UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
Commission File No. 000-50151
Allegheny Bancshares, Inc.
(Name of Registrant in Its Charter)
West Virginia 22-3888163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North Main Street, 26807
P. O. Box 487, Franklin, West Virginia (Zip Code)
(Address of principal executive office)
Registrant's telephone number: (304) 358-2311
Securities registered under Section 12(b) of the Act:
None
Securities registered under Section 12(g) of the Act:
Common Stock - $1.00 Par Value
Indicate by check mark whether the registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [ X ]
As of February 1, 2005, the aggregate market value of the voting stock held
by non-affiliates, based on the last reported sales prices of $49.00 per share
was $43,933,204.
The number of shares outstanding of the registrant's common stock was
896,596 as of February 1, 2005.
DOCUMENTS INCORPORATED BY REFERENCE:
A portion of the registrant's proxy statement to be used in connection
with the solicitation of proxies for the registrant's 2005 annual meeting of
shareholders is incorporated by reference in item 14 at part IV of this annual
report on Form 10-10K.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page 46.
2
TABLE OF CONTENTS
PART I
Item 1. Description of Business 3
Item 2. Description of Property 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
PART II
Item 5. Market for Common Equity and Related Shareholder Matters 7
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 8. Financial Statements 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 41
Item 9A. Controls and procedures 41
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons:
Compliance with Section 16(a) of the Exchange Act 41
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Shareholder Matters 45
Item 13. Certain Relationships and Related Transactions 46
Item 14. Principal Accountant Fees and Services 47
PART IV
Item 15. Exhibits and Reports on Form 8-K 48
3
PART I
Item 1. Description of Business
General
Allegheny Bancshares, Inc. (hereinafter referred to as the "Company"),
incorporated under the laws of West Virginia in 2003, is a one-bank holding
company subject to the provisions of the Bank Holding Company Act of 1956, as
amended, and owns 100% of the outstanding stock of its subsidiary bank,
Pendleton County Bank ("Bank"). The Bank, headquartered in Franklin, West
Virginia, was incorporated under the laws of West Virginia on March 9, 1925 and
operates as a state chartered bank. The Bank is engaged in the general
commercial banking business offering a full range of banking services focused
primarily towards serving individuals, small to medium size businesses, the
agricultural industry, and the professional community. The Bank strives to serve
the banking needs of its customers while developing personal, hometown
relationships.
Location and Market Area
The Bank's primary trade area includes Pendleton, Grant, Hardy and
Pocahontas counties in West Virginia including the towns of Franklin, Marlinton,
Moorefield, and Petersburg. The Bank's secondary trade area includes the
neighboring counties of each respective office, including counties in West
Virginia and Virginia. The Bank's business locations include their main office
and operations center located in Franklin, West Virginia, a full service branch
in Moorefield opened in July 1999, and a full service branch in Marlinton, West
Virginia opened in November 2001.
To better serve the customers in the Marlinton area, the Company has
received approval to relocate the Marlinton branch bank in 2005. Construction is
in progress for a new full service branch bank with an expected opening date of
late spring 2005. Management is continuing to investigate and consider other
possible sites that would enable the Bank to profitably serve its market area.
To this end, the Company purchased land in the Harrisonburg, Virginia market in
January 2005.
Banking Services
The Bank accepts deposits, makes consumer and commercial loans, issues
drafts, and provides other services customarily offered by a commercial banking
institution. The Bank's deposits are insured under the Federal Deposit Insurance
Act to the limits provided thereunder.
Loans
The Bank offers a full range of short-to-medium term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements) and purchase of
equipment and machinery. Consumer loans may include secured and unsecured loans
for financing automobiles, mobile homes, home purchases and improvements,
education and personal investments.
Real estate construction loans (residential and commercial) are made for a
maximum term of nine months. Long-term real estate loans (residential and
commercial) are made with a maximum amortization period of 30 years with both
balloon terms and adjustable rate terms (ARMs) of from one to five years.
Interest rates vary depending on the length of the balloon or ARM term. The
majority of the real estate loans are made as investments, with a small
percentage sold in the secondary market.
4
Loans (Continued)
The Bank's lending activities are subject to a variety of lending limits
imposed by state law. While differing limits apply in certain circumstances
based on the type of loan or the nature of the borrower (including the
borrower's relationship to the Bank), in general, the Bank is subject to a
loan-to-one borrower limit of an amount equal to 15% of the Bank's capital and
surplus in the case of loans which are not fully secured by readily marketable
or other permissible types of collateral. The Bank voluntarily may choose to
impose a policy limit on loans to a single borrower that is less than the legal
lending limit. The Bank may establish relationships with correspondent banks to
participate in loans when loan amounts exceed the Bank's legal lending limits or
internal lending policies.
Deposits
The Bank offers a full range of deposit products including checking, money
market, and savings accounts, certificates of deposits, and individual
retirement accounts. The deposit accounts are insured under the Federal Deposit
Insurance Act to the limits provided thereunder.
Other bank services include safe deposit boxes, issuance of cashier's
checks, credit life insurance, traveler's checks, direct deposit of payroll and
social security checks, automatic drafts for various accounts, telephone
banking, online banking, cash management, and bill pay. The Bank currently
offers credit and debit card services that can be used by bank customers
throughout West Virginia and other regions.
Competition
The Bank's market area is highly competitive and competition in lending
activities comes principally from other commercial banks. The primary factors in
competing for loans are interest rates and overall lending services. There are
branches of nine commercial banks located in its primary market area.
Competition for deposits among the banks is intense, and as a result, the Bank
monitors its competitive position and makes adjustments in pricing that
management deems necessary to attract new depositors and maintain current
deposit relationships. Competition for deposits comes from other commercial
banks, savings associations, money market funds and credit unions. The primary
factors in competing for deposits are interest rates paid on deposits, customer
satisfaction, convenience of office location and overall financial condition.
SUPERVISION AND REGULATION
The Effect of Governmental Policy on Banking
The earnings and growth of the Bank are affected not only by local market
area factors and general economic conditions, but also by government monetary
and fiscal policies. For example, the Board of Governors of the Federal Reserve
System (the "FRB") influences the supply of money through its open market
operations in U.S. Government securities and adjustments to the discount rates
applicable to borrowings by depository institutions and others. Such actions
influence the growth of loans, investments and deposits and also affect interest
rates charged on loans and paid on deposits. The nature and impact of future
changes in such policies on the business and earnings of the Bank cannot be
predicted.
As a consequence of the extensive regulation of commercial banking
activities in the United States, the business of the Bank is particularly
susceptible to being affected by enactment of federal and state legislation
which may have the effect of increasing or decreasing the cost of doing
business, modifying permissible activities, or enhancing the competitive
position of other financial institutions. Any change in applicable laws or
regulations may have a material adverse effect on the business and prospects of
the Bank. The Bank is subject to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revises the bank
regulatory framework and deposit insurance funding provisions of the Federal
Deposit Insurance Act.
5
Bank Regulation and Supervision
As a West Virginia state-chartered bank, the Bank is regulated, supervised
and regularly examined by the West Virginia Division of Banking ("WVDB") and the
Federal Deposit Insurance Corporation ("FDIC"). Deposit accounts at the Bank are
insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, to the
maximum amount permitted by law.
The FDIC may terminate a bank's deposit insurance upon finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition enacted or imposed by the bank's regulatory
agency.
Effect of Environmental Regulation
The Bank's primary exposure to environmental risk is through its lending
activities. In cases when management believes environmental risk potentially
exists, the Bank mitigates its environmental risk exposures by requiring
environmental site assessments at the time of loan origination to confirm
collateral quality as to commercial real estate parcels posing higher than
normal potential for environmental impact, as determined by reference to present
and past uses of the subject property and adjacent sites. Environmental
assessments are typically required prior to any foreclosure activity involving
non-residential real estate collateral.
With regard to residential real estate lending, management reviews those
loans with inherent environmental risk on an individual basis and makes
decisions based on the dollar amount of the loan and the materiality of the
specific credit.
The Bank anticipates no material effect on anticipated capital
expenditures, earnings or competitive position as a result of compliance with
federal, state or local environmental protection laws or regulations.
International Money Laundering Abatement and
Anti-Terrorist Financing Act of 2001 (USA Patriot Act)
The International Money Laundering Abatement and Anti-Terrorist Financing
Act of 2001 (the "Patriot Act") was adopted in response to the September 11,
2001 terrorist attacks. The Patriot Act provides law enforcement with greater
powers to investigate terrorism and prevent future terrorist acts. Among the
broad-reaching provisions contained in the Patriot Act are several designed to
deter terrorists' ability to launder money in the United States and provide law
enforcement with additional powers to investigate how terrorists and terrorist
organizations are financed. The Patriot Act creates additional requirements for
banks, which were already subject to similar regulations. The Patriot Act
authorizes the Secretary of the Treasury to require financial institutions to
take certain "special measures" when the Secretary suspects that certain
transactions or accounts are related to money laundering. These special measures
may be ordered when the Secretary suspects that a jurisdiction outside of the
United States, a financial institution operating outside of the United States, a
class of transactions involving a jurisdiction outside of the United States or
certain types of accounts are of "primary money laundering concern." The special
measures may include any or all of the following: (a) require financial
institutions to keep records and report on the transactions or accounts at
issue; (b) require financial institutions to obtain and retain information
related to the beneficial ownership of any account opened or maintained by
foreign persons; (c) require financial institutions to identify each customer
who is permitted to use a payable-through or correspondent account and obtain
certain information from each customer permitted to use the account; and (d)
prohibit or impose conditions on the opening or maintaining of correspondent or
payable-through accounts.
6
Bank Holding Company
Beginning on January 1, 2003, the Bank became a wholly owned subsidiary of
Allegheny Bancshares, Inc., a bank holding company under the Bank Holding
Company Act of 1956. The Bank Holding Company Act of 1956 restricts the
activities of the Company and the acquisition by the Company of voting stock or
assets of any bank, savings association or other company. The Company is also
subject to the reporting requirements of, and examination and regulation by, the
Federal Reserve Board and the West Virginia Division of Banking. The Bank is
subject to restrictions imposed by the Federal Reserve Act on transactions with
affiliates, including any loans or extensions of credit to the Company or its
subsidiaries, investments in the stock or other securities thereof and the
taking of such stock or securities as collateral for loans to any borrower; the
issuance of guarantees, acceptances or letters of credit on behalf of the
Company and its subsidiaries; purchases or sales of securities or other assets;
and the payment of money or furnishing of services to the Company and other
subsidiaries. The Company is prohibited from acquiring direct or indirect
control of more than 5% of any class of voting stock or substantially all of the
assets of any bank holding company without the prior approval of the Federal
Reserve Board and the West Virginia Board of Banking and Financial Institutions.
