SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarterly Period Ended September 30, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File No. 000-50151
ALLEGHENY BANCSHARES, INC.
(Exact name of registrant as specified 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
P. O. Box 487
Franklin, West Virginia 26807
(Address of principal executive offices, including zip code)
(304) 358-2311
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, par value - $1.00
880,633 shares outstanding as of November 9, 2007
ALLEGHENY BANCSHARES, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Unaudited Consolidated Statements of Income - Nine Months
ended September 30, 2007 and 2006 2
Unaudited Consolidated Statements of Income - Three Months
ended September 30, 2007 and 2006 3
Consolidated Balance Sheets - September 30, 2007 (Unaudited)
and December 31, 2006 (Audited) 4
Unaudited Consolidated Statements of Changes in
Stockholders' Equity - Nine Months Ended September 30, 2007
and 2006 5
Unaudited Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2007 and 2006 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4T. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 1.A. Risk Factors 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8K 16
SIGNATURES 17
CERTIFICATIONS 18
Page 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2007 2006
-------- --------
INTEREST AND DIVIDEND INCOME:
Loans and fees $ 8,508 $ 7,543
Investment securities - taxable 588 537
Investment securities - nontaxable 537 521
Deposits and federal funds sold 111 50
-------- --------
Total Interest and Dividend Income 9,744 8,651
-------- --------
INTEREST EXPENSE:
Deposits 3,727 2,765
Borrowings 276 267
-------- --------
Total Interest Expense 4,003 3,032
-------- --------
NET INTEREST INCOME 5,741 5,619
PROVISION FOR LOAN LOSSES 138 147
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 5,603 5,472
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 572 551
Other income 357 264
Loss on security transactions -- (4)
-------- --------
Total Noninterest Income 929 811
-------- --------
NONINTEREST EXPENSE:
Salaries and benefits 2,165 1,970
Occupancy expenses 269 237
Equipment expenses 468 458
Other expenses 1,121 1,093
-------- --------
Total Noninterest Expenses 4,023 3,758
-------- --------
Income Before Income Taxes 2,509 2,525
INCOME TAX EXPENSE 719 764
-------- --------
NET INCOME $ 1,790 $ 1,761
======== ========
EARNINGS PER SHARE
Net income $ 2.03 $ 1.97
======== ========
Weighted Average Shares Outstanding 882,355 894,407
======== ========
The accompanying notes are an integral part of these statements.
Page 3
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for share and per share information)
(Unaudited)
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2007 2006
-------- --------
INTEREST AND DIVIDEND INCOME:
Loans and fees $ 2,953 $ 2,645
Investment securities - taxable 197 176
Investment securities - nontaxable 178 173
Deposits and federal funds sold 30 27
-------- --------
Total Interest and Dividend Income 3,358 3,021
-------- --------
INTEREST EXPENSE:
Deposits 1,285 1,052
Borrowings 105 89
-------- --------
Total Interest Expense 1,390 1,141
-------- --------
NET INTEREST INCOME 1,968 1,880
PROVISION FOR LOAN LOSSES 48 34
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 1,920 1,846
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 213 200
Other income 126 94
Loss on security transactions -- (4)
-------- --------
Total Noninterest Income 339 290
-------- --------
NONINTEREST EXPENSE:
Salaries and benefits 730 670
Occupancy expenses 90 87
Equipment expenses 155 164
Other expenses 392 378
-------- --------
Total Noninterest Expenses 1,367 1,299
-------- --------
Income Before Income Taxes 892 837
INCOME TAX EXPENSE 277 259
-------- --------
NET INCOME $ 615 $ 578
======== ========
EARNINGS PER SHARE
Net income $ .70 $ .65
======== ========
Weighted Average Shares Outstanding 881,150 893,689
======== ========
The accompanying notes are an integral part of these statements.
