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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1998
------------------
Commission File Number 0-16587
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South Branch Valley Bancorp, Inc.
------------------------------------------
(Exact name of small business issuer as
specified in its charter)
West Virginia 55-0672148
---------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
310 North Main Street
Moorefield, West Virginia 26836
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
(304) 538-2353
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer: (1) has filed all reports required by Section 13 or
15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
592,292 common shares were outstanding as of November 4, 1998
Transitional Small Business Disclosure Format (Check one):
Yes No X
--- ---
This report contains 22 pages.
South Branch Valley Bancorp, Inc. and Subsidiaries
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Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets
September 30, 1998 (unaudited) and December 31, 1997 3
Consolidated statements of income
for the three months and nine months ended
September 30, 1998 and 1997 (unaudited) 4
Consolidated statements of comprehensive
income for the three months and nine months ended
September 30, 1998 and 1997 (unaudited) 5
Consolidated statements of cash flows
for the nine months ended
September 30, 1998 and 1997 (unaudited) 6-7
Consolidated statements of shareholders' equity
for the nine months ended
September 30, 1998 and 1997 (unaudited) 8
Notes to consolidated financial
statements (unaudited) 9-15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16-20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
(a) - Exhibits required by Item 601 of Regulation S-B
27. Financial Data Schedule - electronic filing only
(b) - Reports on Form 8-K
SIGNATURES 22
2
South Branch Valley Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
September 30, December 31,
1998 1997
(unaudited) (*)
------------------------- -------------------------
ASSETS
Cash and due from banks $ 4,204,386 $ 3,945,099
Interest bearing deposits with other banks 968,000 1,256,000
Federal funds sold 4,546,898 5,806,717
Securities available for sale 35,810,175 27,547,094
Investment in affiliate - 5,273,481
Loans, net 136,037,965 92,572,652
Bank premises and equipment, net 5,110,858 3,071,064
Accrued interest receivable 1,097,204 864,083
Other assets 3,098,579 311,435
------------------------- -------------------------
Total assets $ 190,874,065 $ 140,647,625
------------------------- -------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 10,381,182 $ 9,693,915
Interest bearing 136,862,036 97,290,882
------------------------- -------------------------
Total deposits 147,243,218 106,984,797
------------------------- -------------------------
Short-term borrowings 4,877,646 7,145,010
Long-term borrowings 13,049,938 10,395,848
Other liabilities 1,721,727 1,061,418
------------------------- -------------------------
Total liabilities 166,892,529 125,587,073
------------------------- -------------------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value, authorized
2,000,000 shares, issued 600,407 shares in 1998;
382,625 shares in 1997 1,501,018 1,042,355
Capital surplus 9,611,774 2,089,709
Retained earnings 12,938,824 11,898,420
Less cost of shares acquired for the treasury
1998 8,115 shares; 1997 4,115 shares (384,724) (166,970)
Net unrealized gain (loss) on securities 314,644 197,038
------------------------- -------------------------
Total shareholders' equity 23,981,536 15,060,552
------------------------- -------------------------
Total liabilities and shareholders' equity $ 190,874,065 $ 140,647,625
------------------------- -------------------------
(*) - December 31, 1997 financial information has been extracted from audited
consolidated financial statements See Notes to Consolidated Financial
Statements
3
South Branch Valley Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income (unaudited)
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- -------------- -------------- ---------------
Interest income
Interest and fees on loans $ 3,093,108 $ 2,202,059 $ 8,228,698 $ 6,343,404
Interest on securities
Taxable 502,688 411,729 1,429,722 1,247,813
Tax-exempt 80,224 80,455 239,823 236,864
Interest on Federal funds sold 49,411 21,460 182,999 49,626
--------------- -------------- -------------- ---------------
Total interest income 3,725,431 2,715,703 10,081,242 7,877,707
--------------- -------------- -------------- ---------------
Interest expense
Interest on deposits 1,646,856 1,186,673 4,438,711 3,420,304
Interest on short-term borrowings 60,305 58,710 182,443 191,456
Interest on long-term borrowings 167,946 153,663 504,611 388,457
--------------- -------------- -------------- ---------------
Total interest expense 1,875,107 1,399,046 5,125,765 4,000,217
--------------- -------------- -------------- ---------------
Net interest income 1,850,324 1,316,657 4,955,477 3,877,490
Provision for loan losses 75,000 45,000 195,000 110,000
--------------- -------------- -------------- ---------------
Net interest income after provision for loan losses 1,775,324 1,271,657 4,760,477 3,767,490
--------------- -------------- -------------- ---------------
Other income
Insurance commissions 17,817 32,681 67,260 67,990
Service fees 111,533 79,404 311,906 202,645
Securities gains (losses) - 6,104 4,131 6,104
Gain on sale of assets - 83,608 - 96,067
Other 28,460 11,240 61,323 37,458
--------------- -------------- -------------- ---------------
Total other income 157,810 213,037 444,620 410,264
--------------- -------------- -------------- ---------------
Other expense
Salaries and employee benefits 585,053 439,661 1,606,044 1,315,522
Net occupancy expense 67,883 52,952 220,835 144,723
Equipment rentals, depreciation and maintenance 106,184 75,019 286,985 217,853
Federal deposit insurance premiums 3,063 3,168 11,688 9,168
