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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C., 20549
FORM 10-K
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[ X ] Annual Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 31, 1997
OR
[ ] Transition Report Pursuant to Section 13 or 15 (d) or the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number: 0-11671
POCAHONTAS BANKSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
West Virginia 55-0628089
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Federal Street, Bluefield, WV 24701
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 325-8181
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Pocahontas Bankshares Corporation: $1.25 Par Value - Common Stock
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 17, 1998 was $38,927,679 and the number of shares
outstanding of the registrant's common stock was 2,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual shareholders report for the fiscal year ended
December 31, 1997 are incorporated by reference into Part II.
Portions of the proxy statement for the annual shareholders meeting to be
held April 21, 1998, are incorporated by reference into Part III.
Total number of pages, including cover page and exhibits - 61
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POCAHONTAS BANKSHARES CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS............................................. 3
ITEM 2. PROPERTIES........................................... 5
ITEM 3. LEGAL PROCEEDINGS.................................... 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 6
ITEM 6. SELECTED FINANCIAL DATA............................ 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 7
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........ 7
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................... 7
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.. 7
ITEM 11. EXECUTIVE COMPENSATION.............................. 8
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 8
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...... 8
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.................................... 8
SIGNATURES.................................................... 10
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PART I
ITEM 1. BUSINESS
POCAHONTAS BANKSHARES CORPORATION
Pocahontas Bankshares Corporation ("Corporation" or "Registrant") was
organized under the laws of West Virginia in 1983 at the direction of the Board
of Directors of The First National Bank of Bluefield ("Bluefield"). On March 1,
1984, the effective date of the corporate reorganization, the shareholders of
Bluefield became the shareholders of the Corporation, and Bluefield became a
wholly-owned subsidiary of the Corporation. On March 11, 1988, the Registrant
acquired control of the Bank of Oceana, Oceana, WV ("Oceana"). On May 24, 1991,
the Registrant formed First Century Bank, Roanoke, Virginia. During 1993, the
main office of First Century Bank was redesignated to Wytheville, Virginia.
Effective November 28, 1994, the merger of Bank of Oceana into The First
National Bank of Bluefield was completed and the name of the resulting entity
was changed to First Century Bank, National Association, with its main office in
Bluefield, West Virginia. Substantially, all of the operations of the
Corporation are carried on through its Bluefield subsidiary which serves as the
Registrant's lead bank. The officers and directors of the Corporation, who are
also officers and directors of the subsidiaries, receive their entire
compensation from the subsidiaries. The Corporation's executive offices are
located at 500 Federal Street, Bluefield, West Virginia.
The Registrant's principal business and major source of revenue is, and is
expected to remain, commercial banking. The Registrant currently derives
substantially all its revenues from dividends paid by the subsidiary banks.
Dividend payments by these subsidiaries are influenced by the earnings, asset
growth and current capital position of the individual subsidiary. In addition,
various regulatory agencies control the payment of dividends. For additional
information regarding the payment of dividends, see Note 11 of the Notes to the
Consolidated Financial Statements in the Registrant's 1997 Annual Report to the
Stockholders attached as Exhibit 13 to this report.
FIRST CENTURY BANK, N.A.
First Century Bank, N.A., a national banking association, was organized and
chartered in 1891 as The First National Bank of Bluefield, under the laws of the
State of West Virginia and the National Bank Act. Bluefield offers customary
banking services, including commercial, real estate, installment, and other
loans; interest-bearing and non-interest bearing transaction accounts, savings
and time deposit accounts including certificates and other deposit accounts,
featuring various maturities and market rates; Individual Retirement Accounts;
Visa and MasterCard services under an arrangement with a correspondent bank;
safe deposit facilities; personal and corporate trust services; and various cash
management services. In addition to the main office, Bluefield currently
operates five additional branches in Mercer and Wyoming counties in southern
West Virginia.
During the fourth quarter of 1997, Bluefield entered into an agreement with
First American Federal Savings Bank, Roanoke, Virginia ("FAFSB") to acquire the
assets and assume the liabilities of FAFSB's Bluefield, Virginia Branch. This
banking office has approximately $15 million in deposits, Bluefield, Virginia,
and, is a natural extension for the West Virginia subsidiary. It is anticipated
that this transaction will be completed during the second quarter of 1998.
As of December 31, 1997, Bluefield had 120 full-time employees and 12 part-
time employees. Bluefield is not a party to any collective bargaining
agreements, and, in the opinion of management, enjoys satisfactory relations
with its employees.
FIRST CENTURY BANK
First Century Bank, Wytheville, Virginia ("Wytheville"), is a state chartered
bank organized under the laws of the Commonwealth of Virginia. Wytheville
offers customary banking services, including commercial, real estate,
installment, and other loans; interest-bearing and non-interest bearing
transaction accounts, savings and time deposit accounts including certificates
and other deposit accounts, featuring various maturities and market rates;
Individual Retirement Accounts; Visa and MasterCard services under an
arrangement with a correspondent bank; safe deposit facilities; personal and
corporate trust services; and various cash management services. In addition to
the main office, Wytheville currently operates one additional branch.
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As of December 31, 1997, Wytheville had 14 full-time employees and 1 part-
time employee. Wytheville is not a party to any collective bargaining
agreements, and, in the opinion of management, enjoys satisfactory relations
with its employees.
COMPETITION
Vigorous and intense competition exists in all areas where the Registrant and
its subsidiaries are engaged in business, generally from other banks located in
southern West Virginia and southwestern Virginia. However, this competition is
not only limited to other commercial banks. The subsidiary banks also compete
for certain lines of business with savings and loan associations, mortgage
companies, credit unions, consumer finance companies, leasing companies,
insurance companies, mutual funds and brokerage firms. Significant competition
also exists from state-wide and nation-wide bank holding companies located in
West Virginia and Virginia, which have offices in the communities the Registrant
serves. These institutions are larger in terms of capital, resources and
personnel. This requires that the Registrant place a high emphasis on quality
service, with a significant amount of personal attention, in order to
effectively compete with these larger institutions. Management feels that this
competition is likely to intensify in the future, as the nation-wide bank
holding companies, such as NationsBank and Banc One, continue to enter the
markets in which the Registrant currently operates.
FUTURE ACQUISITIONS AND EXPANSION
The Registrant may from time to time consider expansion of its banking
operations through acquisition of or formation of other banks and/or bank
related businesses.
SUPERVISION AND REGULATION
The Corporation is under the jurisdiction of the United States Securities and
Exchange Commission and the State of West Virginia's Secretary of State with
respect to matters relating to the offer and sale of its securities and matters
relating to reporting to such commissions and to its shareholders.
The Corporation is a registered holding company under the Bank Holding
Company Act of 1956, as amended, and is regulated by the Federal Reserve. As a
bank holding company, the Corporation is required to file with the Federal
Reserve an Annual Report and such additional information as the Federal Reserve
may require pursuant to the Bank Holding Company Act. The Federal Reserve may
also conduct examinations of the Corporation and each subsidiary. The Bank
Holding Company Act requires every bank holding company to obtain prior
approval from the Federal Reserve before acquiring direct or indirect ownership
or control of more than five percent of the voting shares of any bank which is
not already majority owned or controlled by that bank holding company. The
Federal Reserve is prohibited, however, from approving the acquisition by the
Corporation of the voting shares of, or substantially all of the assets of, any
bank located outside West Virginia, unless such acquisition is specifically
authorized by the laws of the state in which the bank is located. Under West
Virginia law, the Corporation is authorized to acquire ownership or control of
additional banks in the state of West Virginia, provided, this does not result
in control of more than twenty percent (20%) of the total deposits of all
depository institutions in the state of West Virginia. Acquisition of such
additional banks would require approval from the Federal Reserve and the
Commissioner of Banking of the State of West Virginia.
The Bank Holding Company Act further provides that the Federal Reserve will
not approve any acquisition, merger or consolidation (a) which would result in a
monopoly, (b) which would be in furtherance of any combination or conspiracy to
monopolize or attempt to monopolize the business of banking at any part of the
United States, (c) the effect of which may be to substantially lessen
competition or to tend to create a monopoly in any section of the country or (d)
which in any other manner would be in restraint of trade, unless the anti-
competitive effects of the proposed transaction are clearly outweighed by the
public interest in the probable effect of the transaction meeting the
convenience and needs of the community to be served.
In addition to having the right to acquire ownership and control of other
banks, the Corporation is authorized to acquire ownership and control of non-
banking companies, provided the activities of such companies are so closely
related to banking or managing or controlling banks that the Federal Reserve
considers such activities to be proper to the operation and control of banks.
Regulation Y, promulgated by the Federal Reserve, sets forth those activities
which are regarded as closely related to banking or managing or controlling
banks and thus are
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permissible activities for bank holding companies, subject to the approval by
the Federal Reserve in individual cases.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Bank Holding Company Act on any extension of credit
to the bank holding company or any of its subsidiaries, on investment in the
stock or other securities thereof, and on the taking of such stock or securities
for loans to any borrower. Further, under Section 106 of the 1970 amendments to
the Bank Holding Company Act and the regulations of the Federal Reserve, a bank
holding company through its banking subsidiaries is prohibited from engaging in
certain tie-in arrangements in connection with any extension of credit or
provision of any property or services. The Federal Reserve possesses cease and
desist powers over bank holding companies and their non-bank subsidiaries if
their actions are unsafe or unsound practices or violations of law.
Bluefield operates as a national banking association subject to examination
by the Office of the Comptroller of the Currency (the "Comptroller"). The
Comptroller regulates all areas of a national bank's operations, both commercial
and trust, including loans, deposits, mergers, branches and payments of
dividends.
Bluefield, by means of its national charter, is also a member of the Federal
Reserve System, and as such, is affected by the monetary policies of the Federal
Reserve System which regulates the national money supply in order to mitigate
recessionary and inflationary pressures. The instruments of monetary policy
employed by the Federal Reserve include open market operations in U. S.
Government securities, changes in the reserve requirement for member banks, and
changes in the discount rate for member bank borrowings.
In view of the changing conditions in the national economy and the money
markets, as well as, the effect of actions by monetary and fiscal authorities,
including the Federal Reserve, no prediction can be made as to possible future
changes in interest rates, deposit levels, loan demand of the business and
earnings of the Corporation or its subsidiaries.
Wytheville operates as an insured state non-member bank subject to
examination by the Bureau of Financial Institutions of the State Corporation
Commission of the Commonwealth of Virginia. The Bureau of Financial
Institutions regulates all areas of a state bank's operation, both commercial
and trust, including loans, deposits, mergers, branches and payment of
dividends.
Both of the subsidiary banks are also insured and regulated by the Federal
Deposit Insurance Corporation (the "FDIC"). The major function of the FDIC with
respect to insured member banks is to pay depositors to the extent provided by
law in the event an insured bank is closed without adequately providing for
payment of the claims of the depositors.
STATISTICAL DISCLOSURE
The statistical and other financial data disclosures required pursuant to
Guide 3 of the Preparation and Filing of Reports and Registration Statements
under the Securities Exchange Act of 1934 are contained within Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing on pages 3 through 17 of the accompanying 1997 Annual Report to
Stockholders, incorporated herein by reference in this Form 10-K annual report
as Exhibit 13.
ITEM 2. PROPERTIES
The offices of the Registrant are located at 500 Federal Street, Bluefield,
West Virginia. Principal properties owned or leased by the subsidiary banks
consist of modern single purpose facilities that house all the amenities to
comfortably conduct the full range of financial services provided by the
Registrant and its subsidiaries.
Bluefield holds title to seven pieces of real estate, including the property
and building at 500 Federal Street and the property and building at 516 Federal
Street. These two buildings, which are adjacent to each other, comprise a total
of approximately 45,000 square feet of space. The third property is located at
525 Federal Street, which comprises approximately 10,000 square feet of interior
space and approximately 20,000 square feet of real estate. The fourth property
is located on Bland Street near the 525 Federal Street property, and consists of
approximately 42 parking spaces
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which is used for employee parking. These four properties accommodate the main
offices of both Bluefield and the Registrant.
Bluefield also holds title to three pieces of real estate in Wyoming County,
West Virginia. (1) The property and building that houses the office in Oceana,
located on State Route 10, Cook Parkway, Oceana, West Virginia. This property
consists of approximately 22,000 square feet, of which approximately 6,500
square feet is interior space. (2) The property and building that houses the
Pineville office located on State Route 10, Pineville, West Virginia. This
property consists of approximately 18,000 square feet, of which approximately
3,000 square feet is interior space. (3) Lots Number 22 and 23 Hedrick Addition
which is currently used as an employee parking lot for the Oceana main office.
This property consists of approximately 14,000 square feet, of which 5,500
square feet is paved.
In addition, Bluefield leases approximately 21,750 square feet of space at
2020 College Avenue, Bluefield, WV, under a renewable lease which currently
requires a rental rate of $600 per month. Bluefield also leases approximately
27,225 square feet of space at 1215-A Stafford Drive, Princeton, WV. The
current renewable lease provides for rent to be paid at the rate of $14,000 per
year with adjustments allowed at the end of each five year period of the term.
Wytheville holds title to two pieces of real estate. The property and
building located at 200 Peppers Ferry Road in Wytheville, Virginia houses the
main office and is comprised of approximately two acres of real estate and
approximately 6,200 square feet of interior space. Wytheville also owns the
property and building located on State Route 52 in Max Meadows, Virginia, which
is comprised of approximately one acre of real estate and approximately 2,000
square feet of interior space and houses the Fort Chiswell branch.
ITEM 3. LEGAL PROCEEDINGS
Neither the Registrant nor any of its subsidiaries are presently involved in
any material legal proceedings other than ordinary routine litigation incidental
to its business.
As a result of efforts to collect a delinquent loan, Bluefield filed suit in
the Circuit Court of Mercer County, Civil Action 85-C-847-B, against Andrew L.
Clark and William J. Sheppard involving their alleged failure to pay equity into
a townhouse project which was the subject of a loan agreement with Mercer
County, West Virginia, covering the issuance of an industrial revenue bond in
the principal sum of $1,000,000. Still pending are certain counts of a
counterclaim filed by Clark and Sheppard in relation to the underlying case
which was decided in Bluefield's favor. Management and legal counsel feel
strongly that the remaining counts of the counterclaim filed by Clark and
Sheppard are without merit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders for a vote during the
fourth quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
No established public market presently exists for the common stock of the
Registrant. Management does not expect that a more active trading market will
develop in the near future for the common stock of the Registrant.
Pages 15 and 16 of the 1997 Annual Report to Stockholders (incorporated
herein by reference) describe further the information for market, stockholders,
and dividends. The payment of dividends is subject to the restrictions
described in Note 11 of the Notes to Consolidated Financial Statements. The
Board of Directors evaluates the dividend payment on the Registrant's common
stock after the conclusion of each calendar quarter.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data required by this item is set forth in
Management's Discussion and Analysis of Financial Condition and Results of
Operations on page 17 of the Registrant's 1997 Annual Report to Stockholders
(Exhibit 13), incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations appearing on pages 3 through 17 of the accompanying 1997 Annual
Report to Stockholders is incorporated by reference in this Form 10-K annual
report as Exhibit 13. Management's discussion and analysis should be read in
conjunction with the related financial statements and notes thereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements, management report of financial
responsibility, and report of independent accountants for the years ended
December 31, 1997, 1996, and 1995, which are included in the Corporation's 1997
Annual Report to Stockholders (Exhibit 13), are incorporated herein by
reference:
The report of independent accountants on page 38 of the Registrant's 1997
Annual Report to Stockholders reflects an unqualified opinion on the 1997 and
1996 consolidated statements of financial condition and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997, issued by Coopers
& Lybrand, Charlotte, North Carolina, the Registrant's independent accountant
for those years.
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Reference to
1997 Annual Report
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Consolidated Statements of Condition Page 18
Consolidated Statements of Income Page 19
Consolidated Statements of Cash Flows Page 20
Consolidated Statements of Changes
in Stockholders' Equity Page 21
Notes to Consolidated Financial
Statements Pages 22 through 37
Report of Independent Accountants Page 38
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The supplementary financial information required by this item is set forth in
Note 13 of "Notes to Consolidated Financial Statements" on Page 36 of the
Corporation's 1997 Annual Report to Stockholders (Exhibit 13), incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the independent accountants on
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors and executive officers of the
Registrant has been omitted in accordance with General Instruction G since
Registrant has filed its definitive proxy statement with the Commission on or
about
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March 30, 1998 (which is not later than 120 days after December 31, 1997,
the close of the fiscal year of Registrant): and such information is
incorporated herein by reference to such proxy statement.
