<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-KSB
------------------------
Annual Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number: 333-19409
PONTOTOC BANCSHARES CORP.
(Name of Small Business Issuer in its Charter)
Mississippi 64-0885622
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
19 South Main Street
Pontotoc, Mississippi 38863
(Address of Principal Executive Offices) (Zip Code)
(601) 489-1631
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE
Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
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
----- ------
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will be contained,
to the best of the 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. [X]
The issuer's revenues for the 1997 fiscal year were $2,197,000.
The issuer's securities are not listed on any exchange nor are bid and asked
prices generally available. Therefore, the market value of the issuer's common
equity held by non-affiliates is not readily determinable and is not disclosed
herein.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 31, 1998.
Common Stock, No Par Value: 264,160 shares
Transitional Small Business Disclosure Format (check one):
Yes No X
------ -----
================================================================================
<PAGE>
PONTOTOC BANCSHARES CORP.
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I...................................................................................... 1
Item 1. Description of Business......................................................... 1
Item 2. Description of Property......................................................... 5
Item 3. Legal Proceedings............................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders............................. 5
PART II..................................................................................... 6
Item 5. Market for Common Equity and Related Stockholder Matters........................ 6
Item 6. Management's Discussion and Analysis or Plan of Operation....................... 7
Item 7. Financial Statements............................................................ 7
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................................ 7
PART III.................................................................................... 8
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(a) of the Exchange Act............................. 8
Item 10. Executive Compensation......................................................... 10
Item 11. Security Ownership of Certain Beneficial Owners and Management................. 10
Item 12. Certain Relationships and Related Transactions................................. 12
Item 13. Exhibits, List and Reports on Form 8-K......................................... 12
SIGNATURES.................................................................................. S-1
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS.............................. SI-1
</TABLE>
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
The Company
Pontotoc BancShares Corp. (the "Company") was organized as a Mississippi
business corporation in December of 1996 and became a one-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
when it acquired all of the issued and outstanding shares of First National Bank
of Pontotoc, a national banking association (the "Bank"), during 1997. The Bank
is the only subsidiary of the Company and its stock is the Company's most
significant asset.
The Company's major source of income in 1997 was dividends from the Bank in
the amount of $5,500,000. The Company expects that dividends from the Bank will
continue to be the Company's major source of income in 1998. As of December 31,
1997, the Company had total consolidated assets of approximately $161 million,
and total consolidated shareholders' equity of approximately $22.9 million.
The Bank
The Bank conducts a full service banking business from its main office and
one branch office, both of which are located in Pontotoc, Mississippi. The Bank
provides commercial and consumer banking services to customers in Pontotoc
County and the adjoining counties of Mississippi. The geographical area
serviced by the Bank is economically diverse and includes public and private
sector industries, including government service, manufacturing, tourism, and
agriculture.
The products and services offered by the Bank include personal and
commercial checking accounts, money market deposit accounts and savings
accounts. The Bank also offers money transfer services, safe deposit box
facilities, and access to a network of automated teller machines. The Bank also
engages in other commercial and consumer lending activities.
As of December 31, 1997, the Bank had total assets of approximately $156
million and total deposits of approximately $130 million.
As of December 31, 1997, the Company and the Bank had 53 full-time and 6
part-time employees for a total of 59 employees. The employees are not
represented by a collective bargaining unit. The Company believes that its
relationship with its employees is good.
<PAGE>
SUPERVISION AND REGULATION
The banking industry is extensively regulated under federal and state law.
As a bank holding company, the Company is subject to regulation under the BHCA
and to supervision by the Board of Governors of the Federal Reserve System (the
"FRB"). Pursuant to the BHCA, the Company may not directly or indirectly
acquire the ownership or control of more than 5% of any class of voting shares
or substantially all of the assets of any other company, including a bank,
without the prior approval of the FRB. The BHCA further limits the activities
of both the Company and the Bank to the business of banking and activities
closely related or incidental to banking.
As a national bank, the Bank is subject to supervision and regular
examination by the Office of the Comptroller of the Currency (the
"Comptroller"). Such examinations, however, are for the protection of the Bank
Insurance Fund ("BIF") and, indirectly to a degree, for depositors, and not for
the protection of investors and shareholders. Pursuant to the terms of the
Federal Deposit Insurance Act (the "FDIA"), the deposits of the Bank are insured
through the BIF and the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation ("FDIC"). Accordingly, the Bank is subject
to regulation by the FDIC and is also subject to the Federal Reserve's
requirements to maintain reserves against deposits. restrictions on the types
and amounts of loans that may be granted and the interest that may be charged
thereon, and limitations on the types of investments that may be made and the
types of services that may be offered.
In 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA"), which, among other things, substantially revised the
depository institution regulatory and funding provisions of the FDIA. FDICIA
also expanded the regulatory and enforcement powers of bank regulatory agencies.
Most significantly, FDICIA mandates annual examinations of banks by their
primary regulators and requires the federal banking agencies to take prompt
"corrective action" whenever financial institutions do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized." A depository institution's capitalization
status will depend on how well its capital levels compare to various relevant
capital measures and certain other factors, as established by regulation. As of
December 31, 1997, the Bank maintained a capital level which qualified it as
being "well capitalized" under such regulations.
FDICIA also prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter by
"undercapitalized." For additional information regarding restrictions on the
Bank's payment of dividends, see Item 5 - "Market for Common Equity and Related
Stockholder Matters -- Dividends," below.
The banking industry is affected by the policies of the FRB. An important
function of the FRB is to regulate the national supply of bank credit to
moderate recessions and to curb inflation. Among the instruments of monetary
policy used by the FRB to implement its objectives are:
2
<PAGE>
open-market operations in U.S. Government securities, changes in the discount
rate on bank borrowings and changes in reserve requirements on bank deposits.
INTERSTATE BANKING AND BRANCHING LEGISLATION
Federal Law
In 1994, Congress passed the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("Riegle-Neal"), which affected the interstate banking
and branching abilities of bank holding companies and banks.
Beginning June 1, 1997, Riegle-Neal authorizes a national bank domiciled in
one state to establish branches in any other state as long as neither state has
opted out of interstate branching between the date of enactment of Riegle-Neal
and May 31, 1997. Riegle-Neal, however, does allow states to preserve certain
restrictions on the entry of out-of-state banks, such as the fashion in which
entry can be made, an age requirement for a bank being merged or acquired, and a
deposit cap. Under Riegle-Neal, once a bank has established a branch in another
state, it may exercise the same rights in that state as national and state banks
enjoy in that state, including the ability to branch intra-state. Riegle-Neal
provides that states may opt in early to interstate branching prior to June 1,
1997.
Riegle-Neal also permits states to allow banks to enter the state by
establishing a de novo branch in that state. In order to allow de novo entry
into a state, that state must expressly provide for de novo branching. Once a
bank has established a branch in a host state through de novo branching, it may
exercise the same rights in that state as national and state banks enjoy,
including the ability to branch intra-state. If a state opts out of interstate
branching, no bank domiciled in that state may establish branches in other
states, and no bank domiciled in another state may establish branches in that
state.
Mississippi Law
On March 29, 1996, the Governor of Mississippi signed into law a bill in
which Mississippi elected to opt in to interstate branching, effective May 1,
1997. As enacted, the bill would (1) allow all Mississippi banks to establish
branches in any other state pursuant to the entry rules in the potential host
state, and (2) allow out-of-state banks to establish branches in Mississippi
pursuant to Mississippi's entry rules. The bill as enacted, however, does not
authorize de novo branching into Mississippi. An out-of-state bank can
establish branches in Mississippi only by (1) merging with a Mississippi
domiciled bank, (2) buying all of the assets of a Mississippi domiciled bank, or
(3) buying all of the assets in Mississippi of an out-of-state bank which has
branches in Mississippi. All interstate branching transactions require
appropriate regulatory approval.
3
<PAGE>
Consequence of Increased Interstate Activity
Because of the increasing liberalization of the laws and regulations
affecting the conduct of interstate banking activities, it is anticipated that
competition in the Bank's geographical market area will increase. If large,
regional bank holding companies acquire branches in the Bank's market area, they
may offer a wider range of services than are currently offered by the Bank. In
addition, some of these competitors may be more highly capitalized than the Bank
and the Company.
Further Changes in Regulatory Requirements
The United States Congress and the Mississippi legislature have
periodically considered and adopted legislation that has resulted in
deregulation of, among other matters, banks and other financial institutions, or
adversely affected the profitability of the banking industry. Future
legislation could further modify or eliminate geographic restrictions on banks
and bank holding companies and current prohibitions with other financial
institutions, including mutual funds, securities brokerage firms, insurance
companies, banks from other states and investment banking firms. The effect of
any such legislation on the business of the Company or the Bank cannot be
accurately predicted. The Company also cannot predict what legislation might be
enacted or what other implementing regulations might be adopted, and if enacted
or adopted, the effect thereof.
RESTRICTION ON DIVIDENDS
The Company is a legal entity separate and distinct from the Bank and
substantially all of the Company's revenues result from amounts paid by the
Bank, as dividends, to the Company. The payment of dividends by the Bank is, of
course, dependent upon its earnings and financial condition. The Bank, however,
as a national bank, is also subject to legal limitations on the amount of its
earnings that it may pay as dividends. Among the restrictive covenants of the
Company's debt agreements is a provision limiting the payment of dividends by
the Company to an amount equal to 40% of the Bank's net earnings.
COMPETITION
There is significant competition among banks and bank holding companies in
Mississippi. The Bank competes with both national and state banks and with
savings and loan associations and credit unions for deposits and loans. The
Bank also competes with large national banks from the principal cities in
Mississippi for certain commercial loans.
The deregulation of depository institutions as well as the increased
ability of nonbanking financial institutions, such as finance companies,
investment companies, insurance companies, and several governmental agencies, to
provide services previously reserved to commercial banks has further intensified
competition. Accordingly, the Bank now competes with these nonbanking financial
institutions, all of which are engaged in marketing various types of loans,
commercial paper, short-term obligations, investments, and other services.
Because nonbanking financial
4
<PAGE>
institutions are not subject to the same regulatory restrictions as banks and
bank holding companies, in many instances they may operate with greater
flexibility. The continued deregulation of the financial services industry may
have a detrimental effect on the Bank's long-term growth and profitability.
ENVIRONMENTAL
The Company is subject to various federal, state, and local statutes and
ordinances regulating the discharge of materials into the environment. The
Company does not believe that it will be required to expend any material amounts
to comply with these laws and regulations.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company has its principal offices in its headquarters building at 19
South Main Street, Pontotoc, Pontotoc County, Mississippi 38863, which is owned
and occupied by the Bank. The Bank also owns the property on which its branch
office is located, as well as other residential and commercial properties which
it has acquired primarily through foreclosure proceedings. In the judgment of
management, the facilities of the Company and the Bank are generally suitable
and adequate for the needs of the Company and the Bank.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
5
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
There is no public trading market for the Company's Common Stock.
HOLDERS
On March 31, 1998, there were 190 shareholders of record of the Common
Stock.
DIVIDENDS
Pursuant to Mississippi law, the Company's Board of Directors may authorize
the Company to pay cash dividends to its shareholders. The only limitation on
such a dividend is that no distribution may be made if, after giving effect to
the distribution (a) the Company would not be able to pay its debts as they come
due in the usual course of business, or (b) the Company's total assets would be
less than the sum of its total liabilities plus the amount that would be needed,
if the Company were to be dissolved at the time of the distribution, to satisfy
the preferential rights upon dissolution of any shareholders whose preferential
rights are superior to those receiving the distribution.
The principal source of the Company's cash revenues, however, is dividends
from the Bank. There are certain limitations under federal law on the payment of
dividends by national banks. Under federal law, the directors of a national
bank, after making proper deduction for all expenses and other deductions
required by the Comptroller, may credit net profits to the bank's undivided
profits accounts, and may declare a dividend from that account of so much of the
net profits as they judge expedient.
The prior approval of the Comptroller is required, however, if the total of
all dividends declared by a national bank in any calendar year will exceed the
sum of such bank's net profits for that year and its retained net profits for
the preceding two calendar years, less any required transfers to surplus.
Federal law also prohibits national banks from paying dividends which would be
greater than the bank's undivided profits after deducting statutory bad debt in
excess of the bank's allowance for loan losses. Finally, FDICIA generally
prohibits a depository institution from making any capital distribution to its
holding company if the depository institution would thereafter be
"undercapitalized."
In addition, both the Company and the Bank are subject to various
regulatory policies and requirements relating to the payment of dividends,
including requirements to maintain adequate capital above regulatory minimums.
The appropriate federal regulatory authority is authorized to determine under
certain circumstances relating to the financial condition of a national bank or
bank
6
<PAGE>
holding company that the payment of dividends would be an unsafe or unsound
practice and to prohibit payment thereof. The Comptroller has indicated that
paying dividends that deplete a national bank's capital base to an inadequate
level would be an unsound and unsafe banking practice. The Comptroller and the
Federal Reserve Board have each indicated that banking organizations should
generally pay dividends only out of current operating earnings. The Bank's
ability to pay dividends is also limited by prudence, statutory and regulatory
guidelines, and a variety of other factors.
Further, in connection with the acquisition of the Bank in 1997, the
Company incurred debt with restrictive covenants prohibiting the payment of
dividends by the Company in amounts in excess of 40% of the Bank's net earnings.
Management does not anticipate that this restriction will have a material
adverse effect on the Company's ability to pay dividends to its shareholders.
The Company and the Bank have traditionally declared dividends in December
and paid dividends on such declarations in January of the following year.
Dividends paid in January of 1996, 1997 and 1998 were $1.60, $3.00 and $3.00 per
share, respectively.
