POTOMAC BANCSHARES INC - Annual Report: 2009 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
———————
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
———————
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
XXX | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
For the fiscal year ended December 31, 2009 | |||
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the transition period from __________ to __________ |
Commission File Number
0-24958
POTOMAC BANCSHARES, INC.
(Exact Name of Registrant as Specified in Its Charter)
(Exact Name of Registrant as Specified in Its Charter)
West Virginia | 55-0732247 | ||
(State or Other Jurisdiction of | (I.R.S. Employer | ||
Incorporation or Organization) | Identification No.) | ||
111 East Washington Street | |||
PO Box 906, Charles Town WV | 25414-0906 | ||
(Address of Principal Executive Offices) | (Zip Code) | ||
Registrant's telephone number, including area code | 304-725-8431 |
Securities registered pursuant to Section 12(b) of the
Act:
Name of Each Exchange | |||
Title of Each Class | on Which Registered | ||
NONE | |||
Securities registered
pursuant to Section 12(g) of the Act:
Common Stock, $1.00 Par
Value
(Title of Class)
(Title of Class)
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes | No | XX |
1
Indicate by check mark
if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes | No | XX |
Indicate by check mark
whether the registrant: (l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes | XX | No |
Indicate by check mark
whether the registrant has submitted electronically and posted on its corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes | No |
Indicate by check mark
if disclosure of delinquent filers in response to Item 405 of Regulation S-K (§
228.405) is not contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ____ | Accelerated Filer ____ | Non-Accelerated Filer ____ | Smaller Reporting Company | XX |
Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes | No | XX |
State the aggregate
market value of the voting and non-voting common equity held by nonaffiliates
computed by reference to the price at which the common equity was last sold, or
the average bid and asked price of such common equity, as of the last business
day of the registrant’s most recently completed second fiscal quarter.
$26,258,640 as of June 30,
2009
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. |
3,390,178 as of March 12, 2010 |
DOCUMENTS INCORPORATED
BY REFERENCE
The following lists the
document that is incorporated by reference in the Form 10-K Annual Report, and
the Parts and Items of the Form 10-K into which the document is
incorporated.
Part of the Form 10-K into Which | ||
Document | the Document is Incorporated | |
Portions of Potomac Bancshares, Inc.’s Proxy Statement for the 2010 Annual Meeting of Shareholders which proxy statement will be filed on or about March 30, 2010. | Part III, Items 10, 11, 12, 13 and 14 |
2
Potomac Bancshares, Inc.
Annual Report on Form 10-K
For the Year Ended December 31, 2009
Annual Report on Form 10-K
For the Year Ended December 31, 2009
PART I | ||||
Item | 1. | Business | 4 | |
Item | 2. | Properties | 12 | |
Item | 3. | Legal Proceedings | 12 | |
Item | 4. | (Removed and Reserved) | 12 | |
PART II | ||||
Item | 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases | ||
of Equity Securities | 13 | |||
Item | 6. | Selected Financial Data | 15 | |
Item | 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | |
Item | 8. | Financial Statements and Supplementary Data | 28 | |
Item | 9. | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure | 62 | |
Item | 9A(T). | Controls and Procedures | 62 | |
Item | 9B. | Other Information | 62 | |
PART III | ||||
* Item | 10. | Directors, Executive Officers and Corporate Governance | 63 | |
* Item | 11. | Executive Compensation | 63 | |
* Item | 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 63 | |
* Item | 13. | Certain Relationships and Related Transactions and Director Independence | 63 | |
* Item | 14. | Principal Accounting Fees and Services | 64 | |
PART IV | ||||
Item | 15. | Exhibits and Financial Statement Schedules | 64 |
* The information
required by Items 10, 11, 12, 13 and 14, to the extent not included in this
document, is incorporated herein by reference to the information included under
the captions “Management Nominees to the Board of Potomac,” “Directors
Continuing to Serve Unexpired Terms,” “Section 16(a) Beneficial Ownership
Reporting Compliance,” “Executive Compensation,” “Employee Benefit Plans,”
“Compensation of Directors,” “Ownership of Securities by Nominees, Directors and
Officers,” “Certain Transactions with Directors, Officers and Their Associates”
and “Audit Committee Report” in the registrant’s definitive proxy statement
which is expected to be filed on or about March 30, 2010.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation
Reform Act of 1995 evidences Congress’ determination that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
corporate management. This Form 10-K, including the President’s letter and the
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, contains forward-looking statements that involve risk and
uncertainty. “Forward-looking statements” are easily identified by the use of
words such as “could,” “anticipate,” “estimate,” “believe,” “confident,” and
similar words that refer to a future outlook. To comply with the terms of the
safe harbor, the company notes that a variety of factors could cause the
company’s actual results and experiences to differ materially from the
anticipated results or other expectations expressed in the company’s
forward-looking statements.
The risks and uncertainties that may
affect the operations, performance, development and results of the company’s
business include, but are not limited to, the growth of the economy, interest
rate movements, the impact of competitive products, services and pricing,
customer business requirements, the current economic environment posing
significant challenges and affecting our financial condition and results of
operations, the possibility of future FDIC assessments, Congressional
legislation and similar matters. We caution readers of this report not to place
undue reliance on forward-looking statements which are subject to influence by
unanticipated future events. Actual results, accordingly, may differ materially
from management expectations.
3
PART I
Item 1. Business.
History and Operations
The Board of Directors of Bank of
Charles Town (the "bank") caused Potomac Bancshares, Inc. ("Potomac" or the
“company”) to be formed on March 2, 1994, as a single-bank holding company. To
date, Potomac's only activities have involved the acquisition of the bank.
Potomac acquired all of the shares of the bank’s common stock on July 29,
1994.
Bank of Charles Town is a West
Virginia state-chartered bank that formed and opened for business in 1871. The
Federal Deposit Insurance Corporation insures the bank’s deposits. The bank
engages in general banking business primarily in Jefferson County and Berkeley
County, West Virginia. The bank also provides services to Washington County and
Frederick County, Maryland and Loudoun County, Frederick County and Clarke
County, Virginia. The main office is in Charles Town, West Virginia at 111 East
Washington Street, with branch offices in
- Harpers Ferry, West Virginia,
- Kearneysville, West Virginia,
- Martinsburg, West Virginia and
- Hedgesville, West Virginia.
The bank provides individuals,
businesses and local governments with a broad range of banking services. These
services include
- Commercial credit lines, equipment loans, and construction financing,
- Real estate loans, secondary market and adjustable rate mortgages,
- Retail loan products including home equity lines of credit,
- Checking and savings accounts for businesses and individuals and
- Certificates of deposit and individual retirement accounts.
Online banking with bill pay and
E-statements among other services are available through BCT NetTeller 24 hours a
day, 7 days a week. ATMs located at each of the five offices and Touchline 24,
an interactive voice response system available at 1-304-728-2424, are also
available to customers 24/7. The bank initiated the formation of an ATM network
with two banks in the community to provide customers of all three banks the use
of 17 ATM locations free of charge in the eastern panhandle of West Virginia.
Use of ATMs at all Sheetz locations is also free of charge. Sheetz is a regional
convenience store franchise. The bank’s One Financial Center encompasses the
trust and financial services department and BCT Investments. The trust
department provides financial management, investment and trust services. BCT
Investments provides financial management, investment and brokerage services.
Lending
Activities. The bank
offers a variety of loans for consumer and commercial purposes. The majority of
these loans are secured.
Underwriting standards for all
lending include
- Sound credit analysis,
- Proper documentation according to the bank's loan policy standards,
- Avoidance of loan concentrations to a single industry or with a single class of collateral,
- Diligent maintenance of past due and nonaccrual loans and
- A risk grading system that assists us in managing deteriorating credits on a proactive basis.
The lending policies of the bank
address the importance of a diversified portfolio and a balance between maximum
yield and minimum risk. It is the bank’s policy to avoid concentrations of loans
such as loans to one industry, loans to one borrower or guarantor or loans
secured by similar collateral.
4
The bank's loan policy designates
particular loan-to-value limits for real estate loans in accordance with
recommendations in Section 304 of the Federal Deposit Insurance Corporation
Improvement Act of 1991. As stated in the loan policy, there may be certain
lending situations not subject to these loan-to-value limits and from time to
time senior management of the bank may permit exceptions to the established
limits. Any exceptions are sufficiently documented.
Loans secured by real estate are
made to individuals and businesses for
- The purchase of raw land and land development,
- Commercial, multi-family and other non-residential construction,
- Purchase of improved property,
- Purchase of owner occupied one to four family residential property,
- Lines of credit and
- Home equity loans.
Approximately 91.9% of the bank's
loans are secured by real estate. These loans had an average delinquency rate of
2.92% and a loss rate of 2.04% during 2009. The average delinquency rate and
loss rate are based on comparisons to 2009 average total loans.
As of December 31, 2009 aggregate
dollar amounts (in thousands) in loan categories secured by real estate are as
follows:
|
$ | 38 083 |
|
1 419 | |
|
102 290 | |
|
2 070 | |
|
71 916 | |
$ | 215 778 | |
Commercial loans not secured by real
estate with an aggregate balance of $9.7 million at December 31, 2009 make up
approximately 4.1% of the total loan portfolio. The bank’s loan policy for
commercial loans including those commercial loans secured by real estate is
to
- Grant loans on a sound and collectible basis,
- Invest the bank’s funds profitably for the benefit of shareholders and the protection of depositors and
- Serve the legitimate credit needs of the community in which the bank is located.
Average delinquency and the loss
rate for commercial loans not secured by real estate were less than 1% during
2009 compared to 2009 average total loans.
Retail loans to individuals for
personal expenditures are approximately 3.8% of the bank's total loans at
December 31, 2009. The aggregate balance of these loans was $9 million at
December 31, 2009. The majority of these loans are installment loans with the
remainder made as term loans.
There is some risk in every retail
loan transaction. The bank accepts moderate levels of risk while minimizing
retail loan losses through careful investigation into the character of each
borrower, determining the source of repayment before closing each loan,
collateralizing most loans, exercising care in documentation procedures,
administering an aggressive retail loan collection program, and following the
retail loan policies. Loans to individuals for personal expenditures had an
average delinquency rate of 0.06% and a loss rate of 0.07% in 2009 (based on
comparisons to 2009 average total loans).
All other loans total $222 thousand
(0.09% of total loans) at December 31, 2009. These loans had no delinquency rate
and no average loss rate in 2009 compared to 2009 average total
loans.
Investment
Activities. The bank's
investment policy governs its investment activities.
The policy states that excess daily
funds are to be invested in federal funds sold and securities purchased under
agreements to resell. The daily funds are used to cover deposit draw downs by
customers, to fund loan commitments and to help maintain the bank's
asset/liability mix.
5
According to the policy, funds in
excess of those invested in federal funds sold and securities purchased under
agreements to resell are to be invested in (1) U.S. Treasury bills, notes or
bonds, (2) obligations of U.S. Government agencies or (3) obligations of the
State of West Virginia and political subdivisions thereof with a rating of not
less than A or fully insured bonds or (4) obligations of states other than West
Virginia and political subdivisions thereof with a rating of not less than A or
fully insured bonds.
The policy governs various other
factors including maturities, the closeness of purchase price to par, amounts
that may be purchased and percentages of the various types of investments that
may be held.
Deposit
Activities. The bank
offers noninterest-bearing and interest-bearing checking accounts and savings
accounts. The bank offers automatically renewable certificates of deposit in
various terms from 91 days to five years. The bank is also a participant in the
CDARS program. The CDARS program offers certificates of deposit in various terms
from four weeks to five years. Individual retirement accounts in the form of
certificates of deposit are also available.
To open a deposit account, the
depositor must meet the following requirements for low risk individuals:
- Present a valid identification,
- Have a social security number,
- Must be a U.S. citizen or possess evidence of legal alien status, and
- Must be at least 18 years of age or share an account with a person at least 18 years of age.
When depositors are
considered medium or high risk (i.e. out-of-state driver’s license and/or
resident), additional verification requirements apply.
Competition
As of March 1, 2010, there were 64
bank holding companies (including multi-bank and one bank holding companies)
operating in the State of West Virginia. These holding companies are
headquartered in various West Virginia cities and control banks throughout the
State of West Virginia, including banks that compete with the bank in its market
area.
The bank's market area is generally
defined as Jefferson County and Berkeley County, West Virginia. As of June 30,
2009, there were six banks in Jefferson County with 16 banking offices. The
total deposits of these commercial banks as of June 30, 2009 were $667 million,
and the bank ranked number one in total deposits with $216 million or 32.41 % of
the total deposits in the market at that time. The bank has two branch offices
in Berkeley County. Opening in July 2001 and June 2003, these branches have 4.28
% of the market share of deposits in Berkeley County where there are 11 banks
with 31 banking offices.
For most of the services that the
bank performs, there is also competition from financial institutions other than
commercial banks. For instance, credit unions, some insurance companies, and
issuers of commercial paper and money market funds actively compete for funds
and for various types of loans. In addition, personal and corporate trust and
investment counseling services are offered by insurance companies, investment
counseling firms and other business firms and individuals. Due to the geographic
location of the bank's primary market area, the existence of larger financial
institutions in Maryland, Virginia and Washington, D.C. influences the
competition in the market area. Larger regional and national corporations
continue to be increasingly visible in offering a broad range of financial
services to all types of commercial and consumer customers. The principal
competitive factors in the markets for deposits and loans are interest rates,
either paid or charged. The chartering of numerous new banks in West Virginia
and the opening of numerous federally chartered savings and loan associations
has increased competition for the bank. The 1986 legislation passed by the West
Virginia Legislature allowing statewide branch banking provided increased
opportunities for the bank, but it also increased competition for the bank in
its service area. With the beginning of reciprocal interstate banking in 1988,
bank holding companies (such as Potomac Bancshares, Inc.) also face additional
competition in efforts to acquire other subsidiaries throughout West Virginia.
6
In 1994, Congress passed the
Riegle-Neal Interstate Banking and Branching Efficiency Act. Under this Act,
bank holding companies are permitted to acquire banks located in states other
than the bank holding company’s home state without regard to whether the
transaction is permitted under state law. Commencing on June 1, 1997, the Act
allowed national banks and state banks with different home states to merge
across state lines, unless the home state of a participating bank enacted
legislation prior to May 31, 1997, that expressly prohibits interstate mergers.
Additionally, the Act allows banks to branch across state lines, unless the
state where the new branch will be located enacted legislation restricting or
prohibiting de novo interstate branching on or before May 31, 1997. West
Virginia adopted legislation, effective May 31, 1997, that allowed for
interstate branch banking by merger across state lines and allowed for de novo
branching and branching by purchase and assumption on a reciprocal basis with
the home state of the bank in question. The effect of this legislation has been
increased competition for West Virginia banks, including the bank.
Employees
Potomac currently has no employees.
As of March 1, 2010, the bank had 91
full-time employees and 12 part-time employees.
Supervision and Regulation
Introduction. Potomac is a bank holding company within the
provisions of the Bank Holding Company Act of 1956, is registered as such, and
is subject to supervision by the Board of Governors of the Federal Reserve
System ("Board of Governors"). The Bank Holding Company Act requires Potomac to
secure the prior approval of the Board of Governors before Potomac acquires
ownership or control of more than five percent (5%) of the voting shares or
substantially all of the assets of any institution, including another bank.
As a bank holding company, Potomac
is required to file with the Board of Governors annual reports and such
additional information as the Board of Governors may require pursuant to the
Bank Holding Company Act. The Board of Governors may also make examinations of
Potomac and its banking subsidiaries. Furthermore, under Section 106 of the 1970
Amendments to the Bank Holding Company Act and the regulations of the Board of
Governors, a bank holding company and its subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or any provision of credit, sale or lease of property or furnishing of
services.
Potomac’s depository institution
subsidiary is subject to affiliate transaction restrictions under federal law
that limit the transfer of funds by the subsidiary bank to its respective parent
and any nonbanking subsidiaries, whether in the form of loans, extensions of
credit, investments or asset purchases. Such transfers by any subsidiary bank to
its parent corporation or any nonbanking subsidiary are limited in an amount to
10% of the institution's capital and surplus and, with respect to such parent
and all such nonbanking subsidiaries, to an aggregate of 20% of any such
institution's capital and surplus.
Potomac is required to register
annually with the Commissioner of Banking of West Virginia ("Commissioner") and
to pay a registration fee to the Commissioner based on the total amount of bank
deposits in banks with respect to which it is a bank holding company. Although
legislation allows the Commissioner to prescribe the registration fee, it limits
the fee to ten dollars per million dollars of deposits rounded off to the
nearest million dollars. Potomac is also subject to regulation and supervision
by the Commissioner.
Potomac is required to secure the
approval of the West Virginia Board of Banking before acquiring ownership or
control of more than five percent of the voting shares or substantially all of
the assets of any institution, including another bank. West Virginia banking law
prohibits any West Virginia or non-West Virginia bank or bank holding company
from acquiring shares of a bank if the acquisition would cause the combined
deposits of all banks in the State of West Virginia, with respect to which it is
a bank holding company, to exceed 25% of the total deposits of all depository
institutions in the State of West Virginia.
Depository Institution
Subsidiary. The bank is
subject to FDIC deposit insurance assessments. In addition to the normal FDIC
insurance rates, during 2009, the FDIC imposed a 7 basis point special
assessment based on June 30, 2009 deposits due on or before September 30, 2009,
which amounted to $138,090 for Bank of Charles Town. In November of 2009, the
FDIC required all banks to prepay premiums for the next three years, which was
due on or before December 30, 2009. As a result, Bank of Charles Town has
prepaid the FDIC insurance premiums of $1,661,631 for the years of 2010, 2011,
and 2012. It is possible that the FDIC will impose additional assessments in the
future, and the amount of these assessments could be material.
7
Capital
Requirements. The Federal
Reserve Board has issued risk-based capital guidelines for bank holding
companies, such as Potomac. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, takes off-balance
sheet exposures into explicit account in assessing capital adequacy, and
minimizes disincentives to holding liquid, low-risk assets. Under the guidelines
and related policies, bank holding companies must maintain capital sufficient to
meet both a risk-based asset ratio test and leverage ratio test on a
consolidated basis. The risk-based ratio is determined by allocating assets and
specified off-balance sheet commitments into four weighted categories, with
higher levels of capital being required for categories perceived as representing
greater risk. The leverage ratio is determined by relating core capital (as
described below) to total assets adjusted as specified in the guidelines. The
bank is subject to substantially similar capital requirements adopted by
applicable regulatory agencies.
Generally, under the applicable
guidelines, the financial institution's capital is divided into two tiers. "Tier
1", or core capital, includes common equity, noncumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
or consolidated subsidiaries, less goodwill. Bank holding companies, however,
may include cumulative perpetual preferred stock in their Tier 1 capital, up to
a limit of 25% of such Tier 1 capital. "Tier 2", or supplementary capital,
includes, among other things, cumulative and limited-life preferred stock,
hybrid capital instruments, mandatory convertible securities, qualifying
subordinated debt, and the allowance for loan losses, subject to certain
limitations, less required deductions. "Total capital" is the sum of Tier 1 and
Tier 2 capital.
Financial institutions are required
to maintain a risk-based ratio of 8%, of which 4% must be Tier 1 capital. The
appropriate regulatory authority may set higher capital requirements when an
institution's particular circumstances warrant.
Financial institutions that meet
certain specified criteria, including excellent asset quality, high liquidity,
low interest rate exposure and the highest regulatory rating, are required to
maintain a minimum leverage ratio of 3%. Financial institutions not meeting
these criteria are required to maintain a leverage ratio which exceeds 3% by a
cushion of at least 100 to 200 basis points, and, therefore, the ratio of Tier 1
capital to total assets should not be less than 4%.