The Company and its subsidiary are prohibited from engaging in certain tying
arrangements in connection with extensions of credit and/or the provision of
other property or services to a customer by the Company or its subsidiary.
The Gramm-Leach-Bliley Act (also known as the Financial Services
Modernization Act of 1999) permits bank holding companies to become financial
holding companies. This allows them to affiliate with securities firms and
insurance companies and to engage in other activities that are financial in
nature. A bank holding company may become a financial holding company if each of
its subsidiary banks is well capitalized, is well managed and has at least a
satisfactory rating under the Community Reinvestment Act. No regulatory approval
will be required for a financial holding company to acquire a company, other
than a bank or savings association, engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as determined
by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to
include: securities underwriting, dealing and market making; sponsoring mutual
funds and investment companies; insurance underwriting and agency; merchant
banking activities; and activities that the Federal Reserve Board has determined
to be closely related to banking. A bank also may engage, subject to limitations
on investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate development
and real estate investment, through a financial subsidiary of the bank, if the
bank is well capitalized, well managed and has at least a satisfactory Community
Reinvestment Act rating. The specific effects of the enactment of the Financial
Services Modernization Act on the banking industry in general and on Allegheny
in particular have yet to be determined because of that Act's relatively recent
adoption. Currently, Allegheny has not requested approval as a financial holding
company.
Capital Standards
The FDIC and other federal banking agencies have risk-based capital
adequacy guidelines intended to provide a measure of capital adequacy that
reflects the degree of risk associated with a banking organization's operations.
As of December 31, 2004, the Bank's capital significantly exceeds regulatory
requirements. A schedule of capital amounts and ratios is included in Note 13 to
the financial statements.
Employees
As of December 31, 2004, the Bank had 48 full-time employees and 52 total
employees.
7
Item 2. Description of Property
The main office of the Bank is located at 300 North Main Street, Franklin,
West Virginia and is owned by the Bank. The attractive modern facility was
originally constructed in 1968 and renovated and expanded in 1989. The
construction of the building is cinder block with a brick facing. The 10,640
square foot main floor has six Bank offices, seven administrative offices, five
lobby teller stations, five loan administration offices and a customer service
area. In addition, there are three drive-through lanes, a walk up window, a
night depository and a full service ATM. The 6,660 square foot lower level
houses the operations center, two administration offices, a community room and a
board room.
The branch in Moorefield is located at 402 South Main Street, Moorefield,
West Virginia and is owned by the Bank. The 3,625 square foot building has four
offices, four teller stations, two drive-through lanes, a night deposit drop and
an ATM. The branch was completed in February 2000 and the construction is wood
frame with a gray masonry exterior.
The current branch in Marlinton is located at 219 Eighth Street,
Marlinton, West Virginia and is leased by the Bank. The 1,920 square foot
temporary office has two teller stations, a night deposit drop and customer
service/loan platform area. The branch was opened in November 2001. The Company
is planning to relocate the bank to 900 Seneca Trail North, Marlinton, West
Virginia in 2005 to a permanent location. Construction is currently in progress.
The new 3,500 square foot office will have four offices, four teller stations,
two drive thru lanes, a night deposit drop and an ATM.
Item 3. Legal Proceedings
Management is not aware of any pending or threatened litigation in which
the Bank may be involved as a defendant. In the normal course of business, the
Bank periodically must initiate suits against borrowers as a final course of
action in collecting past due loans.
Item 4. Submission of Matters to a Vote of Security Holders
Allegheny Bancshares has not submitted any matters to the vote of security
holders for the quarter ending December 31, 2004.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
The Company's common stock is currently not traded on any established
market; however, the Company is frequently informed of the sales price at which
common shares are exchanged. Other transactions may have occurred which were not
reported to the Company. The Company acts as its own transfer agent.
The amount of dividends payable by the Company depends upon its earnings
and capital position, and is limited by the federal and state law, regulations
and policy. A West Virginia state bank cannot pay dividends (without the consent
of banking authorities) in excess of the total net profits of the current year
and the combined retained profits of the previous two years.
Annual dividends were declared as of December 31, 2004 and 2003 in the
amount of 1.10 and 1.00 per share, respectively.
8
Stockholders
As of December 31, 2004, there were 655 holders of common stock. This
amount includes all shareholders, whether individually or held by a brokerage
firm or custodian in street name.
The high and low trade prices of the Company's common stock reported to
management were as follows:
Year 2004 2003
---- ---- ----
High Low High Low
1st quarter $ 40.00 $ 37.00 $ 35.11 $ 35.05
2nd quarter 45.00 40.00 35.05 32.00
3rd quarter 62.60(1) 45.00 35.05 35.05
4th quarter 49.00 49.00 37.00 35.05
(1) This price was the result of a private auction and may not be
indicative of the market for the Company's shares.
Purchases of Securities During Last Quarter of 2004
Period Total No. Avg. Price Total No. of Maximum No.
of Shares Paid per Shares (or Units) (or approximate
(or Units) Share (or Unit) Purchased as Part Dollar Value) of
Purchased of Publicly Announced Shares (or Units)
Plans or Programs That May Yet Be
Purchased Under
the Plans or
Programs
10/1/04 - 10/31/04 0 $ N/A N/A
11/1/04 - 11/30/04 229 $ 45 N/A N/A
12/1/04 - 12/31/04 205 $ 49 N/A N/A
Item 6. Selected Financial Data
Years ended December 31,
----------------------------------------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(Dollars in Thousands except per share data)
RESULTS OF OPERATIONS
Interest income $ 9,323 $ 9,143 $ 8,853 $ 8,889 $ 8,514
Interest expense (2,128) (2,513) (2,909) (3,977) (4,413)
------ ------- ------ ------- ------
Net Interest Income 7,195 6,630 5,944 4,912 4,101
Provisions for loan
losses (183) (120) (120) (120) (100)
Noninterest income 512 432 401 231 164
Noninterest expenses (4,112) (3,708) (3,524) (2,759) (2,553)
Income taxes (1,028) (953) (770) (621) (377)
------ ------- ------- ------- -------
Net Income $ 2,384 $ 2,281 $ 1,931 $ 1,643 $ 1,235
====== ======= ====== ======= ======
9
PROFITABILITY RATIOS
Return on Average Assets 1.49% 1.48% 1.40% 1.31% 1.01%
Return on Average Equity 9.95% 9.96% 9.01% 8.14% 6.44%
PER COMMON SHARE
Net Income $2.66 $2.54 $2.15 $1.83 $1.37
Cash Dividends Declared 1.10 1.00 .90 .80 .75
Book Value 26.82 25.63 24.36 22.32 21.10
Last Reported Market Price 49.00 37.00 35.05 30.00 25.00
Dividend Payout Ratio 41.38% 39.45% 41.94% 43.72% 54.66%
AT YEAR END
Assets $ 162,239 $ 157,757 $ 146,001 $ 129,668 $ 124,159
Deposits 131,577 128,553 121,982 108,562 104,437
Loans 117,228 110,516 103,430 82,797 77,311
Stockholders'
Equity 24,047 23,053 21,928 20,091 18,994
Equity to Assets
Ratio 14.82% 14.61% 15.56% 16.12% 15.68%
10
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations
Forward Looking Statements
The following discussion contains statements that refer to future
expectations, contain projections of the results of operations or of financial
condition or state other information that is "forward-looking."
"Forward-looking" statements are easily identified by the use of words such as
"could," "could anticipate," "estimate," "believe," and similar words that refer
to the future outlook. There is always a degree of uncertainty associated with
"forward-looking" statements. The Company's management believes that the
expectations reflected in such statements are based upon reasonable assumptions
and on the facts and circumstances existing at the time of these disclosures.
Actual results could differ significantly from those anticipated.
Many factors could cause the Company's actual results to differ materially
from the results contemplated by the forward-looking statements. Some factors,
which could negatively affect the results, include:
>> General economic conditions, either nationally or within the
Company's markets, could be less favorable than expected;
>> Changes in market interest rates could affect interest margins and
profitability;
>> Competitive pressures could be greater than anticipated; and
>> Legal or accounting changes could affect the Company's results.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments
and estimates used in the preparation of the consolidated financial statements.
Our single most critical accounting policy relates to our allowance for loan
losses, which reflects the estimated losses resulting from the inability of our
customers to make required payments. If the financial condition of our borrowers
were to deteriorate, resulting in an impairment of their ability to make
payments, our estimates would be updated, and additional reserves may be
required. For further discussion of the estimates used in determining the
allowance for loan losses, we refer you to the discussion on "Loan Losses and
Allowance for Loan Losses" below.
Overview
2004 Compared to 2003
Net income of the Company increased 4.51% from 2003 to 2004 and earnings
per share increased 4.72% from $2.54 to $2.66. Increases of $566,000 in net
interest income and $80,000 in noninterest income were offset by increases in
the provision for loan losses and noninterest expenses.
2003 Compared to 2002
Net income of the Company increased 18.13% from 2002 to 2003 and earnings
per share increased 18.14% from $2.15 to $2.54. Increases of $686,000 in net
interest income and $31,000 in noninterest income were offset by increases in
noninterest expenses and income tax expense.
11
Net Interest Earnings
2004 Compared to 2003
The primary source of the Company's earnings is net interest income, the
difference between income on earning assets and the cost of funds supporting
those assets. Significant categories of earning assets are loans and securities
while deposits represent the major portion of interest-bearing liabilities.
For purposes of the following discussion, comparison of net interest income
is done on a tax equivalent basis, which provides a common basis for comparing
yields on earning assets exempt from federal income taxes to those which are
fully taxable. The Company's taxable equivalent net interest income increased
7.61% in 2004 compared to 2003, due to the net growth of earning assets and
improved net yield on earning assets. The Company's net yield on interest
earning assets for 2004 was 4.97% compared to 4.78% for 2003 as the yield on
earning assets declined less than the cost of funds. The cost of funds declined
due to the repricing of maturing time deposits at lower current rates.
