<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
AMENDMENT NO. 2
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Pioneer Bankshares, Inc.
(Name of Small Business Issuer in Its Charter)
Virginia 54-1278721
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
-----------------------------------------
263 East Main Street
P. O. Box 10
Stanley, Virginia 22851
----------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (540) 778-2294
Securities to be registered under Section 12(b) of the Act:
Title of each class to be so Name of each exchange on which
registered each class is to be registered
Not applicable Not applicable
--------------------------------------------------------------------
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK $.50 PAR VALUE
------------------------------------------------------------------
(Title of class)
<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-SB
TABLE OF CONTENTS
PAGE
PART I.
Item 1. Description of Business.............................. 3
Item 2. Management's Discussion and Analysis................. 8
Item 3. Description of Property.............................. 20
Item 4. Security Ownership of Certain Beneficial Owners and
Management........................................... 21
Item 5. Directors, Executive Officers, Promoters and Control
Persons.............................................. 22
Item 6. Executive Compensation............................... 24
Item 7. Certain Relationships and Related Transactions....... 24
Item 8. Description of Securities............................ 24
PART II.
Item 1. Market Price of and Dividends on the Company's Common
Equity and Other Shareholder Matters 25
Item 2. Legal Proceedings.................................... 25
Item 3. Changes in and Disagreements with Accountants........ 25
Item 4. Recent Sales of Unregistered Securities.............. 25
Item 5. Indemnification of Directors and Officers............ 25
Part F/S
Index to Financial Statements............................. 28
PART III.
Item 1. Index to Exhibits...................................... 50
2
<PAGE>
PART I
Item 1. Description of Business
OVERVIEW
Pioneer Bankshares, Inc., [Holding Company] is a Virginia one bank holding
company, headquartered in Stanley, Virginia and was incorporated under the laws
of the Commonwealth of Virginia on November 4, 1983. The Holding Company's
wholly-owned subsidiary, Pioneer Bank [Bank], was established in 1909 as F&M
National Bank of Stanley, and, following the conversion from a national charter
to a state charter in 1994, changed its name to Pioneer Bank in 1999.
The primary holdings of the Holding Company consist of all of the stock of
the Bank, real estate holdings leased to the Bank or intended for future Bank
use and a portfolio of equity investment securities. The Bank is engaged in the
general commercial banking business, primarily serving Page and part of
Rockingham Counties and the City of Harrisonburg in the Shenandoah Valley of
Virginia. In addition, the close proximity and mobile nature of individuals and
businesses in adjoining Virginia counties and nearby cities places these markets
within the Bank's targeted trade area. The Bank also anticipates serving some
individuals and businesses from other areas, including the other counties
surrounding Page County. The Bank offers a full range of banking and related
financial services focused primarily towards serving individuals, small to
medium size businesses, and the professional community. The Bank strives to
serve the banking needs of its customers while developing personal, hometown
relationships with them. The Bank's Directors believe that the marketing of
customized banking services will enable the Bank to continue its position in the
financial services marketplace in this market area.
The Bank provides individuals, professionals and small and medium size
businesses in its market area with responsive and technologically advanced
banking services. These services include competitively priced loans that are
based on deposit relationships, easy access to the Bank's decision-makers, and
quick and innovative action necessary to meet a customer's banking needs. The
Bank's capitalization and lending limit enable it to satisfy the credit needs of
a large portion of the targeted market segment. In the event there are
customers whose loan requirements exceed the Bank's lending limit, the Bank will
seek to arrange such loans on a participation basis with other financial
institutions. The Board of Directors believes the Bank's present capitalization
will support substantial growth in deposits and loans.
Location and Market Area
The Bank operates full service branches in Stanley, Luray and Shenandoah,
Virginia and in 1999 opened a full service branch in Harrisonburg, Virginia.
Management will continue to investigate and consider other possible sites that
would enable the Bank to profitably serve its chosen market area.
The opening of any additional banking offices by the Bank will require
prior regulatory approval, which takes into account a number of factors,
including, among others, a determination that the Bank has capital in an amount
deemed necessary to warrant additional expansion and a finding that the pubic
interest will be served. While the Bank plans to seek regulatory approval at
the appropriate time to establish additional banking offices in various parts of
our market area, there can be no assurance when or if the Bank will be able to
undertake such expansion plans.
3
<PAGE>
Banking Services
The Bank provides a full range of deposit and loan products and services
customarily offered by a community bank. Deposit products include personal and
business checking, internet checking, savings, certificates of deposit, and
IRAs. Deposit services include cashier's checks, certified checks, money
orders, travelers checks and credit cards. The Bank is a member of the Federal
Deposit Insurance Corporation and its deposits are issued to the limits provided
under federal law.
The Bank provides loan products including residential real estate loans,
commercial real estate loans and a full range of short-to-medium term commercial
and personal loans. Residential real estate loans include conforming and
nonconforming first mortgage loans, second mortgage loans, home improvement
loans, and home equity lines of credit. At December 31, 1999, approximately
11.64% of the Bank's loan portfolio, or $14,359,000 consisted of consumer loans.
The majority of residential real estate loans are made with an adjusted rate and
secured by a first trust. At December 31, 1999, approximately 42.78% of the
Bank's loan portfolio, or $52,780,000, consisted of residential real estate
loans. Commercial loans include both secured and unsecured loans for working
capital (including inventory and receivables), business expansion (including
acquisition of real estate and improvements), purchase of equipment and
machinery. At December 31, 1999, approximately 6% of the Bank's loan portfolio,
or $3,959,000 million, consisted of commercial loans. Consumer loans include
secured and unsecured loans for financing automobiles, home improvements,
education and personal investments.
The Bank's lending activities are subject to a variety of lending limits
imposed by state law. While differing limits apply in different circumstances
based on the type of loan or the nature of the borrower (including the
borrower's relationship to the Bank), in general the Bank is subject to a loan-
to-one borrower limit of an amount equal to 15% of the Bank's capital and
surplus in the case of loans which are not fully secured by readily marketable
or other permissible types of collateral. The Bank voluntarily may choose to
impose a policy limit on loans to a single borrower that is less than the legal
lending limit which the Bank presently does on a case-by-case basis. The Bank
may establish relationships with correspondent banks to sell interests or
participations in loans when loan amounts exceed the Bank's legal limitations or
internal lending policies.
The Bank's loan policy for all of its loans is to make conservative loans
and minimize risk. Residential real estate loans are made for a period not to
exceed 30 years and are secured by a first or subordinate deed of trust.
Traditionally, residential real estate mortgages represent a low risk of loss to
the Bank. Commercial loans are normally secured by a security interest in
inventory, accounts receivable, fixed assets, equipment, or other collateral.
These loans also present a low risk of loss because the Bank is very
conservative in requiring high levels of collateral. The Bank makes consumer
loans for a variety of purposes, however, a majority of these loans are secured
by a vehicle. Traditionally, loans secured by a vehicle represent low risk of
loss to the Bank.
Other bank services include safe deposit boxes, cashier's checks, cash
management services, traveler's checks, direct deposit of payroll and social
security checks and automatic drafts for various accounts. The Bank currently
offers ATM card services that can be used by Bank customers throughout Virginia
and other regions. The Bank also offers MasterCard and VISA credit card
services.
The Bank does not have trust powers and the Bank does not anticipate
obtaining trust powers. If the Bank determined to establish a trust department
in the future, the Bank could not do so without the prior approval of the
Virginia State Corporation Commission. The Bank in the future may contract for
the provision of trust services to its customers through outside vendors.
4
<PAGE>
Competition
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, mortgage banking firms, consumer finance companies,
securities brokerage firms, insurance companies, money market mutual funds and
other financial institutions operating in the western Virginia market area and
elsewhere.
The Bank's market area is a highly competitive, highly branched banking
market. Competition in the market area for loans to individuals and small to
medium size businesses, the Bank's target market, is intense, and pricing is
important. Most of the Bank's competitors have substantially greater resources
and lending limits than the Bank, as well as extensive and established branch
networks, that the Bank does not expect to provide or will not provide in the
near future. Moreover, larger institutions operating in the western Virginia
market area have access to borrowed funds at a lower cost than are available to
the Bank. Deposit competition among institutions in the market area also is
strong. While the Bank is not presently paying above-market rates to attract
deposits, it may have to do so in the future.
Employees
As of March 31, 1999, the Bank had 55 employees, with 44 being full-time
employees. None of its employees are represented by any collective bargaining
agreements and relations with employees are considered excellent.
Supervision and Regulation
The Bank is subject to various state and federal banking laws and
regulations that impose specific requirements or restrictions on and provide for
general regulatory oversight with respect to virtually all aspects of
operations. The following is a brief summary of the material provisions of
applicable statutes, rules and regulations that affects the Bank. This summary
is qualified in its entirety by reference to the particular statutory and
regulatory provisions referred to below.
The Bank operates under the supervision of, and subject to regulation and
examination by, the Virginia State Corporation Commission and the Board of
Governors Federal Reserve System. Because the Bank's deposits are insured, the
Bank is also subject to the supervision and regulation of the Federal Deposit
Insurance Corporation. The Bank will be subject to various statutes and
regulations administered by these agencies that govern, among other things,
required reserves, investments, loans, lending limits, acquisitions of fixed
assets, interest rates payable on deposits, transactions among affiliates and
the Bank, the payment of dividends, mergers and consolidations, and the
establishment of branch offices. Federal and state bank regulatory agencies
also have the general authority to eliminate dividends paid by insured banks if
such payment is deemed to constitute an unsafe and unsound practice. As its
primary federal regulator, the Federal Reserve will have the authority to impose
penalties, initiate civil and administrative actions and take other steps to
prevent the Bank from engaging in unsafe and unsound practices.
Under recently enacted federal legislation, the existing restrictions on
interstate bank acquisitions were abolished effective September 29, 1995, and
thereafter bank holding companies from any state were able to acquire banks and
bank holding companies located in any other state. Effective June 1, 1997, and
thereafter, the law allows banks to merge across state lines, subject to earlier
"opt-in" or "opt-out" action by individual states. The law also allows
interstate branch acquisitions and de novo branching if permitted by the host
state. Virginia has recently adopted early "opt-in" legislation that will allow
interstate bank mergers. Virginia also permits interstate branch acquisitions
and de novo branching if reciprocal treatment is accorded Virginia banks in the
state of the acquirer.
5
<PAGE>
The Gramm-Leach-Bliley Act of 1999 (the "Act") was enacted on November 12,
1999. The Act creates a new form of financial organization called a financial
holding company that may own banks, insurance companies and securities firms.
The Holding Company expects to review the ramifications of the Act and to make a
determination in the future upon what role, if any, it will play in the
strategic plans of the Holding Company.
