SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K/B
(Amendment Number 2)
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported)................June 1, 1998
SOUTH BRANCH VALLEY BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
West Virginia 0-16587 55-0672148
- ----------------------------- --------------- --------------------
(State of other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
310 North Main Street, Moorefield, West Virginia 26836
----------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code (304) 538-2353
1
South Branch Valley Bancorp hereby amends its previously filed 8-K/A
(Amendment Number 1) dated April 6, 1998, for the purposes of providing the
financial information required by this Item 7 on Capital State Bank, Inc.,
acquired by the Registrant in a business combination accounted for under the
purchase method of accounting effective April 1, 1998.
Item 7. Financial Statements and Exhibits.
Item 7(a). Financial Statements of Businesses Acquired.
I. Audited Financial Statements of Capital State Bank, Inc. as of
December 31, 1997 and 1996 and for the years ended December
31, 1997 and 1996, and for the period from September 11, 1995,
date of inception, to December 31, 1995.
II. Unaudited Interim Financial Statements of Capital State Bank,
Inc. as of March 31, 1998 and 1997 and for the three months
then ended.
Item 7(b). Proforma Condensed Financial Information.
The proforma condensed financial information reflecting South
Branch Valley Bancorp, Inc. after giving effect to the Merger with
Capital State Bank, Inc. is included in Note 3 of the Notes to
Condensed Consolidated Financial Statements of South Branch Valley
Bancorp, Inc. (Unaudited) filed on Form 10-QSB as of March 31, 1998,
and is hereby incorporated by reference in its entirety.
Item 7(c). Exhibits.
Exhibit 99. Consent of Independent Accountants.
SOUTH BRANCH VALLEY BANCORP, INC.
June 1, 1998 /s/ H. Charles Maddy, III
- ------------------------ ------------------------------
Date By: H. Charles Maddy, III
Its: President
The original statement shall be signed by each person on whose behalf the
statement is filed or his authorized representative. If the statement is signed
on behalf of a person by his authorized representative (other than an executive
officer or general partner of this filing person), evidence of the
representative's authority to sign on behalf of such person shall be filed with
the statement, provided, however, that a power of attorney for this purpose
which is already on file with the Commission may be incorporated by reference.
The name and any title of each person who signs the statement shall be typed or
printed beneath his signature.
CHS168510
2
Item 7(a)I
Financial Report
Captial State Bank, Inc.
December 31, 1997
Page
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of shareholders' equity 4
Statements of cash flows 5
Notes to financial statements 6-18
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
The Capital State Bank, Inc.
Charleston, West Virginia
We have audited the accompanying balance sheets of The Capital State Bank,
Inc. (A Development Stage Company for 1995) as of December 31, 1997 and 1996,
and the related statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1997, 1996 and for the period from September
11, 1995, date of inception, to December 31, 1995. These financial statements
are the responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Capital State Bank,
Inc., as of December 31, 1997 and 1996, and the results of its operations and
cash flows for the years ended December 31, 1997, 1996 and for the period from
September 11, 1995, date of inception, to December 31, 1995, in conformity with
generally accepted accounting principles.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
January 30, 1998
THE CAPITAL STATE BANK, INC.
(A Development Stage Company for 1995)
BALANCE SHEETS
December 31, 1997 and 1996
2
ASSETS
1997 1996
---------- -----------
Cash and due from banks $ 640,734 $ 379,830
Interest bearing deposits with other banks 9,180 1,536,279
Federal funds sold 5,877,000 3,484,000
Securities available for sale 7,976,975 6,949,578
Loans, less allowance for loan losses of
$247,017 and $127,300, respectively 24,007,035 16,237,114
Bank premises and equipment, net 1,289,629 1,399,984
Other assets 609,201 524,594
----------- ----------
Total assets $40,409,754 $30,511,379
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits:
Non interest bearing $1,047,578 $ 678,677
Interest bearing 28,020,898 18,658,567
---------- ----------
Total deposits 29,068,476 19,337,244
Other liabilities 498,505 233,782
---------- ----------
Total liabilities 29,566,981 19,571,026
---------- ----------
Commitments and Contingencies
Shareholders' Equity
Common stock, $1 par value, authorized,
issued and outstanding 1,200,000 shares 1,200,000 1,200,000
Capital surplus 10,398,528 10,398,528
Retained earnings (deficit), including deficit
accumulated during the development stage of
($347,296) (743,587) (625,997)
Net unrealized gain (loss) on securities (12,168) (32,178)
----------- ----------
Total shareholders' equity 10,842,773 10,940,353
---------- ----------
Total liabilities and shareholders' equity $40,409,754 $30,511,379
=========== ===========
See Notes to Financial Statements
3
THE CAPITAL STATE BANK, INC.
(A Development Stage Company for 1995)
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996
and for the Period from September 11, 1995,
Date of Inception, to December 31, 1995
1997 1996 1995
---------- ---------- -----------
Interest income:
Interest and fees on loans $1,760,790 $ 770,938 $ 940
Interest on taxable securities 490,801 320,505 -
Interest bearing deposits with other banks 9,234 11,579 89,360
Interest on Federal funds sold 271,439 314,484 33,770
--------- ---------- -----------
Total interest income 2,532,264 1,417,506 124,070
--------- ---------- -----------
Interest expense:
Interest on deposits 1,210,104 523,386 6,534
Interest on other borrowings - - 17,621
--------- ------- ------
Total interest expense 1,210,104 523,386 24,155
--------- ------- ------
Net interest income 1,322,160 894,120 99,915
Provision for loan losses 120,000 123,800 6,500
--------- ------- ------
Net interest income after provision for
loan losses 1,202,160 770,320 93,415
--------- ------- ------
Other income:
Service fee income 29,738 15,324 83
Other, net 13,916 5,719 -
------ ----- ------
43,654 21,043 83
-------- ------- ------
Other expenses:
Salaries and employee benefits 562,291 442,899 187,143
Net occupancy expense 127,281 91,747 13,663
Equipment rentals, depreciation and
maintenance 100,108 85,686 11,102
Data processing 124,180 86,541 48,120
Insurance 54,013 62,397 12,576
Professional fees 153,340 56,478 54,070
Advertising and marketing 53,164 47,429 66,508
Other 168,936 178,642 28,314
--------- --------- -------
1,343,313 1,051,819 421,496
--------- --------- -------
Income (loss) before income tax expense
(benefit) (97,499) (260,456) (327,998)
Income tax expense (benefit) 20,091 18,245 19,298
-------- -------- -------
Net income (loss) $(117,590) $ (278,701) $ (347,296)
========= =========== ============
Basic earnings (loss) per common shar$ (.10) $ (.23) $ (.29)
========= =========== ============
Average common shares outstanding 1,200,000 1,200,000 1,200,000
========= =========== ============
See Notes to Financial Statements
4
THE CAPITAL STATE BANK, INC.
(A Development Stage Company for 1995)
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996
and the Period from September 11, 1995,
Date of Inception, to December 31, 1995
Net
Unrealized Total
Retained Gain Share-
Common Capital Earnings (Loss) on holders'
Stock Surplus (Deficit) Securities Equity
---------- ----------- ---------- ---------- ---------------
Balance, September 11, 1995,
date of inception $ - $ - $ - $ - $ -
Issuance of common stock for
cash on December 11, 1995 1,200,000 10,398,528 - - 11,598,528
Net income (loss) during
development stage - - (347,296) - (347,296)
---------- ----------- ---------- ---------- ---------------
Balance, December 31, 1995 1,200,000 10,398,528 (347,296) - 11,251,232
Net income (loss) - - (278,701) - (278,701)
Change in net unrealized gain
(loss) on securities - - - (32,178) (32,178)
---------- ---------- ---------- ------------ ----------------
Balance, December 31, 1996 1,200,000 10,398,528 (625,997) (32,178) 10,940,353
Net income (loss) - - (117,590) - (117,590)
Change in net unrealized gain
(loss) on securities - - - 20,010 20,010
---------- ---------- ---------- ----------- ----------------
Balance, December 31, 1997 $1,200,000 $10,398,528 $ (743,587) $ (12,168) $10,842,773
========== =========== ============ =========== ================
See Notes to Financial Statements
5
THE CAPITAL STATE BANK, INC.
