UNITED STATES
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
(Mark one)
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XXX
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ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
fiscal year ended December 31, 2011
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the transition period from
__________
to
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Commission File Number
0-24958
POTOMAC BANCSHARES, INC.
(Exact Name of Registrant as
Specified in Its Charter)
West Virginia
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55-0732247
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(State or Other Jurisdiction of
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(I.R.S. Employer
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Incorporation or Organization)
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Identification No.)
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111 East Washington Street
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PO Box 906, Charles Town WV
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25414-0906
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(Address of Principal Executive Offices)
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(Zip
Code)
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Registrant's telephone number, including area code
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304-725-8431
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Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
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Title of Each Class
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on Which Registered
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NONE
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Securities registered pursuant
to Section 12(g) of the Act:
Common Stock, $1.00 Par Value
(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.
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.
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.
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).
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
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Accelerated Filer
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Non-Accelerated
Filer
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Smaller Reporting
Company
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XX
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
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 registrants most recently completed second fiscal quarter.
$19,207,285 as of June 30,
2011
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
20
,
2012
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.
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Part of the Form 10-K into
Which
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Document
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the Document is
Incorporated
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Portions of Potomac
Bancshares, Inc.s Proxy Statement for the 2012 Annual Meeting of
Shareholders which proxy statement will be filed on or about March 30,
2012.
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Part III,
Items 10, 11, 12, 13 and 14
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2
Potomac Bancshares, Inc.
Annual
Report on Form 10-K
For the Year Ended
December 31, 2011
PART I
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Item
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1.
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Business
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4
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Item
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2.
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Properties
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12
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Item
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3.
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Legal
Proceedings
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13
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Item
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4.
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Mine Safety
Disclosures
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13
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PART II
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Item
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5.
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Market for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases
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of Equity Securities
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13
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Item
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6.
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Selected Financial
Data
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16
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Item
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7.
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Managements Discussion and Analysis of Financial Condition and
Results of Operations
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Item
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7A.
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Quantitative and
Qualitative Disclosures About Market Risk
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29
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Item
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8.
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Financial Statements and Supplementary Data
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31
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Item
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9.
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Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure
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78
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Item
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9A.
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Controls and Procedures
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79
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Item
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9B.
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Other Information
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79
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PART III
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*
Item
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10.
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Directors, Executive Officers and Corporate Governance
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80
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*
Item
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11.
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Executive
Compensation
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80
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*
Item
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12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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80
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*
Item
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13.
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Certain Relationships
and Related Transactions and Director Independence
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80
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*
Item
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14.
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Principal Accounting Fees and Services
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81
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PART IV
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Item
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15.
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Exhibits and Financial Statement Schedules
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81
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*
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 registrants definitive proxy statement which is expected to be
filed on or about March 30, 2012.
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 Presidents
letter and the Managements 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
companys actual results and experiences to differ materially from the
anticipated results or other expectations expressed in the companys
forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the companys business include, but are not limited
to, the growth of the economy, unemployment, pricing in the real estate market,
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,
lack of loan growth,
the possibility of future FDIC assessments, Congressional
legislation and similar matters (including changes as a result of rules and
regulations adopted under the Dodd-Frank Wall Street Reform and Consumer
Protection Act). The downgrade of U.S. government securities by one of the
credit rating agencies could have a material adverse effect on the companys
operations, earnings and financial condition. 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 banks 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 banks deposits. The bank engages in general banking business
primarily in Jefferson, Berkeley and Morgan Counties of West Virginia; Clarke,
Frederick and Loudoun Counties of Virginia, and Washington and Frederick
Counties of Maryland. The main office is in Charles Town, West Virginia at 111
East Washington Street, with branch offices in
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Harpers Ferry, West Virginia,
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Kearneysville, West
Virginia,
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Martinsburg, West
Virginia and
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Hedgesville, West
Virginia.
The bank provides
individuals, businesses and local governments with a broad range of banking
services. These services include
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Commercial
credit lines, equipment loans, and construction financing,
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Real estate loans,
secondary market and adjustable rate mortgages,
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Retail loan
products including home equity lines of credit,
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Checking and
savings accounts for businesses and individuals and
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Certificates of
deposit and individual retirement accounts.
Online banking with bill pay, electronic statements and 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 in 2005 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 (a regional convenience store franchise) locations is also free of
charge. The banks 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
Credit Policies
The bank offers a variety of loans for consumer and commercial purposes.
Underwriting standards for all lending include
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Sound credit
analysis,
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Proper documentation according to the bank's loan
policy and compliance standards,
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Management of loan concentrations to a single
industry or with a single class of collateral, where applicable,
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Diligent
maintenance of past due, nonaccrual loans, and problem loans,
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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 banks
policy to manage concentrations of loans such as loans to one industry, loans to
one borrower or guarantor or loans secured by similar collateral.
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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.
Real Estate Lending
Loans secured by real estate are made to individuals and businesses for
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Purchase/refinance of owner occupied and
investment of one to four family residential property,
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Home equity loans,
lines of credit and construction loans,
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Non-owner occupied
and owner occupied commercial real estate
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Commercial,
multi-family and other non-residential construction,
Approximately 93% of the bank's loans are secured by real estate. These
loans had a delinquency rate of 3.86% and a loss rate of 1.82% during 2011. The
delinquency rate and loss rate are based on comparisons to 2011 period end loans
and average loans, respectively. The delinquent rate to total real estate
lending portfolio was 4.16% at December 31, 2011.
As of December 31,
2011,
aggregate dollar amounts (in thousands) in loan
categories secured by real estate are as follows:
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Construction and land development
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$
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19 179
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Secured by
farmland
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598
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Secured by 1-4 family residential
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92 856
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Secured by
multifamily residential
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3 088
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Commercial real estate owner occupied
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61 086
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Commercial real
estate non-owner occupied
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15
796
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$
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192
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Commercial Lending
Commercial loans not secured by real estate with an aggregate balance of
$8.4 million at December 31, 2011 make up approximately 4.03% of the total loan
portfolio. The banks loan policy for commercial loans including those
commercial loans secured by real estate is to
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Grant loans on a sound and collectible basis,
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Invest the banks funds profitably for the benefit
of shareholders and the protection of depositors and
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Serve the credit
needs of the community in which the bank is located.
The delinquency rate for commercial loans not secured by real estate was
.03% during 2011 and the portfolio had net recoveries for the year. The
delinquency rate and loss rate are based on comparisons to 2011 period end total
loans and average total loans, respectively. The delinquency rate to total
commercial loans was .072% at December 31, 2011.
Consumer Lending
Retail loans to individuals for personal expenditures are approximately
2.97% of the bank's total loans at December 31, 2011. The aggregate balance of
these loans was $6.2 million at December 31, 2011. The majority of these loans
are installment 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 0.02% and a loss rate
of 0.02% in 2011. The delinquency rate and loss rate are based on comparisons to
2011 period end total loans and average total loans, respectively. The
delinquency rate to total consumer loans was .50% at December 31, 2011.
5
All other loans
total $116 thousand (0.06% of total loans) at December 31, 2011. These loans had
no delinquency rate and no loss rate in 2011.
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 withdrawals by customers, to fund loan commitments and to help
maintain the bank's asset/liability mix.
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 and ICS programs. The CDARS program offers
certificates of deposit in various terms from four weeks to five years. The ICS
program offers money market accounts with increased FDIC protection. 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:
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Present a valid identification,
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Have a social
security number,
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Must be a U.S. citizen or possess evidence of
legal alien status, and
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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
drivers license and/or resident), additional verification requirements
apply.
Competition
As of February 16, 2012, there were 58 bank holding companies
headquartered in West Virginia (including multi-bank and one bank holding
companies) operating in the State of West Virginia. These holding companies
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. The bank has three branch locations in Jefferson
County, WV. As of June 30, 2011, there were six banks in Jefferson County with
15 banking offices. The total deposits of these commercial banks as of June 30,
2011 were $673 million, and the bank ranked number one in total deposits with
three branch offices with $209 million or 30.98% of the total deposits in
Jefferson County at that time. The bank has two branch offices in Berkeley
County. Opening in July 2001 and June 2003, these branches have 4.48% of the
market share of deposits in Berkeley County where there are 12 banks with 32
banking offices and total deposits in the Berkeley County market of
$1.12
billion.
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.
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 companys 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, 2012, the bank had 83 full-time employees and 10 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.
Potomacs 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.
The deposits of Bank of Charles Town are insured by the FDIC up to the
limits set forth under applicable law. The deposits of Bank of Charles Town
subsidiary are subject to the deposit insurance assessments of the Deposit
Insurance Fund (DIF) of the FDIC.
7
The FDIC has
implemented a risk-based deposit insurance assessment system under which the
assessment rate for an insured institution may vary according to regulatory
capital levels of the institution and other factors, including supervisory
evaluations. In addition to being influenced by the risk profile of the
particular depository institution, FDIC premiums are also influenced by the size
of the FDIC insurance fund in relation to total deposits in FDIC insured banks.
Beginning April 1, 2011, an institutions assessment base will be its
consolidated total assets less its average tangible equity as defined by the
FDIC. The FDIC has authority to impose special assessments from time to time.
The maximum deposit insurance amount per depositor has been increased
from $100,000 to $250,000. Also, all funds in a noninterest-bearing transaction
account are insured in full by the FDIC from December 31, 2010, through
December 31, 2012. This temporary unlimited coverage is in addition to, and
separate from, the coverage of at least $250,000 available to depositors under
the FDICs general deposit insurance rules. The FDIC issued a rule including
Interest on Lawyers Trust Accounts (IOLTAs) in the temporary unlimited coverage
for noninterest-bearing transaction accounts.
The FDIC is authorized to prohibit any DIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institutions primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. The company is not aware of any existing
circumstances that could result in termination of any of the banks deposit
insurance.
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 and after tax unrealized gain or loss on available for sale debt
securities. Tier 1 capital may also be affected by a limitation on the recorded
deferred tax assets. 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.
8
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.
Payment of Dividends
. The
majority of the companys revenues are from dividends paid to the company by its
subsidiary bank. The bank is subject to laws and regulations that limit the
amount of dividends it can pay. In addition, both the company and the bank are
subject to various regulatory restrictions relating to the payment of dividends,
including requirements to maintain capital at or above regulatory minimums. The
FDIC has the general authority to limit the dividends paid by insured banks if
the payment is deemed an unsafe and unsound practice. The FDIC has indicated
that paying dividends that deplete a banks capital base to an inadequate level
would be an unsound and unsafe banking practice. During the year ended December
31, 2011, the company paid $67 thousand in dividends to its shareholders.
As of December 31, 2011, Potomac had capital in excess of all applicable
requirements as shown below:
|
|
Actual
|
|
Required
|
|
Excess
|
|
|
|
|
(in thousands)
|
|
|
|
Tier 1 capital (to risk-weighted
assets)
|
|
$
|
24 842
|
|
$
|
8
391
|
|
$
|
16 451
|
|
Total capital (to risk-weighted
assets)
|
|
$
|
27 487
|
|
$
|
16
782
|
|
$
|
10 705
|
|
Tier 1 capital (to average assets)
|
|
$
|
24 842
|
|
$
|
11 602
|
|
$
|
13 240
|
|
Capital ratios:
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based
capital ratio
|
|
|
11.84%
|
|
|
4.00%
|
|
|
7.84%
|
Total
risk-based capital ratio
|
|
|
13.10%
|
|
|
8.00%
|
|
|
5.10%
|
Tier 1 capital to
average total assets (leverage)
|
|
|
8.56%
|
|
|
4.00%
|
|
|
4.56%
|
Community
Reinvestment Act
. Under the Community
Reinvestment Act and related regulations, depository institutions have an
affirmative obligation to assist in meeting the credit needs of their market
areas, including low and moderate-income areas, consistent with safe and sound
banking practice. The Community Reinvestment Act requires the adoption by each
institution of a Community Reinvestment Act statement for each of its market
areas describing the depository institutions efforts to assist in its
communitys credit needs. Depository institutions are periodically examined for
compliance with the Community Reinvestment Act and are periodically assigned
ratings in this regard. Banking regulators consider a depository institutions
Community Reinvestment Act rating when reviewing applications to establish new
branches, undertake new lines of business, and/or acquire part or all of another
depository institution. An unsatisfactory rating can significantly delay or even
prohibit regulatory approval of a proposed transaction by a bank holding company
or its depository institution subsidiaries.
The Gramm-Leach-Bliley Act and federal bank regulators have made various
changes to the Community
Reinvestment Act. Among
other changes, Community Reinvestment Act agreements with private parties must
be disclosed and annual reports must be made to a banks primary federal
regulator. A bank holding company will not be permitted to become a financial
holding company and no new activities authorized under the GLBA may be commenced
by a holding company or by a bank financial subsidiary if any of its bank
subsidiaries received less than a satisfactory rating in its latest Community
Reinvestment Act examination.
9
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 1930s. 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.
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.
10
Effective August
29, 2002, as directed by Section 302(a) of Sarbanes-Oxley, Potomacs chief
executive officer and chief financial officer are each required to certify that
Potomacs 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 Potomacs internal controls; they have
made certain disclosures to Potomacs auditors and the audit committee of the
Board of Directors about Potomacs internal controls; and they have included
information in Potomacs Quarterly and Annual Reports about their evaluation and
whether there have been significant changes in Potomacs internal controls or in
other factors that could significantly affect internal controls subsequent to
the evaluation.
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. Treasurys consultation with the
recipients appropriate regulatory agency.
Dodd-Frank Act
. On July 21, 2010,
sweeping financial regulatory reform legislation entitled the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the Dodd-Frank Act) was signed
into law. Generally, the Dodd-Frank Act is effective the day after it was signed
into law, but different effective dates apply to specific sections of the law.
The Dodd-Frank Act implements far-reaching changes across the financial
regulatory landscape, including provisions that, among other things, will:
-
Centralize responsibility for consumer financial
protection by creating a new agency, the Consumer Financial
Protection Bureau, which will have rulemaking authority for
a wide range of consumer protection laws that
would apply to all banks and have broad powers to supervise and enforce
consumer protection laws;
-
After a three-year phase-in period which begins
January 1, 2013, removes trust preferred securities as a
permitted component of a holding companys tier 1
capital;
-
Requires financial holding companies to be
well-capitalized and well-managed as of July 21, 2011. Bank
holding companies and banks must also be both
well-capitalized and well-managed in order to acquire banks
located outside their domiciled state;
-
Provides for an increase in the FDIC assessment
for depository institutions with assets of $10 billion or more,
increases in the minimum reserve ratio for the deposit
insurance fund from 1.15% to 1.35% and changes in the
basis for determining FDIC premiums from deposits to assets;
-
Provides for new disclosure and other requirements
relating to executive compensation and corporate
governance. These disclosures and requirements apply to all public
companies, not just financial institutions;
-
Permanently increases the limit for federal
deposit insurance, increases the cash limit of Securities Investor
Protection Corporation protection from $100,000 to
$250,000 and provides unlimited federal deposit insurance
until January 1, 2013 for non-interest bearing demand
transaction accounts at all insured depository institutions;
-
Repeals the federal prohibitions on the payment of
interest on demand deposits;
-
Amends the Electronic Fund Transfer Act (EFTA) to,
among other things, give the Federal Reserve the
authority to establish rules regarding interchange fees charged for
electronic debit transactions by payment card
issuers having assets over $10 billion and to enforce a new statutory
requirement that such fees be reasonable
and
proportional to the actual cost of a transaction to the issuer; and
-
The Federal Reserve adopted rules effective
October 1, 2011, establishing standards for assessing whether the
interchange fees that may be charged with respect to
electronic debit transactions are reasonable and
proportional to the costs incurred by issuers for such transactions.
The ultimate impact to the bank is not
known.
11
The Dodd-Frank
Act created a new, independent federal agency, the CFPB, which was granted broad
rulemaking, supervisory and enforcement powers under various federal consumer
financial protection laws, including the laws referenced above and certain other
statutes, effective July 21, 2011. The CFPB has examination and primary
enforcement authority with respect to depository institutions with $10 billion
or more in assets. Smaller institutions are subject to rules promulgated by the
CFPB, but continue to be examined and supervised by federal banking regulators
for consumer compliance purposes. The CFPB has authority to prevent unfair,
deceptive or abusive practices in connection with the offering of consumer
financial products. The Dodd-Frank Act authorizes the CFPB to establish certain
minimum standards for the origination of residential mortgages including a
determination of the borrowers ability to repay. In addition, the Dodd-Frank
Act will allow borrowers to raise certain defenses to foreclosure if they
receive any loan other than a qualified mortgage as defined by the CFPB. The
Dodd-Frank Act permits states to adopt consumer protection laws and standards
that are more stringent than those adopted at the federal level and, in certain
circumstances, permits state attorneys general to enforce compliance with both
the state and federal laws and regulations.
Uncertainty remains as to the ultimate impact of the Act, which could
have a material adverse impact either on the financial services industry as a
whole, or on our business. Provisions in the legislation that affect deposit
insurance assessments, payment of interest on demand deposits and interchange
fees could increase the costs associated with deposits as well as place
limitations on certain revenues those deposits may generate. Provisions in the
legislation that revoke the Tier 1 capital treatment of trust preferred
securities and otherwise require revisions to the capital requirements of the
company and the bank could require the company and the bank to seek other
sources of capital in the future.
Available Information.
The company files annual, quarterly and
current reports, proxy statements and other information with the SEC. The
companys SEC filings are filed electronically and are available to the public
through the Internet at the SECs website at
http://www.sec.gov
. In addition, any
document filed by the company with the SEC can be read and copied at the SECs
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 Dean Cognetti, Sr. Vice President and Chief
Financial Officer, Potomac Bancshares, Inc., PO Box 906, Charles Town, WV 25414.
Item 2. Properties
.
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 will most likely be sold when a suitable buyer is
identified.
In addition to land specifically purchased for use by the bank, the bank
owns, by process of foreclosure, properties in which the customer could no
longer meet their obligation to the bank.
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 banks One Financial Center (trust and financial
services). 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.
12
In October 2005
to provide additional office and storage areas, the bank leased space in
Kearneysville, West Virginia at the Burr Industrial Park. Currently, 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.
Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrants 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
20
, 2012, 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 Potomacs symbol PTBS.OB. Scott and Stringfellow, Inc., and Koonce
Securities Inc. are market makers for Potomacs 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 Potomacs stock is available on the
Internet through many of the stock information services using Potomacs 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 2010 and 2011 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
|
2011
|
|
First Quarter
|
|
$
|
6.00
|
|
$
|
4.65
|
|
$
|
.0100
|
|
|
Second Quarter
|
|
|
6.00
|
|
|
5.25
|
|
|
.0100
|
|
|
Third Quarter
|
|
|
5.95
|
|
|
4.20
|
|
|
.0000
|
|
|
Fourth Quarter
|
|
|
5.00
|
|
|
3.51
|
|
|
.0000
|
|
2010
|
|
First Quarter
|
|
$
|
6.10
|
|
$
|
4.63
|
|
$
|
.0000
|
|
|
Second Quarter
|
|
|
6.34
|
|
|
4.50
|
|
|
.0000
|
|
|
Third Quarter
|
|
|
5.84
|
|
|
4.30
|
|
|
.0000
|
|
|
Fourth Quarter
|
|
|
5.25
|
|
|
4.30
|
|
|
.0000
|
13
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 Potomacs
cumulative total shareholder return on common stock for the five-year period
ending December 31, 2011, with the cumulative total return of the Bank Holding
Companies Index (SIC Code 6712) and the Market Value Index. There is no
assurance that Potomacs 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.
COMPARISON OF 5 YEAR CUMULATIVE
TOTAL RETURN
Among Potomac
Bancshares, Inc., Market Value Index, and Bank Holding Companies
Index
ASSUMES $100 WAS INVESTED ON JANUARY 1,
2007 AND ASSUMES
DIVIDENDS WERE REINVESTED THROUGH FISCAL YEAR
ENDING
DECEMBER 31, 2011
14
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
|
|
83 617
|
|
November 1 through November 30
|
|
NONE
|
|
|
- -
|
|
283 553
|
|
83 617
|
|
December 1 through December 31
|
|
NONE
|
|
|
- -
|
|
283 553
|
|
83 617
|
On February 12, 2002, the companys Board
of Directors originally authorized the repurchase program. The program
authorized the repurchase of up to 10% of the companys 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 an annual basis at Potomacs
reorganization meeting.
Summary of Equity Compensation
Plans
|
|
Equity Compensation Plan Information
|
|
|
Number of
|
|
|
|
|
|
|
|
Securities to be
|
|
|
|
|
Number of Securities
|
|
|
Issued Upon
|
|
Weighted Average
|
|
Remaining Available for
|
|
|
Exercise of
|
|
Exercise Price
of
|
|
Future Issuance Under
|
|
|
Outstanding
|
|
Outstanding
|
|
Equity Compensation
|
Plan Category
|
|
Options
|
|
Options
|
|
Plan
|
Equity compensation plans
approved by Stockholders
|
|
119,908
|
|
$
|
14.76
|
|
311,652
|
Equity compensation plans not approved by
Stockholders
|
|
-
|
|
$
|
-
|
|
-
|
|
|
119,908
|
|
$
|
14.76
|
|
311,652
|
The 2003 Stock Incentive Plan was approved by stockholders on
May 13, 2003, which authorized up to 183,600 shares of common stock to be used
in the granting of incentive and non-qualified options to employees and
directors. On April 24, 2007, the stockholders approved an additional 250,000
shares of common stock to be used in the granting of incentive and non-qualified
options to employees and directors. This is the first and only stock incentive
plan adopted by the company. Under the plan, the option price cannot be less
than the fair market value of the stock on the date granted. An options maximum
term is ten years from the date of grant. Employee options granted under the
plan are subject to a five year graded vesting schedule. Director options
immediately vest.
For additional information regarding our equity compensation plans, refer
to the discussion in Note 10 to the audited consolidated financial statements
included in Item 15 of this Annual Report on Form 10-K.
15
Item 6. Selected Financial Data.
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in Thousands
Except Per Share Data)
|
Summary of
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
$
|
12 571
|
|
|
$
|
13 904
|
|
$
|
14 913
|
|
|
$
|
17 358
|
|
$
|
19 691
|
Interest expense
|
|
|
2
900
|
|
|
|
4
143
|
|
|
5
121
|
|
|
|
6
477
|
|
|
8
161
|
Net interest
income
|
|
|
9 671
|
|
|
|
9 761
|
|
|
9 792
|
|
|
|
10 881
|
|
|
11 530
|
Provision for loan losses
|
|
|
3
343
|
|
|
|
1
599
|
|
|
6
690
|
|
|
|
2
934
|
|
|
678
|
Net interest income
after provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for loan losses
|
|
|
6 328
|
|
|
|
8 162
|
|
|
3 102
|
|
|
|
7 947
|
|
|
10 852
|
Noninterest income
|
|
|
4 368
|
|
|
|
4 076
|
|
|
4 281
|
|
|
|
4 540
|
|
|
4 379
|
Noninterest
expense
|
|
|
12 956
|
|
|
|
9 764
|
|
|
11 059
|
|
|
|
9 772
|
|
|
9 703
|
(Loss)
income before income taxes
|
|
|
(2 260
|
)
|
|
|
2 474
|
|
|
(3 676
|
)
|
|
|
2 715
|
|
|
5 528
|
Income tax (benefit)
expense
|
|
|
(1 250
|
)
|
|
|
680
|
|
|
(1 436
|
)
|
|
|
853
|
|
|
1 998
|
|
Net (loss)
income
|
|
$
|
(1 010
|
)
|
|
$
|
1 794
|
|
$
|
(2 240
|
)
|
|
$
|
1 862
|
|
$
|
3 530
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income,
basic
|
|
$
|
(.30
|
)
|
|
$
|
.53
|
|
$
|
(.66
|
)
|
|
$
|
.55
|
|
$
|
1.03
|
Net
(loss) income, diluted
|
|
|
(.30
|
)
|
|
|
.53
|
|
|
(.66
|
)
|
|
|
.55
|
|
|
1.03
|
Cash dividends
declared
|
|
|
.02
|
|
|
|
.00
|
|
|
.27
|
|
|
|
.46
|
|
|
.42
|
Book
value at period end
|
|
|
7.51
|
|
|
|
7.90
|
|
|
7.54
|
|
|
|
8.19
|
|
|
8.52
|
Weighted-average
shares outstanding, basic
|
|
|
3 390 178
|
|
|
|
3 390 178
|
|
|
3 390 516
|
|
|
|
3 401 717
|
|
|
3 423 239
|
Weighted-average shares outstanding, diluted
|
|
|
3 390 178
|
|
|
|
3 390 178
|
|
|
3 390 516
|
|
|
|
3 403 265
|
|
|
3 430 764
|
|
Average Balance Sheet
Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
299 759
|
|
|
$
|
303 998
|
|
$
|
304 739
|
|
|
$
|
303 749
|
|
$
|
297 716
|
Loans
|
|
|
210 817
|
|
|
|
227 113
|
|
|
239 175
|
|
|
|
232 894
|
|
|
226 773
|
Securities
|
|
|
47 090
|
|
|
|
39 388
|
|
|
32 841
|
|
|
|
34 178
|
|
|
42 040
|
Deposits
|
|
|
260 766
|
|
|
|
263 534
|
|
|
261 233
|
|
|
|
259 536
|
|
|
252 908
|
Stockholders
equity
|
|
|
27 167
|
|
|
|
26 780
|
|
|
26 266
|
|
|
|
30 118
|
|
|
28 207
|
|
Performance
Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) return on
average assets
|
|
|
(0.34)%
|
|
|
|
0.59%
|
|
|
(0.74)%
|
|
|
|
0.61%
|
|
|
1.19%
|
(Loss)
return on average equity
|
|
|
(3.72)%
|
|
|
|
6.70%
|
|
|
(8.53)%
|
|
|
|
6.18%
|
|
|
12.51%
|
Dividend payout
ratio
|
|
|
N/A
|
|
|
|
N/A
|
|
|
N/A
|
|
|
|
83.64%
|
|
|
40.78%
|
|
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
ratio
|
|
|
8.56%
|
|
|
|
9.36%
|
|
|
8.75%
|
|
|
|
9.85%
|
|
|
9.99%
|
Risk-based capital ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital
|
|
|
11.84%
|
|
|
|
12.97%
|
|
|
11.65%
|
|
|
|
12.37%
|
|
|
13.01%
|
Total capital
|
|
|
13.10%
|
|
|
|
14.24%
|
|
|
12.92%
|
|
|
|
13.63%
|
|
|
14.23%
|
16
Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING
POLICIES
GENERAL
The companys
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: (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 margin value of collateral and the loan balance.
