<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 June 30, 1998
---------------------------
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, 1998:
Title of Class Number of Shares Outstanding
-------------- ----------------------------
Common Stock, $.01 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 - June 30, 1998,
December 31, 1997 and June 30, 1997 1
Consolidated Statements of Income -
Three Months and Six Months Ended June 30, 1998 2
and June 30, 1997
Consolidated Statements of Changes in Stockholders' Equity -
Six Months Ended June 30, 1998 and June 30, 1997 3
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and June 30, 1997 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. 10-25
PART II. OTHER INFORMATION 26-27
Signatures 28
Exhibit Index 29
</TABLE>
<PAGE> 3
PART 1
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CONDITION
(in thousands)
<TABLE>
<CAPTION>
Unaudited Unaudited
June 30, December 31, June 30,
ASSETS 1998 1997 1997
---------- -------- --------
<S> <C> <C> <C>
Cash and due from banks $ 60,085 $ 46,873 $ 62,988
Investment securities:
Held-to-maturity (fair value of $31,152 at
June 30, 1998, $48,587 at December 31,
1997, and $53,127 at June 30, 1997) 30,912 48,396 53,133
Available-for-sale 176,117 156,691 189,784
Federal funds sold 175 18,830 3,470
Loans 702,343 651,234 593,745
Less: Unearned income 1,908 1,476 1,872
Allowance for loan losses 9,141 7,837 6,939
---------- -------- --------
Net loans 691,294 641,921 584,934
Premises and equipment, net of accumulated
depreciation 23,125 22,740 20,448
Intangible assets 5,313 5,707 6,035
Other assets 17,530 15,732 15,324
========== ======== ========
Total Assets $1,004,551 $956,890 $936,116
========== ======== ========
LIABILITIES
Deposits
Noninterest bearing demand deposits $ 139,941 $126,684 $142,597
Interest bearing demand deposits 134,716 132,755 128,563
Money market accounts 57,294 57,873 45,383
Savings deposits 116,607 111,156 101,936
Time deposits of less than $100,000 253,305 249,368 251,865
Time deposits of $100,000 or more 102,350 70,585 71,836
---------- -------- --------
Total deposits 804,213 748,421 742,180
Federal funds purchased and securities
sold under agreements to repurchase 68,592 60,439 61,508
Other borrowings 20,000 38,000 28,000
Other liabilities 8,622 10,114 8,223
---------- -------- --------
Total liabilities 901,427 856,974 839,911
---------- -------- --------
STOCKHOLDERS' EQUITY
Common stock par value $.01 per share;
8,000,000 authorized; 3,759,912 issued 38 38 38
Surplus 65,190 64,875 64,709
Retained earnings 38,124 35,074 31,649
Unrealized appreciation/(depreciation) on
securities available for sale 936 1,044 783
Less: treasury stock - at cost 1,164 1,115 974
---------- -------- --------
Total stockholders' equity 103,124 99,916 96,205
---------- -------- --------
Total Liabilities and Stockholders' Equity $1,004,551 $956,890 $936,116
========== ======== ========
</TABLE>
1
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
INTEREST INCOME 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest and fees on loans $15,673 $12,790 $30,556 $24,325
Interest on investment securities
Taxable 2,374 2,620 4,475 5,195
Tax exempt 689 1,020 1,397 1,984
Interest on federal funds sold 232 151 572 335
Interest on other earning assets 4 7 14 14
------- ------- ------- -------
Total interest income 18,972 16,588 37,014 31,853
------- ------- ------- -------
INTEREST EXPENSE
Interest bearing demand deposits 1,112 819 1,953 1,650
Money market accounts 508 407 961 823
Savings deposits 735 819 1,662 1,662
Time deposits of less than $100,000 3,575 3,469 7,197 6,722
Time deposits of $100,000 or more 1,365 1,032 2,525 1,924
Federal funds purchased and securities
sold under agreements to repurchase 747 805 1,461 1,365
Other borrowed money 328 209 846 341
------- ------- ------- -------
Total interest expense 8,370 7,560 16,605 14,487
------- ------- ------- -------
Net interest income 10,602 9,028 20,409 17,366
Provision for loan losses 1,337 1,155 2,275 1,621
------- ------- ------- -------
Net interest income
after the provision for loan losses 9,265 7,873 18,134 15,745
------- ------- ------- -------
NONINTEREST INCOME
Trust income 453 404 886 787
Service charge on deposit accounts 1,215 1,038 2,334 2,046
Net securities gains (losses) 4 70 8 62
Other income 999 657 2,401 1,396
------- ------- ------- -------
Total noninterest income 2,671 2,169 5,629 4,291
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 4,689 4,052 9,388 7,749
Occupancy 952 730 1,949 1,892
Other 2,447 2,179 5,056 4,068
------- ------- ------- -------
Total noninterest expense 8,088 6,961 16,393 13,709
------- ------- ------- -------
Income before provision for income taxes 3,848 3,081 7,370 6,327
Provision for income taxes 1,278 1,021 2,440 1,871
======= ======= ======= =======
NET INCOME $ 2,570 $ 2,060 $ 4,930 $ 4,456
======= ======= ======= =======
Basic net income per common share $ 0.684 $ 0.548 $ 1.311 $ 1.185
Diluted net income per common share $ 0.683 $ 0.548 $ 1.311 $ 1.185
Dividends declared per common share $ 0.25 $ 0.23 $ 0.50 $ 0.46
</TABLE>
2
<PAGE> 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands except for share data)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Stock (Depreciation)
------------------- Available-
# of Par Comp. Capital Retained for-Sale Treasury
Shares Value Income Surplus Earnings Sec Stock Total
--------- ------ ------ -------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1996 3,759,912 $38 $ 64,866 $ 28,771 $ 807 $ (559) $ 93,923
Comprehensive Income:
Net income -- -- $4,456 -- 4,456 -- -- 4,456
Other Comprehensive Income, net of tax
Net Change in Unrealized Loss on
Securities Avaliable-for-Sale, net of
reclassification adjustment (23)
Less: reclassification adjustment for gains
included in net income (62)
------
Comprehensive Income $4,371
======
Cash dividend -- -- -- (1,730) -- -- (1,730)
Stock dividend -- -- -- -- -- -- --
Net Changes in Unrealized
Appreciation on Securities
Available-for-Sale -- -- -- -- (23) -- (23)
Sales of Treasury Stock -- -- -- -- -- 604 604
Purchases of Treasury Stock -- -- -- -- -- (1,013) (1,013)
Employee Stock Ownership Plan (ESOP) -- -- (157) 152 (1) (6) (12)
--------- --- -------- -------- ------- -------- ---------
