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1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XX Quarterly report under Section 13 or 15(d) of the Securities Exchange
- ---- Act of 1934
For quarterly period ended September 30, 1997
____ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________________ to _____________________
Commission file number 0-24958
Potomac Bancshares, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
West Virginia 55-0732247
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
111 East Washington Street, Charles Town WV 25414-1071
(Address of Principal Executive Offices) (Zip Code)
304-725-8431
(Issuer's Telephone Number, Including Area Code)
NO CHANGE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XXX No
_____ _____
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No Not applicable
_____ _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 600,000 shares
Transitional Small Business Disclosure Format (check one):
Yes No XXX
_____ _____
<PAGE>
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POTOMAC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1997 1996
------------- ------------
<S> <C>
Assets:
Cash and due from banks $ 5 493 $ 3 401
Securities (fair value: September 30, 1997,
$38,456; December 31, 1996, $40,331)
(Note 2) 38 421 40 333
Securities purchased under agreements to resell 6 000 4 800
Loans (Note 3) 78 703 73 525
Less reserve for loan losses (1 196) (1 139)
--------- ---------
Net loans 77 507 72 386
Bank premises and equipment, net 1 197 1 255
Accrued interest receivable 1 025 1 021
Other assets 625 584
--------- ---------
Total Assets $ 130 268 $ 123 780
========= =========
Liabilities and Stockholders' Equity:
Liabilities:
Non-interest bearing deposits $ 14 249 $ 14 037
Interest bearing deposits 99 731 94 476
--------- ---------
Total Deposits 113 980 108 513
Accrued interest payable 332 326
Securities sold under agreements to repurchase -- --
Other liabilities 647 722
--------- ---------
Total Liabilities $ 114 959 $ 109 561
--------- ---------
Stockholders' Equity:
Common stock par value $1.00 per share
(5,000,000 shares authorized, 600,000 shares
issued and outstanding) $ 600 $ 600
Surplus 5 400 5 400
Net unrealized losses on securities available
for sale (7) (41)
Undivided profits 9 316 8 260
--------- ---------
Total Stockholders' Equity 15 309 14 219
--------- ---------
Total Liabilities and Stockholders' Equity $ 130 268 $ 123 780
========= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
3
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(000 omitted except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -----------------------
1997 1996 1997 1996
-------- -------- -------- ------
<S> <C>
Interest Income:
Interest and fees on loans $ 1 788 $ 1 684 $ 5 246 $ 5 038
Interest on investment securities
Taxable 418 302 1 230 862
Interest and dividends on securities
available for sale
Taxable 162 187 532 474
Dividends 7 6 19 18
Interest on securities purchased
under agreements to resell 43 91 102 353
-------- -------- -------- --------
Total Interest Income $ 2 418 $ 2 270 $ 7 129 $ 6 745
Interest Expense:
Interest on deposits $ 929 $ 908 $ 2 703 $ 2 733
Interest on federal funds purchased 11 -- 16 --
-------- -------- -------- --------
Total Interest Expense $ 940 $ 908 $ 2 719 $ 2 733
-------- -------- -------- --------
Net Interest Income $ 1 478 $ 1 362 $ 4 410 $ 4 012
Provision for Loan Losses 50 -- 125 125
-------- -------- -------- --------
Net Interest Income after
Provision for Loan Losses $ 1 428 $ 1 362 $ 4 285 $ 3 887
-------- -------- -------- --------
Other Income:
Commissions and fees from fiduciary
activities $ 121 $ 110 $ 384 $ 336
Service charges on deposit accounts 97 73 298 203
Fees for other customer services 38 48 125 142
Other operating income 10 30 34 44
-------- -------- -------- --------
Total Other Income $ 266 $ 261 $ 841 $ 725
-------- -------- -------- --------
Other Expenses:
Salaries and employee benefits $ 618 $ 609 $ 1 820 $ 1 811
Net occupancy expense of premises 55 47 146 156
Furniture and equipment expenses 94 75 261 224
Deposit insurance 4 -- 10 2
Other operating expenses 255 271 796 925
-------- -------- -------- --------
Total Other Expenses $ 1 026 $ 1 002 $ 3 033 $ 3 118
-------- -------- -------- --------
Income before Income Tax Expense $ 668 $ 621 $ 2 093 $ 1 494
Income Tax Expense 247 224 767 542
-------- -------- -------- --------
