1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
XX Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
---- of 1934
For quarterly period ended March 31, 2002
--------------------------
____ 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
---------------
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POTOMAC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
(Unaudited)
March 31 December 31
2002 2001
----------- -----------
Assets
Cash and due from banks $ 6 995 $ 9 351
Interest-bearing deposits in financial institutions 2 375 2 466
Securities purchased under agreements to resell
and federal funds sold 9 101 3 912
Securities held to maturity (fair value of $19,412 at
March 31, 2002 and $19,614 at December 31, 2001 18 998 18 990
Securities available for sale, at fair value 27 139 30 708
Loans held for sale 165 916
Loans, net of allowance for loan losses of $1,472 at
March 31, 2002 and $1,402 at December 31, 2001 103 823 100 987
Bank premises and equipment, net 3 476 3 388
Accrued interest receivable 1 119 1 145
Other assets 1 346 1 229
----------- -----------
Total Assets $ 174 537 $ 173 092
=========== ===========
Liabilities and Stockholders' Equity:
Liabilities
Deposits
Noninterest-bearing deposits $ 19 756 $ 20 611
Interest-bearing deposits 127 454 126 283
----------- -----------
Total Deposits 147 210 146 894
Accrued interest payable 188 223
Securities sold under agreements to repurchase 3 423 2 949
Federal Home Loan Bank advances 2 276 2 352
Other liabilities 1 534 1 257
----------- -----------
Total Liabilities $ 154 631 $ 153 675
----------- -----------
Stockholders' Equity
Common stock, $1 per share par value; 5,000,000 shares
authorized; 600,000 shares issued and outstanding $ 600 $ 600
Surplus 5 400 5 400
Undivided profits 13 897 13 208
Accumulated other comprehensive income 9 209
----------- -----------
Total Stockholders' Equity $ 19 906 $ 19 417
----------- -----------
Total Liabilities and Stockholders' Equity $ 174 537 $ 173 092
=========== ===========
See Notes to Consolidated Financial Statements.
3
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(000 omitted except for per share data)
(Unaudited)
For the Three Months
Ended March 31
----------------------------
2002 2001
---------- ----------
Interest and Dividend Income:
Interest and fees on loans $ 2 124 $ 1 879
Interest on securities held to maturity - taxable 286 253
Interest on securities available for sale - taxable 325 266
Interest on securities purchased under agreements
to resell and federal funds sold 22 190
Other interest and dividends 20 10
---------- ----------
Total Interest and Dividend Income $ 2 777 $ 2 598
Interest Expense:
Interest on deposits 672 989
Interest on securities sold under agreements
to repurchase 19 --
Federal Home Loan Bank advances 32 --
---------- ----------
Total Interest Expense 723 989
---------- ----------
Net Interest Income $ 2 054 $ 1 609
Provision for Loan Losses 90 21
---------- ----------
Net Interest Income after
Provision for Loan Losses $ 1 964 $ 1 588
---------- ----------
Noninterest Income:
Trust and financial services $ 112 $ 125
Service charges on deposit accounts 271 96
Insurance commissions 11 7
Loan servicing fees 1 1
Gain on sale of real estate -- 1
Net gain on sale of loans 37 --
Other operating income 47 36
---------- ----------
Total Noninterest Income $ 479 $ 266
---------- ----------
Noninterest Expenses:
Salaries and employee benefits $ 790 $ 780
Net occupancy expense of premises 74 65
Furniture and equipment expenses 109 93
Other operating expenses 395 336
---------- ----------
Total Noninterest Expenses $ 1 368 $ 1 274
---------- ----------
Income before Income Tax Expense $ 1 075 $ 580
Income Tax Expense 386 208
---------- ----------
Net Income $ 689 $ 372
========== ==========
Earnings Per Share, basic and diluted $ 1.15 $ 62
========== ==========
See Notes to Consolidated Financial Statements.