Balances, June 30, 1997 (Unaudited) 3,759,912 $38 $ 64,709 $ 31,649 $ 783 $ (974) $ 96,205
========= === ======== ======== ======= ======== =========
Balances, December 31, 1997 3,759,912 $38 $ 64,875 $ 35,074 $ 1,044 $ (1,115) $ 99,916
Comprehensive Income:
Net income -- -- $4,930 -- 4,930 -- -- 4,930
Other Comprehensive Income, net of tax
Net Changes in Unrealized Loss on
Securities Available-for-Sale, net of
reclassification adjustment (108)
Less: reclassification adjustment for
gains included in net income (8)
------
Comprehensive Income $4,814
======
Cash dividend -- -- -- (1,880) -- -- (1,880)
Net Changes in Unrealized
Appreciation on Securities
Available-for-Sale -- -- -- -- (108) -- (108)
Sales of Treasury Stock -- -- -- -- 858 858
Purchases of Treasury Stock -- -- -- -- -- (907) (907)
Gains on Sales of Treasury Stock -- -- 315 -- -- -- 315
--------- --- -------- -------- ------- -------- ---------
Balances, June 30, 1998 (Unaudited) 3,759,912 $38 $ 65,190 $ 38,124 $ 936 $ (1,164) $ 103,124
========= === ======== ======== ======= ======== =========
</TABLE>
3
<PAGE> 6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Unaudited
Three months ended
June 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,930 $ 4,456
Adjustments to reconcile net income to cash
Provided by operating activities:
Provision for loan losses 2,275 1,621
Depreciation on premises and equipment 1,317 1,285
Amortization and accretion of investment
Securities 105 115
Increase in other assets (1,798) (349)
Net increase (decrease) in other liabilities (1,492) 561
-------- --------
Net cash provided by operating activities 5,337 7,689
-------- --------
INVESTING ACTIVITIES
Proceeds from sales and maturities of
Available-for-sale securities 20,751 64,233
Proceeds from maturities of
Held-to-maturity securities 17,445 6,278
Purchases of investment securities (41,717) (62,500)
Net (increase) decrease in federal funds sold 18,655 (3,470)
Net increase in loans (50,677) (69,060)
Purchases of premises and equipment (598) (1,389)
-------- --------
Net cash used in investing activities (36,141) (65,908)
-------- --------
FINANCING ACTIVITIES
Net increase in demand deposits 15,218 25,484
Net increase (decrease) in savings and MMDA 4,872 (8,373)
Net increase in time deposits 35,702 32,501
Net increase (decrease) in repurchase
Agreements and federal funds purchased 8,153 (1,831)
Net increase (decrease) in other borrowings (18,000) 18,000
Cash dividends paid (1,880) (1,730)
Sales of treasury stock 858 604
Purchase of treasury stock (907) (1,013)
-------- --------
Net cash provided by financing activities 44,016 63,642
-------- --------
Increase in cash and cash
equivalents 13,212 5,423
-------- --------
Cash and cash equivalents at the beginning of
the period 46,873 57,565
-------- --------
Cash and cash equivalents at the end of
the period $ 60,085 $ 62,988
======== ========
</TABLE>
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Unaudited
Six months ended
June 30,
-----------------------------
1998 1997
-------- --------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Unrealized Appreciation (Depreciation)
of Securities, net of Deferred Taxes $(108) $(24)
Increase (Decrease) in Other Real Estate Owned $ 65 $ 10
</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 1997 Annual Report to Shareholders which
was furnished to each shareholder of the Company on March 25, 1998. The
consolidated financial statements presented herein conform to generally accepted
accounting principles and to general industry practices.
Consolidation
The accompanying consolidated financial statements include the accounts of
Pioneer Bancshares, Inc., its subsidiaries, Pioneer Bank, Pioneer Bank, f.s.b.,
Valley Bank, and Pioneer Bank's subsidiaries and trusteed affiliates. Pioneer
Bank's subsidiaries include Pioneer Securities, Inc. (PSI) and Center Finance
Company, Inc. (Center). 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 "Pioneer" or "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.
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, 1997, as filed with the Securities
and Exchange Commission. Since December, 1997, there have been no changes in any
accounting principles or practices, or in the method of applying any such
principles or practices, with the exception of the company's adoption of
Statement of Financial Standard No. 130, "Reporting Comprehensive Income".
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 some portion or all of a deferred tax asset will not be
realized, a valuation allowance is recognized.
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 it deems to be
substantially uncollectible. The Directors Loan Committee approves all loan
charge-offs. The following table details impaired loans:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
---------- --------
<S> <C> <C>
Principal balance $1,483,813 $303,672
Interest income recorded during loan impairment -- --
Reserve for potential credit losses 755,663 172,727
Unreserved portion of impaired loans 728,150 130,945
Average principal balance quarter-to-date 640,936 169,571
Average principal balance year-to-date 525,014 159,632
</TABLE>
Impaired loans are identified according to the two classification methods in the
following table:
<TABLE>
<CAPTION>
June 30,
------------------------------
1998 1997
---------- --------
<S> <C> <C>
Doubtful loans outstanding $1,456,301 $303,672
Loss loans outstanding 27,512 --
</TABLE>
The Company's method of valuing impaired loans approximates fair value as
defined in Statements No. 114 & 118.
7
<PAGE> 10
Earnings Per Common Share
Basic earnings per share ("EPS") is computed by dividing income available to
common shareholders (numerator) by the weighted average number of common shares
outstanding (denominator). Diluted EPS is computed by dividing income available
to common shareholders (numerator) by the adjusted weighted average number of
shares outstanding (denominator). The adjusted weighted average number of shares
outstanding reflects the potential dilution occurring if securities or other
contracts to issue common stock were exercised or converted into common stock
resulting in the issuance of common stock then shared in the earnings of the
entity.