Page 4
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share information)
SEPTEMBER DECEMBER
30, 2007 31, 2006
--------- --------
Unaudited Audited
ASSETS
Cash and due from banks $ 2,493 $ 2,174
Federal funds sold 6,213 3,601
Interest bearing deposits in banks 648 130
Investment securities available for sale 33,006 34,008
Investment securities held to maturity 500 500
Restricted equity securities 1,005 967
Loans receivable, net of allowance for loan
losses of $1,171 and $1,258 respectively 139,886 134,109
Bank premises and equipment, net 6,491 6,749
Other assets 1,754 1,779
-------- --------
Total Assets $191,996 $184,017
======== ========
LIABILITIES
Deposits
Noninterest bearing demand $ 18,544 $ 16,336
Interest bearing
Demand 16,615 16,918
Savings 33,680 32,765
Time deposits over $100,000 24,836 25,479
Other time deposits 61,540 57,844
-------- --------
Total Deposits 155,215 149,342
Accrued expenses and other liabilities 693 754
Federal funds purchased -- --
Short-term borrowings 2,303 2,769
Long-term debt 6,666 5,592
-------- --------
Total Liabilities 164,877 158,457
-------- --------
STOCKHOLDERS' EQUITY
Common stock; $1 par value, 2,000,000 shares
Authorized, 900,000 issued 900 900
Additional paid in capital 900 900
Retained earnings 26,386 24,596
Accumulated other comprehensive (loss) (28) (60)
Treasury stock (at cost, 19,367 shares in 2007 and
14,789 shares in 2006) (1,039) (776)
-------- --------
Total Stockholders' Equity 27,119 25,560
-------- --------
Total Liabilities and Stockholders' Equity $191,996 $184,017
======== ========
The accompanying notes are an integral part of these statements.
Page 5
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Total Stock Capital Earnings (Loss) Stock
------- ------ ---------- -------- ------------- --------
BALANCE, DECEMBER 31, 2006 $25,560 $900 $900 $24,596 $ (60) $ (776)
Comprehensive Income
Net income 1,790 1,790
Change in unrealized loss on
available for sale
securities, net of
income tax effect of $13 32 32
-------
Total Comprehensive Income 1,822
Purchase of Treasury Stock (263) (263)
------- ---- ---- ------- ----- -------
BALANCE, SEPTEMBER 30, 2007 $27,119 $900 $900 $26,386 $ (28) $(1,039)
======= ==== ==== ======= ===== =======
BALANCE, DECEMBER 31, 2005 $24,864 $900 $900 $23,389 $(117) $ (208)
Comprehensive Income
Net income 1,761 1,761
Change in unrealized loss on
available for sale
securities, net of
income tax effect of $(6) (14) (14)
Reclassification
adjustment Net of taxes
of $1 3 3
-------
Total Comprehensive Income 1,750
Purchase of Treasury Stock (90) (90)
------- ---- ---- ------- ----- -------
BALANCE, SEPTEMBER 30, 2006 $26,524 $900 $900 $25,150 $(128) $ (298)
======= ==== ==== ======= ===== =======
The accompanying notes are an integral part of these statements.
Page 6
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2007 2006
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,790 $ 1,761
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 138 147
Depreciation and amortization 375 358
Net amortization of securities 14 20
Deferred income tax benefit 27 --
Loss on sale of securities -- 4
Gain on sale of equipment -- (7)
Net change in:
Accrued income (58) (129)
Other assets 41 (149)
Accrued expense and other liabilities (62) 62
------- --------
Net Cash Provided by Operating Activities 2,265 2,067
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold (2,612) (2,990)
Net change in interest bearing deposits in banks (518) 391
Proceeds from sales, calls and maturities
of available for sale securities 3,330 2,467
Purchase of securities available for sale (2,296) (2,016)
Net increase in restricted investments (38) (446)
Net increase in loans (5,916) (7,586)
Proceeds from sale of bank equipment -- 23
Purchase of bank premises and equipment (115) (1,142)
------- --------
Net Cash Used in Investing Activities (8,165) (11,299)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Demand and savings deposits 2,821 390
Time deposits 3,053 9,858
Short-term borrowings (466) --
Proceeds from long-term borrowings 1,500 1,060
Curtailments of long-term borrowings (426) (2,067)
Purchase of treasury stock (263) (90)
------- --------
Net Cash Provided by Financing Activities 6,219 9,151
------- --------
CASH AND DUE FROM BANKS
Net increase (decrease) in cash and due from banks 319 (81)
Cash and due from banks, beginning of period 2,174 2,882
------- --------
Cash and due from banks, end of period $ 2,493 $ 2,801
======= ========
Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 4,038 $ 2,955
Income taxes $ 696 $ 805
The accompanying notes are an integral part of these statements.
