Notes
to Consolidated Financial Statements
Note
1. Significant Accounting Policies
Nature of
Business:
Citizens Financial Corp. (“Citizens” or “the
company” or “we”) was incorporated as a bank holding company in
1987. Our wholly-owned bank subsidiary, Citizens National Bank of
Elkins (“the bank”) provides retail and commercial loan, deposit, trust and
brokerage services to customers in Randolph, Tucker, Grant and Pocahontas
Counties of West Virginia and nearby areas.
Basis of Financial Statement
Presentation:
Our accounting and reporting policies conform to
U.S. generally accepted accounting principles and to general practices within
the banking industry.
Use of
Estimates:
In preparing consolidated financial statements in
conformity with U.S. generally accepted accounting principles, we are required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheets and 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 deferred
tax assets.
Principles of
Consolidation:
The accompanying consolidated financial
statements include the accounts of Citizens Financial Corp. and its wholly-owned
subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Presentation of Cash
Flows:
For purposes of reporting cash flows, cash and cash
equivalents includes cash on hand, balances due from banks (including cash items
in process of clearing) and federal funds sold. Cash flows from
demand deposits, NOW accounts and savings accounts are reported net since their
original maturities are less than three months. Cash flows from loans
and certificates of deposit and other time deposits are also reported
net.
Securities
: All of
our debt and equity investment securities are classified as available-for-sale
and carried at fair value, with unrealized gains and losses, net of tax,
reported as a separate component of comprehensive income until
realized. Gains and losses on the sale of available-for-sale
securities are determined using the specific identification
method. Premiums and discounts are recognized as interest income
using the interest method over the period to maturity. Declines in the fair
value of available for sale securities below their cost that are deemed to be
other than temporary are reflected in earnings as realized losses. In
estimating other-than-temporary impairment losses, we consider (1) the length of
time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) our ability
to retain our investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Loans and Allowance for Loan
Losses:
The bank makes mortgage, commercial and consumer loans
to customers. Loans which management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are generally
reported at their outstanding principal balance reduced by unearned income and
the allowance for loan losses. Interest income is accrued daily on
the outstanding principal balance. Loan origination fees and certain
direct loan origination costs are deferred and amortized as adjustments to the
related loan’s yield over its contractual life.
The accrual of interest on loans is
discontinued when they are 90 days delinquent unless the loan is well secured
and in the process of collection. However, loans may be placed on
nonaccrual, or charged-off, at an earlier date if the collection of principal
and interest is doubtful. When loans are placed on nonaccrual all
interest which has accrued but not been collected is reversed against interest
income, unless the income was recognized in prior years in which case it is
charged to the allowance for loan losses. Interest income during the
period when a loan is on nonaccrual is recorded on a cash basis after recovery
of principal is reasonably assured. If recovery of principal is not
reasonably assured, payments received on nonaccrual loans are typically applied
directly against the outstanding principal balance until the loan is fully
repaid. Loans are generally restored to an accrual status when the
obligation is brought current, has performed in accordance with the terms of the
note for a reasonable period of time, and interest is no longer in
doubt.
The allowance for loan losses is
maintained at a level considered adequate to provide for losses that are
inherent in the loan portfolio. The allowance is established by
provisions charged to operating expense and reduced when loans are
charged-off. Subsequent recoveries, if any, are credited to the
allowance.
Management’s evaluation of the adequacy
of the allowance for loan losses is based upon quarterly assessments of the loan
portfolio. This assessment is inherently subjective and requires
significant estimates that are subject to revisions as more information becomes
available. Among the factors we consider are the borrower’s ability
to repay, the value of
the
collateral securing the loan, historical charge-off and delinquency trends,
current economic and business conditions, lending policies and procedures,
concentrations of credit, and various other factors.
A loan is considered impaired when,
based on current information and events, it is probable that the company will be
unable to collect the scheduled payments when due according to the contractual
terms of the loan agreement. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed. Impairment is measured on a loan-by-loan basis for larger,
nonhomogeneous loans including commercial and construction
loans. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the bank does not
separately identify individual consumer and residential loans for impairment
disclosures.
The allowance consists of a specific
component which relates to larger loans classified as special mention,
substandard or doubtful and are specifically evaluated for impairment, as well
as a general component for the smaller homogeneous loans not specifically
evaluated. For specifically evaluated loans considered impaired an
allowance is established when the loans’ discounted cash flows, collateral value
or observable market price is less than its carrying value. For loans
which are evaluated but not considered impaired, as well as smaller homogeneous
loans, an allowance is established by grouping the loans into pools having
similar risk characteristics and applying historical loan factors, adjusted for
current conditions, to each pool.
Bank Premises and
Equipment:
Land is carried at cost. Bank premises
and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily by the straight-line
method over the estimated useful lives of the assets. Premises and
equipment typically have useful lives ranging from 5 to 39
years. Repairs and maintenance expenditures are charged to operating
expense as incurred. Major improvements and additions to premises and
equipment are capitalized.
Other Real
Estate:
Other real estate consists of real estate held for
resale which is acquired through foreclosure on loans secured by such real
estate. At the time of acquisition, these properties are recorded at fair value
with any writedown charged to the allowance for loan losses. After
foreclosure, valuations are periodically performed by management and the real
estate is carried at the lower of carrying amount or fair value less cost to
sell. Expenses incurred in connection with operating these properties
are charged to operating expenses as incurred; depreciation is not recorded on
property held for sale. Gains and losses on the sales of these
properties are credited or charged to operating income in the year of the
transaction.
Intangible
Assets:
Intangible assets represent purchased assets that lack
physical substance but can be distinguished from goodwill because of contractual
or other legal rights or because the asset is capable of being sold or exchanged
either on its own or in a combination with a related contract, asset, or
liability. Intangible assets are tested at least annually for
impairment.
Securities Sold Under Agreements to
Repurchase:
We generally account for securities sold under
agreements to repurchase as collateralized financing
transactions. Securities pledged as collateral under these financing
arrangements cannot be sold or repledged by the secured party.
Pension and Other Postretirement
Benefits:
The bank has a noncontributory, defined benefit
pension plan covering substantially all employees. The plan provides
benefits that are based on employees’ five year average final compensation and
years of service. Our funding policy is to make annual contributions
as permitted or required by regulation. Pension costs are actuarially
determined and charged to expense.
The bank also provides certain health
care and life insurance benefits for all retired employees that meet certain
eligibility requirements. The bank's share of the estimated costs
that will be paid after retirement is generally being accrued by charges to
expense over the employees' active service periods to the dates they are fully
eligible for benefits.
The company adopted Statement of
Financial Accounting Standard No. 158 Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS 158) as of December 31,
2006. The company had previously reported the adjustment to initially
apply SFAS 158 as a component of comprehensive income on the Consolidated
Statements of Comprehensive Income and Consolidated Statements of Changes in
Shareholders’ Equity on our Form 10-K filed for the year ended December 31,
2006. The reporting of this adjustment has been subsequently changed
to conform to the implementation guidance in SFAS 158 and is separately
presented herein as an adjustment to the ending balance of accumulated other
comprehensive income, net of tax, on our Consolidated Statement of Changes in
Shareholders’ Equity for the year ended December 31, 2006.
Income
Taxes:
Deferred tax assets and liabilities are determined
based on differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Valuation
allowances are established when deemed necessary to reduce deferred tax assets
to the amount expected to be realized.
When tax returns are filed, it is
highly certain that some positions taken would be sustained upon examination by
the taxing authorities, while others are subject to uncertainty about the merits
of the position taken or the amount of the position that would be ultimately
sustained. The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheets along with any associated interest and
penalties that would be payable to the taxing authorities upon
examination. Interest and penalties associated with unrecognized tax
benefits are classified as additional income taxes in the consolidated
statements of income.
Basic and Fully Diluted Earnings per
Share:
Basic and fully diluted earnings per common share is
computed based upon the weighted average shares outstanding. The
weighted average shares outstanding were 1,829,504, 1,842,662 and 1,864,215 for
the years ended December 31, 2007, 2006 and 2005, respectively, after
considering the stock split outlined in Note 2. We did not have any
potentially dilutive securities during that time.
Trust
Department:
Assets held in an agency or fiduciary capacity by
the bank's trust department are not assets of the bank and are not included in
the accompanying consolidated balance sheets.
Off-Balance-Sheet Credit Related
Financial Instruments
. In the ordinary course of business, we
may enter into commitments to extend credit, including commercial letters of
credit, and standby letters of credit. These financial instruments
are recorded when they are funded.
