-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HcwahfrGK9lvnf7oW8N7mBcVrEFIJ/6H1QQaeE5Rv4LwXjtPusBBAicXMbT8AovE EnLfQdb9mG97zordWxDfsQ== 0000950169-00-000249.txt : 20000411 0000950169-00-000249.hdr.sgml : 20000411 ACCESSION NUMBER: 0000950169-00-000249 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POTOMAC BANCSHARES INC CENTRAL INDEX KEY: 0000925173 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 550732247 STATE OF INCORPORATION: WV FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-24958 FILM NUMBER: 582093 BUSINESS ADDRESS: STREET 1: 111 EAST WASHINGTON ST CITY: CHARLES TOWN STATE: WV ZIP: 25414 BUSINESS PHONE: 3047258431 MAIL ADDRESS: STREET 1: P O BOX 906 CITY: CHARLES TOWN STATE: WV ZIP: 25414 10KSB 1 POTOMAC BANCSHARES, INC. 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 ------------------- --------------------- NONE - ------------------------ ----------------------- - ------------------------ ----------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $1.00 Par Value (Title of Class) Check whether the issuer: (l) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes XXX No _________ --------- 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 ---- State issuer's revenues for its most recent fiscal year. $11,178,662 ----------- 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 ----------- ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ________ No ________ Not Applicable XXX ------- APPLICABLE ONLY TO CORPORATE REGISTRANTS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. 600,000 ------- Transitional Small Business Disclosure Format (check one): Yes ________ No XXX -------- DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents which are incorporated by reference in the Form 10-KSB Annual Report, and the Parts and Items of the Form 10-KSB into which the documents are incorporated. Part of the Form 10-KSB Into Which Document the Document is Incorporated -------- ---------------------------------- Portions of Potomac Bancshares, Inc.'s Part II, Items 6 and 7 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 - ---------------------- 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. 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 ----------- $58,293,333 =========== 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. 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:
(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
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. 5 Competition - ----------- 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, -- ---- 1997. West Virginia adopted legislation, effective May 31, 1997, that allows for interstate branch banking by merger across state lines and allows for de -- novo branching and branching by purchase and assumption on a reciprocal basis - ---- with the home state of the bank in question. The effect of this legislation has been increased competition for West Virginia banks, including the Bank. Employees - --------- 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. 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. 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 ------------ ---------- ----------- Tier 1 capital: Common stock $ 600,000 Surplus 5,400,000 Retained earnings 10,943,890 ------------ Total tier 1 capital $ 16,943,890 $2,922,318 $14,021,572 Tier 2 capital: Allowance for loan losses (1) 916,986 ------------ Total risk-based capital $ 17,860,876 $5,844,636 $12,016,240 ============ ========== =========== Risk-weighted assets $ 73,057,953 ============ Tier 1 capital $ 16,943,890 $4,402,298 $12,541,592 ============ ========== =========== Average total assets $146,743,279 ============ 8 Actual Required Excess ------ -------- ------ 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. 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.
Price Range Cash Dividends * High Low Paid per Share 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
* Dividends have been declared traditionally by Bancshares on a semi-annual basis. 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:
Principal Name Position Since Age Occupation - --------------------------- ------------------- -------------- ------------------------------------------------------------- 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
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. 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. 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 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 EX-13 2 EXHIBIT 13 COVER 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. 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- 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
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.
-2- SELECTED CONSOLIDATED FINANCIAL DATA (Dollars in Thousands Except Per Share Data)
1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- 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%
-3- 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.
1999 1998 -------------------------------------------- ---------------------------------------------- Average Income/ Average Average Income/ Average Balances Expense Yield/rate Balances Expense Yield/rate ------------- ------------- ---------- -------------- ------------- ---------- 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%
-4- 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- 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.
1999 COMPARED TO 1998 1998 COMPARED TO 1997 ----------------------------------------------- --------------------------------------------- Change in Volume Rate Change in Volume Rate Income/expense Effect Effect Income/expense Effect Effect -------------- ------------ ------------- -------------- ---------- ------------ 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) =========== ========== ============ ========== ========== ===========
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- 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.
Mature or Reprice -------------------------------------------------------------------------------------------- After Three Months But After One Year Within Within But Within After Three Months Twelve Months Five Years Five Years Nonsensitive ------------- -------------- ------------- ----------- ------------- Interest Earning Assets: Fixed rate loans $ 8,907,812 $ 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 ============= ============== ============= ===========
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- LOAN PORTFOLIO Loans at December 31, 1999 and 1998 are summarized below:
1999 1998 ------------- ------------- 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 ============= =============
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
Commercial, Financial and Real Estate- Agricultural Construction ------------- ------------- 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 ============ ============
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.