Page 7
ALLEGHENY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The financial statements conform to accounting principles generally
accepted in the United States of America ("GAAP") and to general industry
practices. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September 30,
2007, and the results of operations for the periods ended September 30, 2007 and
2006. The notes included herein should be read in conjunction with the notes to
the financial statements included in the 2006 annual report to stockholders of
Allegheny Bancshares, Inc.
NOTE 2 INVESTMENT SECURITIES AND RESTRICTED SECURITIES:
The amortized costs of investment securities and their approximate fair
values at September 30, 2007 and December 31, 2006 follows (in thousands of
dollars):
SEPTEMBER 30, 2007 DECEMBER 31, 2006
------------------- -------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
SECURITIES AVAILABLE FOR SALE:
U.S. Government Mortgaged
Backed Securities $ 3,141 $ 3,040 $ 3,667 $ 3,576
Government-Sponsored
Enterprise Securities 11,487 11,489 11,730 11,671
Obligations of States and
Political Subdivisions 18,287 18,345 18,599 18,661
Other Equity Securities 132 132 100 100
------- ------- ------- -------
Total $33,047 $33,006 $34,096 $34,008
======= ======= ======= =======
SECURITIES HELD TO MATURITY:
Government-Sponsored
Enterprise Securities $ 500 $ 495 $ 500 $ 490
======= ======= ======= =======
The Company evaluates each of its security investments for impairment under
guidelines contained in SFAS 115, Accounting for Certain Investments in Debt and
Equity Securities. These guidelines require the Company to determine if declines
in market value are other than temporary.
Restricted securities consist of stock in the Federal Home Loan Bank (FHLB)
and Community Financial Services, Inc. (CFSI). Investment in the FHLB stock is
determined by the level of the Bank's participation with FHLB various products
and is collateral against outstanding borrowings from that institution. CFSI is
the parent company of the Bank's correspondent bank. Both of these investments
are carried at cost, and each is restricted as to transferability.
Page 8
ALLEGHENY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS RECEIVABLE:
Loans outstanding are summarized as follows (in thousands of dollars):
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Real estate loans $ 64,387 $ 60,768
Commercial and industrial loans 60,426 59,181
Loans to individuals, primarily
collateralized by autos 11,558 11,381
All other loans 4,686 4,037
-------- --------
Total Loans 141,057 135,367
Less allowance for loan losses 1,171 1,258
-------- --------
Net Loans Receivable $139,886 $134,109
======== ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the nine
months ended September 30, 2007 and 2006 follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
2007 2006
------ ------
Balance, beginning of period $1,258 $1,172
Provision charged to operating
expenses 138 147
Recoveries of loans charged off 75 67
Loans charged off (300) (118)
------ ------
Balance, end of period $1,171 $1,268
====== ======
NOTE 5 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 September 30, 2007
were fixed at the time of the advance and fixed rates range from 3.15% to 5.61%.
The FHLB notes are secured by FHLB Stock, as well as investment securities and
mortgage loans. The weighted average interest rate is 4.62% at September 30,
2007.