Derivative Instruments and Hedging
Activities:
The bank recognizes all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted
to fair value through income. If the derivative is a hedge, depending
on the nature of the hedge, changes in the fair value of derivatives will either
be offset against the change in fair value of the hedged assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a derivative’s change in fair value is immediately recognized in
earnings.
Advertising:
Advertising
costs are expensed as they are incurred.
Reclassifications:
Certain
accounts in the consolidated financial statements for 2006 and 2005, as
previously presented, have been reclassified to conform to current year
classifications.
Significant
New Accounting Pronouncements:
In September 2006, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157, “Fair Value Measurements” (SFAS
157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 does not require
any new fair value measurements, but rather, provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at
fair value. This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those years. As of December 1, 2007, the FASB has proposed a
one-year deferral for the implementation of the Statement for nonfinancial
assets and nonfinancial liabilities that are recognized or disclosed at fair
value in the financial statements on a nonrecurring basis. The
company does not expect the implementation of SFAS 157 to have a material impact
on its consolidated financial statements.
In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (SFAS 158). This Statement
requires that employers measure plan assets and obligations as of the balance
sheet date. This requirement is effective for fiscal years ending
after December 15, 2008. The other provisions of SFAS 158 were
implemented by the company as of December 31, 2006. The company does
not expect the implementation of the measurement date provisions of SFAS 158 to
have a material impact on its consolidated financial statements.
In February 2007, the FASB issued
Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (SFAS 159). This
Statement permits entities to choose to measure many financial instruments and
certain other items at fair value. The objective of this Statement is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by this Statement permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items for
which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option may be applied instrument by instrument
and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s
first fiscal year that begins after November 15, 2007, with early adoption
available in certain circumstances. The company does not expect the
implementation of SFAS 159 to have a material impact on its consolidated
financial statements.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 141(R), “Business Combinations”
(SFAS 141(R)). The Standard will significantly change the financial accounting
and reporting of business combination transactions. SFAS 141(R)
establishes principles for how an acquirer recognizes and measures the
identifiable assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS
141(R) is effective for acquisition dates on or after the beginning of an
entity’s first year that begins after December 15, 2008. The company
does not expect the implementation of SFAS 141(R) to have a material impact on
its consolidated financial statements.
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests
in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS
160). The Standard will significantly change the financial accounting
and reporting of noncontrolling (or minority) interests in consolidated
financial statements. SFAS 160 is effective as of the beginning of an
entity’s first fiscal year that begins after December 15, 2008, with early
adoption prohibited. The company does not expect the implementation
of SFAS 160 to have a material impact on its consolidated financial
statements.
In September 2006, the Emerging Issues
Task Force (EITF) issued EITF 06-4, “Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements.” This consensus concludes that for a split-dollar life
insurance arrangement within the scope of this Issue, an employer should
recognize a liability for future benefits in accordance with SFAS 106 (if, in
substance, a postretirement benefit plan exists) or APB Opinion No. 12 (if the
arrangement is, in substance, an individual deferred compensation contract)
based on the substantive agreement with the employee. The consensus
is effective for fiscal years beginning after December 15, 2007, with early
application permitted. The company is evaluating the effect that EITF
06-4 will have on its consolidated financial statements when
implemented.
In November 2006, the EITF issued
“Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements”
(EITF 06-10). In this Issue, a consensus was reached that an employer
should recognize a liability for the postretirement benefit related to a
collateral assignment split-dollar life insurance arrangement in accordance with
either SFAS 106 or APB Opinion No. 12, as appropriate, if the employer has
agreed to maintain a life insurance policy during the employee's retirement or
provide the employee with a death benefit based on the substantive agreement
with the employee. A consensus also was reached that an employer
should recognize and measure an asset based on the nature and substance of the
collateral assignment split-dollar life insurance arrangement. The
consensuses are effective for fiscal years beginning after December 15, 2007,
including interim periods within those fiscal years, with early application
permitted. The company is evaluating the effect that EITF 06-10 will
have on its consolidated financial statements when implemented.
In February 2007, the FASB issued FSP
No. FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements
No. 87, No. 88 and No. 106 and to the Related Staff Implementation Guides.” This
FSP provides conforming amendments to the illustrations in SFAS 87, 88, and 106
and to related staff implementation guides as a result of the issuance of SFAS
158. The conforming amendments made by this FSP are effective as of
the effective dates of SFAS 158. The unaffected guidance that this
FSP codifies into SFAS 87, 88, and 106 does not contain new requirements and
therefore does not require a separate effective date or transition
method. The company does not expect the implementation of FSP No. FAS
158-1 to have a material impact on its consolidated financial
statements.
In November 2007, the Securities and
Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written
Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109
expresses the current view of the staff that the expected net future cash flows
related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SEC registrants are expected to apply the views in Question 1
of SAB 109 on a prospective basis to derivative loan commitments issued or
modified
in fiscal quarters beginning after December 15, 2007. The company
does not expect the implementation of SAB 109 to have a material impact on its
consolidated financial statements.
In December 2007, the SEC issued Staff
Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected
Term of Share Options” (SAB 110). SAB 110 expresses the current
view of the staff that it will accept a company’s election to use the simplified
method discussed in SAB 107 for estimating the expected term of “plain vanilla”
share options regardless of whether the company has sufficient information to
make more refined estimates. The staff noted that it understands that
detailed information about employee exercise patterns may not be widely
available by December 31, 2007. Accordingly, the staff will continue
to accept, under certain circumstances, the use of the simplified method beyond
December 31, 2007. The company does not expect the implementation of
SAB 110 to have a material impact on its consolidated financial statements as
the company does not have a stock option plan.
Note
2. Declaration of Stock Split
On March 7, 2006 Citizens’ board of
directors declared a stock split which was paid on April 14, 2006 in the form of
a 200% stock dividend to shareholders of record April 3, 2006. The
primary reason for doing so was to reduce the share price of the stock in an
effort to improve its liquidity. Citizens stock, which is neither
widely held nor widely traded, is an over-the-counter bulletin board stock with
the symbol CIWV.OB.
Distribution of this stock dividend
required the use of all authorized shares. On April 22, 2006 the
shareholders authorized an additional 2,250,000 shares for future
use.
Note
3. Restrictions on Cash and Amounts Due from Banks
At December 31, 2007 we had cash
concentrations totaling $4,151,285 with the Federal Reserve Bank of
Richmond. These funds, as well as deposits with other correspondent
banks, are generally unsecured and have limited insurance under current banking
insurance regulations.
Note
4. Securities
The amortized cost, unrealized gains,
unrealized losses and estimated fair values of securities at December 31, 2007
and 2006, are summarized below. All such securities are available for
sale.
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
(Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
28,083,464
|
|
|
$
|
227,154
|
|
|
$
|
19,073
|
|
|
$
|
28,291,545
|
|
Mortgage
backed securities - U.S. Government agencies and
corporations
|
|
|
6,587,411
|
|
|
|
14,238
|
|
|
|
40,667
|
|
|
|
6,560,982
|
|
Federal
Reserve Bank stock, restricted
|
|
|
108,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,000
|
|
Federal
Home Loan Bank stock, restricted
|
|
|
842,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
842,400
|
|
Community
Financial Services Inc. stock
|
|
|
162,714
|
|
|
|
-
|
|
|
|
-
|
|
|
|
162,714
|
|
Tax
exempt state and political subdivisions
|
|
|
22,716,824
|
|
|
|
91,692
|
|
|
|
214,704
|
|
|
|
22,593,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities available for sale
|
|
$
|
58,500,813
|
|
|
$
|
333,084
|
|
|
$
|
274,444
|
|
|
$
|
58,559,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Estimated
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
41,920,556
|
|
|
$
|
5,227
|
|
|
$
|
414,829
|
|
|
$
|
41,510,954
|
|
Mortgage
backed securities - U.S. Government agencies and
corporations
|
|
|
8,374,473
|
|
|
|
299
|
|
|
|
148,911
|
|
|
|
8,225,861
|
|
Federal
Reserve Bank stock, restricted
|
|
|
108,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,000
|
|
Federal
Home Loan Bank stock, restricted
|
|
|
770,200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
770,200
|
|
Tax
exempt state and political subdivisions
|
|
|
9,182,944
|
|
|
|
16,081
|
|
|
|
68,501
|
|
|
|
9,130,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
securities available for sale
|
|
$
|
60,356,173
|
|
|
$
|
21,607
|
|
|
$
|
632,241
|
|
|
$
|
59,745,539
|
|
The tables which follow provide
summaries of securities which were in an unrealized loss position at December
31, 2007 and 2006, all of which are available for sale. As of
December 31, 2007, these securities had a total fair value of $29,020,029 and
carried unrealized losses of $274,444 or 0.95%. Securities which have
been in a continuous loss position for the past twelve months total
$17,776,631. The unrealized loss pertaining to these securities is
$82,499 or 0.46%. The majority of these losses are on municipal
instruments. With the exception of one municipal which is not rated,
all of these instruments carry A ratings from the major credit rating
agencies. The remaining losses are on securities issued by U.S.
government agencies and corporations which carry the implied faith and credit of
the U.S. Government. With the excellent credit quality in
our portfolio, we believe these unrealized losses are the result of changing
interest rates, and we will be able to fully recover our
investment. In addition, no losses have been recognized on the
$55,092,401 of securities that carried unrealized losses at December 31,
2006.
|
|
2007
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
U.S.