Net Income $ 421 $ 397 $ 1 326 $ 952
======== ======== ======== ========
Earnings Per Share, Net Income $ .70 $ .66 $ 2.21 $ 1.59
======== ======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(000 Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Common Capital Mkt Value Undivided
Stock Surplus AFS Secur Profits Total
------ ------- --------- --------- -----
<S> <C>
Balances:
January 1, 1997 $ 600 $ 5 400 $ (41) $ 8 260 $14 219
Net income -- -- -- 1 326 1 326
Cash dividends
($.45 per share) -- -- -- (270) (270)
Change in net
unrealized gain
(loss) on
securities
available for sale -- -- 34 -- 34
-------- --------- ----------- --------- -------
Balances:
September 30, 1997 $ 600 $ 5 400 $ (7) $ 9 316 $15 309
======== ========= =========== ========= =======
Balances:
January 1, 1996 $ 600 $ 5 400 $ -- $ 7 423 $13 423
Net income -- -- -- 952 952
Cash dividends
($.35 per share) -- -- -- (210) (210)
Change in net
unrealized gain
(loss) on
securities
available for sale -- -- (85) -- (85)
-------- --------- ----------- --------- -------
Balances:
September 30, 1996 $ 600 $ 5 400 $ (85) $ 8 165 $14 080
======== ========= =========== ========= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
5
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------
September 30 September 30
1997 1996
------------ -------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1 326 $ 952
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 125 125
Depreciation 157 134
Amortization 9 9
Discount accretion and premium
amortization on securities, net 27 21
Loss on sale of real estate -- 84
(Increase) in accrued interest
receivable (4) (118)
(Increase) decrease in other assets (68) 26
Increase (decrease) in accrued interest
payable 6 (16)
Increase (decrease) in other liabilities (75) 96
-------- --------
Net cash provided by operating
activities $ 1 503 $ 1 313
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ 4 000 $ 10 000
Proceeds from maturity of securities available
for sale 6 000 --
Purchase of investment securities (6 049) (7 976)
Purchase of securities available for sale (2 014) (14 072)
Net (increase) decrease in loans (5 245) 110
Purchases of bank premises and equipment (100) (267)
Proceeds from sale of real estate -- 350
-------- --------
Net cash (used in) investing
activities $ (3 408) $(11 855)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW
accounts and savings accounts $ 3 579 $ 1 074
Net increase in certificates of deposit 1 889 69
Cash dividends (270) (210)
-------- --------
Net cash provided by financing
activities $ 5 198 $ 933
-------- --------
Increase (decrease) in cash and cash
equivalents $ 3 293 $ (9 609)
CASH AND CASH EQUIVALENTS
Beginning 8 201 22 096
-------- --------
Ending $ 11 494 $ 12 487
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors $ 2 713 $ 2 748
======== ========
Income taxes $ 933 $ 572
======== ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Unrealized gain (loss) on securities
available for sale $ 51 $ (129)
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
6
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
1. In the opinion of management, the accompanying financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of September 30,
1997, and December 31, 1996, the results of operations for the three
months ended September 30, 1997 and 1996, and results of operations and
cash flows for the nine months ended September 30, 1997 and 1996. The
statements should be read in conjunction with Notes to Consolidated
Financial Statements included in the Potomac Bancshares, Inc. annual
report for the year ended December 31, 1996. The results of operations
for the nine month periods ended September 30, 1997 and 1996, are not
necessarily indicative of the results to be expected for the full year.
2. Securities held to maturity as of September 30, 1997 and December 31,
1996 are summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
September 30, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
<S> <C>
Securities held to maturity:
U.S. Treasury securities $ 16 049 $ 27 $ (15) $ 16 061
Obligations of U.S.
Government agencies 11 995 25 (2) 12 018
--------- -------- -------- --------
$ 28 044 $ 52 $ (17) $ 28 079
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(000 Omitted)
December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- --------
<S> <C>
Securities held to maturity:
U.S. Treasury securities $ 14 005 $ 25 $ (42) $ 13 988
Obligations of U.S.
