<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, 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 incorporation (I.R.S. Employer
or organization) Identification No.)
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 September 30, 1998:
Title of Class Number of Shares Outstanding
- ---------------------------- ----------------------------
Common Stock, $.01 Par Value 3,735,872
<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, 1998,
December 31, 1997 and September 30, 1997 1
Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 1998 2
and September 30, 1997
Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended September 30, 1998 and September 30, 1997 3
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and September 30, 1997 4-5
Notes to Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
of Pioneer Bancshares, Inc. 9-25
PART II. OTHER INFORMATION 26-27
Signatures 28
Exhibit Index 29
</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 1998 1997 1997
---------------- --------------- ----------------
<S> <C> <C> <C>
Cash and due from banks $ 47,433 $ 46,873 $ 54,832
Investment securities:
Held-to-maturity (fair value of $27,642 at
September 30, 1998, $48,587 at December 31,
1997, and $51,746 at September 30, 1997) 27,382 48,396 51,513
Available-for-sale 170,902 156,691 158,633
Federal funds sold 9,700 18,830 6,565
Loans 702,336 651,234 622,927
Less: Unearned income 1,955 1,476 1,408
Allowance for loan losses 10,411 7,837 7,651
-------- -------- --------
Net loans 689,970 641,921 613,868
Premises and equipment, net of accumulated
Depreciation 22,523 22,740 21,861
Intangible assets 5,106 5,707 5,829
Other assets 17,535 15,732 14,051
======== ======== ========
Total Assets $990,551 $956,890 $927,152
======== ======== ========
LIABILITIES
Deposits
Noninterest bearing demand deposits $131,439 $126,684 $126,619
Interest bearing demand deposits 129,412 132,755 127,103
Money market accounts 54,352 57,873 48,916
Savings deposits 116,547 111,156 103,068
Time deposits of less than $100,000 263,583 249,368 252,963
Time deposits of $100,000 or more 100,081 70,585 75,029
-------- -------- --------
Total deposits 795,414 748,421 733,698
Federal funds purchased and securities
sold under agreements to repurchase 59,593 60,439 58,563
Other borrowings 20,000 38,000 28,000
Other liabilities 10,164 10,114 8,395
-------- -------- --------
Total liabilities 885,171 856,974 828,656
-------- -------- --------
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 64,875
Retained earnings 39,758 35,074 33,743
Unrealized appreciation/(depreciation) on
securities available for sale 1,558 1,044 861
Less: treasury stock - at cost 1,164 1,021 1,021
-------- -------- --------
Total stockholders' equity 105,380 99,916 98,496
======== ======== ========
Total Liabilities and Stockholders' Equity $990,551 $956,890 $927,152
======== ======== ========
</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 1998 1997 1998 1997
------ ------- ------- ------
<S> <C> <C> <C> <C>
Interest and fees on loans $16,156 $14,379 $46,712 $38,704
Interest on investment securities
Taxable 2,262 2,358 6,737 7,553
Tax exempt 640 750 2,037 2,734
Interest on federal funds sold 200 187 772 522
Interest on other earning assets 13 9 27 23
------- ------- ------- -------
Total interest income 19,271 17,683 56,285 49,536
------- ------- ------- -------
INTEREST EXPENSE
Interest bearing demand deposits 804 855 2,537 2,505
Money market accounts 516 405 1,477 1,228
Savings deposits 972 866 2,854 2,528
Time deposits of less than $100,000 3,619 3,566 10,816 10,288
Time deposits of $100,000 or more 1,431 1,034 3,956 2,958
Federal funds purchased and securities
sold under agreements to repurchase 857 706 2,318 2,071
Other borrowed money 304 268 1,150 609
------- ------- ------- -------
Total interest expense 8,503 7,700 25,108 22,187
------- ------- ------- -------
Net interest income 10,768 9,983 31,177 27,349
Provision for loan losses 1,604 1,122 3,879 2,743
------- ------- ------- -------
Net interest income
after the provision for loan losses 9,164 8,861 27,298 24,606
------- ------- ------- -------
NONINTEREST INCOME
Trust income 477 408 1,363 1,195
Service charge on deposit accounts 1,194 1,063 3,528 3,109
Net securities gains (losses) 84 221 92 283
Other income 897 1,061 3,298 2,457
------- ------- ------- -------
Total noninterest income 2,652 2,753 8,281 7,044
------- ------- ------- -------
NONINTEREST EXPENSE
Salaries and employee benefits 4,527 3,678 13,915 11,427
Occupancy 1,063 900 3,012 2,792
Other 2,426 2,801 7,482 6,617
------- ------- ------- -------
Total noninterest expense 8,016 7,379 24,409 20,836
------- ------- ------- -------
Income before provision for income taxes 3,800 4,235 11,170 10,814
Provision for income taxes 1,227 1,377 3,667 3,248
======= ======= ======= =======
NET INCOME $ 2,573 $ 2,858 $ 7,503 $ 7,566
