<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ___________________
Commission File Number 0-84254
-------
PIONEER BANCSHARES, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Delaware 62-1469913
- -------------------------------------------------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 Broad Street, Chattanooga, TN 37402
- --------------------------------------------------------------------------------
(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code 423-755-0000
------------
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of June 30, 1997:
Title of Class Number of Shares Outstanding
-------------- ----------------------------
Common Stock, $.005 Par Value 3,759,912
<PAGE> 2
PIONEER BANCSHARES, INC.
- ------------------------
<TABLE>
<CAPTION>
INDEX PAGE
- ----- -----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997,
December 31, 1996 and September 30, 1996 1
Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 1997
and September 30, 1996 2
Consolidated Statement of Changes in Stockholders' Equity -
Nine Months Ended September 30, 1997 and September 30, 1996 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and September 30, 1996 4-5
Notes to Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
of Pioneer Bancshares, Inc. 10-23
PART II. OTHER INFORMATION 24
Signatures 25
Exhibit Index 26
</TABLE>
<PAGE> 3
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CONDITION Unaudited Unaudited
(in thousands) September 30, December 31, September 30,
------------- ------------ -------------
ASSETS 1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 54,832 $ 57,565 $ 56,055
Investment securities:
Held-to-maturity (fair value of $51,746 at
September 30, 1997, $59,319 at December 31,
1996, and $61,847 at September 30, 1996) 51,513 59,409 63,154
Available-for-sale 158,633 191,519 210,195
Federal funds sold 6,565 -- --
Loans 622,927 524,849 489,865
Less: Unearned income 1,408 1,596 1,598
Allowance for loan losses 7,651 5,758 5,270
-------- -------- --------
Net loans 613,868 517,495 482,997
Premises and equipment, net of accumulated
depreciation 21,861 20,242 20,383
Intangible assets 5,829 6,450 6,657
Other assets 14,051 14,560 14,630
-------- -------- --------
Total Assets $927,152 $867,240 $854,071
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing demand deposits $126,619 $125,530 $129,609
Interest bearing demand deposits 127,103 120,146 118,606
Money market accounts 48,916 43,008 43,888
Savings deposits 103,068 112,684 95,569
Time deposits of less than $100,000 252,963 235,114 248,975
Time deposits of $100,000 or more 75,029 56,086 71,268
-------- -------- --------
Total deposits 733,698 692,568 707,915
Federal funds purchased and securities
sold under agreements to repurchase 58,563 63,339 37,814
Other borrowings 28,000 10,000 10,000
Other liabilities 8,404 7,410 7,152
-------- -------- --------
Total liabilities 828,665 773,317 762,881
-------- -------- --------
STOCKHOLDERS' EQUITY
Common stock par value $.005 per share;
8,000,000 authorized; 3,759,912 issued 19 19 19
Surplus 64,894 64,885 64,728
Retained earnings 33,743 28,771 27,195
Unrealized appreciation/(depreciation) on
securities available for sale 861 807 (726)
Less: treasury stock - at cost (1,021) (559) (26)
-------- -------- --------
Total stockholders' equity 98,496 93,923 91,190
-------- -------- --------
Total Liabilities and Stockholders' Equity $927,152 $867,240 $854,071
======== ======== ========
</TABLE>
1
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three months ended Nine months ended
September 30, September 30,
----------------------------------------------------
INTEREST INCOME 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and fees on loans $14,379 $10,500 $38,704 $29,961
Interest on investment securities
Taxable 2,358 2,860 7,553 8,747
Tax exempt 750 980 2,734 2,970
Interest on federal funds sold 187 224 522 372
Interest on other earning assets 9 6 23 15
------- ------- ------- -------
Total interest income 17,683 14,570 49,536 42,065
------- ------- ------- -------
INTEREST EXPENSE
Interest bearing demand deposits 855 794 2,505 2,357
Money market accounts 405 428 1,228 1,221
Savings deposits 866 573 2,528 1,711
Time deposits of less than $100,000 3,566 3435 10,288 9,863
Time deposits of $100,000 or more 1,034 813 2,958 2,304
Federal funds purchased and securities
sold under agreements to repurchase 706 500 2,071 1,575
Other borrowed money 268 142 609 375
------- ------- ------- -------
Total interest expense 7,700 6,685 22,187 19,406
------- ------- ------- -------
Net interest income 9,983 7,885 27,349 22,659
Provision for loan losses 1,122 221 2,743 756
------- ------- ------- -------
Net interest income
after the provision for loan losses 8,861 7,664 24,606 21,903
------- ------- ------- -------
NONINTEREST INCOME
Trust income 408 343 1,195 991
Service charge on deposit accounts 1,063 978 3,109 2,799
Net securities gains 221 157 283 220
Other income 1,061 618 2,457 1,743
------- ------- ------- -------
Total noninterest income 2,753 2,096 7,044 5,753
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 3,678 3,508 11,427 10,263
Occupancy 900 947 2,792 2,738
Other 3,294 1,913 7,291 5,769
------- ------- ------- -------
Total noninterest expense 7,872 6,368 21,510 18,770
------- ------- ------- -------
Income before provision for income taxes 3,742 3,392 10,140 8,886
Provision for income taxes 884 786 2,574 2,283
------- ------- ------- -------
NET INCOME $ 2,858 $ 2,606 $ 7,566 $ 6,603
======= ======= ======= =======
Net income per common share $ 0.76 $ 0.69 $ 2.01 $ 1.76
Dividends declared per common share $0.2300 $0.2175 $0.6900 $0.6525
</TABLE>
2
<PAGE> 5
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(in thousands except for share data) Unrealized
Common Stock Appreciation
------------------ (Depreciation)
# of Par Capital Retained Available- Treasury Total
Shares Value Surplus Earnings for-Sale Sec Stock
------- ------ ------- -------- ------------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1995 1,879,956 $19 $64,728 $23,045 $ 312 $ (479) $87,625
Net income -- -- -- 6,603 -- -- 6,603
Cash dividend -- -- -- (2,453) -- -- (2,453)
Stock dividend 1,879,956 -- -- -- -- -- --
Net Changes in Unrealized
Appreciation on
Securities Available-for-Sale -- -- -- -- (1,038) -- (1,038)
Sales of Treasury Stock -- -- -- -- -- 631 631
Purchases of Treasury Stock -- -- -- -- -- (178) (178)
---------- --- ------- ------- ------- ------- -------
Balances, September 30, 1996
(Unaudited) 3,759,912 $19 $64,728 $27,195 $ (726) $ (26) $91,190
========== === ======= ======= ======= ======= =======
Balances, December 31, 1996 3,759,912 $19 $64,885 $28,771 $ 807 $ (559) $93,923
Net income -- -- -- 7,566 -- -- 7,566
Cash dividend -- -- -- (2,594) -- -- (2,594)
Net Changes in Unrealized
Appreciation on
Securities Available-for-Sale -- -- -- -- 54 -- 54
Sales of Treasury Stock -- -- 9 -- -- 636 645
Purchases of Treasury Stock -- -- -- -- -- (1,098) (1,098)
--------- --- ------- ------- ------- ------- -------
Balances, September 30, 1997
(Unaudited) 3,759,912 $19 $64,894 $33,743 $ 861 $(1,021) $98,496
========= === ======= ======= ======= ======= =======
</TABLE>
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Unaudited
Nine months ended
OPERATING ACTIVITIES September 30,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Net income
