1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
XXX Annual Report Under Section 13 or 15(d)of the Securities
- --- Exchange Act of 1934 (Fee required)
For the fiscal year ended December 31, 1996
Transition report under Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 (No fee required)
For the transition period from_____________ to _____________
Commission File No. 0-24958
Potomac Bancshares, Inc.
(Name of Small Business Issuer in Its Charter)
West Virginia 55-0732247
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
111 East Washington Street
PO Box 906, Charles Town WV 25414-0906
(Address of Principal Executive Offices) (Zip Code)
304-725-8431
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
- ------------------------------- --------------------------------
- ------------------------------- --------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 Par Value
(Title of Class)
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Check whether the issuer: (l) 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 past 90 days.
Yes XXX No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. XX
----
State issuer's revenues for its most recent fiscal year.
$10,074,770
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $16,724,160
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has 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 XXX
----- ----- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
600,000
Transitional Small Business Disclosure Format (check one):
Yes No XXX
----- -----
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to security-holders for fiscal year ended December 31, 1996 is
incorporated by reference into Part II.
Proxy Statement for annual meeting April 22, 1997, is incorporated by reference
into Part III.
<PAGE>
3
PART I
Item 1. Description of Business.
History and Operations
The Board of Directors of Bank of Charles Town (the "Bank") caused
Potomac Bancshares, Inc. ("Bancshares") to be formed on March 2, 1994, as a
single-bank holding company. To date, Bancshares' only activities have involved
the acquisition of the Bank. Bancshares acquired all of the shares of common
stock of the Bank on July 29, 1994.
Bank of Charles Town is a West Virginia state-chartered bank which
formed and opened for business in 1871. The Bank's deposits are insured by the
Federal Deposit Insurance Corporation. Engaged in general banking business with
the primary market area being Jefferson County, the Bank also provides services
to Washington County and Frederick County, Maryland; Loudoun County and Clarke
County, Virginia; and Berkeley County, West Virginia. The main office is in
Charles Town at 111 East Washington Street, with branch offices in Harpers
Ferry, West Virginia and Kearneysville, West Virginia.
The Bank provides consumers, businesses, and governments with a
broad range of banking services, including personal lines of credit, home equity
lines of credit, commercial, agricultural, real estate, and installment loans;
checking, savings, NOW, and money market accounts, certificates of deposit, and
individual retirement accounts. Automated teller machines are located at each of
the three offices to provide 24 hour service. The trust and financial services
department provides financial management, investment and trust services.
Lending Activities. The Bank offers installment, term, and real
estate loans for consumer, business and commercial purposes. These loans can be
unsecured or secured by collateral being purchased or other collateral.
Underwriting standards covering all lending include sound credit
analysis, proper documentation according to the Bank's loan documentation
checklist, promotion of profitable customer relationships with cross-selling of
bank services, avoidance of loan concentrations to a single industry or with a
single class of collateral, and diligent maintenance of past due and nonaccrual
loans at a minimum.
The Bank's loan policy designates particular loan-to-value limits
for real estate loans in accordance with recommendations in Section 304 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991.
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As stated in the loan policy, there may be certain lending
situations not subject to these loan-to-value limits and from time to time the
Board of Directors may permit exceptions to the established limits. Any
exceptions are sufficiently documented.
Loans secured by real estate are made to individuals and businesses
for the purchase of raw land, for land development, for commercial, multi-family
and other non-residential construction, to purchase improved property, and to
purchase owner occupied one to four family residential property. Lines of credit
and home equity loans are available.
Approximately 72% of the Bank's loans are secured by real estate.
These loans had an average delinquency rate of 1.56% and a loss rate of .00%
during 1996. These rates are based on comparisons to 1996 average total loans.
As of December 31, 1996, aggregate dollar amounts in loan
categories secured by real estate are as follows:
Construction and land development $ 759,619
Secured by farmland 1,501,527
Secured by 1-4 family residential 38,220,730
Other 12,124,747
-----------
$52,606,623
===========
Loans to individuals for personal expenditures are approximately
25% of the Bank's total loans at December 31, 1996. The aggregate balance of
these loans was $18,654,695 at December 31. The majority of these are
installment loans with the remainder made as term loans.
The Bank's loan policy states that evaluation of applications for
installment loans will consider place and length of residence, place and length
of employment, and credit history. Although these are considered, verification
of employment is usually not done, since it is recognized that unless immediate
decisions on applications can be made, a lender may be unable to secure a fair
share of loan business since instant credit is available from many sources in
the market place. This may make installment lending more risky than real estate
lending; however, installment loans had an average delinquency rate of .37% and
a loss rate of .13% in 1996 (based on comparisons to 1996 average total loans).
This delinquency rate for installment loans is lower than the comparable rate
for real estate loans.
The Bank's policy for evaluating term loans involves consideration
of credit history and current financial statements if loan is a certain amount
and unsecured. If loans are not paid at original scheduled maturity, information
must be reviewed by a loan officer for a renewal. The average delinquency rate
was .21% and loss rate was 0.00% compared to average total loans in 1996.
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The remaining aggregate dollar amount of the Bank's loans is
$2,264,022 at December 31. The amount includes:
(1) Dealer wholesale loans with generally
no delinquencies or losses $ 707,309
(2) Term loans for business and commercial
purposes 1,149,910
(3) Industrial revenue bond loans secured
by real estate 149,605
(4) Term loans for agricultural
purposes 229,022
(5) Other loans 28,176
Investment Activities. The Bank's investment activities
are governed by its investment policy.
The policy states that excess daily funds are to be invested in
securities purchased under agreements to resell. The daily funds are used to
cover deposit draw downs by customers, to fund loan commitments, and to help
maintain the Bank's asset/liability mix.
According to the policy, funds in excess of those invested in
securities purchased under agreements to resell are to be invested in U.S.
Treasury bills, notes or bonds, obligations of U.S. Government agencies,
obligations of political subdivisions of the State of West Virginia with a
rating of not less than AAA and, with prior approval of the Board of Directors,
bank qualified local industrial revenue bonds to be carried in the Bank's loan
portfolio.
The policy governs various other factors including maturities, the
closeness of purchase price to par, amounts that may be purchased, and
percentages of the various types of investments that may be held.
Deposit Activities. The Bank offers noninterest bearing checking
accounts and interest bearing NOW accounts and money market accounts. Passbook
and statement savings accounts and Christmas Club accounts are available.
Certificates of deposit are offered in various terms from 91 days to four years
and may be automatically renewed if the depositor wishes. Individual retirement
accounts in the form of certificates of deposit are also available.
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Prior to opening any deposit account particular requirements must
be met by the depositor including presentation of valid identification and
social security number, must not be on record with Chex Systems (credit
reporting agency), must be a U.S. citizen or possess evidence of legal alien
status, and must be at least 18 years of age or share account with a person at
least 18 years of age.
Competition
As of December 31, 1996, there were 54 bank holding companies
(including multi-bank and one bank holding companies) operating in the State of
West Virginia. These holding companies are headquartered in various West
Virginia cities and control banks throughout the State of West Virginia,
including banks which compete with the Bank in its market area.
The Bank's market area is generally defined as Jefferson County,
West Virginia. As of June 30, 1996, there were six banks in Jefferson County
with 14 banking offices. The total deposits of those commercial banks as of
June, 1996, were $375,146,000 and the Bank ranked number one with $109,364,000
or 29.2% of the total deposits in the market.
For most of the services which the Bank performs, there is also
competition from financial institutions other than commercial banks. For
instance, credit unions and issuers of commercial paper and money market funds
actively compete for funds and for various types of loans. In addition, personal
and corporate trust and investment counseling services are offered by insurance
companies, investment counseling firms and other business firms and individuals.
Due to the geographic location of the Bank's primary market area, the existence
of larger financial institutions in Maryland, Virginia and Washington, D.C.
influences the competition in the market area. In addition larger regional and
national corporations continue to be increasingly visible in offering a broad
range of financial services to all types of commercial and consumer customers.
The principal competitive factors in the markets for deposits and loans are
interest rates, either paid or charged. The chartering of numerous new banks in
West Virginia and the opening of numerous federally chartered savings and loan
associations, which are not subject to the State's branch banking laws, have
increased competition for the Bank. The 1986 legislation passed by the West
Virginia Legislature allowing state-wide branch banking provided increased
opportunities for the Bank, but it also increased competition for the Bank in
its service area. With the beginning of reciprocal interstate banking in 1988,
bank holding companies (such as Potomac Bancshares, Inc.) also face additional
competition in efforts to acquire other subsidiaries throughout West Virginia.
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7
In 1994, Congress passed the Riegle-Neal Interstate Banking and
Branching Efficiency Act. Under this Act, absent action to opt out or limit
interstate branching by the West Virginia Legislature, interstate branch banking
may occur after June 1, 1997. States are permitted to opt into interstate branch
banking prior to June 1, 1997, may opt out of interstate branch banking prior to
that date, may allow only acquisition of branches, may opt into de novo
interstate branch banking or may allow the acquisition of a branch of a bank
without acquiring the bank itself. In 1996, the West Virginia Legislature opted
into interstate branch banking, effective May 31, 1997. The effect of this
legislation will likely be increased competition with West Virginia banks,
including the Bank.
Employees
Bancshares currently has no employees.
As of January 31, 1997, the Bank had 79 full-time employees and 8
part-time employees.
Supervision and Regulation
Introduction. Bancshares is a bank holding company within the
provisions of the Bank Holding Company Act of 1956, is registered as such, and
is subject to supervision by the Board of Governors of the Federal Reserve
System ("Board of Governors"). The Bank Holding Company Act requires Bancshares
to secure the prior approval of the Board of Governors before Bancshares
acquires ownership or control of more than five percent (5%) of the voting
shares or substantially all of the assets of any institution, including another
bank.
As a bank holding company, Bancshares is required to file with the
Board of Governors annual reports and such additional information as the Board
of Governors may require pursuant to the Bank Holding Company Act. The Board of
Governors may also make examinations of Bancshares and its banking subsidiaries.
Furthermore, under Section 106 of the 1970 Amendments to the Bank Holding
Company Act and the regulations of the Board of Governors, a bank holding
company and its subsidiaries are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or any provision of
credit, sale or lease of property or furnishing of services.
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8
Bancshares' depository institution subsidiaries are subject to
affiliate transaction restrictions under federal law which limit the transfer of
funds by the subsidiary banks to their respective parents and any nonbanking
subsidiaries, whether in the form of loans, extensions of credit, investments or
asset purchases. Such transfers by any subsidiary bank to its parent corporation
or any nonbanking subsidiary are limited in an amount to 10% of the
institution's capital and surplus and, with respect to such parent and all such
nonbanking subsidiaries, to an aggregate of 20% of any such institution's
capital and surplus.
Bancshares is required to register annually with the Commissioner
of Banking of West Virginia ("Commissioner") and to pay a registration fee to
the Commissioner based on the total amount of bank deposits in banks with
respect to which it is a bank holding company. Although legislation allows the
Commissioner to prescribe the registration fee, it limits the fee to ten dollars
per million dollars of deposits rounded off to the nearest million dollars.
Bancshares is also subject to regulation and supervision by the Commissioner.
Bancshares is required to secure the approval of the West Virginia
Board of Banking before acquiring ownership or control of more than five percent
of the voting shares or substantially all of the assets of any institution,
including another bank. West Virginia banking law prohibits any West Virginia or
non-West Virginia bank or bank holding company from acquiring shares of a bank
if the acquisition would cause the combined deposits of all banks in the State
of West Virginia, with respect to which it is a bank holding company, to exceed
20% of the total deposits of all depository institutions in the State of West
Virginia.
Depository Institution Subsidiaries. Bank is subject to FDIC
deposit insurance assessments. As of January 1, 1997, FDIC set the Financing
Corporation (FICO) Bank Insurance Fund (BIF) premium for the Bank at the annual
rate of 1.296 basis points or .0001296 times the total deposits of the Bank.
