<PAGE>
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, 1999
____ 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
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NONE
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- ------------------------ -----------------------
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 _________
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2
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
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State issuer's revenues for its most recent fiscal year.
$11,178,662
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State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $17,271,174
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ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes ________ No ________ Not Applicable XXX
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 600,000
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Transitional Small Business Disclosure Format (check one):
Yes ________ No XXX
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DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents which are incorporated by reference in the
Form 10-KSB Annual Report, and the Parts and Items of the Form 10-KSB into which
the documents are incorporated.
Part of the Form 10-KSB Into Which
Document the Document is Incorporated
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Portions of Potomac Bancshares, Inc.'s Part II, Items 6 and 7
1999 Annual Report to Shareholders for
the year ended December 31, 1999
Portions of Potomac Bancshares, Inc.'s Part III, Items 9, 10, 11 and 12
Proxy Statement for the 2000 Annual
Meeting of Shareholders
PART I
Item 1. Description of Business.
History and Operations
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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.
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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 1.94% and a loss rate of .03% during 1999.
These rates are based on comparisons to 1999 average total loans.
As of December 31, 1999, aggregate dollar amounts in loan categories secured by
real estate are as follows:
Construction and land development $ 31,000
Secured by farmland 2,604,920
Secured by 1-4 family residential 43,798,037
Other 11,859,376
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$58,293,333
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Loans to individuals for personal expenditures are approximately 22% of the
Bank's total loans at December 31, 1999. The aggregate balance of these loans
was $16,879,468 at December 31, 1999. The majority of these are installment
loans with the remainder made as term loans.
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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 1.15% and
a loss rate of .06% in 1999 (based on comparisons to 1999 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 .28% and the loss rate was .02% compared to average total loans in 1999.
The remaining aggregate dollar amount of the Bank's loans is $3,157,251 at
December 31, 1999. The amount includes:
<TABLE>
<CAPTION>
<S> <C>
(1) Dealer wholesale loans with generally no delinquencies or losses $1,083,242
(2) Term loans for business and commercial purposes 1,351,454
(3) Industrial revenue bond loans secured by real estate 76,475
(4) Term loans for agricultural purposes 280,000
(5) Other loans 366,080
</TABLE>
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.
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5
Competition
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As of March 16, 2000, there were 54 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, 1999, there were six banks in Jefferson County with 16
banking offices. The total deposits of those commercial banks as of June, 1999,
were $459,952,000 and the Bank ranked number one with $130,581,000 or 28.4% 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,
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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
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with the home state of the bank in question. The effect of this legislation
has been increased competition for West Virginia banks, including the Bank.
Employees
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Bancshares currently has no employees.
As of January 31, 2000, the Bank had 78 full-time employees and 8 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.
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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, 1999, FDIC set the Financing
Corporation (FICO) Bank Insurance Fund (BIF) premium for the Bank at the annual
rate of 2.100 basis points or .0002100 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.
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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, 1999, Bancshares had capital in excess of all applicable
requirements as shown below:
Actual Required Excess
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Tier 1 capital:
Common stock $ 600,000
Surplus 5,400,000
Retained earnings 10,943,890
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Total tier 1 capital $ 16,943,890 $2,922,318 $14,021,572
Tier 2 capital:
Allowance for loan losses (1) 916,986
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Total risk-based capital $ 17,860,876 $5,844,636 $12,016,240
============ ========== ===========
Risk-weighted assets $ 73,057,953
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Tier 1 capital $ 16,943,890 $4,402,298 $12,541,592
============ ========== ===========
Average total assets $146,743,279
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8
Actual Required Excess
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Capital ratios:
Tier 1 risk-based capital ratio 23.19% 4.00% 19.19%
Total risk-based capital ratio 24.45% 8.00% 16.45%
Tier 1 capital to average total
assets (leverage) 11.55% 4.00% 7.55%
(1) Limited to 1.25% of gross risk-weighted assets.
Gramm-Leach-Bliley Act of 1999. On November 4, 1999, Congress adopted
the Gramm-Leach-Bliley Act of 1999. This Act, also know as the Financial
Modernization Law, repealed a number of federal limitations on the powers of
banks and bank holding companies originally adopted in the 1930's. Under the
Act, banks, insurance companies, securities firms and other service providers
may now affiliate. In addition to broadening the powers of banks, the act
created a new form of entity, called a financial holding company, which may
engage in any activity that is financial in nature or incidental or
complimentary to financial activities.
The Federal Reserve Board provides the principal regulatory supervision
of financial services permitted under the Act. However, the Securities and
Exchange Commission and state insurance and securities regulators also assume
substantial supervisory powers and responsibilities.
The Act addresses a variety of other matters, including customer
privacy issues. The obtaining of certain types of information by false or
fraudulent pretenses is a crime. Banks and other financial institutions must
notify their customers about their policies on sharing information with certain
third parties. In some instances, customers may refuse to permit their
information to be shared. The Act also requires disclosures of certain automatic
teller machine fees and contains certain amendments to the federal Community
Reinvestment Act. The Act becomes effective 120 days after its passage.
Permitted Non-Banking Activities. Under the Gramm-Leach-Bliley Act,
bank holding companies may become financial holding companies and engage in
certain non-banking activities. Bancshares has not yet filed to become a
financial holding company and presently does not engage in, nor does it have any
immediate plans to engage in, any such non-banking activities.
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 previously consisted of two separate two
story buildings located side by side with an adjoining corridor. During 1999
the older of these two buildings, which was used by the Trust and Financial
Services Division and for storage, was demolished and a new building is being
built. The first floor of the new building will house the Trust and Financial
Services Division. The second floor will house certain administrative and loan
offices. Both of these floors will open into the currently standing Bank
premises. The basement of the new building will be used for record storage.
During the construction, the Trust Division is in temporary quarters on
Washington Street in Charles Town several blocks from the Bank.
The currently standing premises, constructed in 1967, is being
renovated at the same time the new building is being constructed. The renovation
includes all new lighting, new ceilings, new floor and wall coverings as well as
some minor structural changes for more efficient operations.
The estimated cost of the new construction and renovation is
$2,038,000. Completion of the total project is expected in June 2000.
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 17, 2000, there were approximately 825 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
trading values for 1998 and 1999 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> <C>
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
1999 First Quarter $40.375 $38.500 $ N/A
Second Quarter 39.000 36.125 .50
Third Quarter 38.000 35.250 N/A
Fourth Quarter 37.000 33.000 .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 4-11 of the Annual Report to
Shareholders for the year ended December 31, 1999, 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, 1999, 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 4-5 and 13 of the Proxy Statement
dated March 29, 2000, for the April 25, 2000 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>
Principal
Name Position Since Age Occupation
- --------------------------- ------------------- -------------- -------------------------------------------------------------
<S> <C> <C> <C>
Charles W. LeMaster President & CEO 58 Employed at Bank since 1983; President & CEO since 1991.
1994
William R. Harner Sr. Vice President, 59 Employed at Bank since 1967; Sr. Vice President &
Secretary & Treasurer Cashier since 1988.
1994
Gayle Marshall Johnson Vice President & Chief 50 Employed with the Bank 1977-1985 as internal auditor.
Financial Officer Rejoined Bank in 1988 as Financial Officer. Vice
1994 President & Financial Officer of Bank since 1990.
Donald S. Smith Vice President 71 Employed at Bank 1947 to 1991; President 1979 to 1991
& Assistant Secretary (retired).
1994
</TABLE>
Item 10. Executive Compensation.
The information contained on pages 8-9 and 12 of the Proxy Statement dated
March 29, 2000, for the April 25, 2000 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 6-7 of the Proxy Statement dated
March 29, 2000, for the April 25, 2000 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 29, 2000, for the April 25, 2000 Annual Meeting under the caption "Certain
Transactions with Directors, Officers and Their Associates" is incorporated
herein by reference.
Item 13. Exhibits List and Reports on Form 8-K.
(a) 2.1 Agreement and Plan of Merger dated March 8, 1994, by and
between Potomac Bancshares, Inc., and Bank of Charles Town filed with and
incorporated by reference from the Registration on Form S-4 filed with the
Securities and Exchange Commission on June 10, 1994: Registration no. 33-80092.
3.1 Articles of Incorporation of Potomac Bancshares, Inc. filed
with and incorporated by reference from the Registration on Form S-4 filed with
the Securities and Exchange Commission on June 10, 1994: Registration no. 33-
80092.
3.2 Amendments to Articles of Incorporation of Potomac Bancshares,
Inc. adopted by shareholders on April 25, 1995 and filed with the West Virginia
Secretary of State on May 23, 1995, and incorporated by reference from Potomac's
Form 10-KSB for the year ended December 31, 1995 and filed with the Securities
and Exchange Commission, file no. 0-24958.
3.3 Bylaws of Potomac Bancshares, Inc. filed with and incorporated
by reference from the Registration on Form S-4 filed with the Securities and
Exchange Commission on June 10, 1994: Registration no. 33-80092.
3.4 Amended and Restated Bylaws of Potomac Bancshares, Inc.
adopted by shareholders April 25, 1995 and incorporated by reference from
Potomac's Form 10-KSB for the year ended December 31, 1995 and filed with the
Securities and Exchange Commission, file no. 0-24958.
