-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E/F6AIGybiGFsBVLem35ZKc5PoUcaaxAkbkLOuvQ0x7uf1pS+QlyH3nR/ikHEWiv kYq0MKDHLf08Y6jFnbocqA== 0000811808-98-000004.txt : 19980324 0000811808-98-000004.hdr.sgml : 19980324 ACCESSION NUMBER: 0000811808-98-000004 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTH BRANCH VALLEY BANCORP INC CENTRAL INDEX KEY: 0000811808 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 550672148 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-16587 FILM NUMBER: 98571095 BUSINESS ADDRESS: STREET 1: 310 N MAIN ST CITY: MOOREFIELD STATE: WV ZIP: 26836 BUSINESS PHONE: 3045382353 MAIL ADDRESS: STREET 1: PO BOX 680 CITY: MOOREFIELD STATE: WV ZIP: 26836 10KSB 1 FORM 10-KSB FOR SOUTH BRANCH VALLEY BANCORP, INC. 1-74 U. S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 -------------------- Commission File Number 0-16587 -------------------- South Branch Valley Bancorp, Inc. --------------------------------------- (Exact name of registrant as specified in its charter) West Virginia 55-0672148 ----------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 310 N. Main Street Moorefield, West Virginia 26836 ----------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (304) 538-2353 ------------------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------- None None Securities registered pursuant to Section 12(g) of the Act: Common ---------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ----- 1 2-74 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K [229.405 of this chapter] is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendments to this Form 10-KSB. [ X ] State issuer's revenues for its most recent fiscal year: $11,114,309 State the aggregate market value of the voting stock held by non- affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. Aggregate Market Value Based Upon Reported of Voting Stock Closing Price on ------------------------ --------------------- $17,957,975 March 1, 1998 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding as of March 1, 1998 --------- -------------------------------- Common Stock ($2.50 par value) 412,827 shares Documents Incorporated by Reference The following lists the documents which are incorporated by reference in the Annual Report Form 10-KSB, and the Parts and Items of the Form 10-KSB into which the documents are incorporated. Part of Form 10-KSB Into Which Document Document is Incorporated -------- ------------------- South Branch Valley Bancorp, Inc. Part II Annual Report to Shareholders for the year ended December 31, 1997 Reports filed on Form 8-K Part III This form 10-KSB is comprised of 74 pages. The exhibit index is located on page 24. 2 3-74 SOUTH BRANCH VALLEY BANCORP, INC FORM 10-KSB INDEX Page ---- Part I. Item 1. Business..............................................4-12 Item 2. Properties...........................................12-13 Item 3. Legal Proceedings.......................................13 Item 4. Submission of Matters to a Vote of Shareholders......................................13-14 Part II. Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters................15-16 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations and Related Statistical Disclosures.............................................16 Item 7. Financial Statements ...................................16 Item 8. Changes in and Disagreements with Accounts on Accounting and Financial Disclosure..................16 Part III. Item 9. Directors and Executive Officers of the Registrant...........................................17-19 Item 10. Executive Compensation...............................20-21 Item 11. Security Ownership of Certain Bene- ficial Owners & Management...........................22-23 Item 12. Certain Relationships and Related Transactions............................................23 Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K..............................24-25 Signatures.................................................................26-27 3 4-74 PART I ITEM 1. BUSINESS - ---------------- Organized in 1987 as a West Virginia Corporation, South Branch Valley Bancorp, Inc. ("SBVB"), is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. At the close of business on December 31, 1987, SBVB merged its wholly owned subsidiary, South Branch Valley National Bank Inc., with South Branch Valley National Bank of Moorefield, a commercial bank with its principal place of business located at 310 N. Main Street, Moorefield, West Virginia. SBVB's business activities are conducted through the Bank. The Bank presently accounts for substantially all of the consolidated assets, revenues and net income of SBVB. SOUTH BRANCH VALLEY NATIONAL BANK The South Branch Valley National Bank of Moorefield was originally chartered by the Office of the Comptroller of the Currency on August 15, 1883. For purposes of effecting the 1987 merger, South Branch Valley National Bank Inc. was organized and chartered on October 2, 1987. The surviving Bank is currently operating as South Branch Valley National Bank of Moorefield. The Bank is a full service, FDIC insured, national banking association engaged in the commercial and retail banking business. At December 31, 1997 the Bank employed approximately 62 people. The Bank offers a wide variety of banking services to its customers. The Bank accepts deposits and has night depositories and an automated teller machine for the convenience of its customers. The Bank offers its customers various deposit arrangements with various maturities and yields, including non-interest bearing and interest bearing demand deposits, savings deposits, time certificates of deposit, Christmas Club accounts, and individual retirement accounts. The Bank offers a full spectrum of lending services to its customers, including commercial loans and lines of credit, residential real estate loans, consumer installment loans and other personal loans. The Bank also offers credit cards but they are immaterial to total loans. Loan terms, including interest rates, loan to value ratios, and maturities are tailored as much as possible to meet the needs of the borrower. Commercial loans, which represented approximately 32.2% of total loans at December 31, 1997, are generally secured by various collateral including commercial real estate, accounts receivable and business machinery and equipment. Residential real estate loans represented approximately 45.3% of total loans as of December 31, 1997 and consist primarily of mortgages on the borrower's personal residence, and are typically secured by a first lien on the subject property. Consumer and personal loans are generally secured, often by first liens on automobiles, consumer goods or depository accounts. See Note 5 of the accompanying Consolidated 4 5-74 Financial Statements for a summary of the Bank's loans at December 31, 1997 and 1996. Indirect lending represents less than 1.0% of the Bank's total loans. A special effort is made to keep loan products as flexible as possible within the guidelines of prudent banking practices in terms of interest rate risk and credit risk. Bank lending personnel adhere to established lending limits and authorities based on each individual's lending expertise and experience. The Bank does not currently originate loans for sale. When considering loan requests, the primary factors taken into consideration by the Bank are the cash flow and financial condition of the borrower, the value of the underlying collateral, if any, and the character and integrity of the borrower. These factors are evaluated in a number of ways including an analysis of financial statements, credit reviews and visits to the borrower's place of business. The Bank also serves as trustee where appointed by a court or under a private trust agreement. As trustee, the Bank invests the trust assets and makes disbursements according to the terms and conditions of the governing trust document and state and Federal law. For the year ended December 31, 1997, fees generated from the operation of the Bank's Trust Department comprised less than one percent of gross revenues earned during the year. In order to compete with other financial service providers, the Bank principally relies upon personal relationships established by officers, directors, and employees with its customers, and specialized services tailored to meet its customer's needs. The Bank also has a marketing program that primarily utilizes local radio and newspapers to advertise. SUPERVISION AND REGULATION GENERAL South Branch, as a bank holding company, is subject to the restrictions of the BHCA, and is registered pursuant to its provisions. As a registered bank holding company, South Branch is subject to the reporting requirements of the FRB, and is subject to examination by the FRB. The BHCA prohibits the acquisition by a bank holding company of direct or indirect ownership of more than five percent of the voting shares of any bank within the United States without prior approval of the FRB. With certain exceptions, a bank holding company is prohibited from acquiring direct or indirect ownership or control or more than five percent of the voting shares of any company which is not a bank, and from engaging directly or indirectly in business unrelated to the business of banking or managing or controlling banks. The BHCA permits South Branch, as a bank holding company, to purchase or redeem its own securities. However, Regulation Y provides that prior notice must be given to the FRB if the gross consideration 5 6-74 for such purchase or consideration, when aggregated with the net consideration paid by the company for all such purchases or redemptions during the preceding 12 months is equal to 10 percent or more of the company's consolidated net worth. Prior notice is not required if (i) both before and immediately after the redemption, the bank holding company is well-capitalized; (ii) the bank holding company is well-managed and (iii) the bank holding company is not the subject of any unresolved supervisory issues. The FRB, in its Regulation Y, permits bank holding companies to engage in non-banking activities closely related to banking or managing or controlling banks. Approval of the FRB is necessary to engage in these activities or to make acquisitions of corporations engaging in these activities as the FRB determines whether these acquisitions or activities are in the public interest. In addition, by order, and on a case by case basis, the FRB may approve other non-banking activities. As a bank holding company doing business in West Virginia, South Branch is also subject to regulation by the WV Board and must submit annual reports to the West Virginia Division of Banking. Federal law restricts subsidiary banks of a bank holding company from making certain extensions of credit to the parent bank holding company or to any of its subsidiaries, from investing in the holding company stock, and limits the ability of a subsidiary bank to take its parent company stock as collateral for the loans of any borrower. Additionally, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tie-in arrangements in conjunction with the extension of credit or furnishing of services. The operations of South Branch's banking subsidiary, South Branch Valley National Bank, is a national banking subsidiary and is subject to federal statutes which apply to national banks. South Branch's national banking subsidiary is primarily regulated by the OCC. South Branch Valley National Bank is also subject to regulations promulgated by the FRB and the FDIC. As members of the FDIC, the deposits of South Branch's subsidiary are insured as required by federal law. The OCC regularly examines revenues, loans, investments, management practices, and other aspects of South Branch Valley National Bank. These examinations are conducted primarily to protect depositors and not shareholders. In addition to these regular examinations, South Branch's subsidiary banks each must furnish to the OCC a quarterly report containing a full and accurate statement of its affairs. NON-BANKING ACTIVITIES PERMITTED TO SOUTH BRANCH The FRB permits, within prescribed limits, bank holding companies to engage in non-banking activities closely related to banking or to managing or controlling banks. Such activities are not limited to the state of West Virginia. Some examples of non-banking activities which presently may be performed by a bank holding company are: making or acquiring, for its own account or the account of others, loans and other extensions of credit; operating as an industrial bank, or 6 7-74 industrial loan company, in the manner authorized by state law; servicing loans and other extensions of credit; performing or carrying on any one or more of the functions or activities that may be performed or carried on by a trust company in the manner authorized by federal or state law; acting as an investment or financial advisor; leasing real or personal property; making equity or debt investments in corporations or projects designed primarily to promote community welfare, such as the economic rehabilitation and the development of low income areas; providing bookkeeping services or financially oriented data processing services for the holding company and its subsidiaries; acting as an insurance agent or a broker, to a limited extent, in relation to insurance directly related to an extension of credit; acting as an underwriter for credit life insurance which is directly related to extensions of credit by the bank holding company system; providing courier services for certain financial documents; providing management consulting advice to nonaffiliated banks; selling retail money orders having a face value of not more than $1,000, traveler's checks and U. S. savings bonds; performing appraisals of real estate; arranging commercial real estate equity financing under certain limited circumstances; providing securities brokerage services related to securities credit activities; underwriting and dealing in government obligations and money market instruments; providing foreign exchange advisory and transactional services; and acting under certain circumstances, as futures commission merchant for nonaffiliated persons in the execution and clearance on major commodity exchanges of futures contracts and options. CREDIT AND MONETARY POLICIES AND RELATED MATTERS South Branch's subsidiary bank is affected by the fiscal and monetary policies of the federal government and its agencies, including the FRB. An important function of these policies is to curb inflation and control recessions through control of the supply of money and credit. The operations of South Branch's subsidiary bank is affected by the policies of government regulatory authorities, including the FRB which regulates money and credit conditions through open market operations in United States Government and federal agency securities, adjustments in the discount rate on member bank borrowings, and requirements against deposits and regulation of interest rates payable by member banks on time and savings deposits. These policies have a significant influence on the growth and distribution of loans, investments and deposits, and interest rates charged on loans, or paid for time and savings deposits, as well as yields on investments. The FRB has had a significant effect on the operating results of commercial banks in the past and is expected to continue to do so in the future. Future policies of the FRB and other authorities and their effect on future bank earnings cannot be predicted. The FRB has a policy to the effect that a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to support each such subsidiary bank. Under the source of strength doctrine, the FRB may require a bank holding company to contribute capital to a 7 8-74 troubled subsidiary bank, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. This capital injection may be required at times when South Branch may not have the resources to provide it. Any capital loans by a holding company to any of the subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In addition, the Crime Control Act of 1990 provides that in the event of a bank holding company's bankruptcy, any commitment by such holding company to a federal bank or thrift regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. In 1989, the United States Congress enacted the Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"). Under FIRREA depository institutions insured by the FDIC may now be liable for any losses incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989, in connection with (i) the default of a commonly controlled FDIC-insured depository institution, or (ii) any assistance provided by the FDIC to commonly controlled FDIC-insured depository institution in danger of default. "Default" is defined generally as the appointment of a conservator or receiver and "in danger of default" is defined generally as the existence of certain conditions indicating that a "default" is likely to occur in the absence of regulatory assistance. Accordingly, in the event that any insured bank or subsidiary of South Branch causes a loss to the FDIC, other bank subsidiaries of South Branch could be liable to the FDIC for the amount of such loss. Under federal law, the OCC may order the pro rata assessment of shareholders of a national bank whose capital stock has become impaired, by losses or otherwise, to relieve a deficiency in such national bank's capital stock. This statute also provides for the enforcement of any such pro rata assessment of shareholders of such national bank to cover such impairment of capital stock by sale, to the extent necessary, of the capital stock of any assessed shareholder failing to pay the assessment. Similarly, the laws of certain states provide for such assessment and sale with respect to the subsidiary banks chartered by such states. South Branch as the sole stockholder of its subsidiary banks, is subject to such provisions. CAPITAL REQUIREMENTS As a holding company South Branch is subject to FRB risk-based capital guidelines. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures into explicit account in assessing capital adequacy, and minimizes disincentives to holding liquid, low-risk assets. Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and leverage ratio test on a consolidated basis. The risk-based ratio is determined by allocating assets and specified off- balance sheet commitments into four weighted categories, with higher 8 9-74 levels of capital being required for categories perceived as representing greater risk. South Branch's depository institution subsidiary is subject to substantially similar capital requirements adopted by its applicable regulatory agency, the OCC. Generally, under the applicable guidelines, the financial institution's capital is divided into two tiers. "Tier 1," or core capital, includes common equity, noncumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles. "Tier 2," or supplementary capital, includes, among other things, cumulative and limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan losses, subject to certain limitations, less required deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital. Bank holding companies are subject to substantially identical requirements, except that cumulative perpetual preferred stock can constitute up to 25% of a bank holding company's Tier 1 capital. Bank holding companies are required to maintain a risk-based ratio of 8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority may set higher capital requirements when an institution's particular circumstances warrant. For purposes of the leverage ratio, the numerator is defined as Tier 1 capital and the denominator is defined as adjusted total assets (as specified in the guidelines). The guidelines provide for a minimum leverage ratio of 3% for bank holding companies that meet certain specified criteria, including excellent asset quality, high liquidity, low interest rate exposure and the highest regulatory rating. Bank holding companies not meeting these criteria are required to maintain a leverage ratio which exceeds 3% by a cushion of at least 1 to 2 percent. The guidelines also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. Furthermore, the FRB's guidelines indicate that the FRB will continue to consider a "tangible Tier 1 leverage ratio" in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of an institution's Tier 1 capital, less all intangibles, to total assets, less all intangibles. On August 2, 1995, the FRB and other banking agencies issued their final rule to implement the portion of Section 305 of FDICIA that requires the banking agencies to revise their risk-based capital standards to ensure that those standards take adequate account of interest rate risk. This final rule amends the capital standards to specify that the banking agencies will include, in their evaluations of a bank's capital adequacy, an assessment of the exposure to declines in the economic value of the bank's capital due to changes in interest rates. 