UNITED STATES
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, 2008
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
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 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 definition of "accelerated filer," "accelerated filer" and smaller reporting
company" in rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated Filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 30, 2008 the aggregate market value of the voting stock held by
non-affiliates, based on the last reported sales prices of $60.00 per share was
$52,789,980.
The number of shares outstanding of the registrant's common stock was
871,233 as of March 2, 2009.
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement for the Annual Meeting of Shareholders to be held May 4,
2009 (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 6
Item 4. Submission of Matters to a Vote of Security Holders 6
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 7
Item 8. Consolidated Financial Statements 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 43
Item 9A. Controls and procedures 43
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act 43
Item 11. Executive Compensation 44
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions 44
Item 14. Principal Accountant Fees and Services 44
PART IV
Item 15. Exhibits and Financial Statement Schedules 44
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PART I
ITEM 1. BUSINESS
GENERAL
Allegheny Bancshares, Inc. (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
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 grow its market area, and is currently under
an agreement with Citizens National Bank of Elkins, West Virginia to purchase
their branches in Marlinton and Petersburg, West Virginia. It is anticipated
that this purchase will be completed in the second quarter of 2009.
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
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(including the borrower's relationship to the Bank), in general, the Bank is
subject to a loan-to-one borrower limit of an amount equal to 15% of the Bank's
capital and surplus in the case of loans which are not fully secured by readily
marketable or other permissible types of collateral. The Bank voluntarily may
choose to impose a policy limit on loans to a single borrower that is less than
the legal lending limit. The Bank may establish relationships with correspondent
banks to participate in loans when loan amounts exceed the Bank's legal lending
limits or internal lending policies.
DEPOSITS
The Bank offers a full range of deposit products including checking, money
market, savings accounts, certificates of deposits, and individual retirement
accounts. The deposit accounts are insured under the Federal Deposit Insurance
Act to the limits provided there under.
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, remote deposit capture, and bill pay.
EMPLOYEES
As of December 31, 2008, the Bank had 61 full-time employees and 72 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, and in Harrisonburg, Virginia.
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ITEM 3. LEGAL PROCEEDINGS
Management is not aware of any pending or threatened litigation in which
the Bank may be involved as a defendant. In the normal course of business, the
Bank periodically must initiate suits against borrowers as a final course of
action in collecting past due loans.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Allegheny Bancshares has not submitted any matters to the vote of security
holders for the quarter ending December 31, 2008.
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, 2009 is included in Note 12 to the financial statements.
Annual dividends were declared as of December 31, 2008 and 2007 in the
amount of $1.45 and $1.40 per share, respectively.
STOCKHOLDERS
As of December 31, 2008, there were 735 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:
2008 2007
--------------- -----------------
Year High Low High Low
---- ------ ------ ------ ------
1st quarter $65.00 $60.00 $72.50 $57.00
2nd quarter 67.00 60.00 58.00 57.00
3rd quarter 67.15 60.00 66.67(1) 57.00
4th quarter 65.00 58.50 65.00 37.50(1)
(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 2008
Total No. Avg. Price
of Shares Paid per
Period Purchased Share
- ------ --------- ----------
10/1/08- 10/31/08 700 $60.00
11/1/08- 11/30/08 0 $ N/A
12/1/08- 12/31/08 500 $60.00
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Allegheny has not initiated any plans to repurchase its stock, however from time
to time as the opportunity presents itself, the Company, as shown above, has
repurchased shares.
ITEM 6. SELECTED FINANCIAL DATA
Years ended December 31,
------------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
PROFITABILITY RATIOS
Return on Average Assets 1.02% 1.32% 1.34% 1.46% 1.49%
Return on Average Equity 7.48% 9.34% 9.15% 9.77% 9.95%
PER COMMON SHARE
Net Income $ 2.35 $ 2.80 $ 2.65 $ 2.73 $ 2.66
Cash Dividends Declared 1.45 1.40 1.30 1.20 1.10
Book Value 31.17 30.35 28.87 27.77 26.82
Last Reported Market Price 65.00 58.50 57.00 57.00 49.00
Dividend Payout Ratio 61.40% 49.84% 49.06% 43.92% 41.38%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
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 $297,140 and $187,117 for the calendar
years 2008 and 2007 respectively. The allowance for loan losses ("ALL") was
$1,396,000 (.88% of loans) at the end of 2008 compared with $1,186,000 (.80% of
loans) at December 31, 2007. The ALL increase was due to increase in loan loss
provision in 2008. The loan loss provision and our loan recoveries exceeded our
loans charged off in 2008. See Note 5 for the amounts. Loan loss provision was
increased due to a declining economic outlook and increase in delinquencies
during 2008.
The ALL is evaluated on a regular basis by management and is based upon
management's periodic review of the collectibility of the loans, the Company's
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.
-7-
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.
SECURITIES IMPAIRMENT
The Company evaluates each of its investments in securities, debt and equity,
under guidelines contained in SFAS 115, Accounting for Certain Investments in
Debt and Equity Securities. These guidelines require the Company to determine
whether a decline in value below original cost is other than temporary.
Consideration is given to (1) the length of time and the extent to which the
fair value has been less than the cost, (2) the financial condition and near
term prospects of the issuer, and (3) the intent and the abilith of the Company
to retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery of fair value. Declines determined to be other than
temporary are charged to operations. Such charges were $804,600 for 2008, and
none for 2007.
OVERVIEW OF 2008
Net income of the Company decreased 16.74% from 2007 to 2008 and earnings
per share decreased 16.07% from $2.80 to $2.35. Earnings per share decreased
less as a percentage than net income due to lower number of shares outstanding.
A security impairment of $501,000, net of applicable federal and state taxes,
was the primary factor in the decrease in net income. However, this large charge
to income was partially offset by an increase in non interest income.
The Company's balance sheet continued to grow in 2008 as assets increased by
5.05% mainly caused by a $10 million increase in loans and this increase was
funded by a $10 million increase in deposits.
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 decreased 0.82% in
2008 compared to 2007, due primarily to the large decrease in interest rates.
The Company's net yield on interest earning assets for 2008 was 4.35% compared
to 4.68% for 2007 as the yield on earning assets decreased by 80 basis points
while the cost of funds decreased by 63 basis points. This large drop in the
yield of earning assets is primarily due to falling interest rates but it was
also affected by the change in the method of accounting for loan fees.