13 1999 Annual Report to Shareholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Proxy Statement for the 2000 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 29, 2000
---------------------------------------
Charles W. LeMaster
President & Chief Executive Officer
By /s/ L. Gayle Marshall Johnson March 29, 2000
----------------------------------------
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 March , 2000
---------------------------------
J. Scott Boyd, Director
By /s/ John P. Burns, Jr. March 29, 2000
---------------------------------
John P. Burns, Jr., Director
By /s/ Robert W. Butler March 29, 2000
---------------------------------
Robert W. Butler, Director
By /s/ Guy Gareth Chicchirichi March 29, 2000
---------------------------------
Guy Gareth Chicchirichi, Director
By /s/ Thomas C. G. Coyle March 29, 2000
---------------------------------
Thomas C. G. Coyle, Director
<PAGE>
13
Signature & Title Date
- ----------------- ----
By /s/ Francis M. Frye March 29, 2000
-----------------------------------------
Francis M. Frye, Director
By /s/ William R. Harner March 29, 2000
-----------------------------------------
William R. Harner, Director,
Sr. Vice President, Secretary & Treasurer
By /s/ E. William Johnson March 29, 2000
-----------------------------------------
E. William Johnson, Director
By /s/ Charles W. LeMaster March 29, 2000
-----------------------------------------
Charles W. LeMaster, Director,
President, Chief Executive Officer
By /s/ Minnie R. Mentzer March 29, 2000
-----------------------------------------
Minnie R. Mentzer, Director
By /s/ John C. Skinner, Jr. March 29, 2000
------------------------------------------
John C. Skinner, Jr., Director
By /s/ Donald S. Smith March 29, 2000
------------------------------------------
Donald S. Smith, Director
<PAGE>
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.....................4-11
Independent Auditor's Report.................................................13
Consolidated Financial Statements
Consolidated Balance Sheets.........................................14
Consolidated Statements of Income...................................15
Consolidated Statements of Changes in Stockholders' Equity..........16
Consolidated Statements of Cash Flows...............................17
Notes to Consolidated Financial Statements.......................18-30
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
The Board of Directors, Officers and Staff are pleased to submit the
Annual Report for Potomac Bancshares, Inc. for the year 1999. Although we are
not entirely satisfied with last year's results, we feel your holding company is
continuing to be a strong independent institution even in today's fast-paced
economic environment.
Net income for the year totaled $1,543,020 and was an increase of
$53,891 over 1998. The earnings per share was $2.57 and shareholders benefited
by receiving a dividend of $1.15 per share for the year. After payment of the
dividend and holding company expenses, retained earnings credited to capital was
$853,020. During the year, assets declined slightly shown by the decrease in
deposits of approximately $4 million. In order to hold these deposits in house
we would have been required to pay a higher interest rate that we felt was not
justified.
1999 was the year we had to make final preparations for the millennium
conversion. Your holding company was prepared for the worst, but as everyone now
knows the banking industry was well prepared and it was business as usual. Our
Y2K Committee is to be commended for its efforts in meeting the regulators'
requirements and seeing that our conversion was glitch free.
Renovations on the main office and construction of our new building to
house the Trust Department and administrative offices are in full swing and
progressing on schedule. It is anticipated that the completion of this project
will be mid-year 2000.
Mr. James Senseney, a member of our Board of Directors resigned in 1999
because of health problems. He had served faithfully on the Board and Trust
Committee since March 1964, and departed this life in October 1999. J. Scott
Boyd was elected to the corporation's Board of Directors to fill Mr. Senseney's
unexpired term. Mr. Boyd is the owner and operator of Jefferson Pharmacy, Inc.
located in Ranson since 1982. Mr. Boyd is a life time resident of Berkeley
County and completed his education at West Virginia University.
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> <C>
J. SCOTT BOYD THOMAS C. G. COYLE CHARLES W. LEMASTER
Owner Retired Owner-Operator President
Jefferson Pharmacy Riddleberger's Store Bank of Charles Town
JOHN P. BURNS, JR. FRANCIS M. FRYE MINNIE R. MENTZER
Partner Retired President Retired President
Burns Farm Ranson Real Estate Myers Coal Company, Inc.
ROBERT W. BUTLER WILLIAM R. HARNER JOHN C. SKINNER, JR.
Farmer-Orchardist Senior Vice President Owner
Warm Spring Orchard & Farm & Cashier Nichols & Skinner, L.C.
Bank of Charles Town
GUY GARETH CHICCHIRICHI E. WILLIAM JOHNSON DONALD S. SMITH
Executive Manager Professor of Economics Retired President
Guy's Buick-Pontiac- Shepherd College Bank of Charles Town
Oldsmobile-GMC Truck, Inc.
</TABLE>
-2-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in Thousands Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 10,009 $ 10,055 $ 9,563 $ 9,086 $ 8,747
Interest expense 4,191 4,401 3,710 3,623 3,591
-------- -------- -------- -------- --------
Net interest income 5,818 5,654 5,853 5,463 5,156
Provision for loan losses 125 125 127 100 125
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 5,693 5,529 5,726 5,363 5,031
Non-interest income 1,170 1,126 1,128 989 906
Non-interest expense 4,423 4,297 4,127 4,114 4,078
-------- -------- -------- -------- --------
Income before income taxes 2,440 2,358 2,727 2,238 1,859
Income tax expense 897 869 1,005 831 674
-------- -------- -------- -------- --------
Net income $ 1,543 $ 1,489 $ 1,722 $ 1,407 $ 1,185
======== ======== ======== ======== ========
Per Share Data
Net income, basic and diluted $ 2.57 $ 2.48 $ 2.87 $ 2.35 $ 1.98
Cash dividends declared 1.15 1.15 1.15 .95 .85
Book value at period end 27.81 26.99 25.50 23.70 22.37
Average shares outstanding 600,000 600,000 600,000 600,000 600,000
Average Balance Sheet Summary
Assets $147,612 $138,698 $126,474 $124,267 $121,638
Loans 78,710 78,552 76,866 73,817 72,440
Securities 49,315 45,190 40,576 36,972 37,682
Deposits 129,711 121,612 110,291 109,709 107,826
Shareholders' equity 16,539 15,862 14,870 13,806 13,052
Performance Ratios
Return on average assets 1.05% 1.07% 1.36% 1.13% .97%
Return on average equity 9.33% 9.39% 11.58% 10.19% 9.08%
Dividend payout ratio 44.75% 46.37% 40.07% 40.43% 43.93%
Capital Ratios
Leverage ratio 11.55% 11.15% 11.83% 11.43% 10.83%
Risk-based capital ratios
Tier 1 capital 23.19% 22.64% 23.15% 23.21% 20.73%
Total capital 24.45% 23.89% 24.41% 24.47% 21.98%
</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>
1999 1998
-------------------------------------------- ----------------------------------------------
Average Income/ Average Average Income/ Average
Balances Expense Yield/rate Balances Expense Yield/rate
------------- ------------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans
Taxable $ 78,390,482 $ 6,664,884 8.50% $ 78,215,073 $ 6,967,855 8.91%
Tax exempt 319,534 28,182 8.82% 336,999 32,076 9.52%
------------- ------------ ------------- -------------
Total loans 78,710,016 6,693,066 8.50% 78,552,072 6,999,931 8.91%
------------- ------------ ------------- -------------
Taxable securities 49,315,036 2,782,193 5.64% 45,190,167 2,610,758 5.78%
Securities purchased under
agreements to resell and
federal funds sold 11,985,942 543,077 4.53% 7,796,026 455,539 5.84%
------------- ------------ ------------- -------------
Total earning assets 140,010,994 $ 10,018,336 7.16% 131,538,265 $ 10,066,228 7.65%
------------- ============ ------------- =============
Allowance for loan losses (1,183,685) (1,137,864)
Cash and due from banks 5,320,986 5,322,429
Bank premises/equipment,
net 1,493,602 1,212,223
Other assets 1,969,995 1,763,203
------------- -------------
Total assets $ 147,611,892 $ 138,698,256
============= =============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits
Savings and interest
bearing demand
deposits $ 70,917,739 $ 2,018,720 2.85% $ 64,410,847 $ 2,047,815 3.18%
Time deposits 42,393,782 2,171,943 5.12% 42,083,997 2,353,117 5.59%
------------- ------------ ------------- -------------
Total interest
bearing deposits 113,311,521 $ 4,190,663 3.70% 106,494,844 $ 4,400,932 4.13%
------------- ============ ------------- =============
Noninterest bearing demand
deposits 16,399,781 15,117,247
Other liabilities 1,361,238 1,223,874
Stockholders' equity 16,539,352 15,862,291
------------- -------------
Total liabilities and
stockholders' equity $ 147,611,892 $ 138,698,256
============= =============
Net interest spread 3.46% 3.52%
Interest expense as a
percent of average earning assets 2.99% 3.35%
Net interest margin 4.16% 4.31%
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Total assets decreased slightly over 2% in 1999 compared to 1998. This
decrease is a combination of a decrease in the securities portfolio and smaller
increases in various other asset categories. The decrease in assets was offset
by a decrease in deposits.
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 1999 net interest income increased almost 3% when compared to 1998.
The increase is due to decreases in deposit volume and deposit rates.
Interest income decreased only slightly in 1999 to $10,008,754 when
compared to $10,055,322 in 1998.
The loan portfolio increased slightly in 1999 to $78,330,052 compared
to $77,806,536 in 1998. Interest and fees on loans decreased over 4% in 1999 due
to decreasing interest rates and only slight loan growth. There was no
significant increase or decrease in volume in any particular category of loans
during 1999.
Interest income on securities held to maturity and securities available
for sale increased 6.5% in 1999 compared to 1998. This increase is due to
increased volumes of securities since the average rate actually decreased in
1999 compared to 1998. Interest income from securities purchased under
agreements to resell and federal funds sold increased 19% in 1999 compared to
1998. This increase is due to increased volumes since there was also a decrease
in the average rate for these investments in 1999 compared to 1998.