1999 1998 1997 ------------ ------------ ----------- 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% ===== ===== =====
-8- 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.
1999 1998 --------------------------------- -------------------------------- Percent of Loans Percent of Loans in Each Category in Each Category Allowance To Total Loans Allowance To Total Loans ----------- ----------------- ----------- ----------------- 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% =========== ======= =========== ======
RISK ELEMENTS IN THE LOAN PORTFOLIO
1999 1998 1997 ----------- ----------- ------------ 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%
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- The schedule below summarizes the book value of the portfolio by maturity classifications and shows the weighted average yield in each group.
Weighted Weighted 1999 Average 1998 Average Book Value Yield Book Value Yield -------------- -------- -------------- --------- Securities held to maturity U.S. Treasury securities and securities of U.S. Government agencies: Maturing within one year $ 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 ============= ==============
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- 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.
1999 1998 ------------- -------------- 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%
(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- This page is intentionally left blank. -12- 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- CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ----------------- ---------------- 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 ================= ================
See Notes to Consolidated Financial Statements. -14- CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 --------------- --------------- --------------- 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 =============== =============== ===============
See Notes to Consolidated Financial Statements. -15- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated Other Common Undivided Comprehensive Comprehensive Stock Surplus Profits Income (Loss) Income Total ---------- ----------- ------------ ------------- ------------- ------------ 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 ========== =========== ============ ========== ============
See Notes to Consolidated Financial Statements. -16- CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 -------------- ------------- ------------- 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 ============== ============= =============
See Notes to Consolidated Financial Statements. -17- 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- 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- 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:
1999 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ----------- ------------- 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 ============= ============= =========== =============
-20- Note 2. Securities (Continued)
1998 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ----------- ------------- U.S. Treasury securities $ 17,008,734 $ 229,475 $ -- $ 17,238,209 Obligations of U.S. Government agencies 8,020,595 92,530 -- 8,113,125 ------------- ------------- ----------- ------------- $ 25,029,329 $ 322,005 $ -- $ 25,351,334 ============= ============= =========== =============
The amortized cost and fair value of the securities being held to maturity as of December 31, 1999, by contractual maturity, are shown below:
Amortized Fair Cost Value ------------- ------------- 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 ============= =============
The amortized cost and fair value of securities available for sale as of December 31, 1999 and 1998 are as follows:
1999 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ----------- ------------- 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 ============= ============= =========== =============
1998 ---------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains (Losses) Value ------------- ------------- ----------- ------------- U.S. Treasury securities $ 4,999,573 $ 43,239 $ -- $ 5,042,812 Obligations of U.S. Government agencies 19,569,935 140,337 (24,052) 19,686,220 Federal Home Loan Bank stock 449,700 -- -- 449,700 ------------- ------------- ----------- ------------- $ 25,019,208 $ 183,576 $ (24,052) $ 25,178,732 ============= ============= =========== =============
The amortized cost and fair value of the securities available for sale as of December 31, 1999, by contractual maturity, are shown below:
Amortized Fair Cost Value ------------- ------------- 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 ============= =============
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- Note 3. Loans and Related Party Transactions The loan portfolio is composed of the following:
December 31 ------------------------------- 1999 1998 ------------- ------------- 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 ============= =============
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:
1999 1998 1997 ------------ ------------ ------------- 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 ============ ============ =============
Information about impaired loans as of and for the years ended December 31, 1999 and 1998 are as follows:
1999 1998 ------------ ------------ 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 ============ ============
1999 1998 1997 ------------ ------------ ------------- Average balance in impaired loans $ 372,633 $ 397,986 $ 399,178 ============ ============ ============= Interest income recognized $ 21,994 $ 34,062 $ 34,271 ============ ============ =============
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- Note 5. Premises and Equipment, Net Premises and equipment consists of the following:
December 31 ------------------------------- 1999 1998 ------------- ------------- 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 ============= =============
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:
2000 $ 30,069,400 2001 8,707,610 2002 2,259,126 2003 320,133 2004 and thereafter -- ------------- $ 41,356,269 =============
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- Note 7. Employee Benefit Plans (Continued) Information about the plans follow:
Pension Benefits Postretirement Benefits ------------------------- ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- 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) ========== ========== ========= ========= Pension Benefits Postretirement Benefits --------------------------------------- ------------------------------------ 1999 1998 1997 1999 1998 1997 ----------- ----------- ---------- ---------- ---------- ---------- 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% -- -- --
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:
1% Increase 1% Decrease ----------- ----------- 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)
-24- Note 8. Income Taxes Net deferred tax assets consist of the following components as of December 31, 1999 and 1998:
1999 1998 ------ ------ 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 ======== ========
The provision for income taxes charged to operations for the years ended December 31, 1999, 1998 and 1997 consists of the following:
1999 1998 1997 ------ ------ ------ 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 ======== ======== ==========
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:
1999 1998 1997 ------ ------ ------ 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 ======== ======== ==========
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- 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:
1999 1998 ------ ------ 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
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- 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:
1999 1998 ----------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- --------- (in thousands) (in thousands) 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 ======== ======== ======== ========
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- 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.
Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions ------------------ -------------------- ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Amount in Thousands) 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% - - - -
-28- Note 14. Parent Corporation Only Financial Statements
POTOMAC BANCSHARES, INC. (Parent Corporation Only) Balance Sheets December 31, 1999 and 1998 1999 1998 ------ ------ 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 =========== =========== POTOMAC BANCSHARES, INC. (Parent Corporation Only) Statements of Income Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ------ ------ ------ 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 ========== ========== ==========
-29- Note 14. Parent Corporation Only Financial Statements (Continued)
POTOMAC BANCSHARES, INC. (Parent Corporation Only) Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ------ ------ ------ 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 ========== ========== ===========
-30- 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) 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 === ===========
-31- 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 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
-32- 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- EX-21 3 EXHIBIT 21 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 EX-27 4 FINANCIAL DATA SCHEDULE
9 1 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 5,523,254 110,650,389 15,530,674 0 27,281,488 15,007,089 14,917,040 78,330,052 1,217,919 144,714,050 126,684,523 0 1,341,850 0 0 0 600,000 16,087,677 144,714,050 6,683,484 2,782,193 543,077 10,008,754 4,190,663 4,190,663 5,818,091 125,000 0 4,422,869 2,440,130 1,543,020 0 0 1,543,020 2.57 2.57 7.16 112,844 559,924 0 13,560 1,140,000 89,364 42,283 1,217,919 1,217,919 0 0
EX-99 5 EXHIBIT 99 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 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 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 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 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:
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 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.
4
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 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.
Directors Continuing to Serve Unexpired Terms
Served As Family Director Relation- Year of ship With in Which Potomac Other Term Principal Occupation or Directors Age Since Nominees Expires Employment Last Five Years 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.
5 Principal Holders of Voting Securities The following shareholder beneficially owns more than 5% of Potomac Common Stock as of March 1, 2000:
Name Of Amount and Nature of Beneficial Owner Beneficial Ownership Percent of Common Stock Virginia F. Burns 44,480 shares; Direct 7.4133 Rt 2 Box 132 Charles Town WV 25414-9632
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.
Amount and Nature of Nominees Beneficial Ownership Percent of Common Stock 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 Amount and Nature of Directors (Non-Nominees) Beneficial Ownership Percent of Common Stock 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
6
Amount and Nature of Directors (Non-Nominees) Beneficial Ownership Percent of Common Stock 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 Amount and Nature of Officers (Non-Nominees) Beneficial Ownership Percent of Common Stock Gayle Marshall Johnson 408 shares (1,3)* .0680 PO Box 1028 100 shares (2,4)* .0167 Charles Town WV 25414-7028 Amount and Nature of Beneficial Ownership Percent of Common Stock 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 ============= ======
- ------------------------------------------------------------------------------- * (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 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 $100,000. Neither Potomac nor the Bank has any stock option plans, employee stock ownership plans or other employee benefit plans except for the pension plan described in this Proxy Statement. SUMMARY COMPENSATION TABLE
Long-Term Compensation -------------------------------------- Annual Compensation Awards Payouts ----------------------------- -------------------------- ------- Other Securities All Annual Restricted Under- Other Compen- Stock lying LTIP Compen- Name and Salary Bonus sation Award(s) Options/ Payouts sation Principal Position Year ($) ($) ($) (S) SARs (#) ($) ($) - ------------------------------------------------------------------------------------------------------------------- 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
8 PENSION PLAN TABLE
Years of Service -------------------------------------------------------- Remuneration 5 10 15 20 25 30 - -------------------------------------------------------------------------- $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
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 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 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
FISCAL YEAR ENDING ------------------------------------------------------------------------------------- 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
11 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 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 -----END PRIVACY-ENHANCED MESSAGE-----