This premium is not tied to the Bank's risk classification. The rate of the
premium based on the Bank's risk classification is still at 0.00%. It is
possible that BIF insurance assessments will be changed, and it is also possible
that there may be a special additional assessment. A large special assessment
could have an adverse impact on Bancshares' results of operations.
Capital requirements. The Federal Reserve Board has issued
risk-based capital guidelines for bank holding companies, such as Bancshares.
The guidelines establish a systematic analytical framework that makes regulatory
capital requirements more sensitive to differences in risk profiles among
banking organizations, takes off-balance sheet exposures into explicit account
in assessing capital adequacy, and minimizes disincentives to holding liquid,
low-risk assets. Under the guidelines and
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9
related policies, bank holding companies must maintain capital sufficient to
meet both a risk-based asset ratio test and leverage ratio test on a
consolidated basis. The risk-based ratio is determined by allocating assets and
specified off-balance sheet commitments into four weighted categories, with
higher levels of capital being required for categories perceived as representing
greater risk. The leverage ratio is determined by relating core capital (as
described below) to total assets adjusted as specified in the guidelines. Bank
is subject to substantially similar capital requirements adopted by applicable
regulatory agencies.
Generally, under the applicable guidelines, the financial
institution's capital is divided into two tiers. "Tier 1", or core capital,
includes common equity, noncumulative perpetual preferred stock (excluding
auction rate issues) and minority interests in equity accounts or consolidated
subsidiaries, less goodwill. Bank holding companies, however, may include
cumulative perpetual preferred stock in their Tier 1 capital, up to a limit of
25% of such Tier 1 capital. "Tier 2", or supplementary capital, includes, among
other things, cumulative and limited-life preferred stock, hybrid capital
instruments, mandatory convertible securities, qualifying subordinated debt, and
the allowance for loan losses, subject to certain limitations, less required
deductions. "Total capital" is the sum of Tier 1 and Tier 2 capital.
Financial institutions are required to maintain a risk- based ratio
of 8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority
may set higher capital requirements when an institution's particular
circumstances warrant.
Financial institutions that meet certain specified criteria,
including excellent asset quality, high liquidity, low interest rate exposure
and the highest regulatory rating, are required to maintain a minimum leverage
ratio of 3%. Financial institutions not meeting these criteria are required to
maintain a leverage ratio which exceeds 3% by a cushion of at least 100 to 200
basis points, and, therefore, the ratio of Tier 1 capital to total assets should
not be less than 4%.
The guidelines also provide that financial institutions
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets. Furthermore, the Federal
Reserve Board's guidelines indicate that the Federal Reserve Board will continue
to consider a "tangible Tier 1 leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage is the ratio of an
institution's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.
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Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies available to the
federal regulatory authorities, including limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital directive to
increase capital and the termination of deposit insurance by the FDIC, as well
as to the measures described in the "Federal Deposit Insurance Corporation
Improvement Act of 1991" as applicable to undercapitalized institutions.
The Federal Reserve Board, as well as the FDIC, has adopted changes
to their risk-based and leverage ratio requirements that require that all
intangible assets, with certain exceptions, be deducted from Tier 1 capital.
Under the Federal Reserve Board's rules, the only types of intangible assets
that may be included in (i.e., not deducted from) a bank holding company's
capital are readily marketable purchased mortgage servicing rights ("PMSRs") and
purchased credit card relationships ("PCCRs"), provided that, in the aggregate,
that total amount of PMSRs and PCCRs included in capital does not exceed 50% of
Tier 1 capital. PCCRs are subject to a separate limit of 25% of Tier 1 capital.
The amount of PMSRs and PCCRs that a bank holding company may include in its
capital is limited to the lesser of (i) 90% of such assets' fair market value
(as determined under the guidelines), or (ii) 100% of such assets' book value,
each determined quarterly. Identifiable intangible assets (i.e., intangible
assets other than goodwill) other than PMSRs and PCCRs, including core deposit
intangibles, acquired on or before February 19, 1992 (the date the Federal
Reserve Board issued its original proposal for public comment), generally will
not be deducted from capital for supervisory purposes, although they will
continue to be deducted for purposes of evaluating applications filed by bank
holding companies.
As of December 31, 1996, Bancshares had capital in excess of all
applicable requirements as shown below:
Actual Required Excess
Tier 1 capital: ------------ ---------- -----------
Common stock $ 600,000
Surplus 5,400,000
Retained earnings 8,260,037
------------
Total tier 1 capital $ 14,260,037 $2,457,173 $11,802,864
Tier 2 capital:
Allowance for loan losses (1) 772,445
------------
Total risk-based capital $ 15,032,482 $4,914,345 $10,118,137
============ ========== ===========
Risk-weighted assets $ 61,429,313
============
Tier 1 capital $ 14,260,037 $3,741,411 $10,518,626
============ ========== ===========
Average total assets $124,713,706
============
Capital ratios:
Tier 1 risk-based capital ratio 23.21% 4.00% 19.21%
Total risk-based capital ratio 24.47% 8.00% 16.47%
Tier 1 capital to average total
assets (leverage) 11.43% 4.00% 7.43%
(1) Limited to 1.25% of gross risk-weighted assets.
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11
Permitted Non-Banking Activities. The Federal Reserve permits bank
holding companies to engage in non-banking activities closely related to banking
or managing or controlling banks. Bancshares presently does not engage in, nor
does it have any immediate plans to engage in, any non-banking activities bank
holding companies are permitted to perform.
A notice of proposed non-banking activities must be furnished to
the Federal Reserve and the Banking Board before Bancshares engages in such
activities, and an application must be made to the Federal Reserve and Banking
Board concerning acquisitions by Bancshares of corporations engaging in those
activities. In addition, the Federal Reserve may, by order issued on a
case-by-case basis, approve additional non-banking activities.
The Bank. The Bank is a state-chartered bank which is not
a member of the Federal Reserve system and is subject to regulation
and supervision by the FDIC and the Commissioner.
Compliance with Environmental Laws. The costs and effects of
compliance with federal, state and local environmental laws will not have a
material effect or impact on Bancshares or The Bank.
Item 2. Description of Property.
Bancshares currently has no property.
The Bank owns the land and buildings of the main office and two
branch office facilities.
Main office property is located at 111 East Washington Street,
Charles Town, West Virginia. This property consists of two separate two story
buildings located side by side with an adjoining corridor. The older of these
two buildings houses the Bank's Trust and Financial Services Division on its
first floor and the second floor is used for storage. The Trust and Financial
Services area was remodeled in 1982. The newer building houses the commercial
bank operations, using the majority of both floors of the building. This
building was constructed in 1967. Two adjoining sections of property at this
location were purchased in 1986 and 1988 to meet additional parking needs.
The Bank sold the property formerly housing the Charles Town Lodge,
Loyal Order of Moose, Inc., during 1996 for $220,000. This property, used only
as a storage facility, was no longer needed.
One branch office is located at 1318 Washington Street, Bolivar,
West Virginia. The office is a one story brick building constructed in 1975. On
this property is another building which existed at the time of the Bank's
purchase. This is rented to others by the Bank.
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In addition, the Bank owns property in Kearneysville, West
Virginia, on which a second branch facility was erected in 1985. This one story
brick building opened for business in April of 1985. During 1993, an addition
was constructed, doubling the size of this facility.
There are no encumbrances on any of these properties. In the
opinion of management, these properties are adequately covered by insurance.
Item 3. Legal Proceedings.
Currently Bancshares is involved in no legal proceedings.
The Bank is involved in various legal proceedings arising in the
normal course of business, and in the opinion of the Bank, the ultimate
resolution of these proceedings will not have a material effect on the financial
position or operations of the Bank.
Item 4. Submission of Matters to a Vote of Security-Holders.
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The following information reflects comparative per share data for
the periods indicated for Bancshares Common Stock for (a) trading values, and
(b) dividends. As of March 21, 1997, there were approximately 850 shareholders.
Bancshares Common Stock is not traded on any stock exchange or over
the counter. Shares of Bancshares Common Stock are occasionally bought and sold
by private individuals, firms or corporations, and, in many instances,
Bancshares does not have knowledge of the purchase price or the terms of the
purchase. The following information relating to trading values for Bancshares
Common Stock is based upon information furnished to Bancshares by one or more
parties involved in purchases or sales of Bancshares Common Stock. The trading
values shown below are based on arms-length transactions between shareholders.
NO ATTEMPT WAS MADE BY BANCSHARES TO VERIFY OR DETERMINE THE ACCURACY OF THE
REPRESENTATIONS MADE TO BANCSHARES.
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Price Range (1) Cash Dividends (2)
High Low Paid per Share
1995 First Quarter $30.00 $30.00 $ N/A
Second Quarter 30.00 30.00 .35
Third Quarter 35.00 28.00 N/A
Fourth Quarter 30.00 30.00 .50
1996 First Quarter $30.00 $25.00 $ N/A
Second Quarter 30.00 27.00 .35
Third Quarter 30.00 27.00 N/A
Fourth Quarter 31.00 28.00 .60
(1) See the description of "Trading Value" in the preceding paragraph.
(2) Dividends have been declared traditionally by Bancshares on a semi-annual
basis.
The primary source of funds for dividends paid by Bancshares is the
dividend income received from the Bank. The Bank's ability to pay dividends is
subject to restrictions under federal and state law, and under certain cases,
approval by the FDIC and Commissioner could be required. Management of
Bancshares anticipates that the dividends paid by Bancshares will likely be
similar to those paid in the past, but dividends will only be paid when and as
declared by the Board of Directors.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Pages 4-11 of the Annual Report to Shareholders for the year ended
December 31, 1996, are incorporated by reference for this item 6.
Item 7. Financial Statements.
Pages 13-29 of the Annual Report to Shareholders for the year ended
December 31, 1996, are incorporated by reference for this item 7.
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
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14
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.
Pages 2-5 of the Proxy Statement dated March 28, 1997, for the
April 22, 1997 Annual Meeting are incorporated by reference for this item 9.
The Executive Officers are as follows:
Name Position Since Age Principal Occupation
- ----------------------- --------------------- ----- --------------------
Charles W. LeMaster President & CEO 55 Employed at Bank
1994 since 1983; President
& CEO since 1991.
William R. Harner Sr. Vice President, 56 Employed at Bank
Secretary & Treasurer since 1967; Sr. Vice
1994 President & Cashier
since 1988.
Gayle Marshall Johnson Vice President & Chief 47 Employed with the
Financial Officer Bank 1977-1985 as
1994 internal auditor.
Rejoined Bank in 1988
as Financial Officer.
Vice President &
Financial Officer of
Bank since 1990.
Donald S. Smith Vice President & 68 Employed at Bank 1947
Assistant Secretary to 1991; President
1994 1979 to 1991
(retired).
Item 10. Executive Compensation.
Pages 7-9 of the Proxy Statement dated March 28, 1997, for the
April 22, 1997 Annual Meeting are incorporated by reference for this item 10.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
Pages 5-7 of the Proxy Statement dated March 28, 1997, for the
April 22, 1997 Annual Meeting are incorporated by reference for this item 11.
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15
Item 12. Certain Relationships and Related Transactions.
Page 11 of the Proxy Statement dated March 28, 1997, for the April
22, 1997 Annual Meeting is incorporated by reference for this item 12.
Item 13. Exhibits List and Reports on Form 8-K.
1.1 Pages 4-11 and 14-29 of Bancshares' 1996 Annual
Report to Shareholders are incorporated herein by reference.
(a) 2.1 Agreement and Plan of Merger dated March 8, 1994, by and
between Potomac Bancshares, Inc., and Bank of Charles Town filed with and
incorporated by reference from the Registration on Form S-4 filed with the
Securities and Exchange Commission on June 10, 1994: Registration no. 33-80092.
3.1 Articles of Incorporation of Potomac Bancshares,
Inc. filed with and incorporated by reference from the Registration
on Form S-4 filed with the Securities and Exchange Commission on
June 10, 1994: Registration no. 33-80092.
