SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007
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, 26807-0487
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 PER SHARE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
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 a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated Filer [ ]
Non-accelerated filer [X] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of March 1, 2008 the aggregate market value of the voting stock held by
non-affiliates, based on the last reported sales prices of $62.50 per share was
$55,017,688.
The number of shares outstanding of the registrant's common stock was
880,283 as of March 1, 2008.
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DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held April 14,
2008 (the "Proxy Statement")
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page 46.
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TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 4
Item 1B. Unresolved Staff Comments 5
Item 2. Description of Property 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Item 8. Consolidated Financial Statements 18
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 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 42
Item 13. Certain Relationships and Related Transactions 42
Item 14. Principal Accountant Fees and Services 42
PART IV
Item 15. Exhibits and Financial Statement Schedules 42
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PART I
ITEM 1. BUSINESS
GENERAL
Allegheny Bancshares, Inc. (hereinafter referred to as the "Company" or
"we"), 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 Community 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 the West Virginia localities of
Pendleton, Grant, Hardy and Pocahontas counties including the towns of Franklin,
Marlinton, Moorefield, and Petersburg. In addition, the Bank has opened an
office in Rockingham County, Virginia just outside the City of Harrisonburg. 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, a full
service branch in Marlinton, West Virginia opened in November 2001, and the most
recent branch office near Harrisonburg, Virginia which opened in July of 2006.
Management is continuing to investigate and consider other possible sites
that would enable the Bank to profitably serve its market area.
BANKING SERVICES
The Bank is a normal full service commercial bank and as such offers
services that would be normally expected. The Bank accepts deposits, makes
consumer and commercial loans, issues drafts, provides internet access to
customer accounts, offers drive through banking and provides automated teller
machines. 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 twelve months. Long-term real estate loans (residential and
commercial) are made with a maximum amortization period of 30 years with fixed
rates, balloon terms and adjustable rate terms (ARMs) of from one to five years.
Interest rates vary depending on the length of the term. The majority of the
real estate loans are made as investments, with a small percentage sold in the
secondary market.
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
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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.
EMPLOYEES
As of December 31, 2007, the Bank had 59 full-time employees and 68 total
employees. No one employee devotes full time service to Allegheny Bancshares,
Inc.
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 the factors as set forth in
the "Risk Factors" Item 1A. as well as the following: :
- 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.
Any forward looking statements made by us in this Annual Report on 10-K
speaks only as of the date on which we make it. New risks and uncertainties
arise from time to time that are unpredictable. We have no duty to, and do not
intend to update or revise the forward looking statements in this report except
as may be required by law. In light of these risks and uncertainties you should
keep in mind that any forward looking statements in this report might not occur.
ITEM 1B. UNRESOLVED STAFF COMMENTS - NONE
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. In addition to the main office the Bank
owns and operates full service financial centers in the communities of
Moorefield, and Marlinton, West Virginia. The Bank also owns and operates its
newest full service financial center in Harrisonburg, Virginia.
ITEM 3. LEGAL PROCEEDINGS
Management is not aware of any pending or threatened litigation in which
the Bank may be
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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, 2007.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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. The dividend limit
as of January 1, 2008 is included in Note 11 to the financial statements.
Annual dividends were declared as of December 31, 2007 and 2006 in the
amount of 1.40 and 1.30 per share, respectively.
STOCKHOLDERS
As of December 31, 2007, there were 717 shareholders of record. 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:
2007 2006
---------------- ----------------
Year High Low High Low
---- ------ ------ -------- ------
1st quarter $72.50 $57.00 $60.00(1) $52.00
2nd quarter 58.00 57.00 52.00 52.00
3rd quarter 66.67(1) 57.00 70.53(1) 52.00
4th quarter 65.00 37.50(1) 67.50(1) 55.00
(1) This price was the result of a private sale and may not be indicative of
the market for the Company's shares.
PURCHASES OF SECURITIES DURING LAST QUARTER OF 2007
Maximum No.
(or approximate
Dollar Value) of
Total No. of Shares (or Units)
Total No. Avg. Price Shares (or Units) That May Yet Be
of Shares Paid per Purchased as Part of Purchased Under
(or Units) Share Publicly Announced the Plans or
Period Purchased (or Unit) Plans or Programs Programs
- ------ ---------- ---------- -------------------- -----------------
10/1/07- 10/31/07 350 $58.50 N/A N/A
11/1/07- 11/30/07 0 $ N/A N/A N/A
12/1/07- 12/31/07 0 $ N/A N/A N/A
Allegheny has not initiated any plans to repurchase its stock, however from time
to time as the
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opportunity presents itself, the Company, as shown above, has repurchased
shares.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
----------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
(Dollars in Thousands except per share data)
RESULTS OF OPERATIONS
Interest income $ 13,177 $ 11,797 $ 10,226 $ 9,323 $ 9,143
Interest expense (5,395) (4,282) (2,847) (2,128) (2,513)
-------- -------- -------- -------- --------
Net Interest Income 7,782 7,515 7,379 7,195 6,630
Provisions for loan losses (187) (162) (219) (183) (120)
Noninterest income 1,282 1,029 859 512 432
Noninterest expenses (5,440) (5,027) (4,529) (4,112) (3,708)
Income taxes (964) (987) (1,044) (1,028) (953)
-------- -------- -------- -------- --------
Net Income $ 2,473 $ 2,368 $ 2,446 $ 2,384 $ 2,281
======== ======== ======== ======== ========
PROFITABILITY RATIOS
Return on Average Assets 1.32% 1.34% 1.46% 1.49% 1.48%
Return on Average Equity 9.34% 9.15% 9.77% 9.95% 9.96%
PER COMMON SHARE
Net Income $ 2.80 $ 2.65 $ 2.73 $ 2.66 $ 2.54
Cash Dividends Declared 1.40 1.30 1.20 1.10 1.00
Book Value 30.35 28.87 27.77 26.82 25.63
Last Reported Market Price 58.50 57.00 57.00 49.00 37.00
Dividend Payout Ratio 49.84% 49.06% 43.92% 41.38% 39.45%
AT YEAR END
Assets $194,881 $184,017 $171,320 $162,239 $157,757
Deposits 157,112 149,342 136,974 131,577 128,553
Loans 146,785 134,108 124,433 117,228 110,516
Long-term Debt 8,517 5,592 5,109 3,494 3,838
Stockholders' Equity 26,731 25,560 24,864 24,047 23,053
Equity to Assets Ratio 13.72% 13.89% 14.51% 14.82% 14.61%
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS 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 a branch near Harrisonburg, Virginia. Currently
it's primary trade area are these towns and the West Virginia counties of
Pendleton, Hardy, and Pocahontas, and in Harrisonburg and Rockingham County,
Virginia.
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.
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.
ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
The provision for loan losses was $187,117 and $162,323 for the calendar
years 2007 and 2006 respectively. The allowance for loan losses ("ALL") was
$1,186,000 (.80% of loans) at the end of 2007 compared with $1,258,000 (.93% of
loans) at December 31, 2006. The ALL decrease was due to increase in loans
charged offs in 2007. The loans charged off exceeded our provision charged to
the allowance, and recoveries in 2007. 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 Bank 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.
OVERVIEW
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Net income of the Company increased 4.41% from 2006 to 2007 and earnings
per share increased 5.66% from $2.65 to $2.80. Earnings per share increased more
as a percentage than net income due to lower number of shares outstanding.
Increases of $242,000 in net interest income and $252,000 in noninterest income
were primary factors in the increase in income. However, these large increases
were partially offset due to a $413,000 increase in noninterest expenses.