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. ACCOUNTING AND REGULATORY MATTERS
PENDING ACQUISITION
On May 27, 1998, Pioneer Bancshares, Inc., a Delaware corporation, entered into
an Agreement and Plan of Merger with First American Corporation (First
American), a Tennessee corporation, providing for, among other things, the
merger of the Company with and into First American. The Merger is intended to
constitute a tax-free reorganization for federal tax purposes and is to be
accounted for as a pooling-of-interests transaction. Pursuant to the terms of
the Merger Agreement, each share of the Company's common stock, par value $.01
per share, outstanding immediately prior to the effective time of the Merger,
will be converted into the right to receive 1.65 shares of First American common
stock, par value $2.50 per share. The Company's banking operations will be
consolidated with First American and will operate under the First American name.
Management anticipates the Merger will be completed on November 1, 1998.
Bancshares' portion of merger-related costs is being recorded as a prepaid asset
and will be expensed during the fourth quarter of 1998. As of June 30, 1998,
merger related costs before taxes were approximately $179,661. First American
expects to incur restructuring and merger-related, pretax charges of about $16
million.
8
<PAGE> 11
EFFECTS OF ACCOUNTING CHANGES
Statement of Financial Accounting Standards (SFAS) No. 132, "Employers'
disclosures about Pensions and Other Postretirement Benefits", changes the
disclosures about pensions and other benefits provided by employers. This
standard does not affect accounting measurements nor does it revise the
disclosures made in the financial statements of the plans. Rather, this
standard applies to financial statements of sponsors of such plans and
harmonizes the disclosures for various types of plans. The provisions of SFAS
No. 132 are effective for fiscal years beginning after December 15, 1997. Early
application is encouraged. Management intends to include appropriate
disclosures in the Company's financial reports as of December 31, 1998.
In 1998, the Financial Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 requires that derivatives be reported on the
balance sheet at fair value. Changes in fair value are recognized in net income
or, for derivatives which are hedging market risk related to future cash flows,
in the accumulated other comprehensive income section of the stockholder's
equity. Implementation is required by the first quarter of 2000, with cumulative
effect of adoption reflected in net income and accumulated other comprehensive
income, as appropriate. Pioneer Bancshares has not determined the effect or
timing of implementation of this pronouncement.
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 second quarter of 1998 with total assets of $1 billion, a
5.0% increase from December 31, 1997 and a 7.3% increase from June 30, 1997. The
Company reported net income for the three months ending June 30, 1998 of $2.57
million, or $0.684 basic earnings per share, compared to $2.06 million, or
$0.548 basic earnings per share, for the same period in 1997. For the six months
ended June 30, 1998, the Company reported $4.9 million, or $1.31 basic earnings
per share, compared to $4.5 million, or $1.18 basic earnings per share, for the
same period last year. The improvement in earnings represents a 24.8% increase
from the second quarter 1997 to the second quarter of 1998 and a 10.6% increase
from the first six months of 1997 to the first six months of 1998.
NET INTEREST INCOME
Net interest income, before the provision for possible loan losses, was $10.6
million for the three months ended June 30, 1998, compared to $9.0 million for
the same period in 1997. This level of net interest income resulted primarily
from, among other things, an increase in net interest spread of 13 basis points
to 4.04% from 3.91%. The net interest margin was 4.84% in the second quarter of
1998 compared to 4.64% in the second quarter of 1997. The net interest margin
increased because the yield on interest earning assets increased 22 basis
points, while the rate paid on interest bearing liabilities increased only 9
basis points. (See "Net Interest Margin")
Net interest income, before the provision for possible loan losses, was $20.4
million for the six months ended June 30, 1998, compared to $17.4 million for
the same period in 1997. This level of net interest income resulted primarily
from, among other things, an increase in net interest spread of 9 basis points
to 3.94% from 3.85%. The net interest margin was 4.75% for the six months ended
June 30, 1998 compared to 4.61% for the same period last year. The net interest
margin increased because the yield on interest earning assets increased 24 basis
points, while the rate paid on interest bearing liabilities increased only 15
basis points. (See "Net Interest Margin")
CASH AND DUE FROM BANKS
Cash and due from banks increased from $46.9 million as of December 31, 1997, to
$60.1 million as of June 30, 1998, representing a 28.2% increase. The increase
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 increased from $205.1 million to $207.0 million, or 1.0%
from December 31, 1997 to June 30, 1998. Maturities, sales and prepayments
within the securities portfolio were primarily reinvested back into the
investment portfolio. Loan growth was funded primarily by reducing federal fund
sold and from deposit growth. From December 31, 1997 to June 30, 1998 the
"Held-to-Maturity" securities decreased $17.5 million, or 36.1% while the
"Available-for-Sale" securities increased $19.4 million, or 12.4%. The average
expected life of the total investment security portfolio at June 30, 1998 was
2.9 years with an average tax equivalent yield of 6.41%. Taxable equivalent
adjustments, using a 34 percent tax rate, have been made in calculating yields
on tax-exempt obligations.
Since December 31, 1997, interest rate volatility in the bond market has
decreased the after tax value of the investment portfolio by $180,482. Interest
rates increased as the fears of Asia's financial difficulties subsided and
interest rates returned to their normal trading levels. Continued strength of
the U.S. dollar and the lack of any sign of inflation kept interest rates from
rising even higher. Regarding the investment portfolio, management intends to
(i) buy securities only during those times when prices appear most favorable,
(ii) maintain maturities five years or less and (iii) avoid excessive call
exposure.
FASB 115 requires 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 June 30, 1998, the FASB 115 adjustment resulted in
an increase in the asset value of the investment portfolio of $1.4 million and
an adjustment to the capital account of $936,000, after reserving $464,000 for
deferred taxes.
As of June 30, 1998, the Company had $175,000 invested in federal funds sold
compared to $18.8 million at December 31, 1997. 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 $50.7 million, or 7.8% from December
31, 1997 to June 30, 1998. The loan mix changed marginally from year-end 1997 to
six months ending, June 30, 1998. The largest dollar volume loan category
increase occurred in commercial loans by $31.8 million, or 18.9% from December,
1997 to June, 1998. Consumer credit card loans decreased $109,000, or 2.4%.
Residential real estate loans increased $15.8 million, or 9.2% from December 31,
1997 to June 30, 1998, due to a strong demand for home equity loans and home
refinancing. Real estate construction loans increased 4.6%, or $2.5 million, for
the same period. This increase in construction loans is one indication of a
moderately strong local economy.
Management is anticipating moderate loan growth (less than 10%) 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.
