Item 1. Description of Business
General
Allegheny Bancshares, Inc. (hereinafter referred to as the "Company"), incorporated under the laws of West Virginia in 2003, is a one-bank holding company subject to the provisions of the Bank Holding Company Act of 1956, as amended, and owns 100% of the outstanding stock of its subsidiary bank, Pendleton Community Bank ("Bank"). The Bank, headquartered in Franklin, West Virginia, was incorporated under the laws of West Virginia on March 9, 1925 and operates as a state chartered bank. The Bank is engaged in the general commercial banking business offering a full range of banking services focused primarily towards serving individuals, small to medium size businesses, the agricultural industry, and the professional community. The Bank strives to serve the banking needs of its customers while developing personal, hometown relationships.
Location and Market Area
The Bank's primary trade area includes Pendleton, Grant, Hardy and Pocahontas counties in West Virginia including the towns of Franklin, Marlinton, Moorefield, and Petersburg. The Bank's secondary trade area includes the neighboring counties of each respective office, including counties in West Virginia and Virginia. The Bank's business locations include their main office and operations center located in Franklin, West Virginia, a full service branch in Moorefield opened in July 1999, and a full service branch in Marlinton, West Virginia opened in November 2001.
To better serve the customers in the Marlinton area, the Company built a new full service branch in Marlinton and relocated operations to this office in May of 2005.
The Company also has a branch office under construction in Rockingham County, Virginia near Harrisonburg. This branch is expected to be opened in late spring 2006. Management is continuing to investigate and consider other possible sites that would enable the Bank to profitably serve its market area.
Banking Services
The Bank is a normal full service commercial bank and as such offers services that would be normally expected. The Bank accepts deposits, makes consumer and commercial loans, issues drafts, provides internet access to customer accounts, offers drive through banking and provides automated teller machines. The Bank's deposits are insured under the Federal Deposit Insurance Act to the limits provided thereunder.
Loans
The Bank offers a full range of short-to-medium term commercial and personal loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements) and purchase of equipment and machinery. Consumer loans may include secured and unsecured loans for financing automobiles, mobile homes, home purchases and improvements, education and personal investments.
Real estate construction loans (residential and commercial) are made for a maximum term of twelve months. Long-term real estate loans (residential and commercial) are made with a maximum amortization period of 30 years with fixed rates, balloon terms and adjustable rate terms (ARMs) of from one to five years. Interest rates vary depending on the length of the term. The majority of the real estate loans are made as investments, with a small percentage sold in the secondary market.
The Bank's lending activities are subject to a variety of lending limits imposed by state law. While differing limits apply in certain circumstances based on the type of loan or the nature of the borrower (including the borrower's relationship to the Bank), in general, the Bank is subject to a loan-to-one borrower limit of an amount equal to 15% of the Bank's capital and surplus in the case of loans which are not fully secured by readily marketable or other permissible types of collateral. The Bank voluntarily may choose to impose a policy limit on loans to a single borrower that is less than the legal lending limit. The Bank may establish relationships with correspondent banks to participate in loans when loan amounts exceed the Bank's legal lending limits or internal lending policies.
Deposits
The Bank offers a full range of deposit products including checking, money market, and savings accounts, certificates of deposits, and individual retirement accounts. The deposit accounts are insured under the Federal Deposit Insurance Act to the limits provided thereunder.
Other bank services include safe deposit boxes, issuance of cashier's checks, credit life insurance, traveler's checks, direct deposit of payroll and social security checks, automatic drafts for various accounts, telephone banking, online banking, cash management, and bill pay. The Bank currently offers credit and debit card services that can be used by bank customers throughout West Virginia and other regions.
Employees
As of December 31, 2005, the Bank had 54 full-time employees and 60 total employees.
Item 1A.
Item 1A. Risk Factors
Competition
The Bank's market area is highly competitive and competition in lending activities comes principally from other commercial banks. The primary factors in competing for loans are interest rates and overall lending services. There are branches of nine commercial banks located in its primary market area. Competition for deposits among the banks is intense, and as a result, the Bank monitors its competitive position and makes adjustments in pricing that management deems necessary to attract new depositors and maintain current deposit relationships. Competition for deposits comes from other commercial banks, savings associations, investment brokerage firms, insurance companies and credit unions. The primary factors in competing for deposits are interest rates paid on deposits, customer satisfaction, convenience of office location and overall financial condition. West Virginia law allows statewide branch banking which provides increased opportunities for banks, but it also increases the potential competition for banking in its service area. In addition, in 1994, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act. Under this Act, absent contrary action by a state's legislature, interstate branch banking was allowed to occur after June 1, 1997. States are permitted to elect to participate to a variety of degrees in interstate banking or states may elect to "opt out." In 1996, the West Virginia Legislature elected to "opt in." Accordingly, out-of-state banks may form de novo banks or may acquire existing branches of West Virginia banks on a reciprocal basis.
Credit Risk
The Bank makes loans that involve a greater degree of risk than loans involving residential real estate lending. Commercial business loans may involve greater risks than other types of lending because they are often made based on varying forms of collateral, and repayment of these loans often depends on the success of the commercial venture. Consumer loans may involve greater risk because adverse changes in borrowers' incomes and employment after funding of the loans may impact their abilities to repay the loans.
The company's loan portfolio at December 31, 2005, consists of the following:
Type of Loan Percentage of Portfolio ------------ ----------------------- Residential Real Estate Loans 45.42% Commercial Loans, principally real estate secured 45.93% Consumer Loans 8.65%
Interest Rate Risk
Aside from credit risk, the most significant risk resulting from the Bank's normal course of business, extending loans and accepting deposits, is interest rate risk. If market interest rate fluctuations cause the Bank's cost of funds to increase faster than the yield of its interest-earning assets, then its net interest income will be reduced. Company's results of operations depend to a large extent on the level of net interest income, which is the difference between income from interest-earning assets, such as loans and investment securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond the company's control, including general economic conditions and the policies of various governmental and regulatory authorities.
To effectively monitor the interest rate risk discussed above, the Bank uses a well-known computer model to project the change in net interest income under various changes in interest rates. To provide guidance to management, the company's board of directors, through its Asset/Liability/Investment Committee, has established a policy related thereto which includes interest rate risk parameters within which to operate. As of December 31, 2005, the Bank's interest rate risk is within the parameters.
The Effect of Governmental Policy on Banking
The earnings and growth of the Bank are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies. For example, the Board of Governors of the Federal Reserve System (the "FRB") influences the supply of money through its open market operations in U.S. Government securities and adjustments to the discount rates applicable to borrowings by depository institutions and others. Such actions influence the growth of loans, investments and deposits and also affect interest rates charged on loans and paid on deposits. The nature and impact of future changes in such policies on the business and earnings of the Bank cannot be predicted.
As a consequence of the extensive regulation of commercial banking activities in the United States, the business of the Bank is particularly susceptible to being affected by enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities, or enhancing the competitive position of other financial institutions. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of the Bank. The Bank is subject to the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), which substantially revises the bank regulatory framework and deposit insurance funding provisions of the Federal Deposit Insurance Act.
Bank Regulation and Supervision
As a West Virginia state-chartered bank, the Bank is regulated, supervised and regularly examined by the West Virginia Division of Banking ("WVDB") and the Federal Deposit Insurance Corporation ("FDIC"). Deposit accounts at the Bank are insured by the Bank Insurance Fund ("BIF"), as administered by the FDIC, to the maximum amount permitted by law.
The FDIC may terminate a bank's deposit insurance upon finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition enacted or imposed by the bank's regulatory agency.
Effect of Environmental Regulation
The Bank's primary exposure to environmental risk is through its lending activities. In cases when management believes environmental risk potentially exists, the Bank mitigates its environmental risk exposures by requiring environmental site assessments at the time of loan origination to confirm collateral quality as to commercial real estate parcels posing higher than normal potential for environmental impact, as determined by reference to present and past uses of the subject property and adjacent sites. Environmental assessments are typically required prior to any foreclosure activity involving non-residential real estate collateral.
With regard to residential real estate lending, management reviews those loans with inherent environmental risk on an individual basis and makes decisions based on the dollar amount of the loan and the materiality of the specific credit.
The Bank anticipates no material effect on anticipated capital expenditures, earnings or competitive position as a result of compliance with federal, state or local environmental protection laws or regulations.
International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (USA Patriot Act)
The International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 (the "Patriot Act") was adopted in response to the September 11, 2001 terrorist attacks. The Patriot Act provides law enforcement with greater powers to investigate terrorism and prevent future terrorist acts. Among the broad-reaching provisions contained in the Patriot Act are several designed to deter terrorists' ability to launder money in the United States and provide law enforcement with additional powers to investigate how terrorists and terrorist organizations are financed. The Patriot Act creates additional requirements for banks, which were already subject to similar regulations. The Patriot Act authorizes the Secretary of the Treasury to require financial institutions to take certain "special measures" when the Secretary suspects that certain transactions or accounts are related to money laundering. These special measures may be ordered when the Secretary suspects that a jurisdiction outside of the United States, a financial institution operating outside of the United States, a class of transactions involving a jurisdiction outside of the United States or certain types of accounts are of "primary money laundering concern." The special measures may include any or all of the following: (a) require financial institutions to keep records and report on the transactions or accounts at issue; (b) require financial institutions to obtain and retain information related to the beneficial ownership of any account opened or maintained by foreign persons; (c) require financial institutions to identify each customer who is permitted to use a payable-through or correspondent account and obtain certain information from each customer permitted to use the account; and (d) prohibit or impose conditions on the opening or maintaining of correspondent or payable-through accounts.
