SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarterly Period Ended June 30, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 000-50151
ALLEGHENY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
West Virginia 22-3888163
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 North Main Street
P. O. Box 487
Franklin, West Virginia 26807
(Address of principal executive offices, including zip code)
(304) 358-2311
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Common Stock, par value - $1.00
879,833 shares outstanding as of August 8, 2008
ALLEGHENY BANCSHARES, INC.
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 2
Unaudited Consolidated Statements of Income - Six Months
ended June 30, 2008 and 2007 2
Unaudited Consolidated Statements of Income - Three Months
ended June 30, 2008 and 2007 3
Consolidated Balance Sheets - June 30, 2008 (Unaudited) and
December 31, 2007 (Audited) 4
Unaudited Consolidated Statements of Changes in
Stockholders' Equity - Six Months Ended June 30, 2008 and
2007 5
Unaudited Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2008 and 2007 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4T. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 1.A. Risk Factors 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8K 18
SIGNATURES 19
CERTIFICATIONS 20
PART I. FINANCIAL INFORMATION Page 2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
SIX MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2008 2007
-------- --------
INTEREST AND DIVIDEND INCOME:
Loans and fees $ 5,686 $ 5,555
Investment securities - taxable 259 391
Investment securities - nontaxable 343 359
Deposits and federal funds sold 128 81
-------- --------
Total Interest and Dividend Income 6,416 6,386
-------- --------
INTEREST EXPENSE:
Deposits 2,416 2,442
Borrowings 195 171
-------- --------
Total Interest Expense 2,611 2,613
-------- --------
NET INTEREST INCOME 3,805 3,773
PROVISION FOR LOAN LOSSES 135 90
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,670 3,683
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 412 359
Other income 323 231
-------- --------
Total Noninterest Income 735 590
-------- --------
NONINTEREST EXPENSE:
Salaries and benefits 1,447 1,435
Occupancy expenses 189 179
Equipment expenses 302 313
Other expenses 765 729
-------- --------
Total Noninterest Expenses 2,703 2,656
-------- --------
Income Before Income Taxes 1,702 1,617
INCOME TAX EXPENSE 465 442
-------- --------
NET INCOME $ 1,237 $ 1,175
======== ========
EARNINGS PER SHARE
Net income $ 1.41 $ 1.33
======== ========
Weighted Average Shares Outstanding 880,118 882,967
======== ========
The accompanying notes are an integral part of these statements.
Page 3
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except for share and per share information)
(Unaudited)
THREE MONTHS ENDED
-------------------
JUNE 30, JUNE 30,
2008 2007
-------- --------
INTEREST AND DIVIDEND INCOME:
Loans and fees $ 2,806 $ 2,861
Investment securities - taxable 114 191
Investment securities - nontaxable 166 180
Deposits and federal funds sold 69 40
-------- --------
Total Interest and Dividend Income 3,155 3,272
-------- --------
INTEREST EXPENSE:
Deposits 1,168 1,245
Borrowings 88 85
-------- --------
Total Interest Expense 1,256 1,330
-------- --------
NET INTEREST INCOME 1,899 1,942
PROVISION FOR LOAN LOSSES 74 46
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,825 1,896
-------- --------
NONINTEREST INCOME:
Service charges on deposit accounts 226 191
Other income 171 115
-------- --------
Total Noninterest Income 397 306
-------- --------
NONINTEREST EXPENSE:
Salaries and benefits 719 722
Occupancy expenses 99 93
Equipment expenses 149 155
Other expenses 379 396
-------- --------
Total Noninterest Expenses 1,346 1,366
-------- --------
Income Before Income Taxes 876 836
INCOME TAX EXPENSE 240 233
-------- --------
NET INCOME $ 636 $ 603
======== ========
EARNINGS PER SHARE
Net income $ .72 $ .68
======== ========
Weighted Average Shares Outstanding 880,024 881,972
======== ========
The accompanying notes are an integral part of these statements.