The allowance consists of specific
and general components.
The specific component relates to loans (other than consumer and residential
mortgage loans) that are classified
as 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 environmental factors such as economic, concentration and growth
trends. The historical period used in calculating the loss factor has changed.
Prior to August 2011 the bank used a thirty six month rolling average to
calculate the historical loss factor in the loan portfolio. In August 2011 bank
management changed to a twelve month rolling average. The change was made due to
managements belief that the twelve month average more accurately compares with
the current economic environment.
The impact of the change was an increase in the allowance of $476
thousand
at December 31, 2011.
GENERAL
The year ended December 31, 2011 was a mix of challenges and
opportunities. 2011 results were dominated by credit loss provisions, and
foreclosed property expenses. These items were the principal drivers of the loss
for the year as these were over 2010 amounts by $1.7 million and $2.6 million,
respectively. As noted in the table below
,
the primary
charges
occurred in the
third quarter. The net loss in the third quarter was $1.8 million due to two
charges posted in that quarter. First, we reduced the value of our foreclosed
property assets by some $1.85 million upon obtaining updated appraisals on
foreclosed property carried on our balance sheet. We evaluate these assets on an
ongoing basis especially in a declining real estate market which our area
continues to experience. About two thirds of the write-down
involved
residential
lot developments foreclosed upon and charged down in 2009. These properties have
continued to lose value due to very weak demand by consumers for new housing and
little demand from builders for lots. A surplus of foreclosed properties on the
market continues to keep prices low, so until new and existing housing values
reach some sort of price equilibrium, there will be little demand for both lots
and new construction. A second charge of $2.1 million
involved
additions to our
loan loss reserve as businesses and consumers continue to struggle because of
the sluggish economy. In conjunction with our ongoing loan review process, an
analysis of both primary and secondary sources of repayment including an
assessment of the current value of collateral is performed. Again, most of the
collateral that secures our loans is real estate and those values are down
significantly. Management continues to pursue potential loan relationships and
is vigilantly marketing our current inventory of foreclosed
properties.
17
It is
managements opinion that one of the key elements to improving our situation and
that of the local economy is to reduce this housing inventory currently owned by
financial institutions. We expect economic growth to be slow and do not expect
the real estate market to return to pre-recession levels. Partly mitigating
these increased expenses were continued strength in net interest income and
noninterest income, both of which remained consistent with prior year
levels.
Bank management is ending the year still hopeful that sustainable growth
is closer than it has been for some time while also being aware that the pace
will continue to be slow. During the year, unemployment began to improve
slightly along with a further stabilization in local housing values took place.
However in the near term the focus will continue to be on asset quality,
management of capital levels, and continued efforts to differentiate ourselves
from our competition. The company plans continued focus on reducing interest
cost, efficiency improvements, and moderate loan growth utilizing current
liquidity with an expectation of minimal overall asset growth in 2012.
Capital levels as of year-end continued to be in excess of required
minimum regulatory levels.
The debate in Congress regarding the national debt ceiling, federal
budget deficit concerns and overall weakness in the economy resulted in a
downgrade of U.S. government securities by one of the three major credit rating
agencies. This downgrade and the possible future downgrade by one or both of the
other two major ratings agencies could create uncertainty in the U.S. and global
financial markets. These actions could cause other events which, directly or
indirectly, may adversely affect the companys operations, earnings and
financial condition.
The following table sets forth selected quarterly results (with dollars
in thousands) of the company for 2011 and 2010.
|
|
2011
|
|
2010
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
|
Dec 31
|
|
Sept 30
|
|
|
June 30
|
|
Mar 31
|
|
Dec 31
|
|
Sept 30
|
|
June 30
|
|
Mar 31
|
Interest income
|
|
$
|
3 047
|
|
$
|
3 162
|
|
|
$
|
3 138
|
|
$
|
3 224
|
|
$
|
3 380
|
|
$
|
3 459
|
|
$
|
3 539
|
|
$
|
3 526
|
Interest expense
|
|
|
557
|
|
|
634
|
|
|
|
784
|
|
|
925
|
|
|
948
|
|
|
993
|
|
|
1 058
|
|
|
1 144
|
Net interest
income
|
|
|
2 490
|
|
|
2 528
|
|
|
|
2 354
|
|
|
2 299
|
|
|
2 432
|
|
|
2 466
|
|
|
2 481
|
|
|
2 382
|
Provision for loan losses
|
|
|
617
|
|
|
2 128
|
|
|
|
175
|
|
|
423
|
|
|
615
|
|
|
213
|
|
|
461
|
|
|
310
|
Net interest income
after
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
provision for
loan losses
|
|
|
1 873
|
|
|
400
|
|
|
|
2 179
|
|
|
1 876
|
|
|
1 817
|
|
|
2 253
|
|
|
2 020
|
|
|
2 072
|
Noninterest income
|
|
|
1 268
|
|
|
1 054
|
|
|
|
1 071
|
|
|
975
|
|
|
1 051
|
|
|
1 022
|
|
|
1 063
|
|
|
940
|
Noninterest
expense
|
|
|
2 659
|
|
|
4 674
|
|
|
|
3 071
|
|
|
2 552
|
|
|
2 430
|
|
|
2 506
|
|
|
2 431
|
|
|
2 397
|
Income (loss) before taxes
|
|
|
482
|
|
|
(3 220
|
)
|
|
|
179
|
|
|
299
|
|
|
438
|
|
|
769
|
|
|
652
|
|
|
615
|
Income tax expense
(benefit)
|
|
|
120
|
|
|
(1 418
|
)
|
|
|
6
|
|
|
42
|
|
|
32
|
|
|
241
|
|
|
214
|
|
|
193
|
Net income (loss)
|
|
$
|
362
|
|
$
|
(1 802
|
)
|
|
$
|
173
|
|
$
|
257
|
|
$
|
406
|
|
$
|
528
|
|
$
|
438
|
|
$
|
422
|
Earnings (loss) per share,
basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
diluted
|
|
$
|
.11
|
|
$
|
(.53
|
)
|
|
$
|
.05
|
|
$
|
.08
|
|
$
|
.12
|
|
$
|
.16
|
|
$
|
.13
|
|
$
|
.12
|
NET INTEREST INCOME
Interest and dividend income was 10% lower in 2011 when compared with
2010 results. The particular reasons for the reduction in interest income are
(1) an approximately 10% decrease in interest and fees on loans, (2) a 13%
decrease in interest on taxable securities and (3) a 14% increase in interest on
non-taxable securities. The decrease in loan interest is due primarily to a
reduction in average loan values of $16.3 million and, to a lesser degree, a
decrease in the average yield for the year. The decrease in security interest is
caused by lower interest securities replacing higher interest securities at both
maturity and call date. Other earning assets have changed by varying degrees but
have not significantly affected interest income.
Management counteracted the reduction in interest income in 2011 by
reducing interest expense and in particular interest paid on deposits. As a
result, total interest expense decreased 30% in 2011 compared to 2010. There
have been no significant adverse effects to deposit balances.
18
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.
|
|
2011
|
|
2010
|
|
2009
|
|
|
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
|
|
$
|
210 382
|
|
|
$
|
11 618
|
|
5.52%
|
|
$
|
226 192
|
|
|
$
|
12 875
|
|
5.69%
|
|
$
|
238 489
|
|
|
$
|
13 759
|
|
5.77%
|
Tax
exempt
|
|
|
435
|
|
|
|
45
|
|
10.34%
|
|
|
921
|
|
|
|
73
|
|
7.93%
|
|
|
686
|
|
|
|
64
|
|
9.33%
|
Total loans
|
|
|
210 817
|
|
|
|
11 663
|
|
5.53%
|
|
|
227 113
|
|
|
|
12 948
|
|
5.70%
|
|
|
239 175
|
|
|
|
13 823
|
|
5.78%
|
Taxable securities
|
|
|
41 015
|
|
|
|
660
|
|
1.61%
|
|
|
34 372
|
|
|
|
755
|
|
2.20%
|
|
|
29 084
|
|
|
|
933
|
|
3.21%
|
Nontaxable
securities
|
|
|
6 075
|
|
|
|
350
|
|
5.76%
|
|
|
5 016
|
|
|
|
306
|
|
6.10%
|
|
|
3 757
|
|
|
|
224
|
|
5.96%
|
Federal funds sold
|
|
|
1 506
|
|
|
|
1
|
|
0.07%
|
|
|
3 291
|
|
|
|
3
|
|
0.09%
|
|
|
4 049
|
|
|
|
7
|
|
0.17%
|
Other earning
assets
|
|
|
15 705
|
|
|
|
31
|
|
0.20%
|
|
|
10 668
|
|
|
|
21
|
|
0.20%
|
|
|
2 905
|
|
|
|
24
|
|
0.83%
|
Total earning
assets
|
|
|
275 118
|
|
|
$
|
12 705
|
|
4.62%
|
|
|
280 460
|
|
|
$
|
14 033
|
|
5.00%
|
|
|
278
970
|
|
|
$
|
15 011
|
|
5.38%
|
|
Allowance for loan
losses
|
|
|
(4 568
|
)
|
|
|
|
|
|
|
|
(5 335
|
)
|
|
|
|
|
|
|
|
(4 776
|
)
|
|
|
|
|
|
Cash and due from banks
|
|
|
1 687
|
|
|
|
|
|
|
|
|
1 862
|
|
|
|
|
|
|
|
|
6 850
|
|
|
|
|
|
|
Premises and equipment,
net
|
|
|
8 106
|
|
|
|
|
|
|
|
|
8 510
|
|
|
|
|
|
|
|
|
8 650
|
|
|
|
|
|
|
Other assets
|
|
|
19
416
|
|
|
|
|
|
|
|
|
18
501
|
|
|
|
|
|
|
|
|
15
045
|
|
|
|
|
|
|
Total assets
|
|
$
|
299 759
|
|
|
|
|
|
|
|
$
|
303 998
|
|
|
|
|
|
|
|
$
|
304 739
|
|
|
|
|
|
|
|
LIABILITIES AND
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and
interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing demand deposits
|
|
$
|
139 678
|
|
|
$
|
666
|
|
0.48%
|
|
$
|
126 035
|
|
|
$
|
838
|
|
0.66%
|
|
$
|
119 504
|
|
|
$
|
1 016
|
|
0.85%
|
Time
deposits
|
|
|
91 690
|
|
|
|
2
138
|
|
2.33%
|
|
|
109 902
|
|
|
|
3
134
|
|
2.85%
|
|
|
115 239
|
|
|
|
3
756
|
|
3.26%
|
Total interest-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing deposits
|
|
|
231 368
|
|
|
|
2 804
|
|
1.21%
|
|
|
235 937
|
|
|
|
3 972
|
|
1.68%
|
|
|
234 743
|
|
|
|
4 772
|
|
2.03%
|
|
Securities sold under
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to repurchase and
federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
funds
purchased
|
|
|
7 189
|
|
|
|
59
|
|
0.82%
|
|
|
8 372
|
|
|
|
84
|
|
1.00%
|
|
|
9 212
|
|
|
|
148
|
|
1.61%
|
Advances from FHLB and FRB
|
|
|
2
153
|
|
|
|
37
|
|
1.72%
|
|
|
3
333
|
|
|
|
87
|
|
2.61%
|
|
|
4
336
|
|
|
|
201
|
|
4.64%
|
Total interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
bearing liabilities
|
|
|
240 710
|
|
|
$
|
2 900
|
|
1.20%
|
|
|
247 642
|
|
|
$
|
4 143
|
|
1.67%
|
|
|
248 291
|
|
|
$
|
5 121
|
|
2.06%
|
|
Noninterest-bearing
demand
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
deposits
|
|
|
29 398
|
|
|
|
|
|
|
|
|
27 597
|
|
|
|
|
|
|
|
|
26 490
|
|
|
|
|
|
|
Other liabilities
|
|
|
2 484
|
|
|
|
|
|
|
|
|
1 979
|
|
|
|
|
|
|
|
|
3 692
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
27 167
|
|
|
|
|
|
|
|
|
26 780
|
|
|
|
|
|
|
|
|
26 266
|
|
|
|
|
|
|
Total liabilities and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stockholders equity
|
|
$
|
299 759
|
|
|
|
|
|
|
|
$
|
303 998
|
|
|
|
|
|
|
|
$
|
304 739
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
9 805
|
|
|
|
|
|
|
|
$
|
9 890
|
|
|
|
|
|
|
|
$
|
9
890
|
|
|
|
Net interest spread
|
|
|
|
|
|
|
|
|
3.42%
|
|
|
|
|
|
|
|
|
3.33%
|
|
|
|
|
|
|
|
|
3.32%
|
Interest expense as a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
percent of
average earning assets
|
|
|
|
|
|
|
1.05%
|
|
|
|
|
|
|
|
|
1.48%
|
|
|
|
|
|
|
|
|
1.84%
|
|
Net interest margin
|
|
|
|
|
|
|
|
|
3.56%
|
|
|
|
|
|
|
|
|
3.53%
|
|
|
|
|
|
|
|
|
3.55%
|
19
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.
Income
on
tax
exempt loans and securities are computed on a tax equivalent basis using a
federal tax rate of 34%.
|
|
2011 Compared to 2010
|
|
2010 Compared to 2009
|
|
|
(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
257
|
)
|
|
$
|
(881
|
)
|
|
$
|
(376
|
)
|
|
$
|
(884
|
)
|
|
$
|
(697
|
)
|
|
$
|
(187
|
)
|
Tax
exempt loans
|
|
|
(28
|
)
|
|
|
(46
|
)
|
|
|
18
|
|
|
|
9
|
|
|
|
20
|
|
|
|
(11
|
)
|
Taxable securities
|
|
|
(95
|
)
|
|
|
130
|
|
|
|
(225
|
)
|
|
|
(178
|
)
|
|
|
150
|
|
|
|
(328
|
)
|
Nontaxable securities
|
|
|
44
|
|
|
|
62
|
|
|
|
(18
|
)
|
|
|
82
|
|
|
|
77
|
|
|
|
5
|
|
Federal funds sold
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
Other
earning assets
|
|
|
10
|
|
|
|
9
|
|
|
|
1
|
|
|
|
(3
|
)
|
|
|
26
|
|
|
|
(29
|
)
|
TOTAL
|
|
$
|
(1 328
|
)
|
|
$
|
(727
|
)
|
|
$
|
(601
|
)
|
|
$
|
(978
|
)
|
|
$
|
(425
|
)
|
|
$
|
(553
|
)
|
|
INTEREST EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and
interest-bearing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
demand deposits
|
|
$
|
(172
|
)
|
|
$
|
80
|
|
|
$
|
(252
|
)
|
|
$
|
(178
|
)
|
|
$
|
54
|
|
|
$
|
(232
|
)
|
Time
deposits
|
|
|
(996
|
)
|
|
|
(474
|
)
|
|
|
(522
|
)
|
|
|
(622
|
)
|
|
|
(167
|
)
|
|
|
(455
|
)
|
Securities sold under
agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to repurchase and federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
funds purchased
|
|
|
(25
|
)
|
|
|
(11
|
)
|
|
|
(14
|
)
|
|
|
(64
|
)
|
|
|
(13
|
)
|
|
|
(51
|
)
|
Advances from FHLB and FRB
|
|
|
(50
|
)
|
|
|
(25
|
)
|
|
|
(25
|
)
|
|
|
(114
|
)
|
|
|
(39
|
)
|
|
|
(75
|
)
|
TOTAL
|
|
$
|
(1 243
|
)
|
|
$
|
(430
|
)
|
|
$
|
(813
|
)
|
|
$
|
(978
|
)
|
|
$
|
(165
|
)
|
|
$
|
(813
|
)
|
|
NET INTEREST INCOME
|
|
$
|
(85
|
)
|
|
$
|
(297
|
)
|
|
$
|
212
|
|
|
$
|
- -
|
|
|
$
|
(260
|
)
|
|
$
|
260
|
|
NONINTEREST
INCOME
Service charges on deposit accounts continue to be the largest single
contributor to the banks noninterest income. These fees totaled $1.8 million
for 2011, $1.9 million for 2010 and $2.2 million for 2009. The primary driver in
each of these years is overdraft and return check charges. Trust and financial
services income, generally the second largest single contributor to noninterest
income, increased in 2011 compared to 2010 due to an increase in market values,
an
increase
in new account activity and a fee increase in 2010. VISA/MC fees
increased 12% in 2011 compared to 2010 due to continuing consumer comfort with
electronic transactions and an increase in consumer spending throughout 2011.
The miscellaneous income increase was related to the termination of part of
other post-retirement benefits. All other non-interest income changed to varying
degrees, but no significant changes occurred in any one particular income
category.
|
|
2011
|
|
2010
|
|
2009
|
Trust and financial
services
|
|
$
|
894
|
|
$
|
842
|
|
$
|
758
|
Service charges on deposit
accounts
|
|
|
1 831
|
|
|
1 854
|
|
|
2 205
|
Visa/MC Fees
|
|
|
759
|
|
|
676
|
|
|
563
|
Cash surrender value of life
insurance
|
|
|
234
|
|
|
235
|
|
|
238
|
Miscellaneous
income
|
|
|
287
|
|
|
38
|
|
|
4
|
Gain on sale of securities
|
|
|
- -
|
|
|
- -
|
|
|
42
|
Other operating
income
|
|
|
363
|
|
|
431
|
|
|
471
|
Total Noninterest Income
|
|
$
|
4 368
|
|
$
|
4 076
|
|
$
|
4 281
|
20
NONINTEREST
EXPENSE
Salaries and
employee benefits of $5 million are about 38% of the total noninterest expense
for 2011, about a 10% decrease when compared to 2010. This decrease in salaries
and benefits as a percentage of total noninterest expense is due to the increase
in total noninterest expense. During the past few years, full utilization of
personnel has continued to allow the bank to hold down salaries and benefit
costs by holding down the increase in personnel.
Expenses related to premises have decreased and expenses related to
furniture and equipment has increased. The increase in furniture, fixture and
equipment expense is primarily caused by the outsourcing of our core banking
system and increases in general repairs and maintenance. During 2011,
accounting, audit and compliance expense increased 30%. Computer services
increased 80%. This too is related to costs of services now performed by an
outside vendor. The FDIC
assessment
has steadily decreased since 2009. The decrease is due to several factors:
including assessment base, and the size of the FDIC insurance fund in relation to total deposits in FDIC insured banks.
Total costs associated with real estate owned increased by $2.6
million from 2010 to 2011. These expenses include loss (gain) on sale of other
real estate, foreclosed property expense, and write down of other real estate.
Additional write downs of other real estate increased significantly due to
falling property values. The majority of the write down of other real estate
occurred in the third quarter of 2011.
The other operating expense category is the total of approximately 60
separate expense accounts. None of the account balances in this category exceed
1% of gross revenue of the company for any of the three years presented.
Increases are due to the growth in the banks customer base and some
inflationary increases.
|
2011
|
|
2010
|
|
2009
|
Salaries and employee
benefits
|
$
|
4 980
|
|
$
|
4 731
|
|
|
$
|
5 351
|
|
Net occupancy expense of
premises
|
|
629
|
|
|
648
|
|
|
|
570
|
|
Furniture and equipment
expenses
|
|
912
|
|
|
783
|
|
|
|
948
|
|
Accounting, audit and
compliance
|
|
189
|
|
|
145
|
|
|
|
194
|
|
Computer services and online
banking
|
|
331
|
|
|
184
|
|
|
|
91
|
|
Loss (gain) on sale of other real
estate
|
|
343
|
|
|
(223
|
)
|
|
|
(776
|
)
|
FDIC assessment
|
|
453
|
|
|
563
|
|
|
|
711
|
|
Printing, stationery and
supplies
|
|
195
|
|
|
182
|
|
|
|
207
|
|
Communications
|
|
187
|
|
|
183
|
|
|
|
184
|
|
Foreclosed property expense
|
|
551
|
|
|
677
|
|
|
|
1 272
|
|
Write down of other real
estate
|
|
2 182
|
|
|
17
|
|
|
|
303
|
|
ATM and check card expense
|
|
344
|
|
|
291
|
|
|
|
326
|
|
Other operating
expenses
|
|
1 660
|
|
|
1 583
|
|
|
|
1 678
|
|
Total
Noninterest Expenses
|
$
|
12 956
|
|
$
|
9 764
|
|
|
$
|
11 059
|
|
21
LOAN
PORTFOLIO
Loans at
December 31 (in thousands) for each of the five years in the period ended 2011.
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
Commercial, financial and
agricultural
|
$
|
8 361
|
|
$
|
7 920
|
|
$
|
9 700
|
|
$
|
9 671
|
|
$
|
4 987
|
Mortgage loans on real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and land
development
|
|
19 179
|
|
|
24 174
|
|
|
38 083
|
|
|
55 843
|
|
|
55 042
|
Secured
by farm land
|
|
598
|
|
|
792
|
|
|
1 419
|
|
|
1 380
|
|
|
1 328
|
Secured by 1-4 family
residential
|
|
92 856
|
|
|
97 537
|
|
|
102 290
|
|
|
101 253
|
|
|
98 864
|
Secured
by multifamily residential
|
|
3 088
|
|
|
1 976
|
|
|
2 070
|
|
|
1 937
|
|
|
1 749
|
Secured by nonfarm
nonresidential
|
|
76 882
|
|
|
79 615
|
|
|
71 916
|
|
|
63 943
|
|
|
47 726
|
Consumer loans
|
|
6 165
|
|
|
6 800
|
|
|
9 011
|
|
|
11 970
|
|
|
14 718
|
All other loans
|
|
116
|
|
|
436
|
|
|
222
|
|
|
457
|
|
|
193
|
|
$
|
207 245
|
|
$
|
219 250
|
|
$
|
234 711
|
|
$
|
246 454
|
|
$
|
224 607
|
Due in large part to the state of the real estate market and the
resulting economic conditions, the loan portfolio continued to decrease in 2011
compared to the balance at the end of 2010 as it did in 2010 compared to 2009.
Continued foreclosures, charge offs and a very tentative buyers market have all
contributed to the decline in loans.
The bank is projecting and thus has budgeted for an increase in loans
during 2012. The largest expected increase will be in the residential mortgage
and commercial loan portfolio with smaller increases in the other retail loan
portfolios.
There were no categories of loans that exceeded 10% of outstanding loans
at December 31, 2011 that were not disclosed in the table above.
REMAINING MATURITIES OF SELECTED LOANS
(in thousands)
|
Commercial,
|
|
Construction
|
|
Financial
and
|
|
and
land
|
At December 31, 2011
|
|
Agricultural
|
|
Development
|
Loans maturing within one year
|
$
|
4
806
|
|
$
|
6
019
|
Variable
rate loans due after one year through five years
|
|
125
|
|
|
626
|
Variable rate loans due after five years
|
|
96
|
|
|
2
980
|
Fixed rate
loans due after one year through five years
|
|
2 524
|
|
|
4 809
|
Fixed rate loans due after five years
|
|
810
|
|
|
4 745
|
Total
maturities
|
$
|
8 361
|
|
$
|
19
179
|
ALLOWANCE FOR LOAN LOSSES
The table shown below is an analysis of the companys allowance for loan
losses. Prior to 2008, 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. Beginning in 2008 with
the collapse of the economy and real estate market, both net charge offs and the
provision charges to operations increased significantly. Increases to the
allowance were made based on the increased risks assessed in the loan portfolio
as a result of the housing market conditions and the economic slowdown. During
2011, 2010,
and
2009 management has monitored the risk in the portfolio 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.
