1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XX Quarterly report under Section 13 or 15(d) of the Securities Exchange
- ---- Act of 1934
For quarterly period ended March 31, 1998
----------------
Transition report under Section 13 or 15(d) of the Exchange Act
- ----
For the transition period from to
----------------- -----------------
Commission file number 0-24958
Potomac Bancshares, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
West Virginia 55-0732247
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
111 East Washington Street, Charles Town WV 25414-1071
(Address of Principal Executive Offices) (Zip Code)
304-725-8431
(Issuer's Telephone Number, Including Area Code)
NO CHANGE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XXX No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court.
Yes No Not applicable
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
600,000 shares
- ----------------
Transitional Small Business Disclosure Format (check one):
Yes No XXX
----- -----
<PAGE>
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POTOMAC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
(Unaudited)
March 31 December 31
1998 1997
---------- -----------
Assets:
Cash and due from banks $ 3,836 $ 4,518
Securities (fair value: March 31, 1998,
$41,506; December 31, 1997, $37,508)
(Note 2) 41,457 37,444
Securities purchased under agreements to resell 11,100 8,600
Loans (Note 3) 78,190 78,213
Less reserve for loan losses (Note 4) (1,067) (1,139)
-------- --------
Net loans 77,123 77,074
Bank premises and equipment, net 1,201 1,202
Accrued interest receivable 1,080 1,009
Other assets 757 710
-------- --------
Total Assets $136,554 $130,557
======== ========
Liabilities and Stockholders' Equity:
Liabilities:
Non-interest bearing deposits $ 14,180 $ 15,014
Interest bearing deposits 105,329 99,168
-------- --------
Total Deposits 119,509 114,182
Accrued interest payable 341 343
Other liabilities 968 734
-------- --------
Total Liabilities $120,818 $115,259
-------- --------
Stockholders' Equity:
Common stock par value $1.00 per share
(5,000,000 shares authorized, 600,000 shares
issued and outstanding) $ 600 $ 600
Surplus 5,400 5,400
Accumulated other comprehensive income 9 6
Undivided profits 9,727 9,292
-------- --------
Total Stockholders' Equity 15,736 15,298
-------- --------
Total Liabilities and Stockholders' Equity $136,554 $130,557
======== ========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
3
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(000 omitted except for per share data)
(Unaudited)
For the Three Months
Ended March 31
--------------------
1998 1997
--------- ---------
Interest Income:
Interest and fees on loans $1,768 $1,715
Interest on investment securities
Taxable 400 396
Interest and dividends on securities
available for sale
Taxable 186 184
Dividends 6 6
Interest on securities purchased
under agreements to resell 99 43
------ ------
Total Interest Income $2,459 $2,344
Interest Expense:
Interest on deposits $1,028 $ 881
Interest on federal funds purchased -- --
------ ------
Total Interest Expense $1,028 $ 881
------ ------
Net Interest Income $1,431 $1,463
Provision for Loan Losses -- --
------ ------
Net Interest Income after
Provision for Loan Losses $1,431 $1,463
------ ------
Other Income:
Commissions and fees from fiduciary
activities $ 143 $ 122
Service charges on deposit accounts 93 101
Fees for other customer services 37 41
Other operating income 8 16
------ ------
Total Other Income $ 281 $ 280
------ ------
Other Expenses:
Salaries and employee benefits $ 650 $ 597
Net occupancy expense of premises 45 47
Furniture and equipment expenses 84 86
Deposit insurance 4 3
Other operating expenses 236 270
------ ------
Total Other Expenses $1,019 $1,003
------ ------
Income before Income Tax Expense $ 693 $ 740
Income Tax Expense 258 273
------ ------
Net Income $ 435 $ 467
====== ======
Earnings Per Share, basic and diluted $ .73 $ .78
====== ======
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(000 Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities
Common Capital Comprehensive Undivided Available for
Stock Surplus Income Profits Sale, Net Total
------ ------- ------------- --------- -------------- -------
<S><C>
Balances, January 1, 1998 $600 $5,400 $9,292 $ 6 $15,298
Comprehensive income
Net income -- -- $ 435 435 -- 435
Other comprehensive
income, net of tax
Unrealized gain
(loss) on