(A Development Stage Company for 1995)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996
and the Period from September 11, 1995,
Date of Inception, to December 31, 1995
1997 1996 1995
--------- --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(117,590) $(278,701) $(347,296)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 105,974 105,863 10,548
Provision for loan losses 120,000 123,800 6,500
Deferred income tax expense (benefit) 20,091 18,245 19,298
Amortization of organization costs 3,576 3,576 298
Amortization of prepaid land lease 6,000 5,500 2,000
Amortization of security premiums and (accretion)
of discounts, net (2,500) (833) -
Gain on sale of bank premises and equipment (6,261) - -
Decrease (increase) in other assets (15,161) 9,547 (362,310)
Decrease (increase) in accrued interest receivable (58,055) (184,003) (870)
Increase (decrease) in other liabilities 213,933 127,493 86,991
------- ------- ------
Net cash provided by (used in)
operating activities 270,007 (69,513) (584,841)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available for sale (3,245,155) (4,997,500) (2,000,000)
Proceeds from calls and maturities of securities
available for sale 2,250,000 - -
Principal collected on (loans made to) customers,
net (7,889,921)(16,002,334) (367,530)
Purchases of bank premises and equipment (1,358) (26,873) (1,489,522)
Proceeds from sale of bank premises and
equipment 12,000 - -
(Increase) decrease in Federal funds sold, net (2,393,000) 6,751,000 (10,235,000)
(Increase) decrease in interest bearing deposits
with other banks 1,527,099 (1,536,279) -
Proceeds from sale of repossessed assets - 2,450 -
---------- ---------- -----------
Net cash provided by (used in)
investing activities (9,740,335)(15,809,536)(14,092,052)
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non interest bearing
deposits 368,901 556,711 121,966
Net increase (decrease) in NOW accounts and savings
accounts 818,442 5,374,140 2,211,693
Proceeds from the sales of (payments for matured)
time deposits, net 8,543,889 9,998,657 1,074,077
Proceeds from the sale of common stock - - 11,598,528
--------- --------- -----------
Net cash provided by (used in) financing
activities 9,731,232 15,929,508 15,006,264
--------- --------- ----------
(Continued)
5
THE CAPITAL STATE BANK, INC.
(A Development Stage Company for 1995)
STATEMENT OF CASH FLOWS - CONTINUED
For the Years Ended December 31, 1997, 1996
and the Period from September 11, 1995,
Date of Inception, to December 31, 1995
1997 1996 1995
--------- -------- --------
Increase (decrease) in cash and due from banks 260,904 50,459 329,371
Cash and due from banks:
Beginning 379,830 329,371 -
--------- -------- --------
Ending $ 640,734 $ 379,830 329,371
========= ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash payments for:
Interest on deposits $1,150,409 $ 384,315 $ 508
========== ========= ========
Interest on short-term debt, net of
interest capitalized $ - $ - $ 17,621
========== ========= ========
Other assets acquired in settlement of loan $ - $ 2,450 $ -
========== ========= ========
See Notes to Financial Statements
6
Note 1. Significant Accounting Policies
Nature of the business: The Capital State Bank, Inc. is a commercial
-----------------------
bank with operations in Kanawha County, West Virginia. The Bank
provides consumer and commercial loans and deposit services
principally to individuals and small businesses in Kanawha, Boone and
Lincoln Counties, West Virginia and the adjacent counties.
Basis of presentation: The accounting and reporting policies of The
-----------------------
Capital State Bank, Inc. (A Development Stage Company for 1995),
conform to generally accepted accounting principles and to the general
practices within the banking industry.
Organization and Development of the Bank: The Bank was incorporated on
----------------------------------------
September 11, 1995, and undertook an offering to sell 1,200,000 shares
of its $1 par value stock for $10 per share. On December 11, 1995,
after completion of the stock offering and obtaining the requisite
regulatory approvals, the Bank was capitalized with the $12,000,000
proceeds from the stock offering, net of $401,472 in registration
costs. The results of operations of the newly organized Bank from
September 11, 1995, date of inception, to December 31, 1995, are
reflected in the accompanying financial statements. The Bank was
considered a development stage entity for the period from September
11, 1995, to December 31, 1995.
Use of estimates: The preparation of financial statements in
------------------
conformity with generally accepted accounting principles required
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Presentation of cash flows: For purposes of reporting cash flows, cash
--------------------------
and due from banks includes cash on hand and non interest bearing
amounts due from banks (including cash items in process of clearing).
Cash flows from demand deposits, NOW accounts, savings accounts and
Federal funds sold are reported net since their original maturities
are less than three months. Cash flows from loans and certificates of
deposits and other time deposits are reported net.
Securities: 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. The
appropriate classification is determined as follows:
Securities held to maturity - Debt securities for which the Bank
----------------------------
has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and
accretion of discounts. There are no securities classified as
"held to maturity" on the accompanying financial statements.
Securities available for sale - Securities not classified as
-------------------------------
"held to maturity" or as "trading" are classified as "available
for sale". Securities classified as "available for sale" are
those securities the Bank intends to hold for an indefinite
period of time, but not necessarily to maturity. "Available for
sale" securities are reported at estimated fair value net of
unrealized gains or losses, which are adjusted for applicable
income taxes, and reported as a separate component of
shareholders' equity.
Trading securities - There are no securities classified as
"trading" in the accompanying financial statements.
Realized gains and losses on sales of securities are recognized on the
specific identification method. Amortization of premiums and accretion
of discounts are computed using methods which approximate the interest
method.
NOTES TO FINANCIAL STATEMENTS
7
Loans and allowance for loan losses: Loans are stated at the amount of
-----------------------------------
unpaid principal, reduced by an allowance for loan losses. Interest
income on loans is accrued and credited to operations using methods
that approximate a level yield on principal amounts outstanding.
The allowance for loan losses is maintained at a level considered
adequate to provide for losses that can be reasonably anticipated. The
allowance is increased by provisions charged to operating expense and
reduced by net charge-offs. The Bank makes continuous credit
evaluations of the loan portfolio and considers current economic
conditions, historical loan loss experience of similar banks, 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 to the allowance
may be necessary if there are significant changes in conditions.
A loan is impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due in
accordance with the contractual terms of the specific loan agreement.
Impaired loans, other than certain large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment, are
required to be reported at the present value of expected future cash
flows discounted using the loan's original effective interest rate or,
alternatively, at the loan's observable market price, or at the fair
value of the loan's collateral if the loan is collateral dependent.
The method selected to measure impairment is made on a loan-by-loan
basis, unless foreclosure is deemed to be probable, in which case the
fair value of the collateral method is used.
Loans are placed on non-accrual status when management believes that
the borrower's financial condition, after giving consideration to
economic and business conditions and collection efforts, is such that
collection of interest is doubtful. Interest is accrued daily on
impaired loans unless the loan is placed on non-accrual status.
Impaired loans are placed on non-accrual status when the payments of
principal and interest are in default for a period of 90 days, unless
the loan is both well-secured and in the process of collection.
Interest on non-accrual loans is recognized primarily using the
cost-recovery method.
Certain loan fees and direct loan costs are recognized as income or
expense when incurred. Statement Number 91 of the Financial Accounting
Standards Board requires that such fees and costs be deferred and
amortized as adjustments of the related loan's yield over the
contractual life of the loan. The Bank's method of recognition
of loan fees and direct loan costs produce results which are not
materially different from those that would have been recognized had
Statement Number 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. Repairs and maintenance
expenditures are charged to operating expenses as incurred. Major
improvements and additions to premises and equipment are capitalized.
Organization costs: Organization costs, which are insignificant, are
------------------
being amortized on a straight-line basis over a period of 60 months
beginning in December 1995.
Income taxes: Deferred tax assets and liabilities are determined based
-------------
on differences between the financial statement and tax bases of assets
and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable
income. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
Valuation allowances are established, when deemed necessary, to reduce
deferred tax assets to the amount expected to be realized.
NOTES TO FINANCIAL STATEMENTS
8
The provision for income taxes includes Federal and state income taxes
and is based on pretax income reported in the financial statements,
adjusted for transactions that may never enter into the computation of
income taxes payable.
Earnings per share: Basic earnings per common share is computed based
------------------
upon the weighted average shares outstanding. The weighted average
shares outstanding were 1,200,000 for each of the years ended December
31, 1997, 1996 and the period from September 11, 1995 to December 31,
1995, respectively. For the year ended December 31, 1997, the Bank
adopted Financial Accounting Standards Board Statement No. 128,
Earnings per Share. During the years ended December 31, 1997, 1996 and
the period from September 11, 1995 to December 31, 1995, the Bank did
not have any potential dilutive securities, thus, this pronouncement
did not have an impact on the Bank's earnings per share computations.
Emerging accounting standards: In June 1997, the Financial Accounting
------------------------------
Standards Board issued Statement No. 130, Reporting Comprehensive
Income. This Statement requires an entity to include a statement of
comprehensive income in their full set of general-purpose financial
statements. Statement No. 130 is effective for years beginning after
December 15, 1997, and will require financial statements of earlier
periods that are presented for comparative purposes to be
reclassified. Based on the Bank's operations at December 31, 1997,
this pronouncement is not expected to have a significant impact on the
Bank's financial statements.
Reclassifications: Certain accounts in the financial statements for
-----------------
1996 and 1995, as previously reported, have been reclassified to
conform to current year classifications.
Note 2. Cash Concentrations
At December 31, 1997, the Bank had a concentration of risk totaling
$3,715,000 and $2,244,194 in its cash balances on deposit with First
USA Bank and the Bankers Bank of Kentucky, respectively. At December
31, 1996, the Bank had a concentration of risk in its cash balances on
deposit with First USA Bank of $3,220,000. These cash balances are
comprised of balances in due from correspondent accounts, Federal funds
sold and interest bearing deposits, and are generally unsecured by the
correspondent bank.