Other 442,116 261,310 1,146,511 802,264
--------------- -------------- -------------- ---------------
Total other expense 1,204,299 832,110 3,272,063 2,489,530
--------------- -------------- -------------- ---------------
Income before income taxes 728,835 652,584 1,933,034 1,688,224
Income tax expense 224,115 219,618 630,262 546,230
--------------- -------------- -------------- ---------------
Net income $ 504,720 $ 432,966 $ 1,302,772 $ 1,141,994
--------------- -------------- -------------- ---------------
--------------- -------------- -------------- ---------------
Basic earnings per common share $ 0.85 $ 1.05 $ 2.44 $ 2.92
--------------- -------------- -------------- ---------------
--------------- -------------- -------------- ---------------
See Notes to Consolidated Financial Statements
4
South Branch Valley Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (unaudited)
Three Months Ended
----------------------------------------------------
September 30, September 30,
1998 1997
------------------------ -------------------------
Net income $ 504,720 $ 432,966
Other comprehensive income:
Net unrealized gain (loss) on securities
arising during period, before tax 233,335 190,772
Income tax expense (benefit) related to
other comprehensive income 87,980 108,587
------------------------ -------------------------
Other comprehensive income, net of tax
145,355 82,185
------------------------ -------------------------
Comprehensive income $ 650,075 $ 515,151
------------------------ -------------------------
------------------------ -------------------------
Nine Months Ended
----------------------------------------------------
September 30, September 30,
1998 1997
------------------------ -------------------------
Net income $ 1,302,772 $ 1,141,994
Other comprehensive income:
Net unrealized gain (loss) on securities
arising during period, before tax 188,727 136,225
Income tax expense (benefit) related to
other comprehensive income 71,121 87,586
------------------------ -------------------------
Other comprehensive income, net of tax 117,606 48,639
------------------------ -------------------------
Comprehensive income $ 1,420,378 $ 1,190,633
------------------------ -------------------------
------------------------ -------------------------
See Notes to Consolidated Financial Statements
5
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended
---------------------------------------------------
September 30, September 30,
1998 1997
------------------------ ------------------------
Cash Flows from Operating Activities
Net income $ 1,302,772 $ 1,141,994
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 240,909 173,038
Provision for loan losses 195,000 110,000
Deferred income tax (benefit) expense (23,823) 72,422
Security (gains) losses (4,131) (6,104)
(Gain) on disposal of Bank premises and equipment (9,709) (91,507)
(Gain) on disposal of other assets (8,043) (4,559)
Amortization of securities premiums (accretion
of discounts) net (17,979) 7,289
Amortization of goodwill and purchase accounting
adjustments, net 72,399 27,888
(Increase) decrease in accrued interest receivable (233,121) 7,221
(Increase) decrease in other assets 175,977 496,654
Increase (decrease) in other liabilities 109,243 43,595
------------------------ ------------------------
Net cash provided by operating activities 1,799,494 1,977,931
------------------------ ------------------------
Cash Flows from Investing Activities
Proceeds from maturities of interest bearing deposits
with other banks 297,100 297,000
Proceeds from maturities and calls of securities available for sale 5,825,000 3,063,700
Proceeds from sales of securities available for sale 409,050 -
Principal payments received on securities available for sale 2,262,327 1,077,408
Purchases of securities available for sale (6,077,235) (4,004,774)
Purchase of common stock of affiliate (90,465) (5,203,025)
Net (increase) decrease in Federal funds sold 7,476,819 (1,537,603)
Net loans made to customers (19,190,412) (8,805,180)
Purchases of Bank premises and equipment (784,287) (221,130)
Proceeds from sales of Bank premises and equipment 10,693 145,180
Proceeds from sales of other assets 50,801 15,000
Net cash and due from banks acquired in acquisition of
Net cash and due from banks acquired in acquisition of Capital State 976,517 -
------------------------ ------------------------
Net cash (used in) investing activities (8,834,092) (15,173,424)
------------------------ ------------------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and
savings accounts 6,494,806 (1,439,996)
Net increase (decrease) in time deposits 892,474 5,909,490
Net increase (decrease) in short-term borrowings (2,267,364) 596,633
Proceeds from long-term borrowings 6,136,337 6,500,000
Repayment of long-term borrowings (3,482,247) (768,464)
Purchase of treasury stock (217,754) -
Dividends paid (262,367) (155,189)
Net proceeds from issuance of common stock - 1,489,968
------------------------ ------------------------
Net cash provided by financing activities 7,293,885 12,132,442
------------------------ ------------------------
Increase (decrease) in cash and due from banks 259,287 (1,063,051)
Cash and due from banks:
Beginning 3,945,099 3,162,552
------------------------ ------------------------
Ending $ 4,204,386 $ 2,099,501
------------------------ ------------------------
6
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Nine Months Ended
------------------------------------------------------
September 30, September 30,
1998 1997
-------------------------- -------------------------
Supplement Disclosures of Cash Flow Information
Cash payments for:
Interest $ 5,049,168 $ 3,921,196
========================== =========================
Income taxes $ 66,807
========================== =========================
Supplemental Schedule of Noncash Investing and
Financing Activities
Other assets acquired in settlement of loans $ - $ 34,510
========================== =========================
Acquisition of The Capital State Bank, Inc.
