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 June 30, 1999
--------------------------
- ----- 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)
June 30 December 31
1999 1998
---------------- ---------------
Assets:
<S> <C> <C>
Cash and due from banks $ 5 643 $ 4 646
Securities (fair value: June 30, 1999, $50,071;
December 31, 1998, $50,530) 50 045 50 208
Securities purchased under agreements to resell
and federal funds sold 10 821 13 483
Loans 79 527 77 807
Less reserve for loan losses (1 202) (1 140)
---------------- ------------
Net loans 78 325 76 667
Bank premises and equipment, net 1 422 1 224
Accrued interest receivable 1 161 1 168
Other assets 850 708
--------------- ------------
Total Assets $ 148 267 $ 148 104
=============== ============
Liabilities and Stockholders' Equity:
Liabilities:
Non-interest bearing deposits $ 16 536 $ 17 422
Interest bearing deposits 113 989 113 244
--------------- ------------
Total Deposits 130 525 130 666
Accrued interest payable 326 350
Other liabilities 967 892
--------------- ------------
Total Liabilities $ 131 818 $ 131 908
--------------- ------------
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 (134) 105
Undivided profits 10 583 10 091
--------------- ------------
Total Stockholders' Equity 16 449 16 196
--------------- ------------
Total Liabilities and Stockholders' Equity $ 148 267 $ 148 104
=============== ============
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 For the Six Months
Ended June 30 Ended June 30
---------------------------- --------------------------
1999 1998 1999 1998
------------ ---------- ----------- ------------
Interest Income:
Interest and fees on loans $ 1 682 $ 1 740 $ 3 332 $ 3 508
Interest on investment securities
Taxable 363 489 727 889
Interest and dividends on securities available for sale
Taxable 335 173 659 359
Dividends 8 7 15 13
Interest on securities purchased under agreements
to resell and federal funds sold 130 91 250 190
---------- ---------- ---------- ----------
Total Interest Income $ 2 518 $ 2 500 $ 4 983 $ 4 959
Interest Expense:
Interest on deposits $ 1 058 $ 1 092 $ 2 132 $ 2 120
Interest on federal funds purchased -- -- -- --
---------- ---------- ---------- ----------
Total Interest Expense $ 1 058 $ 1 092 $ 2 132 $ 2 120
---------- ---------- ---------- ----------
Net Interest Income $ 1 460 $ 1 408 $ 2 851 $ 2 839
Provision for Loan Losses 75 75 75 75
---------- ---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses $ 1 385 $ 1 333 $ 2 776 $ 2 764
---------- ---------- ---------- ----------
Other Income:
Commissions and fees from fiduciary activities $ 132 $ 143 $ 325 $ 286
Service charges on deposit accounts 85 98 169 191
Fees for other customer services 50 45 89 82
Other operating income 16 7 76 15
---------- ---------- ---------- ----------
Total Other Income $ 283 $ 293 $ 659 $ 574
---------- ---------- ---------- ----------
Other Expenses:
Salaries and employee benefits $ 610 $ 635 $ 1 244 $ 1 285
Net occupancy expense of premises 48 48 96 93
Furniture and equipment expenses 106 82 208 166
Other operating expenses 337 300 643 540
---------- ---------- ---------- ----------
Total Other Expenses $ 1 101 $ 1 065 $ 2 191 $ 2 084
---------- ---------- ---------- ----------
Income before Income Tax Expense $ 567 $ 561 $ 1 244 $ 1 254
Income Tax Expense 203 207 452 465
---------- ---------- ---------- ----------
Net Income $ 364 $ 354 $ 792 $ 789
========== ========== ========== ==========
Earnings Per Share, basic and diluted $ .61 $ .59 $ 1.32 $ 1.32
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(000 Omitted)
(Unaudited)
Accumulated
Other
Common Capital Comprehensive Undivided Comprehensive
Stock Surplus Income Profits Income Total
--------- -------- -------------- ---------- -------------- ----------
Balances, January 1, 1999 $ 600 $ 5 400 $ 10 091 $ 105 $ 16 196
Comprehensive income
Net income -- -- $ 792 792 -- 792
Other comprehensive income,
net of tax
Change in unrealized
gain (loss) on
securities -- -- (239) -- (239) (239)
---------
Comprehensive income $ 553
=========
Cash dividends -- -- (300) -- (300)
--------- --------- --------- -------- ---------
Balances, June 30, 1999 $ 600 $ 5 400 $ 10 583 $ (134) $ 16 449
========= ========= ========= ========
Balances, January 1, 1998 $ 600 $ 5 400 $ 9 292 $ 6 $ 15 298
Comprehensive income
Net income -- -- $ 789 789 -- 789
Other comprehensive income,
net of tax
Change in unrealized
gain (loss) on
securities -- -- 19 -- 19 19
--------
Comprehensive income $ 808
========
Cash dividends -- -- (300) -- (300)
--------- --------- --------- -------- ---------
Balances, June 30, 1998 $ 600 $ 5 400 $ 9 781 $ 25 $ 15 806
