1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark one)
[XXX] Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 1998
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required)
For the transition period from ___________ to ___________
Commission File No. 0-24958
Potomac Bancshares, Inc.
(Name of Small Business Issuer in Its Charter)
West Virginia 55-0732247
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
111 East Washington Street
PO Box 906, Charles Town WV 25414-0906
(Address of Principal Executive Offices) (Zip Code)
304-725-8431
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
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 statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [XX]
<PAGE>
2
State issuer's revenues for its most recent fiscal year. $11,180,990
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. $21,427,060
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes [ ] No [ ] Not Applicable [XXX]
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 600,000
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [XXX]
DOCUMENTS INCORPORATED BY REFERENCE
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.
Part of the Form 10-KSB Into Which
Document the Document is Incorporated
-------- ----------------------------
Portions of Potomac Bancshares, Inc.'s Part II, Items 6 and 7
1998 Annual Report to Shareholders for
the year ended December 31, 1998
Portions of Potomac Bancshares, Inc.'s Part III, Items 9,
Proxy Statement for 10, 11 and 12 the
1999 Annual Meeting of Shareholders
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>
3
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 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. Bill paying and certain other banking services are available online
through a personal computer and/or the World Wide Web. These same bill paying
and banking services are also available using a special telephone. 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 2.76% and a loss rate of .00% during
1998. These rates are based on comparisons to 1998 average total loans.
As of December 31, 1998, aggregate dollar amounts in loan categories
secured by real estate are as follows:
Construction and land development $ 651,848
Secured by farmland 1,394,201
Secured by 1-4 family residential 42,541,181
Other 12,623,662
----------
$57,210,892
==========
Loans to individuals for personal expenditures are approximately 23% of
the Bank's total loans at December 31, 1998. The aggregate balance of these
loans was $17,738,039 at December 31, 1998. The majority of these are
installment loans with the remainder made as term loans.
<PAGE>
4
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 .31% and
a loss rate of .19% in 1998 (based on comparisons to 1998 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 .13% and the loss rate was .02% compared to average total
loans in 1998.
The remaining aggregate dollar amount of the Bank's loans is $2,857,605
at December 31, 1998. The amount includes:
(1) Dealer wholesale loans with generally
no delinquencies or losses $1,201,858
(2) Term loans for business and commercial purposes 985,613
(3) Industrial revenue bond loans secured by real estate 85,817
(4) Term loans for agricultural purposes 246,100
(5) Other loans 338,217
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>
5
Competition
As of March 5, 1999, there were 52 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, 1998, there were six banks in Jefferson County with 17
banking offices. The total deposits of those commercial banks as of June, 1998,
were $456,515,000 and the Bank ranked number one with $121,756,000 or 26.7% 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, 1999, the Bank had 77 full-time employees and 13
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>
6
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, 1998, FDIC set the Financing Corporation
(FICO) Bank Insurance Fund (BIF) premium for the Bank at the annual rate of
1.195 basis points or .0001195 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.
<PAGE>
7
Financial institutions are required to maintain a risk-based ratio of
8%, of which 4% must be Tier 1 capital. The appropriate regulatory authority may
set higher capital requirements when an institution's particular circumstances
warrant.
Financial institutions that meet certain specified criteria, including
excellent asset quality, high liquidity, low interest rate exposure and the
highest regulatory rating, are required to maintain a minimum leverage ratio of
3%. Financial institutions not meeting these criteria are required to maintain a
leverage ratio which exceeds 3% by a cushion of at least 100 to 200 basis
points, and, therefore, the ratio of Tier 1 capital to total assets should not
be less than 4%.
The guidelines also provide that financial institutions experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets. Furthermore, the Federal Reserve
Board's guidelines indicate that the Federal Reserve Board will continue to
consider a "tangible Tier 1 leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage is the ratio of an
institution's Tier 1 capital, less all intangibles, to total assets, less all
intangibles.
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, 1998, Bancshares had capital in excess of all
applicable requirements as shown below:
<TABLE>
<CAPTION>
Actual Required Excess
------ -------- ------
<S> <C> <C> <C>
Tier 1 capital:
Common stock $ 600,000
Surplus 5,400,000
Retained earnings 10,090,870
------------
Total tier 1 capital $ 16,090,870 $ 2,843,486 $ 13,247,384
Tier 2 capital:
Allowance for loan losses (1) 891,693
Total risk-based capital $ 16,982,563 $ 5,686,972 $ 11,295,591
============ ============== ==============
Risk-weighted assets $ 71,087,152
============
Tier 1 capital $ 16,090,870 $ 4,330,639 $ 11,760,231
============ ============== ==============
Average total assets $144,354,648
============
</TABLE>
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8
<TABLE>
<CAPTION>
Actual Required Excess
------ -------- ------
<S> <C> <C> <C>
Capital ratios:
Tier 1 risk-based capital ratio 22.64% 4.00% 18.64%
Total risk-based capital ratio 23.89% 8.00% 15.89%
Tier 1 capital to average total
assets (leverage) 11.15% 4.00% 7.15%
</TABLE>
(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 schematic design has been completed for a major building and
renovation project approved by the Board. The design and development stage is
now underway. The project will include demolition of the older building now
housing Trust and Financial Services and construction of a new building on the
same location. This new building will house Trust, some of the commercial
operations, and provide storage. The project will also include redecoration of
the main office building originally constructed in 1967. The total estimated
cost is $1,800,000 and completion is expected within a year and a half of the
start date.
The Bank sold the property formerly housing the Charles Town Lodge,
Loyal Order of Moose, Inc., during 1996 for $220,000. This property, used only
as a storage facility, was no longer needed.
One branch office is located at 1318 Washington Street, Bolivar, West
Virginia. The office is a one story brick building constructed in 1975. On this
property is another building which existed at the time of the Bank's purchase.
This is rented to others by the Bank.
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9
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 1, 1999, there were approximately 830 shareholders.
Bancshares Common Stock is not traded on any stock exchange or over the
counter. Bancshares (symbol PTBS) is now on the Bulletin Board, a network
available to brokers. Scott and Stringfellow, a regional securities firm with an
office in Winchester, Virginia, is a market maker for Bancshares Common Stock. A
market maker is one who makes a market for a particular stock. Information about
sales (but not necessarily all sales) of Bancshares Common Stock is available on
the Internet through many of the stock information services using Bancshares's
symbol. 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 in
1997 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. The
trading values for 1998 are based on information available as a result of our
participation on the Bulletin Board described above and information gathered on
the Internet. NO ATTEMPT WAS MADE BY BANCSHARES TO VERIFY OR DETERMINE THE
ACCURACY OF THE REPRESENTATIONS MADE TO BANCSHARES OR GATHERED ON THE INTERNET.
<TABLE>
<CAPTION>
Price Range Cash Dividends *
High Low Paid per Share
<S> <C> <C> <C>
1997 First Quarter $30.000 $29.000 $ N/A
Second Quarter 32.000 30.000 .45
Third Quarter 32.000 30.000 N/A
Fourth Quarter 32.000 30.000 .70
1998 First Quarter $38.000 $34.875 $ N/A
Second Quarter 42.000 32.500 .50
Third Quarter 46.000 41.000 N/A
Fourth Quarter 41.000 40.000 .65
</TABLE>
* Dividends have been declared traditionally by Bancshares on a semi-annual
basis.
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10
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 4-12 of the Annual Report to
Shareholders for the year ended December 31, 1998, is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS.
The information contained on pages 13-30 of the Annual Report to
Shareholders for the year ended December 31, 1998, 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 30, 1999, for the April 27, 1999 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> <C> <C>
Charles W. LeMaster President & CEO 57 Employed at Bank since 1983;
1994 President & CEO since 1991.
William R. Harner Sr. Vice President, 58 Employed at Bank since 1967; Sr. Vice
Secretary & Treasurer President & Cashier since 1988.
1994
Gayle Marshall Johnson Vice President & Chief 49 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 & 70 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 30, 1999, for the April 27, 1999 Annual Meeting under the captions
"Executive Compensation" and "Compensation of Directors" is incorporated herein
by reference.
<PAGE>
11
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained on pages 6-8 of the Proxy Statement dated
March 30, 1999, for the April 27, 1999 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
30, 1999, for the April 27, 1999 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) 2.1Agreement 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 1998 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for the 1999 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>
12
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 30, 1999
----------------------------------------------- --
Charles W. LeMaster
President & Chief Executive Officer
By /s/ L. Gayle Marshall Johnson March 30, 1999
----------------------------------------------- --
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 30, 1999
------------------------------------------------- --
John P. Burns, Jr., Director
By /s/ Robert W. Butler March 30, 1999
------------------------------------------------- --
Robert W. Butler, Director
By /s/ Guy Gary Chicchirichi March 30, 1999
-------------------------------------------------- --
Guy Gary Chicchirichi, Director
By /s/ Thomas C. G. Coyle March 30, 1999
-------------------------------------------------- --
Thomas C. G. Coyle, Director
By /s/ Francis M. Frye March 30, 1999
-------------------------------------------------- --
Francis M. Frye, Director
<PAGE>
13
Signature & Title Date
- ----------------- ----
By /s/ William R. Harner March 30, 1999
-------------------------------------------------- --
William R. Harner, Director,
Sr. Vice President, Secretary &
Treasurer
By /s/ E. William Johnson March 30, 1999
-------------------------------------------------- --
E. William Johnson, Director
By /s/ Charles W. LeMaster March 30, 1999
-------------------------------------------------- --
Charles W. LeMaster, Director,
President, Chief Executive Officer
By /s/ Minnie R. Mentzer March 30, 1999
-------------------------------------------------- --
Minnie R. Mentzer, Director
By March 30, 1999
-------------------------------------------------- --
James E. Senseney, Director
By /s/ John C. Skinner, Jr. March 30, 1999
-------------------------------------------------- --
John C. Skinner, Jr., Director
By /s/ Donald S. Smith March 30, 1999
-------------------------------------------------- --
Donald S. Smith, Director
COVER PAGE
<PAGE>
CONTENTS
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.......................4-12
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.........................18-30
Trust and Financial Services..................................................31
Officers and Staff............................................................32
Annual Report on Form 10-KSB..................................................33
General Information...........................................................33
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 evidences Congress'
determination that the disclosure of forward-looking information is desirable
for investors and encourages such disclosure by providing a safe harbor for
forward-looking statements by corporate management. This Annual Report,
including the President's Letter and the Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements that involve risk and uncertainty. In order to comply with the terms
of the safe harbor, the Corporation notes that a variety of factors could cause
the Corporation's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Corporation's
forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
development and results of the Corporation's business include, but are not
limited to, the growth of the economy, interest rate movements, the impact of
competitive products, services and pricing, customer business requirements, the
impact, if any, of Year 2000 computer problems, Congressional legislation and
similar matters. Readers of this report are cautioned not to place undue
reliance on forward-looking statements which are subject to influence by the
named risk factors and unanticipated future events. Actual results, accordingly,
may differ materially from management expectations.