This change in accounting for loan fees is due to the January 2008 adoption of
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, 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. The
net effect of the adoption of FAS 91 is immaterial, however it does reduce the
amount of loan fee income and thus net interest income. It also reduces
noninterest expenses, as it reduces salary and benefit expense.
-8-
In addition to this accounting for loan fee change, net interest income was also
under pressure from falling interest rates. During the first quarter of 2008 the
growth of deposits outpaced the growth of loans. In the last half of 2008, loan
growth exceeded deposit growth. So we had obtained much of the years deposit
growth early when rates were high, and then the investment of these funds into
loans happened late in the year, when loan rates were falling.
NONINTEREST INCOME
Noninterest income consists of all revenues which are not included in interest
and fee income related to earning assets. Exclusive of impairment charge on a
security, noninterest income increased 18.31% during 2008 as compared to 2007.
The majority of this increase is due to income from the investment into bank
owned life insurance. This investment was made in November 2007, and 2008 income
from this investment increased the year over year noninterest income by
$156,000. Increase of $72,655 in overdraft fees also helped noninterest income
in 2008. Noninterest income for 2008 included an impairment charge an equity
interest in Silverton Financial Services, Inc. (SFSI). SFSI is the parent
company of the Subsidiary's correspondent account. The Company determined that
the losses that SFSI generated during 2008 were unlikely to be recouped in the
near future, and as such the market value of the investment was determined to be
other than temporarily impaired in accordance with SFAS 115.
NONINTEREST EXPENSES
Noninterest expenses increased $19,000 in 2008 compared to 2007. This small
increase was held to this very low level due to the adoption of FAS 91. This is
explained in more detail above under the Net Interest Income section. The effect
of the adoption of this new accounting treatment is to delay the recognition of
expenses associated with originating loans and $348,000 of salary expenses was
deferred under the application of FAS 91. Non interest expense would have
increased by 6.7% if not for this accounting change, and was led primarily by
$294,000 increase in salary expense. This increase is a result of an increase in
the number of employees, merit increases, and higher benefit costs. The average
number of full time equivalent (FTE) employees increased from 61 for 2007, to 65
for 2008. After backing out the effect of FAS 91, salary expense increased by
8.20% and benefit costs increased by 19.04%.
INCOME TAX EXPENSE
Income tax expense equaled 23.76% and 28.05% of income before income taxes for
the years ended December, 31 2008 and 2007, respectively. Increase in tax free
income on Bank Owned Life Insurance investment was one of the main causes for
the reduction in income tax expense as a percentage of income. In addition a tax
refund from a prior year in the amount of $38,000 reduced 2008 income taxes.
SECURITIES
Schedules of securities by type and maturity are shown in Note 3 to the
financial statements.
LOANS
Total loans increased 7.03% during 2008 to $158,378,104. Loan growth in 2008
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 5 of the financial statements.
Approximately 86% of the loan portfolio is secured by real estate at December
31, 2008.
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.
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 Company has
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a substantial amount of loans in the loan portfolio related to agribusinesses;
see Note 5 of the financial statements for additional details.
The following table summarizes the Company's nonperforming loans (in thousands
of dollars):
Years ended December 31,
------------------------------------------
2008 2007 2006 2005 2004
------ ------ ------ ------ ------
Nonaccrual loans $ 659 $ 9 $ 104 $ 155 $ 429
Restructured Loans 139 143 24 26 29
Loans delinquent 90 days
or more 1,034 969 206 646 388
------ ------ ------ ------ ------
Total nonperforming loans $1,832 $1,121 $ 334 $ 827 $ 846
====== ====== ====== ====== ======
LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is an estimate of the losses in the current loan
portfolio. The allowance is based on two principles of accounting: (i) SFAS 5,
Accounting for Contingencies which requires that losses be accrued when they are
probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors
for Impairment of a Loan, which requires that loans be identified which have
characteristics of impairment (e.g. the collateral, present value of cash flows
or observable market values are less than the loan balance).
For each period presented, the provision for loan losses charged to operations
is based on management's judgment after taking into consideration all factors
connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors.
Through internal loan review the bank classifies loans into categories and
assigns a risk rating as follows to be used in the calculation: Excellent, Good,
Satisfactory, Special Mention, Substandard, Doubtful and Loss. Within these
categories, Real Estate, Consumer, and Commercial Loans are assigned a specific
loss rate based on historical losses and management's estimation of potential
loss.
Loans identified as problem loans or potential problem loans are committed to a
watch list. Loans on the watch list are classified as loss, doubtful,
substandard or special mention and are subjected to a more detailed review. This
detailed review identifies each applicable loan for specific impairment and a
specific allocation for that impaired amount is used in the calculation. Rates
assigned each category may vary over time as historical loss rates, loan
structure and economic conditions change.
The allowance for loan losses is computed quarterly and adjusted prior to the
issuance of the quarterly financial statements. All loan losses charged to the
allowance are approved by the board of directors at their regular meetings. The
allowance is reviewed for adequacy after considering historical loss rates,
current economic conditions (both locally and nationally) and any known credit
problems that have not been considered under the above formula.
The allowance for loan losses increased from $1,185,826 at December 31, 2007 to
$1,396,074 at December 31, 2008. Net charge offs decreased from $259,413 in 2007
to $86,891 in 2008. The provision for loan losses increased from $187,117 in
2007 to $297,140 in 2008. 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
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since the total allowance is a general allowance applicable to the entire
portfolio.
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's deposits increased $10,127,508 or 6.45% during 2008
and $7,770,278 or 5.20% during 2007. A schedule of deposits by type is shown in
the balance sheets. Time deposits of $100,000 or more were 16.87% and 17.04% of
total deposits at December 31, 2008 and 2007 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 principal payments of $2,597,000 and $575,000 in
2008 and 2007, respectively. The following table shows the long-term FHLB debt
as of December 31, 2008.
(Dollars in Thousands)
--------------------------------------
Interest Loan Term of Current
Loan Date Rate Amount Loan Balance
- --------- -------- ------ -------- -------
June 8, 2005 4.58% $1,000 20 years $ 884
July 11, 2005 4.77% $1,000 20 years $ 889
March 22, 2006 5.40% $ 500 15 years $ 436
March 22, 2006 5.31% $ 500 5 years $ 241
July 11, 2007 5.57% $ 750 20 years $ 720
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, 2008 $5,920
======
Maturity schedule and other information on this debt can be found in Note 12 to
the financial statements.