The declaration of future dividends is at the discretion of the Company and
generally will be dependent upon the earnings of the Bank, the assessment of
capital requirements, considerations of safety and soundness, applicable law and
regulation, and other factors. Subject to the limitations set forth above, it
is the present policy of the Board of Directors of the Company to continue the
declaration of cash dividends on the Company's Common Stock on an annual basis,
to the extent practicable.
Retained earnings of the Bank available for payment of cash dividends under
applicable dividend regulations exceeded $ 3 million as of December 31, 1997,
although the Bank intends to retain most of these funds for capital and not to
pay them out as dividends.
7
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
During March of 1997, Pontotoc BancShares Corp. (the Company) acquired
approximately 20.00% of the outstanding stock of First National Bank of
Pontotoc (the Bank) for cash in a transaction accounted for as a purchase.
On October 31, 1997, the Company acquired the remaining outstanding shares
of the Bank by issuing 10 shares of its no-par stock for each share of Bank
stock in a manner similar to a pooling of interests. Hence, consolidated
results of operations reported in the consolidated statement of income
reflect only two months of subsidiary earnings. Therefore, management's
discussion and analysis of financial condition and results of operations
which follows will compare the results of operations for 1997 as though the
acquisition had occurred January 1, 1997, as discussed in Note 8 of the
consolidated financial statements.
This discussion is intended to supplement the consolidated financial
statements, to explain material changes in the financial condition and to
compare the operating results for the Company for the year ended December
31, 1997 as discussed above, to its predecessor, the Bank, for the same
period in 1996.
THE YEARS ENDED DECEMBER 31, 1997 AND 1996
OVERVIEW
The Company reported pro forma net income for 1997 of $2,145,000
compared to $2,679,000 in 1996. This represented a 19.9% decrease in 1997
compared to 1996. The decrease in earnings from 1996 to 1997 was due to a
$433,000 increase in interest expense on long-term debt and approximately
$270,000 of additional professional fees related to the acquisition of the
Bank. Return on average assets was 1.35% and return on average equity was
9.04% for 1997, compared to the prior year's returns of 1.78% and 10.32%,
respectively.
Average assets increased 5.96% in 1997 from the 1996 level. At year
end 1997 and 1996, total assets were $161,170,000 and $153,289,000,
respectively. Total stockholders' equity was $22,859,000 at December 31,
1997, compared to $26,811,000 at December 31, 1996. The decrease in total
equity from 1996 to 1997 is due to a return of capital paid up to the
Company from the Bank during 1997 of $5,500,000.
RESULTS OF OPERATIONS
NET INTEREST INCOME. The Company's primary source of revenue is net
interest income. Net interest income is the excess of interest income and
fees on earning assets over interest expense on interest-bearing
liabilities. The level of net interest income is determined primarily by
the volume of interest earning assets, and the spread between the yields on
earning assets and the rates paid on their funding sources, as well as the
relative effect of noninterest bearing sources of funds. Net interest
income decreased from $6,719,000 in 1996 to $6,370,000 in 1997 due to an
increase in interest expenses related to debt incurred in the acquisition
of the Bank.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
Average earning assets increased from $145,125,000 in 1996 to
$148,000,000 in 1997. Interest income increased from $11,681,000 in 1996 to
$11,911,000 in 1997 due primarily to an increase in loans. This growth in
higher yielding assets was funded almost entirely by an increase in time
deposits, the average cost of which increased slightly in 1997 to 5.41%
from 5.37% in 1996. However, due to interest costs associated with long-
term debt incurred in the acquisition of the Bank, the Company experienced
a decline in its net interest margin.
The Company's net interest spread, the difference between the yield on
earning assets and the rate paid on interest-bearing liabilities, was 3.26%
for 1997, a 24 basis point decrease from the 1996 level of 3.50%. This
decrease in the Company's net interest spread resulted from an increase in
the percentage of earning assets that was funded by interest-bearing
deposits and higher yielding long-term debt.
INTEREST RATE/VOLUME ANALYSIS. The following table sets forth for the
periods indicated a summary of the changes in interest earned and interest
paid resulting from changes in volume and changes in rates:
SUMMARY OF CHANGES IN NET INTEREST INCOME
<TABLE>
<CAPTION>
1997/1996
-----------------------------------------------
CHANGE DUE TO
-----------------------------------------------
TOTAL
RATE VOLUME CHANGES
-----------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Interest income:
Loans $ (133) $ 387 $ 254
Investment Securities - taxable 4 66 70
Investment Securities - non-taxable 20 1 21
Federal funds and resale agreements 3 (118) (115)
---------- ----------- ---------
Total interest income (106) 336 230
---------- ----------- ---------
Interest expense:
Deposits other than time 31 (2) 29
Time deposits 30 88 118
Other interest-bearing liabilities - - -
Long-term debt - 432 432
---------- ----------- ---------
Total interest expense 61 518 579
---------- ----------- ---------
Net interest income $ (45) $ (182) $ (349)
---------- ----------- ---------
</TABLE>
Note: The changes in interest due to both volume and rate have been
allocated proportionally between rate and volume.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
AVERAGE BALANCES, YIELDS, AND RATES PAID. The following Average Balance
and Yield Analysis presents average balances, interest earned or paid, and
average rates earned or paid. Yields and costs are derived by dividing
income or expense by the average balance of assets or liabilities,
respectively. Average balances are derived from average monthly balances.
AVERAGE BALANCE AND YIELD ANALYSIS
(dollars in thousands)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997 1996
--------------------------------------------- ---------------------------------------------
AVERAGE BALANCE INCOME EXPENSE YIELDS RATES AVERAGE BALANCE INCOME EXPENSE YIELDS RATES
--------------- -------------- ------------ --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) $ 86,987 $ 8,421 9.68% $ 83,031 $ 8,167 9.84%
Interest bearing deposits in banks 26 - 0.00 - - 0.00
Investment Securities (2)
Taxable 40,922 2,412 5.89 39,822 2,342 5.88
Nontaxable 13,662 737 5.39 13,660 716 5.24
Federal funds sold 6,403 341 5.33 8,612 456 5.29
-------- ------- -------- -------
Total earning assets 148,000 11,911 8.05% 145,125 11,681 8.05%
------- -------
Other assets 13,528 7,314
-------- --------
TOTAL ASSETS $161,528 $152,439
======== ========
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY
Interest bearing deposits:
Time deposits $ 76,129 $ 4,115 5.41% $ 74,379 $ 3,997 5.37%
Other interest bearing deposits 34,742 994 2.86 34,779 965 2.77
-------- ------- -------- -------
Total interest bearing deposits 110,871 5,109 4.61 109,158 4,962 4.55
Long-term debt 4,845 432 8.92 - - 0.00
-------- ------- -------- -------
Total interest bearing liabilities 115,716 5,541 4.79 109,158 4,962 4.55
Non-interest bearing deposits 16,764 ------- 15,409 -------
Other liabilities 1,017 2,759
Stockholders' equity 28,031 25,113
-------- --------
$161,528 $152,439
======== ========
Interest income and rate earned 11,911 8.05 11,681 8.05
Interest expense and rate paid 5,541 4.79 4,962 4.55
------- ---- ------- ----
Interest rate spread 3.26 3.50
NET INTEREST INCOME AND NET YIELD ---- ----
ON AVERAGE EARNING ASSETS $ 6,370 4.30% $ 6,719 4.63%
======= ==== ======= ====
</TABLE>
- ---------------------------
(1) Nonaccrual loans are included in average balances, and interest on such
loans is recognized on a cash basis.
(2) The yield on tax exempt securities is not on a tax equivalent basis for this
schedule.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
INTEREST RATE SENSITIVITY. The interest rate sensitivity gap is the
difference between the amount of interest-bearing assets and the amount of
interest-bearing liabilities maturing in any given time period.
GAP ANALYSIS AT DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
0 - 3 4 - 12 1 - 5 OVER 5
MONTHS MONTHS YEARS YEARS
-------- -------- ------- -------
(dollars in thousands)
Loans $ 20,421 $ 25,448 $41,955 $ 1,710
Investment securities, taxable 1,476 1,787 21,092 13,862
Investment securities, non-taxable 175 780 7,199 5,031
Federal funds 3,350 - - -
-------- -------- ------- -------
Total rate sensitive assets $ 25,422 $ 28,015 $70,246 $20,603
-------- -------- ------- -------
Savings deposits (3) $ 3,775 $ 3,775 $ 3,775 $ 7,553
NOW accounts (3) 2,840 2,840 2,840 5,395
Money markets (3) - 3,347 3,347 6,693
Time deposits, less than $ 100,000 19,564 28,538 3,335 -
Time deposits greater than $ 100,000 11,560 13,134 3,585 -
-------- -------- ------- -------
Total rate sensitive liabilities $ 37,739 $ 51,634 $16,882 $19,641
-------- -------- ------- -------
$ Gap $(12,317) $(23,619) $53,364 $ 962
-------- -------- ------- -------
Gap percent of total assets (7.64%) (14.65%) 33.11% 6.59%
-------- -------- ------- -------
$ Cumulative gap $(12,317) $(35,936) $17,428 $18,390
-------- -------- ------- -------
Cumulative gap percent of total
asset (7.64%) (22.30%) 10.81% 11.41%
-------- -------- ------- -------
</TABLE>
(3) The assumed rate of deposit withdrawal allocates 20% of savings
deposits and NOW account balances to each of the following maturity
categories: 0-3 months, 4-12 months, and 1-5 years. The remaining 40%
of balances are allocated to the "over 5 year" category. The gap
calculation also allocates 25% of Money Market account balances in
both the 4-12 month and 1-5 year categories, with the remaining 50%
being allocated to the "over 5 year" category. This method of
allocating withdrawals is consistent with the Bank's historical
experience.
A primary objective of asset/liability management is to achieve stability
in net interest income throughout interest rate cycles. Management of the
Company reviews its interest rate exposure on a monthly basis to analyze
the impact of possible changes in market interest rates on the Company's
net income. At December 31, 1997, the Company's one-year repricing gap,
defined as repricing assets minus repricing liabilities as a percentage of
total assets, was (7.64)%. In other words, more of the Company's
liabilities than assets were scheduled to reprice within a one-year time
frame. In periods of increasing rates, the Company should experience a
negative effect on net income because its interest income on earnings-
assets will increase more slowly than its cost of funds. Conversely, in
periods of declining rates, based on its current interest sensitivity gap,
the Company should experience increased net income, since the interest on
its
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
earnings-assets will decrease more slowly than its cost of funds. However,
the degree of interest rate sensitivity is not equal for all types of
assets and liabilities. The Company's experience has indicated that the
magnitude of repricing of interest-bearing demand, savings, and money
market accounts is not as great as changes in general market rates. These
deposit categories, along with noninterest bearing deposits, have
historically been stable sources of funds for the Bank, which indicates a
much longer implicit maturity than their contractual maturities. The
Company has a targeted gap range of +10% to -10% of total assets with
respect to an immediate and intermediate gap out to one year. Should the
Company's gap not fall within the targeted range, the Company would take
immediate action to attempt to correct the problem.
The gap is primarily managed through the mix of fed funds and longer term
investments. If the Company has a positive gap position outside of the
specified range, the Company would reduce investment in fed funds and
redeploy to longer term investments. If the Company has a negative gap
position outside the range, the Company would sell longer term investment
securities and invest in fed funds.
A significant portion of the loan portfolio consists of fixed rate loans.
The vast majority of these loans mature in a six-month to one-year time
frame. Consequently, fixed rate loans do not significantly impact the
Company in periods of either rising or declining rates.
PROVISION FOR POSSIBLE LOAN LOSSES. The provision for possible loan
losses charged to operating expense is a result of a continuing review of
the loan portfolio, taking into consideration the impact of economic
conditions on the borrower's ability to repay, past collection experience,
the risk characteristics of the loan portfolio, and other factors deemed
appropriate by management. Management calculates the appropriate level of
reserve for loan loss according to OCC guidelines on a quarterly basis and
makes monthly allocations to keep the provision for loan loss at the
appropriate level. The total amount allocated for loan loss provision for
1996 was $420,000. The provision made in 1997 was $300,000.
The Bank identified net charge-offs of $146,000 in 1997 and $348,000 in
1996, to be written off as uncollectible against the reserve for possible
loan losses. The decrease in net charge-offs from 1996 to 1997 was the
effect of a continued good local economy and the efforts of management in
past years to improve the quality of the Bank's loan portfolio.
The allowance for possible loan losses is maintained at a level believed
by management to be adequate to absorb potential losses in the loan
portfolio. The allowance for possible loan losses as a percentage of
average loans outstanding was 1.40% for 1997 and 1.28% for 1996.
NONINTEREST INCOME. Other income for 1997 totaled $1,221,000, compared
to $1,100,000 in 1996, as service charges and other sources of income
increased slightly.
NONINTEREST EXPENSES. In 1997, other expenses totaled $3,775,000,
compared to $3,394,000 in 1996. This was an increase of $381,000, or
10.09%, from the 1996 level. Higher salaries and employee benefits caused
the increase, along with legal and consulting fees related to the formation
of the Company.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
ANALYSIS OF FINANCIAL CONDITION
INVESTMENT SECURITIES. In 1997, average investment securities increased
marginally by $1,102,000 from $53,482,000 in 1996, to $54,584,000 in
1997. Investment securities totaled $51,788,000 at the end of 1997.
Investment securities comprised 36.88% of average earning assets at
December 31, 1997 compared to 36.85% at December 31, 1996.
Securities classified as available for sale constituted approximately 39%
of the total investment portfolio at year-end 1997, compared to
approximately 33% at year-end 1996. These securities, which are largely
mortgage-backed securities, are reported at their estimated fair values in
the balance sheets. The unrealized net losses on these securities of
$227,000 in 1997 and $481,000 in 1996 are reported, net of tax, as a
separate component of shareholders' equity.
