-----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, Hc7KpEMVtx425iIsq1Ex4REixeRFAzjPczy99MJEGGcPNdeDrIaoXBorKYwMs48V 6kkIjthhCUb0FhMeu8dXlA== 0000811808-98-000012.txt : 19980629 0000811808-98-000012.hdr.sgml : 19980629 ACCESSION NUMBER: 0000811808-98-000012 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980625 ITEM INFORMATION: FILED AS OF DATE: 19980626 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: 8-K/A SEC ACT: SEC FILE NUMBER: 000-16587 FILM NUMBER: 98655394 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 8-K/A 1 FORM 8-K FOR SOUTH BRANCH VALLEY BANCORP, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K/B (Amendment Number 2) Current Report Pursuant to Section 13 or 15(d) of The Securities Act of 1934 Date of Report (Date of earliest event reported)................June 1, 1998 SOUTH BRANCH VALLEY BANCORP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) West Virginia 0-16587 55-0672148 - ----------------------------- --------------- -------------------- (State of other (Commission (I.R.S. Employer jurisdiction File Number) Identification No.) of incorporation) 310 North Main Street, Moorefield, West Virginia 26836 ---------------------------------------------------------- (Address of principal executive offices, including zip code) Registrant's telephone number, including area code (304) 538-2353 1 South Branch Valley Bancorp hereby amends its previously filed 8-K/A (Amendment Number 1) dated April 6, 1998, for the purposes of providing the financial information required by this Item 7 on Capital State Bank, Inc., acquired by the Registrant in a business combination accounted for under the purchase method of accounting effective April 1, 1998. Item 7. Financial Statements and Exhibits. Item 7(a). Financial Statements of Businesses Acquired. I. Audited Financial Statements of Capital State Bank, Inc. as of December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996, and for the period from September 11, 1995, date of inception, to December 31, 1995. II. Unaudited Interim Financial Statements of Capital State Bank, Inc. as of March 31, 1998 and 1997 and for the three months then ended. Item 7(b). Proforma Condensed Financial Information. The proforma condensed financial information reflecting South Branch Valley Bancorp, Inc. after giving effect to the Merger with Capital State Bank, Inc. is included in Note 3 of the Notes to Condensed Consolidated Financial Statements of South Branch Valley Bancorp, Inc. (Unaudited) filed on Form 10-QSB as of March 31, 1998, and is hereby incorporated by reference in its entirety. Item 7(c). Exhibits. Exhibit 99. Consent of Independent Accountants. SOUTH BRANCH VALLEY BANCORP, INC. June 1, 1998 /s/ H. Charles Maddy, III - ------------------------ ------------------------------ Date By: H. Charles Maddy, III Its: President The original statement shall be signed by each person on whose behalf the statement is filed or his authorized representative. If the statement is signed on behalf of a person by his authorized representative (other than an executive officer or general partner of this filing person), evidence of the representative's authority to sign on behalf of such person shall be filed with the statement, provided, however, that a power of attorney for this purpose which is already on file with the Commission may be incorporated by reference. The name and any title of each person who signs the statement shall be typed or printed beneath his signature. CHS168510 2 Item 7(a)I Financial Report Captial State Bank, Inc. December 31, 1997 Page INDEPENDENT AUDITOR'S REPORT 1 FINANCIAL STATEMENTS Balance sheets 2 Statements of operations 3 Statements of shareholders' equity 4 Statements of cash flows 5 Notes to financial statements 6-18 INDEPENDENT AUDITOR'S REPORT To the Board of Directors The Capital State Bank, Inc. Charleston, West Virginia We have audited the accompanying balance sheets of The Capital State Bank, Inc. (A Development Stage Company for 1995) as of December 31, 1997 and 1996, and the related statements of operations, shareholders' equity and cash flows for the years ended December 31, 1997, 1996 and for the period from September 11, 1995, date of inception, to December 31, 1995. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Capital State Bank, Inc., as of December 31, 1997 and 1996, and the results of its operations and cash flows for the years ended December 31, 1997, 1996 and for the period from September 11, 1995, date of inception, to December 31, 1995, in conformity with generally accepted accounting principles. ARNETT & FOSTER, P.L.L.C. Charleston, West Virginia January 30, 1998 THE CAPITAL STATE BANK, INC. (A Development Stage Company for 1995) BALANCE SHEETS December 31, 1997 and 1996 2 ASSETS 1997 1996 ---------- ----------- Cash and due from banks $ 640,734 $ 379,830 Interest bearing deposits with other banks 9,180 1,536,279 Federal funds sold 5,877,000 3,484,000 Securities available for sale 7,976,975 6,949,578 Loans, less allowance for loan losses of $247,017 and $127,300, respectively 24,007,035 16,237,114 Bank premises and equipment, net 1,289,629 1,399,984 Other assets 609,201 524,594 ----------- ---------- Total assets $40,409,754 $30,511,379 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits: Non interest bearing $1,047,578 $ 678,677 Interest bearing 28,020,898 18,658,567 ---------- ---------- Total deposits 29,068,476 19,337,244 Other liabilities 498,505 233,782 ---------- ---------- Total liabilities 29,566,981 19,571,026 ---------- ---------- Commitments and Contingencies Shareholders' Equity Common stock, $1 par value, authorized, issued and outstanding 1,200,000 shares 1,200,000 1,200,000 Capital surplus 10,398,528 10,398,528 Retained earnings (deficit), including deficit accumulated during the development stage of ($347,296) (743,587) (625,997) Net unrealized gain (loss) on securities (12,168) (32,178) ----------- ---------- Total shareholders' equity 10,842,773 10,940,353 ---------- ---------- Total liabilities and shareholders' equity $40,409,754 $30,511,379 =========== =========== See Notes to Financial Statements 3 THE CAPITAL STATE BANK, INC. (A Development Stage Company for 1995) STATEMENTS OF OPERATIONS For the Years Ended December 31, 1997, 1996 and for the Period from September 11, 1995, Date of Inception, to December 31, 1995
1997 1996 1995 ---------- ---------- ----------- Interest income: Interest and fees on loans $1,760,790 $ 770,938 $ 940 Interest on taxable securities 490,801 320,505 - Interest bearing deposits with other banks 9,234 11,579 89,360 Interest on Federal funds sold 271,439 314,484 33,770 --------- ---------- ----------- Total interest income 2,532,264 1,417,506 124,070 --------- ---------- ----------- Interest expense: Interest on deposits 1,210,104 523,386 6,534 Interest on other borrowings - - 17,621 --------- ------- ------ Total interest expense 1,210,104 523,386 24,155 --------- ------- ------ Net interest income 1,322,160 894,120 99,915 Provision for loan losses 120,000 123,800 6,500 --------- ------- ------ Net interest income after provision for loan losses 1,202,160 770,320 93,415 --------- ------- ------ Other income: Service fee income 29,738 15,324 83 Other, net 13,916 5,719 - ------ ----- ------ 43,654 21,043 83 -------- ------- ------ Other expenses: Salaries and employee benefits 562,291 442,899 187,143 Net occupancy expense 127,281 91,747 13,663 Equipment rentals, depreciation and maintenance 100,108 85,686 11,102 Data processing 124,180 86,541 48,120 Insurance 54,013 62,397 12,576 Professional fees 153,340 56,478 54,070 Advertising and marketing 53,164 47,429 66,508 Other 168,936 178,642 28,314 --------- --------- ------- 1,343,313 1,051,819 421,496 --------- --------- ------- Income (loss) before income tax expense (benefit) (97,499) (260,456) (327,998) Income tax expense (benefit) 20,091 18,245 19,298 -------- -------- ------- Net income (loss) $(117,590) $ (278,701) $ (347,296) ========= =========== ============ Basic earnings (loss) per common shar$ (.10) $ (.23) $ (.29) ========= =========== ============ Average common shares outstanding 1,200,000 1,200,000 1,200,000 ========= =========== ============
See Notes to Financial Statements 4
THE CAPITAL STATE BANK, INC. (A Development Stage Company for 1995) STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1997, 1996 and the Period from September 11, 1995, Date of Inception, to December 31, 1995 Net Unrealized Total Retained Gain Share- Common Capital Earnings (Loss) on holders' Stock Surplus (Deficit) Securities Equity ---------- ----------- ---------- ---------- --------------- Balance, September 11, 1995, date of inception $ - $ - $ - $ - $ - Issuance of common stock for cash on December 11, 1995 1,200,000 10,398,528 - - 11,598,528 Net income (loss) during development stage - - (347,296) - (347,296) ---------- ----------- ---------- ---------- --------------- Balance, December 31, 1995 1,200,000 10,398,528 (347,296) - 11,251,232 Net income (loss) - - (278,701) - (278,701) Change in net unrealized gain (loss) on securities - - - (32,178) (32,178) ---------- ---------- ---------- ------------ ---------------- Balance, December 31, 1996 1,200,000 10,398,528 (625,997) (32,178) 10,940,353 Net income (loss) - - (117,590) - (117,590) Change in net unrealized gain (loss) on securities - - - 20,010 20,010 ---------- ---------- ---------- ----------- ---------------- Balance, December 31, 1997 $1,200,000 $10,398,528 $ (743,587) $ (12,168) $10,842,773 ========== =========== ============ =========== ================
See Notes to Financial Statements 5
THE CAPITAL STATE BANK, INC. (A Development Stage Company for 1995) STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1997, 1996 and the Period from September 11, 1995, Date of Inception, to December 31, 1995 1997 1996 1995 --------- --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $(117,590) $(278,701) $(347,296) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 105,974 105,863 10,548 Provision for loan losses 120,000 123,800 6,500 Deferred income tax expense (benefit) 20,091 18,245 19,298 Amortization of organization costs 3,576 3,576 298 Amortization of prepaid land lease 6,000 5,500 2,000 Amortization of security premiums and (accretion) of discounts, net (2,500) (833) - Gain on sale of bank premises and equipment (6,261) - - Decrease (increase) in other assets (15,161) 9,547 (362,310) Decrease (increase) in accrued interest receivable (58,055) (184,003) (870) Increase (decrease) in other liabilities 213,933 127,493 86,991 ------- ------- ------ Net cash provided by (used in) operating activities 270,007 (69,513) (584,841) ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available for sale (3,245,155) (4,997,500) (2,000,000) Proceeds from calls and maturities of securities available for sale 2,250,000 - - Principal collected on (loans made to) customers, net (7,889,921)(16,002,334) (367,530) Purchases of bank premises and equipment (1,358) (26,873) (1,489,522) Proceeds from sale of bank premises and equipment 12,000 - - (Increase) decrease in Federal funds sold, net (2,393,000) 6,751,000 (10,235,000) (Increase) decrease in interest bearing deposits with other banks 1,527,099 (1,536,279) - Proceeds from sale of repossessed assets - 2,450 - ---------- ---------- ----------- Net cash provided by (used in) investing activities (9,740,335)(15,809,536)(14,092,052) ---------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in non interest bearing deposits 368,901 556,711 121,966 Net increase (decrease) in NOW accounts and savings accounts 818,442 5,374,140 2,211,693 Proceeds from the sales of (payments for matured) time deposits, net 8,543,889 9,998,657 1,074,077 Proceeds from the sale of common stock - - 11,598,528 --------- --------- ----------- Net cash provided by (used in) financing activities 9,731,232 15,929,508 15,006,264 --------- --------- ----------