The increase in net interest income was caused primarily by growth in our
loan portfolio. Average loans grew by 6.43% and the interest rate environment
increased our yield on the total earning assets as shown in Table I. However
rising interest rates on interest bearing liabilities grew faster than earnings.
NET INTEREST INCOME
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 5.27% in
2007 compared to 2006, due to the net growth of earning assets. The Company's
net yield on interest earning assets for 2007 was 4.68% compared to 4.72% for
2006 as the yield on earning assets increased by 45 basis points while the cost
of funds increased by 59 basis points. 2007 proved to be a tough year for the
interest margin due to increased competition for deposits as well as the flat
yield curve the Company has experienced the last couple of years. The cost of
funds increased due to the repricing of deposits at higher current rates and the
higher rates offered to attract new deposits. In addition, the flat and
sometimes inverted yield curve that existed for practically all of 2007 made it
difficult to increase rates on loans or find additional earnings in the bond
market by investing farther out on the yield curve. As such, cost for the short
term deposits increased more than the yield on our longer term interest bearing
assets.
During the first half of 2007 the growth of deposits outpaced the growth of
loans as we were seeking local deposits to offset some other funding utilized
during 2006. In the last half of 2007, loan growth exceeded deposit growth and
once again we utilized funding from the Federal Home Loan Bank (FHLB). While
this increased our interest expense, it also enabled the Company to mitigate
interest rate risk by matching liabilities to the maturity of assets and the
ability to offer customers longer term loan products.
Due to the falling interest rate environment, it is anticipated that the
interest margin may see an increase over the coming year as the faster repricing
liabilities mature and are re-priced prior to assets being re-priced. However,
changes in our asset mix and possible increase in competition for deposits could
have an impact on this.
NONINTEREST INCOME
Noninterest income consists of all revenues which are not included in
interest and fee income related to earning assets. Noninterest income increased
24.52% during 2007 as compared to 2006. A large part of this increase was due to
the non interest income being reduced in 2006 due to losses on sale of
investments as the Company restructured its bond portfolio. Subtracting the
losses incurred on sale of investments in 2006, the Company still had a 15.68%
increase in non interest income. The increase was primarily due to increases of
$34,000 in overdraft fees, and $113,000 increase in income generated by
originating fixed rate loans for the secondary market.
NONINTEREST EXPENSES
Noninterest expenses increased $413,000 in 2007 compared to 2006.
Noninterest expenses as a percentage of average assets was 2.91% and 2.83% for
each of the years ended December 31, 2007 and 2006, respectively. This increase
is primarily attributable to a $306,000 increase in salaries and benefits as a
result of an increase in the number of employees, merit increases, and higher
benefit costs. The average
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full time equivalent (FTE) employees increased from 57 for 2006, to 61 for 2007.
Salary expense increased by 12.77%, benefit costs increased by 8.67% and payroll
tax expense increased by 7.05%. Total noninterest expenses associated with the
new Harrisonburg financial center that opened in July of 2006 totaled $361,000
which was $148,000 more than 2006. Salary and benefits for the financial center
was $150,100 more than 2006 and occupancy expense for this branch increased
$35,000 from 2006.
INCOME TAX EXPENSE
Income tax expense equaled 28.05% and 29.42% of income before income taxes
for the years ended December, 31 2007 and 2006, respectively. Increases in tax
exempt interest income on municipal bonds and tax exempt loans and tax free
income on Bank Owned Life Insurance investment was the primary cause for the
reduction in income tax expense as a percentage of income.
SECURITIES
Schedules of securities by type and maturity are shown in Note 3 to the
financial statements.
LOANS
Total loans increased 9.31% during 2007 to $147,970,930. Loan growth in
2007 occurred primarily in the commercial loan portfolio and the residential
land portfolio. The commercial loans are typically secured by agricultural land.
A schedule of loans by type is shown in Note 4 of the financial statements.
Approximately 84% of the loan portfolio is secured by real estate at December
31, 2007.
LOAN PORTFOLIO RISK FACTORS
Nonperfoming 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. Loans accounted for on a nonaccrual basis were $9,403 at December
31, 2007. 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 (in thousands
of dollars):
Years ended December 31,
----------------------------------
2007 2006 2005 2004 2003
------ ---- ---- ---- ----
Nonaccrual loans $ 9 $104 $155 $429 $ 9
Restructured Loans 143 24 26 29 33
Loans delinquent 90 days
or more 969 206 646 388 877
------ ---- ---- ---- ----
Total nonperforming loans $1,121 $334 $827 $846 $919
====== ==== ==== ==== ====
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).
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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 decreased from $1,258,122 at December 31,
2006 to $1,185,826 at December 31, 2007. Net charge offs increased from $76,264
in 2006 to $259,413 in 2007. The provision for loan losses increased from
$162,323 in 2006 to $187,117 in 2007. 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.
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 primary source of funding is from local customer deposits.
The company offers standard bank deposit products to local individuals and
businesses. The Company also sought funding from brokered certificate of
deposits during 2006, due to intense competition for local deposits and loan
growth that needed to be funded. As of December 31, 2006 the Company had
$3,015,000 of brokered deposits but did not renew this funding source during
2007. The Company's deposits increased $7,770,278 or 5.20% during 2007 and
$12,367,923 or 9.03% during 2006. A schedule of deposits by type is shown in the
balance sheets. Time deposits of $100,000 or more were 17.04% and 17.06% of
total deposits at December 31, 2007 and 2006 respectively.
LONG-TERM DEBT
The Company has from time to time borrowed long term debt from the Federal
Home Loan Bank in order to fund long-term, fixed rate loan products to
qualifying customers. The Company made
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principal payments of $575,000 and $517,000 in 2007 and 2006, respectively. The
following table shows the FHLB debt as of December 31, 2007.
(Dollars in Thousands)
Interest Loan Term of Current
Loan Date Rate Amount Loan Balance
- --------- -------- ------ -------- -------
March 18, 2003 3.77% $1,000 10 years $ 572
June 18, 2003 3.15% $2,000 10 years $1,177
October 20, 2003 4.28% $1,000 10 years $ 635
June 8, 2005 4.58% $1,000 20 years $ 919
July 11, 2005 4.77% $1,000 20 years $ 923
March 22, 2006 5.40% $ 500 15 years $ 460
March 22, 2006 5.31% $ 500 5 years $ 340
July 11, 2007 5.57% $ 750 20 years $ 741
July 11, 2007 5.61% $ 750 20 years $ 750
December 17, 2007 4.22% $1,000 3 years $1,000
December 17, 2007 4.14% $1,000 2 years $1,000
------
Total FHLB Debt at December 31, 2007 $8,517
======
Maturity schedule and other information on this debt can be found in Note
10 to the financial statements.
CAPITAL
Capital as a percentage of total assets was 13.72% at December 31, 2007 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, 2007, the Company had liquid assets of approximately $3.1
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, 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 under established lines of credit of
$7.7 million.
The Company has relied on local deposits to fund loan growth in the past.
This has become more difficult and expensive in the current rate environment.
There is much competition for deposits locally and the bank has explored other
avenues of funding such as brokered certificates of deposits and Federal Home
Loan Bank borrowings. In the current interest rate environment it has been
difficult to earn the typical interest margin on the interest rate spread
between short term rates and long term rates, since there is very little
increase in interest rates on the longer term assets such as investments and
loans.