Government agencies and corporations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,973,400
|
|
|
$
|
19,073
|
|
|
$
|
10,973,400
|
|
|
$
|
19,073
|
|
Mortgage
backed securities – U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies and corporations
|
|
|
-
|
|
|
|
-
|
|
|
|
4,886,591
|
|
|
|
40,667
|
|
|
|
4,886,591
|
|
|
|
40,667
|
|
Tax-exempt
state and political subdivisions
|
|
|
11,243,398
|
|
|
|
191,945
|
|
|
|
1,916,640
|
|
|
|
22,759
|
|
|
|
13,160,038
|
|
|
|
214,704
|
|
Total
|
|
$
|
11,248,398
|
|
|
$
|
191,945
|
|
|
$
|
17,776,631
|
|
|
$
|
82,499
|
|
|
$
|
29,020,029
|
|
|
$
|
274,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Government agencies and corporations
|
|
$
|
5,332,240
|
|
|
$
|
13,677
|
|
|
$
|
33,264,044
|
|
|
$
|
401,152
|
|
|
$
|
38,596,284
|
|
|
$
|
414,829
|
|
Mortgage
backed securities – U.S.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
agencies and corporations
|
|
|
2,782,873
|
|
|
|
9,857
|
|
|
|
5,327,723
|
|
|
|
139,054
|
|
|
|
8,110,596
|
|
|
|
148,911
|
|
Tax-exempt
state and political subdivisions
|
|
|
3,440,626
|
|
|
|
17,958
|
|
|
|
3,944,895
|
|
|
|
50,543
|
|
|
|
7,385,521
|
|
|
|
68,501
|
|
Total
|
|
$
|
11,555,739
|
|
|
$
|
41,492
|
|
|
$
|
42,536,662
|
|
|
$
|
590,749
|
|
|
$
|
55,092,401
|
|
|
$
|
632,241
|
|
The maturities, amortized cost and
estimated fair values of securities at December 31, 2007 are summarized as
follows:
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Value
|
|
|
|
|
|
|
(Estimated
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value)
|
|
Due
within one year
|
|
$
|
16,959,364
|
|
|
$
|
16,953,101
|
|
Due
after one through five years
|
|
|
26,024,601
|
|
|
|
26,268,237
|
|
Due
after five through ten years
|
|
|
14,403,734
|
|
|
|
14,225,000
|
|
Equity
securities
|
|
|
1,113,114
|
|
|
|
1,113,114
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,500,813
|
|
|
$
|
58,559,453
|
|
Mortgage backed securities have
remaining contractual maturities ranging from 2 months to 14.17 years and are
reflected in the maturity distribution schedule based on their anticipated
average life to maturity, which ranges from 0.20 to 4.55 years. Accordingly,
discounts are accreted and premiums are amortized over the anticipated life to
maturity of the specific obligation.
The proceeds from sales, calls and
maturities of securities, including principal payments received on mortgage
backed securities, and the related gross gains and losses realized
are as follows:
|
|
Proceeds From
|
|
|
Gross Realized
|
|
Years
Ended
|
|
|
|
|
Calls
and
|
|
|
Principal
|
|
|
|
|
|
|
|
December 31,
|
|
Sales
|
|
|
Maturities
|
|
|
Payments
|
|
|
Gains
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
345,900
|
|
|
$
|
19,365,000
|
|
|
$
|
1,854,838
|
|
|
$
|
2,399
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
3,800,409
|
|
|
$
|
14,461,000
|
|
|
$
|
1,963,218
|
|
|
$
|
-
|
|
|
$
|
17,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$
|
522,200
|
|
|
$
|
9,190,545
|
|
|
$
|
2,388,713
|
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2007 and 2006
securities with amortized costs of $32,207,744 and $30,807,634, respectively,
and estimated fair values of $32,357,657 and $30,448,915, respectively, were
pledged to secure public deposits, securities sold under agreements to
repurchase, and for other purposes required or permitted by law.
Federal Reserve Bank stock and Federal
Home Loan Bank stock are equity securities which are included in securities
available for sale in the accompanying consolidated financial
statements. Such securities are carried at cost, since they may only
be sold back to the respective issuer or another member at par
value.
Note
5. Loans
Loans are summarized as
follows:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Commercial,
financial and agricultural
|
|
$
|
21,015,554
|
|
|
$
|
26,968,995
|
|
Real
estate – construction
|
|
|
12,497,098
|
|
|
|
13,964,500
|
|
Real
estate – home equity
|
|
|
6,797,712
|
|
|
|
7,985,253
|
|
Real
estate – residential mortgage
|
|
|
61,726,209
|
|
|
|
61,401,473
|
|
Real
estate – commercial mortgage
|
|
|
57,921,473
|
|
|
|
45,578,979
|
|
Installment
loans
|
|
|
10,902,926
|
|
|
|
10,634,857
|
|
Other
|
|
|
2,011,614
|
|
|
|
1,611,149
|
|
Total
loans
|
|
|
172,872,576
|
|
|
|
168,145,206
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
|
1,763,300
|
|
|
|
1,873,038
|
|
Net
deferred loan origination fees and costs
|
|
|
170,012
|
|
|
|
54,279
|
|
|
|
|
|
|
|
|
|
|
Loans,
net
|
|
$
|
170,939,264
|
|
|
$
|
166,217,889
|
|
Included in the above balance of net
loans are nonaccrual loans of $4,487,291 and $2,208,400 at December 31,
2007 and 2006, respectively. If interest on those nonaccrual loans
had been accrued, such income would have approximated $233,744, $63,341 and
$5,662 for the years ended December 31, 2007, 2006 and 2005,
respectively.
The bank makes loans to its directors,
executive officers and their related interests in the normal course of
business. The activity with respect to these loans for the years
ended December 31, 2007 and 2006 follows:
|
|
2007
|
|
|
2006
|
|
Balance,
beginning
|
|
$
|
6,111,725
|
|
|
$
|
5,892,713
|
|
Additions
|
|
|
1,095,224
|
|
|
|
3,801,609
|
|
Amounts
collected
|
|
|
(895,513
|
)
|
|
|
(3,582,597
|
)
|
|
|
|
|
|
|
|
|
|
Balance,
ending
|
|
$
|
6,311,436
|
|
|
$
|
6,111,725
|
|
The following represents the maturities
and sensitivities of loans to changes in interest rates at December 31, 2007,
without regard to scheduled periodic principal repayments on amortizing
loans:
|
|
|
|
|
Due
After 1
|
|
|
|
|
|
|
|
|
|
Due
|
|
|
But
Within
|
|
|
Due
|
|
|
|
|
|
|
Within 1 Yr
|
|
|
5 Yrs
|
|
|
After 5 Yrs
|
|
|
Total
|
|
Commercial,
financial and agricultural
|
|
$
|
4,660,233
|
|
|
$
|
5,274,029
|
|
|
$
|
11,081,282
|
|
|
$
|
21,015,554
|
|
Real
estate – construction
|
|
|
7,418,959
|
|
|
|
4,815,597
|
|
|
|
262,542
|
|
|
|
12,497,098
|
|
Real
estate – home equity
|
|
|
4,517
|
|
|
|
1,730,362
|
|
|
|
5,062,833
|
|
|
|
6,797,712
|
|
Real
estate – residential mortgage
|
|
|
837,145
|
|
|
|
4,176,214
|
|
|
|
56,712,850
|
|
|
|
61,726,209
|
|
Real
estate – commercial mortgage
|
|
|
4,546,009
|
|
|
|
13,026,493
|
|
|
|
40,348,971
|
|
|
|
57,921,473
|
|
Installment
loans
|
|
|
696,450
|
|
|
|
8,090,003
|
|
|
|
2,116,473
|
|
|
|
10,902,926
|
|
Other
|
|
|
621,654
|
|
|
|
642,574
|
|
|
|
747,386
|
|
|
|
2,011,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,784,967
|
|
|
$
|
37,755,272
|
|
|
$
|
116,332,337
|
|
|
$
|
172,872,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
due after one year with:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
rates
|
|
$
|
124,768,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
rates
|
|
|
29,319,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
154,087,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Concentrations of Credit
Risk:
The bank grants installment, commercial and residential
loans to customers in central and eastern West Virginia in striving to maintain
a diversified loan portfolio. Nonetheless, concentrations of credit,
defined as loans to a customer, the customers’ related parties, or to a number
of customers operating in the same industry, which in the aggregate total 25% or
more of capital can occur. At December 31, 2007, we had seven such
concentrations.