$ 7,566 $ 6,603
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 2,743 756
Depreciation on premises and equipment 1,869 1,372
Amortization and accretion of investment
securities 388 658
Decrease in other assets 509 (3,229)
Increase in other liabilities 994 (481)
-------- --------
Net cash provided by operating activities 14,069 5,679
-------- --------
INVESTING ACTIVITIES
Proceeds from sales and maturities of
available-for-sale securities 101,484 53,540
Proceeds from maturities of
held-to-maturity securities 7,797 14,804
Purchases of investment securities (68,956) (55,767)
Net increase in federal funds sold (6,565) 5,935
Net increase in loans (99,116) (68,122)
Purchases of premises and equipment (2,754) (4,671)
-------- --------
Net cash used in investing activities (68,110) (54,281)
-------- --------
FINANCING ACTIVITIES
Net increase in demand deposits 8,046 2,355
Net decrease in savings and MMDA (3,708) 6,249
Net increase in time deposits 36,792 37,216
Net decrease in repurchase
agreements and federal funds purchased (4,776) (4,101)
Net increase in other borrowings 18,000 10,000
Cash dividends paid (2,594) (2,453)
Sales of treasury stock 646 631
Purchase of treasury stock (1,098) (178)
-------- --------
Net cash provided by financing activities 51,308 49,719
-------- --------
Increase (decrease) in cash and cash
equivalents (2,733) 1,117
-------- --------
Cash and cash equivalents at the beginning of
the period 57,565 54,938
-------- --------
Cash and cash equivalents at the end of
the period $ 54,832 $ 56,055
======== ========
</TABLE>
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF Unaudited
NONCASH INVESTING AND Nine months ended
FINANCING ACTIVITIES September 30,
---------------------
1997 1996
---- ----
<S> <C> <C>
Unrealized Appreciation (Depreciation)
of Securities, net of Deferred Taxes $ 54 $(1,038)
State Taxes Paid $1,185 $ 468
Federal Taxes Paid $3,342 $ 2,949
</TABLE>
5
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PIONEER BANCSHARES, INC.
A. PRESENTATION OF FINANCIAL INFORMATION
The financial statements in this report have not been audited. The information
included herein should be read in conjunction with the notes to consolidated
financial statements included in the 1996 Annual Report to Shareholders which
was furnished to each shareholder of the Company on March 24, 1997. The
consolidated financial statements presented herein conform to generally accepted
accounting principles and to general industry practices. All prior period per
share data has been restated to reflect the two for one stock split approved at
the annual meeting of Pioneer Bancshares, Inc. stockholders held on May 21,
1996.
Consolidation
The accompanying consolidated financial statements include the accounts of
Pioneer Bancshares, Inc., its subsidiaries, Pioneer Bank, Pioneer Bank, f.s.b.
and Valley Bank, and Pioneer Bank's subsidiaries and trusteed affiliates.
Pioneer Bank's subsidiaries include Pioneer Securities, Inc. (PSI) and Center
Finance Company, Inc. The trusteed affiliates of Pioneer Bank include Frontier
Corporation and Valley Company with Valley's wholly-owned subsidiary, Oneida
Insurance Company, Inc. Collectively Pioneer Bancshares and its subsidiaries
and trusteed affiliates are referred to as the "Company." Frontier Corporation
and Valley Company are held in trust for the benefit of Pioneer Bank's
shareholders for a period of one hundred years from 1956. At any time, the
trusts may be liquidated by a two-thirds vote of Pioneer Bank's shareholders.
Center Finance Company, Inc. specializes in consumer finance and related
activities in Athens, Tennessee and commenced operations in the first quarter of
1996.
Substantially all intercompany transactions, profits and balances have been
eliminated.
Accounting Policies
During interim periods, the Company follows the accounting policies set forth in
its Form 10-K for the year ended December 31, 1996, as filed with the Securities
and Exchange Commission. Since December, 1996, there have been no changes in any
accounting principles or practices, or in the method of applying any such
principles or practices.
Interim Financial Data (Unaudited)
In the opinion of Company management, the accompanying interim financial
statements contain all material adjustments, consisting only of normal recurring
adjustments necessary to present fairly the financial condition, the results of
operations, cash flows and stockholders' equity of the Company for the interim
periods. Results for interim periods are not necessarily indicative of the
results to be expected for a full year.
6
<PAGE> 9
Deferred Taxes
Deferred income taxes arise from temporary differences between the income tax
basis and the financial reporting basis of assets and liabilities. If it is more
likely than not that some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
Common Stock Data
Earnings per share is computed by dividing the net income for the period by the
weighted average number of common shares outstanding during the period.
FASB Statements No. 114 & 118
For purposes of these Statements, management maintains the following policy.
Impaired loans are divided into two classifications: doubtful and loss.
"Doubtful" loans indicate probable loss and are reserved at 50% of outstanding
principal regardless of underlying collateral value. If collateral value is less
than 50% of principal, then additional specific reserves are allocated. "Loss"
loans are deemed uncollectible by management and are reserved at 100% of
outstanding principal value. The Company charges-off loans that it deems to be
substantially uncollectible. The Directors Loan Committee approves all loan
charge-offs. The following table details impaired loans:
<TABLE>
<CAPTION>
September 30,
----------------------
1997 1996
---- ----
<S> <C> <C>
Principal balance $239,387 $113,644
Interest income recorded during loan impairment -- --
Reserve for potential credit losses 167,735 64,900
Unreserved portion of impaired loans 71,652 48,744
Average principal balance quarter-to-date 252,900 193,909
Average principal balance year-to-date 195,268 166,446
</TABLE>
Impaired loans are identified according to the two classification methods in the
following table:
<TABLE>
<CAPTION>
September 30,
--------------------------
1997 1996
---- ----
<S> <C> <C>
Doubtful loans outstanding. $239,387 $97,486
Loss loans outstanding -- 16,158
</TABLE>
The Company's method of valuing impaired loans approximates fair value as
defined in Statements No. 114 & 118.
7
<PAGE> 10
Forward-Looking Statements
Certain written and oral statements made by or with the approval of an
authorized executive officer of the Company may constitute "forward-looking
statements" as defined under the Private Securities Litigation Reform Act of
1995. Words or phrases such as "should result, are expected to, we anticipate,
we estimate, we project" or similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from the
Company's historical experience and its present expectations or projections.
These risks and uncertainties include, but are not limited to, unanticipated
economic changes, interest rate movements and the impact of competition. Caution
should be taken not to place undue reliance on any such forward-looking
statements since such statements speak only as of the date of the making of such
statements.
