U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
x | Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For quarterly period ended September 30, 2003 |
¨ | Transition report under Section 13 or 15(d) of the Exchange Act |
For the transition period from to |
Commission file number 0-24958
Potomac Bancshares, Inc.
(Exact Name of Small Business Issuer as Specified in Its Charter)
West Virginia | 55-0732247 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification Number) | |
111 East Washington Street, Charles Town WV | 25414-1071 | |
(Address of Principal Executive Offices) | (Zip Code) |
304-725-8431
(Issuers Telephone Number, Including Area Code)
NO CHANGE
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court.
Yes ¨ No ¨ Not applicable
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date: 1,702,671 shares
Transitional Small Business Disclosure Format (check one):
Yes ¨ No x
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
POTOMAC BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
(000 OMITTED)
(Unaudited) September 30 2003 |
December 31 2002 | |||||
Assets: |
||||||
Cash and due from banks |
$ | 11 564 | $ | 11 243 | ||
Interest-bearing deposits in financial institutions |
396 | 1 970 | ||||
Securities purchased under agreements to resell and federal funds sold |
902 | 3 915 | ||||
Securities held to maturity (fair value $6,101 at September 30, 2003 and $9,313 at December 31, 2002) |
6 005 | 9 013 | ||||
Securities available for sale, at fair value |
38 665 | 42 728 | ||||
Loans held for sale |
633 | 1 924 | ||||
Loans, net of allowance for loan losses of $1,748 at September 30, 2003 and $1,642 at December 31, 2002 |
129 338 | 115 404 | ||||
Bank premises and equipment, net |
5 007 | 4 457 | ||||
Accrued interest receivable |
880 | 1 065 | ||||
Other assets |
4 440 | 1 158 | ||||
Total Assets |
$ | 197 830 | $ | 192 877 | ||
Liabilities and Stockholders Equity: |
||||||
Liabilities: |
||||||
Deposits |
||||||
Noninterest-bearing deposits |
$ | 23 432 | $ | 21 574 | ||
Interest-bearing deposits |
141 784 | 140 606 | ||||
Total Deposits |
165 216 | 162 180 | ||||
Accrued interest payable |
122 | 160 | ||||
Securities sold under agreements to repurchase |
8 604 | 6 103 | ||||
Federal Home Loan Bank advances |
1 799 | 2 042 | ||||
Other liabilities |
1 260 | 1 080 | ||||
Total Liabilities |
$ | 177 001 | $ | 171 565 | ||
Stockholders Equity: |
||||||
Common stock, $1 per share par value; 5,000,000 shares authorized; issued, 2003, 1,800,000 shares; 2002, 600,000 |
$ | 1 800 | $ | 600 | ||
Surplus |
4 200 | 5 400 | ||||
Undivided profits |
16 071 | 14 801 | ||||
Accumulated other comprehensive income |
467 | 759 | ||||
$ | 22 538 | $ | 21 560 | |||
Less cost of shares acquired for the treasury, 2003, 97,329 shares; 2002, 6,110 shares |
1 709 | 248 | ||||
Total Stockholders Equity |
$ | 20 829 | $ | 21 312 | ||
Total Liabilities and Stockholders Equity |
$ | 197 830 | $ | 192 877 | ||
See Notes to Consolidated Financial Statements.