2003 Compared to 2002
The Company's taxable equivalent net interest income increased 10.07% in
2003 compared to 2002, due to the combination of net growth of earning assets
and decreased cost of funds, offset by lower asset yields. The Company's net
yield on interest earning assets for 2003 was 4.78% compared to 4.89% for 2002
as the yield on earning assets declined more than the cost of funds. The yield
on earning assets declined during the period analyzed due somewhat to the
repricing of maturing funds at lower current rates.
Noninterest Income
2004 Compared to 2003
Noninterest income consists of all revenues which are not included in
interest and fee income related to earning assets. Noninterest income increased
18.52% in 2004. Service charges increased $43,000 from 2003 to 2004, primarily
as a result of an increase in overdraft fees and the introduction of the
Company's overdraft bounce protection program. Also included in noninterest
income are gains on securities of $52,000 in 2004 as compared to $7,000 in 2003.
Other increases in noninterest income were due to increases in ATM fees and
insurance commissions. Noninterest income (excluding security gains and losses)
as a percentage of average assets was .29% and .28% for December 31, 2004 and
2003 respectively.
2003 Compared to 2002
Noninterest income increased 7.78% in 2003 primarily due to an increase in
service charge activity. Other income increased primarily due to increase in ATM
Fees. Noninterest income (excluding security gains and losses) as a percentage
of average assets was .28% and .26% for December 31, 2003 and 2002 respectively.
12
Noninterest Expenses
2004 Compared to 2003
Noninterest expenses increased $404,000 in 2004 compared to 2003.
Noninterest expenses as a percentage of average assets was 2.57% and 2.40% for
each of the years ended December 31, 2004 and 2003, respectively. This increase
is primarily attributable to a $170,000 increase in salaries and benefits as a
result of an increase in the number of employees, merit increases, and higher
benefit costs. Occupancy expenses increased due to improvements to the Franklin
Office. Equipment expenses, including software maintenance contract expense and
depreciation expense, increased as a result of computer system improvements and
upgrades in 2003, and developing and implementing the Bank's website, internet
banking and bounce protection in 2004. Director's fees increased in 2004 due to
an increase in fees and the formation of new committees.
Other changes contributing to the increase in noninterest expenses were
increases in information systems consulting fees, education and travel, audit
and accounting fees and nonincome tax expense. These increases were offset
somewhat by decreases in office supplies expense. Other increases include
marketing expenditures due to expanded advertising campaigns.
2003 Compared to 2002
Noninterest expenses increased $184,005 in 2003 compared to 2002.
Noninterest expenses as a percentage of average assets was 2.40% and 2.56% for
each of the years ended December 31, 2003 and 2002, respectively. Salaries and
benefits increased due to annual merit increases and higher benefit costs.
Equipment expenses, including software maintenance contract expense and
depreciation expense, increased as a result of improvements and upgrades to the
Company's data processing infrastructure in 2003.
Other changes contributing to the increase in noninterest expenses were
increases in convention and meeting, advertising, and audit and accounting fees.
Other increases include telephone and communication lines due to improvements in
branch communications.
Income Tax Expense
Income tax expense equaled 30.1%, 29.5% and 28.5% of income before income
taxes for the years ended December , 31 2004, 2003 and 2002, respectively.
Securities
Schedules of securities by type and maturity are shown in Note 3 to the
financial statements.
Loans
Total loans increased 6.05% during 2003 to $118,322,541. A schedule of
loans by type is shown in Note 4 of the financial statements. Approximately 82%
of the loan portfolio is secured by real estate at December 31, 2004.
13
Loan Portfolio Risk Factors
Loans accounted for on a nonaccrual basis were $429,223, $9,250 and
$104,756 at December 31, 2004, 2003 and 2002 (.36%, .01% and .10% of total
loans), respectively. Accruing loans which are contractually past due 90 days or
more as to principal or interest totaled $387,516, $877,462 and $1,413,114 at
December 31, 2004, 2003 and 2002 (.33%, .79% and 1.35% of total loans),
respectively. Loans are placed in a nonaccrual status when management has
information that indicates that principal or interest may not be collectable.
The Company has a substantial amount of loans in the loan portfolio related to
agribusinesses; see Note 4 of the financial statements for additional details.
Management has not identified any additional loans as "troubled debt
restructurings" or "potential problem loans."
Loan Losses and Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses in the current
loan portfolio. The allowance is based on two principles of accounting: (i) SFAS
5, Accounting for Contingencies which requires that losses be accrued when they
are probable of occurring and estimatable and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that loans be identified
which have characteristics of impairment (e.g. the collateral, present value of
cash flows or observable market values are less than the loan balance).
For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
factors connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors.
Through internal loan review the bank classifies loans into categories and
assigns a risk rating as follows to be used in the calculation: Excellent, Good,
Satisfactory, Special Mention, Substandard, Doubtful and Loss. Within these
categories, Real Estate, Consumer, and Commercial Loans are assigned a specific
loss rate based on historical losses and management's estimation of potential
loss.
Loans identified as problem loans or potential problem loans are committed
to a watch list. Loans on the watch list are classified as loss, doubtful,
substandard or special mention and are subjected to a more detailed review. This
detailed review identifies each applicable loan for specific impairment and a
specific allocation for that impaired amount is used in the calculation. Rates
assigned each category may vary over time as historical loss rates, loan
structure and economic conditions change.
The allowance for loan losses is computed quarterly and adjusted prior to
the issuance of the quarterly financial statements. All loan losses charged to
the allowance are approved by the board of directors at their regular meetings.
The allowance is reviewed for adequacy after considering historical loss rates,
current economic conditions (both locally and nationally) and any known credit
problems that have not been considered under the above formula.
The allowance for loan losses increased from $1,051,633 at December 31,
2003 to $1,094,288 at December 31, 2004. Net charge offs increased from $97,000
in 2003 to $141,000 in 2004. The provision for loan losses increased from
$120,000 in 2003 to $183,000 in 2004. Based on historical losses, delinquency
rates, a thorough review of the loan portfolio and after considering the
elements of the preceding paragraph, management is of the opinion that the
allowance for loan losses is appropriately stated in order to absorb losses in
the current portfolio.
See Table IV for a summary of the activity in the allowance for loan
losses.
14
Loan Losses and Allowance for Loan Losses (Continued)
The Company has allocated the allowance according to the amount deemed to
be reasonably necessary to provide for the losses within each of the categories
of loans. The allocation of the allowance as shown in Table IV should not be
interpreted as an indication that loan losses in future years will occur in the
same proportions or that the allocation indicates future loan loss trends.
Furthermore, the portion allocated to each loan category is not the total amount
available for losses that might occur within such categories since the total
allowance is a general allowance applicable to the entire portfolio.
Table IV shows the balance and percentage of the Company's allowance for
loan losses allocated to each major category of loans.
Deposits
The Company's deposits increased $3,023,954 or 2.35% during 2004. A
schedule of deposits by type is shown in the balance sheets. Time deposits of
$100,000 or more were 14.4% of total deposits at December 31, 2004.
Long-Term Debt
The Company signed a 10-year $1,000,000 fixed rate note with FHLB at 3.77%
on March 18, 2003, a 10-year $2,000,000 fixed rate note with FHLB at 3.15% on
June 18, 2003 and a $1,000,000 fixed rate note with FHLB at 4.28% on October 20,
2003. The purpose of the notes was to fund a long-term, fixed rate loan product
to qualifying customers. There were no additional borrowings in 2004 and the
Company made payments of $344,000 and $162,000 in 2004 and 2003, respectively.
Capital
Capital as a percentage of total assets was 14.82% at December 31, 2004 and
significantly exceeded regulatory requirements. The Company is considered to be
well capitalized under the regulatory guidelines.
Uncertainties and Trends
Management is not aware of any trends, events or uncertainties that will
have or that are reasonably likely to have a material effect on liquidity,
capital resources or operations. Additionally, management is not aware of any
current recommendations by the regulatory authorities which, if they were to be
implemented, would have such an effect.
Liquidity and Interest Sensitivity
At December 31, 2004, the Company had liquid assets of approximately $4.9
million in the form of cash and due from banks and federal funds sold.
Management believes that the Company's liquid assets are adequate at December
31, 2004. Additional liquidity may be provided by the growth in deposit accounts
and loan repayments. In the event the Company would need additional funds, it
has the ability to purchase federal funds and borrow under established lines of
credit of $17.1 million.
At December 31, 2004, the Company had a negative cumulative Gap Rate
Sensitivity Ratio of 35.10% for the one-year repricing period. This rate does
not reflect the historical movement of funds during varying interest rate
environments. Adjusted for historical repricing trends in response to interest
rate changes, the adjusted gap ratio is -.12%. This generally indicates that net
interest income would remain stable in both a declining and increasing interest
rate environment. Management constantly monitors the Company's interest rate
risk and has decided that the current position is an acceptable risk for a
growing community bank operating in a rural environment. Table III shows the
Company's interest sensitivity.
15
TABLE I
Allegheny Bancshares, Inc.
Net Interest Margin Analysis
(On a fully tax equivalent basis)
(In Thousands)
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------- -----------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
Interest Income
Loans1 $116,530 $7,957 6.83% $108,006 $7,670 7.10%
Federal funds sold 2,049 30 1.46% 4,056 40 .99%
Interest bearing
deposits
in banks 227 4 1.76% 221 5 2.26%
Investments
Taxable 16,056 613 3.82% 16,017 646 4.03%
Nontaxable2 17,350 1,089 6.28% 18,902 1,184 6.26%
------ ----- ------ ------ ----- ----
Total Earning
Assets $152,212 $9,693 6.37% $147,202 $9,545 6.48%
======= ----- ------ ======= ----- ----
Interest Expense
Demand deposits $ 19,407 $ 163 .84% $ 18,924 $ 190 1.00%
Savings 26,388 198 .75% 26,002 252 .97%
Time deposits 68,369 1,597 2.34% 69,306 1,981 2.86%
Other borrowings 5,522 169 3.06% 3,340 91 2.72%
------ ----- ---- ------ ----- ----
Total Interest
Bearing
Liabilities $119,686 2,127 1.78% $117,572 2,514 2.14%
======= ------ ---- ======= ----- ----
Net Interest Margin1 $7,566 $7,031
===== =====
Net yield on interest
Earning assets 4.97% 4.78%
==== ====
1 Interest on loans includes loan fees.
2 An incremental tax rate of 34% was used to calculate the tax equivalent
income.