22
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
(in thousands)
|
Balance at beginning of
period
|
$
|
5 012
|
|
$
|
5 718
|
|
$
|
4 079
|
|
$
|
2 779
|
|
$
|
2 423
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
20
|
|
|
313
|
|
|
23
|
|
|
21
|
|
|
14
|
Real
estate construction
|
|
1
673
|
|
|
775
|
|
|
3 957
|
|
|
269
|
|
|
32
|
Real estate
mortgage
|
|
2
189
|
|
|
1 245
|
|
|
920
|
|
|
1 102
|
|
|
206
|
Consumer
|
|
172
|
|
|
293
|
|
|
383
|
|
|
441
|
|
|
252
|
Total charge-offs
|
|
4 054
|
|
|
2 626
|
|
|
5 283
|
|
|
1 833
|
|
|
504
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
30
|
|
|
25
|
|
|
5
|
|
|
- -
|
|
|
30
|
Real
estate construction
|
|
5
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Real estate
mortgage
|
|
17
|
|
|
95
|
|
|
2
|
|
|
17
|
|
|
- -
|
Consumer
|
|
131
|
|
|
201
|
|
|
225
|
|
|
182
|
|
|
152
|
Total recoveries
|
|
183
|
|
|
321
|
|
|
232
|
|
|
199
|
|
|
182
|
Net charge-offs
|
|
3 871
|
|
|
2 305
|
|
|
5 051
|
|
|
1 634
|
|
|
322
|
Additions charged to
operations
|
|
3 343
|
|
|
1 599
|
|
|
6 690
|
|
|
2 934
|
|
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of
period
|
$
|
4 484
|
|
$
|
5 012
|
|
$
|
5 718
|
|
$
|
4 079
|
|
$
|
2 779
|
Ratio of net charge-offs during the
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
average loans outstanding during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
period
|
|
1.84%
|
|
|
1.01%
|
|
|
2.11%
|
|
|
0.70%
|
|
|
0.14%
|
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following
table shows an allocation of the allowance among loan categories based upon
analysis of the loan portfolios composition, historical loan loss experience,
and other factors, and the ratio of the related outstanding loan balances to
total loans.
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
Allowance
|
|
% Loans
in
|
|
Allowance
|
|
% Loans
in
|
|
Allowance
|
|
% Loans
in
|
|
Allowance
|
|
% Loans
in
|
|
Allowance
|
|
% Loans
in
|
|
(in
|
|
Category
to
|
|
(in
|
|
Category
to
|
|
(in
|
|
Category
to
|
|
(in
|
|
Category
to
|
|
(in
|
|
Category
to
|
|
thousands)
|
|
Total Loans
|
|
thousands)
|
|
Total Loans
|
|
thousands)
|
|
Total Loans
|
|
thousands)
|
|
Total Loans
|
|
thousands)
|
|
Total Loans
|
Commercial,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financial
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
agricultural
|
$
|
156
|
|
4.03%
|
|
$
|
239
|
|
3.61%
|
|
$
|
425
|
|
4.13%
|
|
$
|
69
|
|
3.92%
|
|
$
|
35
|
|
2.22%
|
Mortgage loans
on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
real
estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and land
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
development
|
|
506
|
|
9.25%
|
|
|
2
022
|
|
11.03%
|
|
|
2
328
|
|
16.23%
|
|
|
2
182
|
|
26.63%
|
|
|
1
025
|
|
24.50%
|
Secured by
farm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land
|
|
17
|
|
.29%
|
|
|
166
|
|
.36%
|
|
|
107
|
|
.60%
|
|
|
76
|
|
.56%
|
|
|
9
|
|
.59%
|
Secured by
1-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
2
754
|
|
44.80%
|
|
|
1
666
|
|
44.49%
|
|
|
1
255
|
|
43.58%
|
|
|
845
|
|
39.38%
|
|
|
924
|
|
44.02%
|
Secured by
multi-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
family
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
residential
|
|
85
|
|
1.49%
|
|
|
25
|
|
.90%
|
|
|
20
|
|
.88%
|
|
|
16
|
|
.79%
|
|
|
13
|
|
.78%
|
Secured by
nonfarm
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
nonresidential
|
|
882
|
|
37.10%
|
|
|
859
|
|
36.31%
|
|
|
1
275
|
|
30.64%
|
|
|
727
|
|
23.67%
|
|
|
661
|
|
21.25%
|
Consumer
loans
|
|
84
|
|
2.98%
|
|
|
20
|
|
3.10%
|
|
|
146
|
|
3.84%
|
|
|
90
|
|
4.86%
|
|
|
111
|
|
6.55%
|
All other
loans
|
|
-
-
|
|
.06%
|
|
|
1
|
|
.20%
|
|
|
-
-
|
|
.10%
|
|
|
4
|
|
.19%
|
|
|
1
|
|
.09%
|
Unallocated
|
|
- -
|
|
- -
|
|
|
14
|
|
- -
|
|
|
162
|
|
- -
|
|
|
70
|
|
- -
|
|
|
- -
|
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4 484
|
|
100.00%
|
|
$
|
5 012
|
|
100.00%
|
|
$
|
5 718
|
|
100.00%
|
|
$
|
4 079
|
|
100.00%
|
|
$
|
2 779
|
|
100.00%
|
23
RISK ELEMENTS IN THE LOAN PORTFOLIO
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
(in thousands)
|
Nonperforming assets
|
|
Nonaccrual loans
(1)
|
$
|
7 243
|
|
$
|
2 233
|
|
$
|
3 819
|
|
$
|
2 669
|
|
$
|
1 584
|
Foreclosed properties
|
|
6
393
|
|
|
6
563
|
|
|
5
632
|
|
|
1
644
|
|
|
430
|
Total nonperforming assets
|
$
|
13 636
|
|
$
|
8 796
|
|
$
|
9 451
|
|
$
|
4 313
|
|
$
|
2 014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing
troubled
debt
restructures
(2)
|
$
|
9 078
|
|
$
|
7 321
|
|
$
|
3 345
|
|
$
|
- -
|
|
$
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans past due 90 days
accruing interest
|
$
|
204
|
|
$
|
- -
|
|
$
|
- -
|
|
$
|
1 263
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
to period end loans
|
|
2.16%
|
|
|
2.29%
|
|
|
2.44%
|
|
|
1.66%
|
|
|
1.24%
|
Nonperforming assets to period end loans
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
foreclosed properties, net
|
|
6.38%
|
|
|
3.90%
|
|
|
3.93%
|
|
|
1.74%
|
|
|
.89%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt
restructures to period end loans
|
|
4.38%
|
|
|
3.33%
|
|
|
1.43%
|
|
|
N/A
|
|
|
N/A
|
|
(1)
|
|
Currently there are 5
TDRs in non-performing assets with a balance of $2.9 million at December
31, 2011.
|
|
(2)
|
|
Within this amount are
two TDRs with balances totaling $107K and both are 30 or more days past
due at December 31, 2011.
|
Loans are
placed on nonaccrual status when the loan officer or collections officer who is
supervising a particular loan determines that it is no longer prudent for a loan
to continue to accrue interest, the loan is to be placed on nonaccrual status.
Generally it is the policy of this bank to stop accruing interest when
principal or interest is greater than 90 days past due based upon the loans
contractual terms, unless the loan is well secured and in the process of
collection. Furthermore, should the bank become aware of events which have
occurred or are expected to occur which causes doubt as to the full
collectability of principal or interest in the future, even though the loan is
currently less than 90 days past due, the loan is considered for nonaccrual
status.
In order to justify the continuation of the accrual of interest on a loan
which is greater than 90 days past due, the loan must be well secured and in the
process of collection. In order to determine whether the loan is well secured,
the loan officer shall obtain an appraisal of the collateral establishing a
value at least equal to principal and accrued interest for all loans with an
aggregate borrower liability to the bank greater than $100,000. For all loans
greater than 90 days past due which fall below this threshold, the bank may
complete its own appraisal or valuation of the collateral as long as its
methodology is documented and consistently applied. For a loan to be considered
in the process of collection, there must be corrective action contemplated by
the borrower, such as payment of all past due amounts, or the bank must be ready
to liquidate the underlying collateral within a relatively short time frame such
as 30 days.
Approval by the Chief Lending Officer or President is required of all
loans greater than 90 days past due which are not placed on nonaccrual status.
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.
24
The schedule below summarizes the carrying value
of the portfolio by maturity classifications and shows the weighted average yield in each group.
The
rates on the tax exempt obligations are computed on a tax equivalent basis using a federal tax rate of 34%.
|
|
2011
|
|
Weighted
|
|
2010
|
|
Weighted
|
|
2009
|
|
Weighted
|
|
|
Carrying Value
|
|
Average
|
|
Carrying Value
|
|
Average
|
|
Carrying Value
|
|
Average
|
|
|
(in
thousands)
|
|
Yield
|
|
(in
thousands)
|
|
Yield
|
|
(in
thousands)
|
|
Yield
|
Securities available for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one year
|
|
$
|
3 029
|
|
1.21%
|
|
$
|
4 587
|
|
3.01%
|
|
$
|
1 005
|
|
1.25%
|
Maturing after one year
but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
within five years
|
|
|
31
794
|
|
1.35%
|
|
|
31
701
|
|
1.65%
|
|
|
27
418
|
|
2.69%
|
Municipal
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing within one
year
|
|
|
332
|
|
4.80%
|
|
|
616
|
|
6.03%
|
|
|
|
|
-
-
|
Maturing after one year but
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
within five years
|
|
|
663
|
|
5.42%
|
|
|
671
|
|
5.09%
|
|
|
999
|
|
5.65%
|
Maturing after five
years
|
|
|
5
720
|
|
5.74%
|
|
|
4
237
|
|
6.09%
|
|
|
3
791
|
|
6.27%
|
Equity securities with no
stated maturity
|
|
|
793
|
|
.01%
|
|
|
878
|
|
.02%
|
|
|
1 100
|
|
.46%
|
Total securities available for sale
|
|
$
|
42 331
|
|
|
|
$
|
42 690
|
|
|
|
$
|
34 313
|
|
|
DEPOSITS
Deposits
decreased $4.3 million or 1.67% at December 31, 2011 compared to December 31, 2010. The net decrease was primarily in
interest-bearing deposits of $14.6 million offset by increases in non-interest bearing deposits of $10.4 million
.
Consistent
with the banks efforts to reduce deposit interest
expense as
noted in the table below the reduction within interest-bearing deposits was centered in
higher
rate time deposits. Partly offsetting the net decrease in deposits was a transfer of balances from securities sold under
agreements to repurchase for those balances under $250 thousand that now have FDIC insurance available and our ability by
law to now be able to pay interest on the accounts. Total transferred during 2011 was approximately $5
million
.
The banks noncore funding in the form of brokered deposits was $13 million and $14.9 million at December 31, 2011 and
2010, respectively. Included in these totals are brokered certificates of deposit through the banks participation in
the CDARS program of $6.7 million at December 31, 2011 and $7.5 million at December 31, 2010. Also included in brokered
deposits are brokered money market ICS of $4.7 million and $126 thousand as of December 31, 2011 and 2010,
respectively. Both of these programs allow for us to place our own customer funds over $250 thousand on a reciprocal basis
with other institutions. The banks market share percentage decreased slightly in both Jefferson and Berkeley county as
of June 30, 2011 compared to June 30, 2010. We have 30.98% of the total deposits in Jefferson County compared to 31.41% in
2010 and 4.48% of the total deposits in Berkeley County compared to 4.94% in 2010.
Schedule of Average Deposits and
Average Rates Paid
|
Year Ended December 31
|
|
(average balances in
thousands)
|
|
2011
|
|
2010
|
|
2009
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Average
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
|
Balance
|
|
Rate
|
Noninterest-bearing demand deposits
|
$
|
29 398
|
|
|
|
$
|
27 597
|
|
|
|
$
|
26 490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits
|
|
87
063
|
|
0.50%
|
|
|
85
654
|
|
0.73%
|
|
|
80
842
|
|
0.94%
|
Savings
deposits
|
|
52 615
|
|
0.44%
|
|
|
40 381
|
|
0.53%
|
|
|
38 662
|
|
0.65%
|
Time
deposits
|
|
91 690
|
|
2.33%
|
|
|
109 902
|
|
2.85%
|
|
|
115 239
|
|
3.26%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest-bearing deposits
|
|
231 368
|
|
1.21%
|
|
|
235 937
|
|
1.68%
|
|
|
234 743
|
|
2.03%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
deposits
|
$
|
260 766
|
|
|
|
$
|
263 534
|
|
|
|
$
|
261 233
|
|
|
25
At December
31, 2011, time deposits of $100 thousand or more were 13.29% of total deposits
compared with 17.50% at December 31, 2010. Maturities of time deposits of $100
thousand or more (in thousands) at December 31, 2011 are as follows:
Within three
months
|
$
|
8 456
|
Over three through six months
|
|
3 566
|
Over six months through
twelve months
|
|
2 603
|
Over twelve months
|
|
19
010
|
|
|
|
Total
|
$
|
33
635
|
ANALYSIS OF
CAPITAL
The adequacy of the companys capital is reviewed by management on an
ongoing basis in terms of the size, composition, and quality of the companys
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. All
capital ratios are within the regulatory guidelines for a well capitalized
institution as noted below.
|
2011
|
|
2010
|
|
2009
|
|
(In
thousands)
|
Tier 1
capital:
|
|
|
|
|
|
|
|
|
Common
stock
|
$
|
3 672
|
|
$
|
3 672
|
|
$
|
3 672
|
Surplus
|
|
3
943
|
|
|
3
932
|
|
|
3
898
|
Retained
earnings
|
|
22 648
|
|
|
23 725
|
|
|
21 931
|
|
|
30
263
|
|
|
31
329
|
|
|
29
501
|
Less:
|
|
|
|
|
|
|
|
|
Cost of shares acquired for the treasury
|
|
2
866
|
|
|
2
866
|
|
|
2
866
|
Disallowed deferred tax asset
|
|
2 555
|
|
|
398
|
|
|
- -
|
|
|
|
|
|
|
|
|
|
Total Tier 1
capital
|
$
|
24
842
|
|
$
|
28
065
|
|
$
|
26
635
|
Tier 2
capital:
|
|
|
|
|
|
|
|
|
Allowance for loan
losses (1)
|
|
2 645
|
|
|
2 733
|
|
|
2 893
|
|
|
|
|
|
|
|
|
|
Total
risk-based capital
|
$
|
27 487
|
|
$
|
30 798
|
|
$
|
29 528
|
|
|
|
|
|
|
|
|
|
Risk-weighted assets
|
$
|
209 774
|
|
$
|
216 322
|
|
$
|
228
607
|
|
|
|
|
|
|
|
|
|
Capital
ratios:
|
|
|
|
|
|
|
|
|
Tier 1 risk-based
capital ratio
|
|
11.84%
|
|
|
12.97%
|
|
|
11.65%
|
Total risk-based
capital ratio
|
|
13.10%
|
|
|
14.24%
|
|
|
12.92%
|
Leverage
ratio
|
|
8.56%
|
|
|
9.36%
|
|
|
8.75%
|
(1)
|
|
Limited to 1.25% of gross
risk-weighted assets.
|
26
LIQUIDITY
Liquidity is a
measure of the Banks ability to respond to sudden changes in funding needs or
funding sources. Examples of sudden changes could involve a sudden increase in
loan demand, a funding need, or it might involve a large decrease in deposited
funds, a funding source. The role of cash management is to manage assets and
liabilities so that the Bank can respond to such fluctuations in sources and
uses of cash. Management spends much of its time assessing our liquidity
position.
Management is informed of the liquidity information via reports and
committee discussion. The
President
is provided a weekly dashboard report of
our liquidity information. The Asset/Liability Committee reviews and discusses
our liquidity position on a quarterly basis. The committee has set a benchmark
minimum liquidity ratio of 15%. Management
implemented a
strategy to
free up some pledged assets for liquidity purposes
during 2011.
Public funds are required to have collateral pledged against their
balances above the FDIC insurance limits. Generally the bank has pledged
securities or obtained letters of credit from the Federal Home Loan Bank of
Pittsburgh to cover public funds. Two additional strategies to cover these funds
are
now
being
used
. In the case of public funds in the form of CDs, the bank
is utilizing the CDARS network to insure their funds. We are also using the
Insured Cash Sweep (ICS) product to secure public funds. Both of the programs
provide complete coverage through FDIC insurance. Most importantly, the
securities that had been pledged against the public funds can be used as a
source of cash if the need would arise. The securities are effectively converted
from a non liquid asset to a liquid asset.
Liquid assets of the company include cash and due from banks, securities
purchased under agreements to resell, federal funds sold, securities available
for sale, and loans and investments maturing within one year. The companys
statement of cash flows details this liquidity since January 1, 2011.
Operating Activities.
The companys net income usually provides
cash from the banks 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 2011, the net income as
adjusted has provided cash of
$4.5
million. Interest income earned on loans and
investment securities is the companys 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.
We
have
taken advantage of our noncore funding capabilities since deposit growth is
not always sufficient. The net amount of cash provided by investing activities
in 2011 is
$5.9
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 companys common stock
for the treasury and repayment of any noncore funding. The net amount of cash
used in financing activities in
2011
is $9.5 million.
At December 31, 2011, cash and due from banks, interest-bearing deposits
in financial
institutions, federal
funds sold and loans and securities maturing within one year were $33.4
million.
Noncore funding capabilities, including
borrowings
, 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
July 2009 the subsidiary bank
secured a credit line with the Federal Reserve discount window. At December 31,
2011, the subsidiary bank has total credit available through these institutions
of approximately
$87.2
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.
27
The companys
exposure to credit loss in the event of nonperformance by the borrowers 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 amount of the companys exposure to off-balance-sheet
risk as of December 31, 2011 and 2010 is as follows (in thousands):
|
2011
|
|
2010
|
Financial instruments
whose
|
|
|
|
|
|
amounts represent
credit risk:
|
|
|
|
|
|
Commitments to extend credit
|
$
|
27 466
|
|
$
|
28 050
|
Standby letters of credit
|
|
2 382
|
|
|
2
225
|
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The company evaluates each customers credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the company upon extension of credit, is based on managements
credit evaluation of the borrower. Collateral held varies but typically is cash
or real estate.
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 contains a specified
maturity date.
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, 2011, the company had no rate lock commitments to
originate mortgage loans.
Short-Term Borrowings.
At
December 31, 2011 and 2010, short-term borrowings consist of securities sold
under agreements to repurchase that are secured transactions with customers. The
total of short-term borrowings was $3.4 million on December 31, 2011 and $7.4
million on December 31, 2010.
The table below presents selected information on these short-term
borrowings (in thousands):
|
December 31
|
|
2011
|
|
2010
|
Balance outstanding at
year end
|
$
|
3 415
|
|
$
|
7 382
|
Maximum balance at any month-end during the
year
|
$
|
10 339
|
|
$
|
10 023
|
Average balance for the
year
|
$
|
7 189
|
|
$
|
8 372
|
Weighted average rate for the year
|
|
0.82%
|
|
|
1.00%
|
Weighted average rate at
year end
|
|
0.75%
|
|
|
1.00%
|
Estimated fair value
|
$
|
3 415
|
|
$
|
7
382
|
Contractual Obligations.
The
table below presents the contractual obligations of the company as of December
31, 2011:
|
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
|
$
|
1 523
|
|
$
|
1 215
|
|
$
|
308
|
|
$
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Obligations for Real Estate
|
$
|
71
|
|
$
|
40
|
|
$
|
31
|
|
$
|
- -
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
Obligations for Equipment
|
$
|
98
|
|
$
|
29
|
|
$
|
59
|
|
$
|
10
|
28
Item 7A. Quantitative and
Qualitative Disclosures About Market Risk.
Market risk is
the risk of loss arising from adverse changes in the fair value of financial
instruments due to changes in interest rates, exchange rates and equity prices.
The companys market risk is composed primarily of interest rate risk. The
companys Asset and Liability Management Committee (ALCO) is responsible for
reviewing the interest rate sensitivity position and establishing policies to
monitor and limit exposure to this risk. The Board of Directors reviews and
approves the guidelines established by ALCO.
Interest rate risk is monitored through the use of three complimentary
modeling tools: static gap analysis, earnings simulation modeling and economic
value simulation (net present value estimation). Each of these models measure
changes in a variety of interest rate scenarios. While each of the interest rate
risk measures has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the company, the
distribution of risk along the yield curve, the level of risk through time, and
the amount of exposure to changes in certain interest rate relationships. Static
gap, which measures aggregate repricing values, is less utilized since it does
not effectively measure the investment options risk impact on the company and is
not addressed here. But earnings simulation and economic value models, which
more effectively measure the cash flow impacts, are utilized by management on a
regular basis and are explained below.
Earnings Simulation Analysis
Management uses simulation analysis to measure the sensitivity of net
income to change in interest rates. The model calculates an earnings estimate
based on current and projected balances and rates. This method is subject to the
accuracy of the assumptions that underlie the process, but it provides a better
analysis of the sensitivity of earnings to changes in interest rates than other
analysis such as the static gap analysis.
Assumptions used in this model, including loan and deposit growth rates,
are derived from seasonal trends, economic forecasts and managements outlook,
as are the assumptions used to project yields and rates for new loans and
deposits. Maturities, calls and prepayments in the securities portfolio are
assumed to be reinvested in like instruments. Mortgage loans and mortgage backed
securities prepayment assumptions are based on industry estimates of repayment
speeds for portfolios with similar coupon ranges and seasoning. Different
interest rate scenarios and yield curves are used to measure the sensitivity of
earnings to changing interest rates. Interest rates on different asset and
liability accounts move differently when the prime rate changes and are
accounted for in the different rate scenarios.
The most likely scenario represents the rate environment as management
forecasts it to occur. From this base, rate shocks in 100 basis point increments
are applied to see the impact on the companys earnings. The following tables
represent the interest rate sensitivity on net income (fully tax equivalent
basis) for the company using different rate scenarios as of December 31,
2011:
One Year
Simulation
|
|
|
|
% Change in
|
Change in Yield Curve
|
|
Net
Interest Income
|
+
|
200 basis points
|
|
|
+
|
7.8%
|
|
+
|
100 basis points
|
|
|
+
|
4.4%
|
|
|
Most likely
|
|
|
|
0
|
|
-
|
100 basis points
|
|
|
-
|
1.5%
|
|
-
|
200 basis points
|
|
|
-
|
4.0%
|
|
Two Year
Simulation
|
|
|
|
% Change in
|
Change in Yield
Curve
|
|
Net Interest
Income
|
+
|
200 basis points
|
|
|
+
|
12.1%
|
|
+
|
100
basis points
|
|
|
+
|
6.8%
|
|
|
Most likely
|
|
|
|
0
|
|
-
|
100
basis points
|
|
|
-
|
4.4%
|
|
-
|
200 basis points
|
|
|
-
|
9.7%
|
|
29
Economic Value Simulation
Economic value
simulation is used to calculate the estimated fair value of assets and
liabilities over different interest rate environments. Economic values are
calculated based on discounted cash flow analysis. The economic value of equity
is the economic value of all assets minus the economic value of all liabilities.
The change in economic value of equity over different rate environments is an
indication of the longer term repricing risk in the balance sheet. The same
assumptions are used in the economic value simulation as in the earnings
simulation.
The following chart reflects the change in net market value over
different rate environments as of December 31, 2011:
|
|
|
Change in Economic Value of
Equity
|
Change in Yield
Curve
|
|
(dollars in
thousands)
|
+
|
200 basis points
|
|
|
$
|
-
|
1,344
|
|
+
|
100
basis points
|
|
|
$
|
-
|
303
|
|
|
Most likely
|
|
|
$
|
|
0
|
|
-
|
100
basis points
|
|
|
$
|
+
|
614
|
|
-
|
200 basis points
|
|
|
$
|
+
|
1,477
|
|
30
Item 8. Financial Statements and
Supplementary Data.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders
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, 2011 and 2010, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for the years ended
December 31, 2011, 2010 and 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. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the 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,
2011 and 2010, and the results of their operations and their cash flows for the
years ended December 31, 2011, 2010 and 2009, in conformity with U.S. generally
accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
March
29
,
2012
31
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2011 and 2010
($ in thousands, except per share
data)
|
|
2011
|
|
2010
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and due from
banks
|
|
$
|
1 485
|
|
|
$
|
2 185
|
|
Interest-bearing deposits in other financial
institutions
|
|
|
11 445
|
|
|
|
7 995
|
|
Federal funds
sold
|
|
|
794
|
|
|
|
2 725
|
|
Securities available for sale, at fair
value
|
|
|
42 331
|
|
|
|
42 690
|
|
Loans held for
sale
|
|
|
198
|
|
|
|
76
|
|
Loans, net of allowance for loan losses of
$4,484
|
|
|
|
|
|
|
|
|
in 2011
and $5,012 in 2010
|
|
|
202 761
|
|
|
|
214 238
|
|
Premises and equipment,
net
|
|
|
7 923
|
|
|
|
8 270
|
|
Other real estate owned, net of valuation
allowance
|
|
|
|
|
|
|
|
|
of
$2,197 in 2011 and $95 in 2010
|
|
|
6 393
|
|
|
|
6 563
|
|
Accrued interest
receivable
|
|
|
832
|
|
|
|
960
|
|
Bank owned life insurance
|
|
|
6 932
|
|
|
|
6 397
|
|
Federal Home Loan Bank of
Pittsburgh stock
|
|
|
808
|
|
|
|
765
|
|
Other assets
|
|
|
5
491
|
|
|
|
4
745
|
|
|
Total Assets
|
|
$
|
287
393
|
|
|
$
|
297
609
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
37 050
|
|
|
$
|
26 695
|
|
Interest-bearing
|
|
|
216 067
|
|
|
|
230 727
|
|
Total Deposits
|
|
|
253 117
|
|
|
|
257 422
|
|
Securities sold under agreements to repurchase
|
|
|
3 415
|
|
|
|
7 382
|
|
Federal Home Loan Bank advances
|
|
|
1 523
|
|
|
|
2 717
|
|
Accrued interest payable
|
|
|
204
|
|
|
|
361
|
|
Other liabilities
|
|
|
3 669
|
|
|
|
2 951
|
|
Total Liabilities
|
|
$
|
261 928
|
|
|
$
|
270 833
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $1 per share par value; 5,000,000 shares
|
|
|
|
|
|
|
|
|
authorized; 3,671,691 shares issued
|
|
$
|
3 672
|
|
|
$
|
3 672
|
|
Surplus
|
|
|
3 943
|
|
|
|
3 932
|
|
Undivided profits
|
|
|
22 648
|
|
|
|
23 725
|
|
Accumulated other
comprehensive (loss), net
|
|
|
(1 932
|
)
|
|
|
(1 687
|
)
|
|
|
$
|
28 331
|
|
|
$
|
29 642
|
|
Less cost of shares acquired for the treasury, 281,513 shares
|
|
|
2 866
|
|
|
|
2 866
|
|
Total Stockholders Equity
|
|
$
|
25 465
|
|
|
$
|
26 776
|
|
|
Total Liabilities and Stockholders Equity
|
|
$
|
287
393
|
|
|
$
|
297
609
|
|
See Notes to Consolidated Financial
Statements.