Acquisition of 40% of the outstanding common shares
previously purchased for cash $ 5,363,946 $ -
Acquisition of 60% of the outstanding common shares
in exchange for 183,465 shares of Company common stock 7,980,728 -
-------------------------- -------------------------
$ 13,344,674 $ -
========================== =========================
Fair value of assets acquired
(principally loans and securities) $ 46,720,306 $ -
Deposits and other liabilities assumed (33,375,632) -
-------------------------- -------------------------
$ 13,344,674 $ -
-------------------------- -------------------------
-------------------------- -------------------------
See Notes to Consolidated Financial Statements
7
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Shareholders' Equity (unaudited)
Nine Months Ended
------------------------------------------------------
September 30, September 30,
1998 1997
-------------------------- -------------------------
Balance, beginning of period $ 15,060,552 $ 12,303,793
Net income 1,302,772 1,141,994
Cash dividends, $0.44 and $0.41
per share, respectively (262,367) (155,189)
Issuance of 183,465 shares of common stock as
consideration for the acquisition of Capital
State Bank, Inc. 7,980,728 -
Sale of 34,317 shares of common stock - 1,489,968
Purchase of 4,000 shares of common stock
for the treasury (217,754) -
Change in net unrealized gain (loss) on securities 117,605 48,639
-------------------------- -------------------------
Balance, end of period $ 23,981,536 $ 14,829,205
-------------------------- -------------------------
-------------------------- -------------------------
See Notes to Consolidated Financial Statements
8
South Branch Valley Bancorp, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements (unaudited)
Note 1. Basis of Presentation
These consolidated financial statements of South Branch Valley Bancorp, Inc. and
Subsidiaries ("South Branch" or "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-QSB and Item 310 of Regulation S-B. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles for annual year end financial statements. In the
opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal recurring nature.
The presentation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ materially from these estimates.
The results of operations for the three month and nine month periods ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year. The consolidated financial statements and notes included
herein should be read in conjunction with the Company's 1997 audited financial
statements and Annual Report on Form 10-KSB.
Effective January 1, 1998, South Branch adopted Statement of Financial
Accounting Standards No. 130 (SFAS No. 130), "Reporting of Comprehensive
Income". Comprehensive income includes any change in equity of the Company
during the period resulting from transactions and other events and circumstances
from nonowner sources. A Statement of Comprehensive Income has been included in
these consolidated financial statements to comply with SFAS No. 130. Prior
interim periods have been reclassified to provide comparative information.
Note 2. Earnings Per Share
Basic earnings per common share are computed based upon the weighted average
shares outstanding. The weighted average shares outstanding for the nine month
periods ended September 30, 1998 and 1997 were 534,241 and 391,709,
respectively. The weighted average shares outstanding for the three month
periods ended September 30, 1998 and 1997 were 592,292 and 412,827,
respectively. During the periods ended September 30, 1998 and 1997, the Company
did not have any dilutive securities.
Note 3. Acquisition of Capital State Bank, Inc.
On March 24, 1998 and March 25, 1998, the shareholders of Capital State Bank,
Inc. and South Branch Valley Bancorp, Inc. respectively, approved the merger of
Capital State into Capital Interim Bank, Inc., a wholly owned subsidiary of
South Branch. The merger was consummated at the close of business on March 31,
1998. This acquisition was accounted for using the purchase method of
accounting., and accordingly, the assets and liabilities and results of
operations of Capital State are reflected in the Company's consolidated
financial statements beginning April 1, 1998. The excess purchase price over the
fair value of the net assets acquired as of the consummation date approximated
$1,966,000, which is included in other assets in the accompanying consolidated
balance sheet as of September 30, 1998. This goodwill is being amortized over a
period of 15 years using the straight line method. The following presents
certain pro forma condensed consolidated financial information of South Branch,
using the purchase method of accounting, after giving effect to the merger as if
it had been consummated at the beginning of the periods presented.