Direct and indirect extensions of
credit to automobile dealers, consisting of floor plan loans and other
commercial loans which are generally secured by liens on the subject inventories
or equipment, totaled $6,963,526. Extensions of credit to companies
in the lodging, restaurant and bar industry totaled
$12,159,763. These loans are usually made to finance the purchase,
operation or improvement of these establishments and are generally secured by
liens on the subject property. Extensions of credit for the purchase
of rental real estate totaled $16,746,410. These loans are usually
made to purchase or improve the subject property and are secured by the rental
unit(s). Retail stores and wholesalers have extensions of credit
totaling $6,184,262 and $7,800,260, respectively. Credit is extended
to these entities primarily to finance the purchase, make capital improvements,
or satisfy working capital needs. These loans are generally secured
by the company’s real estate, equipment, inventory, and/or accounts
receivable. Also, extensions of credit for ski resort related loans
totaled $12,960,995. These loans are extended to business and
residential properties in and around various West Virginia ski
resorts. Additional collateral such as pledges of accounts
receivable, real estate, or personal guarantees may also be required when
granting any of these credits. The bank evaluates each such
customer’s credit worthiness on a case-by-case basis. The amount of
collateral obtained is based upon these credit evaluations.
Note
6. Allowance for Loan Losses
An analysis of the allowance for loan
losses for the years ended December 31, 2007, 2006 and 2005, is as
follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of year
|
|
$
|
1,873,038
|
|
|
$
|
1,597,006
|
|
|
$
|
1,378,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge
offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
|
1,538,565
|
|
|
|
123,400
|
|
|
|
-
|
|
Real
estate – commercial mortgage
|
|
|
347,695
|
|
|
|
-
|
|
|
|
-
|
|
Real
estate – residential mortgage
|
|
|
78
|
|
|
|
-
|
|
|
|
-
|
|
Installment
|
|
|
48,839
|
|
|
|
39,130
|
|
|
|
90,212
|
|
Total
|
|
|
1,935,177
|
|
|
|
162,530
|
|
|
|
90,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial,
financial and agricultural
|
|
|
8,055
|
|
|
|
4,100
|
|
|
|
5,660
|
|
Real
estate – residential mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
1,022
|
|
Installment
|
|
|
34,229
|
|
|
|
11,077
|
|
|
|
27,763
|
|
Total
|
|
|
42,284
|
|
|
|
15,177
|
|
|
|
34,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
charge-offs
|
|
|
1,892,893
|
|
|
|
147,353
|
|
|
|
55,767
|
|
Provision
for loan losses
|
|
|
1,783,155
|
|
|
|
423,385
|
|
|
|
274,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of year
|
|
$
|
1,763,300
|
|
|
$
|
1,873,038
|
|
|
$
|
1,597,006
|
|
The following summary provides
additional information regarding impaired, nonaccrual and past due
loans:
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Impaired
loans without a valuation allowance
|
|
$
|
1,467,156
|
|
|
$
|
155,849
|
|
Impaired
loans with a valuation allowance
|
|
|
2,570,365
|
|
|
|
4,991,814
|
|
Total
impaired loans
|
|
$
|
4,037,521
|
|
|
$
|
5,147,663
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance related to impaired loans
|
|
$
|
623,839
|
|
|
$
|
990,482
|
|
|
|
|
|
|
|
|
|
|
Total
nonaccrual loans excluded from impaired loan disclosure
|
|
$
|
449,770
|
|
|
$
|
506,468
|
|
Total
loans past due ninety days or more still accruing
|
|
|
206,230
|
|
|
|
-
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Average
investment in impaired loans
|
|
$
|
4,244,525
|
|
|
$
|
3,846,072
|
|
|
$
|
3,974,629
|
|
Interest
income recognized on impaired loans
|
|
|
351,874
|
|
|
|
331,872
|
|
|
|
292,013
|
|
Interest
income recognized on a cash basis on impaired loans
|
|
|
124,985
|
|
|
|
276,007
|
|
|
|
278,334
|
|
Interest
income recognized on nonaccrual loans excluded from impaired loan
disclosure
|
|
$
|
34,206
|
|
|
$
|
4,626
|
|
|
$
|
386
|
|
No additional funds are committed to
be advanced in connection with impaired loans.
Note
7. Bank Premises and Equipment
The major categories of bank premises
and equipment and accumulated depreciation and amortization at December 31, 2007
and 2006, are summarized as follows:
|
|
2007
|
|
|
2006
|
|
Land
|
|
$
|
950,403
|
|
|
$
|
950,403
|
|
Buildings
and improvements
|
|
|
5,280,882
|
|
|
|
4,870,355
|
|
Furniture
and equipment
|
|
|
2,552,090
|
|
|
|
2,977,312
|
|
Total
bank premises and equipment
|
|
|
8,783,375
|
|
|
|
8,798,070
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
4,523,711
|
|
|
|
4,466,757
|
|
|
|
|
|
|
|
|
|
|
Bank
premises and equipment, net
|
|
$
|
4,259,664
|
|
|
$
|
4,331,313
|
|
Depreciation expense for the years
ended December 31, 2007, 2006 and 2005, totaled $306,684, $338,543 and $400,996
respectively.
Note
8. Deposits
The following is a summary of interest
bearing deposits by type as of December 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
Interest
bearing checking accounts
|
|
$
|
45,697,691
|
|
|
$
|
41,767,746
|
|
Money
market accounts
|
|
|
5,405,844
|
|
|
|
5,979,073
|
|
Savings
accounts
|
|
|
21,589,320
|
|
|
|
22,745,891
|
|
Certificates
of deposit under $100,000
|
|
|
59,984,442
|
|
|
|
59,949,884
|
|
Certificates
of deposit of $100,000 or more
|
|
|
40,699,314
|
|
|
|
38,997,134
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
173,376,611
|
|
|
$
|
169,439,728
|
|
Interest
expense on deposits is summarized below:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Interest
bearing checking accounts
|
|
$
|
1,277,151
|
|
|
$
|
1,161,291
|
|
|
$
|
613,132
|
|
Money
market accounts
|
|
|
27,625
|
|
|
|
33,159
|
|
|
|
49,703
|
|
Savings
accounts
|
|
|
120,762
|
|
|
|
120,996
|
|
|
|
129,933
|
|
Certificates
of deposit under $100,000
|
|
|
2,636,307
|
|
|
|
2,072,523
|
|
|
|
1,490,864
|
|
Certificates
of deposit of $100,000 or more
|
|
|
1,899,708
|
|
|
|
1,493,549
|
|
|
|
1,092,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,961,553
|
|
|
$
|
4,881,518
|
|
|
$
|
3,376,537
|
|
The following is a summary of the
maturity distribution of certificates of deposit in amounts of $100,000 or more
as of December 31, 2007 and 2006:
|
|
2007
|
|
|
2006
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Three
months or less
|
|
$
|
3,588,278
|
|
|
|
8.82
|
%
|
|
$
|
2,350,997
|
|
|
|
6.03
|
%
|
Three
through six months
|
|
|
6,447,653
|
|
|
|
15.84
|
|
|
|
4,370,990
|
|
|
|
11.21
|
|
Six
through twelve months
|
|
|
14,167,482
|
|
|
|
34.81
|
|
|
|
10,680,396
|
|
|
|
27.39
|
|
Over
twelve months
|
|
|
16,495,901
|
|
|
|
40.53
|
|
|
|
21,594,751
|
|
|
|
55.37
|
|
Total
|
|
$
|
40,699,314
|
|
|
|
100.00
|
%
|
|
$
|
38,997,134
|
|
|
|
100.00
|
%
|
A summary
of the maturities for all time deposits as of December 31, 2007,
follows:
Year
|
|
Amount
|
|
2008
|
|
$
|
60,633,390
|
|
2009
|
|
|
10,801,795
|
|
2010
|
|
|
7,899,979
|
|
2011
|
|
|
14,190,113
|
|
2012
|
|
|
7,013,574
|
|
After
2012
|
|
|
144,905
|
|
Total
|
|
$
|
100,683,756
|
|
At December 31, 2007 and 2006, deposits
of related parties including directors, executive officers, and their related
interests of Citizens Financial Corp. and subsidiary approximated $7,190,207 and
2,748,807, respectively.