ITEM 11. EXECUTIVE COMPENSATION
Management remuneration has been omitted in accordance with General
Instruction G since Registrant has filed its definitive proxy statement with the
Commission on or about March 30, 1998, (which is not later than 120 days after
December 31, 1997, the close of the fiscal year of Registrant): and such
information is incorporated herein by reference to such proxy statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security ownership of certain beneficial owners and management has been
omitted in accordance with General Instruction G since Registrant has filed its
definitive proxy statement with the Commission on or about March 30, 1998,
(which is not later than 120 days after December 31, 1997, the close of the
fiscal year of Registrant): and such information is incorporated herein by
reference to such proxy statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain relationships and related transactions has been omitted in accordance
with General Instruction G since Registrant has filed its definitive proxy
statement with the commission on or about March 30, 1998, (which is not later
than 120 days after December 31, 1997, the close of the fiscal year of
Registrant): and is incorporated herein by reference to such proxy statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements.
See Item 8 on Page 7 of this document for a listing of all Financial
Statements, Accountants' Report, and Supplementary Data.
2. Financial Statement Schedules.
All schedules are omitted, as the required information is
inapplicable or the information is presented in the Consolidated
Financial Statements or related notes.
(b) Reports on Form 8-K.
No Reports on Form 8-K were filed during the fourth quarter of 1997.
(c) Exhibits
3. Articles of incorporation and bylaws.
Articles of amendment to articles of incorporation and restated
articles of incorporation were filed with and are incorporated herein
by reference to the June 30, 1996 Form 10-Q. (Bylaws were previously
filed in a Registration Statement on Form S-14, Registration No. 2-
85126, and are incorporated herein by reference.)
10. Material Contracts
a. Sample agreement pertaining to a split-dollar life insurance
arrangement between Bluefield and Messrs. Wilkinson, Satterfield,
Kennett and Albert.
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11. Statement regarding computation of per share earnings.
(These statements are included in the notes to the consolidated
financial statements which are incorporated herein by reference.)
13. Annual report to security holders.
22. Subsidiaries of the registrant.
(This disclosure is included in the notes to the consolidated financial
statements which are incorporated herein by reference.)
27. Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
(Registrant) Pocahontas Bankshares Corporation
BY: /s/ J. Ronald Hypes
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J. Ronald Hypes, Treasurer
(Principal Accounting & Financial Officer)
DATE: March 18, 1998
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Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
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BY: /s/ B. L. Jackson Date: March 17, 1998
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B. L. Jackson, Jr., Chairman of the Board and Director
BY: /s/ R. W. Wilkinson Date: March 17, 1998
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R. W. Wilkinson, President & Chief Executive Officer & Director
(Principal Executive Officer)
BY: /s/ Charles A. Peters Date: March 17, 1998
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Charles A. Peters, Secretary and Director
BY: /s/ Eustace Frederick Date: March 17, 1998
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Eustace Frederick, Director
BY: /s/ Robert M. Jones, Jr Date: March 17, 1998
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Robert M. Jones, Jr., M.D., Director
BY: Date:
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Harold L. Miller, Jr., Director
BY: Date:
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C. E. Richner, Director
BY: /s/ Byron K. Satterfield Date: March 17, 1998
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Byron K. Satterfield, Director
BY: /s/ John C. Shott Date: March 17, 1998
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John C. Shott, Director
BY: /s/ Scott H. Shott Date: March 17, 1998
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Scott H. Shott, Director
</TABLE>
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BY: /s/ Walter L. Sowers Date: March 17, 1998
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Walter L. Sowers, Director
BY: Date:
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J. Brookins Taylor, M. D., Director
BY: /s/ James P. Thomas Date: March 17, 1998
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James P. Thomas, M. D., Director
BY: /s/ Frank W. Wilkinson Date: March 17, 1998
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Frank W. Wilkinson, Director
</TABLE>
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Exhibit 10
THE FIRST NATIONAL BANK OF BLUEFIELD
EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT
This EXECUTIVE SPLIT DOLLAR LIFE INSURANCE AGREEMENT is made as of the 1st
day of April, 1988, by and between The First National Bank of Bluefield, a West
Virginia corporation (the "Company") and , an
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executive employed by the Company (the "Executive").
1. Definitions. Where indicated by initial capital letters, the following
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terms shall have the following meaning:
(a) Agreement: The Executive Split Dollar Life Insurance Agreement
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(including Schedules and attachments) entered into between the Company and
Executive pursuant to the Plan.
(b) Amount: The level of insurance specified by Executive in Schedule A
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which shall not be more than 5 times Executive's Compensation.
(c) Beneficiary: The person or persons designated in writing by
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Executive to receive the Amount.
(d) Cause: Cause means, but is not limited to, a determination by the
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Company that Executive may have been guilty of criminal conduct (regardless of
whether proven or admitted), gross negligence or willful misconduct in the
performance of his duties or otherwise, or has engaged in conduct which, if
generally known, would bring discredit to or give rise to adverse publicity to
the Company.
(e) Compensation: Compensation means the Executive's annual
------------
rate of total cash compensation as in effect on January 1 of any year of an
election to increase the Amount.
(f) Insurer: Crown Life Insurance Company, or any other insurance
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company issuing a life insurance contract on Executive's life.
(g) Plan: The First National Bank of Bluefield Executive Split Dollar
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Life Insurance Plan.
(h) Policy: One or more life insurance contracts issued on the life of
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Executive pursuant to the Plan as identified on Schedule A.
(i) Recoverable Amount: The Company's annual premium, exclusive of any
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rating, less any amount received from the Executive, compounded at 6% interest
(compounded annually).
(j) Company Cumulative Outlay: The Company's cumulative total premiums
-------------------------
paid to the Insurer, exclusive of ratings, less all amounts received from the
Executive for the Policy.
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(k) Roll-out: Division of the policy into two separate policies, one to
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be retained by the Company, and the other to be transferred to the Executive.
(l) Retirement: Termination of employment (except for Cause) after
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attainment of age 55 with at least ten years of service.
2. Application of Insurance. The Company will apply to the Insurer for a
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Policy with a face amount at least equal to the amount of insurance to which the
Executive is entitled under the Plan. The Company may apply for additional
insurance to insure payment to the Company of the Recoverable Amount. The
Company and the Executive agree to take any action necessary to cause the
Insurer to issue the Policy. The Policy shall be subject to the terms of this
Agreement.
3. Amount or Insurance. Executive shall have the right to specify initially
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the Amount, which shall not be more than 5 times Executive's Compensation.
Executive may thereafter increase the Amount as of April 1 of any subsequent
year. If Executive is not then insurable at standard rates, the additional
rating shall be paid by the Company. Any increase in the Amount shall be not
less than $50,000.
4. Ownership. The Company shall be the owner of the Policy, and it may
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exercise all ownership rights granted to the owner by the terms of the Policy
except as otherwise provided in this Agreement. The Company shall keep
possession of the Policy.
5. Dividend Option. All dividends declared by the Insurer on the Policy
---------------
shall be applied to purchase additional paid-up life insurance on the life of
the Executive. The dividend option will not be changed without Executive's
written consent.
6. Payment of Premiums.
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(a) The Company agrees to pay the total amount of each annual Policy
premium on or before the due date of such premium, or within the grace period
provided, if any.
(b) Thirty (30) days prior to the due date of each annual Policy premium,
the Company shall notify the Executive of the exact amount due from the
Executive to the Company as a premium payment. The amount due shall be equal to
the lesser of (a) the annual cost of the term life insurance protection on the
life of the Executive as measured by the PS-58 rate (or substitute table)
published from time to time by the Internal Revenue Service, and (b) the term
rates published from time to time by the Insurer, as determined by the Insurer.
The annual amount payable by Executive may be deducted ratably from Executive's
Compensation.
7. Death Benefits.
---------------
(a) Upon the Executive's death, the Company will promptly take the
appropriate action to obtain the death benefits provided under the Policy, and
2
<PAGE>
(i) The Company shall be entitled to receive the excess of the total
Policy proceeds over the Amount specified by Executive pursuant to Section 3.
The receipt by the Company of the excess over the amount shall constitute
satisfaction of the Executive's obligation to the Company under this Agreement;
and
(ii) the beneficiary or beneficiaries named under the Policy shall be
entitled to receive the Amount which shall be paid in accordance with the
settlement option elected by the Company at the Executive's request.
(b) If at the time the Amount becomes payable because of Executive's death
there is no effective beneficiary designation, the Amount shall be paid to the
Executive's estate.
(c) If any beneficiary who is entitled to receive a payment from the
Company pursuant to this Agreement is a minor, the Company, in its discretion,
may dispose of such amount in any one or more of the following ways:
(i) By payment of the Amount directly to the minor;
(ii) By application of the Amount for the benefit of the minor;
(iii) By payment of the Amount to a parent of the minor or to any
adult person with whom the minor is living at the time or to any person who is
legally qualified and is acting as guardian of the minor or of the property of
the minor, provided that the parent or adult person to whom any amount is to be
paid had advised the Company in writing that he or she will hold or use the
Amount for the benefit of the minor.
(iv) By payment of the Amount to a custodian selected by the Company
under the appropriate Uniform Transfers to Minors Act.
(d) If a beneficiary who is entitled to receive a payment from the Company
under this Agreement is physically or mentally incapable of personally receiving
and giving a valid receipt for any payment due, the payment may be made to the
beneficiary's legal representative, the person's spouse, son, daughter, parent,
brother, sister or other person deemed by the Company to have incurred expense
for the person otherwise entitled to payment.
(e) The selection of a method of distribution under this Section shall be
in the discretion of the Company, and the Company may not be compelled to select
any method it does not deem to be in the best interest of the distributee.
8. Policy loans.
------------
(a) The Company has the right to obtain loans secured by the Policy from
the Insurer or from others. The Company also has the right to assign the Policy
as security for the repayment of such loans. The amount of such loans together
with interest thereon shall at no time exceed the Company Cumulative Outlays.
All interest charges with respect to any loans shall be paid by the Company.
(b) If the Policy is assigned or encumbered in any way, other than a
3
<PAGE>
Policy Loan, on the date of the Executive's death, the Company shall secure a
release or discharge of the assignment or encumbrance to ensure the prompt
payment of death proceeds under the Policy to the Executive's beneficiary or
beneficiaries.
9. Timing of Roll-Out. Roll-out shall occur no later than the first policy
------------------
anniversary on which:
(1) the Company may retain a policy with cash surrender value equal to the
Company Cumulative Outlays and with death benefits at least equal to the
Recoverable Amount, and
(2) the Executive may receive a policy with death benefits at least equal
to the Amount of coverage specified by the Executive, with no outlays required
to sustain this Amount based on the Dividend schedule in effect on the Roll-out
date, and with no loans.
The Executives may elect an earlier Roll-out date provided that the Company
receives a policy with cash surrender value equal to Company Cumulative Outlays
and with death benefits at least equal to the Recoverable Amount.
10. Amendment and Termination of Agreement.
--------------------------------------
(a) This Agreement may not be amended, altered, or modified except in
writing and signed by the Company and the Executive.
(b) This Agreement shall terminate upon the earliest to occur of any of the
following events:
(i) Roll-out
(ii) termination of the Executive's employment other than by reason of
the death, retirement, or disability (unless the Company determines that
Executive shall be treated as an active employee after a termination of
employment);
(iii) cessation of the Company's business or the bankruptcy,
receivership or dissolution of the Company, unless the Company's business is
continued by a successor corporation or business entity;
(iv) termination of the Agreement by Executive upon written notice to
the Company; or
(v) termination of the Plan by the Company.
(c) If the Executive's termination of employment with the Company is by
reason of disability (as determined by the Company) or by reason of Retirement,
this Agreement shall remain in full force and effect.
11. Disposition of Policy on Termination of Agreement.
-------------------------------------------------
(a) As of the Executive's Roll-out date, the Company shall provide the
Policy into two policies, retaining one policy with a cash surrender value equal
to the Company Cumulative Outlays and a death benefit at least equal to the
Recoverable Amount. The Company shall transfer the remaining policy to the
Executive.
4
<PAGE>
(b) If this Agreement is terminated because of the Executive's termination
of employment for cause (as determined by the Company), the Executive shall have
no rights to the Policy and shall not be permitted to effectuate a Roll-out at
any time.
(c) If this Agreement is terminated because of the Executive's termination
of employment for a reason other than cause, retirement, or a disability, or
pursuant to Section 10 (b) (iii) or (v) of this Agreement, the Executive,
at any time within thirty (30) days after his termination of employment (or
longer period as allowed by the Company) shall have the absolute right to
purchase all of the Company's right, title and interest in the Policy free and
clear of all liens, claims or encumbrances (including any Policy loans) for
cash, by tendering to the Company an amount equal to the Company's Recoverable
Amount. The Executive may direct the Company to borrow against the cash value
of the Policy or surrender any paid-up additions to the Policy and purchase the
Policy, subject to any such Policy loan, for an amount equal to the Company's
Recoverable Amount less such borrowed or cashed-in values.
12. Miscellaneous.
-------------
(a) This Agreement shall not affect any rights the Executive may otherwise
have under any pension, profit sharing or other employee benefit plan
established by the Company.
(b) This Agreement shall be binding on the Company, its successors and
assigns, and it shall be interpreted in accordance with the laws of West
Virginia.
(c) Except as permitted by law or by the Company's written consent, any
benefits to which the Executive or his beneficiaries may become entitled under
this Agreement shall not be subject to anticipation, alienation, sale, transfer,
assignment, or pledge. The Company shall not be liable for, or subject to, the
debts, contracts, liabilities, or torts of any person entitled benefit under
this Agreement.
(d) This Agreement shall not confer upon the Executive any legal or
equitable right against the Company except as expressly provided in this
Agreement, the Plan and the Policy.
(e) Neither this Agreement, the Plan nor the Policy shall constitute an
inducement or consideration for the employment of the Executive and shall not
give the Executive any right to be retained in the employ of the Company, and
the Company hereby retains the right to discharge the Executive at any time,
with or without cause.
(f) The Executive's interest under this Agreement, the Plan and the Policy,
may be assigned by the Executive upon written notice to the Company.
(g) If a provision of this Agreement is not valid or enforceable, that fact
in no way affects the validity of enforceability of any other provision.
5
<PAGE>
In consideration of the foregoing, the Company and the Executive have
executed this Agreement in duplicate, all as of the day and year first written
above.
THE FIRST NATIONAL BANK OF BLUEFIELD
By:
----------------------------------------
----------------------------------------
----------------------------------------
6
<PAGE>
EXHIBIT 13
Annaul Report
1997
LOGO
Pocahontas
Bankshares
Corporation
<PAGE>
Common Shares
Common Shares are not traded on any stock exchange nor over-the-counter.
Stockholder Inquiries
Communications regarding transfer requirements and lost certificates should be
directed to the transfer agent.
Transfer Agent/Registrar
First Century Bank, N.A., Stock Transfer Department, Trust Division,
P.O. Box 1559, Bluefield, WV 24701.
Form 10-K Information
Copies of the Pocahontas Bankshares Corporation's Annual Report to the
Securities and Exchange Commission, Form 10-K, may be obtained by writing
J. Ronald Hypes, Treasurer, Pocahontas Bankshares Corporation, P.O. Box 1559,
Bluefield, WV 24701.
Annual Meeting
The annual meeting of the stockholders will be held at 11:00 AM, Tuesday,
April 21, 1998, at Fincastle Country Club, Bluefield, Virginia. All
stockholders are cordially invited to attend.