Average noninterest bearing deposits for 2004 and 2003 were $15,340 and $13,232,
respectively.
16
TABLE II
Allegheny Bancshares, Inc.
Effect of Rate-Volume Change on Net Interest Income
(On a fully tax equivalent basis)
(In Thousands)
2004 Compared to 2003 2003 Compared to 2002
Increase (Decrease) Increase (Decrease)
Volume Rate Total Volume Rate Total
Interest Income
Loans $ 605 $ (318) $ 287 $1,092 $ (601) $ 491
Federal funds sold (20) 10 (10) 33 (25) 8
Interest bearing
deposits
in banks 0 (1) (1) 2 (1) 1
Investments
Taxable 2 (35) (33) 49 (177) (128)
Nontaxable (97) 2 (95) (58) (67) (125)
------ ----- ------ ------ ----- ------
Total Earning
Assets $ 490 $ (342) $ 148 $1,118 $ (871) $ 247
===== ===== ===== ===== ===== =====
Interest Expense
Demand deposits $ 5 $ (32) $ (27) $ 54 $ (37) $ 17
Savings 4 (58) (54) (12) (178) (190)
Time deposits (27) (357) (384) 226 (532) (306)
Other borrowings 59 19 78 59 25 84
----- ----- ----- ----- ----- -----
Total interest bearing
liabilities 41 (428) (387) 327 (722) (395)
----- ------ ------ ----- ----- -----
Net Interest Income $ 449 $ 86 $ 535 $ 791 $ (149) $ 642
===== ===== ===== ===== ====== =====
NOTE: Volume changes have been determined by multiplying the prior years'
average rate by the change in balances outstanding. The rate change is
the difference between the total change and the volume.
17
TABLE III
Allegheny Bancshares, Inc.
Interest Sensitivity Analysis
(In Thousands)
December 31, 2004
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
Uses of Funds:
Loans:
Commercial $12,745 $ 8,293 $19,178 $11,556 $51,772
Installment 573 944 8,243 1,072 10,832
Real estate 7,239 5,818 8,174 34,176 55,407
Credit card 312 312
Interest bearing bank
deposit 225 225
Investment securities 628 1,012 12,194 19,714 33,548
Federal funds sold 2,018 2,018
------ ------ ------ ------ ------
Total Earning Assets 23,740 16,067 47,789 66,518 154,114
------ ------ ------ ------ -------
Sources of Funds:
Interest bearing
demand deposits 20,746 20,746
Savings deposits 25,732 25,732
Time deposits
$100,000 and over 2,501 8,876 7,615 18,992
Other time deposits 14,491 18,654 15,963 652 49,760
Other borrowings 1,405 1,496 1,563 1,574 6,038
------ ------ ------ ------ -----
Total Interest
Bearing
Liabilities 64,875 29,026 25,141 2,226 121,268
------ ------ ------ ------ -------
Discrete Gap (41,135) (12,959) 22,648 64,292 32,846
Cumulative Gap (41,135) (54,094) (31,446) 32,846
Ratio of Cumulative
Gap to Total Earning
Assets -26.69% -35.10% -20.40% 21.31% 21.31%
======= ======= ======= ====== ======
Rate Risk:
Loans with predetermined
rates $ 6,398 $11,347 $27,559 $46,156 $91,460
Loans with variable/
adjusted rates 14,471 3,708 8,036 648 26,863
Table IV reflects the earlier of the maturity or repricing dates for
various assets and liabilities. The above does not make any assumptions with
respect to loan repayments or deposit run offs. Loan principal payments are
included in the earliest period in which the loan matures or can be repriced.
Principal payments on installment loans scheduled prior to maturity are included
in the period of maturity or repricing. Proceeds from the redemption of
investments and deposits are included in the period of maturity.
18
TABLE IV
Allegheny Bancshares, Inc.
Loan Loss Allowance Activity
(In Thousands)
2004 2003 2002
Beginning balance $1,051 $1,028 $ 960
Provision charged to expense 184 120 120
Loan losses:
Commercial 7 66 5
Installment 149 72 84
Real estate 20 11 38
Credit card 15
----- ----- ------
Total Loan Losses 176 149 142
----- ----- ------
Recoveries:
Commercial 2 28 13
Installment 33 24 37
Real estate 39
Credit card 1
----- ----- ------
Total Loan Recoveries 35 52 90
----- ----- ------
Net Loan Losses 141 97 52
----- ----- ------
Ending balance $1,094 $1,051 $1,028
===== ===== ======
Net loan losses as a percent
of average loans .12% .09% .06%
Allowance as a percent of
year end loans .92% .94% .98%
Analysis of Ending Balance
December 31, 2004 December 31, 2003
----------------------- -------------------------
Percent of Percent of
Percent of Average Percent of Average
Amount Allowance Loans Amount Allowance Loans
Commercial $ 829 75.78% 42.24% $ 822 78.21% 35.68%
Installment 33 3.02% 9.65% 135 12.84% 11.14%
Real estate 201 18.37% 47.86% 34 3.24% 52.93%
Credit card .25% 0.25%
Unallocated 31 2.83% % 60 5.71% %
----- ----- ------ ----- ----- ------
Total $1,094 100.00% 100.00% $1,051 100.00% 100.00%
===== ====== ====== ===== ====== ======
19
TABLE V
Allegheny Bancshares, Inc.
Time Deposit Maturities - Over $100,000
(In Thousands)
2004 2003
Maturity
Less than 3 months $ 2,232 $ 3,734
3 to 6 Months 3,278 3,058
6 to 12 Months 5,867 5,507
Over 12 Months 7,615 6,390
----- -----
Total $18,992 $18,689
====== ======
20
TABLE VI
Allegheny Bancshares, Inc.
Quarterly Financial Results
(In Thousands, except per share amounts)
Fourth Third Second First
2004 Quarter Quarter Quarter Quarter
Interest income $ 2,409 $ 2,362 $ 2,271 $ 2,281
Interest expense (567) (524) (513) (524)
------ ------ ------ ------
Net interest income 1,842 1,838 1,758 1,757
Provision for loan
loss (48) (45) (45) (45)
------ ------ ------ ------
Net interest income
After provision 1,794 1,793 1,713 1,712
Noninterest income 135 126 143 108
Noninterest expense (1,039) (1,010) (1,038) (1,025)
------ ------ ------ -------
Income before income tax
provision 890 909 818 795
Income tax provision (266) (276) (248) (238)
------ ------ ------ ------
Net income $ 624 $ 633 $ 570 $ 557
======= ======= ======= =======
Per common share:
Net income (basic) $ .70 $ .71 $ .63 $ .62
Cash dividends 1.10
Fourth Third Second First
2003 Quarter Quarter Quarter Quarter
Interest income $ 2,316 $ 2,302 $ 2,303 $ 2,222
Interest expense (565) (625) (659) (664)
------- ------ ------- -------
Net interest income 1,751 1,677 1,644 1,558
Provision for loan
loss (30) (30) (30) (30)
------- ------- ------- ------
Net interest income after
provision 1,721 1,647 1,614 1,528
------ ------ ------ ------
Noninterest income 115 104 121 92
Noninterest expense (920) (894) (966) (928)
------ ------ ------ ------
Income before income tax
provision 916 857 769 692
Income tax provision (275) (248) (232) (198)
----- ------ ------ ------
Net income $ 641 $ 609 $ 537 $ 494
====== ====== ====== ======
Per common share:
Net income (basic) $ .71 $ .68 $ .60 $ .55
Cash dividends 1.00
21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
This information is incorporated herein by reference from Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
22
Item 8. Financial Statements
Index to Financial Statements
Page
Independent Auditors' Report 23
Balance Sheets for the years ended
December 31, 2004 and 2003 24
Statements of Income for the years ended
December 31, 2004, 2003 and 2002 25
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002 26
Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 27
Notes to Financial Statements 28
23
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors
Allegheny Bancshares, Inc.
Franklin, West Virginia
We have audited the accompanying balance sheets of Allegheny Bancshares, Inc.
and subsidiary as of December 31, 2004 and 2003, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
years ended December 31, 2004, 2003, and 2002. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 Allegheny Bancshares, Inc. and
subsidiary as of December 31, 2004 and 2003, and the results of its operations
and its cash flows for the years ended December 31, 2004, 2003 and 2002 in
conformity with U.S. generally accepted accounting principles.
S. B. Hoover & Company, L.L.P.
February 11, 2005
Harrisonburg, VA
24
ALLEGHENY BANCSHARES, INC.
BALANCE SHEETS
DECEMBER 31, 2004 AND 2003
ASSETS 2004 2003
Cash and due from banks (Note 2) $ 2,695,155 $ 2,975,449
Interest bearing deposits in banks 225,309 240,004
Federal funds sold (Note 2) 2,017,963 683,895
Securities available for sale (Note 3) 33,047,889 36,857,994
Securities held to maturity (Note 3) 500,000 500,000
Loans receivable, net of allowance for loan
Losses of $1,094,288 in 2004 and $1,051,633
in 2003 (Note 4) 117,228,253 110,515,748
Bank premises and equipment, net (Note 5) 4,763,021 4,213,079
Interest receivable 928,235 947,988
Other assets 832,999 823,016
----------- -----------
Total Assets $162,238,824 $157,757,173
=========== ===========
LIABILITIES
Deposits
Noninterest bearing $ 16,347,656 $ 15,105,539
Interest bearing
Demand deposits 20,746,165 18,446,427
Savings deposits 25,731,632 26,632,309
Time deposits (Note 6) 68,751,388 68,368,612
----------- -----------
Total Deposits 131,576,841 128,552,887
Treasury tax and loan deposit note 192,282 52,899
Securities sold under agreements to repurchase
(Note 7) 2,352,008 1,453,887
Accrued expenses and other liabilities 576,716 806,029
Long-term debt (Note 9) 3,493,737 3,838,178
------------ ------------
Total Liabilities 138,191,584 134,703,880
----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $1 par value, 2,000,000 shares
Authorized, 900,000 issued in
2004 and 2003, respectively 900,000 900,000
Additional paid in capital 900,000 900,000
Retained earnings (Note 10) 22,017,014 20,619,466
Accumulated other comprehensive income 371,582 648,926
Treasury stock (at cost, 3,404 and 417 shares in
2004 and 2003, respectively) (141,356) (15,099)
------------ -----------
Total Stockholders' Equity 24,047,240 23,053,293
----------- -----------
Total Liabilities and Stockholders' Equity $162,238,824 $157,757,173
=========== ===========
The accompanying notes are an integral part of this statement.