(Continued) 5 THE CAPITAL STATE BANK, INC. (A Development Stage Company for 1995) STATEMENT OF CASH FLOWS - CONTINUED For the Years Ended December 31, 1997, 1996 and the Period from September 11, 1995, Date of Inception, to December 31, 1995
1997 1996 1995 --------- -------- -------- Increase (decrease) in cash and due from banks 260,904 50,459 329,371 Cash and due from banks: Beginning 379,830 329,371 - --------- -------- -------- Ending $ 640,734 $ 379,830 329,371 ========= ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash payments for: Interest on deposits $1,150,409 $ 384,315 $ 508 ========== ========= ======== Interest on short-term debt, net of interest capitalized $ - $ - $ 17,621 ========== ========= ======== Other assets acquired in settlement of loan $ - $ 2,450 $ - ========== ========= ========
See Notes to Financial Statements 6 Note 1. Significant Accounting Policies Nature of the business: The Capital State Bank, Inc. is a commercial ----------------------- bank with operations in Kanawha County, West Virginia. The Bank provides consumer and commercial loans and deposit services principally to individuals and small businesses in Kanawha, Boone and Lincoln Counties, West Virginia and the adjacent counties. Basis of presentation: The accounting and reporting policies of The ----------------------- Capital State Bank, Inc. (A Development Stage Company for 1995), conform to generally accepted accounting principles and to the general practices within the banking industry. Organization and Development of the Bank: The Bank was incorporated on ---------------------------------------- September 11, 1995, and undertook an offering to sell 1,200,000 shares of its $1 par value stock for $10 per share. On December 11, 1995, after completion of the stock offering and obtaining the requisite regulatory approvals, the Bank was capitalized with the $12,000,000 proceeds from the stock offering, net of $401,472 in registration costs. The results of operations of the newly organized Bank from September 11, 1995, date of inception, to December 31, 1995, are reflected in the accompanying financial statements. The Bank was considered a development stage entity for the period from September 11, 1995, to December 31, 1995. Use of estimates: The preparation of financial statements in ------------------ conformity with generally accepted accounting principles required management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Presentation of cash flows: For purposes of reporting cash flows, cash -------------------------- and due from banks includes cash on hand and non interest bearing amounts due from banks (including cash items in process of clearing). Cash flows from demand deposits, NOW accounts, savings accounts and Federal funds sold are reported net since their original maturities are less than three months. Cash flows from loans and certificates of deposits and other time deposits are reported net. Securities: Securities are classified as "held to maturity", ---------- "available for sale" or "trading" according to management's intent. The appropriate classification is determined at the time of purchase of each security and re-evaluated at each reporting date. The appropriate classification is determined as follows: Securities held to maturity - Debt securities for which the Bank ---------------------------- has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts. There are no securities classified as "held to maturity" on the accompanying financial statements. Securities available for sale - Securities not classified as ------------------------------- "held to maturity" or as "trading" are classified as "available for sale". Securities classified as "available for sale" are those securities the Bank intends to hold for an indefinite period of time, but not necessarily to maturity. "Available for sale" securities are reported at estimated fair value net of unrealized gains or losses, which are adjusted for applicable income taxes, and reported as a separate component of shareholders' equity. Trading securities - There are no securities classified as "trading" in the accompanying financial statements. Realized gains and losses on sales of securities are recognized on the specific identification method. Amortization of premiums and accretion of discounts are computed using methods which approximate the interest method. NOTES TO FINANCIAL STATEMENTS 7 Loans and allowance for loan losses: Loans are stated at the amount of ----------------------------------- unpaid principal, reduced by an allowance for loan losses. Interest income on loans is accrued and credited to operations using methods that approximate a level yield on principal amounts outstanding. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Bank makes continuous credit evaluations of the loan portfolio and considers current economic conditions, historical loan loss experience of similar banks, review of specific problem loans and other factors in determining the adequacy of the allowance for loan losses. Loans are charged against the allowance for loan losses when management believes that collectibility is unlikely. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in conditions. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due in accordance with the contractual terms of the specific loan agreement. Impaired loans, other than certain large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, are required to be reported at the present value of expected future cash flows discounted using the loan's original effective interest rate or, alternatively, at the loan's observable market price, or at the fair value of the loan's collateral if the loan is collateral dependent. The method selected to measure impairment is made on a loan-by-loan basis, unless foreclosure is deemed to be probable, in which case the fair value of the collateral method is used. Loans are placed on non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of interest is doubtful. Interest is accrued daily on impaired loans unless the loan is placed on non-accrual status. Impaired loans are placed on non-accrual status when the payments of principal and interest are in default for a period of 90 days, unless the loan is both well-secured and in the process of collection. Interest on non-accrual loans is recognized primarily using the cost-recovery method. Certain loan fees and direct loan costs are recognized as income or expense when incurred. Statement Number 91 of the Financial Accounting Standards Board requires that such fees and costs be deferred and amortized as adjustments of the related loan's yield over the contractual life of the loan. The Bank's method of recognition of loan fees and direct loan costs produce results which are not materially different from those that would have been recognized had Statement Number 91 been adopted. Bank premises and equipment: Bank premises and equipment are stated at --------------------------- cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method for Bank premises and equipment over the estimated useful lives of the assets. Repairs and maintenance expenditures are charged to operating expenses as incurred. Major improvements and additions to premises and equipment are capitalized. Organization costs: Organization costs, which are insignificant, are ------------------ being amortized on a straight-line basis over a period of 60 months beginning in December 1995. Income taxes: Deferred tax assets and liabilities are determined based ------------- on differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Valuation allowances are established, when deemed necessary, to reduce deferred tax assets to the amount expected to be realized. NOTES TO FINANCIAL STATEMENTS 8 The provision for income taxes includes Federal and state income taxes and is based on pretax income reported in the financial statements, adjusted for transactions that may never enter into the computation of income taxes payable. Earnings per share: Basic earnings per common share is computed based ------------------ upon the weighted average shares outstanding. The weighted average shares outstanding were 1,200,000 for each of the years ended December 31, 1997, 1996 and the period from September 11, 1995 to December 31, 1995, respectively. For the year ended December 31, 1997, the Bank adopted Financial Accounting Standards Board Statement No. 128, Earnings per Share. During the years ended December 31, 1997, 1996 and the period from September 11, 1995 to December 31, 1995, the Bank did not have any potential dilutive securities, thus, this pronouncement did not have an impact on the Bank's earnings per share computations. Emerging accounting standards: In June 1997, the Financial Accounting ------------------------------ Standards Board issued Statement No. 130, Reporting Comprehensive Income. This Statement requires an entity to include a statement of comprehensive income in their full set of general-purpose financial statements. Statement No. 130 is effective for years beginning after December 15, 1997, and will require financial statements of earlier periods that are presented for comparative purposes to be reclassified. Based on the Bank's operations at December 31, 1997, this pronouncement is not expected to have a significant impact on the Bank's financial statements. Reclassifications: Certain accounts in the financial statements for ----------------- 1996 and 1995, as previously reported, have been reclassified to conform to current year classifications. Note 2. Cash Concentrations At December 31, 1997, the Bank had a concentration of risk totaling $3,715,000 and $2,244,194 in its cash balances on deposit with First USA Bank and the Bankers Bank of Kentucky, respectively. At December 31, 1996, the Bank had a concentration of risk in its cash balances on deposit with First USA Bank of $3,220,000. These cash balances are comprised of balances in due from correspondent accounts, Federal funds sold and interest bearing deposits, and are generally unsecured by the correspondent bank. Note 3. Securities The amortized cost, unrealized gains and losses and estimated fair values of the Bank's securities at December 31, 1997 and 1996, is summarized as follows:
Carrying Value (Estimated Amortized Unrealized Fair ---------- Cost Gains Losses Value) ---------- ----------- -------- --------- 1997 Available for sale: U.S. Government securities $ 500,521 $ - $ 20 $ 500,501 U.S. Government agencies and corporations 7,495,466 5,708 24,700 7,476,474 ---------- ----------- ---------- ---------- $7,995,987 $ 5,708 $ 24,720 $7,976,975 ========== ========== ========== ========== 1996 Available for sale: U.S. Government agencies $6,998,333 $ 9,958 $ 58,713 $6,949,578 ========== ========== ========== ==========
NOTES TO FINANCIAL STATEMENTS 9 At December 31, 1997 and 1996, respectively, securities having an amortized cost of $2,050,625 and $1,150,000 and an estimated fair value of $2,044,523 and $1,148,196 were pledged to secure public deposits and for other purposes required or permitted by law. The maturities, amortized cost and estimated fair values of the Bank's securities at December 31, 1997, is summarized as follows: Available for Sale ------------------ Carrying Value (Estimated Amortized Fair Cost Value) Due after 1 but within 5 years $7,995,988 $7,976,976 ============ ========== Maturities presented in the above schedule are based on the contractual maturity date of the securities. All U.S. Government Agency and Corporate securities owned at December 31, 1997, have provisions which allow the issuer to "call" the security prior to its contractual maturity date. Should these "call" provisions be exercised, the scheduled maturities disclosed above may be altered. The proceeds from sales, calls and maturities of securities, and principal payments received on mortgage backed obligations and the related gross gains and losses realized during the years ended December 31, 1997 and 1996, and the period ended December 31, 1995 are as follows: Proceeds From Gross Realized For the Year Calls and Principal Ended December 31, Sales Maturities Payments Gains Losses ------------------ ------ --------- -------- ----- ------ 1997 Securities available for sale $ - $2,250,000 $ - $ - $ - ====== ========= ========= ======== ======= Note 4. Loans 1997 1996 ----------- ---------- Commercial financial and agriculture $ 1,925,892 $1,358,418 Real estate: Single family residential 12,558,048 7,477,960 Commercial 3,367,396 2,769,273 Revolving home equity 1,125,884 590,097 Construction 172,073 552,807 Consumer installment 5,104,759 3,615,859 --------- --------- Total loans 24,254,052 16,364,414 Less allowance for loan losses 247,017 127,300 ------- ------- Loans, net $24,007,035 $16,237,114 =========== =========== NOTES TO FINANCIAL STATEMENTS 10 Scheduled maturities on loans, without regard to scheduled periodic principal repayments on amortizing loans, are as follows at December 31, 1997:
Due After Due Within 1 Year but Due After 1 Year Within 5 Years 5 Years Total ------------------------- ------------------ Fixed rate: Commercial $ 45,065 $ 222,761 $ 60,260 $ 328,095 Commercial real estate - 2,209,642 648,356 2,857,998 Single family real estate, including home equity 124,470 3,052,802 6,599,789 9,777,061 Construction - - - - Consumer installment 344,872 4,160,266 377,104 4,882,242 Total fixed rate loans 514,407 9,645,471 7,685,518 17,845,396 Floating rate: Commercial 1,239,253 289,075 69,469 1,597,797 Commercial real estate 43,455 208,815 257,128 509,398 Single family real estate, including home equity 230,377 - 3,676,494 3,906,871 Construction 172,073 - - 172,073 Consumer installment 185,185 37,332 - 222,517 --------- --------- --------- ---------- Total floating rate loans 1,870,343 535,222 4,003,091 6,408,656 --------- --------- --------- --------- Total loans $2,384,750 $10,180,693 $11,688,609 $24,254,052 ========== =========== =========== ===========
Substantially all real estate loans outstanding were originated under 3, 5 or 7 year balloon terms with amortization periods of generally 15 to 25 years. Interest rates on floating rate loans generally reprice within one year based on indices which are set by sources independent of the Bank and are subject to interest rate floors, caps and ceilings which may limit changes in the interest rate over the life of the loan. Loans to related parties: The Bank has had, and may be expected to ------------------------- have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been in the opinion of management, on the same terms including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party during the years ended December 31, 1997 and 1996: 1997 1996 ----------- ----------- Balance beginning $ 1,387,804 $ - Additions 347,914 1,458,918 Amounts collected 122,156 71,114 Other (100,000) - -------- ---------- Balance, ending $ 1,513,562 $1,387,804 =========== ========== At December 31, 1997 and 1996, outstanding loans to directors, officers and employees totaled $1,802,427 and $1,499F,255, respectively. Commitments to extend credit under unused open lines of credit to such individuals totaled approximately $98,623 and $210,000 at December 31, 1997 and 1996, respectively. 11 NOTES TO FINANCIAL STATEMENTS Concentration of credit risk: The Bank grants installment, commercial ----------------------------- A and residential loans to customers primarily in Kanawha, Boone and Lincoln Counties, West Virginia and adjacent counties. Although the Bank strives to maintain a diversified loan portfolio, exposure to credit losses can be adversely impacted by downturns in local economic and employment conditions. Major employment within the market area is diverse but primarily includes the industries of government, health care, education, coal production and related services, and various professional, financial and related service industries. The Bank accepts chattel paper without recourse from various approved businesses, primarily automobile dealerships, within its lending area. The Bank has sole discretion whether to purchase such paper on a case basis which is evaluated substantially under the Bank's normal credit underwriting standards and is generally secured by a first lien on the property purchased by the borrower. At December 31, 1997, and December 31, 1996, respectively, such loans approximated $1,995,837 and $1,759,000 of which approximately 80.0% and 86.8% were purchased from businesses considered to be a related party to the Bank. Note 5. Allowance for Loan Losses An analysis of the allowance for loan losses for the years ended December 31, 1997, 1996 and the period from September 11, 1995, date of inception, to December 31, 1995, is as follows: 1997 1996 1995 --------- --------- -------- Balance, beginning of period $ 127,300 $ 6,500 $ - --------- --------- -------- Losses: Commercial financial and agriculture - - - Real estate - - - Consumer installment 283 3,000 - --------- --------- -------- Total 283 3,000 - --------- --------- -------- Recoveries: Commercial financial and agriculture - - - Real estate - - - Consumer installment - - - --------- --------- -------- Total - - - --------- --------- -------- Net recoveries (losses) (283) (3,000) - --------- --------- -------- Provision for loan losses 120,000 123,800 6,500 --------- --------- -------- Balance, end of period $ 247,017 $ 127,300 $ 6,500 ========= ========= ======== During 1997 and 1996, the Company did not have any loans classified as impaired. For purposes of evaluating impairment, the Company considers groups of smaller-balance homogeneous loans to include: mortgage loans secured by residential property, other than those which significantly exceed the bank's typical residential mortgage loan amount and "other" loans, which include small balance, overdraft protection lines and installment loans to individuals. Note 6. Bank Premises and Equipment The major categories of Bank premises and equipment and accumulated depreciation at December 31, 1997 and 1996, is summarized as follows: 1997 1996 ---------- ---------- Building and improvements $1,026,262 $1,024,904 Furniture and equipment 465,662 491,491 ---------- ---------- 1,491,924 1,516,395 Less accumulated depreciation (202,295) (116,411) ---------- ---------- Bank premises and equipment, net $1,289,629 $1,399,984 12 NOTES TO FINANCIAL STATEMENTS Depreciation expense for the year ended December 31, 1997, 1996 and the period from September 11, 1995, date of inception, to December 31, 1995, totaled $105,974, $105,863 and $10,548, respectively. Interest costs incurred to construct the Bank building, amounting to $21,783, were capitalized in 1995 as part of building and improvements. During 1995, the Bank entered into a 50 year agreement to lease the land on which the Bank building is situated. The original term of the lease expires in the year 2045, with an additional 45 year renewal option available through the year 2090. In consideration for this lease, the Bank made a one time, up front payment of $300,000 covering the first 50 year lease term. Total rental expense incurred and recognized on this lease for the years ended December 31, 1997, 1996 and the period from September 11, 1995, date of inception, to December 31, 1995, approximated $6,000, $5,500 and $2,000 respectively. The remaining amount of prepaid lease expense at December 31, 1997 and 1996, which is included in other assets, totaled $286,500 and $292,500, respectively. Note 7. Deposits The following is a summary of interest bearing deposits by type as of December 31, 1997 and 1996: 1997 1996 ----------- ---------- NOW and Super NOW accounts $1,159,858 $ 806,664 Money market accounts 5,399,958 5,758,685 Savings accounts 1,843,921 1,019,946 Certificates of deposit 19,374,669 10,936,308 Individual retirement accounts 242,492 136,964 ----------- ---------- Total $28,020,898 $18,658,567 =========== =========== Time certificates of deposit in denominations of $100,000 or more totaled $6,378,906 and $3,740,852 at December 31, 1997 and 1996, respectively. Interest paid on time certificates in denominations of $100,000 or more was $284,657 and $114,005 year ended December 31, 1997 and 1996, respectively. The following is a summary of the maturity distribution of certificates of deposits in amounts of $100,000 or more as of December 31, 1997: Amount Percent --------- -------- Three months or less $ 655,472 10.3% Three