The decrease in interest expense to $4,190,663 in 1999 compared to
$4,400,932 in 1998 is the reason for the increase in net interest income for
1999 compared to 1998. Decreased volumes and rates were responsible for the
decrease in interest expense. Total interest bearing deposits decreased
$2,600,000 in 1999 compared to 1998.
In 1999, the average yield for earning assets was 7.16%, a decrease of
.49% when compared to 1998. The lower yield is due to the decreased loan yields
during 1999 compared to 1998, and lower yields on securities,on securities
purchased under agreements to resell and federal funds sold during 1999 compared
to 1998.
The average rate paid on all interest bearing liabilities was 3.70% in
1999 compared to 4.13% in 1998. The net interest spread decreased .06% to 3.46%
compared to 3.52% in 1998, and the net interest margin decreased .15% to 4.16%
in 1999 compared to 4.31% in 1998.
-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>
1999 COMPARED TO 1998 1998 COMPARED TO 1997
----------------------------------------------- ---------------------------------------------
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 $ (302,971) $ 15,522 $ (318,493) $ (40,802) $ 168,640 $ (209,442)
Tax exempt loans (3,894) (1,610) (2,284) 16,584 18,455 (1,871)
Taxable securities 171,435 233,359 (61,924) 265,952 265,952 --
Securities purchased under
agreements to resell 87,538 150,248 (62,710) 256,613 234,413 22,200
----------- ---------- ------------ ---------- ---------- -----------
TOTAL $ (47,892) $ 397,519 $ (445,411) $ 498,347 $ 687,460 $ (189,113)
----------- ---------- ------------ ---------- ---------- -----------
INTEREST EXPENSE
Savings and interest bearing
demand deposits $ (29,095) $ 195,057 $ (224,152) $ 596,084 $ 258,237 $ 337,847
Time deposits (181,174) 17,384 (198,558) 111,372 65,059 46,313
Federal funds purchased and
securities sold under
agreements to repurchase -- -- -- (16,219) (16,219) --
----------- ---------- ------------ ---------- ---------- -----------
TOTAL $ (210,269) $ 212,441 $ (422,710) $ 691,237 $ 307,077 $ 384,160
----------- ---------- ------------ ---------- ---------- -----------
NET INTEREST INCOME $ 162,377 $ 185,078 $ (22,701) $ (192,890) $ 380,383 $ (573,273)
=========== ========== ============ ========== ========== ===========
</TABLE>
NONINTEREST INCOME AND EXPENSE
Noninterest income (other income) increased approximately 4% in 1999
compared to 1998. This included an almost 7% increase in income from the Trust
and Financial Services Department, increased fees for other customer services
and increases in other operating income due to net gains on property
transactions and initial income from investment in a West Virginia bankers title
company. These increases were offset by decreased income from service charges on
deposit accounts.
Noninterest expense (other expense) increased 3% in 1999 compared to
1998. There was an 11% increase in net occupancy expense of premises due mostly
to rental expense and improvements to the temporary location for the Trust
Department during construction of the Bank's new building. The majority of the
4% increase in furniture and equipment expenses is due to the purchase of new
computer equipment to prepare for the year 2000. Stationery and supplies expense
increased almost 18% due in large part to additional purchasing of supplies to
prepare for the year 2000. There were decreases in salaries and employee
benefits' expense and directors' fees. Other operating expenses increased over
11%. Advertising, external audit and postage were accounts whose increases were
partially related to Y2K and were included in other operating expenses.
YEAR 2000
The move into the year 2000 came without noticeable operational
problems for the Subsidiary Bank. The Corporation and the Subsidiary Bank had
seriously undertaken the challenge to prepare in advance for December 31, 1999.
All computer and other equipment containing embedded microchips was tested and
upgraded or replaced as needed. Third party vendors and suppliers were contacted
to assure that they were Y2K compliant. The Subsidiary Bank communicated
continuously with customers throughout 1999 to make them aware of the Bank's
preparation for the year 2000. Total Y2K expenditures were $273,625. $57,699 of
the expenditures were charged directly to earnings as the expenses were incurred
during 1998 and 1999. $215,926 of the expenditures were capitalized. The
Corporation and the Subsidiary Bank are confident that these expenditures and
the intense preparation for December 31, 1999 were time and resources well
spent. Directors, officers and staff as well as customers have been able to
continue working and using the services of the Subsidiary Bank as the year 2000
moves ahead.
-6-
<PAGE>
INTEREST RATE SENSITIVITY
The table below shows the opportunities the Corporation will have to
reprice interest earning assets and interest bearing liabilities as of December
31, 1999. Nonaccrual loans are excluded from these balances.
<TABLE>
<CAPTION>
Mature or Reprice
--------------------------------------------------------------------------------------------
After Three
Months But After One Year
Within Within But Within After
Three Months Twelve Months Five Years Five Years Nonsensitive
------------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Fixed rate loans $ 8,907,812 $ 23,893,037 $ 38,986,088 $ 1,912,372 $ --
Floating rate loans 4,517,885 -- -- -- --
Securities 2,000,000 13,979,032 25,859,845 -- 449,700
Securities purchased under
agreements to resell and
federal funds sold 15,530,674 -- -- -- --
------------- -------------- ------------- ----------- -------------
Total $ 30,956,371 $ 37,872,069 $ 64,845,933 $ 1,912,372 $ 449,700
------------- -------------- ------------- ----------- -------------
Interest Bearing Liabilities:
Time deposits
$100,000 and over $ 1,913,061 $ 1,811,295 $ 1,435,709 $ -- $ --
Other time deposits 8,163,153 18,181,892 9,851,159 -- --
Money market accounts 7,400,979 -- -- -- --
NOW accounts 29,543,978 -- -- -- 16,056,849
Savings accounts -- -- -- -- 16,292,314
------------- -------------- ------------- ----------- -------------
Total $ 47,021,171 $ 19,993,187 $ 11,286,868 $ -- $ 32,349,163
------------- -------------- ------------- ----------- -------------
Rate Sensitivity Gap $ (16,064,800) $ 17,878,882 $ 53,559,065 $ 1,912,372
------------- -------------- ------------- -----------
Cumulative Gap $ (16,064,800) $ 1,814,082 $ 55,373,147 $57,285,519
============= ============== ============= ===========
</TABLE>
At December 31, 1999, the Corporation showed a negative cumulative gap
in the first time frame with the remaining time frames showing positive gaps.
The increase in the negative gap in the first time frame when comparing to
December 31, 1998 is due to the increase in time deposit balances in this
category. The positive gap in the second time frame in 1999 compared to a
negative gap in the same time frame in 1998 is due to increased loans and
securities in the category and decreased time deposits in the category. Time
frames three and four are still positive gaps though slightly less in 1999 than
in 1998.
The Corporation's Asset Liability Committee recommended in 1998 that
the APY (annual percentage yield) on the Select Checking accounts be gradually
reduced until the balances stopped increasing. This strategy did finally take
effect because the total balances in Select Checking have remained relatively
stable throughout 1999.
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.
-7-
<PAGE>
LOAN PORTFOLIO
Loans at December 31, 1999 and 1998 are summarized below:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Commercial, financial and agricultural $ 2,823,556 $ 2,433,571
Real estate:
Construction and land development 31,000 651,848
Secured by farm land 2,604,920 1,394,201
Secured by 1-4 family residential 43,798,037 42,541,181
Other real estate 11,859,376 12,623,662
Consumer 16,879,468 17,738,039
All other 333,695 424,034
------------- -------------
$ 78,330,052 $ 77,806,536
============= =============
</TABLE>
Loans have increased only slightly when comparing year end totals for
1999 and 1998. Most of the loan categories listed above remained basically the
same at December 31, 1999 as at December 31, 1998. The decrease in the
construction and land development category was due to the payoff of a large land
development loan during 1999. The majority of the increase in the secured by
farmland category is due to one large loan added to the portfolio during 1999.
There were no categories of loans that exceeded 10% of outstanding
loans at December 31, 1999 which were not disclosed in the table above.
REMAINING MATURITIES OF SELECTED LOANS
<TABLE>
<CAPTION>
Commercial,
Financial and Real Estate-
Agricultural Construction
------------- -------------
<S> <C> <C>
Within one year $ 2,482,559 $ --
Variable rate 223,430 31,000
Fixed rate, over one through nine years 117,567 --
------------ ------------
Total maturities $ 2,823,556 $ 31,000
============ ============
</TABLE>
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 allowance for loan losses is adequate.