This interest rate environment has also changed the pattern of the banking
customers. Customers are wanting longer term adjustable rate mortgages and fixed
rate mortgages, as longer term rates remain low, yet on the deposit side they
are demanding short term deposit products since longer term deposit rates have
not increased as quickly as the short-term rates. As of this writing we see
indications of a
-12-
normalizing yield curve as short term rates drop. But should the flat yield
curve we have experienced during last couple of years continue into the future,
the Company could continue to experience pressure on its net interest margin.
TABLE I
ALLEGHENY BANCSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAX EQUIVALENT BASIS)
(IN THOUSANDS)
Year Ended Year Ended
December 31, 2007 December 31, 2006
-------------------------- --------------------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
-------- ------- ----- -------- ------- -----
Interest Income
Loans(1) $139,365 $11,665 8.37% $130,942 $10,250 7.83%
Federal funds sold 2,755 139 5.05% 1,893 99 5.22%
Interest bearing deposits
in banks 293 15 5.12% 290 14 4.83%
Investments
Taxable 16,189 778 4.81% 16,129 744 4.61%
Nontaxable(2) 18,390 1,082 5.88% 17,608 1,045 5.93%
-------- ------- ---- -------- ------- ----
Total Earning Assets $176,992 $13,679 7.73% $166,862 $12,152 7.28%
======== ------- ---- ======== ------- ----
Interest Expense
Demand deposits $ 15,691 $ 259 1.65% $ 17,899 $ 280 1.56%
Savings 33,340 861 2.58% 29,563 627 2.12%
Time deposits 84,524 3,896 4.61% 77,470 3,021 3.90%
Short-term borrowings 2,399 108 4.50% 2,805 117 4.17%
Long-term borrowings 6,111 270 4.41% 5,647 237 4.20%
-------- ------- ---- -------- ------- ----
Total Interest Bearing
Liabilities $142,065 5,394 3.80% $133,384 4,282 3.21%
======== ------- ======== -------
Net Interest Margin(1) $ 8,285 $ 7,870
======= =======
Net yield on interest
Earning assets 4.68% 4.72%
======= =======
(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 2007 and 2006 were $17,676 and $16,791,
respectively.
-13-
TABLE II
ALLEGHENY BANCSHARES, INC.
EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME
(ON A FULLY TAX EQUIVALENT BASIS)
(IN THOUSANDS)
2007 Compared to 2006 2006 Compared to 2005
Increase (Decrease) Increase (Decrease)
---------------------- ------------------------
Volume Rate Total Volume Rate Total
------ ---- ------ ------ ------ ------
Interest Income
Loans $660 $755 $1,415 $503 $ 912 $1,415
Federal funds sold 45 (5) 40 3 34 37
Interest bearing deposits
in banks -- 1 1 (1) 6 5
Investments
Taxable 3 31 34 50 86 136
Nontaxable 46 (9) 37 (43) 9 (34)
---- ---- ------ ---- ------ ------
Total Earning Assets $754 $773 $1,527 $512 $1,047 $1,559
==== ==== ====== ==== ====== ======
Interest Expense
Demand deposits $(34) $ 13 $ (21) $(12) $ 44 $ 32
Savings 80 154 234 22 302 324
Time deposits 275 600 875 178 804 982
Other borrowings 2 22 24 24 72 96
---- ---- ------ ---- ------ ------
Total interest bearing
liabilities 323 789 1,112 212 1,222 1,434
---- ---- ------ ---- ------ ------
Net Interest Income $431 $(16) $ 415 $300 $ (175) $ 125
==== ==== ====== ==== ====== ======
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.
-14-
TABLE III
ALLEGHENY BANCSHARES, INC.
INTEREST SENSITIVITY ANALYSIS
(IN THOUSANDS)
DECEMBER 31, 2007
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
-------- -------- -------- ------- --------
USES OF FUNDS:
Loans: $ 30,026 $ 31,564 $ 48,960 $37,421 $147,971
Interest bearing bank deposit 259 259
Investment securities 499 1,884 16,060 13,178 31,621
Federal funds sold 34 34
-------- -------- -------- ------- --------
Total Earning Assets 30,818 33,448 65,020 50,599 179,885
-------- -------- -------- ------- --------
SOURCES OF FUNDS:
Interest bearing
demand deposits 15,134 15,134
Savings deposits 33,040 33,040
Time deposits
$100,000 and over 5,684 13,988 7,103 26,775
Other time deposits 17,620 31,388 14,301 604 63,913
Other borrowings 1,867 461 4,505 3,401 10,234
-------- -------- -------- ------- --------
Total Interest Bearing
Liabilities 73,345 45,837 25,909 4005 149,096
-------- -------- -------- ------- --------
Discrete Gap (42,527) (12,389) 39,111 46,594 30789
Cumulative Gap (42,527) (54,916) (15,805) 30,789
Ratio of Cumulative Gap
to Total Earning Assets -23.64% -30.53% -8.79% 17.12% 17.12%
======== ======== ======== ======= ========
Rate Risk:
Loans with predetermined
rates $ 7,131 $ 13,754 $ 21,567 $35,740 $ 78,192
Loans with variable/
adjusted rates 22,895 17,810 27,393 1,681 69,779
Table III 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.
-15-
TABLE IV
ALLEGHENY BANCSHARES, INC.
LOAN LOSS ALLOWANCE ACTIVITY
(IN THOUSANDS)
2007 2006
------ ------
Beginning balance $1,258 $1,172
Provision charged to expense 187 162
Loan losses:
Commercial 142 0
Consumer 198 166
Real estate 9 3
------ ------
Total Loan Losses 349 169
------ ------
Recoveries:
Commercial 2 3
Consumer 86 90
Real estate 2 0
------ ------
Total Loan Recoveries 90 93
------ -----
Net Loan Losses 259 76
------ -----
Ending balance $1,186 $1,258
====== =====
Net loan losses as a percent
of average loans .19% .06%
Allowance as a percent of
year end loans .80% .93%
ANALYSIS OF ENDING BALANCE
December 31, 2007 December 31, 2006
-------------------------------- --------------------------------
Percent of Percent of Percent of Percent of
Amount Allowance Loans Amount Allowance Loans
------ ---------- ---------- ------ ---------- ----------
Commercial $ 340 28.67% 46.67% $ 641 50.95% 46.90%
Consumer 584 49.24% 7.92% 143 11.37% 8.27%
Real estate 262 22.09% 45.41% 472 37.52% 44.83%
Unallocated -- --% --% 2 .16% --%
------ ------ ------ ------ ------ ------
Total $1,186 100.00% 100.00% $1,258 100.00% 100.00%
====== ====== ====== ====== ====== ======
-16-
TABLE V
ALLEGHENY BANCSHARES, INC.
TIME DEPOSIT MATURITIES - OVER $100,000
(IN THOUSANDS)
2007 2006
------- -------
Maturity
Three months or less $ 5,684 $ 6,689
Over three to twelve months 13,988 12,797
Over one year to three years 6,261 4,847
Over three years 842 1,146
------- -------
Total $26,775 $25,479
======= =======
-17-
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm 19
Consolidated Balance Sheets for the years ended
December 31, 2007 and 2006 20
Consolidated Statements of Income for the years ended
December 31, 2007 and 2006 21
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2007 and 2006 22
Consolidated Statements of Cash Flows for the years ended
December 31, 2007 and 2006 23
Notes to Consolidated Financial Statements 24
-18-
(ELLIOTT DAVIS LOGO) 104 Cranberry Road
ACCOUNTS AND BUSINESS ADVISORS Post Office Box 760
Galax, VA 24333
Phone 276.238.1800
Fax 276.238.1801
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Allegheny Bancshares, Inc.