The Holding Company is a bank holding company within the meaning of the
Bank Holding Company Act of 1956. As such, the Holding Company is supervised by
the Federal Reserve and is required to file reports with the Federal Reserve.
Since the number of shareholders of record of the Holding Company exceeded 500
during 1999, the Holding Company is now subject to the registration, periodic
reporting, insider reporting and trading restrictions and proxy solicitation
regulations promulgated by the SEC.
The amount of dividends payable by the Bank will depend upon its earnings
and capital position, and is limited by the federal and state law, regulations
and policy. In addition, Virginia law imposes restrictions on the ability of
all banks chartered under Virginia law to pay dividends. No dividend may be
declared or paid that would impair the Bank's paid-in capital. Each of the
Commission and the Federal Reserve has the general authority to limit dividends
paid by the Bank if such payments are deemed to constitute an unsafe and unsound
practice.
Under current supervisory practice, prior approval of the Federal Reserve
is required if cash dividends declared in any given year exceed the total of its
net profits for such year, plus its retained net profits for the preceding two
years. Also, the Bank may not pay a dividend in an amount greater than its
undivided profits then on hand after deducting current losses and bad debts.
For this purpose, bad debts are generally defined to include the principal
amount of all loans which are in arrears with respect to interest by six months
or more, unless such loans are fully secured and in the process of collection.
Federal law further provides that no issued depository institution may make any
capital distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
Capital Resources
The various federal bank regulatory agencies, including the Federal
Reserve, have adopted risk-based capital requirements for assessing bank capital
adequacy. Virginia chartered banks must also satisfy the capital requirements
adopted by the Commission. The federal capital standards define capital and
establish minimum capital requirements in relation to assets and off-balance
sheet exposure, as adjusted for credit risk. The risk-based capital standards
currently in effect are designed to make regulatory capital requirements more
sensitive to differences in risk profile among bank holding companies and banks,
to account for off-balance sheet exposure and to minimize disincentives for
holding liquid assets. Assets and off-balance sheet items are assigned to broad
risk categories, each with appropriate risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and off-
balance sheet items.
The minimum standard for the ratio of capital to risk-weighted assets
(including some off-balance sheet obligations, such as standby letters of
credit) is 8.0%. At least half of the risk-based capital must consist of common
equity, retained earnings and qualifying perpetual preferred stock, less
deductions for goodwill and various other tangibles ("Tier I capital"). The
remainder ("Tier 2 capital") may consist of a limited amount of subordinated
debt, hybrid capital instruments and other debt securities, preferred stock and
a limited amount of the general valuation allowance for loan losses. The sum of
Tier 1 capital and Tier 2 capital is "total risk-based capital."
6
<PAGE>
The Federal Reserve also has adopted regulations which supplement the risk-
based guidelines to include a minimum leverage ratio of Tier 1 capital to
quarterly average assets ("Leverage Ratio") of 3%. The Federal Reserve has
emphasized that the foregoing standards are supervisory minimums and that a
banking organization will be permitted to maintain such minimum levels of
capital only if it receives the highest rating under the regulatory rating
system and the banking organization is not experiencing or anticipating
significant growth. All other banking organizations are required to maintain a
Leverage Ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain capital positions substantially above
the minimum supervisory levels and comparable to peer group averages,
significant reliance on intangible assets. The Federal Reserve continues to
consider a "tangible Tier I leverage ratio" in evaluating proposals for
expansion or new activities. The tangible Tier 1 leverage ratio is the ratio
banking organization's Tier capital, less deductions for intangibles otherwise
inculpable in Tier 1 capital, to tangible assets. The Bank's capital ratios
significantly exceed all requirements at December 31, 1999 and March 31, 2000.
Deposit Insurance
As an institution with deposits insured by the Bank Insurance Fund of the
FDIC, the Bank also is subject to insurance assessments imposed by the FDIC. In
1995, the FDIC's Board of Directors voted to revise the range of assessment
premiums applicable to BIF-insured deposits. Under the revised risk-based
assess-rate schedule for BIF-insured deposits, the best-rated banks will pay an
annual fee of $2,000, but no percent-of deposits, while other banks pay
according to their capital position and other factors, with the weakest paying
as much as 0.31% of deposits. The new rate schedule is already in effect.
The actual assessment paid is based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized," "adequately capitalized" or "undercapitalized,"
as such terms have been defined in applicable federal regulations, and whether
such institution is considered by its supervisory agency to be financially sound
or to have supervisory concerns. The Bank's assessment premium in 1999 was
$9,329.38 and its assessment risk classification was one A.
Effect of Governmental Monetary Policies
The operations of the Bank will be affected not only by general economic
conditions, but also by the policies of various regulatory authorities. In
particular, the Federal Reserve regulates money, credit conditions and interest
rates in order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of bank loans,
investments and deposits, and affect interest rates charged on loans or paid for
time and savings deposits. Federal Reserve Board monetary policies have had a
significant effect on the operating results of commercial banks in the past and
are expected to do so in the future.
Available Information
The Holding Company files annual, quarterly and current reports, proxy
statements and other information with the SEC. You may read and copy any
document that the Holding Company files at the SEC's public reference room
facility located at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
SEC's regional offices at 7 World Trade Center, 13th Floor, Suite 1300, New
York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains an Internet site at
www.sec.gov that contains reports, proxy and information statements and other
information regarding issuers, including the Holding Company, that file
documents with the SEC electronically through the SEC's electronic data
gathering, analysis and retrieval system known as EDGAR.
7
<PAGE>
You may obtain a copy of the Holding Company's annual report by contacting
Brenda Kite at 252 Main Street, Stanley, Virginia 22851 or by calling (540)
788-2294.
Item 2. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
In October of 1998, the Directors of Page Bankshares, Inc., adopted a
Strategic Plan developed to guide the Bank and Holding Company into the 21st
century. The plan looked ten years into the future with annual reviews of both
the strategic and tactical plan goals. It also articulated the corporate
mission, corporate strengths and weaknesses and specific goals for the future.
The document is forward looking, dynamic and serves as our road map for the
future successes.
To prepare the Bank and Holding Company for the 21st century, the Directors
felt it was necessary to change both the names of the Bank and Holding Company.
The Directors felt that the new names were not geographically limiting and
enable the Bank to expand. Effective April 1, 1999, after almost 90 years,
Farmers & Merchants Bank of Stanley changed its name to Pioneer Bank.
Thereafter, on June 8, 1999, the shareholders approved a resolution changing the
name of the holding company from Page Bankshares, Inc. to Pioneer Bankshares,
Inc.
The following is management's discussion of the financial condition and
results of operations on a consolidated basis for the two years ended December
31, 1999 and 1998, respectively, for the Holding Company. The consolidated
financial statements of the Holding Company include the accounts of the Holding
Company and the Bank. This discussion should be read in conjunction with the
consolidated financial statements and related notes of the Holding Company
presented elsewhere herein.
OPERATIONS ANALYSIS - 1999 Compared to 1998
Overview
The Holding Company's net income for 1999 increased to $403,955 or 35.5%
from 1998 earnings. Net income per share increased to $1.32 in 1999 from $.92
in 1998. The Holding Company's improved earnings were due to a combination of
factors summarized below, however, a majority of the increase was due to a one
time payment to the Holding Company in connection with the departure of the
Holding Company's President.
Net Interest Margins
The net weighted interest margin on earning assets on a tax equivalent
basis increased from 5.41% in 1998 to 5.53% in 1999. The Holding Company's net
yield on average earning assets of 5.53% is in line with its peer group.
Yields on loans decreased from 9.94% in 1998 to 9.85% in 1999. Real estate
loan rates decreased fourteen basis points, while installment loans decreased
twelve basis points. Both declines were due to a general decline in rates of
interest in the market. Commercial loan yields increased as a result of
offering a new commercial loan product called the Town Credit Service. This
product was introduced in the later part of 1998 and was more fully utilized in
1999. The product was designed for small and medium size businesses and
provides funding to customers based on their inventory or receivables.
Additionally, this type of commercial loan carries a higher rate of interest
than the remaining portion of the commercial loan portfolio. Credit card loan
rates increased in 1999 as a result of the ending of most promotional rates in
the beginning of 1999. These promotional rates were offered in earlier periods
in an effort to attract credit card customers. At the end of the promotional
period, fees for credit card services increased.
8
<PAGE>
To balance its interest rate risk on fixed rate loans, the Bank borrows
from the Federal Home Loan Bank at fixed rates that are determined by market
conditions. This program has helped the Bank meet the needs of its customers
who might otherwise have gone to another financial institution seeking fixed
rate loans.
Tax equivalent yields on securities decreased to 5.70% in 1999 from 5.85%
in 1998. This decrease was primarily a result of a decline in market rates on
all types of debt instruments. This decline in general market rates resulted in
increased call activity in the bond portfolio in 1999. Average investments
increased 8.91% from the previous year. The Company's philosophy of investing
only in securities with short to intermediate maturities allows it to be
responsive to interest rate movements within the market place.
The rates paid on interest bearing deposits decreased to 4.15% in 1999 from
4.50% in 1998. Average rates decreased on all deposit types as a result of
declines in general market rates. Rates on interest bearing demand, savings and
time deposits decreased twelve, forty six and thirty one basis points,
respectively. The improvement in the net interest margin was positively
affected by an increase in the mix of interest bearing deposit liabilities that
are low rate obligations (i.e. demand deposits and savings).
Long term borrowings through the FHLB are incurred only to balance the rate
exposure on fixed rate loans and are used to fund loans with fixed rate
features. Short-term borrowings from the FHLB were incurred for possible Y2K
concerns and have been paid off in the year 2000.
Table II contains a complete yield analysis for the last two years and
Table III contains the rate/volume changes in these years.
Resignation of Former President C. Gaylon Waters
C. Gaylon Waters resigned his positions as president and director of
the Bank and president and director of the Holding Company as of February 15,
1999. His resignation occurred as part of an agreement with the Bank and the
Holding Company following the discovery of a pattern of unauthorized
expenditures of bank funds. As part of the agreement between Mr. Waters, the
Bank and the Holding Company, Mr. Waters deposited into an escrow account an
amount of Holding Company stock with a market value of approximately $350,000.00
to secure any claims by the Bank and/or the Holding Company against Mr. Waters
involving the unauthorized expenditures. During the year ended 1999 following
Mr. Waters' resignation, the Bank and the Holding Company charged approximately
$236,000.00 against the escrowed shares which amount includes $202,000.00 in
recovered expenditures and $34,000.00 in reimbursed accounting and legal fees.
As a result of these charges, the Bank and the Holding Company believe that they
have recovered most of the unauthorized expenditures.