======= ======= ======= =======
Basic net income per common share $ 0.69 $ 0.77 $ 2.01 $ 2.03
Diluted net income per common share $ 0.69 $ 0.77 $ 2.01 $ 2.03
Dividends declared per common share $ 0.25 $ 0.23 $ 0.75 $ 0.69
</TABLE>
2
<PAGE> 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands except for share data)
<TABLE>
<CAPTION>
Unrealized
Common Stock Acc. Appreciation
------------------- Other (Depreciation)
# of Par Comp. Capital Retained Available- Treasury
Shares Value Income Surplus Earnings for-Sale 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 -- -- $ 7,566 -- 7,566 -- -- 7,566
Other Comprehensive Income,
net of tax -- (229)
-------
Comprehensive Income $ 7,337
=======
Cash dividend -- -- -- (2,594) -- -- (2,594)
Stock dividend -- -- -- --
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 $38 $64,875 $ 33,743 $ 861 $(1,021) $ 98,496
========= === ======= ======== ======= ======= ==========
Balances, December 31, 1997 3,759,912 $38 $64,875 $ 35,074 $ 1,044 $(1,115) $99,916
Comprehensive Income:
Net income -- -- $ 7,503 -- 7,503 -- -- 7,503
Other Comprehensive Income,
net of tax -- -- 422
-------
Comprehensive Income -- -- $ 7,925
=======
Cash dividend -- -- -- (2,819) -- -- (2,819)
Net Changes in Unrealized Appreciation
on Securities Available-for-Sale -- -- -- -- 514 -- 514
Sales of Treasury Stock -- -- 315 -- -- 858 1,173
Purchases of Treasury Stock -- -- -- -- -- (907 ) (907)
========= === ======= ======== ======= ======== =========
Balances, September 30, 1998
(Unaudited) 3,759,912 $38 $65,190 $ 39,758 $(1,164) 1,558 $ 105,380
========= === ======= ======== ======= ======== =========
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
SOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Unaudited
Nine months ended
OPERATING ACTIVITIES September 30,
1998 1997
-----------------------
<S> <C> <C>
Net income $ 7,503 $ 7,566
Adjustments to reconcile net income to cash
Provided by operating activities:
Provision for loan losses 3,879 2,743
Depreciation on premises and equipment 2,078 1,869
Amortization and accretion of investment
Securities 34 388
(Increase) decrease in other assets (1,803) 509
Net increase (decrease) in other liabilities 50 994
-------- ---------
Net cash provided by operating activities 11,741 14,069
-------- ---------
INVESTING ACTIVITIES
Proceeds from sales and maturities of
Available-for-sale securities 38,035 100,484
Proceeds from maturities of
Held-to-maturity securities 20,948 7,797
Purchases of investment securities (52,146) (68,956)
Net (increase) decrease in federal funds sold 9,130 (6,565)
Net increase in loans (50,623) (99,116)
Purchases of premises and equipment (2,119) (2,753)
-------- ---------
Net cash used in investing activities (36,775) (68,109)
-------- ---------
FINANCING ACTIVITIES
Net increase in demand deposits 1,412 8,046
Net increase (decrease) in savings and MMDA 1,870 (3,708)
Net increase in time deposits 43,711 36,792
Net increase (decrease) in repurchase
Agreements and federal funds purchased (846) (4,776)
Net increase (decrease) in other borrowings (18,000) 18,000
Cash dividends paid (2,819) (2,594)
Sales of treasury stock 1,173 645
Purchase of treasury stock (907) (1,098)
-------- ---------
Net cash provided by financing activities 25,594 51,307
-------- ---------
Increase (Decrease) in cash and cash
Equivalents 560 (2,733)
-------- ---------
Cash and cash equivalents at the beginning of
the period 46,873 57,565
-------- ---------
Cash and cash equivalents at the end of
the period $ 47,433 $ 54,832
======== =========
</TABLE>
4
<PAGE> 7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Unaudited
Nine months ended
SUPPLEMENTAL DISCLOSURES OF September 30,
NONCASH INVESTING AND
FINANCING ACTIVITIES
<TABLE>
<CAPTION>
---------------------------
1998 1997
---------- ----------
<S> <C> <C>
Unrealized Appreciation (Depreciation)
of Securities, net of Deferred Taxes $ 514 $ 54
Increase (Decrease) in Other Real Estate Owned $ 686 $ (549)
</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>
-------------------------------
September 30,
-------------------------------
1998 1997
---------- --------
<S> <C> <C>
Principal balance 2,098,962 239,387
Interest income recorded during loan impairment --- ---
Reserve for potential credit losses 1,158,669 167,735
Unreserved portion of impaired loans 940,293 71,652
Average principal balance quarter-to-date 1,879,064 252,900
Average principal balance year-to-date 751,205 195,268
</TABLE>
Impaired loans are identified according to the two classification methods in the
following table:
<TABLE>
<CAPTION>
--------------------------
September 30,
--------------------------
1998 1997
----------- -------
<S> <C> <C>
Doubtful loans outstanding. $ $880,586 239,387
Loss loans outstanding -- 218,376
</TABLE>
The Company's method of valuing impaired loans approximates fair value as
defined in Statements No. 114 & 118.
