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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 March 31, 1999
--------------
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:
591,292 common shares were outstanding as of May 10, 1998
Transitional Small Business Disclosure Format (Check one):
Yes No X
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This report contains 25 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
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated statements of income
for the three months ended March 31, 1999
and 1998 (unaudited) 4
Consolidated statements of cash flows
for the three months ended
March 31, 1999 and 1998 (unaudited) 5-6
Consolidated statements of shareholders' equity
for the three months ended
March 31, 1999 and 1998 (unaudited) 7
Notes to consolidated financial
statements (unaudited) 8-15
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16-22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
South Branch Valley Bancorp, Inc. and Subsidiaries
- ------------------------------------------------------------------------------
Consolidated Balance Sheets
March 31, December 31,
1999 1998
(unaudited) (*)
---------------- -----------------
ASSETS
Cash and due from banks $ 3,822,396 $ 4,239,721
Interest bearing deposits with other banks 770,000 770,000
Federal funds sold 1,385,334 4,842,745
Securities available for sale 41,700,028 31,409,924
Loans, net 148,634,548 142,770,127
Bank premises and equipment, net 5,202,583 5,170,858
Accrued interest receivable 1,206,686 1,059,990
Other assets 3,071,932 2,735,672
----------------- -----------------
Total assets $ 205,793,507 $ 192,999,037
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing $ 11,419,678 $ 11,455,674
Interest bearing 139,149,706 134,917,518
----------------- -----------------
Total deposits 150,569,384 146,373,192
----------------- -----------------
Short-term borrowings 11,369,475 4,644,143
Long-term borrowings 17,886,647 16,468,875
Other liabilities 1,541,386 1,367,698
----------------- -----------------
Total liabilities 181,366,892 168,853,908
----------------- -----------------
Commitments and Contingencies
Shareholders' Equity
Common stock, $2.50 par value;
authorized 2,000,000 shares; issued
600,407 shares 1,501,018 1,501,018
Capital surplus 9,611,774 9,611,774
Retained earnings 13,551,134 13,103,264
Less cost of 8,115 shares acquired for
the treasury (384,724) (384,724)
Accumulated other comprehensive income 147,413 313,797
----------------- -----------------
Total shareholders' equity 24,426,615 24,145,129
----------------- -----------------
Total liabilities and
shareholders' equity $ 205,793,507 $ 192,999,037
================= =================
(*) - December 31, 1998 financial information has been extracted from audited
consolidated financial statements
See Notes to Consolidated Financial Statements
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Income (unaudited)
Three Months Ended
-----------------------------
March 31, March 31,
1999 1998
-------------- -------------
Interest income
Interest and fees on loans $ 3,154,807 $ 2,204,688
Interest on securities
Taxable 492,070 393,480
Tax-exempt 80,087 78,097
Interest on Federal funds sold 22,368 49,132
-------------- -------------
Total interest income 3,749,332 2,725,397
-------------- -------------
Interest expense
Interest on deposits 1,590,508 1,162,201
Interest on short-term borrowings 65,195 64,835
Interest on long-term borrowings 238,920 167,121
-------------- -------------
Total interest expense 1,894,623 1,394,157
-------------- -------------
Net interest income 1,854,709 1,331,240
Provision for loan losses 77,500 45,000
-------------- -------------
Net interest income after provision
for loan losses 1,777,209 1,286,240
-------------- -------------
Other income
Insurance commissions 11,398 23,455
Service fees 118,080 88,778
Securities gains (losses) - -
Other 24,154 18,075
-------------- -------------
Total other income 153,632 130,308
-------------- -------------
Other expense
Salaries and employee benefits 634,966 468,822
Net occupancy expense 84,056 50,619
Equipment rentals, depreciation
and maintenance 109,070 81,032
Federal deposit insurance premiums 4,418 3,260
Other 384,261 250,339
-------------- -------------
Total other expense 1,216,771 854,072
-------------- -------------
Income before income taxes 714,070 562,476
Income tax expense 266,200 176,685
-------------- -------------
Net income $ 447,870 $ 385,791
============== =============
Basic earnings per common share $ 0.76 $ 0.93
============== =============
Diluted earnings per common share $ 0.76 $ 0.93
============== =============
Dividends per common $ - $ -
============== =============
See Notes to Consolidated Financial Statements
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows (unaudited)
Three Months Ended
-----------------------------
March 31, March 31,
1999 1998
-------------- -------------
