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, 1997
Transition report under Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 (No fee required)
For the transition period from to
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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
------------------- ---------------------
NONE
- --------------------------- ---------------------------
- --------------------------- ---------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $1.00 Par Value
(Title of Class)
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
<PAGE>
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.
$10,690,999
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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. $17,814,624
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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
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Transitional Small Business Disclosure Format (check one):
Yes No XXX
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DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents which are incorporated by reference in the
Form 10-KSB Annual Report, and the Parts and Items of the Form 10-KSB into which
the documents are incorporated.
<TABLE>
<CAPTION>
Part of the Form 10-KSB Into Which
Document the Document is Incorporated
-------- ----------------------------------
<S><C>
Portions of Potomac Bancshares, Inc.'s 1997 Annual Part II, Items 6 and 7
Report to Shareholders for the year ended December 31, 1997
Portions of Potomac Bancshares, Inc.'s Proxy Statement for Part III, Items 9, 10, 11 and 12
the 1998 Annual Meeting of Shareholders
</TABLE>
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.
<PAGE>
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, West Virginia, 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 located at each of the
three offices and Touchline 24, an interactive voice response system available
at 1-304-728-2424, provide certain services to customers on a twenty-four hour
basis. 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.
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 74% of the Bank's loans are secured by real estate. These
loans had an average delinquency rate of 1.78% and a loss rate of .00% during
1997. These rates are based on comparisons to 1997 average total loans.
As of December 31, 1997, aggregate dollar amounts in loan categories
secured by real estate are as follows:
Construction and land development $ 393,187
Secured by farmland 1,717,930
Secured by 1-4 family residential 43,282,898
Other 12,496,739
------------
$ 57,890,754
============
Loans to individuals for personal expenditures are approximately 23% of
the Bank's total loans at December 31, 1997. The aggregate balance of these
loans was $17,705,824 at December 31, 1997. The majority of these are
installment loans with the remainder made as term loans.
<PAGE>
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 .40% and
a loss rate of .21% in 1997 (based on comparisons to 1997 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 the loan is of a certain
amount and is 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 .14% and the loss rate was .02% compared to average total
loans in 1997.
The remaining aggregate dollar amount of the Bank's loans is $2,616,384
at December 31, 1997. The amount includes:
(1) Dealer wholesale loans with generally no
delinquencies or losses $ 845,377
(2) Term loans for business and commercial purposes 1,199,745
(3) Industrial revenue bond loans secured by real estate 125,024
(4) Term loans for agricultural purposes 269,682
(5) Other loans 176,556
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.
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.
<PAGE>
Competition
- -----------
As of March 16, 1998, there were 53 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, 1997, there were six banks in Jefferson County with 15
banking offices. The total deposits of those commercial banks as of June, 1997,
were $404,459,000 and the Bank ranked number one with $108,197,000 or 26.8% 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 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.
In 1994, Congress passed the Riegle-Neal Interstate Banking and
Branching Efficiency Act. Under this Act, bank holding companies are permitted
to acquire banks located in states other than the bank holding company's home
state without regard to whether the transaction is permitted under state law.
Commencing on June 1, 1997, the Act allows national banks and state banks with
different home states to merge across state lines, unless the home state of a
participating bank enacted legislation prior to May 31, 1997, that expressly
prohibits interstate mergers. Additionally, the Act allows banks to branch
across state lines, unless the state where the new branch will be located
enacted legislation restricting or prohibiting de novo interstate branching on
or before May 31, 1997. West Virginia adopted legislation, effective May 31,
1997, that allows for interstate branch banking by merger across state lines and
allows for de novo branching and branching by purchase and assumption on a
reciprocal basis with the home state of the bank in question. The effect of this
legislation will likely be increased competition with West Virginia banks,
including the Bank.
Employees
- ---------
Bancshares currently has no employees.
As of January 31, 1998, the Bank had 81 full-time employees and 7
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.
<PAGE>
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.
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
1.256 basis points or .0001256 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 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.
<PAGE>
Financial institutions that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate exposure and the
highest regulatory rating, are required to maintain a minimum leverage ratio of
3%. Financial institutions not meeting these criteria are required to maintain a
leverage ratio which exceeds 3% by a cushion of at least 100 to 200 basis
points, and, therefore, the ratio of Tier 1 capital to total assets should not
be less than 4%.
The guidelines also provide that financial institutions experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the Federal Reserve
Board's guidelines indicate that the Federal Reserve Board will continue to
consider a "tangible Tier 1 leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage is the ratio of an
institution's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.
Failure to meet applicable capital guidelines could subject the
financial institution to a variety of enforcement remedies available to the
federal regulatory authorities, including limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital directive to
increase capital and the termination of deposit insurance by the FDIC, as well
as to the measures described in the "Federal Deposit Insurance Corporation
Improvement Act of 1991" as applicable to undercapitalized institutions.
The Federal Reserve Board, as well as the FDIC, has adopted changes to
their risk-based and leverage ratio requirements that require that all
intangible assets, with certain exceptions, be deducted from Tier 1 capital.
Under the Federal Reserve Board's rules, the only types of intangible assets
that may be included in (i.e., not deducted from) a bank holding company's
capital are readily marketable purchased mortgage servicing rights ("PMSRs") and
purchased credit card relationships ("PCCRs"), provided that, in the aggregate,
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, 1997, Bancshares had capital in excess of all
applicable requirements as shown below:
<TABLE>
<CAPTION>
Actual Required Excess
------------- ------------ ------------
<S><C>
Tier 1 capital:
Common stock $ 600,000
Surplus 5,400,000
Retained earnings 9,291,741
-------------
Total tier 1 capital $ 15,291,741 $ 2,641,634 $ 12,650,107
Tier 2 capital:
Allowance for loan losses (1) 829,378
-------------
Total risk-based capital $ 16,121,119 $ 5,283,268 $ 10,837,851
============= =========== ============
Risk-weighted assets $ 66,040,845
=============
Tier 1 capital $ 15,291,741 $ 3,877,101 $ 11,414,640
============= =========== ============
Average total assets $ 129,236,704
=============
</TABLE>
<TABLE>
<CAPTION>
Actual Required Excess
------------- ------------ ------------
<S><C>
Capital ratios:
Tier 1 risk-based capital ratio 23.15% 4.00% 19.15%
Total risk-based capital ratio 24.41% 8.00% 16.41%
Tier 1 capital to average total
assets (leverage) 11.83% 4.00% 7.83%
</TABLE>
<PAGE>
(1) Limited to 1.25% of gross risk-weighted assets.
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.
<PAGE>
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 20, 1998, there were approximately 860 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.
<TABLE>
<CAPTION>
Price Range Cash Dividends *
High Low Paid per Share
<S><C>
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
1997 First Quarter $ 30.00 $29.00 $ N/A
Second Quarter 32.00 30.00 .45
Third Quarter 32.00 30.00 N/A
Fourth Quarter 32.00 30.00 .70
</TABLE>
* Dividends have been declared traditionally by Bancshares on a semi-annual
basis.
<PAGE>
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.
The information contained on pages 4-11 of the Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS.
The information contained on pages 13-29 of the Annual Report to
Shareholders for the year ended December 31, 1997, is incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information contained on pages 4-6 and 13 of the Proxy Statement
dated March 27, 1998, for the April 28, 1998 Annual Meeting under the captions
"Management Nominees to the Board of Potomac," "Directors Continuing to Serve
Unexpired Terms," and "Section 16(a) Beneficial Ownership Reporting Compliance"
is incorporated herein by reference.
The Executive Officers are as follows:
<TABLE>
<CAPTION>
Name Position Since Age Principal Occupation
---- -------------- --- --------------------
<S><C>
Charles W. LeMaster President & CEO 56 Employed at Bank since 1983; President
1994 & CEO since 1991.
William R. Harner Sr. Vice President, 57 Employed at Bank since 1967; Sr. Vice
Secretary & Treasurer President & Cashier since 1988.
1994
Gayle Marshall Johnson Vice President & Chief 48 Employed with the Bank 1977-1985 as
Financial Officer as internal auditor. Rejoined Bank in 1988
1994 as Financial Officer. Vice President &
Financial Officer of Bank since 1990.
Donald S. Smith Vice President & 69 Employed at Bank 1947 to 1991; President
Assistant Secretary 1979 to 1991 (retired).
1994
</TABLE>
ITEM 10. EXECUTIVE COMPENSATION.
The information contained on pages 8-9 and 12 of the Proxy Statement
dated March 27, 1998, for the April 28, 1998 Annual Meeting under the captions
"Executive Compensation" and "Compensation of Directors" is incorporated herein
by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
<PAGE>
The information contained on pages 6-8 of the Proxy Statement dated
March 27, 1998, for the April 28, 1998 Annual Meeting under the captions
"Principal Holders of Voting Securities" and "Ownership of Securities by
Nominees, Directors and Officer" is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained on page 12 of the Proxy Statement dated March
27, 1998, for the April 28, 1998 Annual Meeting under the caption "Certain
Transactions with Directors, Officers and Their Associates" is incorporated
herein by reference.
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(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 on April 25, 1995 and filed with the West Virginia
Secretary of State on May 23, 1995, and incorporated by reference from Potomac's
Form 10-KSB for the year ended December 31, 1995 and filed with the Securities
and Exchange Commission, file no. 0-24958.
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 and incorporated by reference from Potomac's Form
10-KSB for the year ended December 31, 1995 and filed with the Securities and
Exchange Commission, file no. 0-24958.
13 1997 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for the 1998 Annual Meeting for Potomac
(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 24, 1998
___________________________________ ----
Charles W. LeMaster
President & Chief Executive Officer
By /s/ L. Gayle Marshall Johnson March 24, 1998
___________________________________ ----
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
- ----------------- ----
By /s/ John P. Burns, Jr. March 24, 1998
___________________________________ ----
John P. Burns, Jr., Director
By /s/ Robert W. Butler March 24, 1998
___________________________________ ----
Robert W. Butler, Director
By /s/ Guy Gary Chicchirichi March 24, 1998
___________________________________ ----
Guy Gary Chicchirichi, Director
By /s/ Thomas C. G. Coyle March 24, 1998
___________________________________ ----
Thomas C. G. Coyle, Director
By /s/ Francis M. Frye March 24, 1998
___________________________________ ----
Francis M. Frye, Director
<PAGE>
Signature & Title Date
- ----------------- ----
By /s/ William R. Harner March 24, 1998
___________________________________ ----
William R. Harner, Director,
Sr. Vice President, Secretary &
Treasurer
By March , 1998
___________________________________ ----
E. William Johnson, Director
By /s/ Charles W. LeMaster March 24, 1998
___________________________________ ----
Charles W. LeMaster, Director,
President, Chief Executive Officer
By /s/ Minnie R. Mentzer March 24, 1998
___________________________________ ----
Minnie R. Mentzer, Director
By /s/ James E. Senseney March 24, 1998
___________________________________ ----
James E. Senseney, Director
By March , 1998
___________________________________ ----
John C. Skinner, Jr., Director
By /s/ Donald S. Smith March 24, 1998
___________________________________ ----
Donald S. Smith, Director
Potomac Bancshares, Inc.
Annual Report
1997
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 1997 annual report on Form 10-KSB filed
with 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, is
infrequent 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, 1997, there were 600,000 common shares
outstanding held by approximately 860 shareholders.
The per share sale prices of the Corporation's stock over the last two
years, based solely on transactions of which the Corporation is aware, and
dividends are listed below.
High Low Dividends
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
1997
----
First Quarter 30.00 29.00 N/A
Second Quarter 32.00 30.00 0.45
Third Quarter 32.00 30.00 N/A
Fourth Quarter 32.00 30.00 0.70
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 28, 1998,
beginning at 10:30 a.m.
<PAGE>
CONTENTS
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
<PAGE>
PRESIDENT'S REPORT
On behalf of the Board of Directors, officers and staff, it is a pleasure to
report the results of Potomac Bancshares, Inc. for the year 1997.
Your corporation experienced an excellent period of growth and profitability.
Total assets at year end were $130,556,528, an increase of $6,776,662 over 1996.
