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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, 1998
OR
[_] Transition Report Pursuant to Section 13 or 15 (d) or the Securities
Exchange Act of 1934
For the transition period from____________ to ___________
Commission file number: 0-11671
POCAHONTAS BANKSHARES CORPORATION
---------------------------------
(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
------------------- ------------------------
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, 1999 was $32,228,405 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, 1998 are incorporated by reference into Part II.
Portions of the proxy statement for the annual shareholders meeting to be
held April 20, 1999, are incorporated by reference into Part III.
Total number of pages, including cover page and exhibits - 63
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POCAHONTAS BANKSHARES CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
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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.............................. 6
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................ 6
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............................... 7
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............................................... 9 - 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 15 of the Notes to the
Consolidated Financial Statements in the Registrant's 1998 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 six additional branches in Mercer and Wyoming counties in southern West
Virginia and Tazewell County in southwestern Virginia.
During the fourth quarter of 1998, Bluefield entered into an agreement with
City National Bank of West Virginia, Charleston, West Virginia ("CNB") to
acquire the assets and assume the liabilities of CNB's Hinton, West Virginia
branch. This banking office has approximately $60 million in deposits and is a
natural market extension for the bank. It is anticipated that this transaction
will be completed during the second quarter of 1999.
As of December 31, 1998, Bluefield had 123 full-time employees and 13 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, 1998, Wytheville had 14 full-time employees and 2 part-
time employees. 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
competitive environment will continue in 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 in 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 permissible activities for bank holding companies, subject to
the approval by the Federal Reserve in individual cases.
4
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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 19 of the accompanying 1998 Annual Report to
Stockholders, incorporated herein by reference in this Form 10-K annual report
as Exhibit 13.
ITEM 2. PROPERTIES
Properties
The executive offices of the Registrant are located at 500 Federal Street,
Bluefield, West Virginia. There are twelve properties owned or leased by the
subsidiary banks consisting 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. Ten of these offices are owned
and two are leased.
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.
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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, 1998.
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.
Page 17 of the 1998 Annual Report to Stockholders (incorporated herein by
reference) describes further the information for market, stockholders, and
dividends. The payment of dividends is subject to the restrictions described in
Note 15 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.
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 19 of the Registrant's 1998 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 19 of the accompanying 1998 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements and report of independent accountants
for the years ended December 31, 1998, 1997, and 1996, which are included in the
Corporation's 1998 Annual Report to Stockholders (Exhibit 13), are incorporated
herein by reference:
The report of independent accountants on page 42 of the Registrant's 1998
Annual Report to Stockholders reflects an unqualified opinion on the 1998 and
1997 consolidated statements of financial condition and the related consolidated
statements of income and comprehensive income, changes in stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998, issued by PricewaterhouseCoopers, LLP, Charlotte, North Carolina, the
Registrant's independent accountant for those years.
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Reference to
1998 Annual Report
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Consolidated Statements of Financial Condition Page 20
Consolidated Statements of Income
and Comprehensive Income Page 21
Consolidated Statements of Cash Flows Page 22
Consolidated Statements of Changes
in Stockholders' Equity Page 23
Notes to Consolidated Financial
Statements Pages 24 through 41
Report of Independent Accountants Page 42
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The supplementary financial information required by this item is set forth
in Note 16 of "Notes to Consolidated Financial Statements" on Page 40 of the
Corporation's 1998 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 March 30, 1999 (which is not later than 120 days after December 31, 1998,
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, 1999, (which is not later than 120 days after
December 31, 1998, 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
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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, 1999,
(which is not later than 120 days after December 31, 1998, 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, 1999, (which is not
later than 120 days after December 31, 1998, 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 1998.
(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.
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 22, 1999
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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 16, 1999
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B. L. Jackson, Jr., Chairman of the Board and Director
BY: /s/ R. W. Wilkinson Date: March 16, 1999
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R. W. Wilkinson, President & Chief Executive Officer & Director
(Principal Executive Officer)
BY: /s/ Charles A. Peters Date: March 16, 1999
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Charles A. Peters, Secretary and Director
BY: ________________________________________ Date: ______________
Paul Cole, Jr., Director
BY: /s/ Eustace Frederick Date: March 16, 1999
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Eustace Frederick, Director
BY: /s/ Robert M. Jones, Jr Date: March 16, 1999
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Robert M. Jones, Jr., M.D., Director
BY: ________________________________________ Date: ______________
Harold L. Miller, Jr., Director
BY: ________________________________________ Date:_______________
C. E. Richner, Director
BY: /s/ Byron K. Satterfield Date: March 16, 1999
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Byron K. Satterfield, Director
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BY: ______________________________________ Date:_______________
John C. Shott, Director
BY: /s/ Scott H. Shott Date: March 16, 1999
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Scott H. Shott, Director
BY: /s/ Walter L. Sowers Date: March 16, 1999
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Walter L. Sowers, Director
BY: /s/ J. Brookins Taylor, M. D. Date: March 16, 1999
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J. Brookins Taylor, M. D., Director
BY: /s/ Frank W. Wilkinson Date: March 16, 1999
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Frank W. Wilkinson, Director
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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
executive employed by the Company (the "Executive").
1. Definitions. Where indicated by initial capital letters, the following
-----------
terms shall have the following meaning:
(a) Agreement: The Executive Split Dollar Life Insurance Agreement
---------
(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
------
which shall not be more than 5 times Executive's Compensation.
(c) Beneficiary: The person or persons designated in writing by Executive
-----------
to receive the Amount.
(d) Cause: Cause means, but is not limited to, a determination by the
-----
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 company
-------
issuing a life insurance contract on Executive's life.
(g) Plan: The First National Bank of Bluefield Executive Split Dollar
----
Life Insurance Plan.
(h) Policy: One or more life insurance contracts issued on the life of
------
Executive pursuant to the Plan as identified on Schedule A.
(i) Recoverable Amount: The Company's annual premium, exclusive of any
------------------
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.
(k) Roll-out: Division of the policy into two separate policies, one to
--------
be retained by the Company, and the other to be transferred to the Executive.
<PAGE>
(l) Retirement: Termination of employment (except for Cause) after
----------
attainment of age 55 with at least ten years of service.
2. Application of Insurance. The Company will apply to the Insurer for a
-------------------------
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
-------------------
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
---------
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.
-------------------
(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
(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
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(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
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:
<PAGE>
(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.
(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,
<PAGE>
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.
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: ________________________________________
________________________________________
________________________________________
<PAGE>
1998 Annual Report
[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 10K, 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 20, 1999, at Fincastle Country Club, Bluefield, Virginia. All
stockholders are cordially invited to attend.
Table of Contents
Financial Highlights............................................. 1
Letter to the Stockholders....................................... 2
Management's Discussion and Analysis of Financial Condition
and Results of Operation....................................... 3
Consolidated Statements of Financial Condition................... 20
Consolidated Statements of Income and Comprehensive Income....... 21
Consolidated Statements of Cash Flows............................ 22
Consolidated Statements of Changes in Stockholders' Equity....... 23
Notes to Consolidated Financial Statements....................... 24
Report of Independent Accountants................................ 42
Boards of Directors.............................................. 43
Corporate and Bank Officers...................................... 44
Pocahontas Bankshares Corporation Subsidiaries......Inside back cover
<PAGE>
Financial
Highlights
1998 1997 1996
---------------------------------------------
(Dollars in Thousands, Except Per Share Data)
- -------------------------------------------------------------------------------
FOR THE YEAR
Total operating income $ 25,239 $ 24,118 $ 23,076
Total operating expense 20,223 19,461 18,789
Net income 3,201 3,002 2,830
Cash dividends declared 1,500 1,300 1,210
- -------------------------------------------------------------------------------
AT YEAR END
Assets $294,579 $276,747 $278,572
Deposits 251,728 232,337 236,722
Loans 202,214 197,094 179,956
Securities 60,936 53,511 65,500
Stockholders' equity 28,503 26,589 24,629
- -------------------------------------------------------------------------------
PER COMMON SHARE
Net income, basic and diluted $1.60 $ 1.50 $ 1.42
Cash dividends declared 0.750 0.650 0.605
Book value 14.25 13.29 12.31
LOANS ASSETS
($ in millions) ($ in millions)
[Graph appears here] [Graph appears here]
------------------------- -------------------------
1996 1997 1998 1996 1997 1998
------------------------- -------------------------
179.9 197.1 202.2 278.6 276.7 294.6
DEPOSITS BOOK VALUE PER SHARE
($ in millions) ($ per common share)
[Graph appears here] [Graph appears here]
------------------------- -------------------------
1996 1997 1998 1996 1997 1998
------------------------- -------------------------
236.7 232.3 251.7 12.31 13.29 14.25
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 1998.
Pocahontas Bankshares Corporation had the most profitable year in its history
with net income of $3,201,000. This represented an increase for 1998 of 6.6%
over the previous year. On a per share basis, net income rose to $1.60 compared
to $1.50 the previous year. Total assets were $294,579,000, up from
$276,747,000 a year ago. This represented an increase of 6.4% in total assets.
The return on average assets for 1998 was 1.10%, and the return on average
equity was 11.61%. Although slightly below 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 pleased with the continued contribution of the
Virginia bank, both in asset growth and earnings. Our Virginia Bank is now
approximately $40 million in total assets. Both banks continued to improve
earnings and asset quality, which was reflected in the performance of the
Corporation in 1998.
Pocahontas Bankshares Corporation closed the transaction with First American
Federal Savings Bank of Roanoke to acquire our Bluefield, Virginia location
onApril 3, 1998.We have been pleased with our progress in Tazewell County, but
we ask for your continued support at this location. The staff is ready, and
waiting to serve you. We look to continue to expand our presence in Tazewell
County, Virginia.
In continuing our commitment to expand our customer base, your board of
directors approved the acquisition of the First National Bank of Hinton Division
of City National Bank of West Virginia in December 1998. The Hinton Office has
total deposits of $60 million. When we close this transaction during the second
quarter of 1999, Pocahontas will have total assets of approximately $360
million. Management is extremely pleased to be expanding into Summers County,
West Virginia.
Pocahontas Bankshares Corporation 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 1998, your Corporation continued its readiness for the Year 2000. We
are in the process of testing all our mission critical systems, and writing
contingency plans for back-up support. We are following guidelines set forth by
our regulatory supervisors, and we anticipate being operational when the new
year arrives. We will keep you posted on our progress.
We believe we are positioned for the future to continue to provide quality
banking services to the customers of our region. If you feel we could better
serve you, please let us know. We ask for your continued support of Pocahontas
Bankshares Corporation and its banking subsidiaries as we continue to deliver
"The experience you expect, the service you deserve." Your confidence and
continued support are greatly appreciated.