3.2 Amendments to Articles of Incorporation of
Potomac Bancshares, Inc. adopted by shareholders April 25, 1995 and recorded by
West Virginia Secretary of State May 23, 1995 filed with the Securities and
Exchange Commission with 1995 Form 10-KSB.
3.3 Bylaws of Potomac Bancshares, Inc. filed with and
incorporated by reference from the Registration on Form S-4 filed with the
Securities and Exchange Commission on June 10, 1994:
Registration no. 33-80092.
3.4 Amended and Restated Bylaws of Potomac
Bancshares, Inc. adopted by shareholders April 25, 1995 filed with
the Securities and Exchange Commission with 1995 Form 10-KSB.
21 Subsidiaries of the Registrant
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES, INC.
By /s/ Charles W. LeMaster March 25, 1997
----------------------------------------
Charles W. LeMaster
President & Chief Executive Officer
By /s/ L. Gayle Marshall Johnson March 25, 1997
----------------------------------------
L. Gayle Marshall Johnson
Vice President & Chief Financial Officer
& Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature & Title Date
- ----------------- ----
/s/ John P. Burns, Jr.
By ________________________________
John P. Burns, Jr., Director March 25, 1997
/s/ Robert W. Butler
By ________________________________
Robert W. Butler, Director March 25, 1997
/s/ Guy Gary Chicchirichi
By ________________________________
Guy Gary Chicchirichi, Director March 25, 1997
/s/ Thomas C. G. Coyle
By ________________________________
Thomas C. G. Coyle, Director March 25, 1997
/s/ Francis M. Frye
By ________________________________
Francis M. Frye, Director March 25, 1997
<PAGE>
Signature & Title Date
- ----------------- ----
/s/ William R. Harner
By ________________________________
William R. Harner, Director, March 25, 1997
Sr. Vice President, Secretary &
Treasurer
/s/ E. William Johnson
By ________________________________
E. William Johnson, Director March 25, 1997
/s/ Charles W. LeMaster
By ________________________________
Charles W. LeMaster, Director, March 25, 1997
President, Chief Executive Officer
/s/ Minnie R. Mentzer
By ________________________________
Minnie R. Mentzer, Director March 25, 1997
/s/ James E. Senseney
By ________________________________
James E. Senseney, Director March 25, 1997
/s/ John C. Skinner, Jr.
By ________________________________
John C. Skinner, Jr., Director March 25, 1997
/s/ Donald S. Smith
By ________________________________
Donald S. Smith, Director March 25, 1997
<PAGE>
[GRAPHIC FRAMED BORDER OMITTED]
Potomac Bancshares, Inc.
1996 Annual Report
[GRAPHIC OMITTED]
Connected To Our Community Through Service
Bank of Charles Town
Member FDIC o Wholly-owned Subsidiary of Potomac Bancshares, Inc.
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
A copy of the Corporation's 1996 annual report on Form 10-KSB to
Securities and Exchange Commission may be obtained without charge upon written
request by any stockholder to:
Gayle Marshall Johnson
Vice President and Chief Financial Officer
Potomac Bancshares, Inc.
111 East Washington Street
PO Box 906
Charles Town West Virginia 25414-0906
GENERAL INFORMATION
COMMON STOCK PRICES AND DIVIDENDS
Trading of Potomac Bancshares, Inc. common stock is not extensive and
cannot be described as a public trading market. A market of the Corporation's
stock and quotations are not listed in any publication of national circulation.
As of December 31, 1996, there were 600,000 common shares outstanding with these
being held by approximately 850 shareholders.
The per share sale prices of and dividends on the Corporation's stock
over the last two years, based solely on transactions of which the Corporation
is aware, are listed below.
High Low Dividends
1995
First Quarter $30.00 $30.00 $ N/A
Second Quarter 30.00 30.00 0.35
Third Quarter 35.00 28.00 N/A
Fourth Quarter 30.00 30.00 0.50
1996
First Quarter 30.00 25.00 N/A
Second Quarter 30.00 27.00 0.35
Third Quarter 30.00 27.00 N/A
Fourth Quarter 31.00 28.00 0.60
Common stock dividends are paid on a semi-annual basis. Management
intends to continue to recommend dividends to be paid as profits and maintenance
of satisfactory equity capital allow.
STOCK TRANSFER AGENT
American Stock Transfer
& Trust Company
40 Wall Street
New York NY 10005
(212) 936-5100
ANNUAL MEETING
The annual meeting of stockholders will be held at the Bavarian Inn,
Shepherdstown, Jefferson County, West Virginia, on Tuesday, April 22, 1997,
beginning at 10:00 a.m.
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Annual Report on Form 10-KSB...................................................Inside Front Cover
General Information............................................................Inside Front Cover
President's Report..............................................................................1
Description of Business.........................................................................2
Board of Directors..............................................................................2
Selected Consolidated Financial Data............................................................3
Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................................4-11
Independent Auditor's Report...................................................................13
Consolidated Financial Statements
Consolidated Balance Sheets...........................................................14
Consolidated Statements of Income.....................................................15
Consolidated Statements of Changes in Stockholders' Equity............................16
Consolidated Statements of Cash Flows.................................................17
Notes to Consolidated Financial Statements.........................................18-29
Trust and Financial Services...................................................................30
Officers and Staff..............................................................Inside Back Cover
</TABLE>
<PAGE>
PRESIDENT'S REPORT
On behalf of the Board of Directors, Officers and Staff, we are
pleased to submit our Annual Report of the operations and condition of our
holding company, Potomac Bancshares, Inc. for the year ended December 31, 1996.
Our net income totaled $1,407,434 for the year 1996 and showed an
increase of $222,306 over 1995. The earnings per share were $2.35 and benefitted
the shareholders who received a dividend of $.95 per share during 1996. This
1996 net income reversed the previous two years' declining trend. The
Corporation maintains a very strong capital to average assets ratio of 11.43% as
of year end. Also, you will note that Reserve for Loan Losses increased
significantly. This is attributed to our continued effort to collect on loans
previously classified as losses. The loan loss allowance is sufficient to
support any loans that may become troublesome.
Your Corporation continues to support the community and its
surrounding market area by providing the services that customers expect from
their financial institution. In January, we instituted Saturday lobby hours at
the main office. This has been well received and is a complete success. We are
working on other services which will be in place in the near future. The first
of these, available this spring, is Touchline 24, our automated voice response
system which will allow our customers to access information about their accounts
24 hours a day.
I want to thank our Officers and Staff for their continued
service, trust and dedication to our customers, and our Directors for their
invaluable support and guidance. As always, we solicit the support of our
shareholders to refer customers to the Bank to ensure our growth and success.
Sincerely,
Charles W. LeMaster
President & CEO
-1-
<PAGE>
DESCRIPTION OF BUSINESS
Potomac Bancshares, Inc., a one-bank holding company, and Subsidiary,
Bank of Charles Town, are engaged in general banking business with the primary
market area being Jefferson County. However, the Corporation also provides
services to Washington County and Frederick County, Maryland; Loudoun County and
Clarke County, Virginia; and Berkeley County, West Virginia. The main office is
in Charles Town with branch offices in Harpers Ferry and Kearneysville.
The Corporation provides consumers, businesses, and governments with a
broad range of banking services, including personal lines of credit, home equity
lines of credit, commercial, agricultural, real estate, and installment loans;
checking, savings, NOW, and money market accounts, certificates of deposit, and
individual retirement accounts. Automated teller machines are located at each of
the three offices to provide twenty-four hour service. The trust and financial
services department provides financial management, investment and trust
services.
Bank of Charles Town is a West Virginia state chartered bank which
formed and opened for business in 1871. The Bank's deposits are insured by
Federal Deposit Insurance Corporation.
BOARD OF DIRECTORS
Potomac Bancshares, Inc. and Bank of Charles Town
<TABLE>
<S> <C>
John P. Burns, Jr. Francis M. Frye Minnie R. Mentzer
Partner Retired President Retired President
Burns Farm Ranson Real Estate Myers Coal Company, Inc.
Robert W. Butler William R. Harner James E. Senseney
Farmer-Orchardist Senior Vice President Retired Owner-Operator
Warm Spring Orchard & Farm & Cashier J. E. Senseney & Sons, Inc.
Bank of Charles Town
Guy Gary Chicchirichi E. William Johnson John C. Skinner, Jr.
General Manager Professor of Economics Owner
Guy's Buick-Pontiac-Oldsmobile- Shepherd College Nichols and Skinner, L.C.
GMC Truck, Inc.
Thomas C. G. Coyle Charles W. LeMaster Donald S. Smith
Retired Owner-Operator President Retired President
Riddleberger's Store Bank of Charles Town Bank of Charles Town
</TABLE>
-2-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C>
Summary of Operations
Interest income $ 9 086 $ 8 747 $ 8 979 $ 9 809 $ 10 448
Interest expense 3 623 3 591 3 509 3 971 4 667
---------- ---------- ---------- ---------- ----------
Net interest income 5 463 5 156 5 470 5 838 5 781
Provision for loan losses 100 125 125 297 565
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 5 363 5 031 5 345 5 541 5 216
Non-interest income 989 906 939 1 036 836
Non-interest expense 4 114 4 078 4 211 4 054 3 780
---------- ---------- ---------- ---------- ----------
Income before income taxes 2 238 1 859 2 073 2 523 2 272
Income tax expense 831 674 742 894 798
----------- ----------- ----------- ----------- -----------
Net income $ 1 407 $ 1 185 $ 1 331 $ 1 629 $ 1 474
========== ========== ========== ========== ==========
Per Share Data
Net income $ 2.35 $ 1.98 $ 2.22 $ 2.72 $ 2.46
Cash dividends declared .95 .85 .85 1.00 .85
Book value at period end 23.70 22.37 21.19 19.88 18.16
Average shares outstanding 600 000 600 000 600 000 600 000 600 000
Average Balance Sheet Summary
Assets $ 124 267 $ 121 638 $ 128 993 $ 126 000 $ 120 770
Loans 73 817 72 440 68 558 69 672 70 703
Securities 36 972 37 682 52 288 48 530 42 311
Deposits 109 709 107 826 115 907 113 885 109 725
Shareholders' equity 13 806 13 052 12 393 11 419 10 462
Performance Ratios
Return on average assets 1.13% .97% 1.03% 1.29% 1.22%
Return on average equity 10.19% 9.08% 10.74% 14.27% 14.09%
Dividend payout ratio 40.43% 42.93% 38.29% 36.76% 34.55%
Capital Ratios
Leverage ratio 11.43% 10.83% 9.61% 9.06% 8.66%
Risk-based capital ratios
Tier 1 capital 23.21% 20.73% 20.74% 19.76% 17.89%
Total capital 24.47% 21.98% 21.99% 21.02% 19.15%
</TABLE>
-3-
<PAGE>
SCHEDULE 1 - AVERAGE BALANCES, INCOME/EXPENSE AND AVERAGE YIELD/RATE
This schedule is a comparison of interest earning assets and interest
bearing liabilities showing average yields or rates derived from average
balances and actual income and expenses. Income and rates on tax exempt loans
are computed on a tax equivalent basis using a federal tax rate of 34%. Loans
placed on nonaccrual status are reflected in the balances.