Note 3. Securities
The amortized cost, unrealized gains and losses and estimated fair
values of the Bank's securities at December 31, 1997 and 1996, is
summarized as follows:
Carrying
Value
(Estimated
Amortized Unrealized Fair
----------
Cost Gains Losses Value)
---------- ----------- -------- ---------
1997
Available for sale:
U.S. Government securities $ 500,521 $ - $ 20 $ 500,501
U.S. Government agencies
and corporations 7,495,466 5,708 24,700 7,476,474
---------- ----------- ---------- ----------
$7,995,987 $ 5,708 $ 24,720 $7,976,975
========== ========== ========== ==========
1996
Available for sale:
U.S. Government agencies $6,998,333 $ 9,958 $ 58,713 $6,949,578
========== ========== ========== ==========
NOTES TO FINANCIAL STATEMENTS
9
At December 31, 1997 and 1996, respectively, securities having an
amortized cost of $2,050,625 and $1,150,000 and an estimated fair
value of $2,044,523 and $1,148,196 were pledged to secure public
deposits and for other purposes required or permitted by law.
The maturities, amortized cost and estimated fair values of the Bank's
securities at December 31, 1997, is summarized as follows:
Available for Sale
------------------
Carrying
Value
(Estimated
Amortized Fair
Cost Value)
Due after 1 but within 5 years $7,995,988 $7,976,976
============ ==========
Maturities presented in the above schedule are based on the
contractual maturity date of the securities. All U.S. Government
Agency and Corporate securities owned at December 31, 1997, have
provisions which allow the issuer to "call" the security prior to its
contractual maturity date. Should these "call" provisions be
exercised, the scheduled maturities disclosed above may be altered.
The proceeds from sales, calls and maturities of securities, and
principal payments received on mortgage backed obligations and the
related gross gains and losses realized during the years ended
December 31, 1997 and 1996, and the period ended December 31, 1995 are
as follows:
Proceeds From Gross Realized
For the Year Calls and Principal
Ended December 31, Sales Maturities Payments Gains Losses
------------------ ------ --------- -------- ----- ------
1997
Securities available
for sale $ - $2,250,000 $ - $ - $ -
====== ========= ========= ======== =======
Note 4. Loans
1997 1996
----------- ----------
Commercial financial and agriculture $ 1,925,892 $1,358,418
Real estate:
Single family residential 12,558,048 7,477,960
Commercial 3,367,396 2,769,273
Revolving home equity 1,125,884 590,097
Construction 172,073 552,807
Consumer installment 5,104,759 3,615,859
--------- ---------
Total loans 24,254,052 16,364,414
Less allowance for loan losses 247,017 127,300
------- -------
Loans, net $24,007,035 $16,237,114
=========== ===========
NOTES TO FINANCIAL STATEMENTS
10
Scheduled maturities on loans, without regard to scheduled periodic
principal repayments on amortizing loans, are as follows at December
31, 1997:
Due After
Due Within 1 Year but Due After
1 Year Within 5 Years 5 Years Total
------------------------- ------------------
Fixed rate:
Commercial $ 45,065 $ 222,761 $ 60,260 $ 328,095
Commercial real estate - 2,209,642 648,356 2,857,998
Single family real estate,
including home equity 124,470 3,052,802 6,599,789 9,777,061
Construction - - - -
Consumer installment 344,872 4,160,266 377,104 4,882,242
Total fixed rate loans 514,407 9,645,471 7,685,518 17,845,396
Floating rate:
Commercial 1,239,253 289,075 69,469 1,597,797
Commercial real estate 43,455 208,815 257,128 509,398
Single family real estate,
including home equity 230,377 - 3,676,494 3,906,871
Construction 172,073 - - 172,073
Consumer installment 185,185 37,332 - 222,517
--------- --------- --------- ----------
Total floating rate
loans 1,870,343 535,222 4,003,091 6,408,656
--------- --------- --------- ---------
Total loans $2,384,750 $10,180,693 $11,688,609 $24,254,052
========== =========== =========== ===========
Substantially all real estate loans outstanding were originated under
3, 5 or 7 year balloon terms with amortization periods of generally 15
to 25 years. Interest rates on floating rate loans generally reprice
within one year based on indices which are set by sources independent
of the Bank and are subject to interest rate floors, caps and ceilings
which may limit changes in the interest rate over the life of the
loan.
Loans to related parties: The Bank has had, and may be expected to
-------------------------
have in the future, banking transactions in the ordinary course of
business with directors, principal officers, their immediate families
and affiliated companies in which they are principal stockholders
(commonly referred to as related parties), all of which have been in
the opinion of management, on the same terms including interest rates
and collateral, as those prevailing at the time for comparable
transactions with others.
The following presents the activity with respect to related party
loans aggregating $60,000 or more to any one related party during the
years ended December 31, 1997 and 1996:
1997 1996
----------- -----------
Balance beginning $ 1,387,804 $ -
Additions 347,914 1,458,918
Amounts collected 122,156 71,114
Other (100,000) -
-------- ----------
Balance, ending $ 1,513,562 $1,387,804
=========== ==========
At December 31, 1997 and 1996, outstanding loans to directors, officers
and employees totaled $1,802,427 and $1,499F,255, respectively.
Commitments to extend credit under unused open lines of credit to such
individuals totaled approximately $98,623 and $210,000 at December 31,
1997 and 1996, respectively.
11
NOTES TO FINANCIAL STATEMENTS
Concentration of credit risk: The Bank grants installment, commercial
-----------------------------
A and residential loans to customers primarily in Kanawha, Boone and
Lincoln Counties, West Virginia and adjacent counties. Although the
Bank strives to maintain a diversified loan portfolio, exposure to
credit losses can be adversely impacted by downturns in local economic
and employment conditions. Major employment within the market area is
diverse but primarily includes the industries of government, health
care, education, coal production and related services, and various
professional, financial and related service industries.
The Bank accepts chattel paper without recourse from various approved
businesses, primarily automobile dealerships, within its lending area.
The Bank has sole discretion whether to purchase such paper on a case
basis which is evaluated substantially under the Bank's normal
credit underwriting standards and is generally secured by a first lien
on the property purchased by the borrower. At December 31, 1997, and
December 31, 1996, respectively, such loans approximated $1,995,837
and $1,759,000 of which approximately 80.0% and 86.8% were purchased
from businesses considered to be a related party to the Bank.
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the years ended
December 31, 1997, 1996 and the period from September 11, 1995, date
of inception, to December 31, 1995, is as follows:
1997 1996 1995
--------- --------- --------
Balance, beginning of period $ 127,300 $ 6,500 $ -
--------- --------- --------
Losses:
Commercial financial and agriculture - - -
Real estate - - -
Consumer installment 283 3,000 -
--------- --------- --------
Total 283 3,000 -
--------- --------- --------
Recoveries:
Commercial financial and agriculture - - -
Real estate - - -
Consumer installment - - -
--------- --------- --------
Total - - -
--------- --------- --------
Net recoveries (losses) (283) (3,000) -
--------- --------- --------
Provision for loan losses 120,000 123,800 6,500
--------- --------- --------
Balance, end of period $ 247,017 $ 127,300 $ 6,500
========= ========= ========
During 1997 and 1996, the Company did not have any loans classified as
impaired. 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 bank's typical residential mortgage loan amount and "other"
loans, which include small balance, overdraft protection lines and
installment loans to individuals.
Note 6. Bank Premises and Equipment
The major categories of Bank premises and equipment and accumulated
depreciation at December 31, 1997 and 1996, is summarized as follows:
1997 1996
---------- ----------
Building and improvements $1,026,262 $1,024,904
Furniture and equipment 465,662 491,491
---------- ----------
1,491,924 1,516,395
Less accumulated depreciation (202,295) (116,411)
---------- ----------
Bank premises and equipment, net $1,289,629 $1,399,984
12
NOTES TO FINANCIAL STATEMENTS
Depreciation expense for the year ended December 31, 1997, 1996 and
the period from September 11, 1995, date of inception, to December 31,
1995, totaled $105,974, $105,863 and $10,548, respectively.
Interest costs incurred to construct the Bank building, amounting to
$21,783, were capitalized in 1995 as part of building and
improvements.
During 1995, the Bank entered into a 50 year agreement to lease the
land on which the Bank building is situated. The original term of the
lease expires in the year 2045, with an additional 45 year renewal
option available through the year 2090. In consideration for this
lease, the Bank made a one time, up front payment of $300,000 covering
the first 50 year lease term. Total rental expense incurred and
recognized on this lease for the years ended December 31, 1997, 1996
and the period from September 11, 1995, date of inception, to December
31, 1995, approximated $6,000, $5,500 and $2,000 respectively. The
remaining amount of prepaid lease expense at December 31, 1997 and
1996, which is included in other assets, totaled $286,500 and
$292,500, respectively.