3
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(000 omitted except for per share data)
(Unaudited)
For the Three Months Ended September 30 |
For the Nine Months Ended September 30 | |||||||||||
2003 |
2002 |
2003 |
2002 | |||||||||
Interest and Dividend Income: |
||||||||||||
Interest and fees on loans |
$ | 2 228 | $ | 2 222 | $ | 6 513 | $ | 6 521 | ||||
Interest on securities held to maturitytaxable |
75 | 247 | 284 | 794 | ||||||||
Interest on securities available for saletaxable |
357 | 390 | 1 133 | 1 081 | ||||||||
Interest on securities purchased under agreements to resell and federal funds sold |
7 | 23 | 36 | 68 | ||||||||
Other interest and dividends |
17 | 21 | 51 | 60 | ||||||||
Total Interest and Dividend Income |
$ | 2 684 | $ | 2 903 | $ | 8 017 | $ | 8 524 | ||||
Interest Expense: |
||||||||||||
Interest on deposits |
$ | 464 | $ | 664 | $ | 1 498 | $ | 1 986 | ||||
Interest on securities sold under agreements to repurchase |
42 | 25 | 125 | 66 | ||||||||
Federal Home Loan Bank advances |
26 | 30 | 80 | 93 | ||||||||
Total Interest Expense |
$ | 532 | $ | 719 | $ | 1 703 | $ | 2 145 | ||||
Net Interest Income |
$ |
2 152 |
$ |
2 184 |
$ |
6 314 |
$ |
6 379 | ||||
Provision for Loan Losses |
64 | 94 | 148 | 293 | ||||||||
Net Interest Income after Provision for Loan Losses |
$ | 2 088 | $ | 2 090 | $ | 6 166 | $ | 6 086 | ||||
Noninterest Income: |
||||||||||||
Trust and financial services |
$ | 115 | $ | 106 | $ | 347 | $ | 338 | ||||
Service charges on deposit accounts |
316 | 277 | 863 | 822 | ||||||||
Brokerage, underwriting fees and commissions |
20 | | 46 | | ||||||||
Insurance commissions |
24 | 19 | 65 | 59 | ||||||||
Gain on sale of securities available for sale |
19 | | 99 | | ||||||||
Net gain on sale of loans |
98 | 54 | 318 | 117 | ||||||||
Cash surrender value of life insurance |
43 | | 123 | | ||||||||
Other operating income |
109 | 70 | 256 | 181 | ||||||||
Total Noninterest Income |
$ | 744 | $ | 526 | 2 117 | $ | 1 517 | |||||
Noninterest Expenses: |
||||||||||||
Salaries and employee benefits |
$ | 951 | $ | 826 | $ | 2 910 | $ | 2 536 | ||||
Net occupancy expense of premises |
85 | 81 | 286 | 239 | ||||||||
Furniture and equipment expenses |
262 | 146 | 667 | 384 | ||||||||
Stationery and supplies |
42 | 35 | 136 | 108 | ||||||||
Communications |
37 | 26 | 104 | 79 | ||||||||
Postage |
35 | 28 | 105 | 100 | ||||||||
Advertising and marketing |
56 | 57 | 162 | 135 | ||||||||
ATM and check card expenses |
44 | 33 | 122 | 79 | ||||||||
Other operating expenses |
273 | 236 | 774 | 734 | ||||||||
Total Noninterest Expenses |
$ | 1 785 | $ | 1 468 | $ | 5 266 | $ | 4 394 | ||||
Income before Income Tax Expense |
$ | 1 047 | $ | 1 148 | $ | 3 017 | $ | 3 209 | ||||
Income Tax Expense |
361 | 407 | 1 049 | 1 144 | ||||||||
Net Income |
$ | 686 | $ | 741 | $ | 1 968 | $ | 2 065 | ||||
Earnings Per Share, basic and diluted |
$ | .40 | $ | .41 | $ | 1.11 | $ | 1.15 | ||||
See Notes to Consolidated Financial Statements.