Table of Contents
Financial Highlights...........................................................1
Letter to the Stockholders.....................................................2
Managements' Discussion and Analysis of Financial Condition
and Results of Operation.....................................................3
Consolidated Statements of Financial Condition................................18
Consolidated Statements of Income.............................................19
Consolidated Statements of Cash Flows.........................................20
Consolidated Statement of Changes in Stockholders' Equity.....................21
Notes to Consolidated Financial Statements....................................22
Report of Independent Accountants.............................................38
Boards of Directors...........................................................39
Corporate and Bank Officers...................................................40
Pocahontas Bankshares Corporation Subsidiaries.................Inside back cover
<PAGE>
Financial
Highlights
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------
(Dollars in Thousands, Except Per Share Data)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Total operating income $ 24,118 $ 23,076 $ 22,208
Total operating expense 18,770 18,145 17,613
Net income 3,002 2,830 2,414
Cash dividends declared 1,300 1,210 1,100
- -----------------------------------------------------------------------------
AT YEAR END
Assets $276,747 $278,572 $265,980
Deposits 232,337 236,722 232,172
Loans 197,094 179,956 177,794
Securities 53,511 65,500 58,859
Stockholders' equity 26,589 24,629 23,186
- -----------------------------------------------------------------------------
PER COMMON SHARE
Net income $ 1.50 $ 1.42 $ 1.21
Cash dividends declared 0.650 0.605 0.550
Book value 13.29 12.31 11.60
</TABLE>
[GRAPH OF LOANS] [GRAPH OF ASSETS]
($ in millions) ($ in millions)
- ----------------------------- -------------------------------
1995 1996 1997 1995 1996 1997
- ----------------------------- -------------------------------
177.8 179.9 197.1 266.0 278.6 276.7
[GRAPH OF DEPOSITS] [GRAPH OF BOOK VALUE PER SHARE]
($ in millions) ($ per common share)
- ----------------------------- -------------------------------
1995 1996 1997 1995 1996 1997
- ----------------------------- -------------------------------
232.2 236.7 232.3 11.60 12.31 13.29
Pocahontas Bankshares Corporation Page 1
<PAGE>
Letter to the
Stockholders
To Our Stockholders, Customers, and Friends:
The directors, officers and employees of Pocahontas Bankshares Corporation and
its wholly-owned subsidiaries, First Century Bank, N.A. and First Century Bank,
are pleased to present this Annual Report for 1997.
Pocahontas Bankshares Corporation had the most profitable year in its history
with net income of $3,002,000. This represented an increase for 1997 of 6% over
the previous year. On a per share basis, net income rose to $1.50 compared to
$1.42 the previous year. Total assets were $276,747,000. The return on average
assets for 1997 was 1.09%, and the return on average equity was 11.66%.
Although slightly lower than our peers, these performance ratios continue to
improve through our efforts to expand our customer base and maintain high asset
quality standards.
Pocahontas Bankshares has continued to operate First Century Bank, N.A. a
national association in West Virginia and First Century Bank, a state-chartered
bank in Virginia. Management is exceptionally pleased with the performance of
our Virginia bank which continues to grow and contribute to the Corporation's
earnings. Both banks continued to improve earnings and asset quality which was
reflected in the performance of the Corporation for 1997.
Pocahontas Bankshares has purchased the Bluefield, Virginia branch of First
American Federal Savings Bank of Roanoke, Virginia. This new branch will
operate as a branch of First Century Bank, N.A. This transaction will close
during the second quarter of 1998. We are excited about this new opportunity to
provide outstanding quality service for our Tazewell County customers and look
forward to expanding our commitment to Tazewell County in the coming years.
Pocahontas Bankshares is continuing to look for expansion opportunities in
both West Virginia and Virginia. We will consider possible associations with
other financial institutions; and, as we have done in the past, will open new
offices in locations where we feel we can give quality service to our present
and future customers.
During 1997, we retained a technology consulting firm to help us upgrade our
systems and technology skills to make us even more competitive in the 21st
Century. We evaluated our personnel and equipment and developed a five-year
strategic plan to upgrade our systems so that our customer services and products
would further enhance our competitiveness as a community bank. Additionally, as
a result of this evaluation, we retained a new data processing provider. We hope
this conversion was transparent to you, our stockholders, and customers. We now
believe that we will better accommodate you by providing faster and more
accurate service. We will also be better equipped to develop new products and
services as we move forward in the future.
These two major improvements in the quality of service will permit us to
provide better service to you. They will also permit us to compete
aggressively against large regional institutions that we feel will not provide
the personal service that the First Century Banks provide.
We ask for your continued support of Pocahontas Bankshares Corporation and its
banking subsidiaries as we make every effort to provide maximum banking service
to the people in our region. Your confidence and continued support are greatly
appreciated.
Sincerely,
/s/ R. W. Wilkinson
R. W. "Buz" Wilkinson
President & Chief Executive Officer
Page 2 Pocahontas Bankshares Corporation
<PAGE>
Management's
Discussion and
Analysis of
Financial
Condition and
Results of
Operations
AVERAGE STATEMENTS OF CONDITION AND NET INTEREST DIFFERENTIAL
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------------------------------------------------------------------
(Dollars in Thousands)
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
ASSETS: Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits with banks $ 1,563 $ 86 5.50% $ 2,009 $ 106 5.28% $ 1,525 $ 86 5.64%
Securities available for sale:
U. S. Government securities 18,326 1,109 6.05% 5,138 299 5.82% -- -- --
U. S. Government agency securities 11,587 766 6.61% 3,458 228 6.59% -- -- --
Other securities 4,506 302 6.70% 5,426 377 6.95% 5,241 386 7.37%
----------------------------------------------------------------------------------------
Total securities available for sale 34,419 2,177 6.32% 14,022 904 6.45% 5,241 386 7.37%
----------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Government securities 7,796 428 5.49% 24,549 1,279 5.21% 36,863 1,880 5.10%
U. S. Government agency securities 13,369 875 6.54% 18,513 1,185 6.40% 13,706 857 6.25%
State and Municipal securities 6,375 403 6.32% 5,563 382 6.87% 3,797 287 7.56%
Other securities 501 31 6.19% 1,037 64 6.17% 1,049 64 6.10%
----------------------------------------------------------------------------------------
Total securities held to maturity 28,041 1,737 6.19% 49,662 2,910 5.86% 55,415 3,088 5.57%
----------------------------------------------------------------------------------------
Federal funds sold 3,769 207 5.49% 5,918 312 5.27% 8,853 531 6.00%
Loans 185,986 17,610 9.47% 180,341 16,837 9.34% 175,280 16,566 9.45%
----------------------------------------------------------------------------------------
Total interest-earning assets 253,778 21,817 8.60% 251,952 21,069 8.36% 246,314 20,657 8.39%
----------------------------------------------------------------------------------------
Allowance for loan losses (2,273) (2,150) (2,059)
Cash and due from banks -- demand 9,650 8,994 7,670
Premises and equipment -- net 8,562 6,914 4,909
Other assets 6,454 6,159 5,622
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $276,171 $271,869 $ 262,456
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interest-bearing demand deposits $ 52,849 1,751 3.31% $ 49,685 1,670 3.36% $ 48,920 1,660 3.39%
Savings deposits 63,591 2,308 3.63% 64,703 2,360 3.65% 69,118 2,502 3.62%
Time deposits 89,837 4,700 5.23% 93,612 5,023 5.37% 85,862 4,441 5.17%
--------------------------------------------------------------------------------------------
Total interest-bearing deposits 206,277 8,759 4.25% 208,000 9,053 4.35% 203,900 8,603 4.22%
--------------------------------------------------------------------------------------------
Short-term debt 15,139 620 4.10% 11,265 428 3.80% 9,661 449 4.65%
--------------------------------------------------------------------------------------------
Long-term debt -- -- -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Total interest-bearing liabilities 221,416 9,379 4.24% 219,265 9,481 4.32% 213,561 9,052 4.24%
--------------------------------------------------------------------------------------------
Demand deposits 27,342 26,832 24,668
Other liabilities 1,669 1,695 1,858
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES 250,427 247,792 240,087
--------------------------------------------------------------------------------------------
Stockholders' equity 25,744 23,897 22,369
--------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $276,171 $271,689 $262,456
- -----------------------------------------------------------------------------------------------------------------------------------
Average rate paid to fund earning
assets 3.70% 3.76% 3.67%
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST DIFFERENTIAL $ 12,438 4.90% $11,588 4.60% $ 11,605 4.71%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
For purposes of this schedule, interest on nonaccrual loans have been included
only to the extent reflected in the income statement. However, the nonaccrual
loan balance is included in the average amount outstanding. Income on loans
includes loan fees of $372,000 in 1997, $250,000 in 1996 and $155,000 in 1995.
Average balances of securities available for sale are reported at amortized
cost; excludes pretax unrealized losses of $156,000 in 1997, $213,000 in 1996,
and $484,000 in 1995. Interest income on tax exempt securities is shown based on
the actual yield.
<TABLE>
<CAPTION>
VOLUME/RATE ANALYSIS
Increase (Decrease) in Interest
--------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
--------------------------------------------------------------------------------
(Dollars in Thousands) (Dollars in Thousands)
Due to Change in (1) Due to Change in (1) Due to Change in (1)
--------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total Volume Rate Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans $ 531 $ 242 $ 773 $ 475 $ (204) $ 271 $ (231) $ 2,051 $ 1,820
Securities available for sale 1,303 (30) 1,273 606 (88) 518 11 (15) $ (4)
Securities held to maturity (1,303) 130 (1,173) (329) 151 (178) (111) 205 94
Federal funds sold (116) 11 (105) (165) (54) (219) 241 85 326
Interest-bearing deposits with banks (24) 4 (20) 26 (6) 20 64 19 83
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 391 357 748 613 (201) 412 (26) 2,345 2,319
- -----------------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest-bearing demand deposits 99 (18) 81 32 (22) 10 (142) 202 60
Savings deposits (40) (12) (52) (160) 18 (142) (367) 253 (114)
Time deposits (200) (123) (323) 408 174 582 602 990 1,592
Short-term borrowings 153 39 192 68 (89) (21) 82 146 228
Long-term debt -- -- -- -- -- -- (138) -- (138)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 12 (114) (102) 348 81 429 37 1,591 1,628
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 379 $ 471 $ 850 $ 265 $ (282) $ (17) $ (63) $ 754 $ 691
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Changes due to a combination of volume and rate have been allocated equally
to volume and rate.
Pocahontas Bankshares Corporation Page 3
<PAGE>
Management's
Discussion and
Analysis of
Financial
Condition and
Results of
Operations
The purpose of this discussion is to focus and expand on certain information
about the Corporation's financial condition and results of operations which is
not otherwise apparent from the audited consolidated financial statements
included in this Annual Report. Reference should be made to those statements
and the selected financial data presented elsewhere in this report for a
thorough understanding of the following discussion and analysis. Management is
not aware of any market or institutional trends, events or uncertainties that
will have or are reasonably likely to have a material effect on the liquidity,
capital resources or operations of the Corporation, except as discussed herein.
Management is also not aware of any current recommendations by any regulatory
authorities, which would have such a material effect if implemented.
Corporate Structure and Acquisitions
Pocahontas Bankshares Corporation ("Corporation") was chartered under the laws
of West Virginia and operates as a multi-bank, interstate bank holding company,
headquartered in Bluefield, WV. The Corporation began active operations in
March 1984, in a business combination with its then sole subsidiary, The First
National Bank of Bluefield. Pocahontas has acquired and currently operates two
subsidiary banks, First Century Bank, N.A., Bluefield, WV ("Bluefield"), and
First Century Bank, Wytheville, VA ("Wytheville"). These subsidiaries are
engaged in commercial banking activities that provide financial services to
individuals and businesses throughout southern West Virginia and southwestern
Virginia.
During the fourth quarter of 1997, Bluefield entered into an agreement with
First American Federal Savings Bank, Roanoke, Virginia ("FAFSB") to acquire the
assets and assume the liabilities of FAFSB's Bluefield, Virginia branch.
Although it is not a large banking office, it has approximately $15 million in
deposits, and is a natural extension for the West Virginia subsidiary. It is
anticipated that this transaction will be completed during the second quarter of
1998.
Management continues to evaluate its current corporate structure for ways to
increase efficiency and reduce its overhead expenses. The commitment to
streamline the operations of the Corporation is expected to result in continued
improvement in its financial performance. Management also continues to seek and
evaluate opportunities to increase its market share throughout the region.
Balance Sheet Analysis
Loans
The Corporation's primary use of funds is loan demand, its most profitable
deployment of funds. Total loans increased $17.1 million or 9.5% in 1997
following a $2.2 million or 1.2% increase in 1996. A significant portion of the
loan growth in 1997 occurred during the fourth quarter when loans increased
approximately $7.5 million, or 4.0%. Expanding affiliate markets have
contributed to loan growth, however, some of the Corporation's larger credits
were paid off unexpectedly before year-end 1996. This also affected the growth
percentages during 1997. At December 31, 1997, the loan portfolio comprised
77.0% of total interest-earning assets as compared to 71.1% of total interest-
earning assets at December 31, 1996, and contributed 80.7% of total interest
income
Page 4 Pocahontas Bankshares Corporation
<PAGE>
AMOUNTS OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 46,012 $ 44,209 $ 45,592 $ 46,173 $ 51,240
Real estate construction 8,068 5,603 3,541 2,202 1,911
Real estate mortgage 116,728 105,564 102,178 97,020 101,781
Installment 26,286 24,580 26,483 25,930 22,399
- ------------------------------------------------------------------------------------------------------
TOTAL LOANS OUTSTANDING $197,094 $179,956 $177,794 $171,325 $177,331
- ------------------------------------------------------------------------------------------------------
</TABLE>
MATURITY SCHEDULE OF LOANS
<TABLE>
<CAPTION>
Remaining maturity at December 31, 1997
---------------------------------------
(Dollars in Thousands)
1 Year 1 to 5 After 5
or Less Years Years Total
---------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $21,717 $ 14,873 $ 9,422 $ 46,012
Real estate construction 5,743 1,654 671 8,068
Real estate mortgage 17,628 45,721 53,379 116,728
Installment 6,025 19,194 1,067 26,286
---------------------------------------
TOTAL $51,113 $ 81,442 $64,539 $197,094
---------------------------------------
Loans with fixed
interest rates $18,126 $ 60,497 $21,427 $100,050
Loans with floating
interest rates 32,987 20,945 43,112 97,044
- --------------------------------------------------------------------------------
TOTAL $51,113 $ 81,442 $64,539 $197,094
- --------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS AND LOAN LOSS ANALYSIS
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
--------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $ 185,986 $ 180,341 $ 175,280 $ 177,888 $ 167,891
Allowance for loan losses:
Balance at beginning of the year $ 2,240 $ 2,145 $ 1,985 $ 1,858 $ 1,540
Loans charged off
Commercial, financial and agricultural 337 135 225 270 106
Real estate construction -- -- -- -- --
Real estate mortgage 9 140 235 438 57
Installment loans to individuals 266 297 254 165 137
--------------------------------------------------------------
TOTAL LOANS CHARGED OFF 612 572 714 873 300
--------------------------------------------------------------
Loan recoveries
Commercial, financial and agricultural 3 3 8 577 148
Real estate construction -- -- -- -- --
Real estate mortgage 31 -- -- 14 --
Installment loans to individuals 17 20 27 14 11
--------------------------------------------------------------
TOTAL LOAN RECOVERIES 51 23 35 605 159
--------------------------------------------------------------
Net loans charged off (561) (549) (679) (268) (141)
Provision for loan losses 691 644 839 395 459
- -----------------------------------------------------------------------------------------------------------------
BALANCE AT END OF THE YEAR $ 2,370 $ 2,240 $ 2,145 $ 1,985 $ 1,858
- -----------------------------------------------------------------------------------------------------------------
Ratio of net loans charged off to
average loans outstanding 0.30% 0.30% 0.39% 0.15% 0.08%
Allowance at year end as a percent of loans 1.20% 1.24% 1.21% 1.15% 1.05%
Provision for loan losses as a percent of loans 0.35% 0.36% 0.47% 0.23% 0.26%
--------------------------------------------------------------
Nonperforming assets (at year end)
Nonaccrual $ 828 $ 1,398 $ 3,194 $ 1,564 $ 1,716
Past-due ninety days or more and still accruing 165 1427 781 536 411
Restructured loans 645 -- -- -- --
Other real estate owned 993 1976 1206 928 1205
--------------------------------------------------------------
TOTAL NONPERFORMING ASSETS $ 2,631 $ 4,801 $ 5,181 $ 3,028 $ 3,332
--------------------------------------------------------------
Nonperforming assets/total loans 1.3% 2.7% 2.9% 1.8% 1.9%
Nonperforming assets/total assets 1.0% 1.7% 1.9% 1.2% 1.3%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 5
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 392 23.35% $ 481 24.57% $ 443 25.64% $ 594 26.95% $ 551 28.90%
Real estate construction -- 4.09% -- 3.11% 20 1.99% 30 1.29% 25 1.08%
Real estate mortgage 456 59.22% 239 58.66% 502 57.47% 781 56.63% 749 57.40%
Installment 250 13.34% 191 13.66% 290 14.90% 245 15.13% 205 12.62%
Unallocated 1,272 N/A 1,329 N/A 890 N/A 335 N/A 328 N/A
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $2,370 100.00% $2,240 100.00% $2,145 100.00% $1,985 100.00% $1,858 100.00%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
in 1997, compared to 79.9% of total interest income in 1996. Loan demand
was relatively strong through most of 1997, primarily in the residential and
commercial mortgage categories of the loan portfolio.