through six months 311,186 4.9% Six through twelve months 2,087,796 32.7% Over twelve months 3,324,452 52.1% --------- ------ Total $6,378,906 100.0% ========== ====== A summary of the maturities of time deposits, which includes certificates of deposit and certain individual retirement accounts, is as follows: Year Amount -------- ------------ 1998 $10,129,214 1999 8,891,134 2000 427,888 2001 122,027 2002 11,950 Thereafter 32,000 ------------ Total $19,614,213 NOTES TO FINANCIAL STATEMENTS 13 At December 31, 1997 and 1996, the Bank was holder of deposits from related parties totaling approximately $1,324,000 and $3,524,000 or 4.7% and 18.2% of total deposits, respectively. At December 31, 1996, these balances included a concentration of deposits totaling $2,090,000 from three individuals and their related interests. At December 31, 1997 and 1996, the Bank had a concentration of deposits from an unrelated party totaling approximately $1,460,000 and $1,091,000 or 5.2% and 5.5% of total deposits, respectively. Note 8. Financial Instruments with Off-Balance-Sheet Risk The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular cases of financial instruments. At December 31, 1997 and 1996, respectively, the Bank's financial instruments with off-balance sheet risk were as follows: Financial instruments whose contract Contract Amount amounts represent credit risk 1997 1996 ------------------------------------------- --------- ------- Commitments to extend credit $ 371,126 $ 780,750 Unused open lines of credit 1,399,404 667,140 Standby letters of credit and financial guarantees written - 100,000 Remaining commitments on construction loans 22,938 267,345 ------ ------- Total $1,793,468 $1,815,235 ========== ========== The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation. Collateral held varies but generally is secured by accounts receivable, inventory, equipment or real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans. These letters of credit are generally collateralized. 14 NOTES TO FINANCIAL STATEMENTS Note 9. Income Taxes The components of applicable income tax expense (benefit) for the year ended December 31, 1997, 1996 and the period from September 11, 1995, date of inception, and December 31, 1995, respectively is as follows: 1997 1996 1995 -------- -------- -------- Current: Federal $ - $ - $ - State - - - -------- -------- -------- - - - Deferred: Federal 17,804 11,368 16,734 State 2,287 6,877 2,564 -------- ------ -------- Total $ 20,091 $ 18,245 $ 19,298 ======== ====== ======== A reconciliation between the amount of reported income tax expense (benefit) and the amount computed by multiplying the statutory income tax rate by book pretax income for the year ended December 31, 1997 and 1996, respectively, is as follows:
1997 1996 1995 ----------------------------------------------------------- Amount Percent Amount Percent Amount Percent ----------------------------------------------------------- Computed tax at applicable statutory rate $(33,150) (34.0) $ (88,555) (34.0) (111,519) (34.0) Increase (decrease) in taxes resulting from: Increase in deferred tax valuation allowance 60,243 61.8 126,087 48.4 156,534 47.7 Deferred state income tax (benefit), expense (11,926) (12.2) (18,968) (7.3) (9,522) (2.9) Other, net 4,924 5.0 (319) (.1) (16,195) (4.9) ----------------------------------------------------------- Applicable income taxes $20,091 20.6 $ 18,245 7.0 $ 19,298 5.9 ===========================================================
Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. 15 NOTES TO FINANCIAL STATEMENTS The tax effects of temporary differences which create the Bank's deferred tax assets and liabilities as of December 31, 1997 and 1996, are as follows: 1997 1996 -------- --------- Deferred Tax Assets: Start up costs deferred for tax purposes $59,076 $ 79,606 Federal and state net operating loss carryforward 262,854 190,242 Net unrealized losses on securities 6,844 16,577 Allowance for loan losses 8,146 11,570 Other 12,788 1,203 ------ ----- Subtotal 349,708 299,198 ------- ------- Less: valuation allowance (342,864) (282,621) -------- -------- Total deferred tax asset 6,844 16,577 ----- ------ Deferred Tax Liability: Depreciation 57,634 37,543 ------ ------ Total deferred tax liability 57,634 37,543 ------ ------ Net deferred tax liability $50,790 $20,966 ======= ====== Realization of future tax benefits related to deferred tax assets is dependent on many factors, including the bank's ability to generate taxable income within the net operating loss carryforward period. Management believes the Bank will generate sufficient future taxable income to realize the tax assets prior to the expiration of carryforward periods. However, failure to achieve forecasted taxable income has and could in the future affect the ultimate realization of deferred tax assets. As a result, a valuation allowance is recorded to reduce deferred tax assets to that portion that is not expected to more likely than not be realized within the next year. The Bank continually reviews the adequacy of the valuation allowance and will recognize these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. Note 10. Commitments and Contingent Liabilities Commitments under servicing agreement: The Bank has contracted with a --------------------------------------- third-party service center to perform substantially all electronic data processing services for the Bank. Pursuant to this agreement, certain payments, as defined in the agreement, may become due if the agreement is terminated before December, 2000. Employment Contracts: The Bank entered into employment agreements (the -------------------- Agreements) with its President and Executive Vice President. These agreements provide for the payment of minimum salaries through December 31, 2000. During 1997, the Bank negotiated with its President to terminate his employment agreement as of December 31, 1997, in exchange for a lump sum settlement of $105,000 which is charged to operations for the year ended December 31, 1997. Minimum salaries payable under the remaining Agreement total $75,000 for each of the remaining three years of the agreement. In addition, the agreement provides for total incentive compensation payments of up to .75% of after tax net income if the Bank achieves certain performance standards as outlined in the agreement. This incentive compensation provision is effective for each of the years ended through December 31, 2000. During 1997, 1996 and 1995, no incentive compensation was paid under the terms of these employment agreements. 16 NOTES TO FINANCIAL STATEMENTS Year 2000 Compliant: The Bank is conducting a comprehensive review of ------------------- its computer systems to identify the systems that could be affected by the "ear 2000 Issue"; and is developing a remediation plan to resolve the Issue. The Issue is whether computer systems will properly recognize date-sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Bank is heavily dependent on computer processing in the conduct of its business activities. While management believes it is doing everything technologically possible to assure Year 2000 compliance, it is in part dependent upon systems and software vendors to represent that the products provided are, or will be, "Year 2000 Compliant". Because the Bank has not completed its review of computer systems and software, management is unable to estimate the costs of making the system Year 2000 compliant, however, the total cost is not expected to be significant to the Bank's financial position or results of operations. Note 11. Fair Value of Financial Instruments The following summarizes the methods and significant assumptions used by the Bank in estimating its fair value disclosures for financial instruments. Cash and due from banks: The carrying values of cash and due from ------------------------ banks approximate their estimated fair value. Federal funds sold and interest bearing deposits with other banks: The ----------------------------------------------------------------- carrying values of Federal funds sold and interest bearing deposits with other banks approximate their estimated fair values. Securities: Estimated fair values of securities are based on quoted ---------- market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. Loans: The estimated fair values for loans are computed based on ------ scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed. Accrued interest receivable and payable: The carrying values of accrued interest receivable and payable approximate their fair values. Deposits: The estimated fair values of demand deposits (i.e. --------- noninterest bearing checking, NOW, Super NOW, money market), savings accounts, and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed. 17 NOTES TO FINANCIAL STATEMENTS The fair values of the Bank's financial instruments as of December 31, 1997 and 1996, are summarized below:
1997 1996 ---------------------- -------------------------- Estimated Estimated Carrying Fair Carrying Fair Amount Value Amount Value ---------------------- -------------------------- Financial assets: Cash and due from bank $ 640,734 $ 640,734 $ 379,830 $ 379,830 Interest bearing deposits with other banks 9,180 9,180 1,536,279 1,536,279 Federal funds sold 5,877,000 5,877,000 3,484,000 3,484,000 Securities available for sale 7,976,975 7,976,975 6,949,578 6,949,578 Loans 24,007,035 23,881,235 16,237,114 16,167,628 Accrued interest receivable 242,928 242,928 184,873 184,873 ----------- ---------- ---------- ---------- $38,753,852 $38,628,052 $28,771,674 $28,702,188 =========== =========== =========== =========== Financial liabilities: Deposits $29,068,476 $29,162,441 $19,337,244 $19,359,623 Accrued interest payable 204,792 204,792 145,097 145,097 ----------- ----------- ----------- ----------- $29,273,268 $29,376,233 $19,482,341 $19,504,720 =========== =========== =========== ===========
Note 12. Restrictions on Dividends and Capital Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires approval by the regulatory agency if dividends declared in any year exceed the year's net income, as defined, plus the retained net profits of the two preceding years. Since the Bank has a net deficit, there are no net retained profits available for distribution. The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined) which is commonly referred to as the leverage ratio. Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the Bank's regulatory authority categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since its last financial reporting that management believes have changed the institution's category. 18 NOTES TO FINANCIAL STATEMENTS The Bank's actual capital amounts and ratios are presented in the following table (in thousands).