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(000 Omitted)
(Unaudited)
Accumulated
Other
Common Undivided Comprehensive Comprehensive
Stock Surplus Profits Income (Loss) Income Total
----------- --------- ------------ --------------- ------------- ---------
Balances, December 31, 2000 $ 600 $ 5 400 $ 12 008 $ (44) $ 17 964
Comprehensive income
Net income -- -- 372 -- $ 372 372
Other comprehensive income,
unrealized holding gains
arising during the period
(net of tax, $70) -- -- -- 136 136 136
--------
Total comprehensive income $ 508
========
------- -------- --------- ------- --------
Balances, March 31, 2001 $ 600 $ 5 400 $ 12 380 $ 92 $ 18 472
======= ======== ========= ======= ========
Balances, December 31, 2001 $ 600 $ 5 400 $ 13 208 $ 209 $ 19 417
Comprehensive income
Net income -- -- 689 -- $ 689 689
Other comprehensive (loss),
unrealized holding (losses)
arising during the period
(net of tax, $103) -- -- -- (200) (200) (200)
--------
Total comprehensive income $ 489
========
------- -------- --------- ------- --------
Balances, March 31, 2002 $ 600 $ 5 400 $ 13 897 $ 9 $ 19 906
======= ======== ========= ======= ========
See Notes to Consolidated Financial Statements.
5
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
For the Three Months Ended
-------------------------------
March 31 March 31
2002 2001
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 689 $ 372
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 90 21
Depreciation 70 60
Discount accretion and premium amortization on securities, net 8 (12)
Loss on sale of real estate -- 5
Changes in assets and liabilities:
Decrease in accrued interest receivable 26 18
(Increase) in other assets (14) (106)
Proceeds from sale of loans 2 296 --
Origination of loans for sale (1 545) --
(Decrease) in accrued interest payable (35) (19)
Increase in other liabilities 277 241
----------- ---------
Net cash provided by operating activities $ 1 862 $ 580
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturity of securities held to maturity $ -- $ 6 000
Proceeds from maturity of securities available for sale 3 250 --
Purchase of securities available for sale -- (6 080)
Net (increase) in loans (2 926) (4 183)
Purchases of bank premises and equipment (158) (58)
Proceeds from sale of real estate -- 8
----------- ---------
Net cash provided by (used in) investing activities $ 166 $ (4 313)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) in noninterest-bearing deposits $ (855) $ (1 818)
Net increase in interest-bearing deposits 1 171 5 805
Net proceeds in securities sold under agreements to repurchase 474 --
Repayment of Federal Home Loan Bank advances (76) --
----------- ---------
Net cash provided by financing activities $ 714 $ 3 987
----------- ---------
Increase in cash and cash equivalents $ 2 742 $ 254
CASH AND CASH EQUIVALENTS
Beginning 15 729 23 419
----------- ---------
Ending $ 18 471 $ 23 673
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 759 $ 1 008
=========== =========
Income taxes $ 83 $ 9
=========== =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES
Unrealized gain (loss) on securities available for sale $ (303) $ 206
=========== =========
See Notes to Consolidated Financial Statements.
6
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 (UNAUDITED) AND DECEMBER 31, 2001
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 March 31,
2002, and December 31, 2001, and the results of operations and cash
flows for the three months ended March 31, 2002 and 2001. The
statements should be read in conjunction with Notes to Consolidated
Financial Statements included in the Potomac Bcshares, Inc. annual
report for the year ended December 31, 2001. The results of operations
for the three month periods ended March 31, 2002 and 2001, are not
necessarily indicative of the results to be expected for the full year.
2. The amortized cost and fair value of securities being held to maturity
as of March 31, 2002 and December 31, 2001 are as follows:
(000 Omitted)
March 31, 2002
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- -------------- ---------------- --------------
Obligations of U. S. Government agencies $ 18 998 $ 414 $ -- $ 19 412
========= ========= ======== =========
(000 Omitted)
December 31, 2001
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- -------------- ---------------- --------------
Obligations of U. S. Government agencies $ 18 990 $ 624 $ -- $ 19 614
========= ========= ======== =========
The amortized cost and fair value of securities available for sale as
of March 31, 2002 and December 31, 2001 are as follows:
(000 Omitted)
March 31, 2002
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- -------------- -------------- --------------
Obligations of U. S. Government agencies $ 27 126 $ 216 $ (203) $ 27 139
========= ========= ======== =========
(000 Omitted)
December 31, 2001
-----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- -------------- -------------- --------------
Obligations of U. S. Government agencies $ 30 391 $ 378 $ (61) $ 30 708
========= ========= ======== =========
7
3. The consolidated loan portfolio, stated at face amount, is composed of the
following:
(000 Omitted)
March 31 December 31
2002 2001
------------- ---------------
Mortgage loans on real estate:
Construction, land development and other land $ 829 $ 530
Farmland 1 786 1 801
One to four family residential 57 726 56 283
Other 20 534 19 275
Loans to farmers (except those secured by real estate) 265 46
Commercial and industrial loans (except those secured
by real estate) 3 329 2 952
Loans to individuals for personal expenditures 20 573 21 214
All other loans 253 288
--------- ---------
Total loans $ 105 295 $ 102 389
Less: Allowance for loan losses 1 472 1 402
--------- ---------
$ 103 823 $ 100 987
========= =========
4. The following is a summary of transactions in the allowance for loan
losses:
(000 Omitted)
March 31 December 31
2002 2001
------------- ---------------
Balance at beginning of period $ 1 402 $ 1 268
Provision charged to operating expense 90 221
Recoveries added to the allowance 9 35
Loan losses charged to the allowance (29) (122)
----------- ---------
Balance at end of period $ 1 472 $ 1 402
=========== =========
5. Information about impaired loans as of March 31, 2002 and December 31, 2001
is as follows:
(000 Omitted)
-------------------------------------
March 31 December 31
2002 2001
------------- ---------------
Impaired loans for which an allowance has been provided $ -- $ --
Impaired loans for which no allowance has been provided -- --
----------- ----------
Total impaired loans $ -- $ --
=========== ==========
Allowance provided for impaired loans, included in the
allowance for loan losses $ -- $ --
=========== ==========
Average balance in impaired loans $ 3 $ 14
=========== ==========
Interest income recognized $ -- $ 1
=========== ==========
Nonaccrual loans excluded from impaired loan disclosures under FASB 114
amounted to $9,060 at March 31, 2002 and $9,060 at December 31, 2001.