Note 7. Deposits
The following is a summary of interest bearing deposits by
type as of December 31, 1997 and 1996:
1997 1996
----------- ----------
NOW and Super NOW accounts $1,159,858 $ 806,664
Money market accounts 5,399,958 5,758,685
Savings accounts 1,843,921 1,019,946
Certificates of deposit 19,374,669 10,936,308
Individual retirement accounts 242,492 136,964
----------- ----------
Total $28,020,898 $18,658,567
=========== ===========
Time certificates of deposit in denominations of $100,000 or more
totaled $6,378,906 and $3,740,852 at December 31, 1997 and 1996,
respectively. Interest paid on time certificates in denominations of
$100,000 or more was $284,657 and $114,005 year ended December 31,
1997 and 1996, respectively.
The following is a summary of the maturity distribution of
certificates of deposits in amounts of $100,000 or more as of December
31, 1997:
Amount Percent
--------- --------
Three months or less $ 655,472 10.3%
Three through six months 311,186 4.9%
Six through twelve months 2,087,796 32.7%
Over twelve months 3,324,452 52.1%
--------- ------
Total $6,378,906 100.0%
========== ======
A summary of the maturities of time deposits, which includes
certificates of deposit and certain individual retirement accounts, is
as follows:
Year Amount
-------- ------------
1998 $10,129,214
1999 8,891,134
2000 427,888
2001 122,027
2002 11,950
Thereafter 32,000
------------
Total $19,614,213
NOTES TO FINANCIAL STATEMENTS
13
At December 31, 1997 and 1996, the Bank was holder of deposits from
related parties totaling approximately $1,324,000 and $3,524,000 or
4.7% and 18.2% of total deposits, respectively. At December 31, 1996,
these balances included a concentration of deposits totaling
$2,090,000 from three individuals and their related interests.
At December 31, 1997 and 1996, the Bank had a concentration of
deposits from an unrelated party totaling approximately $1,460,000 and
$1,091,000 or 5.2% and 5.5% of total deposits, respectively.
Note 8. Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. Those instruments involve
to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of financial
position. The contract amounts of these instruments reflect the extent
of involvement the Bank has in particular cases of financial
instruments. At December 31, 1997 and 1996, respectively, the Bank's
financial instruments with off-balance sheet risk were as follows:
Financial instruments whose contract Contract
Amount
amounts represent credit risk 1997 1996
------------------------------------------- --------- -------
Commitments to extend credit $ 371,126 $ 780,750
Unused open lines of credit 1,399,404 667,140
Standby letters of credit and
financial guarantees written - 100,000
Remaining commitments on
construction loans 22,938 267,345
------ -------
Total $1,793,468 $1,815,235
========== ==========
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. The bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer so
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank
evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary upon extension
of credit, is based on management's credit evaluation. Collateral held
varies but generally is secured by accounts receivable, inventory,
equipment or real estate.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
These guarantees are primarily issued to support private borrowing
arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loans. These
letters of credit are generally collateralized.
14
NOTES TO FINANCIAL STATEMENTS
Note 9. Income Taxes
The components of applicable income tax expense (benefit) for the year
ended December 31, 1997, 1996 and the period from September 11, 1995,
date of inception, and December 31, 1995, respectively is as follows:
1997 1996 1995
-------- -------- --------
Current:
Federal $ - $ - $ -
State - - -
-------- -------- --------
- - -
Deferred:
Federal 17,804 11,368 16,734
State 2,287 6,877 2,564
-------- ------ --------
Total $ 20,091 $ 18,245 $ 19,298
======== ====== ========
A reconciliation between the amount of reported income tax expense
(benefit) and the amount computed by multiplying the statutory income
tax rate by book pretax income for the year ended December 31, 1997
and 1996, respectively, is as follows:
1997 1996 1995
-----------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------
Computed tax at
applicable
statutory rate $(33,150) (34.0) $ (88,555) (34.0) (111,519) (34.0)
Increase (decrease) in
taxes resulting from:
Increase in deferred
tax valuation
allowance 60,243 61.8 126,087 48.4 156,534 47.7
Deferred state income
tax (benefit),
expense (11,926) (12.2) (18,968) (7.3) (9,522) (2.9)
Other, net 4,924 5.0 (319) (.1) (16,195) (4.9)
-----------------------------------------------------------
Applicable
income
taxes $20,091 20.6 $ 18,245 7.0 $ 19,298 5.9
===========================================================
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.
15
NOTES TO FINANCIAL STATEMENTS
The tax effects of temporary differences which create the Bank's
deferred tax assets and liabilities as of December 31, 1997 and 1996,
are as follows:
1997 1996
-------- ---------
Deferred Tax Assets:
Start up costs deferred for tax purposes $59,076 $ 79,606
Federal and state net operating loss
carryforward 262,854 190,242
Net unrealized losses on securities 6,844 16,577
Allowance for loan losses 8,146 11,570
Other 12,788 1,203
------ -----
Subtotal 349,708 299,198
------- -------
Less: valuation allowance (342,864) (282,621)
-------- --------
Total deferred tax asset 6,844 16,577
----- ------
Deferred Tax Liability:
Depreciation 57,634 37,543
------ ------
Total deferred tax liability 57,634 37,543
------ ------
Net deferred tax liability $50,790 $20,966
======= ======
Realization of future tax benefits related to deferred tax assets is
dependent on many factors, including the bank's ability to generate
taxable income within the net operating loss carryforward period.
Management believes the Bank will generate sufficient future taxable
income to realize the tax assets prior to the expiration of
carryforward periods. However, failure to achieve forecasted taxable
income has and could in the future affect the ultimate realization of
deferred tax assets. As a result, a valuation allowance is recorded to
reduce deferred tax assets to that portion that is not expected to
more likely than not be realized within the next year. The Bank
continually reviews the adequacy of the valuation allowance and will
recognize these benefits only as reassessment indicates that it is
more likely than not that the benefits will be realized.
Note 10. Commitments and Contingent Liabilities
Commitments under servicing agreement: The Bank has contracted with a
---------------------------------------
third-party service center to perform substantially all electronic
data processing services for the Bank. Pursuant to this agreement,
certain payments, as defined in the agreement, may become due if the
agreement is terminated before December, 2000.
Employment Contracts: The Bank entered into employment agreements (the
--------------------
Agreements) with its President and Executive Vice President. These
agreements provide for the payment of minimum salaries through
December 31, 2000. During 1997, the Bank negotiated with its President
to terminate his employment agreement as of December 31, 1997, in
exchange for a lump sum settlement of $105,000 which is charged to
operations for the year ended December 31, 1997. Minimum salaries
payable under the remaining Agreement total $75,000 for each of the
remaining three years of the agreement. In addition, the agreement
provides for total incentive compensation payments of up to .75% of
after tax net income if the Bank achieves certain performance
standards as outlined in the agreement. This incentive compensation
provision is effective for each of the years ended through December
31, 2000. During 1997, 1996 and 1995, no incentive compensation was
paid under the terms of these employment agreements.
16
NOTES TO FINANCIAL STATEMENTS
Year 2000 Compliant: The Bank is conducting a comprehensive review of
-------------------
its computer systems to identify the systems that could be affected by
the "ear 2000 Issue"; and is developing a remediation plan to resolve
the Issue. The Issue is whether computer systems will properly
recognize date-sensitive information when the year changes to 2000.
Systems that do not properly recognize such information could generate
erroneous data or cause a system to fail. The Bank is heavily
dependent on computer processing in the conduct of its business
activities. While management believes it is doing everything
technologically possible to assure Year 2000 compliance, it is in part
dependent upon systems and software vendors to represent that the
products provided are, or will be, "Year 2000 Compliant".
Because the Bank has not completed its review of computer systems and
software, management is unable to estimate the costs of making the
system Year 2000 compliant, however, the total cost is not expected to
be significant to the Bank's financial position or results of
operations.
Note 11. Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions used
by the Bank 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.
Federal funds sold and interest bearing deposits with other banks: The
-----------------------------------------------------------------
carrying values of Federal funds sold and interest bearing deposits
with other banks 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 fair values.
Deposits: The estimated fair values of demand deposits (i.e.
---------
noninterest bearing checking, NOW, Super NOW, money market), 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.
17
NOTES TO FINANCIAL STATEMENTS
The fair values of the Bank's financial instruments as of December 31,
1997 and 1996, are summarized below:
1997 1996
---------------------- --------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------- --------------------------
Financial assets:
Cash and due from bank $ 640,734 $ 640,734 $ 379,830 $ 379,830
Interest bearing deposits
with other banks 9,180 9,180 1,536,279 1,536,279
Federal funds sold 5,877,000 5,877,000 3,484,000 3,484,000
Securities available for sale 7,976,975 7,976,975 6,949,578 6,949,578
Loans 24,007,035 23,881,235 16,237,114 16,167,628
Accrued interest receivable 242,928 242,928 184,873 184,873
----------- ---------- ---------- ----------
$38,753,852 $38,628,052 $28,771,674 $28,702,188
=========== =========== =========== ===========
Financial liabilities:
Deposits $29,068,476 $29,162,441 $19,337,244 $19,359,623
Accrued interest payable 204,792 204,792 145,097 145,097
----------- ----------- ----------- -----------
$29,273,268 $29,376,233 $19,482,341 $19,504,720
=========== =========== =========== ===========
Note 12. Restrictions on Dividends and Capital
Dividends paid by the Bank are subject to restrictions by banking
regulations. The most restrictive provision requires approval by the
regulatory agency if dividends declared in any year exceed the year's
net income, as defined, plus the retained net profits of the two
preceding years. Since the Bank has a net deficit, there are no net
retained profits available for distribution.