25
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
INTEREST INCOME:
Loans, including fees $ 7,957,077 $ 7,670,151 $7,179,403
Federal funds sold 30,128 39,802 32,329
Interest bearing deposits in
banks 4,085 5,330 3,272
Debt securities - taxable 613,201 646,351 774,419
Debt securities - nontaxable 718,691 781,500 863,636
------------ ----------- ---------
Total Interest Income 9,323,182 9,143,134 8,853,059
------------ ----------- ----------
INTEREST EXPENSE:
Interest on deposits 1,958,667 2,422,755 2,902,484
Interest on other borrowed money 169,223 90,949 6,130
---------- ----------- ----------
Total Interest Expense 2,127,890 2,513,704 2,908,614
---------- ----------- ----------
NET INTEREST INCOME 7,195,292 6,629,430 5,944,445
PROVISION FOR LOAN LOSSES (Note 4) 183,656 120,000 120,000
--------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,011,636 6,509,430 5,824,445
---------- ----------- ---------
NONINTEREST INCOME:
Service charges, fees and
commissions 267,712 224,703 186,144
Gain on security transactions 52,135 6,958 45,505
Other operating income 192,630 200,519 169,366
--------- ----------- ---------
Total Noninterest Income 512,477 432,180 401,015
--------- ----------- ---------
NONINTEREST EXPENSES:
Salaries and benefits 2,123,528 1,953,054 1,902,047
Occupancy expense 250,874 219,276 188,444
Equipment expense 492,346 433,539 373,265
Director's fees 181,350 104,820 97,550
Other expenses 1,063,501 997,173 962,551
---------- ----------- ---------
Total Noninterest Expenses 4,111,599 3,707,862 3,523,857
--------- ----------- ---------
INCOME BEFORE INCOME TAXES 3,412,514 3,233,748 2,701,603
INCOME TAX EXPENSE (Note 11) 1,028,485 952,693 770,190
--------- ----------- ---------
NET INCOME $2,384,029 $ 2,281,055 $1,931,413
========= ========== =========
Net income per share $ 2.66 $ 2.54 $ 2.15
========= ========== =========
Cash dividends paid per share $ 1.10 $ 1.00 $ .90
========= ========== =========
Average Weighted Shares Outstanding 897,767 899,570 900,000
========= ========== =========
The accompanying notes are an integral part of this statement.
26
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Total Stock Capital Earnings Income Stock
Balance, December 31,
2001 $20,091,386 $900,000 $900,000 $18,116,821 $ 174,565 $ 0
Comprehensive Income
Net income 1,931,413 1,931,413
Change in unrealized
gain on available for
sale securities, net of
income tax effect of
$456,957 714,728 714,728
-----------
Total Comprehensive
Income 2,646,141
Dividends paid (810,000) (810,000)
---------- ------- ------- ---------- --------- -------
Balance, December 31,
2002 21,927,527 900,000 900,000 19,238,234 889,293 0
Comprehensive Income
Net income 2,281,055 2,281,055
Change in unrealized
gain on available for
sale securities, net of
income tax effect of
$(153,677) (240,367) (240,367)
----------
Total Comprehensive
Income 2,040,688
Purchase of treasury
stock (15,099) (15,099)
Dividends paid (899,823) (899,823)
---------- ------- ------- ---------- -------- -------
Balance, December 31,
2003 23,053,293 900,000 900,000 20,619,466 648,926 (15,099)
Comprehensive Income
Net income 2,384,029 2,384,029
Change in unrealized
gain on available for
sale securities, net of
income tax effect of
$(166,943) (277,344) (277,344)
----------
Total Comprehensive
Income 2,106,685
Purchase of treasury
stock (126,257) (126,257)
Dividends paid (986,481) (986,481)
---------- ------- ------- --------- -------- --------
Balance, December 31,
2004 $24,047,240 $900,000 $900,000 $22,017,014 $ 371,582 $(141,356)
========== ======= ======= ========== ======== ========
The accompanying notes are an integral part of this statement.
27
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
OPERATING ACTIVITIES
Net income $2,384,029 $2,281,055 $1,931,413
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 183,656 120,000 120,000
Provision for other real estate owned losses 15,000 5,000
Depreciation and amortization 383,984 344,792 293,324
Gain on security transactions (52,135) (6,958) (45,505)
Net amortization of securities 86,069 94,901 17,108
Gain on sale of equipment (6,174) (2,500)
Gain on sale of other real estate (14,726)
Net change in:
Interest receivable 19,753 41,077 82,509
Other assets (110,261) (356,857) 188,005
Accrued expense and other liabilities (6,273) 56,204 (441,510)
--------- --------- ---------
Net Cash Provided by Operating Activities 2,867,922 2,586,714 2,150,344
--------- --------- ---------
INVESTING ACTIVITIES
Proceeds from sales of available for
sale securities 6,077,995 1,247,303 2,040,030
Proceeds from calls of available for
sale securities 2,791,500 4,445,000 6,585,000
Proceeds from maturities of available
for sale securities 3,417,112 4,801,495 5,222,506
Proceeds from call of held to maturity
security 500,000 500,000
Proceeds from sale of equipment 6,174 2,500 19,933
Proceeds from sale of other real estate 112,226
Purchase of available for sale securities (9,010,820) (14,069,974) (10,415,663)
Purchase of held to maturity securities (500,000) (1,000,000)
Purchase of bank premises and equipment (931,148) (675,254) (773,663)
Net change in interest bearing deposits
in banks 14,695 20,638 (146,955)
Net change in federal funds sold (1,334,068) (583,895) 3,150,000
Net change in loans (6,896,161) (7,205,458) (20,752,928)
----------- ----------- -----------
Net Cash Used in Investing Activities (5,752,495) (12,517,645) (15,071,740)
----------- ----------- -----------
FINANCING ACTIVITIES
Net change in:
Demand and savings deposits 2,641,178 4,878,539 6,776,844
Time deposits 382,776 1,692,204 6,643,242
Short-term borrowings 1,037,504 318,627 1,062,119
Proceeds from long-term debt 4,000,000
Curtailments of long-term debt (344,441) (161,822)
Purchase of treasury stock (126,257) (15,099)
Cash dividends paid (986,481) (899,823) (810,000)
----------- ----------- -----------
Net Cash Provided by Financing Activities 2,604,279 9,812,626 13,672,205
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (280,294) (118,305) 750,809
Cash and Cash Equivalents, January 1 2,975,449 3,093,754 2,342,945
----------- ----------- -----------
Cash and Cash Equivalents, December 31 $ 2,695,155 $ 2,975,449 $ 3,093,754
=========== =========== ===========
Supplemental Disclosure of Cash Paid During the
Year for:
Interest $ 2,122,304 $ 2,592,885 $ 2,995,960
Income taxes 1,040,833 638,110 986,000
The accompanying notes are an integral part of this statement.
28
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Allegheny Bancshares ("Company") is a bank holding company and operates under a
charter issued by the state of West Virginia. The Company owns all of the
outstanding stock of Pendleton County Bank ("Bank"), which operates under a
charter issued by the State of West Virginia and provides commercial banking
services to customers located primarily in Pendleton County, West Virginia and
adjacent counties. As a state chartered bank, the Bank is subject to regulation
by the Department of Banking for the State of West Virginia and the Federal
Deposit Insurance Corporation.
Management uses estimates and assumptions in preparing financial statements.
These estimates and assumptions affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and the
reported revenue and expenses.
The accounting and reporting policies of the Company and its subsidiary conform
to U.S. generally accepted accounting principles and to accepted practice within
the banking industry. A summary of significant accounting policies is as
follows:
Consolidation Policy - The consolidated financial statements include Allegheny
Bancshares, Inc. and Pendleton County Bank. All significant intercompany
balances and transactions have been eliminated.
Investment Securities - Investment securities which the Company intends to hold
for indefinite periods of time, including investment securities used as part of
the Company's asset/liability management strategy, are classified as available
for sale. These investment securities are carried at fair value. Net unrealized
gains and losses, net of deferred income taxes, are excluded from earnings and
reported as a separate component of stockholders' equity until realized. Gains
and losses on the sale of investment securities are determined using the
specific identification method.
Loans Receivable - Loans receivable are intended to be held until maturity and
are shown on the balance sheet net of the allowance for loan losses. Interest is
computed by methods which generally result in level rates of return on
principal. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other impaired loans is recognized only to the extent of interest payments
received.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change could
occur in the allowance for loan losses in the near term. However, the amount of
the change that is reasonably possible cannot be estimated. Past due status is
determined based on contractual terms.
The Company grants commercial, real estate and consumer installment loans to its
customers. Collateral requirements for loans are determined on a loan-by-loan
basis depending upon the purpose of the loan and the financial condition of the
borrower.
29
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In the normal course of business, to meet the credit needs of its customers, the
Company has made commitments to extend credit. These commitments represent a
credit risk, which is not recognized in the Company's balance sheet. The Company
uses the same credit policies in making commitments as it does for other loans.
Commitments to extend credit are generally made for a period of one year or less
and interest rates are determined when funds are disbursed. Collateral and other
security for the loans are determined on a case-by-case basis. Since some of the
commitments are expected to expire without being drawn upon, the contract or
notional amounts do not necessarily represent future cash requirements. See Note
14 for lending commitments as of December 31, 2004 and 2003.
The accrual of interest on all loans is discontinued when the loan is determined
uncollectible. Loans are placed on nonaccrual or charged off if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged off is reversed against interest income. Loans are returned to
accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Cash and Cash Equivalents - Cash and cash equivalents as used in the cash flow
statements are defined as those amounts included in the balance sheet caption
"Cash and due from banks."
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries). Management's
periodic evaluation of the adequacy of the allowance is based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated value
of any underlying collateral, and current economic conditions.
