U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1999
-------------
Commission File Number 0-16587
-------
South Branch Valley Bancorp, Inc.
--------------------------------------
(Exact name of small business issuer as
specified in its charter)
West Virginia 55-0672148
------------------------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
310 North Main Street
Moorefield, West Virginia 26836
---------------------------------------
(Address of principal executive offices) (Zip Code)
(304) 538-1000
---------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required by Section 13 or
15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
591,292 common shares were outstanding as of August 6, 1999
Transitional Small Business Disclosure Format (Check one):
Yes No X
---- ----
This report contains 25 pages.
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
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Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
June 30, 1999 (unaudited) and December 31, 1998 3
Consolidated statements of income
for the three months and six months ended
June 30, 1999 and 1998 (unaudited) 4
Consolidated statements of cash flows
for the six months ended
June 30, 1999 and 1998 (unaudited) 5-6
Consolidated statements of shareholders' equity
for the six months ended
June 30, 1999 and 1998 (unaudited) 7
Notes to consolidated financial
statements (unaudited) 8-16
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16-23
PART II. OTHER INFORMATION
Item 4. Submissions of Matters to a
Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Balance Sheets
June 30, December 31,
1999 1998
(unaudited) (*)
----------------- -----------------
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
================= =================
(*) - December 31, 1998 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended Six Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
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 expense
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
========== ========== ========== ==========
See Notes to Consolidated Financial Statements
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Six Months Ended
--------------------------------
June 30, June 30,
1999 1998
--------------- ---------------
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 (used in)
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
=============== ===============
See Notes to Consolidated Financial Statements
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Six Months Ended
--------------------------------
June 30, June 30,
1999 1998
--------------- ---------------
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
=============== ===============
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity (unaudited)
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 - - - - - (236,583)
-------------
Cash dividend declared on
common stock ($.47 per share) - - (277,105) - - (277,105)
---------- ---------- ------------ ----------- ------------ -------------
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 $43.50 per share
as consideration for the acquisition
of Capital State Bank, Inc. 458,668 7,522,065 - - - 7,980,728
Cost of 5,000 shares of common stock
acquired for the treasury - - - (217,754) - (217,754)
Cash dividends declared on
common stock ($.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 Consolidated Financial Statements
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (unaudited)
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.
<PAGE>
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.
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.
<PAGE>
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:
June 30, 1999
-----------------------------------------------
Estimated
Amortized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
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 5,196 799,292
Mortgage-backed
securities -
U. S. Government
agencies and
corporations 17,561,283 14,662 - 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
============ ========= ======== ============
December 31, 1998
-----------------------------------------------
Estimated
Amortized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
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
============ ========= ======== ============
<PAGE>
The maturites, amortized cost and estimated fair values of securities at June
30, 1999 and December 31, 1998, are summarized as follows:
Available for Sale
---------------------------
Amortized Estimated
Cost Fair Value
---------------------------
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
===========================
Note 5. Loans
Loans are summarized as follows:
June 30, December
31,
1999 1998
---------------------------
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
===========================
The following presents loan maturities at June 30, 1999:
Within After 1 but After
1 Year within 5 5 Years
Years
-----------------------------------------
Commercial, financial and
agricultural $10,078,238 $11,432,010 $ 34,040,843
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
=============
<PAGE>
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:
Year
Ended
Six Months Ended December
June 30, 31,
----------------------------------
1999 1998 1998
----------------------------------
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
==================================
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:
June 30, December 31,
1999 1998
---------------------------
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
===========================
<PAGE>
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of June 30,
1999 and December 31, 1998:
June 30, December 31,
1999 1998
---------------------------
Demand deposits, interest
bearing $ 43,463,987 $ 27,510,717
Savings deposits 33,552,910 14,748,928
Individual retirement accounts 104,151,394 83,319,247
Certificates of deposit 10,538,704 9,338,626
---------------------------
Total $191,706,995 $134,917,518
===========================
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:
Amount Percent
---------------------------
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%
---------------------------
Total $28,031,257 100.0%
===========================
A summary of the scheduled maturities for all time deposits as of June 30, 1999
is as follows:
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
==============
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.
<PAGE>
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).
To be Well
Capitalized
under Prompt
Minimum Required Corrective
Regulatory Action
Actual Capital Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
----------------- ----------------- -----------------
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 * * * * * *
* - No data presented relative to SVNB as of December 31, 1998,
as this subsidiary was capitalized by South Branch in April 1999.
<PAGE>
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 3.3188 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.
<PAGE>
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
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.
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.
<PAGE>
Table I - Average Balance Sheet and Net Interest Income
Analysis
June 30, 1999 June 30, 1998
------------------------- -------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------- -------------------------
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 fund 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%
====== =====
(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.