Bank Holding Company
Beginning on January 1, 2003, the Bank became a wholly owned subsidiary of Allegheny Bancshares, Inc., a bank holding company under the Bank Holding Company Act of 1956. The Bank Holding Company Act of 1956 restricts the activities of the Company and the acquisition by the Company of voting stock or assets of any bank, savings association or other company. The Company is also subject to the reporting requirements of, and examination and regulation by, the Federal Reserve Board and the West Virginia Division of Banking. The Bank is subject to restrictions imposed by the Federal Reserve Act on transactions with affiliates, including any loans or extensions of credit to the Company or its subsidiaries, investments in the stock or other securities thereof and the taking of such stock or securities as collateral for loans to any borrower; the issuance of guarantees, acceptances or letters of credit on behalf of the Company and its subsidiaries; purchases or sales of securities or other assets; and the payment of money or furnishing of services to the Company and other subsidiaries. The Company is prohibited from acquiring direct or indirect control of more than 5% of any class of voting stock or substantially all of the assets of any bank holding company without the prior approval of the Federal Reserve Board and the West Virginia Board of Banking and Financial Institutions. The Company and its subsidiary are prohibited from engaging in certain tying arrangements in connection with extensions of credit and/or the provision of other property or services to a customer by the Company or its subsidiary.
The Gramm-Leach-Bliley Act (also known as the Financial Services Modernization Act of 1999) permits bank holding companies to become financial holding companies. This allows them to affiliate with securities firms and insurance companies and to engage in other activities that are financial in nature. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. No regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve Board.
The Financial Services Modernization Act defines "financial in nature" to include: securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking. A bank also may engage, subject to limitations on investment, in activities that are financial in nature, other than insurance underwriting, insurance company portfolio investment, real estate development and real estate investment, through a financial subsidiary of the bank, if the bank is well capitalized, well managed and has at least a satisfactory Community Reinvestment Act rating. The specific effects of the enactment of the Financial Services Modernization Act on the banking industry in general and on Allegheny in particular have yet to be determined because of that Act's relatively recent adoption. Currently, Allegheny has not requested approval as a financial holding company.
Capital Standards
The FDIC and other federal banking agencies have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization's operations. As of December 31, 2005, the Bank's capital significantly exceeds regulatory requirements. A schedule of capital amounts and ratios is included in Note 14 to the financial statements.
Illiquid Market
Because a very limited public market exists for the holding company's common stock, a shareholder may have difficulty selling his or her shares in the secondary market. We cannot predict when, if ever, we could meet the listing qualifications of the Nasdaq Stock Market's National Market Tier or any exchange. We cannot assure you that there will be a more active public market for the shares in the near future.
Item 1B.
Item 1B. Unresolved Staff Comments - None
Item 2.
Item 2. Description of Property
The main office of the Bank is located at 300 North Main Street, Franklin, West Virginia and is owned by the Bank. The attractive modern facility was originally constructed in 1968 and renovated and expanded in 1989. The construction of the building is cinder block with a brick facing. The 10,640 square foot main floor has six Bank offices, seven administrative offices, five lobby teller stations, five loan administration offices and a customer service area. In addition, there are three drive-through lanes, a walk up window, a night depository and a full service ATM. The 6,660 square foot lower level houses the operations center, two administration offices, a community room and a board room.
The branch in Moorefield is located at 402 South Main Street, Moorefield, West Virginia and is owned by the Bank. The 3,625 square foot building has four offices, four teller stations, two drive-through lanes, a night deposit drop and an ATM. The branch was completed in February 2000 and the construction is wood frame with a gray masonry exterior.
The branch in Marlinton was relocated from a temporary location to a permanent location in May 2005 with the construction of a new building owned by the bank. The new branch is located at 900 Seneca Trail, Marlinton, West Virginia. The 3,500 square foot building has four offices, four teller stations, two drive thru lanes, a night deposit drop and an ATM. The temporary location opened in November 2001 with the relocation completed in May 2005.
Item 3.
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.
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, 2005.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
The Company's common stock is currently not traded on any established market; however, the Company is frequently informed of the sales price at which common shares are exchanged. Other transactions may have occurred which were not reported to the Company. The Company acts as its own transfer agent.
The amount of dividends payable by the Company depends upon its earnings and capital position, and is limited by the federal and state law, regulations and policy. A West Virginia state bank cannot pay dividends (without the consent of banking authorities) in excess of the total net profits of the current year and the combined retained profits of the previous two years. The dividend limit as of January 1, 2006 is included in Note 10 to the financial statements.
Annual dividends were declared as of December 31, 2005 and 2004 in the amount of 1.20 and 1.10 per share, respectively.
Stockholders
As of December 31, 2005, there were 665 holders of common stock. This amount includes all shareholders, whether individually or held by a brokerage firm or custodian in street name.
The high and low trade prices of the Company's common stock reported to management were as follows: Year 2005 2004 ---- ---- ---- High Low High Low 1st quarter $ 49.00 $ 49.00 $ 40.00 $ 37.00 2nd quarter 62.60(1) 49.00 45.00 40.00 3rd quarter 64.00(1) 50.00 62.60(1) 45.00 4th quarter 57.00(1) 50.00 49.00 49.00
(1) This price was the result of a private sale and may not be indicative of the market for the Company's shares.
Item 6.
Item 6. Selected Financial Data
Years ended December 31, 2005 2004 2003 2002 2001 ---- ---- ---- ---- ---- (Dollars in Thousands except per share data)
RESULTS OF OPERATIONS
Interest income $10,226 $9,323 $9,143 $8,853 $8,889 Interest expense (2,847) (2,128) (2,513) (2,909) (3,977) ------- ------ ------ ------ ------
Net Interest Income 7,379 7,195 6,630 5,944 4,912
Provisions for loan losses (219) (183) (120) (120) (120) Noninterest income 859 512 432 401 231 Noninterest expenses (4,529) (4,112) (3,708) (3,524) (2,759) Income taxes (1,044) (1,028) (953) (770) (621) ------ ------ ----- ------ ------
Net Income $ 2,446 $2,384 $2,281 $1,931 $1,643 ====== ====== ====== ====== ======
PROFITABILITY RATIOS
Return on Average Assets 1.46% 1.49% 1.48% 1.40% 1.31% Return on Average Equity 9.77% 9.95% 9.96% 9.01% 8.14%
PER COMMON SHARE
Net Income $ 2.73 $ 2.66 $ 2.54 $ 2.15 $ 1.83 Cash Dividends Declared 1.20 1.10 1.00 .90 .80 Book Value 27.77 26.82 25.63 24.36 22.32 Last Reported Market Price 57.00 49.00 37.00 35.05 30.00 Dividend Payout Ratio 43.92% 41.38% 39.45% 41.94% 43.72%
AT YEAR END
Assets $171,320 $162,239 $157,757 $146,001 $129,668 Deposits 136,974 131,577 128,553 121,982 108,562 Loans 124,433 117,228 110,516 103,430 82,797 Long-term Debt 5,109 3,494 3,838 Stockholders' Equity 24,864 24,047 23,053 21,928 20,091 Equity to Assets Ratio 14.51% 14.82% 14.61% 15.56% 6.12%
Item 7.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operations
Forward Looking Statements
The following discussion contains statements that refer to future expectations, contain projections of the results of operations or of financial condition or state other information that is "forward-looking." "Forward-looking" statements are easily identified by the use of words such as "could," "could anticipate," "estimate," "believe," and similar words that refer to the future outlook. There is always a degree of uncertainty associated with "forward-looking" statements. The Company's management believes that the expectations reflected in such statements are based upon reasonable assumptions and on the facts and circumstances existing at the time of these disclosures. Actual results could differ significantly from those anticipated.
Many factors could cause the Company's actual results to differ materially from the results contemplated by the forward-looking statements. Some factors, which could negatively affect the results, include:
>> General economic conditions, either nationally or within the Company's markets, could be less favorable than expected; >> Changes in market interest rates could affect interest margins and profitability; >> Competitive pressures could be greater than anticipated; and >> Legal or accounting changes could affect the Company's results.
Critical Accounting Policies
Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. Our single most critical accounting policy relates to our allowance for loan losses, which reflects the estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated, and additional reserves may be required. For further discussion of the estimates used in determining the allowance for loan losses, we refer you to the discussion on "Loan Losses and Allowance for Loan Losses" below.
Overview
2005 Compared to 2004
Net income of the Company increased 2.61% from 2004 to 2005 and earnings per share increased 2.63% from $2.66 to $2.73. Increases of $184,000 in net interest income and $346,000 in noninterest income were offset primarily by increases in noninterest expenses.
The increase in net interest income was caused primarily by growth in our loan portfolio. Average loans grew by 6.32% and the rising interest rate environment increased our yield on the total earning assets as shown in Table I. However rising interest rates on interest bearing liabilities grew faster than our earnings.
2004 Compared to 2003
Net income of the Company increased 4.51% from 2003 to 2004 and earnings per share increased 4.72% from $2.54 to $2.66. Increases of $566,000 in net interest income and $80,000 in noninterest income were offset by increases in the provision for loan losses and noninterest expenses.
Net Interest Earnings
2005 Compared to 2004
The primary source of the Company's earnings is net interest income, the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities while deposits represent the major portion of interest-bearing liabilities. For purposes of the following discussion, comparison of net interest income is done on a tax equivalent basis, which provides a common basis for comparing yields on earning assets exempt from federal income taxes to those which are fully taxable. The Company's taxable equivalent net interest income increased 2.37% in 2005 compared to 2004, due to the net growth of earning assets. The Company's net yield on interest earning assets for 2005 was 4.86% compared to 4.97% for 2004 as the yield on earning assets increased by 28 basis points while the cost of funds increased by 49 basis points. 2005 proved to be a costly year to raise deposits as increased competition for deposits and the rising interest rate environment increased the costs of those deposits. The cost of funds increased due to the repricing of deposits at higher current rates and the higher rates offered to attract new deposits. In addition, the flat yield curve that existed for much of the year put pressure on our net interest margin as cost for the short term deposits increased more than the yield on our longer term interest bearing assets.