<PAGE>
PRESIDENT'S REPORT
On behalf of the Board of Directors, Officers and Staff, we are pleased
to submit this Annual Report for your holding company, Potomac Bancshares, Inc.,
for the year ended December 31, 1998.
During the year we experienced growth in assets of over $17,000,000 with
the major portion reflected in deposit growth. Net profit after taxes for 1998
totaled $1,489,129 or $2.48 per share. Even though net income was down from the
previous year, cash dividends paid to stockholders were $1.15 per share, same as
were paid in 1997, and totaled $690,000.
For some time now you have heard a constant media blitz regarding Y2K. A
committee comprised of members of the Board and Staff has been working
diligently for the past year and will continue to do so for the balance of 1999
to prepare for this millennium conversion.
Your Board has been working on its building project and has completed
the schematic design. We are now progressing into the design and development
stage. This venture will involve the area now being utilized for the Trust
Department offices and storage area, along with a redecorating project for the
main office building. This should all be well on its way by mid-year 1999.
The success enjoyed by this corporation would not be possible without
the dedication from members of the staff, nor could it progress without the
commitment of the members of the Board. Everyone's loyalty is greatly
appreciated, as is that of our stockholders and customers.
Sincerely,
Charles W. LeMaster
President and 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 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. Bill paying and certain other banking services are available online
through a personal computer and/or the World Wide Web. These same bill paying
and banking services are also available using a special telephone. The trust and
financial services department provides financial management, investment and
trust services.
Bank of Charles Town is a West Virginia state chartered bank which
formed and opened for business in 1871. The Bank's deposits are insured by
Federal Deposit Insurance Corporation.
BOARD OF DIRECTORS
POTOMAC BANCSHARES, INC. AND BANK OF CHARLES TOWN
<TABLE>
<CAPTION>
<S> <C>
JOHN P. BURNS, JR. FRANCIS M. FRYE MINNIE R. MENTZER
Partner Retired President Retired President
Burns Farm Ranson Real Estate Myers Coal Company, Inc.
ROBERT W. BUTLER WILLIAM R. HARNER JAMES E. SENSENEY
Farmer-Orchardist Senior Vice President Retired Owner-Operator
Warm Spring Orchard & Farm & Cashier J.E. Senseney & Sons, Inc.
Bank of Charles Town
GUY GARY CHICCHIRICHI E. WILLIAM JOHNSON JOHN C. SKINNER, JR.
General Manager Professor of Economics Owner
Guy's Buick-Pontiac-Oldsmobile- Shepherd College Nichols & Skinner, L.C.
GMC Truck, Inc.
THOMAS C. G. COYLE CHARLES W. LEMASTER DONALD S. SMITH
Retired Owner-Operator President Retired President
Riddleberger's Store Bank of Charles Town Bank of Charles Town
</TABLE>
-2-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
Summary of Operations
Interest income $ 10 055 $ 9 563 $ 9 086 $ 8 747 $ 8 979
Interest expense 4 401 3 710 3 623 3 591 3 509
--------- --------- --------- --------- ---------
Net interest income 5 654 5 853 5 463 5 156 5 470
Provision for loan losses 125 127 100 125 125
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses 5 529 5 726 5 363 5 031 5 345
Non-interest income 1 126 1 128 989 906 939
Non-interest expense 4 297 4 127 4 114 4 078 4 211
--------- --------- --------- --------- ---------
Income before income taxes 2 358 2 727 2 238 1 859 2 073
Income tax expense 869 1 005 831 674 742
--------- --------- --------- --------- ---------
Net income $ 1 489 $ 1 722 $ 1 407 $ 1 185 $ 1 331
========= ========= ========= ========= =========
Per Share Data
Net income, basic and diluted $ 2.48 $ 2.87 $ 2.35 $ 1.98 $ 2.22
Cash dividends declared 1.15 1.15 .95 .85 .85
Book value at period end 26.99 25.50 23.70 22.37 21.19
Average shares outstanding 600 000 600 000 600 000 600 000 600 000
Average Balance Sheet Summary
Assets $ 138 698 $ 126 474 $ 124 267 $ 121 638 $ 128 993
Loans 78 552 76 866 73 817 72 440 68 558
Securities 45 190 40 576 36 972 37 682 52 288
Deposits 121 612 110 291 109 709 107 826 115 907
Shareholders' equity 15 862 14 870 13 806 13 052 12 393
Performance Ratios
Return on average assets 1.07% 1.36% 1.13% .97% 1.03%
Return on average equity 9.39% 11.58% 10.19% 9.08% 10.74%
Dividend payout ratio 46.37% 40.07% 40.43% 43.93% 38.29%
Capital Ratios
Leverage ratio 11.15% 11.83% 11.43% 10.83% 9.61%
Risk-based capital ratios
Tier 1 capital 22.64% 23.15% 23.21% 20.73% 20.74%
Total capital 23.89% 24.41% 24.47% 21.98% 21.99%
</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>
<S> <C> <C>
1998 1997
------------------------------------ --------------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Yield/Rate Balances Expense Yield/Rate
ASSETS
Loans
Taxable $78 215 073 $6 967 855 8.91% $76 726 418 $7 008 657 9.13%
Tax exempt 336 999 32 076 9.52% 139 322 15 492 11.12%
---------- ---------- ----------- ----------
Total loans 78 552 072 6 999 931 8.91% 76 865 740 7 024 149 9.14%
---------- ---------- ----------- ----------
Taxable securities 45 190 167 2 610 758 5.78% 40 576 196 2 344 806 5.78%
Securities purchased under
agreements to resell and
federal funds sold 7 796 026 455 539 5.84% 3 755 616 198 926 5.30%
---------- ---------- ----------- ----------
TOTAL EARNING ASSETS 131 538 265 $10 066 228 7.65% 121 197 552 $ 9 567 881 7.89%
----------- =========== ----------- ===========
Reserve for loan losses (1 137 864) (1 160 396)
Cash and due from banks 5 322 429 3 613 704
Bank premises/equipment,
net 1 212 223 1 204 798
Other assets 1 763 203 1 617 882
------------ ------------
Total assets $138 698 256 $126 473 540
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Savings and interest
bearing demand
deposits $64 410 847 $2 047 815 3.18% $ 55 365 510 $1 451 731 2.62%
Time deposits 42 083 997 2 353 117 5.59% 40 929 846 2 241 745 5.48%
----------- ---------- ----------- ----------
Total interest
bearing deposits 106 494 844 4 400 932 4.13% 96 295 356 3 693 476 3.84%
----------- ---------- ----------- ----------
Federal funds purchased and
securities sold under
agreements to repurchase - - - - - - 269 471 16 219 6.02%
----------- ---------- ----------- ----------
TOTAL INTEREST
BEARING LIABILITIES 106 494 844 $ 4 400 932 4.13% 96 564 827 $ 3 709 695 3.84%
----------- =========== ---------- ===========
Noninterest bearing demand
deposits 15 117 247 13 995 920
Other liabilities 1 223 874 1 042 649
Stockholders' equity 15 862 291 14 870 144
------------ -----------
Total liabilities and
stockholders' equity $138 698 256 $ 126 473
============ ===========
540
NET INTEREST SPREAD 3.52% 4.05%
INTEREST EXPENSE AS A
PERCENT OF AVERAGE EARNING ASSETS 3.35% 3.06%
NET INTEREST MARGIN 4.31% 4.84%
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Total assets increased over 13% in 1998 compared to 1997. This
$17,500,000 increase included growth of $13,000,000 in the securities portfolio
and a $5,000,000 increase in the daily investment vehicles of securities
purchased under agreements to resell and federal funds sold. The increased
assets were offset by deposit growth.
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
In 1998 net interest income decreased 3% when compared to 1997. The
majority of the increase is due to increases in deposit volume and deposit
rates.
A 5% increase in interest income brought the 1998 total to $10,055,322
compared to $9,562,614 in 1997.
Although the year end balance for total loans in 1998 was slightly less
than the 1997 balance, the average balance of total loans in 1998 increased
about $1,700,000 compared to the average balance in 1997. Interest and fees on
loans remained basically the same in 1998 showing only a slight increase
compared to 1997. The decrease in average yield on loans offset the increase in
average volume for the year. No particular category of loans showed a
significant increase or decrease in volume.
Interest income on investment securities and securities available for
sale increased 11% in 1998 compared to 1997. This increase is due to increased
volumes of securities since the average rate remained the same in 1997 and 1998.
Income on securities purchased under agreements to resell and federal funds sold
increased 129% in 1998 compared to 1997. Most of this increase is due to
increased volumes although there was an increase in the average rate to 5.84% in
1998 compared to 5.30% in 1997.