The Bank is subject to various regulatory capital requirements
administered by the Federal banking agencies. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I
capital (as defined) to average assets (as defined) which is commonly
referred to as the leverage ratio. Management believes, as of December
31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the Bank's
regulatory authority categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the following table. There are no conditions or events since its
last financial reporting that management believes have changed the
institution's category.
18
NOTES TO FINANCIAL STATEMENTS
The Bank's actual capital amounts and ratios are presented in the
following table (in thousands).
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------------------------
As of December 31, 1997:
Total Capital $ 11,092 48.7% $ 1,822 8.0% $ 2,278 10.0%
(to Risk Weighted Assets)
Tier I Capital $ 10,845 47.6% $ 911 4.0% $ 1,367 6.0%
(to Risk Weighted Assets)
Tier I Capital $ 10,845 27.5% $ 1,577 4.0% $ 1,972 5.0%
(to Average Assets)
As of December 31, 1996:
Total Capital $ 11,128 64.2% $ 1,405 8.0% $ 1,757 10.0%
(to Risk Weighted Assets)
Tier I Capital $ 11,001 63.4% $ 703 4.0% $ 1,054 6.0%
(to Risk Weighted Assets)
Tier I Capital $ 11,001 37.7% $ 1,171 4.0% $ 1,464 5.0%
(to Average Assets)
Note 13. Change in Control and Proposed Merger
During the first six months of 1997, approximately 40% of the Bank's
1,200,000 issued and outstanding common shares were acquired by South
Branch Valley Bancorp, Inc. (South Branch). On August 6, 1997, the
Board of Directors entered into an Agreement and Plan of Merger with
South Branch. The Agreement, as amended on December 16, 1997, called
for the shareholders of Capital State to receive one (1) share of
South Branch common stock in exchange for every 3.95 shares of Capital
State common stock owed. The proposed merger, which has received
necessary regulatory approval, is subject to shareholder approval.
Capital State has scheduled its shareholder meeting for March 24,
1998, while South Branch has scheduled its meeting for March 25, 1998.
It is anticipated that the proposed merger will be accounted for under
the purchase method of accounting in accordance with generally
accepted accounting principles. Accordingly, as of the effective date
of the merger, the assets and liabilities of Capital State will be
adjusted to their fair values and the excess purchase price paid over
the fair value of the assets acquired (goodwill) will be reflected in
Capital State'as financial statements. Based upon preliminary
estimates and assumptions, the excess purchase price over the fair
value of the net assets acquired would have approximated $2,450,000 if
the proposed merger had been consummated as of December 31, 1997. The
goodwill recognized is expected to be amortized over a period of 15
years using the straight-line method.
Upon consummation of the proposed merger, which is expected at or near
the end of the first quarter of 1998, it is anticipated that Capital
State will operate as a wholly-owned subsidiary of South Branch.
Item 7(a) II.
Unaudited Interim Financial Statements of Capital State Bank, Inc. as of March
31, 1998 and 1997 and for the three months then ended.
Contents
Item 1 - Financial Statements
Balance Sheets as of March 31, 1998 (Unaudited), December 31, 1997
and March 31, 1997 (Unaudited)
.................................................................... 1.
Statements of Operations for the Three Months Ended
March 31, 1998 and 1997 (Unaudited)
.................................................................... 2.
Statements of Shareholders' Equity for the Three Months Ended
March 31, 1998 and 1997 (Unaudited)
.................................................................... 3.
Statements of Cash Flows for the Three Months Ended
March 31, 1998 and 1997 (Unaudited)
.................................................................... 4.
Statements of Comprehensive Income for the Three Months Ended
March 31, 1998 and 1997 (Unaudited)
.................................................................... 5.
Notes to the Financial Statements (Unaudited)
.................................................................... 6.-18.
1
BALANCE SHEETS
THE CAPITAL STATE BANK, INC
Restated
--------------------
March 31, 1998 December 31, 1997 March 31, 1998
(Unaudited) 1997 (Unaudited)
-------------- ------------------ --------------------
Assets
Cash and due from banks $976,517 $640,734 $769,997
Interest bearing deposits with other banks 9,100 9,180 0
Federal funds sold 6,217,000 5,877,000 4,866,000
-------------- ------------------ --------------------
Cash and cash equivalents 7,202,617 6,526,914 5,635,997
Securities
Available for sale, at fair value 10,466,790 7,976,975 6,852,037
Loans
Total loans 24,787,782 24,254,052 17,817,765
Allowance for loan losses (271,802) (247,017) (157,300)
-------------- ------------------ --------------------
Net loans 24,515,980 24,007,035 17,660,465
Bank premises and equipment - net 1,287,230 1,289,629 1,373,490
Other assets 536,870 609,201 490,872
-------------- ------------------ --------------------
Total Assets 44,009,487 40,409,754 32,012,661
============== ================== ====================
Liabilities and Shareholders' Equity
Deposits
Non-Interest bearing 1,034,280 1,047,578 848,533
Interest bearing 31,726,407 28,020,898 20,022,708
-------------- ------------------ --------------------
Total deposits 32,760,687 29,068,476 20,871,241
Short Term Borrowings
Federal Funds Purchased 0 0 0
Repurchase agreements and
other borrowings 0 0 0
-------------- ------------------ --------------------
Total short term borrowings 0 0 0
Long-term borrowings 0 0 0
Other liabilities 375,785 498,505 278,133
-------------- ------------------ --------------------
Total Liabilities 33,136,472 29,566,981 21,149,374
-------------- ------------------ --------------------
Shareholders' Equity
Common Stock - $1 per, 1,200.000
shares authorized and outstanding 1,200,000 1,200,000 1,200,000
Capital surplus 10,398,528 10,398,528 10,398,528
Retained earnings (706,478) (743,587) (638,273)
Unrealized gain (loss) on
securities available for sale,
net of deferred taxes (18,035) (12,168) (96,968)
Total shareholders' equity 10,873,015 10,842,773 10,863,287
-------------- ------------------ --------------------
Total liabilities and
shareholders' equity 44,009,487 40,409,754 32,012,661
-------------- ------------------ --------------------
Information extracted from audited financial statements
The accompanying notes are an integral part of these financial statements
2
STATEMENTS OF OPERATIONS
THE CAPITAL STATE BANK, INC.
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1998
-------------------- ------------------
Interest Income
Interest and fees on loans
Taxable $505,568 $348,217
Tax-exempt 0 0
-------------------- ------------------
Total 505,568 348,217
-------------------- ------------------
Interest on investment securities
Taxable 126,978 112,588
Tax-exempt 0 0
-------------------- ------------------
Total 126,978 112,588
-------------------- ------------------
Interest on interest bearing deposits
with other banks 0 9,234
Interest on federal funds sold 98,848 46,538
-------------------- ------------------
Total interest income 731,394 516,577
-------------------- ------------------
Interest expense
Deposits 400,248 232,420
Short-term borrowings 0 0
-------------------- ------------------
Total interest expense 400,248 232,420
-------------------- ------------------
Net Interest Income 331,146 284,157
Provision for loan losses 30,000 30,000
-------------------- ------------------
Net Interest Income after provision
for laon losses 301,146 254,157
-------------------- ------------------
Other Income
Service fee income 8,572 4,709
Other, net 3,381 4,957
Securities transactions 0 0
-------------------- ------------------
Total other income 11,953 9,666
-------------------- ------------------
Other Expenses
Salaries and employee benefits 89,182 120,000
Occupancy expenses - net 22,878 37,846
Equipment expenses 22,696 25,407
Data Processing 39,692 25,341
Insurance 10,119 14,060
Professional fees 22,324 18,377
Advertising and marketing 7,564 13,840
Other operation expenses 30,257 28,432
-------------------- ------------------
Total other expenses 244,712 283,303
-------------------- ------------------
Income (loss) before taxes 68,387 (19,480)
Applicable income tax expense (benefit) 31,278 (7,204)
-------------------- ------------------
Net Income (loss) $37,109 ($12,276)
==================== ==================
Basic earnings (loss) per common share $0.03 ($0.01)
==================== ==================
Average common shares outstanding 1,200,000 1,200,000
==================== ==================
The accompanying notes are an integral part of these financial statements
3
STATEMENTS OF SHAREHOLDERS' EQUITY Three Months
Ended March 31, 1998 and 1997 (Unaudited)
THE CAPITAL STATE BANK, INC.