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------- -----------------------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Yield/Rate Balances Expense Yield/Rate
------------- ------------- ---------- --------------- ------------- ----------
<S> <C>
ASSETS
Loans
Taxable $ 73 523 500 $ 6 728 084 9.15% $ 71 946 058 $ 6 532 422 9.08%
Tax exempt 293 422 32 836 11.19% 494 410 55 664 11.26%
------------- ------------- ------------- -------------
Total loans 73 816 922 6 760 920 9.16% 72 440 468 6 588 086 9.09%
------------- ----------- ------------- -----------
Taxable securities 36 971 951 1 899 156 5.14% 37 681 579 1 800 761 4.78%
Securities purchased under
agreements to resell 8 292 896 437 034 5.27% 6 471 547 376 939 5.82%
------------- ------------ ------------- ------------
Total earning assets 119 081 769 $ 9 097 110 7.64% 116 593 594 $ 8 765 786 7.52%
------------ =========== ------------ ===========
Reserve for loan losses (986 515) (990 939)
Cash and due from banks 3 475 732 3 284 283
Bank premises/equipment,
net 1 384 312 1 506 591
Other assets 1 311 661 1 244 417
------------ -------------
Total assets $124 266 959 $121 637 946
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
NOW accounts $ 15 862 099 $ 320 545 2.02% $ 14 760 237 $ 328 734 2.23%
Money market accounts 16 319 705 409 080 2.51% 19 164 626 523 534 2.73%
Savings deposits 23 654 570 691 389 2.92% 23 913 028 853 301 3.57%
Certificates of deposit 39 986 622 2 202 229 5.51% 36 924 593 1 880 834 5.09%
------------ ----------- ------------ -----------
Total interest
bearing deposits 95 822 996 $ 3 623 243 3.78% 94 762 484 $ 3 586 403 3.78%
------------ ----------- ------------ -----------
Federal funds purchased - - - - - - 65 470 4 008 6.12%
------------ ----------- ------------ -----------
Total interest
bearing liabilities 95 822 996 $ 3 623 243 3.78% 94 827 954 $ 3 590 411 3.79%
------------ ----------- ============ =========== =====
Noninterest bearing demand
deposits 13 886 051 13 063 373
Other liabilities 751 824 694 215
Stockholders' equity 13 806 088 13 052 404
------------ -------------
Total liabilities and
stockholders' equity $124 266 959 $121 637 946
============ ============
Net interest spread 3.86% 3.73%
Interest expense as a
percent of average earning assets 3.04% 3.08%
Net interest margin 4.60% 4.44%
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income in 1996 of $1,407,434 is 19% greater than net income of
$1,185,128 in 1995. Total assets decreased slightly to $123,779,866 from
$124,043,150 when comparing the 1996 year end to the 1995 year end.
Management is unaware of any trends, events or uncertainties that would
have material effect on liquidity, capital resources or operations. There are no
current recommendations by regulatory authorities which if they were to be
implemented would have a material effect on the Corporation.
NET INTEREST INCOME
Net interest income increased to $5,462,702 in 1996 as compared to
$5,156,449 in 1995. This is an increase of 6% due to a combination of changes in
rates and volumes in loans, securities and deposits.
A 4% increase in interest income brought the total to $9,085,945 for
1996 compared to $8,746,860 in 1995.
The average balance of total loans increased for the year and the
average rate on loans increased as well. The 3% increase in interest and fees on
loans from $6,569,160 in 1995 to $6,749,755 in 1996 was due more to increased
volumes in loans rather than increased rates. Year end balances of residential
real estate loans and home equity loans have each increased approximately
$1,000,000 in 1996 compared to 1995.
Income on investment securities, securities available for sale and
securities purchased under agreements to resell increased 7% in 1996 compared to
1995. The increase in interest income for investment securities and securities
available for sale was due more to increased rates since average volumes
actually decreased. Increased volume caused the increase in income for
securities purchased under agreements to resell since rates actually decreased
for these investments.
Interest expense increased slightly under 1.0% in 1996 to $3,623,243
compared to $3,590,411 in 1995. This slight increase was due to various changes
in rates and volumes within the deposit structure.
Comparing year end balances, total deposits have decreased in 1996 to
$108,512,469 compared to $109,789,474 in 1995. However, the average balance for
total deposits shows an increase in 1996 to $109,709,047 compared to
$107,825,857 in 1995. The average balance for total interest bearing
deposits also shows an increase in 1996 to $95,822,996 compared to
$94,762,484 in 1995. Average rates for NOW, money market and savings
accounts decreased significantly in 1996 compared to 1995, while the average
rate for certificate of deposits increased significantly in 1996 compared to
1995. Even with the varying directions of these rate changes for the deposit
accounts the average rate of interest for all deposits remained the same at
3.78% in 1996 as in 1995.
The average rate for the Bank's total earnings assets was 7.64% in
1996, an increase of .12% over the average rate of 7.52% in 1995. The average
rate for total interest bearing liabilities decreased .01% to 3.78% in 1996
compared to 3.79% in 1995. The interest spread in 1996 was 3.86% compared to
3.73% in 1995. The net interest margin was 4.60% in 1996 compared to 4.44% in
1995.
SCHEDULE 2 - VOLUME AND RATE ANALYSIS
This schedule at the top of page 6 analyzes the change in net interest
income attributable to changes in volume of the various portfolios and changes
in interest rates. The change due to both rate and volume variances has been
allocated between rate and volume based on the percentage relationship of such
variances to each other. Income and rates on tax exempt loans are computed on a
tax equivalent basis using a federal tax rate of 34%. Nonaccruing loans are
included in average loans outstanding.
-5-
<PAGE>
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
------------------------------------------------ -------------------------------------------
Change in Volume Rate Change in Volume Rate
Income/Expense Effect Effect Income/Expense Effect Effect
-------------- ----------- ------------ -------------- ------------ -----------
<S> <C>
INTEREST INCOME
Taxable loans $ 195 662 $ 144 762 $ 50 900 $ 389 022 $ 371 275 $ 17 747
Tax exempt loans (22 828) (22 484) (344) (22 697) (23 388) 691
Taxable securities 98 395 (32 807) 131 202 (871 503) (707 156) (164 347)
Securities purchased under
agreements to resell 60 095 90 475 (30 380) 264 854 201 818 63 036
------------ ---------- ----------- ------------ ------------ -----------
TOTAL $ 331 324 $ 179 946 $ 151 378 $ (240 324) $ (157 451) $ (82 873)
------------ ---------- ----------- ------------ ------------ -----------
INTEREST EXPENSE
NOW accounts $ (8 189) $ 31 323 $ (39 512) $ (34 393) $ (3 427) $ (30 966)
Money market accounts (114 454) (74 183) (40 271) (147 529) (156 958) 9 429
Savings deposits (161 912) (9 073) (152 839) (133 439) (106 192) (27 247)
Certificates of deposit 321 395 161 098 160 297 392 221 24 520 367 701
Federal funds purchased (4 008) (4 008) -- 4 008 4 008 --
------------ ---------- ------------ ------------ ------------ -----------
TOTAL $ 32 832 $ 105 157 $ (72 325) $ 80 868 $ (238 049) $ 318 917
------------ ---------- ------------ ------------ ------------ -----------
NET INTEREST INCOME $ 298 492 $ 74 789 $ 223 703 $ (321 192) $ 80 598 $ (401 790)
============ ========== =========== ============ ============ ===========
</TABLE>
NONINTEREST INCOME AND EXPENSE
Noninterest income (other income) increased 9% to $988,825 in 1996
compared to $905,571 in 1995. The significant change was in service charges on
deposit accounts which increased 32% due to increased rates and increased
numbers of charges.
Noninterest expense (other expenses) increased only slightly under 1.0%
in 1996 compared to 1995 due in great part to the diligence of officers and
staff. Expense reductions showed in deposit insurance, stationery and supplies,
and ATM expenses. There were slight increases in salaries and employee benefits,
in directors fees due to increased number of payments rather than increased
fees, and in other operating expenses which included a net loss on sale of real
estate of $94,972.
INTEREST RATE SENSITIVITY
The table below shows the opportunities the Corporation will have to
reprice interest earning assets and interest bearing liabilities as of December
31, 1996. Nonaccrual loans are excluded from these balances.
<TABLE>
<CAPTION>
Mature or Reprice
------------------------------------------------------------------------------------
After Three
Months But After One Year
Within Within But Within After
Three Months Twelve Months Five Years Five Years Nonsensitive
------------ ------------- -------------- ------------ ------------
<S> <C>
Interest Earning Assets:
Fixed rate loans $ 11 040 981 $ 19 499 396 $ 38 134 893 $ 335 891 $ - -
Floating rate loans 4 229 029 - - - - - - - -
Securities 3 999 535 12 007 549 23 939 625 - - 386 800
Securities purchased under
agreements to resell 4 800 000 - - - - - - - -
------------ ------------ ------------ ------------ ------------
Total $ 24 069 545 $ 31 506 945 $ 62 074 518 $ 335 891 $ 386 800
------------ ------------ ------------ ------------ ------------
Interest Bearing Liabilities:
Certificates of deposit
$100,000 and over $ 1 448 539 $ 1 588 254 $ 1 031 041 $ - - $ - -
Other certificates of deposit 7 737 645 17 359 598 10 227 475 - - - -
Money market accounts 15 223 554 - - - - - - - -
NOW accounts - - - - - - - - 16 748 803
Savings accounts - - - - - - - - 23 111 062
------------ ------------ ------------ ------------ -------------
Total $ 24 409 738 $ 18 947 852 $ 11 258 516 $ - - $ 39 859 865
------------ ------------ ------------ ------------ -------------
Rate Sensitivity Gap $ (340 193) $ 12 559 093 $ 50 816 002 $ 335 891
------------ ------------ ------------ ------------
Cumulative Gap $ (340 193) $ 12 218 900 $ 63 034 902 $ 63 370 793
============ ============ ============ ============
</TABLE>
-6-
<PAGE>
As of December 31, 1996 the Corporation is almost evenly matched in the
first time frame, showing only a slight negative gap. Even matches are the
safest positions in the times of rapidly rising or declining rates. The
remaining time frames are positively gapped. In the second time frame, the
cumulative gap is narrower than in 1995. The continued increase of floating rate
loans in 1996 and movement of fixed rate repricing into the first two time
frames has helped to narrow the gap in these time frames. The cumulative gaps in
the third and fourth time frames are only slightly higher than in 1995.
The advantages or disadvantages of positive and negative gaps depend
totally on the direction in which interest rates are moving. An asset sensitive
institution's net interest margin and net interest income generally will be
impacted favorably by rising interest rates, while that of a liability sensitive
institution generally will be impacted favorably by declining interest rates.
LOAN PORTFOLIO
Loans at December 31, 1996 and 1995 are summarized below:
1996 1995
------------ ------------
Commercial, financial and agricultural $ 2 086 241 $ 3 033 160
Real estate:
Construction and land development 759 619 1 052 659
Secured by farm land 1 501 527 1 207 714
Secured by 1-4 family residential 38 220 730 36 586 317
Other real estate 12 124 747 12 295 313
Consumer 18 654 695 18 998 386
All other 177 781 477 625
----------- -----------
$73 525 340 $73 651 174
=========== ===========
Loans have decreased $125,834 when comparing year end totals for 1996
and 1995, while the average balance for total loans increased in 1996 to
$73,816,922 compared to $72,440,468 in 1995. The most notable change was an
increase of $1,634,413 in residential real estate which included an increase of
$995,360 in home equity loans.
There were no categories of loans that exceeded 10% of outstanding
loans at December 31, 1996 which were not disclosed in the table above.
REMAINING MATURITIES OF SELECTED LOANS
Commercial,
Financial and Real Estate-
Agricultural Construction
------------- ------------
Within one year $ 1 748 848 $ 677 619
Variable rate - - 82 000
Fixed rate:
Over one through five years 317 393 - -
After five years 20 000 - -
----------- -----------
Total 337 393 - -
----------- -----------
Total maturities $ 2 086 241 $ 759 619
=========== ===========
-7-
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The table shown below is an analysis of the Corporation's allowance for
loan losses. Historically, net charge-offs (loans charged off as uncollectible
less any amounts recovered on these loans) 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.