The guidelines also provide that
financial institutions experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Furthermore, the Federal Reserve Board's guidelines indicate that the Federal
Reserve Board will continue to consider a "tangible Tier 1 leverage ratio" in
evaluating proposals for expansion or new activities. The tangible Tier 1
leverage is the ratio of an institution's Tier 1 capital, less all intangibles,
to total assets, less all intangibles.
Failure to meet applicable capital
guidelines could subject the financial institution to a variety of enforcement
remedies available to the federal regulatory authorities, including limitations
on the ability to pay dividends, the issuance by the regulatory authority of a
capital directive to increase capital and the termination of deposit insurance
by the FDIC, as well as to the measures described in the "Federal Deposit
Insurance Corporation Improvement Act of 1991" as applicable to undercapitalized
institutions.
The Federal Reserve Board, as well
as the FDIC, has adopted changes to their risk-based and leverage ratio
requirements that require that all intangible assets, with certain exceptions,
be deducted from Tier 1 capital. Under the Federal Reserve Board's rules, the
only types of intangible assets that may be included in (i.e., not deducted
from) a bank holding company's capital are readily marketable purchased mortgage
servicing rights ("PMSRs") and purchased credit card relationships ("PCCRs"),
provided that, in the aggregate, the total amount of PMSRs and PCCRs included in
capital does not exceed 50% of Tier 1 capital. PCCRs are subject to a separate
limit of 25% of Tier 1 capital. The amount of PMSRs and PCCRs that a bank
holding company may include in its capital is limited to the lesser of (i) 90%
of such assets' fair market value (as determined under the guidelines), or (ii)
100% of such assets' book value, each determined quarterly. Identifiable
intangible assets (i.e., intangible assets other than goodwill) other than PMSRs
and PCCRs, including core deposit intangibles, acquired on or before February
19, 1992 (the date the Federal Reserve Board issued its original proposal for
public comment), generally will not be deducted from capital for supervisory
purposes, although they will continue to be deducted for purposes of evaluating
applications filed by bank holding companies.
8
As of December 31, 2009, Potomac had
capital in excess of all applicable requirements as shown below:
Actual | Required | Excess | ||||||
(in thousands) | ||||||||
Tier 1 capital: | ||||||||
Common stock | $ | 3,672 | ||||||
Surplus | 3,898 | |||||||
Retained earnings | 21,931 | |||||||
29,501 | ||||||||
Less cost of shares acquired for the treasury | 2,866 | |||||||
Total tier 1 capital | $ | 26,635 | $ | 9,144 | $ | 17,491 | ||
Tier 2 capital: | ||||||||
Allowance for loan losses (1) | 2893 | |||||||
Total risk-based capital | $ | 29,528 | $ | 18,289 | $ | 11,239 | ||
Risk-weighted assets | $ | 228,607 | ||||||
Tier 1 capital | $ | 26,635 | $ | 12,181 | $ | 14,454 | ||
Average total assets | $ | 304,527 | ||||||
Capital ratios: | ||||||||
Tier 1 risk-based capital ratio | 11.65% | 4.00% | 7.65% | |||||
Total risk-based capital ratio | 12.92% | 8.00% | 4.92% | |||||
Tier 1 capital to average total assets (leverage) | 8.75% | 4.00% | 4.75% |
(1) | Limited to 1.25% of gross risk-weighted assets. |
Gramm-Leach-Bliley Act of
1999. On November 4, 1999,
Congress adopted the Gramm-Leach-Bliley Act of 1999. This Act, also known as the
Financial Modernization Law, repealed a number of federal limitations on the
powers of banks and bank holding companies originally adopted in the 1930’s.
Under the Act, banks, insurance companies, securities firms and other service
providers may now affiliate. In addition to broadening the powers of banks, the
Act created a new form of entity, called a financial holding company, which may
engage in any activity that is financial in nature or incidental or
complementary to financial activities.
The Federal Reserve Board provides
the principal regulatory supervision of financial services permitted under the
Act. However, the Securities and Exchange Commission and state insurance and
securities regulators also assume substantial supervisory powers and
responsibilities.
The Act addresses a variety of other
matters, including customer privacy issues. The obtaining of certain types of
information by false or fraudulent pretenses is a crime. Banks and other
financial institutions must notify their customers about their policies on
sharing information with certain third parties. In some instances, customers may
refuse to permit their information to be shared. The Act also requires
disclosures of certain automatic teller machine fees and contains certain
amendments to the federal Community Reinvestment Act.
Permitted Non-Banking
Activities. Under the
Gramm-Leach-Bliley Act, bank holding companies may become financial holding
companies and engage in certain non-banking activities. Potomac has not yet
filed to become a financial holding company and presently does not engage in,
nor does it have any immediate plans to engage in, any such non-banking
activities.
A notice of proposed non-banking
activities must be furnished to the Federal Reserve and the Banking Board before
Potomac engages in such activities, and an application must be made to the
Federal Reserve and Banking Board concerning acquisitions by Potomac of
corporations engaging in those activities. In addition, the Federal Reserve may,
by order issued on a case-by-case basis, approve additional non-banking
activities.
The Bank. The bank is a state-chartered bank that is
not a member of the Federal Reserve System and is subject to regulation and
supervision by the FDIC and the Commissioner.
Compliance with Environmental
Laws. The costs and
effects of compliance with federal, state and local environmental laws will not
have a material effect or impact on Potomac or the bank.
9
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 include 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.
Sarbanes-Oxley Act of 2002.
On July 30, 2002, the
Senate and the House of Representatives of the United States enacted the
Sarbanes-Oxley Act of 2002, a law that addresses, among other issues, corporate
governance, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information.
Effective August 29, 2002, as
directed by Section 302(a) of Sarbanes-Oxley, Potomac’s chief executive officer
and chief financial officer are each required to certify that Potomac’s
Quarterly and Annual Reports do not contain any untrue statement of a material
fact. The rules have several requirements, including having these officers
certify that: they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of Potomac’s internal controls; they have made
certain disclosures to Potomac’s auditors and the audit committee of the Board
of Directors about Potomac’s internal controls; and they have included
information in Potomac’s Quarterly and Annual Reports about their evaluation and
whether there have been significant changes in Potomac’s internal controls or in
other factors that could significantly affect internal controls subsequent to
the evaluation. Effective in 2010, Potomac will be subject to the Auditor’s
Opinion on internal control portion of Section 404 of Sarbanes-Oxley.
Troubled Asset Relief Program – Capital Purchase
Program. On October
3, 2008, the Federal government enacted the Emergency Economic Stabilization Act
of 2008 (“EESA”). EESA was enacted to provide liquidity to the U.S. financial
system and lessen the impact of looming economic problems. The EESA included
broad authority. The centerpiece of the EESA is the Troubled Asset Relief
Program (“TARP”). EESA’s broad authority was interpreted to allow the U.S.
Treasury to purchase equity interests in both healthy and troubled financial
institutions. The equity purchase program is commonly referred to as the Capital
Purchase Program (“CPP”). Management and our Board of Directors have done a
thorough evaluation of both the positive and negative aspects of the CPP. In the
end, we came to the conclusion that based on our strong capital position,
earnings capacity, and the fact that it would dilute the earnings of existing
shareholders we have decided not to participate in the CPP.
American Recovery and Reinvestment Act of 2009. On February 17, 2009, President Obama signed
into law the American Recovery and Reinvestment Act of 2009 (“ARRA”), more
commonly known as the economic stimulus or economic recovery package. ARRA
includes a wide variety of programs intended to stimulate the economy and
provide for extensive infrastructure, energy, health, and education needs. In
addition, ARRA imposes certain new executive compensation and corporate
expenditure limits on all current and future TARP recipients that are in
addition to those previously announced by the U.S. Treasury, until the
institution has repaid the U.S. Treasury, which is now permitted under ARRA
without penalty and without the need to raise new capital, subject to the U.S.
Treasury’s consultation with the recipient’s appropriate regulatory
agency.
10
Future Legislation. Various other legislative and regulatory initiatives, including proposals
to overhaul the banking regulatory system and to limit the investments that a
depository institution may make with insured funds, are from time to time
introduced in Congress and state legislatures, as well as regulatory agencies.
Such legislation may change banking statutes and the operating environment of
the company and the bank in substantial and unpredictable ways, and could
increase or decrease the cost of doing business, limit or expand permissible
activities or affect the competitive balance depending upon whether any of this
potential legislation will be enacted, and if enacted, the effect that it or any
implementing regulations, would have on the financial condition or results of
operations of the company or the bank. With the recent enactments of EESA and
ARRA, the nature and extent of future legislative and regulatory changes
affecting financial institutions is very unpredictable at this time. The company
cannot determine the ultimate effect that such potential legislation, if
enacted, would have upon its financial condition or operations.
New legislation proposed by Congress may give bankruptcy courts the power
to reduce the increasing number of home foreclosures by giving bankruptcy judges
the authority to restructure mortgages and reduce a borrower's payments.
Property owners would be allowed to keep their property while working out their
debts. Other similar bills placing additional temporary moratoriums on
foreclosure sales or otherwise modifying foreclosure procedures to the benefit
of borrowers and the detriment of lenders may be enacted by either Congress or
the State of West Virginia in the future. These laws may further restrict our
collection efforts on one-to-four single-family mortgage loans. Additional
legislation proposed or under consideration in Congress would give current debit
and credit card holders the chance to opt out of an overdraft protection program
and limit overdraft fees, which could result in additional operational costs and
a reduction in our non-interest income.
Further, our regulators have significant discretion and authority to
prevent or remedy unsafe or unsound practices or violations of laws by financial
institutions and holding companies in the performance of their supervisory and
enforcement duties. In this regard, banking regulators are considering
additional regulations governing compensation, which may adversely affect our
ability to attract and retain employees. On June 17, 2009, the Obama
Administration published a comprehensive regulatory reform plan that is intended
to modernize and protect the integrity of the United States financial system.
The President's plan contains several elements that would have a direct effect
on us. The reform plan proposes the creation of a new federal agency, the
Consumer Financial Protection Agency, which would be dedicated to protecting
consumers in the financial products and services market. The creation of this
agency could result in new regulatory requirements and raise the cost of
regulatory compliance. In addition, legislation stemming from the reform plan
could require changes in regulatory capital requirements, and compensation
practices. If implemented, the foregoing regulatory reforms may have a material
impact on our operations. However, because the legislation needed to implement
the President's reform plan has not been introduced, and because the final
legislation may differ significantly from the legislation proposed by the
Administration, we cannot determine the specific impact of regulatory reform at
this time.
Available Information.
The company files annual,
quarterly and current reports, proxy statements and other information with the
SEC. The company’s SEC filings are filed electronically and are available to the
public through the Internet at the SEC’s website at http://www.sec.gov. In
addition, any document filed by the company with the SEC can be read and copied
at the SEC’s public reference facilities at 100 F Street, NE, Washington, DC
20549. Copies of documents can be obtained at prescribed rates by writing to the
Public Reference Section of the SEC at 100 F Street, NE, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. Copies of documents can also be obtained
free of charge by any shareholder by writing to Gayle Marshall Johnson, Sr. Vice
President and Chief Financial Officer, Potomac Bancshares, Inc., PO Box 906,
Charles Town, WV 25414.
11
Item 2. Properties.
Potomac currently has no property.
The bank owns the land and buildings
of the main office and the branch office facilities in Harpers Ferry,
Kearneysville, Martinsburg and Hedgesville. The bank also owns a lot at the
corner of Route 340 and Washington Street in Bolivar that may be used for future
expansion or may be sold.
The main office property is located
at 111 East Washington Street, Charles Town, West Virginia. This property
consists of two separate two story buildings located side by side with adjoining
corridors. During 2000, the construction of the newer of these two buildings was
completed. The first floor of the new building houses the bank’s One Financial
Center. The second floor of the new building houses certain administrative and
loan offices. Both of these floors open into the older bank premises,
constructed in 1967. In July of 2006, the bank completed the purchase of a
property adjacent to the main office for future expansion. In early 2008,
construction began on an addition to the main office facilities which was
completed in 2009. The new addition houses a new drive through with five lanes
(one ATM/night deposit lane and four transaction lanes), the call center, the
Information Technology and Deposit Operations departments and certain
administrative offices. Renovations to the existing two buildings were completed
along with the addition. In September 2009, the Finance Department relocated
from the leased space in Burr Industrial Park to a part of the renovated main
office building.
In October 2005 to provide
additional office and storage areas, the bank leased space in Burr Industrial
Park in Kearneysville, West Virginia. The leased space provides record storage
facilities and a business recovery site for the bank.
The Harpers Ferry branch office is
located at 1366 W. Washington Street, Bolivar, West Virginia. The office is a
one story brick building constructed in 1975 and renovated in 2005. There is
another building on this property that existed at the time of the bank's
purchase. This separate building is rented to an outside party by the bank.
The branch facility at 5480 Charles
Town Road, Kearneysville, West Virginia was erected in 1985. This one story
brick building opened for business in April of 1985. During 1993, an addition
was constructed, doubling the size of this facility. Renovation of these
facilities was completed in 2006.
The branch facility at 119 Cowardly
Lion Drive, Hedgesville, West Virginia was erected in 2003. This one story brick
building opened for business in June of 2003.
The branch office at 9738 Tuscarora
Pike in Martinsburg, West Virginia opened for business in July of 2001.
Originally housed in a leased facility on the property, the one story brick
building was completed in January 2005.
There are no encumbrances on any of
these properties. In the opinion of management, these properties are adequately
covered by insurance.
Item 3. Legal Proceedings.
Currently Potomac is involved in no
legal proceedings.
The bank is involved in various
legal proceedings arising in the normal course of business, and in the opinion
of the bank, the ultimate resolution of these proceedings will not have a
material effect on the financial position or operations of the bank.
Item 4. (Removed and Reserved).
12
PART II
Item 5. Market for Registrant’s Common Equity,
Related Stockholder Matters and Issuer Purchases of Equity Securities.
The following information reflects
comparative per share data for the periods indicated for Potomac common stock
for (a) trading values and (b) dividends. As of March 12, 2010, there were
approximately 1,100 shareholders.
Trading of Potomac Bancshares, Inc.
common stock is not extensive and cannot be described as a public trading
market. Potomac Bancshares, Inc. is on the OTC Bulletin Board Market. To gather
information about Potomac in this market use Potomac’s symbol PTBS.OB. Scott and
Stringfellow, Inc., and Koonce Securities Inc. are market makers for Potomac’s
stock. Market makers are firms that maintain a firm bid and ask price for a
given number of shares at a given point in time in a given security by standing
ready to buy or sell at publicly quoted prices. Information about sales of
Potomac’s stock is available on the Internet through many of the stock
information services using Potomac’s symbol. Shares of Potomac common stock are
occasionally bought and sold by private individuals, firms or corporations, and,
in most instances, Potomac does not have knowledge of the purchase price or the
terms of the purchase. The trading values for 2008 and 2009 are based on
information available through the Internet. No attempt was made by Potomac to verify or determine the accuracy of the
representations made to Potomac or gathered on the Internet.
Price Range | Cash Dividends | |||||||||
High | Low | Paid per Share | ||||||||
2008 | First Quarter | $ | 13.75 | $ | 12.00 | $ | .1100 | |||
Second Quarter | 14.00 | 12.00 | .1125 | |||||||
Third Quarter | 12.20 | 10.15 | .1150 | |||||||
Fourth Quarter | 11.10 | 8.00 | .1175 | |||||||
2009 | First Quarter | $ | 10.10 | $ | 7.50 | $ | .1175 | |||
Second Quarter | 9.50 | 6.60 | .1175 | |||||||
Third Quarter | 8.00 | 5.35 | .0300 | |||||||
Fourth Quarter | 6.34 | 5.75 | .0000 |
The primary source of funds for
dividends paid by Potomac is the dividend income received from the bank. The
bank's ability to pay dividends is subject to restrictions under federal and
state law, and under certain cases, approval by the FDIC and the Commissioner
could be required. Dividends will only be paid when and as declared by the board
of directors.
Performance Graph
The following graph compares the
yearly percentage change in Potomac’s cumulative total shareholder return on
common stock for the five-year period ending December 31, 2009, with the
cumulative total return of the Bank Holding Companies Index (SIC Code 6712) and
the Morningstar Index. Shareholders may obtain a copy of the index by calling
Morningstar, Inc. at telephone number (312) 384-4055. There is no assurance that
Potomac’s stock performance will continue in the future with the same or similar
trends as depicted in the graph.
The graph shall not be deemed
incorporated by reference by any general statement into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that Potomac specifically incorporates this graph by reference, and shall
not otherwise be filed under such Acts.
13
COMPARISON OF 5-YEAR CUMULATIVE TOTAL
RETURN
AMONG POTOMAC BANCSHARES, INC., BANK HOLDING COMPANIES INDEX AND MORNINGSTAR INDEX
AMONG POTOMAC BANCSHARES, INC., BANK HOLDING COMPANIES INDEX AND MORNINGSTAR INDEX
![](https://www.sec.gov/Archives/edgar/data/0000925173/000120677410000810/potomac_10k2x4x1.jpg)
ASSUMES $100 WAS
INVESTED ON JANUARY 1, 2005 AND ASSUMES DIVIDENDS WERE
REINVESTED THROUGH FISCAL YEAR ENDING DECEMBER 31, 2009
REINVESTED THROUGH FISCAL YEAR ENDING DECEMBER 31, 2009
ISSUER PURCHASES OF EQUITY SECURITIES
(c) Total Number | |||||||||
of Shares | |||||||||
(a) Total | Purchased as | (d) Maximum Number | |||||||
Number of | (b) Average | Part of Publicly | of Shares that May | ||||||
Shares | Price Paid | Announced | Yet be Purchased | ||||||
Period | Purchased | Per Share | Programs | Under the Program | |||||
October 1 through October 31 | NONE | $ | - - | 283 553 | 62 515 | ||||
November 1 through November 30 | NONE | - - | 283 553 | 62 515 | |||||
December 1 through December 31 | NONE | - - | 283 553 | 62 515 |
On February 12, 2002, the company’s
Board of Directors originally authorized the repurchase program. The program
authorized the repurchase of up to 10% of the company’s stock over the next
twelve months. The stock may be purchased in the open market and/or in privately
negotiated transactions as management and the board of directors determine
prudent. The program has been extended on annual basis.
14
Item 6. Selected Financial Data.