B. FORMATION OF FEDERAL SAVINGS BANK
The Company's application to the Office of Thrift Supervision ("OTS"), the
Federal Reserve Bank of Atlanta ("FRB") and the Federal Deposit Insurance
Corporation ("FDIC") to organize and subsequently purchase a Tennessee based, de
novo, federal savings bank ("FSB") was approved during the third quarter. The
Company's request from the FDIC to grant the federally chartered FSB a "Bank
Insurance Fund" insurance charter was also approved. The newly organized savings
bank, Pioneer, f.s.b, a wholly owned subsidiary of Pioneer Bancshares, Inc.
commenced operations on September 9, 1997. Management estimates start-up costs
and operational costs for Pioneer Bank,f.s.b to decrease consolidated earnings
per share by $.16 in 1997, net of taxes.
C. ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," establishes standards and disclosure
requirements for the way companies report information about operating segments,
including related product information, both in annual and interim reports issued
to stockholders. Operating segments are components of a company about which
separate financial information is available and which are used in determining
resource allocations and performance results. Information such as segment net
earnings, appropriate revenue and expense items and certain balance sheet items
are required to be presented, and such amounts are required to be reconciled to
the company's combined financial information. The Company will assess the
methodologies and reporting for compliance with the Standard. This Standard is
effective for financial statements issued for periods ending after December 31,
1997, including interim periods.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," establishes standards for the reporting and the presentation of
comprehensive income. Other comprehensive income items are to be classified by
their nature and by their related accumulated balances in the appropriate
financial statements of a company. Generally, other comprehensive income
includes transactions not typically recorded as a component of net income such
as foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain debt and equity securities. This Standard requires
that such items be presented with equal
8
<PAGE> 11
prominence on a comparative basis in the appropriate financial statements for
fiscal years beginning after December 15, 1997.
Statement of Financial Standards No. 128, "Earnings per Share," establishes
standards for computing and presenting earnings per share ("EPS"). This Standard
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
statement of income for entities with complex capital structures, and it
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution, and it is computed by dividing net income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
This Standard is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods; earlier application is not
permitted. This Standard requires restatement of all prior-period EPS data
presented. Currently, the difference between the Company's basic and fully
diluted EPS is less than one percent.
9
<PAGE> 12
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OF PIONEER BANCSHARES, INC.
OVERVIEW
The Company ended the third quarter with total assets of $927.2 million, a 6.9%
increase from December 31, 1996 and an 8.6% increase from September 30, 1996.
The Company reported net income for the third quarter of $2.9 million, or $0.76
per share, compared to $2.6 million, or $0.69 per share, for the same period in
1996. For the nine months ended September 30, 1997, the Company reported $7.6
million, or $2.01 per share, compared to $6.6 million, or $1.76 per share, for
the same period last year. The improvement in earnings represents a 9.7%
increase from the third quarter 1996 to the third quarter of 1997 and a 14.6%
increase from the first nine months of 1996 to the first nine months of 1997.
NET INTEREST INCOME
Net interest income was $8.9 million for the three months ended September 30,
1997, compared to $7.7 million for the same period in 1996. This level of net
interest income resulted primarily from, among other things, an increase in net
interest spread of 47 basis points to 4.13% from 3.66%. The net interest margin
was 4.96% in the third quarter of 1997 compared to 4.44% in the third quarter of
1996. The margin increased because the yield on interest earning assets
increased 64 basis points, while the rate paid on interest bearing liabilities
increased only 17 basis points.
Net interest income was $24.6 million for the nine months ended September 30,
1997, compared to $21.9 million for the same period in 1996. This level of net
interest income resulted primarily from, among other things, an increase in net
interest spread of 36 basis points to 3.91% from 3.55%. The net interest margin
was 4.68% for the nine months ended September 30, 1997 compared to 4.34% for the
same period last year. The margin increased because the yield on interest
earning assets increased 46 basis points, while the rate paid on interest
bearing liabilities increased only 10 basis points. (See "Net Interest Margin")
CASH AND DUE FROM BANKS
Cash and due from banks decreased from $57.6 million as of December 31, 1996, to
$54.8 million as of September 30, 1997, representing a 4.8% decrease. The
decrease is indicative of normal business cycles in the industry. Cash and due
from bank balances will fluctuate depending on monthly cycles and the volume of
uncollected funds deposited by bank customers. It is management's desire to
maintain adequate cash reserves to meet our customers' cash needs.
10
<PAGE> 13
INVESTMENTS
Investment securities decreased from $250.9 million to $210.1 million, or 16.3%
from December 31, 1996 to September 30, 1997. This decrease was due to deposits
growing slower than the loan portfolio, creating a temporary liquidity need.
Maturities, sales and prepayments within the securities portfolio were not
reinvested in securities, thereby increasing liquidity for loan growth. From
December 31, 1996 to September 30, 1997 the "Held-to-Maturity" securities
decreased $7.9 million, or 13.3% while the "Available-for-Sale" securities
decreased $32.9 million, or 17.2%. The average expected life of the total
investment security portfolio at September 30, 1997 was 3.1 years with an
average tax equivalent yield of 6.50%. Taxable equivalent adjustments, using a
34 percent tax rate, have been made in calculating yields on tax-exempt
obligations.
Since December 31, 1996, interest rate volatility in the bond market has
increased the value of the investment portfolio by $406,000. Interest rates
decreased due to the decrease in the federal deficit causing treasury debt
prices to increase and yields to decrease. Instability in the equity markets
overseas and domestically has created a shift in investment holdings from
equities to bonds causing additional pressure on increasing bond prices. With
the Consumer Price Index showing a less than 3% annual inflation rate, interest
rates in general would not be under pressure to increase. Regarding the
investment portfolio, management intends to (i) buy securities only during those
times when prices appear most favorable, (ii) maintain maturities four years or
less and (iii) avoid mortgage-backed securities and structured notes.
FASB 115 requires that the "Available for Sale" portfolio be valued at market
prices and any difference be recorded as a change in asset value to the
investment portfolio and capital. As of September 30, 1997, the FASB 115
adjustment resulted in an increase in the asset value of the investment
portfolio of $1.3 million and an adjustment to the capital account of $861,000,
after reserving $444,000 for deferred taxes.
As of September 30, 1997, the Company had $6.6 million invested in Federal Funds
compared to no investment in Federal Funds at December 31, 1996. Management
continually monitors the Company's liquidity position to determine the necessary
balances of short term investments and to consider alternative uses of such
funds.