Page 4
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share information)
JUNE 30, DECEMBER 31,
2008 2007
--------- ------------
Unaudited Audited
ASSETS
Cash and due from banks $ 2,941 $ 2,846
Federal funds sold 2,460 34
Interest bearing deposits in banks 7,596 259
Investment securities available for sale 26,441 31,121
Investment securities held to maturity -- 500
Restricted equity securities 2,197 1,667
Loans receivable, net of allowance for loan
losses of $1,319 and $1,186 respectively 152,362 146,785
Bank premises and equipment, net 6,440 6,540
Interest receivable 1,233 1,225
Bank owned life insurance 3,605 3,518
Other assets 525 385
-------- --------
Total Assets $205,800 $194,880
======== ========
LIABILITIES
Deposits
Noninterest bearing demand $ 19,790 $ 18,250
Interest bearing
Demand 16,338 15,134
Savings 31,539 33,040
Time deposits over $100,000 28,955 26,775
Other time deposits 68,900 63,913
-------- --------
Total Deposits 165,522 157,112
Accrued expenses and other liabilities 1,110 803
Federal funds purchased -- --
Short-term borrowings 4,688 1,717
Long-term debt 6,614 8,517
-------- --------
Total Liabilities 177,934 168,149
-------- --------
STOCKHOLDERS' EQUITY
Common stock; $1 par value, 2,000,000 shares
Authorized, 900,000 issued 900 900
Additional paid in capital 900 900
Retained earnings 27,073 25,836
Accumulated other comprehensive income 79 154
Treasury stock (at cost, 20,167 shares in 2008 and
19,717 shares in 2007) (1,086) (1,059)
-------- --------
Total Stockholders' Equity 27,866 26,731
-------- --------
Total Liabilities and Stockholders' Equity $205,800 $194,880
======== ========
The accompanying notes are an integral part of these statements.
Page 5
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Total Stock Capital Earnings (Loss) Income Stock
------- ------ ---------- -------- ------------- --------
BALANCE, DECEMBER 31,
2007 $26,731 $900 $900 $25,836 $ 154 $(1,059)
======= ==== ==== ======= ===== =======
Comprehensive Income
Net income 1,237 1,237
Change in unrealized
gain on
available for sale
securities, net of
income tax effect of
($39) (75) (75)
-------
Total Comprehensive
Income 1,162
Purchase of Treasury
Stock (27) (27)
------- -------
BALANCE, JUNE 30,
2008 $27,866 $900 $900 $27,073 $ 79 $(1,086)
======= ==== ==== ======= ===== =======
BALANCE, DECEMBER 31,
2006 $25,560 $900 $900 $24,596 $ (60) $ (776)
Comprehensive Income
Net income 1,175 1,175
Change in unrealized
loss on
available for sale
securities, net of
income tax effect of
($166) (316) (316)
-------
Total Comprehensive
Income 859
Purchase of Treasury
Stock (191) (191)
------- -------
BALANCE, JUNE 30,
2007 $26,228 $900 $900 $25,771 $(376) $ (967)
======= ==== ==== ======= ===== =======
The accompanying notes are an integral part of these statements.
Page 6
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------
2008 2007
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,237 $ 1,175
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 136 90
Depreciation and amortization 228 248
Loss on disposal of fixed assets 17 --
Net amortization of securities 5 9
Deferred income tax benefit (increase) decrease (110) 30
Income from life insurance investment (87) --
Net change in:
Accrued income (8) (177)
Other assets (101) 39
Accrued expense and other liabilities 416 (185)
-------- -------
Net Cash Provided by Operating Activities 1,733 1,229
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold (2,426) 3,601
Net change in interest bearing deposits in banks (7,337) (76)
Proceeds from sales, calls and maturities
of available for sale securities 6,265 2,820
Purchase of securities available for sale (1,203) (2,264)
Purchase of restricted investments (591)
Proceeds from redemption of restricted investments 61 17
Net increase decrease in loans (5,713) (4,880)
Purchase of bank premises and equipment (145) (95)
-------- -------
Net Cash Used in Investing Activities (11,089) (877)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Demand and savings deposits 1,243 (269)
Time deposits 7,167 (650)
Short-term borrowings 2,971 159
Federal funds purchased -- 759
Curtailments of long-term borrowings (1,903) (403)
Purchase of treasury stock (27) (191)
-------- -------
Net Cash Provided by (Used in) Financing Activities 9,451 (595)
-------- -------
CASH AND DUE FROM BANKS
Net increase (decrease) in cash and due from banks 95 (243)
Cash and due from banks, beginning of period 2,846 2,174
-------- -------
Cash and due from banks, end of period $ 2,941 $ 1,931
======== =======
Supplemental Disclosure of Cash Paid During the Period for:
Interest $ 2,384 $ 2,664
Income taxes $ 520 $ 444
The accompanying notes are an integral part of these statements.
Page 7
ALLEGHENY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 ACCOUNTING PRINCIPLES:
The consolidated financial statements include the accounts of Allegheny
Bancshares Inc. and its subsidiaries (the "Company"). Significant intercompany
accounts and transactions have been eliminated in the consolidation.