Cash Flows from Operating Activities
Net income $ 447,870 $ 385,791
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 94,441 64,958
Provision for loan losses 77,500 45,000
Deferred income tax (benefit) expense 83,600 (8,015)
(Gain) on disposal of other assets - (1,660)
Amortization of securities premiums
(accretion of discounts), net 5,916 (28,426)
Amortization of goodwill and purchase
accounting adjustments, net 29,731 9,294
(Increase) decrease in accrued
interest receivable (146,696) (24,489)
(Increase) decrease in other assets (292,601) (18,687)
Increase (decrease) in other
liabilities 194,247 20,924
------------- -------------
Net cash provided by operating activities 494,008 444,690
------------- -------------
Cash Flows from Investing Activities
Proceeds from maturities of interest
bearing deposits with other banks - 90,000
Proceeds from maturities and calls of
securities available for sale 1,500,000 2,325,000
Principal payments received on
securities available for sale 829,667 600,047
Purchases of securities available for
sale (12,893,932) (4,292,235)
Purchase of common stock of affiliate - (90,465)
Net (increase) decrease in Federal
funds sold 3,457,411 5,081,317
Net loans made to customers (6,028,466) (3,713,886)
Purchases of Bank premises and
equipment (127,582) (7,638)
Proceeds from sales of other assets - 14,410
-------------- ------------
Net cash provided by (used in) investing
activities (13,262,902) 6,550
-------------- ------------
Cash Flows from Financing Activities
Net increase (decrease) in demand
deposit, NOW and savings accounts 4,130,480 436,091
Net increase (decrease) in time
deposits 77,985 (493,495)
Net increase (decrease) in short-term
borrowings 6,725,332 (1,429,375)
Proceeds from long-term borrowings 1,500,000 -
Repayment of long-term borrowings (82,228) (66,391)
------------- ------------
Net cash provided by financing activities 12,351,569 (1,553,170)
------------- ------------
Increase (decrease) in cash and due from
banks (417,325) (1,101,930)
Cash and due from banks:
Beginning 4,239,721 3,945,099
------------- ------------
Ending $ 3,822,396 $ 2,843,169
============= ============
(Continued)
See Notes to Consolidated Financial Statements
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Cash Flows - continued (unaudited)
Three Months Ended
-----------------------------
March 31, March 31,
1999 1998
-------------- -------------
Supplement Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 1,899,396 $ 1,365,665
============= ============
Income taxes $ - $ -
============= ============
Supplemental Schedule of Noncash Investing
and Financing Activities
Other assets acquired in settlement
of loans $ 88,000 $ 30,520
============= ============
See Notes to Consolidated Financial Statements
South Branch Valley Bancorp, Inc. and Subsidiaries
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Consolidated Statements of Shareholders' Equity (unaudited)
Accumulated
Other Total
Compre- Share-
Common Capital Retained Treasury hensive holders'
Stock Surplus Earnings Stock Income Equity
---------- ---------- ------------ ----------- ------------ -------------
Balance, December 31, 1998 $1,501,018 $9,611,774 $13,103,264 $(384,724) $313,797 $24,145,129
Three Months Ended March 31, 1999
Comprehensive income:
Net income - - 447,870 - - 447,870
Other comprehensive income,
net of tax:
Net unrealized (loss) on
securities of ($166,384), net
of reclassification adjustment
for gains(losses) included in net
income of $ - - - - - (166,384) (166,384)
-------------
Total comprehensive income - - - - - 281,486
---------- ---------- ------------ ----------- ------------ -------------
Balance, March 31, 1999 $1,501,018 $9,611,774 $13,551,134 $(384,724) $ 147,413 $ 24,426,615
========== ========== ============ =========== ============ =============
Balance, December 31, 1997 $1,042,355 $2,089,709 $11,898,420 $(166,970) $ 197,038 $ 15,060,552
Three Months Ended March 31, 1998
Comprehensive income:
Net income - - 385,791 - - 385,791
Other comprehensive income,
net of tax:
Net unrealized (loss) on
securities of ($6,492), net
of reclassification adjustment
for gains (losses) included in net
income of $ - - - - - (6,492) (6,492)
------------
Total comprehensive income - - - - - 379,299
---------- ---------- ------------ ----------- ------------ -------------
Balance, March 31, 1998 $1,042,355 $2,089,709 $12,284,211 $(166,970) $ 190,546 $ 15,439,851
========== ========== ============ =========== ============ =============
See Notes to Consolidated Financial Statements
South Branch Valley Bancorp, Inc. and Subsidiaries
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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 months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year. The
consolidated financial statements and notes included herein should be read in
conjunction with the Company's 1998 audited financial statements and Annual
Report on Form 10-KSB.