Sincerely,
/s/ R. W. Wilkinson
R. W. "Buz" Wilkinson
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>
1998 1997 1996
-------------------------------------------------------------------------------------
(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 $ 3,750 $ 196 5.23% $ 1,563 $ 86 5.50% $ 2,009 $ 106 5.28%
Securities available for sale
and other equity securities:
U. S. Government securities 18,439 1,116 6.05% 18,326 1,109 6.05% 5,138 299 5.82%
U. S. Government agency securities 20,306 1,296 6.38% 11,587 766 6.61% 3,458 228 6.59%
Other securities 2,572 169 6.57% 4,506 302 6.70% 5,426 377 6.95%
-------------------------------------------------------------------------------------
Total securities available for sale 41,317 2,581 6.25% 34,419 2,177 6.32% 14,022 904 6.45%
-------------------------------------------------------------------------------------
Securities held to maturity:
U. S. Government securities 2,307 122 5.29% 7,796 428 5.49% 24,549 1,279 5.21%
U. S. Government agency securities 4,662 273 5.86% 13,369 875 6.54% 18,513 1,185 6.40%
State and Municipal securities 6,752 354 5.24% 6,375 403 6.32% 5,563 382 6.87%
Other securities 129 9 6.98% 501 31 6.19% 1,037 64 6.17%
-------------------------------------------------------------------------------------
Total securities held to maturity 13,850 758 5.47% 28,041 1,737 6.19% 49,662 2,910 5.86%
-------------------------------------------------------------------------------------
Federal funds sold 7,158 384 5.36% 3,769 207 5.49% 5,918 312 5.27%
Loans 201,059 18,616 9.26% 185,986 17,504 9.41% 180,341 16,752 9.29%
-------------------------------------------------------------------------------------
Total interestearning assets 267,134 22,535 8.44% 253,778 21,711 8.56% 251,952 20,984 8.33%
-------------------------------------------------------------------------------------
Allowance for loan losses (2,472) (2,273) (2,150)
Cash and due from banks--demand 10,047 9,650 8,994
Premises and equipment--net 9,147 8,562 6,914
Other assets 6,765 6,454 6,159
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $290,621 $276,171 $271,869
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS'
EQUITY:
Interestbearing demand deposits $ 57,317 1,838 3.21% $ 52,849 1,751 3.31% $ 49,685 1,670 3.36%
Savings deposits 63,687 2,305 3.62% 63,591 2,308 3.63% 64,703 2,360 3.65%
Time deposits 96,118 5,059 5.26% 89,837 4,700 5.23% 93,612 5,023 5.37%
-------------------------------------------------------------------------------------
Total interestbearing deposits 217,122 9,202 4.24% 206,277 8,759 4.25% 208,000 9,053 4.35%
-------------------------------------------------------------------------------------
Short-term debt 16,300 661 4.06% 15,139 620 4.10% 11,265 428 3.80%
-------------------------------------------------------------------------------------
Total interestbearing liabilities 233,422 9,863 4.23% 221,416 9,379 4.24% 219,265 9,481 4.32%
-------------------------------------------------------------------------------------
Demand deposits 27,618 27,342 26,832
Other liabilities 2,018 1,669 1,695
-------------------------------------------------------------------------------------
TOTAL LIABILITIES 263,058 250,427 247,792
-------------------------------------------------------------------------------------
Stockholders' equity 27,563 25,744 23,897
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $290,621 $276,171 $271,689
- ------------------------------------------------------------------------------------------------------------------------------------
Average rate paid to fund earning assets 3.69% 3.70% 3.76%
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST DIFFERENTIAL $12,672 4.74% $12,332 4.86% $11,503 4.57%
- ------------------------------------------------------------------------------------------------------------------------------------
</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 $216,000 in 1998, $266,000 in 1997, and $165,000 in 1996.
Average balances of securities available for sale are reported at amortized
cost; excludes pretax unrealized gains of $298,000 in 1998, and unrealized
losses of $156,000 in 1997 and $213,000 in 1996. Interest income on tax exempt
securities is shown based on the actual yield.
VOLUME/RATE ANALYSIS
<TABLE>
<CAPTION>
Increase (Decrease) in Interest
----------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Due to Change in (1) Due to Change in (1) Due to Change in (1)
----------------------------------------------------------------------------------------------------
Interest income on: Volume Rate Total Volume Rate Total Volume Rate Total
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $1,407 $(295) $1,112 $ 528 $ 224 $ 752 $ 475 $(289) $ 186
Securities available for
sale and other equity
securities 434 (30) 404 1,303 (30) 1,273 606 (88) 518
Securities held to maturity (828) (151) (979) (1,303) 130 (1,173) (329) 151 (178)
Federal funds sold 184 (7) 177 (116) 11 (105) (165) (54) (219)
Interest--bearing deposits
with banks 117 (7) 110 (24) 4 (20) 26 (6) 20
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 1,314 (490) 824 388 339 727 613 (286) 327
- -----------------------------------------------------------------------------------------------------------------------------------
Interest expense on:
Interest--bearing demand
deposits 146 (59) 87 99 (18) 81 32 (22) 10
Savings deposits 3 (6) (3) (40) (12) (52) (160) 18 (142)
Time deposits 330 29 359 (200) (123) 323 408 174 582
Short-term borrowings 47 (6) 41 153 39 192 68 (89) (21)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 526 (42) 484 12 (114) (102) 348 81 429
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 788 $(448) $ 340 $ 376 $ 453 $ 829 $ 265 $(367) $(102)
- -----------------------------------------------------------------------------------------------------------------------------------
</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 1998, Bluefield entered into an agreement with City
National Bank of West Virginia, Charleston, West Virginia ("CNB") to acquire the
assets and assume the liabilities of CNB's Hinton, West Virginia branch. This
banking office has approximately $60 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 1999.
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 $5.1 million or 2.6% in 1998
following a $17.1 million or 9.5% increase in 1997. Approximately half of this
growth occurred during the fourth quarter when loans increased approximately
$2.3 million, or 1.1%. Expanding affiliate markets have contributed to loan
growth, however, competition in the marketplace is becoming very aggressive for
the acquisition of new loans. At December 31, 1998, the loan portfolio
comprised 74.8% of total interest-earning assets as compared to 77.0% of total
interest-earning assets at December 31, 1997, and contributed 82.6% of total
interest income in 1998, compared to 80.7% of total interest income in 1997.
Loan demand was relatively strong through most of 1998, primarily in the
consumer installment and the residential and commercial mortgage categories of
the loan portfolio.
Page 4 Pocahontas Bankshares Corporation
<PAGE>
AMOUNTS OF LOANS OUTSTANDING
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 42,584 $ 46,012 $ 44,209 $ 45,592 $ 46,173
Real estate--construction 10,369 8,068 5,603 3,541 2,202
Real estate--mortgage 119,076 116,728 105,564 102,178 97,020
Installment loans to individuals 30,185 26,286 24,580 26,483 25,930
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LOANS OUTSTANDING $ 202,214 $ 197,094 $ 179,956 $177,794 $171,325
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MATURITY SCHEDULE OF LOANS
<TABLE>
<CAPTION>
Remaining maturity at December 31, 1998
-----------------------------------------------------------
(Dollars in Thousands)
1 Year 1 to 5 After 5
or Less Years Years Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 26,426 $10,334 $ 5,824 $ 42,584
Real estate--construction iduals 9,785 49 535 10,369
Real estate--mortgage 22,187 45,583 51,306 119,076
Installment loans to individuals 7,043 21,858 1,284 30,185
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 65,441 $77,824 $58,949 $202,214
- -------------------------------------------------------------------------------------------------------------------------------
Loans with fixed interest rates $ 18,588 $61,466 $22,037 $102,091
Loans with floating interest rates 46,853 16,358 36,912 100,123
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 65,441 $77,824 $58,949 $202,214
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NONPERFORMING ASSETS AND LOAN LOSS ANALYSIS
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
-----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average amount of loans outstanding $201,059 $ 5,986 $180,341 $175,280 $177,888
Allowance for loan losses:
Balance at beginning of the year $ 2,370 $ 2,240 $ 2,145 $ 1,985 1,858
Loans charged off
Commercial, financial and agricultural 66 337 135 225 270
Real estate--construction -- -- -- -- --
Real estate--mortgage 58 9 140 235 438
Installment loans to individuals 316 266 297 254 165
-----------------------------------------------------------
TOTAL LOANS CHARGED OFF 440 612 572 714 873
-----------------------------------------------------------
Loan recoveries
Commercial, financial and agricultural 26 3 3 8 577
Real estate--construction -- -- -- -- --
Real estate--mortgage -- 31 -- -- 14
Installment loans to individuals 33 17 20 27 14
-----------------------------------------------------------
TOTAL LOAN RECOVERIES 59 51 23 35 605
-----------------------------------------------------------
Net loans charged off (381) (561) (549) (679) (268)
Provision for loan losses 544 691 644 839 395
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF THE YEAR $ 2,533 $ 2,370 $ 2,240 $ 2,145 1,985
- -------------------------------------------------------------------------------------------------------------------------
Ratio of net loans charged off to average
loans outstanding 0.19% 0.30% 0.30% 0.39% 0.15%
Allowance at year end as a percent of loans 1.25% 1.20% 1.24% 1.21% 1.15%
Provision for loan losses as a percent of loans 0.27% 0.35% 0.36% 0.47% 0.23%
-----------------------------------------------------------
Nonperforming assets (at year end)
Nonaccrual $ 1,728 828 $1,398 $ 3,194 $ 1,564
Past--due ninety days or more and still accruing 273 165 1,427 781 536
Restructured loans 637 645 -- -- --
Other real estate owned 678 993 1,976 1,206 928
-----------------------------------------------------------
TOTAL NONPERFORMING ASSETS $ 3,316 $ 2,631 $4,801 $5,181 3,028
-----------------------------------------------------------
Nonperforming assets/total loans 1.6% 1.3% 2.7% 2.9% 1.8%
Nonperforming assets/total assets 1.1% 1.0% 1.7% 1.9% 1.2%
-----------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 5
<PAGE>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1998 1997 1996 1995
--------------------------------------------------------------------------------------------
(Dollars in Thousands)
Percent Percent Percent Percent
of of of of
Loans Loans Loans Loans
in Each in Each in Each in Each
Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 621 21.06% $ 392 23.35% $ 481 24.57% $ 443 25.64%
Real estateconstruction -- 5.13% -- 4.09% -- 3.11% 20 1.99%
Real estatemortgage 332 58.88% 456 59.22% 239 58.66% 502 57.47%
Installment loans to
individuals 274 14.93% 250 13.34% 191 13.66% 290 14.90%
Unallocated 1,306 N/A 1,272 N/A 1,329 N/A 890 N/A
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $2,533 100.00% $2,370 100.00% $2,240 100.00% $ 2,145 100.00%
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1994
------------------------
Percent
of
Loans
in Each
Category to
Amount Total Loans
- ------------------------------------------------------------
<S> <C> <C>
Commercial, financial and
agricultural $ 594 26.95%
Real estateconstruction 30 1.29%
Real estatemortgage 781 56.63%
Installment loans to
individuals 245 15.13%
Unallocated 335 N/A
- ------------------------------------------------------------
TOTAL $ 1,985 100.00%
</TABLE>
During 1998, solicitation of small and middle-market companies within the
Corporation's primary trade areas primarily accomplished the growth in the loan
portfolio. Emphasis continued to be on strong local companies with known local
management and excellent financial stability. Most of the commercial loans in
the portfolio were made at variable rates of interest. Additionally, the
Corporation continued to make loans available to a growing retail marketplace.