During the 2nd quarter of 2005 loan demand outpaced the growth of deposits. As the Federal Reserve continued to raise the target Fed Funds rate, short-term deposits became increasingly expensive as compared to long term financing alternatives available from the Federal Home Loan Bank (FHLB). As a result, the Company turned to long term FHLB borrowings to finance loan growth. While this increased our interest expense, it also enabled the Company to mitigate interest rate risk while offering customers longer term loan products.
2004 Compared to 2003
The Company's taxable equivalent net interest income increased 7.61% in 2004 compared to 2003, due to the net growth of earning assets and improved net yield on earning assets. The Company's net yield on interest earning assets for 2004 was 4.97% compared to 4.78% for 2003 as the yield on earning assets declined less than the cost of funds. The cost of funds declined due to the repricing of maturing time deposits at lower current rates.
Noninterest Income
2005 Compared to 2004
Noninterest income consists of all revenues which are not included in interest and fee income related to earning assets. Noninterest income increased 67.59% in 2005. Service charges increased $354,000 from 2004 to 2005, as a result of the Company's overdraft bounce protection program that was implemented in December 2004. Other increases in noninterest income were due to increases in ATM fees and early withdrawal penalties on time deposits. Noninterest income (excluding security gains and losses) as a percentage of average assets was .51% and .29% for December 31, 2005 and 2004 respectively.
2004 Compared to 2003
Noninterest income consists of all revenues which are not included in interest and fee income related to earning assets. Noninterest income increased 18.52% in 2004. Service charges increased $43,000 from 2003 to 2004, primarily as a result of an increase in overdraft fees and the introduction of the Company's overdraft bounce protection program. Also included in noninterest income are gains on securities of $52,000 in 2004 as compared to $7,000 in 2003. Other increases in noninterest income were due to increases in ATM fees and insurance commissions. Noninterest income (excluding security gains and losses) as a percentage of average assets was .29% and .28% for December 31, 2004 and 2003 respectively.
Noninterest Expenses
2005 Compared to 2004
Noninterest expenses increased $418,000 in 2005 compared to 2004. Noninterest expenses as a percentage of average assets was 2.70% and 2.57% for each of the years ended December 31, 2005 and 2004, respectively. This increase is primarily attributable to a $190,000 increase in salaries and benefits as a result of an increase in the number of employees, merit increases, and higher benefit costs. Occupancy and equipment expenses increased as a result of the completed Franklin office renovations in December 2004 and the relocation and construction of the new Marlinton office completed in May 2005. Also included in equipment expenses is software maintenance expense, which increased as a result of implementing Managed Security Services which includes intrusion detection and protection and firewall management to give an added layer of network security. This increased network security helps offsets the additional risk exposure that exists due to our internet banking products that were introduced in late 2004.
In August 2005, the bank subsidiary changed its name from Pendleton County Bank to Pendleton Community Bank. Additional expenses were incurred to replace stationary, supplies, and promotional items. Other contributors to the increase in noninterest expense were the costs incurred in connection with implementing procedures to comply with Sarbanes-Oxley Rule 404.
2004 Compared to 2003
Noninterest expenses increased $404,000 in 2004 compared to 2003. Noninterest expenses as a percentage of average assets was 2.57% and 2.40% for each of the years ended December 31, 2004 and 2003, respectively. This increase is primarily attributable to a $170,000 increase in salaries and benefits as a result of an increase in the number of employees, merit increases, and higher benefit costs. Occupancy expenses increased due to improvements to the Franklin Office. Equipment expenses, including software maintenance contract expense and depreciation expense, increased as a result of computer system improvements and upgrades in 2003, and developing and implementing the Bank's website, internet banking and bounce protection in 2004. Director's fees increased in 2004 due to an increase in fees and the formation of new committees.
Other changes contributing to the increase in noninterest expenses were increases in information systems consulting fees, education and travel, audit and accounting fees and nonincome tax expense. These increases were offset somewhat by decreases in office supplies expense. Other increases include marketing expenditures due to expanded advertising campaigns.
Income Tax Expense
Income tax expense equaled 29.9%, 30.1% and 29.5% of income before income taxes for the years ended December, 31 2005, 2004 and 2003, respectively.
Securities
Schedules of securities by type and maturity are shown in Note 3 to the financial statements.
Loans
Total loans increased 6.15% during 2005 to $125,604,989. A schedule of loans by type is shown in Note 4 of the financial statements. Approximately 82% of the loan portfolio is secured by real estate at December 31, 2005.
Loan Portfolio Risk Factors
Loans are placed in a nonaccrual status when management has information that indicates that principal or interest may not be collectable. The Company has a substantial amount of loans in the loan portfolio related to agribusinesses; see Note 4 of the financial statements for additional details. Management has not identified any additional loans as "troubled debt restructurings" or "potential problem loans."
Loan Losses and Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses in the current loan portfolio. The allowance is based on two principles of accounting: (i) SFAS 5, Accounting for Contingencies which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that loans be identified which have characteristics of impairment (e.g. the collateral, present value of cash flows or observable market values are less than the loan balance).
For each period presented, the provision for loan losses charged to operations is based on management's judgment after taking into consideration all factors connected with the collectibility of the existing portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and value of the portfolio, industry standards and other relevant factors.
Through internal loan review the bank classifies loans into categories and assigns a risk rating as follows to be used in the calculation: Excellent, Good, Satisfactory, Special Mention, Substandard, Doubtful and Loss. Within these categories, Real Estate, Consumer, and Commercial Loans are assigned a specific loss rate based on historical losses and management's estimation of potential loss.
Loans identified as problem loans or potential problem loans are committed to a watch list. Loans on the watch list are classified as loss, doubtful, substandard or special mention and are subjected to a more detailed review. This detailed review identifies each applicable loan for specific impairment and a specific allocation for that impaired amount is used in the calculation. Rates assigned each category may vary over time as historical loss rates, loan structure and economic conditions change.
The allowance for loan losses is computed quarterly and adjusted prior to the issuance of the quarterly financial statements. All loan losses charged to the allowance are approved by the board of directors at their regular meetings. The allowance is reviewed for adequacy after considering historical loss rates, current economic conditions (both locally and nationally) and any known credit problems that have not been considered under the above formula.
The allowance for loan losses increased from $1,094,288 at December 31, 2004 to $1,172,063 at December 31, 2005. Net charge offs stayed level at $141,000 in 2004 and $141,000 in 2005. The provision for loan losses increased from $183,000 in 2004 to $219,000 in 2005. Based on historical losses, delinquency rates, a thorough review of the loan portfolio and after considering the elements of the preceding paragraph, management is of the opinion that the allowance for loan losses is appropriately stated in order to absorb losses in the current portfolio.
See Table IV for a summary of the activity in the allowance for loan losses.
The Company has allocated the allowance according to the amount deemed to be reasonably necessary to provide for the losses within each of the categories of loans. The allocation of the allowance as shown in Table IV should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loan loss trends. Furthermore, the portion allocated to each loan category is not the total amount available for losses that might occur within such categories since the total allowance is a general allowance applicable to the entire portfolio.
Table IV shows the balance and percentage of the Company's allowance for loan losses allocated to each major category of loans.
Deposits
The Company's deposits increased $5,397,005 or 4.10% during 2005. A schedule of deposits by type is shown in the balance sheets. Time deposits of $100,000 or more were 14.04% of total deposits at December 31, 2005.
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 payments of $385,000 and $344,000 in 2005 and 2004, respectively. The following table shows the FHLB debt as of December 31, 2005.
(Dollars in Thousands) Interest Loan Term of Current Loan Date Rate Amount Loan Balance - --------- ---- ------ ---- ------- March 18, 2003 3.77% $1,000 10 years $ 761 June 18, 2003 3.15% $2,000 10 years $1,557 October 20, 2003 4.28% $1,000 10 years $ 818 June 8, 2005 4.58% $1,000 20 years $ 985 July 7, 2005 4.77% $1,000 20 years $ 988 ------
Total FHLB Debt at December 31, 2005 $5,109
Maturity schedule and other information on this debt can be found in Note 9 to the financial statements.
Capital
Capital as a percentage of total assets was 14.51% at December 31, 2005 and significantly exceeded regulatory requirements. The Company is considered to be well capitalized under the regulatory guidelines.
Uncertainties and Trends
Management is not aware of any trends, events or uncertainties that will have or that are reasonably likely to have a material effect on liquidity, capital resources or operations. Additionally, management is not aware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have such an effect.
Liquidity and Interest Sensitivity
At December 31, 2005, the Company had liquid assets of approximately $4.9 million in the form of cash and due from banks and federal funds sold. Management believes that the Company's liquid assets are adequate at December 31, 2005. Additional liquidity may be provided by the growth in deposit accounts and loan repayments. In the event the Company would need additional funds, it has the ability to purchase federal funds and borrow under established lines of credit of $18.2 million.
At December 31, 2005, the Company had a negative cumulative Gap Rate Sensitivity Ratio of -32.42% for the one-year repricing period. This rate does not reflect the historical movement of funds during varying interest rate environments. Adjusted for historical repricing trends in response to interest rate changes, the adjusted gap ratio is 5.47%. This generally indicates that net interest income would remain stable in both a declining and increasing interest rate environment. Management constantly monitors the Company's interest rate risk and has decided that the current position is an acceptable risk for a growing community bank operating in a rural environment. Table III shows the Company's interest sensitivity.
