U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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Commission File Number 0-16587
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South Branch Valley Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
West Virginia 55-0672148
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 N. Main Street
Moorefield, West Virginia 26836
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(Address of principal executive offices) (Zip Code)
(304) 538-2353
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K [229.405 of this chapter] is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $14,488,278
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State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
Aggregate market value Based upon reported
of voting stock closing price on
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$18,625,876 March 24, 1999
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding as of March 24, 1999
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Common ($2.50 par value) 591,292 shares
Documents Incorporated by Reference
The following lists the documents which are incorporated by reference in the
Annual Report Form 10-KSB, and the Parts and Items of the Form 10-KSB into which
the documents are incorporated.
Part of Form 10-KSB
into which document
Document is Incorporated
South Branch Valley Bancorp, Inc.'s Part III - Item 9,
definitive Proxy Statement for the 1999 Item 10, Item 11,
Annual Shareholders' Meeting. and Item 12
This form 10-KSB is comprised of 69 pages. The exhibit index is located on
page 54.
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SOUTH BRANCH VALLEY BANCORP, INC
FORM 10-KSB
INDEX
Page
PART I.
Item 1. Business 4
Item 2. Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Shareholders 10
PART II.
Item 5. Market for the Registrant's Common Stock and
Related Shareholder Matters 11
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations and Related Statistical Disclosures 11
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accounts on Accounting and
Financial Disclosure 24
PART III.
Item 9. Directors and Executive Officers 53
Item 10.Executive Compensation 53
Item 11.Security Ownership of Certain Beneficial
Owners and Management 53
Item 12.Certain Relationships and Related Transactions 53
Item 13.Exhibits, Financial Statement Schedules and Reports on Form 8-K 53
Signatures 55
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PART I.
ITEM 1. BUSINESS
Organized in 1987 as a West Virginia Corporation, South Branch Valley Bancorp,
Inc. ("Company" or "South Branch") is a registered bank holding company under
the Bank Holding Company Act of 1956, as amended.
At the close of business on December 31, 1987, South Branch merged its wholly
owned subsidiary, South Branch Valley National Bank Inc., with South Branch
Valley National Bank ("SBVNB"), a commercial bank with its principal place of
business located at 310 N. Main Street, Moorefield, West Virginia.
During the first half of 1997, the Company purchased approximately 40% of the
outstanding common shares of Capital State Bank, Inc ("CSB"). 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. On August 6, 1997,
the Company entered into an Agreement and Plan of Merger with CSB to acquire the
remaining 60% of its outstanding common shares. The Agreement, as amended on
December 16, 1997, provided for the shareholders of CSB to receive one (1) share
of the Company's common stock in exchange for each 3.95 shares of CSB 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 CSB and the Company respectively, approved the transaction and,
it was consummated at the close of business on March 31, 1998.
South Branch's business activities are conducted through its two bank
subsidiaries, SBVNB and CSB. The bank subsidiaries presently account for
substantially all of the consolidated assets, revenues and earnings of South
Branch. SBVNB was originally chartered by the Office of the Comptroller of the
Currency ("OCC") on August 15, 1883. CSB is a West Virginia banking association
and was chartered on December 8, 1995. SBVNB and CSB are full service, FDIC
insured institutions engaged in the commercial and retail banking business.
The Company 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 their customers. The Company 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 offers a full spectrum of lending services to their customers,
including commercial loans and lines of credit, residential real estate loans,
consumer installment loans and other personal loans. The Company also 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 as much as possible to meet the needs of the borrower. Commercial
loans, which represented approximately 29.1% of total loans at December 31,
1998, are generally secured by various collateral including commercial real
estate, accounts receivable and business machinery and equipment. Residential
real estate loans represented approximately 51.3% of total loans as of December
31, 1998 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. See Note 5 of the
accompanying Consolidated Financial Statements, included in Part II, Item 7 of
this Form 10-KSB, for a summary of the Company's loans at December 31, 1998 and
1997. 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.
When considering loan requests, the primary factors taken into consideration by
the Company are the cash flow and financial condition of the borrower, the value
of the underlying collateral, if any, and the character and integrity of the
borrower. These factors are evaluated in a number of ways including an analysis
of financial statements, credit reviews and visits to the borrower's place of
business.
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South Branch's subsidiary bank, SBVNB also serves 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.