11
<PAGE> 14
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
June 30, 1998. 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>
June Percent December Percent
1998 of Total 1997 of Total
------- ------ ------- ------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $199,417 28.39% $167,655 25.74%
Real estate:
Construction and
land development 57,152 8.14% 54,624 8.39%
Residential 187,917 26.76% 172,124 26.43%
Commercial 170,876 24.33% 155,348 23.86%
Consumer
Credit cards 4,369 0.62% 4,478 0.69%
Installments 82,468 11.74% 96,739 14.85%
Lease financing 144 0.02% 266 0.04%
------- ------ ------- ------
Total Gross Loans 702,343 100.00% 651,234 100.00%
====== =======
Less:
Unearned income 1,908 1,476
Allowance for
loan losses 9,141 7,837
-------- --------
Total Net Loans $691,294 $641,921
======== ========
</TABLE>
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The economic outlook for the State of Tennessee, where the Company does
business, is cautious. However, the economy is generally performing similar to
the nation as a whole. In the Company's markets, real estate values have
increased slightly as interest rates have remained close to the 7% to 7.25%
level for 30 year mortgages. New housing starts have remained relatively
constant for the second quarter of 1998. A continued healthy economy will
probably hold the level of net charge-offs and delinquencies for the remainder
of 1998 at or below historical peer group averages.
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
12
<PAGE> 15
economic conditions when determining the adequacy of the loan loss reserve. The
allowance for possible loan losses increased $1.3 million, or 16.6% from
December 31, 1997 to June 30, 1998. 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 efforts to maintain a minimum percentage of the
allowance for possible loan loss reserve at 1.25% of gross outstanding loans.
The Company's allowance for possible loan losses as a percentage of average
loans, net of unearned income, was 1.33% at June 30, 1998 as compared to 1.23%
at December 31, 1997. The allowance for loan losses at June 30, 1998, and
December 31, 1997, provided 104.78% and 164.97% 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 0.36% during the second
quarter of 1998 as compared to 0.26% for the same period one year ago. At June
30, 1998, management believes that the allowance for possible loan losses is
sufficient to absorb potential losses.
ALLOWANCE FOR LOAN LOSSES
(in thousands)
<TABLE>
<CAPTION>
1998 1997
---------------------- ----------------------------------
Quarter Ending June 30 March 31 Dec 31 Sept 30 June 30
- -------------- ------- -------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $8,414 $7,836 $7,651 $6,940 $6,153
Loans charged-off 832 442 889 529 433
Loans recovered 221 82 209 117 64
------ ------ ------ ------ ------
Net charge-offs (recoveries) 611 360 680 412 369
Provision for loan losses charged
to expense 1,338 938 865 1,123 1,156
------ ------ ------ ------ ------
======
Balance at end of period $9,141 $8,414 $7,836 $7,651 $6,940
====== ====== ====== ====== ======
Allowance for loan losses as
a percentage of verage loans 1.33% 1.27% 1.23% 1.27% 1.22%
outstanding for the period
Allowance for loan losses as a
percentage of nonperforming
assets and loans 90 days past
due outstanding at 104.78% 157.30% 164.97% 267.52% 240.64%
end of the period
Annualized QTD net charge-offs as
a percentage of average loans
outstanding for the period 0.36% 0.22% 0.43% 0.27% 0.26%
Annualized YTD net charge-offs as
a percentage of average loans
outstanding for the period 0.29% 0.22% 0.26% 0.19% 0.16%
</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 1998. 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 June 30, 1998, nonperforming assets were $4.7 million as compared to $2.6
million at December 31, 1997. The ratio of nonperforming assets to average
loans, net of unearned income, other real estate and other nonperforming assets
was 0.68% at June 30, 1998, compared to 0.41% at December 31, 1997 and 0.41% at
June 30, 1997. The increase in nonperforming assets is primarily due to the
addition of one large secured loan. Management is unable to estimate the amount
of recovery on the loan at this time.
Total nonperforming loans to total average loans increased from 0.29% at
December 31, 1997, to 0.57% at June 30, 1998. Loans past due 90 days or more as
a percentage of total average loans increased to 0.59% as of June 30, 1998,
compared to 0.33% as of December 31, 1997. Management believes asset quality
remains strong despite the increase in 90 day past due loans during the second
quarter and will remain strong throughout the remainder of 1998.
Net loans charged off during the second quarter of 1998 were $610,000 compared
to a $369,000 for the same period of 1997. 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>
1998 1997
------------------------- ------------------------------ ---------
Quarter Ending June 30 March 31 Dec 31 Sept 30 June 30
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Avg loans, net of unearned income $685,645 $660,896 $636,559 $603,579 $566,628
======== ======== ======== ======== ========
Nonaccrual loans $ 3,875 $ 4,179 $ 1,836 $ 1,856 $ 1,708
Renegotiated or restructured loans 0 0 0 0 0
-------- -------- -------- -------- --------
Total nonperforming loans 3,875 1,836 1,856 1,708
4,179
Other real estate owned, net 752 753 687 352 571
Other non-performing assets 23 94 107 67 24
-------- -------- -------- -------- --------
Total nonperforming assets $ 4,650 $ 5,026 $ 2,630 $ 2,275 $ 2,303
======== ======== ======== ======== ========
Loans 90 days or more past due
and still accruing $ 4,075 $ 323 $ 2,120 $ 585 $ 581
Total nonperforming loans as a
percentage of total avg loans 0.57% 0.63% 0.29% 0.31% 0.30%
Total nonperforming assets as a
percentage of total avg loans, ORE
and other nonperforming assets 0.68% 0.76% 0.41% 0.38% 0.41%
Loans 90 days past due as a
percentage of total avg loans 0.59% 0.05% 0.33% 0.10% 0.10%
</TABLE>
DEPOSITS
Total deposits increased $55.8 million, or 7.5% from $748.4 million at December
31, 1997 to $804.2 million at June 30, 1998. The increase is due primarily to
customers investing in time deposits and increases in large CD's. Total interest
bearing deposits increased $42.5 million from December 31, 1997 to June 30,
1998. Noninterest bearing demand deposits increased $13.3 million, or 10.5% in
the first six months of 1998 from December 31, 1997. From December 31, 1997 to
June 30, 1998, interest bearing transaction accounts increased $1.9 million, or
1.5%, while money market accounts and savings accounts decreased $579,000, or
1.0%, and increased $5.5 million, or 4.9% respectively.
Federal funds purchased and securities sold under agreements to repurchase
increased $8.2 million, or 13.5% from December 31, 1997 to June 30, 1998.