During 1997, the growth in the loan portfolio was primarily accomplished by
solicitation of small and middle-market companies within the Corporation's
primary trade areas. Emphasis continued to be on strong local companies with
known local management and excellent financial stability. Consistent with
management's philosophy on relationship banking, most borrowers are also
depositors and utilize other banking services. Most of the commercial loans in
the portfolio were made at variable rates of interest. The average yield of the
loan portfolio increased to an average rate of 9.47% in 1997 compared to 9.34%
in 1996. This reflected relatively stable interest rates during 1997 and 1996.
Although the commercial loan portfolio is generally diversified and
geographically dispersed within the region, aggregate loans to three specific
lines of business represent greater than 20% of the Corporation's equity. These
lines of business are Coal Related, Hotel/Motel, and Health Care Professionals.
Although none of these industries represent more than 10% of the total loan
portfolio, management closely monitors these lines. Within each specific
industry, borrowers are well diversified as to specialty, service or other
unique feature of the overall industry. A substantial portion of the customers'
ability to honor their contractual commitment is largely dependent upon the
economic conditions of the respective industry and overall economic conditions
of southern West Virginia and southwestern Virginia.
The consumer portion of the loan portfolio, which increased approximately 7% in
1997, consisted of both secured and unsecured loans made to individuals and
families for various reasons including the purchase of automobiles, home
improvements, educational expenses and other worthwhile purposes. The
Corporation continues to carefully monitor the consumer sector as consumer
bankruptcies continue to increase. If any major weakening in the economy occurs,
the likelihood for increased volatility arises as consumers are servicing higher
credit card and other installment borrowings.
Commitments to extend credit are agreements to lend to a customer provided there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total amount of commitments does not
necessarily represent future cash requirements. At December 31, 1997 and 1996,
the subsidiary banks had outstanding commitments to extend credit of
approximately $24,909,000 and $24,474,000, respectively.
Page 6 Pocahontas Bankshares Corporation
<PAGE>
Nonperforming assets, including nonaccrual loans, loans past-due 90 days or
more, restructured loans and other real estate owned, decreased $2,170,000, or
approximately 45%, from December 31, 1996 to December 31, 1997. This decrease
occurred primarily in loans past-due 90 days or more and other real estate
owned. During 1997, two pieces of other real estate totaling approximately
$600,000 were sold. The corporation recognized losses of approximately $175,000
on this real estate. Nonaccrual and restructured loans remained relatively the
same from 1996 to 1997. The Corporation's policy is to discontinue the accrual
of interest on loans that are past due more than 90 days, unless such loans are
well collateralized and in process of collection. Loans that are on a current
payment status or past due less than 90 days may also be classified as
nonaccrual if repayment of principal or interest is in doubt.
Management continues to enhance the methodology and procedures for determining
the adequacy of the allowance for loan losses. These enhancements have been
approved by each of the respective subsidiaries' boards of directors. The
procedures that are utilized entail analyzing a loan "watch" list and assigning
classifications to each loan, as set forth by the appropriate regulatory agency.
Other real estate owned is also analyzed and assigned a classification.
Subsequently, classified loans are categorized and appropriate reserves are
assigned as follows: Substandard -- 1% -- 20%, Doubtful -- 50%, and Loss --
100%. Other loans, more than 90 days past due and restructured loans, that have
not been considered in the aforementioned procedures are assigned a
classification of Substandard and are reserved for accordingly. The remaining
portfolio is segregated into consumer, commercial, and residential real estate
loans, and the historical net charge off percentage of each category is applied
to the current amount outstanding in that category. Also, a review of
concentrations of credit, classes of loans and pledged collateral is performed
to determine the existence of any deterioration. In addition, volume and
trends in delinquencies and nonaccruals, off-balance sheet credit risks, the
loan portfolio composition, loan volume and maturity of the portfolio, national
and local economic conditions and the experience, ability and depth of lending
management and staff are given consideration.
The Corporation maintains, through its provision, an allowance for loan losses
believed by management to be adequate to absorb potential credit losses inherent
in the portfolio. The $47,000 increase in the provision for loan losses in 1997
compared to 1996 was a result of increased net loans charged off in 1997 of
$12,000 compared to 1996, and additions to the allowance for loan losses due to
the growth in the loan portfolio during 1997. The allowance for loan losses was
1.20% of year-end loans in 1997 compared to 1.24% in 1996.
Securities
Securities, another major use of funds, decreased by $12.0 million or 18.3%
during 1997. Most of this decrease was used as a source of funding for the loan
portfolio. At December 31, 1997, securities comprised 20.9% of total interest-
earning assets compared to 25.9% of total interest-earning assets at December
31, 1996. The composition of the Corporation's securities portfolio reflects
management's investment strategy of maximizing portfolio yields subject to risk
and liquidity considerations. The primary objective of the Corporation's
investment strategy is to maintain an appropriate level of asset liquidity and
provide management a tool to assist in controlling and managing the
Corporation's interest rate position while at the same time producing adequate
levels of interest income. Management of the maturity of the portfolio is
necessary to ensure adequate liq-
Pocahontas Bankshares Corporation Page 7
<PAGE>
MATURITIES OF SECURITIES HELD TO MATURITY
The following table shows the contractual maturities of securities held to
maturity at December 31, 1997, and the weighted average yield of such
securities:
<TABLE>
<CAPTION>
After One After Five
Within But Within But Within After
One year Five Years Ten Years Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
-----------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Government securities $1,499 5.99% $2,018 5.20% -- -- -- $ 3,517 5.54%
U. S. Government agency securities 2,000 7.45% 5,162 5.87% $ 497 6.00% -- -- 7,659 6.29%
State, county and municipal securities 50 4.25% 2,055 5.24% 2,592 5.39% 1,361 7.27% 6,058 5.75%
Other securities -- -- 100 7.35% -- -- 100 7.35%
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES $3,549 6.79% $9,235 5.58% $3,189 5.55% $1,361 7.27% $17,334 5.96%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Yields on tax-exempt obligations have not been computed on a tax equivalent
basis.
uidity and manage interest rate risk. During 1997, in order to enhance
liquidity, management continued its strategy of increasing the available for
sale portfolio, as securities matured in the held to maturity portfolio.
Management believes that the potential of increased loan demand merits enhancing
the liquidity of the securities portfolio. Net unrealized gains in the held to
maturity portfolio amounted to approximately $182,000 at December 31, 1997,
compared to $156,000 in net unrealized gains at December 31, 1996. This was
indicative of the effects of the declining rate environment during the last
quarter of 1997, offset by the reduction in the held to maturity portfolio from
$39,062,000 at December 31, 1996, to $17,334,000 at December 31, 1997.
As of December 31, 1997, the Corporation had an investment in Van Kampen
American Capital U.S. Government Fund, a mutual fund comprised primarily of U.S.
agency mortgage-backed securities. The investment is classified as available
for sale. The aggregate book and market value of this investment was $2,558,000
at December 31, 1997 and $4,282,000 at December 31, 1996. The mutual fund is
composed primarily of GNMA and FNMA pools of mortgages that have weighted
average maturities of approximately seven years. Management is not aware of any
adverse information regarding this issue with regard to regulatory action,
downgrading of debt ratings or cessation of dividends. Due to activities within
the fund during 1995, management determined that the unrealized losses that it
had accumulated were other than temporary and therefore, approximately $341,000
of losses was recognized for the year ended December 31, 1995. No unrealized
losses
SECURITIES
<TABLE>
<CAPTION>
December 31
------------------------------------
1997 1996 1995
------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities available for sale
U. S. Government securities $ 19,287 $ 13,156 --
U. S. Government agency securities 13,304 7,999 --
Other securities 3,586 5,283 5,419
- -------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE 36,177 26,438 5,419
- -------------------------------------------------------------------------------------
Securities held to maturity
U. S. Government securities 3,517 15,580 31,381
U. S. Government agency securities 7,659 16,352 17,186
State, county and municipal securities 6,058 6,099 3,830
Other securities 100 1,031 1,043
- -------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $ 17,334 $ 39,062 $ 53,440
- -------------------------------------------------------------------------------------
</TABLE>
Page 8 Pocahontas Bankshares Corporation
<PAGE>
were recognized for the years ended December 31, 1997 and 1996. During
1997, management began a strategy to reduce its position in this mutual fund.
As a result, approximately $59,000 in losses was recognized from the partial
sale of the fund for the year ended December 31, 1997.
State, county and municipal securities contained no issues in excess of 10% of
stockholders' equity.
Deposits
Deposits, the major source of funds, decreased approximately $4.4 million or
2.0% in 1997, following an increase of $4.6 million or 2.0% in 1996. The
average rate paid on interest-bearing deposits in 1997 was 4.25%, a decrease
from the average rate of 4.35% paid in 1996, reflecting the stable to declining
rate environment during most of 1997. Competition for deposits continues to
intensify among commercial banks, savings banks, thrift institutions, credit
unions, mutual funds, brokerage houses, insurance companies, and certain
national retailers. Despite this intense competition, management continues to
evaluate pricing strategies that will insure the Corporation's long-term benefit
of maintaining market share without sacrificing the Corporation's profitability.
Capital Resources
Cash dividends paid to stockholders during 1997 amounted to $1,300,000 compared
to $1,210,000 paid to stockholders in 1996 and $1,100,000 in 1995. This
represents a dividend pay out (dividends divided by net income) of 43% in 1997
and 1996 and 46% for 1995. Cash dividends per share equaled $0.650 per share in
1997, $0.605 per share in 1996 and $0.550 per share in 1995. The
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1997 1996 1995
Average Average Average
----------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand deposits $ 27,342 N/A $ 26,832 N/A $ 24,668 N/A
Interest-bearing demand deposits 52,849 3.31% 49,865 3.36% 48,920 3.39%
Savings deposits 63,591 3.63% 64,703 3.65% 69,118 3.62%
Time deposits 89,837 5.23% 93,612 5.37% 85,862 5.17%
- -------------------------------------------------------------------------------------------------
TOTAL AVERAGE DEPOSITS $233,619 3.75% $235,012 3.85% $228,568 3.76%
- -------------------------------------------------------------------------------------------------
</TABLE>
There are no foreign offices. Average balances are computed on daily balances.
SHORT-TERM BORROWED FUNDS
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase $12,838 $14,514 $ 8,922
U. S. Treasury demand notes and others 4,200 1,756 720
- ---------------------------------------------------------------------------------------
TOTAL BORROWED FUNDS $17,038 $16,270 $ 9,642
- ---------------------------------------------------------------------------------------
</TABLE>
The approximate average interest rates, average amounts outstanding, and maximum
amounts outstanding at any month-end for securities sold under agreements to
repurchase are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------
<S> <C> <C> <C>
Average interest rates at December 31 4.16% 3.50% 3.79%
Maximum amounts outstanding at any
month-end $18,783 $14,514 $ 9,035
Average daily amount outstanding $13,589 $10,104 $ 7,775
Weighted average interest rates 3.93% 3.66% 4.10%
- ---------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rates are calculated by dividing the annual
interest expense by the related average daily amounts outstanding.
Pocahontas Bankshares Corporation Page 9
<PAGE>
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, 1997
----------------------
(Dollars in Thousands)
<S> <C>
Under 3 months $ 9,785
3 to 6 months 4,092
6 to 12 months 4,497
Over 12 months 3,878
- ----------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT OF $100,000 OR MORE $22,252
- ----------------------------------------------------------------
</TABLE>
Corporation is dependent upon dividends paid by the subsidiary banks to fund
dividends to the stockholders and to cover other operating costs, including
debt service. The Corporation's Board of Directors considers historical
financial performance, future prospects, and anticipated needs for capital in
formulating the dividend payment policy. Future dividends are dependent upon
the Corporation's financial results, capital requirements and general economic
conditions.
REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
Combined Capital
Entity Tier 1 (Tier 1 and Tier 2) Leverage
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated 12.88% 14.05% 9.46%
First Century Bank, N.A. 12.56% 13.71% 9.23%
First Century Bank 12.70% 13.95% 8.77%
</TABLE>
One of management's primary objectives is to maintain a strong capital position.
Stockholders' equity, net of unrealized gains (losses) on securities, increased
$1,960,000 or 8.0% in 1997. The percentage of earnings reinvested in the
Corporation (net income less dividends as a percentage of net income) for the
years 1997, 1996 and 1995 was 56.7%, 57.2% and 54.4%, respectively. The
internal capital formation rate (net income less dividends as a percentage of
average stockholders' equity) indicates the rate at which assets can grow while
maintaining the current ratio of stockholders' equity to assets. The internal
capital formation rate was 6.6% in 1997, 6.8% in 1996, and 5.9% in 1995.
Risk-based capital regulations require all banks and bank holding companies to
have a minimum total risk-based capital ratio of 8% with half of the capital
composed of core capital. Conceptually, risk-based capital requirements assess
the risk of a financial institution's balance sheet and off-balance sheet
commitments in relation to its capital. Under the guidelines, capital strength
is measured in two tiers which are used in conjunction with risk adjusted assets
in determining the risk-based capital ratios. The Corporation's Tier I capital,
which consists of stockholders' equity, adjusted for certain intangible assets,
amounted to $26,100,000 at December 31, 1997, or 12.88% of total risk-weighted
assets. Tier II capital, or supplementary capital, includes capital components
such as qualifying allowance for loan losses, and can equal up to 100% of an
institution's Tier I capital with certain limitations. The Corporation's Tier
II capital amounted to $2,370,000 at December 31, 1997 or 1.17% of total risk-
weighted assets. The Corporation's total consolidated risk-based capital was
$28,470,000, or 14.05% of total risk-weighted assets as of December 31, 1997.
Additionally, risk-based capital guidelines require a minimum leverage ratio
(Tier I capital divided by average adjusted total consolidated assets) of 4%,
which may be increased
Page 10 Pocahontas Bankshares Corporation
<PAGE>
for institutions with higher levels of risk or that are experiencing or
anticipating significant growth. The Corporation has not been advised by any
regulatory agency of any specific minimum leverage ratio applicable to it. As
of December 31, 1997, the Corporation's leverage ratio was 9.46%; therefore, the
Corporation exceeded all current minimum capital requirements.
Liquidity and Interest Sensitivity
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest-sensitive earning
assets and interest-bearing liabilities. Liquidity management involves the
ability to meet the cash flow requirements of customers who may be depositors
wanting to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. Interest rate sensitivity
management seeks to avoid fluctuating net interest margins and to enhance
consistent growth of net interest income through periods of changing interest
rates.
Maturities of securities and loan payments are the principal source of
liquidity. Interest rate sensitivity varies with different types of interest-
earning assets and interest-bearing liabilities. Overnight federal funds, on
which rates change daily and loans that are tied to the prime rate, differ
considerably from long-term securities and fixed rate loans. Similarly, time
deposits of $100,000 and over, now accounts and money market deposit accounts
are much more interest sensitive than passbook savings accounts and other
interest-bearing liabilities. The primary tool used by management to measure
interest rate risk is to monitor the difference or gap between interest-
sensitive earning assets and interest-bearing liabilities over various periods
of time. Trying to minimize this gap is a continual challenge in a changing
interest rate environment and one of the objectives of the Corporation's
asset/liability management strategy.