CAPITAL
Capital as a percentage of total assets was 13.26% at December 31, 2008 and
significantly exceeded regulatory requirements. The Company is considered to be
well capitalized under the regulatory guidelines.
UNCERTAINTIES AND TRENDS
While management is well aware of the deteriorating economic environment
globally, we feel at this point we are able to withstand a deepening recession
thanks to strong capital ratios and consistent and conservative lending
practices over the years. We do realize that this recession will affect our
customers and our Company and that earnings will probably be under pressure at
least in the near future. To what extent, we are unsure but we feel we have the
liquidity and capital to withstand the current and future economic challenges.
LIQUIDITY AND INTEREST SENSITIVITY
At December 31, 2008, the Company had liquid assets of approximately $8.8
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, 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
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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.
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, and adjustable rate loans have
been demonized in the news media. Yet on the deposit side they are demanding
short term deposit products since longer term deposit rates have not been very
attractive.
-12-
TABLE I
ALLEGHENY BANCSHARES, INC.
NET INTEREST MARGIN ANALYSIS
(ON A FULLY TAX EQUIVALENT BASIS)
(IN THOUSANDS)
Year Ended Year Ended
December 31, 2008 December 31, 2007
--------------------------- ---------------------------
Average Income/ Average Income/
Balance Expense Rates Balance Expense Rates
-------- -------- ----- -------- -------- -----
Interest Income
Loans(1) $152,367 $ 11,361 7.46% $139,365 $ 11,665 8.37%
Federal funds sold 1,210 33 2.73% 2,755 139 5.05%
Interest bearing deposits
in banks 6,167 189 3.06% 293 15 5.12%
Investments
Taxable 11,754 492 4.19% 16,189 778 4.81%
Nontaxable(2) 17,338 1,006 5.80% 18,390 1,082 5.88%
-------- -------- ---- -------- -------- ----
Total Earning Assets $188,836 $ 13,081 6.93% $176,992 $ 13,679 7.73%
======== -------- ---- ======== -------- ----
Interest Expense
Demand deposits $ 16,832 $ 173 1.03% 15,691 $ 259 1.65%
Savings 30,646 325 1.06% 33,340 861 2.58%
Time deposits 97,173 4,007 4.12% 84,524 3,896 4.61%
Short-term borrowings 1,783 23 1.29% 2,399 108 4.50%
Long-term borrowings 7,090 336 4.74% 6,111 270 4.41%
-------- -------- ---- -------- -------- ----
Total Interest Bearing
Liabilities $153,524 4,864 3.17% $142,065 5,394 3.80%
======== -------- ---- ======== --------
Net Interest Margin(1) $ 8,217 $ 8,285
======== ========
Net yield on interest
Earning assets 4.35% 4.68%
==== ====
(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 2008 and 2007 were $19,991 and $17,676,
respectively.
-13-
TABLE II
ALLEGHENY BANCSHARES, INC.
EFFECT OF RATE-VOLUME CHANGE ON NET INTEREST INCOME
(ON A FULLY TAX EQUIVALENT BASIS)
(IN THOUSANDS)
2008 Compared to 2007 2007 Compared to 2006
Increase (Decrease) Increase (Decrease)
------------------------ -----------------------
Volume Rate Total Volume Rate Total
------ ------- ----- ----- ----- ------
Interest Income
Loans $1,088 $(1,392) $(304) $ 660 $ 755 $1,415
Federal funds sold (78) (28) (106) 45 (5) 40
Interest bearing deposits
in banks 301 (127) 174 -- 1 1
Investments
Taxable (213) (73) (286) 3 31 34
Nontaxable (62) (14) (76) 46 (9) 37
------ ------- ----- ----- ----- ------
Total Earning Assets $1,036 $(1,634) $(598) $ 754 $ 773 $1,527
====== ======= ===== ===== ===== ======
Interest Expense
Demand deposits $ 19 $ (105) $ (86) $ (34) $ 13 $ (21)
Savings (70) (466) (536) 80 154 234
Time deposits 583 (472) 111 275 600 875
Short-term borrowings (28) (57) (85)
Long-term borrowings 43 23 66 2 22 24
------ ------- ----- ----- ----- ------
Total interest bearing
liabilities 577 (1,077) (530) 323 789 1,112
------ ------- ----- ----- ----- ------
Net Interest Income $ 489 $ (557) $ (68) $ 431 $ (16) $ 415
====== ======= ===== ===== ===== ======
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, 2008
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
-------- -------- -------- ------- --------
USES OF FUNDS:
Loans: $ 19,559 $ 22,371 $ 61,981 $54,467 $158,378
Interest bearing bank deposit 4,133 504 4,637
Investment securities 0 1,182 15,270 9,233 25,685
Federal funds sold 1,570 1,570
-------- -------- -------- ------- --------
Total Earning Assets 25,262 23,553 77,755 63,700 190,270
-------- -------- -------- ------- --------
SOURCES OF FUNDS:
Interest bearing
demand deposits 18,985 18,985
Savings deposits 28,567 28,567
Time deposits
$100,000 and over 5,876 12,325 10,010 28,211
Other time deposits 18,901 24,763 26,952 664 71,280
Other borrowings 3,624 1,170 1,688 3,007 9,489
-------- -------- -------- ------- --------
Total Interest Bearing
Liabilities 75,953 38,258 38,650 3,671 156,532
-------- -------- -------- ------- --------
Discrete Gap (50,691) (14,705) 39,105 60,029 33,738
Cumulative Gap (50,691) (65,396) (26,291) 33,738
Ratio of Cumulative Gap
to Total Earning Assets -26.64% -34.37% -13.82% 17.73% 17.73%
======== ======== ======== ======= ========
Rate Risk:
Loans with predetermined
rates $ 6,509 $ 11,603 $ 35,178 $53,957 $107,247
Loans with variable/
adjusted rates 13,133 11,075 26,806 226 51,240
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)
2008 2007
------ ------
Beginning balance $1,186 $1,258
Provision charged to expense 297 187
Loan losses:
Commercial 39 142
Consumer 155 198
Real estate 0 9
------ ------
Total Loan Losses 194 349
------ ------
Recoveries:
Commercial 2 2
Consumer 105 86
Real estate 0 2
------ ------
Total Loan Recoveries 107 90
------ ------
Net Loan Losses 87 259
------ ------
Ending balance $1,396 $1,186
====== ======
Net loan losses as a percent
of average loans .06% .19%
Allowance as a percent of
year end loans .88% .80%
ANALYSIS OF ENDING BALANCE
December 31, 2008 December 31, 2007
-------------------------------- --------------------------------
Percent of Percent of Percent of Percent of
Amount Allowance Loans Amount Allowance Loans
------ ---------- ---------- ------ ---------- ----------
Commercial $ 443 31.73% 46.64% $ 641 50.95% 46.90%
Consumer 710 50.86% 7.67% 584 49.24% 7.92%
Real estate 243 17.41% 45.69% 262 22.09% 45.41%
Unallocated -- --% --% -- --% --%
------ ------ ------ ------ ------ ------
Total $1,396 100.00% 100.00% $1,186 100.00% 100.00%
====== ====== ====== ====== ====== ======
-16-
TABLE V
ALLEGHENY BANCSHARES, INC.