The amount of the net recovery, $202,000.00, was taken into income by
the Bank during calendar 1999 as Other Income. In addition, $72,000 of deferred
compensation for Mr. Waters was eliminated and this amount was also recognized
by the Bank as Other Income in 1999. The recognition of these amounts as income
during 1999 had the effect of distorting the Bank's net income for 1999 inasmuch
as this amount is not a recurring source of income and was not generated by the
Bank from its regular business operations. The unauthorized expenditures during
the years 1994 through 1998 had the effect of lowering the Bank's net income
during those periods, however. Because certain of the transactions span
multiple periods of time, in many instances it is difficult to determine the
exact amount which should have been attributed to any specific accounting
period.
9
<PAGE>
After agreeing to the vast majority of charges against the escrow
account, Mr. Waters has now challenged some of those charges. These challenges
have led to the filing by him of a lawsuit for recovery of a portion of the
funds recovered by the Bank and the Holding Company, which matter is pending in
the Circuit Court for the City of Harrisonburg, Virginia as Waters v. Pioneer
Bank, et al. While this litigation is pending, the amount of exposure to the
Bank is substantially less than that for which disclosure is required under
federal securities laws.
As a result of these events, including Mr. Waters' departure, the Bank
and the Holding Company have implemented a number of internal controls and
procedures designed to prevent the reoccurrence of such events. Specifically,
the Bank and the Holding Company have implemented new expenditure documentation
and approval policies which require proper documentation and multiple signatures
in order to obtain most expense reimbursements. In addition, the internal and
external audit functions of the Bank and Holding Company have been enhanced to
require frequent monitoring of the expenditure of Bank funds. These events have
been disclosed to and reviewed by the Virginia Bureau of Financial Institutions
and the Federal Reserve System, and both of these regulatory agencies have also
enhanced their monitoring of expenditures by the Bank and Holding Company in
these areas.
Other Income
The Holding Company realized gains of $19,054 in 1999 on the sale of
corporate stocks compared with gains of $39,019 in 1998.
During 1999, the Bank received stock in a life insurance company as a
result of the demutualization of a life insurance company. This item resulted
in $148,120 of other income.
During 1999, the Bank entered into an agreement with its former President
whereby this individual reimbursed the Bank for unauthorized bank expenditures
and costs associated therewith. In this agreement, the former President also
agreed to forego his deferred compensation. In 1999, these items resulted in
$239,000 of other income.
Service charges on deposit accounts increased 34.60% in 1999 from 1998
levels. The increase is attributed to an increase in overdraft charges on
deposit accounts.
Other Expenses
Noninterest expense increased $249,551 or 7.71% in 1999 over 1998 levels.
Salaries and employee benefits decreased 4.51% due to: retirement of a senior
officer the prior year, the presidents position being vacant for part of 1999
and 1998; having a one time charge of $150,000 to accrue a retirement benefit
for a retiring senior officer, offset by increased staffing, including a full
time training director; normal salary increases; and higher health insurance
premiums. Occupancy and equipment expense combined increased by $85,872 or
18.21% primarily due to the opening of a new branch office in Harrisonburg,
Virginia, the installing of two new stand alone ATMs, the commencing of check
imaging, and general equipment. Other noninterest expenses increased $237.397
or 20.19%. Approximately half of this increase was primarily related to
professional fees, advertising and supplies related to the opening of the
Harrisonburg, Virginia branch and changes in the names of the Bank and the
Holding Company. The remaining increases were spread over a variety of expense
categories, with no single area increasing significantly. The Company's overall
cost of operations relative to asset size is comparable to its peer group.
10
<PAGE>
1998 COMPARED TO 1997 OPERATIONS
Net income in 1998 decreased $230,211 or 16.21% over net income in 1997.
Gains on securities transactions decreased $1,908 from 1997 to 1998. The
Holding Company followed its strategy of selectively selling common stocks that
have shown sizable long-term appreciation. The year 1997 was the first year the
Holding Company significantly invested in equity securities.
Other noninterest income was fairly stable for the two-year period.
Noninterest expense increased $514,605 or 18.74% in 1998 over 1997 levels.
Salaries and employee benefits increased 17.63% due to increased staffing and,
normal salary increases and the accrual of a $150,000 retirement benefit for a
senior officer. Other noninterest expenses increased $276,342 or 6.74%. The
increase was spread over a variety of expense categories, with no single area
increasing materially. The Holding Company's overall cost of operations
relative to asset size is comparable to its peer group.
UNCERTAINTIES AND TRENDS
General
Management is of the opinion that loans classified for regulatory purposes
as loss, doubtful, substandard, or special mention do not (i) represent or
result from trends or uncertainties which are reasonably expected to materially
impact future operating results, liquidity, or capital resources, or (ii)
represent material credits of which any available information causes serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
Management is not aware of any known trends, events or uncertainties that
will have or that are reasonably likely to have a material effect on the issuers
liquidity, capital resources or operations of the issuers. Additionally,
management is not aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, would have such an effect.
BALANCE SHEET
Investment Securities
Average balances in investment securities increased 8.91% in 1999 compared
to 1998. The Holding Company maintains a high level of earning assets in
investment securities to provide for liquidity and as security for public
indebtedness. A schedule of investment securities is shown in a note to the
consolidated financial statements.
The Holding Company accounts for investments under Statement of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." This statement requires all securities to be classified at
the point of purchase as trading securities, available for sale or held to
maturity. See the notes to the financial statements for a discussion of the
accounting policies for investments. The Holding Company values its debt
securities based on information supplied by its correspondent banks for actively
traded obligations and by market comparison with similar obligations for non-
rated investments. Investments in common stocks are based on the last trades as
provided by the Holding Company's investment holder.
11
<PAGE>
Yields and Maturities
The yields on taxable and nontaxable investments for 1999 and 1998 are
shown in the yield analysis in Table II. The carrying amount and estimated
market value of debt securities at December 31, 1999 by contractual maturity are
included in a note to the consolidated financial statements.
Management's philosophy is to keep the maturities of investments relatively
short which allows the Company to better match deposit maturities with
investment maturities and thus react more quickly to interest rate changes.
Equity Investments
The Holding Company has investments in common and preferred stock totaling
$1,049,000 at December 31, 1999, with an estimated market value of $1,471,000.
The investments include common stocks with the objective of realizing capital
gains. The market value of these investments is sensitive to general trends in
the stock market.
RISK ELEMENTS IN THE LOAN PORTFOLIO
The Bank's policy has been to make conservative loans that are held for
future interest income. Collateral required by the Bank is determined on an
individual basis depending on the purpose of the loan and the financial
condition of the borrower.
The Bank's real estate mortgage loans increased 10.83% from $47,624,000 to
$52,780,000 at December 31, 1999. Residential real estate loans are generally
made for a period not to exceed 30 years and are secured by first deeds of
trust, which do not exceed 80% of the appraised value. If the loan to value
ratio exceeds 80%, the Bank requires additional collateral or guarantees. For a
majority of the real estate loans, interest is adjustable after each three or
five year period. Fixed rate loans are generally made for a fifteen-year
period. See Table IV for a maturity schedule of fixed and variable rate loans.
In 1999, fixed rate real estate loans have been funded with fixed rate
borrowings from the Federal Home Loan Bank, which allows the Bank to control its
interest rate risk. In addition, the Bank makes home equity loans secured by
second deeds of trust with total indebtedness not to exceed 80% of the appraised
value. Home equity loans are made on a 10-year revolving line of credit basis.
The Bank's consumer loans increased 11.64% to $14,359,000 at December 31,
1999. Consumer loans are made for a variety of reasons, however, vehicles
secure a majority of the loans.
The majority of commercial loans are made to agri business, small retail
and service businesses.
See Table IV for a schedule of loan maturities.
NONACCRUAL AND PAST DUE LOANS
See Table V for schedule of nonaccrual and past due loans.
Interest accruals are continued on past due, secured loans until the
principal and accrued interest equal the value of the collateral and on
unsecured loans until the financial condition of the creditor deteriorates to
the point that any further accrued interest would be determined to be
uncorrectable. At December 31, 1999 and 1998, there were no restructured loans
on which interest was accruing at a reduced rate or on which payments had been
extended.
12
<PAGE>
LOAN CONCENTRATIONS
At December 31, 1999, no industry category exceeded ten percent of total
loans.
LOAN LOSSES AND ALLOWANCE FOR LOAN LOSSES
For each period presented, the provision for loan losses charged to
operations is based on management's judgment after taking into consideration all
factors connected with the collectibility of the existing portfolio. Management
evaluates the loan portfolio in light of economic conditions, changes in the
nature and value of the portfolio, industry standards and other relevant
factors. Specific factors considered by management in determining the amounts
charged to operations include internally generated loan review reports, past due
reports and historical loan loss experience. This review also considers
concentrations of loans in terms of geography, business type or level of risk.
Management evaluates nonperforming loans relative to their collateral value and
makes appropriate adjustments to the allowance for loan losses when needed.
The Bank has not experienced significant loan losses in any of the last two
years. The loss rate on loans outstanding (See Table V) is still below the
Bank's peer group. Based on historical losses, delinquency rates, a thorough
review of the loan portfolio and after considering the elements of the preceding
paragraph, management is of the opinion that the allowance for loan losses is
adequate to absorb future losses in the current portfolio.
See Table V for a summary of the activity in the allowance for loan losses.
The Bank has allocated the allowance according to the amount deemed to be
reasonably necessary to provide for the possibility of losses being incurred
within each of the categories of loans. The allocation of the allowance as
shown in Table V should not be interpreted as an indication that loan losses in
future years will occur in the same proportions or that the allocation indicates
future loan loss trends. Furthermore, the portion allocated to each loan
category is not the total amount available for future losses that might occur
within such categories since the total allowance is a general allowance
applicable to the entire portfolio.
Table V shows the balance and percentage of the Bank's allowance for loan
losses allocated to each major category of loans.
DEPOSITS
The Bank has traditionally avoided brokered and large deposits believing
that they were unstable and thus not desirable. This has proven to be a good
strategy as the local deposit base is considered very stable and small increases
in rates above the competition have resulted in deposit gains in past years.
Certificates of deposit over $100,000 are shown in Table VI.
STOCKHOLDERS' EQUITY
Banking regulators have established a uniform system to address the
adequacy of capital for financial institutions. The rules require minimum
capital levels based on risk adjusted assets. Simply stated, the riskier an
entity's investment, the more capital it is required to maintain. The Bank, as
well as the holding company, is required to maintain these minimum capital
levels. See the notes to the consolidated financial statements for calculations
of actual and minimum capital requirements. The Bank has maintained capital
levels far above the minimum requirements throughout the year. In the unlikely
event that such capital levels are not met, regulatory agencies are empowered to
require the Company to raise additional capital and/or reallocate present
capital.
13
<PAGE>
BORROWINGS
The information concerning borrowings is shown in a note to the
consolidated financial statements.