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio ------------------------------------------------------------------------ As of December 31, 1997: Total Capital $ 11,092 48.7% $ 1,822 8.0% $ 2,278 10.0% (to Risk Weighted Assets) Tier I Capital $ 10,845 47.6% $ 911 4.0% $ 1,367 6.0% (to Risk Weighted Assets) Tier I Capital $ 10,845 27.5% $ 1,577 4.0% $ 1,972 5.0% (to Average Assets) As of December 31, 1996: Total Capital $ 11,128 64.2% $ 1,405 8.0% $ 1,757 10.0% (to Risk Weighted Assets) Tier I Capital $ 11,001 63.4% $ 703 4.0% $ 1,054 6.0% (to Risk Weighted Assets) Tier I Capital $ 11,001 37.7% $ 1,171 4.0% $ 1,464 5.0% (to Average Assets)
Note 13. Change in Control and Proposed Merger During the first six months of 1997, approximately 40% of the Bank's 1,200,000 issued and outstanding common shares were acquired by South Branch Valley Bancorp, Inc. (South Branch). On August 6, 1997, the Board of Directors entered into an Agreement and Plan of Merger with South Branch. The Agreement, as amended on December 16, 1997, called for the shareholders of Capital State to receive one (1) share of South Branch common stock in exchange for every 3.95 shares of Capital State common stock owed. The proposed merger, which has received necessary regulatory approval, is subject to shareholder approval. Capital State has scheduled its shareholder meeting for March 24, 1998, while South Branch has scheduled its meeting for March 25, 1998. It is anticipated that the proposed merger will be accounted for under the purchase method of accounting in accordance with generally accepted accounting principles. Accordingly, as of the effective date of the merger, the assets and liabilities of Capital State will be adjusted to their fair values and the excess purchase price paid over the fair value of the assets acquired (goodwill) will be reflected in Capital State'as financial statements. Based upon preliminary estimates and assumptions, the excess purchase price over the fair value of the net assets acquired would have approximated $2,450,000 if the proposed merger had been consummated as of December 31, 1997. The goodwill recognized is expected to be amortized over a period of 15 years using the straight-line method. Upon consummation of the proposed merger, which is expected at or near the end of the first quarter of 1998, it is anticipated that Capital State will operate as a wholly-owned subsidiary of South Branch. Item 7(a) II. Unaudited Interim Financial Statements of Capital State Bank, Inc. as of March 31, 1998 and 1997 and for the three months then ended. Contents Item 1 - Financial Statements Balance Sheets as of March 31, 1998 (Unaudited), December 31, 1997 and March 31, 1997 (Unaudited) .................................................................... 1. Statements of Operations for the Three Months Ended March 31, 1998 and 1997 (Unaudited) .................................................................... 2. Statements of Shareholders' Equity for the Three Months Ended March 31, 1998 and 1997 (Unaudited) .................................................................... 3. Statements of Cash Flows for the Three Months Ended March 31, 1998 and 1997 (Unaudited) .................................................................... 4. Statements of Comprehensive Income for the Three Months Ended March 31, 1998 and 1997 (Unaudited) .................................................................... 5. Notes to the Financial Statements (Unaudited) .................................................................... 6.-18. 1 BALANCE SHEETS THE CAPITAL STATE BANK, INC
Restated -------------------- March 31, 1998 December 31, 1997 March 31, 1998 (Unaudited) 1997 (Unaudited) -------------- ------------------ -------------------- Assets Cash and due from banks $976,517 $640,734 $769,997 Interest bearing deposits with other banks 9,100 9,180 0 Federal funds sold 6,217,000 5,877,000 4,866,000 -------------- ------------------ -------------------- Cash and cash equivalents 7,202,617 6,526,914 5,635,997 Securities Available for sale, at fair value 10,466,790 7,976,975 6,852,037 Loans Total loans 24,787,782 24,254,052 17,817,765 Allowance for loan losses (271,802) (247,017) (157,300) -------------- ------------------ -------------------- Net loans 24,515,980 24,007,035 17,660,465 Bank premises and equipment - net 1,287,230 1,289,629 1,373,490 Other assets 536,870 609,201 490,872 -------------- ------------------ -------------------- Total Assets 44,009,487 40,409,754 32,012,661 ============== ================== ==================== Liabilities and Shareholders' Equity Deposits Non-Interest bearing 1,034,280 1,047,578 848,533 Interest bearing 31,726,407 28,020,898 20,022,708 -------------- ------------------ -------------------- Total deposits 32,760,687 29,068,476 20,871,241 Short Term Borrowings Federal Funds Purchased 0 0 0 Repurchase agreements and other borrowings 0 0 0 -------------- ------------------ -------------------- Total short term borrowings 0 0 0 Long-term borrowings 0 0 0 Other liabilities 375,785 498,505 278,133 -------------- ------------------ -------------------- Total Liabilities 33,136,472 29,566,981 21,149,374 -------------- ------------------ -------------------- Shareholders' Equity Common Stock - $1 per, 1,200.000 shares authorized and outstanding 1,200,000 1,200,000 1,200,000 Capital surplus 10,398,528 10,398,528 10,398,528 Retained earnings (706,478) (743,587) (638,273) Unrealized gain (loss) on securities available for sale, net of deferred taxes (18,035) (12,168) (96,968) Total shareholders' equity 10,873,015 10,842,773 10,863,287 -------------- ------------------ -------------------- Total liabilities and shareholders' equity 44,009,487 40,409,754 32,012,661 -------------- ------------------ --------------------
Information extracted from audited financial statements The accompanying notes are an integral part of these financial statements 2 STATEMENTS OF OPERATIONS
THE CAPITAL STATE BANK, INC. For the Three For the Three Months Ended Months Ended March 31, 1998 March 31, 1998 -------------------- ------------------ Interest Income Interest and fees on loans Taxable $505,568 $348,217 Tax-exempt 0 0 -------------------- ------------------ Total 505,568 348,217 -------------------- ------------------ Interest on investment securities Taxable 126,978 112,588 Tax-exempt 0 0 -------------------- ------------------ Total 126,978 112,588 -------------------- ------------------ Interest on interest bearing deposits with other banks 0 9,234 Interest on federal funds sold 98,848 46,538 -------------------- ------------------ Total interest income 731,394 516,577 -------------------- ------------------ Interest expense Deposits 400,248 232,420 Short-term borrowings 0 0 -------------------- ------------------ Total interest expense 400,248 232,420 -------------------- ------------------ Net Interest Income 331,146 284,157 Provision for loan losses 30,000 30,000 -------------------- ------------------ Net Interest Income after provision for laon losses 301,146 254,157 -------------------- ------------------ Other Income Service fee income 8,572 4,709 Other, net 3,381 4,957 Securities transactions 0 0 -------------------- ------------------ Total other income 11,953 9,666 -------------------- ------------------ Other Expenses Salaries and employee benefits 89,182 120,000 Occupancy expenses - net 22,878 37,846 Equipment expenses 22,696 25,407 Data Processing 39,692 25,341 Insurance 10,119 14,060 Professional fees 22,324 18,377 Advertising and marketing 7,564 13,840 Other operation expenses 30,257 28,432 -------------------- ------------------ Total other expenses 244,712 283,303 -------------------- ------------------ Income (loss) before taxes 68,387 (19,480) Applicable income tax expense (benefit) 31,278 (7,204) -------------------- ------------------ Net Income (loss) $37,109 ($12,276) ==================== ================== Basic earnings (loss) per common share $0.03 ($0.01) ==================== ================== Average common shares outstanding 1,200,000 1,200,000 ==================== ==================
The accompanying notes are an integral part of these financial statements 3
STATEMENTS OF SHAREHOLDERS' EQUITY Three Months Ended March 31, 1998 and 1997 (Unaudited) THE CAPITAL STATE BANK, INC. Unrealized Restated Gain (loss) on Retained Securities Total Common Stock Capital Surplus Earnings Available for Sale Shareholders' Equity ------------------------------------------------------------------------------------------------- Balance January 1, 1997 $1,200,000 $10,398,528 ($625,997) ($32,178) $10,940,353 Three Months Ended March 31, 1997 Net Income (12,276) (12,276) Cash Dividends 0 0 Charge in Fair Value of Securities Available for Sale, net of deferred taxes (64,790) (64,790) ------------------------------------------------------------------------------------------------- Balance March 31, 1997 $1,200,000 $10,398,528 ($638,273) ($96,968) $10,863,287 ================================================================================================= Balance January 1, 1998 $1,200,000 $10,395,528 ($743,587) ($12,168) $10,842,773 Three months ended March 31, 1998 Net Income 37,109 37,109 Cash Dividends 0 Change in Fair Value of Securities Available for Sale, net deferred taxes (6,867) (6,867) ------------------------------------------------------------------------------------------------- Balance March 31, 1998 $1,200,000 $10,398,528 ($706,478) ($19,035) $10,873,015 =================================================================================================
The accompanying notes are an integral part of these financial statements 4