The increase in interest expense to $4,400,932 in 1998 compared to
$3,709,695 in 1997 is the major cause of decreased net income for 1998 compared
to 1997. The majority of this increase is in the expense for savings and
interest bearing demand deposits with a smaller expense increase in time
deposits. The savings and interest bearing demand deposits increase is due to
the increase in volume and rate of the Select Checking balances. Select Checking
accounts are NOW accounts that earn a higher rate of interest for balances of
$5,000 or more. Increase in time deposit expense is due to an increase in
average volume of $1,000,000 and an increase in average rate of .11%.
Total deposits increased $16,500,000 in 1998 compared to 1997. This
increase is due to the increase in the Select Checking balances as described
above. Continuing to compare 1998 year end balances with 1997 year end balances,
non interest bearing demand deposits increased $2,500,000 in 1998, money market
deposits decreased $5,000,000 in 1998, savings decreased $1,500,000 in 1998, and
certificates of deposits increased $2,000,000 in 1998. The decreases in money
market and savings deposits can also be attributed to the availability of the
Select Checking accounts.
In 1998, the average yield for earning assets was 7.65%, a decrease of
.24% when compared to 1997. The lower yield is due to the decreased loan yields
during 1998 compared to 1997, since the yields on securities remained the same
and yields on securities purchased under agreements to resell and federal funds
sold increased during 1998.
The average rate paid on all interest bearing liabilities was 4.13% in
1998 compared to 3.84% in 1997. The net interest spread decreased .53% to 3.52%
compared to 4.05% in 1997, and the net interest margin decreased the same .53%
to 4.31% in 1998 compared to 4.84% in 1997.
As the narrative above describes, the major reason for decreased
interest income, reduced interest spread and reduced interest margin is the
increased balances in the Select Checking Accounts which pay a higher rate of
interest and minimal increase in income to compensate for this increase in
expense.
-5-
<PAGE>
SCHEDULE 2 - VOLUME AND RATE ANALYSIS
This schedule 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.
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
---------------------------------------- --------------------------------------
Change in Volume Rate Change in Volume Rate
Income/Expense Effect Effect Income/Expense Effect Effect
-------------- ------ ------ -------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Taxable loans $ (40 802) $ 168 640 $ (209 442) $ 280 573 $ 295 395 $ (14 822)
Tax exempt loans 16 584 18 455 (1 871) (17 344) (17 197) (147)
Taxable securities 265 952 265 952 - - 445 650 195 697 249 953
Securities purchased under
agreements to resell 256 613 234 413 22 200 (238 108) (240 612) 2 504
---------- --------- ----------- --------- ---------- ---------
TOTAL $ 498 347 $ 687 460 $ (189 113) $ 470 771 $ 233 283 $ 237 488
---------- --------- ----------- --------- ---------- ---------
INTEREST EXPENSE
Savings and interest bearing
demand deposits $596 084 $ 258 237 $ 337 847 $ 30 717 $ (11 232) $ 41 949
Time deposits 111 372 65 059 46 313 39 516 51 374 (11 858)
Federal funds purchased and
securities sold under
agreements to repurchase (16 219) (16 219) - - 16 219 16 219 - -
---------- --------- ----------- --------- ---------- ---------
TOTAL $ 691 237 $ 307 077 $ 384 160 $ 86 452 $ 56 361 $ 30 091
---------- --------- ----------- --------- ---------- ---------
NET INTEREST INCOME $ (192 890) $ 380 383 $(573 273) $ 384 319 $ 176 922 $ 207 397
========== ========= =========== ========= ========== =========
</TABLE>
NONINTEREST INCOME AND EXPENSE
Noninterest income (other income) decreased slightly in 1998 compared
to 1997. This included a 6% increase in income from the Trust and Financial
Services Department in 1998 compared to 1997 which was offset by decreased
income from service charges on deposit accounts, specifically in the return
check charge category, and decreased other operating income which is a
combination of numerous categories.
Noninterest expense (other expense) increased 4% in 1998 compared to
1997. Included in this is a 6% increase in salaries and employee benefits in
1998 compared to 1997 and a 4% increase in furniture and equipment expenses in
1998 compared to 1997. The bulk of the furniture and equipment expense was the
purchase of new computer equipment to prepare for the year 2000. There was also
a decrease in net occupancy expense of premises of 5% in 1998 compared to 1997.
YEAR 2000
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.
-6-
<PAGE>
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 December 31, 1998 is listed below:
Awareness Complete
Assessment Complete
Renovation Substantially Complete. Remaining
renovation includes replacement of
optical disk storage system
hardware and software, five
personal computers, one server and
hub, and one printer. Expected
completion May 31, 1999.
Validation Progressing on schedule. Mission
critical systems expected to be
substantially complete by March 31,
1999. Remaining validation expected
to be substantially complete within
guidelines of the Federal Financial
Institutions Examination Council
(FFIEC), whose completion deadline
is June 30, 1999.
Implementation Progressing on schedule. As
renovation and validation phases
progress so does completion of this
phase. Expected completion will be
within FFIEC guidelines.
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 December 31, 1998, actual costs were
$187,025. 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 mid-March 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 but not outstanding amounts on lines of credit) of
the loan customers questioned represent approximately 27% of the Bank's total
loan portfolio. In the near future, questionnaires will be sent to significant
deposit customers and responses will be evaluated. The aggregate balances of the
deposit customers who will be questioned represent 2% of the total deposit
portfolio.
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. It is
necessary that all customers understand that the Subsidiary Bank's deposits are
insured by the Federal Deposit Insurance Corporation.
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.
-7-
<PAGE>
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 operation. 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.
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, 1998. Nonaccrual loans are excluded from these balances.
<TABLE>
<CAPTION>
<S> <C>
Mature or Reprice
After Three
Months But After One Year
Within Within But Within After
Three Months Twelve Months Five Years Five Years
Nonsensitive
Interest Earning Assets:
Fixed rate loans $ 8 214 733 $21 503 255 $41 111 453 $ 2 559 819 $ - -
Floating rate loans 4 417 276 - - - - - - - -
Securities 3 000 937 10 571 656 36 185 768 - - 449 700
Securities purchased under
agreements to resell and
federal funds sold 13 483 258 - - - - - - - -
----------- ----------- ---------- ----------- -----------
Total $29 116 204 $32 074 911 $77 297 221 $ 2 559 819 $ 449 700
----------- ----------- ----------- ----------- -----------
Interest Bearing Liabilities:
Time deposits
$100,000 and over $ 779 128 $ 1 643 375 $2 587 927 $ - - $ - -
Other time deposits 6 601 677 19 591 090 11 532 077 - - - -
Money market accounts 7 292 223 - - - - - - - -
NOW accounts 29 111 469 - - - - - - 16 810 385
Savings accounts - - - - - - - - 17 294 315
----------- ----------- ---------- ----------- -----------
Total $43 784 497 $21 234 465 $14 120 004 $ - - $ 34 104 700
----------- ----------- ----------- ----------- ------------
Rate Sensitivity Gap $(14 668 293) $10 840 446 $63 177 217 $ 2 559 819
------------ ----------- ----------- -----------
Cumulative Gap $(14 668 293) $(3 827 847) $59 349 370 $ 61 909 189
============ =========== =========== ============
</TABLE>
At December 31, 1998, the Corporation showed negative cumulative gaps in
the first two time frames with the remaining time frames showing positive gaps.
The increase in the negative gap in the first time frame when comparing to
December 31, 1997 is due to the increase in Select Checking account balances
(Select Checking is a form of NOW account). The Select Checking pays a higher
rate of interest on balances of $5,000 or more and were started in August of
1997 because competition was increasing with similar types of accounts. While
serving the customer well, these accounts are not favorable to the Corporation's
liability sensitive position.
The Corporation's Asset Liability Committee recommended that the APY
(annual percentage yield) on these Select Checking accounts be gradually reduced
until the balances stopped increasing. However, to date this strategy which was
accepted by the Board of Directors has not been successful. The increase in
Select Checking accounts is basically the only change in the Corporation's
balance sheet during 1998 and therefore the major cause of the increased
liability sensitive positions in the first two time frames. The Committee
explored several other options during the year to decrease liability
sensitivity, but the consensus of opinion was not to adopt any of the suggested
strategies.
As stated in previous years, an even match between assets and
liabilities in each time frame is the safest position especially in times of
rapidly rising or declining rates. During other times, the even match is not as
critical. 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.
-8-
<PAGE>
LOAN PORTFOLIO
Loans at December 31, 1998 and 1997 are summarized below:
1998 1997
----------- -----------
Commercial, financial and agricultural $ 2 433 571 $2 314 804
Real estate:
Construction and land development 651 848 393 187
Secured by farm land 1 394 201 1 717 930
Secured by 1-4 family residential 42 541 181 43 282 898
Other real estate 12 623 662 12 496 739
Consumer 17 738 039 17 705 824
All other 424 034 301 580
----------- ----------
$ 77 806 536 $78 212 962
============ ===========
Loans have decreased slightly when comparing year end totals for 1998
and 1997, while the average balance for total loans has increased approximately
$1,700,000 in 1998 compared to 1997. There are no significant differences
between categories in the loan portfolios when comparing 1998 to 1997.
There were no categories of loans that exceeded 10% of outstanding loans
at December 31, 1998 which were not disclosed in the table above.