Net income was $1,721,704 (up 22% over the $1,407,434 in 1996) and reflects a
1.36% return on average assets and 11.58% return on average equity. Our strong
capital position and excellent earnings enabled us to have our best year ever
for the corporation and allowed us to increase our dividend from $.95 per share
in 1996 to $1.15 per share in 1997.
In 1997, we had two long time employees retire. Bernice Snyder with 20 years of
service at our Harpers Ferry Branch retired February 1, 1997. Fonnie Crawford
with 33 years of service at the main office retired September 1, 1997. We hope
they enjoy many years of happy and healthy retirement.
Potomac Bancshares' success depends on the cooperation of the directors,
officers & staff whose responsibility it is to provide good service to our
customers each day. We appreciate everyone's assistance in making 1997 the most
prosperous year. We are grateful for our many shareholders and the support they
have shown us over the years.
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, West Virginia. 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 located at each of the
three offices and Touchline 24, an interactive voice response system available
at 1-304-728-2424, provide certain services to customers on a twenty-four hour
basis. 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
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- Shepherd College Nichols and Skinner, L.C.
Oldsmobile-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
-2-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S><C>
Summary of Operations
Interest income $ 9,563 $ 9,086 $ 8,747 $ 8,979 $ 9,809
Interest expense 3,710 3,623 3,591 3,509 3,971
-------- -------- -------- -------- --------
Net interest income 5,853 5,463 5,156 5,470 5,838
Provision for loan losses 127 100 125 125 297
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 5,726 5,363 5,031 5,345 5,541
Non-interest income 1,128 989 906 939 1,036
Non-interest expense 4,127 4,114 4,078 4,211 4,054
-------- -------- -------- -------- --------
Income before income taxes 2,727 2,238 1,859 2,073 2,523
Income tax expense 1,005 831 674 742 894
-------- -------- -------- -------- --------
Net income $ 1,722 $ 1,407 $ 1,185 $ 1,331 $ 1,629
======== ======== ======== ======== ========
Per Share Data
Net income, basic and diluted $ 2.87 $ 2.35 $ 1.98 $ 2.22 $ 2.72
Cash dividends declared 1.15 .95 .85 .85 1.00
Book value at period end 25.50 23.70 22.37 21.19 19.88
Average shares outstanding 600,000 600,000 600,000 600,000 600,000
Average Balance Sheet Summary
Assets $126,474 $124,267 $121,638 $128,993 $126,000
Loans 76,866 73,817 72,440 68,558 69,672
Securities 40,576 36,972 37,682 52,288 48,530
Deposits 110,291 109,709 107,826 115,907 113,885
Shareholders' equity 14,870 13,806 13,052 12,393 11,419
Performance Ratios
Return on average assets 1.36% 1.13% .97% 1.03% 1.29%
Return on average equity 11.58% 10.19% 9.08% 10.74% 14.27%
Dividend payout ratio 40.07% 40.43% 42.93% 38.29% 36.76%
Capital Ratios
Leverage ratio 11.83% 11.43% 10.83% 9.61% 9.06%
Risk-based capital ratios
Tier 1 capital 23.15% 23.21% 20.73% 20.74% 19.76%
Total capital 24.41% 24.47% 21.98% 21.99% 21.02%
</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>
1997 1996
------------------------------------------------ -----------------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Yield/Rate Balances Expense Yield/Rate
------------ ---------- ---------- ------------ ---------- ----------
<S><C>
ASSETS
Loans
Taxable $ 76,726,418 $7,008,657 9.13% $ 73,523,500 $6,728,084 9.15%
Tax exempt 139,322 15,492 11.12% 293,422 32,836 11.19%
------------ ---------- ------------ ----------
Total loans 76,865,740 7,024,149 9.14% 73,816,922 6,760,920 9.16%
------------ ---------- ------------ ----------
Taxable securities 40,576,196 2,344,806 5.78% 36,971,951 1,899,156 5.14%
Securities purchased under
agreements to resell 3,755,616 198,926 5.30% 8,292,896 437,034 5.27%
------------ ---------- ------------ ----------
Total earning assets 121,197,552 $9,567,881 7.89% 119,081,769 $9,097,110 7.64%
------------ ========== ------------ ==========
Reserve for loan losses (1,160,396) (986,515)
Cash and due from banks 3,613,704 3,475,732
Bank premises/equipment, net 1,204,798 1,384,312
Other assets 1,617,882 1,311,661
------------ ------------
Total assets $126,473,540 $124,266,959
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Savings and interest
bearing demand deposits $ 55,365,510 $1,451,731 2.62% $ 55,836,374 $1,421,014 2.54%
Time deposits 40,929,846 2,241,745 5.48% 39,986,622 2,202,229 5.51%
------------ ---------- ------------ ----------
Total interest bearing
deposits 96,295,356 3,693,476 3.84% 95,822,996 3,623,243 3.78%
------------ ---------- ------------ ----------
Federal funds purchased and
securities sold under
agreements to repurchase 269,471 16,219 6.02% -- -- --
------------ ---------- ------------ ----------
Total interest bearing
liabilities 96,564,827 $3,709,695 3.84% 95,822,996 $3,623,243 3.78%
------------ ========== ------------ ==========
Noninterest bearing demand
deposits 13,995,920 13,886,051
Other liabilities 1,042,649 751,824
Stockholders' equity 14,870,144 13,806,088
------------ ------------
Total liabilities and
stockholders' equity $126,473,540 $124,266,959
============ ============
Net interest spread 4.05% 3.86%
Interest expense as a percent
of average earning assets 3.06% 3.04%
Net interest margin 4.84% 4.60%
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Net income in 1997 increased 22% to $1,721,704 compared to net income
of $1,407,434 in 1996. Total assets increased over 5% to $130,556,528 from
$123,779,866 when comparing the 1997 year end to the 1996 year end. An increase
in loans provided the majority of the increase in assets.
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 $5,852,919 in 1997 compared to
$5,462,702 in 1996. The majority of this 7% increase is due to increased loan
volume and increased rates and volume for securities.
A 5% increase in interest income brought the total to $9,562,614 for
1997 compared to $9,085,945 in 1996.
The average balance of total loans increased $3,000,000 for the year
while the average rate on loans remained about the same as 1996. Interest and
fees on loans increased from $6,749,755 in 1996 to $7,018,882 in 1997.
Continuing the trend of the past several years, most of the increase in loans is
loans secured by residential real estate.
Income on investment securities and securities available for sale
increased 23% in 1997 compared to 1996. Income on securities purchased under
agreements to resell decreased 55% due to decreased volume.
Interest expense increased 2% in 1997 to $3,709,695 compared to
$3,623,243 in 1996 due to various changes in rates and volumes within the
deposit structure and due to the cost of borrowing funds for a short period of
time.
Total deposits at December 31, 1997 of $114,181,922 have increased 5%
over total deposits of $108,512,469 at December 31, 1996. About $3,500,000 of
this growth is due to the offering of a new NOW account called Select Checking
that pays a higher rate of interest on balances of $5,000 or more. In addition
to the new deposits brought in by Select Checking, the new product also drew
$3,000,000 from money market accounts and $4,000,000 from savings accounts.
Noninterest bearing demand deposits have increased about $1,000,000. Time
deposits increased slightly over $1,000,000.
The average rate for the Bank's total earning assets was 7.89% in 1997,
an increase of .25% over the average rate of 1996 principally due to purchase of
higher yielding securities when lower yielding securities matured. The average
rate for total interest bearing liabilities increased .06% to 3.84% in 1997
compared to 3.78% in 1996. The interest spread in 1997 was 4.05% compared to
3.86% in 1996. The net interest margin was 4.84% in 1997 compared to 4.60% in
1996.
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>
1997 Compared to 1996 1996 Compared to 1995
-------------------------------------------- -------------------------------------------
Change in Volume Rate Change in Volume Rate
Income/Expense Effect Effect Income/Expense Effect Effect
-------------- ------ ------ -------------- ------ ------
<S><C>
INTEREST INCOME
Taxable loans $ 280,573 $ 295,395 $(14,822) $ 195,662 $144,762 $ 50,900
Tax exempt loans (17,344) (17,197) (147) (22,828) (22,484) (344)
Taxable securities 445,650 195,697 249,953 98,395 (32,807) 131,202
Securities purchased under
agreements to resell (238,108) (240,612) 2,504 60,095 90,475 (30,380)
--------- --------- -------- --------- -------- ---------
TOTAL $ 470,771 $ 233,283 $237,488 $ 331,324 $179,946 $ 151,378
--------- --------- -------- --------- -------- ---------
INTEREST EXPENSE
Savings and interest bearing
demand deposits $ 30,717 $ (11,232) $ 41,949 $(284,555) $(51,933) $(232,622)
Time deposits 39,516 51,374 (11,858) 321,395 161,098 160,297
Federal funds purchased and
securities sold under
agreements to repurchase 16,219 16,219 -- (4,008) (4,008) --
--------- --------- -------- --------- -------- ---------
TOTAL $ 86,452 $ 56,361 $ 30,091 $ 32,832 $105,157 $ (72,325)
--------- --------- -------- --------- -------- ---------
NET INTEREST INCOME $ 384,319 $ 176,922 $207,397 $ 298,492 $ 74,789 $ 223,703
========= ========= ======== ========= ======== =========
</TABLE>
NONINTEREST INCOME AND EXPENSE
Noninterest income (other income) increased 14% to $1,128,385 in 1997
compared to $988,825 in 1996. This increase included a 13% increase in trust and
financial services income due to a higher volume of estate fee income in 1997
and a 26% increase in service charges on deposit accounts due to increased
volumes and the first full year of charges on foreign ATM transactions.
Noninterest expense (other expenses) increased less than 1% in 1997
compared to 1996. Salaries and employee benefits remained about the same in 1997
as 1996 due to a reduction in the number of employees. Furniture and equipment
expenses increased due to equipment purchases to update technology including
preparation for the year 2000.
YEAR 2000
During 1997 the Bank began to assess the effect of the Year 2000 by
contacting vendors for documentation regarding their planning, testing and
implementation for Year 2000 compliance. In January 1998, the Bank's Board of
Directors approved the appointment of a Year 2000 committee composed of
directors, officers and staff to continue the assessment begun in 1997. The
Board has approved a written plan which details the steps to be taken for Year
2000 compliance, including completion of problem definition by March 1998,
completion of assessment of systems and equipment by March 1998, completion of
necessary repairs, upgrades and replacements of systems and equipment by March
1999, and testing during 1999.
The Bank utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include a mainframe processing system and various software packages, licensed to
the Bank by an outside vendor, which are run on in-house computer equipment. The
Bank's mainframe software vendor and the majority of the other vendors
(including vendors for systems and equipment other than for data processing)
which have been contacted have indicated that their hardware and/or software
will be Year 2000 compliant.
Upgrading and replacing personal computers throughout the Bank is
expected to be a large part of Year 2000 expense during the next two years, but
the cost of Year 2000 compliance is not expected to have a material effect on
the Corporation's consolidated financial statements.
-6-
<PAGE>
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, 1997. 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 $ 10,491,478 $ 20,496,470 $ 38,675,395 $ 2,652,210 $ --
Floating rate loans 5,612,259 -- -- -- --
Securities 2,000,560 10,994,996 24,047,152 -- 401,600
Securities purchased under
agreements to resell 8,600,000 -- -- -- --
------------ ------------ ------------ ------------ ------------
Total $ 26,704,297 $ 31,491,466 $ 62,722,547 $ 2,652,210 $ 401,600
------------ ------------ ------------ ------------ ------------
Interest Bearing Liabilities:
Time deposits
$100,000 and over $ 1,152,344 $ 2,278,221 $ 1,083,041 $ -- $ --
Other time deposits 7,562,848 20,667,661 8,002,436 2,000 --
Money market accounts 12,194,645 -- -- -- --
NOW accounts 10,915,283 -- -- -- 16,441,963
Savings accounts -- -- -- -- 18,867,861
------------ ------------ ------------ ------------ ------------
Total $ 31,825,120 $ 22,945,882 $ 9,085,477 $ 2,000 $ 35,309,824
------------ ------------ ------------ ------------ ------------
Rate Sensitivity Gap $ (5,120,823) $ 8,545,584 $ 53,637,070 $ 2,650,210
------------ ------------ ------------ ------------
Cumulative Gap $ (5,120,823) $ 3,424,761 $ 57,061,831 $ 59,712,041
============ ============ ============ ============
</TABLE>
As of December 31, 1997, the Corporation shows a negative gap in the
first time frame with remaining time frames showing positive gaps. Except in the
first time frame, the cumulative gaps are narrower than in 1996.