Bank Premises and Equipment - Bank premises and equipment are stated at cost
less accumulated depreciation. Depreciation is charged to income over the
estimated useful lives of the assets on a combination of straight-line and
accelerated methods.
Income Taxes - Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
Fair Value of Financial Instruments - The carrying value of cash and cash
equivalents, accrued interest receivable, demand deposits, savings deposits and
short-term borrowings approximates fair value. The fair value of securities is
based upon a pricing model which takes into consideration maturity, yields and
quality. The remainder of the recorded financial instruments were valued based
on the present value of estimated future cash flows, discounted at various rates
in effect for similar instruments at year-end.
Fair values for off-balance-sheet lending commitments approximate the contract
or notional value taking into account the remaining terms of the agreements and
the counterparties' credit standings.
30
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:
The Company has cash on deposit and federal funds sold to other commercial banks
amounting to $3,181,704 and $1,484,203 as of December 31, 2004 and 2003,
respectively.
NOTE 3 SECURITIES:
The amortized cost and fair values of securities are as follows:
(In Thousands) Amortized Gross Unrealized Fair
Cost Gains Losses Value
December 31, 2004
Securities Available-for-Sale
United States Government
Mortgage Backed Securities $ 6,575 $ $ 111 $ 6,464
United States Government
Agency Securities 7,484 122 5 7,601
Obligations of States and
Political Subdivisions 18,450 567 34 18,983
------ ----- ---- ------
$32,509 $ 689 $ 150 $33,048
====== ===== ==== ======
Securities Held-to-Maturity
United States Government
Agency Securities $ 500 $ 1 $ $ 501
====== ===== ==== ======
December 31, 2003
Securities Available-for-Sale
United States Government
Mortgage Backed Securities $10,897 $ 31 $ 94 $10,834
United States Government
Agency Securities 7,030 304 3 7,331
Obligations of States and
Political Subdivisions 17,892 827 26 18,693
------ ----- ---- ------
$35,819 $1,162 $ 123 $36,858
====== ===== ===== ======
Securities Held-to-Maturity
United States Government
Agency Securities $ 500 $ 13 $ $ 513
====== ===== ========= ======
31
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 SECURITIES (CONTINUED):
A maturity schedule of securities as of December 31, 2004 is as follows:
(In Thousands) Weighted
Amortized Fair Average
Due Cost Value Yield
Securities Available-for-Sale
In one year or less $ 1,635 $ 1,640 4.69%
After one year through
five years 18,719 18,949 4.79%
After five years through
ten years 11,412 11,728 5.56%
After ten years 743 731 5.31%
--------- ---------- -------
$ 32,509 $ 33,048 5.07%
========= ========= =======
Securities Held-to-Maturity
After five years through
ten years $ 500 $ 501 5.05%
========= ========= =======
The carrying value of securities pledged by the Company to secure deposits,
repurchase agreements and for other purposes amounted to $13,821,000 and
$13,588,000 at December 31, 2004 and 2003, respectively. The fair value of these
pledged securities approximates the carrying value. Weighted average yields have
been computed on a tax equivalent basis using an incremental tax rate of 34%.
NOTE 4 LOANS RECEIVABLE:
Loans receivable outstanding are summarized as follows: December 31,
2004 2003
(In Thousands)
Loans secured by deeds of trust on real estate
Construction and land development $ 8,150 $ 4,720
Agribusiness 16,198 15,766
1-4 family residential properties 51,235 50,437
Non-farm non-residential properties 19,125 17,265
Loans to finance agricultural production and other
loans to farmers 3,038 3,158
Commercial and industrial loans 6,262 5,457
Personal installment loans 11,083 11,853
All other loans 3,231 2,911
------- -------
Subtotal 118,322 111,567
Less Allowance for loan losses 1,094 1,051
------- -------
Loans Receivable $117,228 $110,516
======= =======
32
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 LOANS RECEIVABLE (CONTINUED):
Although the Company has a diversified loan portfolio, a substantial portion of
the borrowers' ability to honor their contracts is dependent upon the
agribusiness economic sector. Loans for agribusiness include loans directly
related to poultry houses which amounted to $8,662,000 at December 31, 2004 and
$8,485,000 at December 31, 2003. The majority of these loans are collateralized
by a deed of trust on real estate. Farmers Home Administration (FHA) guarantees
cover ninety percent of the loan balance on $2,956,000 of these loans at
December 31, 2004 and $3,278,000 at December 31, 2003.
A summary of transactions in the allowance for loan losses follows:
2004 2003
(In Thousands)
Balance at Beginning of Year $ 1,051 $ 1,028
Provision charged to operating expense 184 120
Loan recoveries 35 52
Loan charge-offs (176) (149)
-------- ------
Balance at End of Year $ 1,094 $ 1,051
======= ======
NOTE 5 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are summarized as follows:
December 31
2004 2003
(In Thousands)
Bank premises $ 4,151 $ 3,622
Furniture and equipment 3,159 2,795
--------- --------
7,310 6,417
Less accumulated depreciation 2,547 2,204
--------- --------
Bank Premises and Equipment $ 4,763 $ 4,213
========= ========
33
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6 TIME DEPOSITS:
The aggregate amount of time deposits with minimum denominations of $100,000 was
approximately $18,992,000 and $18,689,000 in 2004 and 2003, respectively.
At December 31, 2004, the scheduled maturities of time deposits are as follows:
(In Thousands)
2005 $ 44,522
2006 9,147
2007 8,185
2008 3,596
2009 3,301
---------
Total $ 68,751
=========
NOTE 7 SECURITES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to
four days from the transaction date, unless classified as a term repurchase
agreement. The maturity of the term repurchase agreement would generally mature
within six months to one year. Securities sold under agreements to repurchase
are reflected at the amount of cash received in connection with the transaction.
The Company may be required to provide additional collateral based on the fair
value of the underlying securities.
NOTE 8 LINES OF CREDIT:
The Company has lines of credit with the Federal Home Loan Bank (FHLB) and other
financial institutions totaling $17,100,000. As of December 31, 2004, the
Company had no outstanding debt on these lines. The FHLB Line of Credit is
secured by FHLB Stock, as well as investment securities and mortgage loans.
These borrowings will carry interest at prevailing rates when funds are
borrowed.
NOTE 9 LONG-TERM DEBT:
The Company has borrowed money from the Federal Home Loan Bank of Pittsburgh
(FHLB). The interest rates on all of the notes payable as of December 31, 2004
were fixed at the time of the advance and fixed rates range from 3.15% to 4.28%.
The FHLB notes are secured by FHLB Stock, as well as investment securities and
mortgage loans. The weighted average interest rate is 3.60% at December 31,
2004. The company has total borrowing capacity from the FHLB of $70,138,000.
Repayments of long term debt are due monthly. Interest expense of $136,771 was
incurred on these debts in 2004. The maturities of long term debt as of December
31, 2004 are as follows:
(In Thousands)
2005 $ 357
2006 370
2007 383
2008 397
2009 412
Thereafter 1,575
------------
Total $ 3,494
===========
34
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10 DIVIDEND LIMITATIONS:
The principal source of funds of Allegheny Bancshares, Inc. is dividends paid by
its subsidiary bank. The Code of West Virginia imposes certain restrictions on
dividends paid by a state bank. A state bank cannot pay dividends (without the
consent of state banking authorities) in excess of the total net profits of the
current year and the combined retained profits of the previous two years. As of
January 1, 2005, the Bank could pay dividends of up to $2,779,000 without
permission of the authorities.
NOTE 11 INCOME TAXES:
The current and deferred components of income tax expense are as follows:
2004 2003
(In Thousands)
Current component of income tax expense $ 956 827
Net increase resulting from deferred
income taxes 72 126
--------- ---------
Income Tax Expense $ 1,028 $ 953
========= ========
A reconciliation between the provision for income taxes and the amount computed
by multiplying income by the statutory federal income tax rates is as follows:
2004 2003
(In Thousands)
Income taxes computed at the applicable
Federal income tax rate $ 1,160 $ 1,100
Increase (decrease) resulting from:
Tax exempt municipal income (286) (296)
Non-deductible interest expense 28 34
State tax expense, net of federal tax 120 97
Other 6 18
--------- --------
Income Tax Expense $ 1,028 $ 953
========= ========
The net deferred tax liability arising from temporary differences as of December
31 is summarized as follows:
2004 2003
(In Thousands)
Deferred Tax Asset:
- -------------------
Provision for loan losses $ 284 $ 270
Other 10 11
--------- --------
Total Assets 294 283
--------- --------
Deferred Tax Liabilities:
- -------------------------
Unrealized gain on securities
available for sale 167 390
Depreciation 270 204
Other 7
--------- --------
Total Liabilities 444 594
--------- --------
Net Deferred Tax Liability $ (150) $ (313)
========= ========
35
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 RELATED PARTY TRANSACTIONS:
During the year, officers, directors, principal stockholders and their
affiliates (related parties) were customers of and had transactions with the
Company in the ordinary course of business. In management's opinion, these
transactions were made on substantially the same terms as those prevailing for
other customers for comparable transactions and did not involve more than normal
risks. Loan activity to related parties is as follows:
2004 2003
(In Thousands)
Beginning of Year $ 1,249 $ 1,517
Additional borrowings 679 641
Curtailments (559) (909)
---------- --------
End of Year $ 1,369 $ 1,249
========= ========
NOTE 13 REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly additional discretionary - actions
by regulators that, if undertaken, could have a direct material effect on the
Company's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. The Company'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 Company 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).
As of April 30, 2004, the most recent notification from institution's primary
regulator categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Company must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category.
36
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 REGULATORY MATTERS (CONTINUED):
The Company's actual capital amounts and ratios are presented below.