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||
(Dollars in Thousands Except Per Share Data) | ||||||||||||||||
Summary of Operations | ||||||||||||||||
Interest income | $ | 14 913 | $ | 17 358 | $ | 19 691 | $ | 19 099 | $ | 15 424 | ||||||
Interest expense | 5 121 | 6 477 | 8 161 | 6 932 | 4135 | |||||||||||
Net interest income | 9 792 | 10 881 | 11 530 | 12 167 | 11 289 | |||||||||||
Provision for loan losses | 6 690 | 2 934 | 678 | 331 | 330 | |||||||||||
Net interest income after provision | ||||||||||||||||
for loan losses | 3 102 | 7 947 | 10 852 | 11 836 | 10 959 | |||||||||||
Noninterest income | 4 281 | 4 355 | 4 379 | 3 766 | 3 185 | |||||||||||
Noninterest expense | 11 059 | 9 587 | 9 703 | 9 261 | 8 460 | |||||||||||
Income (loss) before income taxes | (3 676 | ) | 2 715 | 5 528 | 6 341 | 5 684 | ||||||||||
Income tax expense (benefit) | (1 436 | ) | 853 | 1 998 | 2 306 | 2 020 | ||||||||||
Net income (loss) | $ | (2 240 | ) | $ | 1 862 | $ | 3 530 | $ | 4 035 | $ | 3 664 | |||||
Per Share Data ** | ||||||||||||||||
Net income (loss), basic | $ | (.66 | ) | $ | .55 | $ | 1.03 | $ | 1.17 | $ | 1.06 | |||||
Net income (loss), diluted | (.66 | ) | .55 | 1.03 | 1.16 | 1.05 | ||||||||||
Cash dividends declared | .27 | .46 | .42 | .38 | .33 | |||||||||||
Book value at period end | 7.54 | 8.19 | 8.52 | 7.78 | 7.23 | |||||||||||
Weighted-average shares outstanding, basic | 3 390 516 | 3 401 717 | 3 423 239 | 3 454 961 | 3 460 984 | |||||||||||
Weighted-average shares outstanding, diluted | 3 390 516 | 3 403 265 | 3 430 764 | 3 467 918 | 3 477 538 | |||||||||||
Average Balance Sheet Summary | ||||||||||||||||
Assets | $ | 304 739 | $ | 303 749 | $ | 297 716 | $ | 289 303 | $ | 264 314 | ||||||
Loans | 239 175 | 232 894 | 226 773 | 220 895 | 196 478 | |||||||||||
Securities | 32 841 | 34 178 | 42 040 | 48 891 | 47 183 | |||||||||||
Deposits | 261 233 | 259 536 | 252 908 | 243 833 | 217 307 | |||||||||||
Stockholders’ equity | 26 266 | 30 118 | 28 207 | 26 632 | 23 822 | |||||||||||
Performance Ratios | ||||||||||||||||
Return (loss) on average assets | (0.74)% | 0.61% | 1.19% | 1.39% | 1.39% | |||||||||||
Return (loss) on average equity | (8.53)% | 6.18% | 12.51% | 15.15% | 15.38% | |||||||||||
Dividend payout ratio | (40.91)% | 83.64% | 40.78% | 32.48% | 31.13% | |||||||||||
Capital Ratios | ||||||||||||||||
Leverage ratio | 8.75% | 9.85% | 9.99% | 9.34% | 9.18% | |||||||||||
Risk-based capital ratios | ||||||||||||||||
Tier 1 capital | 11.65% | 12.37% | 13.01% | 12.71% | 12.68% | |||||||||||
Total capital | 12.92% | 13.63% | 14.23% | 13.82% | 13.76% |
** | All figures have been restated to reflect a 2% stock dividend declared on March 14, 2006 and a 100% stock dividend declared on February 8, 2005. |
15
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations.
AVERAGE BALANCES, INCOME/EXPENSE AND AVERAGE
YIELD/RATE
This schedule is a comparison of
interest earning assets and interest-bearing liabilities showing average yields
or rates derived from average balances and actual income and expenses. Income
and rates on tax exempt loans and securities are computed on a tax equivalent
basis using a federal tax rate of 34%. Loans placed on nonaccrual status are
reflected in the balances.
2009 | 2008 | 2007 | ||||||||||||||||||||||||
Average | Income/ | Average | Average | Income/ | Average | Average | Income/ | Average | ||||||||||||||||||
Balances | Expense | Yield/Rate | Balances | Expense | Yield/Rate | Balances | Expense | Yield/Rate | ||||||||||||||||||
(in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||
Loans | ||||||||||||||||||||||||||
Taxable | $ | 238 493 | $ | 13 759 | 5.77% | $ | 232 124 | $ | 15 151 | 6.53% | $ | 225 876 | $ | 16 971 | 7.51% | |||||||||||
Tax exempt | 682 | 64 | 9.38% | 770 | 73 | 9.48% | 897 | 76 | 8.47% | |||||||||||||||||
Total loans | 239 175 | 13 823 | 5.78% | 232 894 | 15 224 | 6.54% | 226 773 | 17 047 | 7.52% | |||||||||||||||||
Taxable securities | 29 084 | 933 | 3.21% | 31 286 | 1 415 | 4.52% | 40 112 | 1 894 | 4.72% | |||||||||||||||||
Nontaxable securities | 3 757 | 224 | 5.96% | 2 892 | 167 | 5.77% | 1 928 | 112 | 5.81% | |||||||||||||||||
Federal funds sold | 4 049 | 7 | 0.17% | 10 712 | 249 | 2.32% | 8 226 | 435 | 5.29% | |||||||||||||||||
Other earning assets | 3 125 | 24 | 0.77% | 7 765 | 383 | 4.93% | 4 616 | 267 | 5.78% | |||||||||||||||||
Total earning assets | 279 190 | $ | 15 011 | 5.38% | 285 549 | $ | 17 438 | 6.11% | 281 655 | $ | 19 755 | 7.01% | ||||||||||||||
Allowance for loan losses | (4 776 | ) | (2 940 | ) | (2 433 | ) | ||||||||||||||||||||
Cash and due from banks | 6 850 | 4 396 | 5 140 | |||||||||||||||||||||||
Premises and equipment, net | 8 650 | 6 934 | 6 342 | |||||||||||||||||||||||
Other assets | 14 825 | 9 810 | 7 012 | |||||||||||||||||||||||
Total assets | $ | 304 739 | $ | 303 749 | $ | 297 716 | ||||||||||||||||||||
LIABILITIES AND | ||||||||||||||||||||||||||
STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||
Deposits | ||||||||||||||||||||||||||
Savings and interest- | ||||||||||||||||||||||||||
bearing demand deposits | $ | 119 504 | $ | 1 016 | 0.85% | $ | 120 853 | $ | 1 615 | 1.34% | $ | 119 142 | $ | 2 713 | 2.28% | |||||||||||
Time deposits | 115 239 | 3 756 | 3.26% | 111 574 | 4 547 | 4.08% | 106 778 | 4 983 | 4.67% | |||||||||||||||||
Total interest- | ||||||||||||||||||||||||||
bearing deposits | 234 743 | 4 772 | 2.03% | 232 427 | 6 162 | 2.65% | 225 920 | 7 696 | 3.41% | |||||||||||||||||
Securities sold under agreements | ||||||||||||||||||||||||||
to repurchase and federal | ||||||||||||||||||||||||||
funds purchased | 9 212 | 148 | 1.61% | 9 963 | 255 | 2.56% | 10 959 | 441 | 4.02% | |||||||||||||||||
Advances from FHLB and FRB | 4 336 | 201 | 4.64% | 1 381 | 60 | 4.34% | 416 | 24 | 5.77% | |||||||||||||||||
Total interest | ||||||||||||||||||||||||||
bearing liabilities | 248 291 | $ | 5 121 | 2.06% | 243 771 | $ | 6 477 | 2.66% | 237 295 | $ | 8 161 | 3.44% | ||||||||||||||
Noninterest-bearing demand | ||||||||||||||||||||||||||
deposits | 26 490 | 27 109 | 28 988 | |||||||||||||||||||||||
Other liabilities | 3 692 | 2 751 | 3 226 | |||||||||||||||||||||||
Stockholders’ equity | 26 266 | 30 118 | 28 207 | |||||||||||||||||||||||
Total liabilities and | ||||||||||||||||||||||||||
stockholders’ equity | $ | 304 739 | $ | 303 749 | $ | 297 716 | ||||||||||||||||||||
Net interest income | $ | 9 890 | $ | 10 961 | $ | 11 594 | ||||||||||||||||||||
Net interest spread | 3.32% | 3.45% | 3.57% | |||||||||||||||||||||||
Interest expense as a | ||||||||||||||||||||||||||
percent of average earning assets | 1.83% | 2.27% | 2.90% | |||||||||||||||||||||||
Net interest margin | 3.54% | 3.84% | 4.12% |
16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING
POLICIES
GENERAL
The company’s financial statements are prepared in accordance with U. S.
generally accepted accounting principles. The financial information contained
within our statements is, to a significant extent, financial information that is
based on measures of the financial effects of transactions and events that have
already occurred. A variety of factors could affect the ultimate value that is
obtained either when earning income, recognizing an expense, recovering an asset
or relieving a liability. We use historical loss factors as one factor in
determining the inherent loss that may be present in our loan portfolio. Actual
losses could differ significantly from the historical factors that we use. In
addition, U. S. generally accepted accounting principles may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.
ALLOWANCE FOR LOAN
LOSSES
The allowance for loan losses is an estimate of the losses that may be
sustained in our loan portfolio. The allowance is based on two basic principles
of accounting: (i) which requires that estimated losses be accrued when they are
probable of occurring and (ii) 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 consists of specific, general and unallocated components.
The specific component relates to loans that are classified as 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 management’s
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.
GENERAL
If management were to describe 2009
in one word that word would be “change.” The company experienced plenty of
change during the year. Our correspondent banks changed. Management and the
board of directors were faced with situations they had not been accustomed to
facing. Once again, the regulatory environment changed focus to respond to the
most recent events that have affected the United States economy.
The bank’s primary correspondent,
Silverton Bank, was taken into receivership in May 2009 by the FDIC. The FDIC
was unable to find a suitable company to take over operations, and Silverton
Bank terminated operations in July 2009. Fortunately, after researching various
possibilities, we were able to form a relationship with CenterState Bank, a
strongly capitalized bank providing correspondent services. CenterState Bank now
provides most all of the services we received from Silverton Bank with the
exception of international wires. M & T Bank provides international wire
service to the bank and may provide additional services in the future.
Management faced some new challenges
during 2009. We expected foreclosures to increase during the year. However, the
rate of foreclosures and expenses related to preparing the properties for sale
were higher than originally anticipated. Management was aware of the large
percentage of commercial loans that were tied to real estate and the risk
involved. One of the most difficult scenarios to predict was the “trickle down”
effect of the housing market to the mortgage side of our business. As the
economy slowly worsened, so did the job market. With more people out of work for
longer periods of time, the bank saw an unprecedented increase in mortgage
foreclosures. These and other factors, such as tighter lending policies and
lower housing values, affected income and capital. As a result, the board of
directors decided to reduce and then suspend dividends during the third and
fourth quarters of the year.
17
The Federal Reserve finally
accumulated enough data to officially consider the economy in recession during
2009. The result has been a myriad of discussions as to how to bring the economy
out of the recession. As is generally the case, the government has proposed
and/or passed new regulations to fix the newest problems. The FDIC has become
more focused on liquidity and capital. Currently, the company is well
capitalized and the liquidity position has improved with the efforts and
decision making of management and the board of directors. Currently, management
is holding larger amounts in cash and liquid assets as opposed to longer term
investments. Liquidity would have been even better except for the effect of the
FDIC assessment prepayment. The FDIC decided to require banks to prepay their
assessment for the next three years by December 30, 2009. This affected the cash
position of the bank in that the cash paid could have been kept on hand or
invested in liquid assets.
The following table sets forth
selected quarterly results (with dollars in thousands) of the company for 2009
and 2008.
2009 | 2008 | |||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||
Dec 31 | Sept 30 | June 30 | Mar 31 | Dec 31 | Sept 30 | June 30 | Mar 31 | |||||||||||||||||||||
Interest income | $ | 3 594 | $ | 3 704 | $ | 3 805 | $ | 3 810 | $ | 4 171 | $ | 4 198 | $ | 4 318 | $ | 4 671 | ||||||||||||
Interest expense | 1 208 | 1 228 | 1 300 | 1 385 | 1 462 | 1 464 | 1 644 | 1 907 | ||||||||||||||||||||
Net interest income | 2 386 | 2 476 | 2 505 | 2 425 | 2 709 | 2 734 | 2674 | 2 764 | ||||||||||||||||||||
Provision for loan losses | 13 | 3 540 | 1 560 | 1 577 | 1 371 | 1 134 | 276 | 153 | ||||||||||||||||||||
Net interest income (loss) after | ||||||||||||||||||||||||||||
provision for loan losses | 2 373 | (1 064 | ) | 945 | 848 | 1 338 | 1 600 | 2 398 | 2 611 | |||||||||||||||||||
Noninterest income | 1 619 | 1 369 | 1 047 | 1 022 | 923 | 1 048 | 1 334 | 1 050 | ||||||||||||||||||||
Noninterest expense | 2 973 | 3 102 | 3 134 | 2 626 | 2 614 | 2 453 | 2 237 | 2 283 | ||||||||||||||||||||
Income (loss) before taxes | 1 019 | (2 797 | ) | (1 142 | ) | (756 | ) | (353 | ) | 195 | 1 495 | 1 378 | ||||||||||||||||
Income tax expense (benefit) | 614 | (1 204 | ) | (508 | ) | (338 | ) | (129 | ) | 23 | 472 | 487 | ||||||||||||||||
Net income (loss) | $ | 405 | $ | (1 593 | ) | $ | (634 | ) | $ | (418 | ) | $ | (224 | ) | $ | 172 | $ | 1 023 | $ | 891 | ||||||||
Earnings (loss) per share, basic | ||||||||||||||||||||||||||||
and diluted | $ | .12 | $ | (.47 | ) | $ | (.19 | ) | $ | (.12 | ) | $ | (.07 | ) | $ | .05 | $ | .30 | $ | .26 | ||||||||
NET INTEREST INCOME
The economic downturn in 2008 turned into a recession in 2009. Overall,
interest and dividend income was 14% lower in 2009 when compared with 2008
results, due in part to some lowering of balances of all interest earning
assets, but due more to the interest rates remaining historically low throughout
the year. Earning assets include loans, securities, federal funds sold and other
investments. We have not received dividends on Federal Home Loan Bank stock
since the third quarter of 2008. Interest income on tax exempt bonds did
increase in 2009 predominantly as a result of a larger investment in municipal
bonds compared to 2008.
The economy worsened, as expected, during 2008. In spite of the economy,
the loan portfolio (net of reserves) increased 9% on the strength of increases
mainly in the commercial loan area. The bulk of the increase was related to
participations and other portfolio loans as a result of our relationship with
BlueRidge Bank. Still, net interest income decreased 6% as the interest rates
continued to drop throughout 2008. Interest on tax exempt securities and other
interest and dividends showed increases. The tax exempt securities portfolio
increased through new purchases at the end of 2007 and in 2008 and other
interest benefited from interest on loans held to sell to BlueRidge Bank during
the time they were waiting to receive their charter.
Interest expense decreased 21% in 2009 compared to 2008. Coincidentally,
this is the same percentage of decrease in interest expense from 2007 to 2008.
The decreased expense for 2009 and 2008 results from lower interest rates as
balances in deposit accounts have not changed materially during that time
period. The continuance of low rates is precipitated by the rates enacted by the
Federal Reserve during the period.
Calendar year 2009 ended with just as much uncertainty as 2008. The
housing market is showing some signs of improvement. However, the recovery is
expected to continue at a very slow pace. Unemployment is probably the biggest
concern as we look toward 2010. Interest rates are expected to remain at current
levels throughout most of 2010. Management is hopeful that interest rates and
the volume of affordable housing will entice buyers back into the loan market
during 2010.
18
VOLUME AND RATE ANALYSIS
This schedule analyzes the change in net
interest income attributable to changes in volume of the various portfolios and
changes in interest rates. The change due to both rate and volume variances has
been allocated between rate and volume based on the percentage relationship of
such variances to each other.
2009 Compared to 2008 | 2008 Compared to 2007 | |||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||
Change in | Change in | |||||||||||||||||||||||
Income/ | Volume | Rate | Income/ | Volume | Rate | |||||||||||||||||||
Expense | Effect | Effect | Expense | Effect | Effect | |||||||||||||||||||
INTEREST INCOME | ||||||||||||||||||||||||
Taxable loans | $ | (1 392 | ) | $ | 430 | $ | (1 822 | ) | $ | (1 820 | ) | $ | 490 | $ | (2 310 | ) | ||||||||
Tax exempt loans | (9 | ) | (8 | ) | (1 | ) | (3 | ) | (19 | ) | 16 | |||||||||||||
Taxable securities | (482 | ) | (95 | ) | (387 | ) | (479 | ) | (402 | ) | (77 | ) | ||||||||||||
Nontaxable securities | 57 | 52 | 5 | 55 | 56 | (1 | ) | |||||||||||||||||
Federal funds sold | (242 | ) | (97 | ) | (145 | ) | (186 | ) | 217 | (403 | ) | |||||||||||||
Other earning assets | (359 | ) | (149 | ) | (210 | ) | 116 | 148 | (32 | ) | ||||||||||||||
TOTAL | $ | (2 427 | ) | $ | 133 | $ | (2 560 | ) | $ | (2 317 | ) | $ | 490 | $ | (2 807 | ) | ||||||||
INTEREST EXPENSE | ||||||||||||||||||||||||
Savings and interest-bearing | ||||||||||||||||||||||||
demand deposits | $ | (599 | ) | $ | (18 | ) | $ | (581 | ) | $ | (1 098 | ) | $ | 40 | $ | (1 138 | ) | |||||||
Time deposits | (791 | ) | 155 | (946 | ) | (436 | ) | 241 | (677 | ) | ||||||||||||||
Securities sold under agreements | ||||||||||||||||||||||||
to repurchase and federal | ||||||||||||||||||||||||
funds purchased | (107 | ) | (18 | ) | (89 | ) | (186 | ) | (37 | ) | (149 | ) | ||||||||||||
Advances from FHLB and FRB | 141 | 137 | 4 | 36 | 40 | (4 | ) | |||||||||||||||||
TOTAL | $ | (1 356 | ) | $ | 256 | $ | (1 612 | ) | $ | (1 684 | ) | $ | 284 | $ | (1 968 | ) | ||||||||
NET INTEREST INCOME | $ | (1 071 | ) | $ | (123 | ) | $ | (948 | ) | $ | (633 | ) | $ | 206 | $ | (839 | ) | |||||||
NONINTEREST INCOME AND
EXPENSE
As in prior years, fees generated through
the bank’s overdraft protection plan continue to be the largest single
contributor to the bank’s noninterest income. These fees are included in the
service charges on deposit accounts category which totaled $2.2 million for
2009, $2.3 million for 2008 and $2.1 million for 2007. Trust and financial
services income, generally the second largest single contributor to noninterest
income, decreased slightly in 2009 compared to 2008 due to lower market values
which are the basis for fees. VISA/MC fees, typically the third largest single
contributor to noninterest income, increased 9.1% in 2009 compared to 2008 due
to continuing consumer comfort with electronic transactions and more customers
using the Smart Checking product.
Fees on sales of loans in the secondary
market are a source of noninterest income that varies with the market
conditions. Our income from this source was $167 thousand in 2009, $93 thousand
in 2008 and $197 thousand in 2007.
Salaries and employee benefits of $5.4
million are about 45% of the total noninterest expense for 2009, a percentage
about 9% less when compared to 2008 and 2007. This decrease in salaries and
benefits as a percentage of total noninterest expense is due to the increase in
total noninterest expense resulting from foreclosures and other real estate
related expenses. Though the bank has grown during the past few years, full
utilization of personnel has allowed the bank to hold down salaries and benefit
costs by holding down the increase in personnel. During 2010, salaries and
employee benefits are expected to stay steady or decrease slightly. Some
decrease may occur through retirement and attrition. As employees leave, their
positions may not be replaced based on management’s assessment of personnel. Due
to freezing the pension plan as of October 31, 2009, pension expense will be
reduced in 2010 since no further service costs or salary increases for employees
are taken into consideration from October 31, 2009 forward. Group health
insurance expense is expected to increase slightly and 401(k) expenses will
increase as a result of an increased employer match happening in conjunction
with the freezing of the pension plan.
19
Expenses related to premises and
furniture and equipment have increased slightly. The increase is attributable to
completion of the Donald S. Smith Financial Center addition to the main branch
facility. Advertising and marketing expense decreased 33.8% during 2009. The
decrease is in line with management’s effort to control costs. The FDIC
assessment increased due to the special assessment and to the current risk based
assessment procedures. Foreclosed property expense increased significantly in
2009 as a result of increased numbers of properties, expenses to prepare these
properties for selling and holding costs for properties that have not sold.
The other noninterest
expense category is the total of approximately 60 separate expense accounts.