========= ========= ========= ======== =========
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
5
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
For the Six Months Ended
------------------------
June 30 June 30
1999 1998
-------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 792 $ 789
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 75 75
Depreciation 126 93
Amortization 6 6
Discount accretion and premium amortization on
securities, net 21 6
(Gain) on sale of real estate (59) --
(Increase) decrease in accrued interest receivable 7 (151)
(Increase) in other assets (25) (45)
Increase (decrease) in accrued interest payable (24) 16
Increase in other liabilities 75 98
----------- ----------
Net cash provided by operating activities $ 994 $ 887
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ -- $ 2 000
Proceeds from maturity of securities available for sale 3 000 1 000
Purchase of investment securities -- (11 015)
Purchase of securities available for sale (3 221) (48)
Net (increase) in loans (1 885) (950)
Purchases of bank premises and equipment (324) (101)
Proceeds from sale of real estate 211 55
----------- ----------
Net cash (used in) investing activities $ (2 219) $ (9 059)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts and
savings accounts $ 175 $ 5 990
Net increase (decrease) in certificates of deposit (315) 1 552
Cash dividends (300) (300)
----------- ----------
Net cash provided by (used in) financing activities $ (440) $ 7 242
----------- ----------
(Decrease) in cash and cash equivalents $ (1 665) $ (930)
CASH AND CASH EQUIVALENTS
Beginning 18 129 13 118
----------- ----------
Ending $ 16 464 $ 12 188
=========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2 156 $ 2 105
=========== ==========
Income taxes $ 499 $ 435
=========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 168 $ 55
=========== ==========
Loans made on sale of real estate $ 249 $ --
=========== ==========
Unrealized gain (loss) on securities available for sale $ (363) $ 28
=========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
6
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
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 June 30, 1999, and December 31,
1998, the results of operations for the three months ended June 30, 1999
and 1998, and the results of operations and cash flows for the six months
ended June 30, 1999 and 1998. 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, 1998. The
results of operations for the six month periods ended June 30, 1999 and
1998, are not necessarily indicative of the results to be expected for the
full year.
2. Securities held to maturity as of June 30, 1999 and December 31, 1998 are
summarized below:
<TABLE>
<CAPTION>
(000 Omitted)
June 30, 1999
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- ---------- ---------- ------------
Securities held to maturity:
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 8 006 $ 29 $ -- $ 8 035
Obligations of U.S. Government
agencies 17 007 26 (29) 17 004
-------------- ---------- ---------- ------------
$ 25 013 $ 55 $ (29) $ 25 039
============== ========== ========== ============
(000 Omitted)
December 31, 1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- ---------- ---------- ------------
Securities held to maturity:
U.S. Treasury securities $ 17 009 $ 229 $ -- $ 17 238
Obligations of U.S. Government
agencies 8 021 92 -- 8 113
-------------- ---------- ---------- ------------
$ 25 030 $ 321 $ -- $ 25 351
============== ========== ========== ============
<PAGE>
7
Securities available for sale as of June 30, 1999 and December 31, 1998
are summarized below:
(000 Omitted)
June 30, 1999
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- ------------ ------------ ------------
Securities available for sale:
U.S. Treasury securities $ 2 000 $ 13 $ -- $ 2 013
Obligations of U.S. Government
agencies 22 786 20 (237) 22 569
Federal Home Loan Bank stock 450 -- -- 450
-------------- ------------ ------------ ------------
$ 25 236 $ 33 $ (237) $ 25 032
============== ============ ============ ============
(000 Omitted)
December 31, 1998
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
-------------- ------------ ------------ ------------
Securities held to maturity:
U.S. Treasury securities $ 5 000 $ 43 $ -- $ 5 043
Obligations of U.S. Government
agencies 19 570 140 (24) 19 686
Federal Home Loan Bank stock 450 -- -- 450
-------------- ------------ ------------ ------------
$ 25 020 $ 183 $ (24) $ 25 179
============== ============ ============ ============
3. The consolidated loan portfolio, stated at face amount, is composed of the following:
(000 Omitted)
---------------------------------
June 30 December 31
1999 1998
----------- -----------
Real estate loans:
Construction and land development $ 148 $ 652
Secured by farmland 2 727 1 394
Secured by 1-4 family residential 44 513 42 541
Other real estate loans 12 051 12 624
Loans to farmers (except those secured by real estate) 512 246
Commercial and industrial loans (except those secured
by real estate) 2 010 2 188
Loans to individuals for personal expenditures 17 247 17 738
All other loans 319 424
----------- -----------
Total loans $ 79 527 $ 77 807
=========== ===========
4. The following is a summary of transactions in the reserve for loan losses:
(000 Omitted)
------------------------------------
June 30 December 31
1999 1998
----------- -----------
Balance at beginning of period $ 1 140 $ 1 139
Provision charged to operating expense 75 125
Recoveries added to the reserve 14 43
Loan losses charged to the reserve (27) (167)
----------- -----------
Balance at end of period $ 1 202 $ 1 140
=========== ===========
<PAGE>
8
5. Information about impaired loans as of June 30, 1999 and December 31, 1998 is as follows:
(000 Omitted)
---------------------------------
June 30 December 31
1999 1998
----------- -----------
Impaired loans for which a reserve has been provided $ 630 $ 398
Impaired loans for which no reserve has been provided -- --
---------- -----------
Total impaired loans $ 630 $ 398
========== ===========
Reserve provided for impaired loans, included in the
reserve for loan losses $ 268 $ 199
========== ===========
Average balance in impaired loans $ 456 $ 398
========== ===========
Interest income recognized $ 28 $ 34
========== ===========
</TABLE>
Nonaccrual loans excluded from impaired loan disclosures under FASB
114 amounted to $256,620 at June 30, 1999 and $285,150 at December 31,
1998. Interest accrued on these loans is $6,134 and nonaccrual
interest is $5,528 for the first six months of 1999. If interest had
been accrued, income would have been $29,267 in 1998.
6. The "Year 2000 Problem" exists because computers and computer programs
were written using only a two digit field for the year rather than a
four digit field. As we move into the Year 2000 and continue to use
"00" for the date, many computers, computer programs, and any
equipment using date sensitive microchips may not recognize "00" as
the Year 2000, but may "think" it is the year 1900. For many
businesses and industries, this misconception may cause problems.
Hence, the challenge facing the world has been to prepare for the Year
2000 by ensuring that all equipment is appropriately date sensitive to
the four digit date 2000 and beyond. The Subsidiary Bank depends
heavily on computer processing in connection with its business
activities. Failure of its computer systems could have a significant
impact on its operations.
During 1997 the Subsidiary Bank began preparing to meet the challenge
by sending letters to third party vendors and suppliers requesting
written documentation regarding their planning, renovation, and
testing of computer systems and software and other equipment
containing embedded microchips to ensure Year 2000 compliance. Vendors
contacted included all parties that supplied service that the
Subsidiary Bank believed could be affected by embedded microchips,
such as electric, water, computer hardware and software providers. In
January 1998, the Subsidiary Bank's Board of Directors approved the
appointment of a Year 2000 Committee composed of directors, officers
and staff. The Committee has written a Year 2000 Plan that was
approved by the Board of Directors which details steps to be taken for
Year 2000 compliance.
The Plan includes the following phases of procedure: awareness,
assessment, renovation, validation and implementation. The AWARENESS
PHASE was educating all personnel within the organization including
directors, officers and staff so that everyone understood the
definition of the problem. All personnel also needed to understand
that the Corporation was seriously undertaking the challenge to
complete all the remaining phases of the Plan in a timely manner. The
ASSESSMENT PHASE included identifying all systems and equipment that
would be affected by the problem. The RENOVATION PHASE included
performing repairs, upgrades and/or replacements of all computer
systems and equipment containing embedded microchips that were
identified in the assessment phase as needing renovation. The
VALIDATION PHASE includes testing of all systems and equipment. The
IMPLEMENTATION PHASE occurs when all previous phases are complete and
all systems have been certified as Year 2000 compliant.