Even matches are the safest positions in the times of rapidly rising or
declining rates. 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, 1997 and 1996 are summarized below:
1997 1996
----------- -----------
Commercial, financial and agricultural $ 2,314,804 $ 2,086,241
Real estate:
Construction and land development 393,187 759,619
Secured by farm land 1,717,930 1,501,527
Secured by 1-4 family residential 43,282,898 38,220,730
Other real estate 12,496,739 12,124,747
Consumer 17,705,824 18,654,695
All other 301,580 177,781
$78,212,962 $73,525,340
Loans have increased over $4,500,000 when comparing year end totals for
1997 and 1996, and the average balance for total loans has increased over
$3,000,000 in 1997 compared to 1996. The most notable change continues to be the
increase in loans secured by residential real estate which includes growth in
1997 of over $1,000,000 in home equity loans and the purchase of loans during
1997 that have a December 31 balance of $690,000.
There were no categories of loans that exceeded 10% of outstanding
loans at December 31, 1997 which were not disclosed in the table above.
-7-
<PAGE>
REMAINING MATURITIES OF SELECTED LOANS
Commercial,
Financial and Real Estate-
Agricultural Construction
------------- ------------
Within one year $ 1,963,763 $ 116,100
Variable rate 240,980 82,000
Fixed rate:
Over one through five years 110,061 195,087
After five years -- --
----------- ---------
Total 110,061 195,087
----------- ---------
Total maturities $ 2,314,804 $ 393,187
=========== =========
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>
1997 1996 1995
---------- ---------- ---------
<S><C>
Balance at beginning of period $1,138,747 $ 899,245 $ 988,524
Charge-offs:
Commercial, financial and agricultural -- -- --
Real estate - construction -- -- --
Real estate - mortgage -- -- 148,246
Consumer 175,828 98,124 116,005
---------- ---------- ---------
Total charge-offs 175,828 98,124 264,251
---------- ---------- ---------
Recoveries:
Commercial, financial and agricultural -- -- --
Real estate - construction -- -- --
Real estate - mortgage -- 186,534 --
Consumer 48,420 51,092 49,972
---------- ---------- ---------
Total recoveries 48,420 237,626 49,972
---------- ---------- ---------
Net charge-offs (recoveries) 127,408 (139,502) 214,279
Additions charged to operations 127,408 100,000 125,000
---------- ---------- ---------
Balance at end of period $1,138,747 $1,138,747 $ 899,245
========== ========== =========
Ratio of net charge-offs (recoveries) during the period
to average loans outstanding during the period 0.17% (0.19)% 0.30%
===== ======= =====
</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>
1997 1996
------------------------------ ---------------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
Reserve to Total Loans Reserve to Total Loans
---------- ---------------- ---------- ----------------
<S><C>
Commercial, financial and agricultural $ 11,575 2.95% $ 10,431 2.84%
Real estate mortgage:
Construction and land development 51,466 .50% 53,298 1.04%
Secured by farm land 35,679 2.20% 34,597 2.04%
Secured by 1-4 family residential 272,837 55.34% 267,587 51.98%
Other real estate 210,719 15.98% 213,675 16.49%
Consumer 100,671 22.64% 129,255 25.37%
All other 1,506 .39% 889 .24%
Unallocated 454,294 -- 429,015 --
---------- ------- ---------- -------
$1,138,747 100.00% $1,138,747 100.00%
========== ======= ========== =======
</TABLE>
-8-
<PAGE>
RISK ELEMENTS IN THE LOAN PORTFOLIO
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S><C>
Nonaccrual loans $ 285,150 $ 285,150 $ 485,150
Restructured loans -- -- --
Foreclosed properties 100,005 -- --
--------- --------- ---------
Total nonperforming assets $ 385,155 $ 285,150 $ 485,150
========= ========= =========
Loans past due 90 days accruing interest $ 19,923 $ 48,663 $ --
========= ========= =========
Reserve for loan losses to period end loans 1.46% 1.55% 1.22%
Nonperforming assets to period end loans and
foreclosed properties .49% .39% .66%
</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 $397,986
and $407,422 at December 31, 1997 and 1996, respectively.
At December 31, 1997, other potential problem loans totaled $40,169.
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
1997 Average 1996 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 $ 9,995,556 5.98% $ 7,993,959 5.33%
Maturing after one year but
within five years 14,044,650 5.90% 18,003,062 5.92%
------------ ------------
Total securities held to maturity $ 24,040,206 $ 25,997,021
============ ============
Securities available for sale
U.S. Treasury securities and securities
of U.S. government agencies:
Maturing within one year $ 3,000,000 6.09% $ 8,013,125 5.14%
Maturing after one year but
within five years 10,002,502 5.66% 5,936,563 5.55%
Equity securities 401,600 -- 386,800 --
------------ ------------
Total securities available for sale $ 13,404,102 $ 14,336,488
============ ============
Total securities $ 37,444,308 $ 40,333,509
============ ============
</TABLE>
-9-
<PAGE>
DEPOSITS
When comparing the 1997 and 1996 year end balances and the 1997 and
1996 average balances for time deposits, both show the net increase of about
$1,000,000 in 1997 over 1996. During 1997 there was a slight decrease in the
average yield on time deposits from 5.51% in 1996 to 5.48% in 1997. Average
balances for savings, interest bearing demand deposits, and noninterest bearing
demand deposits remained much the same for 1997 and 1996 though year end
balances show an increase of over $3,000,000 in 1997 for savings and interest
bearing demand deposits and an increase of about $1,000,000 for noninterest
bearing demand deposits. The average yield on savings and interest bearing
demand deposits increased in 1997 to 2.62% from 2.54% in 1996 due to the effect
of the new Select Checking product totals included in these figures.
At December 31, 1997, time deposits of $100,000 or more were 4.0% of
total deposits compared with 3.7% at December 31, 1996. Maturities of time
deposits of $100,000 or more at December 31, 1997 are as follows:
Within three months $ 1,152,344
Over three through six months 1,118,014
Over six months through twelve months 1,160,207
Over twelve months 1,083,041
-----------
Total $ 4,513,606
===========
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 24.41% at
December 31, 1997 and a ratio of Tier 1 capital to risk-weighted assets of
23.15%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.
1997 1996
------------ ------------
Tier 1 capital:
Common stock $ 600,000 $ 600,000
Surplus 5,400,000 5,400,000
Retained earnings 9,291,741 8,260,037
------------ ------------
Total tier 1 capital $ 15,291,741 $ 14,260,037
Tier 2 capital:
Allowance for loans losses (1) 829,378 772,445
------------ ------------
Total risk-based capital $ 16,121,119 $ 15,032,482
============ ============
Risk-weighted assets $ 66,040,845 $ 61,429,313
============ ============
Capital ratios:
Tier 1 risk-based capital ratio 23.15% 23.21%
Total risk-based capital ratio 24.41% 24.47%
Leverage ratio 11.83% 11.43%
(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 1997 (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 and payments on and maturities of loans. 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, 1997, cash and due from banks, securities purchased
under agreements to resell and loans and securities maturing within one year
were $50,116,000.
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 $45,000,000.
The Subsidiary Bank did not use either of these sources during 1997.
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.
FASB Statement No. 130, "Reporting Comprehensive Income", establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Statement 130 is effective for financial statements
beginning after December 15, 1997.
During June of 1997, the FASB issued FASB No. 131, "Disclosures about
Segments of an Enterprise and Related Information." FASB No. 131 establishes
standards for the way that public enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement becomes effective for financial statements for periods beginning
after December 31, 1997.
-11-
<PAGE>
[This Page Intentionally Left Blank]
-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, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1997, 1996 and 1995. 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, 1997 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1997, 1996 and 1995, in conformity with generally accepted accounting
principles.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
January 29, 1998
-13-
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S><C>
Cash and due from banks (Note 9) $ 4,517,965 $ 3,400,511
Securities (fair value: 1997, $37,507,918;
1996, $40,330,863) (Note 2) 37,444,308 40,333,509
Securities purchased under agreements to resell 8,600,000 4,800,000
Loans (Note 3) 78,212,962 73,525,340
Reserve for loan losses (Note 4) (1,138,747) (1,138,747)
------------ ------------
Net loans 77,074,215 72,386,593
Premises and equipment, net (Note 5) 1,201,550 1,254,393
Accrued interest receivable 1,008,357 1,021,216
Other assets (Note 8) 710,133 583,644
------------ ------------
Total Assets $130,556,528 $123,779,866
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing demand deposits $ 15,013,619 $ 14,036,498
Savings and interest bearing demand deposits 58,419,752 55,083,420
Time deposits (Note 6) 40,748,551 39,392,551
------------ ------------
Total Deposits $114,181,922 $108,512,469
Accrued interest payable 342,503 326,044
Other liabilities (Notes 7 and 12) 734,152 722,116
Commitments and contingent liabilities (Notes 9 and 11) -- --
------------ ------------
Total Liabilities $115,258,577 $109,560,629
------------ ------------
STOCKHOLDERS' EQUITY
Common stock, $1 per share par value; 5,000,000 shares
authorized; 600,000 shares issued and outstanding $ 600,000 $ 600,000
Surplus 5,400,000 5,400,000
Undivided profits (Note 10) 9,291,741 8,260,037
Unrealized gain (loss) on securities available for
sale, net 6,210 (40,800)
------------ ------------
Total Stockholders' Equity $ 15,297,951 $ 14,219,237
------------ ------------
Total Liabilities and Stockholders' Equity $130,556,528 $123,779,866
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S><C>
Interest Income:
Interest and fees on loans $ 7,018,882 $ 6,749,755 $ 6,569,160
Interest on investment securities
Taxable 1,628,597 1,213,709 1,594,544
Interest and dividends on securities
available for sale
Taxable 691,203 661,125 181,570
Dividends 25,006 24,322 24,647
Interest on securities purchased
under agreements to resell 198,926 437,034 376,939
----------- ----------- -----------
Total Interest Income $ 9,562,614 $ 9,085,945 $ 8,746,860
----------- ----------- -----------
Interest Expense:
Interest on deposits $ 3,693,476 $ 3,623,243 $ 3,586,403
Interest on federal funds purchased
and securities sold under agreements
to repurchase 16,219 -- 4,008
----------- ----------- -----------
Total Interest Expense $ 3,709,695 $ 3,623,243 $ 3,590,411
----------- ----------- -----------
Net Interest Income $ 5,852,919 $ 5,462,702 $ 5,156,449
Provision for Loan Losses (Note 4) 127,408 100,000 125,000
----------- ----------- -----------
Net Interest Income after
Provision for Loan Losses $ 5,725,511 $ 5,362,702 $ 5,031,449
----------- ----------- -----------
Other Income:
Trust and financial services $ 522,023 $ 460,053 $ 446,000
Service charges on deposit accounts 403,006 318,062 240,529
Fees for other customer services 162,423 181,980 192,857
Other operating income 40,933 28,730 26,185
----------- ----------- -----------
Total Other Income $ 1,128,385 $ 988,825 $ 905,571
----------- ----------- -----------
Other Expenses:
Salaries and employee benefits (Notes 7 and 12) $ 2,473,151 $ 2,468,762 $ 2,370,054
Net occupancy expense of premises 194,426 203,033 213,891
Furniture and equipment expenses 348,798 300,211 283,546
Deposit insurance 13,101 2,000 128,478
Stationery and supplies 109,472 106,810 108,279
Directors fees 102,330 105,700 98,910
ATM expenses 75,766 105,445 108,645
Other operating expenses 809,527 821,555 766,047
----------- ----------- -----------
Total Other Expenses $ 4,126,571 $ 4,113,516 $ 4,077,850
----------- ----------- -----------
Income before Income Tax Expense $ 2,727,325 $ 2,238,011 $ 1,859,170
Income Tax Expense (Note 8) 1,005,621 830,577 674,042
----------- ----------- -----------
Net Income $ 1,721,704 $ 1,407,434 $ 1,185,128
=========== =========== ===========
Earnings Per Share, basic and diluted $ 2.87 $ 2.35 $ 1.98
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Undivided Available for
Stock Surplus Profits Sale, Net Total
--------- ----------- ----------- -------------- ------------
<S><C>
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
Net income - 1997 -- -- 1,721,704 -- 1,721,704
Cash dividends - 1997
($1.15 per share) -- -- (690 000) -- (690,000)
Change in net unrealized gain
(loss) on securities available
for sale, net of deferred
income taxes of $24,217 -- -- -- 47,010 47,010
--------- ----------- ----------- --------- ------------
Balances, December 31, 1997 $ 600,000 $ 5,400,000 $ 9,291,741 $ 6,210 $ 15,297,951
========= =========== =========== ========= ============
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------- ------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,721,704 $ 1,407,434 $ 1,185,128
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 127,408 100,000 125,000
Depreciation 208,809 181,424 170,739
Amortization 12,282 12,282 12,282
Deferred income taxes (credits) (40,759) (88,111) 32,425
Discount accretion and premium amortization
on securities, net 28,853 27,060 2,699
Loss on sale of real estate -- 94,972 --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 12,859 (243,706) 205,896
(Increase) decrease in other assets (19,025) 15,002 (81,153)
Increase (decrease) in accrued interest payable 16,459 (20,196) 22,514
Increase in other liabilities 8,837 237,283 70,045
------------ ------------- ------------
Net cash provided by operating activities $ 2,077,427 $ 1,723,444 $ 1,745,575
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ 8,000,000 $ 18,000,000 $ 12,000,000
Proceeds from maturity of securities available for sale 8,000,000 -- 6,019,900
Purchases of investment securities (6,049,375) (17,996,884) --
Purchases of securities available for sale (7,019,050) (14,071,795) --
Net (increase) decrease in loans (4,915,035) 265,336 (3,803,937)
Purchases of premises and equipment (155,966) (318,897) (45,330)
Proceeds from sale of real estate -- 350,000 --
------------ ------------- ------------
Net cash provided by (used in) investing activities $ (2,139,426) $ (13,772,240) $ 14,170,633
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing demand deposits $ 977,121 $ 188,872 $ 551,781
Net increase (decrease) in savings and interest bearing
demand deposits 3,336,332 (1,407,379) (5,980,659)
Net increase (decrease) in time deposits 1,356,000 (58,498) 5,994,395
Cash dividends (690,000) (570,000) (510,000)
------------ ------------- ------------
Net cash provided by (used in) financing activities $ 4,979,453 $ (1,847,005) $ 55,517
------------ ------------- ------------
Increase (decrease) in cash and cash equivalents $ 4,917,454 $ (13,895,801) $ 15,971,725
CASH AND CASH EQUIVALENTS
Beginning 8,200,511 22,096,312 6,124,587
------------ ------------- ------------
Ending $ 13,117,965 $ 8,200,511 $ 22,096,312
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 3,693,236 $ 3,643,439 $ 3,567,897
============ ============= ============
Income taxes $ 1,202,017 $ 806,431 $ 532,749
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 100,005 $ -- $ 108,000
============ ============= ============
Loans made on sale of real estate $ -- $ 291,000 $ --
============ ============= ============
Unrealized gain (loss) on securities available for sale $ 71,227 $ (61,818) $ 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, 1997 and 1996.