Franklin, West Virginia
We have audited the consolidated balance sheets of Allegheny Bancshares, Inc.
and subsidiary as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years in the period ended December 31, 2007. These consolidated 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
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Allegheny
Bancshares, Inc. and subsidiary as of December 31, 2007 and 2006 and the results
of its operations and its cash flows for each of the years then ended, in
conformity with U.S. generally accepted accounting principles.
/s/ Elliott Davis, LLC
Galax, Virginia
February 29, 2008
-19-
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
2007 2006
------------ ------------
ASSETS
Cash and due from banks (Note 2) $ 2,846,286 $ 2,174,186
Federal funds sold 34,000 3,601,000
Interest bearing deposits in banks 259,020 129,926
Investment securities available for sale (Note 3) 31,121,066 34,007,809
Investment securities held to maturity fair value of $501,000
and $490,000 in 2007 and 2006 (Note 3) 500,000 500,000
Restricted equity securities (Note 3) 1,667,004 967,277
Loans receivable, net of allowance for loan losses of
$1,185,826 in 2007 and $1,258,122 in 2006 (Note 4) 146,785,104 134,108,322
Bank premises and equipment, net (Note 5) 6,539,518 6,748,846
Interest receivable 1,224,855 1,307,971
Bank owned life insurance (Note 6) 3,518,386 --
Other assets 385,415 471,246
------------ ------------
Total Assets $194,880,654 $184,016,583
============ ============
LIABILITIES
Deposits
Noninterest bearing $ 18,249,818 $ 16,335,928
Interest bearing
Demand 15,133,535 16,917,934
Savings 33,040,474 32,765,040
Time deposit over $100,000 (Note 7) 26,775,155 25,479,182
Time deposits (Note 7) 63,913,065 57,843,685
------------ ------------
Total Deposits 157,112,047 149,341,769
Treasury tax and loan deposit note 305,567 277,571
Securities sold under agreements to repurchase (Note 8) 1,411,605 2,491,352
Accrued expenses and other liabilities 802,825 754,066
Long-term debt (Note 10) 8,517,265 5,592,095
------------ ------------
Total Liabilities 168,149,309 158,456,853
------------ ------------
Commitments and contingencies -- --
STOCKHOLDERS' EQUITY
Common stock - $1 par value, 2,000,000 shares
Authorized, 900,000 issued 900,000 900,000
Additional paid in capital 900,000 900,000
Retained earnings (Note 11) 25,836,201 24,595,943
Accumulated other comprehensive income (loss) 154,201 (60,150)
Treasury stock (at cost, 19,717 and 14,789 shares in 2007
and 2006, respectively) (1,059,057) (776,063)
------------ ------------
Total Stockholders' Equity 26,731,345 25,559,730
------------ ------------
Total Liabilities and Stockholders' Equity $194,880,654 $184,016,583
============ ============
The accompanying notes are an integral part of this statement.
-20-
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007, AND 2006
2007 2006
----------- -----------
INTEREST INCOME:
Loans, including fees $11,531,097 $10,250,264
Federal funds sold 138,751 98,676
Interest bearing deposits in banks 14,515 13,860
Investment securities - taxable 778,460 743,995
Investment securities - nontaxable 714,066 689,898
----------- -----------
Total Interest Income 13,176,889 11,796,693
----------- -----------
INTEREST EXPENSE:
Interest on deposits 5,017,002 3,928,030
Interest on borrowed money 378,259 353,690
----------- -----------
Total Interest Expense 5,395,261 4,281,720
----------- -----------
NET INTEREST INCOME 7,781,628 7,514,973
PROVISION FOR LOAN LOSSES (NOTE 4) 187,117 162,323
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,594,511 7,352,650
----------- -----------
NONINTEREST INCOME:
Service charges, fees and commissions 797,358 763,183
Increase in bank owned life insurance 18,386 --
Gain (Loss) on sale of investment securities -- (78,635)
Other operating income 466,568 345,282
----------- -----------
Total Noninterest Income 1,282,312 1,029,830
----------- -----------
NONINTEREST EXPENSES:
Salaries and benefits 2,902,523 2,596,942
Occupancy expense 362,373 322,980
Equipment expense 632,142 646,455
Director's fees 175,675 184,310
Other expenses 1,367,699 1,276,308
----------- -----------
Total Noninterest Expenses 5,440,412 5,026,995
----------- -----------
INCOME BEFORE INCOME TAXES 3,436,411 3,355,485
INCOME TAX EXPENSE (NOTE 12) 963,757 987,311
----------- -----------
NET INCOME $ 2,472,654 $ 2,368,174
=========== ===========
Net income per share $ 2.80 $ 2.65
=========== ===========
Cash dividends paid per share $ 1.40 $ 1.30
=========== ===========
Average Weighted Shares Outstanding 881,858 893,693
=========== ===========
The accompanying notes are an integral part of this statement.
-21-
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Total Stock Capital Earnings Income(Loss) Stock
----------- -------- ---------- ----------- ------------- -----------
BALANCE, DECEMBER 31,
2005 $24,863,806 $900,000 $900,000 $23,388,879 $(116,768) $ (208,305)
Comprehensive Income
Net income 2,368,174 2,368,174
Change in unrealized
gain on available for
sale securities, net
of taxes of $2,433 4,723 4,723
Reclassification adjustment
net of taxes $26,740 51,895 51,895
-----------
Total Comprehensive
Income 2,424,792
Purchase of treasury
stock (567,758) (567,758)
Dividends paid (1,161,110) (1,161,110)
----------- -------- -------- ----------- --------- -----------
BALANCE, DECEMBER 31,
2006 25,559,730 900,000 900,000 24,595,943 (60,150) (776,063)
Comprehensive Income
Net income 2,472,654 2,472,654
Change in unrealized
gain on available for
sale securities, net of
taxes of $107,036 214,351 214,351
-----------
Total Comprehensive
Income 2,687,005
Purchase of treasury
stock (282,994) (282,994)
Dividends paid (1,232,396) (1,232,396)
----------- -------- -------- ------------ --------- -----------
BALANCE, DECEMBER 31,
2007 $26,731,345 $900,000 $900,000 $25,836,201 $ 154,201 $(1,059,057)
=========== ======== ======== =========== ========= ===========
The accompanying notes are an integral part of this statement.