Unrealized
Restated Gain (loss) on
Retained Securities Total
Common Stock Capital Surplus Earnings Available for Sale Shareholders' Equity
-------------------------------------------------------------------------------------------------
Balance January 1, 1997 $1,200,000 $10,398,528 ($625,997) ($32,178) $10,940,353
Three Months Ended March 31, 1997
Net Income (12,276) (12,276)
Cash Dividends 0 0
Charge in Fair Value of
Securities Available
for Sale, net of
deferred taxes (64,790) (64,790)
-------------------------------------------------------------------------------------------------
Balance March 31, 1997 $1,200,000 $10,398,528 ($638,273) ($96,968) $10,863,287
=================================================================================================
Balance January 1, 1998 $1,200,000 $10,395,528 ($743,587) ($12,168) $10,842,773
Three months ended March 31, 1998
Net Income 37,109 37,109
Cash Dividends 0
Change in Fair Value of Securities Available
for Sale, net deferred taxes (6,867) (6,867)
-------------------------------------------------------------------------------------------------
Balance March 31, 1998 $1,200,000 $10,398,528 ($706,478) ($19,035) $10,873,015
=================================================================================================
The accompanying notes are an integral part of these financial statements
4
STATEMENTS OF CASH FLOWS
THE CAPITAL STATE BANK, INC.
For the Three For the Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
(Unaudited) (Unaudited)
------------------------------------------
Operating Activities
Net Income (loss) $37,109 ($12,276)
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses 30,000 30,000
Depreciation 25,597 26,494
Amortization and accretion (1,622) (625)
Securities losses (gains) 0 0
Deferred income tax expense (benefit) 31,278 (7,402)
Increase / decrease due to changes in:
Accrued interest receivable 50,303 115,642
Accrued interest payable 14,138 44,351
Other Assets 26,968 (40,942)
Other liabilities (168,136)
------------------------------------------
Net cash provided by operating activities 45,635 155,242
Investing Activities
Proceeds from maturities of securities
available for sale 1,000,000 -
Purchases of securities available for sale (3,500,000) -
Net increase in loans (538,945) (1,453,351)
Purchases of bank premises and equipment (23,198) -
(Increase) decrease in interest bearing
deposits with other banks 0 1,536,279
(Increase) decrease in federal funds sold, net (340,000) (1,382,000)
------------------------------------------
Net cash provided by Investing activities (3,402,063) (1,299,072)
Financing Activities
Net Increase in non interest bearing accounts (13,298) 169,856
Net Increase in NOW accounts and savings accounts 103,000 (262,308)
Proceeds from the sales of (payments for matured)
time deposits, net 3,602,509 1,626,449
------------------------------------------
Net cash provided by financing activities 3,692,211 1,533,997
Increase (decrease) in cash and
cash equivalents 335,783 390,167
Cash and Cash equivalents:
Beginning of year 640,734 379,830
------------------------------------------
End of year $976,517 $769,997
------------------------------------------
Supplemental Disclosures of Cash Flow information:
Cash payments for:
Interest $414,386 $276,771
------------------------------------------
The accompanying notes are an integral part of these financial statements
5
STATEMENTS OF COMPREHENSIVE INCOME
THE CAPITAL STATE BANK, INC.
Three Months Ended March 31
-----------------------------------
1998 1997
------------ ------------
Net Income
Other comprehensive income of tax: $37,109 ($12,276)
Unrealized gain (loss) on securities
arising during the period 6,867 64,790
------------ ------------
Comprehensive Income $43,976 $52,514
------------ ------------
The accompanying notes are an integral part of these financial statements
6
Notes to Financial Statements
Note 1. Basis of Presentation
The accounting and reporting policies of The Capital State Bank, Inc.,
("Capital State" or "The Bank") conform to generally accepted accounting
principles and to general policies within the financial services industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the financial statement
date and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
The information contained in the financial statements is unaudited except
where indicated. In the opinion of management, all adjustments for a fair
presentation of the results of the interim periods have been made. All such
adjustments were of a normal recurring nature. The results of operations
for the three months ended March 31, 1998 are not necessarily indicative of
the results to be expected for the full year. The financial statements and
notes included herein should be read in conjunction with those included in
Capital State's 1997 Form F-2.
For the period ended March 31, 1998, the Company was required to adopt
Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting
Comprehensive Income". Comprehensive income includes any change in equity
of the Company during the period resulting from transactions and other
events and circumstances from nonowner sources. A Statement of
Comprehensive income has been included in these financial statements to
comply with SFAS 130. Prior interim periods presented have been
reclassified to provide comparative information.
Reclassifications: Certain accounts in the Financial Statements for 1997,
as previously reported have been reclassified to conform to current year
classification.
Note 2. Cash Concentrations
At March 31, 1998 and March 31, 1997, the Bank had a concentration of risk
totaling $3,715,000 and $3,220,000 respectively in its cash balances on
deposit with First USA Bank. At December 31, 1997, the Bank had a
concentration of risk totaling $3,715,000 and $2,244,194 in its cash
balances on deposit with First USA Bank and Bankers Bank of Kentucky,
respectively. At March 31, 1998 the Bank had a concentration on deposit
with Bankers Bank of Kentucky of $2,811,990. These cash balances are
comprised of balances in due from correspondent accounts, Federal funds
sold and interest bearing deposits, and are generally unsecured by the
correspondent bank.
7
Note 3. Securities
The amortized cost, unrealized gains and losses and estimated fair values
of the Bank's securities at March 31, 1998, December 31, 1997 and March 31,
1997 are summarized as follows:
Carrying
Value
Amortized Unrealized Unrealized (Estimated
Cost Gains Losses Fair
Value)
------------ ----------- ----------- -------------
March 31, 1998
U.S. Treasuries available $500,443 $407 - $500,850
for sale
U.S. Government agencies and
corporations available for 9,997,166 5,024 36,250 9,965,940
sale
Total $10,497,609 $5,431 $36,250 $10,466,790
------------ ----------- ----------- -------------
Carrying
Value
Amortized Unrealized Unrealized (Estimated
Cost Gains Losses Fair
Value)
------------ ----------- ----------- -------------
December 31, 1997
U.S. Treasuries available $500,521 - $20 $500,501
for sale
U.S. Government agencies and
corporations available for 7,495,466 5,708 24,700 7,476,474
sale
------------ ----------- ----------- -------------
Total $7,995,987 $5,708 $24,720 $7,976,975
------------ ----------- ----------- -------------
March 31, 1997
U.S. Government agencies and
corporations available for $6,998,958 - $146,921 $6,852,037
sale
Total $6,998,958 - $146,921 $6,852,037
------------ ----------- ----------- -------------
The maturities, amortized cost and estimated fair values of the Bank's
securities at March 31, 1998 is summarized as follows:
Carrying Value
(Estimated Fair
Amortized Cost Value)
-------------- ------------------
Due within 1 year $ - $ -
Due after 1 year but within 10,497,609 10,466,790
5 years
Due after 5 but within 10 - -
years
Due after 10 years - -
-------------- ------------------
Total $10,497,609 $10,466,790
============== ==================
8
Maturities presented above are based on the contractual maturities of the
securities. At March 31, 1998, securities with amortized cost of $9,497,609
have provisions which allow the issuer to "call" the securities prior to
its contractual maturity date. Should these "call" provisions be exercised,
the scheduled maturities disclosed above may be altered. Through March 31,
1998, there have been calls, or maturities of 1,000,000 in par value of
these securities.
At March 31, 1998, securities carried at $2,042,992 were pledged to secure
public deposits, repurchase agreements, and for other purposes as required
or permitted by law.
Note 4. Loans
March 31, 1998 Dec 31, 1997 March 31, 1997
--------------- ------------- ----------------
Commercial, financial and $1,823,134 $1,925,892 $1,348,704
agricultural
Consumer loans 4,890,233 5,104,759 3,867,049
Real Estate:
Revolving home equity 1,085,138 1,125,884 629,076
Single family residential 13,141,969 12,558,048 8,285,620
Commercial 3,673,078 3,367,396 3,074,925
Construction 174,230 172,073 612,391
--------------- ------------- ----------------
Total loans net of unearned income 24,787,782 24,254,052 17,817,765
Less allowance for loan losses 271,802 247,017 157,300
--------------- ------------- ----------------
Loans-net $24,515,980 $24,007,035 $17,660,465
=============== ============= ================
Scheduled maturities on loans, without regard to scheduled periodic principal
repayments on amortizing loans, are as follows at March 31, 1998:
Due after 1
Due within 1 year Due after 5
year but within 5 years Total
years
------------- -------------- ------------- --------------
Fixed Rate:
Commercial $ - $336,641 $ - $336,641
Commercial real estate 150,000 2,964,963 - 3,114,963
Single family real estate
including home equity 180,094 7,119,133 2,159,280 9,458,507
Construction - - - -
Consumer Installment 288,230 4,357,276 54,287 4,699,793
Total fixed rate loans 618,324 14,778,013 2,213,567 17,609,904
------------- -------------- ------------- --------------
Floating rate:
Commercial 1,147,288 339,205 - 1,486,493
9
Commercial real estate - 208,266 349,849 558,115
Single family real
estate
including home equity 192,410 - 4,576,190 4,768,600
Construction 174,230 - - 174,230
Consumer Installment 155,750 34,690 - 190,440
------------- -------------- ------------- --------------
Total floating rate loans 1,669,678 582,161 4,926,039 7,177,878
------------- -------------- ------------- --------------
Total loans $2,288,002 $15,360,174 $7,139,606 $24,787,782
============= ============== ============= ==============
Substantially all real estate loans outstanding were originated under 3, 5
or 7 year balloon or adjustable rate mortgage (ARM) terms with amortization
periods of generally 15 to 25 years. Interest rates on floating rate loans
generally reprice within one year based on indices which are set by sources
independent of the Bank and are subject to interest rate floors, caps and
ceilings which may limit changes in the interest rate over the life of the
loan.