LIQUIDITY AND INTEREST SENSITIVITY
Liquidity as of December 31, 1999 remains adequate. The Bank historically
has had a stable core deposit base and, therefore, does not have to rely on
volatile funding sources. Because of the stable core deposit base, changes in
interest rates should not have a significant effect on liquidity. The Bank was
a seller of federal funds for most of 1999. The Bank's membership in the
Federal Home Loan Bank System also provides liquidity, as the Bank borrows money
that is repaid over a ten-year period and uses the money to make fixed rate
loans. The matching of the long-term loans and liabilities helps the Bank
reduce its sensitivity to interest rate changes. The Bank reviews its interest
rate gap periodically and makes adjustments as needed.
There are no off-balance-sheet items that should impair future liquidity.
Table IV contains an analysis, which shows the repricing opportunities of
earning assets and
14
<PAGE>
Table I
Pioneer Bankshares, Inc.
Selected Operating Information
(In thousands, except for per share
information)
Condensed Statement of Income 1998 1999
---- ----
Interest and dividend income $ 7,454 $ 7,734
Interest expense 3,018 2,949
------- --------
Net interest income 4,436 4,785
Provision for loan losses 204 183
------- --------
Net interest income after provision
for loan losses 4,232 4,602
Noninterest income 584 1,086
Noninterest expense 3,237 3,487
------- --------
Income before income taxes 1,579 2,201
Income tax expense 441 659
------- --------
Net Income $ 1,138 $ 1,542
======= ========
Total assets at year end $91,492 $101,045
======= ========
Per Share Information 1
Net income per share $ 0.92 $ 1.32
Dividends per share $ 0.40 $ 0.55
Book value per share $ 8.93 $ 9.15
Financial Statement Ratios
Return on average assets 2 1.26% 1.62%
Return on average equity 2 10.06% 13.97%
Dividend payout ratio 43.66% 44.51%
Average equity to average 12.48% 11.57%
asset 2
1 Adjusted for 1999 2 for 1 stocksplit
2 Ratios are based primarily on daily average balances
15
<PAGE>
Table II
Pioneer Bankshares, Inc.
Net Interest Income/Rates Earned and Paid
(In thousands)
<TABLE>
<CAPTION>
Average Average
1998 Rates 1999 Rates
Income/ Earned/ Income/ Earned/
Assets Average Expense Paid Average Expense Paid
----------------------------------- -------- ------- -------- -------- ------- --------
Loans: 1
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 3,463 $ 368 10.63% $ 3,758 $ 416 11.07%
Real estate 46,856 4,149 8.85% 50,109 4,363 8.71%
Installment 10,640 1,507 14.16% 11,357 1,594 14.04%
Credit Card 911 125 13.72% 890 136 15.28%
---------------------------------------------------------
Total loans 61,870 6,149 9.94% 66,114 6,509 9.85%
Investment Securities 2
Fully taxable 10,397 608 5.85% 12,318 702 5.70%
Nontaxable 4,298 406 9.45% 3,687 308 8.34%
Federal funds sold 7,935 429 5.41% 5,396 266 4.93%
Interest bearing deposits in banks 0 0 0.00% 965 54 5.60%
---------------------------------------------------------
Total earning assets 84,500 $7,592 8.98% 88,480 $7,839 8.86%
====== ===== ====== =====
Allowance for loan losses (779) (762)
Nonearning assets 6,929 7,658
--------- ----------
Total assets $90,650 $95,376
======= =======
Liabilities and Stockholder Equity
Deposits:
Interest bearing demand
deposits $10,198 $ 197 1.93% $10,765 $ 195 1.81%
Savings accounts 10,652 297 2.79% 11,602 270 2.33%
All other time deposits 46,270 2,524 5.45% 46,524 2,393 5.14%
---------------------------------------------------------
Total deposits 67,120 3,018 4.50% 68,891 2,858 5.14%
Borrowings 0 0 0.00% 1,914 91 4.75%
---------------------------------------------------------
Total interest bearing liabilities 67,120 $3,018 4.50% 70,805 $2,949 4.16%
====== ===== ======
Noninterest bearing deposits 11,206 12,375
Other liabilities 1,011 1,160
======= =======
Total Liabilities 79,337 84,340
Stockholders' Equity 11,313 11,036
======= =======
Total Liabilities and Equity $90,650 $95,376
======= =======
Net Interest Earnings $4,574 $4,890
====== ======
Net interest yield on interest 5.41% 5.53%
earning assets ===== =====
</TABLE>
1 Interest on loans includes loan fees ($298 in 1998 and $392 in 1999)
2 An incremental income tax rate of 34% was used to calculate the tax equivalent
income
16
<PAGE>
Table III
Pioneer Bankshares, Inc.
Effect of Rate-Volume Change on Net Interest Income
(On a fully tax equivalent basis)
(In thousands)
<TABLE>
<CAPTION>
1998 compared to 1997 1999 compared to 1998
Increase (Decrease) Increase (Decrease)
------------------------- ------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- ------
Interest income:
Loans:
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 21 $ (69) $ (48) $ 31 $ 17 $ 48
Real estate 177 (328) (151) 288 (74) 214
Installment (52) (41) (93) 102 (15) 87
Credit Card (9) 34 25 (3) 14 11
----------------------------------------------------
Total loans 137 (404) (267) 418 (58) 360
Investment Securities:
Fully taxable 23 5 28 112 (18) 94
Nontaxable 10 (24) (14) (58) (41) (99)
----------------------------------------------------
Total Securities 33 (19) 14 54 (59) (5)
Federal funds sold 7 2 9 (137) (26) (163)
Interest bearing deposits in banks 0 0 0 0 54 54
----------------------------------------------------
Total interest income $177 $(421) $(244) $ 355 $ (89) $ 246
==== ===== ===== ===== ===== =====
Interest expense:
Deposits
Interest bearing demand deposit $ 4 $ 3 $ 7 $ 11 $ (13) $ (2)
Savings 13 (6) 7 26 (53) (27)
All other time deposits 15 9 24 14 (145) (131)
----------------------------------------------------
Total deposits 32 6 38 51 (211) (160)
Borrowings 0 0 0 0 91 91
----------------------------------------------------
Total interest expense $ 32 $ 6 $ 38 $ 51 $(120) $ (69)
</TABLE>
NOTE: Volume changes have been determined by multiplying the prior years'
average rate by the change in average balances outstanding. The rate change is
the difference between the total change and the volume change.
17
<PAGE>
Table IV
Pioneer Bankshares, Inc.
Interest Sensitivity Analysis - Loan Rate Risk
December 31, 1999
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
1-90 91-365 1-5 Over 5 Not
Days Days Years Years Classified Total
-------- -------- -------- ------- ---------- -------
Uses of Funds:
Loans:
Commercial $ 1,300 $ 2,133 $ 427 $ 38 $ 0 $ 3,898
Real estate 1,701 3,345 15,471 33,368 0 53,885
Installment 203 792 11,183 466 0 12,644
Credit Card 0 0 1,083 0 0 1,083
-----------------------------------------------------------------
Total loans 3,204 6,270 28,164 33,872 0 71,510
Federal funds sold 2,215 0 0 0 0 2,215
Interest bearing deposit
in banks 4,536 0 0 0 0 4,536
Investment Securities 0 1,591 5,818 6,304 1,319 15,032
-----------------------------------------------------------------
Total 9,955 7,861 33,982 40,176 1,319 93,293
-----------------------------------------------------------------
Sources of Funds:
Deposits
Interest bearing
demand deposits 14,239 0 0 0 0 14,239
Savings 10,551 0 0 0 0 10,551
All other time deposits 7,770 23,632 17,724 0 0 49,126
-----------------------------------------------------------------
Total deposits 32,560 23,632 17,724 0 0 73,916
Borrowings 4,577 150 800 900 0 6,427
-----------------------------------------------------------------
Total 37,137 23,782 18,524 900 0 80,343
-----------------------------------------------------------------
Discrete Gap (27,182) (15,921) 15,458 39,276 1,319 12,950
Cumulative Gap (27,182) (43,103) (27,645) 11,631 12,950
Ratio of Cumulative Gap
to Total Earning
Assets -30.72% -48.71% -31.24% 13.15% 14.64%
Rate Risk:
Loans with predetermined
rates 2,606 5,026 1,935 7,341 0 16,908
Loans with variable/
adjusted rates 598 1,244 26,229 26,531 0 54,602
</TABLE>
18
<PAGE>
Table IV reflects the earlier of the maturity or repricing dates for various
assets and liabilities. The above does not make any assumptions with respect to
loan repayments or deposit run offs. Loan principal payments are included in
the earliest period in which the loan matures or can be repriced. Principal
payments on installment loans scheduled prior to maturity are included in the
period of maturity or repricing. Proceeds from the redemption of investments
and deposits are included in the period of maturity.
Table V
Pioneer Bankshares, Inc.
Loan Loss Allowance Activity - Non accrual and Past Due Loans
1998 1999
---- ----
Activity (In Thousands)
-----------------------------------
Beginning balance $ 740 $ 773
Provision charged to expense 204 183
Loan losses:
Commercial 1 15
Installment 146 137
Real estate 54 64
Credit card 24 5
-----------------------------------
Total loan losses 225 221
-----------------------------------
Recoveries:
Commercial 0 0
Installment 50 33
Real estate 0 6
Credit card 4 5
-----------------------------------
Total loan recoveries 54 44
-----------------------------------
Net loan losses 171 177
-----------------------------------
Balance at end of period $ 773 $ 779
===== =====
Net loan losses as a percent of total loans 0.27% 0.25%
19
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
------------------------------------ -----------------------------------
Percent of Percent of
Percent of Average Loans Percent of Average Loans
Amount Allowance Amount Allowance
------- ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Analysis of Ending Allowance Balance
Commercial $ 414 53.56% 5.60% $360 46.21% 5.68%
Installment 233 30.14% 75.73% 276 35.43% 75.79%
Real estate 104 13.45% 17.20% 123 15.79% 17.18%
Credit card 22 2.85% 1.47% 20 2.57% 1.35%
--------------------------------------------------------------------------
Total $ 773 100.00% 100.00% $779 100.00% 100.00%
===== ======= ============= ====== ========== =============
1998 1999
Allowance balance as a
percent of average loans 1.25% 1.18%
Nonaccrual and Past Due Loans:
Principal:
Nonaccruing loans $ 302 $ -
Loans past due 90 days or more 77 229
Problem loans 0 0
Interest recognized during the year:
Nonaccruing loans $ - $ -
Loans past due 90 days or more 5 15
Problem loans 0 0
Percentage of total loans 0.36% 0.52%
</TABLE>
Table VI
Pioneer Bankshares, Inc.