securities -- -- 3 -- 3 3
-------
Comprehensive Income $ 438
=======
---- ------ ------ ------ -------
Balances, March 31, 1998 $600 $5,400 $9,727 $ 9 $15,736
==== ====== ====== ====== =======
Balances, January 1, 1997 $600 $5,400 $8,260 $ (41) $14,219
Comprehensive income
Net income -- -- $ 467 467 -- 467
Other comprehensive
income, net of tax
Unrealized gain
(loss) on
securities -- -- (27) -- (27) (27)
-------
Comprehensive Income $ 440
=======
---- ------ ------ ------ -------
Balances, March 31, 1997 $600 $5,400 $8,727 $ (68) $14,659
==== ====== ====== ====== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
5
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
--------------------------
March 31 March 31
1998 1997
--------- --------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 435 $ 467
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses -- --
Depreciation 46 48
Amortization 3 3
Discount accretion and premium
amortization on securities, net 1 8
Loss on sale of real estate -- --
(Increase) in accrued interest
receivable (71) (14)
(Increase) in other assets (50) (7)
Increase (decrease) in accrued interest
payable (2) 2
Increase in other liabilities 232 208
------- -------
Net cash provided by operating
activities $ 594 $ 715
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ 1,000 $ 4,000
Proceeds from maturity of securities available
for sale 1,000 --
Purchase of investment securities (6,009) (6,049)
Purchase of securities available for sale -- (15)
Net (increase) in loans (49) (1,183)
Purchases of bank premises and equipment (45) (6)
Proceeds from sale of real estate -- --
------- -------
Net cash (used in) investing
activities $(4,103) $(3,253)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand deposits, NOW
accounts and savings accounts $ 4,062 $ (500)
Net increase in certificates of deposit 1,265 1,264
------- -------
Net cash provided by financing
activities $ 5,327 $ 764
------- -------
Increase (decrease) in cash and cash
equivalents $ 1,818 $(1,774)
CASH AND CASH EQUIVALENTS
Beginning 13,118 8,201
------- -------
Ending $14,936 $ 6,427
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 1,030 $ 879
======= =======
Income taxes $ 7 $ --
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Unrealized gain (loss) on securities
available for sale $ 5 $ (41)
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
6
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
1. In the opinion of management, the accompanying financial statements
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of March 31, 1998,
and December 31, 1997, and the results of operations and cash flows for
the three months ended March 31, 1998 and 1997. The statements should be
read in conjunction with Notes to Consolidated Financial Statements
included in the Potomac Bancshares, Inc. annual report for the year ended
December 31, 1997. The results of operations for the three month periods
ended March 31, 1998 and 1997, are not necessarily indicative of the
results to be expected for the full year.
2. Securities held to maturity as of March 31, 1998 and December 31, 1997 are
summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
March 31, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S><C>
Securities held to maturity:
U.S. Treasury securities $11,041 $29 $ (1) $11,069
Obligations of U.S.
Government agencies 18,004 35 (14) 18,025
------- --- ---- -------
$29,045 $64 $(15) $29,094
======= === ==== =======
(000 Omitted)
December 31, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S><C>
Securities held to maturity:
U.S. Treasury securities $12,045 $33 $ (1) $12,077
Obligations of U.S.
Government agencies 11,995 32 -- 12,027
------- --- ---- -------
$24,040 $65 $ (1) $24,104
======= === ==== =======
</TABLE>
<PAGE>
7
Securities available for sale as of March 31, 1998 and December 31, 1997
are summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
March 31, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S><C>
Securities available for sale:
U.S. Treasury securities $ 6,992 $21 $(15) $ 6,998
Obligations of U.S.
Government agencies 5,004 8 -- 5,012
Federal Home Loan Bank stock 402 -- -- 402
------- --- ---- -------
$12,398 $29 $(15) $12,412
======= === ==== =======
(000 Omitted)
December 31, 1997
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
<S><C>
Securities available for sale:
U.S. Treasury securities $ 7,988 $26 $(20) $ 7,994
Obligations of U.S.