Loans to related parties.
The Bank has had and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they
are principal stockholders (commonly referred to as related parties), all
of which have been, in the opinion of management, on the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with others.
The following presents the activity with respect to related party loans
aggregating $60,000 or more to any one related party during the three
months ended March 31, 1998:
Balance beginning $1,513,562
Additions 29,283
Amounts Collected 20,045
--------------
Balance, ending $1,522,800
==============
At March 31, 1998, outstanding loans to directors, officers and employees
totaled $1,779,609. Commitments to extend credit under unused open lines of
credit to such individuals totaled approximately $93,980 at March 31, 1998.
The Bank accepts chattel paper without recourse from various approved
businesses, primarily automobile dealerships, within its lending area. The
Bank has sole discretion whether to purchase such paper on a case by case
basis which is evaluated substantially under the Bank's normal credit
underwriting standards and is generally secured by a first lien on the
property purchased by the borrower. At March 31, 1998, December 31, 1997
and March 31, 1997 respectively, such loans approximated $1,862,746,
$1,995,837 and $1,889,157, of which approximately 80.0%, 80.0%, and 54.8%
were purchased from businesses considered to be a related party to the
Bank.
Concentration of credit risk
The Bank grants installment, commercial and residential loans to customers
primarily in Kanawha, Boone and Lincoln Counties, West Virginia and
adjacent counties. Although the Bank strives to maintain a diversified loan
portfolio, exposure to credit losses can be adversely impacted by downturns
in local economic and employment conditions. Major
10
employment within the market area is diverse but primarily includes the
industries of government, health care, education, coal production and
related services, and various professional, financial and related service
industries.
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses for the three months ended
March 31, 1998 and 1997 are as follows:
1998 1997
--------- ------------
Balance, beginning of period $ 247,017 $ 127,300
--------- ------------
Losses:
Commercial financial and agriculture - -
Real estate - -
Consumer installment 5,215 -
--------- ------------
Total 5,215 -
--------- ------------
Recoveries:
Commercial financial and agriculture - -
Real estate - -
Consumer installment - -
--------- ------------
Total - -
--------- ------------
Net recoveries (losses) (5,215) -
--------- ------------
Provision for loan losses 30,000 30,000
--------- ------------
Balance, end of period $ 271,802 $ 157,300
========== =============
Note 6. Bank premises and Equipment
The major categories of Bank premises and equipment and accumulated
depreciation are summarized as follows:
March 31, Dec 31, 1997 March 31, 1997
1998
------------- ------------ --------------
Building and Improvements $1,026,262 $1,026,262 $1,024,904
Furniture and Equipment 488,860 465,662 491,491
------------- ------------ --------------
1,515,122 1,491,924 1,516,395
Less accumulated depreciation (227,892) (202,295) (142,905)
------------- ------------ --------------
Bank premises and equipment, $1,287,230 $1,289,629 $1,373,490
net ============= ============ ==============
Depreciation expense for the three month period ended March 31, 1998 and
March 31, 1997 was $25,597 and $26,494, respectively.
During 1995 the Bank entered into a 50 year agreement to lease the land on
which the Bank building is situated. The original term of the lease expires
in the year 2045, with an additional 45 year option available through the
year 2090. In consideration for this lease, the Bank made a one time, up
front payment of $300,000 covering the first 50 year lease term.
Total rental expense incurred and recognized for each of the three month
periods ended March 31, 1998 and 1997 approximated $1,500. The remaining
amount of prepaid lease at March 31, 1998, December 31, 1997 and March 31,
1996, which is included in other assets totaled $285,000, $286,500 and
$291,000 respectively.
11
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of the
dates indicated:
March 31, Dec 31, 1997 March 31,
1998 1997
------------- ------------- ------------
NOW and Super NOW accounts $2,312,293 $1,159,858 $1,174,440
Money market accounts 4,347,362 5,399,958 4,587,813
Savings accounts 1,847,082 1,843,921 1,560,734
Certificates of deposit 23,219,670 19,617,161 12,699,721
------------- ------------- ------------
Total $31,726,407 $28,020,898 $20,022,708
============= ============= ============
Time certificates of deposit in denomination of $100,000 or more totaled
$8,158,399, $6,378,906 and $4,167,605 at March 31, 1998, December 31, 1997
and March 31, 1997, respectively. Interest paid on time certificates in
denominations of $100,000 or more was $106,557 and $52,416 for the three
month period ended March 31, 1998 and Mach 31, 1997 respectively.
The following is a summary of the maturity distribution of deposits in
amounts of $100,000 or more as of the date indicated.
March 31, 1998 Amount Percent
-------------- --------
Three months or less $304,442 3.7%
Three through six months 1,166,680 14.3%
Six through twelve months 2,235,497 27.4%
Over twelve months 4,451,780 54.6%
Total $8,158,399 100.0%
============== ========
December 31, 1997 Amount Percent
-------------- --------
Three months or less $655,472 10.3%
Three through six months 311,186 4.9%
Six through twelve months 2,087,796 32.7%
Over twelve months 3,324,452 52.1%
Total $6,378,906 100.0%
============== ========
March 31, 1997 Amount Percent
-------------- --------
Three months or less $1,214,999 29.2%
12
Three through six months 902,356 21.6%
Six through twelve months 1,742,668 41.8%
Over twelve months 307,582 7.4%
Total $4,167,605 100.0%
============== ========
A summary of the maturities of time deposits is as follows:
1999 $11,640,279
2000 10,934,259
2001 456,292
2002 120,986
2003 32,851
-------------
After 35,003
-------------
Total $23,219,670
=============
The Bank is the holder of deposits from related parties totaling
approximately $1,973,208 ,or 6.02% of total deposits, and $1,491,123, or
7.14% of total deposits, at March 31, 1998 and 1997, respectively. At
December 31, 1997, deposits of related parties totaled approximately
$1,324,000 or 4.7% of total deposits. At March 31, 1998 and 1997 the Bank
had a concentration of deposits from an unrelated party totaling
approximately $1,479,342 and $1,402,400, or 4.52% and 6.72%, of total
deposits and $1,460,000, or 5.2% or deposits, at December 31, 1997,
respectively.
Note 8. Income Taxes
The components of applicable income tax expense (benefit) for the three
months ended March 31, 1998 and 1997 are as follows:
1998 1997
--------------- ---------------
Current:
Federal
$ - $ -
State
- -
--------------- ---------------
Deferred:
Federal 7,526 (1,781)
State 23,753 (5,621)
--------------- ---------------
--------------- ---------------
Total $31,279 $(7,402)
=============== ===============
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.
The tax effects of temporary differences which create the Bank's deferred
tax assets and liabilities as of March 31, 1998, December 31, 1997 and
March 31, 1997, are as follows:
13
March 31, Dec. 31, March 31,
1998 1997 1997
------------ ------------ ------------
Deferred Tax Assets:
Start up costs deferred for tax $54,216 $59,076 $72,751
purposes
Federal and state net operating 270,182 262,854 197,446
loss carry forward
Depreciation - - -
Net unrealized losses on 11,785 6,844 49,953
securities
Allowance for loan losses - 8,146 18,000
Other 15,328 12,788 1,203
------------ ------------ ------------
Subtotal 351,511 349,708 339,353
Less: valuation allowance 339,726 342,864 289,400
------------ ------------ ------------
Total deferred tax asset 11,785 6,844 49,953
------------ ------------ ------------
Deferred Tax Liability:
Allowance for loan losses 30,480 - -
Depreciation 58,432 57,634 30,339
------------ ------------ ------------
Total deferred tax liability 88,912 57,634 30,339
------------ ------------ ------------
Net deferred tax $(77,127) $(50,790) $19,614
(liability) ============ ============ ============
Realization of future tax benefits related to deferred tax assets is
dependent on many factors, including the bank's ability to generate taxable
income within the net operating loss carry forward period.