REMAINING MATURITIES OF SELECTED LOANS
Commercial,
Financial and Real Estate-
Agricultural Construction
Within one year $ 2 050 883 $ 109 436
Variable rate 248 030 48 000
Fixed rate, over one through five years 134 658 494 412
---------- ----------
Total maturities $ 2 433 571 $ 651 848
=========== ==========
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
continually monitors the loan portfolio with quarterly 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>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period $ 1 138 747 $1 138 747 $ 899 245
Charge-offs:
Commercial, financial and agricultural - - - - - -
Real estate - construction - - - - - -
Real estate - mortgage - - - - - -
Consumer 166 722 175 828 98 124
----------- ----------- -----------
Total charge-offs 166 722 175 828 98 124
----------- ----------- -----------
Recoveries:
Commercial, financial and agricultural - - - - - -
Real estate - construction - - - - - -
Real estate - mortgage - - - - 186 534
Consumer 42 730 48 420 51 092
----------- ----------- -----------
Total recoveries 42 730 48 420 237 626
----------- ----------- -----------
Net charge-offs (recoveries) 123 992 127 408 (139 502)
Additions charged to operations 125 245 127 408 100 000
----------- ----------- -----------
Balance at end of period $ 1 140 000 $ 1 138 747 $ 1 138 747
=========== =========== ===========
Ratio of net charge-offs (recoveries) during the period
to average loans outstanding during the period 0.16% 0.17% (0.19)%
==== ==== =====
</TABLE>
-9-
<PAGE>
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>
<S> <C>
1998 1997
------------------------------ ------------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
Reserve to Total Loans Reserve to Total Loans
--------- ---------------- --------- ----------------
Commercial, financial and agricultural $ 12 168 3.13% $ 11 575 2.95%
Real estate mortgage:
Construction and land development 52 759 .84% 51 466 .50%
Secured by farm land 6 971 1.79% 35 679 2.20%
Secured by 1-4 family residential 294 588 54.68% 272 837 55.34%
Other real estate 288 405 16.22% 210 719 15.98%
Consumer 103 769 22.80% 100 671 22.64%
All other 2 120 .54% 1 506 .39%
Unallocated 379 220 - - 454 294 - -
--------- ------ --------- ------
$1 140 000 100.00% $1 138 747 100.00%
========== ====== ========== ======
RISK ELEMENTS IN THE LOAN PORTFOLIO
1998 1997 1996
--------- --------- ---------
Nonaccrual loans $ - - $ 285 150 $ 285 150
Restructured loans - - - - - -
Foreclosed properties 55 425 100 005 - -
--------- --------- ---------
Total nonperforming assets $ 55 425 $ 385 155 $ 285 150
========= ========= =========
Loans past due 90 days accruing interest $ 596 877 $ 19 923 $ 48 663
========= ========= =========
Reserve for loan losses to period end loans 1.47% 1.46% 1.55%
Nonperforming assets to period end loans and
foreclosed properties .07% .49% .39%
</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
at December 31, 1998 and 1997.
At December 31, 1998, other potential problem loans totaled $100,079.
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, is recognized in
stockholders' equity. The Corporation does not have any derivative financial
instruments.
-10-
<PAGE>
The schedule below summarizes the book value of the portfolio by
maturity classifications and shows the weighted average yield in each group.
<TABLE>
<CAPTION>
<S> <C>
Weighted Weighted
1998 Average 1997 Average
Book Value Yield Book Value Yield
Securities held to maturity
U.S. Treasury securities and securities
of U.S. Government agencies:
Maturing within one year $10 018 466 5.84% $ 9 995 556 5.98%
Maturing after one year but
within five years 15 010 863 5.79% 14 044 650 5.90%
----------- -----------
Total securities held to maturity $ 25 029 329 $24 040 206
============ ===========
Securities available for sale
U.S. Treasury securities and securities
of U.S. government agencies:
Maturing within one year $3 554 127 5.01% $ 3 000 000 6.09%
Maturing after one year but
within five years 21 174 905 5.43% 10 002 502 5.66%
Equity securities 449 700 - - 401 600 - -
----------- -----------
Total securities available for sale $ 25 178 732 $13 404 102
============ ===========
Total securities $ 50 208 061 $37 444 308
============ ===========
</TABLE>
DEPOSITS
When comparing the 1998 and 1997 year end balances, total deposits
increased over $16,400,000 or 14.44% in 1998. Noninterest bearing demand
deposits increased over $2,400,000 or 16.04%. Time deposits increased almost
$2,000,000 or 4.88%.
The most significant change in deposits was in the savings and interest
bearing demand category which increased over $12,000,000 or 20.69%. The Select
Checking balances (a form of NOW account that pays a higher interest rate on
balances of $5,000 or more) increased over $18,000,000. Approximately $5,000,000
moved from Money Market accounts to Select Checking. Balances of NOW accounts
and savings accounts remained basically the same when comparing year end
balances of 1998 and 1997.
The average yield on savings and interest bearing demand deposits
increased from 2.62% at year end 1997 to 3.18% at December 31, 1998. This
increase is due to the higher rates paid on Select Checking balances during
1998. The average yield on time deposits increased slightly in 1998 to 5.59%
compared to 5.48% in 1997.
At December 31, 1998, time deposits of $100,000 or more were 3.8% of
total deposits compared with 4.0% at December 31, 1997. Maturities of time
deposits of $100,000 or more at December 31, 1998 are as follows:
Within three months $ 779 128
Over three through six months 528 599
Over six months through twelve months 1 114 776
Over twelve months 2 587 927
----------
Total $5 010 430
==========
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 consistency 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.
-11-
<PAGE>
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 23.89% at
December 31, 1998 and a ratio of Tier 1 capital to risk-weighted assets of
22.64%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.
1998 1997
------------ ------------
Tier 1 capital:
Common stock $ 600 000 $ 600 000
Surplus 5 400 000 5 400 000
Retained earnings 10 090 870 9 291 741
------------ ------------
Total tier 1 capital $16 090 870 $15 291 741
Tier 2 capital:
Allowance for loan losses (1) 891 693 829 378
------------ ------------
Total risk-based capital $ 16 982 563 $ 16 121 119
============ ============
Risk-weighted assets $ 71 087 152 $ 66 040 845
============ ============
Capital ratios:
Tier 1 risk-based capital ratio 22.64% 23.15%
Total risk-based capital ratio 23.89% 24.41%
Leverage ratio 11.15% 11.83%
(1) Limited to 1.25% of gross risk-weighted assets.
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, federal funds sold, securities available for sale, and loans and
investments maturing within one year. The Corporation's liquidity during 1998
(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's overall liquidity is sufficient to satisfy its
depositors' requirements and to meet its customers' credit needs.
At December 31, 1998, cash and due from banks, securities purchased
under agreements to resell, federal funds sold and loans and securities maturing
within one year were $50,785,000.
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 1998.
ACCOUNTING RULE CHANGES
In June 1998, FASB issued FAS 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 establishes accounting and
reporting standards for derivative financial instruments and other similar
financial instruments and for hedging activities. The standard also allows
securities classified as held-to-maturity to be transferred to the
available-for-sale category at the date of initial application of this standard.
FAS 133 is effective for all fiscal years beginning after June 15, 1999.
Management is currently reviewing this statement to determine the impact, if
any, it will have since the Corporation currently has no derivative instruments.
-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, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
Winchester, Virginia
January 29, 1999
-13-
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
-------------- -------------
ASSETS
Cash and due from banks $ 4 646 475 $ 4 517 965
Securities purchased under agreements to resell
and federal funds sold 13 483 258 8 600 000
Securities (fair value: 1998, $50,530,066; 1997,
$37,507,918) 50 208 061 37 444 308
Loans 77 806 536 78 212 962
Reserve for loan losses (1 140 000) (1 138 747)
-------------- -------------
Net loans 76 666 536 77 074 215
Premises and equipment, net 1 223 979 1 201 550
Accrued interest receivable 1 167 699 1 008 357
Other assets 707 556 710 133
-------------- -------------
Total Assets $ 148 103 564 $ 130 556 528
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing demand deposits $ 17 421 542 $ 15 013 619
Savings and interest bearing demand deposits 70 508 392 58 419 752
Time deposits 42 735 274 40 748 551
-------------- -------------
Total Deposits $ 130 665 208 $ 114 181 922
Accrued interest payable 350 258 342 503
Other liabilities 891 942 734 152
Commitments and contingent liabilities - - - -
-------------- -------------
Total Liabilities $ 131 907 408 $ 115 258 577
-------------- -------------
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 10 090 870 9 291 741
Accumulated other comprehensive income 105 286 6 210
-------------- -------------
Total Stockholders' Equity $ 16 196 156 $ 15 297 951
-------------- -------------
Total Liabilities and Stockholders' Equity $ 148 103 564 $ 130 556 528
============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C>
1998 1997 1996
------------- ------------ ------------
Interest Income:
Interest and fees on loans $ 6 989 025 $ 7 018 882 $ 6 749 755
Interest on investment securities
Taxable 1 702 127 1 628 597 1 213 709
Interest and dividends on securities
available for sale
Taxable 881 103 691 203 661 125
Dividends 27 528 25 006 24 322
Interest on securities purchased under agreements
to resell and federal funds sold 455 539 198 926 437 034
------------- ------------ ------------
Total Interest Income $ 10 055 322 $ 9 562 614 $ 9 085 945
------------- ------------ ------------
Interest Expense:
Interest on deposits $ 4 400 932 $ 3 693 476 $ 3 623 243
Interest on federal funds purchased and securities
sold under agreements to repurchase - - 16 219 - -
------------- ------------ ------------
Total Interest Expense $ 4 400 932 $ 3 709 695 $ 3 623 243
------------- ------------ ------------
Net Interest Income $ 5 654 390 $ 5 852 919 $ 5 462 702
Provision for Loan Losses 125 245 127 408 100 000
------------- ------------ ------------
Net Interest Income after
Provision for Loan Losses $ 5 529 145 $ 5 725 511 $ 5 362 702
------------- ------------ ------------
Other Income:
Trust and financial services $ 555 101 $ 522 023 $ 460 053
Service charges on deposit accounts 378 523 403 006 318 062
Fees for other customer services 161 298 162 423 181 980
Other operating income 30 746 40 933 28 730
------------- ------------ ------------
Total Other Income $ 1 125 668 $ 1 128 385 $ 988 825
------------- ------------ ------------
Other Expenses:
Salaries and employee benefits $ 2 627 960 $ 2 473 151 $ 2 468 762