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- ------------
<S> <C>
Balance at beginning of period $ 899 245 $ 988 524 $1 040 000
Charge-offs:
Commercial, financial and agricultural - - - - - -
Real estate - construction - - - - - -
Real estate - mortgage - - 148 246 136 084
Consumer 98 124 116 005 106 874
----------- ---------- ----------
Total charge-offs 98 124 264 251 242 958
----------- ---------- ----------
Recoveries:
Commercial, financial and agricultural - - - - - -
Real estate - construction - - - - - -
Real estate - mortgage 186 534 - - 29 683
Consumer 51 092 49 972 36 799
----------- ---------- ----------
Total recoveries 237 626 49 972 66 482
----------- ---------- ----------
Net charge-offs (recoveries) (139 502) 214 279 176 476
Additions charged to operations 100 000 125 000 125 000
----------- ---------- ----------
Balance at end of period $ 1 138 747 $ 899 245 $ 988 524
=========== ========== ==========
Ratio of net charge-offs (recoveries)
during the period to average loans
outstanding during the period (0.1890)% 0.2958% 0.2574%
======== ======= =======
</TABLE>
ALLOCATION OF RESERVE FOR LOAN LOSSES
The following table shows an allocation of the reserve among loan
categories based upon analysis of the loan portfolio's composition, historical
loan loss experience, and other factors, and the ratio of the related
outstanding loan balances to total loans. This analysis is recorded each quarter
with monitoring procedures where all loans are examined and problem loans and
potentially problem loans are highlighted for continued observance.
<TABLE>
<CAPTION>
1996 1995
-------------------------------- --------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Reserve Total Loans Reserve Total Loans
----------- ------------- ----------- -------------
<S> <C>
Commercial, financial and agricultural $ 10 431 2.84% $ 15 785 4.12%
Real estate mortgage:
Construction and land development 53 298 1.04% 54 763 1.43%
Secured by farm land 34 597 2.04% 33 128 1.64%
Secured by 1-4 family residential 267 587 51.98% 326 307 49.67%
Other real estate 213 675 16.49% 230 294 16.69%
Consumer 129 255 25.37% 123 202 25.80%
All other 889 .24% 2 389 .65%
Unallocated 429 015 - - 113 377 - -
----------- ---------- ---------- --------
$1 138 747 100.00% $ 899 245 100.00%
========== ======= ========== =======
</TABLE>
-8-
<PAGE>
RISK ELEMENTS IN THE LOAN PORTFOLIO
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
Nonaccrual loans $ 285 150 $ 485 150 $ - -
Restructured loans - - - - - -
Foreclosed properties - - - - - -
---------- ---------- ----------
Total nonperforming assets $ 285 150 $ 485 150 $ - -
========== ========== ==========
Loans past due 90 days accruing interest $ - - $ - - $ 439 076
========== ========== ==========
Reserve for loan losses to period end loans 1.55% 1.22% 1.41%
Nonperforming assets to period end loans and
foreclosed properties .39% .66% .00%
</TABLE>
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.
Impaired loans excluded from nonperforming assets amounted to $407,422
and $417,228 at December 31, 1996 and 1995, respectively.
At December 31, 1996, other potential problem loans totaled $59,462.
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 allowance for these loans according to
the review of the potential loss in each loan situation.
SECURITIES PORTFOLIO
In accordance with FASB No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Corporation records securities being held to
maturity at amortized cost and securities available for sale at fair value. The
effect of unrealized gains and losses, net of tax effects, are recognized in
stockholders' equity. The Corporation does not have any derivative financial
instruments.
The schedule below summarizes the book value of the portfolio by
maturity classifications and shows the weighted average yield in each group.
<TABLE>
<CAPTION>
Weighted Weighted
1996 Average 1995 Average
Book Value Yield Book Value Yield
<S> <C>
Securities held to maturity
U.S. Treasury securities and securities
of U.S. Government agencies:
Maturing within one year $ 7 993 959 5.33% $17 999 931 4.37%
Maturing after one year but
within five years 18 003 062 5.92% 7 985 877 5.33%
----------- -----------
Total securities held to maturity $25 997 021 $25 985 808
=========== ===========
Securities available for sale
U.S. Treasury securities and securities
of U.S. government agencies:
Maturing within one year $ 8 013 125 5.14% $ - - - -
Maturing after one year but
within five years 5 936 563 5.55% - - - -
Equity securities 386 800 - - 367 900 - -
----------- -----------
Total securities available for sale $14 336 488 $ 367 900
=========== ===========
Total securities $40 333 509 $26 353 708
=========== ===========
</TABLE>
-9-
<PAGE>
DEPOSITS
Detail of average deposit information using average balances and
average rates is found in Schedule 1 on page 4. The 1996 average balance for
certificates is approximately $3,000,000 higher than the 1995 balance even
though the year end balances are similar. The 1996 average balance for NOW
accounts shows a slightly greater than $1,000,000 increase over 1995. The only
notable change in the comparison of year end deposit structure in 1996 with 1995
is the reduction of money market deposits by about $2,000,000. This reduction
also shows in comparing the average balance for 1996 and 1995.
At December 31, 1996, certificates of deposit of $100,000 or more were
3.7% of total deposits compared with 4.3% at December 31, 1995. Maturities of
certificates of deposit of $100,000 or more at December 31, 1996 are as follows:
Within three months $1 448 538
Over three through six months 812 049
Over six months through twelve months 776 205
Over twelve months 1 031 041
----------
Total $4 067 833
==========
ANALYSIS OF CAPITAL
The adequacy of the Corporation's capital is reviewed by management on
an ongoing basis with reference to the size, composition, and quality of the
Corporation's asset and liability levels and consistent with regulatory
requirements and industry standards. Management seeks to maintain a capital
structure that will assure an adequate level of capital to support anticipated
asset growth and absorb potential losses.
The Federal Reserve, the Comptroller of the Currency and the Federal
Deposit Insurance Corporation have adopted capital guidelines to supplement the
existing definitions of capital for regulatory purposes and to establish minimum
capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must be Tier 1 capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. The
Corporation had a ratio of total capital to risk-weighted assets of 24.47% at
December 31, 1996 and a ratio of Tier 1 capital to risk-weighted assets of
23.21%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.
1996 1995
------------ ------------
Tier 1 capital:
Common stock $ 600 000 $ 600 000
Surplus 5 400 000 5 400 000
Retained earnings 8 260 037 7 422 603
----------- -----------
Total tier 1 capital $14 260 037 $13 422 603
Tier 2 capital:
Allowance for loans losses (1) 772 445 810 495
----------- -----------
Total risk-based capital $15 032 482 $14 233 098
=========== ===========
Risk-weighted assets $61 429 313 $64 750 821
=========== ===========
Capital ratios:
Tier 1 risk-based capital ratio 23.21% 20.73%
Total risk-based capital ratio 24.47% 21.98%
Leverage ratio 11.43% 10.83%
(1) Limited to 1.25% of gross risk-weighted assets.
-10-
<PAGE>
LIQUIDITY
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management. This
could also be termed the management of the cash flows of an organization. Liquid
assets include cash and due from banks, securities purchased under agreements to
resell, securities available for sale, and loans and investments maturing within
one year. The Corporation's liquidity during 1996 (aside from borrowing
capabilities) is detailed in the statement of cash flows included in the
financial statements. Operating cash flows are derived from net income adjusted
for items that do not involve cash. Cash flows from investing activities include
maturity of securities, payments on and maturities of loans and proceeds from
sales of real estate and equipment. Cash flows from financing activities include
increases in any deposit accounts. As a result of the Corporation's management
of liquid assets and the ability to generate liquidity through liability
funding, management believes that the Corporation maintains overall liquidity
sufficient to satisfy its depositors' requirements and to meet its customers'
credit needs.
At December 31, 1996, cash and due from banks, securities purchased
under agreements to resell, and loans and investments maturing within one year
were $58,977,001.
Borrowing capabilities provide additional liquidity. The Subsidiary
Bank maintains a federal funds line of $5,000,000 with NationsBank, N.A. The
Subsidiary Bank is also a member of the Federal Home Loan Bank of Pittsburgh and
has short and/or long-term borrowing capabilities of approximately $39,000,000.
The Subsidiary Bank did not use either of these sources during 1996.
ACCOUNTING RULE CHANGES
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued in June, 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", defers for one year the effective date
(a) of paragraph 15 of Statement 125 and (b) for repurchase agreement,
dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and
237(b) of Statement 125.
The effects of these Statements on the Corporation's consolidated
financial statements are not expected to be material.
-11-
<PAGE>
[GRAPHIC OMITTED]
-12-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Potomac Bancshares, Inc. and Subsidiary
Charles Town, West Virginia
We have audited the accompanying consolidated balance sheets of Potomac
Bancshares, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1996, 1995 and 1994. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Potomac
Bancshares, Inc. and Subsidiary as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 1 and Note 12, the Corporation changed its method of
accounting for certain benefits provided for retired employees to adopt
provisions of Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," in 1995.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
February 5, 1997
-13-
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
--------------- --------------
<S> <C>
Cash and due from banks (Note 9) $ 3 400 511 $ 3 396 312
Securities (fair value: 1996, $40,330,863; 1995,
$26,307,412) (Note 2) 40 333 509 26 353 708
Securities purchased under agreements to resell 4 800 000 18 700 000
Loans (Note 3) 73 525 340 73 651 174
Reserve for loan losses (Note 4) (1 138 747) (899 245)
------------ ------------
Net loans 72 386 593 72 751 929
Premises and equipment, net (Note 5) 1 254 393 1 444 027
Accrued interest receivable 1 021 216 777 510
Other assets 583 644 619 664
------------ ------------
Total Assets $123 779 866 $124 043 150
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (Note 6):
Noninterest bearing $ 14 036 498 $ 13 847 626
Interest bearing 94 475 971 95 941 848
------------ ------------
Total Deposits $108 512 469 $109 789 474
Accrued interest payable 326 044 346 240
Other liabilities 722 116 484 833
Commitments and contingent liabilities (Notes 9 and 11) - - - -
------------ ------------
Total Liabilities $109 560 629 $110 620 547
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 per share par value; 5,000,000 shares
authorized; 600,000 shares issued and outstanding (Note 1) $ 600 000 $ 600 000
Surplus 5 400 000 5 400 000
Undivided profits (Note 10) 8 260 037 7 422 603
Unrealized gain (loss) on securities available for sale, net (40 800) - -
------------ ------------
Total Stockholders' Equity $ 14 219 237 $ 13 422 603
------------ ------------
Total Liabilities and Stockholders' Equity $123 779 866 $124 043 150
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
Interest Income:
Interest and fees on loans $6 749 755 $6 569 160 $6 195 118
Interest on investment securities
Taxable 1 213 709 1 594 544 1 919 333
Interest and dividends on securities
available for sale
Taxable 661 125 181 570 728 953
Dividends 24 322 24 647 23 978
Interest on securities purchased under
agreements to resell 437 034 376 939 112 085
---------- ---------- ----------
Total Interest Income $9 085 945 $8 746 860 $8 979 467
---------- ---------- ----------
Interest Expense:
Interest on deposits (Note 6) $3 623 243 $3 586 403 $3 509 543
Interest on federal funds purchased - - 4 008 - -
---------- ---------- ----------
Total Interest Expense $3 623 243 $3 590 411 $3 509 543
---------- ---------- ----------
Net Interest Income $5 462 702 $5 156 449 $5 469 924
Provision for Loan Losses (Note 4) 100 000 125 000 125 000
---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses $5 362 702 $5 031 449 $5 344 924
---------- ---------- ----------
Other Income:
Trust and financial services $ 460 053 $ 446 000 $ 425 993
Service charges on deposit accounts 318 062 240 529 240 162
Fees for other customer services 181 980 192 857 218 844
Other operating income 28 730 26 185 53 633
---------- ---------- ----------
Total Other Income $ 988 825 $ 905 571 $ 938 632
---------- ---------- ----------
Other Expenses:
Salaries and employee benefits (Notes 7 and 12) $2 468 762 $2 370 054 $2 343 443
Net occupancy expense of premises 203 033 213 891 211 705
Furniture and equipment expenses 300 211 283 546 322 112
Deposit insurance 2 000 128 478 261 671
Stationery and supplies 106 810 108 279 107 936
Directors fees 105 700 98 910 121 055
ATM expenses 105 445 108 645 98 901
Other operating expenses 821 555 766 047 744 138
---------- ---------- ----------
Total Other Expenses $4 113 516 $4 077 850 $4 210 961
---------- ---------- ----------
Income before Income Tax Expense $2 238 011 $1 859 170 $2 072 595
Income Tax Expense (Note 8) 830 577 674 042 741 627
---------- ---------- ----------
Net Income $1 407 434 $1 185 128 $1 330 968
========== ========== ==========
Earnings Per Share, net income $ 2.35 $ 1.98 $ 2.22
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Undivided Available for
Stock Surplus Profits Sale, Net Total
----------- ----------- ------------- -------------- -------------
<S> <C>
Balances, December 31, 1993 $600 000 $5 400 000 $5 926 507 $ - - $11 926 507
Net income - 1994 - - - - 1 330 968 - - 1 330 968