Page 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Allegheny Bancshares, Inc. (Company) is a single bank holding company organized
under the laws of West Virginia. The Company provides financial services through
its wholly owned subsidiary Pendleton Community Bank (Bank).
The Bank is a full service commercial bank offering financial services
through four financial centers located in the West Virginia towns of Franklin,
Moorefield and Marlinton, and its newest branch near Harrisonburg, Virginia.
Currently its primary trade areas are these towns and the West Virginia counties
of Pendleton, Hardy, Pocahontas, and in western Rockingham County, Virginia. The
newest financial center is located in Rockingham County, Virginia just west of
the city limits of Harrisonburg, Virginia and was opened for business July 19,
2006.
The following discussion and analysis is provided to address information
about the Company's financial condition and results of operations that may not
otherwise be apparent from reading the Consolidated Financial Statements and
notes. This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the related notes to the Consolidated
Financial Statements.
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 POLICY
The financial condition and results of operations as presented in the
Consolidated Financial Statements and the Notes to Consolidated Financial
Statements are dependent on the accounting policies. The policies selected and
applied involve judgments, estimates, and may change from period to period based
upon economic conditions. In addition, changes in generally accepted accounting
principles could impact the calculations of these estimates, and even though
this would not affect the true values, it could affect the timing of recognizing
income or expense.
The following discussion of allowance for loans loss is, in
management's opinion, the most important and critical policy that affects the
financial condition and results of operations. This critical policy involves the
most difficult and complex judgments about the unknown losses that currently
exist in the Company's largest asset, its loan portfolio.
Page 10
ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
The provision for loan losses was $138,000 and $147,000 for the nine month
periods ended September 30, 2007 and 2006 respectively. The allowance for loan
losses ("ALL") was $1,171,000 (.83% of loans) at the end of the first nine
months of 2007 compared with $1,258,000 (.93% of loans) at December 31, 2006.
The ALL decrease was caused primarily by the level of loans charged off during
the first six months of 2007. The Company continues to monitor the loan
portfolio for signs of weakness or developing credit problems. Loan loss
provision for each period is determined after evaluating the loan portfolio and
determining the level of reserves necessary to absorb current charge-offs and
maintain the reserve at adequate levels. See Note 4 for the amounts.
The ALL is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans, industry
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Managements'
valuation of the ALL is based upon two principals of accounting: 1) SFAS No. 5
Accounting for Contingencies and SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The Company utilizes both of theses accounting standards
by first identifying problem loans above a certain threshold and estimating
losses based on the underlying collateral values, and second taking the
remainder of the loan portfolio and separating the portfolio into pools of loans
based on grade of loans as determined by the Company's internal grading system.
We apply loss percentages based upon our historical loss rates, and make
adjustments based on economic conditions. The determination of the ALL is
subjective and actual losses may be more or less than the amount of the
allowance. However management believes that the allowance is a fair estimate of
losses that exists in the loan portfolio as of the balance sheet date.
RESULTS OF OPERATIONS OVERVIEW
Net income of $1,790,000 for the first nine months of 2007 represents an
increase of 1.65% compared to the same period a year ago. Annualized returns on
average equity and average assets for the nine months ended September 30, 2007
were 9.14% and 1.30%, respectively, compared with 9.51% and 1.33% for the same
period in 2006. The net income for the first nine months of 2007 compared to
same period in 2006 was relatively flat. While net interest income has
increased, due to the volume of earning assets, increase in noninterest expenses
has offset the increased net interest income.
Also, during the first nine months of 2007, the interest margin has
remained low due to the flat, and at times, inverted interest rate yield curve.
This situation has caused the deposit rates to rise faster than the loan rates
and has caused the Company's main source of income, net interest margin, to
decline as a percentage of earning assets (See Table I).