TIME DEPOSIT MATURITIES - OVER $100,000
(IN THOUSANDS)
2008 2007
------- -------
Maturity
Three months or less $ 5,876 $ 5,684
Over three to twelve months 12,325 13,988
Over one year to three years 8,064 6,261
Over three years 1,946 842
------- -------
Total $28,211 $26,775
======= =======
-17-
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm 21
Consolidated Balance Sheets as of
December 31, 2008 and 2007 22
Consolidated Statements of Income for the years ended
December 31, 2008 and 2007 23
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 2008 and 2007 24
Consolidated Statements of Cash Flows for the years ended
December 31, 2008 and 2007 25
Notes to Consolidated Financial Statements 26
-18-
104 Cranberry Road
(ELLIOTTDAVIS LOGO) Post Office Box 760
Accountants and Business Advisors 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, 2008 and 2007, and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years then ended. 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, 2008 and 2007 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.
(ELLIOTT DAVIS, LLC)
Galax, Virginia
March 6, 2009
-19-
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
2008 2007
------------ ------------
ASSETS
Cash and due from banks (Note 2) $ 2,561,712 $ 2,846,286
Federal funds sold 1,570,000 34,000
------------ ------------
Cash and Cash Equivalents 4,131,712 2,880,286
Interest earning deposits in banks 4,637,165 259,020
Investment securities available for sale (Note 3) 25,684,622 31,121,066
Investment securities held to maturity fair value of
501,000 in 2007 (Note 3) -- 500,000
Restricted equity securities (Note 4) 1,351,215 1,667,004
Loans receivable, net of allowance for loan losses
of $1,396,074 in 2008 and $1,185,826 in 2007 (Note 5) 156,982,030 146,785,104
Bank premises and equipment, net (Note 6) 6,249,434 6,539,518
Interest receivable 1,276,128 1,224,855
Bank owned life insurance (Note 7) 3,692,887 3,518,386
Other assets 725,025 385,415
------------ ------------
Total Assets $204,730,218 $194,880,654
============ ============
LIABILITIES
Deposits
Noninterest bearing $ 20,197,041 $ 18,249,818
Interest bearing
Demand 18,984,791 15,133,535
Savings 28,566,952 33,040,474
Time deposit over $100,000 (Note 8) 28,211,057 26,775,155
Time deposits (Note 8) 71,279,714 63,913,065
------------ ------------
Total Deposits 167,239,555 157,112,047
Treasury tax and loan deposit note 352,692 305,567
Securities sold under agreements to repurchase (Note 9) 1,466,228 1,411,605
Accrued expenses and other liabilities 841,742 802,825
Short-term debt (Note 11) 1,750,000 --
Long-term debt (Note 12) 5,920,041 8,517,265
------------ ------------
Total Liabilities 177,570,258 168,149,309
------------ ------------
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 13) 26,630,674 25,836,201
Accumulated other comprehensive income 320,543 154,201
Treasury stock (at cost, 28,767 and 19,717 shares in
2008 and 2007, respectively) (1,591,257) (1,059,057)
------------ ------------
Total Stockholders' Equity 27,159,960 26,731,345
------------ ------------
Total Liabilities and Stockholders' Equity $204,730,218 $194,880,654
============ ============
The accompanying notes are an integral part of this statement.
-20-
ALLEGHENY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, AND 2007
2008 2007
----------- -----------
INTEREST INCOME:
Loans, including fees $11,231,103 $11,531,097
Federal funds sold 32,812 138,751
Interest bearing deposits in banks 188,559 14,515
Investment securities - taxable 491,251 778,460
Investment securities - nontaxable 664,259 714,066
----------- -----------
Total Interest Income 12,607,984 13,176,889
----------- -----------
INTEREST EXPENSE:
Interest on deposits 4,504,926 5,017,002
Interest on borrowed money 359,000 378,259
----------- -----------
Total Interest Expense 4,863,926 5,395,261
----------- -----------
NET INTEREST INCOME 7,744,058 7,781,628
PROVISION FOR LOAN LOSSES (NOTE 5) 297,140 187,117
----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,446,918 7,594,511
----------- -----------
NONINTEREST INCOME (EXPENSE):
Service charges, fees and commissions 871,900 797,358
Restricted equity security impairment (Note 4) (804,600) --
Increase in cash value of bank owned life insurance 174,501 18,386
Other operating income 470,720 466,568
----------- -----------
Total Noninterest Income 712,521 1,282,312
----------- -----------
NONINTEREST EXPENSES:
Salaries and benefits 2,848,785 2,902,523
Occupancy expense 400,639 362,373
Equipment expense 610,226 632,142
Director's fees 196,650 175,675
Other expenses 1,403,053 1,367,699
----------- -----------
Total Noninterest Expenses 5,459,353 5,440,412
----------- -----------
INCOME BEFORE INCOME TAXES 2,700,086 3,436,411
INCOME TAX EXPENSE (NOTE 14) 641,600 963,757
----------- -----------
NET INCOME $ 2,058,486 $ 2,472,654
=========== ===========
Net income per share $ 2.35 $ 2.80
=========== ===========
Cash dividends paid per share $ 1.45 $ 1.40
=========== ===========
Average Weighted Shares Outstanding 877,442 881,858
=========== ===========
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, 2008 AND 2007
Accumulated
Additional Other
Common Paid In Retained Comprehensive Treasury
Total Stock Capital Earnings Income(Loss) Stock
----------- -------- ---------- ----------- ------------- -----------
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)
Comprehensive Income
Net income 2,058,486 -- -- 2,058,486 -- --
Change in unrealized
gain on available for
sale securities, net of
taxes of $85,691 166,342 -- -- -- 166,342 --
-----------
Total Comprehensive Income 2,224,828 -- -- -- -- --
Purchase of treasury stock (532,200) -- -- -- -- (532,200)
Dividends paid (1,264,013) -- -- (1,264,013) -- --
----------- -------- -------- ----------- -------- -----------
BALANCE, DECEMBER 31, 2008 $27,159,960 $900,000 $900,000 $26,630,674 $320,543 $(1,591,257)
=========== ======== ======== =========== ======== ===========
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, 2008 AND 2007
2008 2007
------------ ------------
OPERATING ACTIVITIES
Net income $ 2,058,486 $ 2,472,654
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 297,140 187,117
Depreciation and amortization 465,506 502,491
Net amortization of securities 18,874 17,719
Loss on restricted equity security impairment 804,600 --
(Gain) loss on sale of equipment 17,423 (32)
Deferred income (tax) benefit (292,293) 24,162
Increase in bank owned life insurance (174,501) (18,386)