Cash dividends - 1994
($.85 per share) - - - - (510 000) - - (510 000)
Net unrealized gain (loss) on
securities available for sale,
net of deferred income taxes
of $16,095 - - - - - - (31 242) (31 242)
-------- ---------- ---------- -------- -----------
Balances, December 31, 1994 $600 000 $5 400 000 $6 747 475 $(31 242) $12 716 233
Net income - 1995 - - - - 1 185 128 - - 1 185 128
Cash dividends - 1995
($.85 per share) - - - - (510 000) - - (510 000)
Change in net unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $16,095 - - - - - - 31 242 31 242
-------- ---------- ---------- -------- -----------
Balances, December 31, 1995 $600 000 $5 400 000 $7 422 603 $ - - $13 422 603
Net income - 1996 - - - - 1 407 434 - - 1 407 434
Cash dividends - 1996
($.95 per share) - - - - (570 000) - - (570 000)
Change in net unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $21,018 - - - - - - (40 800) (40 800)
-------- ---------- ---------- -------- -----------
Balances, December 31, 1996 $600 000 $5 400 000 $8 260 037 $(40 800) $14 219 237
======== ========== ========== ======== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1 407 434 $ 1 185 128 $ 1 330 968
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 100 000 125 000 125 000
Depreciation 181 424 170 739 218 066
Amortization 12 282 12 282 5 118
Deferred income taxes (credits) (88 111) 32 425 (13 285)
Discount accretion and premium amortization
on securities, net 27 060 2 699 56 964
Loss on sale of equipment - - - - 23 465
(Gain) loss on sale of real estate 94 972 - - (27 300)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (243 706) 205 896 166 207
(Increase) decrease in other assets 15 002 (81 153) 47 433
Increase (decrease) in accrued interest payable (20 196) 22 514 (29 767)
Increase in other liabilities 237 283 70 045 66 551
------------ ----------- -----------
Net cash provided by operating activities $ 1 723 444 $ 1 745 575 $ 1 969 420
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ 18 000 000 $12 000 000 $10 000 000
Proceeds from maturity of securities available for sale - - 6 019 900 7 000 000
Purchases of investment securities (17 996 884) - - (8 983 808)
Purchases of securities available for sale (14 071 795) - - (997 812)
Net (increase) decrease in loans 265 336 (3 803 937) (1 766 380)
Purchases of premises and equipment (318 897) (45 330) (106 220)
Proceeds from sale of real estate 350 000 - - 327 500
Proceeds from sale of equipment - - - - 40 825
------------ ----------- -----------
Net cash provided by (used in) investing activities $(13 772 240) $14 170 633 $ 5 514 105
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in demand deposits, NOW accounts
and savings accounts $ (1 218 507) $(5 428 878) $(2 188 166)
Net increase (decrease) in certificates of deposit (58 498) 5 994 395 (5 207 449)
Cash dividends (570 000) (510 000) (510 000)
------------ ----------- -----------
Net cash provided by (used in) financing activities $ (1 847 005) $ 55 517 $(7 905 615)
------------ ----------- -----------
Increase (decrease) in cash and cash equivalents $(13 895 801) $15 971 725 $ (422 090)
CASH AND CASH EQUIVALENTS
Beginning 22 096 312 6 124 587 6 546 677
------------ ----------- -----------
Ending $ 8 200 511 $22 096 312 $ 6 124 587
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 3 643 439 $ 3 567 897 $ 3 539 310
============ =========== ===========
Income taxes $ 806 431 $ 532 749 $ 807 942
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ - - $ 108 000 $ 300 200
============ =========== ===========
Other assets acquired in settlement of loans $ - - $ - - $ 64 290
============ =========== ===========
Loans made on sale of real estate $ 291 000 $ - - $ - -
============ =========== ===========
Unrealized gain (loss) on securities available for sale $ (61 818) $ 47 337 $ (47 337)
============ =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-17-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Banking Activities and Significant Accounting Policies
Potomac Bancshares, Inc. and Subsidiary (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to
customers, primarily in Jefferson County, West Virginia. The
Corporation's market area also includes Washington County and Frederick
County, Maryland; Loudoun County and Clarke County, Virginia; and
Berkeley County, West Virginia. The loan portfolio is well diversified
and loans generally are collaterized by assets of the customers. The
loans are expected to be repaid from cash flows or proceeds from the
sale of selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Principles of Consolidation
The consolidated financial statements of Potomac Bancshares, Inc.
and its wholly-owned subsidiary, Bank of Charles Town (the Bank),
include the accounts of both companies. All material intercompany
balances and transactions have been eliminated in consolidation.
Securities
Investments are classified in three categories and accounted for as
follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for amortization
of premium and accretion of discount, computed by the interest
method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and
equity securities that the Corporation intends to hold for an
indefinite period of time, but not necessarily to maturity.
Any decision to sell a security classified as available for
sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of
the Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value.
Unrealized gains or losses are reported as increases or
decreases in stockholders' equity, net of the related deferred
tax effect. Realized gains or losses, determined on the basis
of the cost of specific securities sold, are included in
earnings.
c. Trading Securities
Trading securities, which are generally held for the short
term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading
account assets are included in interest income on trading
account securities. The Corporation had no trading securities
at December 31, 1996 and 1995.
Loans
Loans are stated at the amount of unpaid principal reduced by a
reserve for possible loan losses. Interest income on loans is
computed on the loan balance outstanding. Loans are charged off
when in the opinion of management, they are deemed to be
uncollectible after taking into consideration such factors as the
current financial condition of the customer and the underlying
collateral and guarantees.
On January 1, 1995, the Corporation adopted Financial Accounting
Standards Statement No. 114, "Accounting by Creditors for
Impairment of a Loan." This Statement has been amended by FASB
Statement No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures." Statement 114, as
amended, requires that the impairment of loans that have been
separately identified for evaluation is to be measured based on the
present value of expected future cash flows or, alternatively, the
observable market price of the loans or the fair value of the
collateral. However, for those loans that are collateral dependent
(that is, if repayment of those loans is expected to be provided
solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of
those loans is to be based on the fair value of the collateral.
Statement 114, as amended, also requires certain disclosures about
investments in impaired loans and the allowance for credit losses
and interest income recognized on loans.
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.
-18-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
Reserve for Loan Losses
The reserve for loan losses is maintained at a level which, in
management's judgement, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the reserve is based
on management's evaluation of the collectibility of the loan
portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions.
Reserves for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The
reserve is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries.
Changes in the reserves relating to impaired loans are charged or
credited to the provision for loan losses. Because of uncertainties
inherent in the estimation process, management's estimate of credit
losses inherent in the loan portfolio and the related reserve may
change in the near term.
For federal income tax purposes, the Corporation deducts the
maximum amount allowable under current income tax regulations.
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the
straight-line and declining-balance methods.
Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon retirement,
sale or other disposition of property and equipment, the cost and
accumulated depreciation are eliminated from the accounts and gain
or loss is included in operations.
Other Real Estate
Real estate acquired by foreclosure is carried at the lower of cost
or fair market value, adjusted for anticipated selling expenses.
Pension Plan
The Corporation has a noncontributory, defined benefit pension plan
covering employees meeting certain age and service requirements.
The Corporation computes the net periodic pension cost of the plan
in accordance with Financial Accounting Standards Board Statement
No. 87, "Employers' Accounting for Pensions."
Earnings and Dividends Per Share
Earnings and dividends per share of common stock are based on the
weighted average number of shares outstanding during each year.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences,
operating loss carryforwards, and tax credit carryforwards.
Deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are differences between the
reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in
the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and securities
purchased under agreements to resell. Generally, securities
purchased under agreements to resell are purchased and sold for
one-day periods.
Trust Division
Securities and other property held by the Trust Division in a
fiduciary or agency capacity are not assets of the Corporation and
are not included in the accompanying financial statements.
Postretirement Benefits
The Corporation sponsors a postretirement life insurance plan
covering retirees with 25 years of service over the age of 60 and
health care plan for all retirees and six current employees that
have met certain eligibility requirements. The Corporation computes
the net periodic postretirement benefit cost of the plan in
accordance with Financial Accounting Standards Board Statement No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions."
-19-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2. Securities
The amortized cost and fair value of securities being held to maturity
as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ---------- -----------
<S> <C>
U.S. Treasury securities $14 005 278 $24 951 $ (42 416) $13 987 813
Obligations of U.S. Government agencies 11 991 743 20 692 (5 873) 12 006 562
----------- ---------- ---------- -----------
$25 997 021 $45 643 $ (48 289) $25 994 375
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ---------- -----------
<S> <C>
U.S. Treasury securities $15 986 120 $63 651 $ (41 334) $16 008 437
Obligations of U.S. Government agencies 9 999 688 625 (69 238) 9 931 075
----------- ---------- ---------- -----------
$25 985 808 $64 276 $(110 572) $25 939 512
=========== ========== ========== ===========
</TABLE>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1996, by contractual maturity, are shown
below:
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 7 993 959 $ 8 007 931
Due after one year through five years 18 003 062 17 986 444
----------- -----------
$25 997 021 $25 994 375
=========== ===========
There were no sales of securities being held to maturity during 1996,
1995 and 1994.
Securities being held to maturity with a carrying value of $6,988,229
and $8,987,672 at December 31, 1996 and 1995, were pledged to secure
public funds and other balances as required by law.
The amortized cost and fair value of securities available for sale as
of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ---------- -----------
<S> <C>
U.S. Treasury securities $14 011 506 $ 12 389 $(74 207) $13 949 688
Federal Home Loan Bank stock 386 800 - - - - 386 800
----------- ---------- ---------- -----------
$14 398 306 $ 12 389 $(74 207) $14 336 488
=========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ----------- -----------
<S> <C>
Federal Home Loan Bank stock $ 367 900 $ - - $ - - $ 367 900
=========== ========== =========== ===========
</TABLE>
-20-
<PAGE>
Note 2. Securities (Continued)
The amortized cost and fair value of the securities available for sale
as of December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
----------- -----------
<S> <C>
Due in one year or less $ 8 032 958 $ 8 013 125
Due after one year through five years 5 978 548 5 936 563
Other 386 800 386 800
----------- -----------
$14 398 306 $14 336 488
=========== ===========
</TABLE>
There were no sales of securities available for sale during 1996, 1995
and 1994.
Securities available for sale with a carrying value of $1,986,250 and
$-0- at of December 31, 1996 and 1995, were pledged to secure public
funds and other balances as required by law.
Note 3. Loans and Related Party Transactions
The loan portfolio is composed of the following:
<TABLE>
<CAPTION>
December 31
-----------------------------------
1996 1995
-------------- -------------
<S> <C>
Real estate loans:
Construction and land development $ 759 619 $ 1 052 659
Secured by farm land 1 501 527 1 207 714
Secured by 1-4 family residential 38 220 730 36 586 317
Other real estate loans 12 124 747 12 295 313
Loans to farmers (except those secured by
real estate) 229 022 650 275
Commercial and industrial loans (except those
secured by real estate) 1 857 219 2 382 885
Loans to individuals for personal expenditures 18 654 695 18 998 386
All other loans 177 781 477 625
----------- -----------
$73 525 340 $73 651 174
=========== ===========
</TABLE>
The Securities and Exchange Commission requires disclosure of loans
which exceed $60,000 to executive officers and directors of the
Corporation or to their associates. Such loans were made on
substantially the same terms as those prevailing for comparable
transactions with similar risk. At December 31, 1996 and 1995, these
loans totaled $265,715 and $355,806 respectively. During 1996, total
principal additions were $96,700 and total principal payments were
$186,791.