-22-
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
------------ ------------
OPERATING ACTIVITIES
Net income $ 2,472,654 $ 2,368,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 187,117 162,323
Depreciation and amortization 502,491 491,547
Loss (Gain) on security transactions -- 78,635
Net amortization of securities 17,719 23,986
Gain on sale of equipment (32) (7,195)
Deferred income (tax) benefit 24,162 (36,291)
Increase in bank owned life insurance (18,386) --
Net change in:
Interest receivable 83,115 (254,675)
Other assets (48,145) (80,431)
Accrued expense and other liabilities 48,759 180,001
------------ ------------
Net Cash Provided by Operating Activities 3,269,454 2,926,074
------------ ------------
INVESTING ACTIVITIES
Net change in federal funds sold 3,567,000 (2,060,000)
Net change in interest bearing deposits in banks (129,094) 374,691
Proceeds from sales, calls and maturities of
available for sale securities 5,486,356 9,165,255
Purchase of available for sale securities (2,295,944) (9,734,864)
Net increase in restricted investments (699,727) (452,177)
Proceeds from sale of equipment 32 23,020
Purchase of life insurance (3,500,000) --
Purchase of bank premises and equipment (290,385) (1,204,615)
Net change in loans (12,863,899) (9,837,719)
------------ ------------
Net Cash Used in Investing Activities (10,725,661) (13,726,409)
------------ ------------
FINANCING ACTIVITIES
Net change in:
Demand and savings deposits 404,925 946,086
Time deposits 7,365,353 11,421,838
Treasury tax and loan deposit note 27,996 22,003
Securities sold under agreements to repurchase (1,079,747) (1,008,208)
Proceeds from long-term debt 3,500,000 1,000,000
Curtailments of long-term debt (574,830) (516,621)
Purchase of treasury stock (282,994) (567,758)
Cash dividends paid (1,232,396) (1,161,110)
------------ ------------
Net Cash Provided by Financing Activities 8,128,307 10,092,224
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
DUE FROM BANKS 672,100 (708,111)
Cash and due from banks, January 1 2,174,186 2,882,297
------------ ------------
Cash and due from banks, December 31 $ 2,846,286 $ 2,174,186
============ ============
Supplemental Disclosure of Cash Paid During the
Year for:
Interest $ 5,425,494 $ 4,157,851
Income taxes 998,000 1,030,000
The accompanying notes are an integral part of this statement.
-23-
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 Community 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. 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's primary trade area includes the West Virginia localities of
Pendleton, Grant, Hardy and Pocahontas counties including the towns of Franklin,
Marlinton, Moorefield, and Petersburg. In addition the Bank has opened an office
in Rockingham County, Virginia just outside the City of Harrisonburg.
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 Community Bank. All significant intercompany
balances and transactions have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowances for loan and foreclosed real
estate losses, management obtains independent appraisals for significant
properties.
While management uses available information to recognize loan losses, future
additions to the allowance may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as a part of their routine
examination process, periodically review the Company's allowances for loan
losses. Such agencies may require the Company to recognize additions to the
allowances based on their judgments about information available to them at the
time of their examinations. Because of these factors, it is reasonably possible
that the allowances for loan losses may change materially in the near term.
CASH AND DUE FROM BANKS - Cash and due from banks as used in the balance sheet
and cash flow statements is defined as cash on hand and noninterest bearing
funds at correspondent institutions.
INVESTMENT SECURITIES -Securities that the Company has both the ability and
complete intention to hold to maturity (at the time of purchase) are classified
as held to maturity securities. These held to maturity securities are recorded
at amortized cost value. Investment securities which the Company intends to hold
for indefinite periods of time, including investment securities used as part of
the Company's
-24-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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.
Interest and dividends on securities and amortization of premiums and accretion
of discounts on securities are reported as interest income using the effective
interest method. Gains and losses on the sale of investment securities are
determined using the specific identification method.
LOANS - Loans 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
effective interest method which generally result in level rates of return on
principal. Interest income generally is not recognized on loans classified as
nonaccrual loans. 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. Loans will remain
in nonaccrual status unless the loans are brought current per the loan contract
and financial conditions have improved to a point that the likelihood of further
loss is remote.
Loan origination fees are recognized in the period the loan is made and costs of
origination are expensed in the period that the costs are incurred. This is a
deviation from generally accepted accounting principals (GAAP) that indicate
that these fees and costs should be capitalized and recognized as an adjustment
to yield of the related loan. The Company has calculated this costs and the
amount of it's deviation from GAAP, and has determined that there is not a
significant impact on the financial statements.
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.
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
17 for lending commitments as of December 31, 2007 and 2006.
The accrual of interest on all loans is discontinued when in management's
opinion the borrower may be unable to meet payments as they become due. These
loans are considered nonaccrual loans, and 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.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries). Loans are
charged against the allowance when management believes the financial condition
of the borrower is at a point that the payments on the loan can not be expected
through any of the any of the available repayment options. Subsequent recoveries
are added back to the allowance.
-25-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Management's quarterly 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. 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) Statement of Financial Accounting Standards (SFAS) No. 5
Accounting for Contingencies and SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The Bank 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. These pools
are based on grade of loans as determined by the Company's internal grading
system, and the type of loan. 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.
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 principally on a straight-line method. For
buildings and improvements the estimated useful lives are between 10 and 50
years, the estimated lives for furniture and equipment are 5 to 10 years.
INCOME TAXES - Amounts shown as income tax expense are based on income reported
on the financial statements rather than amounts currently payable under state
and federal tax laws. Deferred taxes, which arise principally from the
difference in timing of reporting certain income and expenses for financial
statements and for reporting these items for computation of income for tax
purposes, are included in the amounts reported as income taxes. Deferred income
tax assets and liabilities arise from these timing differences.
BASIC EARNINGS PER SHARE - Basic earnings per share is calculated by dividing
income available to common shareholders by the weighted average number of common
shares outstanding during the period.
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.
RECENT ACCOUNTING PRONOUNCEMENTS -In February 2007, the Financial Accounting
Standards Board (FASB) issued Financial Accounting Standard (FAS) No. 159 ("FAS
159"), "The Fair Value Option for Financial Assets and Financial Liabilities,
including an amendment of FASB Statement
-26-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
No. 115." FAS 159 allows entities to irrevocably elect fair value as the initial
and subsequent measurement attribute for certain financial assets and financial
liabilities that are not otherwise required to be measured at fair value, with
changes in fair value recognized in earnings as they occur. FAS 159 also
requires entities to report those financial assets and financial liabilities
measure at fair value in a manner that separates those reported fair values from
the carrying amounts of similar assets and liabilities measured using another
measurement attribute on the face of the statement of financial position.
Lastly, FAS 159 establishes presentation and disclosure requirements designed to
improve comparability between entities that elect different measurement
attributes for similar assets and liabilities. FAS 159 is effective for fiscal
years beginning after November 15, 2007, with early adoption permitted if an
entity also early adopts the provisions of FAS 157. The Company has determined
that it does not intend to elect to use the fair value option to value financial
assets and liabilities in accordance with FAS 159.
In December 2007, the FASB issues FAS No. 141R, "Business Combinations" ("FAS
141R"), which establishes principles and requirements for the reporting entity
in a business combination, including recognition and measurement in the
financial statements of the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. This statement also
establishes disclosure requirements to enable financial statement users to
evaluate the nature and financial effects of the business combination. FAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after fiscal years beginning after December 15, 2008. FAS 141R will become
effective for our fiscal year beginning January 1, 2009. We are currently
evaluating the effect that the adoption of FAS 141R will have on our
consolidated financial statements.
NOTE 2 CASH AND DUE FROM BANKS:
The Company is required by the Federal Reserve to maintain reserve balance based
upon a percentage of deposits. The Company meets this requirement through cash
on hand and balances held with its correspondent bank. The reserve requirement
at December 31, 2006 and 2007 were $773,000 and $807,000 respectively.