Net occupancy expense of premises 183 917 194 426 203 033
Furniture and equipment expenses 361 798 348 798 300 211
Stationery and supplies 104 927 109 472 106 810
Directors fees 103 630 102 330 105 700
ATM expenses 72 078 75 766 105 445
Other operating expenses 842 650 822 628 823 555
------------- ------------ ------------
Total Other Expenses $ 4 296 960 $ 4 126 571 $ 4 113 516
------------- ------------ ------------
Income before Income Tax Expense $ 2 357 853 $ 2 727 325 $ 2 238 011
Income Tax Expense 868 724 1 005 621 830 577
------------- ------------ ------------
Net Income $ 1 489 129 $ 1 721 704 $ 1 407 434
============= ============ ============
Earnings Per Share, basic and diluted $ 2.48 $ 2.87 $ 2.35
============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C>
Accumulated
Other
Common Undivided Comprehensive Comprehensive
Stock Surplus Profits Income Income Total
-------- ---------- ---------- ------------- ------------- -----------
Balances, December 31, 1995 $600 000 $5 400 000 $7 422 603 $- - $13 422 603
Comprehensive income
Net income - 1996 - - - - 1 407 434 - - $1 407 434 1 407 434
Other comprehensive income
net of tax, unrealized holding
(losses) arising during the
period (net of tax, $21,018) - - - - - - (40 800) (40 800) (40 800)
----------
Comprehensive income $1 366 634
==========
Cash dividends - 1996
($.95 per share) - - - - (570 000) - - (570 000)
-------- ---------- ---------- -------- ------------
Balances, December 31, 1996 $600 000 $5 400 000 $8 260 037 $(40 800) $ 14 219 237
Comprehensive income
Net income - 1997 - - - - 1 721 704 - - $1 721 704 1 721 704
Other comprehensive income
net of tax, unrealized holding
gains arising during the
period (net of tax, $24,217) - - - - - - 47 010 47 010 47 010
----------
Comprehensive income $1 768 714
==========
Cash dividends - 1997
($1.15 per share) - - - - (690 000) - - (690 000)
-------- ---------- ---------- -------- ------------
Balances, December 31, 1997 $600 000 $5 400 000 $9 291 741 $6 210 $ 15 297 951
Comprehensive income
Net income - 1998 - - - - 1 489 129 - - $1 489 129 1 489 129
Other comprehensive income
net of tax, unrealized holding
gains arising during the
period (net of tax, $51,039) - - - - - - 99 076 99 076 99 076
----------
Comprehensive income $1 588 205
==========
Cash dividends - 1998
($1.15 per share) - - - - (690 000) - - (690 000)
-------- ---------- ---------- -------- ------------
Balances, December 31, 1998 $600 000 $5 400 000 $10 090 870 $105 286 $ 16 196 156
======== ========== =========== ======== ============
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C>
1998 1997 1996
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1 489 129 $ 1 721 704 $ 1 407 434
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 125 245 127 408 100 000
Depreciation 212 287 208 809 181 424
Amortization 12 282 12 282 12 282
Deferred income tax (credits) (43 592) (40 759) (88 111)
Discount accretion and premium amortization
on securities, net 19 416 28 853 27 060
Loss on sale of real estate 9 579 - - 94 972
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (159 342) 12 859 (243 706)
(Increase) decrease in other assets (61 732) (19 025) 15 002
Increase (decrease) in accrued interest payable 7 755 16 459 (20 196)
Increase in other liabilities 157 790 8 837 237 283
------------ ----------- -----------
Net cash provided by operating activities $ 1 768 817 $ 2 077 427 $ 1 723 444
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of investment securities $ 10 000 000 $ 8 000 000 $18 000 000
Proceeds from maturity of securities available for sale 3 000 000 8 000 000 - -
Purchases of investment securities (11 014 326) (6 049 375) (17 996 884)
Purchases of securities available for sale (14 618 728) (7 019 050) (14 071 795)
Net (increase) decrease in loans 226 428 (4 915 035) 265 336
Purchases of premises and equipment (234 716) (155 966) (318 897)
Proceeds from sale of real estate 91 007 - - 350 000
------------ ----------- -----------
Net cash (used in) investing activities $(12 550 335) $(2 139 426) $(13 772 240)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing demand deposits $ 2 407 923 $ 977 121 $ 188 872
Net increase (decrease) in savings and interest bearing
demand deposits 12 088 640 3 336 332 (1 407 379)
Net increase (decrease) in time deposits 1 986 723 1 356 000 (58 498)
Cash dividends (690 000) (690 000) (570 000)
------------ ------------- ------------
Net cash provided by (used in) financing activities $15 793 286 $ 4 979 453 $ (1 847 005)
------------ ------------- ------------
Increase (decrease) in cash and cash equivalents $ 5 011 768 $ 4 917 454 $(13 895 801)
CASH AND CASH EQUIVALENTS
Beginning 13 117 965 8 200 511 22 096 312
------------ ------------- ------------
Ending $ 18 129 733 $ 13 117 965 $ 8 200 511
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 4 393 177 $ 3 693 236 $ 3 643 439
============ =========== ===========
Income taxes $902 011 $ 1 202 017 $ 806 431
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 110 006 $ 100 005 $ - -
============ =========== ===========
Loans made on sale of real estate $ 54 000 $ - - $ 291 000
============ =========== ===========
Unrealized gain (loss) on securities available for sale $ 150 115 $ 71 227 $ (61 818)
============ =========== ===========
</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 a separate
component of other comprehensive income, net of tax. 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, 1998 and 1997.
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.
The Corporation has 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 reserve for loan
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 loans
are 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.
Employee Benefit Plans
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."
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."
In 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This pronouncement
does not change the measurement or recognition of amounts
recognized in the Corporation's financial statements applicable
to its defined benefit and postretirement plans. Statement No.
132 revises the existing disclosure requirements by standardizing
the disclosure requirements for pensions requiring certain
additional information on changes in the benefit obligations and
fair values of plan assets, and eliminating certain disclosures.
-19-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
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, 1998, 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.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, securities
purchased under agreements to resell and federal funds sold.
Generally, securities purchased under agreements to resell and
federal funds sold 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.
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.
Comprehensive Income
As of January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." Statement No. 130 establishes new rules
for the reporting and display of comprehensive income and its
components; however, the adoption of this statement had no impact
on the Corporation's net income or stockholders' equity. The
Statement requires other comprehensive income to include
unrealized gains and losses on investments in securities
classified as available for sale, which prior to adoption were
reported separately in stockholders' equity. Financial statements
for prior years have been reclassified to conform to the
requirements of Statement No. 130.
Note 2. Securities
The amortized cost and fair value of securities being held to maturity
as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- --------- -----------
U.S. Treasury securities $17 008 734 $ 229 475 $ - - $17 238 209
Obligations of U.S. Government agencies 8 020 595 92 530 - - 8 113 125
----------- ---------- --------- -----------
$25 029 329 $ 322 005 $ - - $25 351 334
=========== ========== ========= ===========
</TABLE>
-20-
<PAGE>
Note 2. Securities (Continued)
<TABLE>
<CAPTION>
<S> <C>
1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- --------- -----------
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
=========== ========== ========= ===========
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1998, by contractual maturity, are shown
below:
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $10 018 466 $10 104 375
Due after one year through five years 15 010 863 15 246 959
----------- -----------
$25 029 329 $25 351 334
=========== ===========
There were no sales of securities being held to maturity during 1998,
1997 and 1996.
Securities being held to maturity with a carrying value of $6,024,899
and $7,013,601 at December 31, 1998 and 1997, were pledged to secure
public funds and other balances as required by law.
The amortized cost and fair value of securities available for sale as
of December 31, 1998 and 1997 are as follows:
1998
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- --------- -----------
U.S. Treasury securities $ 4 999 573 $ 43 239 $ - - $ 5 042 812
Obligations of U.S. Government agencies 19 569 935 140 337 (24 052) 19 686 220
Federal Home Loan Bank stock 449 700 - - - - 449 700
----------- ---------- --------- -----------
$25 019 208 $ 183 576 $ (24 052) $25 178 732
=========== ========== ========= ===========
1997
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- --------- -----------
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
=========== ========== ========= ===========
The amortized cost and fair value of the securities available for sale
as of December 31, 1998, by contractual maturity, are shown below:
Amortized Fair
Cost Value
----------- -----------
Due in one year or less $ 3 552 553 $ 3 554 127
Due after one year through five years 21 016 955 21 174 905
Other 449 700 449 700
----------- -----------
$25 019 208 $25 178 732
=========== ===========
</TABLE>
There were no sales of securities available for sale during 1998, 1997
and 1996.
Securities available for sale with a carrying value of $2,005,174 and
$1,988,991 at December 31, 1998 and 1997, were pledged to secure public
funds and other balances as required by law.
-21-
<PAGE>
Note 3. Loans and Related Party Transactions
The loan portfolio is composed of the following:
<TABLE>
<CAPTION>
<S> <C>
December 31
-------------------------
1998 1997
----------- -----------
Real estate loans:
Construction and land development $ 651 848 $ 393 187
Secured by farm land 1 394 201 1 717 930
Secured by 1-4 family residential 42 541 181 43 282 898
Other real estate loans 12 623 662 12 496 739
Loans to farmers (except those secured by
real estate) 246 100 269 682
Commercial and industrial loans (except those
secured by real estate) 2 187 471 2 045 122
Loans to individuals for personal expenditures 17 738 039 17 705 824
All other loans 424 034 301 580
----------- -----------
$77 806 536 $78 212 962
=========== ===========
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 risks. At December 31, 1998 and 1997, these
loans totaled $214,881 and $674,248 respectively. During 1998, total
principal additions were $279,722 and total principal payments were
$739,089.