If interest on these loans had been accrued, such income would have
been $290 for the first three months of 2002 and $497 in 2001.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CRITICAL ACCOUNTING POLICIES
General
The Corporation's financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The
financial information contained within our statements is, to a significant
extent, financial information that is based on measures of the financial effects
of transactions and events that have already occurred. A variety of factors
could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use
historical loss factors as one factor in determining the inherent loss that may
be present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. In addition, GAAP itself may change from one
previously acceptable method to another method. Although the economics of our
transactions would be the same, the timing of events that would impact our
transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained
in our loan portfolio. The allowance is based on two basic principles of
accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimatable and (ii) SFAS
114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market and the loan balance.
Our allowance for loan losses has two basic components: the formula allowance
and the unallocated allowance. Each of these components is determined based upon
estimates that can and do change when the actual events occur. The formula
allowance uses a historical loss view as an indicator of future losses and, as a
result, could differ from the loss incurred in the future. However, since this
history is updated with the most recent loss information, the errors that might
otherwise occur are mitigated. The unallocated allowance captures losses that
are attributable to various economic events, industry or geographic sectors
whose impact on the portfolio have occurred but have yet to be recognized in the
formula allowance.
FINANCIAL OVERVIEW
Between December 31, 2001 and March 31, 2002, total assets have increased
$1,400,000. Investment volume overall has been stable. Loans have increased
$2,800,000 since December 31. Loan growth has been spread evenly throughout the
portfolio with the exception of a slight decrease in the loans to consumers for
personal expenditures.
Total deposits have increased only slightly since December 31, 2001. There have
been some slight changes between deposit categories which are typical in the
normal course of business but no major trend shifts are apparent.
Management anticipates that loans and deposits will continue to grow during 2002
at a fairly moderate pace. and not in the dramatic fashion that occurred in
2001. Housing starts are reported to be slowing slightly in Jefferson County but
not in Berkeley County. Commercial lending is continuing to grow in both
counties. As stated above, there seems to be a slow down in consumer spending
compared to early last year.
The March 31 annualized return on average assets is 1.59% compared to 1.27% at
December 31. At March 31 the annualized return on average equity is 14.02%
compared to 10.68% at December 31. The leverage capital (equity to assets) ratio
is 11.41% at March 31 compared to 11.30% at December 31.
The table on page 9 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. The loan policy
regarding the grading and review system has recently been revised to enhance
procedures for our growing portfolio of commercial loans as well as to update
procedures for all other loans. Written reports are prepared on a quarterly
basis for all loans except the commercial portfolio. Information on commercial
loans graded below a certain level are reported to the Board of Directors on a
monthly basis. Based on experience, these loan policies and the Bank's grading
and review system, management believes the loan loss allowance is adequate.