Deposit Maturities - Over $100,000
1998 1999
------------------- -------------------------
(In thousands)
----------------------------------------------
CD's Over $100,000
Maturity
Less than 3 months $ 851 $1,703
3 to 12 months 1,379 2,866
1 to 5 Years 2,808 1,428
Over 5 Years 0 0
----------------------------------------------
Total $5,038 $5,997
====== ======
20
<PAGE>
Item 3. Description of Property
The Holding Company's office is located in Stanley Virginia and is directly
across the street from the Bank's main office. Its building was originally
built as a residence. It was purchased in 1989 and fully renovated for it's
commercial use. The building contains approximately 3,252 square feet. The
Bank's main office in Stanley, Virginia, was constructed in 1984, contains
12,876 square feet on three floors and is situated on approximately two acres.
The building contains a full service branch, administration operations,
bookkeeping and credit departments, three drive-through lanes and an ATM. The
office is an attractive brick building with adequate room for future expansion
and is owned by the Bank.
The branch at Luray, Virginia is a brick building containing approximately
3,797 square feet and situated on a 200 x 150 lot. It contains a full service
branch with two drive-through lanes and an ATM. This branch is located next to
a shopping center and was built in 1989 and is owned by the bank.
The branch at Shenandoah is a brick building containing approximately 3,400
square feet and situated on a 300 x 150 lot. It contains a full service branch
with two drive-through lanes and an ATM. This branch was built in 1995 and is
owned by the Holding Company.
The branch in Harrisonburg, Virginia is leased on a short-term lease at
$1,842.55 per month. This branch is in a small shopping center and fully
remodeled upon occupancy in August, 1999. This branch is a full service branch
with two drive-through lanes and is equipped with an ATM.
The Jenkins Building is a building adjacent to the bank's main office and
is used as a warehouse facility. It has approximately 25,760 square feet and
was purchased in September 8, 1970.
The Jefferson Building is a building located in Stanley and was purchased
for future expansion. This building was purchased in 1998 and contains
approximately 1,728 square feet.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of March 31, 2000, the beneficial
ownership of the Holding Company's common stock, par value $.50 per share
("Common Stock"), held by each director of the Holding Company, the executive
officers' names in the Summary Compensation Table in "Item 6, Executive
Compensation" herein, and by the directors and all executive officers as a
group.
As of March 31, 2000, the Holding company is not aware of any beneficial
owners of 5% or more of the Holding Company's common stock.
Amount and Nature of
<TABLE>
<CAPTION>
Directors Beneficial Ownership (1) Percent of Class
--------------------------------- ---------------------------------- -----------------------------------
<S> <C> <C>
Patricia G. Baker 8,375 *
Louis L. Bosley 22,850 2.05%
Robert E. Long, Chairman 11,310 1.01%
Harry F. Louderback 17,700 1.59%
E. Powell Markowitz 1,430 *
Kyle L. Miller 9,830 *
Mark N. Reed 3,680 *
David N. Slye 1,230 *
</TABLE>
21
<PAGE>
Amount and Nature of
<TABLE>
<CAPTION>
Directors
Executive
Officers Beneficial Ownership (1) Percent of Class
--------------------------------- ---------------------------------- -----------------------------------
<S> <C> <C>
Thomas R. Rosazza, President 16,480 1.48%
All Directors and Executive 92,345 8.27%
Officers as a Group
</TABLE>
(1) For purposes of this table, beneficial ownership has been determined in
accordance with the provisions of Rule 13d-3 of the Securities Exchange Act
of 1934 under which, in general, a person is deemed to be the beneficial
owner of a security if he has or shares the power to vote or direct the
voting of the security or the power to dispose of or direct the disposition
of the security, or if he has the right to acquire beneficial ownership of
the security within sixty days. Shares of Common Stock which are subject to
stock options are deemed to be outstanding for the purpose of computing the
percentage of outstanding Common Stock owned by such person or group but not
deemed outstanding for the purpose of computing the percentage of Common
Stock owned by any other person or group.
Item 5. Directors, Executive Officers, Promoters and Control Persons
The following table sets forth information with respect to the directors
and executive officers of the Holding Company.
<TABLE>
<CAPTION>
Term Principal Occupation
Directors Age Expires During Past Five Years
----------------- --------------- -------------------------- ------------------------------------
<S> <C> <C> <C>
Robert E. Long 69 2003 Real estate agent. Director since
1989 and of the Bank since 1989.
Kyle Miller 65 2003 Retired State Police and Business
Manager. Director since 1986.
Patricia G. Baker 57 2003 Retired bank officer. Director
since 1989 and of the Bank since
1989.
Thomas R. Rosazza 58 2001 President, Pioneer Bankshares, Inc.
Director since 1984 and of the Bank
since 1973.
David N. Slye 47 2001 Insurance agent. Director since
1996 and of the Bank since 1996.
Harry F. Louderback 59 2001 Farmer/retired from FBI. Director
since 1998 and of the Bank since
1998.
Louis L. Bosley 68 2002 Businessman - auto service.
Director since 1984 and of the Bank
since 1976.
Mark N. Reed 42 2002 Attorney at Law. Director since
1994 and of the Bank since 1994.
E. Powell Markowitz 48 2002 Businessman - Hotel/Restaurant.
Director since 1999 and of the Bank
since 1999.
</TABLE>
22
<PAGE>
The Board of Directors has five standing committees, namely;
Personnel/Compensation, Merger/Acquisition, Audit/Compliance, Shareholder
Relations and Strategic Planning.
Directors of the Holding Company receive a fee of $150 for each meeting of
the Board of Directors they attend and $150 for each Board committee meeting
they attend.
Item 6. Executive Compensation
Summary
The following table sets forth a summary of information concerning the
compensation paid by the Holding Company and the Bank for services rendered in
all capacities during the year ended December 31, 1999 to the President and
Chief Executive Officer of the Bank. No other executive officer of the Holding
Company and/or Bank had total compensation during the fiscal year which exceeded
$100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation (1)
---------------------------------------------------------
Name and Principal Position Year Salary Bonus Other
--------------------------------- ---------------- ------------------- ------------------- -------------
<S> <C> <C> <C> <C>
Thomas R. Rosazza, President 1999 $ 77,917 $30,000 None
1998 0 0 0
1997 0 0 0
Gaylon Waters, President 1998 125,004 35,213 0
1997 130,002 15,000 0
</TABLE>
(1) Does not include perquisites and other personal benefits, the amount of
which are not shown because the aggregate amount of such compensation
during the year did not exceed the lesser of $50,000 or 10% of total salary
and bonus reported for such executive officer.
Item 7. Certain Relationships and Related Transactions
During 1999, the Bank extended credit to its directors. All such loans
were made in the ordinary course of business, were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable credits on terms that do not involve more than the normal
risk or collectibility or present other unfavorable features. During fiscal
1999, the Bank made three loans to Louis Bosley, director, in the total amount
of $109,195.27. Also during fiscal 1999, the Bank made a loan to Kyle Miller,
director, in the amount of $4,001.38 and to Edwin Markowitz, director, in the
amount of $153,586.13.
23
<PAGE>
Item 8. Description of Securities
The following summary of the terms of the capital shares of the Company is
qualified in its entirety by reference to the Holding Company's Certificate of
Incorporation and Bylaws, which are filed as Exhibits to this Form 10-SB.
The Holding Company is authorized to issue 5,000,000 shares of Common
Stock, par value $.50 per share. As of December 31, 1999, based on information
available to the Holding Company, the Holding Company had issued and outstanding
1,187,810 shares of Common Stock held by 502 holders of record. Shares of
common stock are not deposits and are not insured by the FDIC.
Holders of shares of Holding Company Common Stock are entitled to receive
dividends when and as declared by the Board of Directors out of funds legally
available therefore. The Holding Company's ability to pay dividends will be
dependent upon its earnings and financial condition and applicable legal
requirements. Upon the liquidation, dissolution or winding up of the Holding
Company, whether voluntary or involuntary, holders of Holding Company Common
Stock are entitled to share ratably, after satisfaction in full of all
liabilities, in all remaining assets of the Holding Company available for
distribution. The dividend and liquidation rights of the Holding Company Common
Stock will be subject to the rights of any Preferred Stock that may be issued
and outstanding.
Holders of Holding Company Common Stock are entitled to one vote per share
on all matters submitted to shareholders. There are no preemptive rights to
purchase additional shares of any class of the Holding Company's capital stock.
Holders of Holding Company's Common Stock will have no conversion or redemption
rights. The shares of Bank Common Stock are fully paid and nonassessable.
Protective Provisions
General. The Holding Company `s Articles of Incorporation and the Virginia
Stock Corporation Act (the "Virginia SCA") contain provisions designed to
enhance the ability of the Board of Directors to deal with attempts to acquire
control of the Bank. Although the Board of Directors believes that these
provisions are beneficial to the Holding Company's shareholders, these
provisions may tend to discourage takeover attempts which have not been approved
by the Board of Directors. The articles of incorporation of the Holding Company
provide that a plan of affiliation or share exchange or merger or a direct or
indirect sale, lease or other disposition of all or substantially all of the
property of the Holding Company requires approval by more than two-thirds of all
votes entitled to be cast. In addition to requiring an affirmation vote of two-
thirds of all votes entitled to be cast, the Holding Company's articles of
incorporation provides that if the proposed transaction is with a corporation,
person or entity that holds more than 5 percent of the capital stock of the
Holding Company, then a vote of 80 percent of all votes entitled to be cast
would be required to approve the transaction. The Board of Directors has sole
authority under the articles of incorporation to determine whether a proposed
transaction triggers the requirement for a 80 percent vote. As a result, the
Holding Company' shareholders may be deprived of opportunities to sell some or
all of their shares at prices that represent a premium over prevailing market
prices. In addition, these provisions may discourage open market purchases by a
potential acquirer. Such purchases may increase the market price of the Holding
Company stock temporarily, enabling shareholders then which otherwise would
prevail. These provisions also may decrease the market price of the Holding
Company by making the stock less attractive to person who invest in securities
in anticipation of price increases from potential acquisition attempts.
24
<PAGE>
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Stock and
Other Shareholder Matters
The Common Stock of the Holding Company is not currently traded on any
established market.
As of March 31, 2000, there were 514 holders of Common Stock.
The Holding Company has declared dividends on its Common Stock as follows:
Declared Record Payment
Date Date Date Per Share Amount
-----------------------------------------------------------------------
1/15/98 12/31/97 1/22/98 $.60
6/11/98 6/30/98 7/13/98 $.20
12/13/99 1/19/00 2/2/00 $.15
1/13/00 1/19/00 2/2/00 $.20
3/9/00 3/31/00 4/14/00 $.10
The Holding Company is subject to restrictions imposed by the reserve and
capital requirements of federal and Virginia banking statutes and regulations.