Net change in:
Interest receivable (51,273) 83,115
Other assets (182,818) (48,145)
Accrued expense and other liabilities 88,729 48,759
------------ ------------
Net Cash Provided by Operating Activities 3,049,873 3,269,454
------------ ------------
INVESTING ACTIVITIES
Net change in interest bearing deposits in banks (4,378,145) (129,094)
Proceeds from sales, calls and maturities of
available for sale securities 9,885,415 5,486,356
Purchase of available for sale securities (4,215,813) (2,295,944)
Proceeds from maturity of held to maturity security 500,000
Purchase of restricted investments (693,911) (699,727)
Proceeds from redemptions of restricted investments 205,100
Proceeds from sale of equipment 500 32
Purchase of life insurance -- (3,500,000)
Purchase of bank premises and equipment (193,345) (290,385)
Net change in loans (10,494,066) (12,863,899)
------------ ------------
Net Cash Used in Investing Activities (9,384,265) (14,292,661)
------------ ------------
FINANCING ACTIVITIES
Net change in:
Demand and savings deposits 1,324,957 404,925
Time deposits 8,802,550 7,365,353
Treasury tax and loan deposit note 47,125 27,996
Securities sold under agreements to repurchase 54,623 (1,079,747)
Proceeds from short-term debt 1,750,000 --
Proceeds from long-term debt -- 3,500,000
Curtailments of long-term debt (2,597,224) (574,830)
Purchase of treasury stock (532,200) (282,994)
Cash dividends paid (1,264,013) (1,232,396)
------------ ------------
Net Cash Provided by Financing Activities 7,585,818 8,128,307
------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,251,426 (2,894,900)
Cash and cash equivalents, January 1 2,880,286 5,775,186
------------ ------------
Cash and cash equivalents, December 31 $ 4,131,712 $ 2,880,286
============ ============
Supplemental Disclosure of Cash Paid During the
Year for:
Interest $ 4,863,926 $ 5,425,494
Income taxes $ 1,020,000 $ 998,000
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.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand and
deposits at other financial institutions whose original maturity is 90 days or
less.
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
-24-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 asset/liability management
strategy, are classified as available for sale. These investment securities are
carried at fair value.
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 results 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.
Prior to 2008, loan origination fees were recognized in the period the loan is
made and costs of origination were expensed in the period that the costs are
incurred. This was 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 had
calculated this costs and the amount of it's deviation from GAAP, and determined
that there was not a significant impact on the financial statements. In 2008 the
Company changed its method to comply with GAAP whereby loan fees are netted
against direct loan origination costs. The resulting net deferred loan fee or
cost is amortized as a component of yield over the life of the loan.
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
19 for lending commitments as of December 31, 2008 and 2007.
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 dates.
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.
NET INCOME PER SHARE - Net income 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 December 2007, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 141(R), "Business Combinations," ("SFAS 141(R)") which replaces
SFAS 141. SFAS 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
controlling interest;
-26-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
recognizes and measures goodwill acquired in the business combination or a gain
from a bargain purchase; and determines what information to disclose to enable
users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS 141(R) is effective for acquisitions by the
Company taking place on or after January 1, 2009. Early adoption is prohibited.
Accordingly, a calendar year-end company is required to record and disclose
business combinations following existing accounting guidance until January 1,
2009. The Company will assess the impact of SFAS 141(R) if and when a future
acquisition occurs.
In April 2008, the FASB issued FASB Staff Position No. 142-3, "Determination of
the Useful Life of Intangible Assets," ("FSP 142-3"). This FSP amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, "Goodwill and Other Intangible Assets," ("SFAS 142"). The intent of
this FSP is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS 141(R) and other U.S. generally
accepted accounting principles. This FSP was effective for the Company on
January 1, 2009 and had no material impact on the Company's financial position,
results of operations or cash flows.
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, 2007 and 2008 were $807,000 and $856,000 respectively.
-27-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 INVESTMENT SECURITIES:
The amortized cost and fair values of securities are as follows:
Gross
Unrealized
Amortized -------------- Fair
(In Thousands) Cost Gains Losses Value
--------- ----- ------ -------
December 31, 2008
Securities Available-for-Sale
Mortgaged-backed obligations
of federal agencies $ 2,905 $ 34 $ 4 $ 2,935
Government sponsored
enterprises 6,008 169 -- 6,177
Obligations of states and
political subdivisions 15,652 396 58 15,991
Corporate obligations 501 -- 50 451
Other equities 131 -- -- 131
------- ---- ---- -------
$25,197 $599 $112 $25,685
======= ==== ==== =======
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
======= ==== ==== =======
For the years ended December 31, 2008, and 2007, proceeds from sales, calls and
maturities of securities available for sale amounted to $9,885,415 and
$5,486,356, respectively. No gains or losses were realized in 2008 or 2007.
-28-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 INVESTMENT SECURITIES (CONTINUED):
The following table shows the gross unrealized losses and fair value of the
Company's investment securities with unrealized losses that are deemed to be
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, 2008. The unrealized losses on the Company's
investment securities were caused by various reasons, but the Company feels that
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 10 investments to be other-than-temporary impaired at
December 31, 2008.