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 June 30, 1998,
none of the repurchased agreements were brokered. As of June 30, 1998 the
Company had $1.0 million in federal funds purchased, and on December 31, 1997
the Company did not have any federal funds purchased. 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 June 30, 1998 total FHLB borrowings were
$20.0 million, or $18 million lower than on December 31, 1997. Regarding the
Company's deposit mix, savings deposits and both interest bearing and
noninterest bearing transaction deposits accounted for 48.7%, 49.5%
15
<PAGE> 18
and 50.3% of total deposits at June 30, 1998, December 31, 1997 and June 30,
1997, respectively. Large certificates of deposits represents 12.7% of total
deposits at June 30, 1998, and is higher than 9.4% at December 31, 1997 and 9.7%
at June 30, 1997.
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 six months ended June 30,
1998, totaled $5.3 million. For the same period, net cash used by investing
activities totaled $36.1 million consisting primarily of proceeds from
maturities and sales of investment securities of $38.2 million, cash outflows of
$41.7 million in investment securities purchases, and a $50.7 million increase
in loans outstanding. Net cash provided by financing activities of $44.0 million
consisted of an increase in demand deposits of $15.2 million, an increase in
savings deposits of $4.9 million, an increase in time deposits of $35.7 million
and a decrease in other borrowings of $18.0 million. The payment of $1.9 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 June 30, 1998 and December 31,
1997 was 10.17% and 10.33%, respectively. The Company's book value per share,
increased from $26.57 at December 31, 1997 to $27.43 at June 30, 1998. The
Company's Tier I risk based capital ratio, total risk based capital ratio and
leverage capital ratio at June 30, 1998 were 12.31%, 13.47% and 9.92%,
respectively, exceeding the fully phased-in required capital ratios of 4.00%,
8.00% and 3.00%, respectively. These ratios as of December 31, 1997 were 12.91%,
13.99% and 10.29%, 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.
16
<PAGE> 19
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 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 June 30, 1998:
17
<PAGE> 20
INTEREST RATE SENSITIVITY ANALYSIS
as of June 30, 1998
(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 $272,117 $ 68,701 $329,378 $ 30,239 -- $ 700,435
Less: Allowance for
loan losses -- -- -- -- $ (9,141) (9,141)
-------- --------- -------- --------- --------- -----------
Net loans 272,117 68,701 329,378 30,239 (9,141) 691,294
Investment securities 10,519 63,488 86,378 46,644 -- 207,029
Federal funds sold 175 -- -- -- -- 175
-------- --------- -------- --------- --------- -----------
Total earning assets 282,811 132,189 415,756 76,883 (9,141) 898,498
Cash and other assets -- -- -- -- 106,053 106,053
-------- --------- -------- --------- --------- -----------
Total assets $282,811 $ 132,189 $415,756 $ 76,883 $ 96,912 $ 1,004,551
======== ========= ======== ========= ========= ===========
</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 $ 20,128 $ 39,142 $ 68,865 $ 6,581 -- $ 134,716
Money market accts -- 28,647 28,647 -- -- 57,294
Savings deposits -- -- 93,286 23,321 -- 116,607
Other time deposits 74,350 126,133 52,812 10 -- 253,305
CD's of $100,000
or more 29,113 51,661 21,571 5 -- 102,350
Federal funds purchased
and securities sold
under agreements
to repurchase 68,592 -- -- -- -- 68,592
Other borrowings -- 10,000 10,000 -- -- 20,000
-------- --------- -------- --------- --------- -----------
Total interest bearing
liabilities 192,183 255,583 275,181 29,917 -- 752,864
Non-interest bearing
demand deposits -- -- -- -- $ 139,941 139,941
Other liabilities -- -- -- -- 8,622 8,622
Stockholders' equity -- -- -- -- 103,124 103,124
-------- --------- -------- --------- --------- -----------
Total liabilities and
stockholders' equity $192,183 $ 255,583 $275,181 $ 29,917 $ 251,687 $ 1,004,551
======== ========= ======== ========= ========= ===========
Interest sensitivity gap $ 90,628 $(123,394) $140,575 $ 46,966
Cumulative interest
sensitivity gap $ 90,628 $ (32,766) $107,809 $ 154,775
Cumulative interest
sensitivity gap as a
percentage of
total earning assets 10.09% -3.65% 12.00% 17.23%
</TABLE>
In analyzing the interest rate sensitivity at June 30, 1998, the Company is
found to be liability sensitive in the less than twelve-month categories in the
amount of $32.8 million. Not until the mid-point of the one-year to five-year
category do assets match up with liabilities. This means the Company is in a
slightly liability sensitive position. During periods of increasing interest
rates,
18
<PAGE> 21
liability sensitivity would narrow the Company's net interest margins,
because interest earning assets would reprice slower than interest bearing
liabilities. During periods of decreasing interest rates, being liability
sensitive would enable the Company to reprice interest bearing liabilities
quicker, thereby increasing the net interest. 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 six months ended June 30, 1998 increased $474,000, or 10.6%
over the same period in 1997. Basic earnings per share for the first six months
of 1998 increased $0.126, or 10.6% to $1.311 compared to $1.185 for the same
period one-year ago. Changes in diluted net income per share were identical
during the same periods. For the first six months of 1998 compared to the same
period last year net income increased even though the loan loss provision
increased by $654,000. Net interest income increased by $3.0 million,
noninterest income increased by $1.3 million and noninterest expense increased
by $2.7 million for the first six months of 1998 compared to the same period
last year. Annualized return on average assets for the six months ending June
30, 1998 was 1.00% as compared to 1.00% for the same period last year. The
annualized return on average equity for the first six months of 1998 was 9.81%,
compared to 9.64% for the same period in 1997. All net income calculations are
before merger related expenses. The pre-tax merger related expenses incurred
through June 30, 1998 are $179,000.
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 June 30, 1998 and 1997.