None of the account balances in this category exceed 1% of gross income of the
company for any of the three years presented. Increases are due to the growth in
the bank’s customer base and some inflationary increases.
INTEREST RATE
SENSITIVITY
The table below shows the opportunities
the company will have to reprice interest earning assets and interest-bearing
liabilities as of December 31, 2009 (in thousands).
Mature or Reprice | |||||||||||||||||
After Three | |||||||||||||||||
Months | After One Year | ||||||||||||||||
Within | But Within | But Within | After | ||||||||||||||
Three Months | Twelve Months | Five Years | Five Years | Nonsensitive | |||||||||||||
Interest Earning Assets: | |||||||||||||||||
Loans | $ | 36 919 | $ | 15 315 | $ | 90 041 | $ | 92 436 | $ | - - | |||||||
Securities | - - | 1 005 | 28 416 | 3 792 | 1 100 | ||||||||||||
Federal funds sold | 5 950 | - - | - - | - - | - - | ||||||||||||
Other earning assets | 53 | - - | - - | - - | - - | ||||||||||||
Total | $ | 42 922 | $ | 16 320 | $ | 118 457 | $ | 96 228 | $ | 1 100 | |||||||
Interest-Bearing Liabilities: | |||||||||||||||||
Time deposits $100,000 and over | $ | 4 607 | $ | 9 020 | $ | 31 090 | $ | - - | $ | - - | |||||||
Other time deposits | 9 684 | 29 850 | 30 304 | - - | - - | ||||||||||||
Interest bearing demand deposits | 49 000 | - - | - - | - - | 34 516 | ||||||||||||
Savings accounts | - - | - - | - - | - - | 38 443 | ||||||||||||
Securities sold under agreements to | |||||||||||||||||
repurchase | 7 340 | - - | - - | - - | - - | ||||||||||||
Federal Home Loan Bank advances | 237 | 727 | 2 892 | - - | - - | ||||||||||||
Total | $ | 70 868 | $ | 39 597 | $ | 64 286 | $ | - - | $ | 72 959 | |||||||
Rate Sensitivity Gap | $ | (27 946 | ) | $ | (23 277 | ) | $ | 54 171 | $ | 96 228 | |||||||
Cumulative Gap | $ | (27 946 | ) | $ | (51 223 | ) | $ | 2 948 | $ | 99 176 | |||||||
The matching of the maturities or
repricing opportunities of interest earning assets and interest-bearing
liabilities may be analyzed by examining the extent to which these assets and
liabilities are interest rate sensitive and by monitoring an institution’s
interest rate sensitivity gap. An asset or liability is interest rate sensitive
within a specific time period if it will mature or reprice within that period.
The interest rate sensitivity gap is the difference between the amount of
interest earning assets that will mature or reprice within a specific time
period and the amount of interest-bearing liabilities that will mature or
reprice within the same time period.
A gap is considered negative when the
amount of liabilities maturing or repricing in a specific period exceeds the
amount of assets maturing or repricing in the same period. An even match between
assets and liabilities in each time frame is the safest position especially in
times of rapidly rising or declining rates. During other times, the even match
is not as critical. The advantages or disadvantages of positive and negative
gaps depend totally on the direction in which interest rates are moving. An
asset sensitive institution’s net interest margin and net interest income
generally will be impacted favorably by rising interest rates, while that of a
liability sensitive institution generally will be impacted favorably by
declining interest rates.
20
During the first twelve months shown in the schedule above, the company
is liability sensitive, and after that time period the company is asset
sensitive. During January, February and March of 2010, $27.9 million more
liabilities may reprice or will mature than assets. During April through
December of 2010, $23.3 million more liabilities may reprice or will mature than
assets. The total effect for 2010 is that $51.2 million more liabilities may
reprice or mature than assets. Since rates are not expected to change much
during 2010, the management will hold deposit rates steady for the most part and
insert floors in loans to help guard the bank’s income.
LOAN PORTFOLIO
Loans at December 31 (in thousands) for each of the five years in the
period ended 2009.
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
Commercial, financial and agricultural | $ | 9 700 | $ | 9 671 | $ | 4 987 | $ | 4 247 | $ | 6 046 | |||||
Mortgage loans on real estate: | |||||||||||||||
Construction and land development | 38 083 | 55 843 | 55 042 | 53 801 | 41 174 | ||||||||||
Secured by farm land | 1 419 | 1 380 | 1 328 | 1 557 | 2 381 | ||||||||||
Secured by 1-4 family residential | 102 290 | 101 253 | 98 864 | 103 983 | 98 408 | ||||||||||
Secured by multifamily residential | 2 070 | 1 937 | 1 749 | 3 733 | 3 486 | ||||||||||
Secured by nonfarm nonresidential | 71 916 | 63 943 | 47 726 | 46 367 | 43 019 | ||||||||||
Consumer loans | 9 011 | 11 970 | 14 718 | 16 089 | 15 549 | ||||||||||
All other loans | 222 | 457 | 193 | 292 | 372 | ||||||||||
$ | 234 711 | $ | 246 454 | $ | 224 607 | $ | 230 069 | $ | 210 435 | ||||||
Due in large part to the state of the real estate market and the
resulting economic conditions, the loan portfolio decreased in 2009 compared to
the balance at the end of 2008. Guidelines for granting credit have tightened,
property appraisals, in many cases, came in lower than expected and a very
tentative buyers’ market have all contributed to the decline in loans.
The bank is projecting and thus has budgeted for an additional decrease
in loans during 2010. The economy is expected to continue recovering at a slow
pace and unemployment may be the biggest problem in 2010.
There were no categories of loans that exceeded 10% of outstanding loans
at December 31, 2009 that were not disclosed in the table above.
REMAINING MATURITIES OF
SELECTED LOANS (in thousands)
Commercial, | |||||||
Financial and | Real Estate- | ||||||
At December 31, 2009 | Agricultural | Construction | |||||
Loans maturing within one year | $ | 2 106 | $ | 19 814 | |||
Variable rate loans due after one year | 1 182 | 6 686 | |||||
Fixed rate loans due after one year through five years | 6 296 | 7 070 | |||||
Fixed rate loans due after five years | 116 | 4 513 | |||||
Total maturities | $ | 9 700 | $ | 38 083 | |||
ALLOWANCE FOR LOAN
LOSSES
The table shown on the next page is an analysis of the company’s
allowance for loan losses. Historically, net charge-offs (loans charged off as
uncollectible less any amounts recovered on these loans) for the company have
been very low when compared with the size of the total loan portfolio.
Management continually monitors the loan portfolio with procedures that allow
for problem loans and potentially problem loans to be highlighted and watched.
Increases to the allowance were made in 2008 based on the increased risks
assessed in the loan portfolio as a result of the housing market conditions and
the economic slowdown. Substantial increases were again made to the allowance in
2009, as assessments of the loan portfolio continued to show increased risks.
During 2009 and much of 2008, management has monitored the risk in the portfolio
almost continually with reporting on a monthly basis compared to the quarterly
reporting done previously. Based on experience, the loan policies and the
current monitoring program, management believes the allowance for loan losses is
adequate but continues to monitor closely and to prepare reporting monthly.
21
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
(in thousands) | |||||||||||||||
Balance at beginning of period | $ | 4 079 | $ | 2 779 | $ | 2 423 | $ | 2 161 | $ | 1 966 | |||||
Charge-offs: | |||||||||||||||
Commercial, financial and agricultural | 23 | 21 | 14 | - - | 30 | ||||||||||
Real estate – construction | 3 957 | 269 | 32 | - - | - - | ||||||||||
Real estate – mortgage | 920 | 1 102 | 206 | - - | - - | ||||||||||
Consumer | 383 | 441 | 252 | 207 | 218 | ||||||||||
Total charge-offs | 5 283 | 1 833 | 504 | 207 | 248 | ||||||||||
Recoveries: | |||||||||||||||
Commercial, financial and agricultural | 5 | - - | 30 | - - | - - | ||||||||||
Real estate – construction | - - | - - | - - | - - | - - | ||||||||||
Real estate – mortgage | 2 | 17 | - - | - - | - - | ||||||||||
Consumer | 225 | 182 | 152 | 138 | 113 | ||||||||||
Total recoveries | 232 | 199 | 182 | 138 | 113 | ||||||||||
Net charge-offs | 5 051 | 1 634 | 322 | 69 | 135 | ||||||||||
Additions charged to operations | 6 690 | 2 934 | 678 | 331 | 330 | ||||||||||
Balance at end of period | $ | 5 718 | $ | 4 079 | $ | 2 779 | $ | 2 423 | $ | 2 161 | |||||
Ratio of net charge-offs during the period | |||||||||||||||
to average loans outstanding during | |||||||||||||||
the period | 2.11% | 0.70% | 0.14% | 0.03% | 0.07% | ||||||||||
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES
The following table shows an allocation of the allowance among loan
categories based upon analysis of the loan portfolio’s composition, historical
loan loss experience, and other factors, and the ratio of the related
outstanding loan balances to total loans.
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||||||||
Allowance (in thousands) |
% Loans in Category to Total Loans |
Allowance (in thousands) |
% Loans in Category to Total Loans |
Allowance (in thousands) |
% Loans in Category to Total Loans |
Allowance (in thousands) |
% Loans in Category to Total Loans |
Allowance (in thousands) |
% Loans in Category to Total Loans |
||||||||||||||||
Commercial, | |||||||||||||||||||||||||
financial and | |||||||||||||||||||||||||
agricultural | $ | 425 | 4.13% | $ | 69 | 3.92% | $ | 35 | 2.22% | $ | 71 | 1.85% | $ | 94 | 2.87% | ||||||||||
Mortgage loans on | |||||||||||||||||||||||||
real estate: | |||||||||||||||||||||||||
Construction | |||||||||||||||||||||||||
and land | |||||||||||||||||||||||||
development | 2 328 | 16.23% | 2 182 | 26.63% | 1 025 | 24.50% | 820 | 23.38% | 538 | 19.57% | |||||||||||||||
Secured by farm | |||||||||||||||||||||||||
land | 107 | .60% | 76 | .56% | 9 | .59% | 12 | .68% | 17 | 1.13% | |||||||||||||||
Secured by 1-4 | |||||||||||||||||||||||||
family | |||||||||||||||||||||||||
residential | 1 255 | 43.58% | 845 | 39.38% | 924 | 44.02% | 753 | 45.20% | 696 | 46.76% | |||||||||||||||
Secured by multi- | |||||||||||||||||||||||||
family | |||||||||||||||||||||||||
residential | 20 | .88% | 16 | .79% | 13 | .78% | 27 | 1.62% | 25 | 1.66% | |||||||||||||||
Secured by nonfarm | |||||||||||||||||||||||||
nonresidential | 1 275 | 30.64% | 727 | 23.67% | 661 | 21.25% | 478 | 20.15% | 477 | 20.44% | |||||||||||||||
Consumer loans | 146 | 3.84% | 90 | 4.86% | 111 | 6.55% | 248 | 6.99% | 261 | 7.39% | |||||||||||||||
All other loans | - - | .10% | 4 | .19% | 1 | .09% | 1 | .13% | 2 | .18% | |||||||||||||||
Unallocated | 162 | - - | 70 | - - | -- | - - | 13 | - - | 51 | - - | |||||||||||||||
$ | 5 718 | 100.00% | $ | 4 079 | 100.00% | $ | 2 779 | 100.00% | $ | 2 423 | 100.00% | $ | 2 161 | 100.00% | |||||||||||
22
RISK ELEMENTS IN THE
LOAN PORTFOLIO
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||
(in thousands) | |||||||||||||||
Nonaccrual loans | $ | 3 819 | $ | 2 669 | $ | 1 584 | $ | 144 | $ | 122 | |||||
Restructured loans | - - | - - | - - | - - | - - | ||||||||||
Foreclosed properties | 5 632 | 1 644 | 430 | - - | - - | ||||||||||
Total nonperforming assets | $ | 9 451 | $ | 4 313 | $ | 2 014 | $ | 144 | $ | 122 | |||||
Loans past due 90 days | |||||||||||||||
accruing interest | $ | - - | $ | 1 263 | $ | 21 | $ | - - | $ | 65 | |||||
Allowance for loan losses | |||||||||||||||
to period end loans | 2.44% | 1.66% | 1.24% | 1.05% | 1.03% | ||||||||||
Nonperforming assets to | |||||||||||||||
period end loans and | |||||||||||||||
foreclosed properties | 3.93% | 1.74% | .89% | .06% | .06% |
Loans are placed on nonaccrual status when a loan is specifically
determined to be impaired or when principal or interest is delinquent for 90
days or more. Interest income generally is not recognized on specific impaired
loans unless the likelihood of further loss is remote. Interest income on other
nonaccrual loans is recognized only to the extent of interest payments received.
At December 31, 2009, other potential problem loans totaled $6.7 million.
Loans are viewed as potential problem loans according to the ability of such
borrowers to comply with current repayment terms. These loans are subject to
constant management attention, and their status is reviewed on a regular basis.
SECURITIES
PORTFOLIO
Currently the company classifies all securities as available for sale and
records these securities at fair value. If the company classified any securities
as held to maturity, held to maturity securities would be recorded at amortized
cost. The effect of unrealized gains and losses on securities available for
sale, net of tax effects, is recognized in stockholders’ equity.
The schedule below summarizes the carrying value of the portfolio by
maturity classifications and shows the weighted average yield in each group.
2009 Carrying Value (in thousands) |
Weighted Average Yield |
2008 Carrying Value (in thousands) |
Weighted Average Yield |
2007 Carrying Value (in thousands) |
Weighted Average Yield |
||||||||||
Securities available for sale | |||||||||||||||
Obligations of U.S. Government agencies: | |||||||||||||||
Maturing within one year | $ | 1 005 | 1.25% | $ | 5 600 | 5.03% | $ | 10 501 | 4.38% | ||||||
Maturing after one year but | |||||||||||||||
within five years | 27 418 | 2.69% | 18 889 | 4.13% | 26 200 | 5.00% | |||||||||
Municipal obligations: | |||||||||||||||
Maturing within one year | - - | 147 | 3.04% | - - | |||||||||||
Maturing after one year but | |||||||||||||||
within five years | 999 | 3.73% | 879 | 3.82% | 1 029 | 3.71% | |||||||||
Maturing after five years | 3 791 | 4.14% | 1 963 | 3.86% | 1 842 | 3.87% | |||||||||
Equity securities with no stated maturity | 1 100 | .46% | 1 217 | .12% | 382 | .35% | |||||||||
Total securities available for sale | $ | 34 313 | $ | 28 695 | $ | 39 954 | |||||||||
23
DEPOSITS
Deposits increased 4% in 2009. The bank does have some noncore funding
included in the deposit portfolio. The portfolio holds approximately $13 million
in brokered certificates of deposit, and as participants in the CDARS program
the portfolio holds approximately $10 million in certificates of deposit through
that program. Even with only a slight increase in deposits, the bank has
increased market share percentages in both Jefferson and Berkeley Counties of
West Virginia as of June 30, 2009. We have 32.41% of total deposits in Jefferson
County compared to 31.05% in 2008 and 4.28% of total deposits in Berkeley County
compared to 4.21% in 2008.
Schedule of Average
Deposits and Average Rates Paid
Year Ended December 31 | |||||||||||||||
(average balances in thousands) | |||||||||||||||
2009 | 2008 | 2007 | |||||||||||||
Average | Average | Average | Average | Average | Average | ||||||||||
Balance | Rate | Balance | Rate | Balance | Rate | ||||||||||
Noninterest-bearing demand deposits | $ | 26 490 | $ | 27 109 | $ | 28 988 | |||||||||
Interest-bearing demand deposits | 80 842 | 0.94% | 79 591 | 1.41% | 83 916 | 2.41% | |||||||||
Savings deposits | 38 662 | 0.65% | 41 262 | 1.20% | 35 226 | 1.96% | |||||||||
Time deposits | 115 239 | 3.26% | 111 574 | 4.08% | 106 778 | 4.67% | |||||||||
Total interest-bearing deposits | 234 743 | 2.03% | 232 427 | 2.65% | 225 920 | 3.41% | |||||||||
Total deposits | $ | 261 233 | $ | 259 536 | $ | 254 908 | |||||||||
At December 31, 2009, time deposits of $100 thousand or more were 16.91%
of total deposits compared with 12.50% at December 31, 2008. Maturities of time
deposits of $100 thousand or more (in thousands) at December 31, 2009 are as
follows:
Within three months | $ | 4 607 | |
Over three through six months | 1 684 | ||
Over six months through twelve months | 7 336 | ||
Over twelve months | 31 090 | ||
Total | $ | 44 717 | |
ANALYSIS OF CAPITAL
The adequacy of the company’s capital is reviewed by management on an
ongoing basis in terms of the size, composition, and quality of the company’s
asset and liability levels, and consistency with regulatory requirements and
industry standards. Management seeks to maintain a capital structure that will
assure an adequate level of capital to support anticipated asset growth and
absorb potential losses.
The Federal Reserve, the Comptroller of the Currency and the Federal
Deposit Insurance Corporation have adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must be Tier 1 capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. The
company had a ratio of total capital to risk-weighted assets of 12.92% and a
ratio of Tier 1 capital to risk-weighted assets of 11.65% at December 31, 2009.
Both ratios exceed the capital requirements adopted by the federal regulatory
agencies.
24
2009 | 2008 | 2007 | |||||||
(In thousands) | |||||||||
Tier 1 capital: | |||||||||
Common stock | $ | 3 672 | $ | 3 672 | $ | 3 672 | |||
Surplus | 3 898 | 3 851 | 3 771 | ||||||
Retained earnings | 21 931 | 25 070 | 24 787 | ||||||
29 501 | 32 593 | 32 230 | |||||||
Less cost of shares acquired for the treasury | 2 866 | 2 837 | 2 701 | ||||||
Total tier 1 capital | $ | 26 635 | $ | 29 756 | $ | 29 529 | |||
Tier 2 capital: | |||||||||
Allowance for loan losses (1) | 2 893 | 3 019 | 2 779 | ||||||
Total risk-based capital | $ | 29 528 | $ | 32 775 | $ | 32 308 | |||
Risk-weighted assets | $ | 228 607 | $ | 240 471 | $ | 227 013 | |||
Capital ratios: | |||||||||
Tier 1 risk-based capital ratio | 11.65% | 12.37% | 13.01% | ||||||
Total risk-based capital ratio | 12.92% | 13.63% | 14.23% | ||||||
Leverage ratio | 8.75% | 9.85% | 9.99% |
(1) Limited to 1.25% of gross risk-weighted
assets.
LIQUIDITY
Liquidity represents an institution’s ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. This could
also be termed the management of the cash flows of an organization. Liquid
assets include cash and due from banks, interest-bearing deposits in financial
institutions, securities purchased under agreements to resell, federal funds
sold, securities available for sale, and loans and investments maturing within
one year. The company’s liquidity during 2009 is detailed in the statement of
cash flows included in the financial statements.
Operating Activities. The company’s net income usually provides
cash from the bank’s operating activities. The net income figure is adjusted for
certain noncash transactions such as depreciation expense that reduces net
income but does not require a cash outlay. During 2009, the net loss as adjusted
has provided cash of $773 thousand. Interest income earned on loans and
investment securities is the company’s major income source.
Investing Activities. Customer core deposits and company noncore
funding provide the funds used to invest in loans and investment securities. In
addition, the principal portion of loan payments, loan payoffs and maturity of
investment securities provide cash flow. Purchases of bank premises and
equipment are an investing activity. As mentioned in the section on deposits, we
have taken advantage of our noncore funding capabilities since deposit growth is
not always sufficient. The net amount of cash used in investing activities in
2009 is $4 million.