The consolidated financial statements conform to accounting principles generally
accepted in the United States of America ("GAAP") and to general industry
practices. In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 30,
2008, and the results of operations for the periods ended June 30, 2008 and
2007. The notes included herein should be read in conjunction with the notes to
the financial statements included in the 2007 annual report to stockholders of
Allegheny Bancshares, Inc.
NOTE 2 INVESTMENT SECURITIES AND RESTRICTED SECURITIES:
The amortized costs of investment securities and their approximate fair values
at June 30, 2008 and December 31, 2007 follows (in thousands of dollars):
JUNE 30, 2008 DECEMBER 31, 2007
------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- ------- --------- -------
SECURITIES AVAILABLE FOR SALE:
Mortgaged backed obligations
of federal agencies $ 3,278 $ 3,215 $ 2,984 $ 2,961
Government sponsored
enterprises 4,997 5,051 9,489 9,579
Obligations of states and
political subdivisions 17,412 17,578 18,282 18,450
Corporate obligations 502 466 -- --
Other equities 131 131 131 131
------- ------- ------- -------
Total $26,320 $26,441 $30,886 $31,121
======= ======= ======= =======
SECURITIES HELD TO MATURITY:
Government sponsored
enterprises $ -- $ -- $ 500 $ 501
======= ======= ======= =======
Restricted securities consist of stock in the Federal Home Loan Bank (FHLB) and
Community Financial Services, Inc. (CFSI). Investment in the FHLB stock is
determined by the level of the Bank's participation with FHLB various products
and is collateral against outstanding borrowings from that institution. CFSI is
the parent company of the Bank's correspondent bank. Both of these investments
are carried at cost, and each is restricted as to transferability.
Page 8
ALLEGHENY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 LOANS RECEIVABLE:
Loans outstanding are summarized as follows (in thousands of dollars):
JUNE 30, DECEMBER 31,
2008 2007
-------- ------------
Real estate loans $ 69,177 $ 67,091
Commercial and industrial loans 67,266 65,223
Loans to individuals, primarily
collateralized by autos 11,933 11,937
All other loans 5,305 3,720
-------- --------
Total Loans 153,681 147,971
Less allowance for loan losses 1,319 1,186
-------- --------
Net Loans Receivable $152,362 $146,785
======== ========
NOTE 4 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses for the six months
ended June 30, 2008 and 2007 follows (in thousands):
SIX MONTHS
ENDED JUNE 30,
---------------
2008 2007
------ ------
Balance, beginning of period $1,186 $1,258
Provision charged to operating expenses 135 90
Recoveries of loans charged off 57 60
Loans charged off (59) (230)
------ ------
Balance, end of period $1,319 $1,178
====== ======
NOTE 5 LONG TERM DEBT:
The Company has borrowed money from the Federal Home Loan Bank of Pittsburgh
(FHLB). The interest rates on all of the notes payable as of June 30, 2008 were
fixed at the time of the advance and fixed rates range from 4.14% 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 4.87% at June 30, 2008.
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.
Page 9
NOTE 7 FAIR VALUE
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement No. 157, Fair Value Measurements, which provides a definition of fair
value for accounting purposes, establishes a framework for measuring fair value
and expands related financial disclosures. Statement No. 157 does not require
any new fair value measurements and was initially effective for the Company
beginning January 1, 2008. Statement No. 157 establishes a hierarchy that
prioritizes the use of fair value inputs used in valuation methodologies into
the following three levels.
Level 1 - Valuation is based upon quoted prices for identical
instruments treaded in active markets.
Level 2 - Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model -based valuation
techniques for which all significant assumptions are observable in the
market.
Level 3 - Valuation is based upon significant inputs that reflect the
reporting entity's own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
The following is a description of valuation methodologies used for assets
recorded at fair values.
Investment securities available for sale: Investment securities available for
sale are recorded at fair value on a recurring basis. Fair value measurement is
based upon quoted prices, when available. If quoted prices are not available,
fair values are measured using independent pricing models. Level 1 securities
include those traded by dealers or brokers in an active over the counter
markets. Level 2 securities include U.S. government sponsored enterprise
securities, mortgage backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include other equities that do not have an active market. Currently all of our
securities are considered Level 2 securities.
Loans: The Company does not record loans at fair value on a recurring basis.