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of period $ 1,140,000 $ 1,138,747 $ 1,138,747
Charge-offs:
Commercial, financial and agricultural -- -- --
Real estate - construction -- -- --
Real estate - mortgage 26,854 --
Consumer 62,510 166,722 175,828
------------ ------------ -------------
Total charge-offs 89,364 166,722 175,828
------------ ------------ -------------
Recoveries:
Commercial, financial and agricultural -- -- --
Real estate - construction -- -- --
Real estate - mortgage 17,000 -- --
Consumer 25,283 42,730 48,420
------------ ------------ -------------
Total recoveries 42,283 42,730 48,420
------------ ------------ -------------
Net charge-offs 47,081 123,992 127,408
Additions charged to operations 125,000 125,245 127,408
------------ ------------ -------------
Balance at end of period $ 1,217,919 $ 1,140,000 $ 1,138,747
============ ============ =============
Ratio of net charge-offs during the period
to average loans outstanding during the period 0.06% 0.16% 0.17%
===== ===== =====
</TABLE>
-8-
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table shows an allocation of the allowance 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>
1999 1998
--------------------------------- --------------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
Allowance To Total Loans Allowance To Total Loans
----------- ----------------- ----------- -----------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 14,118 3.61% $ 12,168 3.13%
Real estate mortgage:
Construction and land development 155 .04% 52,759 .84%
Secured by farm land 13,025 3.32% 6,971 1.79%
Secured by 1-4 family residential 265,168 55.91% 294,588 54.68%
Other real estate 246,681 15.14% 288,405 16.22%
Consumer 93,869 21.55% 103,769 22.80%
All other 1,668 .43% 2,120 .54%
Unallocated 583,235 -- 379,220 --
----------- --------- ----------- ------
$ 1,217,919 100.00% $ 1,140,000 100.00%
=========== ======= =========== ======
</TABLE>
RISK ELEMENTS IN THE LOAN PORTFOLIO
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Nonaccrual loans $ 112,844 $ -- $ 285,150
Restructured loans -- -- --
Foreclosed properties 201,429 55,425 100,005
----------- ----------- -----------
Total nonperforming assets $ 314,273 $ 55,425 $ 385,155
=========== =========== ===========
Loans past due 90 days accruing interest $ 559,924 $ 596,877 $ 19,923
=========== =========== ===========
Allowance for loan losses to period end loans 1.55% 1.47% 1.46%
Nonperforming assets to period end loans and
foreclosed properties .40% .07% .49%
</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 $231,520
and $397,986 at December 31, 1999 and 1998. Nonaccrual loans not classified as
impaired totaled $112,844 in 1999 and $-0- in 1998.
At December 31, 1999, other potential problem loans totaled $13,560.
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.
-9-
<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>
Weighted Weighted
1999 Average 1998 Average
Book Value Yield Book Value Yield
-------------- -------- -------------- ---------
<S> <C> <C> <C> <C>
Securities held to maturity
U.S. Treasury securities and securities
of U.S. Government agencies:
Maturing within one year $ 7,002,421 5.95% $ 10,018,466 5.84%
Maturing after one year but
within five years 8,004,668 5.66% 15,010,863 5.79%
------------- --------------
Total securities held to maturity $ 15,007,089 $ 25,029,329
============= ==============
Securities available for sale
U.S. Treasury securities and securities
of U.S. government agencies:
Maturing within one year $ 8,976,611 5.77% $ 3,554,127 5.01%
Maturing after one year but
within five years 17,855,177 5.37% 21,174,905 5.43%
Equity securities 449,700 -- 449,700 --
------------- --------------
Total securities available for sale $ 27,281,488 $ 25,178,732
============= ==============
Total securities $ 42,288,577 $ 50,208,061
============= ==============
</TABLE>
DEPOSITS
When comparing the 1999 and 1998 year end balances, total deposits
decreased almost $4,000,000 or 3% in 1999. Noninterest bearing deposits
decreased over $1,300,000 or 8%. Interest bearing deposits decreased over
$2,500,000 or 2%.
There were no significant changes in any deposit categories in 1999.
The Select Checking balances (a form of NOW account that pays a higher interest
rate on balances of $5,000 or more) remained stable which was significant after
the dramatic growth in 1998.
The average yield on savings and interest bearing demand deposits
decreased from 3.18% at year end 1998 to 2.85% at December 31, 1999. The average
yield on time deposits decreased in 1999 to 5.12% compared to 5.59% in 1998.
At December 31, 1999, time deposits of $100,000 or more were 4.1% of
total deposits compared with 3.8% at December 31, 1998. Maturities of time
deposits of $100,000 or more at December 31, 1999 are as follows:
Within three months $ 1,913,061
Over three through six months 374,051
Over six months through twelve months 1,437,244
Over twelve months 1,435,709
------------
Total $ 5,160,065
============
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.
-10-
<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 24.45% at
December 31, 1999 and a ratio of Tier 1 capital to risk-weighted assets of
23.19%. Both of these exceed the capital requirements adopted by the federal
regulatory agencies.
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Tier 1 capital:
Common stock $ 600,000 $ 600,000
Surplus 5,400,000 5,400,000
Retained earnings 10,943,890 10,090,870
------------- --------------
Total tier 1 capital $ 16,943,890 $ 16,090,870
Tier 2 capital:
Allowance for loan losses (1) 916,986 891,693
------------- --------------
Total risk-based capital $ 17,860,876 $ 16,982,563
============= ==============
Risk-weighted assets $ 73,057,953 $ 71,087,152
============= ==============
Capital ratios:
Tier 1 risk-based capital ratio 23.19% 22.64%
Total risk-based capital ratio 24.45% 23.89%
Leverage ratio 11.55% 11.15%
</TABLE>
(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 1999
(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, 1999, cash and due from banks, securities purchased
under agreements to resell, federal funds sold and loans and securities maturing
within one year were $55,932,775.
Borrowing capabilities provide additional liquidity. The Subsidiary
Bank maintains a federal funds line of $7,000,000 with Bank of America. 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 1999.
-11-
<PAGE>
This page is intentionally left blank.
-12-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Potomac Bancshares, Inc. and Subsidiary
Charles Town, West Virginia
We have audited the accompanying consolidated balance sheets of Potomac
Bancshares, Inc. and Subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
Winchester, Virginia
January 28, 2000
-13-
<PAGE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,523,254 $ 4,646,475
Securities purchased under agreements to resell
and federal funds sold 15,530,674 13,483,258
Securities held to maturity (fair value of $14,917,040
at December 31, 1999 and $25,351,334 at,
December 31, 1998) 15,007,089 25,029,329
Securities available for sale, at fair value 27,281,488 25,178,732
Loans, net of allowance for loan losses of $1,217,919 in 1999
and $1,140,000 in 1998 77,112,133 76,666,536
Other real estate owned 201,429 55,425
Premises and equipment, net 2,142,650 1,223,979
Accrued interest receivable 1,111,958 1,167,699
Other assets 803,375 652,131
----------------- ----------------
Total Assets $ 144,714,050 $ 148,103,564
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest bearing $ 16,034,134 $ 17,421,542
Interest bearing 110,650,389 113,243,666
----------------- ----------------
Total Deposits $ 126,684,523 $ 130,665,208
Accrued interest payable 307,785 350,258
Other liabilities 1,034,065 891,942
Commitments and contingent liabilities -- --
----------------- ----------------
Total Liabilities $ 128,026,373 $ 131,907,408
----------------- ----------------
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 10,943,890 10,090,870
Accumulated other comprehensive income (loss) (256,213) 105,286
----------------- ----------------
Total Stockholders' Equity $ 16,687,677 $ 16,196,156
----------------- ----------------
Total Liabilities and Stockholders' Equity $ 144,714,050 $ 148,103,564
================= ================
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest Income:
Interest and fees on loans $ 6,683,484 $ 6,989,025 $ 7,018,882
Interest on securities held to maturity
Taxable 1,358,213 1,702,127 1,628,597
Interest and dividends on securities
available for sale
Taxable 1,394,466 881,103 691,203
Dividends 29,514 27,528 25,006
Interest on securities purchased under agreements
to resell and federal funds sold 543,077 455,539 198,926
--------------- --------------- ---------------
Total Interest Income $ 10,008,754 $ 10,055,322 $ 9,562,614
--------------- --------------- ---------------
Interest Expense:
Interest on deposits $ 4,190,663 $ 4,400,932 $ 3,693,476
Interest on federal funds purchased and securities
sold under agreements to repurchase -- -- 16,219
--------------- --------------- ---------------
Total Interest Expense $ 4,190,663 $ 4,400,932 $ 3,709,695
--------------- --------------- ---------------
Net Interest Income $ 5,818,091 $ 5,654,390 $ 5,852,919
Provision for Loan Losses 125,000 125,245 127,408
--------------- --------------- ---------------
Net Interest Income after
Provision for Loan Losses $ 5,693,091 $ 5,529,145 $ 5,725,511
--------------- --------------- ---------------
Other Income:
Trust and financial services $ 592,182 $ 555,101 $ 522,023
Service charges on deposit accounts 348,992 378,523 403,006
Fees for other customer services 168,810 161,298 162,423
Other operating income 59,924 30,746 40,933
--------------- --------------- ---------------
Total Other Income $ 1,169,908 $ 1,125,668 $ 1,128,385
--------------- --------------- ---------------
Other Expenses:
Salaries and employee benefits $ 2,601,097 $ 2,627,960 $ 2,473,151
Net occupancy expense of premises 204,076 183,917 194,426
Furniture and equipment expenses 377,852 361,798 348,798
Stationery and supplies 123,573 104,927 109,472
Directors fees 94,418 103,630 102,330
Other operating expenses 1,021,853 914,728 898,394
--------------- --------------- ---------------
Total Other Expenses $ 4,422,869 $ 4,296,960 $ 4,126,571
--------------- --------------- ---------------
Income before Income Tax Expense $ 2,440,130 $ 2,357,853 $ 2,727,325
Income Tax Expense 897,110 868,724 1,005,621
--------------- --------------- ---------------
Net Income $ 1,543,020 $ 1,489,129 $ 1,721,704
=============== =============== ===============
Earnings Per Share, basic and diluted $ 2.57 $ 2.48 $ 2.87
=============== =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
-15-
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Undivided Comprehensive Comprehensive
Stock Surplus Profits Income (Loss) Income Total
---------- ----------- ------------ ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
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
Comprehensive income
Net income - 1999 -- -- 1,543,020 -- $ 1,543,020 1,543,020
Other comprehensive income
net of tax, unrealized holding
(losses) arising during the
period (net of tax, $(186,227)) -- -- -- (361,499) (361,499) (361,499)
-----------
Comprehensive income $ 1,181,521
===========
Cash dividends - 1999
($1.15 per share) -- -- (690,000) -- (690,000)
---------- ----------- ------------ ---------- ------------
Balances, December 31, 1999 $ 600,000 $ 5,400,000 $ 10,943,890 $ (256,213) $ 16,687,677
========== =========== ============ ========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,543,020 $ 1,489,129 $ 1,721,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 125,000 125,245 127,408
Depreciation 202,873 212,287 208,809
Amortization 7,165 12,282 12,282
Deferred tax (benefit) (85,804) (43,592) (40,759)
Discount accretion and premium amortization
on securities, net 26,060 19,416 28,853
(Gain) loss on sale of other real estate (58,796) 9,579 --
