1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XX Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
___ 1934
For quarterly period ended September 30, 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)
<TABLE>
<CAPTION>
(Unaudited)
September 30 December 31
1998 1997
------ --------
<S><C>
Assets:
Cash and due from banks $ 4 372 $ 4 518
Securities (fair value: September 30, 1998, $45,141;
December 31, 1997, $37,508) (Note 2) 44 742 37 444
Securities purchased under agreements to resell
and federal funds sold 13 860 8 600
Loans (Note 3) 79 278 78 213
Less reserve for loan losses (Note 4) (1 153) (1 139)
--------- --------
Net loans 78 125 77 074
Bank premises and equipment, net 1 236 1 202
Accrued interest receivable 1 115 1 009
Other assets 599 710
--------- --------
Total Assets $ 144 049 $130 557
========= ========
Liabilities and Stockholders' Equity:
Liabilities:
Non-interest bearing deposits $ 15 116 $ 15 014
Interest bearing deposits 111 488 99 168
--------- --------
Total Deposits 126 604 114 182
Accrued interest payable 350 343
Other liabilities 819 734
--------- --------
Total Liabilities $ 127 773 $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 158 6
Undivided profits 10 118 9 292
--------- --------
Total Stockholders' Equity 16 276 15 298
--------- --------
Total Liabilities and Stockholders' Equity $ 144 049 $130 557
========= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
3
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(000 omitted except for per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
----------------------- ----------------------
1998 1997 1998 1997
------- ------ ------ ------
<S><C>
Interest Income:
Interest and fees on loans $ 1 760 $ 1 788 $ 5 268 $ 5 246
Interest on investment securities
Taxable 448 418 1 337 1 230
Interest and dividends on securities available for sale
Taxable 217 162 576 532
Dividends 7 7 20 19
Interest on securities purchased under agreements
to resell and federal funds sold 131 43 321 102
------- ------- ------- -------
Total Interest Income $ 2 563 $ 2 418 $ 7 522 $ 7 129
Interest Expense:
Interest on deposits $ 1 149 $ 929 $ 3 269 $ 2 703
Interest on federal funds purchased -- 11 -- 16
------- ------- ------- -------
Total Interest Expense $ 1 149 $ 940 $ 3 269 $ 2 719
------- ------- ------- -------
Net Interest Income $ 1 414 $ 1 478 $ 4 253 $ 4 410
Provision for Loan Losses 50 50 125 125
------- ------- ------- -------
Net Interest Income after
Provision for Loan Losses $ 1 364 $ 1 428 $ 4 128 $ 4 285
------- ------- ------- -------
Other Income:
Commissions and fees from fiduciary activities $ 132 $ 121 $ 418 $ 384
Service charges on deposit accounts 93 97 284 298
Fees for other customer services 39 38 121 125
Other operating income 8 10 23 34
------- ------- ------- -------
Total Other Income $ 272 $ 266 $ 846 $ 841
------- ------- ------- -------
Other Expenses:
Salaries and employee benefits $ 656 $ 618 $ 1 941 $ 1 820
Net occupancy expense of premises 47 55 140 146
Furniture and equipment expenses 98 94 264 261
Deposit insurance 3 4 10 10
Other operating expenses 291 255 824 796
------- ------- ------- -------
Total Other Expenses $ 1 095 $ 1 026 $ 3 179 $ 3 033
------- ------- ------- -------
Income before Income Tax Expense $ 541 $ 668 $ 1 795 $ 2 093
Income Tax Expense 204 247 669 767
------- ------- ------- -------
Net Income $ 337 $ 421 $ 1 126 $ 1 326
======= ======= ======= =======
Earnings Per Share, basic and diluted $ .56 $ .70 $ 1.88 $ 2.21
======= ======= ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(000 Omitted)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other
Common Capital Comprehensive Undivided Comprehensive
Stock Surplus Income Profits Income Total
------ ------- ------------- -------- -------------- --------
<S><C>
Balances, January 1, 1998 $ 600 $ 5 400 $ 9 292 $ 6 $ 15 298
Comprehensive income
Net income -- -- $1 126 1 126 -- 1 126
Other comprehensive income,
net of tax
Change in unrealized
gain (loss) on
securities -- -- 152 -- 152 152
------
Comprehensive income $1 278
======
Cash dividends -- -- (300) -- (300)
------ -------- --------- ------- ---------
Balances, September 30, 1998 $ 600 $ 5 400 $ 10 118 $ 158 $ 16 276
====== ======== ========= ======= =========
Balances, January 1, 1997 $ 600 $ 5 400 $ 8 260 $ (41) $ 14 219
Comprehensive income
Net income -- -- $1 326 1 326 -- 1 326
Other comprehensive income,
net of tax
Change in unrealized
gain (loss) on
securities -- -- 34 -- 34 34
------
Comprehensive income $1 360
======
Cash dividends -- -- (270) -- (270)
------ -------- --------- ------- ---------
Balances, September 30, 1997 $ 600 $ 5 400 $ 9 316 $ (7) $ 15 309
====== ======== ========= ======= =========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
5
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------
September 30 September 30
1998 1997
------------ ------------
<S><C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1 126 $ 1 326
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 125 125
Depreciation 153 157
Amortization 9 9
Discount accretion and premium amortization on
securities, net 10 27
Loss on sale of real estate 10 --
(Increase) in accrued interest receivable (107) (4)
(Increase) in other assets (79) (68)
Increase in accrued interest payable 7 6
Increase (decrease) in other liabilities 88 (75)