The remaining portfolio securities are classified as held to maturity and
are reported in the balance sheets at amortized cost. The unrealized net
gain on these securities in 1997 was $340,000, compared to an unrealized
net gain in 1996 of $111,000.
The Bank maintains no trading portfolio.
Proceeds from sales and maturities of securities were $16,785,000 during
1997. Gross realized gains and losses were $2,000 and $1,000,
respectively for 1997. The investment securities portfolio serves as a
source of income and liquidity and as collateral to secure public deposits.
SECURITIES PORTFOLIO. The carrying amount of securities at the dates
indicated is set forth in the table below:
<TABLE>
<CAPTION>
1997 1996
------- -------
(dollars in thousands)
<S> <C> <C>
U. S. Treasury $ 499 $ 2,259
Obligations of U. S. Government:
U. S. Agencies 1,247 740
Mortgage-backed 35,360 32,881
State and political subdivisions 13,509 14,056
Other securities 1,173 1,130
------- -------
Total $51,788 $51,066
======= =======
</TABLE>
MATURITY DISTRIBUTION AND INVESTMENT SECURITIES PORTFOLIO YIELDS. The
maturities, based on contractual maturities, of debt securities at December
31, 1997 and the weighted yields of such securities are shown in the table
following. Expected maturities may differ from contractual maturities
because borrowers may have the right to repay obligations with or without
penalties.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
<TABLE>
<CAPTION>
WITHIN AFTER ONE AFTER FIVE AFTER
ONE BUT WITHIN BUT WITHIN TEN
YEAR FIVE YEARS TEN YEARS YEARS TOTAL
----------------- ---------------- --------------- --------------- ---------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury $ 499 5.35% $ - 0.00% $ - 0.00% $ - 0.00% $ 499 5.35%
Obligation of U. S. Government
U. S. Agencies - 0.00 - 0.00 1,247 6.83 - 0.00 1,247 6.83
Mortgage-backed 2,664 6.36 21,254 6.54 2,124 6.59 9,318 5.83 35,360 6.34
State and political 1,055 6.54 7,423 4.85 4,780 5.00 251 4.73 13,509 5.04
subdivisions
Other securities - 0.00 - 0.00 - 0.00 1,173 5.91 1,173 5.91
------ ---- ------- ---- ------ ---- ------- ---- ------- ----
Total $4,218 6.21% $28,677 6.11% $8,151 5.70% $10,742 5.80% $51,788 6.00%
====== ==== ======= ==== ====== ==== ======= ==== ======= ====
</TABLE>
The yield on tax exempt securities is not on a tax equivalent basis for
this schedule.
LOANS AND NONPERFORMING ASSETS. The loan portfolio is one of the largest
components of the Bank's earning assets. Average loans outstanding in 1997
increased $3,956,000 or 4.76%, from the 1996 level of $83,031,000.
Average loans in 1997 were $86,987,000. The increase in 1997 can be
attributed to a strong local economy and the Bank's large share of the
market.
The largest segments of the Bank's loan portfolio are residential real
estate and commercial real estate, which represent approximately 31.1% and
13.7%, respectively, of the total portfolio as of December 31, 1997.
Commercial loans represented approximately 32.2% of total loans at the end
of 1997. No single loan relationship exceeds 5% of total loans.
Total nonperforming assets at December 31, 1997 were $1,677,000,
compared to $2,587,000 at December 31, 1996. Other real estate owned
decreased to $437,000 at December 31, 1997, compared to $854,000 as of
the end of 1996, as foreclosed real estate held at the end of 1996 was sold
during 1997.
Nonaccrual loans are loans on which the accrual of interest income has
been discontinued and previously accrued interest has been reversed,
because the borrower's financial condition has deteriorated to the extent
that the collection of principal and interest is doubtful. Until the loan
is returned to performing status, generally as the result of the full
payment of all past due principal and interest, interest income is recorded
on a cash basis. Interest income that would have been recognized on
nonaccrual loans had those loans been on accrual status at contractual
terms throughout 1997 was approximately $60,000. No interest income was
recognized on nonaccrual loans for 1997.
SUMMARY OF NONPERFORMING ASSETS. Nonaccrual, restructured, and 90 days
past due loans and other real estate are summarized in the following table.
Also, several ratios that measure the Company's level of nonperforming
assets are included in this table.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1997 1996
------- ------
(dollars in thousands)
<S> <C> <C>
Nonperforming loans
Nonaccrual loans $ 308 $ 381
Restructured loans 932 1,352
------- ------
Total non performing loans 1,240 1,733
Other real estate 437 854
------- ------
Total nonperforming assets $1,677 $2,587
------- ------
Loans 90 days or more past due and still
accruing interest $ 650 $ 339
------- ------
Nonperforming loans as a percent of total loans 1.40% 2.05%
------- ------
Nonperforming assets as a percent of total loans
and other real estate 1.88% 3.02%
------- ------
Allowance for possible loan losses as a percent of
nonperforming loans 98.39% 61.51%
------- ------
Allowance for possible loan losses as a percent of
nonperforming assets 60.94% 41.21%
------- ------
</TABLE>
In addition to the nonaccrual loans included in nonperforming assets, the
Bank had approximately $5,194,000 of performing loans that were classified
as of December 31, 1997. Classified loans are credits, identified
internally by management or through the regulatory examination process,
which have a higher degree of risk than other performing loans in the
portfolio.
LOAN PORTFOLIO DISTRIBUTION AND ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN
LOSSES. The following table shows the amounts of loans outstanding and the
allowance for possible loan losses according to type of loan for each of
the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1997 1996
---------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loans:
Commercial $28,897 32.16% $18,184 21.46%
Agricultural 4,602 5.12 4,134 4.88
Real estate-residential 27,944 31.10 25,786 30.43
Real estate-commercial 12,272 13.66 22,275 26.29
Consumer 16,128 17.95 14,355 16.94
------- ------ ------- ------
Loans net of unearned income 89,843 100.00 84,734 100.00
------- ------ ------- ------
Total $89,843 100.00% $84,734 100.00%
======= ====== ======= ======
15
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
----- ------- ------ -------
(dollars in thousands)
Allowance for possible loan losses:
<S> <C> <C> <C> <C>
Commercial $ 378 31.00% $ 309 29.00%
Agricultural 122 10.00 75 7.00
Real estate-residential 268 26.00 117 11.00
Real estate-commercial 256 21.00 330 31.00
Consumer 110 9.00 149 14.00
General Reserve 86 3.00 86 8.00
----- ------- ------ -------
Total $1,220 100.00% $1,066 100.00%
----- ------- ------ -------
</TABLE>
LOAN MATURITY DATA. The tables below show the amounts due on loans,
classified according to the sensitivity to the changes in fixed and
floating interest rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------
DUE DUE AFTER DUE
WITHIN ONE BUT AFTER
ONE WITHIN FIVE
YEAR 5 YEARS YEARS TOTAL
------- ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Sensitivity of loans to
changes in interest
rates:
Fixed interest rate $47,916 $39,053 $ 209 $87,178
Floating or adjustable
interest rate 458 1,409 798 2,665
------- ------- ------ -------
Total $48,374 $40,462 $1,007 $89,843
------- ------- ------ -------
Sensitivity of loans to
changes in interest
rates:
Fixed interest rate:
Commercial $14,418 $11,751 $ 63 $26,232
Agricultural 2,529 2,062 11 4,602
Real estate -
residential 15,359 12,518 67 27,944
Real estate -
commercial 6,745 5,498 29 12,272
Installment loans 8,865 7,224 39 16,128
------- ------- ------ -------
Total $47,916 $39,053 $ 209 $87,178
------- ------- ------ -------
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------
DUE DUE AFTER DUE
WITHIN ONE BUT AFTER
ONE WITHIN FIVE
YEAR 5 YEARS YEARS TOTAL
------- ------- ------ -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Sensitivity of loans to
changes in interest rates:
Floating or adjustable
interest rate:
Commercial,
Financial, and
Agricultural $ 458 $ 1,409 $ 798 $ 2,665
Real estate -
construction - - - -
Real estate -
mortgage - - - -
Installment loans - - - -
------- ------- ------ -------
Total $ 458 $ 1,409 $ 798 $ 2,665
------- ------- ------ -------
TOTAL LOANS $48,374 $40,462 $1,007 $89,843
------- ------- ------ -------
</TABLE>
The loan maturity data is based upon contractual maturities, not interest
rate repricing dates. All these loans have fixed maturities. The Bank
makes residential real estate loans with maturities of one year.
SUMMARY OF LOAN LOSS EXPERIENCE. The loan loss experience for the two
years ended December 31, 1997 is summarized in the following table:
<TABLE>
<CAPTION>
1997 1996
------ -----
(dollars in thousands)
<S> <C> <C>
Balance at beginning of year $1,066 $ 994
Loans charged off
Commercial (25) (143)
Agricultural - (18)
Real estate - residential (34) (54)
Real estate - commercial (35) (78)
Consumer (139) (159)
------ -----
Total charge-offs (233) (452)
------ -----
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
<TABLE>
<CAPTION>
1997 1996
------ ------
(dollars in thousands)
<S> <C> <C>
Recoveries on loans previously charged off
Commercial $ 39 $ 30
Agricultural - -
Real estate - residential 2 1
Real estate - commercial - 38
Consumer 46 35
------ ------
Total recoveries 87 104
------ ------
Net loans charged-off (146) (348)
Additions charged to operations 300 420
------ ------
Balance at end of year $1,220 $1,066
------ ------
Ratio of net charge-offs (recoveries) during period
to outstanding average loans 0.17% 1.22%
------ ------
</TABLE>
DEPOSITS. Total deposits at December 31, 1997 were $129,238,000, up
3.8% from the level of $124,485,000 posted at December 31, 1996.
Time certificates of deposits of $100,000 or more were $28,379,000 at
December 31, 1997. These deposits consist primarily of public fund time
deposits that are fully secured and deposits from local customers with
which the Bank has other banking relationships. Although time deposits of
$100,000 or more can exhibit greater volatility to changes in interest
rates and other factors than do core deposits, management believes that due
to the nature of the deposits of this type, any volatility experienced
could be adequately met with alternate funding sources. The Bank had no
brokered deposits at December 31, 1997.
DEPOSIT AVERAGE BALANCES AND RATES. The following table indicates the
average daily amount of deposits and rates paid on such deposits for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
------------------------------------------------
1997 1996
---------------------- -----------------------
AMOUNT RATE AMOUNT RATE
-------- ---- ------ ----
(dollars in thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing
demand $ 16,765 $ 15,409
Savings deposits 5,355 2.99% 5,137 2.98%
Interest-bearing demand 29,368 2.72% 29,642 2.74%
Time deposits 76,129 5.45% 74,379 5.37%
-------- --------
Total deposits $127,617 $124,567
-------- --------
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE. The maturities of time
deposits of $100,000 or more are summarized for December 31, 1997 in the
table below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
(dollars in
thousands)
<S> <C>
3 months or less $12,788
3 months to 6 months 5,465
6 months to 12 months 6,770
Over 12 months 3,356
-------
Total $28,379
</TABLE> -------
CAPITAL RESOURCES OF THE BANK. The Bank is required to comply with the
risk-based capital guidelines adopted by the Board of Governors of the
Federal Reserve System. Those guidelines apply weighting factors that vary
according to the level or risk associated with each asset category. The
information below summarizes the Bank's risk-based capital and leverage
ratios for December 31, 1997 and 1996. The Bank exceeds all minimum
capital ratios.
<TABLE>
<CAPTION>
BANK'S
SPECIFIC
MINIMUM
DECEMBER 31 RATIO
---------------------- REQUIRE-
1997 1996 MENTS
--------- --------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Tier 1 Capital 26.1% 29.0% 8%
Total Capital 24.9% 30.1% 4%
Leverage Ratio 15.3% 17.6% 4%
</TABLE>
LIQUIDITY. Liquidity is the ability of the Bank to fund the needs of its
borrowers, depositors, and creditors. The Bank's liquidity sources,
including cash flows from sales, maturities, and paydowns of loans and
investment securities, federal funds purchased, and a base of core
deposits, are considered by management to be adequate to meet liquidity
needs for normal operations.
As shown in the accompanying 1997 statement of cash flow, cash and cash
equivalents increased by $830,000 during 1997 to $5,513,000 at December
31, 1997. Cash and cash equivalents were generated primarily by proceeds
from sales and maturities of investment securities totaling $16,785,000,
and a net increase in deposits of $5,553,000. In addition, operating
activities provided net cash of $2,371,000. Offsetting these increases
were purchases of investment securities in the amount of $17,508,000 and a
net increase in loans of $5,256,000.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - (Continued)
OTHER. In management's opinion, the anticipated impact of recently
issued, but, as yet, not adopted, accounting pronouncements are expected to
be immaterial.
Dividend payout and equity to asset ratios for the years ended December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
EQUITY
DIVIDEND TO ASSET
PAYOUT RATIO
--------- ---------
<S> <C> <C>
1997 36.9% 14.2%
1996 37.0% 17.3%
</TABLE>
CAPITAL AND DIVIDENDS. Stockholders' equity decreased by 14.74% to
$22.86 million at December 31, 1997, compared to $26.81 million at the end
of 1996. The ratio of stockholders' equity to assets decreased to 14.18%
at December 31, 1997, compared to 17.49% at the end of 1996. The decreases
are due to the bank paying dividends to the holding company of $5,500,000
million. The Company declared dividends of $3.00 per share in 1997
compared to $30.00 in 1996. The reduction in per share dividends declared
for 1997 is due to the increased number of shares outstanding after the 10
to 1 stock exchange effectuating the business combination.
YEAR 2000
The Company recognizes the problems associated with the year 2000 issue.