In order to compete with other financial service providers, the Company
principally relies upon personal relationships established by officers,
directors, and employees with its customers, and specialized services tailored
to meet its customer's needs. The Company also has a marketing program that
primarily utilizes local radio and newspapers to advertise.
SUPERVISION AND REGULATION
GENERAL
South Branch, as a bank holding company, is subject to the restrictions of the
BHCA, and is registered pursuant to its provisions. As a registered 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.
The FRB, in its Regulation Y, permits bank holding companies to 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.
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The operations of SBVNB, as a national banking association, is subject to
federal statutes and regulations which apply to national banks, and is primarily
regulated by the OCC. CSB is subject to similar West Virginia statutes and
regulations, and is primarily regulated by the West Virginia Division of
Banking. SBVNB and CSB are also subject to regulations promulgated by the FRB
and the FDIC. As members of the FDIC, the deposits of SBVNB and CSB are insured
as required by federal law. Bank regulatory authorities regularly examine
revenues, loans, investments, management practices, and other aspects of SBVNB
and CSB. 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 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.
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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 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, SBVNB and CSB are subject to substantially similar capital
requirements adopted by 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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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 December 31, 1998, the regulatory capital ratios of South Branch and its
bank subsidiaries are set forth in the table in Note 13 of the notes of the
accompanying consolidated financial statements
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 specific capital
level for any capital measure. The banking subsidiaries of South Branch were
"well capitalized" institutions as of December 31, 1998. As well-capitalized
institutions, SBVNB and CSB 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.
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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 (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
The Company 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 takes an aggressive
competitive posture, and intends to continue vigorously competing for its share
of the market within its service area by offering competitive rates and terms on
both loans and deposits.
EMPLOYEES
At December 31, 1998, the Company employed 72 full-time equivalent employees.
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ITEM 2. PROPERTIES
In 1974 the SBVNB acquired 5.82 acres of land located on the west side of U.S.
Route 220 on Main Street in Moorefield, West Virginia. On June 29, 1976 SBVNB
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 SBVNB'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, SBVNB acquired an additional 5 acres of the land adjoining
this site.
On April 5, 1983 the SBVNB acquired property located in the town of Mathias,
West Virginia. Since December 28, 1984 the SBVNB has operated its Mathias branch
bank from this site.
By deeds dated May 31, 1986 and July 14, 1986 the SBVNB 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 SBVNB received preliminary approval from the
Office of the Comptroller of the Currency to establish a branch bank at this
location. SBVNB's Franklin branch was opened for banking operations on January
1, 1987.
During 1995, SBVNB 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
SBVNB on November 15, 1995.
In conjunction with the acquisition of CSB in March 1998, the Company acquired
CSB's banking facility located in South Ridge Centre in Charleston, West
Virginia. South Ridge is a large shopping center complex on U.S. Route 119
approximately eight miles south of the Charleston downtown area. CSB's facility
opened on December 16, 1995, and is constructed on land leased for an initial 50
year term expiring in 2045.
ITEM 3. LEGAL PROCEEDINGS
South Branch is involved in various pending legal proceedings, all of which are
regarded by management as normal litigation incident to the business of banking
and are not expected to have a materially adverse effect on the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote of Company
shareholders.
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PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company acts as its own registrar and transfer agent. During 1998, its
shares were not publicly traded on any exchange or over the counter market.
Shares of the Company's common stock were occasionally bought and sold by
private individuals, firms or corporations. In many instances, the Company did
not have knowledge of the purchase price or the terms of the purchase. No
definitive records of bids and ask or sale prices were available.
Beginning on January 6, 1999, quotation of South Branch's common stock began on
the OTC Bulletin Board under the symbol "SBVB".
The approximate number of stockholders of record for South Branch's common stock
as of March 19, 1999 was 1,446.
The following sets forth quarterly cash dividends declared per share for the
prior two years.
Quarterly Common Stock Dividend
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Quarter 1998 1997
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First $ - $ -
Second .44 .41
Third - -
Fourth .45 .43
Dividends paid by South Branch to its stockholders are based on dividends it
receives from its subsidiary banks. The ability of the bank subsidiaries to pay
dividends to South Branch is subject to certain limitations of the national
banking laws. In general, these limitations provide that no bank can pay
dividends if the total of all dividends, including any proposed dividend
declared by a bank in any calendar year, exceeds net income for that year when
combined with net income for the preceding two years, less dividends for all
three years. This restriction may be waived if the approval of the applicable
bank regulatory authorities is obtained for such distribution.