LOAN PORTFOLIO
Loans, net of unearned income, increased $98.3 million, or 18.8% from December
31, 1996 to September 30, 1997. The loan mix changed marginally from year end
1996 to quarter end, September 30, 1997. The largest dollar volume loan category
increase occurred in commercial loans by $52.0 million, or 49.3% from December,
1996 to September, 1997. Consumer credit card loans increased $70,000, or 1.7%,
due to the re-pricing of the card program after the initial discount rate
offering was completed. Residential real estate loans increased $28.9 million,
or 20.9% from December 31, 1996 to September 30, 1997, due to a strong marketing
program for home equity loans. Real estate construction loans increased 44.1%,
or $16.5 million, for the same period. This increase in construction loans is
one indication of a strong local economy.
11
<PAGE> 14
Management is anticipating strong loan growth for the remainder of the year.
However, the amount of such growth, if any, will depend upon general economic
conditions, including whether or not the Federal Reserve increases or maintains
current interest rate levels. Higher interest rate levels will reduce the growth
rate of the loan portfolio. Management continues to monitor the mix of loans and
the introduction of new loan products to ensure our customers are provided with
the best borrowing opportunities.
The Company had no foreign loans or loans to lesser developed countries as of
September 30, 1997. The Company has not invested in loans to finance highly
leveraged transactions ("HLT"), such as leveraged buy-out transactions, as
defined by the Federal Reserve and other regulatory agencies. There has not been
a concentration in lending to any one industry segment. The Company's loan mix
is further described in the table below.
LOAN PORTFOLIO
(in thousands)
<TABLE>
<CAPTION>
September Percent December Percent
1997 of Total 1996 of Total
---- -------- ---- --------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $157,257 25.24% $105,297 20.06%
Real estate:
Construction and
land development 53,780 8.63% 37,324 7.11%
Residential 167,128 26.83% 138,194 26.33%
Commercial 152,234 24.44% 158,333 30.17%
Consumer
Credit cards 4,231 0.68% 4,161 0.79%
Installments 88,022 14.13% 81,196 15.47%
Lease financing 275 0.05% 344 0.07%
--------------------------------------------------
Total Gross Loans $622,927 100.00% $524,849 100.00%
====== ======
Less:
Unearned income 1,408 1,596
Allowance for
loan losses 7,651 5,758
-------- --------
Total Net Loans $613,868 $517,495
======== ========
</TABLE>
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The economic outlook for the State of Tennessee, where the Company does
business, is cautious. However, it is generally performing better than the
nation as a whole. In the Company's markets, real estate values appear to have
increased slightly as interest rates have eased lower and new housing starts
have remained steady since the first quarter. A continued healthy economy will
probably hold the level of net charge-offs and delinquencies for the remainder
of 1997 at or below historical peer group averages.
12
<PAGE> 15
Management considers changes in the size and character of the loan portfolio,
changes in nonperforming and past due loans, historical loan loss experience,
the existing risk of individual loans, concentrations of loans to specific
borrowers or industries and existing and prospective economic conditions when
determining the adequacy of the loan loss reserve. The allowance for possible
loan losses increased $711,000, or 10.2% during the third quarter of 1997. The
provision charged to expense is based on a continuous analysis by the Company's
management of potential losses in the loan portfolio and management's desire to
increase the percentage of the allowance for possible loan loss reserve to 1.25%
of average outstanding loans before year-end 1997.
The Company's allowance for possible loan losses as a percentage of average
loans, net of unearned income, was 1.27% at September 30, 1997 as compared to
1.14% at December 31, 1996. The allowance for loan losses at September 30, 1997,
and December 31, 1996, provided 267.52% and 163.3% coverage of nonperforming
assets and loans 90 days or more past due, respectively. Net charge-offs
(annualized as a percentage of average quarter-to-date loans) were 0.27% during
the third quarter of 1997 as compared to 0.37% for the same period one year ago.
At September 30, 1997, management believes that the allowance for possible loan
losses is sufficient to absorb potential losses.
ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
Quarter Ending Sept 30 June 30 March 31 Dec 31 Sept 30
------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 6,940 $ 6,153 $ 5,758 $ 5,270 $ 5,493
Loans charged-off 529 433 242 493 566
Loans recovered 117 64 171 640 122
---------------------------------------------------------------
Net charge-offs (recoveries) 412 369 71 (147) 444
Provision for loan losses charged
to expense 1,123 1,156 466 341 221
---------------------------------------------------------------
Balance at end of period $ 7,651 $ 6,940 $ 6,153 $ 5,758 $ 5,270
===============================================================
Allowance for loan losses as a
percentage of average loans
outstanding for the period 1.27% 1.22% 1.17% 1.14% 1.11%
Allowance for loan losses as a
percentage of nonperforming
assets and loans 90 days past
due outstanding at end of the period 267.52% 240.64% 247.41% 163.30% 181.04%
Annualized QTD net charge-offs as
a percentage of average loans
outstanding for the period 0.27% 0.26% 0.05% (0.12)% 0.37%
Annualized YTD net charge-offs as
a percentage of average loans
outstanding for the period 0.19% 0.16% 0.05% 0.24% 0.38%
</TABLE>
13
<PAGE> 16
NONPERFORMING ASSETS AND PAST DUE LOANS
The Company has policies, procedures and underwriting guidelines intended to
assist in maintaining the overall quality of its loan portfolio. The Company
monitors its delinquency levels for any adverse trends. During the past few
years, the Southeastern region of the country has experienced a general
improvement in the real estate loan market. In view of these market conditions,
management has closely monitored and will continue to monitor the Company's real
estate and commercial loan portfolio during 1997. Particular attention will be
focused on those credits targeted by the loan monitoring and review process.
Management's continued emphasis is to seek and maintain a relatively low level
of nonperforming assets and returning the current nonperforming assets to an
earning status.
Nonperforming assets include nonperforming loans, renegotiated loans, foreclosed
real estate held for sale and foreclosed other personal property held for sale.
As of September 30, 1997, nonperforming assets were $2.3 million as compared to
$2.4 million at December 31, 1996. The ratio of nonperforming assets to average
loans, net of unearned income, other real estate and other nonperforming assets
was 0.38% at September 30, 1997, compared to 0.47% at December 31, 1996 and
0.45% at September 30, 1996.
Total nonperforming loans to total average loans decreased from 0.35% at
December 31, 1996, to 0.31% at September 30, 1997. Likewise, loans past due 90
days or more as a percentage of total average loans decreased to 0.10% as of
September 30, 1997, compared to 0.23% as of December 31, 1996. Management
believes that asset quality will remain strong throughout the remainder of 1997.
Net loans charged off during the third quarter of 1997 were $412,000 compared to
a $444,000 for the same period of 1996. Further detail of loan charge-offs and
recoveries is presented in the table "Allowance for Loan Losses."