32
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
OPERATIONS
Years Ended December 31,
2011, 2010 and 2009
($ in thousands, except per share data)
|
|
2011
|
|
2010
|
|
2009
|
Interest and Dividend
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
11 648
|
|
|
$
|
12 923
|
|
|
$
|
13 801
|
|
Interest on
securities available for sale - taxable
|
|
|
660
|
|
|
|
755
|
|
|
|
933
|
|
Interest on securities available for sale - nontaxable
|
|
|
231
|
|
|
|
202
|
|
|
|
148
|
|
Interest on federal
funds sold
|
|
|
1
|
|
|
|
3
|
|
|
|
7
|
|
Other
interest and dividends
|
|
|
31
|
|
|
|
21
|
|
|
|
24
|
|
Total Interest and Dividend Income
|
|
|
12 571
|
|
|
|
13 904
|
|
|
|
14 913
|
|
|
Interest
Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
|
2 804
|
|
|
|
3 972
|
|
|
|
4 772
|
|
Interest on
securities sold under agreements to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
|
and federal funds purchased
|
|
|
59
|
|
|
|
84
|
|
|
|
148
|
|
Interest on Federal Home Loan Bank and Federal Reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank advances
|
|
|
37
|
|
|
|
87
|
|
|
|
201
|
|
Total Interest Expense
|
|
|
2 900
|
|
|
|
4 143
|
|
|
|
5 121
|
|
|
Net Interest Income
|
|
|
9 671
|
|
|
|
9 761
|
|
|
|
9 792
|
|
|
Provision for Loan
Losses
|
|
|
3 343
|
|
|
|
1 599
|
|
|
|
6 690
|
|
|
Net Interest Income after Provision
|
|
|
|
|
|
|
|
|
|
|
|
|
for Loan Losses
|
|
|
6 328
|
|
|
|
8 162
|
|
|
|
3 102
|
|
|
Noninterest
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust
and financial services
|
|
|
894
|
|
|
|
842
|
|
|
|
758
|
|
Service charges on
deposit accounts
|
|
|
1 831
|
|
|
|
1 854
|
|
|
|
2 205
|
|
Visa/MC
Fees
|
|
|
759
|
|
|
|
676
|
|
|
|
563
|
|
Cash surrender value
of life insurance
|
|
|
234
|
|
|
|
235
|
|
|
|
238
|
|
Miscellaneous income
|
|
|
287
|
|
|
|
38
|
|
|
|
4
|
|
Gain on sale of
securities
|
|
|
- -
|
|
|
|
- -
|
|
|
|
42
|
|
Other
operating income
|
|
|
363
|
|
|
|
431
|
|
|
|
471
|
|
Total Noninterest Income
|
|
|
4 368
|
|
|
|
4 076
|
|
|
|
4 281
|
|
|
Noninterest
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
4 980
|
|
|
|
4 731
|
|
|
|
5 351
|
|
Net occupancy
expense of premises
|
|
|
629
|
|
|
|
648
|
|
|
|
570
|
|
Furniture and equipment expenses
|
|
|
912
|
|
|
|
783
|
|
|
|
948
|
|
Accounting, audit
and compliance
|
|
|
189
|
|
|
|
145
|
|
|
|
194
|
|
Computer services and online banking
|
|
|
331
|
|
|
|
184
|
|
|
|
91
|
|
Loss (gain) on sale
of other real estate
|
|
|
343
|
|
|
|
(223
|
)
|
|
|
(776
|
)
|
FDIC
assessment
|
|
|
453
|
|
|
|
563
|
|
|
|
711
|
|
Printing, stationery
and supplies
|
|
|
195
|
|
|
|
182
|
|
|
|
207
|
|
Communications
|
|
|
187
|
|
|
|
183
|
|
|
|
184
|
|
Foreclosed property
expense
|
|
|
551
|
|
|
|
677
|
|
|
|
1 272
|
|
Write
down of other real estate
|
|
|
2 182
|
|
|
|
17
|
|
|
|
303
|
|
ATM and check card
expense
|
|
|
344
|
|
|
|
291
|
|
|
|
326
|
|
Other
operating expenses
|
|
|
1
660
|
|
|
|
1
583
|
|
|
|
1
678
|
|
Total Noninterest Expenses
|
|
|
12 956
|
|
|
|
9 764
|
|
|
|
11 059
|
|
(Loss) Income Before Income Tax (Benefit) Expense
|
|
|
(2 260
|
)
|
|
|
2 474
|
|
|
|
(3 676
|
)
|
Income Tax (Benefit)
Expense
|
|
|
(1 250
|
)
|
|
|
680
|
|
|
|
(1 436
|
)
|
Net (Loss) Income
|
|
$
|
(1 010
|
)
|
|
$
|
1 794
|
|
|
$
|
(2 240
|
)
|
(Loss) Earnings Per Share,
basic and diluted
|
|
$
|
(.30
|
)
|
|
$
|
.53
|
|
|
$
|
(.66
|
)
|
See Notes to Consolidated Financial
Statements.
33
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2011, 2010 and
2009
($ 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
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income 2010
|
|
|
-
-
|
|
|
-
-
|
|
|
1
794
|
|
|
|
-
-
|
|
|
|
-
-
|
|
|
$
|
1
794
|
|
|
|
1
794
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
losses arising during
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the period (net of
tax, $143)
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
(276
|
)
|
|
|
(276
|
)
|
|
|
(276
|
)
|
Change in benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations and plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets for pension and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other postretirement
benefits (net of
tax, $178)
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(348
|
)
|
|
|
(348
|
)
|
|
|
(348
|
)
|
Total other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(624
|
)
|
|
|
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1 170
|
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
- -
|
|
|
34
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
|
|
|
|
34
|
|
Balances, December 31, 2010
|
|
$
|
3 672
|
|
$
|
3 932
|
|
$
|
23 725
|
|
|
$
|
(2 866
|
)
|
|
$
|
(1 687
|
)
|
|
|
|
|
|
$
|
26 776
|
|
See Notes to Consolidated Financial
Statements.
34
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY (CONTINUED)
Years Ended December 31, 2011,
2010 and 2009
($ in thousands,
except per
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
Undivided
|
|
Treasury
|
|
Comprehensive
|
|
Comprehensive
|
|
|
|
|
|
|
Stock
|
|
Surplus
|
|
Profits
|
|
Stock
|
|
(Loss)
|
|
Income
(Loss)
|
|
Total
|
Balances, December 31, 2010
|
|
$
|
3
672
|
|
$
|
3
932
|
|
$
|
23
725
|
|
|
$
|
(2
866
|
)
|
|
$
|
(1
687
|
)
|
|
|
|
|
|
$
|
26
776
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss 2011
|
|
|
- -
|
|
|
- -
|
|
|
(1 010
|
)
|
|
|
- -
|
|
|
|
- -
|
|
|
$
|
(1 010
|
)
|
|
|
(1 010
|
)
|
Other comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
arising during the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period (net of
tax, $157)
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
|
- -
|
|
|
|
304
|
|
|
|
304
|
|
|
|
304
|
|
Change in benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations and plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
assets for pension and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other postretirement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefits (net of
tax, $283)
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
(549
|
)
|
|
|
(549
|
)
|
|
|
(549
|
)
|
Total other comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245
|
)
|
|
|
|
|
Total comprehensive
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1 255
|
)
|
|
|
|
|
Stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
|
|
|
- -
|
|
|
11
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
|
|
|
|
11
|
|
Cash dividends
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($.02 per share)
|
|
|
- -
|
|
|
- -
|
|
|
(67
|
)
|
|
|
- -
|
|
|
|
- -
|
|
|
|
|
|
|
|
(67
|
)
|
Balances, December
31, 2011
|
|
$
|
3 672
|
|
$
|
3 943
|
|
$
|
22 648
|
|
|
$
|
(2 866
|
)
|
|
$
|
(1 932
|
)
|
|
|
|
|
|
$
|
25 465
|
|
See Notes to Consolidated Financial
Statements.
35
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2011, 2010 and 2009
($ in
thousands)
|
|
2011
|
|
2010
|
|
2009
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1
010
|
)
|
|
$
|
1
794
|
|
|
$
|
(2
240
|
)
|
Adjustments to reconcile net (loss) income to net cash provided
by
|
|
|
|
|
|
|
|
|
|
|
|
|
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
3
343
|
|
|
|
1
599
|
|
|
|
6
690
|
|
Depreciation
|
|
|
477
|
|
|
|
550
|
|
|
|
573
|
|
Deferred tax (benefit) expense
|
|
|
(1
197
|
)
|
|
|
494
|
|
|
|
(609
|
)
|
Premium amortization on securities, net
|
|
|
268
|
|
|
|
214
|
|
|
|
129
|
|
Write down of other real estate
|
|
|
2
182
|
|
|
|
17
|
|
|
|
303
|
|
Gain on sale of securities
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(42
|
)
|
Loss (gain) on sale of other real estate
|
|
|
343
|
|
|
|
(223
|
)
|
|
|
(776
|
)
|
Loss on disposal of premises and equipment
|
|
|
- -
|
|
|
|
5
|
|
|
|
4
|
|
Stock-based compensation expense
|
|
|
11
|
|
|
|
34
|
|
|
|
47
|
|
Proceeds from sale of loans for sale
|
|
|
968
|
|
|
|
3 845
|
|
|
|
8 703
|
|
Origination of loans
held
for sale
|
|
|
(1
090
|
)
|
|
|
(3
824
|
)
|
|
|
(8
471
|
)
|
Change in cash surrender value of
bank
owned life
insurance
|
|
|
(234
|
)
|
|
|
(235
|
)
|
|
|
(238
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in accrued interest receivable
|
|
|
128
|
|
|
|
(8
|
)
|
|
|
156
|
|
(Increase) decrease in other assets
|
|
|
535
|
|
|
|
783
|
|
|
|
(1 176
|
)
|
Decrease in accrued interest payable
|
|
|
(157
|
)
|
|
|
(44
|
)
|
|
|
(76
|
)
|
(Decrease)
increase
in
other liabilities
|
|
|
(115
|
)
|
|
|
118
|
|
|
|
(1 901
|
)
|
Net cash provided by operating activities
|
|
$
|
4 452
|
|
|
$
|
5 119
|
|
|
$
|
1 076
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from maturity of
securities available for sale
|
|
$
|
5
110
|
|
|
$
|
1
000
|
|
|
$
|
5
645
|
|
Proceeds from call of securities available for sale
|
|
|
30 046
|
|
|
|
28 545
|
|
|
|
18 000
|
|
Proceeds from sale of
securities available for sale
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
3
042
|
|
Purchases of securities available for sale
|
|
|
(34 604
|
)
|
|
|
(38 555
|
)
|
|
|
(32 594
|
)
|
Net decrease (increase) in
loans
|
|
|
2
977
|
|
|
|
9
565
|
|
|
|
(2
728
|
)
|
Purchases of premises and equipment
|
|
|
(130
|
)
|
|
|
(99
|
)
|
|
|
(1 288
|
)
|
Purchases
of bank owned life
insurrance
|
|
|
(301
|
)
|
|
|
- -
|
|
|
|
- -
|
|
Proceeds from sale of other real estate
|
|
|
2 802
|
|
|
|
2 849
|
|
|
|
5 602
|
|
Net cash provided by (used in)
investing activities
|
|
$
|
5 900
|
|
|
$
|
3 305
|
|
|
$
|
(4 321
|
)
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in
noninterest-bearing deposits
|
|
$
|
10
355
|
|
|
$
|
(1
258
|
)
|
|
$
|
2
484
|
|
Net
(decrease) increase in interest-bearing deposits
|
|
|
(14 660
|
)
|
|
|
(5 787
|
)
|
|
|
7 895
|
|
Net (repayment) proceeds of
securities sold under agreements to repurchase
|
|
|
(3
967
|
)
|
|
|
42
|
|
|
|
(1
012
|
)
|
Net
repayment of Federal Home Loan Bank advances
|
|
|
(1 194
|
)
|
|
|
(1 139
|
)
|
|
|
(920
|
)
|
Purchase of treasury
shares
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
(29
|
)
|
Cash
dividends
|
|
|
(67
|
)
|
|
|
- -
|
|
|
|
(899
|
)
|
Net cash (used in) provided by financing
activities
|
|
$
|
(9 533
|
)
|
|
$
|
(8 142
|
)
|
|
$
|
7 519
|
|
|
Increase in cash and cash
equivalents
|
|
$
|
819
|
|
|
$
|
282
|
|
|
$
|
4 274
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
12 905
|
|
|
|
12 623
|
|
|
|
8 349
|
|
Ending
|
|
$
|
13
724
|
|
|
$
|
12
905
|
|
|
$
|
12
623
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
3 057
|
|
|
$
|
4 187
|
|
|
$
|
5 197
|
|
Income taxes
|
|
$
|
- -
|
|
|
$
|
720
|
|
|
$
|
41
|
|
|
SUPPLEMENTAL DISCLOSURES OF
NON-CASH
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on securities available for sale
|
|
$
|
461
|
|
|
$
|
(419
|
)
|
|
$
|
(83
|
)
|
Change in benefit obligations and plan assets for pension
|
|
|
|
|
|
|
|
|
|
|
|
|
and other postretirement benefits
|
|
$
|
(832
|
)
|
|
$
|
(526
|
)
|
|
$
|
1 430
|
|
Loans transferred to other real estate owned
|
|
$
|
5 157
|
|
|
$
|
3 574
|
|
|
$
|
8 814
|
|
Loans made on sale of other real estate owned
|
|
$
|
249
|
|
|
$
|
695
|
|
|
$
|
1 568
|
|
See Notes to Consolidated Financial
Statements.
36
POTOMAC BANCSHARES, INC. AND
SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Banking Activities and
Significant Accounting Policies
Potomac
Bancshares, Inc., and subsidiary (collectively the company), through Bank of
Charles Town, (the bank) a wholly owned subsidiary of Potomac Bancshares, Inc.,
grants commercial, financial, agricultural, residential and consumer loans to
customers, primarily in Jefferson, Berkeley and Morgan Counties of West
Virginia; Clarke, Frederick and Loudoun Counties of Virginia and Washington and
Frederick Counties of Maryland. The loan portfolio, while having a higher
concentration of real estate loans, is diversified among a large number of
borrowers 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 company
also offers deposit products to the same primary market area as loans. These
products include noninterest-bearing and interest bearing checking accounts,
savings accounts and certificates of deposit in various terms.
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, include the accounts of both
companies. All material intercompany balances and transactions have been
eliminated in consolidation.
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, fair value determination and the pension benefit obligation.
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
managements intent. Currently all debt securities of the company are classified
as available for sale. All equity securities, except investment in FHLB are
classified as available for sale. FHLB stock is classified as restricted and
carried at cost. 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 not
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.
37
Note 1. Nature of Banking Activities and
Significant Accounting Policies (Continued)
Securities (Continued)
For equity
securities, impairment is considered to be other-than-temporary based on the
companys 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 includes 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 companys debtors to honor their contracts is dependent upon
customers recurring income or income derived from collateral securing the loan,
real estate and general economic conditions of the companys market area.
Loans that
management has the intent and ability to hold for the foreseeable future or
until maturity or pay-off, generally, are reported at their recorded investment,
which is the outstanding unpaid principal balance adjusted for the allowance for
loan losses and any deferred fees or costs on the originated loan. 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.
Loans are
placed on nonaccrual status when the loan officer or collections officer who is
supervising a particular loan determines that it is no longer prudent for a loan
to continue to accrue interest, the loan is to be placed on nonaccrual status.
Generally it is
the policy of this bank to stop accruing interest when principal or interest is
greater than 90 days past due based upon the loans contractual terms, unless
the loan is well secured and in the process of collection. Furthermore, should
the bank become aware of events which have occurred or are expected to occur
which causes doubt as to the full collectability of principal or interest in the
future, even though the loan is currently less than 90 days past due, the loan
should be considered for nonaccrual status.
In order to
justify the continuation of the accrual of interest on a loan which is greater
than 90 days past due, the loan must be well secured and in the process of
collection. In order to determine whether the loan is well secured, the loan
officer shall obtain an appraisal of the collateral establishing a value at
least equal to principal and accrued interest for all loans with an aggregate
borrower liability to the bank greater than $100,000. For all loans greater than
90 days past due which fall below this threshold, the bank may complete its own
appraisal or valuation of the collateral as long as its methodology is
documented and consistently applied. For a loan to be considered in the process
of collection, there must be corrective action contemplated by the borrower,
such as payment of all past due amounts, or the bank must be ready to liquidate
the underlying collateral within a relatively short time frame such as 30
days.
All interest
accrued but not collected for all classes of loans that are placed on nonaccrual
or charged-off is reversed against interest income. If the ultimate repayment of
principal, in whole or in part, is not expected, any payment received on a loan
on which the accrual of interest has been suspended is applied to reduce
principal to the extent necessary to restore the expectation of ultimate
collectability. At such time as full collection of the remaining recorded
balance is expected, interest payments are recorded as interest income on a cash
basis until such time the loan can be restored to accrual status in accordance
with regulatory guidelines. Loans of all classes are returned to accrual status
when all principal and interest amounts contractually due are brought current
and future payments are reasonably assured.
For all classes
of loans, approval of the President or Chief Lending Officer is required for all
loans greater than 90 days past due which are not placed on nonaccrual status
and for restoration of nonaccrual loans to accrual status.
38
Note 1. Nature of Banking Activities and
Significant Accounting Policies (Continued)
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 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, at least monthly by management,
and is based upon managements ongoing review of the collectability of the loans
in light of historical experience, the economic environment, concentration and
growth trends, the nature and volume of the loan portfolio, adverse situations
that may affect the borrowers ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. Management monitors
the loan portfolio on a continual basis with procedures that allow for problem
loans and potentially problem loans to be highlighted and watched. Written
reports are prepared on a monthly basis for all loans including commercial loans
graded below a certain level for management review and are reported to the Board
of Directors on a quarterly basis. In addition, a subcommittee of the board of
directors meets monthly to review all classified assets.
Based on
experience, these loan policies and the banks grading and review system,
management believes the loan loss allowance is adequate. This evaluation is
inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
During these
evaluations, particular risk characteristics associated with a segment of the
loan portfolio are also considered. These characteristics are detailed below:
-
Loans secured by farmland, commercial real estate,
and commercial loans not secured by real estate carry risks associated with
the successful operation of a business or farm and the repayment of these
loans may depend on the profitability and cash flows of the business or farm.
Additional risk relates to the value of collateral other than real estate
where depreciation occurs and the appraisal is less precise.
-
Real estate secured construction loans carry risks
that a project will not be completed as scheduled and budgeted and that the
value of the collateral may, at any point, be less than the principal amount
of the loan. Additional risks may occur if the general contractor, who may not
be a loan customer, is unable to finish the project as planned due to
financial pressures unrelated to the project.
-
Consumer loans carry risks associated with the
continued credit-worthiness of the borrower and the value of the collateral,
such as automobiles which may depreciate more rapidly than other assets. In
addition, these loans may be unsecured. Consumer loans are more likely than
real estate loans to be immediately affected in an adverse manner by job loss,
divorce, illness or personal bankruptcy.
-
Residential real estate loans carry risks
associated with the continued credit-worthiness of the borrower and changes in
the value of the collateral.
39
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Allowance for Loan Losses (Continued)
The primary
tool used in managing and controlling problem loans is a watch list
report
.
The report
is a listing of all commercial loans or commitments that are considered problem
loans. The report is controlled by the Credit Administrator and the President.
Consumer and residential mortgage loans are included only if related to a
borrower with commercial or other real estate loans on the watch list report. It
is a primary responsibility of the loan officer to manage the credit risk within
their loan portfolio. As such they should be proactive rather than reactive when
considering adding a loan to the watch list report. Occurrence of any of the
following criteria is a basis for adding a loan (other than consumer and
residential mortgage loans) to the watch list report.
-
Loans classified as
substandard, doubtful or loss by bank examiners, external auditors, loan
officer or the banks credit administration department personnel based upon
financial trends of the business.
-
Loans on nonaccrual status.
-
Loans more than 60 days delinquent.
-
Loans renewed or extended more than three times
with little or no principal curtailment.
-
Loans judgmentally selected by executive
management or the Board of Directors due to unexpected changes or events which
could have a potentially adverse effect on the borrowers ability to repay.
When a loan
is added to the watch list report, both the loan officer and the Credit
Administrator will estimate the need for a specific loss to be calculated in the
banks loan loss allowance.
The
following guidance has been given as an aid to loan officers in detecting
problem loans.
-
Financial Statement
Analysis As customer financial statements are received, they should be
immediately analyzed to see if there are any significant changes in the
financial position or operating results.
-
Delayed Financial Statements If we are having
problems getting financial statements from a customer, a problem may be
developing.
-
Delinquent Principal or Interest Delinquencies
are often the first indication of a problem. We carefully review each loan as
soon as it becomes past due.
-
Marital Difficulties Marital difficulties often
cause business financial stress and are a major cause of problem loans.
-
Lack of Cooperation It is in the borrowers best
interest to cooperate with the bank. We suspect a problem if the customer
becomes uncooperative.
-
Other Red Flags The following are additional red
flags which could mean a problem loan situation is developing: illness or
death of a principal or key employee, overdrafts, unexpected renewals or
unanticipated new borrowing, a too high or too low inventory level in
comparison to industry standards, irresponsible behavior on the part of a
borrower, trade payables begin to increase abnormally and cancellation of
insurance.
The
allowance consists of
specific and general 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 environmental factors such as economic, concentration and growth
trends. The historical period used in calculating the loss factor has changed.
Prior to August 2011 the bank used a thirty six month rolling average to
calculate the historical loss factor in the loan portfolio. In August 2011 bank
management changed to a twelve month rolling average. The change was made due to
managements belief that the twelve month average more accurately compares with
the current economic
environment.
The impact of the change was an increase in the allowance of $476
thousand
at December 31, 2011.
40
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Allowance
for Loan Losses (Continued)
Characteristics of the banks risk classification grades are as follows:
-
Pass Pass rated
loans are to persons or business entities with an acceptable financial
condition, appropriate collateral margins, appropriate cash flow to service
the existing loan, and an appropriate leverage ratio. Borrower has paid all
obligations as agreed and it is expected that this type of payment history
will continue. Acceptable personal guarantors support the loan as
needed.
-
Special Mention Are assets that have potential
weaknesses that deserve managements close attention. If left uncorrected,
these potential weaknesses may result in the deterioration of the repayment
prospects for the asset or in the institutions credit position at some future
date.
-
Substandard The bank is inadequately protected
by the current sound worth and paying capacity of the obligor or of the
collateral pledged, if any. Loans so classified must have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt. They are
characterized by the distinct possibility that the bank will sustain some loss
if the deficiencies are not corrected.
-
Doubtful Loans classified Doubtful
have all
the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently known facts, conditions and values, highly questionable
and improbable.
-
Loss Loans classified in this category are
considered uncollectable and of such little value that their continuation as
bankable assets is not warranted. This classification does not mean that the
loan has absolutely no recovery or salvage value but rather it is not
practical or desirable to defer writing off this basically worthless asset
even though partial recovery may be affected in the future. Any time a credit
is placed in this category, it will be in non-accrual status.
A loan is
generally
considered impaired when, in the judgment of management, based on current
information and events, it is probable that the company will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrowers
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loans effective interest rate, the loans
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. If an impaired loan is on nonaccrual status, any payments
received will generally be applied first to principal. If an impaired loan is
not on nonaccrual status, generally any payments received will be applied to
principal and interest using usual procedures.
Large groups
of smaller balance homogeneous loans (consumer and residential mortgage loans)
are collectively evaluated for impairment. Accordingly, the company does not
necessarily separately identify individual consumer and residential loans for
impairment disclosures unless these loans are related to a borrower with
commercial or other real estate loans that are classified.