The status of these phases as of June 30, 1999 is listed below:
Awareness Complete
Assessment Complete
Renovation Substantially Complete. Remaining renovation
includes replacement of optical disk storage
system hardware and software, two personal
computers, one server and hub. Expected completion
August 31, 1999.
<PAGE>
9
Validation Progressing with expected completion August 31, 1999.
Implementation Progressing. As renovation and validation phases
progress so does completion of this phase.
The Subsidiary Bank does not maintain a formal budget. Therefore,
expenses related to the Year 2000 are reviewed and approved by the
Board of Directors on an as needed basis. As of June 30, 1999, actual
costs were $201,220. Most of the costs were for computers and related
equipment. There have also been expenditures for testing of our major
software vendors. It is estimated that the total costs for the Year
2000 will not exceed $350,000, assuming that the Subsidiary Bank has
identified the most significant Year 2000 issues. These costs do not
include the costs of personnel who have performed Year 2000 functions
in addition to their regular responsibilities during this time of
preparation.
The Subsidiary Bank has continued to communicate with third party
vendors and suppliers to update documentation from them in regard to
their Year 2000 readiness. The majority of these vendors and suppliers
have stated that they have successfully completed their renovations
and testing. Questionnaires were mailed to significant loan customers
(limited to commercial purpose loans) to determine the effectiveness
of their Year 2000 preparation including anticipated problems and
proposed solutions. Written responses were requested with
approximately 69% responding as of June 30, 1999. Response and no
response customers are being evaluated (95% evaluated to date) by loan
personnel, and additions to the reserve for loan losses will be made
if necessary. At this time, the Subsidiary Bank does not expect any of
these loan customer Year 2000 situations to have an adverse material
impact on Bank operations. The aggregate balances (including available
and outstanding amounts on lines of credit) of the loan customers
questioned represent approximately 27% of the Bank's total loan
portfolio.
Questionnaires have been sent to significant deposit customers and
responses have been received from three of the six mailed. Of the
three not responding, one has since dropped below the threshold used
to receive a questionnaire. The aggregate balances of the deposit
customers receiving questionnaires represent 2% of the total deposit
portfolio. Responses received represent 55% of the dollar amount of
the deposits selected to receive questionnaires. Evaluation of these
balances continues.
The Year 2000 Committee has identified customer awareness as an
important part of Year 2000 preparation. We have a Customer Awareness
Policy and have mailed several communications to customers regarding
Year 2000 plans, including a brochure entitled "The Year 2000 Date
Change: What the Year 2000 Date Change Means to You and Your Insured
Financial Institution" that was mailed during the second quarter of
1999. It is necessary that all customers understand that the
Subsidiary Bank's deposits are insured by the Federal Deposit
Insurance Corporation if the deposit accounts are structured
appropriately and balances are within the coverage limitations. The
Subsidiary Bank is planning a day at each of its three locations where
a short video entitled "You and Your Bank: A Successful Partnership
for the Year 2000" prepared by the American Bankers Association is
being shown and where bank personnel are available to answer customer
questions and deal with any concerns customers may have regarding the
Subsidiary Bank's preparation for the Year 2000. At least two
additional mailings are scheduled during 1999 in order to provide
customers with additional information regarding Year 2000.
The Year 2000 Committee has written a Year 2000 Contingency Plan which
has been approved by the Board of Directors. Many issues were
discussed during the development and planning for business resumption
and remediation contingency plans. Responsibility and reporting
structure have been designated. Critical personnel have been
designated to be available as needed. Special staffing and hours have
been approved as needed. Core business processes were identified.
Event timelines were designated including critical testing dates.
Numerous failure scenarios were discussed including power outages from
complete to localized, telecommunications outages, water outages,
various hardware and software failures, and lack of vendor supplies.
Considerations were given to the following factors during the planning
process: estimated costs, feasibility, functionality, and
appropriateness.
The most likely worst-case scenario would be a localized disruption or
failure of power and/or telecommunications, although the Subsidiary
Bank has no reason to conclude that these events will happen. If these
events did occur, the Subsidiary Bank would implement its contingency
plan. It is important for customers to understand that if a
contingency plan is implemented there may be some customer
inconvenience since service levels may not be at peak.