Financing Activities. Customer core deposits and company noncore
funding provide the financing for the investing activities as stated above. If
the company has an excess of funds on any given day, the bank will sell these
funds to make additional interest income to fund activities. Likewise, if the
company has a shortage of funds on any given day it will purchase funds and pay
interest for the use of these funds. Financing activities also include payment
of dividends to shareholders, purchase of shares of the company’s common stock
for the treasury and repayment of any noncore funding. The net amount of cash
provided by financing activities in 2009 is $7.5 million.
At December 31, 2009, cash and due from banks, interest-bearing deposits
in financial institutions, securities purchased under agreements to resell,
federal funds sold and loans and securities maturing within one year were $42.4
million.
25
Noncore funding capabilities, including borrowing, provide additional
liquidity. The subsidiary bank maintains a federal funds line with one financial
institution and is a member of the Federal Home Loan Bank of Pittsburgh. In
September 2008, the subsidiary bank borrowed $5 million amortized over five
years from the Federal Home Loan Bank. In July 2009 the subsidiary bank secured
a credit line with the Federal Reserve discount window. At December 31, 2009,
the subsidiary bank has total credit available through these institutions of
approximately $19.5 million.
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 company’s 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 company’s exposure to
off-balance-sheet risk as of December 31, 2009 and 2008 is as follows (in
thousands):
2009 | 2008 | |||||
Financial instruments whose contract | ||||||
amounts represent credit risk: | ||||||
Commitments to extend credit | $ | 29 275 | $ | 48 726 | ||
Standby letters of credit | 1 646 | 2 467 |
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 customer’s 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 management’s
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.
At December 31, 2009, the company had $820 thousand in rate lock
commitments to originate mortgage loans.
Short-Term Borrowings. At December 31, 2009 and 2008, short-term borrowings consist of
securities sold under agreements to repurchase that are secured transactions
with customers. The total of short-term borrowings was $7.3 million on December
31, 2009 and $8.4 million on December 31, 2008.
The table below presents selected information on these short-term
borrowings (in thousands):
December 31 | ||||||
2009 | 2008 | |||||
Balance outstanding at year end | $ | 7 340 | $ | 8 352 | ||
Maximum balance at any month-end during the year | $ | 11 311 | $ | 10 868 | ||
Average balance for the year | $ | 9 218 | $ | 9 963 | ||
Weighted average rate for the year | 1.61% | 2.56% | ||||
Weighted average rate at year end | 1.61% | 2.56% | ||||
Estimated fair value | $ | 7 340 | $ | 8 352 |
26
Contractual Obligations. The table below presents the contractual obligations of the company as of
December 31, 2009:
Payments (in thousands) Due By Period | ||||||||||||
Over | Over | |||||||||||
Less | 1 Year | 3 Years | ||||||||||
than | through | through | ||||||||||
Total | 1 Year | 3 Years | 5 Years | |||||||||
Long-Term Debt Obligations | $ | 3 856 | $ | 964 | $ | 2 067 | $ | 825 | ||||
Lease Obligations for Real Estate | $ | 28 | $ | 28 | $ | - - | $ | - - | ||||
Lease Obligations for Equipment | $ | 24 | $ | 24 | $ | - - | $ | - - | ||||
27
Item 8. Financial Statements and Supplementary
Data.
![](https://www.sec.gov/Archives/edgar/data/0000925173/000120677410000810/potomac_10k3x8x1.jpg)
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of
Directors and Shareholders
Potomac Bancshares, Inc.
Charles Town, West Virginia
Potomac Bancshares, Inc.
Charles Town, West Virginia
We have audited the
accompanying consolidated balance sheets of Potomac Bancshares, Inc. and
Subsidiary as of December 31, 2009 and 2008, and the related consolidated
statements of operations, changes in stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2009. 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. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Potomac Bancshares, Inc. and
Subsidiary as of December 31, 2009 and 2008, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2009, in conformity with U.S. generally accepted accounting
principles.
We were not engaged to
examine management's assessment of the effectiveness of Potomac Bancshares, Inc.
and Subsidiary’s internal control over financial reporting as of December 31,
2009, included in the accompanying Report of Management’s Assessment of Internal Control Over Financial
Reporting and,
accordingly, we do not express an opinion thereon.
![]() |
Winchester,
Virginia
March 30, 2010 |
28
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(in thousands, except share data)
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(in thousands, except share data)
2009 | 2008 | |||||||
ASSETS
|
||||||||
Cash and due from banks | $ | 6 620 | $ | 3 754 | ||||
Interest-bearing deposits in other financial institutions | 53 | 1 282 | ||||||
Federal funds sold | 5 950 | 3 313 | ||||||
Securities available for sale, at fair value | 34 313 | 28 695 | ||||||
Loans held for sale | 97 | 329 | ||||||
Loans, net of allowance for loan losses of $5,718 | ||||||||
in 2009 and $4,079 in 2008 | 228 993 | 242 375 | ||||||
Premises and equipment, net | 8 726 | 8 015 | ||||||
Other real estate owned, net of valuation allowance | ||||||||
of $303 in 2009 and $0 in 2008 | 5 632 | 1 644 | ||||||
Accrued interest receivable | 952 | 1 108 | ||||||
Federal Home Loan Bank of Pittsburgh stock | 805 | 725 | ||||||
Other assets | 11 048 | 9 141 | ||||||
Total Assets
|
$ | 303 189 | $ | 300 381 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 27 953 | $ | 25 469 | ||||
Interest-bearing | 236 514 | 228 619 | ||||||
Total Deposits
|
$ | 264 467 | $ | 254 088 | ||||
Securities sold under agreements to repurchase | 7 340 | 8 352 | ||||||
Federal Home Loan Bank advances | 3 856 | 4 776 | ||||||
Accrued interest payable | 405 | 481 | ||||||
Other liabilities | 1 549 | 4 880 | ||||||
Commitments and contingent liabilities | - - | - - | ||||||
Total Liabilities
|
$ | 277 617 | $ | 272 577 | ||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $1 per share par value; 5,000,000 shares | ||||||||
authorized; 3,671,691 shares issued | $ | 3 672 | $ | 3 672 | ||||
Surplus | 3 898 | 3 851 | ||||||
Undivided profits | 21 931 | 25 070 | ||||||
Accumulated other comprehensive (loss), net | (1 063 | ) | (1 952 | ) | ||||
$ | 28 438 | $ | 30 641 | |||||
Less cost of shares acquired for the
treasury, 2009, 281,513 and
|
||||||||
2008, 278,086 shares | 2 866 | 2 837 | ||||||
Total Stockholders’
Equity
|
$ | 25 572 | $ | 27 804 | ||||
Total Liabilities and Stockholders’
Equity
|
$ | 303 189 | $ | 300 381 | ||||
See Notes to
Consolidated Financial Statements.
29
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
2009 | 2008 | 2007 | |||||||||
Interest and Dividend Income: | |||||||||||
Interest and fees on loans | $ | 13 801 | $ | 15 201 | $ | 17 093 | |||||
Interest on securities available for sale - taxable | 933 | 1 415 | 1 894 | ||||||||
Interest on securities available for sale - nontaxable | 148 | 110 | 74 | ||||||||
Interest on federal funds sold | 7 | 249 | 435 | ||||||||
Other interest and dividends | 24 | 383 | 195 | ||||||||
Total Interest and Dividend Income | $ | 14 913 | $ | 17 358 | $ | 19 691 | |||||
Interest Expense: | |||||||||||
Interest on deposits | $ | 4 772 | $ | 6 162 | $ | 7696 | |||||
Interest on securities sold under agreements to repurchase | |||||||||||
and federal funds purchased | 148 | 255 | 441 | ||||||||
Interest on Federal Home Loan Bank and Federal Reserve | |||||||||||
Bank advances | 201 | 60 | 24 | ||||||||
Total Interest Expense | $ | 5 121 | $ | 6 477 | $ | 8 161 | |||||
Net Interest Income | $ | 9 792 | $ | 10 881 | $ | 11 530 | |||||
Provision for Loan Losses | 6 690 | 2 934 | 678 | ||||||||
Net Interest Income after Provision | |||||||||||
for Loan Losses | $ | 3 102 | $ | 7 947 | $ | 10 852 | |||||
Noninterest Income: | |||||||||||
Trust and financial services | $ | 758 | $ | 807 | $ | 1 085 | |||||
Service charges on deposit accounts | 2 205 | 2 340 | 2 102 | ||||||||
Visa/MC Fees | 563 | 516 | 453 | ||||||||
Cash surrender value of life insurance | 238 | 240 | 189 | ||||||||
Miscellaneous income | 4 | 246 | 8 | ||||||||
Loss on sale of real estate | - - | (185 | ) | - - | |||||||
Gain on sale of securities | 42 | - - | - - | ||||||||
Other operating income | 471 | 391 | 542 | ||||||||
Total Noninterest Income | $ | 4 281 | $ | 4 355 | $ | 4 379 | |||||
Noninterest Expenses: | |||||||||||
Salaries and employee benefits | $ | 5 351 | $ | 5 146 | $ | 5 252 | |||||
Net occupancy expense of premises | 570 | 542 | 563 | ||||||||
Furniture and equipment expenses | 948 | 933 | 925 | ||||||||
Advertising and marketing | 176 | 266 | 246 | ||||||||
FDIC assessment | 711 | 84 | 30 | ||||||||
Printing, stationery and supplies | 207 | 181 | 212 | ||||||||
Foreclosed property expense | 759 | 167 | 46 | ||||||||
ATM and check card expense | 326 | 313 | 328 | ||||||||
Other operating expenses | 2 011 | 1 955 | 2 101 | ||||||||
Total Noninterest Expenses | $ | 11 059 | $ | 9 587 | $ | 9 703 | |||||
Income (Loss) Before Income Tax Expense (Benefit) | $ | (3 676 | ) | $ | 2 715 | $ | 5 528 | ||||
Income Tax Expense (Benefit) | (1 436 | ) | 853 | 1 998 | |||||||
Net Income (Loss) | $ | (2 240 | ) | $ | 1 862 | $ | 3 530 | ||||
Earnings (Loss) Per Share, basic and diluted | $ | (.66 | ) | $ | .55 | $ | 1.03 | ||||
See Notes to
Consolidated Financial Statements.
30
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
Accumulated | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
Common | Undivided | Treasury | Comprehensive | Comprehensive | ||||||||||||||||||||||
Stock | Surplus | Profits | Stock | (Loss) | Income (Loss) | Total | ||||||||||||||||||||
Balances, December 31, 2006 | $ | 3 672 | $ | 3 661 | $ | 22 677 | $ | (2 279 | ) | $ | (1 014 | ) | $ | 26 717 | ||||||||||||
Comprehensive income | ||||||||||||||||||||||||||
Net income – 2007 | - - | - - | 3 530 | - - | - - | $ | 3 530 | 3 530 | ||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||
Unrealized holding gains | ||||||||||||||||||||||||||
arising during the period | ||||||||||||||||||||||||||
(net of tax, $159) | - - | - - | - - | - - | 306 | 306 | 306 | |||||||||||||||||||
Change in benefit obligations | ||||||||||||||||||||||||||
and plan assets for pension | ||||||||||||||||||||||||||
and other postretirement | ||||||||||||||||||||||||||
benefits (net of tax, $97) | - - | - - | - - | - - | 194 | 194 | 194 | |||||||||||||||||||
Total other comprehensive income | 500 | |||||||||||||||||||||||||
Total comprehensive income | $ | 4 030 | ||||||||||||||||||||||||
Purchase of treasury shares: | ||||||||||||||||||||||||||
28,083 shares | - - | - - | - - | (422 | ) | - - | (422 | ) | ||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||||||||
expense | - - | 110 | - - | - - | - - | 110 | ||||||||||||||||||||
Cash dividends – 2007 | ||||||||||||||||||||||||||
($.42 per share) | - - | - - | (1 420 | ) | - - | - - | (1 420 | ) | ||||||||||||||||||
Balances, December 31, 2007 | $ | 3 672 | $ | 3 771 | $ | 24 787 | $ | (2 701 | ) | $ | (514 | ) | $ | 29 015 | ||||||||||||
Comprehensive income | ||||||||||||||||||||||||||
Net income – 2008 | - - | - - | 1 862 | - - | - - | $ | 1 862 | 1 862 | ||||||||||||||||||
Other comprehensive (loss): | ||||||||||||||||||||||||||
Unrealized holding gains | ||||||||||||||||||||||||||
arising during the period | ||||||||||||||||||||||||||
(net of tax, $40) | - - | - - | - - | - - | 77 | 77 | 77 | |||||||||||||||||||
Change in benefit obligations | ||||||||||||||||||||||||||
and plan assets for pension | ||||||||||||||||||||||||||
and other postretirement | ||||||||||||||||||||||||||
benefits (net of tax, $780) | - - | - - | - - | - - | (1 515 | ) | (1 515 | ) | (1 515 | ) | ||||||||||||||||
Total other comprehensive (loss) | (1 438 | ) | ||||||||||||||||||||||||
Total comprehensive income | $ | 424 | ||||||||||||||||||||||||
Purchase of treasury shares: | ||||||||||||||||||||||||||
13,935 shares | - - | - - | - - | (149 | ) | - - | (149 | ) | ||||||||||||||||||
Sale of treasury shares: | ||||||||||||||||||||||||||
2,040 shares | - - | 10 | - - | 13 | - - | 23 | ||||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||||||||
expense | - - | 70 | - - | - - | - - | 70 | ||||||||||||||||||||
Reduction due to change in | ||||||||||||||||||||||||||
pension measurement date | ||||||||||||||||||||||||||
(net of tax, $16) | - - | - - | (31 | ) | - - | - - | (31 | ) | ||||||||||||||||||
Cash dividends – 2008 | ||||||||||||||||||||||||||
($.42 per share) | - - | - - | (1 548 | ) | - - | - - | (1 548 | ) | ||||||||||||||||||
Balances, December 31, 2008 | $ | 3 672 | $ | 3 851 | $ | 25 070 | $ | (2 837 | ) | $ | (1 952 | ) | $ | 27 804 |
See Notes to
Consolidated Financial Statements.
31
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)
Years Ended December 31, 2009, 2008 and 2007
(in thousands, except per share data)
Accumulated | ||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||
Common | Undivided | Treasury | Comprehensive | Comprehensive | ||||||||||||||||||||||
Stock | Surplus | Profits | Stock | (Loss) | Income (Loss) | Total | ||||||||||||||||||||
Balances, December 31, 2008 | $ | 3 672 | $ | 3 851 | $ | 25 070 | $ | (2 837 | ) | $ | (1 952 | ) | $ | 27 804 | ||||||||||||
Comprehensive (loss) | ||||||||||||||||||||||||||
Net (loss) – 2009 | - - | - - | (2 240 | ) | - - | - - | $ | (2 240 | ) | (2 240 | ) | |||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||
Unrealized holding losses | ||||||||||||||||||||||||||
arising during the period | ||||||||||||||||||||||||||
(net of tax, $14) | - - | - - | - - | - - | (27 | ) | (27 | ) | (27 | ) | ||||||||||||||||
Reclassification for (gains) | ||||||||||||||||||||||||||
included in net income | ||||||||||||||||||||||||||
(net of tax, $14) | - - | - - | - - | - - | (28 | ) | (28 | ) | (28 | ) | ||||||||||||||||
Change in benefit obligations | ||||||||||||||||||||||||||
and plan assets for pension | ||||||||||||||||||||||||||
and other postretirement | ||||||||||||||||||||||||||
benefits (net of tax, $486) | - - | - - | - - | - - | 944 | 944 | 944 | |||||||||||||||||||
Total other comprehensive income | 889 | |||||||||||||||||||||||||
Total comprehensive (loss) | $ | (1 351 | ) | |||||||||||||||||||||||
Purchase of treasury shares: | ||||||||||||||||||||||||||
3,427 shares | - - | - - | - - | (29 | ) | - - | (29 | ) | ||||||||||||||||||
Stock-based compensation | ||||||||||||||||||||||||||
expense | - - | 47 | - - | - - | - - | 47 | ||||||||||||||||||||
Cash dividends – 2009 | ||||||||||||||||||||||||||
($.27 per share) | - - | - - | (899 | ) | - - | - - | (899 | ) | ||||||||||||||||||
Balances, December 31, 2009 | $ | 3 672 | $ | 3 898 | $ | 21 931 | $ | (2 866 | ) | $ | (1 063 | ) | $ | 25 572 | ||||||||||||
See Notes to
Consolidated Financial Statements.
32
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2009, 2008 and 2007
(in thousands)
2009 | 2008 | 2007 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
Net (loss) income | $ | (2 240 | ) | $ | 1 862 | $ | 3 530 | ||||
Adjustments to reconcile net (loss) income to net cash provided by | |||||||||||
(used in) operating activities: | |||||||||||
Provision for loan losses | 6 690 | 2 934 | 678 | ||||||||
Depreciation | 573 | 532 | 568 | ||||||||
Deferred tax (benefit) | (609 | ) | (474 | ) | (250 | ) | |||||
(Discount accretion) and premium amortization on securities, net | 129 | (21 | ) | (63 | ) | ||||||
(Gain) on sale of securities | (42 | ) | - - | - - | |||||||
(Gain) loss on sale of other real estate | (473 | ) | 185 | 15 | |||||||
Loss on disposal of premises and equipment | 4 | 5 | 12 | ||||||||
Stock-based compensation expense | 47 | 70 | 110 | ||||||||
Proceeds from sale of loans | 8 703 | 12 153 | 11 002 | ||||||||
Origination of loans for sale | (8 471 | ) | (4 349 | ) | (18 730 | ) | |||||
Changes in assets and liabilities: | |||||||||||
Decrease in accrued interest receivable | 156 | 258 | 65 | ||||||||
(Increase) in other assets | (1 717 | ) | (418 | ) | (2 212 | ) | |||||
(Decrease) increase in accrued interest payable | (76 | ) | (276 | ) | 85 | ||||||
(Decrease) increase in other liabilities | (1 901 | ) | 304 | 9 | |||||||
Net cash provided by (used in) operating activities | $ | 773 | $ | 12 765 | $ | (5 181 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
Proceeds from maturity of securities available for sale | $ | 5 645 | $ | 5 500 | $ | 14 470 | |||||
Proceeds from call of securities available for sale | 18 000 | 22 000 | 10 035 | ||||||||
Proceeds from sale of securities available for sale | 3 042 | - - | - - | ||||||||
Purchases of securities available for sale | (32 594 | ) | (15 267 | ) | (20 842 | ) | |||||
Net (increase) decrease in loans | (2 425 | ) | (26 719 | ) | 4 709 | ||||||
Purchases of premises and equipment | (1 288 | ) | (2 315 | ) | (384 | ) | |||||
Proceeds from sale of other real estate | 5 602 | 1 815 | 61 | ||||||||
Net cash (used in) provided by investing activities | $ | (4 018 | ) | $ | (14 986 | ) | $ | 8 049 | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
Net increase (decrease) in noninterest-bearing deposits | $ | 2 484 | $ | (2 525 | ) | $ | (1 879 | ) | |||
Net increase in interest-bearing deposits | 7 895 | 3 239 | 3 475 | ||||||||
Net (repayment) proceeds of securities sold under agreements to repurchase | (1 012 | ) | (4 185 | ) | 2 011 | ||||||
Net (repayment) proceeds of Federal Home Loan Bank advances | (920 | ) | 4 564 | (408 | ) | ||||||
Purchase of treasury shares | (29 | ) | (149 | ) | (422 | ) | |||||
Sale of treasury shares | - - | 23 | - - | ||||||||
Cash dividends | (899 | ) | (1 548 | ) | (1 420 | ) | |||||
Net cash provided by (used in) financing activities | $ | 7 519 | $ | (581 | ) | $ | 1 357 | ||||
Increase (decrease) in cash and cash equivalents | $ | 4 274 | $ | (2 802 | ) | $ | 4 225 | ||||
CASH AND CASH EQUIVALENTS | |||||||||||
Beginning | 8 349 | 11 151 | 6 926 | ||||||||
Ending | $ | 12 623 | $ | 8 349 | $ | 11 151 | |||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | |||||||||||
Cash payments for: | |||||||||||
Interest | $ | 5 197 | $ | 6 753 | $ | 8 076 | |||||
Income taxes | $ | 41 | $ | 1 642 | $ | 2 368 | |||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH | |||||||||||
INVESTING AND FINANCING ACTIVITIES | |||||||||||
Unrealized (loss) gain on securities available for sale | $ | (83 | ) | $ | 117 | $ | 465 | ||||
Change in benefit obligations and plan assets for pension | |||||||||||
and other postretirement benefits | $ | 1 430 | $ | (2 295 | ) | $ | 291 | ||||
Loans transferred to OREO | $ | 8 814 | $ | 3 238 | $ | 506 | |||||
Loans made on sale of other real estate owned | $ | 1 568 | $ | 775 | $ | - - | |||||
See Notes to
Consolidated Financial Statements.