ANALYSIS OF INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
Months Years
------------------------------------- ------------------------
Less Than 3 3 - 6 6 - 12 1 - 5 Over 5 Totals
-------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities $ 7,587 $ 551 $ 2,006 $ 37,585 $ 5,782 $ 53,511
Federal funds sold and interest-bearing
balances with banks 5,413 -- -- -- -- 5,413
Loans 99,282 5,570 11,141 60,288 20,813 197,094
-------------------------------------------------------------------------------
Interest-earning assets 112,282 6,121 13,147 97,873 26,595 256,018
-------------------------------------------------------------------------------
Time deposits 30,308 23,606 17,705 17,526 -- 89,145
Other interest-bearing deposits 59,763 -- -- 55,506 -- 115,269
Other interest-bearing liabilities 16,485 -- 211 316 26 17,038
-------------------------------------------------------------------------------
Interest-bearing liabilities 106,556 23,606 17,916 73,348 26 221,452
-------------------------------------------------------------------------------
Interest sensitivity gap $ 5,726 $(17,485) $ (4,769) $ 24,525 $26,569 $ 34,566
Cumulative interest sensitivity gap $ 5,726 $(11,759) $(16,528) $ 7,997 $34,566
-------------------------------------------------------------------------------
Ratio of interest-earning assets to
interest-bearing liabilities 1.05 x 0.26 x 0.73 x 1.33 x 1022.88 x
-----------------------------------------------------------------
Ratio of cumulative interest sensitivity
gap to total earning assets 2.24 % (4.59)% (6.46)% 3.12 % 13.50 %
-----------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 11
<PAGE>
Management continues its efforts to generate variable rate loans. However, with
the lower interest rate environment, customers are requiring more fixed rate
commitments. As a result, the Corporation had a positive cumulative gap of
2.24% at three months and negative cumulative gaps of 4.59% at six months and
6.46% at one year. The Corporation was more asset sensitive at December 31,
1996, due to a significant portion of the securities portfolio maturing during
1997. As these securities were reinvested, the balance sheet became more
liability sensitive. Management continues to monitor the Corporation's
asset/liability gap positions, and thus has produced interest sensitivity ratios
that are well within targeted levels established in the Corporation's
asset/liability management guidelines.
During 1997, management began incorporating more sophisticated risk measurement
tools, including simulation modeling which calculates expected net interest
income based on projected interest-earning assets, interest-bearing liabilities
and interest rates. Utilizing simulation modeling allows the Corporation to
evaluate earnings and capital at risk due to significant changes in interest
rates. The Corporation monitors exposure to the effect of an instantaneous
change in rates of 200 basis points up or down over the same period. As of
December 31, 1997, the model indicated the impact of a 200 basis point increase
in rates would approximate a 1.40% increase in net interest income, while a 200
basis point decline in rates would approximate a 1.26% decrease from an
unchanged rate environment. These changes are well within the Corporation's
policy limits for the maximum negative impact on net interest income from a
change in interest rates.
Liquidity can best be demonstrated by an analysis of the Corporation's cash
flows. In 1997, the primary source of cash flows was from operating activities.
This was due to increased funding requirements to meet the needs of the loan
portfolio. Cash flows from operations were also significant for 1996, however,
the primary source of cash flows was from financing activities. In 1995, the
primary source of cash flows was also from operations, illustrating management's
goal to turn its expansion efforts of the preceding several years into
profitability. A secondary source of liquidity for the Corporation comes from
investing activities in the maturities of investment securities. This
demonstrates management's strategy to maintain the investment portfolio with
short-term, high quality investments. The Corporation's primary use of cash was
from investing activities, primarily increases in earning assets deployed in
investments and loans. This also demonstrated the Corporation's ability to
accommodate loan demand within its service areas.
Income Statement Analysis
Earnings
Net income for 1997 was $3,002,000 or $1.50 per share, an increase of $172,000
or 6% from the $2,830,000 or $1.42 per share earned in 1996, and $588,000 more
than the $2,414,000 or $1.21 per share earned in 1995. This increase occurred
primarily as a result of an increased net interest margin due to the deployment
of funds in the loan portfolio.
Page 12 Pocahontas Bankshares Corporation
<PAGE>
Earnings Per Share
The Earnings Per Share Table summarizes the principal sources of changes in
earnings per share for 1997.
<TABLE>
<CAPTION>
EARNINGS PER SHARE
<S> <C>
Net income per share -- 1996 $1.42
- -------------------------------------------------------------
Increase (decrease) due to change in:
Net interest income 0.42
Provision for loan losses (0.02)
Other operating income 0.14
Personnel expense (0.06)
Other expense (0.40)
- -------------------------------------------------------------
Net income per share -- 1997 $1.50
- -------------------------------------------------------------
</TABLE>
Net Interest Margin
The major portion of the Corporation's earnings are derived from the net
interest margin, which is the interest income on interest-earning assets less
the interest expense on interest-bearing liabilities. During 1997 the net
interest margin increased $850,000 or 7.3%. This followed a 0.1% decrease in
1996, and a 6.3% increase in 1995. For the year ended December 31, 1997,
interest income increased $748,000, or approximately 3.6%, compared to increases
of $412,000, or 2.0% for 1996, and $2,319,000, or 12.6% for 1995. The increase
for 1997 was primarily in the loan portfolio, resulting from increased volume.
The net interest margin was enhanced by a decrease in interest expense of
$102,000 or 1.1% for 1997. This followed increases in interest expense of
$429,000, or 4.7% for 1996, and $1,628,000, or 21.9% for 1995. For 1997,
decreased interest expense on time deposits due to decreased volume was the
primary contributor to the decrease in total interest expense. The net interest
margin is affected by many factors, but most significantly by the prevailing
interest rates during the period, the spread between the various sources and
uses of funds, and by changes in the volume of various assets and liabilities.
The performance for 1997 is indicative of the relatively stable rate environment
prevailing through most of 1997 and 1996 as most changes in the net interest
margin were due to changes in the mix of loans and investments.
Noninterest Income and Expense
Noninterest income increased $294,000 or 15% in 1997, following a $456,000 or
29% increase in 1996, and a decrease of $152,000 or 8.9% in 1995. The largest
component of noninterest income is fees from trust services. Fees from trust
services increased $194,000 or 23% for 1997 and $73,000 or 10% for 1996, and
$101,000 or 15% for 1995. The second largest component of noninterest income is
service charges on deposit accounts. These fees increased approximately
$100,000 or 12% in 1997, after an increase of approximately $13,000 or 2% in
1996, and a decrease of approximately $23,000 or 3% in 1995. Securities losses
of approximately $59,000 were recognized in 1997 and $341,000 in 1995.
Securities gains of approximately $1,000 were recognized in 1996.
Pocahontas Bankshares Corporation Page 13
<PAGE>
<TABLE>
<CAPTION>
RETURN ON EQUITY AND ASSETS
December 31,
----------------------------
1997 1996 1995
----------------------------
<S> <C> <C> <C>
Percentage of net income to:
Average stockholders' equity 11.66% 11.84% 10.79%
Average total assets 1.09% 1.04% 0.92%
Percentage of dividends declared per
common share to net income per
common share 43.33% 42.61% 45.64%
Percentage of average stockholders'
equity to average total assets 9.32% 8.79% 8.52%
</TABLE>
Noninterest expense, excluding the provision for loan losses, increased 8.4% in
1997, following a 1.2% increase in 1996 and a 4.7% increase in 1995. Personnel
expense is the largest component of noninterest expense. Personnel expense
increased 2.7% in 1997, following an increase of 3.9% in 1996, and 1.1% in 1995.
In addition to salaries, employee benefits are a significant component of
personnel expense. For a complete discussion of the Corporation's employee
benefits, refer to Note 7 of the Notes to Consolidated Financial Statements,
presented elsewhere in this report. Additionally, the increase in noninterest
expense for 1997 was affected by approximately $200,000 in losses sustained by
the disposition of certain parcels of other real estate. Management remains
committed to improving operational efficiency throughout the organization while
keeping personnel expense within current inflationary levels.
Income Taxes
Applicable income taxes for 1997 increased $198,000 or 13.6%. This followed a
$115,000 or 8.6% increase for 1996. Income taxes computed at the statutory rate
are reduced primarily by interest earned on state and municipal obligations. For
a complete discussion of the Corporation's tax position, refer to Note 8 of the
Notes to Consolidated Financial Statements, presented elsewhere in this report.
The Effects of Inflation and Changing Prices
Inflation affects the Corporation in several ways, but not to the same extent
that it does a company that makes large capital expenditures or has a large
investment in inventory. The Corporation's asset and liability structure is
primarily monetary in nature and, therefore, its financial results are more
affected by changes in interest rates than by inflation. However, the actions
of the Federal Reserve Board during 1997 indicate that interest rate management
will be the primary tool used to curtail inflationary pressures. Inflation does
affect noninterest expense, such as personnel expense and the cost of services
and supplies. These increases must be offset, to the extent possible, by
increases in noninterest income and by control of noninterest expense.
Accounting, Legislative and Regulatory Matters
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". This statement amends APB Opinion No. 15, "Earnings Per
Share". The provisions of the SFAS are applicable for financial statements
issued for periods ending after December 15,
Page 14 Pocahontas Bankshares Corporation
<PAGE>
1997. SFAS No. 128 provides standards for computing and presenting earnings
per share. Upon retroactive adoption to January 1,1995, this statement did not
have an impact on the Corporation's disclosures as the Corporation has no
common stock equivalents.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income". The provisions of the SFAS are applicable for
financial statements issued for fiscal years beginning after December 15, 1997,
with reclassification of financial statements for earlier periods provided for
comparison purposes. SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
statement supersedes SFAS No. 14, "Financial Reporting for Segments of an
Enterprise" and amends SFAS No. 94, "Consolidation of all Majority-Owned
Subsidiaries". The provisions of the SFAS are applicable for financial
statements issued for fiscal years beginning after December 15, 1997. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers.
During 1997, federal banking regulators issued guidance for banks to plan and
prepare for the upcoming century date change, commonly referred to as the Year
2000, or Y2K, problem. Previous to this guidance, management recognized the
necessity to insure that the Corporation's operating systems and software could
handle the upcoming century date change without adversely impacting operations.
In early 1997, a senior level project was commissioned to review compliance
regarding this issue. The stated goal of this project was "to achieve Mission
Critical Compliance...by December 31, 1998." Management is currently in the
assessment phase of this project. It is anticipated that the testing phase of
the project will be completed by mid 1998. At the present time, the Corporation
does not anticipate the incurrence of material incremental costs related to the
Y2K problem in any single future year.
Per Share Data By Quarter
No established public market presently exists for the common stock of the
Corporation. The per share data by quarter table shows the approximate high and
low bid as reported by the transfer agent and local brokers for 1997 and 1996.
Also presented below are the dividends paid for those
<TABLE>
<CAPTION>
PER SHARE DATA BY QUARTER
Market Quotations
-------------------------------------
Dividends 1997 1996
--------------- -------------------------------------
Quarter 1997 1996 High Low High Low
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $0.150 $0.125 $19.50 $18.50 $16.50 $14.50
Second Quarter $0.150 $0.150 20.00 18.75 18.00 16.00
Third Quarter $0.150 $0.150 20.00 19.00 19.00 18.50
Fourth Quarter $0.200 $0.180 21.00 18.50 18.75 18.50
- --------------------------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 15
<PAGE>
respective years. The number of stockholders of record on December 31, 1997,
was 603 and outstanding shares totaled 2,000,000.
Trust Asset Responsibility
Assets managed by the Trust Division are presented at book value which is the
Federal income tax basis of the assets and is not representative of current
market value. These assets are not included in the financial statements
contained elsewhere in this report. Trust responsibility, as measured by market
value, is substantially greater than book value.
[GRAPH OF TRUST ASSET RESPONSIBILITY AT BOOK VALUE]
Page 16 Pocahontas Bankshares Corporation
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Statistical Summary, 1997 -- 1993
December 31,
---------------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993 %
----------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $197,094 72 $179,956 65 $177,794 67 $171,325 66 $177,331 68
Securities 53,511 19 65,500 23 58,859 23 64,295 25 58,980 22
Federal funds sold 3,400 1 5,750 2 6,300 2 6,400 2 7,770 3
Interest-bearing deposits with banks 2,013 1 1,982 1 3,833 1 245 -- 46 --
-----------------------------------------------------------------------------------
INTEREST-EARNING ASSETS 256,018 93 253,188 91 246,786 93 242,265 93 244,127 93
-----------------------------------------------------------------------------------
Cash and due from banks 8,883 3 12,421 4 10,000 4 10,732 4 9,749 4
Premises And Equipment 8,660 3 8,052 3 5,417 2 4,811 2 4,640 2
Other Assets 5,556 2 7,151 3 5,922 2 5,476 2 5,316 2
Allowance for loan losses (2,370) (1) (2,240) (1) (2,145) (1) (1,985) (1) (1,858) (1)
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $276,747 100 $278,572 100 $265,980 100 $261,299 100 $261,974 100
- ----------------------------------------------------------------------------------------------------------------------------
Savings deposits $115,269 42 $112,970 41 $112,768 42 $128,582 49 $127,905 49
Time deposits 89,145 32 93,190 33 92,043 35 75,464 29 75,570 29
Other interest-bearing liabilities 17,038 6 16,270 6 9,642 4 8,163 3 11,457 4
------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES 221,452 80 222,430 80 214,453 81 212,209 81 214,932 82
------------------------------------------------------------------------------------
Demand deposits 27,923 10 30,562 11 27,361 10 26,836 10 25,976 10
Other liabilities 783 -- 951 -- 980 -- 1,093 1 700 --
------------------------------------------------------------------------------------
TOTAL LIABILITIES 250,158 90 253,943 91 242,794 91 240,138 92 241,608 92
--------- -------- --------- -------- --------
STOCKHOLDERS' EQUITY 26,589 10 24,629 9 23,186 9 21,161 8 20,366 8
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $276,747 100 $278,572 100 $265,980 100 $261,299 100 $261,974 100
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $232,337 $236,722 $232,172 $230,882 $229,451
BOOK VALUE PER SHARE $ 13.29 $12.31 $ 11.60 $ 10.58 $ 10.18
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS
Statistical Summary, 1997 -- 1993
Years Ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income $21,817 $21,069 $20,657 $18,338 $17,114
Interest expense 9,379 9,481 9,052 7,424 7,727
------------------------------------------------------------------
NET INTEREST MARGIN 12,438 11,588 11,605 10,914 9,387
------------------------------------------------------------------
Provision for loan losses 691 644 839 395 459
------------------------------------------------------------------
Net credit margin 11,747 10,944 10,766 10,519 8,928
------------------------------------------------------------------
Noninterest income 2,301 2,007 1,551 1,703 1,682
Noninterest expense 9,391 8,664 8,561 8,985 8,600
------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,657 4,287 3,756 3,237 2,010
------------------------------------------------------------------
Provision for income taxes 1,655 1,457 1,342 980 586
------------------------------------------------------------------
Income before cumulative effect of accounting change 3,002 2,830 2,414 2,257 1,424
Cumulative effect of accounting change -- -- -- -- 123
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,002 $ 2,830 $ 2,414 $ 2,257 $ 1,547
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Income before cumulative effect of accounting change $ 1.50 $ 1.42 $ 1.21 $ 1.13 $ 0.71
Cumulative effect of accounting change -- -- -- -- 0.06
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1.50 $ 1.42 $ 1.21 $ 1.13 $ 0.77
- ---------------------------------------------------------------------------------------------------------------------------
Dividends per common share $ 0.650 $ 0.605 $ 0.550 $ 0.500 $ 0.438
Payout ratio 43% 43% 45% 44% 57%
</TABLE>
Pocahontas Bankshares Corporation Page 17
<PAGE>
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31,
------------------------
1997 1996
------------------------
ASSETS (Dollars in Thousands)
<S> <C> <C>
Cash and due from banks $ 8,883 $12,421
Interest-bearing balances with banks 2,013 1,982
Securities available for sale 36,177 26,438
Securities held to maturity (estimated market value of $17,516
in 1997 and $39,218 in 1996) 17,334 39,062
Federal funds sold 3,400 5,750
Loans 197,094 179,956
Less allowance for loan losses 2,370 2,240
------------------------
Net loans 194,724 177,716
Premises and equipment, net 8,660 8,052
Other assets 5,556 7,151
- ---------------------------------------------------------------------------------------------
TOTAL ASSETS $ 276,747 $ 278,572
- ---------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $27,923 $30,562
Interest-bearing 204,414 206,160
------------------------
Total deposits 232,337 236,722
Short-term borrowings 17,038 16,270
Other liabilities 783 951
------------------------
TOTAL LIABILITIES 250,158 253,943
------------------------
Commitments (Notes 9 and 10) -- --
STOCKHOLDERS EQUITY
Common stock -$1.25 par value; shares issued and outstanding:
2,000,000 at December 31, 1997 and 1996 2,500 2,500
Paid-in capital 785 785
Retained earnings 23,223 21,521
Unrealized gains (losses) on securities, net of tax 81 (177)
------------------------
TOTAL STOCKHOLDERS' EQUITY 26,589 24,629
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 276,747 $ 278,572
- ---------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 18 Pocahontas Bankshares Corporation
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
------------------------------------------
INTEREST INCOME (Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C>
Interest and fees on loans $17,610 $16,837 $16,566
Interest on balances with banks 86 106 86
Interest and dividends from securities available for sale:
Taxable 2,177 904 386
Interest and dividends from securities held to maturity:
Taxable 1,334 2,528 2,801
Tax-exempt 403 382 287
Interest on federal funds sold 207 312 531
------------------------------------------