STATEMENTS OF CASH FLOWS THE CAPITAL STATE BANK, INC. For the Three For the Three Months Ended Months Ended March 31, 1998 March 31, 1997 (Unaudited) (Unaudited) ------------------------------------------ Operating Activities Net Income (loss) $37,109 ($12,276) Adjustments to reconcile net income to net cash provided by operating activities Provision for loan losses 30,000 30,000 Depreciation 25,597 26,494 Amortization and accretion (1,622) (625) Securities losses (gains) 0 0 Deferred income tax expense (benefit) 31,278 (7,402) Increase / decrease due to changes in: Accrued interest receivable 50,303 115,642 Accrued interest payable 14,138 44,351 Other Assets 26,968 (40,942) Other liabilities (168,136) ------------------------------------------ Net cash provided by operating activities 45,635 155,242 Investing Activities Proceeds from maturities of securities available for sale 1,000,000 - Purchases of securities available for sale (3,500,000) - Net increase in loans (538,945) (1,453,351) Purchases of bank premises and equipment (23,198) - (Increase) decrease in interest bearing deposits with other banks 0 1,536,279 (Increase) decrease in federal funds sold, net (340,000) (1,382,000) ------------------------------------------ Net cash provided by Investing activities (3,402,063) (1,299,072) Financing Activities Net Increase in non interest bearing accounts (13,298) 169,856 Net Increase in NOW accounts and savings accounts 103,000 (262,308) Proceeds from the sales of (payments for matured) time deposits, net 3,602,509 1,626,449 ------------------------------------------ Net cash provided by financing activities 3,692,211 1,533,997 Increase (decrease) in cash and cash equivalents 335,783 390,167 Cash and Cash equivalents: Beginning of year 640,734 379,830 ------------------------------------------ End of year $976,517 $769,997 ------------------------------------------ Supplemental Disclosures of Cash Flow information: Cash payments for: Interest $414,386 $276,771 ------------------------------------------
The accompanying notes are an integral part of these financial statements 5 STATEMENTS OF COMPREHENSIVE INCOME THE CAPITAL STATE BANK, INC. Three Months Ended March 31 ----------------------------------- 1998 1997 ------------ ------------ Net Income Other comprehensive income of tax: $37,109 ($12,276) Unrealized gain (loss) on securities arising during the period 6,867 64,790 ------------ ------------ Comprehensive Income $43,976 $52,514 ------------ ------------ The accompanying notes are an integral part of these financial statements 6 Notes to Financial Statements Note 1. Basis of Presentation The accounting and reporting policies of The Capital State Bank, Inc., ("Capital State" or "The Bank") conform to generally accepted accounting principles and to general policies within the financial services industry. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the financial statement date and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. The information contained in the financial statements is unaudited except where indicated. In the opinion of management, all adjustments for a fair presentation of the results of the interim periods have been made. All such adjustments were of a normal recurring nature. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results to be expected for the full year. The financial statements and notes included herein should be read in conjunction with those included in Capital State's 1997 Form F-2. For the period ended March 31, 1998, the Company was required to adopt Statement of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". Comprehensive income includes any change in equity of the Company during the period resulting from transactions and other events and circumstances from nonowner sources. A Statement of Comprehensive income has been included in these financial statements to comply with SFAS 130. Prior interim periods presented have been reclassified to provide comparative information. Reclassifications: Certain accounts in the Financial Statements for 1997, as previously reported have been reclassified to conform to current year classification. Note 2. Cash Concentrations At March 31, 1998 and March 31, 1997, the Bank had a concentration of risk totaling $3,715,000 and $3,220,000 respectively in its cash balances on deposit with First USA Bank. At December 31, 1997, the Bank had a concentration of risk totaling $3,715,000 and $2,244,194 in its cash balances on deposit with First USA Bank and Bankers Bank of Kentucky, respectively. At March 31, 1998 the Bank had a concentration on deposit with Bankers Bank of Kentucky of $2,811,990. These cash balances are comprised of balances in due from correspondent accounts, Federal funds sold and interest bearing deposits, and are generally unsecured by the correspondent bank. 7 Note 3. Securities The amortized cost, unrealized gains and losses and estimated fair values of the Bank's securities at March 31, 1998, December 31, 1997 and March 31, 1997 are summarized as follows: Carrying Value Amortized Unrealized Unrealized (Estimated Cost Gains Losses Fair Value) ------------ ----------- ----------- ------------- March 31, 1998 U.S. Treasuries available $500,443 $407 - $500,850 for sale U.S. Government agencies and corporations available for 9,997,166 5,024 36,250 9,965,940 sale Total $10,497,609 $5,431 $36,250 $10,466,790 ------------ ----------- ----------- ------------- Carrying Value Amortized Unrealized Unrealized (Estimated Cost Gains Losses Fair Value) ------------ ----------- ----------- ------------- December 31, 1997 U.S. Treasuries available $500,521 - $20 $500,501 for sale U.S. Government agencies and corporations available for 7,495,466 5,708 24,700 7,476,474 sale ------------ ----------- ----------- ------------- Total $7,995,987 $5,708 $24,720 $7,976,975 ------------ ----------- ----------- ------------- March 31, 1997 U.S. Government agencies and corporations available for $6,998,958 - $146,921 $6,852,037 sale Total $6,998,958 - $146,921 $6,852,037 ------------ ----------- ----------- ------------- The maturities, amortized cost and estimated fair values of the Bank's securities at March 31, 1998 is summarized as follows: Carrying Value (Estimated Fair Amortized Cost Value) -------------- ------------------ Due within 1 year $ - $ - Due after 1 year but within 10,497,609 10,466,790 5 years Due after 5 but within 10 - - years Due after 10 years - - -------------- ------------------ Total $10,497,609 $10,466,790 ============== ================== 8 Maturities presented above are based on the contractual maturities of the securities. At March 31, 1998, securities with amortized cost of $9,497,609 have provisions which allow the issuer to "call" the securities prior to its contractual maturity date. Should these "call" provisions be exercised, the scheduled maturities disclosed above may be altered. Through March 31, 1998, there have been calls, or maturities of 1,000,000 in par value of these securities. At March 31, 1998, securities carried at $2,042,992 were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law. Note 4. Loans
March 31, 1998 Dec 31, 1997 March 31, 1997 --------------- ------------- ---------------- Commercial, financial and $1,823,134 $1,925,892 $1,348,704 agricultural Consumer loans 4,890,233 5,104,759 3,867,049 Real Estate: Revolving home equity 1,085,138 1,125,884 629,076 Single family residential 13,141,969 12,558,048 8,285,620 Commercial 3,673,078 3,367,396 3,074,925 Construction 174,230 172,073 612,391 --------------- ------------- ---------------- Total loans net of unearned income 24,787,782 24,254,052 17,817,765 Less allowance for loan losses 271,802 247,017 157,300 --------------- ------------- ---------------- Loans-net $24,515,980 $24,007,035 $17,660,465 =============== ============= ================
Scheduled maturities on loans, without regard to scheduled periodic principal repayments on amortizing loans, are as follows at March 31, 1998:
Due after 1 Due within 1 year Due after 5 year but within 5 years Total years ------------- -------------- ------------- -------------- Fixed Rate: Commercial $ - $336,641 $ - $336,641 Commercial real estate 150,000 2,964,963 - 3,114,963 Single family real estate including home equity 180,094 7,119,133 2,159,280 9,458,507 Construction - - - - Consumer Installment 288,230 4,357,276 54,287 4,699,793 Total fixed rate loans 618,324 14,778,013 2,213,567 17,609,904 ------------- -------------- ------------- -------------- Floating rate: Commercial 1,147,288 339,205 - 1,486,493
9
Commercial real estate - 208,266 349,849 558,115 Single family real estate including home equity 192,410 - 4,576,190 4,768,600 Construction 174,230 - - 174,230 Consumer Installment 155,750 34,690 - 190,440 ------------- -------------- ------------- -------------- Total floating rate loans 1,669,678 582,161 4,926,039 7,177,878 ------------- -------------- ------------- -------------- Total loans $2,288,002 $15,360,174 $7,139,606 $24,787,782 ============= ============== ============= ==============