Note 4. Reserve for Loan Losses
The following is a summary of transactions in the reserve for loan
losses for 1998, 1997 and 1996:
1998 1997 1996
---------- ---------- ----------
Balances at beginning of year $1 138 747 $1 138 747 $ 899 245
Provision charged to operating expense 125 245 127 408 100 000
Recoveries added to the reserve 42 730 48 420 237 626
Loan losses charged to the reserve (166 722) (175 828) (98 124)
---------- ---------- ----------
Balances at end of year $1 140 000 $1 138 747 $1 138 747
========== ========== ==========
Information about impaired loans as of and for the years ended December
31, 1998 and 1997 are as follows:
1998 1997
---------- ----------
Impaired loans for which a reserve has been provided $ 397 986 $ 397 986
Impaired loans for which no reserve has been provided - - - -
Total impaired loans $ 397 986 $ 397 986
========== ==========
Reserve provided for impaired loans, included in the
reserve for loan losses $198 993 $ 198 993
========== ==========
1998 1997 1996
---------- ---------- ----------
Average balance in impaired loans $397 986 $ 399 178 $ 472 292
========== ========== ==========
Interest income recognized $ 34 062 $ 34 271 $ 36 125
========== ========== ==========
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $-0- at December 31, 1998 and $285,150 at December 31,
1997. If interest on these loans had been accrued, such income would
have approximated $-0- in 1998 and $29,267 in 1997.
-22-
<PAGE>
Note 5. Premises and Equipment, Net
Premises and equipment consists of the following:
December 31
-------------------------
1998 1997
---------- -----------
Premises $1 851 509 $ 1 813 763
Furniture and equipment 2 458 650 2 262 136
---------- -----------
$4 310 159 $ 4 075 899
Less accumulated depreciation 3 086 180 2 874 349
$1 223 979 $ 1 201 550
========== ===========
Depreciation included in operating expense for 1998, 1997 and 1996, was
$212,287, $208,809 and $181,424 respectively.
Note 6. Deposits
The aggregate amount of time deposits with a balance of $100,000 or
more was $5,010,430 and $4,513,606 at December 31, 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of all time deposits are
as follows:
1999 $28 614 874
2000 10 222 428
2001 2 567 506
2002 1 328 466
2003 and thereafter 2 000
-----------
$42 735 274
===========
Note 7. Employee Benefit Plans
The Corporation sponsors a noncontributory, defined benefit pension
plan covering full-time employees over 21 years of age upon completion
of one year of service. Benefits are based on average compensation for
the five consecutive full calendar years of service which produce the
highest average. 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."
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.
-23-
<PAGE>
Note 7. Employee Benefit Plans (Continued)
Information about the plans follow:
<TABLE>
<CAPTION>
<S> <C>
Pension Benefits Postretirement Benefits
----------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ---------
Change in Benefit Obligation:
Benefit obligation, beginning $3 339 744 $2 866 017 $ 463 642 $ 422 021
Service cost 156 373 129 289 7 904 7 249
Interest cost 262 650 220 359 38 337 34 342
Actuarial loss 337 654 183 315 52 976 21 871
Benefits paid (119 720) (98 157) (28 014) (21 841)
Change in discount rate 152 549 38 921 - - - -
---------- ---------- ---------- ---------
Benefit obligation, ending $4 129 250 $3 339 744 $ 534 845 $ 463 642
---------- ---------- ---------- ---------
Change in Plan Assets:
Fair value of plan assets, beginning $3 337 355 $ 2 888 800 $ - - $ - -
Actual return on plan assets 199 055 546 712 - - - -
Employer contributions - - - - 28 014 21 841
Benefits paid (119 720) (98 157) (28 014) (21 841)
---------- ---------- ---------- ---------
Fair value of plan assets, ending $3 416 690 $ 3 337 355 $ - - $ - -
---------- ---------- ---------- ---------
Funded status $(712 560) $ (2 389) $ (534 845) $(463 642)
Unrecognized net (gain) loss 197 926 (372 224) 17 979 (6 950)
Accumulated premium payments
for retirees - - - - 94 851 66 837
Unrecognized net obligation
(asset) at transition (137 245) (157 547) 278 588 295 851
Unrecognized prior service cost 1 335 1 490 - - - -
---------- ---------- ---------- ---------
Accrued benefit cost included
in other liabilities $(650 544) $ (530 670) $(143 427) $(107 904)
========= ========= ========= =========
Pension Benefits Postretirement Benefits
---------------------------------- ------------------------------
1998 1997 1996 1998 1997 1996
--------- --------- -------- -------- -------- ---------
Components of Net Periodic Benefit Cost:
Service cost $156 373 $ 129 289 $ 133 596 $ 7 904 $ 7 249 $ 6 025
Interest cost 262 650 220 359 200 942 38 337 34 342 38 479
Expected return on plan assets (279 002) (241 937) (217 359) - - - - - -
Amortization of prior service cost 155 155 155 - - - - - -
Amortization of net obligation
at transition (20 302) (20 302) (20 302) 17 296 17 568 19 670
--------- --------- -------- -------- -------- ---------
Net periodic benefit cost $ 119 874 $ 87 564 $ 97 032 $ 63 537 $ 59 159 $ 64 174
========= ========= ======== ======== ======== =========
Weighted-Average Assumptions:
Discount rate 7.00% 7.25% 7.75% 8.00% 8.00% 8.00%
Expected return on plan assets 8.50% 8.50% 8.50% - - - - - -
Rate of compensation increase 5.00% 5.00% 6.00% - - - - - -
For measurement purposes, a 10% annual rate of increase in per capita
health care costs of covered benefits was assumed for 1998, 1997 and
1996, with such annual rate of increase gradually declining to 5% in
2013.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A 1% change in assumed
health care cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
Effect on the health care component of the accumulated
postretirement benefit obligation $ 33 619 $ (29 555)
Effect on total of service and interest cost components of
net periodic postretirement health care benefit cost 3 340 (3 610)
</TABLE>
-24-
<PAGE>
Note 8. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1998 and 1997:
1998 1997
---------- -----------
Deferred tax assets:
Reserve for loan losses $ 232 271 $ 231 845
Accrued pension expense 221 185 180 428
Accrued postretirement benefits 48 765 36 687
Nonaccrual interest - - 10 880
---------- -----------
$ 502 221 $ 459 840
---------- -----------
Deferred tax liabilities:
Premises $ 25 800 $ 27 012
Securities available for sale 54 239 3 199
$ 80 039 $ 30 211
---------- -----------
Net deferred tax assets $ 422 182 $ 429 629
========== ===========
The provision for income taxes charged to operations for the years
ended December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
<S> <C>
1998 1997 1996
---------- ----------- -----------
Current tax expense $ 912 317 $ 1 046 380 $ 918 688
Deferred tax expense (benefit) (43 593) (40 759) (88 111)
---------- ----------- -----------
$ 868 724 $ 1 005 621 $ 830 577
========== =========== ===========
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, 1998, 1997 and 1996 due to the
following:
1998 1997 1996
---------- ----------- -----------
Computed "expected" tax expense $ 801 670 $ 927 291 $ 760 924
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (4 627) (3 353) (6 809)
State income taxes, net of federal income tax benefit 69 385 79 092 74 544
Other 2 296 2 591 1 918
---------- ----------- -----------
$ 868 724 $ 1 005 621 $ 830 577
========== =========== ===========
</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 $2,303,481 in deposits in another
financial institution in excess of amounts insured by the Federal
Deposit Insurance Corporation (FDIC) at December 31, 1998.
The Corporation must maintain a reserve against its deposits in
accordance with Regulation D of the Federal Reserve Act. For the final
bi-weekly reporting periods which included December 31, 1998 and 1997,
the aggregate amounts of daily average required balances were
approximately $2,484,000 and $990,000, respectively.
The Corporation is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue, and is developing a remediation plan to resolve the Issue. The
Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Corporation is heavily dependent on
computer processing in the conduct of its business activities. Failure
of these systems could have a significant impact on the Corporation's
operations.
-25-
<PAGE>
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, 1998, the aggregate amount of unrestricted funds which could be
transferred from the banking subsidiary to the parent corporation,
without prior regulatory approval, totaled $2,723,034 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. Those 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, 1998 and 1997, is
as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 1997
----------- ----------
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit $12 225 851 $8 538 048
Standby letters of credit 3 900 144 639
</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.
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, 1998.
Note 12. 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.
-26-
<PAGE>
Note 12. Disclosures About Fair Value of Financial Instruments (Continued)
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, 1998 and 1997, the difference between 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>
1998 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C>
Financial assets:
Cash $ 4 646 $ 4 646 $ 4 518 $ 4 518
Securities purchased under
agreements to resell and
federal funds sold 13 483 13 483 8 600 8 600
Securities 50 208 50 530 37 444 37 508
Loans 76 667 74 280 77 074 77 039
-------- -------- -------- --------
Total financial assets $145 004 $142 939 $ 127 636 $ 127 665
======== ======== ========== ==========
Financial liabilities:
Deposits $130 665 $130 925 $ 114 182 $ 114 069
======== ======== ========== ==========
</TABLE>
Note 13. 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, 1998, that the
Corporation meets all capital adequacy requirements to which it is
subject.
As of December 31, 1998, the most recent notification from the Federal
Deposit Insurance Corporation and the Federal Reserve Bank 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.