12 MONTHS
LESS THAN 12 MONTHS OR GREATER TOTAL
------------------- ------------------- ------
Fair Unrealized Fair Unrealized Fair
Value Losses Value Losses Value
------ ---------- ------ ---------- ------
DESCRIPTION OF SECURITIES
Mortgage-backed obligations of
federal agencies $ 136 $-- $1,230 $ 4 $1,366
Obligations of states and
political subdivisions 818 29 823 29 1,641
Corporate obligations 451 50 -- -- 451
------ --- ------ --- ------
Total $1,405 $79 $2,053 $33 $3,458
====== === ====== === ======
A maturity schedule of securities in thousands as of December 31, 2008, 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
- --- --------- ------- --------
In one year or less $ 1,160 $ 1,182 5.22%
After one year through five years 14,928 15,270 4.97%
After five years through ten years 6,913 7,015 5.15%
After ten years through fifteen years 2,196 2,218 5.22%
------- ------- ----
$25,197 $25,685 5.06%
======= ======= ====
The carrying value of securities pledged by the Company to secure deposits,
repurchase agreements and for other purposes amounted to $14,432,772 and
$15,138,622 at December 31, 2008 and 2007, respectively. The fair value of these
pledged securities approximates the carrying value. Weighted average yields have
been computed on a tax equivalent basis using an incremental tax rate of 34%.
NOTE 4 RESTRICTED EQUITY SECURITIES:
Restricted equity securities are considered restricted due to lack of
marketability. It consists of stock in the Federal Home Loan Bank (FHLB) and the
parent company of the Bank's Correspondent Bank (Correspondent). 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. The FHLB stock is carried at cost, the "Correspondent" stock is
carried at market value and each is restricted as to transferability. Management
evaluates these restricted securities for other-than-temporary impairment on a
quarterly basis, and more often when conditions warrant.
-29-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 RESTRICTED EQUITY SECURITIES (CONTINUED):
Consideration is given to current market conditions, historical trends in the
individual securities, as well as trends in the overall market. Declines
determined to be other than temporary are charged to operations and are shown on
the income statement. In view of the recent release of fourth quarter earnings
of "Correspondent", particularly as it relates to increases to their provision
for loan losses, net losses for the year 2008, and the elimination of dividends
for the fourth quarter, the Company recorded an other than temporary impairment
("OTTI") non-cash charge. The carrying value of the Company's "Correspondent"
stock as of September 30, 2008 was approximately $1.4 million. The OTTI charge
as of December 31, 2008 was $804,600, reducing our carrying value of
"Correspondent" stock to their book value as of December 31, 2008 of
approximately $603,515. No other than temporary impairment charge was recognized
in 2007.
NOTE 5 LOANS RECEIVABLE:
Loans receivable outstanding as of December 31, are summarized as follows in
thousands:
2008 2007
-------- --------
Loans secured by deeds of trust on real estate
Construction and land development $ 19,764 $ 15,925
Agribusiness 15,451 13,892
1-4 family residential properties 65,945 60,646
Multi family (5 or more) residential properties 81 211
Non-farm non-residential properties 25,359 24,152
Loans to finance agricultural production and other
loans to farmers 3,828 3,790
Commercial and industrial loans 10,344 12,646
Personal installment loans 11,779 11,699
All other loans 5,827 5,010
-------- --------
Subtotal 158,378 147,971
Less Allowance for loan losses 1,396 1,186
-------- --------
Loans Receivable $156,982 $146,785
======== ========
Substantially all of our 1-4 family mortgages as well as our multi family
residential mortgages are covered under a blanket lien with the Federal Home
Loan Bank for Borrowings.
A summary of transactions in the allowance for loan losses follows in thousands:
2008 2007
------ ------
Balance at Beginning of Year $1,186 $1,258
Provision charged to operating expense 297 187
Loan recoveries 107 90
Loan charge-offs (194) (349)
------ ------
Balance at End of Year $1,396 $1,186
====== ======
-30-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 LOANS RECEIVABLE (CONTINUED):
The following is a summary of information pertaining to impaired loans at
December 31, in thousands:
2008 2007
------ ------
Total Impaired Loans (Without a valuation allowance) $1,635 $1,614
====== ======
Total Impaired Loans (All with a valuation allowance) $1,524 $1,208
====== ======
Valuation allowance related to impaired loans $ 225 $ 265
====== ======
The average annual recorded investment in impaired loans and interest income
recognized on impaired loans in thousands for the years ended December 31, 2008
and 2007 is summarized below:
2008 2007
------ ------
Average investment in impaired loans $2,031 $1,080
====== ======
Interest income recognized on impaired loans $ 80 $ 77
====== ======
No additional funds are committed to be advanced in connection with impaired
loans.
Loans accounted for on a nonaccrual basis were $659,366 and $9,403 at December
31, 2008 and 2007 (.42% and .01% of total loans), respectively. Accruing loans
which are contractually past due
90 days or more as to principal or interest totaled $1,034,049 and $968,588 at
December 31, 2008 and 2007 (.65% of total loans for each period), respectively.
Past due status is determined based on the contractual terms of the loan
agreement.
Foreclosed and repossessed assets totaled $85,527 and $45,300 at December 31,
2008 and 2007 respectively.
NOTE 6 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are summarized as follows:
December 31
-----------------
2008 2007
------- -------
(In Thousands)
Bank buildings and improvements $ 6,072 $ 6,072
Furniture and equipment 3,963 4,040
------- -------
10,035 10,112
Less accumulated depreciation 3,786 3,572
------- -------
Bank Premises and Equipment $ 6,249 $ 6,540
======= =======
Depreciation expense on these premises and equipment totaled $465,506 and
$499,713 for the years ended December 31, 2008, and 2007 respectively.
-31-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7 BANK OWNED LIFE INSURANCE:
The Bank, 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 Bank 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 8 TIME DEPOSITS:
At December 31, 2008, the scheduled maturities of time deposits in thousands are
as follows:
2009 $ 59,178
2010 25,582
2011 3,495
2012 9,529
2013 1,155
Thereafter 552
--------
Total $ 99,491
========
Deposits more than $100,000 (28,211)
--------
Other Time Deposits $ 71,280
========
NOTE 9 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 1.24% during 2008. The highest month end balance during 2008 was
$1,720,040. For 2007, the highest month end balance was $2,455,082 and the
average interest rate was 4.50%.