-27-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 SECURITIES:
The amortized cost and fair values of securities are as follows:
Gross Unrealized
Amortized ---------------- Fair
(In Thousands) Cost Gains Losses Value
--------- ----- ------ -------
December 31, 2007
Securities Available-for-Sale
Mortgaged-backed obligations
of federal agencies $ 2,984 $ 11 $ 34 $ 2,961
Government sponsored
enterprises 9,489 90 -- 9,579
Obligations of states and
political subdivisions 18,282 203 35 18,450
Other equities 131 -- -- 131
------- ---- ---- -------
$30,886 $304 $ 69 $31,121
======= ==== ==== =======
Securities Held-to-Maturity
Government sponsored
enterprises $ 500 $ 1 $ -- $ 501
======= ==== ==== =======
December 31, 2006
Securities Available-for-Sale
Mortgaged-backed obligations
of federal agencies $ 3,667 $ 5 $ 96 $ 3,576
Government sponsored
enterprises 11,730 4 63 11,671
Obligations of states and
political subdivisions 18,599 153 91 18,661
Other equity securities 100 -- -- 100
------- ---- ---- -------
$34,096 $162 $415 $34,008
======= ==== ==== =======
Securities Held-to-Maturity
Government sponsored
enterprises $ 500 $ -- $ 10 $ 490
======= ==== ==== =======
-28-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 SECURITIES (CONTINUED):
For the years ended December 31, 2007, and 2006, proceeds from sales, calls and
maturities of securities available for sale amounted to $4,810,000 and
$9,165,255, respectively. Gross realized losses amounted to $78,635 in 2006. No
gains or losses were realized in 2007.
The following table shows the gross unrealized losses and fair value of the
Company's investments with unrealized losses that are not deemed to be
other-than temporarily impaired (in thousands), aggregated by investment
category and length of time that individual securities have been in a
continuous, unrealized loss position at December 31, 2007 and 2006. The
unrealized losses on the Company's investments were caused by interest rate
increases in the current interest rates of similar issues and no material
impairment of value is due to deteriorating financial condition of the issuers.
The contractual terms of those investments do not permit the issuer to settle
the securities at a price less than the amortized cost of the investment.
Because the Company has the ability and intent to hold those investments until a
recovery of fair value, which may be maturity, the Company does not consider
those 16 investments to be other-than-temporary impaired at December 31, 2007.
LESS THAN 12 MONTHS 12 MONTHS OR GREATER
------------------- -------------------- TOTAL
Fair Unrealized Fair Unrealized Fair
Value Losses Value Losses Value
------ ---------- ------ ---------- ------
DESCRIPTION OF SECURITIES
Mortgage-backed obligations of
federal agencies $ 0 $0 $2,537 $34 $2,536
Obligations of states and
political subdivisions 2,150 4 1,855 31 4,005
------ --- ------ --- ------
Total $2,150 $4 $4,891 $65 $7,041
====== === ====== === ======
A maturity schedule of securities in thousands as of December 31, 2007, by
contractual maturity is shown below. Actual maturities may differ because
borrowers may have the right to call or prepay obligations.
WEIGHTED
AMORTIZED FAIR AVERAGE
DUE COST VALUE YIELD
- --- --------- ------- --------
Securities Available-for-Sale
In one year or less $ 2,374 $ 2,384 5.54%
After one year through five years 15,859 16,060 5.27%
After five years through ten years 10,631 10,646 5.10%
After ten years through fifteen years 2,022 2,031 5.28%
------- ------- ----
$30,886 $31,121 5.24%
======= ======= ====
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 $15,138,622 and
$15,727,683 at December 31, 2007 and 2006, 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%.
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.
-29-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 LOANS RECEIVABLE:
Loans receivable outstanding are summarized as follows:
December 31
-------------------
2007 2006
-------- --------
(In Thousands)
Loans secured by deeds of trust on real estate
Construction and land development $ 15,925 $ 14,231
Agribusiness 13,892 14,592
1-4 family residential properties 60,646 55,816
Multi family (5 or more) residential properties 211 269
Non-farm non-residential properties 24,152 22,202
Loans to finance agricultural production and other loans to farmers 3,790 4,136
Commercial and industrial loans 12,646 8,592
Personal installment loans 11,699 11,255
All other loans 5,010 4,273
-------- --------
Subtotal 147,971 135,366
Less Allowance for loan losses 1,186 1,258
-------- --------
Loans Receivable $146,785 $134,108
======== ========
A summary of transactions in the allowance for loan losses follows in thousands:
2007 2006
------ ------
Balance at Beginning of Year $1,258 $1,172
Provision charged to operating expense 187 162
Loan recoveries 90 93
Loan charge-offs (349) (169)
------ ------
Balance at End of Year $1,186 $1,258
====== ======
The following is a summary of information pertaining to impaired loans at
December 31, in thousands:
2007 2006
------ ------
Total Impaired Loans (All with a valuation allowance) $1,208 $1,210
====== ======
Valuation allowance related to impaired loans $ 265 $ 282
====== ======
The average annual recorded investment in impaired loans and interest income
recognized on impaired loans in thousands for the years ended December 31, 2007
and 2006 is summarized below:
2007 2006
------ ------
Average investment in impaired loans $1,080 $1,450
====== ======
Interest income recognized on impaired loans $ 77 $ 92
====== ======
No additional funds are committed to be advanced in connection with impaired
loans.
Loans accounted for on a nonaccrual basis were $9,403 and $104,084 at December
31, 2007 and 2006 (.01% and .08% of total loans), respectively. Accruing loans
which are contractually past due
-30-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 LOANS RECEIVABLE (CONTINUED):
90 days or more as to principal or interest totaled $968,588 and $205,679 at
December 31, 2007 and 2006 (.65%, and .15% of total loans), respectively. Past
due status is determined based on the contractual terms of the loan agreement.
Foreclosed and repossessed assets totaled $45,300 and $69,525 at December 31,
2007 and 2006 respectively.
NOTE 5 COMPANY PREMISES AND EQUIPMENT:
Company premises and equipment are summarized as follows:
December 31
----------------
2007 2006
------- ------
(In Thousands)
Company buildings and improvements $ 6,072 $5,935
Furniture and equipment 4,040 4,045
------- ------
10,112 9,980
Less accumulated depreciation 3,572 3,231
------- ------
Company Premises and Equipment $ 6,540 $6,749
======= ======
Depreciation expense on these premises and equipment totaled $499,713 and
$488,769 for the years ended December 31, 2007, and 2006 respectively.
NOTE 6 BANK OWNED LIFE INSURANCE:
The Company, in an effort to attract and retain employees, offers a variety of
benefits to full time employees. The costs of these benefits continue to grow
faster than inflation. In order to offset some of these costs and to offer other
benefits the Company has invested in a Bank Owned Life Insurance (BOLI)
contract. Earnings on these contracts are tax exempt, and are very attractive in
comparison with other long-term investments.
NOTE 7 TIME DEPOSITS:
At December 31, 2007, the scheduled maturities of time deposits in thousands are
as follows:
2008 $ 66,461
2009 15,260
2010 3,799
2011 1,477
2012 3,087
Thereafter 604
--------
Total $ 90,688
========
Deposits more than $100,000 (26,775)
--------
Other Time Deposits $ 63,913
========
-31-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 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 two years. 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. The weighted average interest rate on these
agreements was 4.50% during 2007. The highest month end balance during 2007 was
$2,455,082. For 2006, the highest month end balance was $3,339,304 and the
average interest rate was 4.03%.
NOTE 9 LINES OF CREDIT:
The Company has lines of credit with Silverton Bank totaling $7,700,000. As of
December 31, 2007, the Company had no outstanding debt on this line. The Line of
Credit is unsecured. These borrowings will carry interest at prevailing federal
funds rates when and if funds are borrowed.
NOTE 10 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, 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 4.59% at December 31,
2007. The company has total borrowing capacity from the FHLB of $82,648,000.
Repayments of long term debt are due monthly. Interest expense of $270,015 and
$236,954 was incurred on these debts in 2007 and 2006, respectively. The
maturities of long term debt as of December 31, 2007 are as follows:
(In Thousands)
2008 $ 611
2009 1,637
2010 1,664
2011 605
2012 600
Thereafter 3,400
------
Total $8,517
======
NOTE 11 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, 2008, the Bank could pay dividends of up to $473,833 without
permission of the authorities.