<PAGE>
10
Finally, we must admit that even after detailed preparation as
described above, there are no guarantees that the assumptions,
estimates, tests, and validation will be as we expect. The Corporation
is still dependent on third party vendors and suppliers for a large
part of our business operations. If events are not as the Corporation
and our vendors expect, the Subsidiary Bank's business, results of
operations and financial position could be materially adversely
affected.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Between December 31, 1998 and June 30, 1999, total assets remained basically the
same. The June 30 annualized return on average assets is 1.07% as it was at
December 31. At June 30 the annualized return on average equity is 9.70%
compared to 9.39% at December 31. The leverage capital (equity to assets) ratio
is 11.09% at June 30 compared to 11.15% at December 31.
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)
June 30, 1999
-------------
Balance at beginning of period $ 1 140
Charge-offs:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 27
-------------
Total charge-offs 27
Recoveries:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 14
-------------
Total recoveries 14
-------------
Net charge-offs 13
Additions charged to operations 75
-------------
Balance at end of period $ 1 202
=============
Ratio of net charge-offs during the period to average
loans outstanding during the period .0165%
======
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)
June 30, 1999
-------------
Nonaccrual loans $ 257
Restructured loans --
Foreclosed properties 76
-------------
Total nonperforming assets $ 333
=============
Loans past due 90 days accruing interest $ 962
=============
Reserve for loan losses to period end loans 1.51%
=====
<PAGE>
11
Nonperforming assets to period end loans and foreclosed properties .42%
====
Loans on nonaccrual status at June 30, 1999 totalled $256,620.
At June 30, 1999, other potential problem loans totalled $26,033. 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.
Total deposits have also remained basically the same when comparing June 30,
1999 with December 31, 1998. The mix of different types of accounts have
remained unchanged except that demand deposit accounts have increased
approximately $1,000,000 and NOW accounts have decreased approximately
$1,000,000.
The comparison of the income statements for the six months ended June 30, 1999
and 1998 shows relatively little difference in the two periods.
Noninterest income increased 15% in 1999 compared to 1998. Income from fiduciary
activities increased 14% and service charges on deposit accounts decreased 12%.
Other operating income increased 400% due to gains on sales of foreclosed
properties. Noninterest expense increased 5%. The majority of the 3% decrease in
salaries and employee benefits is due to decreased group insurance expense
because of a change to a partially self funded plan. Furniture and equipment
expense increased 25% due mostly to computer equipment purchased to insure Y2K
compliance. Other operating expenses increased 19% due to increases in the
following categories:
Legal and professional fees - actual 1998 expense was reduced by payment of
prior period legal fees from sale of property securing two loans that had been
on nonaccrual status.
Printing, stationery, supplies and printed checks
West Virginia Business Franchise Tax expense - increase in tax paid due to law
changes that are phasing out a credit previously taken against this tax.
ATM expenses - late billings from vendor.
Foreclosure expenses - increased number of foreclosures in 1999.
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 decreased during this period, however liquidity of the
Corporation is more than adequate to meet present and future financial
obligations.
<PAGE>
12
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 4. Submission of Matters to a Vote of Security-Holders.
The annual meeting of security-holders was held on April 27, 1999 and the
following matters were submitted to the security-holders for a vote:
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 1999.
3. Any other business which may properly be brought before the meeting or
any adjournment thereof.
Results of the voting in regard to the above listed matters were as follows:
<TABLE>
<CAPTION>
Votes Votes
Votes For Against Withheld Total
---------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
1. Robert W. Butler 404,117 None 23,532 427,649
Guy G. Chicchirichi 404,017 None 23,632 427,649
Thomas C. G. Coyle 404,117 None 23,532 427,649
Francis M. Frye 404,109 None 23,540 427,649
2. 402,981 20,752 3,916 427,649
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
<PAGE>
13
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
</TABLE>
<PAGE>
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 August 12, 1999 /s/ Charles W. LeMaster
------------------------------- -----------------------
Charles W. LeMaster, President & CEO
Date August 12, 1999 /s/ L. Gayle Marshall Johnson
------------------------------- ------------------------------
L. Gayle Marshall Johnson, Vice
President & Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,643
<INT-BEARING-DEPOSITS> 73
<FED-FUNDS-SOLD> 10,821
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0
0
<COMMON> 600
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