NET INTEREST INCOME
The Company's taxable equivalent net interest income increased by 2.60% for
the first nine months of 2007 compared to the first nine months of 2006. This
increase resulted from the increase in the average balance of loans as well as
an increase in federal funds sold. Average balance of interest bearing
liabilities grew by 6.19% while average balance of total earning assets grew by
6.61%. The Company's tax equivalent net yield on earnings assets for first nine
months of 2007 was 4.65% compared to 4.83% for same period in 2006 as the cost
of funds increased 75 basis points while the yield on earning assets increased
41 basis points. Seventeen consecutive increases by the Federal Reserve Board of
the target rate of federal funds from June 2004 to June 2006 have caused
Page 11
the average rates earned on earning assets and the average rates paid on
interest bearing liabilities to continue to increase. Unfortunately for the
Company's interest margin, this rate increase has caused shorter term deposit
rates to rise more than the rates earned on longer term loans and investments.
As shown in the interest sensitivity analysis in Table II, the Company is in a
liability sensitive position, meaning our liabilities mature and reprice faster
than our assets. The last interest rate increase was in June of 2006 and as such
some improvement is being seen in the net interest margin. In September 2007,
the Federal Reserve lowered rates by 50 basis points. While this most recent
rate cut has not had time to affect the Company's interest margin, we expect
some relief from the steepening of the yield curve.
Table I shows the average balances for interest bearing assets and
liabilities, the rates earned on earning assets and the rates paid on deposits
and borrowed funds.
TABLE I
ALLEGHENY BANCSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
-------------------------- --------------------------
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE RATES BALANCE EXPENSE RATES
-------- ------- ----- -------- ------- -----
Interest Income
Loans (1), (2) $137,496 $ 8,606 8.35% $129,802 $7,615 7.82%
Federal funds sold 2,722 103 5.05% 1,017 38 4.98%
Interest bearing deposits 231 7 4.04% 338 12 4.73%
Investments
Taxable 16,339 588 4.80% 15,563 536 4.59%
Nontaxable (2) 18,426 814 5.89% 17,627 788 5.96%
-------- ------- ---- -------- ------ ----
Total Earning Assets 175,214 10,118 7.70% 164,347 8,989 7.29%
-------- ------- ---- -------- ------ ----
Interest Expense
Demand deposits 15,544 193 1.66% 18,024 205 1.52%
Savings 33,329 675 2.70% 28,950 431 1.99%
Time deposits 82,283 2,859 4.63% 75,792 2,129 3.75%
Short-term borrowings 2,469 85 4.59% 2,920 90 4.11%
Long-term debt 5,835 191 4.36% 5,639 177 4.19%
-------- ------- ---- -------- ------ ----
Total Interest Bearing
Liabilities $139,460 $ 4,003 3.83% $131,325 $3,032 3.08%
-------- ------- ---- -------- ------ ----
Net Interest Margin (1) 6,115 5,957
======= ======
Net Yield on Interest
Earning Assets 4.65% 4.83%
==== ====
(1) Interest on loans includes loan fees
(2) An incremental tax rate of 34% was used to calculate the tax equivalent
income
Page 12
NONINTEREST INCOME
Noninterest income increased 14.55% during the first nine months of 2007 as
compared to the same period in 2006. The increase was largely due to an increase
in loan fees earned by our mortgage division, and increased ATM and debit card
fee income. Second quarter 2006 noninterest income included a one time gain of
$26,000 on the sale of the Company's credit card portfolio.
NONINTEREST EXPENSES
Total noninterest expense increased $265,000 or 7.05% for the first nine
months of 2007, as compared to 2006. Salaries and benefits increased by 9.90%
due to the increase in the number of employees, merit increases, and higher
benefit costs. The number of employees as measured by full time equivalents
(FTE) increased by 2.75 in the first nine months of 2007, as compared to the
same period of 2006. This represents a 4.8% increase in number of employees.