Consistent with management's philosophy on relationship banking, most borrowers
are also depositors and utilize other banking services. The average yield of
the loan portfolio decreased to an average rate of 9.26% in 1998 compared to
9.41% in 1997. This reflected the falling interest rate environment during the
last half of 1998.
The commercial loan portfolio is generally diversified and geographically
dispersed within the region. There are no concentrations of lines of business
or industry that represent greater than 20% of the Corporation's equity. Within
each specific industry, borrowers are 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 15% in
1998, 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. The subsidiary banks had
outstanding commitments to extend credit of approximately $28,875,000 at
December 31, 1998, and $24,909,000 at December 31, 1997.
Nonperforming assets, including nonaccrual loans, loans past-due 90 days or
more, restructured loans and other real estate owned, increased $685,000, or
approximately 26%, from December 31, 1997 to December 31, 1998. This increase
occurred primarily in the nonaccrual loan category as a result of the
deterioration of a significant commercial loan. 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.
Page 6 Pocahontas Bankshares Corporation
<PAGE>
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. The Corporation's holdings of other real estate owned continued to
decline in 1998. Other real estate decreased $315,000, or approximately 31.7%
in 1998.
Management continues to enhance the methodology and procedures for determining
the adequacy of the allowance for loan losses. 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 allocated appropriate reserves. 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. In 1998, approximately $163,000 was added to the allowance
for loan losses. The addition to the allowance for loan losses was primarily
due to the growth in the loan portfolio during 1998. The allowance for loan
losses was 1.25% of year-end loans in 1998 compared to 1.20% in 1997.
Securities
Securities, the second largest asset of the Corporation, increased by $7.4
million or 13.9% during 1998. At December 31, 1998, securities comprised 22.5%
of total interest-earning assets compared to 20.9% of total interest-earning
assets at December 31, 1997. 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 liquidity and manage interest rate
risk. During 1998, 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 for
increased loan demand requires maintaining the liquidity of the securities
portfolio. Net unrealized gains in the held to maturity portfolio amounted to
approximately $129,000 at December 31, 1998, compared to $182,000 in net
unrealized gains at December 31, 1997. This indicates the effects of the
declining rate environment during the last quarter of 1998 which were offset by
the reduction in the held to maturity portfolio from $17,334,000 at December 31,
1997, to $13,957,000 at December 31, 1998.
Pocahontas Bankshares Corporation Page 7
<PAGE>
SECURITIES
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997 1996
-----------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Securities available for sale
U. S. Government securities $17,363 $19,287 $13,156
U. S. Government agency securities 27,793 13,304 7,999
Other securities 1,823 3,586 5,283
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $46,979 $36,177 $26,438
- ------------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity
U. S. Government securities $ 2,005 $ 3,517 $15,580
U. S. Government agency securities 3,407 7,659 16,352
State, county and municipal securities 8,395 6,058 6,099
Other securities 150 100 1,031
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $13,957 $17,334 $39,062
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
State, county and municipal securities contained no individual issues in excess
of 10% of stockholders' equity.
MATURITIES OF SECURITIES HELD TO MATURITY
The following table shows the contractual maturities of securities held to
maturity at December 31, 1998, 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 $2,005 5.20% $ -- -- -- -- -- -- $ 2,005 5.20%
U. S. Government agency securities 2,056 5.46% 1,351 5.88% -- -- -- -- 3,407 5.63%
State, county and municipal securities 511 4.45% 3,367 5.03% $4,237 5.13% $280 5.69% 8,395 5.07%
Other securities -- -- 50 6.20% 100 7.35% -- -- 150 6.97%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT
SECURITIES $4,572 5.23% $4,768 5.28% $4,337 5.18% $280 5.69% $13,957 5.24%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Yields on tax-exempt obligations have not been computed on a tax equivalent
basis.
As of December 31, 1998, the Corporation had an investment in 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 $795,000 at December 31, 1998 and $2,558,000 at December 31,
1997. 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. During
1997, management began a strategy to reduce its position in this mutual fund.
As a result, approximately $34,000 in losses were recognized from the partial
sale of the fund for the year ended December 31, 1998, and approximately $59,000
in losses were recognized for the year ended December 31, 1997.
Deposits
Deposits, the major source of funds, increased approximately $19.4 million or
8.3% in 1998, following a decrease of $4.4 million or 2.0% in 1997.
Approximately $15 million of the 1998 increase was attributable to the
acquisition of the Bluefield, Virginia branch assets and deposits of First
American Federal Savings Bank, Roanoke, Virginia during the second quarter of
1998. The average rate paid on interest-bearing deposits in 1998 was 4.24% and
4.25% in 1997. Fierce competition for deposits continues among commercial
Page 8 Pocahontas Bankshares Corporation
<PAGE>
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.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1998 1997 1996
Average Average Average
-----------------------------------------------------------
Amount Rate Amount Rate Amount Rate
-----------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterestbearing demand deposits $ 27,618 N/A $ 27,342 N/A $ 26,832 N/A
Interestbearing demand deposits 57,317 3.21% 52,849 3.31% 49,865 3.36%
Savings deposits 63,687 3.62% 63,591 3.63% 64,703 3.65%
Time deposits 96,118 5.26% 89,837 5.23% 93,612 5.37%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL AVERAGE DEPOSITS $244,740 3.76% $233,619 3.75% $235,012 3.85%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
There are no foreign offices. Average balances are computed on daily balances.
MATURITIES OF TIME CERTIFICATES OF DEPOSIT OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, 1998
----------------------
(Dollars in Thousands)
<S> <C>
Under 3 months $ 6,783
3 to 6 months 5,982
6 to 12 months 4,867
Over 12 months 5,619
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CERTIFICATES OF DEPOSIT OF $100,000 OR MORE $23,251
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SHORT-TERM BORROWED FUNDS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1998 1997 1996
-------------------------------
<S> <C> <C> <C>
(Dollars in Thousands)
Securities sold under agreements to repurchase $12,612 $ 12,838 $14,514
U. S. Treasury demand notes and others 434 4,200 1,756
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL BORROWED FUNDS $13,046 $ 17,038 $16,270
- ----------------------------------------------------------------------------------------------------------------------------------
</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>
1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Average interest rates at December 31 3.21% 4.16% 3.50%
Maximum amounts outstanding at any month-end $18,148 $18,783 $14,514
Average daily amount outstanding $15,050 $13,589 $10,104
Weighted average interest rates 3.87% 3.93% 3.66%
</TABLE>
The weighted average interest rates are calculated by dividing the annual
interest expense by the related average daily amounts outstanding.
Capital Resources
Cash dividends paid to stockholders during 1998 amounted to $1,500,000 compared
to $1,300,000 paid to stockholders in 1997 and $1,210,000 in 1996. This
represents a dividend pay out ratio (dividends divided by net income) of 47% in
1998 and 43% in 1997 and 1996. Cash dividends per share equaled $0.750 per share
in 1998, $0.650 per share in 1997 and $0.605 per share in 1996. The Corporation
is dependent upon dividends paid by the subsidiary banks to fund dividends to
the stockholders and to cover other operating costs. 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.
Pocahontas Bankshares Corporation Page 9
<PAGE>
One of management's primary objectives is to maintain a strong capital position.
Stockholders' equity, including unrealized gains on securities, increased
$1,914,000 or 7.2% in 1998. The percentage of earnings reinvested in the
Corporation (net income less dividends as a percentage of net income) for the
years 1998, 1997 and 1996 was 53.1%, 56.7% and 57.2%, 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 6.2% in 1998, 6.6% in 1997, and 6.8% in 1996.
REGULATORY CAPITAL REQUIREMENTS
<TABLE>
<CAPTION>
Combined Capital
Entity Tier 1 (Tier 1 and Tier 2) Leverage
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Consolidated 12.79% 14.02% 9.08%
First Century Bank, N.A. 12.49% 13.72% 8.71%
First Century Bank 13.01% 14.23% 9.62%
</TABLE>
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 $26,495,000 at December 31, 1998, or 12.79% 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 $2,532,000 at December 31, 1998 or 1.23% of total risk-
weighted assets. The Corporation's total consolidated risk-based capital was
$29,027,000, or 14.02% of total risk-weighted assets as of December 31, 1998.
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 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, 1998, the Corporation's leverage ratio was
9.08%; therefore, the Corporation exceeded all current minimum capital
requirements.
Asset and Liability Management and Interest Rate Sensitivity
The income stream of the Corporation is subject to risk resulting from interest
rate fluctuations to the extent there is a difference between the amount of the
Corporation's interest-earning assets and the amount of interest-bearing
liabilities that are prepaid, withdrawn, mature or reprice in specified periods.
The goal of asset and liability management is to maintain high quality and
consistent growth of net interest income with acceptable levels of risk to
changes in interest rates.
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
Page 10 Pocahontas Bankshares Corporation
<PAGE>
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 Corporation uses a number
of tools to measure interest rate risk, including simulating net interest income
under various rate scenarios, monitoring the change in present value of the
asset and liability portfolios under the same rate scenarios and monitoring the
difference or gap between rate sensitive assets and liabilities over various
time periods.
Management continues its efforts to generate variable rate loans. However, with
the lower interest rate environment, customers are requiring more fixed rate
commitments. The results of management's efforts can be seen in the Analysis of
Interest Rate Sensitivity table. The Corporation had a positive cumulative gap
of 6.10% at three months and negative cumulative gaps of 1.44% at six months and
3.54% at one year. 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.
Management continues to incorporate 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, 1998,
the model indicated the impact of a 200 basis point increase in rates would
approximate a 0.88% increase in net interest income, while a 200 basis point
decline in rates would approximate a 0.86% decrease from an unchanged rate
environment. These changes are within the Corporation's policy limits for the
maximum negative impact on net interest income from a change in interest rates.
Liquidity Management
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.
To ensure the Corporation is positioned to meet immediate and future cash
demands, management relies on liquidity analysis, knowledge of business trends
over past economic cycles and forecasts of future conditions. Liquidity can
best be demonstrated by an analysis of the Corporation's cash flows. The
primary source of cash flows for the Corporation is from operating activities.
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.