41
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
In connection with the evaluation of the
collectability of all classes of loans which are greater than 90 days past due as to principal or interest for nonaccrual status,
any amounts not deemed well secured or otherwise collectible shall be recommended for charge-off at that time. Additionally, charge-off
consideration shall be given to loans evaluated in connection with the banks loan review policy and procedures and loans
identified for repossession or foreclosure or meet the criteria for classification as an in-substance foreclosure. In any event,
it shall be the policy of the bank to charge-off amounts deemed uncollectible in the periods when identified. All charge-off
amounts
are approved
by the Chief Lending Officer or the President
, subject to Board ratification.
Troubled
Debt Restructurings
In
situations where, for economic or legal reasons related to a borrowers
financial condition, management may grant a concession to the borrower that it
would not otherwise consider, the related loan is classified as a troubled debt
restructuring (TDR). Management strives to identify borrowers in financial
difficulty early and work with them to modify their loan to more affordable
terms before their loan reaches nonaccrual status. These modified terms may
include rate reductions, principal forgiveness, payment forbearance and other
actions intended to minimize the economic loss and to avoid foreclosure or
repossession of the collateral. In cases where borrowers are granted new terms
that provide for a reduction of either interest or principal, management
measures any impairment on the restructuring as noted above for impaired
loans. All home
equity, lot, real estate, and commercial loans that are processed for a renewal,
modification or refinance are reviewed to determine if it qualifies as a
TDR.
Loans Held
for Sale
Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or market value 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
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. The
value of real estate collateral is determined based on an internal evaluation,
appraisal outside of the company or a comparative market analysis. Revenue and
expenses from operations and changes in the valuation allowance are included in
foreclosed property expense and write down of other real estate,
respectively.
42
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
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 additional 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
certain current retirees who met certain requirements. This plan is not
available for future retirees.
-
A health care plan covers certain retirees who met
certain eligibility requirements. This plan is not available for future
retirees.
-
A contributory health care plan is available to
current full time employees.
-
A 401(k) retirement savings plan is available to
all employees meeting certain age and service requirements. The employer match
for this plan was 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.
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.
One
Financial Center (formerly the Trust Division)
Securities
and other property held by One Financial Center in a fiduciary or agency
capacity are not assets of the company and are not included in the accompanying
consolidated financial statements.
43
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Advertising
The company
follows the policy of charging the costs of advertising to expense as
incurred.
Advertising expense was $63
thousand
, $61
thousand
and $96
thousand
for the years ended December 31, 2011, 2010, and 2009, respectively.
Treasury
Stock
Common
shares repurchased are recorded as treasury stock at cost.
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.
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 options maximum term is ten years from the date of grant.
Options granted to employees are subject to a
five year vesting period. Options granted to non-employee directors vest on the
grant date.
The
stockholders initially authorized up to 183,600 shares of common stock to be
used in the granting of incentive and non-qualified 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 and non-qualified 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 2011
and 2010. Fair value is estimated using the Black-Scholes option-pricing model.
Expected volatility is based on the historic volatility of the companys stock
price over the expected life of the options. We have determined that the
expected term for options is their contractual life of 10 years. The risk-free
interest rate is the U. S. Treasury zero-coupon issue with a remaining term
equal to the expected term of the options granted. The dividend yield is
estimated as the ratio of the companys historical dividends paid per share of
common stock to the stock price on the date of grant.
Transfers of
Financial Assets
Transfers of
financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the companypresumptively beyond
reach of the transferor and its creditors, even in bankruptcy or other
receivership, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the
transferred assets, and (3) the company does not maintain effective control over
the transferred assets through an agreement to repurchase them before their
maturity or the ability to unilaterally cause the holder to return specific
assets.
Reclassifications
Certain
reclassifications have been made to prior period amounts to conform to the
current year.
44
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Recent
Accounting Pronouncements
In January 2010, the FASB issued Accounting
Standards Update (ASU) 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
was
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
were
effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption
of the new guidance did not have a material impact on the
companys
consolidated financial statements.
In July 2010, the FASB issued ASU 2010-20,
Receivables (Topic 310) Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses. The new disclosure guidance significantly expands the existing requirements and
has
lead to greater transparency into an entitys exposure to credit losses from lending arrangements. The extensive new
disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods
ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such
as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010.
The
company
has included the required disclosures in its consolidated financial statements.
The SEC
issued Final Rule No. 33-9002, Interactive Data to Improve Financial
Reporting. The rule requires companies to submit financial statements in
extensible business reporting language (XBRLformat with their SEC filings on a
phased-in schedule. Large accelerated filers and foreign large accelerated
filers using U.S. generally accepted accounting principles (GAAP) were required
to provide interactive data reports starting with their first quarterly report
for fiscal periods ending on or after June 15, 2010. All remaining filers were
required to provide interactive data reports starting with their first quarterly
report for fiscal periods ending on or after June 15, 2011. The company has
submitted financial statements in extensible business reporting language
(XBRL)
format with their SEC filings in accordance with the phased-in
schedule.
45
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Recent
Accounting Pronouncements
In January
2011, the FASB issued ASU 2011-01, Receivables (Topic 310) Deferral of the
Effective Date of Disclosures about Troubled Debt Restructurings. The
amendments in this ASU temporarily delayed the effective date of the disclosures
about troubled debt restructurings in Update 2010-20 for public entities. The
delay was intended to allow the Board time to complete its deliberations on what
constitutes a troubled debt restructuring. The effective date of the new
disclosures about troubled debt restructurings for public entities and the
guidance for determining what constitutes a troubled debt restructuring was
effective for interim and annual periods ending after June 15, 2011. The
company
has adopted ASU 2011-01 and included the required disclosures in its
consolidated financial statements.
In March
2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or
rescinds portions of the interpretive guidance included in the codification of
the Staff Accounting Bulletin Series. This update is intended to make the
relevant interpretive guidance consistent with current authoritative accounting
guidance issued as a part of the FASBs Codification. The principal changes
involve revision or removal of accounting guidance references and other
conforming changes to ensure consistency of referencing through the SAB Series.
The effective date for SAB 114 is March 28, 2011. The adoption of the new
guidance did not have a material impact on the
companys
consolidated financial
statements.
In April 2011, the FASB issued ASU 2011-02,
Receivables (Topic 310) A Creditors Determination of whether a Restructuring Is a Troubled Debt Restructuring.
The amendments in this ASU clarify the guidance on a creditors evaluation of whether it has granted a concession to a debtor.
They also clarify the guidance on a creditors evaluation of whether a debtor is experiencing financial difficulty. The amendments
in this ASU are effective for the first interim or annual period beginning on or after June 15,
2011.
Retrospective
application to the beginning of the annual period of adoption for modifications occurring on or after the
beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables
that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the
amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The
company
has adopted ASU
2011-02 and included the required disclosures in its consolidated financial statements.
In April
2011, the FASB issued ASU 2011-03, Transfers and Servicing (Topic 860)
Reconsideration of Effective Control for Repurchase Agreements. The amendments
in this ASU remove from the assessment of effective control (1) the criterion
requiring the transferor to have the ability to repurchase or redeem the
financial assets on substantially the agreed terms, even in the event of default
by the transferee and (2) the collateral maintenance implementation guidance
related to that criterion. The amendments in this ASU are effective for the
first interim or annual period beginning on or after December 15, 2011. The
guidance should be applied prospectively to transactions or modifications of
existing transactions that occur on or after the effective date. Early adoption
is not permitted. The
company
is currently assessing the impact that ASU 2011-03
will have on its consolidated financial statements.
46
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Recent
Accounting Pronouncements
In May 2011,
the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP
and IFRSs. This ASU is the result of joint efforts by the FASB and
International Accounting Standards Board (IASB) to develop a single, converged
fair value framework on how (not when) to measure fair value and what
disclosures to provide about fair value measurements. The ASU is largely
consistent with existing fair value measurement principles in U.S. GAAP (Topic
820), with many of the amendments made to eliminate unnecessary wording
differences between U.S. GAAP and International Financial Reporting Standards
(IFRS). The amendments are effective for interim and annual periods beginning
after December 15, 2011 with prospective application. Early application is not
permitted. The
company
is currently assessing the impact that ASU 2011-04 will
have on its consolidated financial statements.
In June
2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220)
Presentation of Comprehensive Income. The objective of this ASU is to improve
the comparability, consistency and transparency of financial reporting and to
increase the prominence of items reported in other comprehensive income by
eliminating the option to present components of other comprehensive income as
part of the statement of changes in stockholders equity. The amendments require
that all non-owner changes in stockholders equity be presented either in a
single continuous statement of comprehensive income or in two separate but
consecutive statements. The single statement of comprehensive income should
include the components of net income, a total for net income, the components of
other comprehensive income, a total for other comprehensive income, and a total
for comprehensive income. In the two-statement approach, the first statement
should present total net income and its components followed consecutively by a
second statement that should present all the components of other comprehensive
income, a total for other comprehensive income, and a total for comprehensive
income. The amendments do not change the items that must be reported in other
comprehensive income, the option for an entity to present components of other
comprehensive income either net of related tax effects or before related tax
effects, or the calculation or reporting of earnings per share. The amendments
in this ASU should be applied retrospectively. The amendments are effective for
fiscal years and interim periods within those years beginning after December 15,
2011. Early adoption is permitted because compliance with the amendments is
already permitted. The amendments do not require transition disclosures. The
company
is currently assessing the impact that ASU 2011-05 will have on its
consolidated financial statements.
In August
2011, the SEC issued Final Rule No. 33-9250, Technical Amendments to Commission
Rules and Forms related to the FASBs Accounting Standards Codification. The
SEC has adopted technical amendments to various rules and forms under the
Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment
Company Act of 1940. These revisions were necessary to conform those rules and
forms to the FASB Accounting Standards Codification. The technical amendments
include revision of certain rules in Regulation S-X, certain items in Regulation
S-K, and various rules and forms prescribed under the Securities Act, Exchange
Act and Investment Company Act. The Release was effective as of August 12, 2011.
The adoption of the new guidance did not have a material impact on the
companys
consolidated financial statements.
In December
2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210) Disclosures
about Offsetting Assets and Liabilities. This ASU requires entities to disclose
both gross information and net information about both instruments and
transactions eligible for offset in the balance sheet and instruments and
transactions subject to an agreement similar to a master netting arrangement. An
entity is required to apply the amendments for annual reporting periods
beginning on or after January 1, 2013, and interim periods within those annual
periods. An entity should provide the disclosures required by those amendments
retrospectively for all comparative periods presented. The
company
is currently
assessing the impact that ASU 2011-11 will have on its consolidated financial
statements.
47
Note 1. Nature of Banking Activities
and Significant Accounting Policies (Continued)
Recent
Accounting Pronouncements
In December
2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220) Deferral
of the Effective Date for Amendments to the Presentation of Reclassifications of
Items Out of Accumulated Other Comprehensive Income in Accounting Standards
Update No. 2011-05. The amendments are being made to allow the Board time to
redeliberate whether to present on the face of the financial statements the
effects of reclassifications out of accumulated other comprehensive income on
the components of net income and other comprehensive income for all periods
presented. While the Board is considering the operational concerns about the
presentation requirements for reclassification adjustments and the needs of
financial statement users for additional information about reclassification
adjustments, entities should continue to report reclassifications out of
accumulated other comprehensive income consistent with the presentation
requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05
are not affected by ASU 2011-12, including the requirement to report
comprehensive income either in a single continuous financial statement or in two
separate but consecutive financial statements. Public entities should apply
these requirements for fiscal years, and interim periods within those years,
beginning after December 15, 2011. The
company
is currently assessing the impact
that ASU 2011-12 will have on its consolidated financial statements.
Note 2. Securities
There were
no securities held to maturity as of December 31, 2011 and 2010.
The
amortized cost and fair value of securities available for sale as of December
31, 2011 and 2010 (in thousands) are as follows:
|
2011
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Value
|
Obligations of U.S.
Government
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agencies
|
$
|
34 475
|
|
$
|
357
|
|
$
|
(9
|
)
|
|
$
|
34 823
|
State and municipal obligations
|
|
6 450
|
|
|
265
|
|
|
- -
|
|
|
|
6 715
|
Equity
securities
|
|
1 099
|
|
|
- -
|
|
|
(306
|
)
|
|
|
793
|
|
$
|
42
024
|
|
$
|
622
|
|
$
|
(315
|
)
|
|
$
|
42 331
|
|
|
2010
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Fair
|
|
Cost
|
|
Gains
|
|
(Losses)
|
|
Value
|
Obligations of U.S.
Government
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored
agencies
|
$
|
36 207
|
|
$
|
241
|
|
$
|
(160
|
)
|
|
$
|
36 288
|
State and municipal obligations
|
|
5 537
|
|
|
71
|
|
|
(84
|
)
|
|
|
5 524
|
Equity
securities
|
|
1 100
|
|
|
- -
|
|
|
(222
|
)
|
|
|
878
|
|
$
|
42 844
|
|
$
|
312
|
|
$
|
(466
|
)
|
|
$
|
42 690
|
48
Note 2. Securities (Continued)
The
amortized cost and fair value of the securities available for sale as of
December 31, 2011 (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
|
$
|
3 333
|
|
$
|
3 361
|
Due after one year through five
years
|
|
32 095
|
|
|
32 457
|
Due after five
years
|
|
5 497
|
|
|
5 720
|
Equity securities
|
|
1 099
|
|
|
793
|
|
$
|
42 024
|
|
$
|
42
331
|
There were
no sales of securities during 2011 or 2010. The gross realized gain from the
sale of one security was $42 thousand as of December 31, 2009.
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 four
debt securities accounts in the consolidated portfolio that have losses at
December 31, 2011. The primary cause of the temporary impairments in the
companys 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, 2011 and no impairment has been recognized.
There are
three equity securities accounts in the companys portfolio with losses at
December 31, 2011. The company considers these investments to be temporarily
impaired at December 31, 2011 and is recognizing no impairment. These are
community bank stock related holdings
that the company has the ability and intent to hold until a recovery of fair value.
US
Government sponsored agencies include the Federal National Mortgage Association
and the Federal Home Loan Mortgage Corporation debt securities with a fair value
of $25.3 million as of December 31, 2011 and $11.7 million as of December 31,
2010.
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, 2011 and 2010 (in thousands).
49
Note
2. Securities (Continued)
|
|
December 31,
2011
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agencies
|
|
$
|
5 023
|
|
$
|
(9
|
)
|
|
$
|
- -
|
|
$
|
- -
|
|
|
$
|
5 023
|
|
$
|
(9
|
)
|
Equity securities
|
|
|
- -
|
|
|
- -
|
|
|
|
793
|
|
|
(306
|
)
|
|
|
793
|
|
|
(306
|
)
|
|
|
$
|
5 023
|
|
$
|
(9
|
)
|
|
$
|
793
|
|
$
|
(306
|
)
|
|
$
|
5 816
|
|
$
|
(315
|
)
|
|
|
|
December 31,
2010
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agencies
|
|
$
|
9 899
|
|
$
|
(147
|
)
|
|
$
|
1 108
|
|
$
|
(13
|
)
|
|
$
|
11 007
|
|
$
|
(160
|
)
|
State and
municipal obligations
|
|
|
1
912
|
|
|
(84
|
)
|
|
|
-
-
|
|
|
-
-
|
|
|
|
1
912
|
|
|
(84
|
)
|
Equity securities
|
|
|
878
|
|
|
(222
|
)
|
|
|
- -
|
|
|
- -
|
|
|
|
878
|
|
|
(222
|
)
|
|
|
$
|
12
689
|
|
$
|
(453
|
)
|
|
$
|
1
108
|
|
$
|
(13
|
)
|
|
$
|
13
797
|
|
$
|
(466
|
)
|
The companys investment in
Federal Home Loan Bank (FHLB) stock totaled $808 thousand at December 31, 2011.
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 FHLBs limited repurchase of excess capital stock in 2011,
the company does not consider this investment to be other-than-temporarily
impaired at December 31, 2011 and no impairment has been recognized. FHLB stock
is shown as a separate line item on the
consolidated
balance sheet and is not a part of the
available for sale securities portfolio.
Securities with a carrying
value of $12.8 million and $24 million at December 31, 2011 and 2010,
respectively were pledged to secure public funds, securities sold under
agreement to repurchase, other borrowings, and for other purposes as required or
permitted by law.
50
Note 3. Loans and Related
Party
Transactions
The loan portfolio, stated at
face amount is composed of the following:
|
|
December
31
|
|
|
2011
|
|
2010
|
|
|
(in thousands)
|
Commercial non real estate
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
8
361
|
|
$
|
7
920
|
Commercial real estate
|
|
|
|
|
|
|
Owner occupied
|
|
|
61
086
|
|
|
67
517
|
Non-owner occupied
|
|
|
15 796
|
|
|
12 098
|
Construction
|
|
|
|
|
|
|
Residential
|
|
|
2 492
|
|
|
5 922
|
Commercial
|
|
|
16
687
|
|
|
18
252
|
Real Estate
|
|
|
|
|
|
|
Farmland
|
|
|
598
|
|
|
792
|
Residential
|
|
|
|
|
|
|
Revolving open end
|
|
|
5
015
|
|
|
5
975
|
1 to 4 family first
liens
|
|
|
80 311
|
|
|
82 691
|
1 to 4 family junior
liens
|
|
|
7
530
|
|
|
8
871
|
5 or more family
|
|
|
3 088
|
|
|
1 976
|
Consumer
loans
|
|
|
|
|
|
|
Titled vehicles
|
|
|
2 650
|
|
|
3 713
|
Deposit accounts
|
|
|
617
|
|
|
737
|
All other consumer
loans
|
|
|
2 898
|
|
|
2 350
|
All other
loans
|
|
|
116
|
|
|
436
|
Total loans
|
|
$
|
207 245
|
|
$
|
219 250
|
Less: allowance for loan losses
|
|
|
4 484
|
|
|
5 012
|
|
|
$
|
202 761
|
|
$
|
214
238
|
At December 31, 2011 and 2010,
overdraft demand deposits reclassified to loans totaled $116 thousand and $186
thousand, respectively.
Loans to directors and
executive officers of the company or to their associates at December 31, 2011
and 2010 totaled $2.9 and $3.1 million, respectively. Such loans were made on
substantially the same terms as those prevailing for comparable transactions
with similar risks. During 2011, total principal additions were $0.4 million and
total principal payments were $0.6 million.
The FHLB of Pittsburgh has a
blanket lien on all the companys loans except those loans specifically pledged
to the Federal Reserve and removed from the FHLB lien. Currently, the FHLB lien
is securing an advance to the company in the amount of $1.5 million and letters
of credit issued on behalf of a customer of the company in the amount of $11
million.
Note 4. Allowance for Loan
Losses
The following is a summary of
transactions in the allowance for loan losses for 2011, 2010 and 2009 (in
thousands):
|
|
2011
|
|
2010
|
|
2009
|
Balance at beginning of year
|
|
$
|
5 012
|
|
|
$
|
5 718
|
|
|
$
|
4 079
|
|
Provision
charged to operating expense
|
|
|
3
343
|
|
|
|
1
599
|
|
|
|
6
690
|
|
Recoveries added to the
allowance
|
|
|
183
|
|
|
|
321
|
|
|
|
232
|
|
Loan losses charged to the
allowance
|
|
|
(4
054
|
)
|
|
|
(2
626
|
)
|
|
|
(5
283
|
)
|
Balance at end of year
|
|
$
|
4 484
|
|
|
$
|
5 012
|
|
|
$
|
5 718
|
|
51
Note 4. Allowance for Loan
Losses (Continued)
Allowance for Loan Losses By
Segment
|
December 31, 2011
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
Commercial
|
|
Real
Estate
|
|
Construction
|
|
Consumer
|
|
Residential
|
|
Other
|
|
Unallocated
|
|
Total
|
Beginning balance
|
|
$
|
166
|
|
|
$
|
239
|
|
|
$
|
859
|
|
|
$
|
2 022
|
|
|
$
|
20
|
|
|
$
|
1 691
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
$
|
5 012
|
|
Charge-offs
|
|
|
- -
|
|
|
|
(20
|
)
|
|
|
(653
|
)
|
|
|
(1
673
|
)
|
|
(172
|
)
|
|
|
(1
536
|
)
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(4
054
|
)
|
Recoveries
|
|
|
- -
|
|
|
|
30
|
|
|
|
6
|
|
|
|
5
|
|
|
|
131
|
|
|
|
11
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
183
|
|
Provision
|
|
|
(149
|
)
|
|
|
(93
|
)
|
|
|
670
|
|
|
|
152
|
|
|
|
105
|
|
|
|
2 673
|
|
|
|
(1
|
)
|
|
|
(14
|
)
|
|
|
3 343
|
|
|
Ending balance
|
|
$
|
17
|
|
|
$
|
156
|
|
|
$
|
882
|
|
|
$
|
506
|
|
|
$
|
84
|
|
|
$
|
2 839
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4 484
|
|
|
Individually evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for impairment
|
|
$
|
0
|
|
|
$
|
161
|
|
|
$
|
122
|
|
|
$
|
102
|
|
|
$
|
39
|
|
|
$
|
349
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
$
|
773
|
|
Collectively evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for impairment
|
|
|
17
|
|
|
|
(5
|
)
|
|
|
760
|
|
|
|
404
|
|
|
|
45
|
|
|
|
2 490
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
3 711
|
|
|
|
$
|
17
|
|
|
$
|
156
|
|
|
$
|
882
|
|
|
$
|
506
|
|
|
$
|
84
|
|
|
$
|
2 839
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
4 484
|
|
|
Financing receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
598
|
|
|
$
|
8 361
|
|
|
$
|
76 882
|
|
|
$
|
19 179
|
|
|
$
|
6 165
|
|
|
$
|
95 944
|
|
|
$
|
116
|
|
|
$
|
- -
|
|
|
$
|
207 245
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for impairment
|
|
$
|
- -
|
|
|
$
|
161
|
|
|
$
|
6
995
|
|
|
$
|
5
250
|
|
|
$
|
109
|
|
|
$
|
5
662
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
$
|
18
177
|
|
Collectively evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for impairment
|
|
|
598
|
|
|
|
8 200
|
|
|
|
69 887
|
|
|
|
13 929
|
|
|
6
056
|
|
|
|
90 282
|
|
|
116
|
|
|
|
- -
|
|
|
|
189 068
|
|
Total
|
|
$
|
598
|
|
|
$
|
8 361
|
|
|
$
|
76 882
|
|
|
$
|
19 179
|
|
|
$
|
6 165
|
|
|
$
|
95 944
|
|
|
$
|
116
|
|
|
$
|
- -
|
|
|
$
|
207 245
|
|
|
Allowance for Loan Losses By
Segment
|
December 31, 2010
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
Commercial
|
|
Real
Estate
|
|
Construction
|
|
Consumer
|
|
Residential
|
|
Other
|
|
Unallocated
|
|
Total
|
Ending balance
|
|
$
|
166
|
|
|
$
|
239
|
|
|
$
|
859
|
|
|
$
|
2 022
|
|
|
$
|
20
|
|
|
$
|
1 691
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
$
|
5 012
|
|
|
Individually evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
|
$
|
161
|
|
|
$
|
217
|
|
|
$
|
528
|
|
|
$
|
1 812
|
|
|
$
|
- -
|
|
|
$
|
429
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
$
|
3 147
|
|
Collectively evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for impairment
|
|
|
5
|
|
|
|
22
|
|
|
|
331
|
|
|
|
210
|
|
|
|
20
|
|
|
|
1 262
|
|
|
|
1
|
|
|
|
14
|
|
|
|
1 865
|
|
|
|
$
|
166
|
|
|
$
|
239
|
|
|
$
|
859
|
|
|
$
|
2 022
|
|
|
$
|
20
|
|
|
$
|
1 691
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
$
|
5 012
|
|
|
Financing receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
792
|
|
|
$
|
7 920
|
|
|
$
|
79 615
|
|
|
$
|
24 174
|
|
|
$
|
6
800
|
|
|
$
|
99 513
|
|
|
$
|
436
|
|
|
$
|
- -
|
|
|
$
|
219 250
|
|
|
Ending balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
|
$
|
539
|
|
|
$
|
367
|
|
|
$
|
9
398
|
|
|
$
|
11
484
|
|
|
$
|
- -
|
|
|
$
|
2
874
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
$
|
24
662
|
|
Collectively evaluated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
impairment
|
|
|
253
|
|
|
|
7 553
|
|
|
|
70 217
|
|
|
|
12 690
|
|
|
6
800
|
|
|
|
96 639
|
|
|
|
436
|
|
|
|
- -
|
|
|
|
194 588
|
|
Total
|
|
$
|
792
|
|
|
$
|
7
920
|
|
|
$
|
79
615
|
|
|
$
|
24
174
|
|
|
$
|
6
800
|
|
|
$
|
99
513
|
|
|
$
|
436
|
|
|
$
|
- -
|
|
|
$
|
219 250
|
|
52
Note 4. Allowance for Loan
Losses (Continued)
Credit Quality Information
By Class
December 31, 2011
(in thousands)
|
|
|
|
|
Special
|
|
Sub-
|
|
|
|
|
|
|
Internal Risk Rating
Grades
|
|
|
Pass
|
|
Mention
|
|
Standard
|
|
Doubtful
|
|
Loss
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
8
094
|
|
$
|
105
|
|
$
|
162
|
|
$
|
-
-
|
|
$
|
-
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
39
405
|
|
|
12 768
|
|
|
8 817
|
|
|
96
|
|
|
-
-
|
Non-owner occupied
|
|
|
14 824
|
|
|
333
|
|
|
583
|
|
|
56
|
|
|
- -
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1 986
|
|
|
- -
|
|
|
506
|
|
|
- -
|
|
|
- -
|
Commercial
|
|
|
10 077
|
|
|
2
123
|
|
|
4
397
|
|
|
90
|
|
|
-
-
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
598
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Deposit
accounts
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
All other
|
|
|
N/A
|
|
|
25
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
N/A
|
|
|
1
276
|
|
|
224
|
|
|
N/A
|
|
|
N/A
|
1-4
family first liens
|
|
|
N/A
|
|
|
2 894
|
|
|
2 351
|
|
|
N/A
|
|
|
N/A
|
1-4 family junior
liens
|
|
|
N/A
|
|
|
172
|
|
|
94
|
|
|
N/A
|
|
|
N/A
|
5 or
more family
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Totals
|
|
$
|
74 984
|
|
$
|
19 696
|
|
$
|
17 134
|
|
$
|
242
|
|
$
|
-
-
|
As a matter of practice, we do not risk rate
consumer or residential mortgage loans. Any of these loans listed in the risk
rating table above are associated with commercial loans that have been risk
rated as per our policy.