NOTE 10 LINES OF CREDIT:
The Bank has lines of credit with a correspondent bank totaling $7,700,000. As
of December 31, 2008, the Bank 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 11 SHORT-TERM DEBT:
The Bank has borrowed money from the Federal Home Loan Bank of Pittsburgh
(FHLB). Typically FHLB debt has been used for long term funding, but in late
2008 we borrowed $1,000,000 for 2 month maturity and $750,000 for 3 month
maturity to correspond with interest bearing assets that were maturing. The
rates on these two loans are 0.87% and 0.93% respectively. The FHLB notes are
secured by FHLB Stock, as well as investment securities and mortgage loans.
-32-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 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, 2008
were fixed at the time of the advance and fixed rates range from 4.14% to 5.57%.
The FHLB notes are secured by FHLB Stock, as well as investment securities and
mortgage loans. The weighted average interest rate is 4.88% at December 31,
2008. The company has additional available borrowing capacity from the FHLB of
$72,902,000.
Repayments of long-term debt are due monthly. Interest expense of $335,746 and
$270,015 was incurred on these debts in 2008 and 2007, respectively. The
maturities of long term debt as of December 31, 2008 in thousands, are as
follows:
2009 $1,225
2010 1,237
2011 162
2012 141
2013 148
Thereafter 3,007
------
Total $5,920
======
NOTE 13 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, 2009, the Bank could pay dividends of up to $657,943 without
permission of the authorities.
NOTE 14 INCOME TAXES:
The current and deferred components of income tax expense in thousands are as
follows:
2008 2007
------ ----
Current component of income tax expense $1,020 $947
Net increase (decrease) resulting from deferred
income taxes (378) 17
------ ----
Income Tax Expense $ 642 $964
====== ====
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
(in thousands):
2008 2007
----- ------
Income taxes computed at the applicable
Federal income tax rate $ 918 $1,168
Increase (decrease) resulting from:
Tax exempt interest income (370) (337)
Non-deductible interest expense 36 45
State tax expense, net of federal tax 93 119
Prior year income tax refund (38) (29)
Other 3 (2)
----- ------
Income Tax Expense $ 642 $ 964
===== ======
-33-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 INCOME TAXES (CONTINUED):
The net deferred tax asset arising from temporary differences in thousands as of
December 31 is summarized as follows:
2008 2007
---- ----
Deferred Tax Asset:
Provision for loan losses $446 $365
Security impairment 303 --
Accrued expenses on
long term benefits 21 --
Interest on nonaccrual loans 4 --
---- ----
Total Assets 774 365
---- ----
Deferred Tax Liabilities:
Unrealized gain on securities
available for sale 166 80
Depreciation 356 321
Other 10 14
---- ----
Total Liabilities 532 415
---- ----
Net Deferred Tax Asset (Liability) $242 $(50)
==== ====
NOTE 15 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 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: $109,163
and $104,148 for years ending December 31, 2008 and 2007 respectively.
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 and 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 $8,925 during 2008 on this plan.
-34-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 EMPLOYEE BENEFITS (CONTINUED):
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 SERP assumes a 6.25% discount rate. The Company
has accrued a liability and incurred a benefit expense of $22,936 during 2008
for this plan.
NOTE 16 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:
2008 2007
----- ----
(In Thousands)
Beginning of Year $ 521 $541
Additional borrowings 394 61
Repayments (215) (81)
----- ----
End of Year $ 700 $521
===== ====
NOTE 17 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.
-35-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 17 FAIR VALUE (CONTINUED):
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
Company's investment securities available for sale are considered Level 2
securities, and their fair value at December 31, 2008 is $25,684,622.
Restricted equity securities: Restricted equity securities that are restricted
as to the transferability of the shares. Fair value measurement is based upon
quoted prices when available, but due to the limited number of transactions, and
the restrictions on transferability of these shares, a true active market does
not always exist. As such, the restricted equity securities are considered as
Level 3 securities, and their estimated fair value at December 31, 2008 is
$1,351,215.
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). 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 age of appraisals the changing market
conditions of real estate the Company considers it's impaired loans to be level
3 assets. At December 31, 2008, the aggregate carrying amount of impaired loans
was $1,298,286.
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. Due to age of
appraisals and changing market conditions, the Company considers it's OREO to be
level 3 assets, and their value as of December 31, 2008 was $84,027.
NOTE 17 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).
-36-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 17 REGULATORY MATTERS( CONTINUED):
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.
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, 2008:
Total Capital (to Risk Weighted Assets) $28,235 19.24% $11,743 Greather than $14,679 Greather than
or Equal to 8% or Equal to 10%
Tier I Capital (to Risk Weighted Assets) 26,839 18.28% 5,872 Greather than 8,807 Greather than
or Equal to 4% or Equal to 6%
Tier I Capital (to Average Assets) 26,839 13.27% 8,087 Greather than 10,109 Greather than
or Equal to 4% or Equal to 5%
As of December 31, 2007:
Total Capital (to Risk Weighted Assets) $27,763 19.84% $11,195 Greather than $13,993 Greather than
or Equal to 8% or Equal to 10%
Tier I Capital (to Risk Weighted Assets) 26,577 18.99% 5,597 Greather than 8,396 Greather than
or Equal to 4% or Equal to 6%
Tier I Capital (to Average Assets) 26,577 13.73% 7,743 Greather than 9,679 Greather than
or Equal to 4% or Equal to 5%
The amounts and ratios above are for the consolidated entity. The differences
for the subsidiary Bank individually are not significant.
NOTE 18 SUBSEQUENT EVENT - PURCHASE OF TWO BRANCH OFFICES:
On January 13, 2009, the Company entered into an agreement to purchase two
branch offices from Citizens National Bank ("CNB"). The two offices are in
Marlinton, WV and Petersburg, WV. The Agreement can be found by accessing the
website of the Securities and Exchange Commission under the filings of Allegheny
Bancshares, Inc. and as part of the Current Report on Form 8-K filed on January
20, 2009. The purchase will include the real estate and both offices of CNB as
well as approximately $17 million loan portfolio and approximately $22 million
in deposits. This purchase is expected to take place in the second quarter of
2009, subject to regulatory approval.