(In thousands, except per share data)
------------------------------------------------------------------
Nine Month Period Ended Nine Month Period Ended
September 30, 1998 September 30, 1997
-------------------------------- ---------------------------------
As Reported Pro Forma As Reported Pro Forma
---------------- --------------- ----------------- ---------------
Total interest income $ 10,081 $ 10,817 $ 7,878 $9,686
Total interest expense $ 5,126 $ 5,515 $ 4,000 $4,872
Net interest income $ 4,955 $ 5,302 $ 3,877 $4,814
Net income $ 1,303 $ 1,328 $ 1,142 $1,048
Basic earnings per common share $ 2.44 $ 2.49 $ 2.92 $ 1.76
This pro forma information has been included for comparative purposes only and
may not be indicative of the combined results of operations that actually would
have occurred had the transaction been consummated at the beginning of the
periods presented, or which will be attained in the future.
Note 4. Securities
The amortized cost, unrealized gains, unrealized losses and estimated fair
values of securities at September 30, 1998 and December 31, 1997 are summarized
as follows:
September 30, 1998
--------------------------------------------------------------------
Amortized Unrealized Estimated
----------------------------------
Cost Gains Losses Fair Value
--------------------------------------------------------------------
Available for Sale
Taxable:
U. S. Treasury securities $ 2,989,169 $ 74,478 $ - $ 3,063,647
U. S. Government agencies
and corporations 16,725,653 92,443 38,190 16,779,906
Small Business Administration
guaranteed loan participation
certificates 1,035,867 18,771 - 1,054,638
Mortgage-backed securities -
U. S. Government agencies and
corporations 7,067,365 76,448 243 7,143,570
Corporate debt securities 249,607 1,793 - 251,400
Federal Reserve Bank stock 44,300 - - 44,300
Federal Home Loan Bank stock 722,500 - - 722,500
Other equity securities 6,625 - - 6,625
--------------------------------------------------------------------
Total taxable 28,841,086 263,933 38,433 29,066,586
--------------------------------------------------------------------
Tax-exempt:
State and political subdivisions 6,482,505 266,342 9,358 6,739,489
Federal Reserve Bank stock 4,100 - - 4,100
--------------------------------------------------------------------
--------------------------------------------------------------------
Total tax-exempt 6,486,605 266,342 9,358 6,743,589
--------------------------------------------------------------------
--------------------------------------------------------------------
Total $ 35,327,691 $ 530,275 $ 47,791 $ 35,810,175
--------------------------------------------------------------------
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10
December 31, 1997
--------------------------------------------------------------------
Amortized Unrealized Estimated
----------------------------------
Cost Gains Losses Fair Value
--------------------------------------------------------------------
Available for Sale
Taxable:
U. S. Treasury securities $ 2,988,064 $ 46,546 $ - $ 3,034,610
U. S. Government agencies
and corporations 9,523,135 71,935 8,850 9,586,220
Small Business Administration
guaranteed loan participation
certificates 1,470,915 16,522 - 1,487,437
Mortgage-backed securities -
U. S. Government agencies and
corporations 6,650,070 21,182 20,328 6,650,924
Corporate debt securities 249,082 3,296 - 252,378
Federal Reserve Bank stock 44,300 - - 44,300
Federal Home Loan Bank stock 722,400 - - 722,400
Other equity securities 6,625 - - 6,625
--------------------------------------------------------------------
Total taxable 21,654,591 159,481 29,178 21,784,894
--------------------------------------------------------------------
--------------------------------------------------------------------
Tax-exempt:
State and political subdivisions 5,568,016 190,084 - 5,758,100
Federal Reserve Bank stock 4,100 - - 4,100
--------------------------------------------------------------------
--------------------------------------------------------------------
Total tax-exempt 5,572,116 190,084 - 5,762,200
--------------------------------------------------------------------
--------------------------------------------------------------------
Total $ 27,226,707 $ 349,565 $ 29,178 $ 27,547,094
--------------------------------------------------------------------
--------------------------------------------------------------------
The maturites, amortized cost and estimated fair values of securities at
September 30, 1998, are summarized as follows:
Available for Sale
---------------------------------------
Amortized Estimated
Cost Fair Value
---------------------------------------
Due in one year or less $ 5,010,067 $ 5,049,319
Due from one to five years 19,729,095 19,934,008
Due from five to ten years 7,419,604 7,531,753
Due after ten years 2,391,400 2,517,570
Equity securities 777,525 777,525
---------------------------------------
$ 35,327,691 $ 35,810,175
---------------------------------------
---------------------------------------
11
Note 5. Loans
Loans are summarized as follows:
September 30, December 31,
1998 1997
---------------------------------------
Commercial, financial and agricultural $ 40,565,219 $ 30,325,145
Real estate - construction 304,181 144,207
Real estate - mortgage 69,318,882 42,640,294
Installment 27,249,942 20,587,084
Other 459,175 468,980
---------------------------------------
Total loans 137,897,399 94,165,710
Less unearned income 542,005 697,777
---------------------------------------