Pocahontas Bankshares Corporation Page 11
<PAGE>
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>
Investment securities $ 4,552 $ 3,314 $ 6,627 $31,981 $14,462 $ 60,936
Federal funds sold and interest-bearing
balances with banks 7,275 -- -- -- -- 7,275
Loans 104,221 4,557 9,115 63,376 20,945 202,214
---------------------------------------------------------------
Interest-earning assets $116,048 $ 7,871 $15,742 $95,357 $35,407 $270,425
---------------------------------------------------------------
Time deposits $ 27,392 $ 28,093 $21,070 $23,973 $ -- $100,528
Other interest-bearing deposits 60,094 -- -- 63,259 -- 123,353
Other interest-bearing liabilities 12,061 178 334 447 26 13,046
---------------------------------------------------------------
Interest-bearing liabilities $ 99,547 $ 28,271 $21,404 $87,679 $ 26 $236,927
---------------------------------------------------------------
Interest sensitivity gap $ 16,501 $(20,400) $(5,662) $ 7,678 $35,381 $ 33,498
Cumulative interest sensitivity gap $ 16,501 $ (3,899) $(9,561) $(1,883) $33,498
Ratio of interest-earning assets to
interest-bearing liabilities 1.17 x 0.28 x 0.74 x 1.09 x 1361.81 x
----------------------------------------------------
Ratio of cumulative interest sensitivity
gap to total earning assets 6.10% (1.44)% (3.54)% (0.70)% 12.39%
----------------------------------------------------
</TABLE>
Income Statement Analysis
Earnings Overview
Net income for 1998 was $3,201,000 or $1.60 per share, an increase of $199,000
or 6.6% from the $3,002,000 or $1.50 per share earned in 1997, and $371,000 more
than the $2,830,000 or $1.42 per share earned in 1996. This increase occurred
primarily as a result of increased net interest income due to the deployment of
funds in the loan portfolio.
Earnings Per Share
The Earnings Per Share Table summarizes the principal sources of changes in
earnings per share for 1998. For further details on the computation of earnings
per share, refer to Note 9 of the Notes to Consolidated Financial Statements,
presented elsewhere in this report.
EARNINGS PER SHARE
<TABLE>
<CAPTION>
<S> <C>
Net income per share--1997 $ 1.50
- -------------------------------------------------
Increase (decrease) due to change in:
Net interest income 0.17
Provision for loan losses 0.09
Other operating income 0.14
Personnel expense (0.13)
Other expense (0.17)
- -------------------------------------------------
Net income per share -- 1998 $ 1.60
- ------------------------------------------------
</TABLE>
Page 12 Pocahontas Bankshares Corporation
<PAGE>
Net Interest Income
The major portion of the Corporation's earnings are derived from net interest
income, which is the interest income on interest-earning assets less the
interest expense on interest-bearing liabilities. During 1998 net interest
income increased $340,000 or 2.8%. This followed a 7.3% increase in 1997, and a
0.1% decrease in 1996. For the year ended December 31, 1998, interest income
increased $824,000, or approximately 3.8%, compared to increases of $727,000, or
3.5% for 1997, and $327,000, or 1.6% for 1996. The increase for 1998 was
primarily from interest on loans which increased $1,112,000 or 6.4%. The
increase in interest income was offset by an increase in interest expense of
$484,000 or 5.2% for 1998. This followed a decrease in interest expense of
$102,000, or 1.1% for 1997, and an increase of $429,000, or 4.7% for 1996. For
1998, the increased interest expense on time deposits due to the Bluefield,
Virginia branch acquisition was the primary contributor to the increase 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 1998 is indicative of the relatively stable
rate environment prevailing through most of 1998 and 1997 as most changes in the
net interest margin were due to changes in the mix of loans and investments.
During the last quarter of 1998, a series of interest rate reductions by the
Federal Reserve Board resulted in the repricing of approximately 50% of the loan
portfolio. This will result in some pressure on the interest margin through the
first quarter of 1999 as time deposits reprice.
Noninterest Income and Expense
Noninterest income increased $297,000 or 12.3% in 1998, following a $315,000 or
15.1% increase in 1997, and a $541,000 or 34.9% increase in 1996. The largest
component of noninterest income is fees from fiduciary activities. Fees from
fiduciary activities increased $66,000 or 6.5% for 1998 and $194,000 or 23.4%
for 1997, and $73,000 or 9.6% for 1996. The second largest component of
noninterest income is service charges on deposit accounts. These fees increased
approximately $22,000 or 2.4% in 1998, after an increase of approximately
$100,000 or 12.1% in 1997, and $13,000 or 1.6% in 1996.
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997 1996
-----------------------
<S> <C> <C> <C>
Percentage of net income to:
Average stockholders' equity 11.61% 11.66% 11.84%
Average total assets 1.10% 1.09% 1.04%
Percentage of dividends declared per common share
to net income per common share 46.88% 43.33% 42.61%
Percentage of average stockholders' equity to average total assets 9.48% 9.32% 8.79%
</TABLE>
Noninterest expense, excluding the provision for loan losses, increased 4.5% in
1998, following an 8.4% increase in 1997 and a 1.2% increase in 1996. Personnel
expense is the largest component of noninterest expense. Personnel expense
increased 5.5% in 1998, following an increase of 2.7% in 1997, and 3.9% in 1996.
The additional staff required for the Bluefield, Virginia branch acquisition
contributed to the 1998 increase. In addition to
Pocahontas Bankshares Corporation Page 13
<PAGE>
salaries, employee benefits are a significant component of personnel expense.
For a complete discussion of the Corporation's employee benefits, refer to Note
11 of the Notes to Consolidated Financial Statements, presented elsewhere in
this report. Management remains committed to improving operational efficiency
throughout the organization while keeping personnel expense within current
inflationary levels.
Income Taxes
Applicable income taxes for 1998 increased $160,000 or 9.7%. This followed a
$198,000 or 13.6% increase for 1997. 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 12 of the
Notes to Consolidated Financial Statements, presented elsewhere in this report.
Year 2000
The change in date to the year 2000 from 1999 could possibly cause data
recognition problems in certain computers, software and facility operations
dependent on computer chip devices due to programming standards that
historically limited data date fields to two digits. In late 1996, the
Corporation initiated a formal evaluation of Year 2000 issues, establishing in
the early months of 1997 a project team to assess and address both internal and
external risks associated with the change in date event. In mid 1998 the
Corporation engaged the outside consulting firm of Vitex, Inc. to further assist
us with our Year 2000 preparedness project. The project team is in the latter
stages of executing a comprehensive Year 2000 readiness plan consisting of five
phases: problem awareness; identification of affected systems, functions and
facilities; conversion or replacement of identified areas to Year 2000 compliant
standards; testing; and implementation.
The Corporation's readiness plan encompasses both information technology systems
and computer chip embedded functions, such as those operating facilities
including elevators, security systems, and building heating and cooling. In
early 1998, the corporation completed its awareness and identification phases.
Since the Corporation relies heavily on third party processors for most of its
information technology, a concerted emphasis was placed on insuring that these
third party providers were industry leaders for information processing. With
this goal in mind, in late 1997 the Corporation changed is core data processor
to Fiserv Atlanta. As of December 31, 1998, 100 percent of all mission critical
information technology systems had been converted to the new systems. While
regulatory guidelines require conversion only of mission critical systems, the
Corporation is converting all information technology systems and is scheduled to
complete the process by March 31, 1999. For computer chip embedded functions,
the Corporation is replacing noncompliant functions essential to business
operations and plans to have all essential functions replaced and tested by mid
year 1999.
Proxy testing of information technology systems currently is completed, and
management is currently reviewing the results of these proxy tests. Testing was
done in both a 21st century and 20th century date environment before systems are
returned to production to ensure data accuracy and consistency. All exceptions
to testing results are resolved before further testing is permitted. Management
has chosen to implement converted systems back into production as systems are
tested to permit greater flexibility in the event of future system flaws or
failures. The percentage of systems implemented, therefore, closely
approximates the percentage tested.
Page 14 Pocahontas Bankshares Corporation
<PAGE>
The Corporation also is working to assess and address Year 2000 readiness on the
part of external entities, particularly critical vendors and significant credit
customers. Identification and monitoring of external entities began in 1997 and
includes surveys with follow-up reviews and contacts. Substantially all of the
Corporation's vendors have responded to management's surveys regarding Year 2000
readiness, with approximately 90 percent compliant as of December 31, 1998. The
project team is continuing to monitor the progress of remaining noncompliant
vendors as well as the status of large corporate borrowers identified as
potentially at risk. The Corporation will conduct testing with external
entities in 1999 as they become Year 2000 ready, with some limited testing
already occurring in 1998.
Management estimates that total Year 2000 project costs will be approximately
$50,000, with $25,000 having been spent through December 31, 1998. The
Corporation's remaining Year 2000 project costs are not expected to have a
material impact on the Corporation's results of operations, liquidity or capital
resources.
The Corporation faces a number of risks related to the Year 2000 date change
event including project management risks, legal risks and financial risks.
Project management risks refer primarily to the failure to adequately assess
Year 2000 planning and resource needs, resulting in under- or over-allotment of
resources assigned to complete the project work, missed deadlines and estimation
errors. Legal risks include the failure to meet contractual service agreements,
leading to possible punitive actions including those of a regulatory nature.
Financial risks concern the possibility of lost revenues, asset quality
deterioration or even business failure.
Management of the date change event entails additional risks separate from those
of project management. Major risks associated with the date change event
include a shut down of voice and data communication systems due to failure by
switching systems, satellites, or telephone companies; excessive cash withdrawal
activity; ATM failures; cash couriers delayed or not available; problems with
international accounts or offices, including inaccurate or delayed information
or inaccessibility of account data; and government offices or facilities not
opening or operating. The Corporation has identified several risks associated
with the date change event and is in the process of developing contingency plans
for each major risk area.
The Corporation is addressing contingency planning for the date change event
from both an internal and external perspective and from a pre-event and post-
event standpoint. This enables management to determine both the level of
control over mitigating a risk and the time period the Corporation would be
impacted. External, pre-event contingency plans focused on vendor readiness to
determine the need for alternative vendors. Internal, post-event contingency
plans will focus on implementing alternative plans if problems occur with
application systems, infrastructure components or branch equipment. External,
post-event contingency plans will focus on actions that can be taken if mission
critical service providers such as voice and data communication systems
experience difficulties. The Corporation expects to have formal contingency
plans for the date change event and post-event risks developed by June 30, 1999.
The Corporation believes the actions it is taking should reduce the risks posed
by Year 2000 challenges to its own systems. Management recognizes that date
change event problems will occur with external entities, impacting the
Corporation due to the interdependencies of its business.
Pocohontas Bankshaes Corporation Page 15
<PAGE>
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 1998 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
On January 1, 1998, the Corporation adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." As required by
SFAS No. 130, prior year information has been modified to conform to the new
presentation. Comprehensive income includes net income and all other changes to
the Corporation's equity, with the exception of transactions with shareholders.
Other comprehensive income is comprehensive income exclusive of net income. The
Corporation's only component of other comprehensive income is the change in
unrealized gains and losses on available for sale securities.
During the year ended December 31, 1998, the Corporation adopted 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". 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.
For the year ended December 31, 1998, the Corporation adopted SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
Statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer seen as useful.
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. Changes in the fair value of derivatives are recorded each
period in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. Management of the Corporation has determined that SFAS
No. 133 will have no material effect on the Corporation's consolidated financial
statements based on the Corporation's current operations.