The Company utilizes outside software vendors for all of its computer
operations. The most critical software system is a "turn-key" banking
software system from Information Technology, Inc. ("ITI"). ITI has been
addressing the year 2000 issue for several years and the Company has
received assurances from ITI that ITI is year 2000 ready, currently, by
using a "Julian" dating system which requires a four digit date for the
year. ITI is also holding training seminars of "self-testing" and will be
providing the Company with test data to test the Company's year 2000
readiness with respect to the Company's banking software, in mid 1998. The
Company has also received assurances from other, less critical, software
vendors, including monthly updates from the Federal Reserve on its
"Fedline" program and its automated teller machine software vendor on its
progress in becoming totally year 2000 compliant.
No material hardware expenditures are expected to be incurred in the
Company's effort to become year 2000 compliant. The only area in which the
Company expects to have year 2000 expenditures is in document processing.
The Bank's reader/sorter (a Unisys DP500) will require a software upgrade,
which is pending delivery with costs not expected to exceed $5,000.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
PONTOTOC BANCSHARES CORP.
AND SUBSIDIARY
PONTOTOC, MISSISSIPPI
DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEET
CONSOLIDATED STATEMENT OF INCOME
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
ADDITIONAL INFORMATION:
INDEPENDENT AUDITORS' REPORT ON ADDITIONAL INFORMATION
STATEMENTS OF INCOME - FIRST NATIONAL BANK
STATEMENTS OF STOCKHOLDERS' EQUITY -
FIRST NATIONAL BANK
STATEMENTS OF CASH FLOWS - FIRST NATIONAL BANK
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Directors
Pontotoc BancShares Corp.
Pontotoc, Mississippi
We have audited the accompanying consolidated balance sheet of Pontotoc
BancShares Corp. and Subsidiary as of December 31, 1997 and the related
statements of income, stockholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion of these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated 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 audit of the consolidated financial
statements provides 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 Pontotoc
BancShares Corp. and Subsidiary as of December 31, 1997 and the results of
operations and cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Nail McKinney PA
New Albany, Mississippi
January 15, 1998
<PAGE>
CONSOLIDATED BALANCE SHEET
PONTOTOC BANCSHARES CORP. AND SUBSIDIARY
DECEMBER 31, 1997
<TABLE>
<CAPTION>
(in thousands)
ASSETS
<S> <C>
Cash and due from banks (Note 12).................................................... $ 5,513
Interest-bearing deposits with banks................................................. 4,700
Federal funds sold................................................................... 3,350
Securities available for sale at fair value (Note 2)................................. 20,042
Securities held to maturity, at amortized cost (fair value of $ 32,087) (Note 2)..... 31,746
Loans, net of allowance for loan losses of $ 1,220 (Note 3).......................... 88,624
Premises and equipment, net (Note 4)................................................. 2,839
Intangibles.......................................................................... 1,303
Deferred tax asset................................................................... 442
Accrued interest..................................................................... 2,108
Other assets......................................................................... 503
--------
Total assets......................................................................... $161,170
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits: (Note 5)
Non-interest bearing............................................................... $ 17,522
Interest bearing................................................................... 111,716
--------
Total deposits................................................................... 129,238
Accrued interest and other liabilities............................................... 2,263
Long-term debt (Note 6).............................................................. 6,810
--------
Total liabilities.................................................................... 138,311
--------
Stockholders' equity:
Common stock; no par value ($ 1 stated value); 3,000,000 shares authorized; 264,160
shares issued and outstanding....................................................... 264
Additional paid-in capital........................................................... 22,939
Retained earnings.................................................................... (202)
Unrealized loss on securities available-for-sale, net of taxes....................... (142)
--------
Total stockholders' equity........................................................... 22,859
--------
Total liabilities and stockholders' equity........................................... $161,170
========
</TABLE>
- --------------------------------------------------------------------------------
The notes to financial statements are an integral
part of this financial statement.
24
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
PONTOTOC BANCSHARES CORP. AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(in thousands
except per
share amounts)
<S> <C>
Interest income:
Interest and fees on loans........................................................... $1,465
Interest on investment securities.................................................... 508
Interest on federal funds sold....................................................... 34
------
Total interest income.................................................................. 2,007
------
Interest expense:
Interest on deposits................................................................. 870
Other interest....................................................................... 432
------
Total interest expense................................................................. 1,302
------
Net interest income.................................................................... 705
Provision for loan losses.............................................................. (40)
------
Net interest income after provision for loan losses.................................... 665
------
Non-interest income:
Service fees......................................................................... 168
Other................................................................................ 37
Loss from sale of investment securities, other real estate, and other foreclosed
assets.............................................................................. (15)
------
Total non-interest income.............................................................. 190
------
Non-interest expenses:
Salaries and employee benefits....................................................... 246
Occupancy expense, net............................................................... 92
Other expenses....................................................................... 622
------
Total non-interest expenses............................................................ 960
------
Loss before income taxes............................................................... (105)
Provision for income taxes (Note 7).................................................... 97
------
Net loss............................................................................... $ (202)
======
Net loss per share..................................................................... $(4.59)
======
</TABLE>
- --------------------------------------------------------------------------------
The notes to financial statements are an integral
part of this financial statement.
25
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PONTOTOC BANCSHARES CORP. AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
-------------------------- GAIN (LOSS) ON TOTAL
PAID-IN RETAINED AVAILABLE-FOR-SALE STOCKHOLDERS'
SHARES CAPITAL EARNINGS SECURITIES EQUITY
---------- ----------- ---------- ------------------ --------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Acquisition of First National
Bank of Pontotoc effectuated
through issuance of 10 Pontotoc
BancShares Corp. shares for
each share of outstanding stock
in First National Bank of
Pontotoc. 264 $23,731 $ - $(213) $23,782
Net loss - - (202) - (202)
Change in market valuation
allowance for available for
sale securities. - - - 71 71
Cash dividend declared ($ 3.00
per share) - (792) - - (792)
--- ------- ----- ----- -------
Balance, December 31, 1997 264 $22,939 $(202) $(142) $22,859
=== ======= ===== ===== =======
</TABLE>
______________________________________
The notes to financial statements are an integral
part of this financial statement.
26
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
PONTOTOC BANCSHARES CORP. AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.............................................................................. $ (202)
Adjustments to reconcile net loss to net cash provided by operating activities:
Provision for loan losses........................................................... 40
Depreciation........................................................................ 56
Provision for deferred income taxes................................................. 21
Amortization........................................................................ 102
Loss on sale of securities, other real estate, and other foreclosed assets.......... 15
Decrease in interest receivable and other assets.................................... 179
Increase in interest payable and other liabilities.................................. 331
-------
Net cash provided by operating activities...................................... 542
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities
Maturities, prepayments, calls, and sales........................................... 488
Activity in held-to-maturity securities
Maturities, prepayments, and calls.................................................. 1,162
Increase in interest bearing deposits with banks...................................... (4,700)
Purchase of investment in First National Bank......................................... (6,384)
Cash outlays for organized costs...................................................... (36)
Cash outlays for debt issue costs..................................................... (5)
Net cash provided by:
Loans............................................................................... 229
Federal funds sold.................................................................. 750
Purchases of premises and equipment................................................... (245)
Proceeds from the sale of other real estate and other foreclosed assets............... 82
-------
Net cash used in investing activities.......................................... (8,659)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.............................................................. 6,810
Net cash provided by deposits......................................................... 2,009
-------
Net cash provided by financing activities........................................... 8,819
-------
Increase in cash and due from banks..................................................... 702
Cash and due from banks at beginning of year............................................ -
-------
Cash and due from banks at end of year.................................................. $ 702
=======
</TABLE>
27
<PAGE>
STATEMENTS OF CASH FLOWS - (Continued)
PONTOTOC BANCSHARES CORP. AND SUBSIDIARY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
Interest paid....................................................................... $ 209
======
Income taxes paid................................................................... $1,339
======
</TABLE>
OTHER NON-CASH INVESTING ACTIVITIES:
During the year ended December 31, 1997, the Company acquired 100 percent of
the stock of First National Bank of Pontotoc. The bank acquired 6,584 shares
through cash outlays totaling approximately $ 6,384,000. The remaining 26,416
shares of the Bank were acquired through an exchange of 10 shares of holding
company stock for each share of bank stock outstanding at October 31, 1997, the
consummation date of the combination.
_________________________________________________________
The notes to financial statements are an integral
part of this financial statement.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PONTOTOC BANCSHARES CORP. AND SUBSIDIARY
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Operating Environment
Pontotoc BancShares Corp. and subsidiary provides financial services
to individuals and corporate customers located primarily in Northeast
Mississippi. Although the Company has a diversified loan portfolio, the
majority of its loan customers are located in Pontotoc County, Mississippi.
The Company is also subject to the regulations of certain federal and state
agencies and undergoes periodic examinations by those regulatory
authorities.
Principles of Consolidation
The consolidated financial statements include the accounts of Pontotoc
BancShares Corp. (the Company) and First National Bank (the Bank) which is
a wholly owned subsidiary of Pontotoc BancShares Corp. All material
intercompany balances and transactions have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ significantly from those
estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on loans and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. While management uses available information to
recognize losses on loans and foreclosed real estate, future additions to
the allowances may be necessary based on changes in local economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for losses
on loans and foreclosed real estate. Such agencies may require the Bank to
recognize allowances based on their judgments about information available
to them at the time of their examination.
Cash Equivalents
For purposes of the Statements of Cash Flows, the Bank considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents, which are included in the balance sheet
caption "Cash and due from banks."
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - (Continued)
Securities
Securities that management has both the positive intent and ability to
hold to maturity are classified as securities held to maturity and are
carried at cost, adjusted for amortization of premium or accretion of
discount using the interest method. Securities that may be sold prior to
maturity for asset/liability management purposes, or that may be sold in
response to changes in interest rates, changes in prepayment risk, to
increase regulatory capital or other similar factors, are classified as
securities available for sale and carried at fair value with any
adjustments to fair value, after tax, reported as a separate component of
shareholders' equity. Declines in the fair value of individual held-to-
maturity and available-for-sale securities below their cost that are other
than temporary are included in earnings as realized losses.
Interest on securities, including the amortization of premiums and the
accretion of discounts, is reported in interest income using the interest
method. Gains and losses on the sale of securities are recorded on the
trade date and are calculated using the specific identification method.
Loans and Allowances for Loan Losses
Loans: Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally are stated at
their outstanding unpaid principal balances. Interest income is accrued on
the unpaid principal balance. Discounts and premiums are amortized to
income using the interest method.
Nonaccrual Loans: Commercial loans are placed on nonaccrual at the
time the loan is 90 days delinquent unless the credit is well secured and
in process of collection. Residential real estate loans are typically
placed on nonaccrual at the time the loan is 120 days delinquent. Credit
card loans, other unsecured personal credit lines, and certain consumer
finance loans are typically charged-off no later than 180 days delinquent.
Other consumer loans are charged-off at 120 days delinquent. In all cases,
loans must be 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 the principal and interest amounts contractually
due are reasonably assured of repayment within a reasonable time frame and
when the borrower has demonstrated payment performance of cash or cash
equivalents for a minimum of six months.
Allowance for Loan Losses: The allowance for loan losses is
established through provisions for loan losses charged against income.
Portions of loans deemed to be uncollectible are charged against the
allowance for losses, and subsequent recoveries, if any, are credited to
the allowance.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - (Continued)
Loans and Allowances for Loan Losses - (Continued)
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flows using the
loan's initial effective interest rate or the fair value, less selling
costs, of the collateral for collateral dependent loans. By the time a
loan becomes probable of foreclosure it has been charged down to fair
value, less estimated cost to sell.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable inherent loan losses.
Management's periodic evaluation of the adequacy of the allowance is based
on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to
repay (including the timing of future payments), the estimated value of any
underlying collateral, composition of the loan portfolio, current economic
conditions, and other relevant factors. This evaluation is inherently
subjective as it requires material estimates that are susceptible to
significant change including the amounts and timing of future cash flows
expected to be received on impaired loans.
Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided
over the estimated useful lives of the respective assets on the straight-
line method.
Foreclosed Assets
Foreclosed assets, which are recorded in other assets, include
properties acquired through foreclosure or in full or partial satisfaction
of the related loan.
Foreclosed assets initially are recorded at the lower of fair value,
net of estimated selling costs, or cost, at the date of foreclosure. After
foreclosure, valuations are periodically performed by management and the
assets are carried at the lower of cost or fair value, less estimated costs
to sell. Revenue and expenses from operations and changes in the valuation
allowance are included in other expenses.
Income Taxes
The objective of accounting for income taxes is to recognize the
amount of current and deferred taxes payable or refundable at the date of
the financial statements as a result of all events that have been
recognized in the financial statements and as measured by the provisions of
enacted tax laws.
Income taxes currently payable are based on the taxable income for the
year. A deferred tax asset or liability is calculated for tax consequences
attributable to temporary differences between taxable income and financial
accounting income. Temporary differences relate primarily to depreciation
methods, unrealized gains and losses on available-for-sale securities, and
provision for loan losses.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES - (Continued)
Earnings Per Share
Substantially all of the 264,160 shares of the company's common stock
were issued in connection with a business combination accounted for as a
purchase on October 31, 1997. Weighted average shares outstanding used in
the computation of earnings per share was 44,027.