Substantially all real estate loans outstanding were originated under 3, 5 or 7 year balloon or adjustable rate mortgage (ARM) terms with amortization periods of generally 15 to 25 years. Interest rates on floating rate loans generally reprice within one year based on indices which are set by sources independent of the Bank and are subject to interest rate floors, caps and ceilings which may limit changes in the interest rate over the life of the loan. Loans to related parties. The Bank has had and may be expected to have in the future, banking transactions in the ordinary course of business with directors, principal officers, their immediate families and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. The following presents the activity with respect to related party loans aggregating $60,000 or more to any one related party during the three months ended March 31, 1998: Balance beginning $1,513,562 Additions 29,283 Amounts Collected 20,045 -------------- Balance, ending $1,522,800 ============== At March 31, 1998, outstanding loans to directors, officers and employees totaled $1,779,609. Commitments to extend credit under unused open lines of credit to such individuals totaled approximately $93,980 at March 31, 1998. The Bank accepts chattel paper without recourse from various approved businesses, primarily automobile dealerships, within its lending area. The Bank has sole discretion whether to purchase such paper on a case by case basis which is evaluated substantially under the Bank's normal credit underwriting standards and is generally secured by a first lien on the property purchased by the borrower. At March 31, 1998, December 31, 1997 and March 31, 1997 respectively, such loans approximated $1,862,746, $1,995,837 and $1,889,157, of which approximately 80.0%, 80.0%, and 54.8% were purchased from businesses considered to be a related party to the Bank. Concentration of credit risk The Bank grants installment, commercial and residential loans to customers primarily in Kanawha, Boone and Lincoln Counties, West Virginia and adjacent counties. Although the Bank strives to maintain a diversified loan portfolio, exposure to credit losses can be adversely impacted by downturns in local economic and employment conditions. Major 10 employment within the market area is diverse but primarily includes the industries of government, health care, education, coal production and related services, and various professional, financial and related service industries. Note 5. Allowance for Loan Losses An analysis of the allowance for loan losses for the three months ended March 31, 1998 and 1997 are as follows: 1998 1997 --------- ------------ Balance, beginning of period $ 247,017 $ 127,300 --------- ------------ Losses: Commercial financial and agriculture - - Real estate - - Consumer installment 5,215 - --------- ------------ Total 5,215 - --------- ------------ Recoveries: Commercial financial and agriculture - - Real estate - - Consumer installment - - --------- ------------ Total - - --------- ------------ Net recoveries (losses) (5,215) - --------- ------------ Provision for loan losses 30,000 30,000 --------- ------------ Balance, end of period $ 271,802 $ 157,300 ========== ============= Note 6. Bank premises and Equipment The major categories of Bank premises and equipment and accumulated depreciation are summarized as follows: March 31, Dec 31, 1997 March 31, 1997 1998 ------------- ------------ -------------- Building and Improvements $1,026,262 $1,026,262 $1,024,904 Furniture and Equipment 488,860 465,662 491,491 ------------- ------------ -------------- 1,515,122 1,491,924 1,516,395 Less accumulated depreciation (227,892) (202,295) (142,905) ------------- ------------ -------------- Bank premises and equipment, $1,287,230 $1,289,629 $1,373,490 net ============= ============ ============== Depreciation expense for the three month period ended March 31, 1998 and March 31, 1997 was $25,597 and $26,494, respectively. During 1995 the Bank entered into a 50 year agreement to lease the land on which the Bank building is situated. The original term of the lease expires in the year 2045, with an additional 45 year option available through the year 2090. In consideration for this lease, the Bank made a one time, up front payment of $300,000 covering the first 50 year lease term. Total rental expense incurred and recognized for each of the three month periods ended March 31, 1998 and 1997 approximated $1,500. The remaining amount of prepaid lease at March 31, 1998, December 31, 1997 and March 31, 1996, which is included in other assets totaled $285,000, $286,500 and $291,000 respectively. 11 Note 7. Deposits The following is a summary of interest bearing deposits by type as of the dates indicated: March 31, Dec 31, 1997 March 31, 1998 1997 ------------- ------------- ------------ NOW and Super NOW accounts $2,312,293 $1,159,858 $1,174,440 Money market accounts 4,347,362 5,399,958 4,587,813 Savings accounts 1,847,082 1,843,921 1,560,734 Certificates of deposit 23,219,670 19,617,161 12,699,721 ------------- ------------- ------------ Total $31,726,407 $28,020,898 $20,022,708 ============= ============= ============ Time certificates of deposit in denomination of $100,000 or more totaled $8,158,399, $6,378,906 and $4,167,605 at March 31, 1998, December 31, 1997 and March 31, 1997, respectively. Interest paid on time certificates in denominations of $100,000 or more was $106,557 and $52,416 for the three month period ended March 31, 1998 and Mach 31, 1997 respectively. The following is a summary of the maturity distribution of deposits in amounts of $100,000 or more as of the date indicated. March 31, 1998 Amount Percent -------------- -------- Three months or less $304,442 3.7% Three through six months 1,166,680 14.3% Six through twelve months 2,235,497 27.4% Over twelve months 4,451,780 54.6% Total $8,158,399 100.0% ============== ======== December 31, 1997 Amount Percent -------------- -------- Three months or less $655,472 10.3% Three through six months 311,186 4.9% Six through twelve months 2,087,796 32.7% Over twelve months 3,324,452 52.1% Total $6,378,906 100.0% ============== ======== March 31, 1997 Amount Percent -------------- -------- Three months or less $1,214,999 29.2% 12 Three through six months 902,356 21.6% Six through twelve months 1,742,668 41.8% Over twelve months 307,582 7.4% Total $4,167,605 100.0% ============== ======== A summary of the maturities of time deposits is as follows: 1999 $11,640,279 2000 10,934,259 2001 456,292 2002 120,986 2003 32,851 ------------- After 35,003 ------------- Total $23,219,670 ============= The Bank is the holder of deposits from related parties totaling approximately $1,973,208 ,or 6.02% of total deposits, and $1,491,123, or 7.14% of total deposits, at March 31, 1998 and 1997, respectively. At December 31, 1997, deposits of related parties totaled approximately $1,324,000 or 4.7% of total deposits. At March 31, 1998 and 1997 the Bank had a concentration of deposits from an unrelated party totaling approximately $1,479,342 and $1,402,400, or 4.52% and 6.72%, of total deposits and $1,460,000, or 5.2% or deposits, at December 31, 1997, respectively. Note 8. Income Taxes The components of applicable income tax expense (benefit) for the three months ended March 31, 1998 and 1997 are as follows: 1998 1997 --------------- --------------- Current: Federal $ - $ - State - - --------------- --------------- Deferred: Federal 7,526 (1,781) State 23,753 (5,621) --------------- --------------- --------------- --------------- Total $31,279 $(7,402) =============== =============== Deferred income taxes reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured for tax purposes. Deferred tax assets and liabilities represent the future tax return consequences of temporary differences, which will either be taxable or deductible when the related assets and liabilities are recovered or settled. The tax effects of temporary differences which create the Bank's deferred tax assets and liabilities as of March 31, 1998, December 31, 1997 and March 31, 1997, are as follows: 13 March 31, Dec. 31, March 31, 1998 1997 1997 ------------ ------------ ------------ Deferred Tax Assets: Start up costs deferred for tax $54,216 $59,076 $72,751 purposes Federal and state net operating 270,182 262,854 197,446 loss carry forward Depreciation - - - Net unrealized losses on 11,785 6,844 49,953 securities Allowance for loan losses - 8,146 18,000 Other 15,328 12,788 1,203 ------------ ------------ ------------ Subtotal 351,511 349,708 339,353 Less: valuation allowance 339,726 342,864 289,400 ------------ ------------ ------------ Total deferred tax asset 11,785 6,844 49,953 ------------ ------------ ------------ Deferred Tax Liability: Allowance for loan losses 30,480 - - Depreciation 58,432 57,634 30,339 ------------ ------------ ------------ Total deferred tax liability 88,912 57,634 30,339 ------------ ------------ ------------ Net deferred tax $(77,127) $(50,790) $19,614 (liability) ============ ============ ============ Realization of future tax benefits related to deferred tax assets is dependent on many factors, including the bank's ability to generate taxable income within the net operating loss carry forward period. Management believes the Bank will generate sufficient future taxable income to realize the tax assets prior to the expiration of carry forward periods. However, failure to achieve forecasted taxable income has and could in the future affect the ultimate realization of deferred tax assets. As a result, a valuation allowance is recorded to reduce deferred tax assets to that portion that is not expected to more likely than not be realized within the next year. The Bank continually reviews the adequacy of the valuation allowance and will recognize these benefits only as reassessment indicates that it is more likely than not that the benefits will be realized. As more fully described in Note 14, the financial statements have been restated to record a valuation allowance for deferred tax assets of $342,864 and $282,621 at December 31, 1997 and March 31, 1997, respectively. Note 9 Fair Value of Financial Instruments The following summarizes the methods and significant assumptions used by the Bank in estimating its fair value disclosure for financial instruments. Cash and due from banks: The carrying values of cash and due from banks approximate their estimated fair value. 14 Federal funds sold and interest bearing deposits with other banks: The carrying values of Federal funds sold and interest bearing deposits with other banks approximate their estimated fair values. Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities. Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed. Accrued interest receivable and payable: The carrying values of accrued interest receivable and payable approximate their fair values. Deposits: The estimated values of demand deposits (i.e. noninterest bearing checking, NOW, Super NOW, money market), savings accounts, and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed. The fair values of the Bank's financial instruments as of March 31, 1998, December 31, 1997, and March 31, 1997 are summarized below:
March 31, 1998 December 31, 1997 March 31, 1997 ---------------------- ----------------------- ------------------------ Carrying Fair Carrying Fair Carrying Fair value amount value amount value amount value ---------- ----------- ----------- ----------- ---------- ------------- Financial assets: Cash and due from banks $976,517 $976,517 $640,734 $640,734 $769,997 $769,997 Interest bearing deposits with other banks 9,100 9,100 9,180 9,180 0 0 Federal funds sold 6,217,000 6,217,000 5,877,000 5,877,000 4,866,000 4,866,000 Securities available for sale 10,466,790 10,466,790 7,976,975 7,976,975 6,852,037 6,852,037 Loans 24,515,980 24,488,647 24,007,035 23,881,235 17,660,465 17,583,779 Accrued interest receivable 192,625 192,625 242,928 242,928 129,231 129,231 ---------- ----------- ----------- ----------- ---------- ------------- $42,378,012 $42,350,679 $38,753,852 $38,628,052 $30,277,73 $30,201,044 ========== =========== =========== =========== ========== ============= Financial liabilities: Deposits 32,760,687 32,896,217 29,068,476 29,162,441 20,871,241 20,912,165 Accrued interest 218,930 218,930 204,792 204,792 213,995 213,995 payable ---------- ----------- ----------- ----------- ---------- ------------- $32,979,617 $33,115,147 $29,273,268 $29,367,233 $21,085,23 $21,126,160 ========== =========== =========== =========== ========== =============
15 Note 10. Restrictions on Dividends and Capital Dividends paid by the Bank are subject to restrictions by banking regulations. The most restrictive provision requires approval by the regulatory agency if dividends in any year exceeds the year's net income, as defined, plus the retained net profits of the preceding years. Since the Bank has a net deficit, there are no net retained profits available for distribution. The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighting and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of March 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. The Bank has not yet received formal notification through examination by its primary regulatory authority of its capital categorization under the regulatory framework for prompt corrective action. However, the Bank's most recent financial reporting to the Bank's primary regulatory authority categorizes the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since its last financial reporting that management believes have changed the institution's category. The Bank's actual capital amounts and ratios at March 31, 1998 is presented in the following table .
Actual For Capital To Be Well Adequacy Capitalized Under Prompt Corrective Purposes Action Provisions ------------------- --------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ----------- ------- ---------- ---------- ----------- ---------- Total Capital (to Risk Weighted Assets) $11,154,316 47.1% $1,896,560 8.0% $2,370,700 10.0% Tier I Capital (to Risk Weighted Assets) $10,873,016 45.9% $948,280 4.0% $1,422,420 6.0% Tier I Capital (to Average Assets) $10,873,016 26.0% $1,674,595 4.0% $2,093,244 5.0%
16 Note 11. Financial Instruments With Off-Balance-Sheet Risk. The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement the Bank has in particular cases of financial instruments. Financial Instruments whose contract Contract amounts represent credit risk Amount ----------------------------------- ------------ Commitments to extend credit $250,000 Unused open lines of credit 1,716,278 Standby letters of credit and - financial guarantees written Remaining commitments on 55,100 construction loans Total $2,021,378 ============ The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit is based on management's credit evaluation Collateral held varies but may include accounts receivable, inventory, equipment or real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans. These letters of credit are generally collateralized. Note 12. Acquisition by South Branch Valley Bancorp, Inc. On March 24, 1998 and March 24, 1998, the shareholders of The Capital State Bank, Inc. and South Branch Valley Bancorp, Inc., (South Branch), respectively, approved the merger of Capital State into Capital Interim Bank, Inc., a wholly owned subsidiary of South Branch. The merger was consummated at the close of business on March 31, 1998. The merger will be treated using the purchase method of accounting; accordingly, the assets and liabilities and results of operations of Capital State will be adjusted to their estimated fair values as of the effective date using the push down accounting guidelines established by generally accepted accounting principles. Based upon preliminary estimates and assumptions, the excess purchase price over the fair value of the net assets acquired as of the consummation date is approximately $2,300,000. This goodwill recognized is expected to be amortized over a period of 15 years using the straight line method. 17 The amount of goodwill will also be adjusted, in accordance with the requirements of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, in future years for tax deductions that are available for future use, which were in existence at the acquisition date, for which no benefit had been recognized (i.e. for which a valuation allowance was recorded). The total of such future deductions was approximately $760,000 for federal tax purposes and approximately $986,000 for state tax purposes. The largest component of these deductions relates to net operating loss carry forwards which will generally only be available for use to the extent that Capital State generates future taxable income. The total amount of Deferred tax assets recorded relating to these acquired deductions for which no benefit was taken was approximately $340,000. The following table sets forth certain pro forma condensed financial information of Capital State, using the purchase method of accounting, after giving effect to the merger as if it had been consummated as of the date presented. Pro Forma Reflecting Capital State After Giving Effect to the Acquisition by South Branch (In thousands, except per share data) As of March 31, 1998 ------------------------------------ Balance Sheet Data As Reported Pro Forma - ------------------------------------------------------------------------------- Total assets 44,009 46,707 Investment Securities 10,467 10,467 Net Loans 24,516 24,488 Bank premises and equipment - net 1,287 1,500 Other assets 537 744 Goodwill - 2,305 Total liabilities 33,136 36,135 Total Deposits 32,761 32,896 Long term debt - 2,771 Other liabilities 376 468 Total equity 10,873 10,572 As Pro Risk Based Capital Ratios Reported Forma - ----------------------------------------- -------- -------------- -------- Amount Ratio Amount Ratio -------------- -------- -------------- -------- Total 11,154 47.1% 8,529 35.4% Tier 1 10,873 45.9% 8,267 34.3% Leverage 10,873 26.0% 8,267 19.3% 18 The Long term Debt recorded as part of the purchase accounting adjustments will mature as follows: 1998 33,500 1998 683,332 2000 683,332 2001 683,332 2002 683,332 thereafter 4,172 ----------- $2,771,000 =========== Note 13. Restatement The accompanying financial statements as of and for the three months ended March 31, 1997, have been restated to reflect the recording of a valuation allowance for deferred tax assets for which it is more likely than not that a tax benefit will not be realized within a short term. Accordingly, a valuation allowance of $282,621 has been recorded at March 31, 1997. The effects of the restatements are as follows: March 31, 1997 ------------------------------- As As Previously Restated Reported -------------- ------------- Balance Sheets: Other Assets 773,293 490,672 -------------- ------------- Total Assets 773,293 490,672 -------------- ------------- Retained earnings (355,652) (638,273) (deficit) ------------------------------- Statements of Operations: Income tax expense (7,204) (7,204) (benefit) ------------------------------- Net Income (loss) (7,204) (7,204) ------------------------------- Earnings (loss) per (0.01) (0.01) common share ------------------------------- EX-99.2N 2 A & F CONSENT FORM EXHIBIT 99 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the inclusion in this Form 8-K/B (Amendment Numbe 2) of our report dated January 30, 1998, on the financial statements of The Capital State Bank, Inc. (A development stage company for 1995) as of December 31, 1997 and 1996, and the related statement of operations, shareholders' equity and cash flows for the years ended December 31, 1997 and 1996, and for the period September 11, 1995, date of inception, to December 31, 1995. ARNETT & FOSTER, P.L.L.C. Charleston, West Virginia June 1, 1998 -----END PRIVACY-ENHANCED MESSAGE-----