Note 2. Earnings per Share
Basic earnings per common share is computed based upon the weighted average
shares outstanding. The weighted average shares outstanding for the three month
periods ended March 31, 1999 and 1998 were 591,292 and 412,827, respectively.
In accordance Financial Accounting Standards Board Statement No. 128, Earning
per Share, diluted earnings per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce the loss or increase the income per common share from continuing
operations. At March 31, 1999, options totaling 7,500 shares of the Company's
common stock had been granted under the Company's 1998 Officer Stock Option
Plan. As of March 31, 1999, none of these options are vested.
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 March 31, 1999. 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)
----------------------------------------------
Three Month Period Three Month Period
Ended Ended
March 31, 1999 March 31, 1998
----------------------------------------------
As Reported Pro Forma As Reported Pro Forma
----------------------------------------------
Total interest income $ 3,749 $ 3,749 $ 2,725 $ 3,459
Total interest expense $ 1,894 $ 1,894 $ 1,394 $ 1,784
Net interest income $ 1,855 $ 1,855 $ 1,331 $ 1,675
Net income $ 448 $ 448 $ 386 $ 390
Basic earnings per
common share $ 0.76 $ 0.76 $ 0.93 $ 0.66
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 March 31, 1999 and December 31, 1998 are summarized as
follows:
March 31, 1999
-----------------------------------------------
Estimated
Amortized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
Available for Sale
Taxable:
U. S. Treasury
securities $ 2,991,539 $ 44,836 $ - $ 3,036,375
U. S. Government
agencies and
corporations 11,196,164 44,711 14,997 11,225,878
Small Business
Administration
guaranteed loan
participation
certificates 850,073 5,890 2,882 853,081
Mortgage-backed
securities -
U. S. Government
agencies and
corporations 18,125,406 76,400 135,046 18,066,760
Corporate debt
securities 249,949 176 - 250,125
Federal Reserve
Bank stock 44,300 - - 44,300
Federal Home Loan
Bank stock 1,447,300 - - 1,447,300
Other equity
securities 306,625 - - 306,625
---------- -------- ------- -----------
Total taxable 35,211,356 172,013 152,925 35,230,444
---------- -------- ------- -----------
Tax-exempt:
State and political
subdivisions 6,244,876 228,856 8,248 6,465,484
Federal Reserve
Bank stock 4,100 - - 4,100
----------- --------- ------- ------------
Total tax-exempt 6,248,976 228,856 8,248 6,469,584
----------- --------- ------- ------------
Total $41,460,332 $400,869 $161,173 $41,700,028
============ ========= ======== ============
December 31, 1998
-----------------------------------------------
Estimated
Amortized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
Available for Sale
Taxable:
U. S. Treasury
securities $ 2,990,294 $ 68,354 $ - $ 3,058,648
U. S. Government
agencies
and corporations 12,698,092 82,796 11,404 12,769,484
Small Business
Administration
guaranteed loan
participation
certificates 973,127 21,119 - 994,246
Mortgage-backed
securities -
U. S. Government
agencies and
corporations 6,334,380 86,483 - 6,420,863
Corporate debt
securities 249,724 1,214 - 250,938
Federal Reserve
Bank stock 44,300 - - 44,300
Federal Home Loan
Bank stock 1,052,300 - - 1,052,300
Other equity
securities 306,625 - - 306,625
---------- -------- -------- -----------
Total taxable 24,648,842 259,966 11,404 24,897,404
---------- -------- -------- -----------
Tax-exempt:
State and political
subdivisions 6,246,745 268,525 6,850 6,508,420
Federal Reserve
Bank stock 4,100 - - 4,100
---------- -------- -------- -----------
Total tax-exempt 6,250,845 268,525 6,850 6,512,520
------------ -------- -------- -----------
Total $30,899,687 $528,491 $18,254 $31,409,924
============ ========= ======== ============
The maturites, amortized cost and estimated fair values of securities at March
31, 1999, are summarized as follows:
Available for Sale
---------------------------
Amortized Estimated
Cost Fair Value
---------------------------
Due in one year or less $ 8,027,047 $ 8,063,860
Due from one to five years 17,440,503 17,520,632
Due from five to ten years 12,014,735 12,044,635
Due after ten years 2,175,722 2,268,576
Equity securities 1,802,325 1,802,325
---------------------------
$41,460,332 $41,700,028
===========================
