U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XX Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
----
of 1934
For quarterly period ended September 30, 2001
------------------
____ Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to ________________
Commission file number 0-24958
Potomac Bancshares, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
West Virginia 55-0732247
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
111 East Washington Street, Charles Town WV 25414-1071
(Address of Principal Executive Offices) (Zip Code)
304-725-8431
(Issuer's Telephone Number, Including Area Code)
NO CHANGE
(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes XXX No
----- ------------
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes______ No _____________ Not applicable
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 600,000 shares
--------------
Transitional Small Business Disclosure Format (check one):
Yes No XXX
----- -------
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POTOMAC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
(Unaudited)
September 30 December 31
2001 2000
------------ -----------
Assets:
Cash and due from banks $ 10 084 $ 6 053
Securities purchased under agreements to resell
and federal funds sold 7 631 $ 17 366
Securities held to maturity (fair value of $19,719 at
September 30, 2001 and $18,105 at December 31, 2000) 18 984 17 928
Securities available for sale, at fair value 26 859 18 162
Loans held for sale 247 --
Loans, net of allowance for loan losses of $1,307 at
September 30, 2001 and $1,268 at December 31, 2000 98 160 83 179
Other real estate owned -- 13
Bank premises and equipment, net 3 341 3 177
Accrued interest receivable 1 148 1 051
Other assets 1 211 1 293
------------ -----------
Total Assets $ 167 665 $ 148 222
============ ===========
Liabilities and Stockholders' Equity:
Liabilities:
Noninterest bearing deposits $ 20 282 $ 19 423
Interest bearing deposits 122 130 109 522
------------ -----------
Total Deposits 142 412 128 945
Accrued interest payable 266 303
Federal funds purchased and securities sold
under agreements to repurchase 1 990 --
Advances payable to Federal Home Loan Bank 2 426 --
Other liabilities 1 060 1 010
------------ -----------
Total Liabilities $ 148 154 $ 130 258
------------ -----------
Stockholders' Equity:
Common stock par value $1.00 per share (5,000,000 shares
authorized, 600,000 shares issued and outstanding) $ 600 $ 600
Surplus 5 400 5 400
Accumulated other comprehensive income (loss) 324 (44)
Undivided profits 13 187 12 008
------------ -----------
Total Stockholders' Equity 19 511 17 964
------------ -----------
Total Liabilities and Stockholders' Equity $ 167 665 $ 148 222
============ ===========
See Accompanying Notes to Consolidated Financial Statements
2
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(000 omitted except for per share data)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30 Ended September 30
--------------------- -------------------
2001 2000 2001 2000
------- ------ ------- ------
Interest Income:
Interest and fees on loans $ 2 140 $1 844 $ 6 045 $5 256
Interest on securities held to maturity - Taxable 313 337 848 981
Interest on securities available for sale - Taxable 280 333 847 1 083
Interest on securities purchased under agreements
to resell and federal funds sold 65 82 356 332
Income on other securities 8 8 24 23
Other interest income 24 2 28 5
------- ------ ------- ------
Total Interest Income $ 2 830 $2 606 $ 8 148 $7 680
Interest Expense:
Interest on deposits 938 993 2 883 2 953
Interest on federal funds purchased and securities
purchased under agreements to resell 11 1 14 1
Interest on other borrowings 34 -- 34 --
------- ------ ------- ------
Total Interest Expense 983 994 2 931 2 954
Net Interest Income $ 1 847 $1 612 $ 5 217 $4 726
Provision for Loan Losses 59 38 99 88
------- ------ ------- ------
Net Interest Income after
Provision for Loan Losses $ 1 788 $1 574 $ 5 118 $4 638
------- ------ ------- ------
Noninterest Income:
Commissions and fees from fiduciary activities $ 133 $ 131 $ 392 $ 404
Service charges on deposit accounts 100 99 296 273
Net servicing fees -- 1 1 2
Insurance commissions and fees 23 20 52 35
Other noninterest income 81 34 171 108
Gain on sale of equipment -- 4 -- 5
Gain on sale of other real estate (net) -- -- -- 28
------- ------ ------- ------
Total Noninterest Income $ 337 $ 289 $ 912 $ 855
------- ------ ------- ------
Noninterest Expenses:
Salaries and employee benefits $ 783 $ 739 $ 2 298 $2 181
Net occupancy expense of premises 80 52 213 165
Furniture and equipment expenses 110 130 309 315
Other operating expenses 170 259 859 816
------- ------ ------- ------
Total Noninterest Expenses $ 1 143 $1 180 $ 3 679 $3 477