TABLE I Allegheny Bancshares, Inc. Net Interest Margin Analysis (On a fully tax equivalent basis) (In Thousands)
Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- Average Income/ Average Income/ Balance Expense Rates Balance Expense Rates ------- ------- ------ ------- ------- ----- Interest Income Loans(1) $123,894 $8,835 7.13% $116,530 $7,957 6.83% Federal funds sold 1,808 62 3.42% 2,049 30 1.46% Interest bearing deposits in banks 323 9 2.79% 227 4 1.76% Investments Taxable 14,906 608 4.08% 16,056 613 3.82% Nontaxable(2) 18,334 1,079 5.88% 17,350 1,089 6.28% ------ ----- ------ ------ ----- ------
Total Earning Assets $159,265 $10,593 6.65% $152,212 $9,693 6.37% ======== ------ ---- ======== ----- ----
Interest Expense Demand deposits $ 18,824 $ 248 1.32% $ 19,407 $ 163 .84% Savings 27,609 303 1.10% 26,388 198 .75% Time deposits 71,251 2,039 2.86% 68,369 1,597 2.34% Short-term borrowings 3,384 90 2.66% 1,851 32 1.73% Long-term borrowings 4,356 168 3.86% 3,671 137 3.73% ------- ------ ---- ------- ------ -----
Total Interest Bearing Liabilities $125,424 2,848 2.27% $119,686 2,127 1.78% ======= ------ ---- ======= ----- -----
Net Interest Margin(1) $ 7,745 $7,566 ======= =====
Net yield on interest Earning assets 4.86% 4.97% ==== =====
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 2005 and 2004 were $16,606 and $15,340, respectively.
TABLE II Allegheny Bancshares, Inc. Effect of Rate-Volume Change on Net Interest Income (On a fully tax equivalent basis) (In Thousands)
2005 Compared to 2004 2004 Compared to 2003 Increase (Decrease) Increase (Decrease) ------------------ ------------------ Volume Rate Total Volume Rate Total ------ ----- ----- ------ ---- -----
Interest Income Loans $ 503 $ 375 $ 878 $ 605 $ (318) $ 287 Federal funds sold (4) 36 32 (20) 10 (10) Interest bearing deposits in banks 2 3 5 0 (1) (1) Investments Taxable (44) 39 (5) 2 (35) (33) Nontaxable 62 (72) (10) (97) 2 (95) ----- ------ ------ ------ ----- ------
Total Earning Assets $ 519 $ 381 $ 900 $ 490 $ (342) $ 148 ====== ====== ====== ====== ====== ======
Interest Expense Demand deposits $ (5) $ 90 $ 85 $ 5 $ (32) $ (27) Savings 9 96 105 4 (58) (54) Time deposits 67 405 472 (27) (357) (384) Other borrowings 68 21 89 59 19 78 ----- ----- ----- ----- ----- -----
Total interest bearing liabilities 139 612 751 41 (428) (387) ----- ----- ----- ----- ----- -----
Net Interest Income $ 380 $ (231) $ 149 $ 449 $ 86 $ 535 ===== ====== ===== ===== ===== =====
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.
TABLE III Allegheny Bancshares, Inc. Interest Sensitivity Analysis (In Thousands) December 31, 2005
0 to 3 4 to 12 1 to 5 Over 5 Months Months Years Years Total ------ ------ ------ ------- ------- Uses of Funds:
Loans: Commercial $16,340 $11,173 $20,356 $ 9,827 $57,696 Installment 561 1,027 7,518 1,446 10,552 Real estate 6,678 5,429 9,458 35,491 57,056 Credit card 301 301 Interest bearing bank deposit 106 299 100 505 Investment securities 1,805 17,211 14,944 33,960 Federal funds sold 1,541 1,541 ------ ------ ------ ------ ------
Total Earning Assets 25,527 19,733 54,643 61,708 161,611 ------ ------ ------ ------ ------
Sources of Funds:
Interest bearing demand deposits 20,276 20,276 Savings deposits 28,522 28,522 Time deposits $100,000 and over 2,361 7,785 9,190 19,336 Other time deposits 14,444 20,037 17,404 680 52,565 Other borrowings 3,069 1,163 1,904 2,771 8,907 ------ ------ ------ ------ -----
Total Interest Bearing Liabilities 68,672 28,985 28,498 3,451 129,606 ------ ------ ------ ------ -------
Discrete Gap (43,145) (9,252) 26,145 58,257 32,005
Cumulative Gap (43,145) (52,397) (26,252) 32,005
Ratio of Cumulative Gap to Total Earning Assets -26.70% -32.42% -16.24% 19.80% 19.80% ====== ====== ====== ====== =====
Rate Risk:
Loans with predetermined rates $ 3,459 $ 9,645 $ 26,207 $ 46,300 $ 85,611
Loans with variable/ adjusted rates 20,421 7,984 11,125 464 39,994
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.
TABLE IV Allegheny Bancshares, Inc. Loan Loss Allowance Activity (In Thousands)
2005 2004 2003
Beginning balance $1,094 $1,051 $1,028
Provision charged to expense 219 184 120
Loan losses: Commercial 17 7 66 Installment 138 149 72 Real estate 2 20 11 Credit card ----- ----- ------
Total Loan Losses 157 176 149 ----- ----- ------
Recoveries: Commercial 1 2 28 Installment 15 33 24 Real estate Credit card ----- ----- ------
Total Loan Recoveries 16 35 52 ----- ----- ------
Net Loan Losses 141 141 97 ----- ----- ------
Ending balance $1,172 $1,094 $1,051 ===== ===== ======
Net loan losses as a percent of average loans .11% .12% .09%
Allowance as a percent of year end loans .93% .92% .94%
Analysis of Ending Balance December 31, 2005 December 31, 2004 ---------------------- ---------------------- Percent of Percent of Percent of Average Percent of Average Amount Allowance Loans Amount Allowance Loans
Commercial $ 401 34.22% 45.25% $ 829 75.78% 42.24% Installment 114 9.73% 8.63% 33 3.02% 9.65% Real estate 610 52.05% 45.88% 201 18.37% 47.86% Credit card 7 .59% .24% 0.25% Unallocated 40 3.41% 31 2.83% ----- ----- ------ ----- ----- ------
Total $1,172 100.00% 100.00% $1,094 100.00% 100.00% ===== ====== ====== ===== ====== ======
TABLE V Allegheny Bancshares, Inc. Time Deposit Maturities - Over $100,000 (In Thousands)
2005 2004
Maturity Less than 3 months $2,361 $2,232 3 to 6 Months 1,489 3,278 6 to 12 Months 6,296 5,867 Over 12 Months 9,190 7,615 ----- -----
Total $19,336 $18,992 ====== ======
TABLE VI Allegheny Bancshares, Inc. Quarterly Financial Results (In Thousands, except per share amounts)
Fourth Third Second First 2005 Quarter Quarter Quarter Quarter
Interest income $ 2,714 $ 2,631 $ 2,500 $ 2,381 Interest expense (841) (757) (665) (584) ------ ------ ------ ------
Net interest income 1,873 1,874 1,835 1,797 Provision for loan loss (56) (54) (55) (54) ------ ------ ------ ------
Net interest income after provision 1,817 1,820 1,780 1,743
Noninterest income 230 229 226 174 Noninterest expense (1,182) (1,167) (1,110) (1,070) ------ ------ ------ ------
Income before income tax provision 865 882 896 847
Income tax provision (247) (256) (272) (269) ------ ------ ------ ------
Net income $ 618 $ 626 $ 624 $ 578 ====== ====== ====== ======
Per common share: Net income (basic) $ .69 $ .70 $ .70 $ .64 Cash dividends 1.20
Fourth Third Second First 2004 Quarter Quarter Quarter Quarter
Interest income $ 2,409 $ 2,362 $ 2,271 $ 2,281 Interest expense (567) (524) (513) (524) ------ ------ ------ ------
Net interest income 1,842 1,838 1,758 1,757 Provision for loan loss (48) (45) (45) (45) ------ ------ ------ ------
Net interest income after provision 1,794 1,793 1,713 1,712 ------ ------ ------ ------
Noninterest income 135 126 143 108 Noninterest expense (1,039) (1,010) (1,038) (1,025) ------ ------ ------ ------
Income before income tax provision 890 909 818 795 Income tax provision (266) (276) (248) (238) ------ ------ ------ ------
Net income $ 624 $ 633 $ 570 $ 557 ======= ======= ======= =======
Per common share: Net income (basic) $ .70 $ .71 $ .63 $ .62 Cash dividends 1.10
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
This information is incorporated herein by reference from Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 8.
Item 8. Financial Statements
Page
Report of Independent Registered Public Accounting Firm 24
Balance Sheets for the years ended December 31, 2005 and 2004 25
Statements of Income for the years ended December 31, 2005, 2004 and 2003 26
Statements of Changes in Stockholders' Equity for the years ended December 31, 2005, 2004 and 2003 27
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 28
Notes to Financial Statements 30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors Allegheny Bancshares, Inc. Franklin, West Virginia
We have audited the accompanying balance sheets of Allegheny Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years ended December 31, 2005, 2004, and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Allegheny Bancshares, Inc. and subsidiary as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years ended December 31, 2005, 2004 and 2003 in conformity with U.S. generally accepted accounting principles.
/s/ S. B. Hoover & Company, L.L.P.
February 13, 2006 Harrisonburg, VA
ALLEGHENY BANCSHARES, INC.