4
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(000 Omitted)
(Unaudited)
Common Stock |
Surplus |
Undivided Profits |
Treasury Stock |
Accumulated Other Comprehensive Income (Loss) |
Comprehensive Income |
Total |
|||||||||||||||||||||
Balances, December 31, 2001 |
$ | 600 | $ | 5 400 | $ | 13 208 | $ | | $ | 209 | $ | 19 417 | |||||||||||||||
Comprehensive income |
|||||||||||||||||||||||||||
Net income |
| | 2 065 | | | $ | 2 065 | 2 065 | |||||||||||||||||||
Other comprehensive income, unrealized holding gains arising during the period (net of tax, $103) |
| | | | 667 | 667 | 667 | ||||||||||||||||||||
Total comprehensive income |
$ | 2 732 | |||||||||||||||||||||||||
Cash dividends |
| | (420 | ) | | | (420 | ) | |||||||||||||||||||
Purchase of treasury shares; 4,310 |
| | | (170 | ) | | (170 | ) | |||||||||||||||||||
Balances, September 30, 2002 |
$ | 600 | $ | 5 400 | $ | 14 853 | $ | (170 | ) | $ | 876 | $ | 21 559 | ||||||||||||||
Balances, December 31, 2002 |
$ | 600 | $ | 5 400 | $ | 14 801 | $ | (248 | ) | $ | 759 | $ | 21 312 | ||||||||||||||
Comprehensive income |
|||||||||||||||||||||||||||
Net income |
| | 1 968 | | | $ | 1 968 | 1 968 | |||||||||||||||||||
Other comprehensive income, unrealized holding (losses) arising during the period (net of tax, $(184)) |
| | | | (357 | ) | (357 | ) | (357 | ) | |||||||||||||||||
Add: reclassification for gains included in net income (net of tax, $34) |
| | | | 65 | 65 | 65 | ||||||||||||||||||||
Total comprehensive income |
$ | 1 676 | |||||||||||||||||||||||||
Adjustment to reflect 200% stock dividend declared as of March 1, 2003 |
1 200 | (1,200 | ) | | | | | ||||||||||||||||||||
Cash dividends |
| | (698 | ) | | | (698 | ) | |||||||||||||||||||
Purchase of treasury shares; 78,999 |
| | | (1 461 | ) | | (1 461 | ) | |||||||||||||||||||
Balances, September 30, 2003 |
$ | 1 800 | $ | 4 200 | $ | 16 071 | $ | (1 709 | ) | $ | 467 | $ | 20 829 | ||||||||||||||
See Notes to Consolidated Financial Statements.
5
POTOMAC BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000 Omitted)
(Unaudited)
For the Nine Months Ended |
||||||||
September 30 2003 |
September 30 2002 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 1 968 | $ | 2 065 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for loan losses |
148 | 293 | ||||||
Depreciation |
463 | 228 | ||||||
Deferred tax expense (benefit) |
| (96 | ) | |||||
Discount accretion and premium amortization on securities, net |
126 | 35 | ||||||
(Gain) on sale of securities available for sale |
(99 | ) | | |||||
Proceeds from sale of loans |
18 400 | 6 727 | ||||||
Origination of loans for sale |
(17 109 | ) | (6 585 | ) | ||||
Changes in assets and liabilities: |
||||||||
(Increase) decrease in accrued interest receivable |
185 | (97 | ) | |||||
(Increase) in other assets |
(3 131 | ) | (208 | ) | ||||
(Decrease) in accrued interest payable |
(38 | ) | (45 | ) | ||||
Increase (decrease) in other liabilities |
180 | (130 | ) | |||||
Net cash provided by operating activities |
$ | 1 093 | $ | 2 187 | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Proceeds from maturity of securities held to maturity |
$ | 3 000 | $ | 5 000 | ||||
Proceeds from maturity of securities available for sale |
7 000 | 9 250 | ||||||
Proceeds from sale of securities available for sale |
8 118 | | ||||||
Purchase of securities available for sale |
(11 517 | ) | (18 239 | ) | ||||
Net (increase) in loans |
(14 082 | ) | (9 878 | ) | ||||
Purchases of bank premises and equipment |
(1 013 | ) | (518 | ) | ||||
Net cash (used in) investing activities |
$ | (8 494 | ) | $ | (14 385 | ) | ||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Net increase (decrease) in noninterest-bearing deposits |
$ | 1 858 | $ | (488 | ) | |||
Net increase in interest-bearing deposits |
1 178 | 12 622 | ||||||
Net proceeds in securities sold under agreements to repurchase |
2 501 | 1 468 | ||||||
Repayment of Federal Home Loan Bank advances |
(243 | ) | (231 | ) | ||||
Purchase of treasury shares |
(1 461 | ) | (170 | ) | ||||
Cash dividends |
(698 | ) | (420 | ) | ||||
Net cash provided by financing activities |
$ | 3 135 | $ | 12 781 | ||||
Increase (decrease) in cash and cash equivalents |
$ | (4 266 | ) | $ | 583 | |||
CASH AND CASH EQUIVALENTS |
||||||||
Beginning |
17 128 | 15 729 | ||||||
Ending |
$ | 12 862 | $ | 16 312 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash payments for: |
||||||||
Interest |
$ | 1 741 | $ | 2 190 | ||||
Income taxes |
$ | 878 | $ | 1 311 | ||||
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Unrealized gain (loss) securities available for sale |
$ | (442 | ) | $ | 1 011 | |||
See Notes to Consolidated Financial Statements.