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.
-18-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
The Corporation considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These loansare
not subject to impairment under FASB 114. A loan is considered
impaired when it is probable that the Corporation will be unable to
collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected
future cash flows, financial condition of the borrower, and the
current economic conditions. A performing loan may be considered
impaired if the factors above indicate a need for impairment. A
loan on nonaccrual status may not be impaired if in the process of
collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less
than 5% of the required principal and interest payment generally
does not indicate an impairment situation, if in management's
judgment the loan will be paid in full. Loans that meet the
regulatory definitions of doubtful or loss generally qualify as an
impaired loan under FASB 114. Charge-offs for impaired loans occur
when the loan, or portion of the loan is determined to be
uncollectible, as is the case for all 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.
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 Per Share
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. The
Corporation had no potential common stock as of December 31, 1997
and 1996.
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.
-19-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
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 five 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."
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.
Advertising
The Corporation follows the policy of charging the costs of
advertising to expense as incurred.
Note 2. Securities
The amortized cost and fair value of securities being held to maturity
as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ---------- -----------
<S><C>
U.S. Treasury securities $12,045,427 $32,708 $ (1,570) $12,076,565
Obligations of U.S. Government agencies 11,994,779 32,472 -- 12,027,251
----------- ------- ---------- -----------
$24,040,206 $65,180 $ (1,570) $24,103,816
=========== ======= ========= ===========
</TABLE>
<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>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1997, by contractual maturity, are shown
below:
Amortized Fair
Cost Value
----------- ------------
Due in one year or less $ 9,995,556 $ 10,014,439
Due after one year through five years 14,044,650 14,089,377
----------- ------------
$24,040,206 $ 24,103,816
=========== ============
There were no sales of securities being held to maturity during 1997,
1996 and 1995.
Securities being held to maturity with a carrying value of $7,013,601
and $6,988,229 at December 31, 1997 and 1996, were pledged to secure
public funds and other balances as required by law.
-20-
<PAGE>
Note 2. Securities (Continued)
The amortized cost and fair value of securities available for sale as
of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ---------- -----------
<S><C>
U.S. Treasury securities $ 7,988,435 $25,941 $ (19,687) $ 7,994,689
Obligations of U.S. Government agencies 5,004,655 4,408 (1,250) 5,007,813
Federal Home Loan Bank stock 401,600 -- -- 401,600
----------- ------- ---------- -----------
$13,394,690 $30,349 $ (20,937) $13,404,102
=========== ======= ========== ===========
</TABLE>
<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>
The amortized cost and fair value of the securities available for sale
as of December 31, 1997, by contractual maturity, are shown below:
Amortized Fair
Cost Value
----------- ------------
Due in one year or less $ 2,989,060 $ 3,000,000
Due after one year through five years 10,004,030 10,002,502
Other 401,600 401,600
----------- ------------
$13,394,690 $ 13,404,102
=========== ============
There were no sales of securities available for sale during 1997, 1996
and 1995.
Securities available for sale with a carrying value of $1,988,991 and
$1,986,250 at December 31, 1997 and 1996, 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
-----------------------------
1997 1996
----------- -----------
<S><C>
Real estate loans:
Construction and land development $ 393,187 $ 759,619
Secured by farm land 1,717,930 1,501,527
Secured by 1-4 family residential 43,282,898 38,220,730
Other real estate loans 12,496,739 12,124,747
Loans to farmers (except those secured by
real estate) 269,682 229,022
Commercial and industrial loans (except those
secured by real estate) 2,045,122 1,857,219
Loans to individuals for personal expenditures 17,705,824 18,654,695
All other loans 301,580 177,781
----------- -----------
$78,212,962 $73,525,340
=========== ===========
</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, 1997 and 1996, these
loans totaled $674,248 and $265,715 respectively. During 1997, total
principal additions were $467,000 and total principal payments were
$58,467.
-21-
<PAGE>
Note 4. Reserve for Loan Losses
The following is a summary of transactions in the reserve for loan
losses for 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S><C>
Balance at beginning of year $1,138,747 $ 899,245 $ 988,524
Provision charged to operating expense 127,408 100,000 125,000
Recoveries added to the reserve 48,420 237,626 49,972
Loan losses charged to the reserve (175,828) (98,124) (264,251)
---------- ---------- ---------
Balance at end of year $1,138,747 $1,138,747 $ 899,245
========== ========== =========
</TABLE>
Information about impaired loans as of and for the years ended December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S><C>
Impaired loans for which a reserve has been provided $397,986 $407,422
Impaired loans for which no reserve has been provided -- --
-------- --------
Total impaired loans $397,986 $407,422
======== ========
Reserve provided for impaired loans, included in the
reserve for loan losses $198,993 $203,711
Average balance in impaired loans $399,178 $472,292
Interest income recognized $ 34,271 $ 36,125
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $285,150 at December 31, 1997 and 1996. If interest on
these loans had been accrued, such income would have approximated
$29,267 in 1997 and $28,494 in 1996.
Note 5. Premises and Equipment, Net
Premises and equipment consists of the following:
December 31
-----------------------------
1997 1996
---------- ----------
Premises $1,813,763 $1,811,852
Furniture and equipment 2,262,136 2,111,224
---------- ----------
$4,075,899 $3,923,076
Less accumulated depreciation 2,874,349 2,668,683
---------- ----------
$1,201,550 $1,254,393
========== ==========
Depreciation included in operating expense for 1997, 1996 and 1995, was
$208,809, $181,424 and $170,739, respectively.
Note 6. Deposits
The aggregate amount of time deposits with a balance of $100,000 or
more was $4,513,606 and $4,067,833 at December 31, 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of all time deposits are
as follows:
1998 $ 31,660,614
1999 5,863,472
2000 2,328,993
2001 893,472
2002 and thereafter 2,000
------------
$ 40,748,551
============
-22-
<PAGE>
Note 7. Defined Benefit Pension Plan
The amount charged to expense for the Corporation's pension plan
totaled $87,564, $97,032 and $93,508 for the years ended December 31,
1997, 1996 and 1995, respectively. The components of the pension cost
charged against expense for 1997, 1996 and 1995 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S><C>
Service cost $ 129,289 $ 133,596 $ 114,859
Interest cost on projected benefit obligation 220,359 200,942 182,585
Actual return on plan assets (241,937) (217,359) (183,789)
Net amortization and deferral (20,147) (20,147) (20,147)
--------- ---------- ---------
$ 87,564 $ 9,032 $ 93,508
========= ========== =========
</TABLE>
The following table sets forth the plan's funded status as of October
31, 1997 and 1996 and the amount recognized in the accompanying balance
sheets as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S><C>
Actuarial present value of benefit obligations:
Vested benefits $ 2,317,028 $ 1,921,000
=========== ===========
Accumulated benefits $ 2,396,376 $ 2,072,000
=========== ===========
Projected benefits $(3,339,744) $(2,866,017)
Plan assets at fair value 3,337,355 2,888,800
----------- -----------
Funded status $ (2,389) $ 22,783
Unrecognized net (gain) (372,224) (289,685)
Unrecognized net (asset) (157,547) (177,849)
Unrecognized prior service cost 1,490 1,645
----------- -----------
Liability on balance sheet $ (530,670) $ (443,106)
=========== ===========
</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 7.25% and 5.0% at October 31, 1997 and 7.75% and 6.0%
at October 31, 1996. The expected long-term rate of return on plan assets was
8.5% for both years.
Note 8. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S><C>
Deferred tax assets:
Reserve for loan losses $ 231,845 $ 231,845
Accrued pension expense 180,428 150,656
Securities available for sale -- 21,018
Accrued postretirement benefits 36,687 23,999
Nonaccrual interest 10,880 12,687
--------- ---------
$ 459,840 $ 440,205
--------- ---------
Deferred tax liabilities:
Premises $ 27,012 $ 25,932
Securities available for sale 3,199 --
Other -- 1,186
--------- ---------
$ 30,211 $ 27,118
--------- ---------
Net deferred tax assets $ 429,629 $ 413,087
========= =========
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1997, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ----------
<S><C>
Current tax expense $ 1,046,380 $ 918,688 $ 641,617
Deferred tax expense (benefit) (40,759) (88,111) 32,425
----------- ---------- ----------
$ 1,005,621 $ 830,577 $ 674,042
=========== ========== ==========
</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, 1997, 1996 and 1995 due to the following:
<TABLE>
<CAPTION> 1997 1996 1995
---------- ---------- ----------
<S><C>
Computed "expected" tax expense $ 927,291 $ 760,924 $ 632,118
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (3,353) (6,809) (11,544)
State income taxes, net of federal income tax benefit 79,092 74,544 51,461
Other 2,591 1,918 2,007
---------- ---------- ----------
$1,005,621 $ 830,577 $ 674,042
========== ========== ==========
</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 $2,041,947 in deposits in another
financial institution in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC) at December 31, 1997.