------- ------ ------- ------
Income before Income Tax Expense $ 982 $ 683 2 351 $2 016
Income Tax Expense 345 251 842 739
------- ------ ------- ------
Net Income $ 637 $ 432 $ 1 509 $1 277
======= ====== ======= ======
Earnings Per Share, basic and diluted $ 1.06 $ .72 $ 2.52 $ 2.13
======= ====== ======= ======
See Accompanying Notes to Consolidated Financial Statements
3
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 2001 AND 2000
(000 Omitted)
(Unaudited)
Accumulated
Other
Common Capital Undivided Comprehensive Comprehensive
Stock Surplus Profits Income (Loss) Income Total
------ ------- --------- ------------- ------------- --------------
Balances, December 31, 1999 $ 600 $ 5 400 $ 10 944 $ (256) $16 688
Comprehensive income
Net income -- -- 1 277 -- $ 1 277 1 277
Other comprehensive income,
unrealized holding gains
arising during the period
(net of tax, $57) -- -- -- 110 110 110
--------
Comprehensive income $ 1 387
========
Cash dividends -- -- (300) -- (300)
------ ------- ------- ------------- -------------
Balances, September 30, 2000 $ 600 $ 5 400 $11 921 $ (146) $17 775
====== ======= ======= ============= =============
Balances, December 31, 2000 $ 600 $ 5 400 $12 008 $ (44) $ 17 964
Comprehensive income
Net income -- -- 1 509 -- $ 1 509 1 509
Other comprehensive income,
unrealized holding gains
arising during the period
(net of tax, $190) -- -- -- 368 368 368
--------
Comprehensive income $ 1 877
========
Cash dividends -- -- (330) -- (330)
------ ------- ------- ------------- -------------
Balances, September 30, 2001 $ 600 $ 5 400 $13 187 $ 324 $ 19 511
====== ======= ======= ============= =============
See Accompanying Notes to Consolidated Financial Statements
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
For the Nine Months Ended
----------------------------
September 30 September 30
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1 509 $ 1 277
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 99 88
Depreciation 184 191
Deferred tax (benefit) -- (35)
Discount accretion and premium amortization on securities, net (21) (27)
(Gain) on sale of real estate -- (19)
(Gain) on sale of equipment -- (6)
(Increase) in accrued interest receivable (97) (70)
(Increase) in other assets (108) (203)
Proceeds from sale of loans 1 603 --
Purchase of loans for sale (1 850) --
(Decrease) in accrued interest payable (37) (18)
Increase (decrease) in other liabilities 50 (69)
-------- -------
Net cash provided by operating activities $ 1 332 $ 1 109
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities held to maturity $ 8 000 $ 4 000
Proceeds from maturity of securities available for sale 6 000 5 000
Purchase of securities held to maturity (9 035) (9 890)
Purchase of securities available for sale (14 139) --
Net (increase) in loans (15 080) (7 248)
Purchases of bank premises and equipment (348) (1 111)
Proceeds from sale of real estate 13 95
Proceeds from sale of equipment -- 6
-------- -------
Net cash (used in) investing activities $(24 589) $(9 148)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing deposits $ 859 $ 1 681
Net increase (decrease) in interest bearing deposits 12 608 (520)
Net increase in securities sold under agreements to repurchase 1 990 --
Net increase in advances payable to Federal Home Loan Bank 2 426 --
Cash dividends (330) (300)
-------- -------
Net cash provided by financing activities $ 17 553 $ 861
-------- -------
(Decrease) in cash and cash equivalents $ (5 704) $(7 178)
CASH AND CASH EQUIVALENTS
Beginning 23 419 21 054
-------- -------
Ending $ 17 715 $13 876
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2 968 $ 2 972
======== =======
Income taxes $ 818 $ 809
======== =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Unrealized gain on securities available for sale $ 558 $ 166
======== =======
See Accompanying Notes to Consolidated Financial Statements
5
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001(UNAUDITED) AND DECEMBER 31, 2000
1. In the opinion of management, the accompanying financial statements contain
all adjustments (consisting of only normal recurring accruals) necessary to
present fairly the financial position as of September 30, 2001, and
December 31, 2000, the results of operations for the three months ended
September 30, 2001 and 2000, and the results of operations and cash flows
for the nine months ended September 30, 2001 and 2000. The statements
should be read in conjunction with Notes to Consolidated Financial
Statements included in the Potomac Bancshares, Inc. annual report for the
year ended December 31, 2000. The results of operations for the nine month
periods ended September 30, 2001 and 2000, are not necessarily indicative
of the results to be expected for the full year.