6
POTOMAC BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002
1. | In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2003, and December 31, 2002, and the results of operations and cash flows for the nine months ended September 30, 2003 and 2002. The statements should be read in conjunction with Notes to Consolidated Financial Statements included in the Potomac Bancshares, Inc. annual report for the year ended December 31, 2002. The results of operations for the nine month periods ended September 30, 2003 and 2002, are not necessarily indicative of the results to be expected for the full year. |
2. | On February 11, 2003 the Board of Directors of Potomac Bancshares, Inc. declared a stock split in the form of a 200% stock dividend payable on March 1, 2003. Shares issued increased from 600,000 to 1,800,000. |
3. | The amortized cost and fair value of securities being held to maturity as of September 30, 2003 and December 31, 2002 are as follows: |
(000 Omitted) | ||||||||||||
September 30, 2003 | ||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | |||||||||
Obligations of U. S. Government agencies |
$ | 6 005 | $ | 96 | $ | | $ | 6 101 | ||||
(000 Omitted) | ||||||||||||
December 31, 2002 | ||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | |||||||||
Obligations of U. S. Government agencies |
$ | 9 013 | $ | 300 | $ | | $ | 9 313 | ||||
The amortized cost and fair value of securities available for sale as of September 30, 2003 and December 31, 2002 are as follows:
(000 Omitted) | |||||||||||||
September 30, 2003 | |||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized |
Fair Value | ||||||||||
Obligations of U. S. Government agencies |
$ | 37 695 | $ | 1 021 | $ | (51 | ) | $ | 38 665 | ||||
(000 Omitted) | |||||||||||||
December 31, 2002 | |||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized (Losses) |
Fair Value | ||||||||||
Obligations of U. S. Government agencies |
$ | 41 315 | $ | 1 413 | $ | | $ | 42 728 | |||||
7
4. | The loan portfolio, stated at face amount, is composed of the following: |
(000 Omitted) | ||||||
September 30 2003 |
December 31 2002 | |||||
Mortgage loans on real estate: |
||||||
Construction, land development and other land |
$ | 8 875 | $ | 2 211 | ||
Secured by farmland |
3 291 | 1 821 | ||||
Secured by 1-4 family residential |
63 963 | 63 239 | ||||
Other real estate |
28 115 | 26 151 | ||||
Loans to farmers (except those secured by real estate) |
368 | 249 | ||||
Commercial and industrial loans (except those secured by real estate) |
8 490 | 3 447 | ||||
Consumer loans |
17 284 | 19 198 | ||||
All other loans |
700 | 730 | ||||
Total loans |
$ | 131 086 | $ | 117 046 | ||
Less: allowance for loan losses |
1 748 | 1 642 | ||||
$ | 129 338 | $ | 115 404 | |||
5. | The following is a summary of transactions in the allowance for loan losses: |
(000 Omitted) | ||||||||
September 30 2003 |
December 31 2002 |
|||||||
Balance at beginning of period |
$ | 1 642 | $ | 1 402 | ||||
Provision charged to operating expense |
148 | 423 | ||||||
Recoveries added to the allowance |
84 | 104 | ||||||
Loan losses charged to the allowance |
(126 | ) | (287 | ) | ||||
Balance at end of period |
$ | 1 748 | $ | 1 642 | ||||
6. | There were no impaired loans at September 30, 2003 and December 31, 2002. |
Nonaccrual loans excluded from impaired loan disclosures under FASB 114 amounted to $301,615 at September 30, 2003. If interest on these loans had been accrued, such income would have been $16,288 for the first nine months of 2003. There were no nonaccrual loans excluded from impaired loan disclosure under SFAS No. 114 at December 31, 2002.