9 10-74 Failure to meet applicable capital guidelines could subject the bank holding company to a variety of enforcement remedies available to the federal regulatory authorities, including limitations on the ability to pay dividends, the issuance by the regulatory authority of a capital directive to increase capital and termination of deposit insurance by the FDIC, as well as to the measures described under the "Federal Deposit Insurance Corporation Improvement Act of 1991" as applicable to undercapitalized institutions. As of December 31, 1997, the regulatory capital ratios of South Branch were as set forth in the table in Note 13 of the Notes to Consolidated Financial Statements included on pages 35 through 36 of the 1997 Annual Report which is incorporated herein by reference under Part II, Item 7 of this filing. FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 In December, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Corporation Act and made revisions to several other banking statues. FDICIA establishes a new regulatory scheme, which ties the level of supervisory intervention by bank regulatory authorities primarily to a depository institution's capital category. Among other things, FDICIA authorizes regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically under capitalized. By regulation, an institution is "well-capitalized" if it has a total risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a Tier 1 leverage ratio of 5% or greater and is not subject to a regulatory order, agreement or directive to meet and maintain a specific capital level for any capital measure. The banking subsidiary of South Branch was a "well capitalized" institution as of December 31, 1997. As a well- capitalized institution, the banking subsidiary of South Branch is permitted to engage in a wider range of banking activities, including among other things, the accepting of "brokered deposits," and the offering of interest rates on deposits higher than the prevailing rate in their respective markets. Another requirement of FDICIA is that federal banking agencies must prescribe regulations relating to various operational areas of banks and bank holding companies. These include standards for internal audit systems, loan documentation, information systems, internal controls, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses, a minimum ratio of 10 11-74 market value to book value for publicly traded shares and such other standards as the agency deems appropriate. REIGLE-NEAL INTERSTATE BANKING BILL In 1994, Congress passed the Reigle-Neal Interstate Banking Bill (the "Interstate Bill"). The Interstate Bill permits certain interstate banking activities through a holding company structure, effective September 30, 1995. It permits interstate branching by merger effective June 1, 1997 unless states "opt-in" sooner, or "opt- out" before that date. States may elect to permit de novo branching by specific legislative election. In March, 1996, West Virginia adopted changes to its banking laws so as to permit interstate banking and branching to the fullest extent permitted by Interstate Bill. The Interstate Bill will permit consolidation of banking institutions across state lines and, perhaps, de novo entry. As its provisions become effective, it is likely that the resulting restructurings and interstate activities will result in the realization of economies of scale within those institutions with entities in more than one state. One result could be increased competitiveness, due to the realization of economies of scale and/or, where permitted, due to de novo market entrants. COMMUNITY REINVESTMENT ACT Bank holding companies and their subsidiary banks are also subject to the provisions of the Community Reinvestment Act of 1977 ("CRA"). Under the CRA, the Federal Reserve Board (or other appropriate bank regulatory agency) is required, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the communities served by that bank, including low and moderate income neighborhoods. Further such assessment is also required of any bank holding company which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office, or (v) merge or consolidate with, or acquire the assets or assume the liabilities of a federally- regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve Board will assess the record of each subsidiary of the applicant bank holding company, and such records may be the basis for denying the application or imposing conditions in connection with approval of the application. On December 8, 1993, the federal regulators jointly announced proposed regulations to simplify enforcement of the CRA by substituting the present twelve categories with three assessment categories for use in calculating CRA ratings (the "December 1993 Proposal"). In response to comments received by the regulators regarding the December 1993 Proposal, the federal bank regulators issued revised CRA proposed regulations on September 26, 1994 (the "Revised CRA Proposal"). The Revised CRA Proposal, compared to the December 1993 Proposal, would essentially broaden the scope of CRA performance examinations and more explicitly consider community development activities. Moreover, in 1994, the Department of Justice, became more actively involved in enforcing fair lending laws. 11 12-74 In its most recent CRA examination by the Federal Reserve Board, South Branch and its bank subsidiaries were given a "outstanding" CRA rating. DEPOSIT ACQUISITION LIMITATION Under West Virginia banking law, an acquisition or merger is not permitted if the resulting depository institution or its holding company, including any depository institutions affiliated therewith, would assume additional deposits to cause it to control deposits in the State of West Virginia in excess of twenty five percent (25%) of such total amount of all deposits held by insured depository institutions in West Virginia. This limitation may be waived by the Commissioner of Banking for good cause shown. COMPETITION The Bank competes primarily with seven commercial banks over a four county area: Hardy County, Hampshire County, Grant County, and Pendleton County. Additionally, Farmers' Home Administration and the Federal Land Bank are competitors for loans. According to the latest FDIC Quarterly Call Reports, dated December 31, 1997, the Bank had assets representing approximately 10.5% of total assets for the seven commercial banks serving its primary market area. It can be expected that with the liberalization of the branch banking laws in West Virginia, additional financial institutions may compete with the Bank. The Bank has taken an aggressive posture with the establishment of the Mathias, Franklin and Petersburg branches, and intends to continue vigorously competing for its share of the market within its service area by offering competitive rates and terms on both loans and deposits. EMPLOYEES At December 31, 1997, the Bank employed 50 full time employees and 12 part time employees. ITEM 2. PROPERTIES - -------------------- In 1911 the Bank acquired the property now known as the "Old Bank" building located at 107 South Main Street, Moorefield, West Virginia. In 1963 the Bank acquired property adjacent to that same building which is now being used as a parking lot. In December 1994 the Bank acquired property on Winchester Avenue that adjoins the Old Bank building and the parking lot. The completion of the renovation and addition to the main office has allowed the Bank's bookkeeping and 12 13-74 operations departments to move into the main office. Therefore, the Winchester Ave. parcel as well as the property located at 107 S. Main St. were offered for sale. On September 9, 1997 the "Old Bank" building and parking lot were sold. In 1974 the Bank acquired 5.82 acres of land located on the west side of U.S. Route 220 of Main Street in Moorefield, West Virginia. On June 29, 1976 the Bank received the approval of the Office of the Comptroller of the Currency to change the location of its main office to this site. This is the present location of the Bank's principal banking offices. In April 1994 the Bank acquired approximately one acre of real estate on the west side of U.S. Route 220 adjoining the main office. On April 5, 1983 the Bank acquired property located in the town of Mathias, West Virginia. Since December 28, 1984 the Bank has operated its Mathias branch bank from this site. By deeds dated May 31, 1986 and July 14, 1986 the Bank acquired two parcels of land located on the east side of U.S. Route 220 in the town of Franklin, West Virginia. On October 3, 1986 the Bank received preliminary approval from the Office of the Comptroller of the Currency to establish a branch bank at this location. The Bank's Franklin branch was opened for banking operations on January 1, 1987. During 1995, the Bank acquired a parcel of land and branch office located on the north side of U.S. Route 220 in the town of Petersburg, West Virginia. This property was purchased from Blue Ridge Bank and began operating as a branch of South Branch Valley National Bank on November 15, 1995. At December 31, 1997, various parcels of real estate with an aggregate book value of $57,465 are maintained by the Bank as a result of foreclosure proceedings on loans collateralized by such real estate. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Bank is involved in various pending legal proceedings, all of which are regarded by management as normal litigation incident to the business of banking and are not expected to have a materially adverse effect on the business or financial condition of the Bank or the Holding Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS - ---------------------------------------------------------- On October 21, 1997 the annual meeting of South Branch Valley Bancorp, Inc. was held to (1) elect four directors for a three year term, (2) ratify the election of Arnett & Foster as the Company's independent certified public accountants for the fiscal year ending 13 14-74 December 31, 1997, and (3) to transact such other business to come before the meeting. The following persons received the number of votes opposite their names for directors of the Company: James M. Cookman 292,163 Thomas J. Hawse, III 317,112 Gary L. Hinkle 292,904 Harold K. Michael 288,717 Mortimer W. Gamble, IV 10,360 Total number of shares voted was 300,314, of which all were voted by proxy and none were voted in person. The firm of Arnett & Foster was ratified to serve as the Company's independent certified public accountants by a vote of 294,304 for, 5,520 against, and 490 abstentions. There were no other matters to come before the annual meeting. 14 15-74 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ---------------------------------------------------------------------------- The Company acts as its own registrar and transfer agent. Its shares are not publicly traded on any exchange or over the counter market. Shares of the Company's common stock are occasionally bought and sold by private individuals, firms or corporations. In many instances, the Company does not have knowledge of the purchase price or the terms of the purchase. No definitive records of bids and ask or sale prices are available. However, the average sales price for the shares that have voluntarily been reported to the Company in the last 60 days is $43.47 per share. The approximate number of stockholders of record for SBVB's common stock as of March 1, 1998 was 635. The following sets forth quarterly cash dividends declared per share for the prior two years. Quarterly Common Stock Dividends -------------------------------- Quarter 1997 1996 ------- ---- ---- First $ - $ - Second .41 .38 Third - - Fourth .43 .39 Dividends paid by SBVB to its stockholders are based on dividends it receives from its subsidiary bank. The ability of the Bank to pay dividends to SBVB is subject to certain limitations of the national banking laws. In general, these limitations provide that no bank can pay dividends if the total of all dividends, including any proposed dividend declared by a bank in any calendar year, exceeds net income for that year when combined with net income for the preceding two years, less dividends for all three years. This restriction may be waived if the approval of the Office of the Comptroller of the Currency is obtained for such distribution. The Comptroller of the Currency may also prohibit a bank's dividend payments if such payment is deemed to be an unsafe or unsound banking practice. The foregoing summary is not a complete statement of applicable limitations and is qualified by reference to Sections 56 and 60 of Title 12 of the United States Code. Additional information related to dividend restrictions is included in Note 13 of the Notes to Consolidated Financial Statements included on pages 35 through 36 of the 1997 Annual Report which is incorporated herein by reference under Part II, Item 7 of this filing. 15 16-74 Cash dividends rose 9.1% to $.84 per share in 1997. It is the intention of management and the Board of Directors to continue to pay dividends on the same schedule during 1998. However, future cash dividends will depend on the earnings, financial condition and the business of the Bank as well as general economic conditions; however, management is not presently aware of any reason why dividend payments should not continue. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS AND RELATED STATISTICAL DISCLOSURES - ------------------------------------------------- "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 4 through 16 of the 1997 Annual Report is incorporated herein by reference. ITEM 7. FINANCIAL STATEMENTS - ----------------------------- The report of the independent auditors and consolidated financial statements and notes thereto are included on pages 17 through 40 of the 1997 Annual Report and are incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- There has been no Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. 16 17-74 PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - ------------------------------------------------------------ CURRENT BOARD OF DIRECTORS. - --------------------------- The Board of Directors of the Company may consist of not less than nine (9) nor more than twenty-one (21) persons in accordance with the Company's Articles of Incorporation. The number of directors may be fixed by the Board of Directors as deemed appropriate. Currently, the Board of Directors has fixed the number of directors at thirteen (13). The current Board of Directors of the Company is comprised of the individuals listed below. Directors of the Company are divided into three classes and serve a staggered three (3) year term. All current directors of the Company are also directors of the Company's subsidiary, South Branch Valley National Bank ("Bank"). Directors of the Bank serve for a one (1) year term. The table below sets forth information concerning each director as of March 1, 1998. Date Current Term as Director of Company Positions & Principal Occupation or Name and Age Expires Employment Last Five Years - --------------------- -------------- ------------------------------------ Oscar M. Bean (47) 1998 Chairman of the Board since February 1995; Director of Company since 1987; Director of Bank since 1978; Managing Partner of Bean & Bean Attorneys. Donald W. Biller (66) 1999 Director and Vice Chairman of the Board since 1987; Director of Bank since 1975; President of D.W. Biller, Inc.; Director of WV Farm Credit ACA; Farmer. James M. Cookman (44) 2000 Director of Company and Bank since 1994; President of Cookman Insurance Center, Inc., President of Cookman Realty Group, Inc. Secretary/Treasurer of Apex Developers, Inc., Trustee of Cookman Insurance Center, Inc. Employee Sharing Plan, Sole Proprietor of WQWV-FM Radio Station and Director of Capital State Bank, Inc. Memeber of West Virginia Lottery Commission. John W. Crites (57) 1999 Director of Company and Bank since 1989; President of Allegheny Wood Products, Inc.; Partner, Allegheny Dimension, LLC; Principal Stockholder, KJV Aviation. 17 18-74 Thomas J. Hawse, III (53) 2000 Director of Company and Bank since 1988; President of Hawse Food Market, Inc. Phoebe F. Heishman (56) 1998 Secretary of Company since 1995; Director of Company since 1987; Director of Bank since 1973; Editor and Publisher of Moorefield Examiner; -------- President of R.E. Fisher Co., Inc. Gary L. Hinkle (48) 2000 Director the Company and Bank since 1993; President of Hinkle Trucking, Inc., Dettinburn Transport, Inc., and Mt. Storm Fuel Corporation. Jeffrey E. Hott (47) 1999 Director of Company and Bank since 1990; Vice President of Hott's Ag Services, E.E. Hott, Inc., and Franklin Oil Co. H. Charles Maddy, III, (34) 2000 Director of Company since 1993; Has served as the Bank's President and Chief Executive Officer since 1993. He served as Chief Financial Officer of the Company from 1988 to 1994 when he became President. Executive Vice President of the Bank, 1992 to 1993. Director of Capital State Bank, Inc. Harold K. Michael (54) 2000 Director of the Company and Bank since 1994 Owner/ agent of H.K. Michael & Son Insurance, Director of Capital State Bank, Inc. and a member of the West Virginia House of Delegates. Mary Ann Ours (64)* 1998 Director of Company and Bank since 1994; President of Ours Valley View Poultry Farm, Inc. Russell F. Ratliff, Jr. (47) 1999 Director of Company and Bank since 1994; Treasurer of the Company, 1987 to present; Vice President and Cashier of the Bank, 1993 to present; CEO and Cashier of the Bank, 1988 to 1993. Harry C. Welton (68) 1999 Director of Company since 1987; Director of Bank since 1986; Retired farmer. *On March 11, 1998, Mary Ann Ours died after a long illness. Her term of office is due to expire in 1998 and no person has been appointed to fill her unexpired term. No discussion pertaining to her replacement has taken place as of the date of this filing. 18 19-74 EXECUTIVE OFFICERS. - ------------------- The following table identifies the executive officers of the Company, all of whom were appointed in October 1997 to serve until the next annual meeting. Mr. Jennings is an executive officer of the Company's only subsidiary, South Branch Valley National Bank. Mr. Bean and Mrs. Heishman, who are also directors of the Company, do not receive additional compensation for their service as executive officers of the Company and thus are not listed in the Executive Compensation Table. Name, Year Appointed, Age Office, Experience covering the - ------------------------- last five years -------------------------------- Oscar M. Bean, 1995 (47) Chairman of the Board of the Company February 1995 to present; Chairman of the Board of the Bank, February 1995 to present; Secretary of the Company 1987 to February 1995. Phoebe F. Heishman, 1995 (56) Secretary of the Company, February 1995 to present. H. Charles Maddy, III, 1988 (34) President of the Company since 1994; Chief Financial Officer of the Company, 1988 to 1994; President and Chief Executive Officer of the Bank, April 1993 to present; Executive Vice President of the Bank, 1992 to 1993. Russell F. Ratliff,Jr., 1986 (47) Treasurer of the Company, 1987 to present; Vice President and Cashier of the Bank, April 1993 to present; CEO and Cashier of the Bank, 1988 to 1993. Scott C. Jennings, 1994 (36) Vice President of Loan Administration, 1997 to present; Vice President of Loan Review and Compliance, 1994 to 1997; Loan Review and Compliance Officer 1991 to 1994. 19 20-74 COMPLIANCE WITH REPORTING OF SECURITIES TRANSACTIONS - ---------------------------------------------------- Pursuant to Section 16(a) of the Securities Exchange Act of 1934 and Securities and Exchange Commission (the "SEC") regulations, the Company's directors, executive officers and greater than ten percent shareholders are required to file reports of ownership and changes in ownership with the SEC and to furnish the Company with copies of all such reports they file. Based solely upon submissions of copies of reports to the Company, the Company is not aware of any late filings. ITEM 10. EXECUTIVE COMPENSATION Cash Compensation. Executive officers of the Company are not compensated for services rendered to the Company. Executive officers of its subsidiary, South Branch Valley National Bank, are compensated for services rendered to the Bank. The table below sets forth the cash compensation of the Company's Chief Executive Officer and any executive officer of South Branch Valley Bancorp, Inc. or its subsidiary earning $100,000 or more for the years ended December 31, 1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE Annual Compensation Name and Principal All Other Position Year Salary Bonus Compensation H. Charles Maddy, III 1997 $89,313 $32,808 $20,521 (1) President & Chief Executive Officer 1996 $73,500 $25,667 $19,113 (1) 1995 $70,000 $25,110 $19,432 (1)
(1) Amount includes payments made on behalf of the executive to the ESOP ($4,466)and 401(k) Profit Sharing Plan ($4,913), amounts taxable to the executive for personal use of the Company vehicle ($5,890), excess life insurance ($54) and fees received by the executive as a member of the Company's subsidiary bank's board of directors, which totaled $5,200. Mr. Maddy received no compensation for his position as Director of the Company. SOUTH BRANCH VALLEY BANCORP, INC. PLANS. - ---------------------------------------- The Company has a defined contribution profit-sharing and thrift plan with 401(k) provisions covering substantially all employees. Any employee who is at least 21 years of age and is employed in a position requiring at least 1,000 hours of service per year is eligible to participate. Under the provisions of the plan, the Company will make a matching contribution on behalf of each participant of 25% of the 20 21-74 participant's salary reduction contributions of up to 4% of such participant's compensation. These matching contributions shall be fully vested at all times. The Company may also make additional contributions at the discretion of the Company's Board of Directors. Vesting in discretionary contributions occurs at the rate of 0% for the first two years of eligibility and 20% per year thereafter. Total Company contributions to the plan for the year ended December 31, 1997, totaled $53,417. The trustees of the plan are also members of the Company's Board of Directors. The Company has an Employee Stock Ownership Plan (ESOP) covering substantially all employees. Any employee who is at least 21 years of age and is credited with at least 1,000 hours of service during the plan year is eligible to participate. Vesting occurs at the rate of 0% for the first year of credited service and 20% for each year thereafter. Under the provisions of the plan, employee participants in the ESOP are not permitted to contribute to the plan, rather the cost of the ESOP is borne by the Company through annual contributions in amounts determined by the Company's Board of Directors. Contributions to the plan for the year ended December 31, 1997, totaled $51,047. The ESOP owns 9,235 shares of the Company's common stock, all of which were purchased at the prevailing market price and are considered outstanding for earnings per share computation. The trustees of the ESOP are also members of the Company's Board of Directors. The Company has an incentive compensation program for its key employees. Bonuses are awarded to key employees based on a prescribed formula using the Company's return on equity as a base. For the year ended December 31, 1997, approximately $141,000 was recognized as expense under the provisions of the incentive compensation program. The amounts awarded to the Chief Executive Officer are shown in the bonus column of the Compensation Table. Neither the Company nor the Bank maintain any form of stock option, stock appreciation rights, or other long term compensation plans. The Chief Executive Officer has an employment contract with the Bank. The significant provisions of this agreement and potential amounts involved are included in Note 12 of the Consolidated Financial Statements included in Item 7 of this filing. 21 22-74 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The following table sets forth the amount of common stock beneficially owned by each director and by all executive officers and directors of the Company and its subsidiary, South Branch Valley National Bank, as a group of fourteen (14) persons as of March 4, 1998.