When a loan
is designated as a loss, the loss portion is charged off, and if applicable the
remaining balance classified as substandard.
Credit Quality Information
By Class
December 31, 2011
(in thousands)
Non Risk
Rated Loans
|
|
Performing
|
|
Nonperforming
|
Consumer non real estate
|
|
|
|
|
|
|
Titled vehicles
|
|
$
|
2
645
|
|
$
|
5
|
Deposit accounts
|
|
|
617
|
|
|
- -
|
All other
|
|
|
2
870
|
|
|
3
|
Residential
|
|
|
|
|
|
|
Revolving open end
|
|
|
3
498
|
|
|
17
|
1-4 family first
liens
|
|
|
74 227
|
|
|
839
|
1-4 Family junior
liens
|
|
|
7
264
|
|
|
-
-
|
5 or more family
|
|
|
3 088
|
|
|
- -
|
All
other
|
|
|
116
|
|
|
- -
|
Totals
|
|
$
|
94
325
|
|
$
|
864
|
53
Note 4. Allowance for Loan
Losses (Continued)
Credit Quality Information
By Class
December 31, 2010
(in thousands)
|
|
|
|
|
Special
|
|
Sub-
|
|
|
|
|
|
|
Internal Risk Rating
Grades
|
|
|
Pass
|
|
Mention
|
|
Standard
|
|
Doubtful
|
|
Loss
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
7
373
|
|
$
|
180
|
|
$
|
95
|
|
$
|
106
|
|
$
|
166
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
53
078
|
|
|
5
041
|
|
|
3
829
|
|
|
5
375
|
|
|
194
|
Non-owner occupied
|
|
|
11 470
|
|
|
628
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
282
|
|
|
489
|
|
|
4 005
|
|
|
1 095
|
|
|
51
|
Commercial
|
|
|
10
348
|
|
|
2
789
|
|
|
3
575
|
|
|
1
363
|
|
|
-
-
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
253
|
|
|
-
-
|
|
|
-
-
|
|
|
539
|
|
|
-
-
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Deposit
accounts
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
All other
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
1-4
family first liens
|
|
|
N/A
|
|
|
3 234
|
|
|
956
|
|
|
1 434
|
|
|
242
|
1-4 family junior
liens
|
|
|
N/A
|
|
|
187
|
|
|
42
|
|
|
175
|
|
|
25
|
5 or
more family
|
|
|
N/A
|
|
|
308
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
Totals
|
|
$
|
82
804
|
|
$
|
12
856
|
|
$
|
12
502
|
|
$
|
10
087
|
|
$
|
678
|
Credit Quality Information
By Class
December 31, 2010
(in thousands)
Non Risk
Rated Loans
|
|
Performing
|
|
Nonperforming
|
Consumer non real estate
|
|
|
|
|
|
|
Titled vehicles
|
|
$
|
3
705
|
|
$
|
8
|
Deposit accounts
|
|
|
737
|
|
|
- -
|
All other
|
|
|
2 345
|
|
|
5
|
Residential
|
|
|
|
|
|
|
Revolving open end
|
|
|
5
962
|
|
|
13
|
1-4 family first
liens
|
|
|
75 901
|
|
|
1 101
|
1-4 Family junior
liens
|
|
|
8
442
|
|
|
-
-
|
5 or more family
|
|
|
1 668
|
|
|
- -
|
All
other
|
|
|
436
|
|
|
- -
|
Totals
|
|
$
|
99 196
|
|
$
|
1 127
|
54
Note 4. Allowance for Loan
Losses (Continued)
Impaired Loans By
Class
December 31, 2011
(in thousands)
With
no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
Recorded
|
|
Income
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
Recognized
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
- -
|
|
$
|
-
-
|
|
$
|
N/A
|
|
$
|
67
|
|
$
|
-
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
4
622
|
|
|
4
440
|
|
|
N/A
|
|
|
3
752
|
|
|
217
|
Non-owner occupied
|
|
|
587
|
|
|
583
|
|
|
N/A
|
|
|
132
|
|
|
11
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
512
|
|
|
506
|
|
|
N/A
|
|
|
799
|
|
|
14
|
Commercial
|
|
|
4 106
|
|
|
3
976
|
|
|
N/A
|
|
|
3
353
|
|
|
168
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
-
-
|
|
|
-
-
|
|
|
N/A
|
|
|
-
-
|
|
|
-
-
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
225
|
|
|
224
|
|
|
N/A
|
|
|
160
|
|
|
15
|
1 to 4 family first
liens
|
|
|
948
|
|
|
870
|
|
|
N/A
|
|
|
1 257
|
|
|
26
|
1 to 4 family junior
liens
|
|
|
-
-
|
|
|
-
-
|
|
|
N/A
|
|
|
177
|
|
|
-
-
|
5 or more family
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
Deposit accounts
|
|
|
-
-
|
|
|
-
-
|
|
|
N/A
|
|
|
-
-
|
|
|
-
-
|
All other consumer
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
4
|
|
|
- -
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
|
|
$
|
11 000
|
|
$
|
10
599
|
|
$
|
N/A
|
|
$
|
9
701
|
|
$
|
451
|
|
With
an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
Recorded
|
|
Income
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
Recognized
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
163
|
|
$
|
161
|
|
$
|
161
|
|
$
|
187
|
|
$
|
8
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
1
989
|
|
|
1
972
|
|
|
122
|
|
|
4
800
|
|
|
93
|
Non-owner occupied
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
163
|
|
|
- -
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
979
|
|
|
- -
|
Commercial
|
|
|
771
|
|
|
768
|
|
|
102
|
|
|
2
443
|
|
|
30
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
108
|
|
|
-
-
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
1
277
|
|
|
1
274
|
|
|
31
|
|
|
331
|
|
|
65
|
1 to 4 family first
liens
|
|
|
2 550
|
|
|
2 540
|
|
|
299
|
|
|
2 342
|
|
|
102
|
1 to 4 family junior
liens
|
|
|
758
|
|
|
754
|
|
|
19
|
|
|
311
|
|
|
28
|
5 or more family
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Deposit accounts
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
All other consumer
|
|
|
109
|
|
|
109
|
|
|
39
|
|
|
37
|
|
|
3
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
$
|
7 617
|
|
$
|
7 578
|
|
$
|
773
|
|
$
|
11 701
|
|
$
|
329
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
non real estate
|
|
$
|
163
|
|
$
|
161
|
|
$
|
161
|
|
$
|
254
|
|
$
|
8
|
Commercial real estate
|
|
|
7 198
|
|
|
6 995
|
|
|
122
|
|
|
8 847
|
|
|
321
|
Construction
|
|
|
5 389
|
|
|
5
250
|
|
|
102
|
|
|
7
574
|
|
|
212
|
Real estate farmland
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
108
|
|
|
- -
|
Residential
|
|
|
5
758
|
|
|
5
662
|
|
|
349
|
|
|
4
578
|
|
|
236
|
Consumer
|
|
|
109
|
|
|
109
|
|
|
39
|
|
|
41
|
|
|
3
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
$
|
18 617
|
|
$
|
18 177
|
|
$
|
773
|
|
$
|
21 402
|
|
$
|
780
|
55
Note 4. Allowance for Loan
Losses (Continued)
Impaired Loans By
Class
December 31, 2010
(in thousands)
With
no related allowance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
Recorded
|
|
Income
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
Recognized
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
117
|
|
$
|
95
|
|
$
|
N/A
|
|
$
|
53
|
|
$
|
-
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
4
206
|
|
|
4
256
|
|
|
N/A
|
|
|
3
591
|
|
|
158
|
Non-owner occupied
|
|
|
75
|
|
|
- -
|
|
|
N/A
|
|
|
15
|
|
|
- -
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
1 188
|
|
|
1 183
|
|
|
N/A
|
|
|
1 769
|
|
|
52
|
Commercial
|
|
|
2
641
|
|
|
2
631
|
|
|
N/A
|
|
|
3
655
|
|
|
112
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
-
-
|
|
|
-
-
|
|
|
N/A
|
|
|
-
-
|
|
|
-
-
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
-
-
|
|
|
-
-
|
|
|
N/A
|
|
|
-
-
|
|
|
-
-
|
1 to 4 family first
liens
|
|
|
1 259
|
|
|
1 242
|
|
|
N/A
|
|
|
1 351
|
|
|
15
|
1 to 4 family junior
liens
|
|
|
175
|
|
|
175
|
|
|
N/A
|
|
|
142
|
|
|
3
|
5 or more family
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
Deposit accounts
|
|
|
-
-
|
|
|
-
-
|
|
|
N/A
|
|
|
-
-
|
|
|
-
-
|
All other consumer
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
N/A
|
|
|
- -
|
|
|
- -
|
|
|
$
|
9 661
|
|
$
|
9 582
|
|
$
|
N/A
|
|
$
|
10 576
|
|
$
|
340
|
|
With an
allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
Interest
|
|
|
Unpaid
|
|
Recorded
|
|
Related
|
|
Recorded
|
|
Income
|
|
|
Principal
|
|
Investment
|
|
Allowance
|
|
Investment
|
|
Recognized
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
274
|
|
$
|
272
|
|
$
|
217
|
|
$
|
355
|
|
$
|
6
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
5
201
|
|
|
5
142
|
|
|
528
|
|
|
4
972
|
|
|
272
|
Non-owner occupied
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
2 786
|
|
|
2 767
|
|
|
600
|
|
|
3 910
|
|
|
175
|
Commercial
|
|
|
4
924
|
|
|
4
903
|
|
|
1
212
|
|
|
3
242
|
|
|
216
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
549
|
|
|
539
|
|
|
161
|
|
|
547
|
|
|
-
-
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
1 to 4 family first
liens
|
|
|
1 412
|
|
|
1 390
|
|
|
362
|
|
|
1 186
|
|
|
56
|
1 to 4 family junior
liens
|
|
|
71
|
|
|
67
|
|
|
67
|
|
|
220
|
|
|
-
-
|
5 or more family
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
Deposit accounts
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
All other consumer
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
4
|
|
|
- -
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
$
|
15 217
|
|
$
|
15 080
|
|
$
|
3 147
|
|
$
|
14 436
|
|
$
|
725
|
|
Totals:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
non real estate
|
|
$
|
391
|
|
$
|
367
|
|
$
|
217
|
|
$
|
408
|
|
$
|
6
|
Commercial real estate
|
|
|
9 482
|
|
|
9 398
|
|
|
528
|
|
|
8 578
|
|
|
430
|
Construction
|
|
|
11
539
|
|
|
11
484
|
|
|
1
812
|
|
|
12
576
|
|
|
555
|
Real estate farmland
|
|
|
549
|
|
|
539
|
|
|
161
|
|
|
547
|
|
|
- -
|
Residential
|
|
|
2
917
|
|
|
2
874
|
|
|
429
|
|
|
2
899
|
|
|
74
|
Consumer
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
4
|
|
|
- -
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
$
|
24 878
|
|
$
|
24 662
|
|
$
|
3 147
|
|
$
|
25 012
|
|
$
|
1 065
|
56
Note 4. Allowance for Loan
Losses (Continued)
The following is a summary of
information pertaining to impaired loans as of December 31, 2009
(in thousands):
|
2009
|
Impaired loans without a valuation allowance
|
$
|
12
397
|
Impaired
loans with a valuation allowance
|
|
14 985
|
Total impaired loans
|
$
|
27 382
|
|
|
|
Valuation allowance related to impaired loans
|
$
|
3 799
|
|
|
|
Total nonaccrual loans
|
$
|
3 819
|
|
|
|
Total loans past due ninety days or more and still
accruing
|
$
|
- -
|
|
|
|
|
2009
|
Average investment in impaired loans
|
$
|
16 262
|
Interest
income recognized on impaired loans
|
$
|
1 233
|
Interest income recognized on a cash basis on impaired
loans
|
$
|
68
|
No additional funds are
committed to be advanced in connection with impaired loans. Nonaccrual loans
excluded from impaired loans at December 31, 2011 and 2010 totaled $1.1 million
and $1.1 million, respectively. If interest had been accrued on these nonaccrual
loans, such income would have approximated $56 thousand in 2011 and $44 thousand
in 2010.
57
Note 4. Allowance for Loan
Losses (Continued)
Modifications
(in
thousands except number of contracts)
For the Year Ended
December 31,
2011
|
|
|
|
Pre-
|
|
Post-
|
|
|
|
|
Modification
|
|
Modification
|
|
|
Number
|
|
Outstanding
|
|
Outstanding
|
Troubled Debt Restructurings
|
|
Of
|
|
Recorded
|
|
Recorded
|
|
|
Contracts
|
|
Investment
|
|
Investment
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
-
-
|
|
$
|
- -
|
|
$
|
-
-
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Owner Occupied
|
|
6
|
|
|
725
|
|
|
725
|
Non
owner occupied
|
|
1
|
|
|
583
|
|
|
583
|
Construction
|
|
|
|
|
|
|
|
|
Residential
|
|
1
|
|
|
121
|
|
|
121
|
Commercial
|
|
9
|
|
|
684
|
|
|
684
|
Real Estate
|
|
|
|
|
|
|
|
|
Farmland
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
Residential
|
|
|
|
|
|
|
|
|
Revolving open end 1 to 4
family
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
1 to 4
family first liens
|
|
19
|
|
|
2 371
|
|
|
2 484
|
1 to 4 family junior
liens
|
|
23
|
|
|
808
|
|
|
808
|
5 or
more family
|
|
- -
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
Titled
Vehicles
|
|
- -
|
|
|
- -
|
|
|
- -
|
Deposit Accounts
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
All
other consumer
|
|
3
|
|
|
77
|
|
|
77
|
All
Other
|
|
- -
|
|
|
- -
|
|
|
- -
|
Totals
|
|
62
|
|
$
|
5
369
|
|
$
|
5
482
|
|
|
Troubled Debt Restructurings
|
|
Number of
|
|
Recorded
|
|
|
|
That Subsequently Defaulted
|
|
Contracts
|
|
Investment
|
|
|
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
-
-
|
|
$
|
-
-
|
|
|
|
Commercial real estate
|
|
|
|
|
|
|
|
|
Owner Occupied
|
|
1
|
|
|
220
|
|
|
|
Non
owner occupied
|
|
- -
|
|
|
- -
|
|
|
|
Construction
|
|
|
|
|
|
|
|
|
Residential
|
|
1
|
|
|
121
|
|
|
|
Commercial
|
|
-
-
|
|
|
- -
|
|
|
|
Real Estate
|
|
|
|
|
|
|
|
|
Farmland
|
|
-
-
|
|
|
- -
|
|
|
|
Residential
|
|
|
|
|
|
|
|
|
Revolving open end 1 to 4
family
|
|
-
-
|
|
|
- -
|
|
|
|
1 to 4
family first liens
|
|
6
|
|
|
1 132
|
|
|
|
1 to 4 family junior
liens
|
|
6
|
|
|
247
|
|
|
|
5 or
more family
|
|
- -
|
|
|
- -
|
|
|
|
Consumer
|
|
|
|
|
|
|
|
|
Titled
Vehicles
|
|
- -
|
|
|
- -
|
|
|
|
Deposit Accounts
|
|
-
-
|
|
|
- -
|
|
|
|
All
other consumer
|
|
- -
|
|
|
- -
|
|
|
|
All
Other
|
|
- -
|
|
|
- -
|
|
|
|
Totals
|
|
14
|
|
$
|
1
720
|
|
|
|
58
Note 4. Allowance for Loan
Losses (Continued)
As of December 31, 2011 there
are five TDRs in non-performing assets with balances totaling $2.9 million. In
addition, two TDRs with balances totaling $107k are 30 or more days past due.
Granting
a concession and assessing financial
difficulty
(ASU
2011-02) are effective for the first interim or annual period beginning on or
after June 15, 2011. ASU 2011-2 is to be applied retrospectively to the
beginning of the annual period of
adoption. As
of December 31,
2010 there were
$7.3
million of TDRs
outstanding.
Nonaccrual and Past Due
Loans By Class
December 31, 2011
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
30-59
|
|
60-89
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
Days
|
|
Days
|
|
or More
|
|
Total
|
|
|
|
|
Total
|
|
Still
|
|
Non-
|
|
|
Past
Due
|
|
Past
Due
|
|
Past
Due
|
|
Past
Due
|
|
Current
|
|
Loans
|
|
Accruing
|
|
Accrual
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
- -
|
|
$
|
6
|
|
$
|
- -
|
|
$
|
6
|
|
$
|
8
355
|
|
$
|
8
361
|
|
$
|
-
-
|
|
$
|
93
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
2
376
|
|
|
996
|
|
|
344
|
|
|
3
716
|
|
|
57
370
|
|
|
61
086
|
|
|
-
-
|
|
|
1
339
|
Non owner occupied
|
|
|
- -
|
|
|
- -
|
|
|
179
|
|
|
179
|
|
|
15 617
|
|
|
15 796
|
|
|
- -
|
|
|
179
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
- -
|
|
|
- -
|
|
|
385
|
|
|
385
|
|
|
2 107
|
|
|
2 492
|
|
|
- -
|
|
|
506
|
Commercial
|
|
|
19
|
|
|
44
|
|
|
1
602
|
|
|
1
665
|
|
|
15
022
|
|
|
16
687
|
|
|
143
|
|
|
3
693
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
598
|
|
|
598
|
|
|
-
-
|
|
|
-
-
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
5
015
|
|
|
5
015
|
|
|
-
-
|
|
|
17
|
1 to 4 family first
liens
|
|
|
1 386
|
|
|
139
|
|
|
360
|
|
|
1 885
|
|
|
78 426
|
|
|
80 311
|
|
|
61
|
|
|
1 408
|
1 to 4 family junior
liens
|
|
|
176
|
|
|
-
-
|
|
|
-
-
|
|
|
176
|
|
|
7
354
|
|
|
7
530
|
|
|
-
-
|
|
|
-
-
|
5 or more family
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
3 088
|
|
|
3 088
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
1
|
|
|
15
|
|
|
- -
|
|
|
16
|
|
|
2 634
|
|
|
2 650
|
|
|
- -
|
|
|
5
|
Deposit accounts
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
617
|
|
|
617
|
|
|
-
-
|
|
|
-
-
|
All other consumer
|
|
|
8
|
|
|
4
|
|
|
3
|
|
|
15
|
|
|
2 883
|
|
|
2 898
|
|
|
- -
|
|
|
3
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
116
|
|
|
116
|
|
|
- -
|
|
|
- -
|
Totals
|
|
$
|
3 966
|
|
$
|
1 204
|
|
$
|
2 873
|
|
$
|
8 043
|
|
$
|
199 202
|
|
$
|
207 245
|
|
$
|
204
|
|
$
|
7 243
|
|
Percentage to Total Loans
|
|
|
1.91%
|
|
|
0.58%
|
|
|
1.39%
|
|
|
3.88%
|
|
|
96.12%
|
|
|
|
|
|
0.10%
|
|
|
3.49%
|
Included in the 30 or more
days past due loans are certain non-accrual loans in the amount of $3.7 million.
The remaining non-accrual loans of $3.5 million are in current
status.
59
Note 4. Allowance for Loan
Losses (Continued)
Nonaccrual and Past Due
Loans By Class
December 31, 2010
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90 Days
|
|
|
|
|
|
30-59
|
|
60-89
|
|
90 Days
|
|
|
|
|
|
|
|
|
|
|
Past Due
|
|
|
|
|
|
Days
|
|
Days
|
|
or More
|
|
Total
|
|
|
|
|
Total
|
|
Still
|
|
Non-
|
|
|
Past
Due
|
|
Past
Due
|
|
Past
Due
|
|
Past
Due
|
|
Current
|
|
Loans
|
|
Accruing
|
|
Accrual
|
Commercial non real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and
industrial
|
|
$
|
80
|
|
$
|
92
|
|
$
|
2
|
|
$
|
174
|
|
$
|
7
746
|
|
$
|
7
920
|
|
$
|
-
-
|
|
$
|
97
|
Commercial real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner occupied
|
|
|
612
|
|
|
-
-
|
|
|
-
-
|
|
|
612
|
|
|
66
905
|
|
|
67
517
|
|
|
-
-
|
|
|
-
-
|
Non owner occupied
|
|
|
194
|
|
|
- -
|
|
|
- -
|
|
|
194
|
|
|
11 904
|
|
|
12 098
|
|
|
- -
|
|
|
- -
|
Construction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
238
|
|
|
- -
|
|
|
- -
|
|
|
238
|
|
|
5 684
|
|
|
5 922
|
|
|
- -
|
|
|
- -
|
Commercial
|
|
|
115
|
|
|
-
-
|
|
|
285
|
|
|
400
|
|
|
17
852
|
|
|
18
252
|
|
|
-
-
|
|
|
405
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmland
|
|
|
-
-
|
|
|
-
-
|
|
|
539
|
|
|
539
|
|
|
253
|
|
|
792
|
|
|
-
-
|
|
|
539
|
Residential
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving open end
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
-
-
|
|
|
5
975
|
|
|
5
975
|
|
|
-
-
|
|
|
38
|
1 to 4 family first
liens
|
|
|
2 269
|
|
|
416
|
|
|
881
|
|
|
3 566
|
|
|
79 125
|
|
|
82 691
|
|
|
- -
|
|
|
1 099
|
1 to 4 family junior
liens
|
|
|
135
|
|
|
19
|
|
|
-
-
|
|
|
154
|
|
|
8
717
|
|
|
8
871
|
|
|
-
-
|
|
|
42
|
5 or more family
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
1 976
|
|
|
1 976
|
|
|
- -
|
|
|
- -
|
Consumer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Titled vehicles
|
|
|
37
|
|
|
2
|
|
|
- -
|
|
|
39
|
|
|
3 674
|
|
|
3 713
|
|
|
- -
|
|
|
8
|
Deposit accounts
|
|
|
11
|
|
|
-
-
|
|
|
-
-
|
|
|
11
|
|
|
726
|
|
|
737
|
|
|
-
-
|
|
|
-
-
|
All other consumer
|
|
|
3
|
|
|
- -
|
|
|
5
|
|
|
8
|
|
|
2 342
|
|
|
2 350
|
|
|
- -
|
|
|
5
|
All
other
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
- -
|
|
|
436
|
|
|
436
|
|
|
- -
|
|
|
- -
|
Totals
|
|
$
|
3 694
|
|
$
|
529
|
|
$
|
1 712
|
|
$
|
5 935
|
|
$
|
213 315
|
|
$
|
219 250
|
|
$
|
- -
|
|
$
|
2 233
|
|
Percentage to Total Loans
|
|
|
1.69%
|
|
|
0.24%
|
|
|
0.78%
|
|
|
2.71%
|
|
|
97.29%
|
|
|
|
|
|
- -%
|
|
|
1.02%
|
Included in the 30 or more days past due loans are
certain non-accrual loans in the amount of $1.8 million. The remaining
non-accrual loans of $429
thousand
are in current status.
The past due policy of the bank is to report all
classes of loans past due in the following categories:
-
30 to 59 days past due (principal or interest)
-
60 to 89 days past due (principal or interest)
-
90 days or more past due (principal or interest)
-
Nonaccrual status.
Note 5. Premises and
Equipment, Net
Premises and equipment
consists of the following:
|
|
December
31
|
|
|
2011
|
|
2010
|
|
|
(in thousands)
|
Premises and improvements
|
|
$
|
9 438
|
|
$
|
9 438
|
Furniture and equipment
|
|
|
4 407
|
|
|
4 377
|
|
|
$
|
13 845
|
|
$
|
13 815
|
Less
accumulated depreciation
|
|
|
5 922
|
|
|
5 545
|
|
|
$
|
7 923
|
|
$
|
8
270
|
Depreciation included in
operating expense for 2011, 2010 and 2009 was $477 thousand, $550 thousand and
$573 thousand, respectively.