-27-
<PAGE>
Note 13. Regulatory Matters (Continued)
The Corporation's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
<S> <C>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
As of December 31, 1998:
Total capital (to risk-weighted assets):
Consolidated $16 983 23.89% =>$5 687 => 8.0% N/A
Bank of Charles Town $16 940 23.84% =>$5 685 => 8.0% =>$7 107 =>10.0%
Tier 1 capital (to risk-weighted assets):
Consolidated $16 091 22.64% =>$2 843 => 4.0% N/A
Bank of Charles Town $16 048 22.58% =>$2 843 => 4.0% =>$4 264 => 6.0%
Tier 1 capital (to average assets):
Consolidated $16 091 11.15% =>$5 774 => 4.0% N/A
Bank of Charles Town $16 048 11.12% =>$5 773 => 4.0% =>$7 217 => 5.0%
As of December 31, 1997:
Total capital (to risk-weighted assets):
Consolidated $16 121 24.41% =>$5 283 => 8.0% N/A
Bank of Charles Town $16 074 24.35% =>$5 281 => 8.0% =>$6 601 =>10.0%
Tier 1 capital (to risk-weighted assets):
Consolidated $15 292 23.15% =>$2 642 => 4.0% N/A
Bank of Charles Town $15 245 23.09% =>$2 640 => 4.0% =>$3 961 => 6.0%
Tier 1 capital (to average assets):
Consolidated $15 292 11.83% =>$5 169 => 4.0% N/A
Bank of Charles Town $15 245 11.80% =>$5 168 => 4.0% =>$6 460 => 5.0%
</TABLE>
-28-
<PAGE>
Note 14. Parent Corporation Only Financial Statements
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
------------ ------------
ASSETS
Cash $ 26 587 $ 20 705
Investment in subsidiary 16 153 510 15 250 816
Organization costs, net of accumulated amortization 7 165 19 447
Other assets 13 890 11 979
----------- -----------
Total Assets $16 201 152 $15 302 947
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES, other $ 4 996 $ 4 996
----------- -----------
STOCKHOLDERS' EQUITY
Common stock $ 600 000 $ 600 000
Surplus 5 400 000 5 400 000
Undivided profits 10 090 870 9 291 741
Accumulated other comprehensive income 105 286 6 210
----------- -----------
Total Stockholders' Equity $16 196 156 $15 297 951
----------- -----------
Total Liabilities and Stockholders' Equity $16 201 152 $15 302 947
=========== ===========
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Income
Dividends from subsidiary $ 715 000 $ 690 000 $ 570 000
Expenses
Amortization $ 12 282 $ 12 282 $ 12 282
Transfer agent expense 7 887 7 592 7 563
Legal and professional 4 634 2 831 2 575
Other operating expenses 18 394 14 710 13 858
----------- ----------- -----------
Total Expenses $ 43 197 $ 37 415 $ 36 278
----------- ----------- -----------
Income before Income Tax (Benefit) and
Equity in Undistributed Income of
Subsidiary $ 671 803 $ 652 585 $ 533 722
Income Tax (Benefit) (13 708) (11 797) (11 618)
----------- ----------- -----------
Income before Equity in Undistributed
Income of Subsidiary $ 685 511 $ 664 382 $ 545 340
Equity in Undistributed Income of Subsidiary 803 618 1 057 322 862 094
----------- ----------- -----------
Net Income $ 1 489 129 $ 1 721 704 $ 1 407 434
=========== =========== ===========
</TABLE>
-29-
<PAGE>
Note 14. Parent Corporation Only Financial Statements (Continued)
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1 489 129 $ 1 721 704 $ 1 407 434
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (income) of
subsidiary (803 618) (1 057 322) (862 094)
Amortization 12 282 12 282 12 282
(Increase) decrease in other assets (1 911) (180) 9 575
Increase in other liabilities - - - - 255
----------- ----------- -----------
Net cash provided by operating
activities $ 695 882 $ 676 484 $ 567 452
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends $ (690 000) $ (690 000) $ (570 000)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents $ 5 882 $ (13 516) $ (2 548)
CASH AND CASH EQUIVALENTS
Beginning 20 705 34 221 36 769
----------- ----------- -----------
Ending $ 26 587 $ 20 705 $ 34 221
=========== =========== ===========
</TABLE>
-30-
<PAGE>
TRUST AND FINANCIAL SERVICES
Your trust department realized record income and asset balances in 1998!
Trust assets as of December 31, 1998 totaled $90,189,000, an increase of
$7,017,000 (8.44%) over December 31, 1997 footings of $83,172,000. Trust fees in
1998 totaled $555,101, an increase of $33,078 (6.34%) compared to $522,023 in
1997.
The question of Y2K preparedness is a concern to all businesses and
individuals as we approach the year 2000. The department administers its
accounting system through the TRUST-RITE software system, developed and
supported by one of the country's leading fiduciary correspondents, Northern
Trust Company. The software has been verified for Y2K compliance by Northern and
independent third party proxy testing.
In 1999, the department will be moving to a temporary office at 202 West
Washington Street during the renovation and construction of the new bank
quarters at the Citizens Building. The temporary location will provide
convenient access to customers visiting the main bank and trust department. We
will enjoy greeting you in our relocated office over the next several months!
The department continues to provide emphasis on personal trust service,
specifically addressing the investment, financial management, third party
"bill-paying", and estate settlement needs of our customers. Our 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 and Trust Officer
STATEMENT OF CONDITION
DECEMBER 31, 1998
(unaudited)
ASSETS
Discretionary assets:
Bank Deposits: Bank of Charles Town $ 259 000
Other Banks 215 000
United States Treasury and Agency Obligations 6 751 000
State, County, and Municipal Obligations 1 149 000
Short Term Interest Bearing Funds 6 720 000
Other Short Term Obligations 115 000
Notes and Bonds 6 076 000
Common and Preferred Stocks 37 563 000
Real Estate Mortgages 301 000
Real Estate 495 000
Miscellaneous Assets 5 000
-----------
Total Discretionary Assets $59 649 000
-----------
Non-Discretionary Assets $30 540 000
-----------
Total Assets $90 189 000
===========
ACCOUNTS
Personal Trusts 154 $56 938 000
Estates and Other Court Accounts 35 6 999 000
Employee Benefit Accounts 25 5 082 000
Agencies and Other 78 21 170 000
--- -----------
Total Accounts 292 $90 189 000
=== ===========
-31-
<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
MORTGAGE AND COMMERCIAL
LOAN DEPARTMENT
Thomas F. Chambers
Vice President
H. William Easter, Jr.
Assistant Vice President
Cynthia A. Light
Assistant Cashier
Patricia A. Ott
INSTALLMENT LOAN DEPARTMENT
Donna J. Burns
Vice President
Richard B. Breeden
Assistant Vice President &
Security Officer
Janice B. Davis
Assistant Cashier
Victoria B. Burns
Kimberly K. DeSarno
Timothy F. Hitrick
Deborah A. Ring
Linda A. Stewart
TELLER DEPARTMENT
Carolyn N. O'Brien
Assistant Cashier & Head Teller
Kyle S. Carter
Jennifer A. Casale
Lisa R. Cook-Bork
Cathryn M. DeRonda
Cathy Jo Fraley
Sharon L. Hardy
Melissa A. Harrison
John N. Haymaker
Christopher J. Lancaster
Cindy L. Magaha
C. Lane McCarron
Kendra L. Nichols
Consuelo L. Shanton
Roxann L. Shives
Michelle N. Slusher
Jeanette Staubs
Misty D. Staubs
Suzanne N. Taylor
Terrie C. Thomas
Linda L. Whittington
ADMINISTRATION
Charles W. LeMaster
President
William R. Harner
Sr. Vice President & Cashier
L. Gayle Marshall Johnson, CPA
Vice President & Financial Officer
Susan S. Myers, CPA
Assistant Vice President & Auditor
Diane C. Bogden
Personnel Officer
William H. Chesley, Jr.
Marketing Officer
Shelly D. Dodson
Tammy L. Miller
BOOKKEEPING DEPARTMENT
Doris V. Loudan
Assistant Cashier & Head Bookkeeper
Patricia L. Clay
Marcia S. Lerch
Elizabeth W. Park
John N. Poole
Penny J. Sebastian
Karen A. Staubs
Stephanie N. Tennant
Peggy C. Turner
KEARNEYSVILLE BRANCH
C. Kenneth Nicewarner, Jr.
Assistant Vice President &
Branch Manager
Nancy L. Baker
Assistant Cashier & Assistant
Branch Manager
Rebecca E. Black
Mary L. Bowers
Stephanie L. DiGennaro-Dailey
Carolyn A. Dunn
Erin L. Guarino
Joshua E. Higdon
Jennifer L. Hockensmith
Tina D. Holbrook
Tammy E. Hough
April D. Myers
COURIER
Benjamin T. Breeden
MAINTENANCE DEPARTMENT
Paula M. Fraley
Paul D. Staubs
E. Geraldine White
TRUST AND FINANCIAL SERVICES
Robert L. Hersey
Vice President & Trust Officer
David S. (Joe) Smith
Trust Officer
Deanna D. Greenfield
Michelle S. Griffith
Sheila R. Miller
K. Renee Queen
Holly A. Stevens
CERTIFICATES OF DEPOSIT
DEPARTMENT
Judith A. Edwards
DATA PROCESSING DEPARTMENT
Richard M. Crea
Assistant Cashier &
Data Processing Manager
Amy L. Brill
Nancy L. Harrison
Robert F. Spring, Jr.
HARPERS FERRY BRANCH
Wayne C. Welty
Assistant Vice President &
Branch Manager
Shelly L. Holmes
Assistant Cashier & Assistant
Branch Manager
Misty N. Ashbaugh
Melissa D. Castle
Jennifer E. Chand
Barbara J. Dupuy
Karen S. James
M. Jacqueline Propst
W. Ann Wilt
Charles W. Wyndham, Jr.
-32-
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
A copy of the Corporation's 1998 annual report of 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. Potomac
Bancshares, Inc. (symbol PTBS) is now on the Bulletin Board, a network available
to brokers. Scott and Stringfellow, a regional securities firm with an office in
Winchester, Virginia, is a market maker for Potomac's stock. A market maker is
one who makes a market for a particular stock. Information about sales (but not
necessarily all sales) of Potomac's stock are available on the Internet through
many of the stock information services using Potomac's symbol. As of December
31, 1998, there were 600,000 common shares outstanding held by approximately 830
shareholders.
The per share sale prices of the Corporation's stock for 1997 listed
below are based solely on transactions of which the Corporation is aware. The
per share sale prices for 1998 are based on information available as a result of
our participation on the Bulletin Board described above and information gathered
on the Internet. The dividends for 1997 and 1998 are also listed.