TOTAL INTEREST INCOME 21,817 21,069 20,657
------------------------------------------
INTEREST EXPENSE
Interest on time certificates of $100,000 or more 1,121 1,231 1,089
Interest on other deposits 7,638 7,822 7,514
Interest on federal funds purchased and securities
sold under agreements to repurchase 534 370 320
Interest on demand notes to U. S. Treasury and other indebtedness 86 58 129
------------------------------------------
TOTAL INTEREST EXPENSE 9,379 9,481 9,052
------------------------------------------
Net interest income 12,438 11,588 11,605
Provision for loan losses 691 644 839
------------------------------------------
Net interest income after provision for loan losses 11,747 10,944 10,766
------------------------------------------
NONINTEREST INCOME
Income from fiduciary activities 1,024 830 757
Service charges on deposit accounts 929 829 816
Other noninterest income 407 347 319
Securities gains (losses) (59) 1 (341)
------------------------------------------
TOTAL NONINTEREST INCOME 2,301 2,007 1,551
------------------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 4,493 4,376 4,210
Premises and equipment expense 1,275 1,051 1,031
Data procession expense 575 467 470
Advertising and public relations 359 331 340
Insurance and bonding 122 128 406
Supplies and printing 328 331 334
Other noninterest expense 2,239 1,980 1,770
------------------------------------------
TOTAL NONINTEREST EXPENSE 9,391 8,664 8,561
------------------------------------------
Income before income taxes 4,657 4,287 3,756
Applicable income taxes 1,655 1,457 1,342
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,002 $ 2,830 $ 2,414
- --------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.50 $ 1.42 $ 1.21
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Pocahontas Bankshares Corporation Page 19
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
----------- ---------------------
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before adjustments to reconcile net income $ 3,002 $ 2,830 $ 2,414
to net cash provided by operating activities:
Provision for loan losses 691 644 839
Depreciation and amortization 620 473 499
Deferred income tax (benefit) liability 57 (46) (46)
Securities (gains) losses 59 (1) 341
(Increase) decrease in interest receivable (45) 106 (94)
Net investment amortization and accretion 239 496 753
Net (increase) decrease in other assets 1,424 (164) (226)
Net decrease in interest payable and other liabilities (285) (118) (224)
-----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,762 4,220 4,256
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in federal funds sold 2,350 550 100
Purchases of securities held to maturity (1,400) (9,397) (9,671)
Purchases of securities available for sale (13,373) (21,998) --
Proceeds from maturities and calls of securities held to maturity 22,986 23,297 14,354
Proceeds from maturities and calls of securities available for sale 2,000 -- --
Proceeds from sales of securities available for sale 1,751 -- --
Net increase in loans (17,478) (3,305) (6,787)
Acquisition of premises and equipment (1,195) (2,770) (1,087)
Proceeds from disposal of premises and equipment 7 5 22
-----------------------------
NET CASH USED BY INVESTING ACTIVITIES (4,352) (13,618) (3,069)
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits (340) 3,403 (15,289)
Net increase (decrease) in time deposits (4,045) 1,147 16,579
Net increase in short-term borrowings 768 6,628 2,679
Principal repayments of long-term debt -- -- (1,200)
Cash dividends paid (1,300) (1,210) (1,100)
-----------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (4,917) 9,968 1,669
-----------------------------
Net increase (decrease) in cash and due from banks (3,507) 570 2,856
Cash and due from banks at beginning of year 14,403 13,833 10,977
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $10,896 $14,403 $13,833
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 9,404 $ 9,517 $ 9,037
Income taxes $ 1,369 $ 1,751 $ 1,456
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
Page 20 Pocahontas Bankshares Corporation
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Unrealized Gains
------------------------ Paid-In Retained (Losses) on
Shares Amount Capital Earnings Securities
---------------------------------------------------------------------
(Dollars in Thousands, Except Number of Shares)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Balance at January 1, 1995 1,000,000 $1,250 $2,035 $ 18,587 $(711)
Net income -- -- -- 2,414 --
Changes in unrealized gains (losses) on securities, net -- -- -- -- 711
Cash dividends declared -- $0.55 per share -- -- -- (1,100) --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 1,000,000 1,250 2,035 19,901 --
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996
Additional shares issued in two-for-one stock split
effected in the form of a stock dividend 1,000,000 1,250 (1,250) -- --
Net income -- -- -- 2,830 --
Changes in unrealized gains (losses) on securities, net -- -- -- -- (177)
Cash dividends declared -- $0.605 per share -- -- -- (1,210) --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 2,000,000 2,500 785 21,521 (177)
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
Net income -- -- -- 3,002 --
Changes in unrealized gains (losses) on securities, net -- -- -- -- 258
Cash dividends declared -- $0.65 per share -- -- -- (1,300) --
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,000,000 $2,500 $ 785 $23,223 $ 81
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Pocahontas Bankshares Corporation Page 21
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting and Reporting Policies
Pocahontas Bankshares Corporation and its subsidiaries (the "Corporation"),
First Century Bank, N.A. and First Century Bank, Virginia operate eight branches
in southern West Virginia and southwestern Virginia. The Corporation's primary
source of revenue is derived from loans to customers who are predominately small
to medium size businesses and middle income individuals. The accounting and
reporting policies of the Corporation conform to generally accepted accounting
principles and to general practices within the banking industry. Certain
reclassifications have been made to the prior years' financial statements to
place them on a comparable basis with the current year's financial statements.
The following is a summary of the more significant accounting and reporting
policies:
Management Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation -- The consolidated financial statements include the
accounts of Pocahontas Bankshares Corporation and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and due from banks -- For purposes of reporting cash flows, cash
equivalents include cash on hand and amounts due from banks (including cash
items in process of collection); and interest-bearing balances with banks. To
comply with Federal Reserve regulations, the subsidiary banks are required to
maintain reserve balances with the Federal Reserve Bank of Richmond. The amount
of those reserve balances at December 31, 1997, was approximately $209,000.
Securities -- Securities are classified as either held to maturity, available
for sale or trading. Classification of securities is generally determined on the
date of purchase. In determining such classification, debt securities that the
Corporation has the positive intent and ability to hold to maturity are
classified as held to maturity and are carried at amortized cost. All other
securities are classified as available for sale and are carried at fair value
with unrealized gains and losses included in stockholders' equity on an after-
tax basis. The Corporation has no securities classified as trading.
Realized gains and losses, determined using the specific identification method,
and declines in value judged to be other than temporary are included in
noninterest income. Premiums and discounts are amortized into interest income
using a level yield method.
Loans -- Loans are reported at their principal outstanding balance net of
charge-offs and certain other deferred or unearned income. Interest income is
generally recognized when income is earned using the interest method.
Page 22 Pocahontas Bankshares Corporation
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
Allowance for loan losses -- The adequacy of the allowance for loan losses is
periodically evaluated by the Corporation in order to maintain the allowance at
a level that is sufficient to absorb probable credit losses. Management's
evaluation of the adequacy of the allowance is based on a review of the
Corporation's historical loss experience, known and inherent risks in the loan
portfolio, including adverse circumstances that may affect the ability of the
borrower to repay interest and/or principal, the estimated value of collateral,
and an analysis of the levels and trends of delinquencies, charge-offs, and the
risk ratings of the various loan categories. Such factors as the level and
trend of interest rates and the condition of the national and local economies
are also considered.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the allowance
due to changes in the measurement of the impaired loans are included in the
provision for loan losses. Loans continue to be classified as impaired unless
they are brought fully current and the collection of scheduled interest and
principal is considered probable.
A loan is considered impaired, based on current information and events, if it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans that are collateral dependent is
based on the fair value of the collateral. The measurement of other impaired
loans is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate.
The Corporation uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation of
related data. This data includes loan payment status, borrowers' financial data
and borrowers' operating factors such as cash flows, operating income or loss,
etc.
When a loan or portion of a loan is determined to be uncollectible, the portion
deemed uncollectible is charged against the allowance and subsequent recoveries,
if any, are credited to the allowance.
Income recognition on impaired and nonaccrual loans -- Loans, including impaired
loans, are generally classified as nonaccrual if they are past due as to
maturity or payment of principal or interest for a period of more than 90 days,
unless such loans are well-collateralized and in the process of collection. If
a loan or a portion of a loan is classified as doubtful or is partially charged
off, the loan is classified as nonaccrual. Loans that are on a current payment
status or past due less than 90 days may also be classified as nonaccrual if
repayment in full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance by the borrower, in accordance with the contractual terms
of interest and principal.
Pocahontas Bankshares Corporation Page 23
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan had been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Cash receipts in excess of that amount are recorded
as recoveries to the allowance for loan losses until prior charge-offs have been
fully recovered.
Other Real Estate Owned -- Other real estate owned includes properties on which
the Corporation's subsidiaries have foreclosed and taken title. Real estate
properties acquired as a result of foreclosures are carried at the lower of the
recorded investment in the loan or the fair value less estimated selling costs.
Any excess of the outstanding principal loan balance over the fair value of the
foreclosed property is charged to the allowance for loan losses. Any subsequent
fair value adjustments and net operating expenses are charged to noninterest
expense.
Restructured loans -- Loans are considered troubled debt restructurings if, for
economic or legal reasons, a concession has been granted to the borrower related
to the borrower's financial difficulties that the Corporation would not have
otherwise considered. The Corporation has restructured certain loans in
instances where a determination was made that greater economic value will be
realized under new terms than through foreclosure, liquidation, or other
disposition. The terms of the renegotiation generally involve some or all of the
following characteristics: a reduction in the interest pay rate to reflect
actual operating income, an extension of the loan maturity date to allow time
for stabilization of operating income, and partial forgiveness of principal and
interest.
The carrying value of a restructured loan is reduced by the fair value on any
assets or equity interest received. In addition, if the present value of future
cash receipts required under the new terms does not equal the recorded
investment in the loan at the time of restructuring the carrying value would be
further reduced by a charge to the allowance. In addition, at the time of
restructuring, loans are generally classified as impaired.
Premises and Equipment -- Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed by the straightline method
based upon the estimated useful lives of the assets. Buildings and improvements
have estimated useful lives of 20 to 40 years. Equipment and fixtures have
estimated useful lives of 3 to 10 years. The cost of major improvements is
capitalized. The expenditures for maintenance and repairs are charged to
expense as incurred. Gains or losses on assets sold are included in other
operating income.
Goodwill And Other Intangibles -- The cost of the investments in the
subsidiaries in excess of amounts attributable to tangible and identified
intangible assets at dates of acquisition is recorded as goodwill and is being
amortized to operations over a period of 25 years using the straightline method.
A portion of the cost of purchased subsidiaries has been allocated to the value
associated with the future earnings potential of the acquired core deposit base
and is being amortized over eight years, the estimated life of the deposit base.
The unamortized balance of intangibles totaled
Page 24 Pocahontas Bankshares Corporation
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
approximately $350,000 at December 31, 1997 and $391,000 at December 31, 1996,
net of accumulated amortization of $834,000 and $793,000, respectively, and is
included in other assets.
Income Taxes -- The Corporation files a consolidated federal income tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized as
income or expense in the period that includes the enactment date.
Common Stock and Per Share Data -- On April 16, 1996, stockholders approved an
increase in the number of authorized shares of the Corporation's common stock
from 2,000,000 to 10,000,000. Additionally, on the same date, the Board of
Directors approved a two-for-one stock split which was effected in the form of a
100% stock dividend, payable on May 6, 1996, to stockholders of record on April
26, 1996. Accordingly, all per common share data has been adjusted to reflect
the stock split. Earnings per common share are computed on the weighted average
number of shares of common stock outstanding during each year. There are no
stock options or other common stock equivalents that would dilute the
Corporation's earnings per share.
2. Securities
Securities available for sale at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $19,155 $149 $17 $19,287
U.S. Government agency obligations 11,991 83 4 12,070
Mortgage-back securities 1,234 -- -- 1,234
Equity Securities 3,644 -- 58 3,586
- --------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $36,024 $232 $79 $36,177
- --------------------------------------------------------------------------------------
<CAPTION>
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $13,201 $ 25 $ 70 $13,156
U.S. Government agency obligations 8,003 46 50 7,999
Equity Securities 5,428 -- 145 5,283
- --------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $26,632 $ 71 $ 265 $26,438
- --------------------------------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 25
<PAGE>
2. Securities (continued)
Securities held to maturity at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $ 3,517 -- $11 $ 3,506
U.S. Government agency obligations 7,024 6 28 7,002
Mortgage-backed securities 635 -- 10 625
State and municipal obligations 6,058 225 -- 6,283
Other debt securities 100 -- -- 100
- ------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $ 17,334 $ 231 $49 $17,516
- ------------------------------------------------------------------------------------------
<CAPTION>
1996
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $ 15,580 $ 20 $ 50 $15,550
U.S. Government agency obligations 15,057 92 73 15,076
Mortgage-backed securities 1,295 10 21 1,284
State and municipal obligations 6,099 185 8 6,276
Other debt securities 1,031 1 -- 1,032
- ------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $ 39,062 $ 308 $ 152 $39,218
- ------------------------------------------------------------------------------------------
</TABLE>
Securities with an aggregate par value of $41,060,000 at December 31, 1997 and
$43,800,000 at December 31, 1996, were pledged to secure public and trust
deposits and for other purposes required or permitted by law, including
approximately $17,000,000 at December 31, 1997 and December 31, 1996 pledged to
secure repurchase agreements.
Gross losses of $59,000 were recognized on sales of available for sale
securities for the year ended December 31, 1997. There were no sales of
securities for the years ended December 31, 1996 and 1995. Gross losses of
$341,000 in 1995 were realized on writedowns of marketable equity securities.
Gross gains of $1,000 in 1996 were realized on calls of held to maturity
securities purchased at a discount.
The amortized cost and estimated market value for securities available for sale
and securities held to maturity by contractual maturities at December 31, 1997
are shown in the following tables. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations.
<TABLE>
<CAPTION>
Net
Estimated Unrealized
Amortized Market Gains
Cost Value (Losses)
----------------------------------
(Dollars in Thousands)
----------------------------------
<S> <C> <C> <C>
Due in one year or less $ 1,997 $ 2,006 $ 9
Due after one year through five years 28,245 28,351 206
Due after five years through ten years 2,238 2,234 (4)
Securities with no contractual maturities 3,644 3,586 (58)
- ------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $36,024 $36,177 $153
- ------------------------------------------------------------------------------
</TABLE>
Page 26 Pocahontas Bankshares Corporation
<PAGE>
2. Securities (continued)
<TABLE>
<CAPTION>
Net
Estimated Unrealized
Amortized Market Gains
Cost Value (Losses)
----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Due in one year or less $ 3,549 $ 3,553 $ 4
Due after one year through five years 9,235 9,264 29
Due after five years through ten years 3,189 3,318 129
Due after ten years 1,361 1,381 20
- ------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $17,334 $17,516 $182
- ------------------------------------------------------------------------------
</TABLE>
3. Loans
Loans at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
---------------------------
(Dollars in Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 46,012 $ 44,209
Real estate - construction 8,068 5,603
Real estate - mortgage (residential and commercial) 116,728 105,564
Loans to individuals 26,286 24,580
---------------------------
Total loans 197,094 179,956
Less: allowance for credit losses 2,370 2,240
- ----------------------------------------------------------------------------------
NET LOANS $ 194,724 $ 177,716
- ----------------------------------------------------------------------------------
</TABLE>
The Corporation's subsidiaries have had and can be expected to have in the
future various banking transactions with directors, executive officers, their
immediate families and affiliated companies in which they are principal
stockholders (commonly referred to as related parties). The total amount of
loans was $5,109,000 and $4,685,000 at December 31, 1997 and 1996,
respectively. During 1997, $9,470,000 in new loans were made and repayments were
$9,046,000.