Additional information with regard to dividend restrictions is included in Note
13 of the Notes to Consolidated Financial Statements included on pages 46
through 47 under Part II, Item 7 of this filing.
Cash dividends rose 6.0% to $.89 per share in 1998. It is the intention of
management and the Board of Directors to continue to pay dividends on similar
schedule during 1998. However, future cash dividends will depend on the
earnings, financial condition and the business of the bank subsidiaries, as well
as general economic conditions; however, management is not presently aware of
any reason why dividend payments should not continue.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND RELATED STATISTICAL DISCLOSURES
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.
11
<PAGE>
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 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.
12
<PAGE>
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.
13
<PAGE>
<TABLE>
<CAPTION>
TABLE I - AVERAGE DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS'
EQUITY, INTEREST EARNINGS & EXPENSES, AND AVERAGE RATES
(In thousands of dollars)
1998 1997 1996
------------------------- ------------------------- ------------------------
Average Earnings/ Yield Average Earnings/ Yield Average Earnings/ Yield
Balances Expense Rate Balances Expense Rate Balances Expense Rate
-------------------------- ------------------------- ------------------------
ASSETS
Interest earning assets
Loans, net of unearned
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.
14
<PAGE>
<TABLE>
<CAPTION>
TABLE II - CHANGES IN INTEREST MARGIN ATTRIBUTABLE TO RATE AND VOLUME
( In thousands of dollars)
1998 VERSUS 1997 1997 VERSUS 1996
---------------- ----------------
Increase (Decrease) Increase(Decrease)
Due to Change in: Due to Change in:
----------------------- ------------------------
Volume Rate Net Volume Rate Net
----------------------- ------------------------
Interest earned on:
<S> <C> <C> <C> <C> <C> <C>
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.
15
<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 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>
<CAPTION>
TABLE III - SECURITIES MATURITY ANALYSIS
(At amortized cost, in thousands of dollars)
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
Available for sale
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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>
16
<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.
(In thousands of dollars)
December 31,
--------------------------
1998 1997 1996
--------------------------
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%
==== ==== ====
17
<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 native factors or trends, such as increases in
bankruptcies, unemployment rates or past due loans.
18
<PAGE>
<TABLE>
<CAPTION>
Table IV below presents an allocation of the expected allowance for loan losses
by major loan type.
TABLE IV - ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
(In thousands of dollars)
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
-----------------------------------------------------------------------
Commercial,financial
<S> <C> <C> <C> <C> <C> <C>
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.
19
<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.
20
<PAGE>
<TABLE>
<CAPTION>
TABLE V: ASSET & LIABILITY RATE SENSITIVITY ANALYSIS, DECEMBER 31, 1998
(In Thousands of Dollars)
Maturing or Repricing Within
---------------------------------------------
0-90 91-180 181-365 Total
Days Days Days 1 Year
---------------------------------------------
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:
<S> <C> <C> <C> <C>
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) -9.5%
=======
</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.
21
<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.
22
<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:
Estimated Estimated
Percent Completion
Phase Complete Date
- -------------------- ------------ -------------
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
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.
23
<PAGE>
Item 7. Financial Statements
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.
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
24
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
---------------- --------------
ASSETS
<S> <C> <C>
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
25
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
-------------- ----------- ----------
Interest income:
<S> <C> <C> <C>
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
26
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
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)
27
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - Continued
For the Years Ended December 31, 1998, 1997 and 1996
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
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
28
<PAGE>
<TABLE>
<CAPTION>
SOUTH BRANCH VALLEY BANCORP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
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 premium,s
(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)
29
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposit,
<S> <C> <C> <C>
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
30
<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.
31
<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 own 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.
32
<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.
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.
33
<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>
34
<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
--------------------------------------------------
Available for Sale
Taxable:
<S> <C> <C> <C> <C>
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>
35
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997
-----------------------------------------------------
Amortized Unrealized Estimated
-----------------
Cost Gains Losses Fair Value
-------------- ------------------ --------------
Available for Sale
Taxable:
<S> <C> <C> <C> <C>
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:
Available for Sale
-----------------------------
Amortized Estimated
Cost Fair Value
------------- -----------
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
============= ===========
36
<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
- ------------------------------ ----------- ----------- ------------- --------- ---------
1998
<S> <C> <C> <C> <C> <C>
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:
1998 1997
----------- ------------
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
=========== ============
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.