14
<PAGE> 17
NONPERFORMING ASSETS AND PAST DUE LOANS
(in thousands)
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------
Quarter Ending Sept 30 June 30 March 31 Dec 31 Sept 30
------- ------- -------- ------ -------
<S> <C> <C> <C> <C> <C>
Avg loans, net of unearned income $603,579 $566,628 $526,599 $503,654 $475,430
======== ======== ======== ======== ========
Nonaccrual loans $ 1,856 $ 1,708 $ 1,488 $ 1,745 $ 1,618
Renegotiated or restructured loans 0 0 0 0 0
-------- -------- -------- -------- --------
Total nonperforming loans 1,856 1,708 1,488 1,745 1,618
Other real estate owned, net 352 571 670 561 421
Other non-performing assets 67 24 26 81 89
-------- -------- -------- -------- --------
Total nonperforming assets $ 2,275 $ 2,303 $ 2,184 $ 2,387 $ 2,128
======== ======== ======== ======== ========
Loans 90 days or more past due
and still accruing $ 585 $ 581 $ 303 $ 1,139 $ 783
Total nonperforming loans as a
percentage of total avg loans 0.31% 0.30% 0.28% 0.35% 0.34%
Total nonperforming assets as a
percentage of total avg loans, ORE
and other nonperforming assets 0.38% 0.41% 0.41% 0.47% 0.45%
Loans 90 days past due as a
percentage of total avg loans 0.10% 0.10% 0.06% 0.23% 0.17%
</TABLE>
DEPOSITS
Total deposits increased $41.1 million, or 5.9% from $692.6 million at December
31, 1996 to $733.7 million at September 30, 1997. The increase is due primarily
to customers investing in time deposits and increases in large CD's. Total
interest bearing deposits increased $40.0 million from December 31, 1996 to
September 30, 1997. Noninterest bearing demand deposits increased in the first
nine months of 1997 from December 31, 1996 by $1.1 million, or 1.0%. From
December 31, 1996 to September 30, 1997, interest bearing transaction accounts
increased $7.0 million, or 5.8%, while money market accounts and savings
accounts increased $5.9 million, or 13.7% and decreased $9.6 million, or 8.5%,
respectively.
Federal funds purchased and securities sold under agreements to repurchase
decreased $4.8 million, or 7.5% from December 31, 1996 to September 30, 1997.
Counterparties to the agreements to repurchase are commercial account customers,
where excess funds from noninterest bearing checking accounts are transferred
nightly to a collateralized interest bearing repurchase account. These accounts
are not FDIC insured, therefore the Company collateralizes the deposits with
securities from the investment portfolio. For the quarter ended September 30,
1997, none of the repurchased agreements were brokered. As of September 30,
1997, the Company's federal funds purchased position was $5.9 million compared
to $13.5 million as of December 31, 1996. The Company uses borrowings from the
Federal Home Loan Board ("FHLB") to supplement the management of interest rate
risk by matching maturities within the loan portfolio with FHLB borrowings. At
September 30, 1997 total FHLB borrowings were $28.0 million, or $18.0 million
higher than on December 31, 1996. Regarding the Company's deposit mix, savings
deposits and both interest bearing and noninterest bearing transaction deposits
accounted for 48.6%, 51.7% and
15
<PAGE> 18
48.6% of total deposits at September 30, 1997, December 31, 1996 and September
30, 1996, respectively. Large certificates of deposits, representing 10.2% of
total deposits, is higher than 8.1% at December 31, 1996 and 10.1% at September
30, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to convert assets into cash or cash
equivalents without significant loss and to raise additional funds by increasing
liabilities. Liquidity management involves maintaining the Company's ability to
meet the day-to-day cash flow requirements of its customers, whether they are
depositors wishing to withdraw funds or borrowers requiring funds to meet their
credit needs.
Net cash provided by operating activities for the nine months ended September
30, 1997, totaled $14.1 million. For the same period, net cash used by investing
activities totaled $68.1 million consisting of proceeds from maturities and
sales of investment securities of $109.3 million, with cash outflows of $69.0
million in investment securities purchases, and a $99.1 million increase in
loans outstanding. Net cash provided by financing activities of $51.3 million
consisted of an increase in demand deposits of $8.0 million, a decrease in
savings deposits of $3.7 million and increases in time deposits of $36.8 million
and other borrowings of $18.0 million. The payment of $2.6 million in common
stock dividends and intercompany dividends was funded from earnings and equity,
respectively. Intercompany dividends are used to fund the ongoing operations of
the holding company in lieu of management fees. Management will stagger the
purchases of investment securities within a four year maturity horizon to
provide sufficient liquidity to the loan portfolio. Management does not
anticipate any unexpected funding needs in the near future that could not be
satisfied with current cash generated from investing activities.
Total stockholders' equity, adjusted for the unrealized appreciation on
securities available for sale, to total assets at September 30, 1997 and
December 31, 1996 was 10.53% and 10.74%, respectively. The Company's book value
per share, increased from $24.98 at December 31, 1996 to $25.99 at September 30,
1997. The Company's Tier I risk based capital ratio, total risk based capital
ratio and leverage capital ratio at September 30, 1997 were 13.28%, 14.40% and
9.88%, respectively, exceeding the fully phased-in required capital ratios of
4.00%, 8.00% and 3.00%, respectively. These ratios as of December 31, 1996, were
13.86%, 14.78% and 10.07%, respectively. Increased regulatory activity in the
financial industry as a whole will continue to impact the structure of the
industry; however, management does not anticipate any negative impact on the
capital resources or operations of the Company.