Management believes the Bank will generate sufficient future taxable income
to realize the tax assets prior to the expiration of carry forward periods.
However, failure to achieve forecasted taxable income has and could in the
future affect the ultimate realization of deferred tax assets. As a result,
a valuation allowance is recorded to reduce deferred tax assets to that
portion that is not expected to more likely than not be realized within the
next year. The Bank continually reviews the adequacy of the valuation
allowance and will recognize these benefits only as reassessment indicates
that it is more likely than not that the benefits will be realized. As more
fully described in Note 14, the financial statements have been restated to
record a valuation allowance for deferred tax assets of $342,864 and
$282,621 at December 31, 1997 and March 31, 1997, respectively.
Note 9 Fair Value of Financial Instruments
The following summarizes the methods and significant assumptions used by
the Bank in estimating its fair value disclosure for financial instruments.
Cash and due from banks: The carrying values of cash and due from banks
approximate their estimated fair value.
14
Federal funds sold and interest bearing deposits with other banks: The
carrying values of Federal funds sold and interest bearing deposits with
other banks 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 fair values.
Deposits: The estimated values of demand deposits (i.e. noninterest bearing
checking, NOW, Super NOW, money market), 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.
The fair values of the Bank's financial instruments as of March 31, 1998,
December 31, 1997, and March 31, 1997 are summarized below:
March 31, 1998 December 31, 1997 March 31, 1997
---------------------- ----------------------- ------------------------
Carrying Fair Carrying Fair Carrying Fair value
amount value amount value amount value
---------- ----------- ----------- ----------- ---------- -------------
Financial assets:
Cash and due
from banks $976,517 $976,517 $640,734 $640,734 $769,997 $769,997
Interest bearing
deposits with
other banks 9,100 9,100 9,180 9,180 0 0
Federal funds
sold 6,217,000 6,217,000 5,877,000 5,877,000 4,866,000 4,866,000
Securities
available for
sale 10,466,790 10,466,790 7,976,975 7,976,975 6,852,037 6,852,037
Loans 24,515,980 24,488,647 24,007,035 23,881,235 17,660,465 17,583,779
Accrued
interest
receivable 192,625 192,625 242,928 242,928 129,231 129,231
---------- ----------- ----------- ----------- ---------- -------------
$42,378,012 $42,350,679 $38,753,852 $38,628,052 $30,277,73 $30,201,044
========== =========== =========== =========== ========== =============
Financial
liabilities:
Deposits 32,760,687 32,896,217 29,068,476 29,162,441 20,871,241 20,912,165
Accrued
interest 218,930 218,930 204,792 204,792 213,995 213,995
payable ---------- ----------- ----------- ----------- ---------- -------------
$32,979,617 $33,115,147 $29,273,268 $29,367,233 $21,085,23 $21,126,160
========== =========== =========== =========== ========== =============
15
Note 10. Restrictions on Dividends and Capital
Dividends paid by the Bank are subject to restrictions by banking
regulations. The most restrictive provision requires approval by the
regulatory agency if dividends in any year exceeds the year's net income,
as defined, plus the retained net profits of the preceding years. Since the
Bank has a net deficit, there are no net retained profits available for
distribution.
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weighting and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of March 31, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
The Bank has not yet received formal notification through examination by
its primary regulatory authority of its capital categorization under the
regulatory framework for prompt corrective action. However, the Bank's most
recent financial reporting to the Bank's primary regulatory authority
categorizes the Bank as well capitalized. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following table.
There are no conditions or events since its last financial reporting that
management believes have changed the institution's category.
The Bank's actual capital amounts and ratios at March 31, 1998 is presented
in the following table .
Actual For Capital To Be Well
Adequacy Capitalized Under
Prompt Corrective
Purposes Action Provisions
------------------- --------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ------- ---------- ---------- ----------- ----------
Total Capital
(to Risk Weighted Assets) $11,154,316 47.1% $1,896,560 8.0% $2,370,700 10.0%
Tier I Capital
(to Risk Weighted Assets) $10,873,016 45.9% $948,280 4.0% $1,422,420 6.0%
Tier I Capital
(to Average Assets) $10,873,016 26.0% $1,674,595 4.0% $2,093,244 5.0%
16
Note 11. Financial Instruments With Off-Balance-Sheet Risk.
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the statement of financial position. The contract amounts of
these instruments reflect the extent of involvement the Bank has in
particular cases of financial instruments.
Financial Instruments whose
contract Contract
amounts represent credit risk Amount
----------------------------------- ------------
Commitments to extend credit $250,000
Unused open lines of credit 1,716,278
Standby letters of credit and -
financial guarantees written
Remaining commitments on 55,100
construction loans
Total $2,021,378
============
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer so long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary upon extension of credit is based
on management's credit evaluation Collateral held varies but may include
accounts receivable, inventory, equipment or real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees
are primarily issued to support private borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loans. These letters of credit are generally
collateralized.
Note 12. Acquisition by South Branch Valley Bancorp, Inc.
On March 24, 1998 and March 24, 1998, the shareholders of The Capital State
Bank, Inc. and South Branch Valley Bancorp, Inc., (South Branch),
respectively, approved the merger of Capital State into Capital Interim
Bank, Inc., a wholly owned subsidiary of South Branch. The merger was
consummated at the close of business on March 31, 1998. The merger will be
treated using the purchase method of accounting; accordingly, the assets
and liabilities and results of operations of Capital State will be adjusted
to their estimated fair values as of the effective date using the push down
accounting guidelines established by generally accepted accounting
principles. Based upon preliminary estimates and assumptions, the excess
purchase price over the fair value of the net assets acquired as of the
consummation date is approximately $2,300,000. This goodwill recognized is
expected to be amortized over a period of 15 years using the straight line
method.
17
The amount of goodwill will also be adjusted, in accordance with the
requirements of Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, in future years for tax deductions that are
available for future use, which were in existence at the acquisition date,
for which no benefit had been recognized (i.e. for which a valuation
allowance was recorded). The total of such future deductions was
approximately $760,000 for federal tax purposes and approximately $986,000
for state tax purposes. The largest component of these deductions relates
to net operating loss carry forwards which will generally only be available
for use to the extent that Capital State generates future taxable income.
The total amount of Deferred tax assets recorded relating to these acquired
deductions for which no benefit was taken was approximately $340,000.
The following table sets forth certain pro forma condensed financial
information of Capital State, using the purchase method of accounting,
after giving effect to the merger as if it had been consummated as of the
date presented.
Pro Forma Reflecting Capital State
After Giving Effect to the Acquisition by South Branch
(In thousands, except per share data)
As of March 31, 1998
------------------------------------
Balance Sheet Data As Reported Pro Forma
- -------------------------------------------------------------------------------
Total assets 44,009 46,707
Investment Securities 10,467 10,467
Net Loans 24,516 24,488
Bank premises and
equipment - net 1,287 1,500
Other assets 537 744
Goodwill - 2,305
Total liabilities 33,136 36,135
Total Deposits 32,761 32,896
Long term debt - 2,771
Other liabilities 376 468
Total equity 10,873 10,572
As Pro
Risk Based Capital Ratios Reported Forma
- ----------------------------------------- -------- -------------- --------
Amount Ratio Amount Ratio
-------------- -------- -------------- --------
Total 11,154 47.1% 8,529 35.4%
Tier 1 10,873 45.9% 8,267 34.3%
Leverage 10,873 26.0% 8,267 19.3%
18
The Long term Debt recorded as part of the purchase accounting adjustments
will mature as follows:
1998 33,500
1998 683,332
2000 683,332
2001 683,332
2002 683,332
thereafter 4,172
-----------
$2,771,000
===========
Note 13. Restatement
The accompanying financial statements as of and for the three months ended
March 31, 1997, have been restated to reflect the recording of a valuation
allowance for deferred tax assets for which it is more likely than not that
a tax benefit will not be realized within a short term. Accordingly, a
valuation allowance of $282,621 has been recorded at March 31, 1997. The
effects of the restatements are as follows:
March 31, 1997
-------------------------------
As As
Previously Restated
Reported
-------------- -------------
Balance Sheets:
Other Assets 773,293 490,672
-------------- -------------
Total Assets 773,293 490,672
-------------- -------------
Retained earnings (355,652) (638,273)
(deficit)
-------------------------------
Statements of Operations:
Income tax expense (7,204) (7,204)
(benefit)
-------------------------------
Net Income (loss) (7,204) (7,204)
-------------------------------
Earnings (loss) per (0.01) (0.01)
common share
-------------------------------
EXHIBIT 99
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Form 8-K/B (Amendment Numbe 2) of our
report dated January 30, 1998, on the financial statements of The Capital State
Bank, Inc. (A development stage company for 1995) as of December 31, 1997 and
1996, and the related statement of operations, shareholders' equity and cash
flows for the years ended December 31, 1997 and 1996, and for the period
September 11, 1995, date of inception, to December 31, 1995.
ARNETT & FOSTER, P.L.L.C.
Charleston, West Virginia
June 1, 1998