37
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following presents loan maturities at December 31, 1998:
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
================ ================ ===========
</TABLE>
Loans due after one year with:
Variable rates $ 41,111,653
Fixed rates 86,639,938
------------
$127,751,591
============
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.
38
<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):
1998 1997
------------- ------------
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
============= ============
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.
39
<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%
============= ===========
40
<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>
41
<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:
Year Ending December 31, Amount
------------------------------ ------------------
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
=================
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:
1998 1997 1996
---------- -------- ----------
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
========== ========= ==========
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:
42
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 1997 1996
-------------------- ------------------ -----------------
Amount Percent Amount Percent Amount Percent
----------- -------- ---------- ------- ---------- ------
Computed tax at applicable
<S> <C> <C> <C> <C> <C> <C>
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
Deferred tax assets ---------------- ---------------
<S> <C> <C>
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>
43
<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.
44
<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).
45
<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).
46
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
------------------- -------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- ------------- ------------ ------------ -----------
As of December 31, 1998
Total Capital (to risk weighted assets)
<S> <C> <C> <C> <C> <C> <C>
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.
47
<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.
48
<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
----------- -------------- ---------- -----------
Financial assets:
<S> <C> <C> <C> <C>
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>
49
<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
1998 1997
------------- -------------
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
============= ===============
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Statements of Income
1998 1997 1996
----------- ---------- ------------
Income
<S> <C> <C> <C>
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>
51
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statements of Cash Flows
1998 1997 1996
---------- ----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $1,733,294 $1,519,657 $1,490,037
Adjustments to reconcile net earningsto
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>
52
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no Form 8-K filed within 24 months prior to the date of the most
recent financial statements reporting a change of accountants and/or reporting
disagreements on any matter of accounting principle or financial statement
disclosure.
PART III.
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
Information required by this item is set forth under the captions "NOMINEE FOR
DIRECTOR WHOSE TERM WILL EXPIRE IN 2001", "NOMINEES FOR DIRECTORS WHOSE TERMS
EXPIRE IN 2002", "DIRECTORS WHOSE TERMS EXPIRE IN 2000" and "DIRECTORS WHOSE
TERMS EXPIRE IN 2001" on pages 7 through 11, and under the caption "Section
16(a) Beneficial Ownership Reporting Compliance" on page 3 of South Branch's
1999 Proxy Statement, and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information required by this item is set forth under the caption"EXECUTIVE
COMPENSATION" on pages 13 through 15, and under the caption "Fees and Benefit
Plans for Directors" on page 5 of South Branch's 1999 Proxy Statement, and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is set forth under the caption "Security
Ownership of Directors and Officers" on page 6, and under the captions "NOMINEE
FOR DIRECTOR WHOSE TERM WILL EXPIRE IN 2001", "NOMINEES FOR DIRECTORS WHOSE
TERMS EXPIRE IN 2002", "DIRECTORS WHOSE TERMS EXPIRE IN 2000" and "DIRECTORS
WHOSE TERMS EXPIRE IN 2001" on pages 7 through 11, of South Branch's 1999 Proxy
Statement, and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is set forth under the captions "Related
Transactions" on page 4 of South Branch's 1999 Proxy Statement, and is
incorporated herein by reference.
53
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
All financial statements and financial statement schedules required to be filed
by this Form or by Regulation S-X, which are applicable to the registrant, have
been presented in the financial statements and notes thereto in Item 7 in
management's discussion and analysis of financial condition and results of
operation in Item 6 or elsewhere in this filing where appropriate. The listing
of exhibits follows:
INDEX TO EXHIBITS
A. Exhibits
Page(s) in
Form 10-KSB
or
Exhibit Prior
Filing
Number Description
Reference
(3) Articles of Incorporation and By-laws
(i) Articles of Association of South
Branch Valley National Bank (a)
(ii) Articles of Incorporation of South (c)
Valley Bancorp, Inc., amended and
restated April 1998
(iii) By-laws of South Branch Valley (a)
Bancorp, Inc.