33
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 company’s 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
Investments in debt and equity securities with readily determinable fair
values are classified as either held to maturity, available for sale, or
trading, based on management’s intent. Currently all of the company’s investment
securities are classified as available for sale. Available for sale securities
are carried at estimated fair value with the corresponding unrealized gains and
losses excluded from earnings and reported in other comprehensive income. Gains
or losses are recognized in earnings on the trade date using the amortized cost
of the specific security sold. Purchase premiums and discounts are recognized in
interest income using the interest method over the terms of the securities.
Impairment of securities occurs when the fair value of a security is less
than its amortized cost. For debt securities, impairment is considered
other-than-temporary and recognized in its entirety in net income if either (1)
the company intends to sell the security or (2) it is more-likely-than-not that
the company will be required to sell the security before recovery of its
amortized cost basis. If, however, the company does not intend to sell the
security and it is no more-likely-than-not that it will be required to sell the
security before recovery, the company must determine what portion of the
impairment is attributable to a credit loss, which occurs when the amortized
cost basis of the security exceeds the present value of the cash flows expected
to be collected from the security. If there is credit loss, the loss must be
recognized in net income and the remaining portion of impairment must be
recognized in other comprehensive income. For equity securities, impairment is
considered to be other-than-temporary based on the company’s ability and intent
to hold the investment until a recovery of fair value. Other-than-temporary
impairment of an equity security results in a write-down that must be included
in net income. Management regularly reviews each investment security for
other-than-temporary impairment based on criteria that include the extent to
which cost exceeds market price, the duration of that market decline, the
financial health of and specific prospects for the issuer, the best estimate of
the present value of cash flows expected to be collected from debt securities,
its intention with regard to holding the security to maturity and the likelihood
that the company would be required to sell the security before
recovery.
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 company’s debtors to honor their contracts is
dependent upon the real estate and general economic conditions of the company’s
market area.
34
Note 1. Nature of
Banking Activities and Significant Accounting Policies (Continued)
Loans (Continued)
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
and any deferred fees or costs on originated loans. Interest income is accrued
on the unpaid principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized as an adjustment of the related
loan yield using the interest method.
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.
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) losses
be accrued when they are probable of occurring and are capable of estimation and
(2) 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 management’s 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 borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
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 and special mention
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management’s 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 borrower’s 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 loan’s effective interest rate, the loan’s obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
35
Note 1. Nature of
Banking Activities and Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
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.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line method.
Estimated useful lives range from five to forty years for premises and
improvements and three 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
Summaries of company employee benefit plans are given below:
- The noncontributory, defined benefit pension plan covering employees meeting certain age and service requirements was frozen at October 31, 2009, the end of the plan year. No more participants may enter the plan, and there will be no further increase in benefits due to increases in salaries and years of service.
- A postretirement life insurance plan covers current and future retirees with 25 years of service over the age of 60.
- A postretirement life insurance plan covers certain current retirees who met certain requirements. This plan is not available for future retirees.
- A health care plan covers current retirees who met certain eligibility requirements. This plan is not available for future retirees.
- A 401(k) retirement savings plan is available to all employees meeting certain age and service requirements. The employer match for this plan has been increased with the freezing of the defined benefit plan as described above. Under this plan, the employer may make a discretionary matching contribution each plan year and may also make other discretionary contributions to the plan.
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.
36
Note 1. Nature of
Banking Activities and Significant Accounting Policies (Continued)
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.
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 operations.
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 consolidated 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 reporting 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, deferred tax assets and the pension benefit obligation.
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.
37
Note 1. Nature of
Banking Activities and Significant Accounting Policies (Continued)
Fair Value of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions, as more fully disclosed in Note 15. Fair
value estimates involve uncertainties and matters of significant judgment.
Changes in assumptions or in market conditions could significantly affect the
estimates.
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 option’s maximum term is ten years from the date of grant.
Options granted under the plan
may be subject to a graded vesting schedule.
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. 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.
Stock option compensation expense is the estimated fair value of options
granted, and is amortized on a straight-line basis over the requisite service
period for each separately vesting portion of the award. There were no options
granted in 2008 and 2009. The weighted average estimated fair value of stock
options granted in the year ended December 31, 2007 was $3.76. Fair value is
estimated using the Black-Scholes option-pricing model with the following
assumptions for grants during 2007: option term until exercise of 10 years,
expected volatility of 19.56%, risk-free interest rate of 4.66%, and expected
dividend yield of 2.74%. Expected volatility is based on the historic volatility
of the company’s 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 company’s 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
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued new
accounting guidance related to U.S. GAAP (FASB ASC 105, Generally Accepted
Accounting Principles). This guidance establishes FASB Accounting Standards
Codification (ASC) as the source of authoritative U.S. GAAP recognized by FASB
to be applied by nongovernmental entities. Rules and interpretive releases of
the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
FASB ASC supersedes all existing non-SEC accounting and reporting standards. All
other non-grandfathered, non-SEC accounting literature not included in FASB ASC
has become non-authoritative. FASB will no longer issue new standards in the
form of Statements, FASB Staff Positions or Emerging Issues Task Force
Abstracts. Instead, it will issue Accounting Standards Updates (ASUs), which
will serve to update FASB ASC, provide background information about the guidance
and provide the basis for conclusions on the changes to FASB ASC. FASB ASC is
not intended to change U.S. GAAP or any requirements of the SEC.
38
Note 1. Nature of
Banking Activities and Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
The company adopted new
guidance impacting FASB Topic 805: Business Combinations (Topic 805) on January 1, 2009. This guidance requires the acquiring
entity in a business combination to recognize the full fair value of assets
acquired and liabilities assumed in the transaction (whether a full or partial
acquisition); establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; requires expensing of
most transaction and restructuring costs; and requires the acquirer to disclose
to investors and other users all of the information needed to evaluate and
understand the nature and financial effect of the business
combination. The adoption of the new guidance did not have
a material impact on the company’s consolidated financial statements.
In April 2009, the FASB issued new guidance impacting Topic 805. This
guidance addresses application issues raised by preparers, auditors, and members
of the legal profession on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising
from contingencies in a business combination. This guidance was effective for
business combinations entered into on or after January 1, 2009. This guidance
did not have a material impact on the company’s consolidated financial
statements.
In December 2008, the FASB issued new guidance impacting FASB Topic
715-20: Compensation Retirement Benefits – Defined
Benefit Plans – General.
The objectives of this guidance are to provide users of the financial statements
with more detailed information related to the major categories of plan assets,
the inputs and valuation techniques used to measure the fair value of plan
assets and the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period, as well as how
investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and strategies. The
disclosures about plan assets required by this guidance are included in Note 8
of the company’s consolidated financial statements.
In April 2009, the FASB issued new guidance impacting FASB Topic 820:
Fair Value Measurements and
Disclosures. This
interpretation provides additional guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased. This also includes guidance on identifying circumstances that
indicate a transaction is not orderly and requires additional disclosures of
valuation inputs and techniques in interim periods and defines the major
security types that are required to be disclosed. This guidance was effective
for interim and annual periods ending after June 15, 2009, and should be applied
prospectively. The adoption of the standard did not have a material impact on
the company’s consolidated financial statements.
In April 2009, the FASB issued new guidance impacting FASB Topic 320-10:
Investments – Debt and Equity
Securities. This guidance
amends GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of other-than-temporary impairments on
debt and equity securities in the financial statements. This guidance was
effective for interim and annual periods ending after June 15, 2009, with
earlier adoption permitted for periods ending after March 15, 2009. The company
did not have any cumulative effect adjustment related to the adoption of this
guidance.
In May 2009, the FASB issued new guidance impacting FASB Topic 855:
Subsequent Events. This update provides guidance on
management’s assessment of subsequent events that occur after the balance sheet
date through the date that the financial statements are issued. This guidance is
generally consistent with current accounting practice. In addition, it requires
certain additional disclosures. This guidance was effective for periods ending
after June 15, 2009 and had no impact on the company’s consolidated financial
statements.
In August 2009, the FASB issued new guidance impacting Topic 820. This
guidance is intended to reduce ambiguity in financial reporting when measuring
the fair value of liabilities. This guidance was effective for the first
reporting period including interim periods after issuance and had no impact on
the company’s consolidated financial statements.
39
Note 1. Nature of
Banking Activities and Significant Accounting Policies (Continued)
Recent Accounting Pronouncements (Continued)
In October 2009, the Securities and Exchange Commission issued Release
No. 33-99072, Internal Control over Financial Reporting in
Exchange Act Periodic Reports of Non-Accelerated Filers. Release No. 33-99072 delays the requirement
for non-accelerated filers to include an attestation report of their independent
auditor on internal control over financial reporting with their annual report
until the fiscal year ending on or after June 15, 2010.
In June 2009, the FASB issued new guidance relating to the accounting for
transfers of financial assets. The new guidance, which was issued as SFAS No.
166, Accounting for Transfers of Financial Assets,
an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of
ASU 2009-16. The new standard provides guidance to improve the relevance,
representational faithfulness, and comparability of the information that an
entity provides in its financial statements about a transfer of financial
assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. The company will adopt the new guidance in 2010
and does not expect the adoption to have a material impact on its consolidated
financial statements.
In June 2009, the FASB issued new guidance relating to the variable
interest entities. The new guidance, which was issued as SFAS No. 167,
Amendments to FASB Interpretation No.
46(R), was adopted into
Codification in December 2009. The objective of the guidance is to improve
financial reporting by enterprises involved with variable interest entities and
to provide more relevant and reliable information to users of financial
statements. SFAS No. 167 is effective as of January 1, 2010. The company does
not expect the adoption of the new guidance to have a material impact on its
consolidated financial statements.
In September 2009, the FASB issued new guidance impacting Topic 820. This
creates a practical expedient to measure the fair value of an alternative
investment that does not have a readily determinable fair value. This guidance
also requires certain additional disclosures. This guidance is effective for
interim and annual periods ending after December 15, 2009. The adoption of the
new guidance did not have a material impact on the consolidated financial
statements.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary – a Scope Clarification. ASU 2010-02 amends Subtopic 810-10 to
address implementation issues related to changes in ownership provisions
including clarifying the scope of the decrease in ownership and additional
disclosures. ASU 2010-02 is effective beginning in the period that an entity
adopts Statement 160. If an entity has previously adopted Statement 160, ASU
2010-02 is effective beginning in the first interim or annual reporting period
ending on or after December 15, 2009 and should be applied retrospectively to
the first period Statement 160 was adopted. The company does not expect the
adoption of ASU 2010-02 to have a material impact on its consolidated financial
statements.
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC
Paragraphs. ASU 2010-04
makes technical corrections to existing SEC guidance including the following
topics: accounting for subsequent investments, termination of an interest rate
swap, issuance of financial statements - subsequent events, use of residual
method to value acquired assets other than goodwill, adjustments in assets and
liabilities for holding gains and losses, and selections of discount rate used
for measuring defined benefit obligation. The company does not expect the
adoption of ASU 2010-04 to have a material impact on its consolidated financial
statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to
clarify existing disclosures, require new disclosures, and includes conforming
amendments to guidance on employers’ disclosures about postretirement benefit
plan assets. ASU 2010-06 is effective for interim and annual periods beginning
after December 15, 2009, except for disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The company
does not expect the adoption of ASU 2010-06 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 February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded
derivatives and hedging. ASU 2010-08 is effective for interim and annual periods
beginning after December 15, 2009. The company does not expect the adoption of
ASU 2010-08 to have a material impact on its consolidated financial
statements.
Note 2. Securities
There were no securities held to maturity as of December 31, 2009 and
2008.
The amortized cost and fair value of securities available for sale as of
December 31, 2009 and 2008 (in thousands) are as follows:
2009 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
Cost | Gains | (Losses) | Value | |||||||||
Obligations of U.S. Government agencies | $ | 28 159 | $ | 279 | $ | (15 | ) | $ | 28 423 | |||
State and municipal obligations | 4 789 | 56 | (55 | ) | 4 790 | |||||||
Equity securities | 1 100 | - - | - - | 1 100 | ||||||||
$ | 34 048 | $ | 335 | $ | (70 | ) | $ | 34 313 | ||||
2008 | ||||||||||||
Gross | Gross | |||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||
Cost | Gains | (Losses) | Value | |||||||||
Obligations of U.S. Government agencies | $ | 23 996 | $ | 493 | $ | - - | $ | 24 489 | ||||
State and municipal obligations | 3 132 | 8 | (151 | ) | 2 989 | |||||||
Equity securities | 1 217 | - - | - - | 1 217 | ||||||||
$ | 28 345 | $ | 501 | $ | (151 | ) | $ | 28 695 | ||||
The amortized cost and fair value of the securities available for sale as
of December 31, 2009 (in thousands), by contractual maturity, are shown below.
The equity securities have no stated maturities.
Amortized | Fair | |||||
Cost | Value | |||||
Due in one year or less | $ | 1 000 | $ | 1 005 | ||
Due after one year through five years | 28 139 | 28 417 | ||||
Due after five years | 3 809 | 3 791 | ||||
Equity securities | 1 100 | 1 100 | ||||
$ | 34 048 | $ | 34 313 | |||
The gross realized gain from the sale of one security was $42 thousand as
of December 31, 2009. There were no sales of securities during 2008 or 2007.
41
Note 2. Securities
(Continued)
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 14 accounts in the consolidated portfolio that have losses
at December 31, 2009. The primary cause of the temporary impairments in the
company’s investments in debt securities was fluctuations in interest rates.
Because the company intends to hold these investments in debt securities to
maturity and it is more likely than not that the company will not be required to
sell these investments before a recovery of unrealized losses, the company does
not consider these investments to be other-than-temporarily impaired at December
31, 2009 and no impairment has been recognized.
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, 2009 and 2008 (in thousands).
December 31, 2009 | |||||||||||||||||||
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 | $ | 4 987 | $ | (15 | ) | $ | - - | $ | - - | $ | 4 987 | $ | (15 | ) | |||||
State and municipal obligations | 2 746 | (55 | ) | - - | - - | 2 746 | (55 | ) | |||||||||||
$ | 7 733 | $ | (70 | ) | $ | - - | $ | - - | $ | 7 733 | $ | (70 | ) | ||||||
December 31, 2008 | |||||||||||||||||||
Less than 12 months | More than 12 months | Total | |||||||||||||||||
Gross | Gross | Gross | |||||||||||||||||
Unrealized | Unrealized | Unrealized | |||||||||||||||||
Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | ||||||||||||||
State and municipal obligations | $ | 2 077 | $ | (151 | ) | $ | - - | $ | - - | $ | 2 077 | $ | (151 | ) | |||||
Securities with a carrying value of $23.6 million and $18.4 million at
December 31, 2009 and 2008 were pledged to secure public funds and other
balances as required by law.
The company’s investment in Federal Home Loan Bank (FHLB) stock totaled
$805 thousand at December 31, 2009. FHLB stock is generally viewed as a
long-term investment and as a restricted investment security, which is carried
at cost, because there is no market for the stock, other than the FHLBs or
member institutions. Therefore, when evaluating FHLB stock for impairment, its
value is based on the ultimate recoverability of the par value rather than by
recognizing temporary declines in value. Despite the FHLB’s temporary suspension
of repurchases of excess capital stock in 2009, the company does not consider
this investment to be other-than-temporarily impaired at December 31, 2009 and
no impairment has been recognized. FHLB stock is shown as a separate line item
on the balance sheet and is not a part of the available for sale securities
portfolio.
42
Note 3. Loans and
Related Party Transactions
The loan portfolio is composed of the following:
December 31 | |||||
2009 | 2008 | ||||
(in thousands) | |||||
Mortgage loans on real estate: | |||||
Construction and land development | $ | 38 083 | $ | 65 643 | |
Secured by farm land | 1 419 | 1 380 | |||
Secured by 1-4 family residential | 102 290 | 97 064 | |||
Secured by multifamily residential | 2 070 | 1 937 | |||
Secured by nonfarm nonresidential | 71 916 | 58 332 | |||
Commercial loans (except those secured | |||||
by real estate) | 9 700 | 9 671 | |||
Consumer loans | 9 011 | 11 970 | |||
All other loans | 222 | 457 | |||
Total loans | $ | 234 711 | $ | 246 454 | |
Less: allowance for loan losses | 5 718 | 4 079 | |||
$ | 228 993 | $ | 242 375 | ||
At December 31, 2009 and 2008, overdraft demand deposits reclassified to
loans totaled $222 thousand and $457 thousand, respectively.
Loans to directors and executive officers of the company or to their
associates at December 31, 2009 and 2008 totaled $3.1 million and $3.1 million,
respectively. Such loans were made on substantially the same terms as those
prevailing for comparable transactions with similar risks. During 2009, total
principal additions were $849 thousand and total principal payments were $844
thousand.
Note 4. Allowance for
Loan Losses
The following is a summary of transactions in the allowance for loan
losses for 2009, 2008 and 2007 (in thousands):
2009 | 2008 | 2007 | |||||||||
Balances at beginning of year | $ | 4 079 | $ | 2 779 | $ | 2 423 | |||||
Provision charged to operating expense | 6 690 | 2 934 | 678 | ||||||||
Recoveries added to the allowance | 232 | 199 | 182 | ||||||||
Loan losses charged to the allowance | (5 283 | ) | (1 833 | ) | (504 | ) | |||||
Balances at end of year | $ | 5 718 | $ | 4 079 | $ | 2 779 | |||||
43
Note 4. Allowance for
Loan Losses (Continued)
The following is a summary of information pertaining to impaired loans as
of December 31 for each of the years presented (in thousands):
2009 | 2008 | |||||||
Impaired loans without a valuation allowance | $ | 12 397 | $ | 7 469 | ||||
Impaired loans with a valuation allowance | 14 985 | 4 245 | ||||||
Total impaired loans | $ | 27 382 | $ | 11 714 | ||||
Valuation allowance related to impaired loans | $ | 3 799 | $ | 1 302 | ||||
Total nonaccrual loans | $ | 3 819 | $ | 2 669 | ||||
Total loans past due ninety days or more and still accruing | $ | - - | $ | 1 263 | ||||
2009 | 2008 | 2007 | ||||||
Average investment in impaired loans | $ | 16 262 | $ | 7 770 | $ | 1 163 | ||
Interest income recognized on impaired loans | $ | 1 233 | $ | 471 | $ | 48 | ||
Interest income recognized on a cash basis on impaired loans | $ | 68 | $ | 4 | $ | - - | ||
No additional funds are committed to be advanced in connection with
impaired loans. Nonaccrual loans excluded from impaired loans at December 31,
2009 and 2008 totaled $1.3 million and $607 thousand, respectively. If interest
had been accrued on these nonaccrual loans, such income would have approximated
$58 thousand in 2009 and $36 thousand in 2008.