Loss on sale and disposal of premises and equipment 41,903 -- --
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 55,741 (159,342) 12,859
(Increase) decrease in other assets 113,621 (61,732) (19,025)
Increase (decrease) in accrued interest payable (42,473) 7,755 16,459
Increase in other liabilities 142,123 157,790 8,837
-------------- ------------- -------------
Net cash provided by operating activities $ 2,070,433 $ 1,768,817 $ 2,077,427
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities held to maturity $ 10,000,000 $ 10,000,000 $ 8,000,000
Proceeds from maturity of securities available for sale 3,550,000 3,000,000 8,000,000
Purchases of securities held to maturity -- (11,014,326) (6,049,375)
Purchases of securities available for sale (6,204,302) (14,618,728) (7,019,050)
Net (increase) decrease in loans (864,271) 226,428 (4,915,035)
Purchases of premises and equipment (1,186,174) (234,716) (155,966)
Proceeds from sale of equipment 22,727 -- --
Proceeds from sale of other real estate 206,467 91,007 --
-------------- ------------- -------------
Net cash provided by (used in) investing activities $ 5,524,447 $ (12,550,335) $ (2,139,426)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits $ (1,387,408) $ 2,407,923 $ 977,121
Net increase (decrease) in interest bearing deposits (2,593,277) 14,075,363 4,692,332
Cash dividends (690,000) (690,000) (690,000)
-------------- ------------- -------------
Net cash provided by (used in) financing activities $ (4,670,685) $ 15,793,286 $ 4,979,453
-------------- ------------- -------------
Increase in cash and cash equivalents $ 2,924,195 $ 5,011,768 $ 4,917,454
CASH AND CASH EQUIVALENTS
Beginning 18,129,733 13,117,965 8,200,511
-------------- ------------- -------------
Ending $ 21,053,928 $ 18,129,733 $ 13,117,965
============== ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 4,233,136 $ 4,393,177 $ 3,693,236
============== ============= =============
Income taxes $ 949,882 $ 902,011 $ 1,202,017
============== ============= =============
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Other real estate acquired in settlement of loans $ 293,674 $ 110,006 $ 100,005
============== ============= =============
Loans originated upon sale of real estate $ 249,000 $ 54,000 $ --
============== ============= =============
Unrealized gain (loss) on securities available for sale $ (547,726) $ 150,115 $ 71,227
============== ============= =============
</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
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to
maturity" and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities
with readily determinable fair values, are classified as
"available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and
reported in other comprehensive income.
Purchased premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of held to maturity and
available for sale securities below their cost that are deemed
to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities
are recorded on the trade date and are determined using the
specific identification method.
Loans
The Corporation grants mortgage, commercial and consumer loans
to customers. A substantial portion of the loan portfolio is
represented by mortgage loans. The ability of the
Corporation's debtors to honor their contracts is dependent
upon the real estate and general economic conditions of the
Corporation's market area.
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally
are reported at their outstanding unpaid principal balances
adjusted for the allowance for loan losses. Interest income is
accrued on the unpaid principal balance.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless
the credit is well-secured and in process of collection.
Installment loans are typically charged off not later than 180
days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are
placed on nonaccrual or charged-off is reversed against
interest income. The interest on these loans is accounted for
on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status
when all principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the
allowance when management believes the uncollectibility of a
loan balance is confirmed. Subsequent recoveries, if any, are
credited to the allowance.
-18-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
The allowance for loan losses is evaluated on a regular basis
by management and is based upon management's periodic review
of the collectibility of the loans in light of historical
experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and
prevailing economic conditions. This evaluation is inherently
subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.
A loan is considered impaired when, based on current
information and events, it is probable that the Corporation
will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the
loan agreement. Factors considered by management in
determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally
are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including
the length of the delay, the reasons for the delay, the
borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial
and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of
the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the
Corporation does not separately identify individual consumer
and residential loans for impairment disclosures.
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 a 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."
The Corporation has 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
standardized 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.
Earnings Per Share
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common
shares outstanding during the period. Diluted earnings per
share reflects additional common shares that would have been
outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result
from the assumed issuance. The Corporation had no potential
common stock as of December 31, 1999, 1998, and 1997.
-19-
<PAGE>
Note 1. Nature of Banking Activities and Significant Accounting Policies
(Continued)
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
In preparing consolidated financial statements in conformity
with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of
the balance sheet and the reported amounts of revenues and
expenses during the reported period. Actual results could
differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan
losses, and the valuation of foreclosed real estate and
deferred tax assets.
Advertising
The Corporation follows the policy of charging the costs of
advertising to expense as incurred.
Comprehensive Income
The Corporation has 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, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 2,000,000 $ 2,500 $ -- $ 2,002,500
Obligations of U.S. Government agencies 13,007,089 620 (93,169) 12,914,540
------------- ------------- ----------- -------------
$ 15,007,089 $ 3,120 $ (93,169) $ 14,917,040
============= ============= =========== =============
</TABLE>
-20-
<PAGE>
Note 2. Securities (Continued)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
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>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1999, by contractual maturity, are shown
below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 7,002,421 $ 6,990,940
Due after one year through five years 8,004,668 7,926,100
------------- -------------
$ 15,007,089 $ 14,917,040
============= =============
</TABLE>
The amortized cost and fair value of securities available for sale as
of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 1,999,808 $ 1,193 $ -- $ 2,001,001
Obligations of U.S. Government agencies 25,220,182 -- (389,395) 24,830,787
Federal Home Loan Bank stock 449,700 -- -- 449,700
------------- ------------- ----------- -------------
$ 27,669,690 $ 1,193 $ (389,395) $ 27,281,488
============= ============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
1998
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
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
============= ============= =========== =============
</TABLE>
The amortized cost and fair value of the securities available for
sale as of December 31, 1999, by contractual maturity, are shown
below:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
------------- -------------
<S> <C> <C>
Due in one year or less $ 9,004,822 $ 8,976,611
Due after one year through five years 18,215,168 17,855,177
Other 449,700 449,700
------------- -------------
$ 27,669,690 $ 27,281,488
============= =============
</TABLE>
There were no sales of securities during 1999, 1998 and 1997.
Securities with a carrying value of $9,828,571 and $8,030,073 at
December 31, 1999 and 1998, 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>
December 31
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Real estate loans:
Construction and land development $ 31,000 $ 651,848
Secured by farm land 2,604,920 1,394,201
Secured by 1-4 family residential 43,798,037 42,541,181
Other real estate loans 11,859,376 12,623,662
Loans to farmers (except those secured by
real estate) 388,860 246,100
Commercial and industrial loans (except those
secured by real estate) 2,434,696 2,187,471
Loans to individuals for personal expenditures 16,879,468 17,738,039
All other loans 333,695 424,034
------------- -------------
$ 78,330,052 $ 77,806,536
============= =============
</TABLE>
The Securities and Exchange Commission requires disclosure of loans
which exceed $60,000 to executive officers and directors of the
Corporation or to their associates. Such loans were made on
substantially the same terms as those prevailing for comparable
transactions with similar risks. At December 31, 1999 and 1998, these
loans totaled $772,076 and $214,881 respectively. During 1999, total
principal additions were $723,589 and total principal payments were
$166,394.
Note 4. Allowance for Loan Losses
The following is a summary of transactions in the allowance for loan
losses for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Balances at beginning of year $ 1,140,000 $ 1,138,747 $ 1,138,747
Provision charged to operating expense 125,000 125,245 127,408
Recoveries added to the allowance 42,283 42,730 48,420
Loan losses charged to the allowance (89,364) (166,722) (175,828)
------------ ------------ -------------
Balances at end of year $ 1,217,919 $ 1,140,000 $ 1,138,747
============ ============ =============
</TABLE>
Information about impaired loans as of and for the years ended
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Impaired loans for which an allowance has been provided $ 231,520 $ 397,986
Impaired loans for which no allowance has been provided -- --
------------ ------------
Total impaired loans $ 231,520 $ 397,986
============ ============
Allowance provided for impaired loans, included in the
allowance for loan losses $ 69,456 $ 198,993
============ ============
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Average balance in impaired loans $ 372,633 $ 397,986 $ 399,178
============ ============ =============
Interest income recognized $ 21,994 $ 34,062 $ 34,271
============ ============ =============
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $112,844 at December 31, 1999. If interest on this
loan had been accrued, such income would have approximated $5,377 in
1999. There were no nonaccrual loans at December 31, 1998 or interest
during the year.
-22-
<PAGE>
Note 5. Premises and Equipment, Net
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
December 31
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Premises $ 1,654,544 $ 1,851,509
Furniture and equipment 2,378,609 2,458,650
Construction in progress 1,050,624 --
------------- -------------
$ 5,083,777 $ 4,310,159
Less accumulated depreciation 2,941,127 3,086,180
------------- -------------
$ 2,142,650 $ 1,223,979
============= =============
</TABLE>
Depreciation included in operating expense for 1999, 1998 and 1997,
was $202,873, $212,287 and $208,809 respectively.