19
<PAGE> 22
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND YIELD/RATES
Taxable Equivalent Basis
(in thousands)
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------------------------------------------------------------------
Assets 1998 1997
-------------------------------------- ----------------------------------
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 $ 685,645 $ 15,694 9.18% $566,701 $ 12,846 9.07%
Investment securities 209,449 3,441 6.59% 252,589 4,203 6.66%
Other earning assets 16,522 236 5.73% 10,189 158 6.20%
--------- --------- -------- --------
Total earning assets 911,616 19,371 8.52% 829,479 17,207 8.30%
Allowance for loan losses (8,833) (6,297)
Cash and other assets 89,699 86,489
--------- --------
TOTAL ASSETS $ 992,482 $909,671
========= ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 143,346 1,112 3.11% $121,762 819 2.69%
Savings deposits 115,606 735 2.55% 104,615 819 3.13%
Time deposits 307,782 4,083 5.32% 298,926 3,876 5.19%
Time deposits of $100,000 or more 94,581 1,365 5.79% 74,206 1,032 5.56%
Federal funds purchased and securities
sold under agreement to repurchase 65,430 747 4.58% 75,120 805 4.29%
Other borrowings 22,527 328 5.84% 14,811 209 5.64%
--------- --------- -------- --------
Total interest bearing liabilities 749,272 8,370 4.48% 689,440 7,560 4.39%
--------- --------
Net interest spread $ 11,001 4.04% $ 9,647 3.91%
========= ========
Noninterest bearing demand deposits 133,061 121,026
Accrued expenses and other liabilities 8,842 7,403
Stockholders' equity 101,307 91,802
--------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 992,482 $909,671
========= ========
Net yield on earning assets 4.84% 4.64%
==== ====
Taxable equivalent adjustment:
Loans $ 21 $ 56
Investment securities 378 563
--------- ---------
Total adjustment $ 399 $ 619
========= =========
</TABLE>
20
<PAGE> 23
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND YIELD/RATES
Taxable Equivalent Basis
(in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------------------------------------------------------
Assets 1998 1997
-------------------------------------- ----------------------------------
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 $ 673,339 $ 30,604 9.17% $546,761 $ 24,390 9.00%
Investment securities 206,508 6,616 6.46% 249,138 8,207 6.64%
Other earning assets 21,070 586 5.61% 12,290 349 5.73%
--------- --------- -------- --------
Total earning assets 900,917 37,806 8.46% 808,189 32,946 8.22%
Allowance for loan losses (8,422) (6,121)
Cash and other assets 89,827 88,321
--------- --------
TOTAL ASSETS $ 982,322 $890,389
========= ========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 138,389 1,953 2.85% $122,244 1,650 2.72%
Savings deposits 114,536 1,662 2.93% 105,478 1,662 3.18%
Time deposits 307,936 8,158 5.34% 294,660 7,545 5.16%
Time deposits of $100,000 or more 87,585 2,525 5.84% 70,410 1,924 5.51%
Federal funds purchased and securities
sold under agreement to repurchase 63,898 1,461 4.61% 63,880 1,365 4.31%
Other borrowings 29,204 846 5.84% 12,419 341 5.54%
--------- --------- -------- --------
Total interest bearing liabilities 741,548 16,605 4.52% 669,091 14,487 4.37%
--------- --------
Net interest spread $ 21,201 3.94% $ 18,459 3.85%
========= ========
Noninterest bearing demand deposits 130,416 120,967
Accrued expenses and other liabilities 9,848 7,893
Stockholders' equity 100,510 92,438
--------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 982,322 $890,389
========= ========
Net yield on earning assets 4.75% 4.61%
==== ====
Taxable equivalent adjustment:
Loans $ 48 $ 65
Investment securities 744 1,028
--------- --------
Total adjustment $ 792 $ 1,093
========= ========
</TABLE>
The net yield on earning assets increased 20 basis points from the second
quarter of 1997 to the second quarter of 1998, 4.64% to 4.84%, 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 $12.0 million, or 9.9%. On a tax
equivalent basis, interest income on earning assets increased $2.2 million, or
12.6% due to an increase of $82.1 million, or 9.9% in the average volume of
interest earning assets. 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 $118.9 million, or 21.0%, while the average
balance of securities decreased $43.1 million, or 17.1% and the average balance
of other earning assets, primarily federal funds sold, increased $6.3 million,
or 62.2%. As a percentage of total earning assets, loans increased from 68.3% to
75.2%, investment securities decreased from 30.5% to 23.0%, and other earning
assets increased from 1.2% to 1.8%, for the second quarter of 1997 and the
second quarter of 1998, respectively. Rates earned on loans increased 11 basis
points, while rates earned on investment securities decreased 7 basis points.
The rates earned on other earning assets decreased 47 basis points. The
21
<PAGE> 24
rate on total earning assets increased 22 basis points. Interest expense on
interest bearing liabilities increased $810,000, or 10.7% in the second quarter
of 1998 compared to the same period last year. Average balances on interest
bearing liabilities increased by $59.8 million, or 8.7%. The average balances of
interest bearing demand deposits increased from second quarter of 1997 to second
quarter of 1998 by $21.6 million, or 17.7%. Savings accounts increased for the
same time periods by $11.0 million, or 10.5%. The rates paid on these types of
accounts during the three months ending June 30, 1998, and 1997, increased 42
and decreased 58 basis points, respectively. The average balance of time
deposits, including time deposits over $100,000, increased $29.2 million, or
7.8% and the rate paid increased 15 basis points. Net interest spread and net
interest spread rate increased from the second quarter 1997 to the second
quarter 1998 by $1.4 million and 13 basis points, respectively.
The net yield on earning assets increased 14 basis points to 4.75% for the first
six months of 1998 from 4.61% for the same period in 1997. 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 $9.4 million, or 7.8%. On a tax equivalent basis,
interest income on earning assets increased $4.9 million, or 14.8% due to an
increase of $92.7 million, or 11.5% in the average volume of interest earning
assets. 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 $126.5 million, or 23.1%, while the average balance of
securities decreased $42.6 million, or 17.1% and the average balance of other
earning assets, primarily federal funds sold, increased $8.8 million, or 71.4%.
As a percentage of total earning assets, loans increased from 67.7% to 74.7%,
investment securities decreased from 30.8% to 22.9%, and other earning assets
increased from 1.5% to 2.4%, for the first six months of 1997 and 1998,
respectively. Rates earned on loans increased 17 basis points, while rates
earned on investment securities decreased 18 basis points. The rates earned on
other earning assets decreased 12 basis points. The rate on total earning assets
increased 24 basis points. Interest expense on interest bearing liabilities
increased $2.1 million, or 14.6% in the first six months of 1998 compared to the
same period last year. Average balances on interest bearing liabilities
increased by $72.5 million, or 10.8%. The average balances of interest bearing
demand deposits increased from the first six months of 1997 to the first six
months of 1998 by $16.1 million, or 13.2%. Savings accounts increased for the
same time periods by $9.1 million, or 8.6%. The rates paid on these types of
accounts during the six months ending June 30, 1998, and 1997, increased 13 and
decreased 25 basis points, respectively. The average balance of time deposits,
including time deposits over $100,000, increased $30.5 million, or 8.3% and the
rate paid increased 22 basis points. Net interest spread and net interest spread
rate increased from the first six months of 1997 to the first six months of 1998
by $2.7 million and 9 basis points, respectively.