4. Allowance for Loan Losses
An analysis of the allowance for loan losses for 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1996 1995
---------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 2,240 $ 2,145 $ 1,985
Provision for loan losses 691 644 839
Recoveries on loans previously charged off 51 23 35
Loans charged off (612) (572) (714)
- -------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $ 2,370 $ 2,240 $ 2,145
- -------------------------------------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 27
<PAGE>
4. Allowance for Loan Losses (continued)
The following is a summary of loans considered impaired under SFAS 114, as
amended by SFAS 118:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------------------
(Dollars in Thousands)
<S> <C> <C>
Gross impaired loans $ 1,441 $1,416
Valuation allowance for impaired loans 347 281
- -----------------------------------------------------------------------------------------------
Recorded investment in impaired loans $ 1,094 $1,135
- -----------------------------------------------------------------------------------------------
Average recorded investment in impaired loans for the year ended $ 1,245 $1,988
- -----------------------------------------------------------------------------------------------
</TABLE>
There was no interest income recognized on impaired loans (during the portion of
the year they were impaired) for the years ended December 31, 1997, 1996 and
1995. At December 31, 1997, 1996 and 1995, the Corporation had nonaccrual loans
of $828,000, $1,398,000 and $3,194,000, respectively. Interest income of
$5,000, $5,000 and $129,000 was recognized on these loans in 1997, 1996 and
1995, respectively. Had these loans performed in accordance with their original
terms, interest income of $142,000, $176,000 and $408,000 would have been
recorded in 1997, 1996 and 1995, respectively.
5. Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
-----------------------
(Dollars in Thousands)
<S> <C> <C>
Land $ 1,291 $ 1,051
Buildings and improvements 8,034 7,117
Equipment and fixtures 3,973 4,572
-----------------------
Total 13,298 12,740
-----------------------
Less accumulated depreciation 4,638 4,688
- ---------------------------------------------------------------------------------
NET PREMISES AND EQUIPMENT $ 8,660 $ 8,052
- ---------------------------------------------------------------------------------
</TABLE>
Depreciation charged to operating expense amounted to $579,000 in 1997, $432,000
in 1996, and $459,000 in 1995.
6. Deposits
Deposits at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------------------
(Dollars in Thousands)
<S> <C> <C>
Individuals, partnerships and corporations:
Demand deposits $ 25,886 $ 26,492
Time and savings deposits 192,972 195,311
U.S. Government 54 297
States and political subdivisions 11,889 11,205
Certified and official checks 1,536 3,417
- --------------------------------------------------------------------------
TOTAL DEPOSITS $232,337 $236,722
- --------------------------------------------------------------------------
</TABLE>
Page 28 Pocahontas Bankshares Corporation
<PAGE>
6. Deposits (continued)
Time deposits included certificates of deposit issued in amounts of $100,000
or more totaling approximately $22,252,000 and $22,730,000 at December 31, 1997
and 1996, respectively.
7. Post Employment Benefits
The Corporation has a noncontributory, trusteed pension plan covering all
eligible employees with six months of service who have attained the age of
twenty and one-half. Contributions to the plan are based on computations by
independent actuarial consultants. Due to the present excess funded position of
the pension plan, no contributions have been made since 1985.
The components of the net periodic pension benefit were as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Service cost $ 245 $ 239 $ 197
Interest cost 359 348 290
Actual return on plan assets (1,662) (983) (1,025)
Unrecognized gain (loss) 1,035 435 560
Net amortizations and deferrals (76) (35) (49)
- --------------------------------------------------------------------------------------
NET PERIODIC PENSION (BENEFIT) COST $ (99) $ 4 $ (27)
- --------------------------------------------------------------------------------------
</TABLE>
The actuarial present value of the projected benefit obligation was determined
using a discount rate of 7.00% for 1997, and 7.50% for 1996; a rate of
compensation increases of 3% for 1997 and 1996; and expected long-term rate of
return on plan assets of 9% for 1997 and 1996. The funded status of the plan
as of December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------
(Dollars in Thousands)
<S> <C> <C>
Accumulated benefit obligation:
Vested $ 4,633 $ 3,860
Non-vested 65 19
-------------------
Total 4,698 3,879
-------------------
Projected benefit obligation 5,877 4,842
Market value of plan assets 8,581 7,025
-------------------
Plan assets in excess of projected
benefit obligation 2,704 2,183
Unrecognized prior service costs 345 376
Unrecognized net transition asset (518) (583)
Unrecognized net gain (1,914) (1,458)
- -------------------------------------------------------------------------------
Prepaid pension costs recorded in
the consolidated statements of financial condition $ 617 $ 518
- -------------------------------------------------------------------------------
</TABLE>
The plan's assets include common stock, fixed income securities, short-term
investments and cash.
The Corporation sponsors two defined benefit postretirement plans that cover
both salaried and nonsalaried employees. One plan provides medical benefits, and
the other provides life insurance benefits. The postretirement health care plan
is contributory and the life insurance plan is noncontributory.
Pocahontas Bankshares Corporation Page 29
<PAGE>
7. Post Employment Benefits (continued)
The health plan has an annual limitation (a "cap") on the dollar amount of the
employer's share of the cost of covered benefits incurred by a plan participant.
The retiree is responsible, therefore, for the amount by which the cost of the
benefit coverage under the plan incurred during a year exceeds that cap.
Financial Accounting Standards Board's Statement of Financial Accounting
Standards 106, "Accounting for Postretirement Benefits Other Than Pensions"
(SFAS 106) requires expense relating to postretirement benefits to be recognized
during an employee's time of service instead of the cash basis. The
Corporation's transition obligation under SFAS 106 was approximately $1,107,000
at January 1, 1993. The Corporation elected to recognize this obligation over 20
years as a component of the annual postretirement benefit cost.
The liability for postretirement benefits is unfunded. The funded status of each
plan at December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
Health Life Health Life
--------------------------------------------------------
<S> <C> <C> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $(311,014) $(332,619) $ (298,727) $ (315,628)
Fully eligible plan participants (87,707) (204,958) (76,926) (179,765)
Other active plan participants (114,680) (128,839) (92,449) (104,489)
------------ --------------------------- -------------
Total (513,401) (666,416) (468,102) (599,882)
Unrecognized net gain (178,002) (40,528) (212,950) (56,160)
Unrecognized prior service cost -- -- -- --
Unrecognized transition obligation 475,004 355,289 506,671 378,975
- -------------------------------------------------------------------------------------------------------
ACCRUED POSTRETIREMENT BENEFIT COST $(216,399) $(351,655) $ (174,381) $ (277,067)
- -------------------------------------------------------------------------------------------------------
</TABLE>
The Corporation's actuary has estimated the net postretirement expense for 1997,
1996, 1995 for each plan as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Health Life Health Life Health Life
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 8,745 $ 9,151 $ 8,517 $ 8,912 $ 6,907 $ 8,098
Interest cost 34,148 44,063 32,236 42,277 32,424 40,457
Actual return on plan assets -- -- -- -- -- --
Amortization of transition obligation 31,667 23,686 31,667 23,686 31,667 23,686
Net amortization of prior service
cost and net gain (9,443) -- (9,129) -- (11,511) (674)
- -------------------------------------------------------------------------------------------------------
NET POSTRETIREMENT EXPENSE $65,117 $76,900 $ 63,291 $74,875 $ 59,487 $ 71,567
- -------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 9.0% annual rate of increase in the per capita cost
of covered health care benefits is assumed for 1995, 8.5% for 1996, and 8.0% for
1997. The rate is assumed to decrease gradually to 5.0% by 2003 and remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. Increasing the assumed health care
cost trend rates by one percentage point in each year would not have a
significant impact. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.00% for 1997 and 7.50% for
1996.
Page 30 Pocahontas Bankshares Corporation
<PAGE>
7. Post Employment Benefits (continued)
The Corporation maintains a qualified 401(k) retirement savings plan. All full
time employees are eligible to participate on a voluntary basis, after
completing their first year of service. All employees may elect to make pretax
contributions up to a maximum of fifteen percent (15%) of their salary, which is
matched fifty percent (50%) by the Corporation. Total amounts charged to
operating expense for payments pursuant to this plan were approximately $99,000
in 1997, $88,000 in 1996 and $82,000 in 1995.
8. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
Tax provision attributed to income from operations 1997 1996 1995
------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Federal
Current $1,342 $1,225 $1,087
Deferred (31) (46) (46)
State
Current 344 278 301
- -----------------------------------------------------------------------------------------
INCOME TAX PROVISION $1,655 $1,457 $1,342
- -----------------------------------------------------------------------------------------
</TABLE>
The components of deferred tax assets and liabilities at December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
(Dollars in Thousands)
<S> <C> <C>
Foreclosures $ 61 54
Provision for loan losses 665 641
Marketable equity securities 126 229
Capital loss carryforward 93 --
Unrealized loss on securities available for sale -- 17
Other net 93 91
-----------------------------
Gross deferred tax assets 1,038 1,032
-----------------------------
Depreciation 127 125
Unrealized gains on securities available for sale 72 --
-----------------------------
Gross deferred tax liabilities 199 125
-----------------------------
Valuation allowance 219 229
- -----------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 620 $ 678
- -----------------------------------------------------------------------------------
</TABLE>
A valuation allowance was established for the "temporary" and "other than
temporary" writedowns of marketable equity securities because their recognition
is limited to future capital gains generated by the Corporation. No tax benefit
has been recognized in the financial statements for the writedowns.
The principal differences between the effective tax rate and the federal
statutory rate was as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
(Dollars in Thousands)
Amount % Amount % Amount %
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $ 1,583 34 $ 1,458 34 $ 1,277 34
Tax-exempt interest income from certain investment
securities and loans (214) (4) (200) (5) (203) (5)
State income tax expense, net of federal benefit 228 5 177 4 198 5
Nondeductible (income) expense 58 1 22 1 70 2
- --------------------------------------------------------------------------------------------------
APPLICABLE INCOME TAXES $ 1,655 36 $ 1,457 34 $ 1,342 36
- --------------------------------------------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 31
<PAGE>
9. Commitments and Contingencies
In the normal course of business, the Corporation is involved in various legal
suits and proceedings. In the opinion of management based on the advice of legal
counsel, these suits are without substantial merit and should not result in
judgments which in the aggregate would have a material adverse effect on the
Corporation's financial statements.
10. Financial Instruments, Concentrations of Credit and Fair Values
The subsidiaries of the Corporation are parties to various financial instruments
with off-balance sheet risk arising in the normal course of business to meet the
financing needs of their customers. Those financial instruments include
commitments to extend credit and standby letters of credit. These commitments
include standby letters of credit of approximately $1,072,000 at December 31,
1997 and $919,000 at December 31, 1996. These instruments contain various
elements of credit and interest rate risk in excess of the amount recognized in
the consolidated statements of financial condition. Additionally, certain off-
balance sheet items of approximately $24,909,000 at December 31, 1997, and
$24,474,000 at December 31, 1996, comprised primarily of unfunded loan
commitments, have an estimated fair value that is not materially different from
the notional amount.
The subsidiaries' exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is the contractual amount of those instruments. The
subsidiaries use the same credit policies in making commitments and conditional
obligations that they do for on-balance sheet instruments.
The Corporation's subsidiaries grant various types of credit including, but not
limited to, agriculture, commercial, consumer, and residential loans to
customers primarily located throughout southern West Virginia and southwestern
Virginia. Each customer's creditworthiness is examined on a case by case basis.
The amount of collateral obtained, if any, is determined by management's credit
evaluation of the customer. Collateral held varies, but may include property,
accounts receivable, inventory, plant and equipment, securities, or other income
producing property. Although the loan portfolio is generally well diversified
and geographically dispersed within the region, aggregate loans to three
specific lines of business represent greater than 25% of the Corporation's
equity. These lines of business are Coal, Hotel/Motel, and Health Care.
Although none of these industries represent more than 10% of the total loan
portfolio, management closely monitors these lines. Within each specific
industry, borrowers are well diversified as to specialty, service, or other
unique feature of the overall industry. A substantial portion of the customers'
ability to honor their contractual commitment is largely dependent upon the
economic conditions of the respective industry and overall economic conditions
of the region.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," (SFAS 107), requires the disclosure of the
estimated fair value of on and off-balance sheet financial instruments. For the
Corporation, as for most financial institutions, approximately 95% of its assets
and liabilities are considered financial instruments as defined by SFAS 107.
Most of the Corporation's financial instruments, however, lack an available
trading market characterized by a willing buyer and a willing seller engaging in
an exchange transaction. It is also
Page 32 Pocahontas Bankshares Corporation
<PAGE>
10. Financial Instruments, Concentrations of Credit and Fair Values (continued)
the Corporation's general practice and intent to hold its financial instruments
to maturity and not to engage in trading or sales activities. Therefore,
significant estimations and present value calculations were used by the
Corporation for the purposes of this disclosure.
Estimated fair values have been determined by the Corporation using the best
available data and an estimation methodology suitable for each category of
financial instruments. For those loans and deposits with floating interest
rates it is presumed that the estimated fair value generally approximated the
recorded book balances. The estimated fair value and the recorded book balances
at December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------
Estimated Carrying Estimated Carrying
Fair Value Amount Fair Value Amount
-----------------------------------------------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 10,896 $ 10,896 $ 14,403 $ 14,403
Federal funds sold 3,400 3,400 5,750 5,750
Securities available for sale 36,177 36,177 26,438 26,438
Securities held to maturity 17,516 17,334 39,218 39,062
Net loans 198,345 194,724 180,235 177,716
Liabilities:
Deposits with no stated maturities $ 143,192 $ 143,192 $143,532 $143,532
Deposits with stated maturities 90,003 89,145 92,914 93,190
Short-term borrowings 17,038 17,038 16,270 16,270
</TABLE>
The estimation methodologies used to determine fair value are as follows:
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices. Financial instruments with stated
maturities have been valued using a present value discounted cash flow with a
discount rate approximating current market rates for similar assets and
liabilities. Financial instrument liabilities with no stated maturities have an
estimated fair value equal to both the amount payable on demand and the recorded
book balance. The net loan portfolio has been valued using a present value
discounted cash flow. The discount rate used in these calculations is the
federal funds sold rate adjusted for noninterest operating costs, credit loss,
and assumed prepayment risk. Fair values for nonperforming loans are estimated
using discounted cash flow analyses, or underlying collateral values, where
applicable. Changes in assumptions or estimation methodologies may have a
material effect on these estimated fair values.
11. Regulatory Matters
The Corporation's principal source of funds for dividend payment and debt
service is dividends received from the subsidiary banks.
Under applicable Federal laws, the Comptroller of the Currency, the primary
regulator of First Century Bank, N.A., restricts the total dividend payments of
a national bank in any calendar year
Pocahontas Bankshares Corporation Page 33
<PAGE>
11. Regulatory Matters (continued)
to the net profits of that year, as defined, combined with the retained net
profits of the two preceding years. At December 31, 1997, retained net profits
for the years 1997 and 1996, which were free of such regulatory restrictions
were approximately $2,609,000.
Under applicable laws of the Commonwealth of Virginia, the Commissioner of
Financial Institutions, the primary regulator of First Century Bank, restricts
the dividend payment of a newly chartered institution, until any deficit in
capital funds originally paid in are restored by earnings to their initial
level. First Century Bank, N.A. fully restored its initial capital level by
earnings in 1997.
The Corporation and its subsidiaries are 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 Corporation's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Corporation and each of its subsidiaries must meet specific capital
guidelines that involve quantitative measures of the Corporation's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and classifications are
also subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and its subsidiaries to maintain minimum amounts and
ratios (set forth in the following table) of total and Tier I capital (as
defined in the regulations) to risk-weighted assets (as defined), and Tier I
capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1997, that the Corporation and each of its subsidiaries meet all
capital adequacy requirements to which they are subject.
As of December 31, 1997, First Century Bank, N.A., and First Century Bank have
each received notification from their respective regulators that they are
well-capitalized under the regulatory framework for prompt corrective action. To
be adequately capitalized, minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the following table must be maintained. There
are no conditions or events since the recent notifications that management
believes have changed the institutions' categories.