Note 5. Loans
Loans are summarized as follows:
March 31, December 31,
1999 1998
---------------------------
Commercial, financial and
agricultural $ 46,438,148 $ 41,956,586
Real estate - construction 1,076,862 1,801,317
Real estate - mortgage 75,693,176 73,885,892
Installment 26,913,042 26,579,782
Other 345,461 409,382
---------------------------
Total loans 150,466,689 144,632,959
Less unearned income 449,330 490,946
---------------------------
Total loans net of unearned
income 150,017,359 144,142,013
Less allowance for loan losses 1,382,811 1,371,886
---------------------------
Loans, net $148,634,548 $142,770,127
===========================
The following presents loan maturities at March 31, 1999:
After 1
but
Within within 5 After
1 Year Years 5 Years
-----------------------------------------
Commercial, financial and
agricultural $ 11,553,903 $ 9,165,339 $ 25,718,906
Real estate - construction 999,327 - 77,535
Real estate - mortgage 3,566,639 15,131,830 56,994,742
Installment 3,390,614 19,704,622 3,817,772
Other 312,866 32,594 -
-----------------------------------------
Total 19,823,349 44,034,385 86,608,955
=========================================
Loans due after one year with:
Variable rates 41,389,148
Fixed rates 89,254,192
-------------
$ 130,643,340
=============
The Company grants commercial, residential and consumer loans to customers
primarily located in the Eastern Panhandle and South Central counties of West
Virginia. Although the Company strives to maintain a diverse loan portfolio,
exposure to credit losses can be adversely impacted by downturns in local
economic and employment conditions. Major employment within the Company's market
area is diverse, but primarily includes the poultry, government, health care,
education, coal production and various professional, financial and related
service industries.
Note 6. Allowance for Loan Losses
An analysis of the allowance for loan losses for the nine month periods ended
March 31, 1999 and 1998, and for the year ended December 31, 1998, is as
follows: .
Year
Ended
Three Months Ended December
March 31, 31,
-----------------------------------
1999 1998 1998
-----------------------------------
Balance, beginning of
period $1,371,886 $ 895,281 $ 895,281
Losses:
Commercial, financial &
agricultural 14,357 - 4,063
Real estate - mortgage 30,488 - -
Installment 28,711 19,235 124,103
Other - 506 24,638
-----------------------------------
Total 73,556 19,741 152,804
-----------------------------------
Recoveries:
Commercial, financial &
agricultural - 1,575 2,830
Real estate - mortgage 450 6,750 21,969
Installment 4,883 6,972 60,797
Other 1,648 101 2,011
-----------------------------------
Total 6,981 15,398 87,607
-----------------------------------
Net losses 66,575 4,343 65,197
Allowance of purchased
subsidiary - - 271,802
Provision for loan losses 77,500 45,000 270,000
-----------------------------------
Balance, end of period $1,382,811 $ 935,938 $1,371,886
===================================
Note 7. Deposits
The following is a summary of interest bearing deposits by type as of March 31,
1999 and December 31, 1998:
March 31, December 31,
1999 1998
---------------------------
Demand deposits, interest
bearing $ 30,788,845 $ 27,510,717
Savings deposits 15,637,277 14,748,928
Certificates of deposit 83,927,494 83,319,247
Individual retirement accounts 8,796,091 9,338,626
---------------------------
Total $139,149,707 $134,917,518
===========================
The following is a summary of the maturity distribution of certificates of
deposit and Individual Retirement Accounts in denominations of $100,000 or more
as of March 31, 1999:
Amount Percent
---------------------------
Three months or less $ 5,712,746 24.8%
Three through six months 4,822,510 20.9%
Six through twelve months 6,927,305 30.0%
Over twelve months 5,609,784 24.3%
---------------------------
Total $23,072,345 100.0%
===========================
A summary of the scheduled maturities for all time deposits as of March 31, 1999
is as follows:
1999 $51,730,716
2000 25,540,584
2001 6,529,132
2002 3,219,712
2003 3,661,080
Thereafter 2,042,361
--------------
$92,723,585
==============
Note 8. 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 March 31, 1999, that South
Branch and each of its subsidiaries met all capital adequacy requirements to
which they were subject.