Total loans net of unearned income 137,355,394 93,467,933
Less allowance for loan losses 1,317,429 895,281
---------------------------------------
Loans, net $ 136,037,965 $ 92,572,652
---------------------------------------
The following presents loan maturities at September 30, 1998:
Within After 1 but After
1 Year within 5 Years 5 Years
------------------------------------------------------------
Commercial, financial and agricultural $ 10,442,023 $ 12,137,687 17,985,499
Real estate - construction 225,741 - 78,438
Real estate - mortgage 2,565,338 8,770,992 57,982,563
Installment 3,523,309 20,209,640 3,516,995
Other 23,672 - 435,503
------------------------------------------------------------
Total $ 16,780,083 $ 41,118,319 $ 79,998,998
------------------------------------------------------------
Loans due after one year with:
Variable rates $ 36,174,464
Fixed rates 84,942,853
--------------------
$ 121,117,317
--------------------
The Company grants commercial, residential and consumer loans to customers
primarily located in the Potomac Highlands and South Central counties of West
Virginia. Although the Company strives to maintain a diverse loan portfolio,
exposure to credit losses can be adversely impacted by downturns in local
economic and employment conditions. Major employment within the Company's market
area is diverse, but primarily includes the poultry, government, health care,
education, coal production and various professional, financial and related
service industries.
12
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine month periods ended
September 30, 1998 and 1997, and for the year ended December 31, 1997, is as
follows:
.
Year Ended
Nine Months Ended September 30, December 31,
---------------------------------------------------
1998 1997 1997
---------------------------------------------------
Balance, beginning of period $ 895,281 $ 858,423 $ 858,423
Losses:
Commercial, financial & agricultural 546 - -
Real estate - mortgage - 16,982 25,536
Installment 113,613 156,886 166,059
Other 2,196 7,882 8,444
---------------------------------------------------
Total 116,355 181,750 200,039
---------------------------------------------------
Recoveries:
Commercial, financial & agricultural 2,830 4,428 27,050
Real estate - mortgage 21,191 7,177 13,675
Installment 47,380 35,119 39,936
Other 300 1,236 1,236
---------------------------------------------------
Total
71,701 47,960 81,897
---------------------------------------------------
Net losses 44,654 133,790 118,142
Allowance of purchased subsidiary 271,802 - -
Provision for loan losses 195,000 110,000 155,000
---------------------------------------------------
Balance, end of period $ 1,317,429 $ 834,633 $ 895,281
---------------------------------------------------
---------------------------------------------------
Note 7. Bank Premises and Equipment
The major categories of Bank premises and equipment and accumulated depreciation
at September 30, 1998 and December 31, 1997 are summarized as follows:
September 30, December 31,
1998 1997
----------------------------------------
Land $ 932,178 $ 429,973
Buildings and improvements 4,168,961 2,681,707
Furniture and equipment 2,178,524 1,675,258
----------------------------------------
7,279,663 4,786,938
Less accumulated depreciation 2,168,805 1,715,874
----------------------------------------
Bank premises and equipment,net $ 5,110,858 $ 3,071,064
----------------------------------------
----------------------------------------
13
Note 8. Deposits
The following is a summary of interest bearing deposits by type as of September
30, 1998 and December 31, 1997:
September 30, December 31,
1998 1997
----------------------------------------
Demand deposits, interest bearing $ 28,326,868 $ 17,468,844
Savings deposits 19,381,466 14,890,934
Individual retirement accounts 80,713,200 8,028,653
Certificates of deposit 8,440,502 56,902,451
----------------------------------------
Total $ 136,862,036 $ 97,290,882
----------------------------------------
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of September 30, 1998:
Amount Percent
----------------------------------------
Three months or less $ 3,916,941 18.8%
Three through six months 3,902,368 18.7%
Six through twelve months 7,109,309 34.1%
Over twelve months 5,900,880 28.3%
----------------------------------------
Total $ 20,829,498 100.0%
----------------------------------------
----------------------------------------
A summary of the scheduled maturities for all time deposits as of September 30,
1998 is as follows:
1998 $ 16,931,014
1999 48,806,086
2000 12,532,482
2001 5,137,914
2002 2,053,376
Thereafter 3,692,830
--------------------
$ 89,153,702
--------------------
--------------------
Note 9. Restrictions on Capital
South Branch and its subsidiaries are subject to various regulatory capital
requirements administered by the banking regulatory agencies. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
South Branch and each of its subsidiaries must meet specific capital guidelines
that involve quantitative measures of South Branch's and its subsidiaries'
assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. South Branch and each of its subsidiaries'
capital amounts and classifications are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require South Branch and each of its subsidiaries to maintain minimum amounts
and ratios of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of September 30, 1998, that South
Branch and each of its subsidiaries met all capital adequacy requirements to
which they were subject.