-32-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 INCOME TAXES:
The current and deferred components of income tax expense in thousands are as
follows:
2007 2006
---- ------
Current component of income tax expense $947 $1,015
Net increase (decrease) resulting from deferred income taxes 17 (28)
---- ------
Income Tax Expense $964 $ 987
==== ======
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:
2007 2006
------ ------
(In Thousands)
Income taxes computed at the applicable Federal income tax rate $1,168 $1,141
Increase (decrease) resulting from:
Tax exempt interest income (337) (301)
Non-deductible interest expense 45 37
State tax expense, net of federal tax 119 122
Prior year income tax refund (29)
Other (2) (12)
------ ------
Income Tax Expense $ 964 $ 987
====== ======
The net deferred tax asset arising from temporary differences in thousands as of
December 31 is summarized as follows:
2007 2006
---- ----
Deferred Tax Asset:
Provision for loan losses $365 $336
Unrealized loss on securities available for sale -- 27
Interest on nonaccrual loans -- 4
---- ----
Total Assets 365 367
---- ----
Deferred Tax Liabilities:
Unrealized gain on securities available for sale 80 0
Depreciation 321 280
Other 14 13
---- ----
Total Liabilities 415 293
---- ----
Net Deferred Tax Asset (Liability) $(50) $ 74
==== ====
NOTE 13 EMPLOYEE BENEFITS:
The Company has a defined contribution plan with 401(k) provisions that is
funded with discretionary contributions by the bank that covers substantially
all full time employees at each bank. There is a one year waiting period prior
to admission into the plan. Contributions to the plan
-33-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 13 EMPLOYEE BENEFITS (CONTINUED):
are based on a percentage of each employee's salary plus matching contributions.
Investment of employee balances is done through the direction of each employee.
Plan contributions by the employer are fully invested in the year of
contribution. The amount of contributions by the Company into employee's
accounts in the plan were: $104,148 and $90,946 for years ending December 31,
2007 and 2006 respectively.
NOTE 14 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:
2007 2006
---- -----
(In Thousands)
Beginning of Year $541 $ 663
Additional borrowings 61 72
Repayments (81) (194)
---- -----
End of Year $521 $ 541
==== =====
NOTE 15 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 and Bank 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 3, 2007, the most recent notification from the 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.
-34-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 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, 2007:
Total Capital (to Risk Weighted Assets) $27,763 19.84% $11,195 > or = 8% $13,993 > or = 10%
Tier I Capital (to Risk Weighted Assets) 26,577 18.99% 5,597 > or = 4% 8,396 > or = 6%
Tier I Capital (to Average Assets) 26,577 13.73% 7,743 > or = 4% 9,679 > or = 5%
As of December 31, 2006:
Total Capital (to Risk Weighted Assets) $26,758 21.5% $ 9,946 > or = 8% $12,433 > or = 10%
Tier I Capital (to Risk Weighted Assets) 25,500 20.5% 4,973 > or = 4% 7,460 > or = 6%
Tier I Capital (to Average Assets) 25,500 13.6% 7,357 > or = 4% 9,196 > or = 5%
The amounts and ratios above are for the consolidated entity. The differences
for the subsidiary Bank individually are not significant.
NOTE 16 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK:
The Company make commitments to extend credit in the normal course of business
and issue standby letters of credit to meet the financing needs of their
customers. The amount of the commitments represents the Company's exposure to
credit loss that is not included in the balance sheet.
The Company use the same credit policies in making commitments and issuing
letters of credit as used for the loans reflected in the balance sheet.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Banks evaluate each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Banks upon the extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment,
commercial and residential real estate.
As of December 31, 2007 and 2006, the Company had outstanding the following
commitments (in thousands of dollars):
2007 2006
------- -------
Home equity lines of credit $ 4,552 $ 4,099
Commitments to fund commercial real estate and construction 3,385 3,079
Other unused commitments 12,059 12,266
Other unused commitments 791 637
------- -------
$20,787 $20,081
======= =======
-35-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 17 CONCENTRATIONS:
The Bank operates as a community bank in the areas that it serves. As such the
loan portfolio consists of commercial, residential real estate and consumer
loans located to individuals and businesses located primarily in the areas
surrounding our four offices. In addition the collateral for our loans is
secured primarily by real estate and personal property located in this same
area.
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 $7,196,301 at December 31, 2007 and
$8,215,000 at December 31, 2006. The majority of these loans are collateralized
by deeds of trust on real estate. Farmers Home Administration (FHA) guarantees
cover ninety percent of the loan balance on $1,429,646 of these loans at
December 31, 2007 and $2,329,000 at December 31, 2006.
Demand deposit accounts that are overdrawn, have been reclassified as a loan
since they represent an amount owed to the bank. The amount of overdrawn
accounts included in the loan balance is $238,191 and $125,470 at December 31,
2007 and 2006, respectively.
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
CASH AND SHORT-TERM DEPOSITS
For those short-term instruments, which includes interest bearing deposits and
fed funds sold the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES
For securities, fair value equals quoted market prices, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
RESTRICTED INVESTMENTS
The carrying value of restricted investments is a reasonable estimate of its
fair value.
LOANS
The fair value of loans is estimated by discounting the future cash flows using
the current offering rates for similar loans to borrowers with similar credit
ratings and for the same remaining maturities.
DEPOSITS
For demand, interest checking, regular savings, money market and any other
account payable on demand with no penalty the fair value is the carrying value.
The fair value of certificates of deposits is estimated using the rates
currently offered for deposits of similar remaining maturities.
SHORT TERM BORROWINGS AND INTEREST PAYABLE OR RECEIVABLE:
Due to the short-term nature of these accounts the carrying value is estimated
to be the same as the carrying value.
LONG-TERM DEBT
The fair value of long term debt is estimated using the rates currently offered
by the Federal Home Loan Bank for indebtedness with similar maturities.
-36-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
OFF -BALANCE SHEET ITEMS
Letters of credit, lines of credit, and loan commitments are deemed to be at
face value.