The most recent notifications from the banking regulatory agencies categorized
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
under Prompt
Minimum Required Corrective
Regulatory Action
Actual Capital Provisions
----------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
----------------- ----------------- -----------------
As of March 31, 1999
Total Capital (to risk
weighted assets)
South Branch $25,138 19.1% $10,512 8.0% $13,140 10.0%
SBVNB 13,989 13.9% 8,072 8.0% 10,091 10.0%
CSB 8,996 41.0% 1,753 8.0% 2,192 10.0%
Tier I Capital (to risk
weighted assets)
South Branch 22,370 17.0% 5,256 4.0% 7,884 6.0%
SBVNB 12,945 12.8% 4,036 4.0% 6,054 6.0%
CSB 8,722 39.8% 877 4.0% 1,315 6.0%
Tier I Capital (to
average assets)
South Branch 22,370 11.5% 5,832 3.0% 9,719 5.0%
SBVNB 12,945 9.0% 4,319 3.0% 7,198 5.0%
CSB 8,722 17.5% 1,499 3.0% 2,498 5.0%
As of December 31, 1998
Total Capital (to risk
weighted assets)
South Branch $23,309 18.4% $10,126 8.0% $12,658 10.0%
SBVNB 13,510 14.0% 7,721 8.0% 9,652 10.0%
CSB 8,976 30.5% 2,356 8.0% 2,945 10.0%
Tier I Capital (to risk
weighted assets)
South Branch 21,937 17.3% 5,063 4.0% 7,595 6.0%
SBVNB 12,468 12.9% 3,861 4.0% 5,791 6.0%
CSB 8,646 29.4% 1,178 4.0% 1,767 6.0%
Tier I Capital (to
average assets)
South Branch 21,937 11.5% 5,702 3.0% 9,504 5.0%
SBVNB 12,468 8.7% 4,289 3.0% 7,148 5.0%
CSB 8,646 17.7% 1,464 3.0% 2,441 5.0%
Note 9. Branch Acquisitions and New Subsidiary
On December 23, 1998, a subsidiary of the Company, Capital State Bank, Inc.
entered into an agreement to purchase three branch banking facilities located in
Greenbrier County, West Virginia. The transaction was completed on April 22,
1999, and includes the branches' facilities and associated loan and deposit
accounts. Total deposits assumed approximated $47.2 million and total loans
acquired approximated $8.8 million as of the transaction's closing. The total
consideration paid approximated $3.4 million and was based upon the total
deposits assumed plus the seller's net book value of the branch offices and
equipment at closing.
During 1998, the Company applied for and on January 25, 1999 received
preliminary approval from the Office of the Comptroller of the Currency to begin
organizing a new subsidiary bank, Shenandoah Valley National Bank, to be located
in Winchester, Virginia. This newly chartered institution will be initially
capitalized with $4 million, to be funded by a special dividend in the amount of
$3 million from the Company's subsidiary bank, South Branch Valley National
Bank, and from a $1 million term loan from an unaffiliated bank. Shenandoah
Valley National Bank is expected to open in May 1999.
Note 10. Pending Merger
On March 22, 1999, the Company entered into a letter of intent ("Letter") to
affiliate with Potomac Valley Bank ("Potomac") in Petersburg, West Virginia.
Under the terms of the Letter, South Branch and Potomac propose a merger whereby
the shareholders of Potomac would exchange all of their outstanding shares of
common stock for shares of South Branch common stock at a book-for-book exchange
based on the respective book values of South Branch and Potomac as of the
closing date. At December 31, 1998, the exchange ratio would have been 3.2143
shares of South Branch common stock for each share of Potomac's 90,000
outstanding shares of common stock. The terms of the Letter also include, among
others, that the merger is subject to negotiation of a definitive merger
agreement, South Branch changing its name to a name mutually agreeable to both
parties, and approval of the transaction by all applicable regulatory
authorities and the shareholders of South Branch and Potomac. It is expected
that the transaction will be accounted for using the pooling of interests method
of accounting. As of December 31, 1998, Potomac's assets, loans, deposits and
shareholders' equity totaled $94,297,000, $50,393,000, $81,968,000 and
$11,813,000, respectively.
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 1998 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. Refer to Note 3 of the
accompanying consolidated financial statements for additional information
regarding this acquisition.
RESULTS OF OPERATIONS
Earnings Summary
The Company reported net income of $448,000 for the three months ended March 31,
1999 compared to $386,000 for the first quarter of 1998, representing a 16.1%
increase. The improvement in earnings for the quarter resulted primarily due to
higher net interest income and non-interest income, which more than offset
increased non-interest expense.
Basic and diluted earnings per common share were $0.76 for the quarter ended
March 31,1999 compared to the $0.93 reported for the first quarter of 1998. The
decline in earnings per share is attributable to the dilution arising from the
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 growth.
Net Interest Income
The Company's net interest income on a fully tax-equivalent basis totaled
$1,895,000 for the three month period ended March 31, 1999 compared to
$1,371,000 for the same period of 1998, representing an increase of $524,000 or
38.2%. 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 4.1% for the three month period ended March 31, 1999, compared to
4.3% for the same period in 1998. Growth in net interest income is expected to
continue due to anticipated continued growth in volumes of interest earning
asset, principally loans, over the near term. Conversely, the Company's net
yield on earning assets is anticipated to continue to contract slightly over the
balance of 1999, primarily due to competitive pressures on interest rates for
new loans within the Company's primary market area.