Name of Qualifying Other Shares Beneficial Shares Beneficially Owned Percent of Owner Owned Direct Indirect Class** - -------------------- ----------- ------------------------------- --------- Oscar M. Bean 1,000 6,536 1,738 (4) 2.0% Donald W. Biller 1,000 506 5,120 (9) 1.4% James M. Cookman 1,000 --- 2,161 (7) .5% John W. Crites 1,000 26,300 23,905 (2) 12.2% Thomas J. Hawse, III 1,000 2,100 --- .5% Phoebe F. Heishman 1,000 9,150 1,540 (5) 2.6% Gary L. Hinkle 1,000 11,462 3,400 (8) 3.6% Jeffrey E. Hott 1,000 3,530 18,105 (3) 5.2% H. Charles Maddy, III * 202 783 (6) .2% Harold K. Michael 1,000 38 --- .0% Mary Ann Ours 1,000 4,121 ---(10) 1.0% Russell F. Ratliff, Jr. * 950 838 (6) .4% Harry C. Welton, Jr. 1,000 840 9,465 (1) 2.5% 65,735 67,055 32.2% ====== ====== ===== All directors and executive officers as a group (14 persons), ESOP and Trust Department*** 65,735 75,179 34.1% ====== ====== =====
* Director/employee exempt from qualifying requirement. ** Does not include qualifying shares. *** Includes 510 shares held in the Trust Department and voted by the Trust Officer and 7,614 shares owned by the Bank's ESOP and voted by three Trustees, who are Directors of the Bank. This total excludes Mr. Maddy's and Mr. Ratliff's shares held in the ESOP. (1) All shares indirectly held are owned by the spouse. (2) All shares indirectly held by Mr. Crites are owned by Allegheny Wood Products, Inc. of which Mr. Crites is the president and majority shareholder. (3) 150 shares are owned by Mr. Hott's minor children; 9,725 shares are owned by E.E. Hott, Inc. and 7,100 shares are owned by Franklin Oil Co. (Mr. Hott is vice president of both companies). 22 23-74 (4) 55 shares are owned by Mr. Bean's spouse; 493 shares are owned by Mr. Bean's minor children; 1,190 shares are owned by Mr. Bean's mother for whom he has power of attorney. (5) 220 shares are owned by Ms. Heishman's spouse; 1320 shares are owned by minor children. (6) Fully vested shares held on behalf of named individual in the Company's ESOP. However, these shares are voted by the Trustees of the ESOP. (7) 710 shares are owned by Mr. Cookman's minor children; 500 shares are owned by Cookman Insurance Center, Inc. in which Mr. Cookman has a majority interest, and 368 shares are owned by the Cookman Insurance Center, Inc. Profit Sharing Plan. (8) 2,400 shares are owned by Hinkle Trucking, Inc. of which Mr. Hinkle is the president. (9) All shares indirectly held by Mr. Biller are owned by D.W. Biller, Inc. of which Mr. Biller is the president. (10) On March 11, 1998, Mary Ann Ours died after a long illness. Her term of office is due to expire in 1998 and no person has been appointed to fill her unexpired term. No discussion pertaining to her replacement has taken place as of the date of this filing. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- Directors and executive officers of South Branch Valley Bancorp, Inc. and subsidiary, members of their immediate families, and business organizations and individuals associated with them have been customers of, and have had normal banking transactions with, South Branch Valley National Bank. All such transactions were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. It is anticipated that similar transactions will continue in the future. The extent of significant transactions with related parties is disclosed in the Notes to the Consolidated Financial Statements included on pages 22 through 40 of the 1997 Annual Report and is incorporated herein by reference. Director Oscar M. Bean is a partner in the law firm of Bean & Bean which has served as counsel for South Branch Valley National Bank in a number of matters during the year. It is anticipated that this relationship will continue in 1998. Fees paid by the Bank to the law firm of Bean & Bean were less than 5% of the law firm's gross revenues in 1997. 23 24-74 ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - ------------------------------------------------------------------------- All financial statements and financial statement schedules required to be filed by this Form or by Regulation S-X, which are applicable to the registrant, have been presented in the financial statements and notes thereto in Item 7 in management's discussion and analysis of financial condition and results of operation in Item 6 or elsewhere in this filing where appropriate. The listing of exhibits follows: INDEX TO EXHIBITS A) Exhibits Page(s) in Exhibit Description Form 10-KSB or Number Prior Filing - ------- Reference --------------- (2) Plan of purchase, sale, reorganization, liquidation or succession. (i) On October 15, 1997 the Registrant filed Form S-4 related to the purchase of 100% of the common stock of Capital State. This document is incorporated herein by reference in it's entirety. (ii) On December 19, 1997 the Registrant filed an amended Form S-4 related to the purchase of 100% of the common stock of Capital State. This document is incorporated herein by reference in it's entirety. (iii) On January 30, 1998 the Registrant filed an amended Form S-4 related to the purchase of 100% of the common stock of Capital State. This document is incorporated herein by reference in it's entirety. (3) Articles of Incorporation and By-laws (i) Articles of Association of South Branch Valley National Bank (a) (ii) Articles of Incorporation of South (a) Valley Bancorp, Inc., dated March 3, 1987 (iii) By-laws of South Branch Valley (a) Bancorp, Inc. 24 25-74 (10) Material Contracts (i) Change of Control Agreement (b) (13) Annual Report to Shareholders 28-71 (21) Subsidiaries of the Registrant 72 (23) Consent of Independent Certified 73 Public Accountants (27) Financial Data Schedule 74 (a)Incorporated herein by reference to exhibits to South Branch Valley Bancorp, Inc.'s registration statement on Form S-4 dated September 1, 1987, Registration No. 33-16947 filed on or about September 1, 1987. (b)Incorporated herein by reference to exhibits to South Branch Valley Bancorp, Inc.'s Form 10-KSB for the fiscal year ended December 31, 1995 filed on or about March 22, 1996. B) Reports on Form 8-K No reports of Form 8-K were filed by the registrant during the fourth quarter of the year ended December 31, 1997. 25 26-74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. South Branch Valley Bancorp, Inc. a West Virginia Corporation (registrant) By:/s/Oscar M. Bean 3/20/98 By:/s/H. Charles Maddy, III 3/20/98 ------------------------------- --------------------------------- Oscar M. Bean, Date H. Charles Maddy, III Date Chairman of the Board President By:/s/Russell F. Ratliff, Jr. 3/20/98 ------------------------------------ Russell F. Ratliff, Jr. Date Treasurer Principal Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Title Date /s/ Oscar M. Bean Director March 20, 1998 - --------------------------- Oscar M. Bean /s/ Donald W. Biller Director March 20, 1998 - --------------------------- Donald W. Biller /s/ James M. Cookman Director March 20, 1998 - --------------------------- James M. Cookman /s/ John W. Crites Director March 20, 1998 - --------------------------- John W. Crites - --------------------------- Director March , 1998 Thomas J. Hawse, III - --------------------------- Director March , 1998 Phoebe F. Heishman 26 27-74 SIGNATURES (cont'd) /s/ Gary L. Hinkle Director March 20, 1998 - --------------------------- Gary L. Hinkle /s/ Jeffrey E. Hott Director March 20, 1998 - --------------------------- Jeffrey E. Hott /s/ H. Charles Maddy, III Director March 20, 1998 - --------------------------- H. Charles Maddy, III - --------------------------- Director March , 1998 Harold K. Michael - --------------------------- Director March , 1998 Mary Ann Ours /s/ Russell F. Ratliff, Jr. Director March 20, 1998 - --------------------------- Russell F. Ratliff, Jr. /s/ Harry C. Welton, Jr. Director March 20, 1998 - --------------------------- Harry C. Welton, Jr. 27 EX-13 2 ANNUAL REPORT FOR SOUTH BRANCH VALLEY BANCORP 28-74 Exhibit (13) South Branch Valley Bancorp,Inc Annual Report To Shareholders for the Year Ended December 31, 1997 29-74 1997 ANNUAL REPORT --------------------- SOUTH BRANCH VALLEY BANCORP, INC. -------------------------------- Contents Message to Stockholders and Friends 2 Financial Highlights 3 Management's Discussion and Analysis 4 Independent Auditor's Report 17 Consolidated Balance Sheets 18 Consolidated Statements of Income 19 Consolidated Statements of Shareholders' Equity 20 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 22 Shareholders' Information 41 Directors of South Branch Valley Bancorp, Inc. 42 Operating Officers and Employees of the Bank 43 Mailing Address South Branch Valley Bancorp, Inc. P.O. Box 680 Moorefield, West Virginia 26836 E-mail: sbvnb@hardynet.com Website: www.sbvnb.com 30-74 [SBV LOGO] South Branch Valley Bancorp, Inc. To Our Stockholders and Friends: It is with great pride that we present to you the 1997 Consolidated Annual Report of South Branch Valley Bancorp, Inc. The past year was our tenth consecutive year of realizing record earnings which totaled $1,520,000. This earnings strength has enabled us to increase our dividends over 1996 by 9.1% to $.84 per share. Throughout 1997 we focused largely on the merger and the acquisition of Capital State Bank. By the time you read this, there will have been a vote by shareholders of both companies and we will be moving on to other projects. We were able to upgrade our technology last year by installing teller machines in all our locations. This year our goals include implementing debit cards and a voice response system. We have confidence that our staff and management team will continue to perform well as we progress through our 115th year and the challenges it will bring. Your continued support is very much appreciated. Once again our Board of Directors and management team wish to convey our deepest appreciation for your continued support. We are proud of the performance of our Company and hope you are as well. Your comments and suggestions are always welcome and your friendship is appreciated. /s/ Oscar M. Bean /s/ H. Charles Maddy, III --------------------- ------------------------- Oscar M. Bean H. Charles Maddy, III Chairman of the Board President P.O. Box Box 680 o Moorefield, West Virginia 26836 o Phone: (304) 538-2353 o Fax: (304) 538-7053
2 31-74 Financial Highlights South Branch Valley Bancorp, Inc. and Subsidiary DIVIDENDS PER SHARE [BAR GRAPH] 1993 $0.48 1994 $0.61 1995 $0.68 1996 $0.77 1997 $0.84 EARNINGS PER SHARE [BAR GRAPH] 1993 $3.06 1994 $3.26 1995 $3.49 1996 $3.94 1997 $3.83
1997 1996 % Change -------- --------- -------- For the Year (in thousands) Net Income $ 1,520 $ 1,490 2.01% Net Interest Income 5,183 4,928 5.17% - --------------------------------------------------------------------------------------- Year End Balances (in thousands) Total Assets $140,648 $122,114 15.18% Total Loans 93,468 83,273 12.24% Total Deposits 106,985 100,941 5.99% Total Equity 15,061 12,304 22.41% - --------------------------------------------------------------------------------------- Per Share Data Earnings $ 3.83 $ 3.94 -2.79% Book Value 36.48 32.51 12.21% Cash Dividends 0.84 0.77 9.09% - --------------------------------------------------------------------------------------- Ratios Return on Average Assets 1.15% 1.27% -9.45% Return on Average Equity 11.09% 12.97% -14.49% Dividend Pay-out 21.89% 19.56% 11.91% Average Shareholders' Equity to Average Assets 10.36% 9.83% 5.39% - ---------------------------------------------------------------------------------------
RETURN ON AVERAGE ASSETS (before cumulative effect of accounting change) [BAR GRAPH] 1993 1.27% 1994 1.29% 1995 1.29% 1996 1.27% 1997 1.15% TOTAL ASSETS [BAR GRAPH] 1993 $94.6 1994 $96.6 1995 $113.1 1996 $122.1 1997 $140.6 3 32-74 South Branch Valley Bancorp, Inc. and Subsidiary Management's Discussion and Analysis Introduction and Summary The following is management's discussion and analysis of the financial condition and financial results of operations for South Branch Valley Bancorp, Inc.(hereafter referred to as the Company) and its wholly owned subsidiary, South Branch Valley National Bank, (hereafter referred to as the Bank) as of December 31, 1997. This discussion may contain forward looking statements based on management's expectations and actual results may differ materially. Since the primary business activities of South Branch Valley Bancorp, Inc. are conducted through its wholly owned subsidiary (the Bank), the following discussion focuses primarily on the financial condition and operations of the Bank. All amounts and percentages have been rounded for this discussion. This discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes thereto of the Company as of December 31, 1997 and for each of the three years then ended. Earnings Summary Net income for the three years ended December 31, 1997, 1996, and 1995, was $1,520,000, $1,490,000, and $1,320,000 respectively. Return on average total assets for the year ended December 31, 1997 was 1.15% compared to 1.27% in 1996 and 1.29% in 1995. On a per share basis, net income was $3.83 in 1997 compared to $3.94 in 1996 and $3.49 in 1995. Dividends per share totaled $.84 in 1997, an increase of 9.1%, compared to $.77 in 1996, which was 13.2% higher than the $.68 per share declared in 1995. Return on average equity (ROE) was 11.09% for 1997 compared to 12.97% for 1996 and 12.83% for 1995. For the year ended December 31, 1997, the Company's only subsidiary, South Branch Valley National Bank, had an increase in net income of $179,000 or 11.9% to $1,683,000, compared to $1,504,000 for the year ended December 31, 1996, which was $173,000 or 13.0% more than the year ended 1995. The Bank's return on average assets of 1.32% for 1997 remained consistent with 1996 and 1995 ratios of 1.29% and 1.30%, respectively. A summary of the significant factors influencing the Company's results of operations and related ratios is included in the following discussion. Results of Operations Net Interest Income The major component of the Company's net earnings is net interest income, which is the excess of interest earned on earning assets over the interest expense incurred on interest bearing sources of funds. Net interest income is affected by changes in volume, resulting from growth and alterations of the balance sheet's composition, fluctuations in interest rates and maturities of sources and uses of funds. Management seeks to maximize net interest income through management of its balance sheet components. This is accomplished by determining the optimal product mix with respect to yields on assets and costs of funds in light of projected economic conditions, while maintaining portfolio risk at an acceptable level. Management uses GAP analysis to determine the optimal product mix. The Company's GAP analysis at year end is discussed later in this discussion under the caption "Asset/Liability Management." Net interest income, as adjusted to a fully tax equivalent basis, totaled $5,262,000, $4,980,000 4 33-74 and $4,583,000 for the years ended December 31, 1997, 1996, and 1995, respectively, resulting in a net interest margin of 4.3% for 1997 compared to 4.5% and 4.7% for 1996 and 1995 respectively. The net interest margin recognizes earning asset growth by expressing net interest income as a percentage of total average earning assets. An increase in the average cost of borrowed funds, which have been used to primarily fund loan growth, and lower loan yields were the primary factors which negatively impacted the Company's net interest margin. The spread between interest earning assets and interest bearing liabilities could continue to contract, thus negatively impacting the Company's net interest income in 1998. Management continues to monitor the net interest margin through GAP analysis to minimize the potential for any significant negative impact. See the "Asset/Liability Management" section for further discussion of the impact changes in market interest rates could have on the Company. Net interest income on a fully tax equivalent basis, average balance sheet amounts, and corresponding average yields on earning assets and costs of interest bearing liabilities for the years 1995, 1996 and 1997 are presented in Table I. Table II presents, for the periods indicated, the changes in interest income and expense attributable to (a) changes in volume (changes in volume multiplied by prior period rate) and (b) changes in rate (change in rate multiplied by prior period volume). Changes in interest income and expense attributable to both rate and volume have been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each. As identified in Table II, the change in net interest margin from 1996 to 1997 was primarily attributed to the change in volume of certain interest bearing assets and liabilities, the reasons which are presented later in this discussion under the appropriate balance sheet section. Provision for Loan Losses The provision for loan losses represents management's determination of the amount necessary to be charged against the current period's earnings in order to maintain the allowance for loan losses at a level which is considered adequate in relation to the estimated risk inherent in the loan portfolio. The provision for loan losses for each of the years ended December 31, 1997, 1996 and 1995 totaled $155,000, $95,000 and $55,000, respectively. As further discussed in the loan portfolio and risk elements section of this analysis, increases in the Company's provision for loan losses are primarily attributed to inherent losses which are probable due to the Company's strong loan growth, as opposed to the Company's loan quality ratios, which continue to reflect positive trends. An analysis of the components comprising the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995, including charge-offs and recoveries within each significant loan classification, is included in Note 6 of the accompanying Consolidated Financial Statements. Other Income Other income totaled $525,000, $457,000 and $379,000 or 4.7%, 4.5%, and 4.2% of total income for each of the years ended December 31, 1997, 1996, and 1995, respectively. Total non-interest income earned in 1997 increased $68,000 or 14.9%. This net increase is primarily attributable to one item. Gain on sales of assets increased from $7,000 in 1996 to $90,000 in 1997. This was the result of the sale of the old bank building that was no longer used for banking purposes. There were no other significant fluctuations or unusual items during 1997. 5 34-74 Table I: Average Distribution of Assets, Liabilities and Shareholders' Equity, Interest Earnings & Expenses, and Average Rates