NOTE 2. INVESTMENT SECURITIES
The carrying amount of securities and their approximate fair values at
December 31, 1997 follow:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------------------
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury securities $ 500 $ - $ 1 $ 499
Obligations of other U.S. government
agencies 1,250 1 4 1,247
Mortgage-backed securities 17,346 14 237 17,123
Other securities 1,173 - - 1,173
------- ---- ---- -------
$20,269 $15 $242 $20,042
------- ---- ---- -------
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------------------
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Obligations of states and political
subdivision $13,509 $267 $1 $13,775
Mortgage-backed securities 18,237 78 4 18,311
------- ---- ---- -------
$31,746 $345 $5 $32,087
------- ---- ---- -------
</TABLE>
Gross realized gains and gross realized losses on sales of available-for-
sale securities were approximately $ 0 and $ 2,000, respectively, in 1997. All
dispositions of held-to-maturity securities were the result of calls or
maturities of the respective securities.
The amortized cost and estimated market value of investment securities at
December 31, 1997 by contractual maturities follow. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations.
32
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 2. INVESTMENT SECURITIES - (Continued)
<TABLE>
<CAPTION>
SECURITIES HELD-TO-MATURITY SECURITIES AVAILABLE-FOR-SALE
----------------------------- -------------------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
(in thousands)
Amounts maturing in:
One year or less $ 2,526 $ 2,535 $ 1,693 $ 1,692
After one year through five years 23,192 23,389 5,486 5,485
After five years through ten years 5,777 5,910 2,380 2,374
After ten years 251 253 10,710 10,491
------- ------- ------- -------
$31,746 $32,087 $20,269 $20,042
------- ------- ------- -------
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which are
not due at a single maturity date, have been allocated over maturity groupings
based on the weighted-average contractual maturities of underlying collateral.
The mortgaged-backed securities may mature earlier than their weighted-average
contractual maturities because of principal prepayments.
Assets, principally securities, carried at approximately $ 16,069,000 at
December 31, 1997 were pledged to secure public deposits and for other purposes
required or permitted by law.
NOTE 3. LOANS
The components of loans included in the balance sheets are as follows:
(in thousands)
Commercial $28,897
Agricultural 4,602
Real estate:
Residential 27,944
Commercial 12,272
Consumer installment 16,324
-------
90,039
Less: Unearned income (195)
Allowance for loan losses (1,220)
-------
Loans, net $88,624
-------
33
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 3. LOANS - (Continued)
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Balance, beginning of year $ -
Acquired in business combination 1,218
Provision for loan losses 40
Loan losses, net of recoveries (38)
------
Balance, end of year $1,220
======
</TABLE>
Impairment of loans having recorded investments of $ 969,000 at December
31, 1997 has been recognized in conformity with FASB Statement 114, as amended
by GASB Statement 118. The total allowance for loan losses related to these
loans was $ 306,000 on December 31, 1997.
The Company's average recorded investment in impaired loans during 1997
amounted to approximately $ 970,000. Interest income recognized on impaired
loans during 1997 is immaterial to the financial statements.
Loans having carrying values of $ 90,000 were transferred to foreclosed
real estate in 1997.
NOTE 4. BANK PREMISES AND EQUIPMENT
The following is a summary of premises and equipment:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Bank premises $2,451
Furniture, fixtures, and equipment 2,363
------
4,814
Less: Accumulated depreciation and amortization 1,975
------
$2,839
======
</TABLE>
The Company leases certain office equipment under terms of operating
leases. Total rental expenses and minimum future payments required under the
noncancelable leases are insignificant to the financial statements for 1997.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 5. DEPOSITS
Total deposits consisted of the following at December 31, 1997:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Demand $ 16,729
Savings 18,878
NOW 13,915
Certificates of deposit less than $ 100,000 51,337
Certificates of deposit greater than $ 100,000 28,379
--------
Total deposits $129,238
--------
</TABLE>
At December 31, 1997, the scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<S> <C>
Year ending December 31, 1998 $72,796
1999 4,609
2000 1,403
2001 409
2002 499
-------
$79,716
=======
</TABLE>
NOTE 6. LONG-TERM DEBT
Long-term debt at December 31, 1997 consisted of notes payable to a bank
bearing interest at floating prime payable in equal, annual principal and
interest installments beginning March 18, 1998, collateralized by 6,557 shares
in First National Bank.
The debt agreements contain restrictive covenants limiting the payment of
dividends to forty percent of earnings.
Maturities of long-term debt over the next five years are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1998 $1,149
1999 $1,247
2000 $1,353
2001 $1,468
2002 $1,593
</TABLE>
NOTE 7. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Current $75
Deferred 22
---
Total tax provision $97
===
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 7. INCOME TAXES - (Continued)
The provision for income taxes differs from that computed by applying
statutory rates to income before income taxes, as indicated in the following
analysis:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Expected tax provision at a 37.3% rate $(39)
Effect of tax-exempt income (40)
Nondeductible expenses related to acquisition 101
Other, net 75
----
$ 97
====
</TABLE>
The temporary differences which give rise to significant portions of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
(in thousands)
Deferred tax assets:
<S> <C>
Allowance for loan losses $455
Unrealized losses on securities 85
Other -
----
Total deferred tax assets 540
----
Deferred tax liabilities:
Premises and equipment 98
----
98
----
Net deferred tax assets $442
====
</TABLE>
The ultimate realization of deferred tax assets is dependent upon the
generation of sufficient taxable income in the future periods in which the
temporary differences become deductible for federal tax purposes. Management
believes that, based on performance in prior years and the likelihood of future
taxable income, these assets are more likely than not to be realized.
NOTE 8. BUSINESS COMBINATIONS
During the year ended December 31, 1997, the Company acquired 100 percent
of the outstanding stock of First National Bank of Pontotoc accounted for under
the purchase method of accounting for business combinations. The purchase was
effectuated in two steps. Pontotoc BancShares Corp. first incurred long-term
debt in order to purchase approximately 20 percent of the outstanding stock of
the Bank in March 1997 for approximately $ 6,357,000. In October 1997, after
obtaining shareholder approval for the transaction, the Company issued 10 shares
of its no-par common stock for each of the remaining outstanding shares of the
Bank.
Goodwill acquired by the Company in the purchase amounted to approximately
$ 919,000 and is being amortized on the straight-line method over a 15-year
period.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 8. BUSINESS COMBINATIONS - (Continued)
Results of operations of the acquired subsidiary are reflected in the
Statement of Income from November 1, 1997 through December 31, 1997 subsequent
to the exchange of stock.
A condensed income statement reflecting the results of operations as though
the Bank was acquired by the Company at January 1, 1997 follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Interest income $11,911
Interest expense 5,541
-------
Net interest revenue 6,370
Provision for loan losses (300)
-------
Net interest revenue after provision for loan losses 6,070
Non-interest income 940
Non-interest expenses 3,775
-------
Income before taxes 3,235
Provision for income taxes 1,090
-------
Net income $ 2,145
-------
</TABLE>
NOTE 9. RELATED PARTY TRANSACTIONS
The Bank makes loans to its officers and directors as well as other related
parties. Loans to directors require the approval of the Board of Directors with
the interested party abstaining from voting. Loans to related parties amounted
to approximately $ 127,000 at December 31, 1997.
NOTE 10. PROFIT SHARING PLAN
The Company has a contributory profit sharing plan. Employees with one
year of service are eligible to participate. Participating employees are
required to contribute 2% of their salaries each year. The Company also makes
discretionary contributions each year.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 11. COMPANY COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company has various outstanding
commitments to extend credit and standby letters of credit which are not
disclosed in the accompanying financial statements. In the opinion of
management, no significant credit losses will result from these commitments. On
December 31, 1997, the Company had outstanding standby letters of credit of $
1,559,000 and commitments to extend credit under outstanding lines of credit of
approximately $ 5,150,000
NOTE 12. DUE FROM BANKS
The Company had funds on deposit with other banks at December 31, 1997
totaling $ 2,937,000 which were in excess of federal deposit insurance coverage.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgement in estimating the fair value of the
Company's financial instruments. However, there are inherent weaknesses in any
estimation technique. Therefore, for substantially all financial instruments,
the fair value estimates herein are not necessarily indicative of the amounts
the Company could have realized in a sales transaction on the dates indicated.
The estimated fair value amounts have been measured as of their respective year
ends, and have not been reevaluated or updated for purposes of these
consolidated financial statements subsequent to those respective dates. As
such, the estimated fair values of these financial instruments subsequent to the
respective reporting dates may be different than the amounts reported at each
year end.
The following information should not be interpreted as an estimate of the
fair value of the entire corporation since a fair value calculation is only
provided for a limited portion of the Company's assets. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Company's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were
used to estimate the fair values of the Company's financial instruments at
December 31, 1997:
Financial Instruments Valued at Carrying Value
The carrying amounts of cash and cash equivalents approximate their fair
value. The carrying amounts of notes payable and other borrowings maturing
within 90 days approximate their fair values. Fair values of other borrowed
funds in excess of 90 days are estimated using discounted cash flow analyses
based on the Bank's current incremental borrowing rates for similar types of
borrowing arrangements. The carrying amounts of accrued interest and other
assets approximate their fair values.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS - (Continued)
Available-for-sale and held-to-maturity securities
Fair values for securities are based on available quoted market prices. If
quoted market prices are unavailable, fair values are based on quoted market
prices of comparable instruments. For unquoted securities for which no
comparable instruments exists, the reported fair value is estimated on the basis
of cost, book, or appraised value as deemed appropriate by management.
Available-for-sale securities are carried at their aggregate fair value.
Loans
For variable-rate commercial loans that reprice frequently (within a
relatively short time frame) and have no significant change in credit risk, fair
values are based on carrying values. Residential first mortgages are based on
quoted market prices of similar loans. Fair values for certain junior mortgage
loans, consumer installment loans, credit-card loans, and other consumer loans
are estimated using discounted cash flow models. The discount rates are based
on current market interest rates for similar types of loans. Fair values for
commercial real estate and commercial loans that do not reprice or do not mature
within relatively short time frames are estimated using discounted cash flow
analyses. The discount rates used are those currently being offered for loans
with similar terms to borrowers of similar credit quality. Fair values for
impaired loans are estimated using discounted cash flow analyses or underlying
collateral values, where applicable.
Deposits
The fair values for demand deposits and deposits with no defined maturity
are taken to be the amount payable on demand at the reporting date. The fair
values for fixed-maturity deposits are estimated using discounted cash flow
models based on rates currently offered for the relevant product types with
similar remaining maturities.
Long-Term Debt
The estimated fair value was determined using a discounted cash flow
analysis, based on current market rates of similar maturity debt securities, to
discount cash flows.
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS - (Continued)
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
CARRYING AMOUNT FAIR VALUE
--------------- ----------
(in thousands)
<S> <C> <C>
Financial assets:
Cash and due from banks $ 5,513 $ 5,513
Interest bearing deposits with banks 4,700 4,700
Federal funds sold 3,350 3,350
Securities available-for-sale 20,042 20,042
Securities held-to-maturity 31,746 32,087
Loans (gross) 89,844 90,026
Allowance for loan losses (1,220) -
Accrued interest receivable 2,108 2,108
-------- --------
156,083 $157,826
--------
Nonfinancial assets:
Premises and equipment, net 2,839
Intangibles 1,303
Deferred tax assets 442
Other assets 503
--------
$161,170
--------
Financial liabilities:
Deposits:
Demand deposits $ 16,729 $ 16,729
NOW accounts 13,915 13,915
Savings 18,878 18,878
Time 79,716 80,536
Accrued interest and other liabilities 2,263 2,263
Long-term debt 6,810 6,899
-------- --------
138,311 $139,220
========
Stockholders' equity 22,859
--------
$161,170
========
</TABLE>
The carrying amounts in the table above are the amounts at which the
financial instruments are reported in the financial statements.
40
<PAGE>
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 14. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Title I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Bank's
primary regulator categorized the Bank as well capitalized under the framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since the
notification that management believes have changed the institution's category.
The following regulatory capital ratios are for the Bank only. Calculation or a
consolidated basis would be materially the same.
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER PROMPT
ACTUAL ADEQUACY PURPOSES CORRECTIVE ACTION PROVISIONS
----------------------- ------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- -------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital
(to Risk-Weighted Assets) $25,137 26.1% $7,692 8.0% $9,615 >10.0%
Tier I Capital
(to Risk-Weighted Assets) $23,935 24.9% $3,846 4.0% $5,769 >6.0%
Tier I Capital
(to Average Assets) $23,935 15.3% $6,280 4.0% $7,850 >5.0%
</TABLE>
<PAGE>
ADDITIONAL INFORMATION
<PAGE>
INDEPENDENT AUDITORS' REPORT ON
ADDITIONAL INFORMATION
To the Directors and Shareholders
Pontotoc BancShares Corp. and Subsidiary
Pontotoc, Mississippi
Our report on our audit of the consolidated financial statements of
Pontotoc BancShares Corp. and Subsidiary for 1997 appears on Page 3. The audit
was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The Bank-only comparative income
statements, statements of stockholders' equity, and cash flows in Schedules 1,
2, and 3 are presented for the purpose of additional analysis of the Company's
predecessor, First National Bank of Pontotoc, and are not a required part of
these basic financial statements. Such information has been subjected to the
audit procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, the schedules referred to above are fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.