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 (in
thousands of dollars)
March 31, 1999 March 31, 1998
------------------------- -------------------------
Average Earnings Yield/ Average Earnings Yield/
Balance Expense Rate Balance Expense Rate
------------------------- -------------------------
Interest earning assets
Loans, net of
unearned income $146,881 $3,155 8.6% $ 94,235 $2,205 9.4%
Securities
Taxable 29,860 492 6.6% 22,671 393 6.9%
Tax-exempt (1) 6,246 121 7.7% 5,987 118 7.9%
Federal funds sold 2,053 22 4.3% 3,332 49 5.9%
------------------------- -------------------------
Total interest earning
assets 185,040 3,790 8.2% 126,225 2,765 8.8%
------------------------- -------------------------
Noninterest earning
assets
Cash & due from
banks 3,842 3,083
Bank premises and
equipment 5,664 3,048
Other assets 2,573 6,791
Allowance for loan
losses (1,386) (920)
--------- ---------
Total assets $195,733 $138,227
========= =========
Interest bearing
liabilities
Interest bearing
demand deposits $ 28,371 $ 225 3.2% $ 17,379 $ 131 3.0%
Savings deposits 15,075 105 2.8% 13,973 113 3.2%
Time deposits 92,521 1,261 5.5% 64,591 918 5.7%
Short-term
borrowings 6,275 65 4.1% 5,959 54 3.6%
Long-term
borrowings 17,893 239 5.3% 10,358 178 6.9%
------------------------- -------------------------
Total interest bearing
liabilities 160,135 1,895 4.7% 112,260 1,394 5.0%
------------------------- -------------------------
Noninterest bearing
liabilities
and shareholders'
equity
Demand deposits 11,375 9,490
Other liabilities 1,766 1,136
Shareholders'equity 22,457 15,341
-------- --------
Total liabilities and
shareholders'
equity $195,733 $138,227
======== ========
Net interest earnings $1,895 $1,371
====== ======
Net yield on interest
earning assets 4.1% 4.3%
==== ====
(1) - Interest income on tax-exempt securities has been adjusted assuming an
effective tax rate of 34% for both periods presented. The tax equivalent
adjustment resulted in an increase in interest income of $41,000 and $40,000
for the periods ended March 31, 1999 and 1998, respectively.
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 $78,000 provision for loan losses for the first three
months of 1999, compared to $45,000 for the same period in 1998. This increase
reflects the acquisition of Capital State and continued growth of the loan
portfolio. Net loan charge offs for the first quarter of 1999 were $67,000, as
compared to $4,000 over the same period of 1998. The increase in net loan charge
offs is related primarily to losses, which had previously been provided for in
the allowance for loan losses, were incurred on one commercial and one real
estate loan during the first quarter of 1999. At March 31, 1999, the allowance
for loan losses totaled $1,383,000 or 0.9% of loans, net of unearned income,
compared to $1,372,000 or 1.0% of loans, net of unearned income at December 31,
1998. See Note 6 of the notes to the accompanying consolidated financial
statements for an analysis of the activity in the Company's allowance for loan
losses for the three month periods ended March 31, 1999 and 1998 and for the
year ended December 31, 1998.
As illustrated in Table II below, the Company's non-performing assets and loans
past due 90 days or more and still accruing interest have remained relatively
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)
March 31,
------------------- December 31,
1999 1998 1998
------------------- -----------
Loans contractually past due 90 days or
more still accruing interest $ 19 $ 120 $ 355
Non-performing assets:
Non-accruing loans 275 154 297
Repossessed assets - 31 12
Foreclosed properties 173 47 85
------ ------ ------
$ 467 $ 352 $ 749
====== ====== ======
Percentage of total loans 0.3% 0.4% 0.5%
==== ==== ====
Noninterest Income and Expense
Total other income increased approximately $23,000 or 17.7% to $154,000 during
the first quarter of 1999, as compared to the first three months of 1998. The
most significant item contributing to this increase was service fee income,
which increased $29,000 from approximately $89,000 to $118,000, or 32.6%. This
resulted primarily from a change in South Branch's deposit fee structure and the
acquisition of Capital State effective April 1, 1998.
Total noninterest expense increased approximately $363,000, or 42.5% to
$1,217,000 during the first quarter of 1999 as compared to the same period in
1998. Substantially all of this increase resulted due to the noninterest
expenses of Capital State.