1997 1996 1995 --------------------------------- --------------------------------- -------------------------------- (In thousands Average Earnings/ Yield/ Average Earnings/ Yield/ Average Earnings/ Yield/ of dollars) Balances Expense Rate Balances Expense Rate Balances Expense Rate --------------------------------- --------------------------------- -------------------------------- ASSETS Interest earning assets: Loans, net of unearned interest (1) $ 90,082 $ 8,558 9.5% $ 76,797 $ 7,552 9.8% $ 66,148 $ 6,590 10.0% Securities Taxable 23,572 1,541 6.5% 26,557 1,711 6.4% 26,059 1,651 6.3% Tax-exempt (2) 6,005 393 6.5% 4,757 307 6.5% 2,898 205 7.1% Interest bearing deposits with other banks 1,437 97 6.8% 1,869 125 6.7% 1,997 137 6.9% Federal Funds sold 1,388 80 5.8% 892 49 5.5% 756 49 6.5% ---------- ---------- --------- ---------- ---------- -------- ---------- ---------- --------- Total interest earning assets 122,484 10,669 8.7% 110,872 9,744 8.8% 97,858 8,632 8.8% Noninterest earning assets: Cash & due from banks 2,752 2,419 2,157 Bank premises & equipment 3,121 3,155 2,084 Other assets 4,773 1,298 1,052 Allowance for loan losses (852) (861) (930) ---------- ---------- ---------- Total assets $ 132,278 $ 116,883 $ 102,221 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Interest bearing liabilities: Interest bearing demand deposits $ 18,725 $ 579 3.1% $ 19,761 $ 669 3.4% $ 17,825 $ 641 3.6% Regular savings 13,349 424 3.2% 15,048 523 3.5% 13,084 446 3.4% Time savings 62,307 3,604 5.8% 57,756 3,398 5.9% 51,492 2,901 5.6% Federal funds purchased and securities sold with agreements to repurchase 3,962 168 4.2% 1,422 60 4.2% -- -- -- Borrowed funds 9,554 632 6.6% 1,960 114 5.8% 995 61 6.1% ---------- ---------- --------- ---------- ---------- -------- ---------- ---------- --------- 107,897 5,407 5.0% 95,947 4,764 5.0% 83,396 4,049 4.9% Noninterest bearing liabilities Demand deposits 9,213 8,532 7,819 Other liabilities 1,468 914 716 ---------- ---------- ---------- Total liabilities 118,578 105,393 91,931 Shareholders' equity 13,700 11,490 10,290 ---------- ---------- ---------- Total liabilities and shareholders' equity $ 132,278 $ 116,883 $ 102,221 ========== ========== ========== NET INTEREST EARNINGS $ 5,262 $ 4,980 $ 4,583 ========== ========== ========== NET INTEREST YIELD ON EARNING ASSETS 4.3% 4.5% 4.7% ========= ======== =========
(1) For purposes of this table, non-accrual loans are included in average loan balances. Included in interest and fees on loans are loan fees of $173,000, $181,000, and $180,000 for the years ended December 31, 1997, 1996, and 1995 respectively. (2) For purposes of this table, interest income on tax-exempt securities has been adjusted assuming an effective combined Federal and state tax rate of 39% for all the years presented. The tax equivalent adjustment results in an increase in interest income of $81,000, $52,000, and $41,000 for the years ended December 31, 1997, 1996, and 1995, respectively. 6 35-74 Table II: Changes in Interest Margin Attributable to Rate and Volume (In Thousands of Dollars)
1997 VERSUS 1996 1996 VERSUS 1995 ---------------------------------------- ---------------------------------------- Increase (Decrease) Increase (Decrease) Due to Change in: Due to Change in: Volume Rate Net Volume Rate Net ----------- ------------ ----------- ----------- ----------- ----------- Loans $ 1,246 $ (240) $ 1,006 $ 1,091 $ (129) $ 962 Securities Taxable (195) 25 (170) 33 27 60 Tax-exempt 86 -- 86 121 (19) 102 Interest bearing deposits with other banks (30) 2 (28) (8) (4) (12) Federal funds sold 28 3 31 8 (8) -- ----------- ------------ ----------- ----------- ----------- ----------- Total interest earned on interest-earning assets 1,135 (210) 925 1,245 (133) 1,112 ----------- ------------ ----------- ----------- ----------- ----------- Interest paid on: Interest bearing demand deposits (40) (50) (90) 64 (36) 28 Regular savings (56) (43) (99) 64 13 77 Time savings 265 (59) 206 343 154 497 Federal funds purchased and securities sold with agree- ments to repurchase 107 1 108 60 -- 60 Borrowed funds 500 18 518 56 (3) 53 ----------- ------------ ----------- ----------- ----------- ----------- Total interest paid on liabilities 776 (133) 643 587 128 715 ----------- ------------ ----------- ----------- ----------- ----------- Net interest income $ 359 $ (77) $ 282 $ 658 $ (261) $ 397 =========== ============ =========== =========== =========== ===========
Other Expenses Other expenses totaled $3,342,000, $3,156,000, and $2,866,000 or 37.5%, 39.4%, and 41.1% of total expense for each of the years ended December 31, 1997, 1996, and 1995, respectively. Total non-interest expense increased $186,000 or 5.9% from 1996 to 1997. The most significant component of non-interest expense, salaries and employee benefits, increased 2.6% from $1,728,000 in 1996 to $1,772,000 in 1997. This is primarily a result of general merit raises. Equipment rentals, depreciation and maintenance increased 30.2% from $222,000 in 1996 to $289,000 in 1997. This increase is primarily comprised of three items. Depreciation expense increased $23,000 due to fixed asset acquisitions, repairs and maintenance costs increased $11,000 primarily due to the aging of facilities and equipment, and maintenance contracts increased $7,000. There were no other significant fluctuations or unusual items during 1997. Income Tax Expense Income tax expense (benefit) for the three years ended December 31, 1997, 1996, and 1995 totaled $691,000, $643,000 and $680,000 respectively. Refer to Note 10 of the accompanying consolidated financial statements for further information and additional discussion of the significant components influencing the Company's effective income tax rates. 7 36-74 Changes in Financial Position Total average assets for the year ended December 31, 1997 were $132,278,000, an increase of 13.2% over 1996's average of $116,883,000. This increase is primarily attributable to funds available through increases in deposits, borrowings, and the issuance of common stock and are detailed below in the discussions of changes in significant components of the Company's balance sheet between December 31, 1996 and December 31, 1997. The Company's total average interest earning assets, expressed as a percentage of total average assets, remains high, although this ratio has decreased slightly to 92.6% for 1997 as compared to 94.8% for 1996. Securities and Federal Funds Sold Securities and Federal funds sold comprised approximately 19.6% and 4.1% respectively, of total assets at December 31, 1997 compared to 24.0% and .6% at December 31, 1996. All securities have been classified as available for sale to provide management with flexibility to better manage its balance sheet structure and react to asset/liability management issues as they arise. The subsidiary bank sells funds to correspondent banks overnight as a temporary investment of excess funds. Average Federal funds sold during 1997 approximated $1,388,000 or 55.6% more than 1996's average of $892,000 primarily due to security maturities being temporarily invested in Federal funds sold throughout 1997 due to the insignificant difference between market rates which can be earned on Federal funds sold and current rates available on U.S. Government securities. Average securities approximated $29,577,000 for 1997 or 5.6% less than 1996's average of $31,314,000. Refer to Note 4 of the accompanying consolidated financial statements for details of amortized cost, the fair values, unrealized gains and losses as well as the security classifications by type. At December 31, 1997, the Bank did not own securities of any one issuer that exceeded ten percent of shareholders' equity. The maturity distribution of the securities portfolio at December 31, 1997, together with the weighted average yields for each range of maturity, are summarized in Table III. The stated average yields are actual yields and are not stated on a tax equivalent basis. Table III: Investment Security Maturity Analysis (In thousands of dollars)
After One After Five Within but within but within After One Year Five Years Ten Years Ten Years --------------------- ---------------------- --------------------- ---------------------- Amount Yield Amount Yield Amount Yield Amount Yield ---------- ---------- ---------- ---------- --------- --------- ---------- ---------- U.S. Treasury securities $ 503 8.25% $ 2,485 6.54% $ - - - - $ - - - - U.S. Government agencies and corporations 993 5.94% 4,787 6.71% 3,743 6.51% - - - - Small Business Administration guaranteed loan participation certificates 173 6.68% 693 6.68% 605 6.68% - - - - Mortgage backed securities: U.S. Government agencies and corporations 2,979 6.62% 3,671 6.57% - - - - - - - - State and political subdivisions 65 5.71% 1,594 5.17% 2,098 5.19% 1,811 5.27% Other - - - - 249 7.00% - - - - 777 6.00% ---------- ---------- --------- ---------- Total $ 4,713 6.64% $ 13,479 6.46% $ 6,446 6.10% $ 2,588 5.49% ========== ========== ========= ==========
8 37-74 Investment in Affiliate As further discussed in Note 15 to the accompanying consolidated financial statements, the Company purchased approximately 40% of the outstanding common stock of Capital State Bank during 1997. This investment of approximately $5,273,000 is reflected on the Company's balance sheet as Investment in affiliate. The Company has filed the appropriate documents to acquire the remaining 60% of Capital State Bank's outstanding stock subject to shareholder approval by both organizations and regulatory approval. On February 6, 1998 the Company received notification of regulatory approval and therefore anticipates consummation of the merger, to be accounted for using the purchase method accounting, during the first quarter of 1998. Loan Portfolio The following table depicts loan balances at December 31, 1997 and 1996 by types along with their respective percentage of total loans outstanding. 1997 1996 ------------------- -------------------- (In thousands of dollars) Percent Percent Amount of Total Amount of Total ------- -------- ------- -------- Commercial, financial, and agricultural $30,325 32.4% $27,377 32.9% Real estate--mortgage 42,640 45.6% 36,542 43.9% Real estate--construction 144 .2% 154 .2% Installment loans to individuals (net of unearned interest) 19,890 21.3% 18,584 22.3% Other 469 .5% 615 .7% ------- ----- ------- ----- Total loans (net of unearned interest) 93,468 100.0% 83,272 100.0% ===== ===== Less allowance for loan losses 895 858 ------- ------- Loans, net $92,573 $82,414 ======= ======= Total net loans averaged $90,082,000 in 1997 and comprised 68.1% of total average assets compared to $76,797,000 or 65.7% of total average assets during 1996. This increase in the dollar volume of loans is primarily attributable to increased loan demand experienced in 1997 as well as a more aggressive strategy taken by management to increase loan volume by expanding the Bank's commercial and real estate portfolios. Management successfully achieved this objective by increasing outstanding loan balances by 12.2% while not lowering the Bank's significant loan underwriting standards. Refer to Note 5 of the accompanying consolidated financial statements for the Company's loan maturities and a discussion of the Company's adjustable rate loans as of December 31, 1997. In the normal course of business, the Bank makes various commitments and incurs certain contingent liabilities which are disclosed in Note 12 to the accompanying consolidated financial statements but not reflected in the accompanying consolidated financial statements. There have been no significant changes in these type of commitments and contingent liabilities and the Bank does not anticipate any material losses as a result of these commitments. 9 38-74 Risk Elements The following table presents a summary of restructured or non-performing loans for each of the three years ended December 31, 1997, 1996 and 1995. December 31, --------------------------- 1997 1996 1995 ---- ----- ------- (In thousands of dollars) Nonaccrual loans $ 142 $ 343 $ 538 Accruing loans past due 90 days or more 96 324 260 Restructured loans 55 55 230 ----- ----- ------- Total $ 293 $ 722 $1,028 ===== ===== ======= Percentage of total loans 0.3% 0.9% 1.4% ===== ===== ======= Due to management's diligent effort to improve the quality of the loan portfolio, the amount of restructured and non-performing loans continues to decrease. Total non-performing loans as detailed above remain insignificant as a percentage of total outstanding loans for each of the three years presented. Refer to Note 5 of the accompanying consolidated financial statements for additional discussion of non-accrual loans and to Note 6 for a discussion of impaired loans which are included in the above balances. The Company's subsidiary bank, on a quarterly basis, performs a comprehensive loan evaluation which encompasses the identification of all potential problem credits which are included on an internally generated watch list. The identification of loans for inclusion on the watch list is facilitated through the use of various sources, including past due loan reports, previous internal and external loan evaluations, classified loans identified as part of regulatory agency loan reviews and reviews of new loans representative of current lending practices within the Bank. Once this list is reviewed to ensure it is complete, the credit review department reviews the specific loans for collectibility, performance and collateral protection. In addition, a grade is assigned to the individual loans utilizing internal grading criteria, which is somewhat similar to the criteria utilized by the Bank's primary regulatory agency. Based on the results of these reviews, specific reserves for potential losses are identified and the allowance for loan losses is adjusted appropriately through a provision for loan losses. While there may be some loans or portions of loans identified as potential problem credits which are not specifically identified as either non-accrual or accruing loans past due 90 or more days, they are considered by management to be insignificant to the overall disclosure and are, therefore, not specifically quantified within the Management's Discussion and Analysis. In addition, management feels these additional loans do not represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity or capital resources. Also, these loans do not represent material credits about which management is aware of any information which would cause the borrowers to not comply with the loan repayment terms. Specific reserves are allocated to non-performing loans based on the quarterly evaluation of expected loan loss reserve requirements as determined by Bank management. In addition, a portion of the reserve is determined through the use of loan loss experience factors which do not provide for identification of specific potential problem loans. As noted above, some of the loans, which are not deemed significant, are included in the watch list of potential problem loans and have specific reserves allocated to them. At December 31, 1997 and 1996 the allowance for loan losses represented 1.0% of gross loans or $895,000 and $858,000, respectively, and was considered adequate to cover inherent losses in the subsidiary bank's loan portfolio as of the respective evaluation date. The Company maintains an 10 39-74 allowance for loan losses at a level considered adequate to provide for losses that can be reasonably anticipated. The Company performs a quarterly evaluation of the loan portfolio to determine its adequacy. The evaluation is based on assessments of specifically identified loans evaluated as part of the Company's loan review procedures discussed above, loss experience factors, current and anticipated economic conditions and other factors to identify and estimate inherent losses from homogeneous pools of loans. The allocated portion of the subsidiary bank's allowance for loan losses is established on a loan-by-loan and pool-by-pool basis. The unallocated portion is for inherent losses that probably exist as of the evaluation date, but which have not been specifically identified by the processes used to establish the allocated portion due to inherent imprecision in the objective processes management utilizes to identify probable and estimable losses. This unallocated portion is subjective and requires judgement based on various qualitative factors in the loan portfolio and the market in which the Company operates. At December 31, 1997 and 1996, respectively, the unallocated portion of the allowance approximated $67,000 and $67,700 or 7.5% and 7.9% of the total allowance. This unallocated portion of the allowance was considered necessary based on consideration of the known risk elements in certain pools of loans in the loan portfolio and management's assessment of the economic environment in which the Company operates. More specifically, while loan quality remains good, the subsidiary bank has typically experienced greater losses within certain homogeneous loan pools when the Bank's market area has experienced economic downturns or other significant negative factors or trends, such as increases in bankruptcies, unemployment rates or past due loans. While no significant adverse changes in past due loan and unemployment rate trends have been noted, personal bankruptcies have increased approximately 54% in West Virginia, where the Company's operations are located, during the past year as compared to a nationwide increase of approximately 20%. Table IV below presents an allocation of the expected allowance for loan losses by major loan type. Table IV: Allocation of the Allowance for Loan Losses (In thousands of dollars)
1997 1996 1995 --------------------- --------------------- ---------------------- Percent of Percent of Percent of Loans in Each Loans in Each Loans in Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- Commercial, financial, and agricultural $182 32.4% $182 32.9% $203 26.4% Real estate 300 45.8% 303 44.1% 322 51.9% Installment 339 21.3% 294 22.3% 218 20.9% Other 7 .5% 11 0.7% 8 0.8% Unallocated 67 - - 68 - - 109 - - ---- ------ ----- ------- ---- ------ $895 100.0% $858 100.0% $860 100.0% ==== ====== ===== ======= ==== ======