2. Securities held to maturity as of September 30, 2001 and December 31, 2000
are summarized below:
(000 Omitted)
September 30, 2001
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -------
Securities held to maturity:
Obligations of U.S. Government
agencies $ 18 984 $ 735 $ -- $19 719
========= ========== ========== =======
(000 Omitted)
December 31, 2000
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -------
Securities held to maturity:
Obligations of U.S. Government
agencies $ 17 928 $ 187 $ (10) $18 105
========= ========== ========== =======
Securities available for sale as of September 30, 2001 and December 31,
2000 are summarized below:
(000 Omitted)
September 30, 2001
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ----------- ------------- -------
Securities available for sale:
Obligations of U.S. Government
agencies $ 26 368 $ 491 $ -- $26 859
========= ========== =========== =======
(000 Omitted)
December 31, 2000
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -------
Securities available for sale:
Obligations of U.S. Government
agencies $ 18 229 $ 15 $ (82) $18 162
========= ========== ========== =======
6
3. The consolidated loan portfolio, stated at face amount, is composed of the
following:
(000 Omitted)
September 30 December 31
2001 2000
------------ -----------
Real estate loans:
Construction and land development $ -- $ 14
Secured by farmland 2 292 2 763
Secured by 1-4 family residential 51 562 45 056
Other real estate loans 19 780 12 150
Loans to farmers (except those secured by real estate) 375 209
Commercial and industrial loans (except those secured
by real estate) 2 965 2 027
Loans to individuals for personal expenditures 22 299 22 023
All other loans 194 205
------------ -----------
$ 99 467 $ 84 447
Less: Allowance for loan losses 1 307 1 268
------------ -----------
Total loans $ 98 160 $ 83 179
============ ===========
4. The following is a summary of transactions in the allowance for loan
losses:
(000 Omitted)
September 30 December 31
2001 2000
------------ -----------
Balance at beginning of period $ 1 268 $ 1 218
Provision charged (credited) to operating
expense 99 (70)
Recoveries added to the allowance 22 226
Loan losses charged to the allowance (82) (106)
---------- ---------
Balance at end of period $ 1 307 $ 1 268
========== =========
5. Information about impaired loans as of September 30, 2001 and December
31, 2000 is as follows:
(000 Omitted)
-----------------------------
September 30 December 31
2001 2000
------------ -----------
Impaired loans for which an allowance has been provided $ -- $ 725
Impaired loans for which no allowance has been provided -- --
-------- ---------
Total impaired loans $ -- $ 725
======= =========
Allowance provided for impaired loans, included in the
allowance for loan losses $ -- $ 218
======= =========
Average balance in impaired loans $ 195 $ 239
======= =========
Interest income recognized $ -- $ 18
======= =========
There were loans on nonaccrual status at September 30, 2001 in the amount
of $10,560.00. If interest had been recognized on these loans, it would
have amounted to $246 at September 30, 2001. At December 31, 2000 there
were no loans on nonaccrual status.
7
6. Recent Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board issued two statements -
Statement 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets, which will potentially impact the accounting for goodwill and
other intangible assets. Statement 141 eliminates the pooling method of
accounting for business combinations and requires that intangible assets that
meet certain criteria be reported separately from goodwill. The Statement also
requires negative goodwill arising from a business combination to be recorded as
an extraordinary gain. Statement 142 eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life. The Statement
requires, at a minimum, annual impairment tests for goodwill and other
intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to re-evaluate
goodwill and other intangible assets that arose from business combinations
entered into before July 1, 2001. If the recorded other intangible assets do not
meet the criteria for recognition, they should be classified as goodwill.
Similarly, if there are other intangible assets that meet the criteria for
recognition but were not separately recorded from goodwill, they should be
reclassified from goodwill. An organization also must reassess the useful lives
of intangible assets and adjust the remaining amortization periods accordingly.
Any negative goodwill must be written-off.
The standards generally are required to be implemented by the Corporation in its
2002 financial statements. The adoption of these standards will not have a
material impact on the financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Between December 31, 2000 and September 30, 2001, total assets increased
$19,000,000. Total securities (held to maturity and available for sale)
increased $10,000,000 and loans increased $15,000,000 while securities purchased
under agreements to resell and federal funds sold decreased $10,000.00. Total
deposits increased $13,000,000.
The September 30 annualized return on average assets is 1.27% compared to 1.25%
at December 31. At September 30 the annualized return on average equity is
10.74% compared to 10.46% at December 31. The leverage capital (equity to
assets) ratio is 11.64% at September 30 compared to 12.32% at December 31.
The table shown below is an analysis of the Corporation's allowance for loan
losses. Net charge-offs for the Corporation have been very low when compared
with the size of the total loan portfolio. Management monitors the loan
portfolio on a continual basis with procedures that allow for problem loans and
potentially problem loans to be highlighted and watched. Written reports
detailing this loan information are prepared on a quarterly basis. Based on
experience, the loan policies, and the current monitoring program, management
believes the loan loss allowance is very adequate.