BALANCE SHEETS DECEMBER 31, 2005 AND 2004
ASSETS 2005 2004
Cash and due from banks (Note 2) $2,882,297 $2,695,155 Interest bearing deposits in banks 504,617 225,309 Federal funds sold (Note 2) 1,541,000 2,017,963 Securities available for sale (Note 3) 33,458,768 33,047,889 Securities held to maturity (Note 3) 500,000 500,000 Loans receivable, net of allowance for loan losses of $1,172,063 in 2005 and $1,094,288 in 2004 (Note 4) 124,432,926 117,228,253 Bank premises and equipment, net (Note 5) 6,048,824 4,763,021 Interest receivable 1,053,296 928,235 Other assets 897,840 832,999 -------- ----------
Total Assets $171,319,568 $162,238,824 =========== ===========
LIABILITIES
Deposits Noninterest bearing $16,274,352 $16,347,656 Interest bearing Demand deposits 20,276,233 20,746,165 Savings deposits 28,522,231 25,731,632 Time deposits (Note 6) 71,901,030 68,751,388 ---------- ---------- Total Deposits 136,973,846 131,576,841
Treasury tax and loan deposit note 255,568 192,282 Securities sold under agreements to repurchase (Note 7) 3,543,567 2,352,008 Accrued expenses and other liabilities 574,065 576,716 Long-term debt (Note 9) 5,108,716 3,493,737 --------- -----------
Total Liabilities 146,455,762 138,191,584 ----------- -----------
STOCKHOLDERS' EQUITY
Common stock - $1 par value, 2,000,000 shares Authorized, 900,000 issued in 2005 and 2004, respectively 900,000 900,000 Additional paid in capital 900,000 900,000 Retained earnings (Note 10) 23,388,879 22,017,014 Accumulated other comprehensive income (loss) (116,768) 371,582 Treasury stock (at cost, 4,743 and 3,404 shares in 2005 and 2004, respectively) (208,305) (141,356) --------- -----------
Total Stockholders' Equity 24,863,806 24,047,240 ---------- ----------
Total Liabilities and Stockholders' Equity $171,319,568 $162,238,824 =========== ============
The accompanying notes are an integral part of this statement.
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003 INTEREST INCOME:
Loans, including fees $8,835,223 $7,957,077 $7,670,151 Federal funds sold 62,205 30,128 39,802 Interest bearing deposits in banks 8,647 4,085 5,330 Debt securities - taxable 608,085 613,201 646,351 Debt securities - nontaxable 712,113 718,691 781,500 ---------- --------- ---------
Total Interest Income 10,226,273 9,323,182 9,143,134 ---------- --------- ---------
INTEREST EXPENSE:
Interest on deposits 2,589,511 1,958,667 2,422,755 Interest on other borrowed money 257,648 169,223 90,949 ---------- --------- ----------
Total Interest Expense 2,847,159 2,127,890 2,513,704 ---------- --------- ----------
NET INTEREST INCOME 7,379,114 7,195,292 6,629,430
PROVISION FOR LOAN LOSSES (Note 4) 218,660 183,656 120,000 ---------- --------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,160,454 7,011,636 6,509,430 ---------- --------- ---------
NONINTEREST INCOME: Service charges, fees and commissions 621,925 267,712 224,703 Gain on security transactions 8,036 52,135 6,958 Other operating income 228,875 192,630 200,519 ---------- --------- ---------
Total Noninterest Income 858,836 512,477 432,180 ---------- --------- ---------
NONINTEREST EXPENSES: Salaries and benefits 2,313,640 2,123,528 1,953,054 Occupancy expense 284,320 250,874 219,276 Equipment expense 567,060 492,346 433,539 Director's fees 175,990 181,350 104,820 Other expenses 1,188,200 1,063,501 997,173 ---------- --------- ---------
Total Noninterest Expenses 4,529,210 4,111,599 3,707,862 ---------- --------- ---------
INCOME BEFORE INCOME TAXES 3,490,080 3,412,514 3,233,748
INCOME TAX EXPENSE (Note 11) 1,043,907 1,028,485 952,693 ---------- --------- ---------
NET INCOME $2,446,173 $2,384,029 $2,281,055 ========== ========= =========
Net income per share $ 2.73 $ 2.66 $ 2.54 ========= ======== =========
Cash dividends paid per share $ 1.20 $ 1.10 $ 1.00 ========= ======== =========
Average Weighted Shares Outstanding 896,186 897,767 899,570 ========= ======== =========
The accompanying notes are an integral part of this statement.
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
The accompanying notes are an integral part of this statement.
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003 OPERATING ACTIVITIES Net income $ 2,446,173 $2,384,029 $2,281,055 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 218,660 183,656 120,000 Provision for other real estate owned losses 15,000 Depreciation and amortization 445,153 383,984 344,792 Gain on security transactions (8,036) (52,135) (6,958) Net amortization of securities 50,168 86,069 94,901 Gain on sale of equipment (6,174) (2,500) Gain on sale of other real estate (14,726) Net change in: Interest receivable (125,061) 19,753 41,077 Other assets (67,619) (110,261) (356,857) Accrued expense and other liabilities 216,753 (6,273) 56,204 --------- --------- ---------
Net Cash Provided by Operating Activities 3,176,191 2,867,922 2,586,714 --------- --------- ---------
INVESTING ACTIVITIES Proceeds from sales of available for sale securities 2,304,534 6,077,995 1,247,303 Proceeds from calls of available for sale securities 1,460,000 2,791,500 4,445,000 Proceeds from maturities of available for sale securities 2,141,282 3,417,112 4,801,495 Proceeds from call of held to maturity security 500,000 500,000 Proceeds from sale of equipment 6,174 2,500 Proceeds from sale of other real estate 112,226 Purchase of available for sale securities (7,066,581) (9,010,820) (14,069,974) Purchase of held to maturity securities (500,000) (1,000,000) Purchase of bank premises and equipment (1,728,178) (931,148) (675,254) Net change in interest bearing deposits in banks (279,308) 14,695 20,638 Net change in federal funds sold 476,963 (1,334,068) (583,895) Net change in loans (7,423,333) (6,896,161) (7,205,458 ---------- ---------- ----------
Net Cash Used in Investing Activities (10,114,621) (5,752,495) (12,517,645) ----------- ---------- ----------
FINANCING ACTIVITIES Net change in: Demand and savings deposits 2,247,363 2,641,178 4,878,539 Time deposits 3,149,642 382,776 1,692,204 Short-term borrowings 1,254,845 1,037,504 318,627 Proceeds from long-term debt 2,000,000 4,000,000 Curtailments of long-term debt (385,021) (344,441) (161,822) Purchase of treasury stock (66,949) (126,257) (15,099) Cash dividends paid (1,074,308) (986,481) (899,823) ---------- ---------- ---------
Net Cash Provided by Financing Activities 7,125,572 2,604,279 9,812,626 ---------- ---------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 187,142 (280,294) (118,305)
Cash and Cash Equivalents, January 1 2,695,155 2,975,449 3,093,754 ---------- ---------- ---------
Cash and Cash Equivalents, December 31 $2,882,297 $2,695,155 $2,975,449 ========== ========= =========
ALLEGHENY BANCSHARES, INC.
STATEMENTS OF CASH FLOWS (Continued) FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
Supplemental Disclosure of Cash Paid During the Year for: 2005 2004 2003
Interest $ 2,754,310 $2,122,304 $2,592,885 Income taxes 1,023,500 1,040,833 638,110
The accompanying notes are an integral part of this statement.
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.
Management uses estimates and assumptions in preparing financial statements. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported revenue and expenses.
The accounting and reporting policies of the Company and its subsidiary conform to U.S. generally accepted accounting principles and to accepted practice within the banking industry. A summary of significant accounting policies is as follows:
Consolidation Policy - The consolidated financial statements include Allegheny Bancshares, Inc. and Pendleton Community Bank. All significant intercompany balances and transactions have been eliminated.
Investment Securities -Securities that the Company has both the ability and complete intention to hold to maturity (at the time of purchase) are classified as held to maturity securities. These held to maturity securities are recorded at amortized cost value. Investment securities which the Company intends to hold for indefinite periods of time, including investment securities used as part of the Company's asset/liability management strategy, are classified as available for sale. These investment securities are carried at fair value. Net unrealized gains and losses, net of deferred income taxes, are excluded from earnings and reported as a separate component of stockholders' equity until realized.
Interest and dividends on securities and amortization of premiums and accretion of discounts on securities are reported as interest income using the effective interest method. Gains and losses on the sale of investment securities are determined using the specific identification method.
Loans - Loans are intended to be held until maturity and are shown on the balance sheet net of the allowance for loan losses. Interest is computed by methods which generally result in level rates of return on principal. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Payments received on such loans are applied as a reduction of the loan principal balance. Interest income on other impaired loans is recognized only to the extent of interest payments received.
Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. Past due status is determined based on contractual terms.
The Company grants commercial, real estate and consumer installment loans to its customers. Collateral requirements for loans are determined on a loan-by-loan basis depending upon the purpose of the loan and the financial condition of the borrower.
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
In the normal course of business, to meet the credit needs of its customers, the Company has made commitments to extend credit. These commitments represent a credit risk, which is not recognized in the Company's balance sheet. The Company uses the same credit policies in making commitments as it does for other loans. Commitments to extend credit are generally made for a period of one year or less and interest rates are determined when funds are disbursed. Collateral and other security for the loans are determined on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the contract or notional amounts do not necessarily represent future cash requirements. See Note 15 for lending commitments as of December 31, 2005 and 2004.
The accrual of interest on all loans is discontinued when the loan is determined uncollectible. Loans are placed on nonaccrual or charged off if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Cash and Cash Equivalents - Cash and cash equivalents as used in the cash flow statements are defined as those amounts included in the balance sheet caption "Cash and due from banks", and include cash on hand and noninterest bearing funds at correspondent institutions.