At December 31, 1997, the Company had approximately $57,000 in other real estate owned which was obtained as the result of foreclosure proceedings and $16,000 in other repossessed assets which was obtained as the result of auto repossessions. Repossessions have been insignificant throughout 1997 and management does not anticipate any material losses on any of the items currently held in other real estate owned or other repossessed assets. 11 40-74 Loan Concentrations The Company's subsidiary bank grants commercial, residential and consumer loans to customers primarily located in Hardy, Grant, Hampshire and Pendleton counties of West Virginia. Although the Bank strives to maintain a diverse loan portfolio, a substantial portion of its debtors' ability to honor their contracts is indirectly dependent upon the poultry industry. As of December 31, 1997 and 1996, the Bank had direct extensions of credit used to build and operate poultry houses totaling approximately $3,430,000 and $4,564,000 respectively. A significant portion of this decrease was the result of The Federal Land Bank being more competitive in the local loan market for poultry loans. Deposits Total deposits at December 31, 1997 increased approximately $6,044,000 or 6.0% compared to December 1996. Average deposits increased approximately $2,497,000 or 2.5% during 1997. Average demand deposits and average savings deposits decreased 1.3% and 11.3% respectively compared to 1996 as monies migrated to higher yielding short term time deposits, which increased average total time deposits 7.9% from December 31, 1996 to December 31, 1997. This growth was within management's goals of consistent, controlled deposit growth and asset/liability management strategies. See Note 8 of the accompanying consolidated financial statements for a maturity distribution of time deposits as of December 31, 1997. Borrowings Lines of Credit: The unused portion of the bank's available line of credit from the Federal Home Loan Bank totalled $29,833,000 at December 31, 1997. Management uses this line to make additional funds available to customers in the form of loans at competitive rates. At the time of advance, the bank may choose products with maturities ranging from overnight to 30 years, depending on the purpose. Funds acquired through this program are reflected on the consolidated balance sheet as part of short-term borrowings or long-term borrowings, depending on the repayment terms of the debt agreement. Refer to Note 9 of the accompanying consolidated financial statements for additional discussion of short-term borrowings activity and long-term borrowings. Other lines of credit available, but unused, to the Bank through purchases of Federal funds through correspondent banks totaled $5,000,000 as of December 31, 1997. Short Term Borrowings: Total short-term borrowings increased $2,768,000 or 63.2% from $4,377,000 at December 31, 1996 to $7,145,000 at December 31, 1997. This increase consisted of a $1,368,000 increase in repurchase agreements resulting from the bank's efforts to expand this service to commercial customers, and a $1,400,000 increase in line of credit borrowings from the Federal Home Loan Bank, which was used to fund local mortgage loan growth. See Note 9 of the accompanying consolidated financial statements for a discussion of short term borrowings. Long Term Borrowings: The Company's long-term borrowings of $10,396,000 at December 31, 1997, compared to $3,515,000 at December 31, 1996, consisted of $2,839,000 from other financial institutions to fund a portion of the Company's investment in an affiliate and $7,558,000 from the available line of credit with the Federal Home Loan Bank to fund fixed rate local mortgage loan growth and specific commercial loan projects. Refer to Note 9 of the accompanying consolidated financial statements for a discussion of long-term borrowings. Liquidity Liquidity in commercial banking can be defined as the ability to satisfy customer loan demand and meet deposit withdrawals while maximizing net interest income. The Bank uses ratio analysis to monitor the changes in its sources and uses of funds so that an adequate liquidity position is maintained. Liquidity was available through cash, due from banks, Federal funds sold, securities 12 41-74 and interest bearing deposits with other banks maturing within one year and totaled approximately $11,799,000 and $6,851,000 or 8.4% and 5.6% of total assets at December 31, 1997 and 1996 respectively. Secondary sources of liquidity are provided by all remaining available for sale securities, Federal funds purchased, Federal Home Loan Bank lines of credit, and correspondent banks lines of credit. Management believes that the liquidity of the Company is adequate and foresees no demands or conditions that would adversely affect it. Asset/Liability Management The principal objective of asset/liability management is to minimize interest rate risk, which is the vulnerability of the Company's net interest income to changes in interest rates and manage the ratio of interest rate sensitive assets to interest rate sensitive liabilities within specified maturities or repricing dates. The Company's actions in this regard are taken under the guidance of the subsidiary bank's Asset/Liability Management Committee, which is comprised of members of the Bank's senior management and members of the Board of Directors. The Bank's Asset/Liability Management Committee is actively involved in formulating the economic assumptions that the Bank uses in its financial planning and budgeting process and establishes policies which control and monitor the Bank's sources, uses and prices of funds. Some amount of interest rate risk is inherent and appropriate to the banking business. Several techniques are available to monitor and control the level of interest rate risk. The Bank regularly performs modeling to project the potential impact of future interest rate scenarios on net interest income. Through such simulation analysis, interest rate risk is maintained within established policy limits. Based upon the present mix of assets and liabilities and management's assumptions with respect to growth and repricing, no significant impact on the Company's 1998 net interest margin is expected given a 200 basis point change in interest rates during 1998. Another means of analyzing an institution's interest rate risk is by monitoring its interest rate sensitivity "gaps." An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity "gap" is defined as the difference between interest earning assets and interest bearing liabilities maturing or repricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. During a period of falling interest rates, a positive gap would tend to adversely affect net interest income, while a negative gap would tend to result in an increase in net interest income. During a period of rising interest rates, a positive gap would tend to result in an increase in net interest income while a negative gap would tend to affect net interest income adversely. Table V on page 14 sets forth the Company's interest rate sensitivity gaps within the one year time horizon computed based upon contractual repricings and maturities at December 31, 1997. As presented in the table, the Company has a one year cumulative negative interest sensitivity gap of $28.3 million (or 22.2% of total earning assets). However, included within the one year time period are $32.4 million of interest bearing demand and savings deposits which on a contractual basis are immediately repriceable. The actual repricing of these deposits tends to lag well behind movements in market interest rates. Accordingly, the sensitivity of such core deposits to changes in market interest rate may differ significantly from their contractual terms. If interest bearing demand and savings deposits are assumed to reprice beyond the one year time horizon, the Company's one year cumulative interest rate sensitivity gap at December 31, 1997 would be a positive $4.1 million or just 3.2% of interest earning assets. 13 42-74 Table V & Liability Rate Sensitivity Analysis, December 31, 1997 (In thousands of dollars)
Maturing or Repricing Within ----------------------------------- 0-90 91-180 181-365 Total Days Days Days 1 Year --------- ---------- ---------- ---------- Interest Earning Assets: Loans $ 15,738 $ 10,524 $ 12,157 $ 38,419 Taxable Securities 1,471 - - 1,496 2,967 Mortgage-backed Securities 745 745 1,489 2,979 Tax Exempt Securities - - - - 65 65 Other 90 - - 396 486 --------- ---------- ---------- ---------- Total Earning Assets $ 18,044 $ 11,269 $ 15,603 $ 44,916 ========= ========== ========== ========== Interest Bearing Liabilities: Certificates of Deposit $ 10,700 $ 12,029 $ 18,090 $ 40,819 Savings Deposits 14,891 - - - - 14,891 Interest Bearing Demand Deposits 17,469 - - - - 17,469 --------- ---------- ---------- ---------- $ 43,060 $ 12,029 $ 18,090 $ 73,179 --------- ---------- ---------- ---------- Static Interest Sensitivity Gap $ (25,016) $ (760) $ (2,487) $ (28,263) ========= ========== ========== ========== Cumulative Gap $(25,016) $ (25,776) $ (28,263) ========= ========== ========== Gap/Total Earning Assets (22.2%) ========== Gap/Total Earning Assets (excluding savings & demand deposits) 3.2% ==========
Capital Resources The capital position of South Branch Valley Bancorp, Inc. has shown consistent growth during the past three years. Stated as a percentage of total assets, the Company's equity ratio was 10.7%, 10.1%, and 10.0% at December 31, 1997, 1996 and 1995 respectively. These increases can be attributed to a strong earnings base during the past three years combined with controlled asset growth. Furthermore, the Company issued 34,317 shares of common stock during 1997. The Company's subsidiary bank's risk weighted tier I capital, total capital and leverage capital ratios were approximately 13.4%, 14.4% and 9.2%, respectively, at December 31, 1997 which is considered well capitalized under regulatory guidelines for prompt corrective actions. The Bank is subject to minimum capital ratios as further discussed in Note 13 of the accompanying consolidated financial statements. Management has established an objective to maintain a minimum 8.0% rate of internal capital growth as a primary means of ensuring capital adequacy within regulatory guidelines. The percent of return on average equity multiplied by the percent of earnings retained equals the internal capital growth rate percentage. The following table illustrates this relationship. Relationship Between Significant Financial Ratios 1997 1996 1995 -------- --------- -------- Return on average equity 11.1% 13.0% 12.8% times Earnings retained 78.1% 80.4% 80.5% equals Internal capital growth rate 8.7% 10.5% 10.3% 14 43-74 Return on average equity (ROE) was 11.1% at December 31, 1997 compared to 13.0% and 12.8% at December 31, 1996 and 1995 respectively. The Company's decrease in ROE is primarily attributable to the combination of the issuance of 34,317 shares of common stock and the company retaining a significant portion of its earnings to have available to fund the pending purchase of Capital State Bank which is further discussed in Note 15 to the accompanying consolidated financial statements. Management foresees this decline to continue through 1998 but anticipates that return on average equity will compare favorably with peers thereafter. The percentage of earnings retained by the Company to fund future growth has not significantly changed during the three years ended December 31, 1997. Cash dividends rose 9.1% to $.84 in 1997. It is the intention of management and the Board of Directors to continue to pay dividends on a similar schedule during 1998. Future cash dividends will depend on the earnings, financial condition and the business of the Bank as well as general economic conditions; however, management is not presently aware of any reason dividend payments should not continue. Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires approval by the regulatory agency if dividends declared in any year exceed the year's net income, as defined, plus the retained net profits of the two preceding years. During 1998 the net retained profits available for distribution to South Branch Valley Bancorp, Inc. as dividends without regulatory approval are approximately $1,086,000, plus net income for the interim periods through the date of declaration. Effects of Changing Prices The results of operations and the financial position of the Company have been presented based on historical cost, unadjusted for the effects of inflation, except for the recording of unrealized gains/losses on available for sale securities. Inflation could significantly impact the value of the Company's interest rate sensitive assets and liabilities and the cost of noninterest expenses, such as salaries and occupancy expenses. As a financial intermediary, the Company holds a high percentage of interest rate sensitive assets and liabilities. Consequently, the estimated fair value of a significant portion of the Company's assets and liabilities reprice more frequently than those of non-banking entities. The Company's policies attempt to structure its mix of financial instruments and manage its interest rate sensitivity gap in order to minimize the potential adverse effects of inflation or other market forces on its net interest income, earnings and capital. A comparison of the carrying value of the Company's financial instruments to their estimated fair value as of December 31, 1997 is disclosed in Note 14 to the accompanying consolidated financial statements. Indirectly, management of the money supply by the Federal Reserve to control the rate of inflation has an impact on the earnings of the Company. Further, changes in interest rates to control inflation may have a corresponding impact on the ability of certain borrowers to repay loans granted by the Company. Year 2000 Except for securities record keeping, the significant electronic data processing systems of the Company are operated in-house through software which is purchased through third-party vendors. The Company has an ongoing program designed to ensure that its operational and financial systems will not be adversely affected by year 2000 software failures due to processing errors arising from calculations using the year 2000 date. In 1997, management established a committee to 15 44-74 monitor the Company's plan in evaluating its hardware, software and operating systems for Year 2000 issues. This committee also monitors management's assessment of the potential impact on significant customers, borrowers, suppliers and service organizations. While management believes it is doing everything technologically possible to assure year 2000 compliance, it is in part dependent upon systems and software vendors to represent that the products provided are, or will be, "Year 2000 Compliant." Management is and has been in contact with its vendors and believes that all upgrades needed to be "Year 2000 Compliant" have been affected or are in process. Management will continue to monitor this situation and will take all steps necessary to keep its operating systems compliant. Although not quantified based upon management's current assessment, the costs expected to be incurred over the next two years on the Company's program to redevelop, replace, or repair its computer applications to make them "Year 2000 Compliant" is not expected to be significant to the Company's financial position or results of operations. Additionally, the Company has implemented a program of testing for compliance and testing began in February 1998. 16 45-74 Independent Auditor's Report [ARNETT & FOSTER LOGO] To the Board of Directors South Branch Valley Bancorp,Inc. Moorefield, West Virginia We have audited the accompanying consolidated balance sheets of South Branch Valley Bancorp, Inc., and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of South Branch Valley Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARNETT & FOSTER, P.L.L.C. /s/ Arnett & Foster, P.L.L.C. Charleston, West Virginia January 22, 1998 1000 Laidley Tower, 500 Lee Street, East, P.O. Box 2629 Charleston, West Virginia 25329 304/346-0441 o 800/642-3601 Certified Public Accountants Member of the McGladrey Network 17 46-74 South Branch Valley Bancorp, Inc., and Subsidiary - ------------------------------------------------- Consolidated Balance Sheets December 31, 1997 and 1996
1997 1996 ------------ ------------ ASSETS Cash and due from banks $ 3,945,099 $ 3,162,552 Interest bearing deposits with other banks 1,256,000 1,553,000 Federal funds sold 5,806,717 723,734 Securities available for sale 27,547,094 29,351,998 Investment in affiliate 5,273,481 - - Loans, less allowance for loan losses of $895,281 and $858,423, respectively 92,572,652 82,414,205 Bank premises and equipment, net 3,071,064 3,121,892 Accrued interest receivable 864,083 928,642 Other assets 311,435 857,582 ------------ ------------ Total assets $140,647,625 $122,113,605 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Non interest bearing $ 9,693,915 $ 9,075,059 Interest bearing 97,290,882 91,866,353 ------------ ------------ Total deposits 106,984,797 100,941,412 Short-term borrowings 7,145,010 4,377,397 Long-term borrowings 10,395,848 3,514,652 Other liabilities 1,061,418 976,351 ------------ ------------ Total liabilities 125,587,073 109,809,812 ------------ ------------ Commitments and Contingencies SHAREHOLDERS' EQUITY Common stock, $2.50 par value, authorized 600,000 shares, issued 416,942 shares in 1997; 382,625 shares in 1996 1,042,355 956,562 Capital surplus 2,089,709 685,534 Retained earnings 11,898,420 10,711,468 Less cost of shares acquired for the treasury 1997 and 1996, 4,115 shares (166,970) (166,970) Net unrealized gain (loss) on securities 197,038 117,199 ------------ ------------ Total shareholders' equity 15,060,552 12,303,793 ------------ ------------ Total liabilities and shareholders' equity $140,647,625 $122,113,605 ============ ============
See Notes to Consolidated Financial Statements 18 47-74 South Branch Valley Bancorp, Inc., and Subsidiary - ------------------------------------------------- Consolidated Statements of Income For The Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------- ---------- ---------- Interest income Interest and fees on loans $ 8,558,144 $7,551,735 $6,589,530 Interest and dividends on securities: Taxable 1,540,530 1,711,158 1,650,905 Tax-exempt 314,596 254,988 164,410 Interest on interest bearing deposits with other banks 96,549 125,604 136,696 Interest on Federal funds sold 79,971 48,811 49,297 ----------- ---------- ---------- Total interest income 10,589,790 9,692,296 8,590,838 ----------- ---------- ---------- Interest expense Interest on deposits 4,606,578 4,590,018 3,987,850 Interest on short-term borrowings 256,554 68,676 55,994 Interest on long-term borrowings 543,566 105,668 5,095 ----------- ---------- ---------- Total interest expense 5,406,698 4,764,362 4,048,939 ----------- ---------- ---------- Net interest income 5,183,092 4,927,934 4,541,899 Provision for loan losses 155,000 95,000 55,000 ----------- ---------- ---------- Net interest income after provision for loan losses 5,028,092 4,832,934 4,486,899 ----------- ---------- ---------- Other income (expense) Insurance commissions 90,680 110,982 110,352 Trust department income 3,861 5,853 5,052 Service fees 280,442 232,845 211,379 Securities gains (losses) 9,789 29,999 (1,546) Gain (loss) on sales of assets 89,919 7,202 -- Other 49,828 69,705 53,758 ----------- ---------- ---------- Total other income 524,519 456,586 378,995 ----------- ---------- ---------- Other expenses Salaries and employee benefits 1,772,344 1,727,839 1,557,108 Net occupancy expense 196,005 189,285 126,315 Equipment rentals, depreciation and maintenance 289,223 222,543 199,321 Federal deposit insurance premiums 12,427 2,000 100,174 Other 1,071,690 1,014,603 883,144 ----------- ---------- ---------- Total other expenses 3,341,689 3,156,270 2,866,062 ----------- ---------- ---------- Income before income tax expense 2,210,922 2,133,250 1,999,832 Income tax expense 691,265 643,213 679,676 ----------- ---------- ---------- Net income $ 1,519,657 $1,490,037 $1,320,156 =========== ========== ========== Basic earnings per common share $ 3.83 $ 3.94 $ 3.49 =========== ========== ========== Average common shares outstanding 397,032 378,510 378,510 =========== ========== ==========
See Notes to Consolidated Financial Statements 19 48-74 South Branch Valley Bancorp, Inc., and Subsidiary - ------------------------------------------------- Consolidated Statements of Shareholders' Equity For The Years Ended December 31, 1997, 1996 and 1995
Net Unrealized Common Capital Retained Treasury Gain (Loss) on Stock Surplus Earnings Stock Securities ---------- ---------- ----------- --------- -------------- Balance, December 31, 1994 $ 956,562 $ 685,534 $ 8,450,114 $(166,970) $(547,100) Net income - - - - 1,320,156 - - - - Cash dividends declared on common stock ($.68 per share) - - - - (257,386) - - - - Change in net unrealized gain (loss) on securities - - - - - - - - 887,750 ---------- ---------- ----------- --------- --------- Balance, December 31, 1995 956,562 685,534 9,512,884 (166,970) 340,650 Net income - - - - 1,490,037 - - - - Cash dividends declared on common stock ($.77 per share) - - - - (291,453) - - - - Change in net unrealized gain (loss) on securities - - - - - - - - (223,451) ---------- ---------- ----------- --------- --------- Balance, December 31, 1996 956,562 685,534 10,711,468 (166,970) 117,199 Net income - - - - 1,519,657 - - - - Net proceeds from issuance of 34,317 shares of $2.50 par value common stock at $43.50 per share 85,793 1,404,175 - - - - - - Cash dividends declared on common stock ($.84 per share) - - - - (332,705) - - - - Change in net unrealized gain (loss) on securities - - - - - - - - 79,839 ---------- ---------- ----------- --------- --------- Balance, December 31, 1997 $1,042,355 $2,089,709 $11,898,420 $ (166,970) $ 197,038 ========== ========== =========== ========= =========