However, from time to time, a loan is considered impaired and an allowance for
loan loss is established in accordance with SFAS 114 Accounting by Creditors for
Impairment of a Loan, including impaired loans measured at an observable market
price (if available), or at the fair value of the loan's collateral (if the loan
is collateral dependent).. At June 30, 2008 the fair value was determined by the
measurement of the fair value of the underlying collateral. Typically the
collateral value is determined by applying a discount to an appraisal that was
performed at or about the date of the loan. Due to the uncertainty of appraisals
and fluctuation in real estate prices, the Company records the impaired loans as
nonrecurring Level 3. The loans listed below have a gross carrying value of
$1,327,000, but a fair value of $1,085,000, which results in an increase in our
Allowance for Loan Loss of $242,000.
Other Real Estate Owned: Certain assets such as other real estate owned (OREO)
are measured at fair value less cost to sell. We believe that the fair value
component in its valuation follows the provisions of SFAS No. 157.
FAIR VALUE
TOTAL AT MEASUREMENTS USING:
JUNE 30, ---------------------------
Dollars in thousands 2008 LEVEL 1 LEVEL 2 LEVEL 3
- -------------------- -------- ------- ------- -------
Assets:
Securities available for sale $26,441 -- $26,441 --
Impaired loans 1,327 -- -- 1,085
Page 10
NOTE 8 BENEFIT PLANS
Executive Performance Driven Plan: On June 4th, 2008, the Company, approved the
Pendleton Community Bank, Inc. Executive Performance Driven Plan. The
Performance Plan provides for bonus compensation based on achievement of certain
performance goals. The CEO is eligible to receive a bonus based on achievement
of the performance criteria.
For the Bank's Chief Executive Officer, performance compensation will be
based on the following individual categories (as reflected in the performance of
Allegheny Bancshares, Inc.): Return on Average Equity, Increase in Earnings per
Share, Return on Assets, Asset Growth Rate.
The total performance compensation which may be earned by the CEO is
between 0% and 11.50% of his base salary. The Company has accrued a liability
and incurred a benefit expense of $10,500 for the first six months of 2008 for
this plan based on the assumption that the CEO will earn 10% of his base salary
for 2008.
Supplemental Retirement Agreement: On June 4th, 2008 the Bank entered into a
non-qualified Supplemental Retirement Agreement ("SERP") with the CEO. The SERP
provide for the payment of a monthly supplemental executive retirement benefit
equal to annual payments of $54,663 for a 15 year period. Such benefit shall be
payable for a period of fifteen years, or under certain circumstances, prior to
age 65. For each full calendar year the CEO completes with the Bank without
separation of service, the CEO shall be credited with 8.33% of this benefit,
toward 100% after 12 years. The Company has accrued a liability and incurred a
benefit expense of $11,470 for the first six months of 2008 for this plan.
Page 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Allegheny Bancshares, Inc. (Company) is a single bank holding company organized
under the laws of West Virginia. The Company provides financial services through
its wholly owned subsidiary Pendleton Community Bank (Bank).
The Bank is a full service commercial bank offering financial services through
four financial centers located in the West Virginia towns of Franklin,
Moorefield and Marlinton, and its newest office near Harrisonburg, Virginia.
Currently its primary trade areas are these towns and the West Virginia counties
of Pendleton, Hardy, Pocahontas, and in western Rockingham County, Virginia. The
newest financial center is located in Rockingham County, Virginia just west of
the city limits of Harrisonburg, Virginia and was opened for business July 19,
2006.
The following discussion and analysis is provided to address information about
the Company's financial condition and results of operations that may not
otherwise be apparent from reading the Consolidated Financial Statements and
notes. This discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and the related notes to the Consolidated
Financial Statements.
FORWARD LOOKING STATEMENTS
The following discussion contains statements that refer to future expectations,
contain projections of the results of operations or of financial condition or
state other information that is "forward-looking." "Forward-looking" statements
are easily identified by the use of words such as "could," "could anticipate,"
"estimate," "believe," and similar words that refer to the future outlook. There
is always a degree of uncertainty associated with "forward-looking" statements.
The Company's management believes that the expectations reflected in such
statements are based upon reasonable assumptions and on the facts and
circumstances existing at the time of these disclosures. Actual results could
differ significantly from those anticipated.
Many factors could cause the Company's actual results to differ materially from
the results contemplated by the forward-looking statements. Some factors, which
could negatively affect the results, include:
- General economic conditions, either nationally or within the Company's
markets, could be less favorable than expected;
- Changes in market interest rates could affect interest margins and
profitability;
- Competitive pressures could be greater than anticipated; and
- Legal or accounting changes could affect the Company's results.