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, 1997, the aggregate
amount of unrestricted funds which could be transferred from the banking
subsidiary to the parent corporation, without prior regulatory approval, totaled
$2,569,884 or 16.8% of the consolidated net assets.
Note 11. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. 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, 1997 and 1996, is as
follows:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S><C>
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $ 8,538,048 $ 9,234,952
Standby letters of credit 144,639 145,777
</TABLE>
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, 1997.
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 five 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.
Net periodic postretirement benefit cost included the following
components for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- -------------------- ----------------------
Medical Life Medical Life Medical Life
--------- ---------- -------- --------- --------- --------
<S><C>
Service cost benefits attributable
to service during the year $ 3,071 $ 4,178 $ 2,237 $ 3,788 $ 1,641 $ 4,163
Interest on accumulated
postretirement benefit obligation 23,109 11,233 23,824 14,655 18,333 9,860
Amortization of transition
obligation 11,458 6,110 12,298 7,372 11,458 5,954
-------- --------- -------- -------- -------- --------
$ 37,638 $ 21,521 $ 38,359 $ 25,815 $ 31,432 $ 19,977
======== ========= ======== ======== ======== ========
</TABLE>
The following table sets forth the plan's funded status reconciled with
the obligation recognized in the accompanying balance sheets at December 31,
1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
<S><C> --------------------- ---------------------
Accumulated postretirement benefit obligation:
Retirees $ 230,102 $ 84,201 $ 213,057 $ 77,934
Other fully eligible participants 81,868 26,029 72,733 24,101
Other active participants -- 41,442 -- 34,196
--------- --------- --------- --------
$ 311,970 $ 151,672 $ 285,790 $136,231
Plan assets: ========= ========= ========= ========
Accumulated postretirement benefit obligation in
excess of plan assets $ 311,970 $ 151,672 $ 285,790 $136,231
Unrecognized transition obligation (194,787) (101,064) (206,245) (107,174)
Net amortization and deferral (9,755) 16,705 (10,114) 16,735
Accumulated premium payments for retirees (46,678) (20,159) (31,485) (13,152)
--------- --------- --------- --------
Obligation included on balance sheet $ 60,750 $ 47,154 $ 37,946 $ 32,640
========= ========= ========= ========
</TABLE>
For measurement purposes, a 10 percent annual rate of increase in per
capita health care costs of covered benefits was assumed for 1997 and 1996, with
such annual rate of increase gradually declining to 5 percent in 2012. If
assumed health care cost trend rates were increased by 1 percentage point in
each year, the accumulated postretirement benefit obligation at December 31,
1997 would be increased by $32,197 and the aggregate of the service and interest
cost components of net periodic postretirement benefit cost for the year ended
December 31, 1997 would be increased by $3,154.
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, 1997 and 1996, 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>
1997 1996
------------------------ ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- -------- --------
(in thousands) (in thousands)
<S><C>
Financial assets:
Cash $ 4,518 $ 4,518 $ 3,401 $ 3,401
Securities purchased under
agreements to resell 8,600 8,600 4,800 4,800
Securities 37,444 37,508 40,334 40,331
Loans 78,213 77,039 73,525 72,103
Less: reserve for loan losses (1,139) -- (1,139) --
-------- -------- -------- --------
Total financial assets $127,636 $127,665 $120,921 $120,635
======== ======== ======== ========
Financial liabilities:
Deposits $114,182 $114,069 $108,512 $108,479
======== ======== ======== ========
</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, 1997, that the Corporation meets all
capital adequacy requirements to which it is subject.
As of December 31, 1997, 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>
For Capital
Actual Adequacy Purposes
-------------- ---------------------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Amount in Thousands)
<S><C>
As of December 31, 1997:
Total capital (to risk-
weighted assets):
Consolidated $16,121 24.41% (greater than or equal to) $5,283 (greater than or equal to) 8.0%
Bank of Charles Town $16,074 24.35% (greater than or equal to) $5,281 (greater than or equal to) 8.0%
Tier 1 capital (to risk-
weighted assets):
Consolidated $15,292 23.15% (greater than or equal to) $2,642 (greater than or equal to) 4.0%
Bank of Charles Town $15,245 23.09% (greater than or equal to) $2,640 (greater than or equal to) 4.0%
Tier 1 capital (to
average assets):
Consolidated $15,292 11.83% (greater than or equal to) $5,169 (greater than or equal to) 4.0%
Bank of Charles Town $15,245 11.80% (greater than or equal to) $5,168 (greater than or equal to) 4.0%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------------------------
Amount Ratio
------ -----
<S><C>
As of December 31, 1997:
Total capital (to risk-
weighted assets):
Consolidated N/A
Bank of Charles Town (greater than or equal to) $6,601 (greater than or equal to) 10.0%
Tier 1 capital (to risk-
weighted assets):
Consolidated N/A
Bank of Charles Town (greater than or equal to) $3,961 (greater than or equal to) 6.0%
Tier 1 capital (to
average assets):
Consolidated N/A
Bank of Charles Town (greater than or equal to) $6,460 (greater than or equal to) 5.0%
</TABLE>
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
-------------- ---------------------------------
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% (greater than or equal to) $4,914 (greater than or equal to) 8.0%
Bank of Charles Town $14,959 24.37% (greater than or equal to) $4,911 (greater than or equal to) 8.0%
Tier 1 capital (to risk-
weighted assets):
Consolidated $14,260 23.21% (greater than or equal to) $2,457 (greater than or equal to) 4.0%
Bank of Charles Town $14,187 23.11% (greater than or equal to) $2,455 (greater than or equal to) 4.0%
Tier 1 capital (to
average assets):
Consolidated $14,260 11.43% (greater than or equal to) $4,989 (greater than or equal to) 4.0%
Bank of Charles Town $14,187 11.38% (greater than or equal to) $4,987 (greater than or equal to) 4.0%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------------------------
Amount Ratio
------ -----
<S><C>
As of December 31, 1996:
Total capital (to risk-
weighted assets):
Consolidated N/A
Bank of Charles Town (greater than or equal to) $6,139 (greater than or equal to) 10.0%
Tier 1 capital (to risk-
weighted assets):
Consolidated N/A
Bank of Charles Town (greater than or equal to) $3,683 (greater than or equal to) 6.0%
Tier 1 capital (to
average assets):
Consolidated N/A
Bank of Charles Town (greater than or equal to) $6,234 (greater than or equal to) 5.0%
</TABLE>
-27-
<PAGE>
Note 16. Parent Corporation Only Financial Statements
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS
1997 1996
------------ ------------
<S><C>
Cash $ 20,705 $ 34,221
Investment in subsidiary 15,250,816 14,146,483
Organization costs, net of accumulated amortization 19,447 31,729
Other assets 11,979 11,800
------------ -----------
Total Assets $ 15,302,947 $ 14,224,233
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Other liabilities $ 4,996 $ 4,996
------------ ------------
STOCKHOLDERS' EQUITY
Common stock $ 600,000 $ 600,000
Surplus 5,400,000 5,400,000
Undivided profits 9,291,741 8,260,037
Unrealized gain (loss) on securities available for sale, net 6,210 (40,800)
------------ ------------
Total Stockholders' Equity $ 15,297,951 $ 14,219,237
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,302,947 $ 14,224,233
============ ============
</TABLE>
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S><C> ---------- ----------- ----------
Income
Dividends from subsidiary $ 690,000 $ 570,000 $ 576,000
Expenses
Amortization $ 12,282 $ 12,282 $ 12,282
Transfer agent expense 7,592 7,563 21,553
Legal and professional 2,831 2,575 13,582
Other operating expenses 14,710 13,858 15,219
---------- ---------- ----------
Total Expenses $ 37,415 $ 36,278 $ 62,636
---------- ---------- ----------
Income before Taxes and Equity in
Undistributed Income of Subsidiary $ 652,585 $ 533,722 $ 513,364
Income Tax (Benefit) (11,797) (11,618) (21,296)
---------- ---------- ----------
Income before Equity in Undistributed
Income of Subsidiary $ 664,382 $ 545,340 $ 534,660
Equity in Undistributed Income of Subsidiary 1,057,322 862,094 650,468
---------- ---------- ----------
Net Income $1,721,704 $1,407,434 $1,185,128
========== ========== ==========
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,721,704 $ 1,407,434 $ 1,185,128
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (income) of
subsidiary (1,057,322) (862,094) (650,468)
Amortization 12,282 12,282 12,282
(Increase) decrease in other assets (180) 9,575 (19,187)
Increase in other liabilities -- 255 3,789
---------- ----------- -----------
Net cash provided by operating
activities $ 676,484 $ 567,452 $ 531,544
---------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends $ (690,000) $ (570,000) $ (510,000)
---------- ----------- ----------
Net cash (used in) financing activities $ (690,000) $ (570,000) $ (510,000)
---------- ----------- ----------
Increase (decrease) in cash and cash
equivalents $ (13,516) $ (2,548) $ 21,544
CASH AND CASH EQUIVALENTS
Beginning 34,221 36,769 15,225
---------- ---------- ----------
Ending $ 20,705 $ 34,221 $ 36,769
========== ========== ==========
</TABLE>
-29-
<PAGE>
TRUST AND FINANCIAL SERVICES
The year 1997 was a year of asset and income growth for your Trust and
Financial Services Department. Trust assets as of December 31, 1997, totaled
$83,172,000, an increase of $11,304,000 (15.73%) over December 31, 1996 footings
of $71,868,000. Trust fees in 1997 totaled $522,023, an increase of $61,970
(13.47%), compared to $460,053 in 1996.
Distributions from thirty one accounts totaled $5,020,700, including
$1,000,000 from four closed estates. Of the closed accounts, three represent
transfers to active estates which will later fund over $2,400,000 to perpetual
charitable trusts to be retained in the trust department. Three closings
represent transfers of $610,000 to new agencies and trusts via account
restructuring.
Eighteen new accounts, totaling $6,272,000 in assets, were comprised of
$2,537,000 in three estates, and $3,735,000 in trust and agency accounts. Fees
on new estate qualifications in 1997 exceeded estate settlement fees by $76,000,
and net new trust and agency fees increased by $4,500 per year. The Trust
Referral Plan produced a total of five new accounts having $2,600,000 in assets,
and $15,700 in fees.
The department continues to provide emphasis on personal trust service,
specifically addressing the investment and financial management needs of our
customers. An important element of our personal service includes "bill-paying"
responsibilities which incorporate cash flow management and insurance
coordination for our clients, particularly senior citizens.
The department's dedication to the delivery of community bank service,
and our response to the financial and estate planning needs of our clients, will
continue to be the foundation of our fiduciary service.