(10) Material Contracts
(i) Change of Control Agreement (b)
(ii) Employment Agreement 57
(iii) 1998 Officers Stock Option Plan (c)
(21) Subsidiaries of the Registrant 68
(23) Consent of Independent Auditors 69
(27) Financial Data Schedule -- electronic filing only
(a) Incorporated herein by reference to exhibits to South Branch
Valley Bancorp, Inc.'s registration statement on Form S-4
dated September 1, 1987, Registration No. 33-16947 filed on or
about September 1, 1987.
(b) Incorporated herein by reference to exhibits to South Branch
Valley Bancorp, Inc.'s Form 10-KSB for the fiscal year ended
December 31, 1995 filed on or about March 22, 1996.
(c) Incorporated herein by reference to exhibits to South Branch
Valley Bancorp, Inc.'s Form 10-QSB for the quarter ended June
30, 1998 filed on or about August 17, 1998.
B. Reports on Form 8-K
No reports of Form 8-K were filed by the registrant during the fourth
quarter of the year ended December 31, 1998.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SOUTH BRANCH VALLEY BANCORP, INC.
a West Virginia Corporation
(registrant)
By: /s/Oscar M. Bean 3/30/99 By:/s/ H. Charles Maddy, III 3/30/99
- ------------------------------- -------------------------------------
Oscar M. Bean Date H. Charles Maddy, III Date
Chairman of the Board President & Chief Executive Officer
By: /s/Robert S. Tissue 3/30/99
- --------------------------------
Robert S. Tissue Date
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Title Date
/s/ Oscar M. Bean Director March 30, 1999
- ------------------
Oscar M. Bean
Director
- -------------------
Frank A. Baer, III
Director
- -------------------
Donald W. Biller
/s/ James M. Cookman Director March 30, 1999
- -------------------
James M. Cookman
Director
- -------------------
John W. Crites
Director
- --------------
Georgette Rashid George
/s/ Thomas J. Hawse, III Director March 30, 1999
- -------------------------
Thomas J. Hawse, III
/s/ Phoebe Fisher Heishman Director March 30, 1999
- --------------------------
Phoebe Fisher Heishman
55
<PAGE>
SIGNATURES - continued
Title Date
Director
- --------------
Gary L. Hinkle
Director
- --------------
Jeffrey E. Hott
/s/ H. Charles Maddy, III Director March 30, 1999
- ----------------------------
H. Charles Maddy, III
/s/ Harold K. Michael Director March 30, 1999
- -----------------------------
Harold K. Michael
/s/ Ronald F. Miller Director March 30, 1999
- -----------------------------
Ronald F. Miller
/s/ Russell F. Ratliff, Jr. Director March 30, 1999
- -----------------------------
Russell F. Ratliff, Jr.
Director
- -----------------------------
Charles S. Piccirillo
/s/ Harry C. Welton, Jr. Director March 30, 1999
- -----------------------------
Harry C. Welton, Jr.
56
<PAGE>
Exhibit 10 (ii)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") made in duplicate
originals and effective this 1st day of August, 1998, is between SOUTH BRANCH
VALLEY BANCORP, INC., a West Virginia corporation and bank holding company (the
"Company"), and RONALD MILLER ("Employee").
WHEREAS, the Company is forming a subsidiary entity (the "Virginia
Bank") for purposes of conducting banking operations in the Commonwealth of
Virginia; and
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 Chairman of the Board of Directors of the Virginia Bank 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 three (3) years,
unless one of the parties terminates this Agreement as provided herein. 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:
57
<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 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 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.
58
<PAGE>
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 six (6) months of base salary payments, whichever
is greater.
D. Employee Resignation. Employee recognizes and understands
the vital role he plays in the Company's establishment of
the Virginia Bank, and therefore agrees not to resign from
employment during the initial three-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.
F. No Charter or Branch. In the event that (1) employment of
Employee as set forth herein is not approved by the
regulatory authorities or (2) the Company is rendered
unable either by lack of regulatory approval or by business
impracticability to establish operations in the City of
Winchester, County of Frederick, Virginia either by way of
the formation and charter of the Virginia Bank or the
establishment of a branch bank, the Company and Employee
agree that this Agreement shall terminate as of the date
upon which such fact(s) become(s) reasonably apparent. The
parties further agree that each shall hold the other
harmless in any such event.