Under these statutes and regulations the payment of dividends are limited, if,
after making such distribution, the institution would be undercapitalized.
Further, the Virginia State Corporation Commission has the authority to prohibit
payment of dividends by a Virginia charted bank if it determines that the
limitation is in the public interest and is necessary to ensure the bank's
financial soundness. Additionally, the Holding Company intends to follow a
policy of retained earnings sufficient for the purpose of maintaining net worth
and reserves of the Bank at adequate levels and to provide for the Holding
Company's growth and ability to compete in its market area.
Item 2. Legal Proceedings
None
Item 3. Changes in and Disagreements with Accountants
None
Item 4. Recent Sales of Unregistered Securities
None
Item 5. Indemnification of Officers and Directors
The Articles of Incorporation of the Holding Company contain a provision
which, subject to exceptions described below, eliminates the liability of a
director or officer to the Holding Company or its shareholders for monetary
damages for any breach of duty as a director or officer. This provision does
not eliminate such liability to the extent that it is proven that the director
or officer engaged in willful misconduct or a knowing violation of criminal law
or of any federal or state securities law.
25
<PAGE>
The Articles of Incorporation require indemnification of any person against
liability incurred in connection with any proceeding to which that person is
made a party by reason of (i) his service to the Holding Company as a director
or officer or (ii) his service as director, officer, trustee, or partner to some
other enterprise at the request of the Holding Company, except in the event of
willful misconduct or a knowing violation of the criminal law. The Articles of
Incorporation also authorize the Holding Company's Board of Directors to
contract in advance to indemnify any director or officer by a majority vote of a
quorum of disinterested directors.
The elimination of liability and indemnification provisions contained in
the Holding Company's Articles of Incorporation may be limited in connection
with legal actions brought by state or federal banking agencies under state and
federal law.
26
<PAGE>
PART F/S
The audited balance sheet of the Holding Company as of December 31, 1999,
and related statements of income, changes in shareholders' equity and cash flows
for the period from January 1, 1998 through December 31, 1999, together with the
report of Independent Auditors, are attached hereto as Annex A following the
signature page.
27
<PAGE>
Index to Financial Statements
-----------------------------
Page
----
Independent Auditors' Report....................................... 29
Statement of Financial Condition as of December 31, 1999 and 1998.. 30
Statement of Income for the Years ended
December 31, 1999 and 1998....................................... 31
Statement of Stockholders' Equity for the years ended
December 31, 1999 and 1998....................................... 32
Statement of Cash Flows for the years ended
December 31, 1999 and 1998....................................... 33
Notes to Financial Statements...................................... 34
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Pioneer Bankshares, Inc.
We have audited the consolidated balance sheets of Pioneer Bankshares, Inc. and
subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pioneer Bankshares,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and cash flows for the years then ended in conformity with generally
accepted accounting principles.
S. B. Hoover & Company, L.L.P.
February 4, 2000, except for Note 2 -
Allowance for Loan Losses and Note 11,
as to which the date is August 10, 2000.
Members of the American Institute of Certified Public Accountants and Virginia
Society of Certified Public Accountants
29
<PAGE>
PIONEER BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
------------- ------------
Cash and due from banks (Note 3) $ 5,198,869 $ 4,399,503
Federal funds sold 2,215,000 6,620,000
Interest-bearing deposits in banks 4,536,011
Investment securities
Available for sale (Note 5) 11,628,002 6,345,803
Held to maturity (fair value was $3,541,000
and $8,076,000 in 1999 and 1998,
respectively) (Note 5) 3,556,585 7,906,376
Loans receivable (Note 6), net of allowance for
loan losses of $779,000 in 1999 and $773,000
in 1998 (Note 7) 69,252,023 62,288,028
Bank premises and equipment, net (Note 8) 2,909,495 2,682,889
Accrued interest receivable 559,994 550,535
Other assets 1,189,019 698,738
------------ -----------
Total Assets $101,044,998 $91,491,872
============ ===========
LIABILITIES
Deposits
Noninterest bearing $ 12,246,396 $11,428,099
Interest bearing
Demand 10,516,300 10,290,703
Savings 10,411,914 10,774,274
Time deposits over $100,000 (Note 9) 5,064,680 4,828,343
Other time deposits (Note 9) 44,199,879 41,889,798
------------ -----------
Total Deposits 82,439,169 79,211,217
Treasury tax and loan deposit note 76,904 33,225
Accrued expenses and other liabilities 1,349,382 1,187,715
Borrowings (Note 10) 6,350,000
------------
Total Liabilities 90,215,455 80,432,157
------------ -----------
30
<PAGE>
STOCKHOLDER'S EQUITY
Common stock; $.50 par value, authorized
5,000,000 shares; outstanding - 1,121,670
shares in 1999; 1,187,810 shares in 1998 560,835 593,905
Retained earnings (Note 14) 10,274,779 10,351,815
Accumulated other comprehensive income (6,071) 113,995
------------ -----------
Total Stockholders' Equity 10,829,543 11,059,715
------------ -----------
Total Liabilities and Stockholders' Equity $101,044,998 $91,491,872
The accompanying notes are an integral part of this statement.
31
<PAGE>
PIONEER BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
INTEREST AND DIVIDEND INCOME: 1999 1998
---------- -----------
Loans including fees $6,512,534 $6,153,509
Debt securities - taxable 655,184 583,490
Debt securities - nontaxable 202,749 267,918
Deposits and federal funds sold 319,958 429,139
Equity securities 47,142 24,391
---------- ----------
Total Interest and Dividend Income 7,737,567 7,458,447
---------- ----------
INTEREST EXPENSE:
Deposits 2,857,557 3,017,765
Borrowings 91,017
----------
Total Interest Expense 2,948,574 3,017,765
---------- ----------
NET INTEREST INCOME 4,788,993 4,440,682
PROVISION FOR LOAN LOSSES (Note 7) 182,500 204,000
---------- ----------
NET INTEREST INCOME AFTER PROVISIONS FOR
LOAN LOSSES 4,606,493 4,236,682
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 526,700 421,777
Other income 536,100 118,815
Gain on security transactions (Note 5) 19,054 39,018
---------- ----------
Total Noninterest Income 1,081,854 579,610
---------- ----------
NONINTEREST EXPENSES:
Salaries and benefits 1,516,146 1,589,864
Occupancy expenses 241,373 196,434
Equipment expenses 315,938 275,005
Other expenses 1,413,367 1,175,970
---------- ----------
32
<PAGE>
Total Noninterest Expenses 3,486,824 3,237,273
---------- ----------
INCOME BEFORE INCOME TAXES 2,201,523 1,579,019
INCOME TAX EXPENSE (Note 13) 659,104 440,555
---------- ----------
NET INCOME $1,542,419 $1,138,464
========== ==========
EARNINGS PER SHARE
Net income $1.32 $.92
========== ==========
Weighted Average Shares Outstanding $1,172,935 $1,238,490
========== ==========
The accompanying notes are an integral part of this statement.
33
<PAGE>
PIONEER BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid in Retained Comprehensive
Total Stock Capital Earnings Income
------------ ---------- ----------- ------------ --------------
BALANCES,
DECEMBER 31,
<S> <C> <C> <C> <C> <C>
1997 $11,327,120 $621,680 $ 71,300 $10,611,280 $ 22,860
Comprehensive Income
Net income 1,138,464 1,138,464
Net change in
unrealized gains
on securities
available for
sale, net of
income taxes 91,135 $ 91,135
Total Comprehensive Income 1,229,599
Dividends declared (497,104) (497,104)
Retirement of common stock
(999,900) (27,775) (71,300) (900,825)
-----------------------------------------------------------------------
BALANCES,
DECEMBER 31,
1998 11,059,715 593,905 10,351,815 113,995
Comprehensive Income
Net income 1,542,419 1,542,419
Net change in
unrealized gains
on securities
available for sale,
net of income taxes (120,066) (120,066)
Total Comprehensive
Income 1,422,353
Dividends declared (643,064) (643,064)
Retirement of common stock
(1,009,052) (33,010) (976,042)
Other (409) (60) (349)
-----------------------------------------------------------------------
BALANCES,
DECEMBER 31,
1999 $10,829,543 $560,835 $- $10,274,779 $ (6,071)
=========== ========= ========== =========== ================
</TABLE>
The accompanying notes are an integral part of this statement.
34
<PAGE>
PIONEER BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
------------------ ----------------------
<S> <C> <C>
Net income $ 1,542,419 $ 1,138,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 182,500 204,000
Demutualization stock gain (148,120)
Depreciation 239,898 232,085
Net change in:
Accrued income (9,459) 61,067
Other assets (23,983) (58,136)
Accrued expense and other liabilities 207,725 236,626
----------- ----------
Net Cash Provided by Operating Activities 1,990,980 1,814,106
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in federal funds sold 4,405,000 (2,585,000)
Net increase in interest bearing deposits (4,536,011)
Proceeds from maturities and sales of securities
available for sale 2,125,885 4,559,689
Proceeds from maturities and sales of securities
held to maturity 3,962,586 2,331,848
Purchase of securities available for sale (7,426,089) (3,873,051)
Purchase of securities held to maturity (15,995) (1,332,812)
Net increase in loans (7,146,495) (1,535,510)
Purchase of bank premises and equipment (466,504) (576,638)
Investment in life insurance policies (63,098) (63,098)
-------------- ---------------
Net Cash Used in Investing Activities (9,160,721) (3,074,572)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in:
Demand savings deposits 681,534 1,099,833
Time deposits 2,546,418 1,818,396
Short-term borrowings 43,680 8,439
Proceeds from borrowings 6,500,000
Curtailments of borrowings (150,000)
Purchase and subsequent retirement of common stock (1,009,461) (999,900)
Dividends paid (643,064) (497,104)
-------------- -------------
Net Cash Provided by Financing Activities 7,969,107 1,429,664
------------- -------------
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
CASH AND CASH EQUIVALENTS
<S> <C>
Net increase in cash and cash equivalents 799,366 169,198
Cash and cash equivalents, beginning of year 4,399,503 4,230,305
------------- --------------
Cash and Cash Equivalents, End of Year $ 5,198,869 $ 4,399,503
=========== ===========
Supplement Disclosure of Cash Paid During
the Year for: Interest $ 2,910,000 $ 3,076,740
Income taxes 634,000 547,000
</TABLE>
The accompanying notes are an integral part of this statement.