Robert L. Hersey
Vice President & Trust Officer
STATEMENT OF CONDITION
December 31, 1997
(unaudited)
<TABLE>
<S><C>
ASSETS
------
Discretionary assets:
Bank Deposits: Bank of Charles Town $ 142,000
Other Banks 80,000
United States Treasury and Agency Obligations 6,174,000
State, County, and Municipal Obligations 1,342,000
Short Term Interest Bearing Funds 7,802,000
Other Short Term Obligations 181,000
Notes and Bonds 5,053,000
Common and Preferred Stocks 34,621,000
Real Estate Mortgages 1,567,000
Real Estate 489,000
Miscellaneous Assets 9,000
Total Discretionary Assets $57,460,000
-----------
Non-Discretionary Assets $25,712,000
-----------
Total Assets $83,172,000
===========
ACCOUNTS
--------
Personal Trusts 172 $53,514,000
Estates and Other Court Accounts 34 6,309,000
Employee Benefit Accounts 24 4,310,000
Agencies and Other 76 19,039,000
--- ------------
Total Accounts 306 $83,172,000
=== ===========
</TABLE>
-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, Assistant Vice President & Auditor
BANK OF CHARLES TOWN
<TABLE>
<S><C>
Mortgage and Commercial Administration Maintenance Department
Loan Department
Charles W. LeMaster Paula M. Fraley
Thomas F. Chambers President Paul D. Staubs
Vice President E. Geraldine White
William R. Harner
H. William Easter, Jr. Sr. Vice President & Cashier Trust and Financial Services
Assistant Vice President
L. Gayle Marshall Johnson, CPA Robert L. Hersey
Cynthia A. Light Vice President & Financial Officer Vice President & Trust Officer
Assistant Cashier
Susan S. Myers, CPA Betty A. Braxton
Carolyn A. Galli Assistant Vice President & Auditor Trust Officer
Patricia A. Ott
Lisa O. Weiant Pamela W. Stevens, CPA David S. (Joe) Smith
Assistant Vice President & Trust Officer
Installment Loan Department Compliance Officer
Tina D. Carroll
Donna J. Burns Diane C. Allen Deanna D. Greenfield
Vice President Personnel Officer Rebecca J. Johnson
K. Renee Queen
Richard B. Breeden William H. Chesley, Jr. Deborah A. Watts
Assistant Vice President & Marketing Officer
Security Officer Certificates of Deposit
Shelly D. Dodson Department
Victoria B. Burns Tammy L. Miller
Janice B. Davis Judith A. Edwards
Kimberly K. DeSarno Bookkeeping Department
Timothy F. Hitrik Data Processing Department
Linda A. Stewart Clara K. Carroll
Assistant Cashier Kelly J. Bechdel
Teller Department Assistant Vice President &
Doris V. Loudan Data Processing Manager
Carolyn N. O'Brien Assistant Cashier & Head Bookkeeper
Assistant Cashier & Head Teller Amy L. Brill
Rebecca E. Black Roberta J. Burke
Jennifer A. Casale Nancy L. Harrison Richard M. Crea
Cathryn M. DeRonda Marcia S. Lerch
Bryan J. Dougherty Elizabeth W. Park Harpers Ferry Branch
Shirley G. Dutrow Deborah A. Ring
Cathy Jo Fraley Karen A. Staubs Wayne C. Welty
Melissa A. Harrison Peggy C. Turner Assistant Vice President &
Chastidy S. Kimble Tricia M. Viands Branch Manager
Christopher J. Lancaster
Cindy L. Magaha Kearneysville Branch Shelly L. Holmes
Holly S. Martin Assistant Cashier & Assistant
Kendra L. Nichols C. Kenneth Nicewarner, Jr. Branch Manager
Christina R. Peacher Assistant Vice President &
Consuelo L. Shanton Branch Manager Melissa D. Castle
Roxann L. Shives Margaret A. Courtney
Jeanette Staubs Nancy L. Baker Barbara J. Dupuy
Misty D. Staubs Assistant Cashier & Assistant Malissia A. Harder
Thea C. Turner Branch Manager Karen S. James
Linda L. Whittington Stacy L. Mumaw
Mary L. Bowers M. Jacqueline Propst
Courier Stephanie L. Digennaro-Dailey Charles W. Wyndham, Jr.
Carolyn A. Dunn
Benjamin T. Breeden Jennifer L. Hockensmith
Tammy E. Hough
Sonya A. Lilla
April D. Myers
Robert F. Spring 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,517,965
<INT-BEARING-DEPOSITS> 99,168,303
<FED-FUNDS-SOLD> 8,600,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,404,102
<INVESTMENTS-CARRYING> 24,040,206
<INVESTMENTS-MARKET> 24,103,816
<LOANS> 78,212,962
<ALLOWANCE> 1,138,747
<TOTAL-ASSETS> 130,556,528
<DEPOSITS> 114,181,922
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,076,655
<LONG-TERM> 0
0
0
<COMMON> 600,000
<OTHER-SE> 14,697,951
<TOTAL-LIABILITIES-AND-EQUITY> 130,556,528
<INTEREST-LOAN> 7,018,882
<INTEREST-INVEST> 2,344,806
<INTEREST-OTHER> 198,926
<INTEREST-TOTAL> 9,562,614
<INTEREST-DEPOSIT> 3,693,476
<INTEREST-EXPENSE> 3,709,695
<INTEREST-INCOME-NET> 5,852,919
<LOAN-LOSSES> 127,408
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,126,571
<INCOME-PRETAX> 2,727,325
<INCOME-PRE-EXTRAORDINARY> 1,721,704
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,721,704
<EPS-PRIMARY> 2.87
<EPS-DILUTED> 2.87
<YIELD-ACTUAL> 7.89
<LOANS-NON> 285
<LOANS-PAST> 19,923
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 40,169
<ALLOWANCE-OPEN> 1,138,747
<CHARGE-OFFS> 175,828
<RECOVERIES> 48,420
<ALLOWANCE-CLOSE> 1,138,747
<ALLOWANCE-DOMESTIC> 1,138,747
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
POTOMAC BANCSHARES, INC.
Charles Town, West Virginia
------------------------------------------------
NOTICE OF REGULAR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 28, 1998
------------------------------------------------
To the Shareholders:
The Regular Annual Meeting of Shareholders of Potomac Bancshares, Inc.
("Potomac"), will be held at Bavarian Inn and Lodge, Shepherdstown, West
Virginia, at 10:30 a.m. on April 28, 1998, for the purposes of considering and
voting upon proposals:
1. To elect a class of Directors for a term of three years.
2. To ratify the selection by the Board of Directors of Yount, Hyde &
Barbour, P.C., as independent Certified Public Accountants for the year 1998.
3. Any other business which may properly be brought before the meeting
or any adjournment thereof.
Only those shareholders of record at the close of business on March 20,
1998, shall be entitled to notice of the meeting and to vote at the meeting.
By Order of the Board of Directors
Charles W. LeMaster, President
PLEASE SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR
NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. IF YOU DO ATTEND THE MEETING, YOU
HAVE THE OPTION TO WITHDRAW YOUR PROXY.
March 27, 1998
<PAGE>
POTOMAC BANCSHARES, INC.
111 EAST WASHINGTON STREET
P.O. BOX 906
CHARLES TOWN, WEST VIRGINIA
(304) 725-8431
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS - APRIL 28, 1998
This statement is furnished in connection with the solicitation of
proxies for use at the Annual Meeting of Shareholders of Potomac Bancshares,
Inc. ("Potomac") to be held on April 28, 1998, at the time and for the purposes
set forth in the accompanying Notice of Regular Annual Meeting of Shareholders.
SOLICITATION OF PROXIES
The solicitation of proxies is made by management at the direction of
the Board of Directors of Potomac. These proxies enable shareholders to vote on
all matters which are scheduled to come before the meeting. If the enclosed
proxy is signed and returned, it will be voted as directed; or if not directed,
the proxy will be voted "FOR" all of the various proposals to be submitted to
the vote of shareholders described in the enclosed Notice of Regular Annual
Meeting and this Proxy Statement. A shareholder executing the proxy may revoke
it at any time before it is voted: (i) by notifying Potomac in person, (ii) by
giving written notice to Potomac of the revocation of the proxy, (iii) by
submitting to Potomac a subsequently-dated proxy, or (iv) by attending the
meeting and withdrawing the proxy before it is voted at the meeting.
The expenses of the solicitation of proxies will be paid by Potomac. In
addition to this solicitation by mail, officers and regular employees of Potomac
and Bank of Charles Town may, to a limited extent, solicit proxies personally or
by telephone or telegraph, although no person will be engaged specifically for
that purpose.
ELIGIBILITY OF STOCK FOR VOTING PURPOSES
Pursuant to the Bylaws of Potomac, the Board of Directors has fixed
March 20, 1998, as the record date for the purpose of determining the
shareholders entitled to notice of, and to vote at, the meeting or any
adjournment thereof, and only shareholders of record at the close of business on
that date are entitled to such notice and to vote at such meeting or any
adjournment thereof.
As of the record date for the Annual Meeting, 600,000 shares of the
capital stock of Potomac were issued and outstanding and entitled to vote. The
principal holders of Potomac Common Stock are discussed under the section of
this Proxy Statement entitled, "Principal Holders of Voting Securities". As of
the record date, Potomac had a total of approximately 860 shareholders.
<PAGE>
PURPOSES OF MEETING
1. ELECTION OF DIRECTORS
GENERAL
The Bylaws of Potomac currently provide for a classified Board of
Directors. There are three classes with each being elected for a three year
term. There are presently twelve Directors on the Board, four of whom are
nominees for election at the 1998 Annual Meeting. Of the four nominees, three
are non-employee Directors.
The Bylaws of Potomac provide that in the election of Directors of
Potomac each shareholder will have the right to vote the number of shares owned
by that shareholder for as many persons as there are Directors to be elected, or
to cumulate such shares and give one candidate as many votes as the number of
Directors multiplied by the number of shares owned shall equal, or to distribute
them on the same principle among as many candidates as the shareholder sees fit.
For all other purposes, each share is entitled to one vote. If any shares are
voted cumulatively for the election of Directors, the Proxies, unless otherwise
directed, shall have full discretion and authority to cumulate their votes and
vote for less than all such nominees.
The Bylaws of Potomac provide that nominations for election to the
Board of Directors, other than those made by or on behalf of the existing
management of Potomac, must be made by a shareholder in writing delivered or
mailed to the President not less than 14 days nor more than 50 days prior to the
meeting called for the election of Directors; provided, however, that if less
than 21 days' notice of the meeting is given to shareholders, the nominations
must be mailed or delivered to the President not later than the close of
business on the 7th day following the day on which the notice of meeting was
mailed. The notice of nomination must contain the following information, to the
extent known: (a) name and address of proposed nominee(s); (b) principal
occupation of nominee(s); (c) total shares to be voted for each nominee; (d)
name and address of notifying shareholder; and (e) number of shares owned by
notifying shareholder. Nominations not made in accordance with these
requirements may be disregarded by the Chairman of the meeting and in such case
the votes cast for each such nominee will likewise be disregarded.
The table set forth on pages 4 and 5 of this Proxy Statement contains
background information on each director nominee.
COMMITTEES OF THE BOARD
The Board of Directors of Potomac, as such, has no standing committees,
and the functions of Board committees have been carried out by the Board of
Directors as a whole or through committees of the Board of Directors of the
Bank. While there is no such requirement, the Board of Directors of the Bank and
Potomac are, and have at all times been, identical.
2
<PAGE>
The Bank has a standing Asset/Liability Management Committee, Audit
Committee, Building/Site Committee, Community Reinvestment Act/Fair Lending
Committee, Investment Committee, Salary and Personnel Committee, Steering
Committee, Trust Committee and Trust Investment Review Committee.
The Asset/Liability Management Committee consists of seven members:
Thomas F. Chambers, Thomas C.G. Coyle, William R. Harner, E. William Johnson,
Gayle Marshall Johnson, Charles W. LeMaster and Donald S. Smith. This Committee
is comprised of Board members and senior officers whose responsibilities are to
manage the balance sheet of the Bank to maximize and maintain the spread between
interest earned and interest paid while assuming acceptable business risks and
ensuring adequate liquidity. This Committee held no meetings during 1997.
The Audit Committee consists of five members: Guy Gary Chicchirichi,
Francis M. Frye, E. William Johnson, Minnie R. Mentzer and Donald S. Smith. The
purpose of the Audit Committee is to meet with the internal auditor to discuss
and review audit procedures and results. The auditing department consists of one
full-time employee with the responsibility to administer internal audit
procedures on a regular basis. During 1997, the Audit Committee held five
meetings.
The Building/Site Committee consists of eight members: John P. Burns,
Jr., Robert W. Butler, Thomas C.G. Coyle, Francis M. Frye, William R. Harner,
Charles W. LeMaster, John C. Skinner, Jr. and Donald S. Smith. The Building/Site
Committee is charged with making recommendations and decisions regarding proper
repair and maintenance of the Bank's real property. The Committee held four
meetings in 1997.
The Community Reinvestment Act (CRA)/Fair Lending Committee consists of
eight members: John P. Burns, Jr., Thomas F. Chambers, William H. Chesley, Jr.,
Guy Gary Chicchirichi, William R. Harner, E. William Johnson, Charles W.
LeMaster and Pamela W. Stevens. The CRA/Fair Lending Committee is responsible
for recommending to the Board of Directors policies that address fair lending
concerns and the requirements of the CRA. Fair lending concerns are directed at
preventing lending practices that discriminate either overtly or that have the
effect of discrimination. The Community Reinvestment Act requires that banks
meet the credit needs of their communities, including those of low and moderate
income borrowers. This Committee held no meetings in 1997.
The Investment Committee consists of seven members: John P. Burns, Jr.,
Guy Gary Chicchirichi, William R. Harner, E. William Johnson, Charles W.