/s/ Nail McKinsey PA
New Albany, Mississippi
January 15, 1998
<PAGE>
SCHEDULE 1
STATEMENTS OF INCOME
FIRST NATIONAL BANK
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------- ----------
(in thousands except for
share data)
<S> <C> <C>
Interest income:
Interest and fees on loans $ 8,421 $ 8,167
Interest on investment securities 3,149 3,058
Interest on federal funds 341 456
------- -------
Total interest income 11,911 11,681
------- -------
Interest expense:
Interest on deposits 5,109 4,962
------- -------
Net interest income 6,802 6,719
Provision for loan losses (300) (420)
------- -------
Net interest income after provision for loan losses 6,502 6,299
------- -------
Non-interest income:
Service fees 1,025 1,005
Other 196 95
Loss from sale of investment securities, other real estate, and other
foreclosed assets (281) (180)
------- -------
Total non-interest income 940 920
------- -------
Non-interest expenses:
Salaries and employee benefits 1,790 1,782
Occupancy expense, net 369 316
Other expenses 1,291 1,296
------- -------
Total non-interest expenses 3,450 3,394
------- -------
Income before income taxes 3,992 3,825
Provision for income taxes 1,272 1,146
------- -------
Net income $ 2,720 $ 2,679
======= =======
Net income per share $82.42 $81.18
======= =======
</TABLE>
<PAGE>
SCHEDULE 2
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FIRST NATIONAL BANK
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON TOTAL
-------------------- AVAILABLE- STOCK-
PAR PAID-IN UNDIVIDED FOR-SALE HOLDERS'
SHARES VALUE CAPITAL SURPLUS PROFITS SECURITIES EQUITY
-------- ------- --------- ------- --------- ----------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 33 $330 $ - $21,000 $ 4,093 $(300) $25,123
Net income - - - - 2,679 - 2,679
Cash dividend declared ($ 30 per share) - - - - (989) - (989)
Change in market valuation of
available-for-sale securities - - - - - (2)
--- ---- ---- ------- ------- ----- -------
Balance, December 31, 1996 33 330 - 21,000 5,783 (302) 26,811
Net income - - - - 2,720 - 2,720
Cash dividend to holding company - - - - (5,500) - (5,500)
Additional paid-in capital - - 396 - - - 396
Change in market valuation of
available-for-sale securities - - - - - 160
--- ---- ---- ------- ------- ----- -------
Balance, December 31, 1997 33 $330 $396 $21,000 $ 3,003 $(142) $24,587
=== ==== ==== ======= ======= ===== =======
</TABLE>
45
<PAGE>
SCHEDULE 3
STATEMENTS OF CASH FLOWS
FIRST NATIONAL BANK
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
-------- ---------
(in thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,720 $ 2,679
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 300 420
Depreciation 201 188
Provision for deferred income taxes 15 (27)
Amortization 291 279
Loss on sale of securities, other real estate, and other foreclosed
assets 282 180
Increase in interest receivable and other assets (507) (26)
Decrease in interest payable and other liabilities (931) (36)
-------- -------
Net cash provided by operating activities 2,371 3,657
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Activity in available-for-sale securities
Maturities, prepayments, calls, and sales 7,560 5,670
Purchases (10,385) (4,982)
Activity in held-to-maturity securities
Maturities, prepayments, and calls 9,225 6,746
Purchases (7,123) (8,208)
Net cash provided (used) by:
Loans (5,256) (4,635)
Federal funds sold 4,650 (900)
Purchases of premises and equipment (1,365) (626)
Proceeds from the sale of other real estate and other foreclosed
assets 674 649
-------- -------
Net cash used in investing activities (2,020) (6,286)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital infusion from holding company 396 -
Cash dividends (5,500) -
Net cash provided by deposits 5,553 3,501
-------- -------
Net cash provided by financing activities 449 3,501
-------- -------
Increase in cash and due from banks 800 872
Cash and due from banks at beginning of year 4,683 3,811
-------- -------
Cash and due from banks at end of year $ 5,483 $ 4,683
======== =======
</TABLE>
46
<PAGE>
SCHEDULE 3 - CONTINUED
STATEMENTS OF CASH FLOWS - (Continued)
FIRST NATIONAL BANK
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
(in thousands)
SUPPLEMENTAL CASH FLOWS INFORMATION:
<S> <C> <C>
Interest paid $5,030 $5,013
====== ======
Income taxes paid $1,081 $1,203
====== ======
</TABLE>
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of December 31, 1997:
<TABLE>
<CAPTION>
Position(s) with the
Name Age Company and the Bank
- ---- --- ----------------------
<S> <C> <C>
William W. Anderson............... 52 Vice President
Anna M. Berryhill................. 69 Director
Richard Frazier................... 49 Vice President
Buddy R. Montgomery............... 57 Director and President
Larry Russell..................... 56 Director, Executive Vice President
and Secretary
Michael Simon..................... 51 Director
Charles D. Thomas................. 62 Director
J. Lowell Whitworth............... 84 Director
</TABLE>
The Board of Directors of the Company shall serve until the first annual
meeting of the shareholders of the Company in 1998, or until their successors
are elected and qualified.
The business experience of each of the directors and executive officers of
the Company is set forth below.
William W. Anderson is a Vice President of the Bank, specializing in
consumer lending. Mr. Anderson has worked at the Bank since 1989, initially
serving as a loan collector and then as a loan officer, before being promoted to
his current position.
Anna M. Berryhill is retired. Previously she was a schoolteacher in
Pontotoc County for more than twelve years. Ms. Berryhill is a director and the
treasurer of the Tombigbee River Valley Water Management District. She has
served as a director of the Bank since 1994.
48
<PAGE>
Richard Frazier has been Vice President and Assistant Loan Administrator of
the Bank since 1992. Mr. Frazier has worked in the banking industry since 1973.
Mr. Frazier was a Senior Vice President and Executive Officer at Peoples Bank &
Trust Company in Pontotoc, Mississippi from 1979 until 1992, when he came to
work for the Bank in his present capacities.
Buddy R. Montgomery has been the President of the Bank since 1993. Mr.
Montgomery has worked in various capacities for the Bank since 1963, including
as its Senior Vice President and Cashier from 1977 to 1993. Mr. Montgomery has
served on the Board of the Directors of the Bank since 1969 and was its
Secretary from 1977 to 1995. Mr. Montgomery also serves as a Member of the
Economic and Community Development Committee of the Pontotoc County Chamber of
Commerce.
Larry Russell currently serves as the Bank's Executive Vice President and
Loan Administrator, positions he has held since 1993. He has also served as
Secretary to the Bank's Board of Directors since 1995. Mr. Russell has been
employed by the Bank since 1964 and has served it in many capacities including
loan teller, loan officer and Senior Vice President. Mr. Russell has served on
the Board of Directors of the Bank since 1972.
Michael Simon is the President and majority shareholder of Simon, Inc.,
which is Pontotoc, Mississippi's largest department store. Mr. Simon has served
on the Board of Directors of the Bank since 1975.
Charles D. Thomas is a judge for the First Chancery Court District in
Pontotoc, Mississippi. Prior to his judicial appointment, Chancellor Thomas was
in the private practice of law for over twenty years. Chancellor Thomas has
served on the Board of Directors of the Bank since 1983.
J. Lowell Whitworth is retired. Previously, Mr. Whitworth was the owner
and operator of a local pharmacy in Pontotoc, Mississippi. Mr. Whitworth
currently serves on three Board Committees, the Executive Committee, the Loan
Review Committee and the Audit Committee. He is Chairman of the Audit
Committee. Mr. Whitworth has served as a director of the Bank since 1972.
49
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------------------------------ -----------------------------------------------------------------
AWARDS PAYOUTS
---------------------------- ----------------------------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL RESTRICTED STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY ($) BONUS ($) COMPENSATION AWARD(S) ($) OPTIONS PAYOUT ($) COMPENSATION ($)/(1)/
- ------------------ ---- ---------- --------- ------------ ---------------- ---------- ---------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Buddy Montgomery, 1997 $120,290 $8,468 0 N/A 0 0 $14,144
President & CEO 1996 112,400 9,016 0 N/A 0 0 10,672
1995 105,200 600 0 N/A 0 0 10,614
Larry Russell, 1997 $112,376 $7,957 0 N/A 0 0 $13,211
Executive Vice 1996 105,016 8,462 0 N/A 0 0 9,974
President 1995 98,280 600 0 N/A 0 0 9,919
</TABLE>
- ----------------------
/(1)/ These amounts represent the estimated annual contribution on behalf of the
named executives pursuant to the Bank's Employees' Profit Sharing Plan.
EMPLOYMENT AGREEMENTS
Effective November 20, 1996, the Bank entered into agreements with Buddy R.
Montgomery and Larry Russell. Pursuant to the terms of their individual
agreements, Messrs. Montgomery and Russell are entitled to, among other things,
300% of their "annual salaries" (as defined in the agreements) if, during the
"covered period" (as defined in the agreements to be the one-year period
preceding through the five-year period following a change-in-control), either is
terminated without cause or resigns following a change in his duties in
connection with a change in control of the Bank.
COMPENSATION OF DIRECTORS
All directors, other than Messrs. Montgomery and Russell, receive a monthly
fee of $450. Mr. Whitworth receives an additional $325 per month for serving on
the Executive Committee.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the shares of
the Company Common Stock owned as of December 31, 1997 (i) by each person who
beneficially owns more than 5% of the shares of Company Common Stock, (ii) by
each of the Company's executive officers and directors, and (iii) by all
directors and executive officers as a group.
50
<PAGE>
<TABLE>
<CAPTION>
Number of Shares
Beneficially Percentage
Name and Address Owned Ownership
- ---------------- ---------------- ----------
<S> <C> <C>
William W. Anderson 1,000 *
1737 Clark Street
Pontotoc, Mississippi 38863
Anna M. Berryhill 51,550 19.51%
175 Cedar Creek Drive
Pontotoc, Mississippi 38863
Richard Frazier 0 *
302 South Main Street
Pontotoc, Mississippi 38863
Buddy R. Montgomery 2,010 *
380 Northridge Drive
Pontotoc, Mississippi 38863
Larry Russell 2,100 *
9672 Highway 9 South
Pontotoc, Mississippi 38863
Michael Simon/(1)/ 15,530 5.88%
P. O. Box 239
Pontotoc, Mississippi 38863
Charles D. Thomas 3,860 1.46%
2507 Highway 6 East
Pontotoc, Mississippi 38863
J. Lowell Whitworth 7,340 2.78%
108 West Oxford Street
Pontotoc, Mississippi 38863
Louise M. Wilson 21,450 8.12%
P. O. Box 1200, Suite 261
Humble, Texas 77347
Directors and executive officers 83,390 31.57%
as a group (8 persons)
</TABLE>
- ------------
* Less than one (1%) percent.
/(1)/ Of the shares shown, 2,910 shares are held of record by Simon, Inc., of
which Mr. Simon is the President and majority shareholder, and 700 shares are
held of record by members of Mr. Simon's immediate family.
51
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
EXHIBITS
The response to this portion of Item 13 is submitted as the Exhibit Index
attached hereto and hereby incorporated herein by this reference.
REPORTS ON FORM 8-K
None.
52
<PAGE>
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.
PONTOTOC BANCSHARES CORP.
(REGISTRANT)
By: /s/ Buddy R. Montgomery
----------------------------------
Buddy R. Montgomery, President
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
- --------- ----- ----
/s/ Anna M. Berryhill Director March 27, 1998
- ---------------------------
Anna M. Berryhill
/s/ Buddy R. Montgomery Director, President March 27, 1998
- --------------------------- (Principal Executive Officer
Buddy R. Montgomery and Principal Financial Officer)
/s/ Larry Russell Director and March 27, 1998
- --------------------------- Executive Vice President
Larry Russell
/s/ Michael Simon Director March 27, 1998
- ---------------------------
Michael Simon
/s/ Charles D. Thomas Director March 27, 1998
- ---------------------------
Charles D. Thomas
S-1
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
Director March 27, 1998
/s/ James L. Whitworth
- ---------------------------
James L. Whitworth
/s/ Julie Henry Principal Accounting Officer March 27, 1998
- ---------------------------
Julie Henry
S-2
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
Included in this Form 10-KSB as Exhibit 99.1 are the following:
(1) Any annual report to security holders covering the Company's last
fiscal year; and
(2) Every proxy statement, form of proxy or other proxy soliciting material
sent to more than 10 of the Company's security holders with respect to any
annual or other meeting of security holders.
SI-1
<PAGE>
EXHIBITS TO ANNUAL REPORT ON FORM 10-KSB
OF PONTOTOC BANCSHARES CORP.
FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------
<C> <S>
2.1 Plan of Reorganization and Agreement of Merger, incorporated by reference to
Exhibit 2.1 to Registrant's Registration Statement on Form S-4, Registration
No. 333-19409, filed with the Commission on January 8, 1997 and declared
effective on August 26, 1997.
3.1 The Company's Articles of Incorporation, incorporated by reference to Exhibit
3.1 to Registrant's Registration Statement on Form S-4, Registration No.
333-19409, filed with the Commission on January 8, 1997 and declared
effective on August 26, 1997.
3.2 The Company's Bylaws, incorporated by reference to Exhibit 3.2 to
Registrant's Registration Statement on Form S-4, Registration No. 333-19409,
filed with the Commission on January 8, 1997 and declared effective on August
26, 1997.
10.1 Executive Agreement effective November 20, 1996, by and between Buddy R.
Montgomery and the Bank, incorporated by reference to Exhibit 10.1 to
Registrant's Registration Statement on Form S-4, Registration No. 333-19409,
filed with the Commission on January 8, 1997 and declared effective on
August 26, 1997.
10.2 Executive Agreement effective November 20, 1996, by and between Larry
Russell and the Bank, incorporated by reference to Exhibit 10.2 to Registrant's
Registration Statement on Form S-4, Registration No. 333-19409, filed with the
Commission on January 8, 1997 and declared effective on August 26, 1997.
10.3 Stock Purchase Agreement dated March 18, 1997 among Pontotoc BancShares
Corp., First National Bank of Pontotoc, Union Planters Corporation, Doty
Investments, L.P., Martha W. Doty, Gerry G. Jones and All Saints Episcopal
Church of Memphis, Tennessee, incorporated by reference to Exhibit 10.3 to
Registrant's Registration Statement on Form S-4, Registration No. 333-19409,
filed with the Commission on January 8, 1997 and declared effective on
August 26, 1997.