9
(000 Omitted)
March 31, 2002
--------------
Balance at beginning of period $ 1 402
Charge-offs:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 29
-------
Total charge-offs 29
-------
Recoveries:
Commercial, financial and agricultural --
Real estate - construction --
Real estate - mortgage --
Consumer 9
-------
Total recoveries 9
-------
Net charge-offs 20
Additions charged to operations 90
-------
Balance at end of period $ 1 472
=======
Ratio of net charge-offs during the period to average
loans outstanding during the period 0193%
=======
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)
March 31, 2002
==============
Nonaccrual loans $ 9
Restructured loans --
Foreclosed properties --
-------
Total nonperforming assets $ 9
=======
Loans past due 90 days accruing interest $ 2
=======
Allowance for loan losses to period end loans 1.40%
=======
Nonperforming assets to period end loans and foreclosed properties 009%
=======
At March 31, 2002, other potential problem loans (excluding impaired loans)
totalled $351,882. Readers may note that this figure is somewhat larger than it
has often been in the past. This is a result of the enhancements to the review
system and does not indicate a deterioration in the portfolio. 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.
The comparison of the income statements for the three months ended March 31,
2002 and 2001 shows an increase of 85.2% in net income in 2002.
The average balances during the first quarter of 2002 of the loan and investment
portfolios are larger when compared to the first quarter of 2001. The interest
rates on these portfolios are lower in 2002 compared to 2001, yet interest and
dividend income increased 6.9% in 2002 compared to 2001. The same scenario
follows for the liabilities. Average balances are greater and interest rates are
lower in 2002 compared to 2001 yet interest expense decreased 26.9% in 2002. As
a result, net interest income during the first quarter of 2002 increased 27.6%
over the first quarter of 2001.
10
Beginning in 2001 increased loan production, additional fee income in the loan
area, closer scrutiny of all expenses, and close monitoring of deposit interest
rates were goals set by management to ensure a stable yet constant increase to
net income. These goals have been productive to date. Loan production, scrutiny
of expenses, and monitoring of deposit rates will continue to be goals of
management. Sources of additional income are constantly being reviewed to aid in
increasing net income.
Noninterest income increased 80.1% as of March 31, 2002 compared to March 31,
2001. A large part of increased income is from fees generated through an
overdraft protection program for customers that was started in December 2001.
Additional increases were from secondary market fee income and commissions from
increased sales of loan related insurance. Noninterest expense increased 7.4%.
Salaries and employee benefits increased only 1.3% in 2002 when compared to
2001. Occupancy and furniture and equipment expenses increased 15.8% in 2002
compared to 2001 due to addition of a branch office, improvements at the two
previously existing branch offices and continual updating of technological
equipment. Additional increases due to growth were noted in the following
operating expenses: postage, telephone, state franchise tax, computer supplies,
and fees related to various computer services.
Liquid assets of the Corporation 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
statement of cash flows details this liquidity. Net income after certain
adjustments for noncash transactions provided cash from operating activities.
Funds from maturity of securities available for sale were used to fund investing
activities. Financing activities provided funds with increases in total deposits
and securities sold under agreements to repurchase. Cash and cash equivalents
increased slightly during this period, and liquidity of the Corporation is
adequate to meet present and future financial obligations.
11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
There are no material legal proceedings to which the Registrant or its
subsidiary, directors or officers is a party or by which they, or any of them,
are threatened. All legal proceedings presently pending or threatened against
Potomac Bancshares, Inc. and its subsidiary involve routine litigation
incidental to the business of the Company or the subsidiary and are either not
material in respect to the amount in controversy or fully covered by insurance.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession.
Not applicable
4. Instruments defining the rights of security holders, including
indentures.
Not applicable
10. Material contracts.
Not applicable
11. Statement re: computation of per share earnings.
Not applicable
15. Letter on unaudited interim financial information.
Not applicable
18. Letter on change in accounting principles.
Not applicable
19. Reports furnished to security holders.
Not applicable
22. Published report regarding matters submitted to vote of security
holders.
Not applicable
23. Consent of experts and counsel.
Not applicable
24. Power of attorney.
Not applicable
99. Additional exhibits.
Not applicable
(b) Reports on Form 8-K:
A Form 8-K dated February 20, 2002 was filed with SEC on February 21,
2002. The form included a press release issued by Potomac Bancshares, Inc.
stating the Potomac Board of Directors had authorized management to repurchase
up to 60,000 shares of the Corporation's common stock. The stock will be
purchased in the open market and/or by privately negotiated transactions as
management and the board of directors determine prudent.
12
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
POTOMAC BANCSHARES, INC.
Date May 9, 2002 /s/ Robert F. Baronner, Jr.
----------------------- ---------------------------
Robert F. Baronner, Jr.
President & CEO
Date May 9, 2002 /s/ Gayle Marshall Johnson
---------------------- --------------------------
Gayle Marshall Johnson
Vice President and Chief Financial
Officer