-------- -------
Net cash provided by operating activities $ 1 342 $ 1 503
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ 8 000 $ 4 000
Proceeds from maturity of securities available for sale 1 000 6 000
Purchase of investment securities (11 014) (6 049)
Purchase of securities available for sale (5 065) (2 014)
Net (increase) in loans (1 230) (5 245)
Purchases of bank premises and equipment (188) (100)
Proceeds from sale of real estate 147 --
-------- -------
Net cash (used in) investing activities $ (8 350) $(3 408)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts $ 10 766 $ 3 579
Net increase in certificates of deposit 1 656 1 889
Cash dividends (300) (270)
-------- -------
Net cash provided by financing activities $ 12 122 $ 5 198
-------- -------
Increase in cash and cash equivalents $ 5 114 $ 3 293
CASH AND CASH EQUIVALENTS
Beginning 13 118 8 201
-------- -------
Ending $ 18 232 $11 494
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 3 261 $ 2 713
======== =======
Income taxes $ 679 $ 933
======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 55 $ --
======== =======
Unrealized gain (loss) on securities available for sale $ 229 $ 51
======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
6
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 September 30,
1998, and December 31, 1997, the results of operations for the three
months ended September 30, 1998 and 1997, and the results of operations
and cash flows for the nine months ended September 30, 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 nine month periods ended September 30, 1998 and 1997, are not
necessarily indicative of the results to be expected for the full year.
2. Securities held to maturity as of September 30, 1998 and December 31, 1997
are summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
September 30, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ------------ -------
<S><C>
Securities held to maturity:
U.S. Treasury securities $ 8 028 $ 120 $ -- $ 8 148
Obligations of U.S. Government
agencies 19 009 279 -- 19 288
--------- ------ ---- --------
$ 27 037 $ 399 $ -- $ 27 436
========= ====== ==== ========
<CAPTION>
(000 Omitted)
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ------------ -------
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 September 30, 1998 and December 31,
1997 are summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
September 30, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ------------ -------
<S><C>
Securities available for sale:
U.S. Treasury securities $ 6 997 $ 60 $ -- $ 7 057
Obligations of U.S. Government
agencies 10 019 179 -- 10 198
Federal Home Loan Bank stock 450 -- -- 450
--------- ------ ---- --------
$ 17 466 $ 239 $ -- $ 17 705
========= ====== ==== ========
<CAPTION>
(000 Omitted)
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ------------ -------
Securities held to maturity:
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:
<TABLE>
<CAPTION>
(000 Omitted)
September 30 December 31
1998 1997
------------ ------------
<S><C>
Real estate loans:
Construction and land development $ 669 $ 393
Secured by farmland 1 527 1 718
Secured by 1-4 family residential 43 671 43 283
Other real estate loans 12 557 12 497
Loans to farmers (except those secured by real estate) 400 270
Commercial and industrial loans (except those secured
by real estate) 2 125 2 045
Loans to individuals for personal expenditures 17 973 17 706
All other loans 356 301
-------- --------
Total loans $ 79 278 $ 78 213
======== ========
</TABLE>
4. The following is a summary of transactions in the reserve for loan losses:
<TABLE>
<CAPTION>
(000 Omitted)
September 30 December 31
1998 1997
------------ ------------
<S><C>
Balance at beginning of period $ 1 139 $ 1 139
Provision charged to operating expense 125 128
Recoveries added to the reserve 38 48
Loan losses charged to the reserve (149) (176)
-------- -------
Balance at end of period $ 1 153 $ 1 139
======== =======
</TABLE>
<PAGE>
8
Information about impaired loans as of September 30, 1998 and December 31,
1997 is as follows:
<TABLE>
<CAPTION>
(000 Omitted)
September 30 December 31
1998 1997
------------ ------------
<S><C>
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 $ 25 $ 34
======= =======
</TABLE>
Nonaccrual loans excluded from impaired loan disclosures under FASB 114 amounted
to $-0- at September 30, 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
nine 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 September 30, 1998, total assets increased
$13,492,000. The September 30 annualized return on average assets is 1.09%
compared to 1.36% at December 31. At September 30 the annualized return on
average equity is 9.51% compared to 11.58% at December 31. The leverage capital
(equity to assets) ratio is 11.30% at September 30 compared to 11.83% at
December 31.
The majority of the increase in assets is due to an increase in the securities
portfolio. The increase in assets is offset on the liability side by increases
in deposits.
<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 the procedures that allow for problem loans
and potentially problem loans to be highlighted and watched. Based on
experience, the loan policies and the current monitoring program, management
believes the loan loss reserve is adequate.