10.4 Note, Security Agreement and Loan Agreement dated March 18, 1997 between
Pontotoc BancShares Corp. and National Bank of Commerce, incorporated by
reference to Exhibit 10.4 to Registrant's Registration Statement on Form S-4,
Registration No. 333-19409, filed with the Commission on January 8, 1997 and
declared effective on August 26, 1997.
11 Statement re: computation of per share earnings
21 Subsidiaries of the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ------------
<C> <S>
23.1 Consent of Independent Auditors
27 Financial Data Schedule
99.1 Supplemental Information
</TABLE>
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31, 1997
-------------------
<S> <C>
PRIMARY:
Average shares outstanding: 44,027
=========
Net Loss $(202,000)
=========
Net loss per share $ (4.59)
=========
FULLY DILUTED:
Average shares outstanding: 44,027
=========
Net loss $(202,000)
=========
Net loss per share $ (4.59)
=========
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The following is a list of subsidiaries of the Company at December 31, 1997
and all are included in the Company's consolidated financial statements:
<TABLE>
<CAPTION>
JURISDICTION PERCENTAGE OF
OF VOTING SECURITIES
SUBSIDIARY/(1)(2)/ INCORPORATION OWNED
- ------------------ ------------- -----------------
<S> <C> <C>
First National Bank of Pontotoc Federal Law 100%
</TABLE>
NOTES
/(1)/ The Subsidiary is included in the consolidated financial statements.
/(2)/ The Subsidiary conducts business under its own name.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Annual Report (Form 10-KSB) of Pontotoc
BancShares Corp. (the "Company") of our reports dated January 15, 1998 with
respect to (i) the consolidated financial statements of the Company and
Subsidiary as of and for the year ended December 31, 1997, and (ii) the
Additional Information attached to the consolidated financial statements as
Schedules 1, 2 and 3.
New Albany, Mississippi
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001030180
<NAME> PONTOTOC BANCSHARES CORP.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-18-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,513
<INT-BEARING-DEPOSITS> 111,716
<FED-FUNDS-SOLD> 3,350
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,042
<INVESTMENTS-CARRYING> 31,746
<INVESTMENTS-MARKET> 52,129
<LOANS> 89,844
<ALLOWANCE> 1,220
<TOTAL-ASSETS> 161,170
<DEPOSITS> 129,238
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,263
<LONG-TERM> 6,810
0
0
<COMMON> 264
<OTHER-SE> 22,595
<TOTAL-LIABILITIES-AND-EQUITY> 161,170
<INTEREST-LOAN> 1,465
<INTEREST-INVEST> 508
<INTEREST-OTHER> 34
<INTEREST-TOTAL> 2,007
<INTEREST-DEPOSIT> 870
<INTEREST-EXPENSE> 432
<INTEREST-INCOME-NET> 705
<LOAN-LOSSES> (40)
<SECURITIES-GAINS> (15)
<EXPENSE-OTHER> 960
<INCOME-PRETAX> (105)
<INCOME-PRE-EXTRAORDINARY> (105)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (105)
<EPS-PRIMARY> (459)
<EPS-DILUTED> (459)
<YIELD-ACTUAL> 805
<LOANS-NON> 308
<LOANS-PAST> 650
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 932
<ALLOWANCE-OPEN> 1,066
<CHARGE-OFFS> (233)
<RECOVERIES> 87
<ALLOWANCE-CLOSE> 1,220
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
SUPPLEMENTAL INFORMATION
<PAGE>
[LOGO OF FIRST NATIONAL BANK]
February 27, 1998
Dear Shareholder:
With the beginning of each new year your management and Board of Directors look
foward with enthusiasm to the opportunities and challenges that are before us.
Throughout 1997 we were faced with a variety of issues and opportunities that
certainly presented challenges. You are aware of the principal ones which were:
the negotiating for the purchase of approximately twenty (20) percent of the
stock in First National Bank by Pontotoc BancShares Corp, the completion of the
merging of First National Bank and Pontotoc BancShares Corp, the reissuing
/exchange of stock from First National Bank into Pontotoc BancShares Corp, the
many accounting reports requested by the regulatory agencies--especially the
Securities and Exchange Commission and the completion and moving into our new
branch facility located at 236 Highway 15 North.
I am pleased to acknowledge that each of these challenges, along with many other
opportunities, were successfully achieved with your outstanding and loyal
support. The merger was completed and effective October 31, 1997. The new
branch was occupied November 15, 1997, and has been a most encouraging and
successful venture. Plans are already underway to expand our parking lot by
doubling it in size. The reissuing/exchange of the stock is virtually complete.
It is with a great deal of pride and satisfaction that I share with you the 1997
annual report of operations. We believed that with a strong resolve and total
commitment from each of us along with the entire staff of employees that success
would be ours to share with you, our loyal shareholders and friends. I
encourage you to take time to read the enclosed report and believe that you will
conclude that 1997 was a financially successful year.
Our annual shareholder's meeting for Pontotoc BancShares Corp is at 2:00 p.m.,
Tuesday March 17, 1998. If you are unable to attend, please sign the enclosed
proxy and return it to us as soon as possible. A stamped, self-addressed
envelope is enclosed for your convenience.
We sincerely appreciate your support and loyalty to our bank. Please continue
to promote your bank at every opportunity and let us know your suggestions for
making First National Bank even better in the future. Your continued support
and encouragement will be greatly appreciated.
Respectfully yours,
/s/ BUDDY R. MONTGOMERY
Buddy R. Montgomery
President
Enclosures
[ADDRESS OF FIRST NATIONAL BANK APPEARS HERE]
<PAGE>
NOTICE OF STOCKHOLDERS ANNUAL MEETING
The annual meeting of the stockholders of PONTOTOC BANCSHARES CORP., PONTOTOC,
MISSISSIPPI for the election of directors and the transaction of any other
business that may come before the meeting, will be held at the main office of
FIRST NATIONAL BANK OF PONTOTOC at 2:00 P.M. on March 17, 1998.
BUDDY MONTGOMERY
PRESIDENT
<PAGE>
Know all men by these present,
That I do hereby constitute and PROXY
appoint Alvin Ashmore, or DeVan
Dallas, or ____________________
Attorney and Agent for me, and
in my name, place and stead to
vote as my proxy, at a meeting of the stockholders of PONTOTOC BANCSHARES CORP.,
PONTOTOC, MISSISSIPPI to be held at the main office of FIRST NATIONAL BANK OF
PONTOTOC, in Pontotoc, Mississippi, on the 17th day of March A.D. 1998, or any
adjournment or adjournments thereof, according to the number of votes I should
be entitled to vote if personally present, with power of substitution.
In Witness Whereof, I have hereunto set my hand and seal this ______ day of
___________________ A.D. 19____
In Presence of
________________________________ ______________________________
<PAGE>
FIRST NATIONAL BANK OF PONTOTOC
PROFITS
[CHART APPEARS HERE]
<PAGE>
FIRST NATIONAL BANK OF PONTOTOC
HISTORICAL GRAPH
[CHART APPEARS HERE]
<PAGE>
FIRST NATIONAL BANK OF PONTOTOC
HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
BOOK VALUE EARNINGS DIV. PER
YEAR ASSETS LOANS PROFITS CAPITAL PER SHARE PER SHARE SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997 155,451,000 #REF! 2,720,000 24,191,000 $733 $82 N/A
- -------------------------------------------------------------------------------------------------------------------------
1996 153,288,000 83,668,000 2,679,000 26,811,000 $812 $81 $18.00
- -------------------------------------------------------------------------------------------------------------------------
1995 147,105,000 80,446,000 2,440,000 25,123,000 $761 $74 $16.00
- -------------------------------------------------------------------------------------------------------------------------
1994 133,495,000 70,464,000 2,191,000 21,861,000 $662 $66 $15.00
- -------------------------------------------------------------------------------------------------------------------------
1993 124,222,000 65,413,000 2,779,000 22,276,000 $675 $84 $14.00
- -------------------------------------------------------------------------------------------------------------------------
1992 119,584,000 63,317,000 2,382,000 19,926,000 $604 $72 $13.00
- -------------------------------------------------------------------------------------------------------------------------
1991 113,516,000 62,861,000 2,315,000 18,161,000 $550 $70 $12.00
- -------------------------------------------------------------------------------------------------------------------------
1990 104,854,000 59,395,000 2,053,000 16,242,000 $492 $62 $11.00
- -------------------------------------------------------------------------------------------------------------------------
1989 98,310,000 55,208,000 1,722,000 14,552,000 $441 $52 $10.00
- -------------------------------------------------------------------------------------------------------------------------
1988 94,104,000 47,936,000 1,834,000 13,160,000 $399 $56 $9.00
- -------------------------------------------------------------------------------------------------------------------------
1987 84,116,000 43,392,000 1,679,000 11,927,000 $361 $51 $8.00
- -------------------------------------------------------------------------------------------------------------------------
RETURN ON RETURN ON CAPITAL TO
YEAR ASSETS EQUITY ASSETS
----------------------------------------------------------------
1997 1.75% 11.24% 15.56%
----------------------------------------------------------------
1996 1.75% 9.99% 17.49%
----------------------------------------------------------------
1995 1.73% 9.71% 17.08%
----------------------------------------------------------------
1994 1.66% 10.02% 16.38%
----------------------------------------------------------------
1993 2.26% 12.48% 17.93%
----------------------------------------------------------------
1992 2.05% 11.95% 16.66%
----------------------------------------------------------------
1991 2.04% 12.75% 16.00%
----------------------------------------------------------------
1990 1.96% 12.64% 15.49%
----------------------------------------------------------------
1989 1.75% 11.83% 14.80%
----------------------------------------------------------------
1988 1.95% 13.94% 13.98%
----------------------------------------------------------------
1987 2.00% 14.08% 14.18%
----------------------------------------------------------------
** Total Assets, Capital and corresponding ratios beginning in 1994 are net of FASB 115 adjustments.
</TABLE>
INCOME TAXES
1997 1996
---------------- ----------------
Federal 1,116,000 1,002,000
State 156,000 143,000
Total 1,272,000 1,145,000
Deferred Portion 16,000 (27,000)
1
<PAGE>
CONSOLIDATED BALANCE SHEET
PONTOTOC BANCSHARES CORPORATION AND SUBSIDIARY
December 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Cash and due from banks (Note 1) $ 5,513,000
Interest-bearing deposits with banks 4,700,000
Federal Funds sold 3,350,000
Securities available for sale at fair value (Note 2) 20,042,000
Securities held to maturity, at amortized cost (fair value of $32,087,000) (Note 2) 31,746,000
Loans, net of allowance for loan losses of $1,220,000 (Note 3) 88,624,000
Premises and equipment, net (Note 4) 2,839,000
Intangibles 1,303,000
Deferred tax asset 442,000
Accrued interest 2,108,000
Other assets 503,000
------------
Total assets $161,170,000
============
Liabilities:
Deposits: (Note 5)
Non-interest bearing $ 17,522,000
Interest bearing 111,716,000
------------
Total Deposits 129,238,000
Accrued interest and other liabilities 2,263,000
Long-term debt (Note 6 ) 6,810,000
------------
Total liabilites 138,311,000
------------
Stockholder's equity:
Common stock; no par value ($1 stated value); 3,000,000 shares authorized;
264,160 shares issued and outstanding 264,000
Additional paid-in capital 22,939,000
Retained earnings (202,000)
Unrealized loss on securities available-for-sale, net of taxes (142,000)
------------
Total stockholder's equity 22,859,000
------------
Total liabilites and stockholders' equity $161,170,000
============
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENT OF INCOME
PONTOTOC BANCSHARES CORPORATION AND SUBSIDIARY
A condensed income statement reflecting the results of operations as
though the Bank was aquired by the Company at January 1, 1997 as follows:
<TABLE>
<CAPTION>
<S> <C>
Interest income $ 11,911,000
Interest expense 5,541,000
---------------
Net interest revenue 6,370,000
Provision for loan losses (300,000)
---------------
Net interest revenue after provision for loan losses 6,070,000
Non-interest income 940,000
Non-ineterest expenses 3,775,000
---------------
Income before taxes 3,235,000
Provision for income taxes 1,090,000
---------------
Net income 2,145,000
===============
</TABLE>
3
<PAGE>
FIRST NATIONAL BANK OF PONTOTOC
BALANCE SHEET
December 31, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------------- -------------------
<S> <C> <C> <C> <C> <C>
Cash & Due From Banks $ 5,087,000 $ 4,684,000
Held-to-Maturity Securities book value 31,746,000 34,013,000
Available-for-Sale Securities book value 19,095,000 16,404,000
* less UNREALIZED loss 226,000 18,869,000 481,000 15,923,000
-------------- --------------
Federal Reserve and Federal Home Loan Bank Stock 1,173,000 1,130,000
Federal Funds Sold 3,350,000 8,000,000
Loans 88,624,000 83,668,000
Bank Building & Furniture & Fixtures 2,839,000 1,675,000
Goodwill 397,000 432,000
Other Real Estate 437,000 854,000
Other Assets 2,929,000 2,909,000
================== ==================
TOTAL ASSETS $155,451,000 $153,288,000
LIABILITIES
Deposits
Noninterest-bearing 17,639,000 17,704,000
Interest-bearing 112,399,000 107,770,000
Other Liabilities 1,222,000 1,003,000
------------------- -------------------
TOTAL LIABILITIES $131,260,000 $126,477,000
EQUITY CAPITAL
Common Stock 330,000 330,000
Surplus 21,000,000 21,000,000
Undivided Profits 3,003,000 5,783,000
TOTAL CAPITAL 24,333,000 27,113,000
* less UNREALIZED loss
on available for sale securities (142,000) (302,000)
------------------- -------------------
NET CAPITAL $ 24,191,000 $ 26,811,000
================== ==================
TOTAL CAPITAL & LIABILITIES $155,451,000 $153,288,000
</TABLE>
* Per accounting requirements FASB 115 requiring Available-for-sale
securities to be shown at market value
4
<PAGE>
FIRST NATIONAL BANK OF PONTOTOC
INCOME STATEMENT
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
INTEREST REVENUE
Interest and fees on loans $8,451,000 $8,169,000
Interest on investment securities:
U S Treasuries and U S Government Agencies 2,377,000 2,262,000
Obligations of state and political subdivisions:
Taxable securities 14,000 18,000
Nontaxable securities 688,000 716,000
Other Securities 69,000 62,000
Interest on Federal Funds sold 341,000 456,000
------------ ------------
Total Interest Revenue 11,940,000 11,683,000
INTEREST EXPENSE
Interest on deposits:
Interest on Transaction accounts 391,000 378,000
Interest on Money Market and Savings accounts 568,000 587,000
Interest on Time certificates $100,000 or more 1,428,000 1,373,000
Interest on all other time certificates 2,723,000 2,624,000
Interest on Federal Funds purchased - -
------------ ------------
Net Interest Revenue 6,830,000 6,721,000
Provision for Loan Losses 300,000 420,000
------------ ------------
Net Interest Revenue after provision for loan losses 6,530,000 6,301,000
------------ ------------
OTHER REVENUE
Service fees 176,000 188,000
Other 1,017,000 913,000
Gain (Loss) from sale of securities 1,000 (2,000)
------------ ------------
1,194,000 1,099,000
OTHER EXPENSE
Salaries and employee benefits 1,790,000 1,782,000
Occupancy expense 408,000 335,000
Other expenses 1,534,000 1,459,000
------------ ------------
Total other expense 3,732,000 3,576,000
------------ ------------
Income before income taxes 3,992,000 3,824,000
Income Taxes:
State 156,000 143,000
Federal 1,116,000 1,002,000
------------ ------------
Net Income $2,720,000 $2,679,000
============ ============
Earnings per Share $82.42 $81.18
================ ================
</TABLE>
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
PONTOTOC BANCSHARES CORPORATION AND SUBSIDIARY
December 31, 1997
NOTE 1. DUE FROM BANKS
The Company had funds on deposit with other banks at December 31,
1997 totaling $2,937,000 which were in excess of federal deposit insurance
coverage.