December 31, 2007 December 31, 2006
------------------- -------------------
Fair Carrying Fair Carrying
Value Value Value Value
-------- -------- -------- --------
(In Thousands) (In Thousands)
Cash and due from banks $ 2,846 $ 2,846 $ 2,174 $ 2,174
Interest bearing deposits in banks 259 259 130 130
Federal funds sold 34 34 3,601 3,601
Securities available for sale 31,121 31,121 34,008 34,008
Securities held to maturity 501 500 490 500
Restricted investments 1,667 1,667 967 967
Loans 147,088 146,785 132,078 134,108
Interest receivable 1,225 1,225 1,308 1,308
Bank owned life insurance 3,518 3,518
Demand deposits 33,383 33,383 33,254 33,254
Savings deposits 33,040 33,040 32,765 32,765
Time deposits 91,078 90,688 83,063 83,323
Short-term borrowings 1,717 1,717 2,770 2,769
Accrued interest payable 378 378 292 292
Long-term debt 8,486 8,517 5,025 5,592
The contract or notional amount of financial instruments with off-balance sheet
risk is as follows:
2007 2006
------- -------
Home equity lines of credit $ 4,552 $ 4,099
Commitments to fund commercial real estate and construction 3,385 3,079
Other unused commitments 12,059 12,266
Other unused commitments 791 637
------- -------
$20,787 $20,081
======= =======
-37-
NOTE 19 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
December 31, December 31,
2007 2006
------------ ------------
ASSETS
Cash $ 628 $ 4,889
Investment in subsidiary 25,620,884 25,088,296
Investment Securities 1,076,424 452,297
Due from subsidiary 8,495
Other assets 24,914 18,889
----------- -----------
TOTAL ASSETS $26,731,345 $25,564,371
=========== ===========
LIABILITIES
Due to subsidiary $ -- $ 4,641
----------- -----------
TOTAL LIABILITIES -- 4,641
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
2,000,000 shares authorized, 900,000
shares issued in 2007
and 2006, respectively 900,000 900,000
Additional paid in capital 900,000 900,000
Retained earnings 25,836,201 24,595,944
Accumulated other comprehensive (loss) 154,201 (60,151)
Less treasury stock (at cost, 19,367 and 14,789
shares in 2007 and 2006, respectively) (1,059,057) (776,063)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 26,731,345 25,559,730
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,731,345 $25,564,371
=========== ===========
-38-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 19 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
---------- ----------
INCOME:
Dividends from subsidiary $2,172,396 $2,196,109
Income from securities 6,595 4,198
---------- ----------
Total Income 2,178,991 2,200,307
---------- ----------
EXPENSES:
Professional fees 7,110 18,083
Annual shareholder meeting 20,129 15,748
Amortization 2,778 2,778
Other expenses 8,140 7,863
---------- ----------
Total Expenses 38,157 44,472
---------- ----------
INCOME BEFORE UNDISTRIBUTED
INCOME OF SUBSIDIARY 2,140,834 2,155,835
Income tax benefit 13,584 16,110
UNDISTRIBUTED INCOME OF
SUBSIDIARY 318,236 196,229
---------- ----------
NET INCOME $2,472,654 $2,368,174
========== ==========
-39-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 19 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006
2007 2006
----------- -----------
OPERATING ACTIVITIES
Net income $ 2,472,654 $ 2,368,174
Adjustments:
Undistributed subsidiary income (318,236) (196,229)
Increase (decrease) in other liabilities (4,641) 4,641
(Increase) decrease in other assets (14,520) 7,242
----------- -----------
Net Cash Provided by Operating Activities 2,135,257 2,183,828
----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities (624,127) (452,297)
----------- -----------
Net Cash Used by Investing Activities (624,127) (452,297)
----------- -----------
FINANCING ACTIVITIES
Purchase of treasury stock (282,994) (567,758)
Cash dividends paid (1,232,397) (1,161,109)
----------- -----------
Net Cash Used by Financing Activities (1,515,391) (1,728,867)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (4,261) 2,664
Cash and Cash Equivalents, January 1 4,889 2,225
----------- -----------
Cash and Cash Equivalents, December 31 $ 628 $ 4,889
=========== ===========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9A(T). CONTROLS AND PROCEDURES
The management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. The internal control process
has been designed under our supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of the
Company's financial statements for external reporting purposes in accordance
with accounting principles generally accepted in the United States of America.
Management has conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007, utilizing the
framework established by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, management has determined
that the Company's internal controls over financial reporting as of December 31,
2007 are effective.
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.
This Annual Report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in the Annual Report.
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.
ITEM 9B. OTHER INFORMATION - NONE
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Information regarding directors, executive officers and the audit committee
financial expert is Incorporated by reference from the Company's definitive
proxy statement for the Company's 2008 Annual Meeting of Shareholders. To be
held April 14th, 2008 ("Proxy Statement"), under caption "Election of
Directors."
Information on Section 16(a) beneficial ownership reporting compliance for the
directors and executive officers of the Company is incorporated by reference
from the Proxy Statement under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance."
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ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference from the Proxy Statement under the
caption "Executive Compensation and other Information."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information incorporated by reference from the Proxy Statement under the
caption "Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information incorporated by reference from the Proxy Statement under the
caption "Certain Transactions with Directors and Officers and Their Associates."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information incorporated by reference from the Proxy Statement under the
caption "Auditors."
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A)(1) FINANCIAL STATEMENTS
Reference is made to Part II, Item 8 of the Annual Report on Form 10-K
(A)(2) FINANCIAL STATEMENT SCHEDULES
All schedules are omitted since they are not required, are not
applicable, or the required information is shown on the consolidated
financial statements or related notes.
(A)(3) EXHIBITS
The following Exhibits are attached.
No. Description
- ---- -----------
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following Exhibits are incorporated by reference to the Exhibits to
Allegheny Bancshares, Inc. Form 10-K filed March 31, 2007.
10.1 Employment Agreement with William A. Loving, Jr. with modification
10.2 Executive Severance Agreement with William A. Loving, Jr. with
modification
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The following Exhibits are incorporated by reference to the Exhibits to
Allegheny Bancshares, Inc. Form 10-K filed March 31, 2006.
No. Description
- ---- -----------
3.3 By-Laws of Allegheny Bancshares, Inc.
The following Exhibits are incorporated by reference to the Exhibits to
Allegheny Bancshares, Inc. Form 10-KSB filed March 26, 2004.
No. Description
- ---- -----------
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
- ---- -----------
3.1 Articles of Incorporation - Allegheny Bancshares, Inc.
4.1 Specimen Common Stock Certificate of Allegheny Bancshares, Inc.
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: WILLIAM A. LOVING, JR.
------------------------------------
William A. Loving, Jr.
Executive Vice-President and
Chief Executive Officer
Date: March 9, 2008
By: L. KIRK BILLINGSLEY
------------------------------------
L. Kirk Billingsley
Chief Financial Officer
Date: March 9, 2008
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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 Director March 9, 2008
- -------------------------------
Thomas J. Bowman
/s/ Roger D. Champ Director March 9, 2008
- -------------------------------
Roger D. Champ
/s/John E. Glover Vice Chairman of the Board March 9, 2008
- ------------------------------- Director
John E. Glover
/s/ Carole H. Hartman Secretary March 9, 2008
- ------------------------------- Director
Carole H. Hartman
/s/ Richard W. Homan Director March 9, 2008
- -------------------------------
Richard W. Homan
/s/ Jerry D. Moore Chairman of the Board March 9, 2008
- ------------------------------- Director
Jerry D. Moore
/s/ Richard C. Phares Director March 9, 2008
- -------------------------------
Richard C. Phares
/s/ William A. Loving, Jr. Director March 9, 2008
- -------------------------------
William A. Loving, Jr.
/s/ Dolan Irvine Director March 9, 2008
- -------------------------------
Dolan Irvine
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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
Date: March 9, 2008
By: /s/ L. Kirk Billingsley
------------------------------------
L. Kirk Billingsley
Chief Financial Officer
Date: March 9, 2008
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 Director March 9, 2008
- -------------------------------
Thomas J. Bowman
/s/ Roger D. Champ Director March 9, 2008
- -------------------------------
Roger D. Champ
/s/ John E. Glover Director March 9, 2008
- -------------------------------
John E. Glover
/s/ Carole H. Hartman Director March 9, 2008
- ------------------------------- Secretary
Carole H. Hartman
/s/ Richard W. Homan Director March 9, 2008
- -------------------------------
Richard W. Homan
/s/ Jerry D. Moore Chairman of the Board March 9, 2008
- ------------------------------- Director
Jerry D. Moore
/s/ Richard C. Phares Director March 9, 2008
- -------------------------------
Richard C. Phares
/s/ William A. Loving, Jr. Director March 9, 2008
- -------------------------------
William A. Loving, Jr.
/s/ Dolan Irvine Director March 9, 2008
- -------------------------------
Dolan Irvine
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