36
<PAGE>
PIONEER BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS:
Pioneer Bankshares, Inc. ("Company"), through its subsidiary the Pioneer
Bank ("Bank"), operates under a charter issued by the Commonwealth of Virginia
and provides commercial banking services. As a state chartered bank, the Bank
is subject to regulation by the Virginia Bureau of Financial Institutions and
the Federal Reserve Bank. The Bank provides services at four separate locations
to customers located primarily in Page and Rockingham Counties of Virginia.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to accepted practice within the banking
industry. A summary of significant accounting policies is as follows:
Consolidation Policy - The consolidated financial statements include
Pioneer Bankshares, Inc. and Pioneer Bank which is a wholly-owned subsidiary.
All significant intercompany balances and transactions have been eliminated.
Use of Estimates - Management uses estimates and assumptions in preparing
financial statements; actual results could differ significantly from those
estimates. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities and
the reported revenue and expenses.
Investment Securities - Investment securities which the Bank intends to
hold until maturity or until called are classified as Held to Maturity. These
investment securities are carried at cost, adjusted for amortization of premium
and accretion of discounts.
Investment securities which the Bank intends to hold for indefinite periods
of time, including investment securities used as part of the Bank's
asset/liability management strategy, are classified as available for sale.
These investment securities are carried at fair value. Net unrealized gains and
losses, net of deferred income taxes, are excluded from earnings and reported as
a separate component of stockholders' equity until realized.
Gains and losses on the sale of investment securities are determined using
the specific identification method.
Loans Receivable - Loans receivable are intended to be held until maturity
and are shown on the statements of financial condition net of unearned interest
and the allowance for loan losses. Interest is computed by methods which
generally result in level rates of return on principal. Interest on past due
and problem loans is accrued until serious doubt arises as to the collectibility
of the interest.
Allowance for Loan Losses - The allowance for loan losses is increased by
charges to income and decreased by charge-offs [net of recoveries]. The
provision for loan losses charged to income is based on management's judgment
after taking into consideration all factors connected with the collectability of
the existing portfolio. Management evaluates the loan portfolio in light of
economic conditions, changes in the nature and value of the loan portfolio,
industry standards and other relevant factors. Specific factors considered by
management in determining the amount charged to income include; internally
generated loan review and loan evaluation reports, past due reports, watch
lists, and historical loan loss experience. Consideration is also given to loan
concentrations involving geography, business type or level of risk.
Nonperforming loans are evaluated by management relative to their collateral
value.
37
<PAGE>
Bank Premises and Equipment - Bank premises and equipment are stated at
cost less accumulated depreciation. Depreciation is charged to income over the
estimated useful lives of the assets on a combination of straight-line and
accelerated methods.
Income Taxes - Amounts provided for income tax expense are based on income
reported for financial statement purposes rather than amounts currently payable
under income tax laws. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.
Financial Instruments - In the ordinary course of business, the Bank has
entered into off-balance-sheet financial instruments consisting of commitments
to extend credit, commitments under credit-card arrangements, commercial letters
of credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related fees are
incurred or received.
The Bank uses the same credit policies in making commitments as it does for
other loans. Commitments to extend credit are generally made for a period of
one year or less and interest rates are determined when funds are disbursed.
Collateral and other security for the loans are determined on a case-by-case
basis. Since some of the commitments are expected to expire without being drawn
upon, the contract or notional amounts do not necessarily represent future cash
requirements.
Cash and Cash Equivalents - Cash and cash equivalents include cash on hand
and deposits at other financial institutions whose initial maturity is ninety
days or less.
Comprehensive Income - The Company adopted SFAS 130, Reporting
Comprehensive Income, as of January 1, 1998. Accounting principles generally
require that recognized revenue, expenses, gains and losses be included in net
income.
Although certain changes in assets and liabilities, such as unrealized
gains and losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with net
income, are components of comprehensive income. The adoption of SFAS 130 had no
effect on the Company's net income or stockholders' equity.
Earnings Per Share - Earnings per share are based on the weighted average
number of shares outstanding. Prior period per share amounts have been restated
to reflect the 1999 stock split.
NOTE 3 CASH AND DUE FROM BANKS:
The Bank is required to maintain average reserve balances based on a
percentage of deposits. The average balance of cash, which the Federal Reserve
Bank requires to be on reserve, was $683,000 and $652,000 for the years ended
December 31, 1999 and 1998, respectively.
NOTE 4 DEPOSITS IN AND FEDERAL FUNDS SOLD TO BANKS:
The Bank has cash deposited in and federal funds sold to other banks, most
of which exceed federally insured limits, totaling $9,155,000 and $8,927,000 at
December 31, 1999 and 1998, respectively.
38
<PAGE>
NOTE 5 INVESTMENT SECURITIES:
The amortized cost and fair value of investment securities are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Value Losses
--------- ---------- ---------- ------
December 31, 1999
Available for sale
U.S. government and
agency securities $10,563,000 $ 1,000 $407,000 $10,157,000
Equity securities 1,049,000 436,000 14,000 1,471,000
----------- -------- -------- -----------
$11,612,000 $437,000 $421,000 $11,628,000
=========== ======== ======== ===========
Held to Maturity
U.S. government and
agency securities $ 1,759,000 $ 2,000 $ 24,000 $ 1,737,000
State and municipals 1,253,000 29,000 1,282,000
Mortgage-backed 545,000 23,000 522,000
----------- -------- -------- -----------
$ 3,557,000 $ 31,000 $ 47,000 $ 3,541,000
=========== ======== ======== ===========
December 31, 1998
Available for sale
U.S. government and
agency securities $ 5,031,000 $ 38,000 $ 10,000 $ 5,059,000
Equity securities 1,133,000 210,000 56,000 1,287,000
----------- -------- -------- -----------
$ 6,164,000 $248,000 $ 66,000 $ 6,346,000
=========== ======== ======== ===========
Held to Maturity
U.S. government and
agency securities $ 3,123,000 $ 44,000 $ 3,167,000
State and municipals 3,646,000 124,000 3,770,000
Mortgage-backed 746,000 10,000 8,000 748,000
Equity securities 391,000 391,000
----------- -------- -------- -----------
$ 7,906,000 $178,000 $ 8,000 $ 8,076,000
=========== ======== ======== ===========
39
<PAGE>
The amortized cost and fair value of investment securities at December
31, 1999, by contractual maturity, are shown in the following schedule.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
----------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- ------------- --------------------------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,224,000 $ 1,219,000 $ 201,000 $ 204,000
Due after one year through
five years 5,061,000 4,867,000 2,513,000 2,514,000
Due five years through
ten years 3,378,000 3,263,000 298,000 301,000
Due after ten years 900,000 809,000
----------- -----------
10,563,000 10,157,000 3,012,000 3,019,000
Mortgage-backed 545,000 522,000
Equity securities 1,049,000 1,471,000
----------- -----------
$11,612,000 $11,628,000 $3,557,000 $3,541,000
Realized gains and losses on marketable equity
transactions are summarized below:
1999 1998
----------- ------------
Gains $ 197,000 $ 121,000
Losses 178,000 82,000
----------- ------------
Net Gains $ 19,000 $ 39,000
=========== ============
</TABLE>
Investment securities with a book value of $818,000 and $1,463,000 at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes required by law.
NOTE 6 LOANS:
Loans are stated at their face amount, net of unearned discount, and are
classified as follows at December 31:
1999 1998
----------- ------------
Real estate loans $52,780,000 $47,624,000
Commercial and industrial loans 4,007,000 3,285,000
Loans to individuals, primarily collateralized
by autos 14,359,000 12,862,000
All other loans 364,000 591,000
----------- -----------
Total Loans 71,510,000 64,362,000
40
<PAGE>
Less unearned discount 1,479,000 1,301,000
----------- -----------
Loans, less unearned discount 70,031,000 63,061,000
Less allowance for loan losses 779,000 773,000
----------- -----------
Net Loans Receivable $69,252,000 $62,288,000
The Bank grants commercial, real estate and consumer installment loans
to its customers. Collateral requirements for loans are determined on a loan by
loan basis depending upon the purpose of the loan and the financial condition of
the borrower.
The Company has a blanket lien against their one to four person
mortgage loans as collateral for borrowings with the Federal Home Loan Bank of
Atlanta.
NOTE 7 ALLOWANCE FOR LOAN LOSSES:
A summary of transactions in the allowance for loan losses are as follows:
1999 1998
------------ -----------
Balance, beginning of year $ 773,000 $ 740,000
Provision charged to operating expenses 183,000 204,000
Recoveries of loans charged off 45,000 54,000
Loans charged off (222,000) (225,000)
----------- ----------
Balance, End of Year $ 779,000 $ 773,000
=========== ==========
NOTE 8 BANK PREMISES AND EQUIPMENT:
Bank premises and equipment included in the financial statements at
December 31, are as follows:
1999 1998
----------- ----------
Land $ 342,000 $ 342,000
Land improvements and buildings 2,580,000 2,507,000
Furniture and equipment 2,832,000 2,439,000
----------- ----------
5,754,000 5,288,000
Less accumulated depreciation 2,845,000 2,605,000
----------- ----------
Net $ 2,909,000 $2,683,000
=========== ==========
41
<PAGE>
NOTE 9 DEPOSITS:
At December 31, 1999, the scheduled maturities of certificates of deposit are
as follows:
2000 $31,379,000
2001 10,264,000
2002 3,169,000
2003 2,102,000
2004 2,189,000
-----------
Total $49,103,000
===========
NOTE 10 BORROWINGS:
Advances from the Federal Home Loan Bank of Atlanta (FHLB) for the
year ended December 31, 1999, totaled $6,500,000. The debt is comprised of two
separate borrowings.
The Company borrowed $2,000,000 at a fixed interest rate of 6.09%,
with repayments of $50,000 due quarterly. Additionally, there was a $4,500,000
advance on a line of credit. The interest rate was computed daily and ranged
from 5% to 5.9%. The borrowings are secured by qualifying mortgage loans owned
by the Company.
Interest on the debt is due monthly and interest expense of $91,000
was incurred in 1999. The maturities of debt as of December 31, 1999 are as
follows:
2000 $4,550,000
2001 200,000
2002 200,000
2003 200,000
2004 200,000
Thereafter 1,000,000
----------
Total $6,350,000
==========
NOTE 11 OTHER INCOME:
During 1999, the Bank entered into an agreement with its former
President whereby this individual reimbursed the Bank for certain prior bank
expenditures and certain costs associated therewith. The prior bank
expenditures relate to direct purchases and credit card charges that were not
found to have adequate documentation to support the business purpose of the
expenditure. These items total $155,000. The former President also reimbursed
legal and accounting fees incurred by the Bank in regards to these maters in the
amount of $34,000. Additionally, the former President agreed to forego deferred
incentive compensation accounting to $78,000.
During 1999, the Bank received equity securities resulting from the
demutualization of a life insurance company. This resulted in the securities
being recognized at fair value on date of receipt. Other income includes
$148,000 to reflect this gain.