FINANCIAL CONDITION
Total assets of the Company were $205,794,000 at March 31, 1999, compared to
$192,999,000 at December 31, 1998, representing a 6.6% increase. Table III below
serves to illustrate significant changes in the Company's financial position
between December 31, 1998 and March 31, 1999.
Table III -
Summary of Significant Changes
in Company's Financial
Position
(in thousands of dollars)
Increase
Balance (Decrease) Balance
December 31, ------------- March 31,
1998 Amount Percentage 1999
---------------------------------------
Assets
Federal funds sold $ 4,843 $(3,458) -71.4% $ 1,385
Securities
available for sale 31,410 10,290 32.8% 41,700
Loans, net of
unearned income 144,142 5,875 4.1% 150,017
Liabilities
Interest bearing
deposits $134,918 $ 4,232 3.1% $139,150
Short-term
borrowings 4,644 6,725 144.8% 11,369
Long-term
borrowings 16,469 1,418 8.6% 17,887
The increase in securities available for sale resulted primarily from the
purchase of GNMA mortgage backed securities during the first quarter of 1999.
Purchases of these securities were made as part of South Branch's ongoing
asset/liability management strategy, which strives to minimize interest rate
risk while enhancing the financial position of the Company. These securities
purchases were funded by the reduction in Federal funds sold and the increase in
short-term borrowings under the Company's line of credit with the Federal Home
Loan Bank ("FHLB").
The growth in loans during the first three months of 1999, occurring principally
in the commercial and real estate portfolios, was funded by increased interest
bearing deposits and long-term borrowings from the FHLB.
In conjunction with the Company's acquisition of three branch banks in
Greenbrier County, West Virginia in April 1999 (see Note 9 of the accompany
consolidated financial statements), the Company realized approximately $36
million in investable funds. These funds were used to repay all the short-term
FHLB borrowings used to fund the first quarter 1999 securities purchases
discussed above, and were invested in government agency securities and Federal
funds sold.
Refer to Notes 4, 5 and 7 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 March
31, 1999 and December 31, 1998.
LIQUIDITY
Liquidity reflects the Company's ability to ensure the availability of adequate
funds to meet loan commitments and deposit withdrawals, as well as provide for
other transactional requirements. Liquidity is provided primarily by funds
invested in cash and due from banks, Federal funds sold, securities and interest
bearing deposits with other banks maturing within one year, and lines of credit
with FHLB which totaled approximately $37.1 million at March 31, 1999 versus
$45.1 million at December 31, 1998. Further enhancing the Company's liquidity is
the availability as of March 31, 1999 of additional securities totaling $33.4
million classified as available for sale in response to an unforeseen need for
liquidity.
The Company's liquidity position is monitored continuously to ensure that
day-to-day as well as anticipated funding needs are met. Management is not aware
of any trends, commitments, events or uncertainties that have resulted in or are
reasonably likely to result in a material change to the 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 March 31,
1999 totaled $24,427,000 compared to $24,145,000 at December 31, 1998,
representing an increase of 1.2% which resulted primarily from net retained
earnings of the Company during the first quarter of 1999.
See Note 8 of the notes to the accompanying consolidated financial statements
for information regarding regulatory restrictions on the Company's and its
subsidiaries' capital.
YEAR 2000
The Year 2000 Issue is the result of many existing computer programs and other
date dependent electronic devices using only the last two digits, as opposed to
four digits, to indicate the year. Such computer systems and devices may be
unable to recognize a year that begins with 20XX instead of 19XX. If not
corrected, the computer programs and devices could cause systems to fail or
other computer errors, leading to possible disruptions in operations or creation
of erroneous results. South Branch recognizes the significant potential risk
associated with the Year 2000 Issue and, in a Company-wide effort, is taking
steps to ensure that its internal systems are secure from such failure.
The Company's Year 2000 Plan ("Plan") addresses all its systems, software,
hardware, and infrastructure components. The Plan identifies and addresses
"Mission Critical" and "Non-mission Critical" components for Information
Technology ("IT") systems and Non-information Technology ("Non-IT") systems. IT
includes, for example, systems that service loan and deposit customers. Non-IT
systems include security systems, elevators, utilities and voice/data
communications. An application, system, or process is deemed "Mission Critical"
if it is vital to the successful continuance of a core business activity.