LeMaster, Minnie R. Mentzer and Donald S. Smith. The Investment Committee
recommends investment policies to the Board and reviews investments as
necessary. On most occasions the entire Board acts as the Committee. The
Investment Committee held one meeting in 1997.
The Salary and Personnel Committee consists of seven members: Guy Gary
Chicchirichi, Thomas C.G. Coyle, Francis M. Frye, William R. Harner, Charles W.
LeMaster, Minnie R. Mentzer and Donald S. Smith. The Salary and Personnel
Committee's responsibilities include evaluating staff performance and
requirements, reviewing salaries, and making necessary recommendations to the
Board regarding these responsibilities. The Committee held three meetings in
1997. Neither of the executive officers who serve on this Committee makes
recommendations or participates in meetings relating to his own salary. See
"Salary and Personnel Committee Report on Executive Compensation."
3
<PAGE>
The Steering Committee consists of twelve members: John P. Burns, Jr.,
Robert W. Butler, Thomas F. Chambers, Francis M. Frye, William R. Harner, Robert
L. Hersey, Gayle Marshall Johnson, Charles W. LeMaster, Minnie R. Mentzer, James
E. Senseney, John C. Skinner, Jr. and Donald S. Smith. The Steering Committee
held no meetings in 1997. This Committee reviews and evaluates operating
procedures, interest rates charged on loans and interest rates being paid on
deposits.
The Trust Committee consists of six members: Robert W. Butler, Thomas
C.G. Coyle, Robert L. Hersey, Charles W. LeMaster, James E. Senseney and John C.
Skinner, Jr. The Trust Committee is responsible for the general supervision of
the fiduciary activities performed by the Trust and Financial Services Division
in order to ensure proper administration of all aspects of the Bank's fiduciary
business. It sets forth prudent policies and guidelines under which the
department can fulfill its fiduciary responsibilities in a timely and efficient
manner and meet state and federal regulatory requirements. The Committee makes
periodic reports to the Board of Directors and oversees the activities of the
Trust Investment Review Committee. The Trust Committee held sixteen regular
meetings in 1997.
The Trust Investment Review Committee, consisting of three trust
officers and one director (Robert L. Hersey, Betty A. Braxton, David S. Smith
and Robert W. Butler), meets regularly to review investments in trust accounts
and to determine that these investments remain within the guidelines of the
account. This Committee held eight meetings during 1997.
Neither Potomac nor the Bank has a nominating committee. Rather, the
Board of Directors of each selects nominees to fill vacancies on the Board.
The Board of Directors of Potomac met for four regular quarterly
meetings in 1997. The Board of Directors of the Bank holds regular weekly
meetings each Tuesday and special meetings from time to time as required. During
1997, the Bank Board held 52 regular meetings. During the year, each of the
Directors attended at least 75% of all meetings of the Boards of Potomac and the
Bank and all Committees of the Board of the Bank on which they served.
MANAGEMENT NOMINEES TO THE BOARD OF POTOMAC
The management nominees for the Board of Directors are:
<TABLE>
<CAPTION>
SERVED AS FAMILY
DIRECTOR RELATION- YEAR
OF SHIP WITH IN WHICH
POTOMAC OTHER TERM PRINCIPAL OCCUPATION OR
NOMINEES AGE SINCE NOMINEES EXPIRES EMPLOYMENT LAST FIVE YEARS
<S><C>
John P. Burns, Jr. 56 1994 None 2001 Owner/Operator of a beef &
grain farm in Jefferson
County, West Virginia;
President-Jefferson County
Fair Association; Director-
Valley Farm Credit
Charles W. LeMaster 56 1994 None 2001 Employed at Bank since 1983;
President & CEO since 1991;
former member of Jefferson
County Board of Education;
President and CEO of Potomac
since 1994.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SERVED AS FAMILY
DIRECTOR RELATION- YEAR
OF SHIP WITH IN WHICH
NOMINEES POTOMAC OTHER TERM PRINCIPAL OCCUPATION OR
(CONTINUED) AGE SINCE NOMINEES EXPIRES EMPLOYMENT LAST FIVE YEARS
<S><C>
Minnie R. Mentzer 81 1994 None 2001 Retired owner of Myers Coal
Company; President-Jefferson
County Youth Board; former
member of Citizens Advisory
Committee for Jefferson County,
West Virginia.
James E. Senseney 84 1994 None 2001 Retired from J.E. Senseney &
Sons, Inc. (Western Auto Franchisee),
Jefferson County, West Virginia.
</TABLE>
DIRECTORS CONTINUING TO SERVE UNEXPIRED TERMS
<TABLE>
<CAPTION>
SERVED AS FAMILY
DIRECTOR RELATION- YEAR
OF SHIP WITH IN WHICH
POTOMAC OTHER TERM PRINCIPAL OCCUPATION OR
DIRECTORS AGE SINCE NOMINEES EXPIRES EMPLOYMENT LAST FIVE YEARS
<S><C>
Robert W. Butler 74 1994 None 1999 Owner of Warm Spring Farm & Orchard,
Jefferson County, West Virginia;
retired from Stauffer Chemical Company.
Guy Gary Chicchirichi 56 1994 None 1999 Secretary/Treasurer-Guy's
Buick-Pontiac-Oldsmobile-GMC Truck,
Inc., Jefferson County, West Virginia;
charter member of Charles Town Rotary
Club.
Thomas C.G. Coyle 69 1994 None 1999 Retired owner/operator of Riddleberger's
Store, Jefferson County, West Virginia;
Trustee and active Elder-Charles Town
Presbyterian Church; Director-Edge Hill
Cemetery.
Francis M. Frye 71 1994 None 1999 Retired owner/operator of Ranson Real
Estate Company, Jefferson County, West
Virginia.
William R. Harner 57 1994 None 2000 Employed at Bank since 1967; Sr. Vice
President & Cashier since 1988; Sr. Vice
President and Secretary of Potomac since
1994.
E. William Johnson 53 1994 None 2000 Chair-Division of Business and Social
Sciences and Professor-Shepherd College, Jefferson
County, West Virginia; Director-Jefferson
Memorial Hospital.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
SERVED AS FAMILY
DIRECTOR RELATION- YEAR
OF SHIP WITH IN WHICH
DIRECTORS POTOMAC OTHER TERM PRINCIPAL OCCUPATION OR
(CONTINUED) AGE SINCE NOMINEES EXPIRES EMPLOYMENT LAST FIVE YEARS
<S><C>
John C. Skinner, Jr. 56 1994 None 2000 Attorney, owner of Nichols &
Skinner, L.C., Jefferson County,
West Virginia; Bank attorney
since 1986; Potomac attorney since
1994.
Donald S. Smith 69 1994 None 2000 Employed at Bank 1947 to 1991;
President 1978 to 1991 (retired);
Vice President and Assistant
Secretary of Potomac since 1994.
</TABLE>
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following shareholder beneficially owns more than 5% of Potomac
Common Stock as of February 24, 1998:
NAME OF AMOUNT AND NATURE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
Virginia F. Burns
Rt 2 Box 132
Charles Town WV 25414-9632 44,480 shares; Direct 7.4133
OWNERSHIP OF SECURITIES BY NOMINEES, DIRECTORS AND OFFICERS
The following table shows the amount of Potomac's outstanding Common
Stock beneficially owned by nominees, directors and principal officers of
Potomac individually and as a group. The information is furnished as of February
24, 1998, on which date 600,000 shares were outstanding.
AMOUNT AND NATURE OF
NOMINEES BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
John P. Burns, Jr. 100 shares (1,3)* .0167
Rt 1 Box 296 1,495 shares (2,4)* .2492
Charles Town WV 25414-9769 12 shares (5)* .0020
Charles W. LeMaster 3,805 shares (1,3)* .6342
PO Box 207 1,000 shares (2,4)* .1667
Shepherdstown WV 25443-0207
Minnie R. Mentzer 4,326 shares (1,3)* .7210
PO Box 84
Harpers Ferry WV 25425-0084
James E. Senseney 8,000 shares (1,3)* 1.3333
117 Eastland Drive 1,720 shares (2,4)* .2867
Charles Town WV 25414-9718 96 shares (5)* .0160
6
<PAGE>
DIRECTORS (NON-NOMINEES) AMOUNT AND NATURE OF
(CONTINUED) BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
Robert W. Butler 2,300 shares (1,3)* .3833
635 S Samuel Street 96 shares (2,4)* .0160
Charles Town WV 25414-1141 1,416 shares (5)* .2360
Guy Gary Chicchirichi 1,550 shares (1,3)* .2583
Rt 1 Box 38
Charles Town WV 25414-9704
Thomas C.G. Coyle 784 shares (1,3)* .1307
Rt 3 Box 252 1,641 shares (5)* .2735
Kearneysville WV 25430-9439
Francis M. Frye 2,611 shares (1,3)* .4352
400 Forrest Avenue 262 shares (5)* .0437
Charles Town WV 25414-1408
William R. Harner 50 shares (1,3)* .0083
141 Tuscawilla Hills 1,350 shares (2,4)* .2250
Charles Town WV 25414-3535
E. William Johnson 325 shares (1,3)* .0542
869 Deer Mountain Estates 50 shares (2,4)* .0083
Harpers Ferry WV 25425
John C. Skinner, Jr. 936 shares (1,3)* .1560
PO Box 133 1,946 shares (2,4)* .3243
Charles Town WV 25414-0133 1,014 shares (5)* .1690
Donald S. Smith 2,400 shares (1,3)* .4000
PO Box 264 3,500 shares (5)* .5833
Charles Town WV 25414-0264
AMOUNT AND NATURE OF
OFFICERS (NON-NOMINEES) BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
Gayle Marshall Johnson 408 shares (1,3)* .0680
PO Box 1028 100 shares (2,4)* .0167
Charles Town WV 25414-7028
7
<PAGE>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
All nominees, Directors & 27,595 shares (1,3)* 4.5992
principal officers as a group 7,757 shares (2,4)* 1.2928
(13 persons) 7,941 shares (5)* 1.3235
------------- ------
43,293 shares 7.2155
Total ============= ======
- --------------------------------------------------------------------------------
* 1 indicates sole voting power, 2 indicates shared voting power, 3 indicates
sole investment power, 4 indicates shared investment power, 5 indicates
indirect ownership by spouse or minor child.
EXECUTIVE COMPENSATION
Potomac's officers did not receive compensation as such during 1997.
The following table sets forth the annual and long-term compensation for
services in all capacities to the Bank for the fiscal years ended December 31,
1997, 1996 and 1995 of the chief executive officer. No officer had total annual
salary and bonus exceeding $100,000. Neither Potomac nor the Bank has any stock
option plans, employee stock ownership plans or other employee benefit plans
except for the pension plan described in this Proxy Statement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------- ------------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDER- OTHER
COMPEN- STOCK LYING LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
- ------------------------------------------------------------------------------------------------------------------
<S><C>
Charles W. LeMaster 1997 79,822 N/A 0 N/A N/A N/A 0
President and CEO
1996 76,366 N/A 0 N/A N/A N/A 0
1995 73,701 N/A 0 N/A N/A N/A 0
</TABLE>
8
<PAGE>
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 30
---------------------------------------------------------------------
<S><C>
$10,000 $ 760 $ 1,520 $ 2,280 $ 3,040 $ 3,800 $ 3,800
15,000 1,260 2,520 3,780 5,040 6,300 6,300
20,000 1,760 3,520 5,280 7,040 8,800 8,800
25,000 2,260 4,520 6,780 9,040 11,300 11,300
30,000 2,760 5,520 8,280 11,040 13,800 13,800
40,000 3,760 7,520 11,280 15,040 18,800 18,800
50,000 4,760 9,520 14,280 19,040 23,800 23,800
60,000 5,760 11,520 17,280 23,040 28,800 28,800
70,000 6,760 13,520 20,280 27,040 33,800 33,800
80,000 7,760 15,520 23,280 31,040 38,800 38,800
</TABLE>
The Bank's retirement plan is The West Virginia Bankers' Association
Retirement Plan for Employees of Member Banks. This is a defined benefit plan
under which benefits are determined based on an employee's average annual
compensation for any five consecutive full calendar years of service which
produce the highest average. An employee is any person (but not including a
person acting only as a director) who is regularly employed on a full-time
basis. An employee becomes eligible to participate in the plan upon completion
of at least one year of service and attainment of age 21.