22
<PAGE> 25
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 Six Months
Ended June 30, Ended June 30,
----------------- Percent ----------------- Percent
1998 1997 Change 1998 1997 Change
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Trust income $ 453 $ 404 12.13% $ 886 $ 787 12.58%
Service charge on deposit
accounts 1,215 1,038 17.05% 2,334 2,046 14.08%
Net securities gains (losses) 4 70 (94.29)% 8 62 (87.09)%
Other income 999 657 52.05% 2,401 1,396 71.99%
------ ------ ------ ------ -----
TOTAL $2,671 $2,169 23.14% $5,629 $4,291 31.18%
====== ====== ====== ======
</TABLE>
Trust fees increased $49,000 or 12.1% for the three months ended June 30, 1998,
as compared to the quarter ended June 30, 1997. Service charges increased
$177,000, or 17.1% from the second quarter of 1997 compared to the second
quarter of 1998. The increase in service charges is attributable to a new fee
structure implemented during the third quarter of 1997. Net securities gains of
$4,000 were realized in the second quarter of 1998, compared to gains of $70,000
realized in the same period of 1997. Other noninterest income increased
$342,000, or 52.1% for the second quarter 1998 compared to the second quarter of
1997. The increase in other noninterest income is primarily attributable to the
sale of Company real estate properties, which in management's opinion, were no
longer needed for continuing operations.
Trust fees increased $99,000 or 12.6% for the six months ended June 30, 1998,
as compared to the quarter ended June 30, 1997. Service charges increased
$288,000, or 14.1% from the second quarter of 1997 compared to the second
quarter of 1998. The increase in service charges is attributable to a new fee
structure implemented during the third quarter of 1997. Net securities gains of
$8,000 were realized in the first six months of 1998 compared to gains of
$62,000 realized in the same period of 1997. Other noninterest income increased
$1.0 million, or 72.0% for the six months ending June 30, 1998 compared to the
same period last year. The increase in other noninterest income is primarily
attributable to the fees collected from the long-term mortgage department, where
long-term mortgages are sold to the secondary loan market, and from Pioneer
Securities, Inc., a wholly owned subsidiary of Pioneer Bank.
NONINTEREST EXPENSE
Salaries and benefits increased $637,000, or 15.7% for the three months ending
June 30, 1998, as compared to June 30, 1997 due to Company growth including the
establishment of Pioneer Bank, f.s.b., and commissions paid on long-term
mortgage origination. Occupancy expenses increased $222,000, or 30.4% due to
increased repair and maintenance expense. Management anticipates the level of
spending for occupancy expense to be about 5% higher than last year. Other
expenses
23
<PAGE> 26
increased $268,000, or 12.3% for the second quarter ending June 30, 1998,
compared to the same period last year.
Salaries and benefits increased $1.6 million, or 21.2% for the six months ending
June 30, 1998, as compared to June 30, 1997 due to Company growth including the
establishment of Pioneer Bank, f.s.b., and year-to-date commissions paid on
long-term mortgage origination. Occupancy expenses increased $57,000, or 3.0%.
Management anticipates the level of spending for occupancy expense to remain at
this level through year-end. Other expenses increased $988,000, or 19.6% for the
six months ending June 30, 1998, compared to the same period last year.
NONINTEREST EXPENSE
(in thousands)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
----------------- Percent ----------------- Percent
1998 1997 Change 1998 1997 Change
------ ------ ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $4,689 $4,052 15.72% $ 9,388 $ 7,749 21.15%
Net occupancy expense 952 730 30.41% 1,949 1,892 3.01%
Other expense 2,447 2,179 12.30% 5,056 4,068 24.29%
------ ------ ------- -------
TOTAL $8,088 $6,961 16.19% $16,393 $13,709 19.58%
====== ====== ======= =======
</TABLE>
PROVISION FOR INCOME TAXES
The Company's provision for income taxes increased $257,000, or 25.2% to $1.3
million for the three months ended June 30, 1998, as compared to $1.0 million
for the same period in 1997. The effective tax rate was 33.2% for the three
months ended June 30, 1998 as compared to 33.1% for June 30, 1997. The Company's
provision for income taxes increased $569,000, or 30.4% to $2.4 million for the
six months ended June 30, 1998, as compared to $1.9 million for the same period
in 1997. The effective tax rate was 33.1% for the six months ended June 30, 1998
as compared to 29.8% for June 30, 1997. This increase is attributable to a large
decrease in tax-free investments in the company's securities portfolio and gains
on the sale of company property. The notes to the December 31, 1997, financial
statements provide additional information regarding the Company's taxes.
YEAR 2000 COMPUTER ISSUE
The Year 2000 problem manifests in computer software and, in certain cases,
hardware not equipped to recognize the year change from 1999 to 2000. Much of
the software used today was designed with only two digits available for
indicating the current year. Thus the year 1998 would be represented as "98".
The computer software assumes the first two digits are "19", therefore correctly
interpreting "98" as "1998". In the year 2000 the computer software will
continue to store the last two digits as "00" and use "19" as the first two
digits, however the date will be incorrectly interpreted as "1900". This
problem, at its most fundamental level, threatens the integrity of financial
information produced by an organization's computer systems, and could undermine
the organization" ability to accurately report financial information.
24
<PAGE> 27
The federal regulatory agencies have required all financial institutions to
resolve their Year 2000 computer software problems by December 31, 1998. In
1997, the Company formalized its "Year 2000 Conversion Action Plan" (the
"Plan"). The Plan possesses a sound, systematic and rational process of
attaining Year 2000 compliance by December 31, 1998. The Plan uses a six-step
approach to attaining Year 2000 compliance. The six steps are awareness,
assessment, remediation, validation, implementation and contingency planning.