On September 29, 1997, the Corporation approved a Project Development
and Construction Agreement to renovate the existing main offices and
construct additional building space. The Confirmation of Estimate of
Construction was signed July 15, 1999 stating the estimated cost of
the project which is currently $2,038,000.
Note 6. Deposits
The aggregate amount of time deposits with a balance of $100,000 or
more was $5,160,065 and $5,010,430 at December 31, 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of all time deposits
are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 30,069,400
2001 8,707,610
2002 2,259,126
2003 320,133
2004 and thereafter --
-------------
$ 41,356,269
=============
</TABLE>
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 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. The Corporation accounts for its
share of the costs of those benefits in accordance with Financial
Accounting Standards Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." 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>
Pension Benefits Postretirement Benefits
------------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation, beginning $4,129,250 $3,339,744 $ 534,845 $ 463,642
Service cost 161,271 156,373 8,536 7,904
Interest cost 274,718 262,650 42,787 38,337
Actuarial (gain) loss (144,079) 337,654 13,855 52,976
Benefits paid (117,991) (119,720) (25,226) (28,014)
Change in discount rate (566,427) 152,549 -- --
---------- ---------- --------- ---------
Benefit obligation, ending $3,736,742 $4,129,250 $ 574,797 $ 534,845
---------- ---------- --------- ---------
Change in Plan Assets:
Fair value of plan assets, beginning $3,416,690 $3,337,355 $ -- $ --
Actual return on plan assets 175,266 199,055 -- --
Employer contributions 57,949 -- 25,226 28,014
Benefits paid (117,991) (119,720) (25,226) (28,014)
---------- ---------- --------- ---------
Fair value of plan assets, ending $3,531,914 $3,416,690 $ -- $ --
---------- ---------- --------- ---------
Funded status $ (204,828) $ (712,560) $(574,797) $(534,845)
Unrecognized net (gain) loss (402,581) 197,926 6,608 17,979
Accumulated premium payments
for retirees -- -- 120,077 94,851
Unrecognized net obligation
(asset) at transition (116,943) (137,245) 261,176 278,588
Unrecognized prior service cost 1,180 1,335 -- --
---------- ---------- --------- ---------
Accrued benefit cost included
in other liabilities $ (723,172) $ (650,544) $(186,936) $(143,427)
========== ========== ========= =========
<CAPTION>
Pension Benefits Postretirement Benefits
--------------------------------------- ------------------------------------
1999 1998 1997 1999 1998 1997
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic Benefit Cost:
Service cost $ 161,271 $ 156,373 $ 129,289 $ 8,536 $ 7,904 $ 7,249
Interest cost 274,718 262,650 220,359 42,787 38,337 34,342
Expected return on plan assets (285,265) (279,002) (241,937) -- -- --
Amortization of prior service cost 155 155 155 -- -- --
Amortization of net obligation
at transition (20,302) (20,302) (20,302) 17,412 17,296 17,568
--------- ---------- --------- --------- --------- -------
Net periodic benefit cost $ 130,577 $ 119,874 $ 87,564 $ 68,735 $ 63,537 $59,159
========= ========== ========= ========= ========= =======
Weighted-Average Assumptions:
Discount rate 8.00% 7.00% 7.25% 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% 5.00% -- -- --
</TABLE>
For measurement purposes, a 10% annual rate of increase in per capita
health care costs of covered benefits was assumed for 1999, 1998 and
1997, 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:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on the health care component of the accumulated
postretirement benefit obligation $39,454 $(33,914)
Effect on total of service and interest cost components of
net periodic postretirement health care benefit cost 4,010 (3,428)
</TABLE>
-24-
<PAGE>
Note 8. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Deferred tax assets:
Reserve for loan losses $258,763 $232,271
Accrued pension expense 245,848 221,185
Accrued postretirement benefits 62,362 48,765
Nonaccrual interest 1,828 --
Securities available for sale 131,989 --
-------- --------
$700,790 $502,221
-------- --------
Deferred tax liabilities:
Depreciation $ 6,576 $ 25,800
Securities available for sale -- 54,239
-------- --------
$ 6,576 $ 80,039
-------- --------
Net deferred tax assets $694,214 $422,182
======== ========
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1999, 1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Current tax expense $982,914 $912,316 $1,046,380
Deferred tax (benefit) (85,804) (43,592) (40,759)
-------- -------- ----------
$897,110 $868,724 $1,005,621
======== ======== ==========
</TABLE>
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, 1999, 1998 and 1997 due to
the following:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Computed "expected" tax expense $829,644 $801,670 $ 927,291
Increase (decrease) in income taxes resulting from:
Tax exempt interest income (6,324) (4,627) (3,353)
State income taxes, net of federal income tax benefit 73,767 69,385 79,092
Other 23 2,296 2,591
-------- -------- ----------
$897,110 $868,724 $1,005,621
======== ======== ==========
</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 $1,726,536 in deposits in another
financial institution in excess of amounts insured by the Federal
Deposit Insurance Corporation (FDIC) at December 31, 1999.
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, 1999
and 1998, the aggregate amounts of daily average required balances
were approximately $2,881,000 and $2,484,000, respectively.
-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, 1999, the aggregate amount of unrestricted funds which
could be transferred from the banking subsidiary to the parent
corporation, without prior regulatory approval, totaled $2,688,033 or
16.1% 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, 1999 and 1998,
is as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $7,890,050 $12,225,851
Standby letters of credit 264,194 3,900
</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.
Unfunded commitments under commercial lines of credit are commitments
for possible future extensions of credit to existing customers. These
lines of credit are uncollateralized and usually do not contain a
specified maturity date and may not be drawn upon to the extent to
which the Corporation is committed.
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, 1999.
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.
-26-
<PAGE>
Note 12. Disclosures About Fair Value of Financial Instruments (Continued)
Loans
For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on
carrying values. The fair values for other loans were
estimated using discounted cash flow analyses, using interest
rates currently being offered.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently
offered for deposits of similar remaining maturities.
Accrued Interest
The carrying amounts of accrued interest approximates fair
value.
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, 1999 and 1998, 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>
1999 1998
----------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 5,523 $ 5,523 $ 4,646 $ 4,646
Securities purchased under
agreements to resell and
federal funds sold 15,531 15,531 13,483 13,483
Securities held to maturity 15,007 14,917 25,029 25,351
Securities available for sale 27,281 27,281 25,179 25,179
Loans, net 77,112 73,391 76,667 74,280
Accrued interest receivable 1,112 1,112 1,168 1,168
-------- -------- -------- --------
Total financial assets $141,566 $137,755 $146,172 $144,107
======== ======== ======== ========
Financial liabilities:
Deposits $126,685 $126,714 $130,665 $130,925
Accrued interest payable 308 308 350 350
-------- -------- -------- --------
Total financial liabilities $126,993 $127,022 $131,015 $131,275
======== ======== ======== ========
</TABLE>
Note 13. Regulatory Matters
The Corporation and the Bank are 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 and Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Corporation and Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the table on page 28) 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, 1999, that the Corporation and the Bank meet all
capital adequacy requirements to which they are subject.
-27-
<PAGE>
Note 13. Regulatory Matters (Continued)
As of December 31, 1999, the most recent notification from the
Federal Deposit Insurance Corporation categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, an institution must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed
the institution's category.
The Corporation's and the Bank's actual capital amounts and ratios
are also presented in the table.
<TABLE>
<CAPTION>
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------ -------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total capital (to risk-weighted assets):
Consolidated $17,861 24.45% >$5,845 >8.0% N/A
- -
Bank of Charles Town $17,792 24.36% >$5,844 >8.0% >$7,305 >10.0%
- - - -
Tier 1 capital (to risk-weighted assets):
Consolidated $16,944 23.19% >$2,922 >4.0% N/A
- -
Bank of Charles Town $16,875 23.10% >$2,922 >4.0% >$4,383 > 6.0%
- - - -
Tier 1 capital (to average assets):
Consolidated $16,944 11.55% >$5,870 >4.0% N/A
- -
Bank of Charles Town $16,875 11.50% >$5,869 >4.0% >$7,336 > 5.0%
- - - -
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%
- - - -
</TABLE>
-28-
<PAGE>
Note 14. Parent Corporation Only Financial Statements
<TABLE>
<CAPTION>
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 1999 and 1998
1999 1998
------ ------
<S> <C> <C>
ASSETS
Cash $ 62,699 $ 26,587
Investment in subsidiary 16,619,104 16,153,510
Organization costs, net of accumulated amortization -- 7,165
Other assets 10,870 13,890
----------- -----------
Total Assets $16,692,673 $16,201,152
=========== ===========
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 10,943,890 10,090,870
Accumulated other comprehensive income (loss) (256,213) 105,286
----------- -----------
Total Stockholders' Equity $16,687,677 $16,196,156
----------- -----------
Total Liabilities and Stockholders' Equity $16,692,673 $16,201,152
=========== ===========
<CAPTION>
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income
Dividends from subsidiary $ 740,000 $ 715,000 $ 690,000
Expenses
Amortization $ 7,165 $ 12,282 $ 12,282
Transfer agent expense 8,095 7,887 7,592
Legal and professional 3,675 4,634 2,831
Other operating expenses 15,826 18,394 14,710
---------- ---------- ----------
Total Expenses $ 34,761 $ 43,197 $ 37,415
---------- ---------- ----------
Income before Income Tax (Benefit) and
Equity in Undistributed Income of
Subsidiary $ 705,239 $ 671,803 $ 652,585
Income Tax (Benefit) (10,688) (13,708) (11,797)
---------- ---------- ----------
Income before Equity in Undistributed
Income of Subsidiary $ 715,927 $ 685,511 $ 664,382
Equity in Undistributed Income of Subsidiary 827,093 803,618 1,057,322
---------- ---------- ----------
Net Income $1,543,020 $1,489,129 $1,721,704
========== ========== ==========
</TABLE>
-29-
<PAGE>
Note 14. Parent Corporation Only Financial Statements (Continued)
<TABLE>
<CAPTION>
POTOMAC BANCSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $1,543,020 $1,489,129 $ 1,721,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed (income) of
subsidiary (827,093) (803,618) (1,057,322)
Amortization 7,165 12,282 12,282
(Increase) decrease in other assets 3,020 (1,911) (180)
---------- ---------- -----------
Net cash provided by operating
activities $ 726,112 $ 695,882 $ 676,484
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends $ (690,000) $ (690,000) $ (690,000)
---------- ---------- -----------
Increase (decrease) in cash and cash
equivalents $ 36,112 $ 5,882 $ (13,516)
CASH AND CASH EQUIVALENTS
Beginning 26,587 20,705 34,221
---------- ---------- -----------
Ending $ 62,699 $ 26,587 $ 20,705
========== ========== ===========
</TABLE>
-30-
<PAGE>
TRUST AND FINANCIAL SERVICES
Your trust department realized record income receipts in 1999! Trust fees
in 1999 totaled $592,182, compared to $555,101 in 1998. Trust revenue continues
to reflect the department's emphasis on personal account relationships, with
approximately 92% of income derived from grantor trusts, testamentary trusts,
and personal agency accounts. Approximately 72% of our peer group department
income was derived from personal accounts in 1998 (the most recent year for FDIC
peer group statistics). Your Bank's NET trust income in 1998 equaled 25% of
gross fees, verses an average of 12.5% for the peer group. Net trust income in
1999 equaled 21% of gross fees. In 1999 estate fees totaled $101,000, verses
$69,000 in 1998.