CRITICAL ACCOUNTING POLICY
The financial condition and results of operations as presented in the
Consolidated Financial Statements and the Notes to Consolidated Financial
Statements are dependent on the accounting policies. The policies selected and
applied involve judgments, estimates, and may change from period to period based
upon economic conditions. In addition, changes in generally accepted accounting
principles could impact the calculations of these estimates, and even though
this would not affect the true values, it could affect the timing of recognizing
income or expense.
The following discussion of allowance for loans loss is, in management's
opinion, the most important and critical policy that affects the financial
condition and results of operations. This critical policy involves the most
difficult and complex judgments about the unknown losses that currently exist in
the Company's largest asset, its loan portfolio.
Page 12
ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
The provision for loan losses was $135,000 and $90,000 for the six month periods
ended June 30, 2008 and 2007 respectively. The allowance for loan losses ("ALL")
was $1,319,000 (.86% of loans) at the end of the first six months of 2008
compared with $1,186,000 (.80% of loans) at December 31, 2007. The ALL increase
was caused primarily by the increased provision to the allowance during the
first six months of 2008. The Company continues to monitor the loan portfolio
for signs of weakness or developing credit problems. Loan loss provision for
each period is determined after evaluating the loan portfolio and determining
the level of reserves necessary to absorb current charge-offs and maintain the
reserve at adequate levels. See Note 4 for the amounts.
The ALL is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans, industry
historical experience, the nature and volume of the loan portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral and prevailing economic conditions. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available. Managements'
valuation of the ALL is based upon two principals of accounting: 1) SFAS No. 5
Accounting for Contingencies and SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. The Company utilizes both of theses accounting standards
by first identifying problem loans above a certain threshold and estimating
losses based on the underlying collateral values, and second taking the
remainder of the loan portfolio and separating the portfolio into pools of loans
based on grade of loans as determined by the Company's internal grading system.
We apply loss percentages based upon our historical loss rates, and make
adjustments based on economic conditions. The determination of the ALL is
subjective and actual losses may be more or less than the amount of the
allowance. However management believes that the allowance is a fair estimate of
losses that exists in the loan portfolio as of the balance sheet date.
RESULTS OF OPERATIONS OVERVIEW
Net income of $1,237,000 for the first six months of 2008 represents an increase
of 5.28% compared to the same period a year ago. Annualized returns on average
equity and average assets for the six months ended June 30, 2008 were 9.05% and
1.24%, respectively, compared with 9.08% and 1.28% for the same period in 2007.
The increase in income is primarily due to an increase in noninterest income as
indicated by a $145,000 increase over the same period in 2007. Net interest
income for the period was fairly flat compared to the same period in 2007.
NET INTEREST INCOME
As the Company has seen its net interest income before provision for loan losses
increase in the first six months of 2008 compared to a year earlier, this small
increase is due to increase volume of loans, not from increase in the net
interest margin. Tax equivalent net yield on interest earning assets fell from
4.63% for the first six months of 2007 to 4.18% for the same period in 2008.
Average earning assets increased by 7.81% of the same period a year ago and
average interest bearing liabilities increased 9.82%.
Table I shows that the Company's taxable equivalent net interest income
decreased by 2.76% for the first six months of 2008 compared to the first six
months of 2007. This decrease is due primarily to the large drop in the yield on
average earning assets. This decrease resulted not only from the drop in
interest rates, as the Federal Reserve has dropped Fed Funds rate by 325 basis
points since beginning of August 2007, but also from the change in the way the
Company recognizes loan fee income.
In January 2008, the Company began following the Financial Accounting Standard
(FAS) No. 91 Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases ("FAS 91").
FAS 91 was issued in December 1986 by the Financial Accounting Standards Board
(FASB) and was effective for years beginning after December 15, 1987. FAS 91
establishes the accounting for nonrefundable fees and costs associated with
lending,
Page 13
commitments to lend, or purchasing a loan or a group of loans. The main effect
to the Company with this adoption, is that now the Company will amortize the
loan fees we collect over the life of the loan. This amortization adjusts the
yield on the loans. In addition, the Company will also amortize the direct costs
that the Company incurs on originating loans. This also affects the yield on
loans. The Company has measured the effect on income and the financial condition
of the Company since the effective date of FAS 91 and has determined it is not
material. However while the net effect is not material it does lower our net
yield on earning assets as shown in Table 1, since historically all
nonrefundable loan fees have been included in the calculation of interest income
on loans. This has the affect of lowering the net yield on interest earning
assets as shown in Table I by 22 basis points.