Page 34 Pocahontas Bankshares Corporation
<PAGE>
11. Regulatory Matters (continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $28,470 14.05% > $16,205 >8.00%
- -
First Century Bank, N.A. $24,408 13.71% > $14,245 >8.00% >$17,806 >10.00%
- - - -
First Century Bank $3,526 13.95% > $ 2,021 >8.00% >$ 2,527 >10.00%
- - - -
Tier I Capital (to Risk Weighted Assets):
Consolidated $26,100 12.88% > $ 8,103 >4.00%
- -
First Century Bank, N.A. $22,358 12.56% > $ 7,122 >4.00% >$10,684 > 6.00%
- - - -
First Century Bank $3,210 12.70% > $ 1,011 >4.00% >$ 1,516 > 6.00%
- - - -
Tier I Capital (to Average Assets):
Consolidated $26,100 9.46% > $11,033 >4.00%
- -
First Century Bank, N.A. $22,358 9.23% > $ 9,689 >4.00% >$12,111 > 5.00%
- - - -
First Century Bank $ 3,210 8.77% > $ 1,464 >4.00% >$ 1,830 > 5.00%
- - - -
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets):
Consolidated $26,510 13.97% > $15,181 >8.00%
- -
First Century Bank, N.A. $22,844 13.80% > $13,242 >8.00% >$16,552 >10.00%
- - - -
First Century Bank $ 3,081 12.70% > $ 1,940 >8.00% >$ 2,425 >10.00%
- - - -
Tier I Capital (to Risk Weighted Assets):
Consolidated $24,270 12.79% > $ 7,590 >4.00%
- -
First Century Bank, N.A. $20,884 12.62% > $ 6,621 >4.00% >$ 9,931 > 6.00%
- - - -
First Century Bank $ 2,801 11.55% > $ 970 >4.00% >$ 1,455 > 6.00%
- - - -
Tier I Capital (to Average Assets):
Consolidated $24,270 8.85% > $10,971 >4.00%
- -
First Century Bank, N.A. $20,884 8.63% > $ 9,681 >4.00% >$12,101 > 5.00%
- - - -
First Century Bank $ 2,801 8.36% > $ 1,340 >4.00% >$ 1,675 > 5.00%
- - - -
</TABLE>
Pocahontas Bankshares Corporation Page 35
<PAGE>
12. Short-term Borrowings
Short-term borrowings consist of treasury tax and loan deposits, which are
generally repaid within 30 days from the transaction date, and securities sold
under agreements to repurchase. Securities sold under agreements to repurchase
generally mature within one to four days from the transaction date. Information
concerning securities sold under agreements to repurchase is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------
(Dollars in Thousands)
<S> <C> <C>
Average balance during the year $ 13,589 $10,104
Average interest rate during the year 3.93% 3.66%
Maximum month-end balance during the year $ 18,783 $14,514
</TABLE>
13. Quarterly Financial Data (Unaudited)
The summary financial data by quarter for the years ended December 31, 1997,
1996 and 1995 was as follows:
<TABLE>
<CAPTION>
Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C>
1997
Interest income $ 5,269 $ 5,442 $ 5,479 $ 5,627
Net interest income 2,874 3,161 3,137 3,266
Provision for possible loan losses 141 238 204 108
Securities gains (losses) -- (59) -- --
Income before taxes 902 1,262 1,249 1,244
Net income 605 799 817 781
- ---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.30 $ 0.40 $ 0.41 $ 0.39
- ---------------------------------------------------------------------------------------------------
1996
Interest income $ 5,182 $ 5,278 $ 5,320 $ 5,289
Net interest income 2,819 2,929 2,944 2,896
Provision for possible loan losses 109 257 82 196
Securities gains (losses) -- -- 1 --
Income before taxes 988 1,063 1,148 1,088
Net income 648 712 742 728
- ---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.33 $ 0.36 $ 0.37 $ 0.36
- ---------------------------------------------------------------------------------------------------
1995
Interest income $ 4,960 $ 5,164 $ 5,235 $ 5,298
Net interest income 2,890 2,942 2,873 2,900
Provision for possible loan losses 101 245 311 182
Securities gains (losses) -- -- -- 341
Income before taxes 1,033 980 974 769
Net income 706 656 639 413
- ---------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.35 $ 0.33 $ 0.32 $ 0.21
- ---------------------------------------------------------------------------------------------------
</TABLE>
Page 36 Pocahontas Bankshares Corporation
<PAGE>
14. Parent Company Financial Data
Condensed financial information of Pocahontas Bankshares Corporation (parent
company only) is presented below:
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
December 31,
-------------------------------------
1997 1996
-------------------------------------
Assets: (Dollars in Thousands)
<S> <C> <C>
Cash $ 222 $ 287
Investment in subsidiaries at equity 26,057 24,031
Other assets 429 339
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $26,708 $ 24,657
- ----------------------------------------------------------------------------------------------------
Liabilities:
Other liabilities $ 119 $ 28
-------------------------------------
TOTAL LIABILITIES 119 28
-------------------------------------
Stockholders' Equity:
Common stock -$1.25 par value; shares issued and outstanding:
2,000,000 at December 31, 1997 and December 31, 1996 2,500 2,500
Paid-in capital 785 785
Retained earnings 23,304 21,344
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 26,589 24,629
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,708 $ 24,657
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years ended December 31,
--------------------------------------
1997 1996 1995
--------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 1,300 $ 1,350 $2,400
--------------------------------------
TOTAL INCOME 1,300 1,350 2,400
--------------------------------------
Expenses:
Interest on long-term borrowings -- -- 56
Other 33 64 37
--------------------------------------
TOTAL EXPENSES 33 64 93
--------------------------------------
Applicable income taxes (benefits) (9) (24)
Income before equity in undistributed
net income of subsidiaries 1,234 1,295 2,331
Equity in undistributed net income of subsidiaries 1,768 1,535 83
- ---------------------------------------------------------------------------------------
NET INCOME $ 3,002 $ 2,830 $2,414
- ---------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Years ended December 31,
--------------------------------
1997 1996 1995
--------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,002 $ 2,830 $ 2,414
Adjustments to reconcile net income to net cash
Provided by operating activities:
Equity in undistributed net income of subsidiaries (1,768) (1,535) (83)
Other adjustments, net 1 (2) (6)
--------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,235 1,293 2,325
--------------------------------
Cash flows from financing activities
Principal repayments of long term debt -- -- (1,200)
Cash dividends paid (1,300) (1,210) (1,100)
--------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,300) (1,210) (2,300)
--------------------------------
Net increase (decrease) in cash (65) 83 25
Cash at January 1, 287 204 179
- ----------------------------------------------------------------------------------------------------
Cash at December 31, $ 222 $ 287 $ 204
- ----------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ -- $ -- $ 56
Income taxes $ 1,369 $ 1,751 $ 1,456
</TABLE>
Pocahontas Bankshares Corporation Page 37
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders
Pocahontas Bankshares Corporation:
We have audited the accompanying consolidated statements of financial condition
of Pocahontas Bankshares Corporation and Subsidiaries (the "Corporation") as of
December 31, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pocahontas
Bankshares Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand
Charlotte, North Carolina
January 30, 1998
Page 38 Pocahontas Bankshares Corporation
<PAGE>
BOARDS OF DIRECTORS
================================================================================
POCAHONTAS BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
EUSTACE FREDERICK
Retired, Senior Vice President-
Mining, Consolidation Coal Co.,
Southern Appalachia Region
B. L. JACKSON, JR.
Chairman of the Board
Pocahontas Bankshares
Corporation
ROBERT M. JONES, JR., M.D.
Physician
HAROLD LEE MILLER, JR.
Retired, President
Flat Top Insurance Agency
CHARLES A. PETERS
President,
Peters Equipment, Inc.
Secretary, Pocahontas
Bankshares Corporation
C. E. RICHNER
President
C. E. Richner Drilling Co.
BYRON K. SATTERFIELD
Executive Vice President &
Trust Officer, First Century
Bank, N.A.
JOHN C. SHOTT
Chairman of the Board
Paper Supply Company
SCOTT H. SHOTT
Shott Foundation
WALTER L. SOWERS
President
Pemco Corporation
J. BROOKINS TAYLOR, M.D.
Physician
JAMES P. THOMAS, M.D.
Retired, Physician and Surgeon
FRANK W. WILKINSON
Vice President, Marketing and
Branch Administration,
First Century Bank, N.A.
R. W. WILKINSON
President & Chief Executive
Officer, Pocahontas Bankshares
Corporation,
First Century Bank, N.A.
Chairman, First Century Bank
FIRST CENTURY BANK, N.A.
- --------------------------------------------------------------------------------
EUSTACE FREDERICK
Retired, Senior Vice President-
Mining, Consolidation Coal Co.,
Southern Appalachia Region
B. L. JACKSON, JR.
Chairman of the Board
Pocahontas Bankshares
Corporation
ROBERT M. JONES, JR.
Physician
HAROLD LEE MILLER, JR.
Retired, President
Flat Top Insurance Agency
MARSHALL S. MILLER
President, Marshall Miller
& Associates
CHARLES A. PETERS
President, Peters Equipment, Inc.
Secretary, Pocahontas
Bankshares Corporation
ROBERT L. RAINES
Retired, President
Pocahontas Land Corporation
C.E. RICHNER
President
C.E. Richner Drilling Co.
BYRON K. SATTERFIELD
Executive Vice President &
Trust Officer, First Century
Bank, N.A.
JOHN H. SHOTT
Attorney
SCOTT H. SHOTT
Shott Foundation
WALTER L. SOWERS
President, Pemco Corporation
WILLIAM CHANDLER SWOPE
President
Swope Construction
Services, Inc.
J. BROOKINS TAYLOR, M.D.
Physician
JAMES P. THOMAS, M.D.
Retired, Physician and Surgeon
FRANK W. WILKINSON
Vice President, Marketing and
Branch Administration,
First Century Bank, N.A.
R. W. WILKINSON
President & Chief Executive
Officer, Pocahontas Bankshares
Corporation,
First Century Bank, N.A.
Chairman, First Century Bank
FIRST CENTURY BANK, N.A.
WYOMING COUNTY OPERATIONS
ADVISORY BOARD
- --------------------------------------------------------------------------------
TED BAILEY
President, Pineville Land Co.
TOM EVANS, JR.
President, Evans Funeral Home
JOHN D. LAY
Vice President, Wyoming County
Area, First Century Bank, N.A.
C. E. RICHNER
President,
C. E. Richner Drilling Co.
BYRON K. SATTERFIELD
Executive Vice President &
Trust Officer, First Century
Bank, N.A.
FRANK W. WILKINSON
Vice President, Marketing and
Branch Administration,
First Century Bank, N.A.
R. W. WILKINSON
President & Chief Executive
Officer, Pocahontas Bankshares
Corporation, First Century Bank, N.A.
Chairman, First Century Bank
DENNIS WORRELL
Partner, Worrell Exxon &
Owner, D & T Car Wash
FIRST CENTURY BANK
- -------------------------------------------------------------------------------
J.J. BOOKER, III, M.D.
Physician
JAMES W. CAUDILL
President, R.P. Johnson & Sons
ROBERT T. DUPUIS
President, P & T Products, Inc.
JEFFERY L. FORLINES
Chief Executive Officer, First
Century Bank
STEPHEN A. LESTER
Ewald-Lester Insurance
Agency, Inc.
FRANK W. WILKINSON
Vice President, Marketing and
Branch Administration,
First Century Bank, N.A.
R. W. WILKINSON
President & Chief Executive
Officer, Pocahontas Bankshares
Corporation,
First Century Bank, N.A.
Chairman, First Century Bank
Pocahontas Bankshares Corporaiton Page 39
<PAGE>
OFFICERS
================================================================================
POCAHONTAS
BANKSHARES CORPORATION
- --------------------------------------------------------------------------------
B. L. JACKSON, JR.
Chairman of the Board
R. W. WILKINSON
President & Chief Executive
Officer
CHARLES A. PETERS
Secretary
W. E. ALBERT
Assistant Secretary
J. RONALD HYPES
Treasurer
FIRST CENTURY BANK, N.A.
- --------------------------------------------------------------------------------
ADMINISTRATION
- --------------
R. W. WILKINSON
President &
Chief Executive Officer
J. RONALD HYPES
Vice President & Comptroller
WAYNE L. BLEVINS
Assistant Comptroller
BARBARA MOORE-RAY
Community
Development Officer
KENNETH W. BEARD
Vice President &
Compliance Officer
ZELLA W. DILLON
Auditor
LISA A. KEENE
Training Director
BARRY W. WHITT
Loan Review Officer
BRANCH ADMINISTRATION
- ---------------------
FRANK W. WILKINSON
Vice President, Marketing and
Branch Administration
JOHN D. LAY
Vice President, Wyoming County
Area
RANDALL PRICE
Vice President,
Corporate Development
ANGELA M. JAMES
Assistant Cashier
KAREN KIDD
Assistant Cashier
REVONDA D. HELMS
Assistant Cashier
JUANITA GROWE
Branch Manager, Pineville
Branch
JEAN STANLEY
Assistant Cashier
RHONDA G. SUTHERLAND
Assistant Cashier
RITA TOLER
Assistant Cashier, Oceana Office
LOANS
- -----
R. S. KENNETT
Senior Vice President, Loans
GARNETT L. LITTLE
Vice President, Loans
HAL ABSHER
Director of Secondary
Mortgage Lending
ROBERT SEXTON
Manager, Consumer Loans
MARSHALL V. LYTTON
Vice President, Loan Officer
DEBRA BRUNTY
Manager, Consumer Loans,
Wyoming County Area
JAMES GOODWIN
Loan Officer
Princeton Office
CHRISTOPHER W. NIPPER
Loan Officer, College Avenue
Office
CHARLES LESTER
Collection Officer and
Loan Officer
SHELA D. FORTNER
Consumer Loan Officer
Pineville Office
CHARLENE MAYNARD
Consumer Loan Officer
Oceana Office
OPERATIONS
- -----------
W. E. ALBERT
Vice President & Cashier
JACK M. FORBES
Assistant Vice
President, Transit
ERWIN C. BROWNING
Assistant Vice President &
Security Officer
NINA C. CROCKETT
Manager, Administrative Support
Group
CHRISTINA H. NAYLOR
Teller Operations Manager
MARTHA COOPER
Assistant Cashier
HAROLD MITCHELL
Assistant Cashier
REBECCA LYNN DANIELS
Assistant Cashier, Wyoming
County Operations
TRUST
- -----
BYRON K. SATTERFIELD
Executive Vice President & Trust
Officer
PATSY R. SYKES
Vice President & Trust Officer
ELIZABETH PRUETT
Trust Operations Officer
GARY R. MILLS
Trust Officer and
Director of Human Resources
FIRST CENTURY BANK
- --------------------------------------------------------------------------------
R. W. WILKINSON
Chairman &
Trust Officer
JEFFERY L. FORLINES
President &
Chief Executive Officer
W. EDWARD SMITH
Assistant Vice President
JAMES B. LITTON
Vice President & Security
Officer, Wytheville Office
ZERNA FELTS
Branch and Security Officer, Fort
Chiswell Office
Page 40 Pocahontas Bankshares Corporation
<PAGE>
First Century Bank, N.A.
500 Federal Street
Bluefield, WV 24701
(304) 325-8181
525 Federal Street
Bluefield, WV 24701
(304) 325-6600
2020 College Avenue
Bluefield, WV 24701
(304) 327-5660
1223 Stafford Drive
Pine Plaza, Princeton, WV 24740
(304) 425-0856
Rt. 10, Cook Parkway
Oceana, WV 24870
(304) 682-6221
Rt. 10, East Pineville
Pineville, WV 24874
(304) 732-8850
First Century Bank
Wytheville Office
200 Pepper's Ferry Road
Wytheville, VA 24382
(540) 223-1115
Fort Chiswell Office
Rt. 94
Max Meadows, VA 24360
(540) 637-3100
Pocahontas Bankshares Corporation Page 41
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 8,883
<INT-BEARING-DEPOSITS> 2,013
<FED-FUNDS-SOLD> 3,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,177
<INVESTMENTS-CARRYING> 17,334
<INVESTMENTS-MARKET> 17,516
<LOANS> 197,094
<ALLOWANCE> 2,370
<TOTAL-ASSETS> 276,747
<DEPOSITS> 232,337
<SHORT-TERM> 17,038
<LIABILITIES-OTHER> 783
<LONG-TERM> 0
0
0
<COMMON> 2,500
<OTHER-SE> 24,089
<TOTAL-LIABILITIES-AND-EQUITY> 276,747
<INTEREST-LOAN> 17,610
<INTEREST-INVEST> 3,914
<INTEREST-OTHER> 293
<INTEREST-TOTAL> 21,817
<INTEREST-DEPOSIT> 8,759
<INTEREST-EXPENSE> 9,379
<INTEREST-INCOME-NET> 12,438
<LOAN-LOSSES> 691
<SECURITIES-GAINS> (59)
<EXPENSE-OTHER> 9,391
<INCOME-PRETAX> 4,657
<INCOME-PRE-EXTRAORDINARY> 3,002
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,002
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.50
<YIELD-ACTUAL> 4.90
<LOANS-NON> 828
<LOANS-PAST> 165
<LOANS-TROUBLED> 645
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,240
<CHARGE-OFFS> 612
<RECOVERIES> 51
<ALLOWANCE-CLOSE> 2,370
<ALLOWANCE-DOMESTIC> 1,098
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,272
</TABLE>