Note
9. Derivative Instruments
From 2001 to 2004, the bank offered a
product known as the Index Powered CD to its customers. This is a
five year certificate of deposit which, if held to maturity, provides the
customer with guaranteed return of principal and interest which is linked to the
performance of the Standard and Poor’s 500 Index over the term of the
certificate of deposit. As of December 31, 2007 and 2006 the notional
value of these deposits was $203,373 and $894,278, respectively.
The
linkage of the interest earned on the certificate of deposit and the return of
the index is considered an equity option and is accounted for as an embedded
derivative under Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative
Instruments and Hedging Activities”
(“SFAS 133”). As required
by SFAS 133, the fair value of the embedded derivative is deducted from the
certificate of deposit creating a discount that is amortized to interest expense
using the effective interest method over the term of the certificate of
deposit. The corresponding equity option is carried as a liability at
fair value with changes in the value recognized in current
earnings.
To manage
the market risk associated with this product, the bank entered into interest
rate swap agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”) for
the notional amount of the certificate of deposit. Under these
agreements the bank pays either fixed or variable interest to the FHLB quarterly
over the term of the certificate of deposit and the FHLB pays the bank the
amount of interest due the customer at maturity.
This
interest rate swap also represents a derivative contract and is accounted for as
a fair value hedge under SFAS 133. As such, it is carried as an asset
at fair value with changes in value being recognized in current
earnings. The impact of our derivative activities on pretax income
was $(19,639) in 2007, $(43,501) in 2006 and $(37,865) in 2005.
Note
10. Income Taxes
The
company files income tax returns in the U.S. federal jurisdiction and the state
of West Virginia. With few exceptions, the company is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2004. The company adopted the
provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1,
2007 with no impact on the financial statements.
The components of applicable income tax
expense/(benefit) for the years ended December 31, 2007, 2006 and 2005, are as
follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
135,605
|
|
|
$
|
986,391
|
|
|
$
|
982,912
|
|
State
|
|
|
39,729
|
|
|
|
144,201
|
|
|
|
146,870
|
|
|
|
|
175,334
|
|
|
|
1,130,592
|
|
|
|
1,129,782
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
53,463
|
|
|
|
(162,754
|
)
|
|
|
(181,117
|
)
|
State
|
|
|
6,290
|
|
|
|
(12,192
|
)
|
|
|
(21,307
|
)
|
|
|
|
59,753
|
|
|
|
(174,946
|
)
|
|
|
(202,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
235,087
|
|
|
$
|
955,646
|
|
|
$
|
927,358
|
|
Deferred income taxes reflect the
impact of temporary differences between amounts of assets and liabilities for
financial reporting purposes and such amounts as measured for tax
purposes. Deferred tax assets and liabilities represent the future
tax return consequences of temporary differences, which will either be taxable
or deductible when the related assets and liabilities are recovered or
settled.
The tax effects of temporary
differences which give rise to the company's deferred tax assets and liabilities
as of December 31, 2007 and 2006, are as follows:
|
|
2007
|
|
|
2006
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Allowance
for loan losses
|
|
$
|
404,264
|
|
|
$
|
562,127
|
|
Accrued
income and expenses
|
|
|
18,060
|
|
|
|
18,553
|
|
Employee
benefit plans
|
|
|
733,905
|
|
|
|
832,401
|
|
Net
loan origination fees and costs
|
|
|
64,652
|
|
|
|
20,624
|
|
Interest
on nonaccrual loans
|
|
|
8,422
|
|
|
|
-
|
|
Deferred
gain on sale of other real estate
|
|
|
18,303
|
|
|
|
-
|
|
Net
unrealized loss on securities
|
|
|
-
|
|
|
|
232,041
|
|
|
|
|
1,247,606
|
|
|
|
1,665,746
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Accretion
on securities
|
|
|
(31,895
|
)
|
|
|
(26,265
|
)
|
Net
unrealized gains on securities
|
|
|
(22,283
|
)
|
|
|
-
|
|
Depreciation
|
|
|
(207,536
|
)
|
|
|
(197,141
|
)
|
|
|
|
(261,714
|
)
|
|
|
(223,406
|
)
|
Net
deferred tax asset
|
|
$
|
985,892
|
|
|
$
|
1,442,340
|
|
A reconciliation between the amount
of reported income tax expense and the amount computed by multiplying the
statutory income tax rate by book pretax income for the years ended December 31,
2007, 2006 and 2005, is as follows:
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Computed
tax at applicable statutory rate
|
|
$
|
431,430
|
|
|
|
34.0
|
%
|
|
$
|
1,034,463
|
|
|
|
34.0
|
%
|
|
$
|
1,011,345
|
|
|
|
34.0
|
%
|
Increase/(decrease)
in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt
interest
|
|
|
(226,911
|
)
|
|
|
(17.9
|
)
|
|
|
(149,248
|
)
|
|
|
(4.9
|
)
|
|
|
(147,527
|
)
|
|
|
(5.0
|
)
|
State
income taxes, net of federal tax benefit
|
|
|
30,373
|
|
|
|
2.4
|
|
|
|
87,126
|
|
|
|
2.8
|
|
|
|
82,872
|
|
|
|
2.8
|
|
Tax
exempt income on retirement plans
|
|
|
(28,485
|
)
|
|
|
(2.2
|
)
|
|
|
(27,772
|
)
|
|
|
(0.9
|
)
|
|
|
(27,755
|
)
|
|
|
(0.9
|
)
|
Other
|
|
|
28,680
|
|
|
|
2.2
|
|
|
|
11,077
|
|
|
|
0.4
|
|
|
|
8,423
|
|
|
|
0.3
|
|
Applicable
income taxes
|
|
$
|
235,087
|
|
|
|
18.5
|
%
|
|
$
|
955,646
|
|
|
|
31.4
|
%
|
|
$
|
927,358
|
|
|
|
31.2
|
%
|
Note
11. Employee Benefit Plans
The bank offers a number of benefit
plans to its employees and directors. Among them are pension and
other postretirement benefit plans which are described below.
Pension Plan:
The
bank has a defined benefit pension plan covering all employees who meet the
eligibility requirements. To be eligible, an employee must be 21
years of age and have completed one year/1,000 hours of continuous
service. The plan provides benefits based on the participant’s years
of service and five year average final compensation. Our funding
policy is to make annual contributions as permitted or required by applicable
regulations.
401(k) Plan:
A
401(k) profit sharing plan is provided for the benefit of all employees who have
attained the age of 21 and completed one year/1,000 hours of continuous
service. The plan allows participating employees to contribute
amounts up to the limits set by the Internal Revenue Service and permits the
bank to make discretionary contributions to the plan in such amount as the Board
may determine to be appropriate. Contributions made to the plan by
the bank for the years ended December 31, 2007, 2006 and 2005, were $49,000,
$81,000 and $77,000, respectively.
Executive Supplemental Income
Plan:
Subsequent to an amendment to the bank’s pension benefit
formula in 1995, it offered a nonqualified executive supplemental income plan to
certain senior officers, some of whom are now retired, as a means of overcoming
the reduced pension benefit. The plan provides predetermined fixed
monthly income for a period of 180 months to the participants upon
retirement. It is funded by life insurance contracts which the bank
purchased. The bank has been named the beneficiary of those
contracts. The liability accrued under this plan at December 31, 2007
and 2006 was $247,417 and $253,292, respectively. The cash surrender
values of the underlying insurance contracts at those same dates were $561,602
and $516,130. Expenses associated with the plan were $10,566 in 2007,
$8,549 in 2006, and $11,217 in 2005.
Executive and Director Supplemental
Retirement Plan:
Effective January 1, 2003, the bank entered
into a non-qualified supplemental executive and director retirement plan with
various officers and directors of the bank which provides them with income
benefits payable at retirement age or death. In connection with this
plan, the bank purchased life insurance contracts in 2002 for
$2,000,000. These contracts are not assets of the plan but are
instead owned by the bank and had cash surrender values of $2,273,638 at
December 31, 2007 and $2,189,860 at December 31, 2006. Liabilities
under the plan were $742,566 at December 31, 2007 and $653,097 at December 31,
2006. Expenses of the plan, net of income for the increase in the
cash surrender value, were $40,081 in 2007, $66,936 in 2006 and $51,992 in
2005.