The Plan requires evaluating the Year 2000 impact of each of the Company's
areas, products and systems for both information technology ("IT") based and
non-IT based systems. Areas being addressed by the Plan include:
Business Systems Applications - This involves Year 2000 remediation of
application software used to perform specific business functions such as deposit
and loan systems. All mission critical systems are currently in the validation
phase of the Year 2000 process. The Company expects all critical and
non-critical systems to be Year 2000 compliant before December 31, 1998.
Technology Infrastructure - This involves Year 2000 remediation of the
hardware and software environment used to run application software, and would
include PC and ATM networks, telecommunications, mainframe computers, operating
systems and productivity software. Remediation of the Company's technology
infrastructure is approximately 95% complete. Validation and implementation
phases have already been completed on over 80% of the Company's technology
infrastructure.
Credit Administration - In this area the Plan requires reviewing the risk
associated with Year 2000 status of the Company's clients and depositors. This
is a continuous process of evaluating the individual impact of a client not
being Year 2000 compliant. No assurance can be given that potential Year 2000
problems at those with whom the Company does business will not occur, and if
these occur, consequences to the Company will not be material.
Facilities Systems - This involves Year 2000 remediation of non-IT systems
such as elevators, HVAC systems, security systems, lighting systems and
utilities. All areas where third party involvement is necessary have been
validated and implemented with regard to the physical property the Company
either owns or leases. However, for any area outside the direct control of the
Company, such as utilities, the validation process is currently continuing.
Vendor and Third Party Associations - In this area the Plan requires an
inventory of the systems and products provided by third parties, and requires
the Company to contact each vendor or third-party to gain knowledge of the
status of their Year 2000 compliance. This is broad-based to include IT and
non-IT systems. Currently all items in this area are in the validation process.
The Company estimates the cost of its Year 2000 project will not exceed $1
million in the aggregate and the cost will not be material to earnings. Actual
expenditures to date and anticipated future expenditures are within this
estimate. The Company's management believes its approach to the Year 2000 issue
to be comprehensive, and does not expect the Year 2000 issue to have a material
impact on its results of operations, liquidity or financial condition. However,
given the nature of the problem and the number of factors outside the Company's
direct control, management is continuously evaluating the risks associated with
Year 2000. To help mitigate the risks a Year 2000 corporate contingency plan is
being developed. This plan is approximately 50% complete and will be finished
before December 31, 1998. Primarily this plan will concentrate on performing all
mission critical systems that are believed to be at high risk for noncompliance.
25
<PAGE> 28
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 the Pioneer Bancshares, Inc. stockholders was
held on April 22, 1998 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 Basic and Diluted Earnings Per Share
27 Financial Data Schedule (SEC use only)
26
<PAGE> 29
(b) Reports on Form 8-K.
During the second quarter of 1998, the Company filed the following
report on Form 8-K. Current Report on Form 8-K dated June 5, 1998, in
reference to the Registrant's acquisition and merger by First American
Corporation.
27
<PAGE> 30
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: August 14, 1998 /s/ Rodger B. Holley
---------------------------------------
Rodger B. Holley
Chairman, President and CEO
Date: August 14, 1998 /s/ Gregory B. Jones
---------------------------------------
Gregory B. Jones
Executive Vice President and Treasurer
Date: August 14, 1998 /s/ Robert M. Wilbanks, Jr.
---------------------------------------
Robert M. Wilbanks, Jr.
Vice President and Controller
28
<PAGE> 31
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
------ ----------- ----
<S> <C> <C>
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 Basic and Diluted Earnings
Per Share 30-31
27 Financial Data Schedule (SEC use only)
</TABLE>
29
<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 June 30, 1998 1997
---------- ----------
<S> <C> <C>
Basic earnings per common share computation:
Numerator:
Net Income....................................... $2,570,000 $2,060,000
Denominator:
Average common shares outstanding................ 3,759,912 3,759,912
Basic earnings per common share..................... $ 0.684 $ 0.548
Diluted earnings per common share Computation:
Numerator:
Net Income....................................... $2,570,000 $2,060,000
Denominator:
Average common shares outstanding................ 3,759,912 3,759,912
Dilutive stock options 1,970 --
Dilutive average common shares Outstanding..... 3,761,882 3,759,912
Diluted earnings per common share.............. $ .683 $ 0.548
</TABLE>
<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 six months ended June 30, 1998 1997
---------- ----------
<S> <C> <C>
Basic earnings per common share computation:
Numerator:
Net Income...................................... $4,930,000 $4,456,000
Denominator:
Average common shares outstanding............... 3,759,912 3,759,912
Basic earnings per common share.................... $ 1.311 $ 1.185
Diluted earnings per common share Computation:
Numerator:
Net Income...................................... $4,930,000 $4,456,000
Denominator:
Average common shares outstanding............... 3,759,912 3,759,912
Dilutive stock options 1,970 --
Dilutive average common shares Outstanding.... 3,761,882 3,759,912
Diluted earnings per common share............. $ 1.311 $ 1.185
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 60,085
<INT-BEARING-DEPOSITS> 664,272
<FED-FUNDS-SOLD> 175
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 176,117
<INVESTMENTS-CARRYING> 30,912
<INVESTMENTS-MARKET> 31,152
<LOANS> 702,343
<ALLOWANCE> 9,141
<TOTAL-ASSETS> 1,004,551
<DEPOSITS> 804,213
<SHORT-TERM> 0
<LIABILITIES-OTHER> 8,622
<LONG-TERM> 20,000
0
0
<COMMON> 38
<OTHER-SE> 103,086
<TOTAL-LIABILITIES-AND-EQUITY> 1,004,551
<INTEREST-LOAN> 30,556
<INTEREST-INVEST> 6,444
<INTEREST-OTHER> 14
<INTEREST-TOTAL> 37,014
<INTEREST-DEPOSIT> 14,298
<INTEREST-EXPENSE> 16,605
<INTEREST-INCOME-NET> 20,409
<LOAN-LOSSES> 2,275
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 16,393
<INCOME-PRETAX> 7,370
<INCOME-PRE-EXTRAORDINARY> 7,370
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,930
<EPS-PRIMARY> 1.311
<EPS-DILUTED> 1.311
<YIELD-ACTUAL> 4.75
<LOANS-NON> 3,867
<LOANS-PAST> 4,020
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,484
<ALLOWANCE-OPEN> 7,836
<CHARGE-OFFS> 1,274
<RECOVERIES> 304
<ALLOWANCE-CLOSE> 9,141
<ALLOWANCE-DOMESTIC> 9,141
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