ASSET/LIABILITY MANAGEMENT
Interest Rate Sensitivity
Interest rate sensitivity is a function of the repricing characteristics of the
Company's portfolio of assets and liabilities. These repricing characteristics
are the time frames within which the interest bearing assets and liabilities are
subject to change in interest rates either at replacement, repricing or maturity
during the life of the instruments. Interest rate sensitivity management focuses
on
16
<PAGE> 19
repricing relationships of assets and liabilities during periods of changes in
market interest rates. Interest rate sensitivity is measured as the difference
between the volumes of assets and liabilities that are subject to repricing at
various time horizons. The following table illustrates the Company's exposure to
interest rate fluctuations as of September 30, 1997:
INTEREST RATE SENSITIVITY ANALYSIS
as of September 30, 1997
(in thousands)
<TABLE>
<CAPTION>
Over 3 Over 1
Months Year Non-
3 Months through through Over Interest
or less 12 Months 5 Years 5 Years Sensitive Total
-------- --------- ------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest Earning Assets:
Loans, net of unearned
income $216,283 $53,267 $313,124 $38,744 -- $621,418
Less: Allowance for
loan losses -- -- -- -- $(7,651) (7,651)
---------------------------------------------------------------------------
Net loans 216,283 53,267 313,124 38,744 (7,651) 613,767
Investment securities 21,742 40,567 102,375 46,759 -- 211,443
Federal funds sold 6,565 -- -- -- -- 6,566
---------------------------------------------------------------------------
Total earning assets 244,590 93,834 415,499 85,503 (7,651) 831,775
Cash and other assets -- -- -- -- 95,377 95,377
---------------------------------------------------------------------------
Total assets $244,590 $93,834 $415,499 $85,503 $87,726 $927,152
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
Over 3 Over 1
Months Year Non-
3 Months through through Over Interest
or less 12 Months 5 Years 5 Years Sensitive Total
-------- --------- ------- ------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Interest Bearing
Liabilities
Interest bearing demand
deposits $ 20,776 $ 11,261 $101,513 $ 11,260 -- $144,810
Money market accts -- 16,397 16,397 -- -- 32,794
Savings deposits -- 9,213 83,056 9,213 -- 101,482
Other time deposits 75,766 138,904 35,358 2,525 -- 252,553
CD's of $100,000
or more 22,632 41,492 10,562 754 -- 75,440
Federal funds purchased
and securities sold
under agreements
to repurchase 58,563 -- -- -- -- 58,563
Other borrowings -- 28,000 -- -- -- 28,000
----------------------------------------------------------------------------
Total interest bearing
liabilities 177,737 245,267 246,886 23,752 -- 693,642
Non-interest bearing
demand deposits -- -- -- -- $126,619 $126,619
Other liabilities -- -- -- -- 9,154 9,154
Stockholders' equity -- -- -- -- 97,737 97,737
----------------------------------------------------------------------------
Total liabilities and
stockholders' equity $177,737 $ 245,267 $246,886 $ 23,752 $233,510 $927,152
============================================================================
Interest sensitivity gap $ 66,853 $(151,433) $168,613 $ 61,751
Cumulative interest
sensitivity gap $ 66,853 $ (84,580) $ 84,033 $145,784
Cumulative interest
sensitivity gap as a
percentage of
total earning assets 8.04% -10.17% 10.10% 17.53%
</TABLE>
17
<PAGE> 20
In analyzing the interest rate sensitivity at September 30, 1997, the Company is
liability sensitive in the less than twelve month categories in the amount of
$84.6 million. In the greater than one year categories, the Company is asset
sensitive in the amount of $230.4 million. Overall the Company is asset
sensitive in the amount of $145.8 million. During periods of increasing interest
rates, asset sensitivity would enable the Company to reprice earning assets
faster than interest bearing liabilities, therefore optimizing net interest
margins. During periods of decreasing interest rates, being asset sensitive
would narrow net interest margins, because interest earning assets would reprice
faster at lower rates before the repricing of the interest bearing liabilities.
Management maintains several interest rate risk models, regularly meets with the
Board of Directors to discuss asset/liability management issues and believes
this level of exposure to interest rate fluctuations to be acceptable.
NET INCOME
Net income for the nine months ended September 30, 1997 increased $963,000, or
14.6% over the same period in 1996. Net income per share for the first nine
months increased $0.25, or 14.2% to $2.01 per share compared to $1.76 per share
for the same period one year ago. Annualized return on average assets for the
nine months ending September 30, 1997 was 1.12% as compared to 1.07% for 1996.
The annualized return on average equity for the first nine months of 1997 was
10.59%, compared to 9.79% for the same period in 1996.
NET INTEREST MARGIN
Net interest margin is the principal component of a financial institution's
income stream and represents the difference or spread between interest from
earning assets and the interest expense paid on deposits and other borrowed
funds. Fluctuations in interest rates as well as volume and mix changes in
earning assets and interest bearing liabilities can materially impact net
interest margin. The discussion of net interest margin is presented on a tax
equivalent basis, unless otherwise noted, to facilitate comparisons among
various taxable and tax-exempt assets.
The following table shows average balances, interest income and interest
expense, and yields/rates for the three months ending September 30, 1997 and
1996.
18
<PAGE> 21
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND
YIELD/RATES
Taxable Equivalent Basis
(in thousands)
<TABLE>
<CAPTION>
Three months ended
September 30,
Assets 1997 1996
----------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Earning assets: Balance Expense Rate Balance Expense Rate
-------- ------- ------ -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income $603,579 $14,297 9.47% $475,430 $10,516 8.85%
Investment securities 222,757 3,647 6.55% 263,600 4,339 6.58%
Other earning assets 14,492 173 4.78% 17,232 225 5.22%
-------------------- --------------------
Total earning assets 840,828 18,117 8.62% 756,262 15,080 7.98%
------- -------
Allowance for loan losses (7,185) (5,432)
Cash and other assets 87,989 86,714
-------- --------
TOTAL ASSETS $921,632 $837,544
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $124,737 855 2.74% $120,264 730 2.43%
Savings deposits 106,959 866 3.24% 86,225 572 2.65%
Time deposits 298,462 3,970 5.32% 296,969 3,928 5.29%
Time deposits of $100,000 or more 72,020 1,033 5.74% 59,611 812 5.45%
Federal funds purchased and securities
sold under agreement to repurchase 64,690 720 4.45% 45,073 501 4.45%
Other borrowings 18,754 254 5.42% 10,548 142 5.38%
-------------------- --------------------
Total interest bearing liabilities 685,622 7,698 4.49% 618,690 6,685 4.32%
------- -------
Net interest spread $10,419 4.13% $ 8,395 3.66%
======= =======
Noninterest bearing demand deposits 126,918 120,671
Accrued expenses and other liabilities 10,861 7,791
Stockholders' equity 98,231 90,392
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $921,632 $837,544
======== ========
Net yield on earning assets 4.96% 4.44%
Taxable equivalent adjustment:
Loans $ 39 $ 37
Investment securities 390 472
-------- -------
Total adjustment $ 429 $ 509
======== =======
</TABLE>
19
<PAGE> 22
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND
YIELD/RATES
Taxable Equivalent Basis
(in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
Assets 1997 1996
------------------------------------------------------------------
Average Income/ Yield/ Average Income/ Yield/
Earning assets: Balance Expense Rate Balance Expense Rate
-------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Loans, net of unearned income $565,884 $38,687 9.09% $457,030 $30,053 8.75%
Investment securities 241,117 11,854 6.54% 274,834 13,160 6.37%
Other earning assets 13,032 522 5.33% 9,460 382 5.37%
-------------------- --------------------
Total earning assets 820,033 51,063 8.28% 741,324 43,595 7.82%
------- -------
Allowance for loan losses (6,479) (5,668)
Cash and other assets 88,408 84,436
-------- --------
TOTAL ASSETS $901,962 $820,092
======== ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $123,084 2,505 2.71% $118,894 2,293 2.57%
Savings deposits 105,977 2,528 3.17% 87,193 1,730 2.64%
Time deposits 295,938 11,515 5.18% 285,489 11,131 5.19%
Time deposits of $100,000 or more 71,052 2,957 5.54% 55,161 2,303 5.55%
Federal funds purchased and securities
sold under agreement to repurchase 64,153 2,085 4.32% 47,841 1,574 4.38%
Other borrowings 14,554 595 5.44% 9,186 375 5.43%
-------------------- --------------------
Total interest bearing liabilities 674,758 22,185 4.37% 603,764 19,406 4.27%
------- -------
Net interest spread $28,878 3.91% $24,189 3.55%
======= =======
Noninterest bearing demand deposits 122,940 118,583
Accrued expenses and other liabilities 8,990 7,825
Stockholders' equity 95,274 $ 89,920
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $901,962 $820,092
======== ========
Net yield on earning assets 4.68% 4.34%
Taxable equivalent adjustment:
Loans $ 104 $ 113
Investment securities 1,418 1,416
------- -------
Total adjustment $ 1,522 $ 1,529
======= =======
</TABLE>
The net yield on earning assets increased 52 basis points from the third quarter
of 1996 to the third quarter of 1997, 4.44% to 4.96%, respectively. The increase
resulted from changes in rates, volumes and mix of interest earning assets and
interest bearing liabilities. In addition, the average balance of noninterest
bearing demand deposits increased $6.2 million, or 5.2%. On a tax equivalent
basis, interest income on earning assets increased $3.0 million, or 20.1% due to
an increase of $84.6 million, or 11.2% in the average volume of interest earning
assets. The rates earned on the loans and investment securities increased 62
basis points and decreased 3 basis points, respectively. The development of the
mix of interest earning assets is the primary factor of the improved yields of
earning assets as a whole. The average balances of loans increased $128.1
million, or 26.9%, while the average balance of securities decreased $40.8
million, or 15.5% and the average balance of other earning assets, primarily
federal funds sold, decreased $2.7 million, or 15.9%. As a percentage of total
earning assets, loans increased from 62.8% to 71.8%, investment securities
decreased from 34.9% to 26.5%, and other earning assets decreased from 2.3% to
1.7%, for the third quarter of 1996 and the third quarter of 1997, respectively.