Occupancy and equipment expenses increased by 13.50% primarily due to expenses
of the new Harrisonburg, Virginia office. The Harrisonburg office was opened in
July of 2006, and for the first nine months of 2007, the pre tax loss from the
operations for this branch totaled $292,000. This compares to $139,000 loss for
the same period in 2006.
INCOME TAX EXPENSE
Income tax expense equaled 28.66% of income before income taxes for the
nine months ended September 30, 2007 compared with 30.26% for the same period of
2006. This was partially due to the charge-off of a loan in 2007 which we had
reserved for, but the actual tax benefit of this transaction was greater than
the tax benefit that we had accrued. In addition, we received a $10,000 refund
on an amended tax issue from the 2003 tax year.
LOANS AND PROVISION FOR LOAN LOSS
Total loans were $141,057,000 at September 30, 2007, compared to
$135,367,000 at December 31, 2006, representing a 4.20% increase. This growth in
the loan portfolio is primarily driven by residential real estate loans, which
has grown by 6.00% since December 31, 2006. A schedule of loans by type is shown
in Note 3 to the financial statements. Approximately 82% of the loan portfolio
is secured by real estate at September 30, 2007.
LOAN PORTFOLIO RISK FACTORS
Nonperforming loans include nonaccrual loans, loans over 90 days past due
and restructured loans. Nonaccrual loans are loans in which interest accruals
have been discontinued. 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. Restructured loans are loans for which a borrower has been granted a
concession on the interest rate or the original repayment terms because of
financial difficulties.
The following table summarizes the Company's nonperforming loans at September
30, 2007 and December 31, 2006 (in thousands of dollars):
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Nonaccrual loans $ 15 $104
Restructured loans 144 24
Loans delinquent 90 days or more 494 206
---- ----
Total Nonperforming Loans $653 $334
==== ====
Page 13
DEPOSITS
The Company's deposits increased $5,873,000 or 3.93% during the first nine
months of 2007. A schedule of deposits by type is shown in the balance sheets.
The primary reason for this increase was the increase in non interest bearing
checking accounts and certificates of deposit. Certificates of deposit increased
even though the bank reduced the level of "brokered deposits". Brokered deposits
are certificates of deposits (CD) that are purchased from a broker acting as an
agent for depositors. They typically are sold in increments of $100,000 and
usually have higher rates than the typical CD rates. The Company has used
brokered deposits in the past for short-term funding. Due to growth in core
deposits during the first nine months of 2007, the Company was able to decrease
its balance of brokered deposits by $3,621,000. Time deposits of $100,000 or
more were 16.00% and 17.06% of total deposits at September 30, 2007 and December
31, 2006, respectively.
BORROWINGS
The Company borrows funds from the Federal Home Loan Bank (FHLB) to provide
liquidity and to reduce interest rate risk. As competition for deposits have
increased during periods of loan growth, FHLB borrowings have been utilized to
help fund the loan growth. These borrowings have a fixed rate of interest and
are amortized over a period of 5 to 20 years. Interest rates on these
obligations range from 3.15% to 5.61%.
CAPITAL
The Company continues to maintain a strong capital position to provide an
attractive financial return to our shareholders and to support future growth.
Capital as a percentage of total assets was 14.13% at September 30, 2007 and
significantly exceeded regulatory requirements. The Company is considered to be
well capitalized under the regulatory framework for prompt corrective actions.
UNCERTAINTIES AND TRENDS
Management is not aware of any known 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
Liquidity reflects our ability to ensure that funds are available to meet
present and future obligations. At September 30, 2007, the Company had liquid
assets of approximately $8.71 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 September 30, 2007. 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 $89.1 million.
At September 30, 2007, the Company had a negative cumulative Gap Rate
Sensitivity Ratio of 27.67% for the one year repricing period. This rate
reflects a very conservative estimate since we show an immediate runoff of
accounts without a specific maturity date, and 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 -9.91%. This indicates that the Company is liability sensitive. But
this negative gap ratio is within guidelines set by the Company and the Company
expects interest income would remain stable in both a declining and increasing
interest rate environment. Management constantly monitors the Company's interest
Page 14
rate risk and has decided that the current position is an acceptable risk for a
community bank operating in a rural environment. Table II shows the Company's
interest sensitivity.