7. | Weighted Average Number of Shares Outstanding |
2003 |
2002 | |||
Weighted average number of shares outstanding for the nine months ending September 30 |
1 766 044 | 1 793 844 |
Shares outstanding have been restated to reflect the 200% stock dividend discussed in Note 2.
8
8. | Recent Accounting Pronouncements |
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). The Interpretation elaborates on the disclosures to be made by a guarantor in its financial statements under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Interpretation requires disclosure of the nature of the guarantee, the maximum potential amount of future payments that the guarantor could be required to make under the guarantee, and the current amount of the liability, if any, for the guarantors obligations under the guarantee. The recognition requirements of the Interpretation were effective beginning January 1, 2003. Management does not anticipate that the recognition requirements of this Interpretation will have a material impact on the Corporations consolidated financial statements.
In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). This Interpretation provides guidance with respect to the identification of variable interest entities and when the assets, liabilities, noncontrolling interests, and results of operations of a variable interest entity need to be included in a corporations consolidated financial statements. The Interpretation requires consolidation by business enterprises of variable interest entities in cases where the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity, or in cases where the equity investors lack one or more of the essential characteristics of a controlling financial interest, which include the ability to make decisions about the entitys activities through voting rights, the obligations to absorb the expected losses of the entity if they occur, or the right to receive the expected residual returns of the entity if they occur. The Interpretation applies immediately to variable interest entities created after January 31, 2003, and applies to previously existing entities beginning in the fourth quarter of 2003. Management is currently evaluating the applicability of FIN 46 but the adoption of this Interpretation is not expected to have a material impact on the Corporations consolidated financial statements.
In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Corporations consolidated financial statements.
In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Corporations consolidated financial statements.
9
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
CRITICAL ACCOUNTING POLICIES
General
The Corporations financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
Our allowance for loan losses has two basic components: the formula allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in the formula allowance.
FINANCIAL OVERVIEW
Between December 31, 2002 and September 30, 2003, total assets have increased 2% from $193 million to $198 million. Securities purchased under agreements to resell, federal funds sold, securities held to maturity and securities available for sale have decreased $10 million and loans have increased $14 million since December 31, 2002. Loan growth has been in loans secured by real estate for construction, land development and other land, in loans secured by farmland and other real estate and in commercial and industrial loans. Consumer borrowing for personal expenditures has continued to decline since December 31, 2002 now being about 10% behind December 31, 2002.
As management anticipated, loans grew moderately during the first half of 2003. However, the growth rate has increased some in the third quarter of 2003.
Total deposits are about 2% above the level of December 31, 2002 after some decline was reported at March 31, 2003. Since December 31, 2002, noninterest-bearing demand deposits have increased $2 million. Select checking balances (accounts that pay higher interest on balances of $5 thousand and above) have increased $9 million since June 30, 2003. As of July 1, 2003, the bank stopped offering money market accounts and the $6 million in money market accounts were changed to select checking accounts. Select checking balances also increased an additional $3 million.