Allowance for Loan Losses - The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions.
Bank Premises and Equipment - Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to income over the estimated useful lives of the assets on a combination of straight-line and accelerated methods.
Income Taxes - 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.
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.
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:
The Company has cash on deposit and federal funds sold to other commercial banks amounting to $2,159,995 and $3,181,704 as of December 31, 2005 and 2004, respectively.
NOTE 3 SECURITIES:
The amortized cost and fair values of securities are as follows:
(In Thousands) Amortized Gross Unrealized ---------------- Fair Cost Gains Losses Value
December 31, 2005
Securities Available-for-Sale
United States Government Mortgage Backed Securities $ 5,022 $ $ 222 $ 4,800 United States Government Agency Securities 10,457 7 94 10,370 Obligations of States and Political Subdivisions 18,149 239 99 18,289 --------- --------- --------- ---------
$ 33,628 $ 246 $ 415 $ 33,459 ========= ========= ========= =========
Securities Held-to-Maturity
United States Government Agency Securities $ 500 $ $ 12 $ 488 ========= ========== ========= =========
December 31, 2004
Securities Available-for-Sale
United States Government Mortgage Backed Securities $ 6,575 $ $ 111 $ 6,464 United States Government Agency Securities 7,484 122 5 7,601 Obligations of States and Political Subdivisions 18,450 567 34 18,983 --------- --------- --------- ---------
$ 32,509 $ 689 $ 150 $ 33,048 ========= ========= ========= =========
Securities Held-to-Maturity
United States Government Agency Securities $ 500 $ 1 $ $ 501 ========= ========== ========== ==========
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 SECURITIES (CONTINUED):
The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than temporarily impaired (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous, unrealized loss position at December 31, 2005. The unrealized losses on the Company's investments were caused by interest rate increases. 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 investments to be other-than-temporary impaired at December 31, 2005.
Less than 12 Months 12 Months or Greater Total Fair Unrealized Fair Unrealized Fair Value Losses Value Losses Value ------ --------- ------- ---------- ----- Description of Securities U.S. Government Mortgage Backed Securities $ 0 $ 0 $ 4,800 $ 222 $ 4,800 U.S. Government Agency Securities 8,866 91 485 15 9,351 Obligations of States and Political Subdivisions 4,484 59 1,707 40 6,191 ------- ---- ------ ---- ------- Total $ 13,350 $ 150 $ 6,992 $ 277 $ 20,342 ======= ==== ====== ==== =======
A maturity schedule of securities as of December 31, 2005 is as follows:
(In Thousands) Weighted Amortized Fair Average Due Cost Value Yield Securities Available-for-Sale In one year or less $ 1,802 $ 1,806 4.86% After one year through five years 17,287 17,210 4.86% After five years through ten years 14,539 14,443 5.45% -------- ------- ------
$ 33,628 $ 33,459 5.05% ======== ======= ====== Securities Held-to-Maturity After five years through ten years $ 500 $ 488 5.05% ======== ======= ======
The carrying value of securities pledged by the Company to secure deposits, repurchase agreements and for other purposes amounted to $15,573,000 and $13,821,000 at December 31, 2005 and 2004, 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%.
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4 LOANS RECEIVABLE:
Loans receivable outstanding are summarized as follows: December 31 2005 2004 (In Thousands)
Loans secured by deeds of trust on real estate Construction and land development $ 12,836 $ 8,150 Agribusiness 14,110 16,198 1-4 family residential properties 53,752 51,235 Non-farm non-residential properties 19,941 19,125 Loans to finance agricultural production and other loans to farmers 3,871 3,038 Commercial and industrial loans 8,304 6,262 Personal installment loans 10,776 11,083 All other loans 2,015 3,231 ------- ------
Subtotal 125,605 118,322 Less Allowance for loan losses 1,172 1,094 ------- ------
Loans Receivable $124,433 $117,228 ======= =======
Although the Company has a diversified loan portfolio, a substantial portion of the borrowers' ability to honor their contracts is dependent upon the agribusiness economic sector. Loans for agribusiness include loans directly related to poultry houses which amounted to $8,696,000 at December 31, 2005 and $8,662,000 at December 31, 2004. The majority of these loans are collateralized by a deed of trust on real estate. Farmers Home Administration (FHA) guarantees cover ninety percent of the loan balance on $2,578,000 of these loans at December 31, 2005 and $2,956,000 at December 31, 2004.
A summary of transactions in the allowance for loan losses follows:
2005 2004 (In Thousands)
Balance at Beginning of Year $ 1,094 $ 1,051 Provision charged to operating expense 219 184 Loan recoveries 16 35 Loan charge-offs (157) (176) -------- ------
Balance at End of Year $ 1,172 $ 1,094 ======= ======
Loans accounted for on a nonaccrual basis were $155,427, $429,223, and $9,250 at December 31, 2005, 2004 and 2003 (.12%, .36% and .01% of total loans), respectively. Accruing loans which are contractually past due 90 days or more as to principal or interest totaled $648,175, $387,516 and $877,462 at December 31, 2005, 2004 and 2003 (.52%, .33% and .79% of total loans), respectively
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 5 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment are summarized as follows: December 31 2005 2004 (In Thousands)
Bank premises $ 5,303 $ 4,151 Furniture and equipment 3,721 3,159 --------- --------
9,024 7,310
Less accumulated depreciation 2,975 2,547 --------- --------
Bank Premises and Equipment $ 6,049 $ 4,763 ========= ========
NOTE 6 TIME DEPOSITS:
The aggregate amount of time deposits with minimum denominations of $100,000 was approximately $19,336,000 and $18,992,000 in 2005 and 2004, respectively.
At December 31, 2005, the scheduled maturities of time deposits are as follows:
(In Thousands) 2006 $ 41,367 2007 22,278 2008 3,065 2009 2,097 2010 2,407 Thereafter 687 ---------- Total $ 71,901 =========
NOTE 7 SECURITES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date, unless classified as a term repurchase agreement. The maturity of the term repurchase agreement would generally mature within six months to one year. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
NOTE 8 LINES OF CREDIT:
The Company has lines of credit with the Federal Home Loan Bank (FHLB) and other financial institutions totaling $18,200,000. As of December 31, 2005, the Company had no outstanding debt on these lines. The FHLB Line of Credit is secured by FHLB Stock, as well as investment securities and mortgage loans. These borrowings will carry interest at prevailing rates when funds are borrowed.
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 9 LONG-TERM DEBT:
The Company has borrowed money from the Federal Home Loan Bank of Pittsburgh (FHLB). The interest rates on all of the notes payable as of December 31, 2005 were fixed at the time of the advance and fixed rates range from 3.15% to 4.77%. The FHLB notes are secured by FHLB Stock, as well as investment securities and mortgage loans. The weighted average interest rate is 4.11% at December 31, 2005. The company has total borrowing capacity from the FHLB of $70,037,000.
Repayments of long term debt are due monthly. Interest expense of $167,365 was incurred on these debts in 2005. The maturities of long term debt as of December 31, 2005 are as follows: (In Thousands)
2006 $ 433 2007 450 2008 467 2009 485 2010 503 Thereafter 2,771 -----------
Total $ 5,109 ===========
NOTE 10 DIVIDEND LIMITATIONS:
The principal source of funds of Allegheny Bancshares, Inc. is dividends paid by its subsidiary bank. The Code of West Virginia imposes certain restrictions on dividends paid by a state bank. A state bank cannot pay dividends (without the consent of state banking authorities) in excess of the total net profits of the current year and the combined retained profits of the previous two years. As of January 1, 2006, the Bank could pay dividends of up to $2,769,000 without permission of the authorities.
NOTE 11 INCOME TAXES:
The current and deferred components of income tax expense are as follows: 2005 2004 (In Thousands) Current component of income tax expense $ 1,046 956 Net increase(decrease) resulting from deferred income taxes (2) 72 ---------- --------- Income Tax Expense $ 1,044 $ 1,028 ========= ========
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: 2005 2004 (In Thousands) Income taxes computed at the applicable Federal income tax rate $ 1,186 $ 1,160 Increase (decrease) resulting from: Tax exempt municipal income (283) (286) Non-deductible interest expense 34 28 State tax expense, net of federal tax 119 120 Other (12) 6 ---------- -------- Income Tax Expense $ 1,044 $ 1,028 ========= ========
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 11 INCOME TAXES (CONTINUED):
The net deferred tax liability arising from temporary differences as of December 31 is summarized as follows: 2005 2004 Deferred Tax Asset: (In Thousands) - ------------------- Provision for loan losses $ 310 $ 284 Unrealized loss on securities available for sale 52 Other 0 10 --------- --------
Total Assets 362 294 --------- --------
Deferred Tax Liabilities: - ------------------------- Unrealized gain on securities available for sale 0 167 Depreciation 280 270 Other 11 7 --------- --------
Total Liabilities 291 444 --------- --------
Net Deferred Tax Asset (Liability) $ 71 $ (150) ========= =========
NOTE 12 EMPLOYEE BENEFITS:
The bank has a defined contribution plan with 401(k) provisions that is funded with discretionary contributions by the bank. 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.
NOTE 13 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:
2005 2004 2003 (In Thousands)
Beginning of Year $ 1,369 $ 1,249 $ 1,517 Additional borrowings 714 679 641 Curtailments (601) (559) (909) ---------- --------- ---------
End of Year $ 1,482 $ 1,369 $ 1,249 ======== ========= ========
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 14 REGULATORY MATTERS:
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
As of April 30, 2004, the most recent notification from institution's primary regulator categorized the Company as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Company must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Company's actual capital amounts and ratios are presented below.