Rates earned on loans
20
<PAGE> 23
increased 62 basis points, while rates earned on investment securities decreased
3 basis points. The rates earned on other earning assets decreased 44 basis
points. The rate on total earning assets increased 64 basis points. Interest
expense on interest bearing liabilities increased $1.0 million, or 15.2% in the
third quarter of 1997 compared to the same period last year. Average balances on
interest bearing liabilities increased by $66.9 million, or 10.8%. The average
balances of interest bearing demand deposits increased from third quarter of
1996 to third quarter of 1997 by $4.5 million, or 3.7%. Savings accounts
increased for the same time periods by $20.7 million, or 24.1%. The rates paid
on these type of accounts during the three months ending September 30, 1997, and
1996, increased 31 and increased 59 basis points, respectively. The average
balance of time deposits, including time deposits over $100,000, increased $13.9
million, or 3.9% and the rate paid increased 9 basis points. Net interest spread
and net interest spread rate increased from the third quarter 1996 to the third
quarter 1997 by $2.0 million and 47 basis points, respectively.
The net yield on earning assets increased 34 basis points to 4.68% for the first
nine months of 1997 from 4.34% for the same period in 1996. The increase
resulted from changes in rates, volumes and mix of interest earning assets and
interest bearing liabilities. In addition, the average balance of noninterest
bearing demand deposits increased $4.4 million, or 3.7%. On a tax equivalent
basis, interest income on earning assets increased $7.5 million, or 17.1% due to
an increase of $78.7 million, or 10.8% in the average volume of interest earning
assets. The rates earned on the loans and investment securities increased 34
basis points and 17 basis points, respectively. The development of the mix of
interest earning assets is the primary factor of the improved yields of earning
assets as a whole. The average balances of loans increased $108.9 million, or
23.8%, while the average balance of securities decreased $33.7 million, or 12.3%
and the average balance of other earning assets, primarily federal funds sold,
increased $3.6 million, or 37.8%. As a percentage of total earning assets, loans
increased from 61.6% to 69.0%, investment securities decreased from 37.1% to
29.4%, and other earning assets increased from 1.3% to 1.6%, for the first nine
months of 1996 and 1997, respectively. Rates earned on loans increased 34 basis
points, while rates earned on investment securities increased 17 basis points.
The rates earned on other earning assets decreased 4 basis points. The rate on
total earning assets increased 46 basis points. Interest expense on interest
bearing liabilities increased $2.8 million, or 14.3% in the first nine months of
1997 compared to the same period last year. Average balances on interest bearing
liabilities increased by $71.0 million, or 11.8%. The average balances of
interest bearing demand deposits increased from the first nine months of 1996 to
first nine months of 1997 by $4.2 million, or 3.5%. Savings accounts increased
for the same time periods by $18.8 million, or 21.6%. The rates paid on these
type of accounts during the nine months ending September 30, 1997, and 1996,
increased 14 basis points and 53 basis points, respectively. The average balance
of time deposits, including time deposits over $100,000, increased $26.3
million, or 7.7% and the rate paid decreased 6 basis points. Net interest spread
and net interest spread rate increased from the first nine months of 1996 to the
first nine months of 1997 by $4.7 million and 36 basis points, respectively.
21
<PAGE> 24
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of
financial services and activities including fee-based services and commissions.
NONINTEREST INCOME
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- Percent ------------------- Percent
1997 1996 Change 1997 1996 Change
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Trust income $ 408 $ 343 18.95% $1,195 $ 991 20.59%
Service charge on deposit 1,063 978 8.69% 3,109 2,799 11.08%
accounts
Net securities gains (losses) 221 157 40.76% 283 220 28.64%
Other income 1,061 618 71.68% 2,457 1,743 40.96%
---------------- ---------------
TOTAL $2,753 $2,096 31.35% $7,044 $5,753 22.44%
================ ===============
</TABLE>
Trust fees increased $65,000 or 19.0% from the third quarter of 1996 compared to
the third quarter of 1997. Service charges increased $85,000, or 8.7% for the
three months ended September 30, 1997, as compared to the quarter ended
September 30, 1996. Net securities gains of $221,000 were realized in the third
quarter of 1997, compared the gain of $157,000 realized in the same period of
1996. Other noninterest income increased $443,000, or 71.68% for the third
quarter 1997 compared to the third quarter of 1996.
Trust fees increased $204,000, or 20.6% for the first nine months of 1997
compared to the same period last year. Service charges increased $310,000, or
11.1% for the nine months ended September 30, 1997, as compared to the nine
months ended September 30, 1996. Net securities gains were $283,000 as of
September 30, 1997, compared to the gain of $220,000 realized in the first nine
months of 1996. Other noninterest income increased $714,000, or 41.0% for the
first nine months of 1997, compared to the same period last year.
NONINTEREST EXPENSE
Salaries and benefits increased $170,000, or 4.9% for the three months ending
September 30, 1997, as compared to September 30, 1996. Occupancy expenses
decreased $47,000, or 5.0% due to increased rent income. Management anticipates
the level of spending for occupancy expense to be about the same as last year.
Other expenses increased $1.3 million, or 72.2% for the third quarter ending
September 30, 1997, compared to the same period last year.
Salaries and benefits increased $1.2 million, or 11.3% for the nine months
ending September 30, 1997, as compared to September 30, 1996. Occupancy expenses
increased $54,000, or 2.0%. Other expenses increased $1.5 million, or 26.4% for
the nine months ending September 30, 1997, compared to the same period last
year.