The September 30, 2003 annualized return on average assets is 1.34% compared to 1.35% at December 31, 2002. At September 30, 2003 the annualized return on average equity is 12.45% compared to 11.97% at December 31, 2002. The leverage capital (equity to assets) ratio is 11.27% at September 30, 2003 compared to 10.77% at December 31, 2002. The increase in ratios involving equity has been aided by the repurchase of additional stock for the treasury during the third quarter.
10
The following table is an analysis of the Corporations allowance for loan losses. Net charge-offs for the Corporation have been very low when compared with the size of the total loan portfolio. Management monitors the loan portfolio on a continual basis with procedures that allow for problem loans and potentially problem loans to be highlighted and watched. The loan policy regarding the grading and review system has recently been revised to enhance procedures for our growing portfolio of commercial loans as well as to update procedures for all other loans. Written reports are prepared on a quarterly basis for all loans. Information on commercial loans graded below a certain level are reported to the Board of Directors on a monthly basis. Based on experience, these loan policies and the Banks grading and review system, management believes the loan loss allowance is adequate.
(000 Omitted) | ||||
September 30, 2003 |
||||
Balance at beginning of period |
$ | 1 642 | ||
Charge-offs: |
||||
Commercial, financial and agricultural |
| |||
Real estate construction |
| |||
Real estate mortgage |
| |||
Consumer |
126 | |||
Total charge-offs |
126 | |||
Recoveries: |
||||
Commercial, financial and agricultural |
| |||
Real estate construction |
| |||
Real estate mortgage |
8 | |||
Consumer |
76 | |||
Total recoveries |
84 | |||
Net charge-offs |
42 | |||
Additions charged to operations |
148 | |||
Balance at end of period |
$ | 1 748 | ||
Ratio of net charge-offs during the period to average loans outstanding during the period |
.034 | % | ||
Loans are placed on nonaccrual status when a loan is specifically determined to be impaired or when principal or interest is delinquent for 90 days or more. Interest income generally is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Following is a table showing the risk elements in the loan portfolio.
(000 Omitted) | ||||
September 30, 2003 |
||||
Nonaccrual loans |
$ | 302 | ||
Restructured loans |
| |||
Foreclosed properties |
| |||
Total nonperforming assets |
$ | 302 | ||
Loans past due 90 days accruing interest |
$ | 99 | ||
Allowance for loan losses to period end loans |
1.33 | % | ||
Nonperforming assets to period end loans and foreclosed properties |
.230 | % | ||
At September 30, 2003, other potential problem loans (excluding impaired loans) totalled $790 thousand. 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.
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The comparison of the income statements for the three months ended September 30, 2003 and 2002 and for the nine months ended September 30, 2003 and 2002 shows similar differences between 2003 and 2002. Interest income and interest expense are both down in 2003 compared to 2002 due primarily to lower interest rates. Net interest income also shows a small decrease in both the three month and the nine month comparison of 2003 with 2002.
Noninterest income increased 39% for the nine months ended September 30, 2003 compared to September 30, 2002. There was a 41% increase in noninterest income for the three months ended September 30, 2003 compared to September 30, 2002. There are a number of reasons for these increases. There were gains on sales of securities available for sale. Additional increases were from secondary market fee income as a result of activity due to lower interest rates, increased Visa/MC fee income because of increased debit card usage, and income from increase in cash surrender value of bank owned life insurance purchased in January 2003.
Noninterest expense increased 21% for the three months ended September 30, 2003 compared to the same period in 2002. For the nine months ended September 30, 2003 compared to the same period in 2002, there was a 20% increase in noninterest expense. Salaries and employee benefits increased for both the three and nine month periods in 2003 when compared to those same periods in 2002 due to annual pay increases, the additional employees for the new branch office in Hedgesville, Berkeley County, West Virginia, increased group insurance costs, increased pension expense to compensate for decreased market value of plan assets, and increased 401-k expense due to increase in employer match and increased participation. Occupancy expense and furniture and equipment expenses increased in 2003 for both the three and nine month periods compared to the same 2002 periods due to construction of the new branch office in Hedgesville and a major computer conversion started late in 2002 and continuing through mid 2003. A number of increases for the nine month period ended September 30, 2003 compared to 2002 are included in other operating expenses such as ATM and check card expense increases related to the computer conversion, external audit fee increases due to EDP audit (occurs every other year), website maintenance and online banking expense increases related to computer conversion.