Page 16 Pocahontas Bankshares Corporation
<PAGE>
On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134
establishes accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct operations that
are substantially similar to the primary operations of a mortgage banking
enterprise. This statement is effective for fiscal years beginning after
December 31, 1998. Management of the Corporation has determined that SFAS No.
134 will have no effect on the Corporation's results of operations or its
financial position as the Corporation does not engage in these types of
activities.
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 1998 and 1997.
Also presented below are the dividends paid for those respective years. The
number of stockholders of record on December 31, 1998, was 609 and outstanding
shares totaled 2,000,000.
PER SHARE DATA BY QUARTER
<TABLE>
<CAPTION>
Market Quotations
-----------------------------
Dividends 1998 1997
--------------------------------------------
Quarter 1998 1997 High Low High Low
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter $0.15 $0.15 $20.13 $19.50 $19.50 $18.50
Second Quarter $0.15 $0.15 20.25 20.00 20.00 18.75
Third Quarter $0.20 $0.15 21.75 20.25 20.00 19.00
Fourth Quarter $0.25 $0.20 23.00 21.63 21.00 18.50
</TABLE>
Pocahontas Bankshares Corporation Page 17
<PAGE>
Trust Asset Responsibility
Assets managed by the Trust Division are presented at book value, which is the
Federal income tax basis of the assets and is not representative of current
market value. These assets are not included in the consolidated financial
statements contained elsewhere in this report. Trust responsibility, as
measured by market value, is substantially greater than book value.
TRUST ASSET RESPONSIBILITY AT BOOK VALUE
($ in millions)
[GRAPH APPEARS HERE]
1994 1995 1996 1997 1998
162 163 169 173 198
Page 18 Pocahontas Bankshares Corporation
<PAGE>
CONDENSED STATEMENTS OF FINANCIAL CONDITION
Statistical Summary, 1998 -- 1994
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------
1998 % 1997 % 1996 % 1995 % 1994 %
------------------------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $202,214 69 $ 197,094 72 $179,956 65 $177,794 67 $171,325 66
Securities 60,936 21 53,511 19 65,500 23 58,859 23 64,295 25
Federal funds sold 4,000 1 3,400 1 5,750 2 6,300 2 6,400 2
Interestbearing deposits
with banks 3,275 1 2,013 1 1,982 1 3,833 1 245 --
------------------------------------------------------------------------------------------------
INTEREST-EARNING ASSETS 270,425 92 256,018 93 253,188 91 246,786 93 242,265 93
------------------------------------------------------------------------------------------------
Cash and due from banks 10,473 4 8,883 3 12,421 4 10,000 4 10,732 4
Premises and equipment 9,199 3 8,660 3 8,052 3 5,417 2 4,811 2
Other assets 7,015 2 5,556 2 7,151 3 5,922 2 5,476 2
Allowance for loan losses (2,533) (1) (2,370) (1) (2,240) (1) (2,145) (1) (1,985) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $294,579 100 $ 276,747 100 $278,572 100 $265,980 100 $261,299 100
- -----------------------------------------------------------------------------------------------------------------------------------
Savings deposits $123,353 42 $ 115,269 42 $112,970 41 $112,768 42 $128,582 49
Time deposits 100,528 34 89,145 32 93,190 33 92,043 35 75,464 29
Other interestbearing
liabilities 13,046 4 17,038 6 16,270 6 9,642 4 8,163 3
------------------------------------------------------------------------------------------------
INTEREST-BEARING
LIABILITIES 236,927 80 221,452 80 222,430 80 214,453 81 212,209 81
------------------------------------------------------------------------------------------------
Demand deposits 27,847 10 27,923 10 30,562 11 27,361 10 26,836 10
Other liabilities 1,302 -- 783 -- 951 -- 980 -- 1,093 1
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 266,076 90 250,158 90 253,943 91 242,794 91 240,138 92
------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 28,503 10 26,589 10 24,629 9 23,186 9 21,161 8
------------------------------------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY $294,579 100 $ 276,747 100 $278,572 100 $265,980 100 $261,299 100
------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $251,728 $ 232,337 $236,722 $232,172 $230,882
------------------------------------------------------------------------------------------------
BOOK VALUE PER SHARE $ 14.25 $ 13.29 $ 12.31 $ 11.60 $ 10.58
------------------------------------------------------------------------------------------------
</TABLE>
SUMMARY OF OPERATIONS
Statistical Summary, 1998 -- 1994
<TABLE>
<CAPTION>
Years Ended December 31, 1998
---------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C>
Interest income $ 22,535 $21,711 $ 20,984 $ 20,657 $ 18,338
Interest expense 9,863 9,379 9,481 9,052 7,424
-----------------------------------------------------
NET INTEREST MARGIN 12,672 12,332 11,503 11,605 10,914
-----------------------------------------------------
Provision for loan losses 544 691 644 839 395
-----------------------------------------------------
Net credit margin 12,128 11,641 10,859 10,766 10,519
-----------------------------------------------------
Noninterest income 2,704 2,407 2,092 1,551 1,703
Noninterest expense 9,816 9,391 8,664 8,561 8,985
-----------------------------------------------------
INCOME BEFORE INCOME TAXES 5,016 4,657 4,287 3,756 3,237
-----------------------------------------------------
Provision for income taxes 1,815 1,655 1,457 1,342 980
-----------------------------------------------------
NET INCOME $ 3,201 $ 3,002 $ 2,830 $ 2,414 $ 2,257
-----------------------------------------------------
EARNINGS PER COMMON SHARE:
Basic $1.60 $1.50 $1.42 $1.21 $1.13
Diluted $1.60 $1.50 $1.42 $1.21 $1.13
-----------------------------------------------------
Dividends per common share $0.75 $0.650 $0.605 $0.550 $0.500
Payout ratio 47% 43% 43% 45% 44%
</TABLE>
Pocahontas Bankshares Corporation Page 19
<PAGE>
Consolidated
Statements of
Financial
Condition
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-----------------------
<S> <C> <C>
ASSETS (Dollars in Thousands)
Cash and due from banks $ 10,473 $ 8,883
Interest-bearing balances with banks 3,275 2,013
Securities available for sale 45,951 35,149
Securities held to maturity (estimated market value of $14,086
in 1998 and $17,516 in 1997) 13,957 17,334
Federal Home Loan Bank and Federal Reserve Bank Stock 1,028 1,028
Federal funds sold 4,000 3,400
Loans 202,214 197,094
Less allowance for loan losses 2,533 2,370
--------------------
Net loans 199,681 194,724
Premises and equipment, net 9,199 8,660
Other assets 7,015 5,556
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $294,579 $276,747
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 27,847 $ 27,923
Interest-bearing 223,881 204,414
--------------------
Total deposits 251,728 232,337
Short-term borrowings 13,046 17,038
Other liabilities 1,302 783
--------------------
TOTAL LIABILITIES 266,076 250,158
--------------------
STOCKHOLDERS' EQUITY
Common stock - $1.25 par value; shares issued and outstanding:
2,000,000 at December 31, 1998 and 1997 2,500 2,500
Paid-in capital 785 785
Retained earnings 24,924 23,223
Accumulated other comprehensive income, net of tax 294 81
--------------------
TOTAL STOCKHOLDERS' EQUITY 28,503 26,589
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $294,579 $276,747
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 20 Pocahontas Bankshares Corporation
<PAGE>
Consolidated
Statements of
Income and
Comprehensive
Income
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
INTEREST INCOME (Dollars in Thousands,
Except Per Share Data)
Interest and fees on loans $ 18,616 $ 17,504 $ 16,752
Interest on balances with banks 196 86 106
Interest and dividends from securities available for sale:
Taxable 2,581 2,177 904
Interest and dividends from securities held to maturity:
Taxable 410 1,334 2,528
Tax-exempt 348 403 382
Interest on federal funds sold 384 207 312
----------------------------------
TOTAL INTEREST INCOME 22,535 21,711 20,984
----------------------------------
INTEREST EXPENSE
Interest on time certificates of $100,000 or more 1,236 1,121 1,231
Interest on other deposits 7,966 7,638 7,822
Interest on federal funds purchased and securities
sold under agreements to repurchase 583 534 370
Interest on demand notes to U. S. Treasury and other indebtedness 78 86 58
----------------------------------
TOTAL INTEREST EXPENSE 9,863 9,379 9,481
----------------------------------
Net interest income 12,672 12,332 11,503
Provision for loan losses 544 691 644
----------------------------------
Net interest income after provision for loan losses 12,128 11,641 10,859
----------------------------------
NONINTEREST INCOME
Income from fiduciary activities 1,090 1,024 830
Service charges on deposit accounts 951 929 829
Other noninterest income 697 513 432
Securities gains (losses) (34) (59) 1
----------------------------------
TOTAL NONINTEREST INCOME 2,704 2,407 2,092
----------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 4,741 4,493 4,376
Premises and equipment expense 1,405 1,275 1,051
Data processing expense 589 575 467
Advertising and public relations 381 359 331
Insurance and bonding 112 122 128
Supplies and printing 361 328 331
Other noninterest expense 2,227 2,239 1,980
----------------------------------
TOTAL NONINTEREST EXPENSE 9,816 9,391 8,664
----------------------------------
Income before income taxes 5,016 4,657 4,287
Provision for income taxes 1,815 1,655 1,457
----------------------------------
NET INCOME 3,201 3,002 2,830
----------------------------------
Other comprehensive income (loss), net of tax 213 258 (177)
----------------------------------
COMPREHENSIVE INCOME $ 3,414 $ 3,260 $ 2,653
----------------------------------
NET INCOME PER COMMON SHARE:
----------------------------------
Basic $1.60 $1.50 $1.42
Diluted $1.60 $1.50 $1.42
----------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Pocahontas Bankshares Corporation Page 21
<PAGE>
Consolidated
Statements of
Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
----------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income before adjustments to reconcile net income
to net cash provided by operating activities: $ 3,201 $ 3,002 $ 2,830
Provision for loan losses 544 691 644
Depreciation and amortization 812 620 473
Deferred income tax liability (benefit) 181 57 (46)
Securities (gains) losses 34 59 (1)
(Increase) decrease in interest receivable 31 (45) 106
Net investment amortization and accretion 142 239 496
Net (increase) decrease in other assets (464) 1,424 (164)
Net increase (decrease) in interest payable and other liabilities 163 (285) (118)
----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,644 5,762 4,220
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold (600) 2,350 550
Purchases of securities held to maturity (3,665) (1,400) (9,397)
Purchases of securities available for sale (21,066) (13,346) (21,990)
Purchases of Federal Home Loan Bank stock -- (27) (8)
Proceeds from maturities and calls of securities held to maturity 6,987 22,986 23,297
Proceeds from maturities and calls of securities available for sale 8,689 2,000 --
Proceeds from sales of securities available for sale 1,760 1,751 --
Net increase in loans (1,881) (17,478) (3,305)
Net cash received from branch acquisition 8,510 -- --
Acquisition of premises and equipment (1,160) (1,195) (2,770)
Proceeds from disposal of premises and equipment -- 7 5
----------------------------------
NET CASH USED BY INVESTING ACTIVITIES (2,426) (4,352) (13,618)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in demand and savings deposits 4,442 (340) 3,403
Net increase (decrease) in time deposits 1,684 (4,045) 1,147
Net increase (decrease) in short-term borrowings (3,992) 768 6,628
Cash dividends paid (1,500) (1,300) (1,210)
----------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 634 (4,917) 9,968
----------------------------------
Net increase (decrease) in cash and due from banks 2,852 (3,507) 570
Cash and due from banks at beginning of year 10,896 14,403 13,833
- -----------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 13,748 $ 10,896 $14,403
- -----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 9,826 $ 9,404 $ 9,517
Income taxes $ 1,853 $ 1,369 $ 1,751
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Page 22 Pocahontas Bankshares Corporation
<PAGE>
Consolidated
Statements of
Changes in
Stockholders'
Equity
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Comprehensive
-------------------- Paid-In Retained Income,
Shares Amount Capital Earnings Net of tax
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 (Dollars in Thousands, Except Number of Shares)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 1,000,000 $ 1,250 $ 2,035 $ 19,901 $ --
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 --
Other comprehensive income, net of tax -- -- -- -- (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 --
Other comprehensive income, net of tax -- -- -- -- 258
Cash dividends declared $0.65 per share -- -- -- (1,300) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,000,000 2,500 785 23,223 81
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1998
Net income -- -- -- 3,201 --
Other comprehensive income, net of tax -- -- -- -- 213
Cash dividends declared $0.75 per share -- -- -- (1,500) --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 2,000,000 $ 2,500 $ 785 $ 24,924 $ 294
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
Pocahontas Bankshares Corporation Page 23
<PAGE>
Notes to
Consolidated
Financial
Statements
1. Summary of Significant Accounting and Reporting Policies
Pocahontas Bankshares Corporation and its wholly owned subsidiaries (the
"Corporation"), First Century Bank, N.A. And First Century Bank, Virginia
operate nine 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 interestbearing 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, 1998, was approximately $980,000.