22
<PAGE> 25
NONINTEREST EXPENSE
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- Percent ------------------- Percent
1997 1996 Change 1997 1996 Change
---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $3,678 $3,508 4.85% $11,427 $10,263 11.34%
Net occupancy expense 900 947 (4.96)% 2,792 2,738 1.97%
Other expense 3,294 1,913 72.19% 7,291 5,769 26.38%
------ ----- ------- -------
TOTAL $7,872 $6,368 23.62% $21,510 $18,770 14.60%
================= ==================
</TABLE>
PROVISION FOR INCOME TAXES
The Company's provision for income taxes increased $98,000, or 12.5% to $884,000
for the three months ended September 30, 1997, as compared to $786,000 for the
same period in 1996. The effective tax rate was 23.6% for the three months ended
September 30, 1997 as compared to 23.2% for September 30, 1996. The Company's
provision for income taxes increased $291,000, or 12.8% to $2.6 million for the
nine months ended September 30, 1997, as compared to $2.3 million for the same
period in 1996. The effective tax rate was 25.4% for the nine months ended
September 30, 1997 as compared to 25.7% for September 30, 1996. The notes to the
December 31, 1996, financial statements provide additional information regarding
the Company's taxes.
23
<PAGE> 26
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings
None
ITEM 2. Change in Securities
None
ITEM 3. Defaults Upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of Pioneer Bancshares, Inc. stockholders was held on
April 16, 1997 at the Chattanooga Trade Center. Only those items
disclosed within the Pioneer Bancshares, Inc. Proxy Statement were
voted.
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) The exhibits filed as part of the Report are as follows:
Exhibit
Number Description
3(a) Certificate of Incorporation, incorporated herein by
reference from Registrant's Registration Statement on Form S-4
(Registration No. 33-49360).
3(b) By-laws, incorporated herein by reference from Registrant's
Registration Statement on Form S-4 (Registration No. 33-49360)
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K.
None
24
<PAGE> 27
SIGNATURES
Pursuant to the requirements 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.
Pioneer Bancshares, Inc.
Date: November 13, 1997 /s/ Rodger B. Holley
-------------------------------------
Rodger B. Holley
Chairman, President and CEO
Date: November 13, 1997 /s/Gregory B. Jones
--------------------------------------
Gregory B. Jones
Executive Vice President and Treasurer
Date: November 13, 1997 /s/Robert M. Wilbanks, Jr.
--------------------------------------
Robert M. Wilbanks, Jr.
Vice President and Controller
25
<PAGE> 28
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit
Number Description Page
3(a) Certificate of Incorporation, incorporated herein
by reference from Registrant's Registration
Statement on Form S-4 (Registration No. 33-49360).
3(b) By-laws, incorporated herein by reference from
Registrant's Registration Statement on Form S-4
(Registration No. 33-49360).
11 Statement Regarding Computation of Net Earnings
per Share 27-28
27 Financial Data Schedule (For SEC Use Only)
26
<PAGE> 1
PIONEER BANCSHARES, INC.
Form 10-Q, Part II, Item 6
Exhibit 11 - Statement Regarding Computation of
Net Earnings Per Share
<TABLE>
<CAPTION>
For the three months ended September 30, 1997 1996
---- ----
<S> <C> <C>
Income as reported in consolidated
statements of income $2,858,000 $2,606,000
========== ==========
Per share computation of common and
dilutive common equivalent shares:
Weighted average number of
shares outstanding 3,759,912 3,759,912
Weighted average number of shares
issuable upon exercise of stock options
applying the treasury stock method 0 0
---------- ----------
Weighted average number of shares
outstanding used to calculate per share
data assuming no dilution 3,759,912 3,759,912
========== ==========
Net income per common and common
equivalent share $ 0.76 $ 0.69
========== ==========
Per share computation assuming full dilution:
Weighted average number of shares
outstanding 3,759,912 3,759,912
Weighted average number of shares
issuable upon exercise of stock options
applying the treasury stock method 0 0
---------- ----------
Weighted average number of shares
outstanding used to calculate per share
data assuming full dilution 3,759,912 3,759,912
========== ==========
Net income per common and common
equivalent share assuming full dilution $ 0.76 $ 0.69
========== ==========
</TABLE>
27
<PAGE> 2
PIONEER BANCSHARES, INC.
Form 10-Q, Part II, Item 6
Exhibit 11 - Statement Regarding Computation of
Net Earnings Per Share
<TABLE>
<CAPTION>
For the nine months ended September 30, 1997 1996
---- ----
<S> <C> <C>
Income as reported in consolidated
statements of income $7,566,000 $6,603,000
========== ==========
Per share computation of common and
dilutive common equivalent shares:
Weighted average number of
shares outstanding 3,759,912 3,759,912
Weighted average number of shares
issuable upon exercise of stock options
applying the treasury stock method 0 0
---------- ----------
Weighted average number of shares
outstanding used to calculate per share
data assuming no dilution 3,759,912 3,759,912
========== ==========
Net income per common and common
equivalent share $ 2.01 $ 1.76
========== ==========
Per share computation assuming full dilution:
Weighted average number of shares
outstanding 3,759,912 3,759,912
Weighted average number of shares
issuable upon exercise of stock options
applying the treasury stock method 0 0
---------- ----------
Weighted average number of shares
outstanding used to calculate per share
data assuming full dilution 3,759,912 3,759,912
========== ==========
Net income per common and common
equivalent share assuming full dilution $ 2.01 $ 1.76
========== ==========
</TABLE>
28
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PIONEER BANCSHARES, INC. FOR THE 9 MONTHS ENDED
SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 54,832
<INT-BEARING-DEPOSITS> 607,079
<FED-FUNDS-SOLD> 6,565
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 158,633
<INVESTMENTS-CARRYING> 51,513
<INVESTMENTS-MARKET> 51,746
<LOANS> 622,927
<ALLOWANCE> 7,651
<TOTAL-ASSETS> 927,152
<DEPOSITS> 733,698
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,404
<LONG-TERM> 28,000
0
0
<COMMON> 19
<OTHER-SE> 98,477
<TOTAL-LIABILITIES-AND-EQUITY> 927,152
<INTEREST-LOAN> 38,704
<INTEREST-INVEST> 10,809
<INTEREST-OTHER> 23
<INTEREST-TOTAL> 49,536
<INTEREST-DEPOSIT> 19,507
<INTEREST-EXPENSE> 22,187
<INTEREST-INCOME-NET> 27,349
<LOAN-LOSSES> 2,743
<SECURITIES-GAINS> 283
<EXPENSE-OTHER> 21,510
<INCOME-PRETAX> 10,140
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,566
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 4.68
<LOANS-NON> 1,856
<LOANS-PAST> 585
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 239,387
<ALLOWANCE-OPEN> 6,940
<CHARGE-OFFS> 529
<RECOVERIES> 117
<ALLOWANCE-CLOSE> 7,651
<ALLOWANCE-DOMESTIC> 7,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