14
The most recent notifications from the banking regulatory agencies categorized
South Branch and each of its subsidiaries as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, South Branch and each of its subsidiaries must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table below.
South Branch's and its subsidiaries', South Branch Valley National Bank's
("SBVNB") and Capital State Bank, Inc.'s ("CSB"), actual capital amounts and
ratios are also presented in the following table (dollar amounts in thousands).
To be Well Capitalized
Minimum Required under Prompt Corrective
Actual Regulatory Capital Action Provisions
------------------------ ------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
------------------------ ------------------------- ------------------------
As of September 30, 1998
Total Capital (to risk weighted assets)
South Branch $ 22,976 18.6% $ 9,882 8.0% $ 12,353 10.0%
SBVNB 13,579 14.1% 7,704 8.0% 9,630 10.0%
CSB 8,968 33.9% 2,116 8.0% 2,645 10.0%
Tier I Capital (to risk weighted assets)
South Branch 21,659 17.6% 4,923 4.0% 7,384 6.0%
SBVNB 12,582 13.1% 3,842 4.0% 5,763 6.0%
CSB 8,647 32.7% 1,058 4.0% 1,587 6.0%
Tier I Capital (to average assets)
South Branch 21,659 11.7% 5,549 3.0% 9,248 5.0%
SBVNB 12,582 9.0% 4,194 3.0% 6,990 5.0%
CSB 8,647 18.8% 1,380 3.0% 2,300 5.0%
As of December 31, 1997
Total Capital (to risk weighted assets)
South Branch $ 15,759 17.7% $ 7,126 8.0% $ 8,908 10.0%
SBVNB 12,779 14.4% 7,123 8.0% 8,904 10.0%
CSB
* * * * * *
Tier I Capital (to risk weighted assets)
South Branch 14,864 16.7% $ 3,563 4.0% $ 5,345 6.0%
SBVNB 11,884 13.4% 3,562 4.0% 5,342 6.0%
CSB * * * * * *
Tier I Capital (to average assets)
South Branch 14,864 11.3% 3,941 3.0% 6,569 5.0%
SBVNB 11,884 9.2% 3,897 3.0% 6,494 5.0%
CSB * * * * * *
* - No data presented relative to CSB for the year ended December 31, 1997, as
this subsidiary was acquired by South Branch in March 1998.
15
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Management's Discussion and Analysis of Financial Condition and
Results of Operations
INTRODUCTION
The following is a discussion and analysis focused on significant changes in the
financial condition and results of operations of South Branch Valley Bancorp,
Inc. ("Company" or "South Branch") and its wholly owned subsidiaries, South
Branch Valley National Bank ("SBVNB") and Capital State Bank, Inc. ("Capital
State"), for the periods indicated. This discussion and analysis should be read
in conjunction with the Company's 1997 audited financial statements and Annual
Report on Form 10-KSB. This discussion may also contain forward-looking
statements based on management's expectations, and actual results may differ
materially.
ACQUISITION
At the close of business March 31, 1998, South Branch acquired 60% of the
outstanding common stock of Capital State, a Charleston, West Virginia state
chartered bank with total assets approximating $44 million at the time of
acquisition, in exchange for 183,465 shares of South Branch's common stock.
South Branch had previously acquired 40% of Capital State's outstanding common
stock during 1997. This acquisition was accounted for using the purchase method
of accounting, and accordingly, the assets and liabilities and results of
operations of Capital State are reflected in the Company's consolidated
financial statements beginning April 1, 1998.
RESULTS OF OPERATIONS
Earnings Summary
The Company reported net income of $505,000 for the three months ended September
30, 1998 compared to $433,000 for the third quarter of 1997, representing an
16.6% increase. For the nine month period ended September 30, 1998, South
Branch's net income of $1,303,000, increased 14.1% from the $1,142,000 reported
for the same period of 1997. The increase in earnings for both the quarterly and
nine month periods resulted primarily from growth in interest earning assets and
improved service fee revenues.
Earnings per common share were $0.85 for the quarter ended September 30, 1998,
compared to the $1.05 reported for the third quarter of 1997. For the nine month
period ended September 30, 1998, earnings per common share totaled $2.44,
compared to $2.92 for the same period of 1997. The declines in quarterly and
year-to-date earnings per share are attributable to the dilution arising from
acquisition of Capital State. The dilutive effect of this acquisition is
expected to be offset in the future by improved earnings performance of Capital
State resulting from its continued asset growth and planned cost control
initiatives.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$5,079,000 for the nine month period ended September 30, 1998 compared to
$3,999,000 for the same period of 1997, representing an increase of $1,080,000
or 27.0%. This increase resulted from growth in the volume of earning assets as
result of the acquisition of Capital State and as a result of continued solid
loan growth. South Branch's net yield on interest earning assets decreased
slightly to 4.3% for the nine month period ended September 30, 1998, compared to
4.4% for the same period in 1997. Growth in net interest income is expected to
continue due to anticipated continued growth in volumes of interest earning
asset, principally loans, over
16
the near term. Conversely, the Company's net yield on earning assets is
anticipated to continue to contract over the balance of 1998, primarily due to
Capital State having a lower yield on interest earning assets and a slightly
higher cost of interest bearing liabilities compared to that of SBVNB.