South Branch's Plan follows a five phase approach recommended by bank regulatory
authorities. These phases are: Awareness, Assessment, Renovation,
Testing/Validation, and Implementation. During the Awareness Phase, management
gathered information and appointed a project steering committee to coordinate
the Company's Year 2000 efforts. In the Assessment Phase, South Branch
identified its Mission Critical IT and Non-IT systems and performed an inventory
of all systems, software, hardware, equipment and components that potentially
could be affected by the Year 2000 issue. The Renovation Phase involves
implementing program changes and new components, where applicable, to
accommodate identified Year 2000 issues. In the Testing/Validation Phase, the
Company is testing renovated applications and components to ensure they are Year
2000 compliant. During the Implementation Phase, applications, systems and other
components are fine-tuned and final programs and components are placed into
operation.
South Branch's estimated progress as of March 31, 1999 towards meeting the
Plan's goals for both IT and Non-IT systems by phase are as follows:
Estimated Estimated
Percent Completion
Phase Complete Date
- -------------------- --------- ----------
Mission Critical
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 98% 06/30/1999
Testing/Validation 98% 06/30/1999
Implementation 95% 06/30/1999
Non-mission Critical
Awareness 100% 06/30/1998
Assessment 100% 09/30/1998
Renovation 95% 06/30/1999
Testing/Validation 95% 06/30/1999
Implementation 95% 06/30/1999
South Branch depends on various third-party vendors, suppliers, and service
providers, and will be dependent on their continued service in order to avoid
business interruptions. Any interruption in a third party's ability to provide
goods and services, such as issues with telecommunication links and providers of
electricity, could interrupt South Branch's ability to meet its customer's
needs. South Branch has identified several third-party relationships considered
Mission Critical, and is presently working with each to test transactions and/or
interfaces between its processors, obtain appropriate information from each
party, or assess each party's readiness with regard to the Year 2000 Issue.
Identifiable costs for the Company's Year 2000 project during 1999 approximated
$20,000, substantially all of which were capital expenditures for the
replacement of computers and other date dependent electronic devices. The cost
to complete the Plan is not expected to exceed $50,000.
Major business risks associated with the Year 2000 problem include, but are not
limited to, infrastructure failures, disruptions to the economy in general,
excessive cash withdrawal activity, closure of government offices and clearing
houses, and increased problem loans and credit losses in the event that
borrowers fail to properly respond to the problem. These risks, along with the
unlikely risk of South Branch failing to adequately complete the remaining
phases of its Plan and the resulting possible inability to properly process
business transactions expose the Company to loss of revenues, litigation, and
asset quality deterioration.
The Year 2000 problem is unique in that it has never previously occurred; thus,
it is not possible to completely foresee or quantify the overall or any specific
financial or operational impacts to the Company or to third parties which
provide Mission Critical services to the Company. South Branch is in the process
of developing Year 2000 contingency plans in the event that Mission Critical
third party vendors or other third parties fail to adequately address Year 2000
issues. Such plans principally will involve internal remediation or identifying
alternative vendors.
PART II. OTHER INFORMATION
Item 6(a). Exhibits required by Item 601 of Regulation S-B
Exhibit 11. Statement re: Computation of Earnings per Share
Exhibit 27. Financial Data Schedule - electronic filing only
Item 6(b). Reports on Form 8-K.
On January 4, 1999, South Branch Valley Bancorp, Inc. announced it will
acquire three branch banking facilities located in Greenbrier County, West
Virginia and the related loans and deposits from another financial
institution.
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: May 17, 1999
--------------
EXHIBIT 11. Statement re: Computation of Earnings per Share Three Months Ended March 31, ---------------------------- 1999 1998 ---------------------------- Numerator: Net Income $ 447,870 $ 385,791 Denominator: Denominator for basic earnings per share -- weighted average common shares outstanding 591,292 412,827 Effect of dilutive securities: Employee stock option plan 26 - ----------- ----------- Denominator for diluted earnings per share -- weighted average common shares outstanding and assumed conversions 591,318 412,827 =========== ========== Basic earnings per share $ 0.76 $ 0.93 ========== ========== Diluted earnings per share $ 0.76 $ 0.93 ========== ==========
9 0000811808 South Branch Valley Bancorp, Inc. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 3,822,396 770,000 1,385,334 0 41,700,028 0 0 150,017,359 (1,382,811) 205,793,507 150,569,384 11,369,475 1,541,366 17,886,647 0 0 1,501,018 22,925,597 205,793,507 3,154,807 572,157 22,368 3,749,332 1,590,508 1,894,623 1,854,709 77,500 0 1,216,771 714,070 714,070 0 0 447,870 0.76 0.76 4.10 275,000 19,000 0 2,375,000 1,371,886 73,556 6,981 1,382,811 1,302,811 0 80,000