NOTE 2. INVESTMENT SECURITIES
Securities that management has both the positive intent and ability
to hold to maturity are classified as securities held to maturity and are
carried at cost, adjusted for amortization of premium or accretion of discount
using the interest method. Securities that may be sold prior to maturity for
asset/liability management purposes, or may be sold in response to changes in
interest rates, changes in prepayment risk, to increase regulatory capital or
other similar factors, are classified as securities available for sale and
carried at fair value with any adjustments to fair value, after tax, reported as
a separate component of shareholders' equity. Declines in the fair value of
individual held-to-maturity and available-for-sale securities below their cost
that are other than temporary are included in earnings as realized losses.
Interest on securities, including the amortization of premiums and
the accretion of discounts, is reported in interest income using the interest
method. Gains and losses on the sale of securities are recorded on the trade
date and are calculated using the specific identification method.
The carrying amount of securities and their approximate fair values
at December 31, 1997 follow:
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------------- FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Treasury securities $ 500 $ - $ 1 $ 499
Obligations of other U.S.
government agencies 1,250 1 4 1,247
Mortgage-backed securities 17,346 14 237 17,123
Other securities 1,173 - - 1,173
---------------------------------------------------
$ 20,269 $ 15 $ 242 $ 20,042
===================================================
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED -------------------------- FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Held-to-maturity securities:
Obligations of states and political
subdivisions $ 13,509 $ 267 $ 1 $ 13,775
Mortgage-backed securities 18,237 78 4 18,311
---------------------------------------------------
$ 31,746 $ 345 $ 5 $ 32,087
===================================================
</TABLE>
Gross realized gains and gross realized losses on sales of
available-for sale securities were approximately $0 and $2,000 respectively, in
1997. All dispositions of held-to-maturity securities were the result of calls
or maturities of the respective securities.
The amortized cost and estimated market value of investment
securities at December 31, 1997 by contractual maturities follow. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 2 INVESTMENT SECURITIES - (Continued)
<TABLE>
<CAPTION>
SECURITIES HELD-TO- SECURITIES AVAILABLE
MATURITY FOR-SALE
--------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C>
Amounts maturing in:
One year or less $ 2,526 $ 2,535 $ 1,693 $ 1,692
After one year through five years 23,192 23,389 5,486 5,485
After five years through ten years 5,777 5,910 2,380 2,374
After ten years 251 253 10,710 10,491
--------------------------------------------------
$ 31,746 $ 32,087 $ 20,269 $ 20,042
</TABLE>
For purposes of the maturity table, mortgage-backed securities, which
are not due at a single maturity date, have been allocated over maturity
groupings based on the weighted-average contractual maturities of underlying
collateral. The mortgaged-backed securities may mature earlier than their
weighted-average contractual maturities because of principal prepayments.
Assets, principally securities, carried at approximately $16,069,000
at December 31, 1997 were pledged to secure public deposits and for other
purposes required or permitted by law.
NOTE 3 LOANS AND ALLOWANCES FOR LOAN LOSSES
Loans: Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or pay-off generally are stated at
their outstanding unpaid principal balances. Interest income is accrued on the
unpaid principal balance. Discounts and premiums are amortized to income using
the interest method.
Nonaccrual Loans: Commercial loans are placed on nonaccrual at the
time the loan is 90 days delinquent unless the credit is well secured and in
process of collection. Residential real estate loans are typically placed on
nonaccrual at the time the loan is 120 days delinquent. Credit card loans, other
unsecured personal credit lines, and certain consumer finance loans are
typically charged-off no later than 180 days delinquent. Other consumer loans
are charged-off at 120 days delinquent. In all cases, loans must be 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
the principal and interest amounts contractually due are reasonably assured of
repayment within a reasonable time frame and when the borrower has demonstrated
payment performance of cash or cash equivalents for a minimum of six months.
Allowance for Loan Losses: The allowance for loan losses is
established through provisions for loan losses charged against income. Portions
of loans deemed to be uncollectable are charged against the allowance for
losses, and subsequent recoveries, is any, are credited to the allowance.
The allowance for loan losses related to impaired loans that are
identified for evaluation is based on discounted cash flows using the loan's
initial effective interest rate or the fair value, less selling costs, of the
collateral dependent loans. By the time a loan becomes probable of foreclosure
it has been charged down to fair value, less estimated cost to sell.
The allowance for loan losses is maintained at a level believed
adequate by management to absorb estimated probable inherent loan losses.
Management's periodic evaluation of the adequacy of the allowance is based on
the Bank's past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower's ability to repay (including
the timing of future payments), the estimated value of any underlying
collateral, composition of the loan portfolio, current economic conditions, and
other relevant factors. This evaluation is inherently subjective as it requires
material estimates that are susceptible to significant change including the
amounts and timing of future cash flows expected to be received on impaired
loans.
7
<PAGE>
NOTE 3 LOANS - (Continued)
The components of loans included in the balance sheets are as
follows:
(in thousands)
Commercial $ 28,897
Agricultural 4,602
Real estate:
Residential 27,944
Commercial 12,272
Consumer installment 16,324
------------
90,039
Less: Unearned income (195)
Allowance for loan losses (1,220)
------------
Loans, net $ 88,624
============
Changes in the allowance for loan losses were as follows:
(in thousands)
Balance, beginning of year $ -
Acquired in business combination 1,218
Provision for loan losses 40
Loan losses, net of recoveries (38)
------------
Balance, end of year $ 1,220.00
============
Reflects consolidation of Bank and holding company effective
November 1, 1997
NOTE 4 PREMISES AND FIXED EQUIPMENT
The following is a summary of premises and equipment:
(in thousands)
Bank premises $ 2,451
Furniture, fixtures, and equipment 2,363
------------
4,814
Less: Accumulated depreciation and amortization 1,975
------------
$ 2,839
The Company leases certain office equipment under terms of operating
leases. Total rental expenses and minimum future payments required under the
noncancelable leases are insignificant to the financial statements for 1997.
8
<PAGE>
NOTE 5 DEPOSITS
Total deposits consisted of the following at December 31, 1997:
(in thousands)
Demand $ 16,729
Savings 18,878
NOW 13,915
Certificates of deposit less than $100,000 51,337
Certificates of deposit greater than $100,000 28,379
-----------
Total deposits $ 129,238
At December 31, 1997, the scheduled maturities of certificates of
deposit are as follows:
Year ending December 31, 1998 $ 72,796
1999 4609
2000 1403
2001 409
2002 499
-----------
$ 79,716
===========
NOTE 6 LONG-TERM DEBT
Long-term debt at December 31, 1997 consisted of notes payable to a
bank bearing interest at floating prime payable in equal, annual principal and
interest installments beginning March 18, 1998, collateralized by 6,557 shares
in First National Bank.
The debt agreements contain restrictive covenants limiting the
payment of dividends to forty percent of earnings.
Maturities of long-term debt over the next five years are as follows:
(in thousands)
1999 $ 1,149
2000 $ 1,247
2001 $ 1,353
2002 $ 1,468
2003 $ 1,593
NOTE 7 COMPANY COMMITMENTS AND CONTENGENCIES
In the normal course of business, the Company has various outstanding
commitments to extend credit and standby letters of credit which are not
disclosed in the accompanying financial statements. In the opinion of
management, no significant credit losses will results from these commitments. On
December 31, 1997, the Company had outstanding standby letters of credit of
$1,559,000 and commitments to extend credit under outstanding lines of credit of
approximately $5,150,000.
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS
Available-for-sale and held-to-maturity securities
Fair values for securities are based on available quoted market
prices. If quoted market prices are unavailable, fair values are based on quoted
market prices of comparable instruments. For unquoted securities for which no
comparable instruments exists, the reported fair value is estimated on the basis
of cost, book, or appraised value as deemed appropriate by management.
Available-for-sale securities are carried at their aggregate fair value.
9
<PAGE>
NOTE 8 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Loans
For variable-rate commercial loans that reprice frequently (within a
relatively short time frame) and have no significant change in credit risk, fair
values are based on carrying values. Residential first mortgages are based on
quoted market prices of similar loans. Fair values for certain junior mortgage
loans, consumer installment loans, credit-card loans, and other consumer loans
are estimated using discounted cash flow models. The discount rates are based on
current market interest rates for similar types of loans. Fair values for
commercial real estate and commercial loans that do not mature within relatively
short time frames are estimated using discounted cashflow analysis. The discount
rates used are those currently being offered for loans with similar terms to
borrowers of similar credit quality. Fair values for impaired loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
Deposits
The fair values for demand deposits and deposits with no defined
maturity are taken to be the amount payable on demand at the reporting date. The
fair values for fixed-maturity deposits are estimated using discounted cash flow
models based on rates currently offered for the relevant product type with
similar remaining maturities.
Long-Term Debt
The estimated fair value was determined using discounted cash flow
analysis, based on current market rates of similar maturity debt securities, to
discount cash flows.
The estimated fair values of the Company's financial instruments are
as follows:
CARRYING FAIR
AMOUNT VALUE
-------------------------
(in thousands)
Financial assets:
Cash and short term investments $ 13,563 $ 13,563
Investment securities 51,788 51,788
Loans (gross) 89,844 90,026
Allowance for loan losses (1,220) -
153,975 $ 155,377
==========
Financial liabilities:
Deposits $ 129,238 $ 130,058
Long-term debt 6,810 6,899
--------- ----------
The carrying amounts in the table above are the amounts at which the
financial instruments are reported in the financial statements.
10
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDER EQUITY
FIRST NATIONAL BANK
Years ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON TOTAL
---------------- AVAILABLE- STOCK-
PAR PAID-IN UNDIVIDED FOR-SALE HOLDERS'
SHARES VALUE CAPITAL SURPLUS PROFITS SECURITIES EQUTY
------ ----- ------- ------- --------- ---------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 33 $ 330 $ - $ 21,000 $ 4,093 $ (300) $ 25,123
Net income - - - - 2,679 - $ 2,679
Cash dividend declared ($30 per share) - - - - (989) - $ (989)
Change in market valuation of available-
for-sale securities - - - - - (2) $ (2)
--- --- --- -------- ------- ------ --------
Balance, December 31, 1996 33 330 - 21,000 5,783 (302) 26,811
Net income - - - - 2,720 - 2,720.00
Cash dividend to holding company - - - - (5,500) - (5,500.00)
Additional paid-in capital - - 396 - - - 396.00
Change in market valuation of available-
for-sale securities - - - - - 160 160.00
------
Balance, December 31, 1997 $ 33 $ 330 $ 396 $ 21,000 $ 3,003 $ (142) $ 24,587
</TABLE>
16
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDER EQUITY
PONTOTOC BANCSHARES CORPORATION AND SUBSIDIARY
Year ended December 31, 1997
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON TOTAL
------------------------------ AVAILABLE- STOCK-
PAID-IN RETAINED FOR-SALE HOLDERS'
SHARES CAPITAL EARNINGS SECURITIES EQUITY
-------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Acquisition of First National Bank
of Pontotoc effecuated through
issuance of 10 Pontotoc BancShares
Corporation shares for each of
outstanding stock in First National
Bank of Pontotoc. 264 $ 23,731 $ - $ (213) $ 23,782
Net loss - - (202) - (202)
Change in market valuation
allowance for available-for-
sale securities. - - - 71 71
Cash dividends declared ($3.00 per share) - (792) - - (792)
Balance, December 31, 1997 264 $ 22,939 $ (202) $ (142) $ 22,859
===================================================================
</TABLE>
12