<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)
June 30, December 31,
--------------------------------------
1999 1998 1998
--------------------------------------
Loans contractually past due 90
days or 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%
==== ==== ====
<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
Company's Financial Position
(in thousands of dollars)
Increase
Balance (Decrease) Balance
December 31,----------------- June 30,
1998 Amount Percentage 1999
---------------------------------------
Assets
Securities $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
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.
<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.
<PAGE>
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.
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:
Estimated
Percent Completion
Phase Complete Date
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
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.
<PAGE>
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.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On April 27, 1999, at the annual meeting of the shareholders of South Branch
Valley Bancorp, Inc., the matters set forth below were voted upon. The number of
votes cast for or against, as well as the number of abstentions and withheld
votes concerning each matter are indicated in the following tabulations.
1. Election of John W. Crites to the Company's Board of Directors for a two
year term.
For Withheld
435,101 5,716
2. Election of the following listed individuals to the Company's Board of
Directors for three year terms.
For Withheld
Frank A. Baer, III 434,937 5,880
Donald W. Biller 439,240 1,577
Jeffrey E. Hott 434,878 5,939
Ronald F. Miller 435,131 5,686
Russell F. Ratliff, Jr. 435,158 5,659
Harry C. Welton 447,332 0
The following directors' terms of office continued after the 1999 annual
shareholders' meeting: James M. Cookman, Georgette R. George, Thomas
J. Hawse, III, Gary L. Hinkle, Harold K. Michael, Oscar M. Bean, Phoebe
F. Heishman, H. Charles Maddy, III and Charles S. Piccirillo.
3. Ratify Arnett & Foster, CPA's to serve as the Company's independent
auditors for 1999.
For Against Abstentions
438,611 75 1,802
Item 6(a). Exhibits required by Item 601 of Regulation S-B
Exhibit 10. Employment Agreement
Exhibit 11. Statement re: Computation of Earnings per Share
Exhibit 27. Financial Data Schedule - electronic filing only
Item 6(b). Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH BRANCH VALLEY BANCORP, INC.
(Registrant)
By:/s/ H. Charles Maddy, III
--------------------------
H. Charles Maddy, III,
President and
Chief Executive Officer
By:/s/ Robert S.Tissue
--------------------------
Robert S. Tissue,
Vice President and
Chief Financial Officer
Date: August 13, 1999
------------------
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made in duplicate
originals and effective this 5th day of February, 1999, is between CAPITAL STATE
BANK, INC., a West Virginia corporation (the "Company"), and C. DAVID ROBERTSON
("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 and Chief Executive
Officer of the Company and member of the Board of Directors of the Company upon
the terms and conditions set forth herein effective March 8, 1999, or such
earlier date as the parties may mutually agree.
2. Term. The term of this Agreement shall be for five (5) years,
unless one of the parties terminates this Agreement as provided herein. Upon
termination of the original term of the 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:
<PAGE>
A. Mutual Agreement. The Employee's employment may be
terminated 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.
(2) For purposes of this Agreement, the term "cause"
shall be defined as follows:
(a) Employee's 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, including but not limited to (i)
failure of Employee to ensure the overall quality
of the Company's loan portfolio is maintained at a
level which is satisfactory to the Board of
Directors of the Company, and (ii) failure of the
Employee to ensure that the Company's loan loss
experience remains at a level which is
satisfactory to the Company's Board of Directors;
(b) Employee's commission of any act constituting
theft, intentional wrongdoing or fraud;
<PAGE>
(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 9
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 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 six (6) months of base
salary payments, whichever is greater.
<PAGE>
D. Employee Resignation. Employee recognizes and understands the
vital role he plays in the Company's development of the
Company, and therefore agrees not to resign from employment
during the initial four-year 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 A, Employee agrees as follows:
A. For a period of five (5) years after Employee's employment
with the Company is terminated by Employee for any reason
other than Employee's disability or Good Reason (as that
term is defined in Exhibit B hereto), Employee shall not,
directly or indirectly, engage in the business of banking
in the City of Charleston or the Counties of Kanawha and
Greenbrier, West Virginia, or in any other county in which
the Company has operating offices at the time of the
termination. For purposes 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 five
(5) 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.
<PAGE>
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 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: 206
Georgetown Place, Charleston, West Virginia 25314. In the case of the Company,
addressed to H. Charles Maddy, III in care of South Branch Valley Bancorp, Inc.,
P.O. Box 680, Moorefield, WV 26836. 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.
<PAGE>
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 Charleston, West Virginia 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.
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 had 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 the 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.
<PAGE>
16. Wavier 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:
CAPITAL STATE BANK, INC.