Note 4. Reserve for Loan Losses
The following is a summary of transactions in the reserve for loan
losses for 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C>
Balance at beginning of year $ 899 245 $ 988 524 $1 040 000
Provision charged to operating expense 100 000 125 000 125 000
Recoveries added to the reserve 237 626 49 972 66 482
Loan losses charged to the reserve (98 124) (264 251) (242 958)
---------- --------- ----------
Balance at end of year $1 138 747 $ 899 245 $ 988 524
========== ========= ==========
</TABLE>
-21-
<PAGE>
Note 4. Reserve for Loan Losses (Continued)
Information about impaired loans as of and for the years ended December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C>
Impaired loans for which a reserve has been provided $407 422 $617 228
Impaired loans for which no reserve has been provided - - - -
-------- --------
Total impaired loans $407 422 $617 228
======== ========
Reserve provided for impaired loans, included in the
reserve for loan losses $203 711 $268 614
Average balance in impaired loans $472 292 $522 457
Interest income recognized $ 36 125 $ 44 107
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $285,150 at December 31, 1996 and 1995. If interest on
these loans had been accrued, such income would have approximated
$28,494 in 1996 and $8,820 in 1995.
Note 5. Premises and Equipment, Net
Premises and equipment consists of the following:
December 31
---------------------------
1996 1995
------------ ------------
Premises $1 811 852 $2 146 531
Furniture and equipment 2 111 224 1 952 876
---------- ----------
$3 923 076 $4 099 407
Less accumulated depreciation 2 668 683 2 655 380
---------- ----------
$1 254 393 $1 444 027
========== ==========
Depreciation included in operating expense for 1996, 1995 and 1994, was
$181,424, $170,739 and $218,066, respectively.
Note 6. Deposits
Deposits outstanding at December 31, 1996, 1995 and 1994, and the
related interest expense for the years then ended are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------- ------------------------- --------------------------
Amount Expense Amount Expense Amount Expense
------------ ---------- ------------ ---------- ------------ ----------
<S> <C>
Noninterest bearing $ 14 036 498 $ - - $ 13 847 626 $ - - $ 13 295 845 $ - -
------------ ---------- ------------ --------- ------------ ----------
Interest bearing:
NOW accounts $ 16 748 803 $ 320 545 $ 15 996 973 $ 328 734 $ 14 875 986 $ 363 127
Money market accounts 15 223 555 409 080 17 182 177 523 534 21 271 806 671 063
Savings deposits 23 111 062 691 389 23 311 649 853 301 26 323 667 986 740
Certificates of deposit:
Less than $100,000 35 324 718 1 932 641 34 757 455 1 643 457 30 265 501 1 303 414
$100,000 and more 4 067 833 269 588 4 693 594 237 377 3 191 152 185 199
------------ ---------- ------------ ---------- ------------ ----------
Total interest
bearing $ 94 475 971 $3 623 243 $ 95 941 848 $3 586 403 $ 95 928 112 $3 509 543
------------ ---------- ------------ ---------- ------------ ------------
Total deposits $108 512 469 $3 623 243 $109 789 474 $3 586 403 $109 223 957 $3 509 543
============ ========== ============ ========== ============ ==========
</TABLE>
-22-
<PAGE>
Note 7. Defined Benefit Pension Plan
The amount charged to expense for the Corporation's pension plan
totaled $97,032, $93,508 and $93,106 for the years ended December 31,
1996, 1995 and 1994, respectively. The components of the pension cost
charged against expense for 1996, 1995 and 1994 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- -----------
<S> <C>
Service cost $133 596 $ 114 859 $ 120 976
Interest cost on projected benefit obligation 200 942 182 585 179 141
Actual return on plan assets (217 359) (183 789) (186 864)
Net amortization and deferral (20 147) (20 147) (20 147)
---------- ----------- -----------
$ 97 032 $ 93 508 $ 93 106
========== =========== ===========
</TABLE>
The following table sets forth the plan's funded status as of October
31, 1996 and 1995 and the amount recognized in the accompanying balance
sheets as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 1 921 000 $ 1 849 000
=========== ===========
Accumulated benefits $ 2 072 000 $ 1 978 000
=========== ===========
Projected benefits $(2 866 017) $(2 733 720)
Plan assets at fair value 2 888 800 2 601 639
----------- -----------
Funded status $ 22 783 $ (132 081)
Unrecognized net (gain) (289 685) (17 642)
Unrecognized net (asset) (177 849) (198 151)
Unrecognized prior service cost 1 645 1 800
----------- -----------
Liability on balance sheet $ (443 106) $ (346 074)
=========== ===========
</TABLE>
The weighted average discount rate and rate of increase in future
compensation levels used in determining the actuarial present value of
the benefit obligations were 7.75% and 6.0% at October 31, 1996. The
expected long-term rate of return on plan assets was 8.5%.
Note 8. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1996 and 1995:
1996 1995
---------- ----------
Deferred tax assets:
Reserve for loan losses $ 231 845 $ 197 844
Accrued pension expense 150 656 117 665
Securities available for sale 21 018 - -
Accrued postretirement benefits 23 999 9 988
Nonaccrual interest 12 687 4 741
---------- ----------
$ 440 205 $ 330 238
--------- ---------
Deferred tax liabilities:
Premises $ 25 932 $ 24 670
Other 1 186 1 610
---------- ----------
$ 27 118 $ 26 280
--------- ---------
Net deferred tax assets $ 413 087 $ 303 958
========= =========
The provision for income taxes charged to operations for the years
ended December 31, 1996, 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
Current tax expense $ 918 688 $ 641 617 $ 754 912
Deferred tax expense (benefit) (88 111) 32 425 (13 285)
---------- ---------- ----------
$ 830 577 $ 674 042 $ 741 627
========== ========== ==========
</TABLE>
-23-
<PAGE>
Note 8. Income Taxes (Continued)
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1996, 1995 and 1994 due to the
following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
Computed "expected" tax expense $760 924 $632 118 $704 682
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (6 809) (11 544) (16 371)
State income taxes, net of federal income tax benefit 74 544 51 461 51 574
Other 1 918 2 007 1 742
---------- ---------- ----------
$830 577 $674 042 $741 627
========== ========== ==========
</TABLE>
Note 9. Commitments and Contingent Liabilities
In the normal course of business, there are outstanding various
commitments and contingent liabilities, which are not reflected in the
accompanying financial statements. The Corporation does not anticipate
losses as a result of these transactions.
See Note 11 with respect to financial instruments with
off-balance-sheet risk.
The Corporation has approximately $1,200,230 in deposits in another
financial institution in excess of amounts insured by the Federal
Deposit Insurance Corporation (FDIC) at December 31, 1996.
Note 10. Retained Earnings
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of December
31, 1996, the aggregate amount of unrestricted funds which could be
transferred from the banking subsidiary to the parent corporation,
without prior regulatory approval, totaled $2,410,776 or 17.0% of the
consolidated net assets.
Note 11. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is 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. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes of
financial instruments.
The Corporation'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 notional amount of those instruments.
The Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of December 31, 1996 and 1995, is
as follows:
1996 1995
---------- ----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $9 234 952 $7 707 163
Standby letters of credit 145 777 184 080
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if deemed necessary by the Corporation upon extension of credit, is
based on management's credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property
and equipment, and income-producing commercial properties.
-24-
<PAGE>
Note 11. Financial Instruments With Off-Balance-Sheet Risk (Continued)
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds real
estate as collateral supporting those commitments for which collateral
is deemed necessary. No collateral was held for commitments as of
December 31, 1996.
Note 12. Postretirement Benefits
The Corporation sponsors a postretirement life insurance plan covering
retirees with 25 years of service over the age of 60 and health care
plan for all retirees and six current employees that have met certain
eligibility requirements. The plan is contributory for future
retirees, with retiree contributions that are currently set at 20% of
the required premium. Effective January 1, 1995, the Corporation
adopted Financial Accounting Standards Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," to
account for its share of the costs of those benefits. Under that
Statement, the Corporation'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, except that the Corporation's unfunded cost
that existed at January 1, 1995 is being accrued primarily in a
straight-line manner that will result in its full accrual by December
31, 2014. Prior to 1995, the Corporation expensed its share of costs
as they were paid.
Net periodic postretirement benefit cost included the following
components for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Medical Life Medical Life
------- ------- ------- -------
<S> <C>
Service cost benefits attributable to
service during the year $ 2 237 $ 3 788 $ 1 641 $ 4 163
Interest on accumulated postretirement
benefit obligation 23 824 14 655 18 333 9 860
Amortization of transition obligation 12 298 7 372 11 458 5 954
------- ------- ------- -------
$38 359 $25 815 $31 432 $19 977
======= ======= ======= =======
</TABLE>
Postretirement benefit cost recognized in 1994 under the Corporation's
prior accounting policy was $21,480.
The following table sets forth the plan's funded status reconciled
with the obligation recognized in the accompanying balance sheets at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------------------- -----------------------
Medical Life Medical Life
--------- --------- --------- ---------
<S> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 213 057 $ 77 934 $ 206 424 $ 78 294
Other fully eligible participants 72 733 24 101 42 711 22 661
Other active participants - - 34 196 - - 32 150
--------- --------- --------- ---------
$ 285 790 $ 136 231 $ 249 135 $ 133 105
========= ========= ========= =========
Plan assets:
Accumulated postretirement benefit
obligation in excess of plan assets $ 285 790 $ 136 231 $ 249 135 $ 133 105
Unrecognized transition obligation 206 245) (107 174) (217 703) (113 128)
Net amortization and deferral (10 114) 16 735 - - - -
Accumulated premium payments for retirees (31 485) (13 152) (15 622) (6 410)
--------- --------- --------- ---------
Obligation included on balance sheet $ 37 946 $ 32 640 $ 15 810 $ 13 567
========= ========= ========== =========
</TABLE>
For measurement purposes, a 10 percent annual rate of increase in per
capita health care costs of covered benefits was assumed for 1996 and
1995, with such annual rate of increase gradually declining to 5
percent in 2011. If assumed health care cost trend rates were
increased by 1 percentage point in each year, the accumulated
postretirement benefit obligation at December 31, 1996 would be
increased by $35,064 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the
year ended December 31, 1996 would be increased by $3,261.
The weighted average discount rate used in estimating the accumulated
postretirement benefit obligation was 8%.
-25-
<PAGE>
Note 13. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
Loans
For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for other loans were estimated
using discounted cash flow analyses, using interest rates
currently being offered.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At December 31, 1996 and 1995, the carrying amounts and fair values
of loan commitments and standby-letters of credit were immaterial.
The estimated fair values of the Corporation's financial instruments
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C>
Financial assets:
Cash $ 3 401 $ 3 401 $ 3 396 $ 3 396
Securities purchased under
agreements to resell 4 800 4 800 18 700 18 700
Securities 40 334 40 331 26 354 26 307
Loans 73 525 72 103 73 651 68 970
Less: reserve for loan losses (1 139) - - (899) - -
-------- -------- -------- --------
Total financial assets $120 921 $120 635 $121 202 $117 373
======== ======== ======== ========
Financial liabilities:
Deposits $108 512 $108 479 $109 789 $109 855
======== ======== ======== ========
</TABLE>
Note 14. Derivative Financial Instruments
In October, 1994, Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments" was issued. The Statement is effective for
financial statements issued for fiscal years ending after December 15,
1994. It requires various disclosures for derivative financial
instruments which are futures, forward, swap, or option contract, or
other financial instruments with similar characteristics. The
Corporation does not have any derivative financial instruments as
defined under this Statement.
-26-
<PAGE>
Note 15. Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation must meet
specific capital guidelines that involve quantitative measures of the
Corporation's assets, liabilities, and certain off- balance-sheet
items as calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31,
1996, that the Corporation meets all capital adequacy requirements to
which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Corporation must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the institution's category.