(000 Omitted)
September 30, 2001
------------------
Balance at beginning of period $1 268
Charge-offs:
Commercial, financial and agricultural 8
Real estate - construction --
Real estate - mortgage 6
Consumer 68
------
Total charge-offs 82
------
Recoveries:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 22
------
Total recoveries 22
------
Net charge-offs 60
Additions charged to operations 99
------
Balance at end of period $1 307
======
Ratio of net charge-offs during the period to average
loans outstanding during the period .0652%
======
8
Loans are placed on nonaccrual status when a loan is specifically determined to
be impaired or when principal or interest is delinquent for 90 days or more.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest income on other nonaccrual
loans is recognized only to the extent of interest payments received. Following
is a table showing the risk elements in the loan portfolio.
(000 Omitted)
September 30, 2001
------------------
Nonaccrual loans $ 11
Restructured loans --
Foreclosed properties --
------
Total nonperforming assets $ 11
======
Loans past due 90 days accruing interest $ 8
======
Allowance for loan losses to period end loans 1.31%
======
Nonperforming assets to period end loans and
foreclosed properties .0111%
======
There were loans on nonaccrual status at September 30, 2001 in the amount of
$10,560.00. If interest had been accrued on these loans, it would have amounted
to $246 at September 30, 2001.
At September 30, 2001, other potential problem loans totalled $27,446. 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 loan losses for these
loans according to the review of the potential loss in each loan situation.
The overall increase in deposits at September 30 compared to December 31 was
$13,000,000, or 10%. All different types of deposit accounts increased with
increases ranging from 4% to 16%. New deposits are attributed to a combination
of factors including the opening of a new branch in Martinsburg, West Virginia,
new loan clients opening new deposit accounts and a certificate of deposit
promotion that ran in August and the first part of September.
The comparison of the income statements for the three months and nine months
ended September 30, 2001 and 2000 shows similar changes in most income and
expense categories. Net interest income in 2001 increased 10% when comparing the
nine month figures to 2000. Interest income has increased due to increased loan
fees and increased loan volume. Interest expense has decreased slightly due to
decreased interest rates. Net income for the nine month period in 2001 has
increased over 18% when compared to 2000.
Noninterest income increased over 6% in 2001 compared to 2000. The increase is
due to increased fees in certain areas and additional commissions on insurance
due to increased sales of insurance. Increases in the following areas are
notable. Increased VISA fees are due to a successful debit card promotion and
resulting customer usage of the cards. Increased fees from ATM surcharges to
non-customers are due to an increase in the amount of the charge. Secondary
market fees in 2001 are due to initiating this program in 2001.
Noninterest expense increased 6% in 2001 compared to 2000 for the nine month
period. Salaries and benefits increased due to annual salary increases,
additional personnel, and increased insurance claims. Occupancy and furniture
and equipment expenses increased due to the building and renovation projects
completed in 2000. Advertising expense is up 41% in 2001 compared to 2000 due to
creation of a new bank logo and replacement expense that accompanies such a
change. Telephone expense has increased 24% in 2001 compared to 2000 due to
increased service requirements because of growth and increased use of the
internet system.
Liquid assets of the Corporation include cash and due from banks, securities
purchased under agreements to resell, securities available for sale, and loans
and investments maturing within one year. The Corporation's statement of cash
flows details this liquidity. Net income after certain adjustments for noncash
transactions provided cash from operating activities. Funds from maturity of
investment securities, existing cash and financing activities were used to fund
investing activities. Financing activities included increased deposits,
increased securities sold under agreements to repurchase, and an advance from
the Federal Home Loan Bank. Cash and cash equivalents decreased during this
period, however liquidity of the Corporation is more than adequate to meet
present and future financial obligations.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which the Registrant or its
subsidiary, directors or officers is a party or by which they, or any of them,
are threatened. All legal proceedings presently pending or threatened against
Potomac Bancshares, Inc. and its subsidiary involve routine litigation
incidental to the business of the Company or the subsidiary and are either not
material in respect to the amount in controversy or fully covered by insurance.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
Not applicable
4. Instruments defining the rights of security holders, including
indentures.
Not applicable
10. Material contracts.
Not applicable
11. Statement re: computation of per share earnings.
Not applicable
15. Letter on unaudited interim financial information.
Not applicable
18. Letter on change in accounting principles.
Not applicable
19. Reports furnished to security holders.
Not applicable
22. Published report regarding matters submitted to vote of security
holders.
Not applicable
23. Consent of experts and counsel.
Not applicable
24. Power of attorney.
Not applicable
99. Additional exhibits.
Not applicable
(b) Reports on Form 8-K:
NONE
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES, INC.
Date November 9 , 2001 /s/ Robert F. Baronner, Jr.
---------------------- ----------------------------------
Robert F. Baronner, Jr., President & CEO
Date November 9, 2001 /s/ L. Gayle Marshall Johnson
---------------------- ---------------------------------
L. Gayle Marshall Johnson, Vice
President & Chief Financial Officer
11