Table I shows the average balances for interest bearing assets and liabilities,
the rates earned on earning assets and the rates paid on deposits and borrowed
funds.
TABLE I
ALLEGHENY BANCSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAXABLE EQUIVALENT BASIS)(DOLLAR AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2008 JUNE 30, 2007
-------------------------- --------------------------
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE RATES BALANCE EXPENSE RATES
-------- ------- ----- -------- ------- -----
Interest Income
Loans (1, 2) $149,523 $5,616 7.51% $135,864 $5,619 8.27%
Federal funds sold 1,473 25 3.39% 2,921 77 5.25%
Interest bearing deposits 6,322 104 3.29% 142 4 5.63%
Investments
Taxable 11,979 259 4.32% 16,299 391 4.80%
Nontaxable (2) 17,963 520 5.79% 18,467 545 5.90%
-------- ------ ---- -------- ------ ----
Total Earning Assets 187,260 6,524 6.97% 173,693 6,636 7.64%
-------- ------ ---- -------- ------ ----
Interest Expense
Demand deposits 15,679 87 1.10% 15,787 126 1.60%
Savings 31,950 201 1.26% 32,932 442 2.68%
Time deposits 96,417 2,128 4.41% 82,837 1,873 4.52%
Short-term borrowings 1,603 15 1.87% 2,432 55 4.52%
Long-term debt 7,488 180 4.81% 5,456 116 4.25%
-------- ------ ---- -------- ------ ----
Total Interest Bearing
Liabilities $153,137 $2,611 3.41% $139,444 $2,612 3.75%
-------- ------ ---- -------- ------ ----
Net Interest Margin (1) 3,913 4,024
====== ======
Net Yield on Interest
Earning Assets 4.18% 4.63%
===== =====
(1) Interest on loans includes loan fees
(2) An incremental tax rate of 34% was used to calculate the tax equivalent
income
Page 14
NONINTEREST INCOME
Noninterest income increased 24.58% during the first six months of 2008 as
compared to the same period in 2007. The increase was largely due to earnings
the Company recognized on it's Subsidiary's Bank Owned Life Insurance (BOLI)
investment. This investment in BOLI has provided $87,000 in noninterest income
in the first half of 2008 and none of this was present in 2007. In addition,
increases of $53,000 in deposit service charges, $24,000 in a combination of ATM
fees and debit card fee income all boosted the Company's noninterest income for
the first half of 2008.
NONINTEREST EXPENSES
Total noninterest expense increased $47,000 or 1.77% for the first six months of
2008, as compared to 2007. Salaries and benefits increased by 0.84% due to the
increase in the number of employees, merit increases, and higher benefit costs.
This increase was held down by the adoption of FAS 91. As mentioned under the
net interest income section above, FAS 91 requires the incremental direct costs
of completing a loan to be deferred and amortized over the life of the loan
adjusting the net yield. This deferral of loan costs had the effect of reducing
salary expense by $178,000 for the first six months of 2008. After adding back
the cost deferral under FAS 91, our total salary and benefit expense increased
by 13.24%. The number of employees as measured by full time equivalents (FTE)
increased by 3.5 or 5.83% in the first six months of 2008, as compared to the
same period of 2007. Salary and benefit costs increases were led by a 28.13%
increase in benefit costs.
Other expenses increased by approximately $35,000 or 2.87%. Some of the reasons
for this increase include $12,000 increase in ATM fees, $9,000 increase in
directors fees due to increased meeting fees and increased meetings, and $8,000
increase in dues and memberships during the first half 2008 over the same period
in 2007.
INCOME TAX EXPENSE
Income tax expense equaled 27.32% of income before income taxes for the first
six months of 2008 compared with 27.33% for the same period of 2007. 2007 taxes
were lower than normal due to a $10,000 refund received on an amended tax issue
from the 2003 tax year. 2008 taxes are being reduced to an increased amount of
tax exempt income, particularly the income from the BOLI investment as discussed
above in non interest income section.
LOANS AND PROVISION FOR LOAN LOSS
Total loans were $153,681,000 at June 30, 2008 as compared to $147,971,000 at
December 31, 2007, representing a 3.86% increase. This loan growth came
primarily from real estate and commercial loans. A schedule of loans by type is
shown in Note 3 to the financial statements. The breakdown of loan growth as
shown in Note 3 is a 3.11% increase in our residential real estate loans, 3.13%
growth in commercial loans. Approximately 84% of the loan portfolio is secured
by real estate at June 30, 2008.