For Capital To Be Well
Actual Adequacy Purposes Capitalized
(Dollars In Thousands) Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2004:
Total Capital (to Risk Weighted Assets) $24,844 23.4% $8,495 > 8% $10,619 >10%
- -
Tier I Capital (to Risk Weighted Assets) 23,750 22.4% 4,247 > 4% 6,371 > 6%
- -
Tier I Capital (to Average Assets) 23,750 14.4% 6,582 > 4% 8,228 > 5%
- -
As of December 31, 2003:
Total Capital (to Risk Weighted Assets) $23,383 22.3% $8,389 > 8% $10,486 >10%
- -
Tier I Capital (to Risk Weighted Assets) 22,332 21.3% 4,195 > 4% 6,291 > 6%
- -
Tier I Capital (to Average Assets) 22,332 14.0% 6,370 > 4% 7,963 > 5%
- -
NOTE 14 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value and the carrying value of recorded financial instruments are as
follows:
December 31, 2004 December 31, 2003
Fair Carrying Fair Carrying
Value Value Value Value
(In Thousands) (In Thousands)
Cash and due from banks $ 2,695 $ 2,695 $ 3,215 $ 3,215
Federal funds sold 2,018 2,018 684 684
Securities available for sale 33,048 33,048 36,858 36,858
Securities held to maturity 501 500 513 500
Loans 117,219 118,322 112,293 111,567
Interest receivable 928 928 948 948
Demand deposits 37,094 37,094 33,552 33,552
Savings deposits 25,732 25,732 26,632 26,632
Time deposits 68,516 68,751 68,914 68,369
Short-term borrowings 2,548 2,544 1,496 1,507
Accrued interest payable 199 199 194 194
Long-term debt 3,494 3,494 3,817 3,838
The contract or notional amount of financial instruments with off-balance sheet
risk is as follows:
December 31
2004 2003
(In Thousands)
Letters of Credit $ 1,372 $ 1,330
Lines of Credit (commercial and personal) 8,223 8,048
Loan commitments (commercial and personal) 1,697 1,027
Credit card unused credit limits 1,397 1,213
37
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
Assets December 31, December 31,
2004 2003
---- ----
Cash $ 2,755 $ 81,100
Investment in subsidiary 24,121,541 22,980,652
Other assets 8,335 11,114
---------- ----------
Total Assets $24,132,631 $23,072,866
========== ==========
Liabilities
Due to subsidiary $ 85,391 $ 19,573
--------- ---------
Total Liabilities 85,391 19,573
--------- ---------
Stockholders' Equity
Common stock, par value $1 per share
2,000,000 shares authorized,
900,000 shares issued in 2004
and 2003, respectively $ 900,000 $ 900,000
Additional paid in capital 900,000 900,000
Retained earnings 22,017,014 20,619,466
Accumulated other comprehensive
income 371,582 648,926
---------- ----------
24,188,596 23,068,392
Less treasury stock (at cost,
3,404 and 417 shares in 2004
and 2003, respectively) (141,356) (15,099)
---------- ----------
Total Stockholders' Equity 24,047,240 23,053,293
---------- ----------
Total Liabilities and Stockholders'
Equity $24,132,631 $23,072,866
========== ==========
38
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME
December 31,December 31,
2004 2003
Income
Dividends from subsidiary $1,016,481 $ 996,865
--------- ---------
Total 1,016,481 996,865
--------- ---------
Expenses
Professional fees 26,346 4,588
Annual shareholder meeting 16,679
Amortization 2,778 2,778
Other expenses 4,881 1,936
--------- --------
Total 50,684 9,302
--------- --------
Income before undistributed income
of subsidiary 965,797 987,563
Undistributed income of
Subsidiary 1,418,232 1,293,492
--------- ---------
Net Income $2,384,029 $2,281,055
========= =========
39
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Total Stock Capital Earnings Income Stock
Balance, December 31,
2002 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Exchange of Allegheny
Bancshares common
stock for Pendleton
County Bank stock 21,927,527 900,000 900,000 19,238,234 889,293
Comprehensive Income
Net income 2,281,055 2,281,055
Change in unrealized
gain on
available for sale
securities, net of
income tax effect of
$(153,677) (240,367) (240,367)
----------
Total Comprehensive
Income 2,040,688
Purchase of treasury
stock (15,099) (15,099)
Dividends paid (899,823) (899,823)
---------- ------- ------ ---------- ---------- ---------
Balance, December 31,
2003 23,053,293 900,000 900,000 20,619,466 648,926 (15,099)
Comprehensive Income
Net income 2,384,029 2,384,029
Change in unrealized
gain on available for
sale securities, net of
income tax effect of
$(166,943) (277,344) (277,344)
----------
Total Comprehensive
Income 2,106,685
Purchase of treasury
stock (126,257) (126,257)
Dividends paid (986,481) (986,481)
---------- ------- ------- ---------- ---------- --------
Balance, December 31,
2004 $24,047,240 $900,000 $900,000 $22,017,014 $ 371,582 $(141,356)
========== ======= ======= ========== ========== ========
40
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
December 31, December 31,
2004 2003
---- ----
Cash Flows from Operating Activities:
Net income $ 2,384,029 $ 2,281,055
Adjustments
Undistributed subsidiary income (1,418,232) (1,293,492)
Increase in other liabilities 65,818 19,573
Increase in other assets 2,778 (11,114)
---------- ----------
Net Cash Provided by Operating
Activities 1,034,393 996,022
---------- ----------
Cash Flows from Financing Activities:
Purchase of treasury stock (126,257) (15,099)
Dividends paid (986,481) (899,823)
---------- ----------
Net Cash Used in Financing Activities (1,112,738) (914,922)
---------- ----------
Net Increase (Decrease) in Cash (78,345) 81,100
Cash, Beginning of Year 81,100 0
---------- ----------
Cash, End of Year $ 2,755 $ 81,100
========== ==========
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None
Item 9A. Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
such as Allegheny Bancshares, Inc. that file periodic reports under the
Securities Exchange Act of 1934 (the "Act") are now required to include in those
reports certain information concerning the issuer's controls and procedures for
complying with the disclosure requirements of the federal securities laws. Under
rules adopted by the Securities and Exchange Commission effective August 29,
2002, these disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports it files or submits under the Act, is
communicated to the issuer's management, including its principal executive
officer or officers and principal financial officer or officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure.
We have established our disclosure controls and procedures to ensure that
material information related to Allegheny Bancshares, Inc. is made known to our
principal executive officer and principal financial officer on a regular basis,
in particular during the periods in which our quarterly and annual reports are
being prepared. These disclosure controls and procedures consist principally of
communications between and among the Chief Executive Officer and the Chief
Financial Officer to identify any new transactions, events, trends,
contingencies or other matters that may be material to the Company's operations.
As required, we have evaluated the effectiveness of these disclosure controls
and procedures as of the end of the period covered by this report. Based on this
evaluation, Allegheny Bancshares, Inc.'s management, including the Chief
Financial Officer, concluded that such disclosure controls and procedures were
operating effectively as designed as of the date of such evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in
Allegheny Bancshares, Inc.'s internal controls pertaining to its financial
reporting and control of its assets or in other factors that could significantly
affect these controls.
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act.
The following table sets forth information with respect to the directors
and executive officers of the Company:
Principal
Position With Term Occupation During
Directors Age the Company Expires the Past Five Years
Thomas J. Bowman 80 Director Since 1969 2006 Owner of Earnest
P. O. Box 905 Bowman & Brother
Franklin, WV 26807-0905 and Self-Employed
Farmer
Roger D. Champ 59 Director Since 1994 2005 Self-Employed
P. O. Box 395 Contractor
Moorefield, WV 26836-0395
42
John E. Glover 62 Director Since 1999 2006 Self-Employed Dentist
P. O. Box 668
Petersburg, WV 26847-0668
Carole H. Hartman 58 Director Since 1990 2005 Owner of Pendleton
P. O. Box 864 Secretary of the County Insurance
Franklin, WV 26807-0864 Board Agency, Self-
Employed Farmer
John D. Heavner 68 Director Since 1972 2005 Self-Employed Farmer
HC 60, Box 4
Upper Tract, WV 26866-9518
Richard W. Homan 82 Director Since 1952 2007 Banker
P. O. Box 550 and President of the
Franklin, WV 26807-0550 Bank and CEO prior
to October 16, 2000
William McCoy, Jr. 83 Director Since 1954 2005 Owner of Pendleton
P. O. Box 886 and Chairman of the Times Newspaper,
Franklin, WV 26807-0886 Board Attorney
Jerry D. Moore 52 Director Since 1987 2005 Self-Employed
P. O. Box 8 Attorney
Franklin, WV 26807-0008
Richard C. Phares 76 Director Since 1969 2006 Owner of R.C. Phares
P. O. Box 1092 Store, Self-Employed
Onego, WV 26886-1092 Farmer
William A. Loving, Jr. 49 Executive Vice- 2005 1993-2000 Regional
P.O. Box 238 President and CEO Vice-President with
Franklin, WV 26807-0238 of the Bank since One Valley Bank in
October 16, 2000; Beckley, WV
Director since
January 29, 2002
Dolan Irvine 57 Director Since 2007 Assessor, Appraiser
HC 82 Box 151 October 30, 2003 Pocahontas County
Marlinton, WV 24954 Self-Employed
Farmer
L. Kirk Billingsley 44 Vice President of
P.O. Box 523 Finance and Chief Branch Manager and
Monterey, VA 24465 Financial Officer Chief Financial
since February 22, Officer, Blue Grass
2005 Valley Bank
43
Committees of Board of Directors
Board Committees. The Board of Directors has not established formal
nominating or compensation committees as the entire board serves in these
capacities. The Company has an audit committee as discussed below.
Audit Committee. The audit committee was formed in January 2002, and is
composed of Dr. John Glover, Roger Champ and Thomas J. Bowman. The audit
committee oversees the Company's financial reporting process on behalf of the
board of directors. Management has the primary responsibility for the financial
statements and the reporting process, including the systems of internal
controls. In fulfilling its oversight responsibilities, the committee reviewed
the audited financial statements in the annual report with management including
a discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the clarity and
disclosures in the financial statements. The audit committee is governed by a
written charter approved by the board of directors in January 2002.
It is difficult for a community bank to find a single individual that has
every one of the Securities and Exchange Commission's qualifications of an audit
committee financial expert; Allegheny believes that having only one individual
with financial expertise designation would cause the remaining members to
believe that their oversight responsibility had been diminished. Allegheny
believes that each member of the audit committee has sufficient knowledge in
financial and auditing matters to serve on the committee. As such, the board
does not believe that it is necessary to actively search for an outside person
to serve on the board to qualify as an audit committee financial expert. The
committee has authority to engage legal counsel, other experts or consultants as
it deems appropriate to carry out its responsibilities. The audit committee is
responsible for the appointment, replacement, compensation and oversight of the
independent auditor engaged to prepare or issue audit reports on our financial
statements. As a result, Allegheny has not designated one individual as an
"audit committee financial expert."