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 15 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Fair value and the carrying value of recorded financial instruments are as follows:
December 31, 2005 December 31, 2004 Fair Carrying Fair Carrying Value Value Value Value (In Thousands) (In Thousands)
Cash and due from banks $ 2,882 $ 2,882 $ 2,695 $ 2,695 Interest bearing deposits in banks 505 505 225 225 Federal funds sold 1,541 1,541 2,018 2,018 Securities available for sale 33,459 33,459 33,048 33,048 Securities held to maturity 488 500 501 500 Loans 125,100 125,605 117,219 118,322 Interest receivable 1,053 1,053 928 928 Demand deposits 36,551 36,551 37,094 37,094 Savings deposits 28,522 28,522 25,732 25,732 Time deposits 71,629 71,904 68,516 68,751 Short-term borrowings 3,811 3,799 2,548 2,544 Accrued interest payable 292 292 199 199 Long-term debt 4,879 5,109 3,494 3,494
The contract or notional amount of financial instruments with off-balance sheet risk is as follows: December 31 2005 2004 (In Thousands) Letters of Credit $ 427 $ 1,372 Lines of Credit (commercial and personal) 10,251 8,223 Loan commitments (commercial and personal) 2,101 1,697 Credit card unused credit limits 1,449 1,397
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
Assets December 31, December 31, 2005 2004 ---- ----
Cash $ 2,225 $ 2,755 Investment in subsidiary 24,835,449 24,121,541 Due from subsidiary 20,575 Other assets 5,557 8,335 ---------- ----------
Total Assets $24,863,806 $24,132,631 ========== ==========
Liabilities
Due to subsidiary $ $ 85,391 ---------- ----------
Total Liabilities 85,391 ---------- ----------
Stockholders' Equity
Common stock, par value $1 per share 2,000,000 shares authorized, 900,000 shares issued in 2005 and 2004, respectively 900,000 900,000 Additional paid in capital 900,000 900,000 Retained earnings 23,388,879 22,017,014 Accumulated other comprehensive income(loss) (116,768) 371,582 ---------- ----------
25,072,111 24,188,596 Less treasury stock (at cost, 4,743 and 3,404 shares in 2005 and 2004, respectively) (208,305) (141,356) ---------- ----------
Total Stockholders' Equity 24,863,806 24,047,240 ---------- ----------
Total Liabilities and Stockholders' Equity $24,863,806 $24,132,631 ========== ==========
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003 INCOME:
Dividends from subsidiary $ 1,269,308 $1,016,481 $ 996,865 Income tax benefit 15,168 ----------- --------- ----------
Total Income 1,284,476 1,016,481 996,865 ---------- --------- ----------
EXPENSES:
Professional fees 16,112 26,346 4,588 Annual shareholder meeting 15,288 16,679 Amortization 2,778 2,778 2,778 Other expenses 6,384 4,881 1,936 ----------- --------- ----------
Total Expenses 40,562 50,684 9,302 ----------- --------- ---------
INCOME BEFORE UNDISTRIBUTED INCOME OF SUBSIDIARY 1,243,914 965,797 987,563
UNDISTRIBUTED INCOME OF SUBSIDIARY 1,202,259 1,418,232 1,293,492 ----------- --------- -----------
NET INCOME $ 2,446,173 $ 2,384,029 $ 2,281,055 =========== ========== ==========
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED):
ALLEGHENY BANCSHARES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 16 PARENT CORPORATION ONLY FINANCIAL STATEMENTS (CONTINUED): STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
2005 2004 2003 OPERATING ACTIVITIES Net income $ 2,446,173 $2,384,029 $2,281,055 Adjustments: Undistributed subsidiary income (1,202,259) (1,418,232) (1,293,492) Increase (decrease) in other liabilities (85,391) 65,818 19,573 (Increase) decrease in other assets (17,796) 2,778 (11,114) --------- -------- ---------
Net Cash Provided by Operating Activities 1,140,727 1,034,393 996,022 --------- -------- ---------
FINANCING ACTIVITIES
Purchase of treasury stock (66,949) (126,257) (15,099) Cash dividends paid (1,074,308) (986,481) (899,823) ----------- ---------- ---------
Net Cash Used by Financing Activities (1,141,257) (1,112,738) (914,922) ----------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (530) (78,345) 81,100
Cash and Cash Equivalents, January 1 2,755 81,100 ---------- --------- ---------
Cash and Cash Equivalents, December 31 $ 2,225 $ 2,755 $ 81,100 ========== ========= =========
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None
Item 9A.
Item 9A. Controls and Procedures
As a result of the enactment of the Sarbanes-Oxley Act of 2002, issuers such as Allegheny Bancshares, Inc. that file periodic reports under the Securities Exchange Act of 1934 (the "Act") are now required to include in those reports certain information concerning the issuer's controls and procedures for complying with the disclosure requirements of the federal securities laws. Under rules adopted by the Securities and Exchange Commission effective August 29, 2002, these disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports it files or submits under the Act, is communicated to the issuer's management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
We have established our disclosure controls and procedures to ensure that material information related to Allegheny Bancshares, Inc. is made known to our principal executive officer and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. These disclosure controls and procedures consist principally of communications between and among the Chief Executive Officer and the Chief Financial Officer to identify any new transactions, events, trends, contingencies or other matters that may be material to the Company's operations. As required, we have evaluated the effectiveness of these disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, Allegheny Bancshares, Inc.'s management, including the Chief Financial Officer, concluded that such disclosure controls and procedures were operating effectively as designed as of the date of such evaluation.
Changes in Internal Controls
During the period reported upon, there were no significant changes in Allegheny Bancshares, Inc.'s internal controls pertaining to its financial reporting and control of its assets or in other factors that could significantly affect these controls.
Item 9B.
Item 9B. Other Information - None
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a) of the Exchange Act.
The following table sets forth information with respect to the directors and executive officers of the Company: Principal Position With Term Occupation During Directors Age the Company Expires the Past Five Years
Thomas J. Bowman 81 Director Since 1969 2006 Owner of Earnest P. O. Box 905 Bowman & Brother Franklin, WV 26807-0905 and Self-Employed Farmer
Roger D. Champ 60 Director Since 1994 2005 Self-Employed P. O. Box 395 Contractor Moorefield, WV 26836-0395
John E. Glover 63 Director Since 1999 2006 Self-Employed P. O. Box 668 Dentist Petersburg, WV 26847-0668
Carole H. Hartman 59 Director Since 1990 2005 Owner of Pendleton P. O. Box 864 Secretary of the County Insurance Franklin, WV 26807-0864 Board Agency, Self- Employed Farmer
*John D. Heavner 69 Director Since 1972 2005 Self-Employed Farmer HC 60, Box 4 Upper Tract, WV 26866-9518
Richard W. Homan 83 Director Since 1952 2007 Banker P. O. Box 550 and President of the Franklin, WV 26807-0550 Bank and CEO prior to October 16, 2000
William McCoy, Jr. 84 Director Since 1954 2005 Owner of Pendleton P. O. Box 886 and Chairman of the Times Newspaper, Franklin, WV 26807-0886 Board Attorney
Jerry D. Moore 53 Director Since 1987 2005 Prosecuting P. O. Box 8 Attorney Franklin, WV 26807-0008
Richard C. Phares 77 Director Since 1969 2006 Owner of R.C. Phares P. O. Box 1092 Store, Self-Employed Onego, WV 26886-1092 Farmer
William A. Loving, Jr. 50 Executive Vice- 2005 1993-2000 Regional P.O. Box 238 President and CEO Vice-President with Franklin, WV 26807-0238 of the Bank since One Valley Bank in October 16, 2000; Beckley, WV Director since January 29,
Dolan Irvine 58 Director Since 2007 Assessor, Appraiser HC 82 Box 151 October 30, 2003 Pocahontas County Marlinton, WV 24954 Self-Employed Farmer
L. Kirk Billingsley 45 Vice President of Branch Manager and P.O. Box 523 Finance and Chief Chief Financial Monterey, VA 24465 Financial Officer Officer, Blue Grass Since February 22, 2005 Valley Bank
*Appointed Director Emeritus on February 2, 2006.
Committees of Board of Directors
Board Committees. The Board of Directors has not established formal nominating or compensation committees as the entire board serves in these capacities. The Company has an audit committee as discussed below.
Audit Committee. The audit committee was formed in January 2002, and is composed of Dr. John Glover, Roger Champ and Thomas J. Bowman. The audit committee oversees the Company's financial reporting process on behalf of the board of directors. Management has the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. In fulfilling its oversight responsibilities, the committee reviewed the audited financial statements in the annual report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity and disclosures in the financial statements. The audit committee is governed by a written charter approved by the board of directors in January 2002.
It is difficult for a community bank to find a single individual that has every one of the Securities and Exchange Commission's qualifications of an audit committee financial expert; Allegheny believes that having only one individual with financial expertise designation would cause the remaining members to believe that their oversight responsibility had been diminished. Allegheny believes that each member of the audit committee has sufficient knowledge in financial and auditing matters to serve on the committee. As such, the board does not believe that it is necessary to actively search for an outside person to serve on the board to qualify as an audit committee financial expert. The committee has authority to engage legal counsel, other experts or consultants as it deems appropriate to carry out its responsibilities. The audit committee is responsible for the appointment, replacement, compensation and oversight of the independent auditor engaged to prepare or issue audit reports on our financial statements. As a result, Allegheny has not designated one individual as an "audit committee financial expert."
Compensation of Directors
Each director received an annual retainer fee of $2,500 with the exception of the secretary of the board, who received $4,000. Directors received $350 for each board meeting and $250 for each board committee meeting of the bank that they attended.
Code of Ethics
The Company has adopted a Code of Ethics that applies to principal officers and financial professionals of both the Company and the Bank, including the Chief Executive Officer and Chief Financial Officer. If we make any substantive amendments to this Code of Ethics or grant any waivers, including any implicit waiver, from a provision of the code to our Chief Executive Officer or Chief Financial Officer, we will disclose the nature of such amendment or waiver in a report on Form 8-K.
Item 11.
Item 11. Executive Compensation
Summary of Compensation
The table below reflects information concerning the annual compensation for services in all capacities to the corporation for the fiscal years ended December 31, 2005, 2004 and 2003, for the Chief Executive Officer and any executive officer whose annual salary and bonus exceeded $100,000.
Summary Compensation Table Annual Compensation (1) ------------------------------------ Other Annual Name and Principal Position Year Salary Bonus Compensation --------------------------- ---- ------ ----- ------------ William A. Loving, Jr., Executive Vice 2005 $ 150,000 $ 24,390(2) $ 0 President and Chief 2004 $ 132,500 $ 16,695(3) $ 0 Executive Officer 2003 $ 125,000 14,900(4) 0
(1) Does not include perquisites and other personal benefits, including personal use of an automobile valued at $1,746 in 2005 and the cost of group-term life insurance coverage over $50,000 which was $552 in 2005. (2) Paid in 2006. (3) Paid in 2005. (4) Paid in 2004
The Company does not maintain any form of stock option, stock appreciation rights, or other long-term compensation plans.
Employment and Change in Control Agreements
The Bank entered into a three-year employment agreement with William A. Loving, Jr. effective September 30, 2003, in which Mr. Loving agreed to serve as the Bank's Chief Executive Officer. This agreement is automatically renewable for additional three-year terms, unless terminated earlier or unless one of the parties elects not to renew the agreement at least 90 days prior to the end of the term. Under the employment agreement, the Bank may terminate Mr. Loving's employment prior to the expiration of the term of employment with or without cause; provided, however, in the event the Bank terminates his employment without cause (as defined in the employment agreement), he will be entitled to severance equal to the sum of his base annual compensation for the greater of (i) the remainder of the term of the employment agreement (had it not been terminated) or (ii) twelve months. Under the employment agreement, Mr. Loving is entitled to annual compensation of $125,000, which may be adjusted upward by the board of directors of the bank, plus any bonus resulting from any subsequently adopted bonus plan. The employment agreement also contains a provision regarding non-competition, which effectively restricts Mr. Loving's ability to work in a similar capacity within the Counties of Pendleton, Grant and Hardy, West Virginia, for a period of two years following termination of employment with the Bank.
At the same time as the execution of the employment agreement by the Bank and Mr. Loving, the parties also entered into an executive severance agreement effective for a period ending on December 31, 2003 (but subject to annual renewals thereafter unless either party objects). This agreement provides that upon a change in control (as defined in the agreement) and for a period of two years thereafter, if Mr. Loving's employment is terminated involuntarily by the Bank (or its successor) without cause, Mr. Loving shall be entitled to a severance payment in the amount equal to 2 1/2 times his annual base salary (in effect at termination of employment or change in control, whichever is greater), plus benefits. In addition, the Bank, or its successor, shall be obligated to provide Mr. Loving health insurance coverage comparable to that received immediately prior to termination of employment.
401(k) Plan
The Bank maintains a 401(k) profit sharing plan that generally covers all employees who have completed one year of service. Contributions to the plan are based on a percentage of each employee's salary plus matching contributions. The payment of benefits to participants is made at death, disability, termination or retirement. Contributions to the plan for all employees charged to operations during 2005 amounted to $78,782.
Compensation Policies
The board of directors has not established formal compensation committees as the entire board serves in these capacities. Other information required by this item is set forth under the caption "Board of Directors Report on Executive Compensation" of our 2006 Proxy Statement and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The following table sets forth information as of February 1, 2006, relating to the beneficial ownership of the common stock by (a) each person or group known by the Company to own beneficially more than 5% of the outstanding common stock; (b) each of the Company's directors; and (c) all directors and executive officers of the Company as a group. Ownership includes direct and indirect (beneficial) ownership as defined by SEC rules.
Name Amount and Nature of Percent and Address Beneficial Ownership (1)(2) of Class ----------- -------------------------- --------
T. J. Bowman 1,783 Direct 1.49% 11,555 Indirect
Roger Champ 4,250 Direct * 480 Indirect
John E. Glover 5,785 Direct 1.51% 7,755 Indirect
Carole H. Hartman 2,576 Direct *
John D. Heavner 2,400 Direct * 1,200 Indirect
Richard Homan 600 Direct 7.87% P. O. Box 550 69,900 Indirect (3) Franklin, WV 26807-0550
William McCoy, Jr. 14,751 Direct 2.98% 12,000 Indirect
Jerry Moore 10,170 Direct 1.14%
Richard C. Phares 17,937 Direct 2.00%
William A. Loving, Jr. 757 Direct * 222 Indirect
Dolan Irvine 1,148 Direct *
All Directors and Executive Officers As a Group 165,269 18.46%
(1) For purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934 under which, in general, a person is deemed to be the beneficial owner of a security if he has or shares the power to vote or direct the voting of the security or the power to dispose of or direct the disposition of the security, or if he has the right to acquire beneficial ownership of the security within 60 days. Shares of common stock which are subject to stock options are deemed to be outstanding for the purpose of computing the percentage of outstanding common stock owned by such person or group but not deemed outstanding for the purpose of computing the percentage of common stock owned by any other person or group.
(2) Includes qualifying shares of 500 as required by the Company's bylaws.
(3) Consists of 33,400 held in the Richard Homan Trust and the Jean Ann Homan Trust of which Mr. Homan is Trustee. Also includes 36,500 shares owned by Captaur Limited Liability Company in which Mr. Homan owns a 50% interest and serves as Member/Manager.
(*) Less than 1%.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of the registered class of the Company's equity securities, to make stock ownership and transaction filings with the FDIC and to provide copies to the Company. Based solely on a review of the reports furnished to the Company and written statements that no other reports were required, all Section 16(a) filing requirements applicable to its officers and directors were met. The Company is required to report late filings.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Company has had and intends to continue to have banking and financial transactions in the ordinary course of business with directors and executive officers of the Company and their associates. Total loans outstanding from the Company at December 31, 2005 to the Company's officers and directors as a group and members of their immediate families and companies in which they had an ownership interest of 10% or more were $1,481,703 or approximately 5.96% of the Company's total equity capital. These loans do not involve more than the normal risk of collectibility or present other unfavorable features.
Director Moore provides legal services for the Bank. Based on information provided by him, payments made by the Bank to him for legal services were less than five percent of his gross revenue.
The Company purchases property insurance coverage from Pendleton County Insurance Company of which Director Hartman is an owner. The terms of and premiums for this insurance are as favorable to the Company as they would have been with third parties not otherwise affiliated with the Company.
Item 14.
Item 14. Principal Accountant Fees and Services
The information regarding principal accountant fees and services under the caption Auditors contained in the 2005 Proxy Statement is incorporated herein by reference.
PART IV
Item 15.
Item 15. Exhibits and Reports on Form 8-K
a. Exhibits
The following Exhibits are attached.
No. Description 3.3 By-Laws of Allegheny Bancshares, Inc.
31.1 Certification of CEO pursuant to Rule 13a-14(a)
31.2 Certification of CFO pursuant to Rule 13a-14(a)
32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
The following Exhibits are incorporated by reference to the Exhibits to Allegheny Bancshares, Inc. Form 10KSB filed March 26, 2004.
No. Description
10.1 Employment Agreement with William A. Loving, Jr.
10.2 Executive Severance Agreement with William A. Loving, Jr.
14 Code of Ethics
21 List of Subsidiaries of the Registrant
The following Exhibits are incorporated by reference to the Exhibits to Allegheny Bancshares, Inc. Form 10-KSB filed March 30, 2003.
No. Description Exhibit Number
3.1 Articles of Incorporation - Allegheny Bancshares, Inc. E2
4.1 Specimen Common Stock Certificate of Allegheny Bancshares, Inc. E5
b. Reports on 8K
On December 20, 2005, the Company filed a report on Form 8K, Item 5.03 to report amendments to the Company's Bylaws.
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 30, 2006 -----------------
By: /s/ L. KIRK BILLINGSLEY ----------------------------------- L. Kirk Billingsley Chief Financial Officer
Date: MARCH 30, 2006 ----------------
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/ T. J. BOWMAN MARCH 30, 2006 - --------------------------- ------------- Thomas J. Bowman Director
- --------------------------- -------------- Roger D. Champ Director
/s/ JOHN E. GLOVER MARCH 30, 2006 - --------------------------- -------------- John E. Glover Director
/s/ CAROLE H. HARMAN MARCH 30, 2006 - --------------------------- Director -------------- Carole H. Hartman Secretary
/s/ RICHARD W. HOMAN MARCH 30, 2006 - --------------------------- -------------- Richard W. Homan Director
- --------------------------- Chairman of the Board -------------- William McCoy, Jr. Director
/s/ JERRY D. MOORE MARCH 30, 2006 - --------------------------- -------------- Jerry D. Moore Director
/s/ R. C. PHARES MARCH 30, 2006 - --------------------------- -------------- Richard C. Phares Director
/s/ WILLIAM A. LOVING, JR. MARCH 30, 2006 - --------------------------- -------------- William A. Loving, Jr. Director
/s/ DOLAN IRVINE MARCH 30, 2006 - --------------------------- -------------- Dolan Irvine Director