The Corporation's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- ------- -------- -------
(Amount in Thousands)
<S> <C>
As of December 31, 1996:
Total capital (to risk-
weighted assets):
Consolidated $15 032 24.47% >$4 914 >8.0% N/A
- -
Bank of Charles Town $14 959 24.37% >$4 911 >8.0% >$6 139 >10.0%
- - - -
Tier 1 capital (to risk-
weighted assets):
Consolidated $14 260 23.21% >$2 457 >4.0% N/A
- -
Bank of Charles Town $14 187 23.11% >$2 455 >4.0% >$3 683 >6.0%
- - - -
Tier 1 capital (to
average assets):
Consolidated $14 260 11.43% >$4 989 >4.0% N/A
- -
Bank of Charles Town $14 187 11.38% >$4 987 >4.0% >$6 234 >5.0%
- - - -
</TABLE>
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------ -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------- ------- -------- ------- -------- -------
(Amount in Thousands)
<S> <C>
As of December 31, 1995:
Total capital (to risk-
weighted assets):
Consolidated $14 233 21.98% >$5 180 >8.0% N/A
- -
Bank of Charles Town $14 135 21.84% >$5 177 >8.0% >$6 472 >10.0%
- - - -
Tier 1 capital (to risk-
weighted assets):
Consolidated $13 423 20.73% >$2 590 >4.0% N/A
- -
Bank of Charles Town $13 325 20.59% >$2 589 >4.0% >$3 883 >6.0%
- - - -
Tier 1 capital (to
average assets):
Consolidated $13 423 10.83% >$4 957 >4.0% N/A
- -
Bank of Charles Town $13 325 10.76% >$4 954 >4.0% >$6 193 >5.0%
- - - -
</TABLE>
-27-
<PAGE>
Note 16. Parent Corporation Only Financial Statements
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
----------- -----------
<S> <C>
Cash $ 34 221 $ 36 769
Investment in subsidiary 14 146 483 13 325 189
Organization costs, net of accumulated amortization 31 729 44 012
Other assets 11 800 21 374
----------- -----------
Total Assets $14 224 233 $13 427 344
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 4 996 $ 4 741
----------- -----------
STOCKHOLDERS' EQUITY
Common stock $ 600 000 $ 600 000
Surplus 5 400 000 5 400 000
Undivided profits 8 260 037 7 422 603
Unrealized gain (loss) on securities available
for sale, net (40 800) - -
----------- -----------
Total Stockholders' Equity $14 219 237 $13 422 603
----------- -----------
Total Liabilities and Stockholders' Equity $14 224 233 $13 427 344
=========== ===========
</TABLE>
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
Income
Dividends from subsidiary $ 570 000 $ 576 000 $ 437 000
---------- ---------- ----------
Expenses
Amortization $ 12 282 $ 12 282 $ 5 118
Transfer agent expense 7 563 21 553 1 315
Legal and professional fees 2 575 13 582 - -
Other operating expenses 13 858 15 219 - -
---------- ---------- ----------
Total Expenses $ 36 278 $ 62 636 $ 6 433
---------- ---------- ----------
Income before Taxes and Equity in Undistributed
Income of Subsidiary $ 533 722 $ 513 364 $ 430 567
Income Tax (Benefit) (11 618) (21 296) (2 187)
---------- ---------- ----------
Income before Equity in Undistributed Income
of Subsidiary $ 545 340 $ 534 660 $ 432 754
Equity in Undistributed Income of Subsidiary 862 094 650 468 898 214
---------- ---------- ----------
Net Income $1 407 434 $1 185 128 $1 330 968
========== ========== ==========
</TABLE>
-28-
<PAGE>
Note 16. Parent Corporation Only Financial Statements (Continued)
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1 407 434 $1 185 128 $1 330 968
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (income) of subsidiary (862 094) (650 468) (898 214)
Amortization 12 282 12 282 5 118
(Increase) decrease in other assets 9 575 (19 187) (123 599)
Increase in other liabilities 255 3 789 952
---------- ---------- ----------
Net cash provided by operating activities $ 567 452 $ 531 544 $ 315 225
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES,
cash dividends $ (570 000) $ (510 000) $ (300 000)
---------- ---------- ----------
Net cash (used in) financing activities $ (570 000) $ (510 000) $ (300 000)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents $ (2 548) $ 21 544 $ 15 225
CASH AND CASH EQUIVALENTS
Beginning 36 769 15 225 - -
---------- ---------- ----------
Ending $ 34 221 $ 36 769 $ 15 225
========== ========== ==========
</TABLE>
-29-
<PAGE>
TRUST AND FINANCIAL SERVICES
1996 was a year of account restructuring for your Trust and Financial
Services Department. Distributions from 32 closed trust and estate accounts
totaled $2,130,000 (average $66,562) in assets, and approximately $57,000 in
fees. Of the closed accounts, 19 were under $25,000 in assets and generated
under $5,000 in total fees, and four were estates generating approximately
$47,000 in fees. During 1996, 15 new trust, agency, and estate accounts added
over $2,400,000 to department assets (average $160,000), and over $90,000 to
income. Of the new accounts, six were estates generating approximately $65,000
in fees.
Trust assets as of December 31, 1996, totaled $71,868,000, an increase
of $3,989,000 (5.8%) over December 31, 1995 footings of $67,879,000. Trust fees
in 1996 totaled $460,053, compared to $446,000 in 1995.
The Trust Referral Plan was adopted in the fall of 1996 as a means of
developing new trust accounts and cross selling bank services. The plan provides
financial incentives for employees providing referral of fiduciary account
prospects to the department. In addition, the department is implementing a
direct mail newsletter program to promote trust services.
The department's dedication to the delivery of community bank service
and our response to customer financial and estate planning needs will continue
to be the mission of our fiduciary service.
Robert L. Hersey
Vice President & Trust Officer
STATEMENT OF CONDITION
December 31, 1996
(unaudited)
ASSETS
Discretionary assets:
Bank Deposits: Bank of Charles Town $ 94 000
Other Banks 125 000
United States Treasury and Agency Obligations 7 089 000
State, County, and Municipal Obligations 1 527 000
Short Term Interest Bearing Funds 4 820 000
Other Short Term Obligations 44 000
Notes and Bonds 4 775 000
Common and Preferred Stocks 27 930 000
Real Estate Mortgages 1 590 000
Real Estate 1 260 000
Miscellaneous Assets 27 000
-----------
Total Discretionary Assets $49 281 000
-----------
Non-Discretionary Assets $22 587 000
-----------
Total Assets $71 868 000
===========
ACCOUNTS
Personal Trusts 177 $47 474 000
Estates and Other Court Accounts 37 4 170 000
Employee Benefit Accounts 27 3 892 000
Agencies and Other 72 16 332 000
---- -----------
Total Accounts 313 $71 868 000
==== ===========
-30-
<PAGE>
POTOMAC BANCSHARES, INC.
Charles W. LeMaster, President & CEO
William R. Harner, Sr. Vice President, Secretary & Treasurer
L. Gayle Marshall Johnson, Vice President & Chief Financial Officer
Donald S. Smith, Vice President & Assistant Secretary
Susan S. Myers, Auditor
BANK OF CHARLES TOWN
<TABLE>
<S> <C>
Administration Maintenance Department
Charles W. LeMaster Paula M. Fraley
Mortgage and Commercial President Paul D. Staubs
Loan Department E. Geraldine White
William R. Harner
Thomas F. Chambers Sr. Vice President & Cashier
Vice President Trust and Financial Services
L. Gayle Marshall Johnson, CPA
H. William Easter, Jr. Vice President & Financial Officer Robert L. Hersey
Assistant Vice President Vice President & Trust Officer
Diane C. Allen
Cynthia A. Light Personnel Officer Betty A. Braxton
Assistant Cashier Trust Officer
Susan S. Myers, CPA
Carolyn A. Galli Auditor David S. (Joe) Smith
Patricia A. Ott Trust Officer
Lisa O. Weiant Pamela W. Stevens, CPA
Compliance Officer Tina D. Carroll
Rebecca J. Johnson
Installment Loan Department William H. Chesley, Jr. K. Renee Queen
Marketing Officer Deanna D. Shade
Fonnie R. Crawford Deborah A. Watts
Vice President Shelly D. Dodson
Tammy L. Miller
Richard B. Breeden Teller Department
Assistant Vice President &
Security Officer Kearneysville Branch Carolyn N. O'Brien
Assistant Cashier & Head Teller
Donna J. Burns C. Kenneth Nicewarner, Jr.
Assistant Cashier Assistant Vice President & Malissia A. Aronowitz
Branch Manager Michael W. Boyd
Victoria B. Burns Amy L. Brill
Janice B. Davis Nancy L. Baker Jennifer L. Burch
Kimberly K. DeSarno Assistant Cashier & Assistant Melissa D. Castle
Timothy F. Hitrik Branch Manager Shirley G. Dutrow
Linda A. Stewart Lisa M. Gray
Mary L. Bowers Melissa A. Harrison
Stephanie L. Digennaro-Dailey Brian T. Moler
Certificates of Deposit Carolyn A. Dunn Stacy L. Mumaw
Department Erin L. Guarino Kendra L. Nichols
Jennifer L. Hockensmith M. Jacqueline Propst
Judith A. Edwards Tammy E. Hough Jeanette Staubs
Erin E. Harrison Lisa M. Sherrard Linda L. Whittington
Robert F. Spring Jr.
Data Processing Department Harpers Ferry Branch
Bookkeeping Department
Kelly J. Bechdel Wayne C. Welty
Assistant Vice President & Clara K. Carroll Assistant Vice President &
Data Processing Manager Assistant Cashier Branch Manager
Roberta J. Burke Rebecca E. Black Bernice H. Snyder
Doris V. Loudan Cathy J. Chambers Assistant Cashier & Assistant
Lori L. Orlando Connie R. Craigo Branch Manager
Nancy L. Harrison
Marcia S. Lerch Michele R. Carroll
Courier April D. Myers Margaret A. Courtney
Elizabeth W. Park Shelly L. Holmes
Deborah A. Ring Karen S. James
Benjamin T. Breeden Karen A. Staubs Jennifer L. Manuel
Peggy C. Turner Deborah L. Roper
Rebekah L. Turner Paula A. Wolfe
Tricia M. Viands Charles W. Wyndham, Jr.
</TABLE>
Exhibit 21
Subsidiaries of the Registrant
Wholly-owned subsidiary: Bank of Charles Town
111 East Washington Street
PO Box 906
Charles Town, WV 25414-0906
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,400,511
<INT-BEARING-DEPOSITS> 14,247
<FED-FUNDS-SOLD> 4,800,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,336,488
<INVESTMENTS-CARRYING> 25,997,021
<INVESTMENTS-MARKET> 25,994,375
<LOANS> 73,525,340
<ALLOWANCE> 1,138,747
<TOTAL-ASSETS> 123,779,866
<DEPOSITS> 108,512,469
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,048,160
<LONG-TERM> 0
0
0
<COMMON> 600,000
<OTHER-SE> 13,619,237
<TOTAL-LIABILITIES-AND-EQUITY> 123,779,866
<INTEREST-LOAN> 6,749,755
<INTEREST-INVEST> 1,899,156
<INTEREST-OTHER> 437,034
<INTEREST-TOTAL> 9,085,945
<INTEREST-DEPOSIT> 3,623,243
<INTEREST-EXPENSE> 3,623,243
<INTEREST-INCOME-NET> 5,462,702
<LOAN-LOSSES> 100,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,113,516
<INCOME-PRETAX> 2,238,011
<INCOME-PRE-EXTRAORDINARY> 1,407,434
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,407,434
<EPS-PRIMARY> 2.35
<EPS-DILUTED> 2.35
<YIELD-ACTUAL> 7.64
<LOANS-NON> 285,150
<LOANS-PAST> 48,633
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 59,462
<ALLOWANCE-OPEN> 899,245
<CHARGE-OFFS> 98,124
<RECOVERIES> 237,626
<ALLOWANCE-CLOSE> 1,138,747
<ALLOWANCE-DOMESTIC> 1,138,747
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