Postretirement Healthcare and Life
Insurance Plan:
The bank sponsors a postretirement healthcare
plan and a postretirement life insurance plan for all retired employees that
meet certain eligibility requirements. Both plans are contributory
with retiree contributions that are adjustable based on various factors, some of
which are discretionary. These factors are intended to hold constant
the maximum monthly benefit of $100 payable per eligible retiree for
postretirement health care. Accordingly, an assumed 1 percentage
point increase or decrease in healthcare cost trend rates would not impact the
healthcare plan’s accumulated postretirement benefit obligation or the aggregate
of the plans service and interest costs. Both the healthcare plan and
life insurance plan are unfunded.
In September 2006, the FASB issued
Statement of Financial Accounting Standards No. 158, “Employer’s Accounting for
Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB
Statements No. 87, 88, 106, and 132(R)” (SFAS 158). The company
adopted SFAS 158 on a prospective basis beginning with the year ended December
31, 2006. Additional information regarding the company’s pension and
other postretirement benefits is presented below in accordance with SFAS 158 for
2007 and 2006. Previous year information for 2005 is presented in
accordance with the previous FASB Statements. The measurement date
used for the pension disclosures is October 31 for all years
presented.
Obligations
and Funded Status
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation at beginning of year
|
|
$
|
4,811,427
|
|
|
$
|
4,734,599
|
|
|
$
|
522,934
|
|
|
$
|
613,217
|
|
Service
cost
|
|
|
116,060
|
|
|
|
112,312
|
|
|
|
20,070
|
|
|
|
24,242
|
|
Interest
cost
|
|
|
288,608
|
|
|
|
271,181
|
|
|
|
27,945
|
|
|
|
31,769
|
|
Actuarial
(gain)/loss
|
|
|
(46,451
|
)
|
|
|
(68,016
|
)
|
|
|
30,421
|
|
|
|
(119,255
|
)
|
Benefits
paid
|
|
|
(269,319
|
)
|
|
|
(238,649
|
)
|
|
|
(41,486
|
)
|
|
|
(27,039
|
)
|
Benefit
obligation at end of year
|
|
$
|
4,900,325
|
|
|
$
|
4,811,427
|
|
|
$
|
559,884
|
|
|
$
|
522,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of year
|
|
$
|
4,059,169
|
|
|
$
|
3,755,700
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Actual
return on plan assets
|
|
|
601,238
|
|
|
|
471,946
|
|
|
|
-
|
|
|
|
-
|
|
Employer
contribution
|
|
|
111,802
|
|
|
|
70,172
|
|
|
|
41,486
|
|
|
|
27,039
|
|
Benefits
paid
|
|
|
(269,319
|
)
|
|
|
(238,649
|
)
|
|
|
(41,486
|
)
|
|
|
(27,039
|
)
|
Fair
value of plan assets at end of year
|
|
$
|
4,502,890
|
|
|
$
|
4,059,169
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded
status
|
|
$
|
(397,435
|
)
|
|
$
|
(752,258
|
)
|
|
$
|
(559,884
|
)
|
|
$
|
(522,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized on consolidated balance sheets as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
benefit liability
|
|
$
|
(397,435
|
)
|
|
$
|
(752,258
|
)
|
|
$
|
(559,884
|
)
|
|
$
|
(522,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
recognized in accumulated other comprehensive income consist
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss)/gain
|
|
$
|
(1,120,633
|
)
|
|
$
|
(1,533,873
|
)
|
|
$
|
208,745
|
|
|
$
|
251,293
|
|
Prior
service (cost)/credit
|
|
|
12,555
|
|
|
|
29,523
|
|
|
|
-
|
|
|
|
-
|
|
Net
obligation at transition
|
|
|
-
|
|
|
|
-
|
|
|
|
(104,717
|
)
|
|
|
(125,663
|
)
|
Deferred
tax benefit/(expense)
|
|
|
421,070
|
|
|
|
571,653
|
|
|
|
(39,531
|
)
|
|
|
(47,739
|
)
|
|
|
$
|
(687,008
|
)
|
|
$
|
(932,697
|
)
|
|
$
|
64,497
|
|
|
$
|
77,891
|
|
The
accumulated benefit obligation of our pension plan was $4,315,444 at October 31,
2007 and $4,213,134 at October 31, 2006.
Components
of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive
Income
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net
periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
116,060
|
|
|
$
|
112,312
|
|
|
$
|
98,730
|
|
|
$
|
20,070
|
|
|
$
|
24,242
|
|
|
$
|
23,575
|
|
Interest
cost
|
|
|
288,608
|
|
|
|
271,181
|
|
|
|
267,484
|
|
|
|
27,945
|
|
|
|
31,769
|
|
|
|
31,084
|
|
Expected
return on plan assets
|
|
|
(330,584
|
)
|
|
|
(329,317
|
)
|
|
|
(341,241
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
amortization and deferral
|
|
|
(16,968
|
)
|
|
|
(16,968
|
)
|
|
|
(16,968
|
)
|
|
|
8,819
|
|
|
|
16,318
|
|
|
|
15,664
|
|
Recognized
net actuarial loss
|
|
|
96,135
|
|
|
|
95,680
|
|
|
|
47,051
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net
periodic benefit cost
|
|
|
153,251
|
|
|
|
132,888
|
|
|
|
55,056
|
|
|
|
56,834
|
|
|
|
72,329
|
|
|
|
70,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
changes in plan assets and benefit obligations recognized in other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(gain)/loss for period
|
|
$
|
(317,105
|
)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
|
$
|
30,421
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
Amortization
of prior service cost
|
|
|
16,968
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Amortization
of transition obligation
|
|
|
-
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
(20,946
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
Amortization
of net loss/(gain)
|
|
|
(96,135
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
12,127
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
recognized in other comprehensive income
|
|
|
(396,272
|
)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
21,602
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
recognized in net periodic benefit cost and other comprehensive
income
|
|
$
|
(243,021
|
)
|
|
$
|
132,888
|
|
|
$
|
55,056
|
|
|
$
|
78,436
|
|
|
$
|
72,329
|
|
|
$
|
70,323
|
|
Unrecognized prior service cost is
expensed using a straight-line amortization of the cost over the average future
service of employees expected to receive benefits under the plan.
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 are $70,123 and $(12,555), respectively. The
estimated transition obligation for the other defined benefit postretirement
plans that will be amortized from accumulated other comprehensive income into
net periodic benefit cost over the next fiscal year is $20,946.
Assumptions
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
6.50
|
%
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
5.75
|
%
|
Expected
long-term return on plan assets
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Rate
of compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.50
|
%
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
assumptions used to determine benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount
rate
|
|
|
6.25
|
%
|
|
|
6.00
|
%
|
|
|
|
|
|
|
6.00
|
%
|
|
|
5.75
|
%
|
|
|
|
|
Rate
of compensation increase
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
The expected long-term rate of return
for the pension plan is based on the expected return of each of the plan’s asset
categories (detailed below), weighted based on the median of the target
allocation of each category.
Plan
Assets
|
|
Pension Benefits
|
|
|
|
Target
|
|
|
|
|
|
Percentage
of Plan
|
|
|
|
Allocation
|
|
|
Allowable
|
|
|
Assets at October 31,
|
|
|
|
2008
|
|
|
Range
|
|
|
2007
|
|
|
2006
|
|
Asset
category:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
securities
|
|
|
70
|
%
|
|
|
40-80
|
%
|
|
|
68
|
%
|
|
|
74
|
%
|
Debt
securities
|
|
|
25
|
%
|
|
|
20-40
|
%
|
|
|
27
|
%
|
|
|
20
|
%
|
Real
estate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Other
|
|
|
5
|
%
|
|
|
3-10
|
%
|
|
|
5
|
%
|
|
|
6
|
%
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
Investment
Policy and Strategy
The
policy, as established by the Pension Committee, is to invest assets per the
target allocations stated above. The assets will be reallocated
periodically to meet the above target allocations. The investment
policy will be reviewed periodically, under the advisement of a certified
investment advisor, to determine if the policy should be changed.
The
overall investment return goal is to achieve a return greater than a blended mix
of stated indices tailored to the same asset mix of the plan assets by 0.5%
after fees over a rolling 5-year moving average basis.