42
<PAGE>
NOTE 12 OTHER EXPENSE:
Other expense in the consolidated statement of income includes the
following components:
1999 1998
---------- -----------
Supplies and printing $ 209,000 $ 134,000
Directors fees 101,000 103,000
Professional fees 133,000 82,000
Life insurance 95,000 131,000
Other 875,000 726,000
---------- ----------
Total $1,413,000 $1,176,000
NOTE 13 INCOME TAXES:
The components of income tax expense are as follows:
1999 1998
---- ----
Current income tax expense $ 583,000 $ 472,000
Deferred income taxes (benefit) 76,000 (31,000)
---------- ----------
Income Tax Expense $ 659,000 $ 441,000
========== ==========
The reasons for the differences between income tax expense and the
amount computed by applying the statutory federal income tax rate are as
follows:
1999 1998
---------- ----------
Income taxes computed at the applicable
federal income tax rate $685,000 $ 537,000
Increase (decrease) resulting from:
Tax-exempt municipal income (71,000) (100,000)
Other 45,000 4,000
-------- ---------
Income Tax Expense $659,000 $ 441,000
The deferred tax effects of temporary differences are as follows:
1999 1998
-------- ---------
Provision for loan losses $ (2,000) $ (11,000)
Gain on stock received in demutulization 50,000
Deferred compensation 14,000 (29,000)
Depreciation 15,000 (1,000)
Cash surrender value of life insurance 10,000 6,000
Other (11,000) 4,000
-------- ---------
Deferred Income Taxes (Benefit) $ 76,000 $ (31,000)
======== =========
43
<PAGE>
At December 31, the net deferred tax asset was made up of the following:
1999 1998
--------- ---------
Deferred Tax Assets:
Provision for loan losses $190,000 $188,000
Deferred compensation 105,000 119,000
Securities available for sale 5,000
--------
Total 300,000 307,000
Deferred Tax Liabilities:
Depreciation 130,000 115,000
Cash surrender value of life insurance 38,000 28,000
Securities available for sale 57,000
Other 7,000 18,000
-------- --------
Total 175,000 218,000
Net Deferred Tax Asset $125,000 $ 89,000
======== ========
NOTE 14 DIVIDEND LIMITATION ON SUBSIDIARY BANK:
The principal source of funds of the Company is dividends paid by the
Bank. The amount of dividends the Bank may pay is regulated by the Federal
Reserve. As of January 1, 2000, maximum amount of dividends the Bank can pay to
the Company is $75,000, without requesting permission from the Federal Reserve
Bank.
NOTE 15 REGULATORY MATTERS:
The Bank is subject to various regulatory capital requirements
administered 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 judgements 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 Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999, that the
Bank meets all capital adequacy requirements to which it is subject.
44
<PAGE>
As of December 31, 1998, the most recent notification from the
institution's primary regulator categorized the Bank as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized the Bank must maintain minimum total risk-based, Tier I risk-
based, Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented
below: (in thousands)
<TABLE>
<CAPTION>
For Capital To Be Well
Actual Adequacy Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ----------- ----------- --------- ------------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk Weighted
Assets) $ 9,160 14.9% $ 4,932 (equal to or 8.0% $6,165 (equal to or 10.0%
less than) less than)
Tier I Capital (to Risk Weighted
Assets) 8,391 13.7% 2,457 (equal to or 4.0% 3,686 (equal to or 6.0%
less than) less than)
Tier I Capital (to Average
Assets) 8,391 9.0% 2,827 (equal to or 3.0% 4,712 (equal to or 5.0%
less than) less than)
As of December 31, 1998:
Total Capital (to Risk Weighted
Assets) $ 9,058 16.2% $ 4,484 (equal to or 8.0% $5,609 (equal to or 10.0%
less than) less than)
Tier I Capital (to Risk Weighted
Assets) 8,357 15.0% 2,442 (equal to or 4.0% 3,366 (equal to or 6.0%
less than) less than)
Tier I Capital (to Average
Assets) 8,357 9.3% 2,709 (equal to or 3.0% 4,516 (equal to or 5.0%
less than) less than)
</TABLE>
NOTE 16 LENDING COMMITMENTS:
The contract or notional amount of financial instruments with
off-balance sheet risk are as follows:
1999 1998
----------- ----------
Lines of Credit (commercial and personal) $2,731,000 $3,136,000
Loan commitments and letters of credit
(commercial and personal) 845,000 810,000
Credit card unused credit limits 2,128,000 2,378,000
NOTE 17 TRANSACTIONS WITH RELATED PARTIES:
During the year, officers and directors (and companies controlled by
them) were customers of and had transactions with the Company in the normal
course of business. These transactions were made on substantially the same
terms as those prevailing for other customers and did not involve any abnormal
risk.
Loan transactions to such related parties are shown in the following schedule:
45
<PAGE>
1999 1998
---------- ----------
Total loans, beginning of year $331,000 $ 388,000
New loans 265,000 46,000
Payments (70,000) (103,000)
-------- ---------
Total Loans, End of Year $526,000 $ 331,000
======== =========
NOTE 18 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107 (SFAS 107)
"Disclosures About the Fair Value of Financial Statements" defines the fair
value of a financial instrument as the amount at which a financial instrument
could be exchanged in a current transaction between willing parties, other than
in a forced liquidation sale. As the majority of the Bank's financial
instruments lack an available trading market, significant estimates, assumptions
and present value calculations are required to determine estimated fair value.
Estimated fair value and the carrying value of financial instruments
at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
---------- ----------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- -------- ---------- --------
Financial Assets
Cash $ 5,199 $ 5,199 $ 4,400 $ 4,400
Interest bearing deposits 4,536 4,536
Federal funds sold 2,215 2,215 6,620 6,620
Securities available for sale 11,628 11,628 6,346 6,346
Securities held to maturity 3,541 3,557 8,076 7,906
Loans 64,166 69,252 55,999 62,288
Accrued interest receivable 560 560 551 551
Financial Liabilities
Demand Deposits:
Non-interest bearing 12,246 12,246 11,428 11,428
Interest bearing 10,516 10,516 10,291 10,291
Savings deposits 10,412 10,412 10,774 10,774
Time deposits 49,398 49,265 47,312 46,718
Short-term debt 77 77 33 33
Long-term debt 5,906 6,350
The carrying value of cash and cash equivalents, other investments,
deposits with no stated maturities, short-term borrowings, and accrued
interest approximates fair value. The fair value of securities was calculated
using the most recent transaction price or a pricing model, which takes into
consideration maturity, yields and quality. The remaining financial instruments
were valued based on the present value of estimated future cash flows,
discounted at various rates in effect for similar instruments during the month
of December 1999.
46
<PAGE>
NOTE 19 PARENT CORPORATION ONLY FINANCIAL STATEMENTS:
BALANCE SHEETS
ASSETS 1999 1998
------------ -----------
Cash and cash equivalents $ 415,744 $ 334,522
Investment in subsidiary 8,024,770 8,375,294
Securities available for sale 1,318,544 1,287,240
Due from subsidiaries 206,485
Bank premises and equipment, net 1,095,785 1,134,131
Income tax refund 14,850 7,229
----------- -----------
Total Assets $11,076,178 $11,138,416
=========== ===========
LIABILITIES
Dividends payable $ 169,791 $ 934
Deferred income taxes 177,221 77,766
Other liabilities 481
-----------
Total Liabilities 347,493 78,700
----------- -----------
STOCKHOLDERS' EQUITY
Common stock 560,835 593,905
Retained earnings 10,177,020 10,351,815
Accumulated other comprehensive income (9,170) 113,996
----------- -----------
Total Stockholders' Equity 10,728,685 11,059,716
----------- -----------
Total Liabilities and Stockholders' Equity $11,076,178 $11,138,416
=========== ===========
47
<PAGE>
STATEMENTS OF NET INCOME AND RETAINED EARNINGS
INCOME 1999 1998
------------ ------------
Dividends from affiliate $ 1,500,178 $ 999,900
Interest income 1,827 883
Dividend income 18,478 14,012
Security gains 3,768 2,399
Rent income 82,874 82,874
Other income 2,264 16
----------- -----------
Total Income 1,609,389 1,100,084
----------- -----------
EXPENSES
Occupancy expenses 39,911 39,434
Furniture and equipment expenses 9,112 6,671
Other operating expenses 54,651 59,642
----------- -----------
Total Expenses 103,674 105,747
----------- -----------
Net income before income tax benefit and
increase in undistributed equity of affiliates 1,505,715 994,337
INCOME TAX BENEFIT 3,000 5,000
----------- -----------
Income before increase in undistributed equity
of affiliates 1,508,715 999,337
Increase (decrease) in undistributed income of
affiliates (64,055) 139,127
----------- -----------
NET INCOME 1,444,660 1,138,464
Retained earnings, beginning of year 10,351,815 9,710,455
Dividends on common stock (643,064) (497,104)
Retirement of common stock (976,042)
Other (349)
-----------
Retained Earnings, End of Year $10,177,020 $10,351,815
=========== ===========
STATEMENTS OF CASH FLOWS
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,444,660 $1,138,464
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed subsidiary income 64,055 (139,127)
Gain on sale of securities (3,768) (2,398)
Depreciation 39,912 39,435
Decrease (increase) in due from subsidiary (206,485) (48,501)
Decrease (increase) in other receivables (7,621) 27,699
Increase (decrease) in accrued expenses (333) 1,175
---------- ----------
Net Cash Provided by Operating Activities 1,330,420 1,016,747
---------- ----------
48
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available 970,807 480,372
for sale
Purchase of securities available for sale (735,120) (917,899)
Purchase of fixed assets (1,566) (189,802)
----------- -----------
Net Cash Provided by (Used in) Investing
Activities 234,121 (627,329)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of common stock (1,009,112) (999,900)
Dividends paid in cash (474,207) (497,104)
----------- -----------
Net Cash Used in Financing Activities (1,483,319) (1,497,004)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents 81,222 (1,107,586)
Cash and Cash Equivalents, Beginning of Year 334,522 1,442,108
----------- -----------
Cash and Cash Equivalents, End of Year $ 415,744 $ 334,522
=========== ===========
49
<PAGE>
PART III
Items 1. Index to Exhibits
The following exhibits are filed as part of this Form 10-SB, and this
list includes the exhibit index:
No. Description
3.1 Articles of Incorporation of Pioneer Bankshares, Inc.*
3.2 Bylaws of Pioneer Bankshares, Inc.*
4.2 Specimen Common Stock Certificate of Pioneer Bankshares, Inc.*
______________________
*Previously filed.
50
<PAGE>
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant causes this Amendment No. 2 registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Pioneer Bankshares, Inc.
By: /s/ Thomas R. Rosazza
----------------------
Thomas R. Rosazza
President
Date: August 16, 2000
51