Compensation of Directors
Directors of the Company receive a fee of $500 for each meeting of the
Board of Directors they attend.
Code of Ethics
The Company has adopted a Code of Ethics that applies to principal
officers and financial professionals of both the Company and the Bank, including
the Chief Executive Officer and Chief Financial Officer. The Code of Ethics has
been filed as Exhibit 14 to this Form 10-K. If we make any substantive
amendments to this Code of Ethics or grant any waivers, including any implicit
waiver, from a provision of the code to our Chief Executive Officer or Chief
Financial Officer, we will disclose the nature of such amendment or waiver in a
report on Form 8-K.
44
Item 11. Executive Compensation
Summary of Compensation
The table below reflects information concerning the annual compensation for
services in all capacities to the corporation for the fiscal years ended
December 31, 2004, 2003 and 2002, for the Chief Executive Officer and any
executive officer whose annual salary and bonus exceeded $100,000.
Summary Compensation Table
Annual Compensation (1)
Other Annual
Name and Principal Position Year Salary Bonus Compensation
--------------------------- ---- ------ ----- ------------
William A. Loving, Jr., Executive
Vice President and Chief 2004 $132,500 $16,695(2) $ 0
Executive Officer 2003 $125,000 $14,900(3) $ 0
2002 $122,134 $10,585(4) $ 0
(1) Does not include perquisites and other personal benefits, including
personal use of an automobile valued at $1,671 in 2004 and the cost of
group-term life insurance coverage over $50,000 which was $360 in 2004.
(2) Paid in 2005.
(3) Paid in 2004.
(4) Paid in 2003.
The Company does not maintain any form of stock option, stock appreciation
rights, or other long-term compensation plans.
Employment and Change in Control Agreements
The Bank entered into a three-year employment agreement with William A.
Loving, Jr. effective September 30, 2003, in which Mr. Loving agreed to serve as
the Bank's Chief Executive Officer. This agreement is automatically renewable
for additional three-year terms, unless terminated earlier or unless one of the
parties elects not to renew the agreement at least 90 days prior to the end of
the term. Under the employment agreement, the Bank may terminate Mr. Loving's
employment prior to the expiration of the term of employment with or without
cause; provided, however, in the event the Bank terminates his employment
without cause (as defined in the employment agreement), he will be entitled to
severance equal to the sum of his base annual compensation for the greater of
(i) the remainder of the term of the employment agreement (had it not been
terminated) or (ii) twelve months. Under the employment agreement, Mr. Loving is
entitled to annual compensation of $125,000, which may be adjusted upward by the
board of directors of the bank, plus any bonus resulting from any subsequently
adopted bonus plan. The employment agreement also contains a provision regarding
non-competition, which effectively restricts Mr. Loving's ability to work in a
similar capacity within the Counties of Pendleton, Grant and Hardy, West
Virginia, for a period of two years following termination of employment with the
Bank.
At the same time as the execution of the employment agreement by the Bank
and Mr. Loving, the parties also entered into an executive severance agreement
effective for a period ending on December 31, 2003 (but subject to annual
renewals thereafter unless either party objects). This agreement provides that
upon a change in control (as defined in the agreement) and for a period of two
years thereafter, if Mr. Loving's employment is terminated involuntarily by the
Bank (or its successor) without cause, Mr. Loving shall be entitled to a
severance payment in the amount equal to 2 1/2 times his annual base salary (in
effect at termination of employment or change in control, whichever is greater),
plus benefits. In addition, the Bank, or its successor, shall be obligated to
provide Mr. Loving health insurance coverage comparable to that received
immediately prior to termination of employment.
45
401(k) Plan
The Bank maintains a 401(k) profit sharing plan that generally covers all
employees who have completed one year of service. Contributions to the plan are
based on a percentage of each employee's salary plus matching contributions. The
payment of benefits to participants is made at death, disability, termination or
retirement. Contributions to the plan for all employees charged to operations
during 2004 amounted to $77,116.
Compensation Policies
The board of directors has not established formal compensation committees
as the entire board serves in these capacities. Other information required by
this item is set forth under the caption "Board of Directors Report on Executive
Compensation" of our 2005 Proxy Statement and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The following table sets forth information as of February 1, 2005, relating
to the beneficial ownership of the common stock by (a) each person or group
known by the Company to own beneficially more than 5% of the outstanding common
stock; (b) each of the Company's directors; and (c) all directors and executive
officers of the Company as a group. Ownership includes direct and indirect
(beneficial) ownership as defined by SEC rules.
Name Amount and Nature of Percent
and Address Beneficial Ownership (1)(2) of Class
T. J. Bowman 1,752 Direct 1.48%
11,555 Indirect
Roger Champ 4,140 Direct *
480 Indirect
John E. Glover 5,675 Direct 1.50%
7,755 Indirect
Carole H. Hartman 2,555 Direct *
John D. Heavner 2,400 Direct *
1,200 Indirect
Richard Homan 600 Direct 7.86%
P. O. Box 550 69,900 Indirect (3)
Franklin, WV 26807-0550
William McCoy, Jr. 15,976 Direct 3.12%
12,000 Indirect
Jerry Moore 10,060 Direct 1.16%
300 Indirect
46
Richard C. Phares 17,827 Direct 1.99%
William A. Loving, Jr. 719 Direct *
209 Indirect
Dolan Irvine 1,038 Direct *
All Directors and Executive
Officers As a Group 166,141 17.10%
(1) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act
of 1934 under which, in general, a person is deemed to be the beneficial
owner of a security if he has or shares the power to vote or direct the
voting of the security or the power to dispose of or direct the disposition
of the security, or if he has the right to acquire beneficial ownership of
the security within 60 days. Shares of common stock which are subject to
stock options are deemed to be outstanding for the purpose of computing the
percentage of outstanding common stock owned by such person or group but
not deemed outstanding for the purpose of computing the percentage of
common stock owned by any other person or group.
(2) Includes qualifying shares of 500 as required by the Company's bylaws.
(3) Consists of 33,400 held in the Richard Homan Trust and the Jean Ann Homan
Trust of which Mr. Homan is Trustee. Also includes 36,500 shares owned by
Captaur Limited Liability Company in which Mr. Homan owns a 50% interest
and serves as Member/Manager.
(*) Less than 1%.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
registered class of the Company's equity securities, to make stock ownership and
transaction filings with the FDIC and to provide copies to the Company. Based
solely on a review of the reports furnished to the Company and written
statements that no other reports were required, all Section 16(a) filing
requirements applicable to its officers and directors were met. The Company is
required to report late filings.
Item 13. Certain Relationships and Related Transactions
The Company has had and intends to continue to have banking and financial
transactions in the ordinary course of business with directors and executive
officers of the Company and their associates. Total loans outstanding from the
Company at December 31, 2004 to the Company's officers and directors as a group
and members of their immediate families and companies in which they had an
ownership interest of 10% or more were $1,369,308 or approximately 5.69% of the
Company's total equity capital. These loans do not involve more than the normal
risk of collectibility or present other unfavorable features.
Director Moore provides legal services for the Bank. Based on information
provided by him, payments made by the Bank to him for legal services were less
than five percent of his gross revenue.
47
The Company purchases property insurance coverage from Pendleton County
Insurance Company of which Director Hartman is an owner. The terms of and
premiums for this insurance are as favorable to the Company as they would have
been with third parties not otherwise affiliated with the Company.
Item 14. Principal Accountant Fees and Services
The information regarding principal accountant fees and services under the
caption Ratification of Auditors contained in the 2004 Proxy Statement is
incorporated herein by reference.
PART IV
Item 15. Exhibits and Reports on Form 8-K
a. Exhibits
The following Exhibits are attached.
No. Description
31.1 Certification of CEO pursuant to Rule 13a-14(a)
31.2 Certification of CFO pursuant to Rule 13a-14(a)
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (filed herewith).
The following Exhibits are incorporated by reference to the Exhibits to
Allegheny Bancshares, Inc. Form 10KSB filed March 26, 2004.
No. Description
3.3 By-Laws of Allegheny Bancshares, Inc.
10.1 Employment Agreement with William A. Loving, Jr.
10.2 Executive Severance Agreement with William A. Loving, Jr.
14 Code of Ethics
21 List of Subsidiaries of the Registrant
The following Exhibits are incorporated by reference to the Exhibits to
Allegheny Bancshares, Inc. Form 10-KSB filed March 30, 2003.
No. Description Exhibit Number
3.1 Articles of Incorporation - Allegheny Bancshares, Inc. E2
4.1 Specimen Common Stock Certificate of Allegheny Bancshares, Inc. E5
b. Reports on 8K
No reports were filed for the quarter ended December 31, 2004.
48
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant causes this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLEGHENY BANCSHARES, INC.
By: /s/ WILLIAM A. LOVING, JR.
----------------------------------
William A. Loving, Jr.
Executive Vice-President and
Chief Executive Officer
Date: March 18, 2005
---------------
By: /s/ ERIN S. SITES
----------------------------------
Erin S. Sites
Controller
Date: March 18, 2005
----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and as of the date indicated.
Signature Title Date
/s/ THOMAS J. BOWMAN
- ---------------------- March 17, 2005
Thomas J. Bowman Director
/s/ ROGER D. CHAMP
- ---------------------- March 17, 2005
Roger D. Champ Director
/s/ JOHN E. GLOVER
- ---------------------- March 17, 2005
John E. Glover Director
/s/ CAROLE H. HARTMAN
- --------------------- Director March 17, 2005
Carole H. Hartman Secretary
/s/ JOHN D. HEAVNER
- --------------------- March 17, 2005
John D. Heavner Director
/s/ RICHARD W. HOMAN
- --------------------- March 17, 2005
Richard W. Homan Director
- ---------------------
Chairman of the Board
William McCoy, Jr. Director
/s/ JERRY D. MOORE
- --------------------- March 17, 2005
Jerry D. Moore Director
/s/ RICHARD C. PHARES
- --------------------- March 17, 2005
Richard C. Phares Director
/s/ WILLIAM A LOVING, JR.
- --------------------- March 17, 2005
William A. Loving, Jr. Director
/s/ DOLAN IRVINE
- --------------------- March 17, 2005
Dolan Irvine Director