Government agencies 5,005 4 (1) 5,008
Federal Home Loan Bank stock 402 -- -- 402
------- --- ---- -------
$13,395 $30 $(21) $13,404
======= === ==== =======
</TABLE>
3. The consolidated loan portfolio, stated at face amount, is composed of the
following:
(000 Omitted)
March 31 December 31
1998 1997
-------- -----------
Real estate loans:
Construction and land development $ 232 $ 393
Secured by farmland 1,413 1,718
Secured by 1-4 family residential 44,063 43,283
Other real estate loans 12,795 12,497
Loans to farmers (except those secured
by real estate) 250 270
Commercial and industrial loans (except those
secured by real estate) 2,187 2,045
Loans to individuals for personal expenditures 16,979 17,706
All other loans 271 301
------- -------
Total loans $78,190 $78,213
======= =======
4. The following is a summary of transactions in the reserve for loan
losses:
(000 Omitted)
March 31 December 31
1998 1997
-------- -----------
Balance at beginning of period $1,139 $1,139
Provision charged to operating expense -- 128
Recoveries added to the reserve 7 48
Loan losses charged to the reserve (79) (176)
------ ------
Balance at end of period $1,067 $1,139
====== ======
<PAGE>
8
Information about impaired loans as of March 31, 1998 and December 31, 1997 is
as follows:
(000 Omitted)
March 31 December 31
1998 1997
-------- -----------
Impaired loans for which a reserve has been
provided $398 $398
Impaired loans for which no reserve has been
provided -- --
---- ----
Total impaired loans $398 $398
==== ====
Reserve provided for impaired loans, included
in the reserve for loan losses $199 $199
Average balance in impaired loans $398 $399
Interest income recognized $ 8 $ 34
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $-0- at March 31, 1998 and $285,150 at December 31, 1997. If interest on
these loans had been accrued, such income would have been $-0- for the first
three months of 1998 and $29,267 in 1997.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Between December 31, 1997 and March 31, 1998, total assets increased $5,997,000.
The March 31 annualized return on average assets is 1.30% compared to 1.36% at
December 31. At March 31 the annualized return on average equity is 11.21%
compared to 11.58% at December 31. The leverage capital (equity to assets) ratio
is 11.52% at March 31 compared to 11.83% at December 31.
The increase in assets is a combination of an increase in the securities
portfolio and an increase in securities purchased under agreements to resell.
The asset increases are offset on the liability side by increases in deposits.
Floating rate loans make up 44% of the loan portfolio at March 31, 1998.
<PAGE>
9
The table shown below is an analysis of the Corporation's reserve for loan
losses. Net charge-offs for the Corporation have been very low when compared
with the size of the total loan portfolio. Management monitors the loan
portfolio on a quarterly basis with procedures that allow for problem loans and
potentially problem loans to be highlighted and watched. Based on experience,
the loan policies and the current monitoring program, management believes the
loan loss reserve is adequate.
(000 Omitted)
March 31, 1998
--------------
Balance at beginning of period $1,139
Charge-offs:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 79
------
Total charge-offs 79
------
Recoveries:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 7
------
Total recoveries 7
------
Net charge-offs 72
Additions charged to operations --
------
Balance at end of period $1,067
======
Ratio of net charge-offs during
the period to average loans
outstanding during the period .0921%
=====
Loans are placed on nonaccrual status when a loan is specifically determined to
be impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Following
is a table showing the risk elements in the loan portfolio.
(000 Omitted)
March 31, 1998
--------------
Nonaccrual loans $ --
Restructured loans --
Foreclosed properties 100
----
Total nonperforming assets $100
====
Loans past due 90 days accruing interest $ 62
====
Reserve for loan losses to period end loans 1.36%
Nonperforming assets to period end loans and
foreclosed properties .13%
There were no loans on nonaccrual status at March 31, 1998.
At March 31, 1998, other potential problem loans totalled $31,815. Loans are
viewed as potential problem loans according to the ability of such borrowers to
comply with current repayment terms. These loans are subject to constant
management attention, and their status is reviewed on a regular basis.
Management has allocated a portion of the reserve for these loans according to
the review of the potential loss in each loan situation.
<PAGE>
10
Total deposits have increased $5,327,000 as of March 31, 1998 compared with
December 31, 1997. The Select Checking balances have increased from $11,000,000
at December 31, 1997 to $17,000,000 at March 31, 1998. Select Checking is the
NOW account started in August 1997 that pays a higher rate of interest on
balances of $5,000 or more. Money market accounts have decreased slightly over
$1,000,000 and certificates of deposits have increased slightly over $1,000,000
as of March 31 compared with December 31. Non-interest bearing deposits have
decreased approximately $1,000,000 at March 31 compared with December 31. NOW
accounts (other than Select Checking) and savings accounts remain basically
unchanged when comparing March 31 to December 31.