See Notes to Consolidated Financial Statements 20 49-74 South Branch Valley Bancorp, Inc., and Subsidiary - ------------------------------------------------- Consolidated Statements of Cash Flows For The Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ Cash Flows from Operating Activities Net Income $ 1,519,657 $ 1,490,037 $ 1,320,156 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation 235,488 212,383 154,338 Provision for loan losses 155,000 95,000 55,000 Security (gains) losses (9,789) (29,999) 1,546 (Gain) loss on sale of other assets 1,588 (7,202) - - (Gain) loss on sale/disposal of Bank premises and equipment (91,507) (23,176) - - Deferred income tax expense (benefit) 47,839 (35,110) 22,802 (Increase) decrease in accrued interest receivable 64,559 55,199 (96,329) Amortization of securities premiums and (accretion of discounts) net 10,069 50,141 88,705 (Increase) decrease in other assets 574,396 (455,720) (82,702) Increase (decrease) in other liabilities (12,752) 167,700 146,024 ------------ ------------ ------------ Net cash provided by operating activities 2,494,548 1,519,253 1,609,540 ------------ ------------ ------------ Cash Flows from Investing Activities (Purchase of) proceeds from interest bearing deposits with other banks, net 297,000 581,919 (401,219) Proceeds from maturities and calls of securities held to maturity - - - - 100,000 Proceeds from maturities and calls of securities available for sale 6,748,200 3,950,000 5,345,000 Proceeds from sales of securities available for sale 1,539,666 6,735,258 2,030,688 Principal payments received on securities held to maturity - - - - 313,701 Principal payments received on securities available for sale 1,417,948 768,591 170,994 Purchase of common stock of affiliate (5,273,481) - - - - Purchases of securities held to maturity - - - - (615,569) Purchases of securities available for sale (7,771,371) (9,708,744) (10,917,720) (Increase) decrease in Federal funds sold (5,082,983) 1,438,011 (2,161,745) Loans made to customers, net (10,387,784) (11,950,307) (6,147,361) Purchases of Bank premises and equipment (238,333) (223,759) (1,427,803) Net cash acquired in purchase of Petersburg Branch - - - - 3,400,973 Proceeds from sales of other assets 44,500 22,000 - - Proceeds from sale/disposal of Bank premises and equipment 145,180 93,011 - - ------------ ------------ ----------- Net cash (used in) investing activities (18,561,458) (8,294,020) (10,310,061) ------------ ------------ ----------- Cash Flows from Financing Activities Net increase (decrease) in demand deposit, NOW and savings accounts (100,161) (1,437,576) 4,987,833 Proceeds from sales of time deposits, net 6,143,546 2,332,652 4,958,802 Net increase (decrease) in short-term borrowings 2,767,613 4,377,397 (1,700,000) Proceeds from long-term borrowings 7,700,000 2,840,000 750,000 Repayment of long-term debt (818,804) (75,348) - - Dividends paid (332,705) (291,453) (257,386) Net proceeds from common stock sold 1,489,968 - - - - ------------ ------------ ----------- Net cash provided by financing activities 16,849,457 7,745,672 8,739,249 ------------ ------------ ----------- Increase (decrease) in cash and due from banks 782,547 970,905 38,728 Cash and due from banks: Beginning 3,162,552 2,191,647 2,152,919 ------------ ------------ ----------- Ending $ 3,945,099 $ 3,162,552 $ 2,191,647 ============ ============ =========== Supplemental Disclosures of Cash Flow Information Cash payments for: Interest, net of interest capitalized during construction $ 5,351,175 $ 4,742,367 $ 3,943,067 ============ ============ =========== Income taxes $ 604,871 $ 627,563 $ 759,002 ============ ============ =========== Supplemental Schedule of Noncash Investing and Financing Activities Other assets acquired in settlement of loans $ 74,337 $ 39,500 $ 17,905 ============ ============ =========== Acquisition of Petersburg Branch: Net cash acquired in purchase $ - - $ - - $ 3,400,973 ============ ============ =========== Fair value of assets acquired, net of cash and cash equivalents (principally loans) $ - - $ - - $ 1,738,987 Deposits and other liabilities assumed - - - - (5,139,960) ------------ ------------ ----------- $ - - $ - - $(3,400,973) ============ ============ ===========
See Notes to Consolidated Financial Statements 21 50-74 South Branch Valley Bancorp, Inc., and Subsidiary - ------------------------------------------------- Notes to Consolidated Financial Statements NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Business: South Branch Valley Bancorp, Inc., is a one bank holding - ------------------ company. The wholly owned subsidiary, South Branch Valley National Bank, Inc. is a commercial bank with operations in Hardy, Grant and Pendleton counties of West Virginia. The Bank provides retail and commercial loans, and deposit and trust services principally to individuals and small businesses. Basis of financial statement presentation: The accounting and reporting policies - ------------------------------------------ of South Branch Valley Bancorp, Inc., and its subsidiary conform to generally accepted accounting principles and to general practices within the banking industry. Use of estimates: The preparation of financial statements in conformity with - ---------------- generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of consolidation: The accompanying consolidated financial statements - ---------------------------- include the accounts of South Branch Valley Bancorp, Inc., and its subsidiary, South Branch Valley National Bank, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation. Presentation of cash flows: For purposes of reporting cash flows, cash and due - -------------------------- from banks includes cash on hand and amounts due from banks (including cash items in process of clearing). Cash flows from demand deposits, NOW accounts, savings accounts and Federal funds purchased and sold are reported net since their original maturities are less than three months. Cash flows from loans and certificates of deposit and other time deposits are reported net. Securities: Debt and equity securities are classified as "held to maturity", - ---------- "available for sale" or "trading" according to management's intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date. Securities held to maturity--There are no securities classified as "held --------------------------- to maturity" in the accompanying consolidated financial statements. Securities available for sale--Securities not classified as "held to ----------------------------- maturity" or as "trading" are classified as "available for sale." Securities classified as "available for sale" are those securities the Bank intends to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity. Trading securities--There are no securities classified as "trading" in the ------------------ accompanying consolidated financial statements. Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using the interest method. Loans and allowance for loan losses: Loans are stated at the amount of unpaid - -------------------------------------- principal, reduced by unearned discount and an allowance for loan losses. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating 22 51-74 expense and reduced by net charge-offs. The subsidiary bank makes continuous credit reviews of the loan portfolio and considers current economic conditions, historical loan loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance for loan losses. Loans are charged against the allowance for loan losses when management believes that collectibility is unlikely. While management uses the best information available to make its evaluation, future adjustments may be necessary if there are significant changes in conditions. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the specific loan agreement. Impaired loans, other than certain large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loan's collateral if the loan is collateral dependent. The method selected to measure impairment is made on a loan-by-loan basis, unless foreclosure is deemed to be probable, in which case the fair value of the collateral method is used. Generally, after management's evaluation, loans are placed on nonaccrual status when principal or interest is greater than 90 days past due based upon the loan's contractual terms. Interest is accrued daily on impaired loans unless the loan is placed on non-accrual status. Impaired loans are placed on non-accrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on non-accrual loans is recognized primarily using the cost-recovery method. Unearned interest on discounted loans is amortized to income over the life of the loans, using methods which approximate the interest method. For all other loans, interest is accrued daily on the outstanding balances. Certain loan fees and direct loan costs are recognized as income or expense when incurred. Whereas, generally accepted accounting principles require that such fees and costs be deferred and amortized as adjustments of the related loan's yield over the contractual life of the loan. The subsidiary bank's method of recognition of loan fees and direct loan costs produces results which are not materially different from those that would be recognized had Statement Number 91 of the Financial Accounting Standards Board been adopted. Bank premises and equipment: Bank premises and equipment are stated at cost less - --------------------------- accumulated depreciation. Depreciation is computed primarily by the straight-line method for bank premises and equipment over the estimated useful lives of the assets. The estimated useful lives employed are on average 30 years for premises and 3 to 10 years for furniture and equipment. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment, including construction period interest costs, are capitalized. No interest was capitalized during 1997 and 1996. Interest capitalized during 1995 totaled $26,921. Other real estate: Other real estate consists primarily of real estate held for - ------------------ resale which was acquired through foreclosure on loans secured by such real estate. At the time of acquisition, these properties are recorded at fair value with any writedown being charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value, less cost to sell. Expenses incurred in connection with operating these properties are generally insignificant and are charged to operating expenses. Gains and losses on the sales of these properties are credited or charged to operating income in the year of the transactions. 23 52-74 Other real estate acquired through foreclosure with carrying values of $57,465 and $28,955, at December 31, 1997 and 1996, respectively, is included in other assets in the accompanying consolidated balance sheets. Income taxes: The consolidated provision for income taxes includes Federal and - ------------ state income taxes and is based on pretax net income reported in the consolidated financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. Earnings per share: Earnings per common share are computed based upon the - ------------------- weighted average shares outstanding. The weighted average number of shares outstanding was 397,032, 378,510 and 378,510 for the years ended December 31, 1997, 1996 and 1995, respectively. For the year ended December 31, 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, Earnings per Share. During the years ended December 31, 1997, 1996 and 1995, the Company did not have any potentially dilutive securities, thus, this pronouncement did not have an impact on the Company's earnings per share computations as presented in the accompanying consolidated financial statements. Employee benefits: The Company has a profit-sharing and thrift plan and an - ------------------ employee stock ownership plan (ESOP) which cover substantially all employees. The amount of the contributions to the plans are at the discretion of the Company's Board of Directors. Trust department: Assets held in an agency or fiduciary capacity by the - ------------------ subsidiary bank's Trust Department are not assets of the subsidiary bank and are not included in the accompanying consolidated balance sheets. Trust Department income is recognized on the cash basis in accordance with customary banking practice. Reporting such income on a cash basis rather than the accrual basis does not have a material effect on net income. Emerging accounting standards: In June 1997, the Financial Accounting Standards - ----------------------------- Board issued Statement No. 130, Reporting Comprehensive Income. This Statement requires an entity to include a statement of comprehensive income in their full set of general-purpose financial statements. Statement No. 130 is effective for years beginning after December 15, 1997 and will require financial statements of earlier periods that are presented for comparative purposes to be reclassified. Based on the Company's operations at December 31, 1997, this pronouncement is not expected to have a significant impact on the Company's consolidated financial statements upon adoption. Reclassifications: Certain accounts in the consolidated financial statements for - ----------------- 1996 and 1995, as previously presented, have been reclassified to conform to current year classifications. NOTE 2. ACQUISITION OF PETERSBURG BRANCH On November 15, 1995, the Bank acquired a branch bank located in Petersburg, West Virginia from an unaffiliated institution. In connection with this acquisition, the Bank acquired the branch's assets including its land, banking facility, equipment and loans and assumed its deposit liabilities. The acquisition was accounted for as a purchase and the results of operations of the Petersburg Branch since the date of its acquisition are included in the accompanying consolidated financial statements. The Branch's purchase price and the related excess of the purchase price over the fair value of the net assets acquired was not significant. 24 53-74 NOTE 3. CASH CONCENTRATION At December 31, 1997 and 1996, the subsidiary bank had a concentration totaling $8,514,792 and $2,451,256, respectively, with two financial institutions consisting of a due from bank account balance and Federal funds sold. NOTE 4. SECURITIES The amortized cost, unrealized gains and losses, and estimated fair values of securities at December 31, 1997 and 1996, are summarized as follows:
1997 --------------------------------------------------- Carrying Unrealized Value Amortized -------------------- (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 =========== ======== ======= ===========
1996 ---------------------------------------------------- Carrying Unrealized Value Amortized --------------------- (Estimated Cost Gains Losses Fair Value) ----------- -------- -------- ----------- Available for sale: Taxable: U.S. Treasury Securities $ 4,246,582 $ 46,198 $ 12,270 $ 4,280,510 U.S. Government agencies and corporations 12,013,602 75,012 46,518 12,042,096 Small Business Administration guaranteed loan participation certificates 1,646,390 36,719 - - 1,683,109 Mortgage-backed securities - U.S. Government agencies and corporations 4,642,785 22,891 49,602 4,616,074 Corporate debt securities 498,476 3,688 672 501,492 Federal Reserve Bank stock 44,300 - - - - 44,300 Federal Home Loan Bank stock 339,400 - - - - 339,400 Other equity securities 6,625 - - - - 6,625 ----------- -------- -------- ----------- Total taxable 23,438,160 184,508 109,062 23,513,606 ----------- -------- -------- -----------
25 54-74
1996 ---------------------------------------------------- Carrying Unrealized Value Amortized --------------------- (Estimated Cost Gains Losses Fair Value) ----------- -------- ------- ----------- Tax-Exempt: State and political subdivisions 5,719,170 129,004 13,882 5,834,292 Federal Reserve Bank stock 4,100 - - - - 4,100 ----------- -------- -------- ----------- Total tax-exempt 5,723,270 129,004 13,882 5,838,392 ----------- -------- -------- ----------- Total $29,161,430 $313,512 $122,944 $29,351,998 =========== ======== ======== ===========
Federal Reserve Bank stock and Federal Home Loan Bank stock are equity securities which are included in securities available for sale in the accompanying consolidated financial statements. Such securities are carried at cost, since they may only be sold back to the respective Federal Reserve Bank or Federal Home Loan Bank or another member at par value. Mortgage-backed obligations of U.S. Government agencies and corporations and Small Business Administration guaranteed loan participation certificates are included in securities at December 31, 1997 and 1996. These obligations, having contractual maturities ranging from 2 to 22 years, are reflected in the following maturity distribution schedules based on their anticipated average life to maturity, which ranges from 1 to 9 years. Accordingly, discounts are accreted and premiums are amortized over the anticipated average life to maturity of the specific obligation. The maturities, amortized cost and estimated fair values of securities at December 31, 1997, are summarized as follows: Available for Sale --------------------------------- Carrying Value Amortized (Estimated Cost Fair Value) --------------- --------------- Due in one year or less $ 4,713,450 $ 4,719,584 Due from one to five years 13,479,100 13,618,493 Due from five to ten years 6,445,747 6,540,110 Due after ten years 1,810,985 1,891,482 Equity securities 777,425 777,425 --------------- --------------- Total $ 27,226,707 $ 27,547,094 =============== =============== The proceeds from sales, calls, maturities of securities, including principal payments received on mortgage-backed obligations and the related gross gains and losses realized are as follows: 26 55-74
Proceeds From Gross Realized ------------------------------------ ------------------ Years Ended Calls and Principal December 31, Sales Maturities Payments Gains Losses - ------------------------- ---------- ---------- ---------- -------- ------- 1997 Securities available for sale $1,539,666 $6,748,200 $1,417,948 $ 9,789 $ - - ========== ========== ========== ======== ======= 1996 Securities available for sale $6,735,258 $3,950,000 $ 768,591 $45,824 $15,825 ========== ========== ========== ======== ======= 1995 Securities held to maturity $ - - $ 100,000 $ 313,701 $ - - $ - - Securities available for sale 2,030,688 5,345,000 170,994 19,618 21,164 ---------- ---------- ---------- -------- ------- $2,030,688 $5,445,000 $ 484,695 $19,618 $21,164 ========== ========== ========== ======== =======
At December 31, 1997 and 1996, securities with amortized costs of $17,149,748 and $16,120,939, respectively, with estimated fair values of $17,313,961 and $16,240,924, respectively, were pledged to secure public deposits, and for other purposes required or permitted by law. NOTE 5. LOANS Loans are summarized as follows: 1997 1996 ----------- ----------- Commercial, financial and agricultural $30,325,145 $27,376,966 Real estate - construction 144,207 154,388 Real estate - mortgage 42,640,294 36,541,867 Installment 20,587,084 19,486,254 Other 468,980 614,818 ----------- ----------- Total loans 94,165,710 84,174,293 Less unearned discount 697,777 901,665 ----------- ----------- Total loans net of unearned income 93,467,933 83,272,628 Less allowance for loan losses 895,281 858,423 ----------- ----------- Loans, net $92,572,652 $82,414,205 =========== =========== Included in the net balance of loans are non-accrual loans amounting to $141,735 and $342,842 at December 31, 1997 and 1996, respectively. If interest on non-accrual loans had been accrued, such income would have approximated $14,200, $30,978 and $36,708 for the years ended December 31, 1997, 1996 and 1995, respectively. The following presents loan maturities at December 31, 1997:
Within After 1 But After 1 Year Within 5 Years 5 Years ----------- -------------- ----------- Commercial, financial and agricultural $ 7,472,521 $ 6,401,848 $16,450,776 Real estate - construction 64,207 - - 80,000 Real estate - mortgage 1,800,225 2,575,586 38,264,483 Installment loans 2,309,614 15,230,225 3,047,245 Other 120,553 45,749 302,678 ----------- ----------- ----------- Total $11,767,120 $24,253,408 $58,145,182 =========== =========== =========== Loans due after one year with: Variable rates $34,355,266 Fixed rates 48,043,324 ----------- $82,398,590 ===========
27 56-74 The Bank has made, and may be expected to make in the future, commercial and mortgage loans that have adjustable rates. Such loan rates are generally indexed to the Wall Street prime interest rate or to other common indices. At December 31, 1997, the Bank's commercial loan portfolio contained adjustable rate loans of approximately $14,297,406. The interest rates on such loans ranged from 7.53% to 12.25%, and provided for future interest rate changes at set intervals, ranging from one to sixty months. Likewise, the Bank's mortgage portfolio contained adjustable rate loans of approximately $23,235,836 at December 31, 1997. The interest rates on such loans ranged from 6.75% to 13.56%, and provided for future interest rate changes at set intervals, ranging from monthly to fifteen years. Concentration of credit risk: The subsidiary bank grants commercial, residential - ---------------------------- and consumer loans to customers primarily located in Hardy, Grant, Hampshire and Pendleton Counties of West Virginia. Although the Bank strives to maintain a diverse loan portfolio, a substantial portion of its debtors' ability to honor their contracts is indirectly dependent upon the poultry industry. As of December 31, 1997 and 1996, the Bank had direct extensions of credit used to build and operate poultry houses totaling approximately $3,429,533 and $4,563,919, respectively. These loans are generally structured to be repaid over periods ranging from 15 to 20 years, however, most also contain balloon provisions which serve to require each loan's renewal every 1 to 5 years or are written with an adjustable interest rate feature. The security for these loans generally consists of liens on the land, buildings and equipment associated with each poultry house. The Bank evaluates the credit worthiness of each of its customers on a case-by-case basis and the amount of collateral it obtains is based upon management's credit evaluation. Loans to related parties: The subsidiary bank has had, and may be expected to - -------------------------- have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party (other changes represent additions to and changes in director and executive officer status): 1997 1996 ------------ ------------ Balance, beginning $ 4,318,097 $ 5,176,398 Additions 1,651,121 1,574,443 Amounts collected (1,483,575) (1,658,303) Other changes, net (571,700) (774,441) ------------ ------------ Balance, ending $ 3,913,943 $ 4,318,097 ============ ============ NOTE 6. ALLOWANCE FOR LOAN LOSSES An analysis of the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995, is as follows: 28 57-74
1997 1996 1995 -------- -------- -------- Balance, beginning of year $858,423 $859,681 $993,023 Losses: Commercial, financial and agricultural - - 10,194 46,373 Real estate - mortgage 25,536 12,778 137,334 Installment loans 166,059 93,826 39,004 Other 8,444 9,951 10,909 -------- -------- -------- Total 200,039 126,749 233,620 -------- -------- -------- Recoveries: Commercial, financial and agricultural 27,050 5,658 7,864 Real estate - mortgage 13,675 1,885 3,135 Installment loans 39,936 20,525 28,862 Other 1,236 2,423 5,417 -------- -------- -------- Total 81,897 30,491 45,278 -------- -------- -------- Net losses 118,142 96,258 188,342 Provision for loan losses 155,000 95,000 55,000 -------- -------- -------- Balance, end of year $895,281 858,423 $859,681 ======== ======== ========
The Bank's total recorded investment in impaired loans at December 31, 1997 and 1996, approximated $125,114 and $383,615, respectively, for which the related allowance for loan losses determined in accordance with generally accepted accounting principles approximated $77,500 and $91,518, respectively. The Bank's average investment in such loans approximated $125,114 and $381,938 for the years ended December 31, 1997 and 1996, respectively. All impaired loans at December 31, 1997 and 1996, were collateral dependent, and accordingly, the fair value of the loan's collateral was used to measure the impairment of each loan. For purposes of evaluating impairment, the Bank considers groups of smaller-balance, homogeneous loans to include: mortgage loans secured by residential property, other than those which significantly exceed the Bank's typical residential mortgage loan amount (currently those in excess of $100,000); small balance commercial loans (currently those less than $50,000); and installment loans to individuals, exclusive of those loans in excess of $50,000. For the years ended December 31, 1997 and 1996, the Bank recognized approximately $12,272 and $46,779, respectively, in interest income on impaired loans. Using a cash-basis method of accounting, the Bank would have recognized approximately the same amount of interest income on such loans. NOTE 7. BANK PREMISES AND EQUIPMENT The major categories of Bank premises and equipment and accumulated depreciation at December 31, 1997 and 1996, are summarized as follows: 1997 1996 ---------- ---------- Land $ 429,973 $ 435,473 Building and improvements 2,681,707 2,805,616 Furniture and equipment 1,675,258 1,674,269 ---------- ---------- 4,786,938 4,915,358 Less accumulated depreciation 1,715,874 1,793,466 ---------- ---------- Bank, premises and equipment, net $3,071,064 $3,121,892 ========== ========== 29 58-74 Depreciation expense for the years ended December 31, 1997, 1996 and 1995 totaled $235,488, $212,383 and $154,338, respectively. NOTE 8. DEPOSITS The following is a summary of interest bearing deposits by type as of December 31, 1997 and 1996: 1997 1996 ----------- ----------- Demand deposits, interest bearing $17,468,844 $20,139,983 Savings deposits 14,890,934 12,938,812 Certificates of deposit 56,902,451 50,997,400 Individual Retirement Accounts 8,028,653 7,790,158 ----------- ----------- Total $97,290,882 $91,866,353 =========== =========== Time certificates of deposit and IRA's in denominations of $100,000 or more totaled $10,726,460 and $9,260,399 at December 31, 1997 and 1996, respectively. Interest paid on time certificates of deposit and Individual Retirement Accounts in denominations of $100,000 or more was $565,000, $501,754 and $392,641 for the years ended December 31, 1997, 1996 and 1995, respectively. The following is a summary of the maturity distribution of certificates of deposit and IRA's in denominations of $100,000 or more as of December 31, 1997: Amount Percent ----------- ------- Three months or less $ 768,783 7.2% Three through six months 2,970,343 27.7% Six through twelve months 3,154,059 29.4% Over twelve months 3,833,275 35.7% ----------- ------ Total $10,726,460 100.00% =========== ====== A summary of the scheduled maturities for all time deposits as of December 31, 1997, follows: 1998 $40,805,514 1999 14,001,099 2000 3,763,963 2001 3,360,840 2002 1,947,938 Thereafter 1,051,750 ----------- $64,931,104 =========== NOTE 9. OTHER BORROWINGS SHORT-TERM BORROWINGS: Federal funds purchased and securities sold under agreements to repurchase mature the next business day. The securities underlying the repurchase agreements are under the subsidiary bank's control and secure the total outstanding daily balances. Other borrowings consist of lines of credit from the Federal Home Loan Bank (FHLB) under its Flexline and RepoPlus Programs. The Flexline is limited to 10% of the Bank's calculated maximum borrowing capacity at time of application, or approximately $3,644,000 at December 31, 1997, and is subject to annual renewal. Borrowings under this arrangement bear interest at the rate posted by the FHLB on the day of the borrowing and is subject to change daily. The RepoPlus is limited to the Bank's outstanding maximum borrowing capacity of approximately $38,791,000 at December 31, 1997, less the current outstanding flexline balance, and is subject to annual renewal. Borrowings under this arrangement will be granted for terms of 1 to 120 days and will bear interest at a fixed rate set 30 59-74 at the time of the funding request. The lines of credit are secured by a blanket lien on all unpledged and unencumbered assets of the Bank. Additional details regarding short-term borrowings during the years ended December 31, 1997 and 1996, are presented below: 1997 ---------------------------------------- Federal Funds Repurchase Other Purchased Agreements Borrowings --------- ----------- ----------- Outstanding at year end $ - - $ 5,745,010 $ 1,400,000 Average amount outstanding 107,534 3,853,897 1,724,015 Maximum amount outstanding at any month end - - 5,745,010 2,400,000 Weighted average interest rate 5.33% 4.21% 5.14% 1996 ---------------------------------------- Federal Funds Repurchase Other Purchased Agreements Borrowings ---------- ---------- ---------- Outstanding at year end $ - - $4,377,397 $ - - Average amount outstanding 86,175 1,335,635 156,733 Maximum amount outstanding at any month end 1,050,000 4,377,397 2,916,000 Weighted average interest rate 5.76% 4.13% 5.49% LONG-TERM BORROWINGS: On February 18, 1997 and March 14, 1997, the Company obtained two long-term borrowings from two separate financial institutions in the amounts of $3,000,000 and $500,000 respectively, to fund a portion of its investment in an affiliate. Each of these loans bear an interest rate of prime minus .25%, adjusted annually, with interest payments due quarterly. Annual principal payments in the amount of $600,000 are due on the $3,000,000 loan beginning in February 1998, while quarterly principal payments in the amount of $20,833 are due on the $500,000 loan beginning in June 1997. The $3,000,000 loan is collateralized by 291,410 shares of the affiliate stock that the Company owns. An additional 48,500 shares of the affiliate stock presently owned are pledged as collateral for the $500,000 loan. The subsidiary bank also had long-term borrowings of $7,558,348 and $3,514,652 as of December 31, 1997 and 1996, respectively, which consisted of advances from the Federal Home Loan Bank of Pittsburgh to fund local mortgage loan growth. These borrowings bear variable interest rates which adjust at least annually and mature in varying amounts through the year 2006. The average interest rate paid during 1997 and 1996 approximated 6.11% and 5.81%, respectively. 31 60-74 A summary of the maturities of all long-term borrowings for the next five years and thereafter is as follows: Long-term Borrowings From ------------------------- Financial FHLB Institutions Advances Total ------------ ---------- ----------- 1998 $ 83,332 $ - - $ 83,332 1999 683,332 690,000 1,373,332 2000 683,332 500,000 1,183,332 2001 683,332 500,000 1,183,332 2002 683,332 2,750,000 3,433,332 Thereafter 20,840 3,118,348 3,139,188 ---------- ---------- ----------- $2,837,500 $7,558,348 $10,395,848 ========== ========== =========== 31 Note 10. Income Taxes The components of applicable income tax expense(benefit) for the years ended December 31, 1996, 1995 and 1994, are as follows: 1997 1996 1995 -------- -------- -------- Current: Federal $563,735 $602,391 $587,472 State 79,691 75,932 69,402 -------- -------- -------- 643,426 678,323 656,874 -------- -------- -------- Deferred: Federal 39,640 (31,208) 20,268 State 8,199 (3,902) 2,534 -------- -------- -------- 47,839 (35,110) 22,802 -------- -------- -------- Total $691,265 $643,213 $679,676 ======== ======== ======== A reconciliation between the amount of reported income tax expense and the amount computed by multiplying the statutory income tax rates by book pretax income for the years ended December 31, 1997, 1996 and 1995, is as follows:
1997 1996 1995 --------------------- ------------------- ------------------- Amount Percent Amount Percent Amount Percent --------- --------- -------- --------- -------- --------- Computed tax at applicable statutory rate $751,713 34 $725,305 34 $679,943 34 Increase (decrease) in taxes resulting from: Tax-exempt interest, net (94,460) (4) (80,961) (4) (55,982) (3) State income taxes, net of Federal income tax benefit 58,007 3 47,540 2 45,802 2 Noncash charitable contribution (41,573) (2) (59,704) (3) - - - - Other, net 17,578 1 11,033 1 9,913 1 --------- --------- -------- --------- -------- --------- Applicable income taxes $ 691,265 32 $643,213 30 $679,676 34 ========= ========= ======== ========= ======== =========
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differ- 32 61-74 ences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. Valuation allowances are established when deemed necessary to reduce deferred tax assets to the amount expected to be realized. The tax effects of temporary differences which give rise to the Company's deferred tax assets and liabilities as of December 31, 1997 and 1996, are as follows: 1997 1996 --------- --------- Deferred tax assets: Allowance for loan losses $ 226,964 $ 217,199 Deferred compensation 62,137 43,280 Charitable contribution carryover - - 44,327 Goodwill 9,482 9,482 --------- --------- 298,583 314,288 Less valuation allowance (209,768) (194,010) --------- --------- 88,815 120,278 --------- --------- Deferred tax liabilities: Depreciation 51,225 33,104 Net unrealized gain on securities 123,349 73,369 Accretion on tax-exempt securities 2,519 480 Bank premises and equipment disposal 15,135 18,919 --------- --------- 192,28 125,872 --------- --------- Net deferred tax assets (liabilities) $(103,413) $ (5,594) ========= ========= The income tax expense (benefit) on realized securities gains (losses) was $3,769, $11,550, and $(595), for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 11. EMPLOYEE BENEFITS Profit-Sharing and Thrift Plan: - ------------------------------- The Company has a defined contribution profit-sharing and thrift plan with 401(k) provisions covering substantially all employees. Contributions to the Plan are at the discretion of the Board of Directors. Contributions made to the plan and charged to expense were $53,417, $54,240, and $50,475 for the years ended December 31, 1997, 1996 and 1995, respectively. Employee Stock Ownership Plan: - ----------------------------- The Company has an Employee Stock Ownership Plan (ESOP) which enables eligible employees to acquire shares of the Company's common stock. The cost of the ESOP is borne by the Company through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors. The expense recognized by the Company is based on cash contributed or committed to be contributed by the Company to the ESOP during the year. Contributions to the ESOP for the years ended December 31, 1997, 1996 and 1995 were $51,047, $48,250 and $45,582, respectively. Dividends made by the Company to the ESOP are reported as a reduction to retained earnings. The ESOP owns 9,235 shares of the Company's common stock, all of which were purchased at the prevailing market price and are considered outstanding for earnings per share computations. The trustees of both the Profit-Sharing and Thrift Plan and ESOP are also members of the Company's and subsidiary bank's Board of Directors. 33 62-74 Incentive Compensation Program: - ------------------------------- The subsidiary bank has an incentive compensation program for its key employees. Bonuses are awarded to key employees based on a prescribed formula using the Bank's return on assets as a base. Under the terms of the incentive compensation program, bonuses charged to operations totaled $141,000, $137,000 and $120, 000 for 1997, 1996 and 1995, respectively. Directors Deferred Compensation Plan: - ------------------------------------- The Bank has established a non-qualified deferred compensation plan for directors who voluntarily elect to participate. Under that plan, a director, on or before December 31, of any year, may elect to defer payment of all retainer, meeting and committee fees earned during the calendar year following such election and, unless such election is subsequently terminated, all succeeding calendar years. Amounts deferred are periodically converted to units representing shares of the Company's stock which are to be periodically purchased by the plan at current market values when available on the open market. The liability for deferred directors compensation at December 31, 1997 and 1996, approximated $162,450 and $113,150, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. NOTE 12. COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance sheet risk: The subsidiary bank is a - ----------------------------------------------------- party of certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Such financial instruments consist solely of commitments to extend credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement the Bank has in this class of financial instruments. The Bank's total contract amount of commitments to extend credit at December 31, 1997 and 1996, approximated $5,715,032 and $5,639,457, respectively. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate. Litigation: The Bank is involved in various legal actions arising in the - ----------- ordinary course of business. In the opinion of counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements. Employment Agreement: The Company has an employment agreement with its chief - ---------------------- executive officer. This agreement contains change in control provisions that would entitle the officer to receive compensation in the event there is a change in control in the Company (as defined) and a termination of his employment without cause (as defined). Year 2000 Compliant: The Company is conducting a comprehensive review of its - -------------------- subsidiary bank's computer systems to identify the systems that could be affected by the "Year 2000 Issue" 34 63-74 ("Issue") and is developing a remediation plan to resolve the Issue. The Issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The subsidiary bank is heavily dependent on computer processing in the conduct of business activities. While management believes it is doing everything technologically possible to assure Year 2000 compliance, it is in part dependent upon systems and software vendors to represent that the products provided are, or will be, "Year 2000 Compliant." Because the Company has not completed its review of computer systems, management is unable to estimate the exact costs of making the system Year 2000 compliant, however, the total cost is not expected to be significant to the Company's financial position or results of operations. NOTE 13. RESTRICTIONS ON CAPITAL AND DIVIDENDS The primary source of funds for the dividends paid by South Branch Valley Bancorp, Inc. is dividends received from its subsidiary bank. Dividends paid by the subsidiary bank are subject to restrictions by banking regulations. The most restrictive provision requires approval by the regulatory agency if dividends declared in any year exceed the year's net income, as defined, plus the net retained profits of the two preceding years. During 1998, the net retained profits available for distribution to South Branch Valley Bancorp, Inc. as dividends without regulatory approval are approximately $1,086,000 plus net retained income of the subsidiary bank for the interim periods through the date of declaration. The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. The most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. The Bank's actual capital amounts and ratios are also presented in the following table (in thousands).