Securities -- Securities are classified as either held to maturity, available
for sale or trading. Classification of securities is 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 comprehensive income. 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
recognized when income is earned using the interest method.
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
Page 24 Pocahontas Bankshares Corporation
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
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.
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.
Pocahontas Bankshares Corporation Page 25
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
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 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 periods from 15 - 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 approximately
$1,687,000 at December 31, 1998 and $350,000 at December 31, 1997, net of
accumulated amortization of $938,000 and $834,000, 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
Page 26 Pocahontas Bankshares Corporation
<PAGE>
1. Summary of Significant Accounting and Reporting Policies (continued)
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.
Segment Information -- During the year ended December 31, 1998, the Bank adopted
the provisions of Statement of Financial Accounting Standard ("SFAS") No. 131
"Disclosures about Segments of an Enterprise and Related Information." This
Statement requires that public business enterprises report certain information
about operating segments in their annual financial statements and in condensed
financial statements of interim periods issued to shareholders. It also requires
that public business enterprises report related disclosures and descriptive
information about products and services provided by significant segments,
geographic areas, and major customers, differences between the measurements used
in reporting segment information and those used in the enterprise's general-
purpose financial statements, and changes in the measurement of segment amounts
from period to period.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance. The Corporation has determined that is has one significant
operating segment, the providing of general commercial financial services to
customers located in the geographic areas of southern West Virginia and
southwestern Virginia. The various products are those generally offered by
community banks, and the allocation of resources is based on the overall
performance of the institution, versus the individual branches or products.
There are no differences between the measurements used in reporting segment
information and those used in the enterprise's general-purpose financial
statements, and the measurement of segment amounts has not changed for 1998 from
prior years.
New Accounting Pronouncements -- In June of 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. This standard establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
Based on its operations at December 31, 1998, management does not expect this
standard to have a material effect on the Corporation's consolidated financial
statements upon adoption.
Pocahontas Bankshares Corporation Page 27
<PAGE>
2. Securities
Securities available for sale at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $17,070 $293 $ -- $17,363
U.S. Government agency obligations 23,998 199 26 24,171
Mortgage-backed securities 3,603 21 2 3,622
Equity Securities 822 -- 27 795
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $45,493 $513 $ 55 $45,951
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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-backed securities 1,234 -- -- 1,234
Equity Securities 2,616 -- 58 2,558
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $34,996 $232 $ 79 $35,149
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities held to maturity at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
1998
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
U.S. Government obligations $ 2,005 $ 3 $ -- $ 2,008
U.S. Government agency obligations 3,014 4 -- 3,018
Mortgage-backed securities 393 -- 2 391
State and municipal obligations 8,395 262 144 8,513
Other debt securities 150 6 -- 156
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $13,957 $275 $146 $14,086
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Securities with an aggregate par value of $34,000,000 at December 31, 1998 and
$41,060,000 at December 31, 1997, were pledged to secure public and trust
deposits and for other purposes required or permitted by law, including
approximately $14,000,000 at December 31, 1998 and $17,000,000 at December 31,
1997 pledged to secure repurchase agreements.
Page 28 Pocahontas Bankshares Corporation
<PAGE>
2. Securities (continued)
Gross losses of $34,000 and $59,000 were recognized on sales of available for
sale securities for the years ended December 31, 1998 and December 31, 1997,
respectively. There were no sales of securities for the year ended December 31,
1996. 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, 1998
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>
Estimated Net
Amortized Market Unrealized Gains
Cost Value (Losses)
--------------------------------------
(Dollars in Thousands)
--------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 9,054 $ 9,126 $ 72
Due after one year through five years 26,827 27,213 386
Due after five years through ten years 8,790 8,817 27
Securities with no contractual maturities 822 795 (27)
- ---------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE $45,493 $ 45,951 $458
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Estimated Net
Amortized Market Unrealized Gains
Cost Value (Losses)
--------------------------------------
(Dollars in Thousands)
--------------------------------------
<S> <C> <C> <C>
Due in one year or less $ 4,572 $ 4,582 $ 10
Due after one year through five years 4,768 4,832 64
Due after five years through ten years 4,337 4,378 41
Due after ten years 280 294 14
- ---------------------------------------------------------------------------------------------------------
TOTAL SECURITIES HELD TO MATURITY $13,957 $ 14,086 $129
- ---------------------------------------------------------------------------------------------------------
</TABLE>
3. Loans
Loans at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
--------------------------
(Dollars in Thousands)
<S> <C> <C>
Commercial, financial and agricultural $ 42,584 $ 46,012
Real estateconstruction 10,369 8,068
Real estatemortgage (residential and commercial) 119,076 116,728
Installment loans to individuals 30,185 26,286
Total loans 202,214 197,094
Less: allowance for credit losses 2,533 2,370
- ---------------------------------------------------------------------------------------------------------
NET LOANS $199,681 $194,724
- ---------------------------------------------------------------------------------------------------------
</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 $6,355,000 and $5,109,000 at December 31, 1998 and 1997, respectively.
During 1998, $19,615,000 in loan advances were made and repayments were
$18,369,000.
Pocahontas Bankshares Corporation Page 29
<PAGE>
4. Allowance for Loan Losses
An analysis of the allowance for loan losses for 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1998 1997 1996
----------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Balance at beginning of year $2,370 $2,240 $2,145
Provision for loan losses 544 691 644
Recoveries on loans previously charged off 59 51 23
Loans charged off (440) (612) (572)
- ---------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $2,533 $2,370 $2,240
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of loans considered impaired:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------------------------
(Dollars in Thousands)
<S> <C> <C>
Gross impaired loans $2,569 $1,441
Valuation allowance for impaired loans 520 347
- ---------------------------------------------------------------------------------------------------
Recorded investment in impaired loans $2,049 $1,094
- ---------------------------------------------------------------------------------------------------
Average recorded investment in impaired loans for the year ended $1,928 $1,245
- ---------------------------------------------------------------------------------------------------
</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, 1998, 1997 and
1996. At December 31, 1998, 1997 and 1996, the Corporation had nonaccrual loans
of $1,728,000, $828,000 and $1,398,000, respectively. Interest income of $1,000,
$5,000 and $5,000 was recognized on these loans in 1998, 1997 and 1996,
respectively. Had these loans performed in accordance with their original terms,
interest income of $194,000, $142,000 and $176,000 would have been recorded in
1998, 1997 and 1996, respectively.
5. Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------------------------
(Dollars in Thousands)
<S> <C> <C>
Land $ 1,341 $ 1,291
Buildings and improvements 8,280 8,034
Equipment and fixtures 4,509 3,973
Total 14,130 13,298
Less accumulated depreciation 4,931 4,638
- ---------------------------------------------------------------------------------------------------
NET PREMISES AND EQUIPMENT $ 9,199 $ 8,660
- ---------------------------------------------------------------------------------------------------
</TABLE>
Depreciation charged to operating expense amounted to $707,000 in 1998, $579,000
in 1997, and $432,000 in 1996.
Page 30 Pocahontas Bankshares Corporation
<PAGE>
6. Deposits
Deposits at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
------------------------
(Dollars in Thousands)
<S> <C> <C>
Individuals, partnerships and corporations:
Demand deposits $ 25,685 $ 25,886
Time and savings deposits 215,400 192,972
U.S. Government -- 54
States and political subdivisions 9,275 11,889
Certified and official checks 1,368 1,536
- ---------------------------------------------------------------------------------------------------
TOTAL DEPOSITS $251,728 $232,337
- ---------------------------------------------------------------------------------------------------
</TABLE>
Time deposits included certificates of deposit issued in amounts of $100,000 or
more totaling approximately $23,251,000 and $22,252,000 at December 31, 1998 and
1997, respectively.
7. 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>
1998 1997
------------------------
(Dollars in Thousands)
<S> <C> <C>
Average balance during the year $15,050 $13,589
Average interest rate during the year 3.87% 3.93%
Maximum month-end balance during the year $18,148 $18,783
</TABLE>
8. Other Comprehensive Income
Effective January 1, 1998, the Corporation adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes requirements for
the disclosure of comprehensive income in the Corporation's consolidated
financial statements. Comprehensive income is defined as net income plus
transactions and other occurrences which are the result of nonowner changes in
equity. As required by SFAS No. 130, prior period consolidated financial
statements have been reclassified to reflect application of the provisions of
this statement.