Further analysis of the Company's yields on interest earning assets and interest
bearing liabilities are presented in Table I below.
Table I - Average Balance Sheet and Net Interest Income Analysis
September 30, 1998 September 30, 1997
------------------------------------ ----------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Balance Expense Rate Balance Expense Rate
------------------------------------ ----------------------------------------
Interest Earning Assets
Loans, net of unearned income $117,225 $ 8,229 9.4% $ 87,349 $ 6,343 9.7%
Securities
Taxable 28,674 1,430 6.6% 25,398 1,248 6.6%
Tax-exempt (1) 6,187 363 7.8% 6,028 359 7.9%
Federal funds sold 5,128 182 4.7% 1,106 49 5.9%
------------------------------------ ---------------------------------------
Total interest earning assets 157,214 10,204 8.7% 119,881 7,999 8.9%
Noninterest earning assets
Cash & due from banks 3,565 2,739
Bank premises and equipment 4,081 3,127
Other assets 6,066 6,140
Allowance for loan losses (1,144) (846)
-------------- ----------------
Total assets $169,782 $131,041
-------------- ----------------
-------------- ----------------
Interest bearing liabilities
Interest bearing demand Deposits $ 23,340 $ 588 3.4% $ 19,072 $ 444 3.1%
Savings deposits 15,881 383 3.2% 13,661 324 3.2%
Time deposits 79,918 3,466 5.8% 61,385 2,652 5.8%
Short-term borrowings 5,228 168 4.3% 5,695 191 4.5%
Long-term borrowings 12,395 520 5.6% 7,300 389 7.1%
------------------------------------- --------------------------------------
Total interest bearing liabilities 136,762 5,125 5.0% 107,113 4,000 5.0%
------------------------------------- --------------------------------------
Noninterest bearing liabilities
and shareholders' equity
Demand deposits 10,759 9,107
Other liabilities 1,418 1,537
Shareholders' equity 20,843 13,284
------------- ------------
Total liabilities and
shareholders' equity $169,782 $131,041
============= ============
Net interest earnings $ 5,079 $ 3,999
========= ========
Net yield on interest earning assets 4.3% 4.4%
============ ============
(1) - Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for both periods presented. The tax equivalent
adjustment resulted in an increase in interest income of $126,000 and $122,000
for the periods ended September 30, 1998 and 1997, respectively.
17
Credit Experience
The provision for loan losses represents charges to earnings necessary to
maintain an adequate allowance for potential future loan losses. Management's
determination of the appropriate level of the allowance is based on an ongoing
analysis of credit quality and loss potential in the loan portfolio, change in
the composition and risk characteristics of the loan portfolio, and the
anticipated influence of national and local economic conditions. The adequacy of
the allowance for loan losses is reviewed quarterly and adjustments are made as
considered necessary.
The Company recorded a $195,000 provision for loan losses for the first nine
months of 1998, compared to $110,000 for the same period in 1997. This increase
reflects the acquisition of Capital State and continued growth of the loan
portfolio. Net loan charge-offs for the first three quarters of 1998 were
$45,000, as compared to $134,000 over the same period of 1997. At September 30,
1998, the allowance for loan losses totaled $1,317,000 or 1.0% of loans, net of
unearned income, compared to $895,000 or 1.0% of loans, net of unearned income
at December 31, 1997. See Note 6 of the notes to the accompanying consolidated
financial statements for an analysis of the activity in the Company's allowance
for loan losses for the nine month periods ended September 30, 1998 and 1997 and
for the year ended December 31, 1997.
As illustrated in Table II below, the Company's non-performing assets and loans
past due 90 days or more and still accruing interest have remained stable during
the past 12 months, despite continued growth in the Company's loan portfolio.