60
Note 6. Deposits
The aggregate amount of time deposits
with a balance of $100,000 or more was $33.6 million and $45.0 million at
December 31, 2011 and 2010, respectively.
At December 31,
2011, the scheduled maturities of all time deposits (in thousands) are as
follows:
2012
|
$
|
34 004
|
2013
|
|
14 804
|
2014
|
|
9 738
|
2015
|
|
9 562
|
2016
|
|
9 085
|
|
$
|
77 193
|
Brokered
deposits totaled $13.0 million and $14.9 million at December 31, 2011 and 2010,
respectively. Certificates of deposits included in these totals are $8.3 million
and $14.7 million at December 31, 2011 and 2010, respectively.
Deposits of the
companys directors, executive officers and associates totaled $2.1 million at
December 31, 2011 and 2010.
No deposits
of public
funds entities exceeded 5% of the banks total deposits.
Note 7. Borrowings
Short-term
borrowings consist of securities sold under agreements to repurchase, which
totaled $3.4 million and $7.4 million as of December 31, 2011 and 2010,
respectively.
During 2010,
the bank incurred fixed rate long term debt consisting of a Federal Home Loan
Bank, three year loan, with an original balance of $3.6 million and monthly
payments of interest and principal with an interest rate of 1.72%. The December
31, 2011 balance of this advance is $1.5 million. This loan modified the five
year, $5 million, 4.61% fixed rate advance originated in 2008. Included with the
refinancing was payment of a $162 thousand penalty that is being amortized over
the life of the modified advance.
Principal
payments (in thousands) on the note are due as follows:
2012
|
|
1 215
|
2013
|
|
308
|
|
$
|
1 523
|
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
July 2009 the subsidiary bank secured a credit
line with the Federal Reserve discount window. At December 31, 2011, the
subsidiary bank has total credit available through these institutions of
approximately
$87.2
million.
Note 8. Employee Benefit Plans
The companys
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 certain
retirees with 25 years of service
who are
over the age of 60 and an unfunded health care
plan for certain retirees that met certain eligibility requirements. This plan
is not available to future retirees.
61
Note 8. Employee Benefit Plans (Continued)
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 company 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 companys 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 $215 thousand, $214 thousand and $111
thousand in 2011, 2010 and 2009, respectively.
The company has
entered into contracts with three retirees where the company has agreed to pay
the beneficiaries of two participants $50,000 each and the beneficiary of one
participant $25,000 at the death of the participants. This postretirement
benefit has been accrued as of December 31, 2011. While these liabilities are
unfunded, life insurance has been obtained by the company to help offset these
payments.
Obligations and
funded status:
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Pension Benefits
|
|
Postretirement Benefits
|
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
|
(in thousands)
|
|
(in
thousands)
|
Change in benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation, beginning
|
|
$
|
7 656
|
|
|
$
|
6 962
|
|
|
$
|
625
|
|
|
$
|
568
|
|
Service cost
|
|
|
- -
|
|
|
|
- -
|
|
|
|
12
|
|
|
|
12
|
|
Interest cost
|
|
|
402
|
|
|
|
413
|
|
|
|
37
|
|
|
|
34
|
|
Change in
assumptions
|
|
|
- -
|
|
|
|
- -
|
|
|
|
29
|
|
|
|
27
|
|
Actuarial loss (gain)
|
|
|
710
|
|
|
|
592
|
|
|
|
- -
|
|
|
|
- -
|
|
Amendment
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(341
|
)
|
|
|
4
|
|
Benefits paid
|
|
|
(346
|
)
|
|
|
(311
|
)
|
|
|
(19
|
)
|
|
|
(20
|
)
|
Curtailment
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
Benefit
obligation, ending
|
|
$
|
8 422
|
|
|
$
|
7 656
|
|
|
$
|
343
|
|
|
$
|
625
|
|
|
Change in plan
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets, beginning
|
|
$
|
6 098
|
|
|
$
|
5 621
|
|
|
$
|
- -
|
|
|
$
|
- -
|
|
Actual return on plan
assets
|
|
|
155
|
|
|
|
443
|
|
|
|
- -
|
|
|
|
- -
|
|
Employer contributions
|
|
|
9
|
|
|
|
345
|
|
|
|
19
|
|
|
|
20
|
|
Benefits paid
|
|
|
(346
|
)
|
|
|
(311
|
)
|
|
|
(19
|
)
|
|
|
(20
|
)
|
Fair
value of plan assets, ending
|
|
$
|
5 916
|
|
|
$
|
6 098
|
|
|
$
|
-
-
|
|
|
$
|
-
-
|
|
|
Funded status at end of
year
|
|
$
|
(2 506
|
)
|
|
$
|
(1 558
|
)
|
|
$
|
(343
|
)
|
|
$
|
(625
|
)
|
Unrecognized net (gain)
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(21
|
)
|
Unrecognized transition
asset
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
70
|
|
|
Accounts recognized on
consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
balance sheet
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit liabilities
|
|
$
|
(2 506
|
)
|
|
$
|
(1 558
|
)
|
|
$
|
(343
|
)
|
|
$
|
(576
|
)
|
|
Amounts recognized in
accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive loss
consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss (gain)
|
|
$
|
3 235
|
|
|
$
|
2 354
|
|
|
$
|
- -
|
|
|
$
|
(21
|
)
|
Transition
liability
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
70
|
|
Deferred tax asset
|
|
|
(1 100
|
)
|
|
|
(800
|
)
|
|
|
-
-
|
|
|
|
(17
|
)
|
|
|
$
|
2 135
|
|
|
$
|
1 554
|
|
|
$
|
- -
|
|
|
$
|
32
|
|
The accumulated
benefit obligation for the defined benefit pension plan was $8.4 million and
$7.7 million at December 31, 2011 and 2010, respectively.
62
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
|
|
|
2011
|
|
2010
|
|
2009
|
|
2011
|
|
2010
|
|
2009
|
|
|
(in thousands)
|
|
(in
thousands)
|
Components of net periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
- -
|
|
|
$
|
- -
|
|
|
$
|
266
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Interest cost
|
|
|
402
|
|
|
|
413
|
|
|
|
447
|
|
|
|
37
|
|
|
|
34
|
|
|
|
32
|
|
Expected return on plan assets
|
|
|
(475
|
)
|
|
|
(460
|
)
|
|
|
(373
|
)
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
Amortization of net
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at transition
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
70
|
|
|
|
17
|
|
|
|
17
|
|
Recognized actuarial loss
|
|
|
- -
|
|
|
|
96
|
|
|
|
159
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
Amortization of prior
service cost
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(341
|
)
|
|
|
- -
|
|
|
|
- -
|
|
Amortization of Loss
|
|
|
150
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
8
|
|
|
|
-
-
|
|
|
|
-
-
|
|
Net periodic benefit
cost
|
|
$
|
77
|
|
|
$
|
49
|
|
|
$
|
499
|
|
|
$
|
(214
|
)
|
|
$
|
63
|
|
|
$
|
61
|
|
|
Other changes in plan
assets and benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations recognized
in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
1 030
|
|
|
$
|
609
|
|
|
$
|
(201
|
)
|
|
$
|
21
|
|
|
$
|
31
|
|
|
$
|
1
|
|
Transition
liability
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
|
|
(70
|
)
|
|
|
(18
|
)
|
|
|
(17
|
)
|
Deferred tax
|
|
|
(299
|
)
|
|
|
(174
|
)
|
|
|
481
|
|
|
|
17
|
|
|
|
(4
|
)
|
|
|
5
|
|
Amortization of net (gain)
|
|
|
(150
|
)
|
|
|
(96
|
)
|
|
|
(159
|
)
|
|
|
- -
|
|
|
|
- -
|
|
|
|
- -
|
|
Adjustment to (gain) for curtailment
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
(1 054
|
)
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
-
-
|
|
Total recognized in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive loss
|
|
$
|
581
|
|
|
$
|
339
|
|
|
$
|
(933
|
)
|
|
$
|
(32
|
)
|
|
$
|
9
|
|
|
$
|
(11
|
)
|
Total recognized in net periodic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit cost and accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other comprehensive loss
|
|
$
|
658
|
|
|
$
|
388
|
|
|
$
|
(434
|
)
|
|
$
|
(246
|
)
|
|
$
|
72
|
|
|
$
|
50
|
|
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
$212
thousand. The estimated
unrecognized transition liability for the other defined benefit postretirement
plan is zero due to the termination of benefits for current
employees.
Assumptions
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
|
2011
|
|
2010
|
|
2009
|
|
2011
|
|
2010
|
|
2009
|
Weighted-average
assumptions used to
|
|
|
|
|
|
|
|
|
|
|
|
|
determine net periodic
benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.99%
|
|
6.08%
|
|
6.30%
|
|
5.70%
|
|
6.00%
|
|
6.00%
|
Expected return on plan assets
|
|
6.31%
|
|
8.00%
|
|
8.00%
|
|
- -
|
|
- -
|
|
- -
|
Rate of compensation increase
|
|
N/A
|
|
N/A
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
3.00%
|
|
Weighted-average
assumptions used to
|
|
|
|
|
|
|
|
|
|
|
|
|
determine benefit
obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.99%
|
|
5.37%
|
|
6.08%
|
|
4.70%
|
|
5.70%
|
|
6.00%
|
Rate of compensation increase
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
3.00%
|
|
3.00%
|
63
Note 8. Employee Benefit Plans (Continued)
Long-Term Rate
of Return
The plan
sponsor selects the expected long-term rate-of-return-on-assets assumption in
consultation with their investment advisors and actuary. This rate is intended
to reflect the average rate of earnings expected to be earned on the funds
invested or to be invested to provide plan benefits. Historical performance is
reviewed, especially with respect to real rates of return (net of inflation),
for the major asset classes held or anticipated to be held by the trust, and for
the trust itself. Undue weight is not given to recent experience that may not
continue over the measurement period, with higher significance placed on current
forecasts of future long-term economic conditions.
Because assets
are held in a qualified trust, anticipated returns are not reduced for taxes.
Further, solely for this purpose, the plan is assumed to continue in force and
not terminate during the period during which assets are invested. However,
consideration is given to the potential impact of current and future investment
policy, cash flow into and out of the trust, and expenses (both investment and
non-investment) typically paid from plan assets (to the extent such expenses are
not explicitly estimated within periodic cost).
|
|
|
|
|
Fair Value Measurement at December 31, 2011
|
|
|
|
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
|
|
|
|
Active Markets
for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Identical
|
|
Inputs
|
|
Inputs
|
Asset Category
|
|
Total
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Cash & cash
equivalents
|
|
$
|
190
|
|
$
|
190
|
|
$
|
- -
|
|
$
|
- -
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
companies
|
|
|
1 830
|
|
|
1 830
|
|
|
- -
|
|
|
- -
|
International companies
|
|
|
465
|
|
|
465
|
|
|
- -
|
|
|
- -
|
U. S. Treasury
securities
|
|
|
989
|
|
|
989
|
|
|
- -
|
|
|
- -
|
U. S. Corporate bonds
|
|
|
2 229
|
|
|
2 229
|
|
|
- -
|
|
|
- -
|
International Corporate
bonds
|
|
|
213
|
|
|
213
|
|
|
- -
|
|
|
- -
|
|
Total
|
|
$
|
5 916
|
|
$
|
5 916
|
|
$
|
- -
|
|
$
|
- -
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2010
|
|
|
|
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
|
|
|
|
Active Markets
for
|
|
Observable
|
|
Unobservable
|
|
|
|
|
|
Identical
|
|
Inputs
|
|
Inputs
|
Asset Category
|
|
Total
|
|
Assets (Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Cash and cash
equivalents
|
|
$
|
615
|
|
$
|
615
|
|
$
|
- -
|
|
$
|
- -
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
companies
|
|
|
2 502
|
|
|
2 502
|
|
|
- -
|
|
|
- -
|
International companies
|
|
|
646
|
|
|
646
|
|
|
- -
|
|
|
- -
|
U. S. Treasury
securities
|
|
|
718
|
|
|
718
|
|
|
- -
|
|
|
- -
|
U. S. Corporate bonds
|
|
|
1 531
|
|
|
1 531
|
|
|
- -
|
|
|
- -
|
International Corporate
bonds
|
|
|
86
|
|
|
86
|
|
|
- -
|
|
|
- -
|
|
Total
|
|
$
|
6 098
|
|
$
|
6 098
|
|
$
|
- -
|
|
$
|
- -
|
64
Note 8. Employee Benefit Plans (Continued)
Asset Allocation
The pension
plans weighted-average asset allocations at December 31, 2011 and 2010 by asset
category are as follows:
|
|
Plan Assets at December 31
|
|
|
2011
|
|
2010
|
Asset Category
|
|
|
|
|
Equities
|
|
39%
|
|
52%
|
Fixed
income/cash
|
|
61%
|
|
48%
|
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. The investment manager selects
investment fund managers with demonstrated experience and expertise and funds
with demonstrated historical performance for the implementation of the plans
investment strategy. The investment manager will consider both actively and
passively managed investment strategies and will allocate funds across the asset
classes to develop an efficient investment structure.
It is the
responsibility of the trustee to administer the investments of the trust within
reasonable costs, being careful to avoid sacrificing quality. These costs
include, but are not limited to, management and custodial fees, consulting fees,
transaction costs and other administrative costs chargeable to the trust.
After review of
the December 2011 allocations shown above, the funds were rebalanced and were
within policy at February 29, 2012.
There is no
company common stock included in the equity securities of the pension plan at
December 31, 2011 and 2010.
Cash Flow
The company
expects to contribute $2 million to its pension plan in 2012 and $18 thousand to
its postretirement plan in 2012.
The following
benefit payments (in thousands) are expected to be paid:
|
|
|
|
|
Other
|
|
|
|
|
|
Postretirement
|
|
|
Pension Benefits
|
|
Benefits
|
2012
|
|
$
|
417
|
|
$
|
18
|
2013
|
|
|
435
|
|
|
19
|
2014
|
|
|
456
|
|
|
21
|
2015
|
|
|
472
|
|
|
24
|
2016
|
|
|
491
|
|
|
24
|
Thereafter
|
|
|
2 641
|
|
|
130
|
For measurement
purposes, a 6.05%, 6.40% and 6.85% annual rate of increase in per capita health
care costs of covered benefits was assumed for the retiree health care plan for
2011, 2010 and 2009, with such annual rate of increase gradually declining to 5%
in 2013.
Assumed health
care cost trend rates have a significant effect on the amounts reported for the
health care plans. A 1% change in assumed health care cost trend rates would
have the following effects:
|
|
1% Increase
|
|
1% Decrease
|
|
|
(in
thousands)
|
Effect on the health care
component of the accumulated
|
|
|
|
|
|
|
|
postretirement benefit
obligation
|
|
$
|
49
|
|
$
|
(42
|
)
|
Effect on total of service and interest cost
components of
|
|
|
|
|
|
|
|
net
periodic other postretirement health care benefit cost
|
|
|
9
|
|
|
(4
|
)
|
65
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.
|
|
2011
|
|
2010
|
|
2009
|
|
|
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
|
|
3 390
|
|
$
|
(.30
|
)
|
|
3 390
|
|
$
|
.53
|
|
3 391
|
|
$
|
(.66
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
-
-
|
|
|
|
|
|
-
-
|
|
|
|
|
-
-
|
|
|
|
|
|
Diluted (loss)
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per share
|
|
3 390
|
|
$
|
(.30
|
)
|
|
3 390
|
|
$
|
.53
|
|
3 391
|
|
$
|
(.66
|
)
|
Stock options
for 119,908, 124,911 and 129,067 average shares of common stock were not
considered in computing diluted earnings per common share for 2011, 2010 and
2009, 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 and non-qualified stock
options to employees and directors.
A summary of
option activity under the plan as of December 31, 2011, 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
|
|
120 974
|
|
$
|
14.76
|
|
|
|
|
|
Granted
|
|
- -
|
|
|
|
- -
|
|
|
|
|
|
Exercised
|
|
- -
|
|
|
|
- -
|
|
|
|
|
|
Forfeited
|
|
(1 066
|
)
|
|
|
15.60
|
|
|
|
|
|
Outstanding at end of
year
|
|
119 908
|
|
|
$
|
14.76
|
|
4
|
|
$
|
- -
|
Exercisable at end of year
|
|
116 896
|
|
|
$
|
14.73
|
|
4
|
|
$
|
-
-
|
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, 2011. The aggregate intrinsic values change based on changes in the
market value of the companys stock.
The exercise
price of stock options granted under this plan, both incentive and
non-qualified, cannot be less than the fair market value of the common stock on
the date that the option is granted. The maximum term for an option granted
under this plan is ten years and options granted may be subject to a vesting
schedule. The non-qualified options granted are exercisable immediately. The
incentive options granted are subject to a five year vesting period whereby the
grantees are entitled to exercise one fifth of the options on the anniversary of
the grant date over the next five years. The following table summarizes options
outstanding at December 31, 2011:
66
Note 10. Stock-Based Compensation
(Continued)
|
|
|
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
|
|
24 468
|
|
2.0
|
|
$
|
11.28
|
|
24 468
|
|
$
|
11.28
|
|
14.00
|
|
32 735
|
|
3.0
|
|
|
14.00
|
|
32 735
|
|
|
14.00
|
|
17.25
|
|
34 477
|
|
4.0
|
|
|
17.25
|
|
34 477
|
|
|
17.25
|
|
15.60
|
|
28 228
|
|
5.0
|
|
|
15.60
|
|
25 216
|
|
|
15.60
|
|
|
|
119 908
|
|
|
|
|
|
|
116 896
|
|
|
|
As of December
31, 2011, there was
$248 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
less than
one year.
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 2008.
Net deferred
tax assets (in thousands) consist of the following components as of December 31,
2011 and 2010:
|
|
2011
|
|
2010
|
Deferred tax
assets:
|
|
|
|
|
|
|
Reserve
for loan losses
|
|
$
|
949
|
|
$
|
1 245
|
Accrued pension
expense
|
|
|
823
|
|
|
530
|
Accrued
postretirement benefits
|
|
|
178
|
|
|
255
|
Nonaccrual
interest
|
|
|
83
|
|
|
36
|
Stock
option expense
|
|
|
35
|
|
|
35
|
Home equity closing
costs
|
|
|
11
|
|
|
23
|
Net
loan origination fees
|
|
|
102
|
|
|
69
|
Securities available for
sale
|
|
|
- -
|
|
|
52
|
Net
operating loss carryforward
|
|
|
553
|
|
|
- -
|
OREO expense
|
|
|
240
|
|
|
138
|
OREO
valuation allowance
|
|
|
835
|
|
|
32
|
OREO built in
gain
|
|
|
280
|
|
|
250
|
|
|
$
|
4 089
|
|
$
|
2 665
|
Deferred tax
liabilities:
|
|
|
|
|
|
|
Depreciation
|
|
$
|
84
|
|
$
|
89
|
Securities available for
sale
|
|
|
105
|
|
|
- -
|
|
|
$
|
189
|
|
$
|
89
|
|
Net deferred tax assets
|
|
$
|
3 900
|
|
$
|
2 576
|
The (benefit)
provision for income taxes charged to operations for the years ended December
31, 2011, 2010 and 2009 consists of the following (in thousands):
|
|
2011
|
|
2010
|
|
2009
|
Current tax (benefit)
expense
|
|
$
|
(53
|
)
|
|
$
|
186
|
|
$
|
(827
|
)
|
Deferred tax (benefit) expense
|
|
|
(1 197
|
)
|
|
|
494
|
|
|
(609
|
)
|
|
|
$
|
(1 250
|
)
|
|
$
|
680
|
|
$
|
(1 436
|
)
|
67
Note 11. Income Taxes (Continued)
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, 2011,
2010 and 2009 due to the following (in thousands):
|
|
2011
|
|
2010
|
|
2009
|
Computed expected tax
(benefit) expense
|
|
$
|
(768
|
)
|
|
$
|
841
|
|
|
$
|
(1 250
|
)
|
Increase (decrease) in income taxes
resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax exempt
income
|
|
|
(168
|
)
|
|
|
(165
|
)
|
|
|
(146
|
)
|
State
income tax (benefit) expense
|
|
|
(250
|
)
|
|
|
- -
|
|
|
|
(163
|
)
|
Other
|
|
|
(64
|
)
|
|
|
4
|
|
|
|
123
|
|
|
|
$
|
(1 250
|
)
|
|
$
|
680
|
|
|
$
|
(1 436
|
)
|
The realization
of deferred income tax assets is assessed and a valuation allowance is recorded
if it is more likely than not that all or a portion of the deferred tax asset
will not be realized. More likely than not is defined as greater than a 50%
chance. Management considers all available evidence, both positive and negative,
to determine whether, based on the weight of that evidence, a valuation
allowance is needed. Managements assessment is primarily dependent on
historical taxable income and projections of future taxable income, which are
directly related to the companys core earnings capacity and its prospects to
generate core earnings in the future. Projections of core earnings and taxable
income are inherently subject to uncertainty and estimates that may change given
the uncertain economic outlook, banking industry conditions and other factors.
Based upon an analysis of available evidence, management has determined that it
is more likely than not that the companys deferred income tax assets as of
December 31, 2011 will be fully realized and therefore no valuation allowance to
the companys deferred income tax assets was recorded. However, the company can
give no assurance that in the future its deferred income tax assets will not be
impaired because such determination is based on projections of future earnings
and the possible effect of certain transactions, which are subject to
uncertainty and based on estimates that may change due to changing economic
conditions and other factors. Due to the uncertainty of estimates and
projections, it is possible that the company will be required to record
adjustments to the valuation allowance in future reporting periods.
Under the provisions of the Internal Revenue Code, the Company has approximately $697,168 of net operating loss carryforwards which can be offset against future taxable income. The carryforwards expire through December 31, 2031. In addition, the Company has approximately $3,958,316 of net operating loss carryforwards which can be offset against future West Virginia taxable income. These carryforwards also expire through December 31, 2031. The full realization of the tax benefits associated with the carryforwards depends predominately upon the recognition of ordinary income during the carryforward period.
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
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, 2011 and 2010, this requirement was met by the amount of
vault cash.
The table below
presents the contractual obligations of the company as of December 31, 2011 not
disclosed in other notes:
|
|
Lease
|
|
Lease
|
|
|
Obligations
|
|
Obligations
|
|
|
for
|
|
for
|
|
|
Real Estate
|
|
Equipment
|
2012
|
|
$
|
40
|
|
$
|
29
|
2013
|
|
|
31
|
|
|
29
|
2014
|
|
|
- -
|
|
|
29
|
2015
|
|
|
- -
|
|
|
10
|
2016
|
|
|
- -
|
|
|
- -
|
Thereafter
|
|
|
-
-
|
|
|
-
-
|
|
|
|
$
|
71
|
|
$
|
97
|
68
Note 13. Retained Earnings
Federal and
state banking regulations place certain restrictions on dividends paid and loans
or advances made by the bank to the company. The approval of the State Banking
Commissioner is required if the total of all dividends declared in any calendar
year exceeds the banks net profits for that year combined with its retained net
profits for the preceding two calendar years and loans or advances are limited
to 10 percent of the banks capital stock and surplus on a secured basis.
At December 31,
2011, none of the banks retained earnings were available for the payment of
dividends. Accordingly, $24.5 million of the companys equity in the net assets
of the bank was restricted at December 31, 2011. Funds available for loans or
advances by the bank to the company amounted to $600 thousand.
In addition,
dividends paid by the bank to the company would be prohibited if the effect
thereof would cause the banks capital to be reduced below applicable minimum
capital requirements.
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 companys
exposure to credit loss in the event of nonperformance by the borrowers for
commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The company uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
A summary of
the contract or notional amount of the companys exposure to off-balance-sheet
risk as of December 31, 2011 and 2010 (in thousands) is as follows:
|
|
2011
|
|
2010
|
Financial instruments
whose
|
|
|
|
|
|
|
amounts represent
credit risk:
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
27 466
|
|
$
|
28 050
|
Standby letters of credit
|
|
|
2 382
|
|
|
2
225
|
Commitments to
extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The company evaluates each customers credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by
the company upon extension of credit, is based on managements credit evaluation
of the borrower. Collateral held varies but typically is cash or real estate.
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.
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,
2011, the company had no rate lock commitments to originate mortgage loans and
had mortgage loans held for sale in the amount of $198 thousand. The company
enters into corresponding mandatory commitments, on a best-efforts basis, to
sell the loans. These commitments to sell loans are designed to eliminate the
companys exposure to fluctuations in interest rates in connection with rate
lock commitments and loans held for sale.
69
Note 15. Fair Value Measurements
Determination
of Fair Value
The company
uses fair value measurements to record fair value adjustments for certain assets
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
companys 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.
The 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
1Valuation 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
2Valuation 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
3Valuation 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
instruments 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.
70
Note 15. Fair Value Measurements
(Continued)
Securities
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). Certain of the equity
securities with inactive markets utilize level 3 which may include judgment or
estimation.
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.
Loans held for Sale
The fair value of loans held for sale is based on outstanding commitments from investors.
FHLB Stock
The carrying
amounts of FHLB stock approximate fair value based on redemption provisions of
the FHLB.