Other comprehensive income is defined as comprehensive income exclusive of net
income. Unrealized gains (losses) on available for sale investment securities
represent the sole component of the Company's other comprehensive income. Other
comprehensive income (loss) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) arising during the year $ 267 $ 287 $(193)
Reclassification adjustment for (gains) losses included in net income 40 59 (1)
----------------------
Other comprehensive income (loss) before tax 307 346 (194)
Income tax (expense) benefit related to other comprehensive income (94) (88) 17
- -----------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax $ 213 $ 258 $(177)
- -----------------------------------------------------------------------------------------------
</TABLE>
Pocahontas Bankshares Corporation Page 31
<PAGE>
9. Earnings Per Share
The following table reconciles the numerator and denominator of the basic and
diluted computations for income from continuing operations for the year ended
December 31, 1998:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-------------------------------------
<S> <C> <C> <C>
Basic EPS:
Income available to common shareholders $3,201,000 2,000,000 $1.60
Diluted EPS:
Effect of dilutive securities--Stock options 0 1,847
- --------------------------------------------------------------------------------------------------------
Income available to common shareholders and assumed conversions $3,201,000 2,001,847 $1.60
- --------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1997 and 1996, there were no adjustments to
either the numerator or denominator for the purpose of calculating diluted
earnings per share as the Corporation had no dilutive securities.
10. Stock Option Plans
During 1998, the Corporation adopted the 1998 Officer Stock Option Plan (the
"Officer Plan") which provides for the issuance of options to purchase shares of
the Corporation's common stock to officers of the Corporation. The options have
an original term of ten years with an exercise price equal to the market price
of the common stock on the date of grant, as defined by the plan. The options
vest 20% per year after their date of grant. During the year ended December 31,
1998, 58,470 options were granted under the Officer Plan at an exercise price of
$20.25 per share. At December 31, 1998, the weighted average remaining
contractual life of the outstanding options is 114 months. At December 31,
1998, options for 111,530 shares of common stock were reserved for future
issuance for the Officer Plan. As of December 31, 1998, no options had been
exercised under the Officer Plan.
During 1998, the Corporation adopted the 1998 Director Stock Option Plan (the
"Director Plan") which provides for the issuance of options to purchase shares
of the Corporation's common stock to directors of the Corporation and its
subsidiaries. The options have an original term of ten years with an exercise
price equal to the market price of the common stock on the date of grant, as
defined by the plan. The options are fully vested upon their date of grant.
During the year ended December 31, 1998, 20,000 options were granted under the
Director Plan at an exercise price of $20.25 per share. At December 31, 1998,
the weighted average remaining contractual life of the outstanding options is
114 months. At December 31, 1998, options for 10,000 shares of common stock
were reserved for future issuance for the Director Plan. As of December 31,
1998, no options had been exercised under the Director Plan.
The Corporation accounts for the Officer Plan and the Director Plan under the
provision of SFAS No. 123, "Accounting for Stock Based Compensation". As
permitted by SFAS No. 123, the Corporation has chosen to apply APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for options granted under the plans. Had compensation cost for the Corporation's
plans been determined based on the fair value at
Page 32 Pocahontas Bankshares Corporation
<PAGE>
10. Stock Option Plans (continued)
the grant dates for awards under the plans consistent with the method of SFAS
No. 123, the Corporation's net income and net income per share for the year
ended December 31, 1998, would have been decreased to the pro forma amounts
indicated below. The Corporation did not award any option grants prior to July
1, 1998, therefore, there are no pro forma amounts for prior periods.
<TABLE>
<CAPTION>
As Reported Pro Forma
-------------------------
<S> <C> <C>
Net income $3,201,000 $3,171,000
- -----------------------------------------------------------------------
Net income per shareBasic $ 1.60 $ 1.59
- -----------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for the 1998 grants: 8% dividend growth rate; expected
volatility of 3.31%; risk-free interest rate of 5.46%; and expected life of six
years for directors and seven years for officers.
11. Post Employment Benefits
The Corporation has a noncontributory 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 plan's assets include
common stock, fixed income securities, short-term investments and cash.
The Corporation sponsors two defined benefit post retirement plans that cover
both salaried and nonsalaried employees. One plan provides medical benefits, and
the other provides life insurance benefits.The post retirement health care plan
is contributory and the life insurance plan is noncontributory. 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. No health care cost
increases have been factored into the health plan's actuarial calculations due
to this cap.
Pocahontas Bankshares Corporation Page 33
<PAGE>
11. Post Employment Benefits (continued)
The following table outlines the changes in the Corporation's postemployment
benefit plan obligations, assets and funded status for the year ended December
31, 1998 and December 31, 1997, and the assumptions and components of net
periodic benefit costs for the three years in the period ended December 31,
1998.
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
-------------------------------------------------
1998 1997 1998 1997
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 5,877 $ 4,842 $ 1,180 $ 1,068
Service cost 264 245 21 18
Interest cost 407 359 81 78
Amendments 219 -- -- --
Actuarial (gain) loss 365 537 59 45
Benefits paid (261) (106) (44) (29)
-------------------------------------------------
Benefit obligation at end of year 6,871 5,877 1,297 1,180
-------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 8,581 7,025 N/A N/A
Actual return on plan assets 1,222 1,662 N/A N/A
Employer contribution -- -- N/A N/A
Benefits paid (261) (106) N/A N/A
Fair value of plan assets at end of year 9,542 8,581 N/A N/A
Funded status 2,671 2,704 (1,297) (1,180)
Unrecognized net actuarial gain (1,941) (1,914) (152) (218)
Unrecognized prior service cost 534 345 -- --
Unrecognized transition obligation (454) (518) 775 830
-------------------------------------------------
Prepaid (accrued) benefit cost $ 810 $ 617 $ (674) $ (568)
-------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Other
Postretirement
Pension Benefits Benefits
---------------------------------------------------------------
Weighted-average assumptions as of 12/31 1998 1997 1996 1998 1997 1996
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.50% 7.00% 7.50% 6.50% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00% N/A N/A N/A
Rate of compensation increase 3.00% 3.00% 3.00% N/A N/A N/A
Components of net periodic benefit cost
Service cost $ 264 $ 245 $ 239 $ 21 $ 18 $ 17
Interest cost 407 359 348 81 78 75
Expected return on plan assets (767) (627) (548) -- -- --
Amortization of prior service cost 30 30 30 -- -- --
Amortization of transition obligation (65) (65) (65) 55 55 55
Recognized net actuarial gain (62) (41) -- (7) (9) (9)
---------------------------------------------------------------
Net periodic benefit cost $(193) $ (99) $ 4 $ 150 $ 142 $ 138
---------------------------------------------------------------
</TABLE>
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
are matched fifty percent (50%) by the Corporation. Total amounts charged to
operating expense for payments pursuant to this plan were approximately $104,000
in 1998, $99,000 in 1997 and $88,000 in 1996.
Page 34 Pocahontas Bankshares Corporation
<PAGE>
12. Income Taxes
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
Tax provision attributed to income from operations: 1998 1997 1996
------------------------
Federal (Dollars in Thousands)
<S> <C> <C> <C>
Current $1,421 $1,342 $1,225
Deferred 87 (31) (46)
State
Current 307 344 278
- --------------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAX $1,815 $1,655 $1,457
- --------------------------------------------------------------------------------------------------
</TABLE>
The components of deferred tax assets and liabilities at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------
(Dollars in Thousands)
<S> <C> <C>
Foreclosures $ 12 $ 61
Provision for loan losses 744 665
Marketable equity securities 220 219
Other, net 20 93
----------------------
Gross deferred tax assets 996 1,038
----------------------
Depreciation (171) (127)
Unrealized gains on securities available for sale (166) (72)
----------------------
Gross deferred tax liabilities (337) (199)
----------------------
Valuation allowance (220) (219)
- ----------------------------------------------------------------------------------------------------
NET DEFERRED TAX ASSETS $ 439 $ 620
- ----------------------------------------------------------------------------------------------------
</TABLE>
A valuation allowance was established for the 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,
----------------------------------------
1998 1997 1996
----------------------------------------
(Dollars in Thousands)
Amount % Amount % Amount %
----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Provision at statutory rate $1,705 34 $1,583 34 $1,458 34
Tax-exempt interest income from certain investment
securities and loans (194) (4) (214) (4) (200) (5)
State income tax expense, net of federal benefit 203 4 228 5 177 4
Nondeductible (income) expense 101 2 58 1 22 1
- ----------------------------------------------------------------------------------------------
PROVISION FOR INCOME TAXES $1,815 36 $1,655 36 $1,457 34
- ----------------------------------------------------------------------------------------------
</TABLE>
13. 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.
Pocahontas Bankshares Corporation Page 35
<PAGE>
14. 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 $622,000 at December 31, 1998
and $1,072,000 at December 31, 1997. 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 $28,875,000 at December 31, 1998, and $24,909,000
at December 31, 1997, 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. The loan portfolio is generally well diversified and
geographically dispersed within the region. There are no industry
concentrations that represent more than 25% of the Corporation's equity. 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.
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," 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 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.
Page 36 Pocahontas Bankshares Corporation
<PAGE>
14. Financial Instruments, Concentrations of Credit and Fair Values (continued)
The estimated fair value and the recorded book balances at December 31, 1998 and
1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
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 $ 13,748 $ 13,748 $ 10,896 $ 10,896
Federal funds sold 4,000 4,000 3,400 3,400
Securities available for sale 45,951 45,951 35,149 35,149
Securities held to maturity 14,086 13,957 17,516 17,334
Federal Home Loan Bank and Federal Reserve Bank stock 1,028 1,028 1,028 1,028
Net loans 205,052 199,681 198,345 194,724
Liabilities:
Deposits with no stated maturities $151,200 $151,200 $143,192 $143,192
Deposits with stated maturities 101,004 100,528 90,003 89,145
Short-term borrowings 13,046 13,046 17,038 17,038
</TABLE>
The estimation methodologies used to determine fair value are as follows: For
those loans and deposits with floating interest rates it was presumed that the
estimated fair value generally approximated the recorded book balances.
Securities actively traded in a secondary market have been valued using quoted
available market prices. Deposits 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. Deposits with no stated
maturities have an estimated fair value equal to the amount payable on demand
which is 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 losses, and assumed prepayment risk. Fair values for nonperforming
loans are estimated using discounted cash flow analysis, or underlying
collateral values, where applicable. Changes in assumptions or estimation
methodologies may have a material effect on these estimated fair values.
15. 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 to the net profits of that year, as
defined, combined with the retained net profits of the two preceding years. At
December 31, 1998, retained net profits for the years 1998 and 1997, which were
free of such regulatory restrictions were approximately $2,767,000.
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.