The comparison of the income statements for the three months ended March 31,
1998 and 1997 shows a decrease of 7% in net income in 1998. Net interest income
decreased 2% with increases in interest income and in interest expense.
Interest income increased 5% as of March 31, 1998 compared with March 31, 1997.
This is due to increased balances in the loan portfolio and securities purchased
under agreements to resell. Interest expense has increased 17% as of March 31,
1998 compared with March 31, 1997. This increase is due to the increase in
deposits overall of which a good portion went to Select Checking and the
movement of funds into Select Checking from existing deposit accounts paying a
lower interest rate.
Noninterest income remained about the same in 1998 as in 1997, although income
from fiduciary activities increased 17% and the other categories of income
decreased. Noninterest expenses increased almost 2%. Salaries and employee
benefits increased 9% due to increases in salaries and wages and group insurance
expenses. There were decreases in the other noninterest expense categories.
Liquid assets of the Corporation include cash and due from banks, securities
purchased under agreements to resell, securities available for sale, and loans
and investments maturing within one year. The Corporation's statement of cash
flows details this liquidity. Net income after certain adjustments for noncash
transactions provided cash from operating activities. Funds from maturity of
investment securities and existing cash were used to fund investing activities.
Financing activities were funded through an increase in total deposits. Cash and
cash equivalents have increased during this period insuring liquidity of the
Corporation is more than adequate to meet present and future financial
obligations.
<PAGE>
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which the Registrant or its
subsidiary, directors or officers is a party or by which they, or any of them,
are threatened. All legal proceedings presently pending or threatened against
Potomac Bancshares, Inc. and its subsidiary involve routine litigation
incidental to the business of the Company or the subsidiary and are either not
material in respect to the amount in controversy or fully covered by insurance.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
Not applicable
4. Instruments defining the rights of security holders, including
indentures.
Not applicable
10. Material contracts.
Not applicable
11. Statement re: computation of per share earnings. Not
applicable
15. Letter on unaudited interim financial information.
Not applicable
18. Letter on change in accounting principles.
Not applicable
19. Reports furnished to security holders. Not applicable
22. Published report regarding matters submitted to vote of security
holders.
Not applicable
23. Consent of experts and counsel. Not applicable
24. Power of attorney.
Not applicable
27. Financial Data Schedule.
99. Additional exhibits.
Not applicable
(b) Reports on Form 8-K:
NONE
<PAGE>
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES, INC.
Date May 12, 1998 /s/ Charles W. LeMaster
___________________ ____________________________________
Charles W. LeMaster, President & CEO
Date May 12, 1998 /s/ L. Gayle Marshall Johnson
___________________ ____________________________________
L. Gayle Marshall Johnson, Vice
President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,836
<INT-BEARING-DEPOSITS> 82
<FED-FUNDS-SOLD> 11,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,412
<INVESTMENTS-CARRYING> 29,045
<INVESTMENTS-MARKET> 29,094
<LOANS> 78,190
<ALLOWANCE> 1,067
<TOTAL-ASSETS> 136,554
<DEPOSITS> 119,509
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,309
<LONG-TERM> 0
0
0
<COMMON> 600
<OTHER-SE> 15,136
<TOTAL-LIABILITIES-AND-EQUITY> 136,554
<INTEREST-LOAN> 1,768
<INTEREST-INVEST> 592
<INTEREST-OTHER> 99
<INTEREST-TOTAL> 2,459
<INTEREST-DEPOSIT> 1,028
<INTEREST-EXPENSE> 1,028
<INTEREST-INCOME-NET> 1,431
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,019
<INCOME-PRETAX> 693
<INCOME-PRE-EXTRAORDINARY> 435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 435
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
<YIELD-ACTUAL> 7.781
<LOANS-NON> 0
<LOANS-PAST> 62
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 32
<ALLOWANCE-OPEN> 1,139
<CHARGE-OFFS> 79
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 1,067
<ALLOWANCE-DOMESTIC> 1,067
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