Trust assets as of December 31, 1999, totaled $87,545,000, compared to
December 31, 1998 footings of $90,189,000. The net decrease in fiduciary assets
was the result of the distribution of three estates with $1,500,000 in asssets,
and termination of several personal agencies and trusts following the relocation
or death of the grantors.
In 1999 the question of Y2K preparedness was a concern to all businesses
and individuals. The department's trust accounting software operated without Y2K
problems through the date change.
As we prepare for our return to our renovated offices in early summer, 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, 1999
(unaudited)
<TABLE>
<S> <C> <C>
ASSETS
------
Discretionary assets:
Bank Deposits: Bank of Charles Town $ 43,000
Other Banks 270,000
United States Treasury and Agency Obligations 5,291,000
State, County, and Municipal Obligations 828,000
Short Term Interest Bearing Funds 4,750,000
Other Short Term Obligations 75,000
Notes and Bonds 9,488,000
Common and Preferred Stocks 33,844,000
Real Estate Mortgages 283,000
Real Estate 565,000
Miscellaneous Assets 20,000
-----------
Total Discretionary Assets $55,457,000
-----------
Non-Discretionary Assets $32,088,000
-----------
Total Assets $87,545,000
===========
ACCOUNTS
--------
Personal Trusts 139 $54,812,000
Estates and Other Court Accounts 35 6,666,000
Employee Benefit Accounts 26 5,014,000
Agencies and Other 71 21,053,000
--- -----------
Total Accounts 271 $87,545,000
=== ===========
</TABLE>
-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
<TABLE>
<S> <C> <C>
Administration
Mortgage and Commercial Maintenance Department
Loan Department Charles W. LeMaster
President Paula M. Fraley
Thomas F. Chambers Paul D. Staubs
Vice President William R. Harner E. Geraldine White
Sr. Vice President & Cashier
H. William Easter, Jr. Trust and Financial Services
Assistant Vice President L. Gayle Marshall Johnson, CPA
Vice President & Financial Officer Robert L. Hersey
Cynthia A. Light Vice President & Trust Officer
Assistant Cashier Susan S. Myers, CPA
Assistant Vice President & Auditor David S. (Joe) Smith
Patricia A. Ott Trust Officer
Diane C. Bogden
Installment Loan Department Personnel Officer Sheila R. Miller
Assistant Trust Officer
Donna J. Burns William H. Chesley, Jr.
Vice President Marketing Officer Deanna D. Greenfield
Michelle S. Griffith
Richard B. Breeden Gary L. Dungan, CPA Deborah A. Ring
Assistant Vice President & Compliance Officer Consuelo L. Shanton
Security Officer Jeanette Staubs
Tammy L. Miller
Janice B. Davis Certificates of Deposit
Assistant Cashier Bookkeeping Department Department
Victoria B. Burns Doris V. Loudan Judith A. Edwards
Kimberly K. DeSarno Assistant Cashier & Head Bookkeeper
Matthew D. Perks Data Processing Department
Jacqueline L. Smith Neil A. Bradley
Linda A. Stewart Patricia L. Clay Richard M. Crea
Shirley G. Dutrow Assistant Cashier &
Teller Department Marcia S. Lerch Data Processing Manager
Cindy L. Magaha
Carolyn N. O'Brien Elizabeth W. Park Amy L. Brill
Assistant Cashier & Head Teller M. Jacqueline Propst Nancy L. Harrison
Penny J. Sebastian Richard S. Stotler
Jennifer A. Casale Karen A. Staubs
Latisha C. Clinton Peggy C. Turner Harpers Ferry Branch
Leah G. Driver
Deanna M. Durbin Kearneysville Branch Wayne C. Welty
Cathy Jo Fraley Assistant Vice President &
Amy E. Gray C. Kenneth Nicewarner, Jr. Branch Manager
John N. Haymaker Assistant Vice President &
Julia A. Jones Branch Manager Shelly L. Holmes
Elizabeth J. Keller Assistant Cashier & Assistant
Bradley R. Leigh Nancy L. Baker Branch Manager
C. Lane McCarron Assistant Cashier & Assistant
Kendra L. Nichols Branch Manager Andrea Ariano
Sharon L. Perry Misty N. Ashbaugh
Michelle N. Slusher Rebecca E. Black Melissa D. Castle
Jody L. Talley Mary L. Bowers Heather M. Cole
Suzanne N. Taylor Carolyn A. Dunn Patricia A. Hardy
Terrie C. Thomas Joshua E. Higdon Karen S. James
Rebecca K. Viands Tammy E. Hough Jennifer L. Riley
Linda L. Whittington Jena L. Manuel W. Ann Wilt
Beth A. Wilson Cheryl C. Miller Charles W. Wyndham, Jr.
April D. Myers
Parttime Courier
Clara K. Carroll Benjamin T. Breeden
</TABLE>
-32-
<PAGE>
ANNUAL REPORT ON FORM 10-KSB
A copy of the Corporation's 1999 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, 1999, there were 600,000 common shares outstanding held by approximately 825
shareholders.
The per share sale prices of the Corporation's stock for 1998 and 1999
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 1998 and 1999 are also listed.
High Low Dividends
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
1999
----
First Quarter $40.375 $38.500 $ N/A
Second Quarter 39.000 36.125 0.50
Third Quarter 38.000 35.250 N/A
Fourth Quarter 37.000 33.000 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 25, 2000,
beginning at 10:30 a.m.
-33-
<PAGE>
14
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>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,523,254
<INT-BEARING-DEPOSITS> 110,650,389
<FED-FUNDS-SOLD> 15,530,674
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 27,281,488
<INVESTMENTS-CARRYING> 15,007,089
<INVESTMENTS-MARKET> 14,917,040
<LOANS> 78,330,052
<ALLOWANCE> 1,217,919
<TOTAL-ASSETS> 144,714,050
<DEPOSITS> 126,684,523
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,341,850
<LONG-TERM> 0
0
0
<COMMON> 600,000
<OTHER-SE> 16,087,677
<TOTAL-LIABILITIES-AND-EQUITY> 144,714,050
<INTEREST-LOAN> 6,683,484
<INTEREST-INVEST> 2,782,193
<INTEREST-OTHER> 543,077
<INTEREST-TOTAL> 10,008,754
<INTEREST-DEPOSIT> 4,190,663
<INTEREST-EXPENSE> 4,190,663
<INTEREST-INCOME-NET> 5,818,091
<LOAN-LOSSES> 125,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,422,869
<INCOME-PRETAX> 2,440,130
<INCOME-PRE-EXTRAORDINARY> 1,543,020
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,543,020
<EPS-BASIC> 2.57
<EPS-DILUTED> 2.57
<YIELD-ACTUAL> 7.16
<LOANS-NON> 112,844
<LOANS-PAST> 559,924
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,560
<ALLOWANCE-OPEN> 1,140,000
<CHARGE-OFFS> 89,364
<RECOVERIES> 42,283
<ALLOWANCE-CLOSE> 1,217,919
<ALLOWANCE-DOMESTIC> 1,217,919
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
POTOMAC BANCSHARES, INC.
Charles Town, West Virginia
- --------------------------------------------------------------------------------
NOTICE OF REGULAR ANNUAL MEETING OF SHAREHOLDERS
To be held April 25, 2000
- --------------------------------------------------------------------------------
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 25, 2000, 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 2000.
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 17,
2000, 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 29, 2000
<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 25, 2000
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 25, 2000, 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: (a) by notifying Potomac in person, (b) by giving written
notice to Potomac of the revocation of the proxy, (c) by submitting to Potomac a
subsequently-dated proxy, or (d) 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
17, 2000, 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 825 shareholders.
1
<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 12 Directors on the Board, four of whom are nominees
for election at the 2000 Annual Meeting. Three 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 Bank of
Charles Town. 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
one meeting during 1999.
The Audit Committee consists of five members: Guy Gareth 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 1999 the Audit Committee held one
meeting.