LOAN PORTFOLIO RISK FACTORS
Nonperforming loans include nonaccrual loans, loans over 90 days past due and
restructured loans. Nonaccrual loans are loans in which interest accruals have
been discontinued. Loans are placed in a nonaccrual status when management has
information that indicates that principal or interest may not be collectable.
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.
Page 15
The following table summarizes the Company's nonperforming loans at June 30,
2008 and December 31, 2007 (in thousands of dollars):
JUNE 30, DECEMBER 31,
2008 2007
-------- ------------
Nonaccrual loans $ 78 $ 9
Restructured loans 141 143
Loans delinquent 90 days or more 1,075 969
------ ------
Total Nonperforming Loans $1,294 $1,121
====== ======
DEPOSITS
The Company's deposits increased $8,410,000 or 5.35% during the first six months
of 2008. A schedule of deposits by type is shown in the balance sheets. The
primary reason for this increase was the increase in certificates of deposits
(CDs). Much of this growth it is believed to be due to a "flight to quality" as
customers seek safe investments due to recent decreases in the equity markets.
Time deposits of $100,000 or more were 17.49% and 17.04% of total deposits at
June 30, 2008 and December 31, 2007, respectively.
BORROWINGS
The Company borrows funds from the Federal Home Loan Bank (FHLB) to provide
liquidity and to reduce interest rate risk. As competition for deposits have
increased during periods of loan growth, FHLB borrowings have been utilized to
help fund the loan growth. These borrowings have a fixed rate of interest and
are amortized over a period of 5 to 20 years. Interest rates on these
obligations range from 2.46% to 5.61%.
CAPITAL
The Company continues to maintain a strong capital position to provide an
attractive financial return to our shareholders and to support future growth.
Capital as a percentage of total assets was 13.54% at June 30, 2008 and
significantly exceeded regulatory requirements. The Company is considered to be
well capitalized under the regulatory framework for prompt corrective actions.
UNCERTAINTIES AND TRENDS
Management is not aware of any known trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on liquidity,
capital resources or operations. Additionally, management is not aware of any
current recommendations by the regulatory authorities which, if they were to be
implemented, would have such an effect.
LIQUIDITY AND INTEREST SENSITIVITY
Liquidity reflects our ability to ensure that funds are available to meet
present and future obligations. At June 30, 2008, the Company had liquid assets
of approximately $5.4 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
June 30, 2008. Additional liquidity may be provided by the growth in deposit
accounts and loan repayments. In the event the Company would need additional
funds, it has the ability to purchase federal funds and borrow under established
lines of credit of $81.3 million.
Page 16
At June 30, 2008, the Company had a negative cumulative Gap Rate Sensitivity
Ratio of 29.69% for the one year repricing period. This rate reflects a very
conservative estimate since we show an immediate runoff of accounts without a
specific maturity date, and does not reflect the historical movement of funds
during varying interest rate environments. Adjusted for historical repricing
trends in response to interest rate changes, the adjusted Gap Ratio is -14.80%.
This indicates that the Company is liability sensitive. But this negative gap
ratio is within guidelines set by the Company and the Company expects interest
income would remain stable in both a declining and increasing interest rate
environment. Management constantly monitors the Company's interest rate risk and
has decided that the current position is an acceptable risk for a community bank
operating in a rural environment. Table II shows the Company's interest
sensitivity.
TABLE II
ALLEGHENY BANCSHARES, INC.
INTEREST SENSITIVITY ANALYSIS
JUNE 30, 2008
(In Thousands of Dollars)
0-3 4-12 1-5 OVER 5
MONTHS MONTHS YEARS YEARS TOTAL
------- ------- ------- ------ -------
USES OF FUNDS:
Loans 27,560 28,789 54,174 43,158 153,681
Federal funds sold 2,460 2,460
Interest bearing deposits 2,557 5,039 7,596
Investment securities 396 1,652 13,736 10,657 26,441
Restricted Investments 2,197 2,197
------- ------- ------- ------ -------
Total 32,973 35,480 67,910 56,012 192,375
------- ------- ------- ------ -------
SOURCES OF FUNDS:
Deposits:
Interest bearing demand 16,338 16,338
Savings 31,539 31,539
Time deposits over $100,000 11,638 9,475 7,842 28,955
Other time deposits 29,182 22,382 16,436 600 68,600
Short-term borrowings 4,688 4,688
Long-term debt 78 241 3,173 3,122 6,614
------- ------- ------- ------ -------
Total 93,463 32,098 27,451 3,722 156,734
------- ------- ------- ------ -------
Discrete Gap (60,490) 3,382 40,459 52,290 35,641
Cumulative Gap (60,490) (57,108) (16,649) 35,641
Ratio of Cumulative Gap
To Total Earning Assets -31.44% -29.69% -8.65% 18.53%
Table II reflects the earlier of the maturity or repricing dates for various
assets and liabilities at June 30, 2008. In preparing the above table, no
assumptions are made with respect to loan prepayments or deposit run offs. Loan
principal payments are included in the earliest period in which the loan matures
or can be repriced. Principal payments on installment loans scheduled prior to
maturity are included in the period of maturity or repricing. A loan with a
floating rate that has reached a contractual floor or ceiling level is being
treated as a fixed rate loan until the rate is again free to float.