Note 5. Premises and
Equipment, Net
Premises and equipment consists of the following:
December 31 | |||||
2009 | 2008 | ||||
(in thousands) | |||||
Premises and improvements | $ | 9 516 | $ | 8 676 | |
Furniture and equipment | 4 630 | 4 539 | |||
$ | 14 146 | $ | 13 215 | ||
Less accumulated depreciation | 5 420 | 5 200 | |||
$ | 8 726 | $ | 8 015 | ||
Depreciation included in operating expense for 2009, 2008 and 2007 was
$573 thousand, $532 thousand and $568 thousand, respectively.
Note 6. Deposits
The aggregate amount of time deposits with a balance of $100,000 or more
was $44.7 million and $31.8 million at December 31, 2009 and 2008,
respectively.
At December 31, 2009, the scheduled maturities of all time deposits (in
thousands) are as follows:
2010 | $ | 53 100 |
2011 | 38 678 | |
2012 | 12 878 | |
2013 | 4 498 | |
2014 | 5 401 | |
$ | 114 555 | |
44
Note 6. Deposits
(Continued)
Brokered deposits (all in the form of certificates of deposit) totaled
$12.9 million and $9.6 million at December 31, 2009 and 2008,
respectively.
Deposits of the company’s directors, executive officers and associates
totaled $2.2 million and $1.6 million at December 31, 2009 and 2008,
respectively.
Deposits of one public funds entity exceed 5% of the bank’s total
deposits.
Note 7. Borrowings
Short-term borrowings consist of securities sold under agreements to
repurchase, which totaled $7.3 million and $8.4 million as of December 31, 2009
and 2008, respectively.
During 2008, the bank incurred fixed rate long term debt consisting of a
Federal Home Loan Bank, five year loan, with an original balance of $5 million
and monthly payments of interest and principal with an interest rate of
4.61%.
Principal payments (in thousands) on the note are due as follows:
2010 | $ | 964 |
2011 | 1 010 | |
2012 | 1 057 | |
2013 | 825 | |
$ | 3 856 | |
The company has unused lines of credit with the Federal Home Loan Bank
and other financial institutions totaling approximately $19.5 million at
December 31, 2009.
Note 8. Employee Benefit
Plans
The company’s defined benefit pension plan, covering full-time employees
over 21 years of age upon completion of one year of service, was frozen as of
October 31, 2009, the end of the plan year. Benefits will be based on average
compensation for the five consecutive full calendar years of service which
produces the highest average as of October 31, 2009. No additional participants
may enter the plan, and there will be no further increases in benefits due to
increases in salaries and years of service.
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.
The company sponsors a health care plan covering current retirees who met
certain eligibility requirements. This plan is not available for future
retirees.
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 company may make a
discretionary matching contribution each plan year. The company may also make
other discretionary contributions to the plan. The company’s match for this plan
has been increased with the freezing of the defined benefit plan as described
above. The company made 401(k) matching contributions of $111 thousand, $100
thousand and $92 thousand in 2009, 2008 and 2007, respectively.
The company has entered into contracts with three retirees where the
company agrees to pay the participant’s beneficiaries $50,000 upon the
participant’s death. The present value of this postretirement benefit has been
accrued as of December 31, 2009 in the amount of $131 thousand. While these
liabilities are unfunded, life insurance has been obtained by the company to
help offset these payments.
45
Note 8. Employee Benefit
Plans (Continued)
Obligations and funded status:
Other | |||||||||||||||
Pension Benefits | Postretirement Benefits | ||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||
(in thousands) | (in thousands) | ||||||||||||||
Change in benefit obligation: | |||||||||||||||
Benefit obligation, beginning | $ | 7 401 | $ | 6 374 | $ | 547 | $ | 536 | |||||||
Service cost | 266 | 344 | 11 | 12 | |||||||||||
Interest cost | 447 | 474 | 32 | 30 | |||||||||||
Actuarial (gain) loss | 210 | 514 | 1 | (6 | ) | ||||||||||
Benefits paid | (308 | ) | (305 | ) | (23 | ) | (25 | ) | |||||||
Curtailment | (1 054 | ) | - - | - - | - - | ||||||||||
Benefit obligation, ending | $ | 6 962 | $ | 7 401 | $ | 568 | $ | 547 | |||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets, beginning | $ | 4 026 | $ | 5 303 | $ | - - | $ | - - | |||||||
Actual return on plan assets | 785 | (1 457 | ) | - - | - - | ||||||||||
Employer contributions | 1 118 | 485 | 23 | 25 | |||||||||||
Benefits paid | (308 | ) | (305 | ) | (23 | ) | (25 | ) | |||||||
Fair value of plan assets, ending | $ | 5 621 | $ | 4 026 | $ | - - | $ | - - | |||||||
Funded status at end of year | $ | (1 341 | ) | $ | (3 375 | ) | $ | (568 | ) | $ | (547 | ) | |||
Unrecognized net (gain) | - - | - - | (52 | ) | (53 | ) | |||||||||
Unrecognized transition asset | - - | - - | 87 | 105 | |||||||||||
Accounts recognized on consolidated | |||||||||||||||
balance sheet as: | |||||||||||||||
Accrued benefit liabilities | $ | (1 341 | ) | $ | (3 375 | ) | $ | (533 | ) | $ | (495 | ) | |||
Amounts recognized in accumulated other | |||||||||||||||
comprehensive loss consist of: | |||||||||||||||
Net loss (gain) | $ | 1 841 | $ | 3 255 | $ | (52 | ) | $ | (53 | ) | |||||
Transition liability | - - | - - | 87 | 104 | |||||||||||
Deferred tax asset | (626 | ) | (1 107 | ) | (12 | ) | (17 | ) | |||||||
$ | 1 215 | $ | 2 148 | $ | 23 | $ | 34 | ||||||||
The accumulated benefit obligation for the defined benefit pension plan
was $7.0 million and $7.4 million at December 31, 2009 and 2008, respectively.
46
Note 8. Employee Benefit
Plans (Continued)
Components of net periodic benefit cost and other amounts recognized in
accumulated other comprehensive loss:
Other | |||||||||||||||||||||||
Pension Benefits | Postretirement Benefits | ||||||||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||||||||
(in thousands) | (in thousands) | ||||||||||||||||||||||
Components of net periodic benefit cost: | |||||||||||||||||||||||
Service cost | $ | 266 | $ | 301 | $ | 254 | $ | 12 | $ | 12 | $ | 11 | |||||||||||
Interest cost | 447 | 410 | 362 | 32 | 30 | 30 | |||||||||||||||||
Expected return on plan assets | (373 | ) | (313 | ) | (356 | ) | - - | - - | - - | ||||||||||||||
Amortization of net obligation | |||||||||||||||||||||||
at transition | - - | - - | - - | 17 | 17 | 17 | |||||||||||||||||
Recognized actuarial loss | 159 | 71 | 40 | - - | - - | - - | |||||||||||||||||
Net periodic benefit cost | $ | 499 | $ | 469 | $ | 300 | $ | 61 | $ | 59 | $ | 58 | |||||||||||
Other changes in plan assets and benefit | |||||||||||||||||||||||
obligations recognized in accumulated | |||||||||||||||||||||||
other comprehensive loss: | |||||||||||||||||||||||
Net loss (gain) | $ | (201 | ) | $ | 2 319 | (274 | ) | $ | 1 | $ | (6 | ) | - - | ||||||||||
Transition liability | - - | - - | - - | (17 | ) | (18 | ) | (17 | ) | ||||||||||||||
Deferred tax | 481 | (789 | ) | 91 | 5 | 9 | 6 | ||||||||||||||||
Amortization of net (gain) loss | (159 | ) | - - | - - | - - | - - | - - | ||||||||||||||||
Adjustment to (gain) for curtailment | (1 054 | ) | - - | - - | - - | - - | - - | ||||||||||||||||
Total recognized in | |||||||||||||||||||||||
accumulated other | |||||||||||||||||||||||
comprehensive loss | $ | (933 | ) | $ | 1 530 | $ | (183 | ) | $ | (11 | ) | $ | (15 | ) | $ | (11 | ) | ||||||
Total recognized in net periodic | |||||||||||||||||||||||
benefit cost and accumulated | |||||||||||||||||||||||
other comprehensive loss | $ | (434 | ) | $ | 1 999 | $ | 117 | $ | 50 | $ | 44 | $ | 47 | ||||||||||
Adjustment (in thousands) to retained earnings due to change in measurement | |||||||||||||||||||||||
date for the year ended December 31, 2008: | |||||||||||||||||||||||
Service cost | $ | 42 | |||||||||||||||||||||
Interest cost | 64 | ||||||||||||||||||||||
Expected return on plan assets | (66 | ) | |||||||||||||||||||||
Deferred tax benefit | (16 | ) | |||||||||||||||||||||
Amortization of loss | 7 | ||||||||||||||||||||||
Net period benefit cost | $ | 31 | |||||||||||||||||||||
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 $159
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.
47
Note 8. Employee Benefit
Plans (Continued)
Assumptions
Pension Benefits | Other Postretirement Benefits | ||||||||||||||||
2009 | 2008 | 2007 | 2009 | 2008 | 2007 | ||||||||||||
Weighted-average assumptions used to | |||||||||||||||||
determine net periodic benefit cost: | |||||||||||||||||
Discount rate | 6.30 | % | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | |||||
Expected return on plan assets | 8.00 | % | 6.00 | % | 7.50 | % | - - | - - | - - | ||||||||
Rate of compensation increase | 3.00 | % | 3.50 | % | 4.50 | % | 3.00 | % | 3.00 | % | 3.00 | % | |||||
Weighted-average assumptions used to | |||||||||||||||||
determine benefit obligations: | |||||||||||||||||
Discount rate | 6.08 | % | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % | |||||
Rate of compensation increase | N/A | 3.50 | % | 4.50 | % | 3.00 | % | 3.00 | % | 3.00 | % |
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).
The fair value (in thousands) of the company’s pension plan assets at
December 31, 2009, by asset category is as follows:
Fair Value Measurement at December 31, 2009 | ||||||||||||
Quoted Prices in | Significant | Significant | ||||||||||
Active Markets for | Observable | Unobservable | ||||||||||
Identical | Inputs | Inputs | ||||||||||
Asset Category | Total | Assets (Level 1) | (Level 2) | (Level 3) | ||||||||
Cash | $ | 194 | $ | 194 | $ | - - | $ | - - | ||||
Equity securities | ||||||||||||
U.S. companies | 2 749 | 2 749 | - - | - - | ||||||||
International companies | 657 | 657 | - - | - - | ||||||||
U. S. Treasury securities | 1 175 | 1 175 | - - | - - | ||||||||
Corporate bonds | 846 | 846 | - - | - - | ||||||||
Total | $ | 5 621 | $ | 5 621 | $ | - - | $ | - - | ||||
48
Note 8. Employee Benefit
Plans (Continued)
Asset Allocation
The pension plan’s weighted-average asset allocations at December 31,
2009 and 2008 by asset category are as follows:
Plan Assets at December 31 | |||||
2009 | 2008 | ||||
Asset Category | |||||
Equities | 61 | % | 57 | % | |
Fixed income/cash | 39 | % | 43 | % | |
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 50% equities and 50% fixed income/cash and acceptable ranges within these
categories of 40% to 60%. The trust fund allocation is reviewed on a monthly
basis and rebalanced to within the acceptable ranges as needed. After review of
the December 2009 allocations shown above, the funds were rebalanced and within
acceptable ranges at January 31, 2010. The investment manager selects investment
fund managers with demonstrated experience and expertise and funds with
demonstrated historical performance for the implementation of the plan’s
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, 2009 and 2008.
Cash Flow
The company expects to contribute $345 thousand to its pension plan in
2010 and $27 thousand to its postretirement plan in 2010.
The following benefit payments, which reflect future service, are
expected to be paid:
Other | |||||
Postretirement | |||||
Pension Benefits | Benefits | ||||
(in thousands) | |||||
2010 | $ | 329 | $ | 27 | |
2011 | 356 | 28 | |||
2012 | 385 | 30 | |||
2013 | 402 | 31 | |||
2014 | 421 | 33 | |||
2015-2019 | 2 401 | 176 |
For measurement purposes, a 6.85%, 7.10% and 7.35% annual rate of
increase in per capita health care costs of covered benefits was assumed for the
retiree health care plan for 2009, 2008 and 2007, with such annual rate of
increase gradually declining to 5% in 2013.
49
Note 8. Employee Benefit
Plans (Continued)
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 | $ | 62 | $ | (59 | ) | |
Effect on total of service and interest cost components of | ||||||
net periodic postretirement health care benefit cost | 3 | (4 | ) |
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.
2009 | 2008 | 2007 | |||||||||||||
Average | Per Share | Average | Per Share | Average | Per Share | ||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||
(in thousands) | (in thousands) | (in thousands) | |||||||||||||
Basic (loss) earnings | |||||||||||||||
per share | 3 391 | $ | (.66 | ) | 3 402 | $ | .55 | 3 423 | $ | 1.03 | |||||
Effect of dilutive securities: | |||||||||||||||
Stock options | - - | 2 | 8 | ||||||||||||
Diluted (loss) earnings | |||||||||||||||
per share | 3 391 | $ | (.66 | ) | 3 404 | $ | .55 | 3 431 | $ | 1.03 | |||||
Stock options for 126,224, 132,620 and 120,534 shares of common stock
were not considered in computing diluted earnings per common share for 2009,
2008 and 2007, respectively, because they were anti-dilutive.
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. 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, 2009, and
changes during the year then ended is presented below:
Weighted- | ||||||||||
Weighted- | Average | Aggregate | ||||||||
Average | Remaining | Intrinsic | ||||||||
Exercise | Contractual | Value | ||||||||
Shares | Price | Life in Years | (in thousands) | |||||||
Outstanding at beginning of year | 132 620 | $ | 14.75 | |||||||
Granted | - - | - - | ||||||||
Exercised | - - | - - | ||||||||
Forfeited | (6 396 | ) | 14.75 | |||||||
Outstanding at end of year | 126 224 | $ | 14.75 | 6 | $ | - - | ||||
Exercisable at end of year | 100 323 | $ | 14.45 | 5 | $ | - - | ||||
50
Note 10. Stock-Based
Compensation (Continued)
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, 2009. The amount changes based on
changes in the market value of the company’s 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, 2009:
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 | 25 826 | 4.0 | $ | 11.28 | 25 826 | $ | 11.28 | |||||
14.00 | 34 124 | 5.0 | 14.00 | 29 801 | 14.00 | ||||||||
17.25 | 35 867 | 6.0 | 17.25 | 26 523 | 17.25 | ||||||||
15.60 | 30 407 | 7.0 | 15.60 | 18 173 | 15.60 | ||||||||
126 224 | 100 323 | ||||||||||||
As of December 31, 2009, there was $50 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 two years.
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 2006.
Net deferred tax assets (in thousands) consist of the following
components as of December 31, 2009 and 2008:
2009 | 2008 | |||||
Deferred tax assets: | ||||||
Reserve for loan losses | $ | 1 504 | $ | 1 229 | ||
Accrued pension expense | 456 | 1 148 | ||||
Accrued postretirement benefits | 238 | 229 | ||||
Nonaccrual interest | 58 | 80 | ||||
Stock option expense | 35 | 35 | ||||
Home equity closing costs | 44 | 64 | ||||
Net loan origination fees | 50 | 35 | ||||
OREO expense | 102 | 11 | ||||
OREO valuation allowance | 103 | - - | ||||
OREO built in gain | 358 | - - | ||||
$ | 2 948 | $ | 2 831 | |||
Deferred tax liabilities: | ||||||
Depreciation | $ | 108 | $ | 114 | ||
Securities available for sale | 90 | 119 | ||||
$ | 198 | $ | 233 | |||
Net deferred tax assets | $ | 2 750 | $ | 2 598 | ||
51
Note 11. Income Taxes
(Continued)
The provision for income taxes charged to operations for the years ended
December 31, 2009, 2008 and 2007 consists of the following:
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Current tax (benefit) expense | $ | (827 | ) | $ | 1 327 | $ | 2 248 | |||||
Deferred tax (benefit) | (609 | ) | (474 | ) | (250 | ) | ||||||
$ | (1 436 | ) | $ | 853 | $ | 1 998 | ||||||
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, 2009, 2008 and 2007 due to the following (in thousands):
2009 | 2008 | 2007 | ||||||||||
Computed “expected” tax (benefit) expense | $ | (1 250 | ) | $ | 923 | $ | 1 880 | |||||
Increase (decrease) in income taxes resulting from: | ||||||||||||
Tax exempt income | (146 | ) | (217 | ) | (107 | ) | ||||||
State income tax (benefit) expense | (163 | ) | 123 | 191 | ||||||||
Other | 123 | 24 | 34 | |||||||||
$ | (1 436 | ) | $ | 853 | $ | 1 998 | ||||||
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.
The company has approximately $135 thousand in deposits in other
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) at December 31, 2009.
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, 2009 and 2008, the aggregate amounts of
daily average required balances were approximately $300 thousand for each time
period.
The table below presents the contractual obligations of the company as of
December 31, 2009 not disclosed in other notes:
Payments (in thousands) Due By Period | ||||||||||||
Over | Over | |||||||||||
Less | 1 Year | 3 Years | ||||||||||
than | through | through | ||||||||||
Total | 1 Year | 3 Years | 5 Years | |||||||||
Lease Obligations for Real Estate | $ | 28 | $ | 28 | $ | - - | $ | - - | ||||
Lease Obligations for Equipment | $ | 24 | $ | 24 | $ | - - | $ | - - | ||||
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 limited by federal and state
regulatory authorities.
52
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 company’s 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 company’s exposure to
off-balance-sheet risk as of December 31, 2009 and 2008 (in thousands) is as
follows:
2009 | 2008 | |||||
Financial instruments whose contract | ||||||
amounts represent credit risk: | ||||||
Commitments to extend credit | $ | 29 275 | $ | 48 726 | ||
Standby letters of credit | 1 646 | 2 467 |
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 customer’s 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 management’s
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 are collateralized and usually contain 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.
At December 31, 2009, the company had rate lock commitments to originate
mortgage loans amounting to $820 thousand and mortgage loans held for sale in
the amount of $97 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 company’s exposure to fluctuations in
interest rates in connection with rate lock commitments and loans held for sale.
Note 15. Fair Value
Measurements
Determination of Fair Value
The company uses fair value measurements to record fair value adjustments
to certain assets and liabilities and to determine fair value disclosures. In
accordance with the Fair Value Measurements and Disclosures topic of FASB ASC,
the fair value of a financial instrument is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Fair value is best determined based
upon quoted market prices. However, in many instances, there are no quoted
market prices for the company’s various financial instruments. In cases where
quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly
affected by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.
53
Note 15. Fair Value
Measurements (Continued)
The recent fair value guidance provides a consistent definition of fair
value, which focuses on exit price in an orderly transaction (that is, not a
forced liquidation or distressed sale) between market participants at the
measurement date under current market conditions. If there has been a
significant decrease in the volume and level of activity for the asset or
liability, a change in valuation technique or the use of multiple valuation
techniques may be appropriate. In such instances, determining the price at which
willing market participants would transact at the measurement date under current
market conditions depends on the facts and circumstances and requires the use of
significant judgment. The fair value is a reasonable point within the range that
is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, the company groups its financial assets
and financial liabilities generally measured at fair value in three levels,
based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value.
Level 1—Valuation is based on quoted prices in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date. Level 1 assets and liabilities generally include
debt and equity securities that are traded in an active exchange market.