(000 Omitted)
September 30, 1998
------------------
Balance at beginning of period $ 1 139
Charge-offs:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 149
-----------
Total charge-offs 149
-----------
Recoveries:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 38
-----------
Total recoveries 38
-----------
Net charge-offs 111
Additions charged to operations 125
-----------
Balance at end of period $ 1 153
===========
Ratio of net charge-offs during the period to average
loans outstanding during the period .1410%
======
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.
<TABLE>
<CAPTION>
(000 Omitted)
September 30, 1998
------------------
<S><C>
Nonaccrual loans $ --
Restructured loans --
Foreclosed properties --
-----------
Total nonperforming assets $ --
===========
Loans past due 90 days accruing interest $ 323
===========
Reserve for loan losses to period end loans 1.45%
=====
Nonperforming assets to period end loans and foreclosed properties --
==
</TABLE>
There were no loans on nonaccrual status at September 30, 1998.
At September 30, 1998, other potential problem loans totalled $106,135. 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 $12,422,000 as of September 30, 1998 compared with
December 31, 1997. The Select Checking balances have increased from $11,000,000
at December 31, 1997 to $26,000,000 at September 30, 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. When comparing balances of other deposits as of
September 30 to December 31, 1997, money market accounts have decreased
$2,100,000, certificates of deposit have increased $1,600,000, NOW accounts
(other than Select Checking) have decreased $900,000, savings accounts have
decreased $1,000,000 and non-interest bearing deposits remain basically
unchanged.
The comparison of the income statements for the nine months ended September 30,
1998 and 1997 shows a decrease of 15% in net income in 1998. Net interest income
decreased 4%, interest income increased 6%, and interest expense increased 20%.
The majority of the increase in interest income at September 30, 1998 compared
with September 30, 1997, is due to increased balances in the securities
portfolio and securities purchased under agreements to resell. The increase in
interest expense as of September 30, 1998 compared with September 30, 1997, is
due to the increase in deposits overall of which a significant portion went to
Select Checking as well as 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 9% and the other categories of income
decreased. Noninterest expense increased almost 5%. Salaries and employee
benefits increased 7% due to increases in salaries and wages and group insurance
expenses. Other noninterest expense categories remained basically unchanged.
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 financing activities were used to fund investing
activities. Financing activities provided funds through an increase in total
deposits. Cash and cash equivalents increased during this period, and liquidity
of the Corporation is more than adequate to meet present and future financial
obligations.
<PAGE>
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which the Registrant or its
subsidiary, directors or officers is a party or by which they, or any of them,
are threatened. All legal proceedings presently pending or threatened against
Potomac Bancshares, Inc. and its subsidiary involve routine litigation
incidental to the business of the Company or the subsidiary and are either not
material in respect to the amount in controversy or fully covered by insurance.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
Not applicable
4. Instruments defining the rights of security holders, including
indentures.
Not applicable
10. Material contracts.
Not applicable
11. Statement re: computation of per share earnings. Not applicable
15. Letter on unaudited interim financial information.
Not applicable
18. Letter on change in accounting principles.
Not applicable
19. Reports furnished to security holders. Not applicable
22. Published report regarding matters submitted to vote of security
holders.
Not applicable
23. Consent of experts and counsel. Not applicable
24. Power of attorney. Not applicable
27. Financial Data Schedule.
99. Additional exhibits.
Not applicable
(b) Reports on Form 8-K:
NONE
<PAGE>
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES, INC.
Date November 12, 1998 /s/ Charles W. LeMaster
_________________________ ____________________________________
Charles W. LeMaster, President & CEO
Date November 12, 1998 /s/ L. Gayle Marshall Johnson
_________________________ ____________________________________
L. Gayle Marshall Johnson, Vice
President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000925173
<NAME> POTOMAC BANCSHARES
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1,000
<CASH> 4,372
<INT-BEARING-DEPOSITS> 49
<FED-FUNDS-SOLD> 13,860
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,705
<INVESTMENTS-CARRYING> 27,037
<INVESTMENTS-MARKET> 27,436
<LOANS> 79,278
<ALLOWANCE> 1,153
<TOTAL-ASSETS> 144,049
<DEPOSITS> 126,604
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,169
<LONG-TERM> 0
0
0
<COMMON> 600
<OTHER-SE> 15,676
<TOTAL-LIABILITIES-AND-EQUITY> 144,049
<INTEREST-LOAN> 5,268
<INTEREST-INVEST> 1,933
<INTEREST-OTHER> 321
<INTEREST-TOTAL> 7,522
<INTEREST-DEPOSIT> 3,269
<INTEREST-EXPENSE> 3,269
<INTEREST-INCOME-NET> 4,253
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,179
<INCOME-PRETAX> 1,795
<INCOME-PRE-EXTRAORDINARY> 1,126
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.88
<YIELD-ACTUAL> 7.68
<LOANS-NON> 0
<LOANS-PAST> 323
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 106
<ALLOWANCE-OPEN> 1,139
<CHARGE-OFFS> 149
<RECOVERIES> 38
<ALLOWANCE-CLOSE> 1,153
<ALLOWANCE-DOMESTIC> 1,153
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