Page 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in Quantitative and Qualitative Disclosures
about Market Risk as reported in the 2007 Form 10-K.
ITEM 4T. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers
that file periodic reports under the Securities Exchange Act of 1934 (the "Act")
are now required to include in those reports certain information concerning the
issuer's controls and procedures for complying with the disclosure requirements
of the federal securities laws. Under rules adopted by the Securities and
Exchange Commission effective August 29, 2002, these disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by an issuer in the reports it
files or submits under the Act, is communicated to the issuer's management,
including its principal executive officer or officers and principal financial
officer or officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding disclosure.
We have established disclosure controls and procedures to ensure that
material information related to Allegheny Bancshares, Inc. and its subsidiary is
made known to our principal executive officer and principal financial officer on
a regular basis, in particular during the periods in which our quarterly and
annual reports are being prepared. These disclosure controls and procedures
consist principally of communications between and among the Chief Executive
Officer and the Chief Financial Officer to identify any new transactions,
events, trends, contingencies or other matters that may be material to the
Company's operations. As required, we have evaluated the effectiveness of these
disclosure controls and procedures as of the end of the period covered by this
quarterly report. Based on this evaluation, the Company's management, including
the Chief Financial Officer, concluded that such disclosure controls and
procedures were operating effectively as designed as of the date of such
evaluation.
CHANGES IN INTERNAL CONTROLS
During the period reported upon, there were no significant changes in the
Company's internal controls pertaining to its financial reporting and control of
its assets or in other factors that could significantly affect these controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -
Not Applicable
ITEM 2. CHANGES IN SECURITIES -
During the six month period ending June 30, 2008, the Company purchased some of
the Company's stock to be held as treasury stock. This was not part of publicly
announced plan. The details of the transaction were as follows:
TOTAL NUMBER AVERAGE
OF SHARES PRICE PER
DATE PURCHASED SHARE
---- ------------ ---------
March 05, 2008 250 $60.00
June 26, 2008 200 $60.00
Page 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -
At the Annual Shareholders Meeting held on April 14, 2008, the officers and
directors were introduced and the following directors whose terms had expired,
Roger Champ, Carole Hartman and William Loving, Jr. were considered for
election. The directors above were duly elected for three-year terms commencing
in 2008 with voting results as follows: 637,580 of 639,800 shares represented
voted "for", 2,220 of 639,800 shares represented voted "against". The following
board members were retained for their respective terms: Thomas J. Bowman, John
E. Glover, Richard Phares, Richard Homan, Jerry Moore, and Dolan Irvine.
ITEM 5. OTHER INFORMATION -
Not Applicable
ITEM 6. EXHIBITS
The following Exhibits are filed as part of this Form 10-Q
No. Description
- ---- -------------------------------------------------------------------------
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
(filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
(filed herewith).
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
The following exhibit is incorporated by reference to the Exhibits to Allegheny
Bancshares, Inc. Form 10-KSB filed March 30, 2003.
No. Description Exhibit Number
- ---- ------------------------------------------------------ --------------
3.1 Articles of Incorporation - Allegheny Bancshares, Inc. E2
The following exhibit is incorporated by reference to the Exhibits to Allegheny
Bancshares, Inc. Form 10-K filed March 31, 2006.
No. Description Exhibit Number
- ---- ------------------------------------------------------ --------------
3.3 Bylaws of Allegheny Bancshares, Inc. 3.3
Page 19
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant causes this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLEGHENY BANCSHARES, INC.
By: /s/ WILLIAM A. LOVING
------------------------------------
William A. Loving, Jr.
Executive Vice President and
Chief Executive Officer
By: /s/ L. KIRK BILLINGSLEY
------------------------------------
L. Kirk Billingsley
Chief Financial Officer
Date: August 8, 2008