Government agencies 11 992 21 (6) 12 007
--------- -------- -------- --------
$ 25 997 $ 46 $ (48) $ 25 995
========= ======== ======== ========
</TABLE>
<PAGE>
7
Securities available for sale as of September 30, 1997 and December 31,
1996 are summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
September 30, 1997
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- -------- -------- --------
<S> <C>
Securities available for sale:
U.S. Treasury securities $ 9 986 $ 19 $ (30) $ 9 975
Federal Home Loan Bank stock 402 -- -- 402
--------- -------- -------- --------
$ 10 388 $ 19 $ (30) $ 10 377
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(000 Omitted)
December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- -------- -------- --------
<S> <C>
Securities available for sale:
U.S. Treasury securities $ 14 011 $ 12 $ (74) $ 13 949
Federal Home Loan Bank stock 387 -- -- 387
--------- -------- -------- --------
$ 14 398 $ 12 $ (74) $ 14 336
========= ======== ======== ========
</TABLE>
3. The consolidated loan portfolio, stated at face amount, is composed of
the following:
<TABLE>
<CAPTION>
(000 Omitted)
September 30 December 31
1997 1996
----------- ----------
<S> <C>
Real estate loans:
Construction and land development $ 502 $ 759
Secured by farmland 1 727 1 501
Secured by 1-4 family residential 43 390 38 221
Other real estate loans 12 369 12 125
Loans to farmers (except those secured
by real estate) 306 229
Commercial and industrial loans (except those
secured by real estate) 1 854 1 857
Loans to individuals for personal expenditures 18 261 18 655
All other loans 294 178
-------- --------
Total loans $ 78 703 $ 73 525
======== ========
</TABLE>
4. The following is a summary of transactions in the reserve for loan
losses:
<TABLE>
<CAPTION>
(000 Omitted)
September 30 December 31
1997 1996
------------ -----------
<S> <C>
Balance at beginning of period $ 1 139 $ 899
Provision charged to operating expense 125 100
Recoveries added to the reserve 29 238
Loan losses charged to the reserve (97) (98)
-------- --------
Balance at end of period $ 1 196 $ 1 139
======== ========
</TABLE>
<PAGE>
8
Information about impaired loans as of September 30, 1997 and December 31, 1996
is as follows:
<TABLE>
<CAPTION>
(000 Omitted)
---------------------------------
September 30 December 31
1997 1996
------------ -----------
<S> <C>
Impaired loans for which a reserve has been
provided $ 398 $ 407
Impaired loans for which no reserve has been
provided -- --
----- -----
Total impaired loans $ 398 $ 407
===== =====
Reserve provided for impaired loans, included
in the reserve for loan losses $ 199 $ 204
Average balance in impaired loans $ 402 $ 472
Interest income recognized $ 27 $ 36
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $285,150 at September 30, 1997 and December 31, 1996. If interest on these
loans had been accrued, such income would have approximated $21,890 for the
first nine months of 1997 and $28,494 in 1996.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Between December 31, 1996 and September 30, 1997, total assets increased
$6,488,000. The September 30 annualized return on average assets is 1.39%
compared to 1.13% at December 31. At September 30 the annualized return on
average equity is 11.62% compared to 10.19% at December 31. The leverage capital
(equity to assets) ratio is 11.75% at September 30 compared to 11.43% at
December 31. Since dividends are paid on a semi-annual basis, this ratio may
seem higher at the end of the first and third quarters of the year.
The increase in assets is a combination of a decrease in the securities
portfolio, an increase in the loan portfolio and an increase in cash and cash
equivalents. As noted for the second quarter, the increase in loans is primarily
for real estate secured by 1-4 family residential property.
Floating rate loans make up 39% of the loan portfolio at September 30 as
compared with 29% at December 31.
<PAGE>
9
The table shown below is an analysis of the Corporation's reserve for loan
losses. Net charge-offs for the Corporation have been very low when compared
with the size of the total loan portfolio. Management monitors the loan
portfolio on a quarterly basis with procedures that allow for problem loans and
potentially problem loans to be highlighted and watched. Based on experience,
the loan policies and the current monitoring program, management believes the
loan loss reserve is adequate.
(000 Omitted)
September 30, 1997
------------------
Balance at beginning of period $1 139
Charge-offs:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 97
------
Total charge-offs 97
------
Recoveries:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 29
------
Total recoveries 29
------
Net charge-offs 68
Additions charged to operations 125
------
Balance at end of period $1 196
======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .0893%
======
Loans are placed on nonaccrual status when a loan is specifically determined to
be impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Following
is a table showing the risk elements in the loan portfolio.
(000 Omitted)
September 30, 1997
------------------
Nonaccrual loans $ 285
Restructured loans --
Foreclosed properties --
-----
Total nonperforming assets $ 285
=====
Loans past due 90 days accruing interest $ 137
=====
Reserve for loan losses to period end loans 1.52%
Nonperforming assets to period end loans and
foreclosed properties .36%
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $285,150 at September 30, 1997. If interest on these loans had been accrued,
such income would have approximated $21,890 for the nine months ended September
30, 1997.
At September 30, 1997, other potential problem loans totalled $45,705. Loans are
viewed as potential problem loans according to the ability of such borrowers to
comply with current repayment terms. These loans are subject to constant
management attention, and their status is reviewed on a regular basis.
Management has allocated a portion of the reserve for these loans according to
the review of the potential loss in each loan situation.