High Low Dividends
1997
----
First Quarter $ 30.000 $ 29.000 $ N/A
Second Quarter 32.000 30.000 0.45
Third Quarter 32.000 30.000 N/A
Fourth Quarter 32.000 30.000 0.70
1998
----
First Quarter $ 38.000 $ 34.875 $ N/A
Second Quarter 42.000 32.500 0.50
Third Quarter 46.000 41.000 N/A
Fourth Quarter 41.000 40.000 0.65
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 27, 1999,
beginning at 10:30 a.m.
-33-
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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,646,475
<INT-BEARING-DEPOSITS> 113,243,666
<FED-FUNDS-SOLD> 13,483,258
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,178,732
<INVESTMENTS-CARRYING> 25,029,329
<INVESTMENTS-MARKET> 25,351,334
<LOANS> 77,806,536
<ALLOWANCE> 1,140,000
<TOTAL-ASSETS> 148,103,564
<DEPOSITS> 130,665,208
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,242,200
<LONG-TERM> 0
0
0
<COMMON> 600,000
<OTHER-SE> 15,596,156
<TOTAL-LIABILITIES-AND-EQUITY> 148,103,564
<INTEREST-LOAN> 6,989,025
<INTEREST-INVEST> 2,610,758
<INTEREST-OTHER> 455,539
<INTEREST-TOTAL> 10,055,322
<INTEREST-DEPOSIT> 4,400,932
<INTEREST-EXPENSE> 4,400,932
<INTEREST-INCOME-NET> 5,654,390
<LOAN-LOSSES> 125,245
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,296,960
<INCOME-PRETAX> 2,357,853
<INCOME-PRE-EXTRAORDINARY> 1,489,129
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,489,129
<EPS-PRIMARY> 2.48
<EPS-DILUTED> 2.48
<YIELD-ACTUAL> 7.65
<LOANS-NON> 0
<LOANS-PAST> 596,877
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 100,079
<ALLOWANCE-OPEN> 1,138,747
<CHARGE-OFFS> 166,722
<RECOVERIES> 42,730
<ALLOWANCE-CLOSE> 1,140,000
<ALLOWANCE-DOMESTIC> 1,140,000
<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 27, 1999
------------------------------------------------
To the Shareholders:
The Regular Annual Meeting of Shareholders of Potomac Bancshares, Inc.
("Potomac"), will be held at Bavarian Inn, Shepherdstown, West Virginia, at
10:30 a.m. on April 27, 1999, 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 1999.
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 19,
1999, 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 30, 1999
<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 27, 1999
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 27, 1999, 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 19, 1999, 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 830 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 1999 Annual Meeting. All of the four nominees 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.
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. A Year 2000
Committee was appointed in 1998 and will continue to serve as long as necessary
to meet Year 2000 challenges.
2
<PAGE>
The Asset/Liability Management Committee consists of eight members:
Donna J. Burns, 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
three meetings during 1998.
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 1998, the Audit Committee held three
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 two
meetings in 1998.
The Community Reinvestment Act (CRA)/Fair Lending Committee consists of
eight members: Donna J. Burns, John P. Burns, Jr., Thomas F. Chambers, William
H. Chesley, Jr., Guy Gary Chicchirichi, William R. Harner, E. William Johnson
and Charles W. LeMaster. 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 1998.
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 no meetings in 1998.
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 ten meetings in 1998.
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."
The Steering Committee consists of thirteen members: Donna J. Burns,
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 1998. This Committee
reviews and evaluates operating procedures, interest rates charged on loans and
interest rates being paid on deposits.
3
<PAGE>
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 fifteen regular
meetings in 1998.
The Trust Investment Review Committee, consisting of two trust officers
and one director (Robert L. Hersey, 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 ten
meetings during 1998.
The Year 2000 Committee consists of fifteen members: Donna J. Burns,
John P. Burns, Jr., Thomas F. Chambers, Thomas C.G. Coyle, Richard Crea, Judy
Edwards, William R. Harner, Robert L. Hersey, Gayle Marshall Johnson, Doris
Loudan, Susan Myers, Kenny Nicewarner, Carolyn O'Brien and Wayne C. Welty. The
Year 2000 Committee was appointed by the Board in January 1998 to coordinate and
guide the Bank in its preparation to meet the challenge of Year 2000 by ensuring
that all equipment is appropriately date sensitive to the four digit date of
2000 and beyond. This Committee held fourteen meetings in 1998.
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 1998. The Board of Directors of the Bank holds regular weekly
meetings each Tuesday and special meetings from time to time as required. During
1998, the Bank Board held 52 regular meetings and one special meeting. During
the year, each of the Directors, except Guy Gary Chicchirichi and John C.
Skinner, Jr., 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> <C> <C>
Robert W. Butler 75 1994 None 2002 Owner of Warm Spring Farm & Orchard,
Jefferson County, West Virginia; retired
from Stauffer Chemical Company
Guy Gary Chicchirichi 57 1994 None 2002 Secretary/Treasurer - Guy's Buick-Pontiac-
Oldsmobile-GMC Truck, Inc., Jefferson
County, West Virginia; charter member of
Charles Town Rotary Club
</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> <C> <C>
Thomas C.G. Coyle 70 1994 None 2002 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 72 1994 None 2002 Retired owner/operator of Ranson Real Estate
Company, Jefferson County, West Virginia.
DIRECTORS CONTINUING TO SERVE UNEXPIRED TERMS
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
John P. Burns, Jr. 57 1994 None 2001 Owner/operator of a beef & grain farm in
Jefferson County, West Virginia; President -
Jefferson County Fair Association; Director -
Valley Farm Credit.
William R. Harner 58 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 54 1994 None 2000 Chair - Division of Business and Social
Sciences and Professor - Shepherd College,
Jefferson County, West Virginia; Director -
Jefferson Memorial Hospital.
Charles W. LeMaster 57 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.
Minnie R. Mentzer 82 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 85 1994 None 2001 Retired from J.E. Senseney & Sons, Inc.
(Western Auto Franchisee), Jefferson County,
West Virginia.
John C. Skinner, Jr. 57 1994 None 2000 Attorney, owner of Nichols & Skinner, L.C.,
Jefferson County, West Virginia; Bank attorney
since 1986; Potomac attorney since 1994.
</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> <C> <C> <C> <C>
Donald S. Smith 70 1994 None 2000 Employed at Bank 1947 to 1991; President
1978 to 1991 (retired); Vice President and
Assistant Secretary of Potomac since 1994.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following shareholder beneficially owns more than 5% of Potomac
Common Stock as of March 1, 1999:
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 March 1,
1999, on which date 600,000 shares were outstanding.
AMOUNT AND NATURE OF
NOMINEES BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
Robert W. Butler 2,310 shares(1,3)* .3850
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 1,000 shares(1,3)* .1667
400 Forrest Avenue 1,873 shares(2,4)* .3122
Charles Town WV 25414-1408
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
DIRECTORS (NON-NOMINEES) BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
<S> <C> <C> <C>
John P. Burns, Jr. 100 shares(1,3)* .0167
Rt 1 Box 296 1,645 shares(2,4)* .2742
Charles Town WV 25414-9769 12 shares (5)* .0020
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
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
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
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF COMMON STOCK
<S> <C> <C> <C>
All nominees, Directors & principal 25,994 shares(1,3)* 4.3324
officers as a group 9,780 shares(2,4)* 1.6300
(13 persons) 7,679 shares (5)* 1.2798
------------- ------
Total 43,453 shares 7.2422
============= ======
</TABLE>
- --------------------------------------------------------------------------------
* 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 1998. 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, 1998, 1997
and 1996 of the chief executive officer. No officer had total annual salary and
bonus exceeding $100,000. Neither Potomac nor the Bank has any stock option
plans, employee stock ownership plans or other employee benefit plans except for
the pension plan described in this Proxy Statement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------- ------------------------- --------------------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDER- OTHER
COMPEN- STOCK LYING LTIP COMPEN-
NAME AND SALARY BONUS SATION AWARD(S) OPTIONS/ PAYOUTS SATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) SARS (#) ($) ($)
<S> <C> <C> <C> <C>
Charles W. LeMaster 1998 84,282 N/A 0 N/A N/A N/A 0
President and CEO
1997 79,822 N/A 0 N/A N/A N/A 0
1996 76,366 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> <C> <C> <C> <C> <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, 1998, 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 23 years $33,480
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 1998 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 United National Bank, 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, 1998, 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]
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG POTOMAC BANCSHARES, INC.,
MEDIA GENERAL INDEX AND SIC CODE INDEX
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
---------------------------------------------------------------------------
COMPANY/INDEX/MARKET 12/31/1993 12/30/1994 12/29/1995 12/31/1996 12/31/1997 12/31/1998
- -------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
POTOMAC BANCSHARES, INC. 100.00 129.66 134.91 130.17 154.30 203.30
Bank Holding Companies 100.00 108.84 161.89 233.99 327.08 427.22
Media General Index 100.00 99.17 128.58 155.28 201.64 246.49
</TABLE>
ASSUMES $100 INVESTED ON JAN. 01, 1994
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 1998
11
<PAGE>
COMPENSATION OF DIRECTORS
Directors of Potomac were not compensated as such during 1998. Directors
of the Bank are compensated at the rate of $150 for each regular and special
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 1998
and will perform similar services in 1999. 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 1998 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 1999.
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 1998 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, 1998, 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 2000
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 30, 1999, to have it considered for inclusion in the proxy
statement of the Annual Meeting in 2000.
Charles W. LeMaster
President
Charles Town, West Virginia
March 30, 1999
<PAGE>
POTOMAC BANCSHARES, INC.
111 EAST WASHINGTON STREET, PO BOX 906, CHARLES TOWN WV 25414-0906
PROXY FOR ANNUAL MEETING OF SHAREHOLDERS
April 27, 1999
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 Thomas C.G. Coyle,
or any one of them, with full power to act alone as my (our) true and lawful
attorney(s) will 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 19, 1999, 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 27, 1999, 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:
Robert W. Butler Thomas C. G. Coyle
Guy Gary Chicchirichi Francis M. Frye
[ ] 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 CHOSE 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 the described more
fully in this 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.