TABLE II
ALLEGHENY BANCSHARES, INC.
INTEREST SENSITIVITY ANALYSIS
SEPTEMBER 30, 2007
(In Thousands of Dollars)
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
------- ------- ------- ------ -------
USES OF FUNDS:
Loans 33,243 26,186 46,118 35,510 141,057
Federal funds sold 6,213 6,213
Interest bearing deposits 548 100 648
Investment securities 500 1,235 18,119 13,652 33,506
Restricted Investments 1,005 1,005
------- ------- ------- ------ -------
Total 40,504 27,521 64,237 50,167 182,429
------- ------- ------- ------ -------
SOURCES OF FUNDS:
Deposits:
Interest bearing demand 16,615 16,615
Savings 33,680 33,680
Time deposits over $100,000 6,773 12,020 6,043 24,836
Other time deposits 19,656 27,459 13,782 643 61,540
Short-term borrowings 1,700 603 2,303
Long-term debt 149 456 2,508 3,553 6,666
------- ------- ------- ------ -------
Total 78,573 39,935 22,936 4,196 145,640
------- ------- ------- ------ -------
Discrete Gap (38,069) (12,414) 41,301 45,971 36,789
Cumulative Gap (38,069) (50,483) (9,182) 36,789
Ratio of Cumulative Gap
To Total Earning Assets -20.87% -27.67% -5.03% 20.17%
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at September 30, 2007. In preparing the above table, no
assumptions are made with respect to loan prepayments 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. A loan with a
floating rate that has reached a contractual floor or ceiling level is being
treated as a fixed rate loan until the rate is again free to float.
Page 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in Quantitative and Qualitative Disclosures
about Market Risk as reported in the 2006 Form 10-K.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
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 disclosure.
We have established disclosure controls and procedures to ensure that
material information related to Allegheny Bancshares, Inc. and its subsidiary 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
quarterly report. Based on this evaluation, the Company'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 the
Company's internal controls pertaining to its financial reporting and control of
its assets or in other factors that could significantly affect these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -
Not Applicable
ITEM 1 A. RISK FACTORS -
No Material Changes
ITEM 2. CHANGES IN SECURITIES -
During the 3-month period ending September 30, 2007, the Company purchased some
of the Company's stock to be held as treasury stock. This was not part of
publicly announced plan. The details of the transaction were as follows:
Page 16
TOTAL NUMBER AVERAGE
OF SHARES PRICE PER
DATE PURCHASED SHARE
---- ------------ ---------
July 11, 2007 50 $58.00
July 19, 2007 2 $58.00
July 20, 2007 400 $58.00
August 8, 2007 406 $58.00
August 9, 2007 200 $58.00
September 27, 2007 170 $59.00
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
Not Applicable
ITEM 5. OTHER INFORMATION -
Not Applicable
ITEM 6. EXHIBITS AND REPORTS ON 8-K -
A. EXHIBITS
The following Exhibits are filed as part of this Form 10-Q
No. Description
-- -----------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
(filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
(filed herewith).
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 exhibit is 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
The following exhibit is incorporated by reference to the Exhibits to
Allegheny Bancshares, Inc. Form 10-K filed March 31, 2006.
No. Description Exhibit Number
--- ----------- --------------
3.3 Bylaws of Allegheny Bancshares, Inc. 3.3
B. REPORTS ON 8K
No reports filed in the third quarter of 2007.
Page 17
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
------------------------------------
William A. Loving, Jr.
Executive Vice President and
Chief Executive Officer
By: /s/ L. KIRK BILLINGSLEY
------------------------------------
L. Kirk Billingsley
Chief Financial Officer
Date: November 9, 2007