Valuations are obtained from readily available pricing sources for market
transactions involving identical assets or liabilities.
Level 2—Valuation is based on inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly
or indirectly. The valuation may be based on quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for
substantially the full term of the asset or liability.
Level 3—Valuation is based on unobservable inputs that are supported by
little or no market activity and that are significant to the fair value of the
assets or liabilities. Level 3 assets and liabilities include financial
instruments whose value is determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as instruments for which
determination of fair value requires significant management judgment or
estimation.
A financial instrument’s categorization within the valuation hierarchy is
based upon the lowest level of input that is significant to the fair value
measurement.
The following methods and assumptions were used by the company in
estimating fair value disclosures for financial instruments:
Cash and Short-Term Investments
The carrying amounts of cash and short-term instruments approximate fair
values based on the short-term nature of the assets.
Securities
Where quoted prices are available in an active market, we classify the
securities within Level 1 of the valuation hierarchy. Securities are defined as
both long and short positions. Level 1 securities include highly liquid
government bonds and exchange traded equities. Instruments generally classified
within Level 2 include GSE obligations, corporate bonds, and other securities.
Loans
For variable rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
other loans were estimated using discounted cash flow analyses, using interest
rates currently being offered.
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.
54
Note 15. Fair Value
Measurements (Continued)
Short-Term Borrowings
The carrying amounts of borrowings under repurchase agreements and
federal funds purchased approximate fair value.
FHLB Advances
The fair values of the company’s FHLB advances are estimated using
discounted cash flow analysis based on the company’s 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, 2009 and 2008, the fair value of loan commitments and
standby-letters of credit was immaterial. Therefore, they have not been included
in the following table.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following describes the valuation techniques used by the company to
measure certain financial assets and liabilities recorded at fair value on a
recurring basis in the financial statements:
Securities available for
sale: Securities available
for sale are recorded at fair value on a recurring basis. Fair value measurement
is based upon quoted market prices, when available (Level 1). If quoted market
prices are not available, fair values are measured utilizing independent
valuation techniques of identical or similar securities for which significant
assumptions are derived primarily from or corroborated by observable market
data. Third party vendors compile prices from various sources and may determine
the fair value of identical or similar securities by using pricing models that
consider observable market data (Level 2).
The following table presents the balances (in thousands) of financial
assets and liabilities measured at fair value on a recurring basis as of
December 31, 2009 and 2008:
Fair Value Measurements at December 31 | ||||||||||||
Quoted Prices | ||||||||||||
in Active | Significant | |||||||||||
Markets for | Other | Significant | ||||||||||
Identical | Observable | Unobservable | ||||||||||
Balance as of | Assets | Inputs | Inputs | |||||||||
Description | December 31 | (Level 1) | (Level 2) | (Level 3) | ||||||||
Available for sale securities | ||||||||||||
2009 | $ | 34 313 | $ | - - | $ | 34 313 | $ | - - | ||||
2008 | 28 695 | - - | 28 695 | - - |
55
Note 15. Fair Value
Measurements (Continued)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis in
accordance with generally accepted accounting principles. Adjustments to the
fair value of these assets usually result from the application of
lower-of-cost-or-market accounting or write-downs of individual
assets.
The following describes the valuation techniques used by the company to
measure certain assets recorded at fair value on a nonrecurring basis in the
financial statements:
Loans held for sale: Loans held for sale are carried at the lower
of cost or market value. These loans currently consist of one-to-four family
residential loans originated for sale in the secondary market. Fair value is
based on the price secondary markets are currently offering for similar loans
using observable market data which is not materially different than cost due to
the short duration between origination and sale (Level 2). As such, the company
records any fair value adjustments on a nonrecurring basis. No nonrecurring fair
value adjustments were recorded on loans held for sale during the year ended
December 31, 2009 and 2008. Gains and losses on the sale of loans are recorded
within other operating income on the consolidated statements of
operations.
Impaired Loans: Loans are designated as impaired when, in
the judgment of management based on current information and events, it is
probable that all amounts due according to the contractual terms of the loan
agreement will not be collected. The measurement of loss associated with
impaired loans can be based on either the observable market price of the loan or
the fair value of the collateral. Fair value is measured based on the value of
the collateral securing the loans. Collateral may be in the form of real estate
or business assets including equipment, inventory, and accounts receivable. The
vast majority of the collateral is real estate. The value of real estate
collateral is determined utilizing an income or market valuation approach based
on an appraisal conducted by an independent, licensed appraiser outside of the
company using observable market data (Level 2). However, if the collateral is a
house or building in the process of construction or if an appraisal of the real
estate property is over two years old, then the fair value is considered Level
3. The value of business equipment is based upon an outside appraisal if deemed
significant, or the net book value on the applicable business’ financial
statements if not considered significant using observable market data. Likewise,
values for inventory and accounts receivables collateral are based on financial
statement balances or aging reports (Level 3). Impaired loans allocated to the
Allowance for Loan Losses are measured at fair value on a nonrecurring basis.
Any fair value adjustments are recorded in the period incurred as provision for
loan losses on the consolidated statements of operations.
Other Real Estate Owned: Certain assets such as other real estate
owned (OREO) are measured at fair value less cost to sell.
The following table summarizes the company’s
financial assets that were measured at fair value (in thousands) on a
nonrecurring basis as of December 31, 2009 and 2008.
Carrying Value at December 31 | |||||||||||||
Quoted Prices | |||||||||||||
in Active | Significant | ||||||||||||
Markets for | Other | Significant | |||||||||||
Identical | Observable | Unobservable | |||||||||||
Balance as of | Assets | Input | Input | ||||||||||
Description | December 31 | (Level 1) | (Level 2) | (Level 3) | |||||||||
Assets | |||||||||||||
Impaired Loans | |||||||||||||
2009 | $ | 11 186 | $ | - - | $ | 3 311 | $ | 7 875 | |||||
2008 | 2 943 | - - | 2 943 | - - | |||||||||
OREO | |||||||||||||
2009 | $ | 5 632 | $ | - - | $ | 5 632 | $ | - - | |||||
2008 | 1 644 | - - | 1 644 | - - |
56
Note 15. Fair Value
Measurements (Continued)
The carrying amounts and estimated fair values of the company’s financial
instruments are as follows:
2009 | 2008 | |||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
Amount | Value | Amount | Value | |||||||||
(in thousands) | (in thousands) | |||||||||||
Financial assets: | ||||||||||||
Cash | $ | 6 673 | $ | 6 673 | $ | 5 036 | $ | 5 036 | ||||
Federal funds sold | 5 950 | 5 950 | 3 313 | 3 313 | ||||||||
Securities available for sale | 34 313 | 34 313 | 28 695 | 28 695 | ||||||||
Loans, net | 228 993 | 236 838 | 242 375 | 244 138 | ||||||||
Loans held for sale | 97 | 97 | 329 | 329 | ||||||||
Accrued interest receivable | 952 | 952 | 1 108 | 1 108 | ||||||||
Financial liabilities: | ||||||||||||
Deposits | 264 467 | 260 915 | 254 088 | 252 521 | ||||||||
Securities sold under | ||||||||||||
agreements to repurchase | 7 340 | 7 340 | 8 352 | 8 352 | ||||||||
FHLB advances | 3 856 | 4 012 | 4 776 | 5 034 | ||||||||
Accrued interest payable | 405 | 405 | 481 | 481 |
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 company’s and the bank’s financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the company and bank must meet specific capital
guidelines that involve quantitative measures of 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,
2009 and 2008, that the company and the bank meet all capital adequacy
requirements to which they are subject.
As of December 31, 2009, 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 institution’s category.
57
Note 16. Regulatory
Matters (Continued)
The company’s and the bank’s actual capital amounts and ratios are also
presented in the table.
Minimum | |||||||||||||||
Capital | Minimum To Be | ||||||||||||||
Actual | Requirement | Well Capitalized | |||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||
(in thousands) | |||||||||||||||
As of December 31, 2009: | |||||||||||||||
Total capital (to risk-weighted | |||||||||||||||
assets): | |||||||||||||||
Consolidated | $ | 29 528 | 12.92% | $ | 18 289 | 8.0% | N/A | N/A | |||||||
Bank of Charles Town | $ | 28 293 | 12.44% | $ | 18 190 | 8.0% | $ | 22 737 | 10.0% | ||||||
Tier 1 capital (to risk-weighted | |||||||||||||||
assets): | |||||||||||||||
Consolidated | $ | 26 635 | 11.65% | $ | 9 144 | 4.0% | N/A | N/A | |||||||
Bank of Charles Town | $ | 25 415 | 11.18% | $ | 9 095 | 4.0% | $ | 13 642 | 6.0% | ||||||
Tier 1 capital (to average | |||||||||||||||
assets): | |||||||||||||||
Consolidated | $ | 26 635 | 8.75% | $ | 12 181 | 4.0% | N/A | N/A | |||||||
Bank of Charles Town | $ | 25 415 | 8.38% | $ | 12 133 | 4.0% | $ | 15 166 | 5.0% | ||||||
As of December 31, 2008: | |||||||||||||||
Total capital (to risk-weighted | |||||||||||||||
assets): | |||||||||||||||
Consolidated | $ | 32 775 | 13.63% | $ | 19 238 | 8.0% | N/A | N/A | |||||||
Bank of Charles Town | $ | 31 423 | 13.14% | $ | 19 133 | 8.0% | $ | 23 917 | 10.0% | ||||||
Tier 1 capital (to risk-weighted | |||||||||||||||
assets): | |||||||||||||||
Consolidated | $ | 29 756 | 12.37% | $ | 9 619 | 4.0% | N/A | N/A | |||||||
Bank of Charles Town | $ | 28 420 | 11.88% | $ | 9 567 | 4.0% | $ | 14 350 | 6.0% | ||||||
Tier 1 capital (to average | |||||||||||||||
assets): | |||||||||||||||
Consolidated | $ | 29 756 | 9.85% | $ | 12 081 | 4.0% | N/A | N/A | |||||||
Bank of Charles Town | $ | 28 420 | 9.45% | $ | 12 030 | 4.0% | $ | 15 038 | 5.0% |
58
Note 17. Parent Company
Only Financial Statements
POTOMAC BANCSHARES,
INC.
(Parent Company Only)
Balance Sheets
December 31, 2009 and 2008
(in thousands)
(Parent Company Only)
Balance Sheets
December 31, 2009 and 2008
(in thousands)
2009 | 2008 | |||||||
ASSETS | ||||||||
Cash | $ | 1 | $ | 48 | ||||
Investment in subsidiary | 24 352 | 26 468 | ||||||
Other assets | 1 220 | 1 288 | ||||||
Total Assets | $ | 25 573 | $ | 27 804 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
LIABILITIES | ||||||||
Other liabilities | $ | 1 | $ | - - | ||||
Total Liabilities | $ | 1 | $ | - - | ||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock | $ | 3 672 | $ | 3 672 | ||||
Surplus | 3 898 | 3 851 | ||||||
Undivided profits | 21 931 | 25 070 | ||||||
Accumulated other comprehensive (loss), net | (1 063 | ) | (1 952 | ) | ||||
$ | 28 438 | $ | 30 641 | |||||
Less cost of shares acquired for the treasury | 2 866 | 2 837 | ||||||
Total Stockholders’ Equity | $ | 25 572 | $ | 27 804 | ||||
Total Liabilities and Stockholders’ Equity | $ | 25 573 | $ | 27 804 | ||||
59
Note 17. Parent Company
Only Financial Statements (Continued)
POTOMAC BANCSHARES,
INC.
(Parent Company Only)
Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(in thousands)
(Parent Company Only)
Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(in thousands)
2009 | 2008 | 2007 | ||||||||||
Income | ||||||||||||
Dividends from subsidiary | $ | 977 | $ | 2 582 | $ | 1 942 | ||||||
Interest income | 1 | 3 | 1 | |||||||||
Total Income | $ | 978 | $ | 2 585 | $ | 1 943 | ||||||
Expenses | ||||||||||||
Stock-based compensation expense | $ | 47 | $ | 70 | $ | 110 | ||||||
Transfer agent expense | 15 | 11 | 9 | |||||||||
Legal fees | 11 | 9 | 20 | |||||||||
Other professional fees | 63 | 43 | 57 | |||||||||
Printing, stationery and supplies | 16 | 14 | 16 | |||||||||
Other operating expenses | 145 | 24 | 20 | |||||||||
Total Expenses | $ | 297 | $ | 171 | $ | 232 | ||||||
Income before Income Tax (Benefit) and | ||||||||||||
Equity in Undistributed (Loss) Income | ||||||||||||
of Subsidiary | $ | 681 | $ | 2 414 | $ | 1 711 | ||||||
Income Tax (Benefit) | (84 | ) | (32 | ) | (56 | ) | ||||||
Income before Equity in Undistributed (Loss) | ||||||||||||
Income of Subsidiary | $ | 765 | $ | 2 446 | $ | 1 767 | ||||||
Equity in Undistributed (Loss) Income of Subsidiary | (3 005 | ) | (584 | ) | 1 763 | |||||||
Net (Loss) Income | $ | (2 240 | ) | $ | 1 862 | $ | 3 530 | |||||
60
Note 17. Parent Company
Only Financial Statements (Continued)
POTOMAC BANCSHARES,
INC.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(in thousands)
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(in thousands)
2009 | 2008 | 2007 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
Net (loss) income | $ | (2 240 | ) | $ | 1 862 | $ | 3 530 | ||||
Adjustments to reconcile net (loss) income to net cash | |||||||||||
provided by operating activities: | |||||||||||
Equity in undistributed loss (income) of | |||||||||||
subsidiary | 3 005 | 584 | (1 763 | ) | |||||||
Stock-based compensation expense | 47 | 70 | 110 | ||||||||
Decrease (increase) in other assets | 68 | (830 | ) | (24 | ) | ||||||
Increase in other liabilities | 1 | - - | - - | ||||||||
Net cash provided by operating activities | $ | 881 | $ | 1 686 | $ | 1 853 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
Cash dividends | $ | (899 | ) | $ | (1 548 | ) | $ | (1 420 | ) | ||
Purchase of treasury shares | (29 | ) | (149 | ) | (422 | ) | |||||
Sale of treasury shares | - - | 23 | - - | ||||||||
Net cash (used in) financing activities | $ | (928 | ) | $ | (1 674 | ) | $ | (1 842 | ) | ||
(Decrease) increase in cash and cash | |||||||||||
equivalents | $ | (47 | ) | $ | 12 | $ | 11 | ||||
CASH AND CASH EQUIVALENTS | |||||||||||
Beginning | 48 | 36 | 25 | ||||||||
Ending | $ | 1 | $ | 48 | $ | 36 | |||||
Note 18. Subsequent
Events
In accordance with ASC 855-10, the company evaluates subsequent events
that have occurred after the balance sheet date but before the financial
statements are issued. There are two types of subsequent events: (1) recognized,
or those that provide additional evidence about conditions that existed at the
date of the balance sheet, including the estimates inherent in the process of
preparing financial statements, and (2) nonrecognized, or those that provide
evidence about conditions that did not exist at the date of the balance sheet
but arose after that date.
Based on the evaluation, the company did not identify any recognized or
nonrecognized subsequent events that would have required adjustment to or
disclosure in the financial statements.
61
Item 9. Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure.
Not Applicable.
Item 9A(T). Controls and Procedures.
The company’s chief executive officer and
chief financial officer, based on their evaluation as of the date of this report
of the company’s disclosure controls and procedures (as defined in Rule
13(a)-14(e) of the Securities Exchange Act of 1934), have concluded that the
company’s 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 company’s 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 company’s registered public accounting firm regarding
internal control over financial reporting. Management’s report was not subject
to attestation by the company’s registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
company to provide only management’s report in this annual report.
There were no significant changes in the
company’s internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation.
Management’s 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 management’s 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 company’s internal control over financial reporting includes those policies
and procedures that pertain to the company’s 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 company’s
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, 2009. 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, 2009.
The Board of Directors, acting through
its Audit Committee, is responsible for the oversight of the company’s
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
company’s 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 company’s 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.
62
PART III
Item 10. Directors and Executive Officers of
the Registrant.
The information contained on pages 7-10
of the Proxy Statement dated April 9, 2010, for the May 18, 2010 Annual Meeting
under the captions “Management Nominees to the Board of Potomac” and “Directors
Continuing to Serve Unexpired Terms,” and page 17 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 |
51 | Employed by bank as of 1/1/01 as President and CEO. | |||
David W. Irvin | Executive Vice
President 2004 |
46 | Employed at bank from 2001 to present as Commercial Loan Division Manager. | |||
Gayle Marshall Johnson | Sr. Vice President & Chief Financial
Officer 1994 |
60 | Employed with the bank 1977-1985 and 1988-present; Vice President and Chief Financial Officer since 1990. Sr. Vice President since 2005. |
The bank has adopted a Code of Ethics
that applies to all employees, including Potomac’s and the bank’s 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 Potomac’s and the bank’s 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 12-16
of the Proxy Statement dated April 9, 2010, for the May 18, 2010 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 10-11
of the Proxy Statement dated April 9, 2010, for the May 18, 2010 Annual Meeting
under the caption “Ownership of Securities by Nominees, Directors and Officers”
is incorporated herein by reference.
Securities authorized for issuance under
Potomac’s 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 | 126,224 | $14.75 | 305,336 | |||
Item 13. Certain Relationships and Related
Transactions.
The information contained on page 16 of
the Proxy Statement dated April 9, 2010, for the May 18, 2010 Annual Meeting
under the caption “Certain Transactions with Directors, Officers and Their
Associates” is incorporated herein by reference.
63
Item 14. Principal Accountant Fees and
Services.
The information contained on pages 6-7 of the Proxy Statement
dated April 9, 2010, for the May 18, 2010 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 the Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on June 10, 1994, Registration No. 33-80092. 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.
3.2 Amended and Restated Bylaws of Potomac Bancshares, Inc. and
subsequent amendments thereto.
10.1 2003 Stock Incentive Plan adopted by the Potomac Board
February 20, 2003 and approved by the company’s shareholders on May 13, 2003,
amended by the company’s shareholders on April 24, 2007 and incorporated by
reference from Potomac’s 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 Registered Public Accounting
Firm*
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 2010 Annual Meeting for Potomac,
portions are incorporated by reference in Form 10-K Annual Report*
* Filed herewith.
64
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES,
INC.
By | /s/ Robert F. Baronner, Jr. | March 30, 2010 | |
Robert F. Baronner, Jr. | |||
President & Chief Executive Officer | |||
By | /s/ Gayle Marshall Johnson | March 30, 2010 | |
Gayle Marshall Johnson | |||
Sr. Vice President & Chief Financial Officer |
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature & Title | Date | ||
By | /s/ Dr. Keith Berkeley | March 30, 2010 | |
Dr. Keith Berkeley, Director | |||
By | /s/ J. Scott Boyd | March 30, 2010 | |
J. Scott Boyd, Director | |||
By | /s/ John P. Burns, Jr. | March 30, 2010 | |
John P. Burns, Jr., Director | |||
By | /s/ Guy Gareth Chicchirichi | March 30, 2010 | |
Guy Gareth Chicchirichi, Director | |||
By | /s/ Margaret Cogswell | March 30, 2010 | |
Margaret Cogswell, Director | |||
By | /s/ Mary Clare Eros | March 30, 2010 | |
Mary Clare Eros, Director | |||
By | /s/ William R. Harner | March 30, 2010 | |
William R. Harner, Director | |||
By | /s/ Barbara H. Pichot | March 30, 2010 | |
Barbara H. Pichot, Director |
65
By | /s/ John C. Skinner, Jr. | March 30, 2010 | |
John C. Skinner, Jr., Director | |||
By | /s/ C. Larry Togans | March 30, 2010 | |
C. Larry Togans, Director |
66