Allowable
assets include cash equivalents, fixed income securities, equity securities,
exchange traded index funds and GICs. Prohibited investments include,
but are not limited to, commodities and future contracts, private placements,
options, limited partnerships, venture capital investments, real estate and IO,
PO, and residual tranche CMOs. Unless a specific derivative security
is allowed per the plan document, permission must be sought from the Pension
Committee to include such investments.
In order
to achieve a prudent level of portfolio diversification, the securities of any
one company should not exceed more that 10% of the total plan assets, and no
more that the 25% of total plan assets should be invested in any one industry
(other than securities of U.S. Government or Agencies). Additionally,
no more than 20% of the plan assets shall be invested in foreign securities
(both equity and fixed).
Cash
Flows
Contributions:
Our
pension plan calls for a minimum contribution of approximately $216,082 in
2008. No contributions are expected to be made to our other
postretirement plans, however.
Estimated Future Benefits
Payments
: The following benefit payments, which reflect future service,
are expected to be paid:
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
2008
|
|
$
|
278,047
|
|
|
$
|
38,885
|
|
2009
|
|
|
280,573
|
|
|
|
37,410
|
|
2010
|
|
|
292,125
|
|
|
|
37,791
|
|
2011
|
|
|
293,673
|
|
|
|
39,823
|
|
2012
|
|
|
296,795
|
|
|
|
38,225
|
|
2013
- 2017
|
|
|
1,566,090
|
|
|
|
195,989
|
|
Note
12. Other Borrowings
Short-Term
Borrowings:
During 2007 and 2006, our short-term borrowings
consisted of securities sold under agreements to repurchase (repurchase
agreements), advances under a line of credit with the Federal Home Loan Bank of
Pittsburgh (FHLB) and federal funds purchased. Interest is paid on
the repurchase agreements based on either fixed or variable rates as determined
upon origination. At December 31, 2007 and 2006, securities with an
amortized cost of $14,611,458 and $14,095,926, respectively, and estimated fair
values of $14,750,799 and $13,900,030, respectively, were pledged to secure the
repurchase agreements.
As a member of the FHLB, the bank has
access to various lines of credit under programs administered by the
FHLB. Borrowings under these arrangements bear interest at the
interest rate posted by the FHLB on the day of the borrowing and are subject to
change daily. The lines of credit are secured by a blanket lien on
all unpledged and unencumbered assets.
The following information is provided
relative to our short-term borrowing obligations:
|
|
Repurchase
|
|
|
Line
of
|
|
|
Federal
Funds
|
|
|
|
Agreement
|
|
|
Credit
|
|
|
Purchased
|
|
2007
|
|
|
|
|
|
|
|
|
|
Amount
outstanding at December 31
|
|
$
|
14,258,042
|
|
|
$
|
3,997,900
|
|
|
$
|
1,400,000
|
|
Weighted
average interest rate at December 31
|
|
|
3.51
|
%
|
|
|
4.32
|
%
|
|
|
4.25
|
%
|
Maximum
month-end amount outstanding
|
|
$
|
21,888,322
|
|
|
$
|
3,997,900
|
|
|
$
|
1,400,000
|
|
Average
daily amount outstanding
|
|
$
|
18,868,254
|
|
|
$
|
406,537
|
|
|
$
|
618
|
|
Weighted
average interest rate for the year
|
|
|
3.52
|
%
|
|
|
4.85
|
%
|
|
|
4.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
outstanding at December 31
|
|
$
|
15,970,434
|
|
|
$
|
3,438,000
|
|
|
$
|
425,000
|
|
Weighted
average interest rate at December 31
|
|
|
3.99
|
%
|
|
|
5.40
|
%
|
|
|
5.56
|
%
|
Maximum
month-end amount outstanding
|
|
$
|
25,052,293
|
|
|
$
|
9,630,000
|
|
|
$
|
2,800,000
|
|
Average
daily amount outstanding
|
|
$
|
19,204,359
|
|
|
$
|
2,699,222
|
|
|
$
|
69,521
|
|
Weighted
average interest rate for the year
|
|
|
3.43
|
%
|
|
|
5.20
|
%
|
|
|
4.79
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
outstanding at December 31
|
|
$
|
20,511,399
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Weighted
average interest rate at December 31
|
|
|
2.50
|
%
|
|
|
-
|
|
|
|
-
|
|
Maximum
month-end amount outstanding
|
|
$
|
24,983,307
|
|
|
$
|
1,389,500
|
|
|
$
|
-
|
|
Average
daily amount outstanding
|
|
$
|
21,635,619
|
|
|
$
|
108,678
|
|
|
$
|
14,178
|
|
Weighted
average interest rate for the year
|
|
|
2.30
|
%
|
|
|
3.60
|
%
|
|
|
3.55
|
%
|
Long-Term
Borrowings:
Long-term borrowings of $2,718,865 and $3,511,770
at December 31, 2007 and 2006, respectively, consist of advances from the
FHLB which are used to finance specific lending activities. These
advances carry fixed interest rates ranging from 4.46% to 5.00% while the
weighted average interest rate at December 31, 2007 was 4.56%. The
weighted average interest rate for the year ending December 31, 2007 was
4.50%.
A summary of the maturities of the
long-term borrowings for the next five years is as follows:
Year
|
|
Amount
|
|
2008
|
|
$
|
375,518
|
|
2009
|
|
|
392,915
|
|
2010
|
|
|
411,119
|
|
2011
|
|
|
430,167
|
|
2012
|
|
|
337,590
|
|
2013
and thereafter
|
|
|
771,556
|
|
|
|
|
|
|
Total
|
|
$
|
2,718,865
|
|
Note
13. Commitments and Contingencies
At December 31, 2007 and 2006, the
bank maintained required reserve balances with the Federal Reserve Bank of
Richmond approximating $338,000 and $123,000, respectively. The bank
does not earn interest on such reserve balances.
Litigation:
We are
involved in various legal actions arising in the ordinary course of
business. In the opinion of counsel, the outcome of these matters
will not have a significant adverse effect on our financial condition or results
of operations.
Financial Instruments With
Off-Balance-Sheet Risk:
The bank 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. These financial instruments
include commitments to extend credit and standby letters of
credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of these
instruments reflect the extent of involvement the bank has in particular classes
of financial instruments.
|
|
Contract Amount
|
|
Fi
nancial instruments
whose contract
amounts
represent credit risk
|
|
2007
|
|
|
2006
|
|
Commitments
to extend credit
|
|
$
|
24,602,947
|
|
|
$
|
22,054,312
|
|
Standby
letters of credit
|
|
|
301,223
|
|
|
|
461,689
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,904,170
|
|
|
$
|
22,516,001
|
|
The
bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of these
instruments. The bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
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. The bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts
receivable, inventory, equipment or real estate.
Standby letters of credit are
conditional commitments issued by the bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
support private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans. These letters of credit are generally
uncollateralized.
Note
14. Shareholders’ Equity and Restrictions on Dividends
The primary source of funds for the
dividends paid by Citizens Financial Corp. is dividends received from Citizens
National Bank. Dividends paid by the bank are subject to restrictions
by banking regulations. The most restrictive provision requires
approval by the Office of the Comptroller of the Currency if dividends declared
in any year exceed the year's net income, as defined, plus the retained net
profits of the two preceding years. At December 31, 2007, the net
retained profits available for distribution to Citizens Financial Corp. as
dividends without regulatory approval approximate $1,875,098 or 8.8% of
consolidated net assets.
The company and bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the company and bank must meet specific
capital guidelines that involve quantitative measures of the company’s and
bank’s assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The company and bank’s 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 bank to maintain
minimum amounts and ratios of total and Tier I capital to risk-weighted assets,
and of Tier I capital to average assets. We believe, as of
December 31, 2007, that the company and bank meet all capital adequacy
requirements to which they are subject.
The most recent notification from the
Office of the Comptroller of the Currency categorized the bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the bank must maintain
minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set
forth in the table below. There are no conditions or events since
that notification that we believe have changed the bank's category.