Table II -
Summary of Past Due Loans and Non-Performing Assets
(in thousands of dollars)
September 30 December 31,
------------------------
1998 1997 1997
---- ---- ----
Loans contractually past due 90 days or
more still accruing interest $327 $31 $ 96
==== === ====
Non-performing assets:
Non-accruing Loans $140 $125 $142
Other repossessed assets - 35 16
Other real estate owned 19 55 57
----- ----- -----
$159 $215 $215
==== ==== ====
Noninterest Income and Expense
Ignoring the $96,000 gain on the sale of Bank premises, equipment and other
assets recognized in 1997, total other income increased approximately $130,000
or 41.5% to $444,000 during the first nine months of 1998, as compared to the
first nine months of 1997. The most significant item contributing to this
increase was service fee income, which increased $109,000 from approximately
$203,000 to $312,000, or 53.9%. This resulted primarily from a change in SBVNB's
deposit fee structure. Management expects the Company will achieve similar
levels of service fee income throughout the remainder of 1998.
18
Total noninterest expense increased approximately $783,000, or 31.4% to
$3,272,000 during the first nine months of 1998 as compared to the first nine
months of 1997. Substantially all of this increase resulted due to the
noninterest expenses of Capital State incurred from the date of its acquisition
on April 1, 1998 through September 30, 1998.
FINANCIAL CONDITION
Total assets were $190,874,000 at September 30, 1998, compared to $140,648,000
at December 31, 1997, representing a 35.7% increase, which resulted primarily
from the Company's acquisition of Capital State effective April 1, 1998. Table
III below serves to illustrate the impact of the Capital State acquisition on
the Company's securities, loans and deposit portfolios, as well as shareholders'
equity.
Table III -
Impact of Capital State Acquisition on
Company's Financial Position
(in thousands)
Increase (Decrease)
------------------------
Change due Net
Balance to Capital Changes due Balance
December 31, State other Sept. 30,
1997 Acquisition Factors 1998
-----------------------------------------------------
Securities $ 27,547 $ 10,467 $ (2,204) $ 35,810
Loans, net 92,573 24,488 18,977 136,038
Noninterest bearing deposits 9,694 1,034 (347) 10,381
Interest bearing deposits 97,291 31,861 7,710 136,862
Shareholders equity 15,061 7,981 940 23,982
Refer to Notes 4, 5 and 8 of the notes to the accompanying consolidated
financial statements for additional information with regard to changes in the
composition of the South Branch's securities, loans and deposits between
September 30, 1998 and December 31, 1997.
LIQUIDITY
Liquidity reflects the Company's ability to ensure the availability of adequate
funds to meet loan commitments and deposit withdrawals, as well as provide for
other transactional requirements. Liquidity is provided primarily by funds
invested in cash and due from banks and Federal funds sold, which totaled
$8,751,000 at September 30, 1998 versus $9,752,000 at December 31, 1997. Further
enhancing the Company's liquidity is the availability as of September 30, 1998
of $5,010,000 in securities maturing within one year, plus additional securities
totaling in excess of $30,761,000 classified as available for sale in response
to an unforeseen need for liquidity. Additionally, the Company has unused lines
of credit available under various existing borrowing arrangements with the
Federal Home Loan Bank of Pittsburgh.
19
The Company's liquidity position is monitored continuously to ensure that
day-to-day as well as anticipated funding needs are met. Management is not aware
of any trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to the Company's liquidity.
CAPITAL RESOURCES
Maintenance of a strong capital position is a continuing goal of Company
management. Through management of its capital resources, the Company seeks to
provide an attractive financial return to its shareholders while retaining
sufficient capital to support future growth. Shareholders' equity at September
30, 1998 totaled $23,981,000 compared to $15,061,000 at December 31, 1997,
representing an increase of 59.2% which as illustrated in Table III above,
resulted primarily from to the acquisition of Capital State.
See Note 9 of the notes to the accompanying consolidated financial statements
for information regarding regulatory restrictions on the Company's and its
subsidiaries' capital.
20
PART II. OTHER INFORMATION
Item 6(b). Reports on Form 8-K.
On August 10, 1998, South Branch Valley Bancorp, Inc. filed notice that it
intends to seek regulatory approval to establish a subsidiary de novo
national bank to be located in Winchester, Virginia.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTH BRANCH VALLEY BANCORP, INC.
(registrant)
By: /s/ H. Charles Maddy III
---------------------------------
H. Charles Maddy, III,
President and
Chief Executive Officer
By: /s/ Robert S. Tissue
---------------------------------
Robert S. Tissue,
Chief Financial Officer
Date November 16, 1998
- ------------------------
22
9 0000811808 SOUTH BRANCH VALLEY BANCORP 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 4,204,386 968,000 4,546,898 0 35,810,175 0 0 136,037,965 (1,317,429) 190,874,065 147,243,218 4,877,646 1,721,727 13,049,938 0 0 1,501,018 22,480,518 190,874,065 8,228,698 1,669,545 182,999 10,081,242 4,438,711 5,125,765 4,955,477 195,000 4,131 3,272,063 1,933,034 1,302,772 0 0 1,302,772 2.44 2.44 4.25 160,653 327,641 54,440 1,958,813 1,167,083 116,355 71,701 1,317,429 1,247,429 0 70,000