Bank Owned Life Insurance (BOLI)
The carrying amounts of BOLI
approximate fair value.
Deposit
Liabilities
The fair value
of demand deposits, savings accounts, and certain money market deposits is the
amount payable on demand at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Short-Term
Borrowings
The carrying
amounts of borrowings under repurchase agreements and federal funds purchased
approximate fair value.
FHLB Advances
The fair values
of the companys FHLB advances are estimated using discounted cash flow analysis
based on the companys incremental borrowing rates for similar types of
borrowing arrangements.
Accrued
Interest
The carrying
amounts of accrued interest approximate fair value.
Off-Balance
Sheet Financial Instruments
At December 31,
2011 and 2010, the fair value of loan commitments and standby-letters of credit
was immaterial. Therefore, they have not been included in the following table.
71
Note 15. Fair Value Measurements
(Continued)
The carrying
amounts and estimated fair values of the companys financial instruments are as
follows:
|
2011
|
|
2010
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
(in thousands)
|
|
(in
thousands)
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and interest
|
|
|
|
|
|
|
|
|
|
|
|
bearing deposits
|
$
|
12 930
|
|
$
|
12 930
|
|
$
|
10 180
|
|
$
|
10 180
|
Federal funds
sold
|
|
794
|
|
|
794
|
|
|
2 725
|
|
|
2 725
|
Securities available for sale
|
|
42 331
|
|
|
42 331
|
|
|
42 690
|
|
|
42 690
|
Loans, net
|
|
202 761
|
|
|
202 737
|
|
|
214 238
|
|
|
212 200
|
Loans
held for sale
|
|
198
|
|
|
198
|
|
|
76
|
|
|
76
|
FHLB stock
|
|
808
|
|
|
808
|
|
|
765
|
|
|
765
|
BOLI
|
|
6 932
|
|
|
6 932
|
|
|
6 397
|
|
|
6 397
|
Accrued interest
receivable
|
|
832
|
|
|
832
|
|
|
960
|
|
|
960
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
253 117
|
|
|
253 885
|
|
|
257 422
|
|
|
258 240
|
Securities sold
under
|
|
|
|
|
|
|
|
|
|
|
|
agreements to repurchase
|
|
3 415
|
|
|
3 415
|
|
|
7 382
|
|
|
7 382
|
FHLB
advances
|
|
1 523
|
|
|
1 534
|
|
|
2 717
|
|
|
2 734
|
Accrued interest
payable
|
|
204
|
|
|
204
|
|
|
361
|
|
|
361
|
Assets Measured
at Fair Value on a Recurring Basis
The following
table presents the balances (in thousands) of financial assets measured at fair
value on a recurring basis as of December 31, 2011 and 2010:
|
|
|
|
Fair Value Measurements at December 31, 2011
Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
in
Active
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
Balance as of
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
December 31
|
|
Assets
|
|
Inputs
|
|
Inputs
|
Description
|
|
2011
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level
3)
|
Available for sale debt securities
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency securities
|
$
|
34
823
|
|
$
|
-
-
|
|
$
|
34
823
|
|
$
|
-
-
|
State and municipal
securities
|
|
6 715
|
|
|
- -
|
|
|
6 715
|
|
|
- -
|
|
Total
available for sale debt securities
|
|
41
538
|
|
|
-
-
|
|
|
41
538
|
|
|
-
-
|
|
Available for sale equity securities
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
industry
|
|
793
|
|
|
- -
|
|
|
149
|
|
|
644
|
|
Total
available for sale securities
|
$
|
42 331
|
|
$
|
- -
|
|
$
|
41 687
|
|
$
|
644
|
72
Note 15. Fair Value Measurements
(Continued)
|
|
|
|
Fair Value Measurements at December 31, 2010
Using
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
Balance as of
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
December 31
|
|
Assets
|
|
Inputs
|
|
Inputs
|
Description
|
|
2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Available for sale securities
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government
|
|
|
|
|
|
|
|
|
|
|
|
sponsored agency securities
|
$
|
36 288
|
|
$
|
- -
|
|
$
|
36 288
|
|
$
|
- -
|
State and municipal
securities
|
|
5 524
|
|
|
- -
|
|
|
5 524
|
|
|
- -
|
|
Total available for sale debt securities
|
|
41 812
|
|
|
- -
|
|
|
41 812
|
|
|
- -
|
|
Available for sale equity securities
|
|
|
|
|
|
|
|
|
|
|
|
Financial services
industry
|
|
878
|
|
|
-
-
|
|
|
878
|
|
|
-
-
|
|
Total available for sale securities
|
$
|
42 690
|
|
$
|
- -
|
|
$
|
42 690
|
|
$
|
- -
|
Assets Measured
at Fair Value on a Recurring Basis Using Significant Unobservable Inputs (Level
3)
|
Fair Value Measurements Using
Significant Unobservable Inputs (Level 3)
|
|
($ in thousands)
|
|
|
|
Available for Sale Equity
Securities
|
Beginning Balance January
1, 2011
|
|
|
|
$
|
- -
|
|
|
|
Transfers into Level 3
|
|
|
|
834
|
|
|
|
Transfers out of Level 3
|
|
|
|
- -
|
|
|
|
Total losses (unrealized)
|
|
|
|
|
|
|
|
included in other
|
|
|
|
|
|
|
|
comprehensive income
|
|
|
|
(190
|
)
|
|
|
|
Ending Balance December
31, 2011
|
|
|
|
$
|
644
|
|
|
Assets 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 years ended December 31, 2011 and 2010. Gains and losses on the sale of loans
are recorded within other operating income on the consolidated statements of operations.
73
Note 15. Fair Value Measurements
(Continued)
Impaired
Loans
: Loans are
generally
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 businesss 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 value
of real estate collateral is determined by internal evaluation or an appraisal
outside of the company or a comparative market analysis (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, or the property is
in the process of being appraised then the fair value is considered level
3.
The following
table summarizes the
companys assets that were measured at fair value (in
thousands) on a nonrecurring basis as of December 31, 2011 and 2010.
|
|
|
|
|
Carrying Value at December 31,
2011
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Balance as of
|
|
Assets
|
|
Input
|
|
Input
|
Description
|
|
|
December 31, 2011
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for
sale
|
|
$
|
198
|
|
$
|
- -
|
|
$
|
198
|
|
$
|
- -
|
Impaired Loans
with a valuation allowance
|
|
|
6 805
|
|
|
- -
|
|
|
308
|
|
|
6 497
|
OREO
|
|
|
6 393
|
|
|
- -
|
|
|
4 365
|
|
|
2 028
|
|
|
|
|
|
|
Carrying Value at December 31,
2010
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
Significant
|
|
|
|
|
|
|
|
|
Markets for
|
|
Other
|
|
Significant
|
|
|
|
|
|
Identical
|
|
Observable
|
|
Unobservable
|
|
|
Balance as of
|
|
Assets
|
|
Input
|
|
Input
|
Description
|
|
|
December 31, 2010
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for
sale
|
|
$
|
76
|
|
$
|
- -
|
|
$
|
76
|
|
$
|
- -
|
Impaired Loans
with a valuation allowance
|
|
|
11 933
|
|
|
- -
|
|
|
10 593
|
|
|
1 340
|
OREO
|
|
|
6 563
|
|
|
- -
|
|
|
6 563
|
|
|
-
-
|
74
Note 16. Regulatory Matters
The company (on
a consolidated basis) and the bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory possibly
additional discretionary actions by regulators that, if undertaken, could have
a direct material effect on the companys and the banks financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the company and bank must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Prompt
corrective action provisions are not applicable to bank holding
companies.
Quantitative
measures established by regulation to ensure capital adequacy require the
company and the bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2011 and 2010, that
the company and the bank meet all capital adequacy requirements to which they
are subject.
The most recent notification from the FDIC 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.
The companys
and the banks actual capital amounts and ratios are 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,
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
27 487
|
|
13.10%
|
|
$
|
16 782
|
|
8.0%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
$
|
26 331
|
|
12.64%
|
|
$
|
16 662
|
|
8.0%
|
|
$
|
20 828
|
|
10.0%
|
Tier 1 capital (to
risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
24 842
|
|
11.84%
|
|
$
|
8 391
|
|
4.0%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
$
|
23 704
|
|
11.38%
|
|
$
|
8 331
|
|
4.0%
|
|
$
|
12 497
|
|
6.0%
|
Tier 1
capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
24 842
|
|
8.56%
|
|
$
|
11 602
|
|
4.0%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
$
|
23 704
|
|
8.21%
|
|
$
|
11 544
|
|
4.0%
|
|
$
|
14 430
|
|
5.0%
|
|
As of December 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
capital (to risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
30 798
|
|
14.24%
|
|
$
|
17 306
|
|
8.0%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
$
|
29 584
|
|
13.74%
|
|
$
|
17 223
|
|
8.0%
|
|
$
|
21 529
|
|
10.0%
|
Tier 1 capital (to
risk-weighted assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
28 065
|
|
12.97%
|
|
$
|
8 653
|
|
4.0%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
$
|
26 864
|
|
12.48%
|
|
$
|
8 612
|
|
4.0%
|
|
$
|
12 917
|
|
6.0%
|
Tier 1
capital (to average assets):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
$
|
28 065
|
|
9.36%
|
|
$
|
11 992
|
|
4.0%
|
|
|
N/A
|
|
N/A
|
Bank of Charles Town
|
$
|
26 864
|
|
8.99%
|
|
$
|
11 947
|
|
4.0%
|
|
$
|
14 934
|
|
5.0%
|
75
Note 17. Parent Company Only Financial
Statements
POTOMAC BANCSHARES, INC.
(Parent
Company Only)
Balance Sheets
December 31, 2011 and 2010
(in thousands)
|
2011
|
|
2010
|
ASSETS
|
|
|
|
|
|
|
|
Cash
|
$
|
2
|
|
|
$
|
70
|
|
Investment in
subsidiary
|
|
24 492
|
|
|
|
25 685
|
|
Equity
securities available for sale, at fair value
|
|
793
|
|
|
|
858
|
|
Other assets
|
|
178
|
|
|
|
163
|
|
|
Total Assets
|
$
|
25 465
|
|
|
$
|
26 776
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Other
liabilities
|
$
|
-
-
|
|
|
$
|
-
-
|
|
Total Liabilities
|
$
|
- -
|
|
|
$
|
- -
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
Common
stock
|
$
|
3 672
|
|
|
$
|
3 672
|
|
Surplus
|
|
3 943
|
|
|
|
3 932
|
|
Undivided profits
|
|
22 648
|
|
|
|
23 725
|
|
Accumulated other
comprehensive (loss), net
|
|
(1 932
|
)
|
|
|
(1 687
|
)
|
|
$
|
28 331
|
|
|
$
|
29 642
|
|
Less cost of shares acquired for the treasury
|
|
2 866
|
|
|
|
2 866
|
|
Total Stockholders Equity
|
$
|
25 465
|
|
|
$
|
26 776
|
|
|
Total Liabilities and Stockholders Equity
|
$
|
25 465
|
|
|
$
|
26 776
|
|
76
Note 17. Parent Company Only Financial
Statements (Continued)
POTOMAC BANCSHARES, INC.
(Parent
Company Only)
Statements of Operations
Years Ended December 31, 2011, 2010
and 2009
(in thousands)
|
2011
|
|
2010
|
|
2009
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from subsidiary
|
$
|
68
|
|
|
$
|
80
|
|
|
$
|
977
|
|
Interest
income
|
|
- -
|
|
|
|
- -
|
|
|
|
1
|
|
Total Income
|
$
|
68
|
|
|
$
|
80
|
|
|
$
|
978
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
$
|
11
|
|
|
$
|
34
|
|
|
$
|
47
|
|
Public relations &
new business development
|
|
5
|
|
|
|
3
|
|
|
|
4
|
|
Transfer agent expense
|
|
16
|
|
|
|
15
|
|
|
|
15
|
|
Computer
services
|
|
4
|
|
|
|
4
|
|
|
|
3
|
|
Director and committee fees
|
|
10
|
|
|
|
9
|
|
|
|
8
|
|
Legal fees
|
|
11
|
|
|
|
17
|
|
|
|
11
|
|
Other
professional fees
|
|
21
|
|
|
|
16
|
|
|
|
63
|
|
Postage
|
|
5
|
|
|
|
4
|
|
|
|
4
|
|
Proxy
solicitation
|
|
9
|
|
|
|
9
|
|
|
|
8
|
|
Printing, stationery and
supplies
|
|
13
|
|
|
|
15
|
|
|
|
16
|
|
Other
taxes
|
|
1
|
|
|
|
1
|
|
|
|
1
|
|
Other operating
expenses
|
|
- -
|
|
|
|
- -
|
|
|
|
117
|
|
Total Expenses
|
$
|
106
|
|
|
$
|
127
|
|
|
$
|
297
|
|
|
(Loss) Income before Income Tax (Benefit) and
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Undistributed (Loss) Income
|
|
|
|
|
|
|
|
|
|
|
|
of Subsidiary
|
$
|
(38
|
)
|
|
$
|
(47
|
)
|
|
$
|
681
|
|
|
Income Tax
(Benefit)
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
(84
|
)
|
|
(Loss) Income before Equity in Undistributed
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Income of Subsidiary
|
$
|
(7
|
)
|
|
$
|
(16
|
)
|
|
$
|
765
|
|
|
Equity in Undistributed
(Loss) Income of Subsidiary
|
|
(1 003
|
)
|
|
|
1 810
|
|
|
|
(3 005
|
)
|
Net (Loss) Income
|
$
|
(1 010
|
)
|
|
$
|
1 794
|
|
|
$
|
(2 240
|
)
|
77
Note 17. Parent Company Only Financial
Statements (Continued)
POTOMAC BANCSHARES, INC.
(Parent
Company Only)
Statements of Cash Flows
Years Ended December 31, 2011, 2010
and 2009
(in thousands)
|
2011
|
|
2010
|
|
2009
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
$
|
(1 010
|
)
|
|
$
|
1 794
|
|
|
$
|
(2 240
|
)
|
Adjustments to reconcile
net (loss) income to net cash
|
|
|
|
|
|
|
|
|
|
|
|
(used in)
provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed loss (income) of
|
|
|
|
|
|
|
|
|
|
|
|
subsidiary
|
|
1 003
|
|
|
|
(1 810
|
)
|
|
|
3 005
|
|
Stock-based compensation expense
|
|
11
|
|
|
|
34
|
|
|
|
47
|
|
(Increase) decrease in other assets
|
|
(5
|
)
|
|
|
52
|
|
|
|
68
|
|
(Decrease) increase in other liabilities
|
|
- -
|
|
|
|
(1
|
)
|
|
|
1
|
|
|
Net cash (used in) provided by
|
|
|
|
|
|
|
|
|
|
|
|
operating activities
|
$
|
(1
|
)
|
|
$
|
69
|
|
|
$
|
881
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends
|
$
|
(67
|
)
|
|
$
|
- -
|
|
|
$
|
(899
|
)
|
Purchase of treasury
shares
|
|
-
-
|
|
|
|
-
-
|
|
|
|
(29
|
)
|
|
Net cash (used in) financing activities
|
$
|
(67
|
)
|
|
$
|
- -
|
|
|
$
|
(928
|
)
|
|
(Decrease) increase in cash and cash
|
|
|
|
|
|
|
|
|
|
|
|
equivalents
|
$
|
(68
|
)
|
|
$
|
69
|
|
|
|
(47
|
)
|
|
CASH AND CASH
EQUIVALENTS
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
70
|
|
|
|
1
|
|
|
|
48
|
|
Ending
|
$
|
2
|
|
|
$
|
70
|
|
|
$
|
1
|
|
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.
Item 9. Changes In and Disagreements
with Accountants on Accounting and Financial Disclosure
.
Not Applicable.
78
Item 9A. Controls and Procedures.
The companys chief executive officer and chief
financial officer, based on their evaluation as of the date of this report of
the companys disclosure controls and procedures (as defined in Rule 13(a)-14(e)
of the Securities Exchange Act of 1934), have concluded that the companys
disclosure controls and procedures are adequate and effective for purposes of
Rule 13(a)-14(c) and timely, alerting them to material information relating to
the company required to be included in the companys filings with the Securities
and Exchange Commission under the Securities Exchange Act of 1934.
As a smaller reporting company, managements report will not be subject
to attestation by the companys registered public accounting firm pursuant to
permanent rules of the Securities and Exchange Commission that permit the
company to provide only managements report in this annual report.
There were no significant changes in the companys internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of their evaluation.
Managements Report on Internal Control
Over Financial Reporting
To the Stockholders:
Management is responsible for the preparation and fair presentation of
the financial statements included in this annual report. The financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America and reflect managements judgments and
estimates concerning effects of events and transactions that are accounted for
or disclosed.
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting. The companys internal control over
financial reporting includes those policies and procedures that pertain to the
companys ability to record, process, summarize and report reliable financial
data. Management recognizes that there are inherent limitations in the
effectiveness of any internal control over financial reporting, including the
possibility of human error and the circumvention or overriding of internal
control. Accordingly, even effective internal control over financial reporting
can provide only reasonable assurance with respect to financial statement
preparation. Further, because of changes in conditions, the effectiveness of
internal control over financial reporting may vary over time.
In order to ensure that the companys internal control over financial
reporting is effective, management regularly assesses such controls and did so
most recently for its financial reporting as of December 31, 2011. This
assessment was based on criteria for effective internal control over financial
reporting described in
Internal
ControlIntegrated
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, 2011.
The Board of Directors, acting through its Audit Committee, is
responsible for the oversight of the companys accounting policies, financial
reporting and internal control. The Audit Committee of the Board of Directors is
comprised entirely of outside directors who are independent of management. The
Audit Committee is responsible for the appointment and compensation of the
independent registered public accounting firm and approves decisions regarding
the appointment or removal of the companys internal auditor. It meets
periodically with management, the independent registered public accounting firm
and the internal auditor to ensure that they are carrying out their
responsibilities. The Audit Committee is also responsible for performing an
oversight role by reviewing and monitoring the financial, accounting and
auditing procedures of the company in addition to reviewing the companys
financial reports. The independent registered public accounting firm and the
internal auditor have full and unlimited access to the Audit Committee, with or
without management, to discuss the adequacy of internal control over financial
reporting, and any other matter which they believe should be brought to the
attention of the Audit Committee.
Item 9B. Other
Information.
None.
79
PART III
Item 10. Directors and Executive
Officers of the Registrant.
The information
contained on pages 7-10 of the Proxy Statement dated March 30, 2012, for the May
15, 2012 Annual Meeting under the captions Management Nominees to the Board of
Potomac and Directors Continuing to Serve Unexpired Terms, and page 16-17
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
|
|
53
|
|
Employed by bank as of
1/1/01 as President and CEO.
|
|
|
2001
|
|
|
|
|
|
Dean Cognetti
|
|
Sr. Vice President &
Chief
|
|
52
|
|
Employed with the bank as
of 7/11/11 as
|
|
|
Financial
Officer
|
|
|
|
Sr. Vice President and
Chief Financial Officer.
|
|
|
2011
|
|
|
|
|
|
Arch A. Moore,
III
|
|
Executive Vice
President
|
|
60
|
|
Employed with the bank as
of
1/1/11
as Executive
|
|
|
& Chief Lending
Officer
|
|
|
|
Vice President and Chief
Lending Officer.
|
|
|
2011
|
|
|
|
|
The bank has adopted a Code of Ethics that applies to all employees,
including Potomacs and the banks chief executive officer and chief financial
officer and other senior officers. Additionally, there is a Code of Ethics for
Senior Financial Officers which applies to Potomacs and the banks chief
executive officer and chief financial officer. These Codes of Ethics are
attached to this document as Exhibits 14.1 and 14.2. If we make any substantive
amendments to this code or grant any waiver from a provision of the code to our
chief executive officer or chief financial officer, we will disclose the
amendment or waiver in a report on Form 8-K.
Item 11. Executive Compensation.
The information contained on pages 12-15 of the Proxy Statement dated
March 30, 2012, for the May 15, 2012 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
11-12
of the Proxy Statement dated
March 30, 2012, for the May 15, 2012 Annual Meeting under the caption Ownership
of Securities by Nominees, Directors and Officers is incorporated herein by
reference.
Securities
authorized for issuance under Potomacs 2003 Stock Incentive Plan are listed
below:
|
|
|
|
|
|
|
Number of
securities
|
|
|
Number of securities
|
|
|
|
|
remaining available
for
|
|
|
to be issued
|
|
Weighted-average
|
|
future issuance
under
|
|
|
upon exercise of
|
|
exercise price
of
|
|
equity compensation
plans
|
|
|
outstanding options,
|
|
outstanding
options,
|
|
(excluding
securities
|
Plan category
|
|
warrants and rights
|
|
warrants and rights
|
|
reflected in column (a))
|
2003 Stock Incentive
Plan
|
|
|
|
|
|
|
|
amended by
shareholders
|
|
|
|
|
|
|
|
April 24, 2007
|
|
119,908
|
|
$
|
14.76
|
|
311,652
|
Item 13. Certain Relationships and
Related Transactions
.
The information contained on page 16 of the Proxy Statement dated March
30, 2012, for the May 15, 2012 Annual Meeting under the caption Certain
Transactions with Directors, Officers and Their Associates is incorporated
herein by reference.
80
Item 14. Principal Accountant Fees and
Services.
The information
contained on pages 6-7 of the Proxy Statement dated March 30, 2012, for the May
15, 2012 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,
both incorporated by reference from the Form 10-K for the year ended December
31, 2009, and filed with the Securities and Exchange Commission, File No.
0-24958.
3.2 Amended and Restated Bylaws of Potomac Bancshares, Inc. and
subsequent amendments thereto, incorporated by reference from the Form 10-K for
the year ended December 31, 2009, and filed with the Securities and Exchange
Commission, File No. 0-24958.
10.1 2003 Stock Incentive Plan adopted by the Potomac Board February 20,
2003 and approved by the companys shareholders on May 13, 2003, amended by the
companys shareholders on April 24, 2007 and incorporated by reference from
Potomacs Form 10-K for the year ended December 31, 2006 and filed with the
Securities and Exchange Commission, File No. 0-24958.
10.2 Employment Agreement of Mr. Robert F. Baronner, Jr., filed with and
incorporated by reference from Form 10-KSB for the year ended December 31, 2001,
and filed with the Securities and Exchange Commission, File No. 0-24958.
14.1
Code
of Ethics (for all employees)*
14.2
Code
of Ethics for Senior Financial Officers*
21 Subsidiaries of the Registrant*
23.1 Consent of Independent 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
2012
Annual Meeting for
Potomac, portions are incorporated by reference in Form 10-K Annual
Report*
101.INS XBRL Instance Document. **
101.SCH XBRL Taxonomy Extension Schema. **
101.CAL XBRL Taxonomy Extension Calculation Linkbase. **
101.LAB XBRL Taxonomy Extension Label Linkbase. **
101.PRE XBRL Taxonomy Extension Presentation Linkbase. **
101.DEF XBRL Taxonomy Definition Linkbase. **
* Filed herewith.
** Furnished, not filed, herewith
81
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
29
, 2012
|
|
Robert F. Baronner,
Jr.
|
|
|
|
President & Chief
Executive Officer
|
|
|
|
|
|
By
|
/s/ Dean Cognetti
|
|
March
29
, 2012
|
|
Dean Cognetti
|
|
|
|
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
29
, 2012
|
|
Dr. Keith Berkeley,
Director
|
|
|
|
|
|
|
By
|
/s/ J. Scott
Boyd
|
|
March
29
, 2012
|
|
J. Scott Boyd,
Director
|
|
|
|
|
|
|
By
|
/s/ John P.
Burns, Jr.
|
|
March
29
, 2012
|
|
John P. Burns, Jr.,
Director
|
|
|
|
|
|
|
By
|
/s/ Guy
Gareth Chicchirichi
|
|
March
29
, 2012
|
|
Guy Gareth Chicchirichi,
Director
|
|
|
|
|
|
|
By
|
/s/ Margaret
Cogswell
|
|
March
29
, 2012
|
|
Margaret Cogswell,
Director
|
|
|
|
|
|
|
By
|
/s/ Mary
Clare Eros
|
|
March
29
, 2012
|
|
Mary Clare Eros,
Director
|
|
|
|
|
|
|
By
|
/s/ William
R. Harner
|
|
March
29
, 2012
|
|
William R. Harner,
Director
|
|
|
|
|
|
|
By
|
/s/ Stanley
L. Merson
|
|
March
29
, 2012
|
|
Stanley L. Merson,
Director
|
|
|
|
|
|
|
|
|
|
|
By
|
/s/ Barbara
H. Pichot
|
|
March
29
, 2012
|
|
Barbara H. Pichot,
Director
|
|
|
|
|
|
|
|
|
|
|
By
|
/s/ John C.
Skinner, Jr.
|
|
March
29
, 2012
|
|
John C. Skinner, Jr.,
Director
|
|
|
|
|
|
|
By
|
/s/ C. Larry
Togans
|
|
March
29
, 2012
|
|
C. Larry Togans,
Director
|
|
|
82
Grafico Azioni Potomac Bancshares (PK) (USOTC:PTBS)
Storico
Da Ago 2024 a Set 2024
Grafico Azioni Potomac Bancshares (PK) (USOTC:PTBS)
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