The bank’s actual capital amounts and
ratios, which are the same as those for the holding company on a consolidated
basis, are presented in the following table (in thousands).
|
|
Actual
|
|
|
For Capital
Adequacy Purposes
|
|
|
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital:Risk Weighted Assets
|
|
$
|
23,328
|
|
|
|
12.52
|
%
|
|
$
|
14,906
|
|
|
|
8.00
|
%
|
|
$
|
18,633
|
|
|
|
10.00
|
%
|
Tier
I Capital:Risk Weighted Assets
|
|
|
21,565
|
|
|
|
11.57
|
|
|
|
7,455
|
|
|
|
4.00
|
|
|
|
11,183
|
|
|
|
6.00
|
|
Tier
I Capital:Average Assets
|
|
|
21,565
|
|
|
|
8.75
|
|
|
|
9,858
|
|
|
|
4.00
|
|
|
|
12,323
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Capital:Risk Weighted Assets
|
|
$
|
22,413
|
|
|
|
12.95
|
%
|
|
$
|
13,846
|
|
|
|
8.00
|
%
|
|
$
|
17,307
|
|
|
|
10.00
|
%
|
Tier
I Capital:Risk Weighted Assets
|
|
|
20,540
|
|
|
|
11.87
|
|
|
|
6,922
|
|
|
|
4.00
|
|
|
|
10,382
|
|
|
|
6.00
|
|
Tier
I Capital:Average Assets
|
|
|
20,540
|
|
|
|
8.49
|
|
|
|
9,677
|
|
|
|
4.00
|
|
|
|
12,097
|
|
|
|
5.00
|
|
Note
15. Fair Value of Financial Instruments and Interest Rate
Risk
The following summarizes the methods
and significant assumptions used in estimating fair value disclosures for
financial instruments.
Cash and Due From
Banks:
The carrying values of cash and due from banks
approximate their estimated fair values.
Federal Funds
Sold:
The carrying values of federal funds sold approximate
their estimated fair values.
Securities:
Estimated
fair values of securities are based on quoted market prices, where
available. If quoted market prices are not available, estimated fair
values are based on quoted market prices of comparable securities.
Loans:
The
estimated fair values for loans are computed based on scheduled future cash
flows of principal and interest, discounted at interest rates currently offered
for loans with similar terms to borrowers of similar credit
quality. No prepayments of principal are assumed.
Accrued Interest Receivable and
Payable:
The carrying values of accrued interest receivable
and payable approximate their estimated fair values.
Deposits:
The
estimated fair values of demand deposits (i.e. noninterest bearing and interest
bearing checking), money market, savings and other variable rate deposits
approximate their carrying values. Fair values of fixed maturity
deposits are estimated using a discounted cash flow methodology at rates
currently offered for deposits with similar remaining maturities. Any
intangible value of long-term relationships with depositors is not considered in
estimating the fair values disclosed.
Short-Term
Borrowings:
The carrying values of short-term borrowings
approximate their estimated fair values.
Long-Term
Borrowings:
The fair values of long-term borrowings are
estimated by discounting scheduled future payments of principal and interest at
current rates available on borrowings with similar terms.
Off-Balance-Sheet
Instruments:
The fair values of commitments to extend credit
and standby letters of credit are estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit standing of the counterparties. The
amounts of fees currently charged on commitments and standby letters of credit
are deemed insignificant, and therefore, the estimated fair values and carrying
values are not shown below.
Derivative Financial
Instruments:
The fair values of the interest rate swaps are
based on quoted market prices of like products.
The carrying values and estimated
fair values of the company's financial instruments are summarized
below:
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
Financial
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
7,049,699
|
|
|
$
|
7,049,699
|
|
|
$
|
6,064,890
|
|
|
$
|
6,064,890
|
|
Interest
bearing deposits with other banks
|
|
|
12,421
|
|
|
|
12,421
|
|
|
|
29,858
|
|
|
|
28,858
|
|
Federal
funds sold
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Securities
available for sale
|
|
|
58,559,453
|
|
|
|
58,559,453
|
|
|
|
59,745,539
|
|
|
|
59,745,539
|
|
Loans,
net
|
|
|
170,939,264
|
|
|
|
166,266,520
|
|
|
|
166,217,889
|
|
|
|
158,001,485
|
|
Accrued
interest receivable
|
|
|
1,384,943
|
|
|
|
1,384,943
|
|
|
|
1,393,468
|
|
|
|
1,393,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
201,296,470
|
|
|
$
|
202,239,030
|
|
|
$
|
196,543,215
|
|
|
$
|
197,344,439
|
|
Short-term
borrowings
|
|
|
19,655,942
|
|
|
|
19,655,942
|
|
|
|
19,833,434
|
|
|
|
19,833,434
|
|
Long-term
borrowings
|
|
|
2,718,865
|
|
|
|
2,720,621
|
|
|
|
3,511,770
|
|
|
|
3,426,840
|
|
Accrued
interest payable
|
|
|
523,403
|
|
|
|
523,403
|
|
|
|
511,094
|
|
|
|
511,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swaps and call options
|
|
$
|
2,957
|
|
|
$
|
2,957
|
|
|
$
|
21,054
|
|
|
$
|
21,054
|
|
The
company assumes interest rate risk (the risk that general interest rate levels
will change) as a result of its normal operations. As a result, the
fair values of the company’s financial instruments will change when interest
rate levels change and that change may be either favorable or unfavorable to the
company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate
risk. However, borrowers with fixed rate
obligations
are less likely to prepay in a rising rate environment and more likely to prepay
in a falling rate environment. Conversely, depositors who are
receiving fixed rates are more likely to withdraw funds before maturity in a
rising rate environment and less likely to do so in a falling rate
environment. Management monitors rates and maturities of assets and
liabilities and attempts to minimize interest rate risk by adjusting terms of
new loans and deposits and by investing in securities with terms that mitigate
the company’s overall interest rate risk.
Note
16. Condensed Financial Statements of Parent Company
Information relative to the parent
company's balance sheets at December 31, 2007 and 2006, and the related
statements of income and cash flows for the years ended December 31, 2007, 2006
and 2005, are presented below.
|
|
|
|
|
December 31,
|
|
Balance
Sheets
|
|
|
|
|
2007
|
|
|
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
$
|
2,992
|
|
|
$
|
2,853
|
|
Investment
in subsidiary
|
|
|
|
|
|
21,077,936
|
|
|
|
20,275,166
|
|
Total
assets
|
|
|
|
|
$
|
21,080,928
|
|
|
$
|
20,278,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, $2.00 par value, 4,500,000 shares authorized, issued 2,250,000
shares
|
|
|
|
|
$
|
4,500,000
|
|
|
$
|
4,500,000
|
|
Retained
earnings
|
|
|
|
|
|
20,998,645
|
|
|
|
20,842,981
|
|
Accumulated
other comprehensive income/(loss)
|
|
|
|
|
|
( 586,154
|
)
|
|
|
(1,233,399
|
)
|
Treasury
stock at cost, 420,496 shares
|
|
|
|
|
|
(3,831,563
|
)
|
|
|
(3,831,563
|
)
|
Total
shareholders' equity
|
|
|
|
|
$
|
21,080,928
|
|
|
$
|
20,278,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December
31,
|
|
Statements of
Income
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Income
- dividends from subsidiary bank
|
|
$
|
883,801
|
|
|
$
|
1,512,770
|
|
|
$
|
1,288,485
|
|
Expenses
- operating
|
|
|
5,500
|
|
|
|
7,400
|
|
|
|
6,203
|
|
Income
before equity in undistributed income of subsidiary
|
|
|
878,301
|
|
|
|
1,505,370
|
|
|
|
1,282,282
|
|
Equity
in undistributed income of subsidiary
|
|
|
155,525
|
|
|
|
581,521
|
|
|
|
764,904
|
|
Net
income
|
|
$
|
1,033,826
|
|
|
$
|
2,086,891
|
|
|
$
|
2,047,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December
31,
|
|
Statements of Cash
Flows
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,033,826
|
|
|
$
|
2,086,891
|
|
|
$
|
2,047,186
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in undistributed income of subsidiary
|
|
|
(155,525
|
)
|
|
|
(581,521
|
)
|
|
|
(764,904
|
)
|
Cash
provided by operating activities
|
|
|
878,301
|
|
|
|
1,505,370
|
|
|
|
1,282,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
paid to shareholders
|
|
|
(878,162
|
)
|
|
|
(1,048,482
|
)
|
|
|
(992,726
|
)
|
Acquisition
of treasury stock
|
|
|
-
|
|
|
|
(456,171
|
)
|
|
|
(290,074
|
)
|
Cash
used in financing activities
|
|
|
(878,162
|
)
|
|
|
(1,504,653
|
)
|
|
|
(1,282,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(decrease)
in cash
|
|
|
139
|
|
|
|
717
|
|
|
|
(518
|
)
|
Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
2,853
|
|
|
|
2,136
|
|
|
|
2,654
|
|
Ending
|
|
$
|
2,992
|
|
|
$
|
2,853
|
|
|
$
|
2,136
|
|