<PAGE>
10
Total deposits have increased $5,467,000 as of September 30 compared with
December 31, 1996. In August 1997, the Corporation began offering a new type of
NOW account called Select Checking that pays a higher rate of interest than
other NOW accounts on balances of $5,000 and above. As of September 30, the
balance in Select Checking accounts is approximately $6,000,000. NOW accounts
(other than Select Checking) and savings accounts have decreased in total about
$3,500,000 since December 31. Certificates of deposit have increased almost
$2,000,000 since December 31. Balances in demand deposits and money market
accounts remain basically unchanged compared to December 31.
The comparison of the income statements for the three months ended September 30,
1997 and 1996 shows an increase of 6% in net income in 1997. Net interest income
increased 9% with increases in interest income and in interest expense.
Noninterest income increased 2% with increases in fiduciary activities income
and service charges on deposit accounts. Noninterest expenses increased 2%.
The comparison of the income statements for the nine months ended September 30,
1997 and 1996 shows an increase in net income of 42% in 1997. Interest income
has increased about 6% in 1997 compared to 1996, and interest expense has
decreased less than 1%. The increase in interest income is from an increase in
interest and fees on loans due to increased loan balances and increased rates
and an increase in interest on securities due primarily to increased rates. The
decrease in interest expense is primarily due to decreased interest rates.
Noninterest income has increased 16% as of September 30, 1997 compared with
September 30, 1996. The increase includes increases in commissions and fees from
fiduciary activities and service charges on deposit accounts. The increased
service charges are due to increases in some existing fees and the start of fees
on customer ATM transactions at foreign ATM's.
Noninterest expense has decreased 3% as of September 30, 1997 compared with
September 30, 1996. The major decreases are in occupancy expense and other
operating expenses.
Liquid assets of the Corporation include cash and due from banks, securities
purchased under agreements to resell, securities available for sale, and loans
and investments maturing within one year. The Corporation's statement of cash
flows details this liquidity. Net income after certain adjustments for noncash
transactions provided cash from operating activities. Funds from maturity of
investment securities and existing cash were used to fund investing activities.
Financing activities were funded through an increase in total deposits. Cash and
cash equivalents have increased during this period insuring liquidity of the
Corporation is more than adequate to meet present and future financial
obligations.
<PAGE>
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which the Registrant or its
subsidiary, directors or officers is a party or by which they, or any of them,
are threatened. All legal proceedings presently pending or threatened against
Potomac Bancshares, Inc. and its subsidiary involve routine litigation
incidental to the business of the Company or the subsidiary and are either not
material in respect to the amount in controversy or fully covered by insurance.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation
or succession.
Not applicable
4. Instruments defining the rights of security holders, including
indentures.
Not applicable
10. Material contracts.
Not applicable
11. Statement re: computation of per share earnings.
Not applicable
15. Letter on unaudited interim financial information.
Not applicable
18. Letter on change in accounting principles.
Not applicable
19. Reports furnished to security holders.
Not applicable
22. Published report regarding matters submitted to vote of
security holders.
Not applicable
23. Consent of experts and counsel.
Not applicable
24. Power of attorney.
Not applicable
27. Financial Data Schedule.
99. Additional exhibits.
Not applicable
(b) Reports on Form 8-K:
NONE
<PAGE>
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES, INC.
Date November 12, 1997 /s/ Charles W. LeMaster
______________________ _____________________________________
Charles W. LeMaster, President & CEO
Date November 12, 1997 /s/ L. Gayle Marshall Johnson
______________________ _____________________________________
L. Gayle Marshall Johnson, Vice
President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 5,493
<INT-BEARING-DEPOSITS> 18
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,377
<INVESTMENTS-CARRYING> 28,044
<INVESTMENTS-MARKET> 28,079
<LOANS> 78,703
<ALLOWANCE> 1,196
<TOTAL-ASSETS> 130,268
<DEPOSITS> 113,980
<SHORT-TERM> 0
<LIABILITIES-OTHER> 979
<LONG-TERM> 0
0
0
<COMMON> 600
<OTHER-SE> 14,709
<TOTAL-LIABILITIES-AND-EQUITY> 130,268
<INTEREST-LOAN> 5,246
<INTEREST-INVEST> 1,781
<INTEREST-OTHER> 102
<INTEREST-TOTAL> 7,129
<INTEREST-DEPOSIT> 2,703
<INTEREST-EXPENSE> 2,719
<INTEREST-INCOME-NET> 4,410
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,033
<INCOME-PRETAX> 2,093
<INCOME-PRE-EXTRAORDINARY> 1,326
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,326
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 2.21
<YIELD-ACTUAL> 7.896
<LOANS-NON> 285
<LOANS-PAST> 137
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 46
<ALLOWANCE-OPEN> 1,139
<CHARGE-OFFS> 97
<RECOVERIES> 29
<ALLOWANCE-CLOSE> 1,196
<ALLOWANCE-DOMESTIC> 1,196
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
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