Normal retirement is at age 65 with the accrued monthly benefit
determined on actual date of retirement. An employee may take early retirement
from age 60 and the accrued monthly benefit as of the normal retirement date is
actuarially reduced. There is no reduction if an employee is 62 years of age and
has 30 years service.
Compensation covered by the pension plan is based upon total pay.
Effective for plan years beginning after December 31, 1993, the Internal Revenue
Code (the Code) prohibits compensation in excess of $150,000 (as indexed) to be
taken into account in determining one's pension benefit.
As of December 31, 1997, the current credited years of service and
projected estimated annual benefit under the pension plan (assuming that he
continues employment, the plan is not terminated or amended, current
compensation increases under the plan's assumptions and that the maximum
compensation allowed under the Code does not exceed $150,000) for the following
officer is:
NAME CURRENT SERVICE PROJECTED ANNUAL PENSION
Charles W. LeMaster 22 years $31,752
9
<PAGE>
SALARY AND PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Salary and Personnel Committee is comprised of seven members: Guy
Gary Chicchirichi, Thomas C.G. Coyle, Francis M. Frye, William R. Harner,
Charles W. LeMaster, Minnie R. Mentzer and Donald S. Smith. The Salary and
Personnel Committee reviews and recommends to the board changes to the
compensation levels of all executive officers of the Bank. The Committee seeks
to attract and retain highly capable and well-qualified executives and to
compensate executives at levels commensurate with their amount of service to the
Bank. The Committee met once to review and approve the Bank's 1997 compensation
levels. The Bank's Chief Executive Officer and the Senior Vice President review
each executive officer's compensation and make recommendations to the Committee.
The Committee reviews these recommendations and independently evaluates each
executive's job performance and contribution to the Bank. The Committee also
considers the inflation rate and the compensation levels of executive officers
holding similar positions with the Bank's competitors. For instance, the
Committee compares the compensation levels of its executive officers with the
levels, when known, of such institutions as Bank One, F&M Blakeley, Jefferson
Security Bank, Blue Ridge Bank and One Valley Bank of Martinsburg. Compensation
levels for executives of the Bank are competitive when compared to these
institutions.
Compensation for the Chief Executive Officer and the Senior Vice
President is determined in essentially the same way as for other executives.
Although the Chief Executive Officer's compensation is not tied to any
performance goals of the Bank, the Committee does consider the Bank's
profitability for the prior fiscal years. Charles W. LeMaster serves on the
Committee and is the Bank's Chief Executive Officer; however, he does not make
any recommendations relating to his salary and is not present at Committee
meetings when his compensation is being discussed.
The Senior Vice President's compensation also is not tied to any
performance goals of the Bank. William R. Harner serves on the Committee and is
Senior Vice President of the Bank; however, he does not make any recommendations
relating to his salary and is not present at Committee meetings when his
compensation is being discussed.
Neither Potomac nor Bank of Charles Town currently has any employment
agreements with any employees.
The Internal Revenue Code disallows deductions of compensation
exceeding $1,000,000 for certain executive compensation. The Committee has not
adopted a policy in this regard because none of the Bank's executives received
compensation approaching the $1,000,000 level.
This report should not be deemed incorporated by reference by any
general statement incorporating by reference this Proxy Statement into any
filing under the Securities Act of 1933 or the Securities Exchange Act of 1934,
except to the extent that Potomac specifically incorporates this report by
reference, and shall not otherwise be filed under such Acts. This report is
submitted by:
Guy Gary Chicchirichi
Thomas C.G. Coyle
Francis M. Frye
William R. Harner
Charles W. LeMaster
Minnie R. Mentzer
Donald S. Smith
10
<PAGE>
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in Potomac's
(and prior to Potomac's formation, the Bank's) cumulative total shareholder
return on Common Stock for the five-year period ending December 31, 1997, with
the cumulative total return of the Media General Index (SIC Code Index 6712 -
Bank Holding Companies). Shareholders may obtain a copy of the index by calling
Media General Financial Services, Inc. at telephone number (800) 446-7922. There
is no assurance that Potomac's stock performance will continue in the future
with the same or similar trends as depicted in the graph.
The information used to determine Potomac's cumulative total
shareholder return on its Common Stock is based upon information furnished to
Potomac or the Bank by one or more parties involved in purchases or sales of
Potomac's (and prior to its formation, the Bank's) Common Stock. NO ATTEMPT WAS
MADE BY POTOMAC OR THE BANK TO VERIFY OR DETERMINE THE ACCURACY OF THE
REPRESENTATIONS MADE TO POTOMAC OR THE BANK.
The graph shall not be deemed incorporated by reference by any general
statement incorporating by reference this Proxy Statement into any filing under
the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent that Potomac specifically incorporates this graph by reference, and shall
not otherwise be filed under such Acts.
[Graph Appears Here -- Plot Points Below]
COMPARISON OF CUMULATIVE TOTAL RETURN
OF COMPANY, INDUSTRY INDEX AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
---------------------------------------------------------
COMPANY 1992 1993 1994 1995 1996 1997
<S><C>
POTOMAC BANCSHARES, INC. 100 104.03 134.89 140.35 135.42 160.52
INDUSTRY INDEX 100 134.67 146.57 218.03 315.12 440.49
BROAD MARKET 100 114.79 113.84 147.60 178.25 231.46
</TABLE>
11
<PAGE>
COMPENSATION OF DIRECTORS
Directors of Potomac were not compensated as such during 1997.
Directors of the Bank are compensated at the rate of $150 for each regular board
meeting attended. They are additionally compensated $85 for each committee
meeting attended. Directors who are operating officers of the Bank are not
compensated for Committee meetings attended.
CERTAIN TRANSACTIONS WITH DIRECTORS, OFFICERS AND THEIR ASSOCIATES
Potomac and the Bank have had, and expect to have in the future,
transactions in the ordinary course of business with Directors, officers,
principal shareholders and their associates. All of these transactions remain on
substantially the same terms, including interest rates, collateral and repayment
terms on the extension of credit, as those prevailing at the same time for
comparable transactions with unaffiliated persons, and in the opinion of
management of Potomac and the Bank, did not involve more than the normal risk of
collectibility or present other unfavorable features.
Nichols and Skinner, L.C., a law firm in which Director John C.
Skinner, Jr. is a shareholder, performed legal services for the Bank and Potomac
in 1997 and will perform similar services in 1998. On the basis of information
provided by Mr. Skinner, it is believed that less than five percent of the gross
revenues of this law firm in 1997 resulted from payment for legal services by
Potomac and the Bank. In the opinion of Potomac and the Bank, the transactions
with Nichols and Skinner, L.C., were on terms as favorable to Potomac and the
Bank as they would have been with third parties not otherwise affiliated with
Potomac or the Bank.
2. RATIFICATION OF SELECTION OF AUDITORS
The Board of Directors has selected the firm of Yount, Hyde & Barbour,
P.C. to serve as independent auditors for Potomac for the calendar year 1998.
Although the selection of auditors does not require shareholder ratification,
the Board of Directors has directed that the appointment of Yount, Hyde &
Barbour, P.C. be submitted to the shareholders for ratification. If the
shareholders do not ratify the appointment of Yount, Hyde & Barbour, P.C., the
Board will consider the appointment of other auditors. Potomac is advised that
no member of this accounting firm has any direct or indirect material interest
in Potomac, or any of its subsidiaries.
A representative of Yount, Hyde & Barbour, P.C., will be present at the
Annual Meeting to respond to appropriate questions and to make a statement if he
so desires. The enclosed proxy will be voted "FOR" the ratification of the
selection of Yount, Hyde & Barbour, P.C., unless otherwise directed. The
affirmative vote of a majority of the shares of Potomac's Common Stock
represented at the Annual Meeting of Shareholders is required to ratify the
appointment of Yount, Hyde & Barbour, P.C.
FORM 10-KSB ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION
Upon written request by any shareholder 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, a copy of
Potomac's 1997 Annual Report on Form 10-KSB will be provided without charge.
12
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Potomac's
Directors and executive officers, and persons who own more than ten percent of a
registered class of Potomac's equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of Potomac. Officers,
Directors and shareholders owning more than ten percent are required by SEC
regulation to furnish Potomac with copies of all Section 16(a) forms which they
file.
To Potomac's knowledge, based solely upon review of the copies of such
reports furnished to Potomac and written representations that no other reports
were required, during the two fiscal years ended December 31, 1997, all Section
16(a) filing requirements applicable to its officers, Directors and persons
owning more than ten percent were complied with.
OTHER INFORMATION
If any of the nominees for election as Directors should be unable to
serve as Directors by reason of death or other unexpected occurrence, a proxy
will be voted for a substitute nominee or nominees designated by the Board of
Potomac unless the Board of Directors adopts a resolution pursuant to the Bylaws
reducing the number of Directors.
The Board of Directors is unaware of any other matters to be considered
at the meeting but, if any other matters properly come before the meeting,
persons named in the proxy will vote such proxy in accordance with their
judgment on such matters.
SHAREHOLDER PROPOSAL FOR 1999
Any shareholder who wishes to have a proposal placed before the next
Annual Meeting of Shareholders must submit the proposal to William R. Harner,
Senior Vice President and Secretary of Potomac, at its executive offices, no
later than November 27, 1998, to have it considered for inclusion in the proxy
statement of the Annual Meeting in 1999.
Charles W. LeMaster
President
Charles Town, West Virginia
March 27, 1998
13
<PAGE>
POTOMAC BANCSHARES, INC.
111 EAST WASHINGTON STREET, PO BOX 906, CHARLES TOWN WV 25414-0906
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
APRIL 28, 1998
KNOW ALL PERSONS BY THESE PRESENTS, That the undersigned shareholder(s)
of Potomac Bancshares, Inc. ("Potomac"), Charles Town, West Virginia, does (do)
hereby nominate, constitute and appoint Donald S. Smith and James E. Senseney,
or any one of them, with full power to act alone as my (our) true and lawful
attorney(s) with full power of substitution for me (us) in my (our) name, place
and stead to vote all the Common Stock of Potomac, standing in my (our) name on
its books at the close of business on March 20, 1998, at the Annual Meeting of
Shareholders of Potomac Bancshares, Inc., called for and to be held at the
Bavarian Inn and Lodge, Shepherdstown, West Virginia, on April 28, 1998, at
10:30 a.m., and at any and all adjournments of said meeting, with all the powers
the undersigned would possess if personally present, as follows:
1. ELECTION OF DIRECTORS. For the election of the four persons
listed below for a three year term:
John P. Burns, Jr. Minnie R. Mentzer
Charles W. LeMaster James E. Senseney
[ ] FOR ALL OF THE ABOVE LISTED NOMINEES
[ ] DO NOT VOTE FOR ANY OF THE ABOVE LISTED NOMINEES
[ ] FOR ALL OF THE NOMINEES LISTED ABOVE EXCEPT THOSE FOR
WHOM I CHOOSE TO WITHHOLD TO VOTE FOR AS LISTED
BELOW:
_______________________________________
2. A proposal to ratify the appointment by the Board of Directors
of Yount, Hyde & Barbour, P.C., as independent Certified
Public Accountants for the year 1998.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Any other business which may be brought before the meeting or
any adjournment thereof.
Unless otherwise specified on this Proxy, the shares represented by
this Proxy will be voted "FOR" the propositions listed above and described more
fully in the Proxy Statement of Potomac Bancshares, Inc., distributed in
connection with this Annual Meeting. If any shares are voted cumulatively for
the election of Directors, the Proxies, unless otherwise directed, shall have
full discretion and authority to cumulate their votes and vote for less than all
such nominees. If any other business is presented at said meeting, this Proxy
shall be voted in accordance with recommendations of management.
The Board of Directors recommends a vote "FOR" the listed propositions.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND MAY BE
REVOKED PRIOR TO ITS EXERCISE.
Dated: _________________________________
_________________________________
_________________________________
(Signature(s) of Shareholder(s))
When signing as attorney, executor, administrator, trustee or guardian, please
give full title. If more than one trustee, all should sign. All joint owners
must sign.