By: /s/ H. Charles Maddy, III
---------------------------
Its: Director
--------------------------
/s/ C. David Robertson
--------------------------------------
C. David Robertson
<PAGE>
Exhibit A
Compensation and Benefits
A. Base Salary. Employee's starting base salary shall be as mutually agreed
upon by Company and Employee. Employee shall be considered for salary
increases on the basis of merit beginning in the third year of his
employment.
B. Bonus. In addition to the base salary provided for herein, Employee shall
be eligible for incentive bonuses subject to goals and criteria to be
determined by the Board of Directors of the Company.
C. Other Compensation. The Company shall provide the following other
compensation to Employee, up to a maximum of $7,000 per year:
(1) An amount equal to Employee's monthly country club dues.
(2) An amount equal to the premiums on the life insurance policy held by
Employee as of the effective date of this Agreement.
Employee shall be subject to taxation on such other compensation as
required by the Internal Revenue Code.
D. Vacation. Employee shall be entitled to all paid vacation and holidays and
other paid leave as provided by the Company to other employees.
E. Fringe Benefits. The Company shall afford to Employee the benefit of
----------------
retirement plans afforded to all other Company officers, subject to the
terms and conditions thereof. In the event that Employee's health
insurance coverage is discontinued or becomes unavailable to him for
some reason outside the control of Employee, Employee shall be afforded
the opportunity to enroll in the Company's health insurance plan;
provided, however, that the Company may adjust the Other Compensation
set forth above in Paragraph C in an amount equivalent to the cost of
Employee's participation in the Company's health insurance plan.
<PAGE>
F. 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 and reasonable expenses for customer entertainment.
G. 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 the 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.
H. Director's Fees. The Company shall pay Employee the same director's fees
as are provided to other inside officer members of the Board of Directors.
<PAGE>
Exhibit B
Change in Control Agreement
A. Definitions. For purposes of this Exhibit B, the following definitions
shall apply:
(1) "Change of Control" means
(a) a change of ownership of the Company that would have to be
reported to the Securities and Exchange Commission as a
Change of Control, including but not limited to the
acquisition by any "person" and/or entity as defined by
securities regulations and law, of direct or indirect
"beneficial ownership" as defined, of twenty-five percent
(25%) or more of the combined voting power of the Company's
then outstanding securities; or
(b) 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
(c) the consummation of a "Business Combination" as defined in the
company's Articles of Incorporation.
(2) "Salary" means the greater of the initial base salary or the average
of Employee's full earnings reported on IRS Form W-2 for the two
full year periods immediately prior to the date of the consummation
of the Change of Control or for the two full year periods
immediately preceding the Date of Termination, whichever is greater.
(3) For purposes of this Exhibit B, "Good Cause" has the same meaning as
the term "cause" set forth in Paragraph 5(B)(2) of the foregoing
Employment Agreement.
<PAGE>
(4) "Disability" means a physical or mental condition rendering Employee
substantially unable to perform the duties of an officer and
director of a banking organization.
(5) "Retirement" means termination of employment by Employee in
accordance with Company's (or its successor's) retirement plan,
including early retirement as approved by the Board of Directors.
(6) "Good Reason" means
(a) A Change of Control in the Company (as defined above) and:
(i) a decrease in Employee's Salary below its level in
effect immediately prior to the date of consummation
of the Change of Control, without Employee's prior
written consent; or
(ii) a material reduction in the importance of Employee's job
responsibilities or assignment of job responsibilities
inconsistent with employee's responsibility prior to the
Change in Control without Employee's prior written
consent; or
(iii) a geographical relocation of Employee to an office more
than 20 miles from Employee's location at the time of
the Change of Control or the imposition of travel
requirements inconsistent with those existing prior to
the Change in Control without Employee's prior written
consent; or
(b) Failure of the Company to obtain assumption of this Change in
Control Agreement by its successor as required by Paragraph
E(1) below; or
(c) Any removal of Employee from, or failure to re-elect Employee
to any of Employee's position with Company immediately prior
to a Change in Control (except in connection with the
termination of Employee's employment for Good Cause, death,
Disability or Retirement) without Employee's prior consent.
<PAGE>
(7) "Wrongful Termination" means termination of Employee's employment by
the Company or its affiliates for any reason other than at
Employee's option, Good Cause or the death, Disability or Retirement
of Employee prior to the expiration of eighteen (18) months after
consummation of the Change of Control.
B. Compensation of Employee Upon Termination for Good Reason or Wrongful
Termination within Twenty-four (24) Months of a Change in Control. Except
as hereinafter provided, if Employee terminates his employment with the
Company for Good Reason or the Company terminates Employee's employment in
a manner constituting Wrongful Termination, the Company agrees as follows:
(1) The Company shall pay Employee a cash payment equal to Employee's
Salary, on a monthly basis, multiplied by the number of months
between the Date of Termination and the date that is eighteen (18)
months after the date of consummation of the Change of Control.