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, Employee shall not,
directly or indirectly, engage in the business of banking
in the City of Winchester or the County of Frederick,
Virginia. 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.
59
<PAGE>
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.
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: Post
Office Box 384, Strasburg, Virginia 22657. In the case of the Company to the
President 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.
60
<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 Martinsburg, 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.
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.
61
<PAGE>
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:
SOUTH BRANCH VALLEY BANCORP, INC.
By: __________________________________
Its: _________________________________
--------------------------------------
Ronald Miller
<PAGE>
Exhibit A
Compensation and Benefits
A. Base Salary. Employee's starting base salary shall be $75,000 per year. As
of the date that the Virginia Bank opens for business, the base salary
shall be increased to $100,000 per year. Employee shall be considered for
salary increases on the basis of merit beginning in the second 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. Vacation. Employee shall be entitled to all paid vacation and holidays and
other paid leave as provided by the Company to other employees.
D. Fringe Benefits. Except as specified below, 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, stock
ownership or stock option plans, life insurance, disability, health and
accident insurance benefits or any other fringe benefit plan now
existing or hereinafter adopted by the Company, subject to the terms
and conditions thereof.
(1) The Company shall pay 65% of the actual premiums paid by the
Company for Employee's health and accident insurance benefits and
Employee shall be responsible for the remaining 35% of the actual
premiums.
(2) The Company shall provide life insurance for the Employee in the
amount of $100,000.
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 and reasonable expenses for customer entertainment.
F. Automobile. The Company shall purchase from Employee the 1996 Buick
Ultra owned by him as of the execution of this Agreement and provide
such vehicle for the employee's business and personal use. The
purchase price of the vehicle shall be agreed upon between the
Company's President and Employee. Following the purchase, 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.
G. 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.
63
<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 $75,000 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.
(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 responsibilites
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
64
<PAGE>
(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 positioins 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.
(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.
(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.
65
<PAGE>
(4) In the event Employee becomes entitled to any payments or benefits
under this Change in Control Agreement or any benefit plan or
program of the Company, if any such payments or benefits will be
subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (or any similar tax that
may hereinafter be imposed), the Company shall pay to employee an
additional amount or amounts (each, a "Gross Up Payment"), such that
the net amount or amounts retained by Employee, after deduction of
any Excise Tax on any of the above-described payments or benefits
and any federal, state and local income tax and excise tax upon
payment provided for by this section, shall be equal to the amount
of such payment or benefits prior to the imposition of such Excise
Tax.
(5) 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.
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.
66
<PAGE>
(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
67
Exhibit 21
SUBSIDIARIES OF REGISTRANT
The following lists the subsidiary of the registrant, a West Virginia
Corporation.
South Branch Valley National Bank, a national banking association
organized under the laws of the United States of America
Capital State Bank, a state banking association organized under the laws
of the State of West Virginia
68
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
Securities and Exchange Commission
Washington, D.C.
We hereby consent to the inclusion in this Annual Report on Form 10-KSB of
our report dated February 11, 1999, except for Note 15 as to which the date is
March 22, 1999, on our audit of the consolidated financial statements of South
Branch Valley Bancorp, Inc. as of December 31, 1998 and 1997, appearing in Part
II, Item 7 of the 1998 Form 10-KSB of South Branch Valley Bancorp, Inc.
ARNETT & FOSTER, P.L.L.C.
/s/Arnett & Foster, P.L.L.C.
Charleston, West Virginia
March 30, 1999
69
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000811808
<NAME> South Branch Valley Bancorp
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,239,721
<INT-BEARING-DEPOSITS> 770,000
<FED-FUNDS-SOLD> 4,842,745
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<LOANS> 144,142,013
<ALLOWANCE> (1,371,886)
<TOTAL-ASSETS> 192,999,037
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<SHORT-TERM> 4,644,143
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<LONG-TERM> 16,468,475
0
0
<COMMON> 1,501,018
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<INTEREST-TOTAL> 13,879,187
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<LOAN-LOSSES> 270,000
<SECURITIES-GAINS> 8,160
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<INCOME-PRETAX> 2,699,844
<INCOME-PRE-EXTRAORDINARY> 2,699,844
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<NET-INCOME> 1,733,294
<EPS-PRIMARY> 3.16
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<LOANS-NON> 297,000
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