Pocahontas Bankshares Corporation Page 37
<PAGE>
15. Regulatory Matters (continued)
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 riskweighted assets (as defined), and Tier I
capital to average assets (as defined). Management believes, as of December 31,
1998, that the Corporation and each of its subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 1998, First Century Bank, N.A., and First Century Bank have
each received notification from their respective regulators that they are
wellcapitalized under the regulatory framework for prompt corrective action. To
be adequately capitalized, minimum total riskbased, Tier I riskbased, 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 38 Pocahontas Bankshares Corporation
<PAGE>
15. Regulatory Matters (continued)
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
-----------------------------------------------------------------------------
Amount Ratio Amount Ratio
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated $29,027 14.02% (greater than/equal to)$16,566 (greater than/equal to)8.00%
First Century Bank, N.A. $24,620 13.72% (greater than/equal to)$14,359 (greater than/equal to)8.00%
First Century Bank $ 3,955 14.23% (greater than/equal to)$ 2,224 (greater than/equal to)8.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $26,495 12.79% (greater than/equal to)$ 8,283 (greater than/equal to)4.00%
First Century Bank, N.A. $22,425 12.49% (greater than/equal to)$ 7,179 (greater than/equal to)4.00%
First Century Bank $ 3,618 13.01% (greater than/equal to)$ 1,112 (greater than/equal to)4.00%
Tier I Capital (to Average Assets):
Consolidated $26,495 9.08% (greater than/equal to)$11,673 (greater than/equal to)4.00%
First Century Bank, N.A. $22,425 8.71% (greater than/equal to)$10,302 (greater than/equal to)4.00%
First Century Bank $ 3,618 9.62% (greater than/equal to)$ 1,504 (greater than/equal to)4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
---------------------------------------------------------------------
Amount Ratio
---------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1998:
Total Capital (to Risk Weighted Assets):
Consolidated
First Century Bank, N.A. (greater than or equal to)$ 17,949 (greater than or equal to)10.00%
First Century Bank (greater than or equal to)$ 2,780 (greater than or equal to)10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated
First Century Bank, N.A. (greater than or equal to)$ 10,769 (greater than or equal to)6.00%
First Century Bank (greater than or equal to)$ 1,668 (greater than or equal to)6.00%
Tier I Capital (to Average Assets):
Consolidated
First Century Bank, N.A. (greater than or equal to)$ 12,878 (greater than or equal to)5.00%
First Century Bank (greater than or equal to)$ 1,881 (greater than or equal to)5.00%
</TABLE>
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
----------------------------------------------------------------------------------------
Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated $28,470 14.05% (greater than or equal to)$16,205 (greater than or equal to)8.00%
First Century Bank, N.A. $24,408 13.71% (greater than or equal to)$14,245 (greater than or equal to)8.00%
First Century Bank $ 3,526 13.95% (greater than or equal to)$ 2,021 (greater than or equal to)8.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated $26,100 12.88% (greater than or equal to)$ 8,103 (greater than or equal to)4.00%
First Century Bank, N.A. $22,358 12.56% (greater than or equal to)$ 7,122 (greater than or equal to)4.00%
First Century Bank $ 3,210 12.70% (greater than or equal to)$ 1,011 (greater than or equal to)4.00%
Tier I Capital (to Average Assets):
Consolidated $26,100 9.46% (greater than or equal to)$11,033 (greater than or equal to)4.00%
First Century Bank, N.A. $22,358 9.23% (greater than or equal to)$ 9,689 (greater than or equal to)4.00%
First Century Bank $ 3,210 8.77% (greater than or equal to)$ 1,464 (greater than or equal to)4.00%
<CAPTION>
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-------------------------------------------------------------------------
Amount Ratio
-------------------------------------------------------------------------
<S> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets):
Consolidated
First Century Bank, N.A. (greater than or equal to)$ 17,806 (greater than or equal to)10.00%
First Century Bank (greater than or equal to)$ 2,527 (greater than or equal to)10.00%
Tier I Capital (to Risk Weighted Assets):
Consolidated
First Century Bank, N.A. (greater than or equal to)$ 10,684 (greater than or equal to)6.00%
First Century Bank (greater than or equal to)$ 1,516 (greater than or equal to)6.00%
Tier I Capital (to Average Assets):
Consolidated
First Century Bank, N.A. (greater than or equal to)$ 12,111 (greater than or equal to)5.00%
First Century Bank (greater than or equal to)$ 1,830 (greater than or equal to)5.00%
</TABLE>
Pocahontas Bankshares Corporation Page 39
<PAGE>
16. Quarterly Financial Data (Unaudited)
The summary financial data by quarter for the years ended December 31, 1998,
1997 and 1996 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>
1998
Interest income $ 5,391 $5,731 $5,853 $ 5,560
Net interest income 3,090 3,213 3,246 3,123
Provision for possible loan losses 188 133 124 99
Securities gains (losses) (14) -- -- (20)
Income before taxes 1,130 1,354 1,290 1,242
Net income 725 864 820 792
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME PER SHARE $ 0.36 $ 0.43 $0.41 $0.40
- ---------------------------------------------------------------------------------------------------------------------------
1997
Interest income $ 5,252 $5,413 $5,453 $ 5,593
Net interest income 2,857 3,132 3,111 3,232
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 $ 5,165 $5,250 $5,300 $ 5,269
Net interest income 2,802 2,901 2,924 2,876
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
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Page 40 Pocahontas Bankshares Corporation
<PAGE>
17. Parent Company Financial Data
Condensed financial information of Pocahontas Bankshares Corporation (parent
company only) is presented below:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-----------------------
(Dollars in Thousands)
<S> <C> <C>
Assets:
Cash $ 173 $ 222
Investment in subsidiaries at equity 28,051 26,057
Other assets 279 429
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $28,503 $26,708
- ----------------------------------------------------------------------------------------------------
Liabilities:
Other liabilities $ -- $ 119
----------------------
TOTAL LIABILITIES -- 119
----------------------
Stockholders' Equity:
Common stock -$1.25 par value; shares issued and outstanding:
2,000,000 at December 31, 1998 and December 31, 1997 2,500 2,500
Paid-in capital 785 785
Retained earnings 25,218 23,304
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 28,503 26,589
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $28,503 $26,708
- ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Income:
Dividends from subsidiary banks $ 1,500 $ 1,300 $ 1,350
---------------------------------
TOTAL INCOME 1,500 1,300 1,350
---------------------------------
Expenses:
Interest on long-term borrowings -- -- --
Other 55 33 64
---------------------------------
TOTAL EXPENSES 55 33 64
---------------------------------
Applicable income taxes (benefits) 25 33 (9)
---------------------------------
Income before equity in undistributed
net income of subsidiaries 1,420 1,234 1,295
Equity in undistributed net income of subsidiaries 1,781 1,768 1,535
- --------------------------------------------------------------------------------------------------
NET INCOME $ 3,201 $ 3,002 $ 2,830
- --------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Years Ended December 31,
---------------------------------
1998 1997 1996
---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,201 $ 3,002 $ 2,830
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (1,781) (1,768) (1,535)
Other adjustments, net 31 1 (2)
---------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,451 1,235 1,293
---------------------------------
Cash flows from financing activities
Principal repayments of long term debt -- -- --
Cash dividends paid (1,500) (1,300) (1,210)
---------------------------------
NET CASH USED BY FINANCING ACTIVITIES (1,500) (1,300) (1,210)
---------------------------------
Net increase (decrease) in cash (49) (65) 83
Cash at January 1, 222 287 204
- --------------------------------------------------------------------------------------------------
Cash at December 31, $ 173 $ 222 $ 287
- --------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ -- $ -- $ --
Income taxes $ 1,853 $ 1,369 $ 1,751
</TABLE>
Pocahontas Bankshares Corporation Page 41
<PAGE>
Report of
Independent
Accountants
January 29, 1999
The Board of Directors and Stockholders
Pocahontas Bankshares Corporation:
In our opinion, the accompanying consolidated statements of financial condition
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows present fairly, in all material
respects, the financial position of Pocahontas Bankshares Corporation and
Subsidiaries (the "Corporation") at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
Page 42 Pocahontas Bankshares Corporation
<PAGE>
Boards of
Directors
POCAHONTAS BANKSHARES CORPORATION
- ------------------------------------------------------------------------------
W. Paul Cole, Jr.
President Cole
Motor & Cole
Chevrolet-Cadillac
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
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.
- ------------------------------------------------------------------------------
W. Paul Cole, Jr.
President Cole
Motor & Cole
Chevrolet-Cadillac
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
Daniel D. Smith
President
Pocahontas Land Company
Walter L. Sowers
President
Pemco Corporation
William Chandler Swope
President
Swope Construction
Services, Inc.
J. Brookins Taylor, M.D.
Physician
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 Corporation Page 43
<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
Director of Personnel &
Training
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
Christina H. Naylor
Branch Manager, Main Office
& Teller Operations
Karen Kidd
Branch Manager/
Assistant Cashier,
College Ave. Office
Revonda D. Helms
Branch Manager/
Assistant Cashier,
Federal Street Office
Juanita Growe
Branch Manager,
Pineville Office
Jean Stanley
Branch Manager/
Assistant Cashier,
Princeton Office
Brenda Davidson
Branch Manager and
Loan Officer,
Bluefield, Virginia Office
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
Loan Officer,
Bluefield Office
Debra Brunty
Assistant Vice President-Loans,
Wyoming County Area
James Goodwin
Loan Officer,
Princeton Office
Linda Hamer
Loan Officer,
Bluefield Office
Christopher W. Nipper
Loan Officer,
College Avenue Office
Charles Lester
Collection Loan Officer
Barry W. Whitt
Loan Administration 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
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
Vice President
& Trust Officer
Angela M. James
Trust Officer,
Employee Benefits
Carol Oliver
Trust Operations
Officer
FIRST CENTURY BANK
- -------------------------------------------------------------------------------
R. W. WILKINSON
Chairman &
Trust Officer
Jeffery L. Forlines
President &
Chief Executive Officer
W. Edward Smith
Assistant Vice President
John Phillips
Assistant Cashier &
Director of Marketing
Zerna Felts
Branch and Security Officer,
Fort Chiswell Office
Page 44 Pocahontas Bankshares Corporation
<PAGE>
Pocahontas
Bankshares
Corporation
Subsidiaries
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
427 Virginia Ave.
Bluefield, VA 24605
(540) 326-2606
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,473
<INT-BEARING-DEPOSITS> 3,275
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 45,951
<INVESTMENTS-CARRYING> 13,957
<INVESTMENTS-MARKET> 14,086
<LOANS> 202,214
<ALLOWANCE> 2,533
<TOTAL-ASSETS> 294,579
<DEPOSITS> 251,728
<SHORT-TERM> 13,046
<LIABILITIES-OTHER> 1,302
<LONG-TERM> 0
0
0
<COMMON> 2,500
<OTHER-SE> 26,003
<TOTAL-LIABILITIES-AND-EQUITY> 294,579
<INTEREST-LOAN> 18,616
<INTEREST-INVEST> 3,339
<INTEREST-OTHER> 580
<INTEREST-TOTAL> 22,235
<INTEREST-DEPOSIT> 9,202
<INTEREST-EXPENSE> 9,863
<INTEREST-INCOME-NET> 12,672
<LOAN-LOSSES> 544
<SECURITIES-GAINS> (34)
<EXPENSE-OTHER> 9,816
<INCOME-PRETAX> 5,016
<INCOME-PRE-EXTRAORDINARY> 3,201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,201
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.60
<YIELD-ACTUAL> 4.74
<LOANS-NON> 1,728
<LOANS-PAST> 273
<LOANS-TROUBLED> 637
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,370
<CHARGE-OFFS> 440
<RECOVERIES> 59
<ALLOWANCE-CLOSE> 2,533
<ALLOWANCE-DOMESTIC> 1,227
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,306
</TABLE>
