counsel for Potomac.
I represent, warrant and covenant with and to Summit that in the event
I receive any Summit Stock as a result of the Merger:
<PAGE>
Potomac Valley Bank
Summit Financial Group, Inc.
__________, 1999
Page 2
1. I shall not make any sale, transfer, or other disposition of such
Summit Financial Group, Inc. Stock unless (i) such sale, transfer
or other disposition has been registered under the Securities
Act, (ii) such sale, transfer or other disposition is made in
conformity with the provisions of Rule 145 under the Securities
Act (as such rule may be amended from time to time), or (iii) in
the opinion of counsel in form and substance reasonably
satisfactory to Summit, or under a "no-action" letter obtained by
me from the staff of the SEC, such sale, transfer or other
disposition will not violate or is otherwise exempt from
registration under the Securities Act.
2. I understand that Summit is under no obligation to register the
sale, transfer or other disposition of shares of Summit Stock by
me or on my behalf under the Securities Act or to take any other
action necessary in order to make compliance with an exemption
from such registration available.
3. I understand that stop transfer instructions will be given to
Summit's transfer agent with respect to shares of Summit Stock
issued to me as a result of the Merger and that there will be
placed on the certificates for such shares, or any substitutions
therefor, a legend stating in substance:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities
Act of 1933 applies. The shares represented by this certificate
may be transferred only in accordance with the terms of a letter
agreement, dated __, 199_, between the registered holder hereof
and Summit, a copy of which agreement is on file at the principal
offices of Summit. This legend shall become null and void on and
after ______ _________, [two years after the Effective Time.]"
4. I understand that, unless transfer by me of the Summit Stock
issued to me as a result of the Merger has been registered under
the Securities Act or such transfer is made in conformity with
the provisions of Rule 145(d) under the Securities Act, Summit
reserves the right, in its sole discretion, to place the
following legend on the certificates issued to my transferee:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and were acquired
from a person who received such shares in a transaction to which
Rule 145 under
<PAGE>
Potomac Valley Bank
Summit Financial Group, Inc.
__________, 1999
Page 3
the Securities Act of 1933 applies. The shares have been acquired
by the holder not with a view to, or for resale in connection
with, any distribution thereof within the
meaning of the Securities Act of 1933 and may not be offered,
sold, pledged or otherwise transferred except in accordance with
an exemption from the registration requirements of the Securities
Act of 1933. This legend shall become null and void on and after
_____________ [two years after the effective time]."
It is understood and agreed that the legends set forth in paragraphs
(3) and (4) above shall be removed by delivery of substitute certificates
without such legends if I shall have delivered to Summit (i) a copy of a "no
action" letter from the staff of the SEC, or an opinion of counsel in form and
substance reasonably satisfactory to Summit, to the effect that such legend is
not required for purposes of the Act, or (ii) evidence or representations
satisfactory to Summit that the Summit Stock represented by such certificates is
being or has been sold in conformity with the provisions of Rule 145(d).
I further represent, warrant and covenant with and to Summit that I
will not sell, transfer or otherwise dispose of, or reduce my risk relative to,
any shares of Potomac Stock or South Branch Stock (whether or not acquired by me
in the Merger) during the period commencing 30 days prior to effective date of
the Merger and ending at such time as Summit notifies me that results covering
at least 30 days of combined operations of Potomac and Summit after the Merger
have been published by Summit. I understand that Summit is not obligated to
publish such combined financial results except in accordance with its normal
financial reporting practice.
I further understand and agree that this letter agreement shall apply
to all shares of Potomac Stock and Summit Stock that I am deemed to beneficially
own pursuant to applicable federal securities law.
I also understand that the Merger is intended to be treated as a
"pooling of Interests" for accounting purposes, and I agree that if Potomac or
Summit advises me in writing that additional restrictions apply to my ability to
sell, transfer, or otherwise dispose of Potomac
<PAGE>
Potomac Valley Bank
Summit Financial Group, Inc.
__________, 1999
Page 4
Stock or Summit Stock in order for Summit to be entitled to use the pooling of
interests accounting method, I will abide by such restrictions.
Very truly yours,
By__________________________
Name:
Accepted this ____ day of
_______________, 1999.
Potomac Valley Bank
By________________________
Name:
Title:
Summit Financial Group, Inc.
By________________________
Name:
Title:
<PAGE>
Exhibit 99(d)
FORM OF AFFILIATE'S AGREEMENT SUMMIT FINANCIAL GROUP, INC.
____________, 1999
Summit Financial Group, Inc.
310 North Main Street
P. O. Box 680
Moorefield, West Virginia 26836
Attention: H. Charles Maddy, III
Ladies and Gentlemen:
I have been advised that I may be deemed to be, but do not admit that
I am, an "affiliate" of South Branch Valley Bancorp, Inc., a West Virginia
corporation ("South Branch"), as that term is defined in the Securities and
Exchange Commission's Accounting Series Releases 130 and 135. I understand that
pursuant to the terms of the Agreement and Plan of Merger, dated as of _____ __,
1999 (the "Merger Agreement"), by and between South Branch and Potomac Valley
Bank, a West Virginia corporation ("Potomac"), wholly-owned subsidiary of South
Branch (the "Merger"), will merge with and into Potomac, and that the Merger is
intended to be accounted for under the "pooling-of-interests" accounting method.
I have carefully read this letter and reviewed the Merger Agreement
and discussed their requirements and other applicable limitations upon my
ability to sell, transfer, or otherwise dispose of common stock of South Branch
and Potomac, to the extent I felt necessary, with my counsel or counsel for
Summit.
I hereby represent, warrant and covenant with and to Summit that:
1. I will not sell, transfer or otherwise dispose of, or reduce my
risk relative to, any shares of common stock of Potomac or Summit
(whether or not acquired by me in the Merger) during the period
commencing 30 days prior to the effective date of the Merger and
ending at such time as Summit notifies me that results covering
at least 30 days of combined operations of Potomac and Summit
after the Merger have been published by Summit. I understand
that Summit is not obligated to publish such combined financial
results except in accordance with its normal financial reporting
practice.
2. I further understand and agree that this letter agreement shall
apply to all shares of common stock of Potomac and Summit that I
am deemed to beneficially own pursuant to applicable federal
securities laws.
3. If Summit advises me in writing that additional restrictions
apply to my ability to sell, transfer, or otherwise dispose of
common stock of Potomac or Summit in order for Summit to be
entitled to use the "pooling-of-interests" accounting method, I
will abide by such restrictions.
Very truly yours,
By_______________________
Name:
<PAGE>
Accepted this ____ day of
_______________, 1999.
Summit Financial Group, Inc.
By________________________
Name:
Title:
