|
|
2007
|
|
2006
|
|
2005
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3 530
|
|
|
$
|
4 035
|
|
|
$
|
3 664
|
|
Adjustments to reconcile net income to net
cash
|
|
|
|
|
|
|
|
|
|
|
|
|
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
678
|
|
|
|
331
|
|
|
|
330
|
|
Depreciation
|
|
|
568
|
|
|
|
582
|
|
|
|
578
|
|
Deferred tax (benefit)
|
|
|
(250
|
)
|
|
|
(190
|
)
|
|
|
(41
|
)
|
Discount accretion and premium
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization on securities, net
|
|
|
(63
|
)
|
|
|
(131
|
)
|
|
|
69
|
|
(Gain) loss on sale or call of securities available for
sale
|
|
|
(1
|
)
|
|
|
- -
|
|
|
|
369
|
|
Loss on sale of other real estate
|
|
|
15
|
|
|
|
- -
|
|
|
|
- -
|
|
Loss on disposal of premises and equipment
|
|
|
12
|
|
|
|
- -
|
|
|
|
- -
|
|
Loss on sale of repossessed assets
|
|
|
8
|
|
|
|
- -
|
|
|
|
- -
|
|
Stock-based compensation expense
|
|
|
110
|
|
|
|
112
|
|
|
|
- -
|
|
Proceeds from sale of loans
|
|
|
11 002
|
|
|
|
7 285
|
|
|
|
10 260
|
|
Origination of loans for sale
|
|
|
(18 730
|
)
|
|
|
(7 690
|
)
|
|
|
(10 112
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accrued interest
receivable
|
|
|
65
|
|
|
|
(279
|
)
|
|
|
(239
|
)
|
(Increase) in other assets
|
|
|
(2 220
|
)
|
|
|
(211
|
)
|
|
|
(1 123
|
)
|
Increase in accrued interest payable
|
|
|
85
|
|
|
|
341
|
|
|
|
151
|
|
Increase (decrease) increase in other
liabilities
|
|
|
10
|
|
|
|
(391
|
)
|
|
|
420
|
|
Net cash (used in) provided by operating
activities
|
|
$
|
(5 181
|
)
|
|
$
|
3 794
|
|
|
$
|
4 326
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturity of securities available for
sale
|
|
$
|
14 470
|
|
|
$
|
15 500
|
|
|
$
|
9 000
|
|
Proceeds from sale of securities available
for sale
|
|
|
- -
|
|
|
|
- -
|
|
|
|
13 900
|
|
Proceeds from call of securities available for sale
|
|
|
10 035
|
|
|
|
2 500
|
|
|
|
- -
|
|
Purchases of securities available for
sale
|
|
|
(20 842
|
)
|
|
|
(13 437
|
)
|
|
|
(23 331
|
)
|
Net decrease (increase) in loans
|
|
|
4 709
|
|
|
|
(19 703
|
)
|
|
|
(31 565
|
)
|
Purchases of premises and
equipment
|
|
|
(384
|
)
|
|
|
(958
|
)
|
|
|
(836
|
)
|
Proceeds from sale of other real estate
|
|
|
61
|
|
|
|
- -
|
|
|
|
- -
|
|
Net cash provided by (used in) investing
activities
|
|
$
|
8 049
|
|
|
$
|
(16 098
|
)
|
|
$
|
(32 832
|
)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) in noninterest-bearing
deposits
|
|
$
|
(1 879
|
)
|
|
$
|
(2 741
|
)
|
|
$
|
(1 622
|
)
|
Net increase in interest-bearing
deposits
|
|
|
3 475
|
|
|
|
24 639
|
|
|
|
30 951
|
|
Net proceeds (repayment) of securities sold under agreements
to
|
|
|
|
|
|
|
|
|
|
|
|
|
repurchase and federal funds purchased
|
|
|
2 011
|
|
|
|
(9 031
|
)
|
|
|
1 980
|
|
Net (repayment) of Federal Home Loan Bank
advances
|
|
|
(408
|
)
|
|
|
(385
|
)
|
|
|
(5 365
|
)
|
Purchase of treasury shares
|
|
|
(422
|
)
|
|
|
(429
|
)
|
|
|
- -
|
|
Cash dividends
|
|
|
(1 420
|
)
|
|
|
(1 295
|
)
|
|
|
(1 137
|
)
|
Net cash provided by financing activities
|
|
$
|
1 357
|
|
|
$
|
10 758
|
|
|
$
|
24 807
|
|
Increase (decrease) in cash and cash
equivalents
|
|
$
|
4 225
|
|
|
$
|
(1 546
|
)
|
|
$
|
(3 699
|
)
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
6 926
|
|
|
|
8 472
|
|
|
|
12 171
|
|
Ending
|
|
$
|
11 151
|
|
|
$
|
6 926
|
|
|
$
|
8 472
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
8 076
|
|
|
$
|
6 591
|
|
|
$
|
3 984
|
|
Income taxes
|
|
$
|
2 368
|
|
|
$
|
2 936
|
|
|
$
|
1 519
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON-CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING AND FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for
sale
|
|
$
|
465
|
|
|
$
|
186
|
|
|
$
|
(381
|
)
|
Change in benefit obligations and plan assets for
pension
|
|
|
|
|
|
|
|
|
|
|
|
|
and other postretirement benefits
|
|
$
|
291
|
|
|
$
|
(1 305
|
)
|
|
$
|
- -
|
|
Loans transferred to OREO
|
|
$
|
506
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Banking Activities
and Significant Accounting Policies
Potomac
Bancshares, Inc. and Subsidiary (the company) grant commercial, financial,
agricultural, residential and consumer loans to customers, primarily in Berkeley
County and Jefferson County, West Virginia. The companys market area also
includes Washington County and Frederick County, Maryland and Frederick County,
Loudoun County and Clarke County, Virginia. The loan portfolio is well
diversified and loans generally are collateralized by assets of the customers.
The loans are expected to be repaid from cash flows or proceeds from the sale of
selected assets of the borrowers.
The
accounting and reporting policies of the company conform to accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. The following is a summary of the more
significant policies.
Principles
of Consolidation
The
consolidated financial statements of Potomac Bancshares, Inc. and its
wholly-owned subsidiary, Bank of Charles Town (the bank), include the accounts
of both companies. All material intercompany balances and transactions have been
eliminated in consolidation.
Interest-bearing Deposits in Financial Institutions
Interest-bearing deposits in financial institutions mature within one
year and are carried at cost.
Securities
Debt
securities that management has the positive intent and ability to hold to
maturity are classified as held to maturity and recorded at amortized cost.
Securities not classified as held to maturity, including equity securities with
readily determinable fair values, are classified as available for sale and
recorded at fair value, with unrealized gains and losses excluded from earnings
and reported in other comprehensive income.
Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-than-temporary impairment losses, management considers (l)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
The company
grants mortgage, commercial and consumer loans to customers. A substantial
portion of the loan portfolio is comprised of loans secured by real estate. The
ability of the companys debtors to honor their contracts is dependent upon the
real estate and general economic conditions of the companys market area.
Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or payoff, generally, are reported at their outstanding unpaid
principal balances adjusted for the allowance for loan losses. Interest income
is accrued on the unpaid principal balance.
The accrual
of interest on loans is discontinued at the time the loan is 90 days delinquent
unless the credit is well-secured and in process of collection. In all cases,
loans are placed on nonaccrual or charged-off at an earlier date 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. The interest on these loans is accounted
for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Loans are returned to accrual status when all principal and interest
amounts contractually due are brought current and future payments are reasonably
assured.
35
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Allowance for Loan Losses
The
allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The
allowance is based on two basic principles of accounting: (1) SFAS No. 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and are capable of estimation and (2) SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, which requires that losses
be accrued based on the differences between the value of collateral, present
value of future cash flows or values that are observable in the secondary market
and the loan balance.
The
allowance for loan losses is evaluated on a regular basis by management and is
based upon managements periodic review of the collectability of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrowers ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The
allowance consists of specific, general and unallocated components. The specific
component relates to loans that are classified as either doubtful or
substandard. For such loans that are also classified as impaired, an allowance
is established when the discounted cash flows (or collateral value or observable
market price) of the impaired loan is lower than the carrying value of that
loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect managements
estimate of probable losses. The unallocated component of the allowance reflects
that margin of imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
A loan is
considered impaired when, based on current information and events, it is
probable that the company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrowers prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loans
effective interest rate, the loans obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups
of smaller balance homogeneous loans are collectively evaluated for impairment.
Accordingly, the company does not separately identify individual consumer and
residential loans for impairment disclosures.
Loans Held
for Sale
Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or market determined in the aggregate. The company does not retain
mortgage servicing rights on loans held for sale.
In 2007, the
bank entered into an agreement with BlueRidge Bank (In Organization) whereby
Bank of Charles Town would fund loans for BlueRidge Bank (In Organization) until
such time as BlueRidge Bank (In Organization) could get its charter. Upon
receiving its charter, BlueRidge Bank (In Organization) will buy the loans from
Bank of Charles Town. In the event that BlueRidge Bank (In Organization) exceeds
its legal lending limit, Bank of Charles Town will fund additional loan amounts
through participation agreements. Bank of Charles Town has funded $7.8 million
in loans on behalf of BlueRidge Bank (In Organization) as of December 31, 2007.
36
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Premises and
Equipment
Land is
carried at cost. Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the straight-line and
declining-balance methods. Estimated useful lives range from five to forty years
for premises and improvements and five to twenty-five years for furniture and
equipment.
Maintenance
and repairs of property and equipment are charged to operations and major
improvements are capitalized. Upon retirement, sale or other disposition of
property and equipment, the cost and accumulated depreciation are eliminated
from the accounts and gain or loss is included in operations.
Other Real
Estate
Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at the lower of the loan balance or the fair value net of
estimated selling costs at the date of foreclosure, establishing a new cost
basis. Subsequent to foreclosure, valuations are periodically performed by
management and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in net expenses from foreclosed assets.
Employee
Benefit Plans
The company
sponsors the following employee benefit plans:
-
a
noncontributory, defined benefit pension
plan covering employees meeting certain age and service
requirements,
-
a
postretirement life insurance plan
covering current and future retirees with 25 years of service over the age of
60,
-
a
postretirement life insurance plan
covering certain current retirees who met certain requirements that is not
available for future retirees,
-
a health care plan for current retirees who met certain
eligibility requirements that is not available for future retirees and
-
a 401(k) retirement savings plan available to all employees
meeting certain age and service requirements. Under this plan the employer may
make a discretionary matching contribution each plan year and may also make
other discretionary contributions to the plan.
Stock
Dividends
On March 14, 2006 the Board of Directors declared a 2% stock
dividend. Shares increased from 3,600,000 to 3,671,691. On February 8, 2005 the
Board of Directors declared a stock split in the form of a 100% stock dividend.
Shares increased from 1,800,000 to 3,600,000.
Earnings Per
Share
Basic
earnings per share represent income available to common stockholders divided by
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflect additional common shares that would have been
outstanding if dilutive potential common shares had been issued, as well as any
adjustment to income that would result from the assumed issuance. Potential
common shares that may be issued by the company relate solely to outstanding
stock options and are determined using the treasury method. All amounts have
been retroactively restated for the stock dividends as described above.
Income Taxes
Deferred
income tax assets and liabilities are determined using the balance sheet method.
Under this method, the net deferred tax asset or liability is determined based
on the tax effects of the temporary difference between the book and tax bases of
the various balance sheet assets and liabilities and gives current recognition
to changes in tax rates and laws.
37
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Income Taxes
(Continued)
When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained. The benefit of a tax position is
recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheets along with any associated interest and
penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified
as additional income taxes in the consolidated statements of income.
Cash and
Cash Equivalents
For purposes
of reporting cash flows, cash and cash equivalents include cash on hand, amounts
due from banks, interest-bearing deposits in financial institutions, securities
purchased under agreements to resell and federal funds sold. Generally,
securities purchased under agreements to resell and federal funds sold are
purchased and sold for one-day periods.
Trust
Division
Securities
and other property held by the Trust Division in a fiduciary or agency capacity
are not assets of the company and are not included in the accompanying financial
statements.
Use of
Estimates
In preparing
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and the reported amounts of
revenues and expenses during the reported period. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the allowance
for loan losses and the valuation of foreclosed real estate and deferred tax
assets.
Advertising
The company
follows the policy of charging the costs of advertising to expense as incurred.
Comprehensive Income
Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities and changes
in pension and postretirement benefit obligations , are reported as a separate
component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income.
Stock-Based
Compensation Plan
The 2003
Stock Incentive Plan was approved by stockholders on May 13, 2003. This is the
first stock incentive plan adopted by the company. Under the plan, the option
price cannot be less than the fair market value of the stock on the date
granted. An options maximum term is ten years from the date of grant.
Options granted under the plan may be subject to
a graded vesting schedule.
38
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Stock-Based
Compensation Plan (Continued)
The
stockholders initially authorized up to 183,600 shares of common stock to be
used in the granting of incentive options to employees and directors. These
shares have been restated to reflect the 2% stock dividend declared March 14,
2006 and the 100% stock dividend declared February 8, 2005. On April 24, 2007
the shareholders authorized an additional 250,000 shares of common stock to be
used in the granting of incentive options to employees and directors.
In December
2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (SFAS
123R). SFAS 123R requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, such as stock options and
nonvested shares, based on the fair value of those awards at the date of grant
and eliminates the choice to account for employee stock options under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
25). The company adopted SFAS 123R effective January 1, 2006 using the modified
prospective method and as such, results for prior periods have not been
restated. Prior to January 1, 2006, no compensation expense was recognized for
stock option grants as all such grants had an exercise price not less than fair
market value on the date of grant.
The
following illustrates the effect on net income and earnings per share if the
company had applied the fair value method of SFAS 123R, prior to January 1,
2006:
|
For the Year Ended
|
|
December 31, 2005
|
|
(dollars in thousands except
|
|
per share amounts)
|
Net income, as reported
|
|
|
$
|
3 664
|
|
Less pro forma stock option compensation
|
|
|
|
|
|
expense, net of tax
|
|
|
|
(55
|
)
|
Pro forma net income
|
|
|
$
|
3 609
|
|
|
Earnings per share:
|
|
|
|
|
|
Basic as reported
|
|
|
$
|
1.06
|
|
Basic pro forma
|
|
|
$
|
1.04
|
|
Diluted as reported
|
|
|
$
|
1.05
|
|
Diluted pro forma
|
|
|
$
|
1.04
|
|
Stock option
compensation expense is the estimated fair value of options granted amortized on
a straight-line basis over the requisite service period for each separately
vesting portion of the award. The weighted average estimated fair value of stock
options granted in the twelve months ended December 31, 2007, 2006 and 2005 was
$3.76, $3.88 and $2.91, respectively. Fair value is estimated using the
Black-Scholes option-pricing model with the following assumptions for grants
during 2007, 2006 and 2005: option term until exercise 10 years, expected
volatility of 19.56%, 17.86% and 19.46%, risk-free interest rates of 4.66%,
4.43% and 4.26%, and expected dividend yields of 2.74%, 2.66% and 3.15%,
respectively. Expected volatility is based on the historic volatility of the
companys stock price over the expected life of the options. We have determined
that the expected term for options is their contractual life of 10 years. The
risk-free interest rate is the U. S. Treasury zero-coupon issue with a remaining
term equal to the expected term of the options granted. The dividend yield is
estimated as the ratio of the companys historical dividends paid per share of
common stock to the stock price on the date of grant.
Reclassifications
Certain
reclassifications have been made to prior period amounts to conform to the
current year presentation.
39
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Recent
Accounting Pronouncements
In September
2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value measurements,
but rather, provides enhanced guidance to other pronouncements that require or
permit assets or liabilities to be measured at fair value. This statement is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those years. The FASB has approved
a one-year deferral for the implementation of the statement for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. The company does not
expect the implementation of SFAS 157 to have a material impact on its
consolidated financial statements.
In September
2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS 158).
This statement requires employers to measure plan assets and obligations as of
the balance sheet date. This requirement is effective for fiscal years ending
after December 15, 2008. The other provisions of SFAS 158 were implemented by
the company as of December 31, 2006. The company does not expect the
implementation of the measurement date provisions of SFAS 158 to have a material
impact on its consolidated financial statements.
In February
2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159).
This statement permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective of this statement is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by this statement permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied instrument by instrument
and is irrevocable. SFAS 159 is effective as of the beginning of an entitys
first fiscal year that begins after November 15, 2007, with early adoption
available in certain circumstances. The company does not expect the
implementation of SFAS 159 to have a material impact on its consolidated
financial statements.
In December
2007, the FASB issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations (SFAS 141(R)). The standard will significantly change
the financial accounting and reporting of business combination transactions.
SFAS 141(R) establishes principles for how an acquirer recognizes and measures
the identifiable assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141(R) is
effective for acquisition dates on or after the beginning of an entitys first
year that begins after December 15, 2008. The company does not expect the
implementation of SFAS 141(R) to have a material impact on its consolidated
financial statements.
In December
2007, the FASB issued Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of
ARB No. 51 (SFAS 160). The standard will significantly change the financial
accounting and reporting of noncontrolling (or minority) interests in
consolidated financial statements. SFAS 160 is effective as of the beginning of
an entitys first fiscal year that begins after December 15, 2008, with early
adoption prohibited. The company does not expect the implementation of SFAS 160
to have a material impact on its consolidated financial statements.
40
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Recent
Accounting Pronouncements (Continued)
In September
2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. This consensus concludes that for a
split-dollar life insurance arrangement within the scope of this issue, an
employer should recognize a liability for future benefits in accordance with
SFAS 106 (if, in substance, a postretirement benefit plan exists) or APB Opinion
No. 12 (if the arrangement is, in substance, an individual deferred compensation
contract) based on the substantive agreement with the employee. The consensus is
effective for fiscal years beginning after December 15, 2007, with early
application permitted. The company does not expect the implementation of EITF
06-4 to have a material impact on its consolidated financial statements.
In November
2006, the EITF issued Accounting for Collateral Assignment Split-Dollar Life
Insurance Arrangements (EITF 06-10). In this issue, a consensus was reached
that an employer should recognize a liability for the postretirement benefit
related to a collateral assignment split-dollar life insurance arrangement in
accordance with either SFAS 106 or APB Opinion No. 12, as appropriate, if the
employer has agreed to maintain a life insurance policy during the employee's
retirement or provide the employee with a death benefit based on the substantive
agreement with the employee. A consensus also was reached that an employer
should recognize and measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement. The consensuses
are effective for fiscal years beginning after December 15, 2007, including
interim periods within those fiscal years, with early application permitted. The
company does not expect the implementation of EITF 06-10 to have a material
impact on its consolidated financial statements.
In February
2007, the FASB issued FSP No. FAS 158-1, Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88 and No. 106 and to the Related
Staff Implementation Guides. This FSP provides conforming amendments to the
illustrations in SFAS 87, 88, and 106 and to related staff implementation guides
as a result of the issuance of SFAS 158. The conforming amendments made by this
FSP are effective as of the effective dates of SFAS 158. The unaffected guidance
that this FSP codifies into SFAS 87, 88, and 106 does not contain new
requirements and therefore does not require a separate effective date or
transition method. The company does not expect the implementation of FSP No. FAS
158-1 to have a material impact on its consolidated financial statements.
In November
2007, the Securities and Exchange Commission (SEC) issued Staff Accounting
Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through
Earnings (SAB 109). SAB 109 expresses the current view of the staff that the
expected net future cash flows related to the associated servicing of the loan
should be included in the measurement of all written loan commitments that are
accounted for at fair value through earnings. SEC registrants are expected to
apply the views in Question 1 of SAB 109 on a prospective basis to derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The company does not expect the implementation of SAB 109 to have a
material impact on its consolidated financial statements.
In December
2007, the SEC issued Staff Accounting Bulletin No. 110, Use of a Simplified
Method in Developing Expected Term of Share Options (SAB 110). SAB 110
expresses the current view of the staff that it will accept a companys election
to use the simplified method discussed in SAB 107 for estimating the expected
term of plain vanilla share options regardless of whether the company has
sufficient information to make more refined estimates. The staff noted that it
understands that detailed information about employee exercise patterns may not
be widely available by December 31, 2007. Accordingly, the staff will continue
to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. The company does not expect the implementation of SAB 110 to
have a material impact on its consolidated financial statements.
41
Note 2. Securities
There were
no securities held to maturity as of December 31, 2007 and 2006.
The
amortized cost and fair value of securities available for sale as of December
31, 2007 and 2006 (in thousands) are as follows:
|
|
|
2007
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Value
|
|
|
Obligations of U.S. Government agencies
|
$
|
36 471
|
|
$
|
246
|
|
$
|
(16
|
)
|
|
$
|
36 701
|
|
|
State and
municipal obligations
|
|
2 868
|
|
|
5
|
|
|
(2
|
)
|
|
|
2 871
|
|
|
|
$
|
39 339
|
|
$
|
251
|
|
$
|
(18
|
)
|
|
$
|
39 572
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Value
|
|
|
Obligations of U.S. Government agencies
|
$
|
41 213
|
|
$
|
16
|
|
$
|
(242
|
)
|
|
$
|
40 987
|
|
|
State and
municipal obligations
|
|
1 725
|
|
|
3
|
|
|
(9
|
)
|
|
|
1 719
|
|
|
|
$
|
42 938
|
|
$
|
19
|
|
$
|
(251
|
)
|
|
$
|
42
706
|
The
amortized cost and fair value of the securities available for sale as of
December 31, 2007 (in thousands), by contractual maturity, are shown below:
|
|
Amortized
|
|
Fair
|
|
|
Cost
|
|
Value
|
|
Due in one year
or less
|
$
|
10 490
|
|
$
|
10 501
|
|
Due after one year through five
years
|
|
27 008
|
|
|
27 229
|
|
Due after five
years
|
|
1 841
|
|
|
1 842
|
|
|
$
|
39 339
|
|
$
|
39 572
|
There were
no sales of securities available for sale during 2007 or 2006. Proceeds from
sales of securities available for sale were $13.9 million during 2005. Gross
losses of $369 thousand were realized on sales in 2005.
The primary
purpose of the investment portfolio is to generate income and meet liquidity
needs of the company through readily saleable financial instruments. The
portfolio is made up of fixed rate bonds, whose prices move inversely with
rates. At the end of any accounting period, the investment portfolio has
unrealized gains and losses. The company monitors the portfolio which is subject
to liquidity needs, market rate changes and credit risk changes to see if
adjustments are needed. The primary concern in a loss situation is the credit
quality of the business behind the instrument. The primary cause of impairments
is the decline in the prices of the bonds as rates have risen. There are
approximately 8 accounts in the consolidated portfolio that have losses at
December 31, 2007. These securities have not suffered credit deterioration and
the company has the ability and intent to hold these issues to maturity or
recovery of value; therefore, the gross unrealized losses are considered
temporary as of December 31, 2007.
42
Note 2. Securities (Continued)
The
following table summarizes the fair value and gross unrealized losses for
securities aggregated by investment category and length of time that individual
securities have been in a continuous gross unrealized loss position as of
December 31, 2007 and 2006 (in thousands).
|
|
December 31, 2007
|
|
|
Less than 12 months
|
|
More than 12
months
|
|
Total
|
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
Fair Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
$
|
- -
|
|
$
|
- -
|
|
|
$
|
4 984
|
|
$
|
(16
|
)
|
|
$
|
4 984
|
|
$
|
(16
|
)
|
|
State and
municipal obligations
|
|
469
|
|
|
(1
|
)
|
|
|
371
|
|
|
(1
|
)
|
|
|
840
|
|
|
(2
|
)
|
|
|
$
|
469
|
|
$
|
(1
|
)
|
|
$
|
5 355
|
|
$
|
(17
|
)
|
|
$
|
5 824
|
|
$
|
(18
|
)
|
|
|
|
|
|
|
December 31, 2006
|
|
|
Less than 12 months
|
|
More than 12
months
|
|
Total
|
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
|
|
Unrealized
|
|
|
Fair Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Fair
Value
|
|
Losses
|
|
Obligations of U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agencies
|
$
|
6 753
|
|
$
|
(11
|
)
|
|
$
|
20 733
|
|
$
|
(231
|
)
|
|
$
|
27 486
|
|
$
|
(242
|
)
|
|
State and
municipal obligations
|
|
- -
|
|
|
- -
|
|
|
|
731
|
|
|
(9
|
)
|
|
|
731
|
|
|
(9
|
)
|
|
|
$
|
6 753
|
|
$
|
(11
|
)
|
|
$
|
21 464
|
|
$
|
(240
|
)
|
|
$
|
28 217
|
|
$
|
(251
|
)
|
Securities
with a carrying value of $25.6 million and $25.2 million at December 31, 2007
and 2006 were pledged to secure public funds and other balances as required by
law.
Note 3. Loans and Related Party
Transactions
The loan
portfolio is composed of the following:
|
|
December
31
|
|
|
2007
|
|
2006
|
|
|
|
(in thousands)
|
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
Construction and land development
|
$
|
55 042
|
|
$
|
53 801
|
|
Secured by farm land
|
|
1 328
|
|
|
1 557
|
|
Secured by 1-4 family residential
|
|
98 864
|
|
|
103 983
|
|
Secured by multifamily residential
|
|
1 749
|
|
|
3 733
|
|
Secured by nonfarm nonresidential
|
|
47 726
|
|
|
46 367
|
|
Commercial loans (except those secured
|
|
|
|
|
|
|
by real estate)
|
|
4 987
|
|
|
4 247
|
|
Consumer
loans
|
|
14 718
|
|
|
16 089
|
|
All other loans
|
|
193
|
|
|
292
|
|
Total loans
|
$
|
224 607
|
|
$
|
230 069
|
|
Less: allowance for loan losses
|
|
2 779
|
|
|
2 423
|
|
|
$
|
221 828
|
|
$
|
227 646
|
At December
31, 2007 and 2006, overdraft demand deposits reclassified to loans totaled $193
thousand and $144 thousand, respectively.
Loans to
directors and executive officers of the company or to their associates at
December 31, 2007 and 2006 totaled $2.8 million and $3.3 million, respectively.
Such loans were made on substantially the same terms as those prevailing for
comparable transactions with similar risks. During 2007, total principal
additions were $566 thousand and total principal payments were $1 million.
43
Note 4. Allowance for Loan Losses
The
following is a summary of transactions in the allowance for loan losses for
2007, 2006 and 2005 (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Balances at beginning of year
|
$
|
2 423
|
|
|
$
|
2 161
|
|
|
$
|
1 966
|
|
|
Provision charged to operating expense
|
|
678
|
|
|
|
331
|
|
|
|
330
|
|
|
Recoveries added to the allowance
|
|
182
|
|
|
|
138
|
|
|
|
113
|
|
|
Loan losses charged to the allowance
|
|
(504
|
)
|
|
|
(207
|
)
|
|
|
(248
|
)
|
|
Balances at end of year
|
$
|
2 779
|
|
|
$
|
2 423
|
|
|
$
|
2 161
|
|
The
following is a summary of information pertaining to impaired loans as of
December 31 for each of the years presented (in thousands):
|
|
2007
|
|
2006
|
|
|
|
|
Impaired loans without a valuation allowance
|
$
|
3 157
|
|
$
|
- -
|
|
|
|
|
Impaired loans
with a valuation allowance
|
|
2 656
|
|
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
$
|
5 813
|
|
$
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance related to impaired loans
|
$
|
636
|
|
$
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans past due ninety days or more and still accruing
|
$
|
21
|
|
$
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
Average investment in impaired loans
|
$
|
1 163
|
|
$
|
- -
|
|
$
|
- -
|
|
Interest income
recognized on impaired loans
|
$
|
48
|
|
$
|
- -
|
|
$
|
- -
|
|
Interest income recognized on a cash basis on impaired loans
|
$
|
- -
|
|
$
|
- -
|
|
$
|
- -
|
No
additional funds are committed to be advanced in connection with impaired loans.
Nonaccrual loans excluded from impaired loan disclosure under SFAS No. 114 at
December 31, 2007 and 2006 totaled $517 thousand and $144 thousand,
respectively. If interest had been accrued on these nonaccrual loans, such
income would have approximated $3 thousand in 2007 and $14 thousand in 2006.
Note 5. Premises and Equipment, Net
Premises and
equipment consists of the following:
|
|
December 31
|
|
|
2007
|
|
2006
|
|
|
|
(in
thousands)
|
|
Premises and improvements
|
$
|
6 614
|
|
$
|
6 537
|
|
Furniture and
equipment
|
|
4 393
|
|
|
5 360
|
|
|
$
|
11 007
|
|
$
|
11 897
|
|
Less accumulated
depreciation
|
|
4 770
|
|
|
5 476
|
|
|
$
|
6 237
|
|
$
|
6 421
|
Depreciation
included in operating expense for 2007, 2006 and 2005 was $568 thousand, $582
thousand and $578 thousand, respectively.
Note 6. Deposits
The
aggregate amount of time deposits with a balance of $100,000 or more was $28.2
million and $22.6 million at December 31, 2007 and 2006, respectively.
44
Note 6. Deposits (Continued)
At December
31, 2007, the scheduled maturities of all time deposits (in thousands) are as
follows:
|
2008
|
$
|
70 985
|
|
2009
|
|
20 516
|
|
2010
|
|
7 957
|
|
2011
|
|
2 482
|
|
2012
|
|
4 136
|
|
|
$
|
106 076
|
Brokered
deposits (all in the form of certificates of deposit) totaled $3.4 million and
$12.9 million at December 31, 2007 and 2006, respectively.
Deposits of
the companys directors, executive officers and associates totaled $104 thousand
and $96 thousand at December 31, 2007 and 2006, respectively.
Note 7. Borrowings
Short-term
borrowings may consist of securities sold under agreements to repurchase and
federal funds purchased. At December 31, 2007, short-term borrowings totaled
$12.5 million in securities sold under agreements to repurchase through secured
transactions with customers. There were no federal funds purchased.
At December
31, 2006 short-term borrowings totaled $10.5 million which included $10.3
million in securities sold under agreements to repurchase through secured
transactions with customers and $200 thousand in federal funds purchased.
In June
2001, the bank incurred fixed rate long term debt consisting of a Federal Home
Loan Bank seven year loan with an original balance of $2.5 million and monthly
payments of interest and principal with an interest rate of 5.51%. Total
non-securities collateral available to secure loans with the Federal Home Loan
Bank is $134 million. The remaining principal payments on the note are due
during 2008 in the amount of $212 thousand.
The balance
of this loan at December 31, 2006 was $620 thousand.
The company
has unused lines of credit with the Federal Home Loan Bank and other financial
institutions totaling approximately $150 million at December 31, 2007.
Note 8. Employee Benefit Plans
The company
sponsors a 401(k) retirement savings plan available to all employees meeting
certain age and service requirements. Employees become eligible to participate
in the plan upon reaching age 21 and completing one year of service. Entry dates
are January 1, April 1, July 1 and October 1. Employees can make a salary
deferral election authorizing the employer to withhold up to the amount allowed
by law each calendar year. The employer may make a discretionary matching
contribution each plan year. The employer may also make other discretionary
contributions to the plan. The company made 401(k) matching contributions of $92
thousand, $56 thousand and $50 thousand in 2007, 2006 and 2005, respectively.
The company
sponsors a funded noncontributory, defined benefit pension plan covering
full-time employees over 21 years of age upon completion of one year of service.
Benefits are based on average compensation for the five consecutive full
calendar years of service which produces the highest average.
The company
sponsors an unfunded postretirement life insurance plan covering current and
future retirees with 25 years of service over the age of 60 and an unfunded
health care plan for current retirees that met certain eligibility
requirements.
45
Note 8. Employee Benefit Plans
(Continued)
The company
has entered into contracts with four retirees where the company agrees to pay
the participants beneficiaries $50,000 upon the participants death. The
present value of this postretirement benefit has been accrued as of December 31,
2007 in the amount of $77 thousand. While these liabilities are unfunded, life
insurance has been obtained by the company to help offset these payments.
Obligations
and funded status:
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation, beginning
|
$
|
6 148
|
|
|
$
|
5 490
|
|
|
$
|
515
|
|
|
$
|
517
|
|
|
Service cost
|
|
254
|
|
|
|
274
|
|
|
|
11
|
|
|
|
10
|
|
|
Interest cost
|
|
362
|
|
|
|
323
|
|
|
|
30
|
|
|
|
30
|
|
|
Actuarial (gain) loss
|
|
(144
|
)
|
|
|
271
|
|
|
|
- -
|
|
|
|
(20
|
)
|
|
Benefits paid
|
|
(246
|
)
|
|
|
(210
|
)
|
|
|
(20
|
)
|
|
|
(22
|
)
|
|
Benefit obligation, ending
|
$
|
6 374
|
|
|
$
|
6 148
|
|
|
$
|
536
|
|
|
$
|
515
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets, beginning
|
$
|
4 622
|
|
|
$
|
4 097
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
Actual return on plan assets
|
|
442
|
|
|
|
436
|
|
|
|
- -
|
|
|
|
- -
|
|
|
Employer contributions
|
|
485
|
|
|
|
299
|
|
|
|
20
|
|
|
|
22
|
|
|
Benefits paid
|
|
(246
|
)
|
|
|
(210
|
)
|
|
|
(20
|
)
|
|
|
(22
|
)
|
|
Fair value of plan assets, ending
|
$
|
5 303
|
|
|
$
|
4 622
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
|
|
Funded status at end of year
|
$
|
(1 071
|
)
|
|
$
|
(1 526
|
)
|
|
$
|
(536
|
)
|
|
$
|
(515
|
)
|
|
|
|
Accounts recognized on consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance sheet as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued benefit liabilities
|
$
|
(1 071
|
)
|
|
$
|
(1 526
|
)
|
|
$
|
(536
|
)
|
|
$
|
(515
|
)
|
|
|
|
Amounts recognized in accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive (loss) consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
$
|
936
|
|
|
$
|
1 210
|
|
|
$
|
(47
|
)
|
|
$
|
(47
|
)
|
|
Transition liability
|
|
- -
|
|
|
|
- -
|
|
|
|
122
|
|
|
|
139
|
|
|
Deferred tax benefit
|
|
(318
|
)
|
|
|
(410
|
)
|
|
|
(26
|
)
|
|
|
(31
|
)
|
|
|
$
|
618
|
|
|
$
|
800
|
|
|
$
|
49
|
|
|
$
|
61
|
|
The
accumulated benefit obligation for the defined benefit pension plan was $5.9
million and $5.0 million at December 31, 2007 and 2006, respectively.
46
Note 8. Employee Benefit Plans
(Continued)
Components
of net periodic benefit cost and other amounts recognized in accumulated other
comprehensive (loss):
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
254
|
|
|
$
|
274
|
|
|
$
|
226
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
7
|
|
|
Interest cost
|
|
362
|
|
|
|
323
|
|
|
|
314
|
|
|
|
30
|
|
|
|
30
|
|
|
|
30
|
|
|
Expected return on plan assets
|
|
(356
|
)
|
|
|
(331
|
)
|
|
|
(314
|
)
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
Amortization of net obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(asset) at transition
|
|
- -
|
|
|
|
- -
|
|
|
|
(15
|
)
|
|
|
17
|
|
|
|
18
|
|
|
|
17
|
|
|
Recognized actuarial (gain) loss
|
|
40
|
|
|
|
35
|
|
|
|
27
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(2
|
)
|
|
Net periodic benefit cost
|
$
|
300
|
|
|
$
|
301
|
|
|
$
|
238
|
|
|
$
|
58
|
|
|
$
|
58
|
|
|
$
|
52
|
|
|
|
|
Other changes in plan assets and benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations recognized in accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
$
|
(274
|
)
|
|
$
|
1 210
|
|
|
|
N/A
|
|
|
$
|
- -
|
|
|
$
|
(47
|
)
|
|
|
N/A
|
|
|
Transition liability
|
|
- -
|
|
|
|
- -
|
|
|
|
N/A
|
|
|
|
(17
|
)
|
|
|
139
|
|
|
|
N/A
|
|
|
Deferred tax
|
|
91
|
|
|
|
(410
|
)
|
|
|
N/A
|
|
|
|
6
|
|
|
|
(31
|
)
|
|
|
N/A
|
|
|
Total
recognized in other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income (loss)
|
$
|
(183
|
)
|
|
$
|
800
|
|
|
|
N/A
|
|
|
$
|
(11
|
)
|
|
$
|
61
|
|
|
|
N/A
|
|
|
Total recognized in net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit
cost and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income (loss)
|
$
|
117
|
|
|
$
|
1 101
|
|
|
|
N/A
|
|
|
$
|
47
|
|
|
$
|
119
|
|
|
|
N/A
|
|
The
estimated net loss and prior service cost for the defined benefit pension plan
that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next fiscal year approximates $40 thousand. The
estimated unrecognized transition liability for the other defined benefit
postretirement plans that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is $17 thousand.
Assumptions
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
2007
|
|
2006
|
|
2005
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
|
(in thousands)
|
|
Weighted-average assumptions used to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
6.00
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
|
Expected return on plan assets
|
7.50
|
%
|
|
8.00
|
%
|
|
8.50
|
%
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
Rate of compensation increase
|
4.50
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
|
|
Weighted-average assumptions used to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
determine benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
6.00
|
%
|
|
6.00
|
%
|
|
6.50
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
|
6.00
|
%
|
|
Rate of compensation increase
|
4.50
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
|
3.00
|
%
|
47
Note 8. Employee Benefit Plans
(Continued)
Long-Term
Rate of Return
The plan
sponsor selects the expected long-term rate-of-return-on-assets assumption in
consultation with their investment advisors and actuary. This rate is intended
to reflect the average rate of earnings expected to be earned on the funds
invested or to be invested to provide plan benefits. Historical performance is
reviewed, especially with respect to real rates of return (net of inflation),
for the major asset classes held or anticipated to be held by the trust, and for
the trust itself. Undue weight is not given to recent experience that may not
continue over the measurement period, with higher significance placed on current
forecasts of future long-term economic conditions.
Because
assets are held in a qualified trust, anticipated returns are not reduced for
taxes. Further, solely for this purpose, the plan is assumed to continue in
force and not terminate during the period during which assets are invested.
However, consideration is given to the potential impact of current and future
investment policy, cash flow into and out of the trust, and expenses (both
investment and non-investment) typically paid from plan assets (to the extent
such expenses are not explicitly estimated within periodic cost).
Asset Allocation
The pension
plans weighted-average asset allocations at October 31, 2007 and 2006 (the
plans valuation date), by asset category are as follows:
|
|
Plan Assets at
October 31
|
|
|
2007
|
|
2006
|
|
Asset Category
|
|
|
|
|
|
|
Equities
|
61
|
%
|
|
63
|
%
|
|
Fixed income/cash
|
39
|
%
|
|
37
|
%
|
|
|
|
Total
|
100
|
%
|
|
100
|
%
|
The trust
fund is sufficiently diversified to maintain a reasonable level of risk without
imprudently sacrificing return, with a targeted asset allocation of 60% equities
and 40% fixed income/cash. The trust fund allocation is reviewed on a quarterly
basis and rebalanced back to the original weighting if the actual weighting
varies by at least 5% from the target allocation. The investment manager selects
investment fund managers with demonstrated experience and expertise, and funds
with demonstrated historical performance, for the implementation of the plans
investment strategy. The investment manager will consider both actively and
passively managed investment strategies and will allocate funds across the asset
classes to develop an efficient investment structure.
It is the
responsibility of the trustee to administer the investments of the trust within
reasonable costs, being careful to avoid sacrificing quality. These costs
include, but are not limited to, management and custodial fees, consulting fees,
transaction costs and other administrative costs chargeable to the trust.
There is no
company common stock included in the equity securities of the pension plan at
December 31, 2007 and 2006.
48
Note 8. Employee Benefit Plans
(Continued)
Cash Flow
The company
expects to contribute $300 thousand to its pension plan in 2008 and $23 thousand
to its postretirement plan in 2008.
The
following benefit payments, which reflect future service, are expected to be
paid:
|
Pension Benefits
|
|
Other Benefits
|
|
|
(in thousands)
|
|
2008
|
|
$
|
238
|
|
|
|
$
|
23
|
|
2009
|
|
|
253
|
|
|
|
|
26
|
|
2010
|
|
|
254
|
|
|
|
|
28
|
|
2011
|
|
|
249
|
|
|
|
|
30
|
|
2012
|
|
|
300
|
|
|
|
|
32
|
|
2013-2017
|
|
|
1 838
|
|
|
|
|
165
|
|
For
measurement purposes, an 8.5% annual rate of increase in per capita health care
costs of covered benefits was assumed for 2007, 2006 and 2005, with such annual
rate of increase gradually declining to 5% in 2013.
Assumed
health care cost trend rates have a significant effect on the amounts reported
for the health care plans. A 1% change in assumed health care cost trend rates
would have the following effects:
|
|
1%
Increase
|
|
1%
Decrease
|
|
|
|
(in
thousands)
|
|
|
|
Effect on the health care component of the accumulated
|
|
|
|
|
|
|
|
|
|
postretirement benefit obligation
|
$
|
20
|
|
|
$
|
(21
|
)
|
|
|
Effect on total
of service and interest cost components of
|
|
|
|
|
|
|
|
|
|
net periodic postretirement
health care benefit cost
|
|
2
|
|
|
|
(2
|
)
|
|
Note 9. Weighted Average Number of
Shares Outstanding and Earnings Per Share
The
following shows the weighted average number of shares used in computing earnings
per share and the effect on weighted average number of shares of diluted
potential common stock. Potential diluted common stock had no effect on earnings
per share available to stockholders.
|
|
December 31, 2007
|
|
December 31, 2006
|
|
December 31, 2005
|
|
|
Average
|
|
Per
Share
|
|
Average
|
|
Per
Share
|
|
Average
|
|
Per
Share
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Basic earnings per share
|
3 423 239
|
|
$
|
1.03
|
|
3 454 961
|
|
$
|
1.17
|
|
3 460 984
|
|
$
|
1.06
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options
|
7 525
|
|
|
|
|
12 948
|
|
|
|
|
16 554
|
|
|
|
|
|
|
Diluted earnings per share
|
3 430 764
|
|
$
|
1.03
|
|
3 467 909
|
|
$
|
1.16
|
|
3 477 538
|
|
$
|
1.05
|
Shares
outstanding have been restated to reflect the 2% stock dividend in 2006 and the
100% stock dividend in 2005.
Stock
options for 120,534, 83,811 and 40,574 shares of common stock were not
considered in computing diluted earnings per common share for 2007, 2006 and
2005, respectively, because they were antidilutive.
49
Note 10. Stock-Based Compensation
During 2003,
the company adopted an incentive stock plan which allows key employees and
directors to increase their personal financial interest in the company. This
plan permits the issuance of incentive stock options and non-qualified stock
options. The plan authorizes the issuance of up to 183,600 shares of common
stock (shares have been restated to reflect the 2% stock dividend declared March
14, 2006 and the 100% stock dividend declared on February 8, 2005). In 2007 the
shareholders authorized an additional 250,000 shares of common stock to be used
in the granting of incentive options to employees and directors.
A summary of
option activity under the plan as of December 31, 2007, and changes during the
year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
Options
|
|
Shares
|
|
Price
|
|
Life in Years
|
|
(in
thousands)
|
|
Outstanding at beginning of year
|
|
|
115 739
|
|
|
$
|
14.31
|
|
|
|
|
|
|
|
|
Granted
|
|
|
36 723
|
|
|
|
15.60
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- -
|
|
|
|
- -
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1 346
|
)
|
|
|
12.35
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
151 116
|
|
|
$
|
14.77
|
|
5
|
|
|
$
|
87
|
|
|
Exercisable at
end of year
|
|
|
81 757
|
|
|
$
|
14.30
|
|
7
|
|
|
$
|
66
|
|
|
|
|
|
Weighted average fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of options
granted
|
|
$
|
3.76
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of a stock option in the table above represents the
total pre-tax intrinsic value (the amount by which the current market value of
the underlying stock exceeds the exercise price of the option) that would have
been received by the option holders had all option holders exercised their
options on December 31, 2007. The amount changes based on changes in the market
value of the companys stock.
The exercise
price of stock options granted under this plan, both incentive and
non-qualified, cannot be less than the fair market value of the common stock on
the date that the option is granted. The maximum term for an option granted
under this plan is ten years and options granted may be subject to a vesting
schedule. The non-qualified options granted are exercisable immediately. The
incentive options granted are subject to a five year vesting period whereby the
grantees are entitled to exercise one fifth of the options on the anniversary of
the grant date over the next five years. The following table summarizes options
outstanding at December 31, 2007:
|
|
Options
Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
|
Average
|
Exercise
|
|
Number
|
|
Contractual
|
|
Exercise
|
|
Number
|
|
Exercise
|
Price
|
|
Outstanding
|
|
Life (in years)
|
|
Price
|
|
Exercisable
|
|
Price
|
$ 11.28
|
|
|
30 582
|
|
|
6.0
|
|
$ 11.28
|
|
|
23 238
|
|
|
$ 11.28
|
14.00
|
|
|
40 574
|
|
|
7.0
|
|
14.00
|
|
|
25 397
|
|
|
14.00
|
17.25
|
|
|
43 237
|
|
|
8.0
|
|
17.25
|
|
|
20 879
|
|
|
17.25
|
15.60
|
|
|
36 723
|
|
|
9.0
|
|
15.60
|
|
|
12 243
|
|
|
15.60
|
|
|
|
151 116
|
|
|
|
|
|
|
|
81 757
|
|
|
|
As of
December 31, 2007 there was $178 thousand of total unrecognized compensation
expense related to nonvested stock options, which will be recognized over the
remaining requisite service period. The unrecognized compensation expense has a
weighted average life of three years.
50
Note 11. Income Taxes
The company
files income tax returns in the U. S. federal jurisdiction and the state of West
Virginia. With few exceptions, the company is no longer subject to U. S.
federal, state and local income tax examinations by tax authorities for years
prior to 2004.
The company
adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes,
on January 1, 2007 with no impact on the financial statements.
Net deferred
tax assets consist of the following components as of December 31, 2007 and 2006:
|
2007
|
|
2006
|
|
(in thousands)
|
Deferred tax assets:
|
|
|
|
|
|
Reserve for loan losses
|
$
|
790
|
|
$
|
669
|
Accrued pension expense
|
|
438
|
|
|
519
|
Accrued postretirement benefits
|
|
208
|
|
|
175
|
Nonaccrual interest
|
|
17
|
|
|
5
|
Stock option expense
|
|
35
|
|
|
20
|
Home equity closing costs
|
|
72
|
|
|
61
|
Net loan origination fees
|
|
14
|
|
|
- -
|
OREO expense
|
|
11
|
|
|
- -
|
Securities available for sale
|
|
- -
|
|
|
79
|
|
$
|
1 585
|
|
$
|
1 528
|
Deferred tax
liabilities:
|
|
|
|
|
|
Net loan origination costs
|
$
|
- -
|
|
$
|
9
|
Depreciation
|
|
122
|
|
|
130
|
Securities available for sale
|
|
79
|
|
|
- -
|
|
$
|
201
|
|
$
|
139
|
|
Net
deferred tax assets
|
$
|
1 384
|
|
$
|
1 389
|
The
provision for income taxes charged to operations for the years ended December
31, 2007, 2006 and 2005 consists of the following:
|
|
2007
|
|
2006
|
|
2005
|
|
|
(in thousands)
|
|
Current tax expense
|
$
|
2 248
|
|
|
$
|
2 496
|
|
|
$
|
2 061
|
|
|
Deferred tax
expense (benefit)
|
|
(250
|
)
|
|
|
(190
|
)
|
|
|
(41
|
)
|
|
|
$
|
1 998
|
|
|
$
|
2 306
|
|
|
$
|
2 020
|
|
The income
tax provision differs from the amount of income tax determined by applying the
U.S. federal income tax rate to pretax income for the years ended December 31,
2007, 2006 and 2005 due to the following (in thousands):
|
|
2007
|
|
2006
|
|
2005
|
|
Computed expected tax expense
|
$
|
1 880
|
|
|
$
|
2 156
|
|
|
$
|
1 933
|
|
|
Increase
(decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt income
|
|
(107
|
)
|
|
|
(87
|
)
|
|
|
(86
|
)
|
|
State income taxes, net of federal income tax benefit
|
|
191
|
|
|
|
202
|
|
|
|
173
|
|
|
Other
|
|
34
|
|
|
|
35
|
|
|
|
- -
|
|
|
|
$
|
1 998
|
|
|
$
|
2 306
|
|
|
$
|
2 020
|
|
Note 12. Commitments and Contingent
Liabilities
In the
normal course of business, there are outstanding, various commitments and
contingent liabilities which are not reflected in the accompanying financial
statements. The company does not anticipate losses as a result of these
transactions. See Note 14 with respect to financial instruments with
off-balance-sheet risk.
51
Note 12. Commitments and Contingent
Liabilities (Continued)
The company
has approximately $92 thousand in deposits in other financial institutions in
excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) at
December 31, 2007.
The company
must maintain a reserve against its deposits in accordance with Regulation D of
the Federal Reserve Act. For the final bi-weekly reporting periods which
included December 31, 2007 and 2006, the aggregate amounts of daily average
required balances were approximately $300 thousand for each time period.
Note 13. Retained Earnings
Transfers of
funds from the banking subsidiary to the parent company in the form of loans,
advances and cash dividends are restricted by federal and state regulatory
authorities. As of December 31, 2007, the aggregate amount of unrestricted funds
which could be transferred from the banking subsidiary to the parent company,
without prior regulatory approval, totaled $6.3 million or 21.8% of the
consolidated net assets.
Note 14. Financial Instruments With
Off-Balance-Sheet Risk
The company
is a party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. Those financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The contract
or notional amounts of those instruments reflect the extent of involvement the
company has in particular classes of financial instruments.
The
companys exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments. The company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of
the contract or notional amount of the companys exposure to off-balance-sheet
risk as of December 31, 2007 and 2006 (in thousands) is as follows:
|
2007
|
|
2006
|
Financial instruments whose contract
|
|
|
|
|
|
amounts represent credit
risk:
|
|
|
|
|
|
Commitments to extend credit
|
$
|
53 389
|
|
$
|
60 683
|
Standby letters of credit
|
|
3 294
|
|
|
4 750
|
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The company evaluates each customers credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the company upon extension of credit, is based on managements credit evaluation
of the counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Unfunded
commitments under commercial lines of credit are commitments for possible future
extensions of credit to existing customers. The majority of these lines of
credit is collateralized and usually contains a specified maturity date and may
not be drawn upon to the extent to which the company is committed.
Standby
letters of credit are conditional commitments issued by the company to guarantee
the performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The company generally holds
collateral supporting those commitments if deemed necessary.
52
Note 14. Financial Instruments With
Off-Balance-Sheet Risk (Continued)
At December
31, 2007, the company had rate lock commitments to originate mortgage loans
amounting to $603 thousand and mortgage loans held for sale in the amount of
$306 thousand. The company enters into corresponding mandatory commitments, on a
best-efforts basis, to sell the loans. These commitments to sell loans are
designed to eliminate the companys exposure to fluctuations in interest rates
in connection with rate lock commitments and loans held for sale.
Note 15. Fair Value of Financial
Instruments and Interest Rate Risk
The
following methods and assumptions were used to estimate the fair value of each
class of financial instruments for which it is practicable to estimate that
value:
Cash and
Short-Term Investments
For those
short-term instruments, the carrying amount is a reasonable estimate of fair
value.
Securities
For
securities held for investment purposes, fair values are based on quoted market
prices or dealer quotes.
Loans
For
variable rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values. The fair values for other
loans were estimated using discounted cash flow analyses, using interest rates
currently being offered.
Loans Held
for Sale
The
carrying amount of loans held for sale approximates fair value.
Deposit
Liabilities
The fair
value of demand deposits, savings accounts, and certain money market deposits is
the amount payable on demand at the reporting date. The fair value of
fixed-maturity certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Short-term
Borrowings
The
carrying amounts of borrowings under repurchase agreements and federal funds
sold approximate fair value.
FHLB
Advances
The fair
values of the companys FHLB advances are estimated using discounted cash flow
analysis based on the companys incremental borrowing rates for similar types of
borrowing arrangements.
Accrued
Interest
The
carrying amounts of accrued interest approximate fair value.
Off-Balance
Sheet Financial Instruments
The fair
value of commitments is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the counterparties at
the reporting date.
At December
31, 2007 and 2006, the fair value of loan commitments and standby-letters of
credit was immaterial. Therefore, they have not been included in the following
table.
53
Note 15. Fair Value of Financial
Instruments and Interest Rate Risk (Continued)
The carrying
amounts and estimated fair values of the companys financial instruments are as
follows:
|
|
2007
|
|
2006
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
|
(in thousands)
|
|
(in thousands)
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
6
031
|
|
$
|
6
031
|
|
$
|
6
581
|
|
$
|
6
581
|
Securities purchased
under
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to resell and
|
|
|
|
|
|
|
|
|
|
|
|
|
federal funds sold
|
|
|
5 120
|
|
|
5 120
|
|
|
345
|
|
|
345
|
Securities available for
sale
|
|
|
39
572
|
|
|
39
572
|
|
|
42
706
|
|
|
42
706
|
Loans, net
|
|
|
221
828
|
|
|
223
920
|
|
|
227
646
|
|
|
226
928
|
Loans held for
sale
|
|
|
8
133
|
|
|
8
133
|
|
|
405
|
|
|
405
|
Accrued interest
receivable
|
|
|
1 366
|
|
|
1 366
|
|
|
1 431
|
|
|
1 431
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
253 374
|
|
|
253 430
|
|
|
251 778
|
|
|
251 823
|
Securities sold
under
|
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
and federal funds
|
|
|
|
|
|
|
|
|
|
|
|
|
purchased
|
|
|
12 537
|
|
|
12 537
|
|
|
10 526
|
|
|
10 526
|
FHLB
advances
|
|
|
212
|
|
|
212
|
|
|
620
|
|
|
620
|
Accrued interest
payable
|
|
|
757
|
|
|
757
|
|
|
672
|
|
|
672
|
The company
assumes interest rate risk (the risk that general interest rate levels will
change) as a result of its normal operations. As a result, the fair values of
the company's financial instruments will change when interest rate levels change
and that change may be either favorable or unfavorable to the company.
Management attempts to match maturities of assets and liabilities to the extent
believed necessary to minimize interest rate risk. However, borrowers with fixed
rate obligations are less likely to prepay in a rising rate environment and more
likely to prepay in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and attempts
to minimize interest rate risk by adjusting terms of new loans and deposits and
by investing in securities with terms that mitigate the company's overall
interest rate risk.
Note 16. Regulatory Matters
The company
(on a consolidated basis) and the bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the companys and the banks financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the company and bank must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
company and the bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2007 and 2006, that
the company and the bank meet all capital adequacy requirements to which they
are subject.
54
Note 16. Regulatory Matters (Continued)
As of
December 31, 2007, the most recent notification from the Federal Deposit
Insurance Corporation categorized the bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institutions category.
The
companys and the banks actual capital amounts and ratios are also presented in
the table.
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
Minimum
|
|
Capitalized Under
|
|
|
|
|
|
|
|
Capital
|
|
Prompt Corrective
|
|
|
Actual
|
|
Requirement
|
|
Action Provisions
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(in thousands)
|
As of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
32 308
|
|
14.23
%
|
|
$
|
18 161
|
|
8.0
%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
|
$
|
31
814
|
|
14.04
%
|
|
$
|
18
124
|
|
8.0
%
|
|
$
|
22
656
|
|
10.0
%
|
Tier 1 capital (to
risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
29
529
|
|
13.01
%
|
|
$
|
9
081
|
|
4.0
%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
|
$
|
29 035
|
|
12.82
%
|
|
$
|
9 062
|
|
4.0
%
|
|
$
|
13 593
|
|
6.0
%
|
Tier 1 capital (to
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
29 529
|
|
9.99
%
|
|
$
|
11 818
|
|
4.0
%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
|
$
|
29
035
|
|
9.84
%
|
|
$
|
11
799
|
|
4.0
%
|
|
$
|
14
749
|
|
5.0
%
|
|
|
As of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to
risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
30 154
|
|
13.82
%
|
|
$
|
17 455
|
|
8.0
%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
|
$
|
29
695
|
|
13.64
%
|
|
$
|
17
421
|
|
8.0
%
|
|
$
|
21 776
|
|
10.0
%
|
Tier 1 capital (to
risk-weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
27
731
|
|
12.71
%
|
|
$
|
8
728
|
|
4.0
%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
|
$
|
27 272
|
|
12.52
%
|
|
$
|
8 710
|
|
4.0
%
|
|
$
|
13 066
|
|
6.0
%
|
Tier 1 capital (to
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
27 731
|
|
9.34
%
|
|
$
|
11 882
|
|
4.0
%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
|
$
|
27
272
|
|
9.20
%
|
|
$
|
11
863
|
|
4.0
%
|
|
$
|
14
829
|
|
5.0
%
|
55
Note 17. Parent Company Only Financial
Statements
POTOMAC BANCSHARES, INC.
(Parent
Company Only)
Balance Sheets
December 31, 2007 and 2006
(in
thousands)
|
2007
|
|
2006
|
ASSETS
|
|
|
|
|
|
|
|
Cash
|
$
|
36
|
|
|
$
|
25
|
|
Investment in
subsidiary
|
|
28 521
|
|
|
|
26 258
|
|
Other assets
|
|
458
|
|
|
|
434
|
|
|
Total Assets
|
$
|
29 015
|
|
|
$
|
26 717
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES, other
|
$
|
- -
|
|
|
$
|
- -
|
|
|
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
Common stock
|
$
|
3 672
|
|
|
$
|
3 672
|
|
Surplus
|
|
3 771
|
|
|
|
3 661
|
|
Undivided profits
|
|
24 787
|
|
|
|
22 677
|
|
Accumulated other
comprehensive (loss)
|
|
(514
|
)
|
|
|
(1 014
|
)
|
|
$
|
31 716
|
|
|
$
|
28 996
|
|
Less cost of shares acquired for the
treasury
|
|
2 701
|
|
|
|
2 279
|
|
Total Stockholders Equity
|
$
|
29 015
|
|
|
$
|
26 717
|
|
|
Total Liabilities and Stockholders Equity
|
$
|
29 015
|
|
|
$
|
26 717
|
|
POTOMAC BANCSHARES, INC.
(Parent
Company Only)
Statements of Income
Years Ended December 31, 2007, 2006
and 2005
(in thousands)
|
2007
|
|
2006
|
|
2005
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiary
|
$
|
1 942
|
|
|
$
|
1 905
|
|
|
$
|
1 487
|
|
Interest
income
|
|
1
|
|
|
|
1
|
|
|
|
- -
|
|
Total Income
|
$
|
1
943
|
|
|
$
|
1
906
|
|
|
$
|
1
487
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense
|
$
|
110
|
|
|
$
|
112
|
|
|
$
|
-
-
|
|
Other professional
fees
|
|
57
|
|
|
|
39
|
|
|
|
34
|
|
Other operating
expenses
|
|
65
|
|
|
|
56
|
|
|
|
60
|
|
Total Expenses
|
$
|
232
|
|
|
$
|
207
|
|
|
$
|
94
|
|
|
Income before Income Tax
(Benefit) and
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Undistributed Income of Subsidiary
|
$
|
1
711
|
|
|
$
|
1
699
|
|
|
$
|
1
393
|
|
|
Income Tax (Benefit)
|
|
(56
|
)
|
|
|
(51
|
)
|
|
|
(31
|
)
|
|
Income before Equity in
Undistributed
|
|
|
|
|
|
|
|
|
|
|
|
Income of Subsidiary
|
$
|
1
767
|
|
|
$
|
1
750
|
|
|
$
|
1
424
|
|
|
Equity in Undistributed Income of
Subsidiary
|
|
1 763
|
|
|
|
2 285
|
|
|
|
2 240
|
|
|
Net
Income
|
$
|
3 530
|
|
|
$
|
4 035
|
|
|
$
|
3 664
|
|
56
Note 17. Parent Company Only Financial
Statements (Continued)
POTOMAC BANCSHARES, INC.
(Parent
Company Only)
Statements of Cash Flows
Years Ended December 31, 2007,
2006 and 2005
(in thousands)
|
2007
|
|
2006
|
|
2005
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
3
530
|
|
|
$
|
4
035
|
|
|
$
|
3
664
|
|
Adjustments to reconcile
net income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed (income) of
|
|
|
|
|
|
|
|
|
|
|
|
subsidiary
|
|
(1 763
|
)
|
|
|
(2 285
|
)
|
|
|
(2 240
|
)
|
Stock-based compensation expense
|
|
110
|
|
|
|
112
|
|
|
|
-
-
|
|
(Increase) in other assets
|
|
(24
|
)
|
|
|
(153
|
)
|
|
|
(251
|
)
|
(Decrease) in other liabilities
|
|
- -
|
|
|
|
- -
|
|
|
|
(3
|
)
|
|
Net cash provided by operating
activities
|
$
|
1 853
|
|
|
$
|
1 709
|
|
|
$
|
1 170
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
$
|
(1 420
|
)
|
|
$
|
(1 295
|
)
|
|
$
|
(1 137
|
)
|
Purchase of treasury
shares
|
|
(422
|
)
|
|
|
(429
|
)
|
|
|
- -
|
|
|
Net cash (used in) financing
activities
|
$
|
(1 842
|
)
|
|
$
|
(1 724
|
)
|
|
$
|
(1 137
|
)
|
|
Increase (decrease) in cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
$
|
11
|
|
|
$
|
(15
|
)
|
|
$
|
33
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
25
|
|
|
|
40
|
|
|
|
7
|
|
Ending
|
$
|
36
|
|
|
$
|
25
|
|
|
$
|
40
|
|
57
Item 9. Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure
.
Not Applicable.
Item 9A(T). Controls and Procedures.
The companys chief
executive officer and chief financial officer, based on their evaluation as of
the date of this report of the companys disclosure controls and procedures (as
defined in Rule 13(a)-14(e) of the Securities Exchange Act of 1934), have
concluded that the companys disclosure controls and procedures are adequate and
effective for purposes of Rule 13(a)-14(c) and timely, alerting them to material
information relating to the company required to be included in the companys
filings with the Securities and Exchange Commission under the Securities
Exchange Act of 1934.
This annual report does not include an attestation report of the
companys registered public accounting firm regarding internal control over
financial reporting. Managements report was not subject to attestation by the
companys registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
managements report in this annual report.
There were no significant changes in the companys internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
Managements Report on Internal
Control Over Financial Reporting
To the Stockholders:
Management is responsible for the preparation and fair presentation of
the financial statements included in this annual report. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and reflect managements judgments and
estimates concerning effects of events and transactions that are accounted for
or disclosed.
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting. The companys internal control over
financial reporting includes those policies and procedures that pertain to the
companys ability to record, process, summarize and report reliable financial
data. Management recognizes that there are inherent limitations in the
effectiveness of any internal control over financial reporting, including the
possibility of human error and the circumvention or overriding of internal
control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal control over financial reporting may vary over time.
In order to ensure that the companys internal control over financial
reporting is effective, management regularly assesses such controls and did so
most recently for its financial reporting as of December 31, 2007. This
assessment was based on criteria for effective internal control over financial
reporting described in
Internal Control
Integrated
Framework
issued by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission. Based on this
assessment, management has concluded that the internal control over financial
reporting was effective as of December 31, 2007.
The Board of Directors, acting through its Audit Committee, is
responsible for the oversight of the companys accounting policies, financial
reporting and internal control. The Audit Committee of the Board of Directors is
comprised entirely of outside directors who are independent of management. The
Audit Committee is responsible for the appointment and compensation of the
independent registered public accounting firm and approves decisions regarding
the appointment or removal of the companys internal auditor. It meets
periodically with management, the independent registered public accounting firm
and the internal auditor to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and
auditing procedures of the company in addition to reviewing the companys
financial reports. The independent registered public accounting firm and the
internal auditor have full and unlimited access to the Audit Committee, with or
without management, to discuss the adequacy of internal control over financial
reporting, and any other matter which they believe should be brought to the
attention of the Audit Committee.
Item 9B. Other
Information.
None.
58
PART III
Item 10. Directors and Executive
Officers of the Registrant.
The information contained on pages 7-8 of the Proxy Statement dated March
31, 2008, for the April 22, 2008 Annual Meeting under the captions Management
Nominees to the Board of Potomac and Directors Continuing to Serve Unexpired
Terms, and page 15 under the caption Section 16(a) Beneficial Ownership
Reporting Compliance is incorporated herein by reference.
The Executive Officers are as follows:
Name
|
|
Position Since
|
|
Age
|
|
Principal Occupation
|
Robert F. Baronner, Jr.
|
|
President & CEO
2001
|
|
49
|
|
Employed by bank as of 1/1/01 as President and CEO.
|
|
|
|
|
|
|
|
David W. Irvin
|
|
Executive Vice President
2004
|
|
44
|
|
Employed at bank from 2001 to present as Commercial Loan Division
Manager.
|
|
|
|
|
|
|
|
Gayle Marshall Johnson
|
|
Sr. Vice President & Chief
Financial Officer
1994
|
|
58
|
|
Employed with the bank 1977-1985 and 1988-present; Vice President
and Chief Financial Officer since 1990. Sr. Vice President since
2005.
|
|
Donald S. Smith
|
|
Vice President
1994
|
|
79
|
|
Employed at bank 1947 to 1991; President 1979 to 1991
(retired).
|
The bank has adopted a Code of Ethics that applies to all employees,
including Potomacs and the banks chief executive officer and chief financial
officer and other senior officers. Additionally, there is a Code of Ethics for
Senior Financial Officers which applies to Potomacs and the banks chief
executive officer and chief financial officer. These Codes of Ethics are
attached to this document as Exhibits 14.1 and 14.2. If we make any substantive
amendments to this code or grant any waiver from a provision of the code to our
chief executive officer or chief financial officer, we will disclose the
amendment or waiver in a report on Form 8-K.
Item 11. Executive Compensation.
The information contained on pages 10-13 of the Proxy Statement dated
March 31, 2008, for the April 22, 2008 Annual Meeting under the captions
Executive Compensation, Employee Benefit Plans, Employment Agreement, and
Compensation of Directors is incorporated herein by reference.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters.
The
information contained on pages 9-10 of the Proxy Statement dated March 31, 2008,
for the April 22, 2008 Annual Meeting under the caption Ownership of Securities
by Nominees, Directors and Officers is incorporated herein by reference.
Securities authorized for issuance under Potomacs 2003 Stock Incentive
Plan are listed below:
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
Number of securities
|
|
|
|
|
|
remaining available for
|
|
|
to be issued
|
|
Weighted-average
|
|
future issuance under
|
|
|
upon exercise of
|
|
exercise price of
|
|
equity compensation plans
|
|
|
outstanding options,
|
|
outstanding options,
|
|
(excluding securities
|
Plan category
|
|
warrants and rights
|
|
warrants and
rights
|
|
reflected in column
(a))
|
2003 Stock Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
|
amended by shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, 2007
|
|
|
152,462
|
|
|
|
$14.62
|
|
|
|
281,138
|
|
Item 13. Certain Relationships and
Related Transactions
.
The information contained on page 14 of the Proxy Statement dated March
31, 2008, for the April 22, 2008 Annual Meeting under the caption Certain
Transactions with Directors, Officers and Their Associates is incorporated
herein by reference.
59
Item 14. Principal Accountant Fees
and Services.
The information contained on pages 6-7 of the Proxy Statement dated March
31, 2008, for the April 22, 2008 Annual Meeting under the caption Audit
Committee Report is incorporated herein by reference.
Item 15. Exhibits and Financial
Statement Schedules.
(a)
(1)
Financial
Statements
. Reference is made to Part II,
Item 8 of this Annual Report on Form 10-K.
(2)
Financial Statement Schedules
. These schedules are omitted as the required information is
inapplicable or the information is presented in the consolidated financial
statements or related notes.
(3)
Exhibits
.
See below.
2.1 Agreement and Plan of Merger dated March 8, 1994, by and between
Potomac Bancshares, Inc., and Bank of Charles Town filed with and incorporated
by reference from the Registration on Form S-4 filed with the Securities and
Exchange Commission on June 10, 1994, Registration No. 33-80092.
3.1 Articles of Incorporation of Potomac Bancshares, Inc. filed with and
incorporated by reference from the Registration Statement on Form S-4 filed with
the Securities and Exchange Commission on June 10, 1994, Registration No.
33-80092.
3.2 Amendments to Articles of Incorporation of Potomac Bancshares, Inc.
adopted by shareholders on April 25, 1995 and filed with the West Virginia
Secretary of State on May 23, 1995, and incorporated by reference from Potomacs
Form 10-KSB for the year ended December 31, 1995 and filed with the Securities
and Exchange Commission, File No. 0-24958.
3.3 Amended and Restated Bylaws of Potomac Bancshares, Inc. adopted by
shareholders April 25, 1995 and incorporated by reference from Potomacs Form
10-KSB for the year ended December 31, 1995, and filed with the Securities and
Exchange Commission, File No. 0-24958.
10.1 2003 Stock Incentive Plan adopted by the Potomac Board February 20,
2003 and approved by the Companys shareholders on May 13, 2003, amended by the
Companys shareholders on April 24, 2007 and incorporated by reference from
Potomacs Form 10-K for the year ended December 31, 2006 and filed with the
Securities and Exchange Commission, File No. 0-24958.
10.2 Employment Agreement of Mr. Robert F. Baronner, Jr., filed with and
incorporated by reference from Form 10-KSB for the year ended December 31, 2001,
and filed with the Securities and Exchange Commission, File No. 0-24958.
14.1
Code of Ethics (for all employees)*
14.2
Code of Ethics for Senior Financial Officers*
21 Subsidiaries of the Registrant*
23.1 Consent of Independent Accountants*
31.1 Rule 13a-15(e)/15d-15(e) Certification of Chief Executive Officer*
31.2 Rule 13a-15(e)/15d-15(e) Certification of Chief Financial Officer*
32.1 Section 1350 Certification of Chief Executive Officer*
32.2 Section
1350 Certification of Chief Financial Officer*
99.1 Proxy Statement for the 2008 Annual Meeting for Potomac, portions
are incorporated by reference in Form 10-K Annual Report*
* Filed herewith.
60