NOTE 19 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK:
The Company makes 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 uses 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 Bank
-37-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 19 FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK (CONTINUED):
evaluates 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, 2008 and 2007, the Company had outstanding the following
commitments (in thousands of dollars):
2008 2007
------- -------
Home equity lines of credit $ 4,946 $ 4,552
Commitments to fund commercial real estate and construction 4,930 3,385
Other unused commitments 12,448 12,059
Performance standby letter of credits 278 791
------- -------
$22,602 $20,787
======= =======
NOTE 20 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 $7,025,030 at December 31, 2008 and
$7,196,301 at December 31, 2007. 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 $1,606,654 of these loans at
December 31, 2008 and $1,429,646 at December 31, 2007.
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 $440,596 and $238,191 at December 31,
2008 and 2007, respectively.
NOTE 21 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.
-38-
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 21 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
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 DEBT 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.
OFF -BALANCE SHEET ITEMS
Letters of credit, lines of credit, and loan commitments are deemed to be at
face value.
December 31, 2008 December 31, 2007
------------------- ------------------
Fair Carrying Fair Carrying
Value Value Value Value
-------- -------- ------- --------
(In Thousands) (In Thousands)
Cash and due from banks $ 2,592 $ 2,562 2,846 $ 2,846
Interest bearing deposits in banks 4,637 4,637 259 259
Federal funds sold 1,570 1,570 34 34
Securities available for sale 25,685 25,685 31,121 31,121
Securities held to maturity -- -- 501 500
Restricted equity securities 1,889 1,889 1,667 1,667
Loans 159,721 156,982 147,088 146,785
Interest receivable 1,276 1,276 1,225 1,225
Bank owned life insurance 3,693 3,693 3,518 3,518
Demand deposits 39,182 39,182 33,383 33,383
Savings deposits 28,567 28,567 33,040 33,040
Time deposits 100,621 99,491 91,078 90,688
Short-term borrowings 3,569 3,569 1,717 1,717
Accrued interest payable 371 371 378 378
Short-term debt 1,750 1,750 -- --
Long-term debt 6,361 5,920 8,486 8,517
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ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
December 31, December 31,
2008 2007
------------ ------------
ASSETS
Cash $ 271 $ 628
Investment in subsidiary 26,126,933 25,620,884
Restricted equity securities 735,035 1,076,424
Due from subsidiary -- 8,495
Other Assets 386,574 24,914
----------- -----------
TOTAL ASSETS $27,248,813 $26,731,345
=========== ===========
LIABILITIES
Due to subsidiary $ 85,853 $ --
Accrued expenses 3,000 --
----------- -----------
TOTAL LIABILITIES 88,853 --
----------- -----------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share
2,000,000 shares authorized, 900,000
shares issued in 2008
and 2007, respectively 900,000 900,000
Additional paid in capital 900,000 900,000
Retained earnings 26,630,674 25,836,201
Accumulated other comprehensive (loss) 320,543 154,201
Less treasury stock (at cost, 28,767 and 19,717
shares in 2008 and 2007, respectively) (1,591,257) (1,059,057)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 27,159,960 26,731,345
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $27,248,813 $26,731,345
=========== ===========
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ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
---------- ----------
INCOME:
Dividends from subsidiary $2,214,013 $2,172,396
Restricted equity security impairment (804,600)
Income from securities 13,294 6,595
---------- ----------
Total Income 1,422,707 2,178,991
---------- ----------
EXPENSES:
Professional fees 28,656 7,110
Annual shareholder meeting 18,630 20,129
Amortization -- 2,778
Other expenses 11,946 8,140
---------- ----------
Total Expenses 59,232 38,157
---------- ----------
INCOME BEFORE UNDISTRIBUTED
INCOME OF SUBSIDIARY 1,363,475 2,140,834
Income tax benefit 355,304 13,584
UNDISTRIBUTED INCOME OF SUBSIDIARY 339,707 318,236
---------- ----------
NET INCOME $2,058,486 $2,472,654
========== ==========
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ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 22 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 2007
----------- -----------
OPERATING ACTIVITIES
Net income $ 2,058,486 $ 2,472,654
Adjustments:
Undistributed subsidiary income (339,707) (318,236)
Deferred income (tax) benefit (303,333) --
Loss on restricted equity security impairment 804,600
Increase (decrease) in other liabilities 88,853 (4,641)
(Increase) decrease in other assets (49,832) (14,520)
----------- -----------
Net Cash Provided by Operating Activities 2,259,067 2,135,257
----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities (463,211) (624,127)
----------- -----------
Net Cash Used by Investing Activities (463,211) (624,127)
----------- -----------
FINANCING ACTIVITIES
Purchase of treasury stock (532,200) (282,994)
Cash dividends paid (1,264,013) (1,232,397)
----------- -----------
Net Cash Used by Financing Activities (1,796,213) (1,515,391)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (357) (4,261)
Cash and Cash Equivalents, January 1 628 4,889
----------- -----------
Cash and Cash Equivalents, December 31 $ 271 $ 628
=========== ===========
-42-
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, 2008, 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,
2008 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 fro the Company's 2009 Annual Meeting of Shareholders to be held
May 4, 2009 ("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 fro
the Proxy Statement under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance."
-43-
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
-44-
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: /s/ WILLIAM A. LOVING, JR.
------------------------------------
William A. Loving, Jr.
Executive Vice-President and
Chief Executive Officer
Date: March 13, 2009
By: /s/ L. KIRK BILLINGSLEY
------------------------------------
L. Kirk Billingsley
Chief Financial Officer
Date: March 13, 2009
-45-
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
- -------------------------------------
Thomas J. Bowman Director March 13, 2009
/s/ William G. Bosley, II
- -------------------------------------
William G. Bosley, II Director March 13, 2009
/s/ Roger D. Champ
- -------------------------------------
Roger D. Champ Secretary Director March 13, 2009
/s/ John E. Glover
- -------------------------------------
John E. Glover Vice Chairman of the Board March 13, 2009
Director
/s/ Carole H. Hartman
- -------------------------------------
Carole H. Hartman Chairman of the Board March 13, 2009
Director
/s/ Richard W. Homan
- -------------------------------------
Richard W. Homan Director March 13, 2009
/s/ Richard C. Phares
- -------------------------------------
Richard C. Phares Director March 13, 2009
/s/ William A. Loving, Jr.
- -------------------------------------
William A. Loving, Jr. Director March 13, 2009
/s/ Dolan Irvine
- -------------------------------------
Dolan Irvine Director March 13, 2009
-46-