Liquid assets of the Corporation include cash and due from banks, securities purchased under agreements to resell, federal funds sold, securities available for sale, and loans and investments maturing within one year. The Corporations statement of cash flows details this liquidity. Net income after certain adjustments for noncash transactions provided cash from operating activities. Operating activities requiring funds include the initial funding of loans held for sale and the January 1, 2003 purchase of bank owned life insurance. Funds from maturity and sales of securities available for sale and maturity of securities held to maturity were used to fund investing activities. Investments made year to date include purchase of securities available for sale, funding loans, and purchases of bank premises and equipment. Financing activities provided funds through increases in securities sold under agreements to repurchase and increases in deposits. Financing activity expenditures included repaying a Federal Home Loan Bank advance, paying cash dividends to shareholders and purchasing shares for the treasury. Cash and cash equivalents decreased during this period. The Corporation has additional funding sources in the Federal Home Loan Bank, The Bankers Bank and Mercantile-Safe Deposit and Trust Company. Liquidity of the Corporation is adequate to meet present and future financial obligations.
Item 3. | Controls and Procedures |
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings. |
There are no material legal proceedings to which the Registrant or its subsidiary, directors or officers is a party or by which they, or any of them, are threatened. All legal proceedings presently pending or threatened against Potomac Bancshares, Inc. and its subsidiary involve routine litigation incidental to the business of the Company or the subsidiary and are either not material in respect to the amount in controversy or fully covered by insurance.
Item 6. | Exhibits and Reports on Form 8-K. |
(a) | Exhibits: |
2. | Plan of acquisition, reorganization, arrangement, liquidation or succession. |
Not applicable
4. | Instruments defining the rights of security holders, including indentures. |
Not applicable
10. | Material contracts. |
Not applicable
11. | Statement re: computation of per share earnings. |
Not applicable
15. | Letter on unaudited interim financial information. |
Not applicable
18. | Letter on change in accounting principles. |
Not applicable
19. | Reports furnished to security holders. |
Not applicable
22. | Published report regarding matters submitted to vote of security holders. |
Not applicable
23. | Consent of experts and counsel. |
Not applicable
24. | Power of attorney. |
Not applicable
31.1 | Certification Under Exchange Act Rule 13a-14, Chief Executive Officer (and Section 302 of Sarbanes-Oxley Act of 2002) |
31.2 | Certification Under Exchange Act Rule 13a-14, Chief Financial Officer (and Section 302 of Sarbanes-Oxley Act of 2002) |
32 | Certification Pursuant to 18 U.S.C. Section 1350, Chief Executive Officer and Chief Financial Officer (pursuant to Section 906 of Sarbanes-Oxley Act of 2002) |
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(b) | Reports on Form 8-K: |
A Form 8-K was filed with SEC on August 8, 2003. The form included notification that the Potomac Board of Directors had authorized a $.1350 per share quarterly dividend for all shareholders of record on August 15, 2003 payable on September 1, 2003. The form also included notification that Potomac repurchased 78,999 shares of its common stock at $18.50 per share representing 4.43% of the companys outstanding common stock.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
POTOMAC BANCSHARES, INC. | ||
Date November 10, 2003 |
/s/ ROBERT F. BARONNER, JR. Robert F. Baronner, Jr. President & CEO | |
Date November 10, 2003 |
/s/ GAYLE MARSHALL JOHNSON Gayle Marshall Johnson Vice President and Chief Financial Officer |