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 no
meetings in 1999.
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 Gareth 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 1999.
The Investment Committee consists of seven members: John P. Burns, Jr.,
Guy Gareth 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 1999.
The Salary and Personnel Committee consists of six members: Guy Gareth
Chicchirichi, Thomas C.G. Coyle, Francis M. Frye, William R. Harner, Charles W.
LeMaster 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 four meetings in 1999. 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 twelve 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, John C. Skinner, Jr. and Donald S. Smith. The Steering Committee held
no meetings in 1999. 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: John P. Burns, Jr., Robert W.
Butler, Thomas C.G. Coyle, Robert L. Hersey, Charles W. LeMaster, 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 nineteen regular
meetings in 1999.
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 1999.
The Year 2000 Committee consists of fourteen members: Donna J. Burns, John
P. Burns, Jr., Thomas F. Chambers, Thomas C.G. Coyle, Richard Crea, William R.
Harner, Robert L. Hersey, Gayle Marshall Johnson, Doris Loudan, Tammy Miller,
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 eleven meetings in 1999.
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 1999. The Board of Directors of the Bank holds regular weekly meetings each
Tuesday and special meetings from time to time as required. During 1999, the
Bank Board held 52 regular meetings. During the year, each of the Directors
attended at least 75% of all meetings of the Boards of Potomac and the Bank and
all Committees of the Board of the Bank on which they served.
Management Nominees to the Board of Potomac
The management nominees for the Board of Directors are:
<TABLE>
<CAPTION>
Served As Family
Director Relation- Year
of ship With in Which
Potomac Other Term Principal Occupation or
Nominees Age Since Nominees Expires Employment Last Five Years
<S> <C> <C> <C> <C> <C>
William R. Harner 59 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 55 1994 None 2000 Chair - Division of Business and Social Sciences and
Professor - Shepherd College, Jefferson County, West
Virginia; Director - Jefferson Memorial Hospital.
</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> <C> <C>
John C. Skinner, Jr. 58 1994 None 2000 Attorney, owner of Nichols & Skinner, L.C., Jefferson
County, West Virginia; Bank attorney since 1986; Potomac
attorney since 1994.
Donald S. Smith 71 1994 None 2000 Employed at Bank 1947 to 1991; President 1978 to 1991
(retired); Vice President and Assistant Secretary of
Potomac since 1994.
</TABLE>
Directors Continuing to Serve Unexpired Terms
<TABLE>
<CAPTION>
Served As Family
Director Relation- Year
of ship With in Which
Potomac Other Term Principal Occupation or
Directors Age Since Nominees Expires Employment Last Five Years
<S> <C> <C> <C> <C> <C>
J. Scott Boyd 43 1999 None 2001 Pharmacist and President of Jefferson Pharmacy, Inc.
in Jefferson County, West Virginia since 1982;
President and Chairman of Board of Directors of In
Home Medications West Virginia, Inc.
John P. Burns, Jr. 58 1994 None 2001 Owner/operator of a beef & grain farm in Jefferson
County, West Virginia; President - Jefferson County Fair
Association; Director - Valley Farm Credit.
Robert W. Butler 76 1994 None 2002 Owner of Warm Spring Farm & Orchard, Jefferson County,
West Virginia; retired from Stauffer Chemical Company.
Guy Gareth Chicchirichi 58 1994 None 2002 Executive Manager; Secretary/Treasurer - Guy's Buick-
Pontiac-Oldsmobile-GMC Truck, Inc., Jefferson County,
West Virginia; charter member of Charles Town Rotary
Club.
Thomas C.G. Coyle 71 1994 None 2002 Retired owner/operator of Riddleberger's Store, Jefferson
County, West Virginia; Trustee and Elder - Charles Town
Presbyterian Church; Director - Edge Hill Cemetery.
Francis M. Frye 73 1994 None 2002 Retired owner/operator of Ranson Real Estate Company,
Jefferson County, West Virginia; past president of
Chamber of Commerce, Lions Club, JEDECO, Inc.; past
secretary of Jefferson Memorial Hospital Board; co-
founder of Mountain Heritage Arts and Crafts Festival .
Charles W. LeMaster 58 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 83 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.
</TABLE>
5
<PAGE>
Principal Holders of Voting Securities
The following shareholder beneficially owns more than 5% of Potomac Common
Stock as of March 1, 2000:
<TABLE>
<CAPTION>
Name Of Amount and Nature of
Beneficial Owner Beneficial Ownership Percent of Common Stock
<S> <C> <C>
Virginia F. Burns 44,480 shares; Direct 7.4133
Rt 2 Box 132
Charles Town WV 25414-9632
</TABLE>
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, 2000,
on which date 600,000 shares were outstanding.
<TABLE>
<CAPTION>
Amount and Nature of
Nominees Beneficial Ownership Percent of Common Stock
<S> <C> <C>
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 75 shares (2,4)* .0125
Harpers Ferry WV 25425
John C. Skinner, Jr. 936 shares (1,3)* .1560
PO Box 133 1,946 shares (2,4)* .3243
Charles Town WV 25414-0133 1,014 shares (5)* .1690
Donald S. Smith 2,400 shares (1,3)* .4000
PO Box 264 3,500 shares (5)* .5833
Charles Town WV 25414-0264
<CAPTION>
Amount and Nature of
Directors (Non-Nominees) Beneficial Ownership Percent of Common Stock
<S> <C> <C>
J. Scott Boyd 50 shares (1,3)* .0083
201 S. Preston Street
Ranson WV 25438
Robert W. Butler 2,330 shares (1,3)* .3883
635 S Samuel Street 96 shares (2,4)* .0160
Charles Town WV 25414-1141 1,416 shares (5)* .2360
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Amount and Nature of
Directors (Non-Nominees) Beneficial Ownership Percent of Common Stock
<S> <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
Guy Gareth 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
808 High Street 1,641 shares (5)* .2735
Charles Town WV 25414
Francis M. Frye 1,000 shares (1,3)* .1667
400 Forrest Avenue 1,873 shares (2,4)* .3122
Charles Town WV 25414-1408
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
<CAPTION>
Amount and Nature of
Officers (Non-Nominees) Beneficial Ownership Percent of Common Stock
<S> <C> <C>
Gayle Marshall Johnson 408 shares (1,3)* .0680
PO Box 1028 100 shares (2,4)* .0167
Charles Town WV 25414-7028
<CAPTION>
Amount and Nature of
Beneficial Ownership Percent of Common Stock
<S> <C> <C>
All nominees, Directors & principal 18,064 shares (1,3)* 3.0107
officers as a group 8,085 shares (2,4)* 1.3475
(13 persons) 7,583 shares (5)* 1.2638
------------- ------
Total 33,732 shares 5.6220
============= ======
</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.
7
<PAGE>
Executive Compensation
Potomac's officers did not receive compensation as such during 1999. 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, 1999, 1998
and 1997 of the chief executive officer. No officer had total annual salary and
bonus exceeding $100,000. Neither Potomac nor the Bank has any stock option
plans, employee stock ownership plans or other employee benefit plans except for
the pension plan described in this Proxy Statement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term Compensation
--------------------------------------
Annual Compensation Awards Payouts
----------------------------- -------------------------- -------
Other Securities All
Annual Restricted Under- Other
Compen- Stock lying LTIP Compen-
Name and Salary Bonus sation Award(s) Options/ Payouts sation
Principal Position Year ($) ($) ($) (S) SARs (#) ($) ($)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles W. LeMaster 1999 85,551 N/A 0 N/A N/A N/A 0
President and CEO
1998 84,282 N/A 0 N/A N/A N/A 0
1997 79,822 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, 1999, 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 24 years $35,628
9
<PAGE>
Salary and Personnel Committee Report on Executive Compensation
The Salary and Personnel Committee is comprised of six members: Guy Gareth
Chicchirichi, Thomas C.G. Coyle, Francis M. Frye, William R. Harner, Charles W.
LeMaster 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 1999 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, City National 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 Gareth Chicchirichi
Thomas C.G. Coyle
Francis M. Frye
William R. Harner
Charles W. LeMaster
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, 1999, 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.
COMPARISON OF CUMULATIVE TOTAL RETURN OF ONE OR MORE
COMPANIES, PEER GROUPS, INDUSTRY INDEXES AND/OR BROAD MARKETS
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMPANY / INDEX / MARKET 12/30/1994 12/29/1995 12/31/1996 12/31/1997 12/31/1998 12/31/1999
POTOMAC BANCSHARES, INC. 100.00 104.05 100.39 119.00 156.80 130.39
Bank Holding Companies 100.00 148.75 214.99 300.53 392.53 472.68
Media General Index 100.00 129.66 156.58 203.33 248.56 303.21
</TABLE>
11
<PAGE>
Compensation of Directors
Directors of Potomac were not compensated as such during 1999. 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 1999
and will perform similar services in 2000. 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 1999 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.
J. Scott Boyd, a Director of the Bank and Potomac, has been indebted to the
Bank during 1999 in an amount in excess of $60,000. In the opinion of Potomac
and the Bank, these loans were made in the ordinary course of business, were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons,
and do not involve more than the normal risk of collectability or present other
unfavorable features.
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 2000.
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.
12
<PAGE>
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 1999 Annual Report on Form 10-KSB will be provided without charge.
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, 1999, all Section
16(a) filing requirements applicable to its officers, Directors and persons
owning more than ten percent were complied with.
OTHER MATTERS
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 Proposals for 2001
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 29, 2000, to have it considered for inclusion in the proxy statement of
the Annual Meeting in 2001.
Charles W. LeMaster
President
Charles Town, West Virginia
March 29, 2000
13