(2) For the year in which termination occurs, Employee will be entitled
to receive his reasonable share of the Company's cash bonuses, if
any, allocated in accordance with existing principles and authorized
by the Board of Directors. The amount of Employee's cash incentive
award shall not be reduced due to Employee not being actively
employed for the full year.
<PAGE>
(3) Employee will continue to participate, without discrimination, for
the number of months between the Date of Termination and the date
that is eighteen (18) months after the date of the consummation of
the Change of Control in benefit plans (such as retirement,
disability and medical insurance) maintained after any Change of
Control for employees, in general, of the Company, or any successor
organization, provided Employee's continued participation is
possible under the general terms and conditions of such plans. In
the event Employee's participation in any such plan is barred, the
Company shall arrange to provide Employee with benefits
substantially similar to those which Employee would have been
entitled had his participation not been barred. However, in no event
will Employee receive from the Company the employee benefits
contemplated by this subparagraph if Employee receives comparable
benefits from any other source.
(4) Paragraph 6 (Noncompetition and Nonsolicitation) of the foregoing
Agreement shall not apply.
C. Other Employment. Employee shall not be required to mitigate the amount of
any payment provided for in this Change in Control Agreement by seeking
other employment. The amount of any payment provided for in this Change in
Control Agreement shall not be reduced by any compensation earned or
benefits provided (except as set forth in Paragraph B(3) above) as the
result of employment by another employer after the Date of Termination.
D. Rights of Company Prior to the Change of Control. This Change in
------------------------------------------------------
Control Agreement shall not effect the right of the Company or Employee
to terminate the foregoing Agreement or the employment of Employee in
accordance thereof; provided, however, that any termination or
reduction in salary or benefits that takes place after discussions have
commenced that result in a Change in Control shall be presumed (without
clear and convincing evidence to the contrary) to be a violation of
this Change in Control Agreement entitling Employee to the benefits
hereof, so that any termination by Company shall be deemed to be a
wrongful termination, and all references in this Change in Control
Agreement to Salary shall be deemed to mean the Salary, as defined
herein, based on the earnings Employee would have had prior to any
reduction thereof.
<PAGE>
E. Successors; Binding Agreement
(1) The Company shall require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by
agreement in form and substance satisfactory to Employee, to
expressly assume and agree to perform this Change in Control
Agreement. Failure of the Company to obtain such agreement prior to
the effectiveness of any such succession shall be a breach of the
this Change in Control Agreement and shall entitle Employee to
compensation from the Company in the same amount and on the same
terms as he would be entitled to hereunder if he terminated his
employment for Good Reason hereunder.
(2) This Change in Control Agreement and all rights of Employee
hereunder shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees, and
legatees. If Employee should die while any amounts would still be
payable to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to Employee's devisee,
legatee, or other designee or, if there be no such designee, to
Employee's estate.
<PAGE>
EXHIBIT 11.
Statement re: Computation of Earnings per Share
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
---------------------- ---------------------
Numerator:
Net Income $414,265 $412,106 $862,135 $797,897
======== ======== ======== ========
Denominator:
Denominator for basic
earnings per share --
weighted average
common shares
outstanding 591,292 595,479 591,292 504,657
Effect of dilutive
securities:
Employee stock
option plan 124 - 85 -
-------- ------- ------- -------
Denominator for
diluted earnings
, per share --
weighted average
common shares
outstanding and
assumed conversions 591,416 595,479 591,377 504,657
======== ======== ======== =======
Basic earnings per share $0.70 $0.69 $1.46 $1.58
===== ===== ===== =====
Diluted earnings per share $0.70 $0.69 $1.46 $1.58
===== ===== ===== =====
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000811808
<NAME> South Branch Valley Bancorp, Inc.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,117,844
<INT-BEARING-DEPOSITS> 6,596,773
<FED-FUNDS-SOLD> 10,006,943
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<ALLOWANCE> (1,466,053)
<TOTAL-ASSETS> 271,865,829
<DEPOSITS> 209,627,862
<SHORT-TERM> 16,312,904
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<LONG-TERM> 20,803,179
0
0
<COMMON> 1,501,018
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<TOTAL-LIABILITIES-AND-EQUITY> 271,865,829
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<INTEREST-TOTAL> 8,263,639
<INTEREST-DEPOSIT> 3,518,213
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<INTEREST-INCOME-NET> 4,058,425
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<INCOME-PRETAX> 1,353,121
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<NET-INCOME> 862,136
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