1997 ----------------------------------------------------------------- To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ----------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------- -------- ------ ------- ------- ------- As of December 31, 1997: Total Capital $12,779 14.35% $7,123 8.0% $8,904 10.0% (to Risk Weighted Assets) Tier I Capital 11,884 13.35% 3,562 4.0% 5,342 6.0% (to Risk Weighted Assets) Tier I Capital 11,884 9.15% 3,897 3.0% 7,793 6.0% (to Average Assets)
35 64-74
1996 ------------------------------------------------------------------ To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ----------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------- --------- ------ ------- ------ ------- As of December 31, 1996: Total Capital $12,522 15.86% $6,315 8.0% $7,893 10.0% (to Risk Weighted Assets) Tier I Capital 11,664 14.78% 3,157 4.0% 4,736 6.0% (to Risk Weighted Assets) Tier I Capital 11,664 9.88% 3,540 3.0% 7,081 5.0% (to Average Assets)
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following summarizes the methods and significant assumptions used by the Company in estimating its fair value disclosures for financial instruments. CASH AND DUE FROM BANKS: The carrying values of cash and due from banks approximate their estimated fair value. INTEREST BEARING DEPOSITS WITH OTHER BANKS: The fair values of interest bearing deposits with other banks are estimated by discounting scheduled future receipts of principal and interest at the current rates offered on similar instruments with similar remaining maturities. FEDERAL FUNDS SOLD: The carrying values of Federal funds sold approximate their estimated fair values. SECURITIES: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. LOANS: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed. ACCRUED INTEREST RECEIVABLE AND PAYABLE: The carrying values of accrued interest receivable and payable approximate their estimated fair values. DEPOSITS: The estimated fair values of demand deposits (i.e. noninterest bearing checking, NOW, Super NOW, money market and savings accounts) and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed. SHORT-TERM BORROWINGS: The carrying values of short-term borrowings approximate their estimated fair values. LONG-TERM BORROWINGS: The fair values of long-term borrowings are estimated by discounting scheduled future payments of principal and interest at current rates available on borrowings with similar terms. OFF-BALANCE SHEET INSTRUMENTS: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counterparties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values are not shown below. 36 65-74 The carrying values and estimated fair values of the Company's financial instruments are summarized below:
December 31, 1997 December 31, 1996 --------------------------- --------------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ------------ ------------ ------------ ------------ Financial assets: Cash and due from banks $ 3,945,099 $ 3,945,099 $ 3,162,552 $ 3,162,552 Interest bearing deposits, other banks 1,256,000 1,283,843 1,553,000 1,596,273 Investment in affiliate 5,273,481 5,273,481 - - - - Federal funds sold 5,806,717 5,806,717 723,734 723,734 Securities available for sale 27,547,094 27,547,094 29,351,998 29,351,998 Loans 92,572,652 93,668,853 82,414,205 82,296,508 Accrued interest receivable 864,083 864,083 928,642 928,642 ------------ ------------ ------------ ------------ $137,265,126 $138,389,170 $118,134,131 $118,059,707 ============ ============ ============ ============ Financial liabilities: Deposits $106,984,797 $107,728,110 $100,941,412 $101,317,554 Short-term borrowings 7,145,010 7,145,000 4,377,397 4,377,397 Long-term borrowings 10,395,848 10,395,848 3,514,652 3,514,652 Accrued interest payable 483,857 483,857 428,334 428,334 ------------ ------------ ------------ ------------ $125,009,512 $125,752,815 $109,261,795 $109,637,937 ============ ============ ============ ============
NOTE 15. INVESTMENT IN AFFILIATE AND PROPOSED MERGER During the first six months of 1997 the Company purchased approximately 40% or 474,680 of the 1,200,000 issued and outstanding common shares of The Capital State Bank, Inc. (Capital State). The Company's investment of $5,273,481 is reflected in the accompanying consolidated balance sheet under the caption "investment in affiliate" at December 31, 1997. To facilitate the funding of this investment, the Company issued and sold 34,317 shares of $2.50 par value common stock at $43.50 per share to seven directors of the Company in a limited stock offering. The net proceeds of the sale increased common stock $85,793 and capital surplus $1,404,175. For additional funding of the investment, on February 18, 1997 and March 14, 1997, the Company obtained two long-term borrowings from two separate financial institutions in the amounts of $3,000,000 and $500,000 respectively. Each of these loans bears an interest rate of prime minus .25%, adjusted annually, with interest payments due quarterly. Annual principal payments in the amount of $600,000 are due on the $3,000,000 loan, while quarterly principal payments in the amount of $20,833 are due on the $500,000 loan. The $3,000,000 loan is collateralized by 291,410 shares of Capital State stock and 48,500 shares of Capital State stock are pledged as collateral for the $500,000 loan. Proposed merger: On August 6, 1997, the Company entered into an Agreement and - ----------------- Plan of Merger with The Capital State Bank, Inc. (Capital State). The Agreement, as amended on December 16, 1997, calls for the shareholders of Capital State to receive one (1) share of the Company's common stock in exchange for 3.95 shares of Capital State common stock owned. The Company anticipates issuing an additional 184,005 shares to consummate the merger. The proposed merger is subject to shareholder and regulatory approval. The Company anticipates that upon consummation of the merger, Capital State will operate as a wholly-owned subsidiary bank. The Company will account for the merger as a purchase in accordance with generally accepted accounting principles. 37 66-74 The following tables set forth certain pro forma condensed consolidated financial information of South Branch after giving effect to the Proposed Merger as if it had been consummated, with respect to the Statement of Operations, at the beginning of the period presented, or with respect to the Balance Sheet, as of the date presented. The following tables present such information as if the Proposed Merger had been accounted for using the purchase method of accounting. This pro forma information has been included for comparative purposes only and may not be indicative of the combined financial position or results of operations that actually would have occurred had the transaction been consummated during the period or as of the date indicated, or which will be attained in the future. Note 15. Pro Forma Reflecting South Branch Valley Bancorp, Inc. After Giving Effect to the Proposed Merger With The Capital State Bank, Inc. (In thousands, except for per share data) As of December 31, 1997 ----------------------- As Reported Pro forma - -------------------------------------------------------------------- Consolidated Balance Sheet Data Total assets $140,648 $178,365 Investment securities $ 27,547 $ 35,524 Net loans $ 92,573 $116,454 Total deposits $106,985 $136,148 Shareholders' equity $ 15,061 $ 23,064 Book value per common share $ 36.48 $ 38.64 For the year ended December 31, 1997 ------------------------------------ As Reported Pro forma - ------------------------------------------------------------------------------- Consolidated Statement of Operations Data Total interest income $ 10,590 $ 13,144 Total interest expense $ 5,407 $ 6,641 Net interest income $ 5,183 $ 6,503 Provision for possible loan losses $ 155 $ 275 Net income $ 1,520 $ 1,238 Per common share: Net income $ 3.83 $ 2.07 Cash dividends declared $ 0.84 $ 0.56 Weighted average shares outstanding 397,032 596,832 38 67-74 NOTE 16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY The investment of the Corporation in its wholly-owned subsidiary is presented on the equity method of accounting. Information relative to the Corporation's balance sheets at December 31, 1997 and 1996, and the related statements of income and cash flows for the years ended December 31, 1997, 1996 and 1995 are presented as follows:
December 31, --------------------------- 1997 1996 ----------- ----------- Assets - ------ Cash $ 145,593 $ 157,133 Investment in bank subsidiary, eliminated in consolidation 12,189,418 11,926,831 Securities available for sale 206,625 206,625 Investment in affiliate 5,273,481 - - Other assets 109,374 13,204 ----------- ----------- Total assets $17,924,491 $12,303,793 =========== =========== Liabilities and shareholders' equity - ------------------------------------ Long-term borrowings $ 2,837,500 $ - - Other liabilities 26,439 - - ----------- ----------- Total liabilities $ 2,863,939 $ - - ----------- ----------- Common stock, $2.50 par value, authorized 600,000 shares, issued 416,942 shares in 1997; 382,625 shares in 1996 $ 1,042,355 $ 956,562 Capital surplus 2,089,709 685,534 Retained earnings (consisting of undivided profits of bank subsidiary not yet distributed) 11,898,420 10,711,468 Less cost of shares acquired for the treasury 1997 and 1996, 4,115 shares (166,970) (166,970) Net unrealized gain (loss) on securities 197,038 117,199 ----------- ----------- Total shareholders' equity 15,060,552 12,303,793 ----------- ----------- Total liabilities and shareholders' equity $17,924,491 $12,303,793 =========== ===========
1997 1996 1995 ---------- ----------- ----------- Statements of Income - -------------------- Income - dividends from bank subsidiary $1,500,000 $ 600,000 $ 264,000 Other dividends 225 197 191 Tax-exempt interest 9,000 2,600 - - Interest expense (214,790) - - - - Expenses--operating (65,400) (26,504) (17,727) ---------- ----------- ----------- Income before income taxes and undistributed income 1,229,035 576,293 246,464 Applicable income tax expense (benefit) (107,874) (10,204) (6,826) ---------- ----------- ----------- Income before undistributed income 1,336,909 586,497 253,290 Equity in undistributed income of bank subsidiary 182,748 903,540 1,066,866 ---------- ----------- ----------- Net income $1,519,657 $ 1,490,037 $ 1,320,156 ========== =========== ===========
39 68-74
1997 1996 1995 ----------- ---------- ----------- Statements of Cash Flows - ------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,519,657 $1,490,037 $ 1,320,156 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (182,748) (903,540) (1,066,866) (Increase) decrease in other assets (96,170) (6,377) - - Increase in other liabilities 26,439 - - - - ----------- ----------- ----------- Net cash provided by operating activities 1,267,178 580,120 253,290 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities available for sale - - (200,000) - - Purchase of common stock of affiliate (5,273,481) - - - - ----------- ----------- ----------- Net cash (used in) investing activities (5,273,481) (200,000) - - ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Purchase of treasury stock - - - - - - - Dividends paid to shareholders (332,705) (291,453) (257,386) Proceeds from long-term borrowings 3,500,000 - - - - Repayment of long-term debt (662,500) - - - - Net proceeds from issuance of common stock 1,489,968 - - - - ----------- ----------- ----------- Net cash provided by (used in) financing activities 3,994,763 (291,453) (257,386) Increase (decrease) in cash (11,540) 88,667 (4,096) Cash: Beginning 157,133 68,466 72,562 ----------- ----------- ----------- Ending $ 145,593 157,133 $ 68,466 =========== =========== ===========
South Branch Valley Bancorp, Inc., accounts for its investment in its bank subsidiary by the equity method. During the years ended December 31, 1997, 1996 and 1995, changes were as follows:
Number of shares owned at December 31, 1997 - 60,000 Percent to total shares at December 31, 1997 - 100% Balance at December 31, 1994 $ 9,292,126 Add (deduct): Equity in net income 1,330,866 Dividends declared (264,000) Change in net unrealized gain (loss) on securities 887,750 ----------- Balance at December 31, 1995 $11,246,742 Add (deduct): Equity in net income 1,503,540 Dividends declared (600,000) Change in net unrealized gain (loss) on securities (223,451) ----------- Balance at December 31, 1996 $11,926,831 Add (deduct): Equity in net income 1,682,748 Dividends declared (1,500,000) Change in net unrealized gain (loss) on securities 79,839 ----------- Balance at December 31, 1997 $12,189,418 ===========
40 69-74 Shareholders' Information South Branch Valley Bancorp, Inc. files an annual report to the Securities and Exchange Commission on Form 10-KSB. Copies of this report may be obtained without charge upon written request to: Carol A. Riggleman South Branch Valley Bancorp, Inc. Post Office Box 680 Moorefield, West Virginia 26836 or E-Mail: sbvnb@hardynet.com Common Stock Dividend Dividends on South Branch Valley Bancorp, Inc. stock are normally paid on the 15th day of June and December. The record date is normally the 1st day of the same months. The Company acts as its own registrar and transfer agent. Its shares are not publicly traded on any exchange or over the counter market. Shares of the Company's common stock are occasionally bought and sold by private individuals, firms or corporations. In many instances, the Company does not have knowledge of the purchase price or the terms of the purchase. No definitive records of bids and ask or sale prices are available. Offices of South Branch Valley National Bank Main Bank Petersburg Branch 310 North Main Street 102 Virginia Avenue Moorefield, WV 26836 Petersburg, WV 26847 (304) 538-2353 (304) 257-2122 fax: (304) 538-7053 fax: (304) 257-2858 Mathias Branch Franklin Branch P.O. Box 40 P.O. Box 863 Mathias, WV 26812 Franklin, WV 26807 (304) 897-5997 (304) 358-2388 fax: (304) 897-6232 fax: (304) 358-2149 Officers of the Holding Company South Branch Valley Bancorp, Inc. OSCAR M. BEAN H. CHARLES MADDY, III Chairman of the Board President DONALD W. BILLER PHOEBE FISHER HEISHMAN Vice Chairman Secretary RUSSELL F. RATLIFF, JR. CAROL A. RIGGLEMAN Treasurer Assistant Secretary 41 70-74 Directors South Branch Valley Bancorp, Inc. and South Branch Valley National Bank OSCAR M. BEAN Chairman of the Board Managing Partner -- Bean & Bean Attorneys H. CHARLES MADDY, III President and Chief Executive Officer, South Branch Valley National Bank DONALD W. BILLER Vice-Chairman and Director President -- D. W. Biller, Inc. Director -- WV Farm Credit ACA PHOEBE FISHER HEISHMAN Secretary Editor and Publisher -- Moorefield Examiner President -- R.E. Fisher Co., Inc.
JAMES M. COOKMAN JEFFREY E. HOTT President -- Cookman Insurance Center, Inc. Vice-President -- Hott's Ag Services, Inc. President -- Cookman Realty Group, Inc. Vice-President -- Franklin Oil Co. Sole Proprietor -- WQWV-FM Radio Station Vice-President -- E.E. Hott, Inc. Secretary/Treasurer-- Apex Developers, Inc. HAROLD K. MICHAEL JOHN W. CRITES Owner/Agent -- H.K. Michael & Son Insurance President -- Allegheny Wood Products, Inc. Member -- WV House of Delegates Partner -- Allegheny Dimension, Limited Liability Co. Principal Stockholder - KJV Aviation, Inc. MARY ANN OURS President -- Ours Valley View Poultry Farms, Inc. THOMAS J. HAWSE, III President -- Hawse Food Market, Inc RUSSELL F. RATLIFF, JR. Vice President & Cashier GARY L. HINKLE South Branch Valley National Bank President -- Hinkle Trucking, Inc. President -- Dettinburn Transport, Inc. HARRY C. WELTON, JR. President -- Mt. Storm Fuel Corp. Retired Farmer
J. ALECK WELTON Director Emeritus RENICK C. WILLIAMS Director Emeritus 42 71-74 Operating Officers of the Bank South Branch Valley National Bank H. CHARLES MADDY, III President and Chief Executive Officer RUSSELL F. RATLIFF, JR. SCOTT C. JENNINGS Vice President, Cashier & Trust Officer Vice President JULIE R. COOK CAROL A. RIGGLEMAN Controller CRA Officer, Executive Secretary DEBRA S. DAVIS MARK H. WRIGHT Assistant Vice President of Lending Assistant Vice President of Lending DANYL FREEMAN TRACEY L. GOCHENOUR Assistant Vice President Operations Loan Review & Compliance Officer BARBARA GORENFLO KATHLEEN S. SIMERLY Assistant Vice President Teller Operations Accounting Officer J. VANCE WILSON MARLIN C. CASTO Loan Officer Loan Officer KENT SHIPE THOMAS G. KIMBLE Mathias Branch Manager Franklin Branch Manager WILLIAM F. COOK LARRY G. SMITH Petersburg Branch Manager Assistant Branch Manager, Franklin BELINDA L. TURNER DEBORAH HAMILTON Assistant Branch Manager, Petersburg Assistant Branch Manager, Mathias
JENNY L. CARR Internal Auditor Employees of the Bank South Branch Valley National Bank STAFF Main Bank Teresa Barr Larry Curtis Gail Malcolm Amy Regester Rebecca Bishoff Gloria George Tina Martin Angie Smith Curtis Boswell Jean Griffith Tabitha Mongold Elaine Stickley Stacey Bowman Jolene Johnson Bernadette Nesslerodt Ramona Thorne Tammy Brewer Amy Ketterman Sandra Ours Catherine Weese Shirley Corsetti Fern Ludwick Shelly Reel Pamela Wilson Mathias Christine Delawder Connie Landacre Donna Shipe Teresa Halterman Helen May Dorothy Strawderman Franklin Wanda Bowers Amy Roberson Tammy Clutter Lisa Roberson Renee Hedrick Leslie Lambert Shasta Vance Petersburg Lisa Casto Stacy Park Diana Cook Belinda Crites Pamela Swick 43 EX-21 3 SUBSIDIARIES OF THE REGISTRANT SBVBANCORP 72-74 Exhibit 21 SOUTH BRANCH VALLEY BANCORP, INC. SUBSIDIARIES OF REGISTRANT The following lists the subsidiary of the registrant, a West Virginia Corporation. South Branch Valley National Bank, a national banking association organized under the laws of the United States of America EX-23 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 73-74 Exhibit 23 CONSENT OF INDEPENDENT AUDITORS Securities and Exchange Commission Washington, D.C. We hereby consent to the incorporation by reference in this Annual Report on Form 10-KSB of our report dated January 22, 1998, on our audit of the consolidated financial statements of South Branch Valley Bancorp, Inc. as of December 31, 1997 and 1996, and for the three years in the period ended December 31, 1997, appearing in the 1997 Annual Report to Shareholders of South Branch Valley Bancorp, Inc. Arnett & Foster, P.L.L.C. Charleston, West Virginia March 23, 1998 EX-27 5 FDS --
9 THIS CONFORMING PAPER FORMAT DOCUMENT IS BEING PURSUANT TO RULE 901 (D) OF REGULATION S-T. 0000811808 SOUTH BRANCH VALLEY NATIONAL BANK YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 3,945,099 1,256,000 5,806,717 0 27,547,094 0 0 93,467,933 (895,281) 140,647,625 106,984,797 7,145,010 1,061,418 10,395,848 0 0 1,042,355 14,018,197 140,647,625 8,558,144 1,855,126 176,520 10,589,790 4,606,578 5,406,698 5,183,092 155,000 9,789 3,341,689 2,210,922 2,210,922 0 0 1,519,657 3.83 3.83 4.30 141,735 95,928 55,216 292,878 858,423 200,039 81,897 895,281 828,485 0 66,796
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