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
7
<PAGE> 10
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 20, 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 September 30,
1998, merger related costs before taxes were approximately $490,297. First
American expects to incur restructuring and merger-related, pretax charges of
about $16 million.
8
<PAGE> 11
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 of 1998 with total assets of $990.6 million,
a 3.5% increase from December 31, 1997 and a 6.8% increase from September 30,
1997. The Company reported net income for the three months ending September 30,
1998 of $2.6 million, or $0.69 basic earnings per share, compared to $2.9
million, or $0.77 basic earnings per share, for the same period in 1997. For the
nine months ended September 30, 1998, the Company reported $7.5 million, or
$2.01 basic earnings per share, compared to $7.6 million, or $2.03 basic
earnings per share, for the same period last year. The decrease in earnings
represents a 10.0% decrease from the third quarter 1997 to the third quarter of
1998 and a 0.8% decrease from the first nine months of 1997 to the first nine
months of 1998.
NET INTEREST INCOME
Net interest income, before the provision for possible loan losses, was $10.8
million for the three months ended September 30, 1998, compared to $10.0 million
for the same period in 1997. This level of net interest income resulted
primarily from, among other things, an increase in total interest income to
$19.3 million from $17.7 million, or 9.0%. The net interest margin was 4.86% in
the third quarter of 1998 compared to 4.95% in the third quarter of 1997. The
net interest margin decreased because the yield on interest earning assets
decreased 4 basis points, and the rate paid on interest bearing liabilities
increased 7 basis points. (See "Net Interest Margin")
Net interest income, before the provision for possible loan losses, was $31.2
million for the nine months ended September 30, 1998, compared to $27.3 million
for the same period in 1997. This level of net interest income resulted
primarily from, among other things, an increase in total interest income to
$56.3 million from $49.5 million, or 13.6 %. The net interest margin was 4.76%
for the nine months ended September 30, 1998 compared to 4.69% for the same
period last year. The net interest margin increased because the yield on
interest earning assets exceeded the rate paid on interest bearing liabilities
during the three quarters of 1998; however the difference has decreased by 7
basis points since the prior quarter as the rate paid on interest bearing
liabilities decreased by 2 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
$47.4 million as of September 30, 1998, representing a 1.2% increase. The
increase is indicative of normal business cycles in the industry. Cash and due
from bank balances will fluctuate depending on
9
<PAGE> 12
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.
INVESTMENTS
Investment securities decreased from $205.1 million to $198.2 million, or 3.3%
from December 31, 1997 to September 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 September 30, 1998 the
"Held-to-Maturity" securities decreased $21 million, or 43.4% while the
"Available-for-Sale" securities increased $14.2 million, or 9.1%. The average
expected life of the total investment security portfolio at September 30, 1998
was 2.4 years with an average tax equivalent yield of 6.34%. 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
increased the after tax value of the investment portfolio by $583,000. Interest
rates decreased as the U.S Economy began to feel the effects of the world's
financial difficulties and market traders fled to quality in U.S. Treasury
Notes. Further contributing to the gain were the continued strength of the U.S.
dollar and the lack of any sign of inflation. 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 September 30, 1998, the FASB 115 adjustment
resulted in an increase in the asset value of the investment portfolio of $2.4
million and an adjustment to the capital account of $1.6 after reserving
$800,000 for deferred taxes.
As of September 30, 1998, the Company had $9.7 million 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 $50.6 million, or 7.8% from December
31, 1997 to September 30, 1998. The loan mix changed marginally from year-end
1997 to nine months ending, September 30, 1998. The largest dollar volume loan
category increase occurred in commercial loans by $23.3 million, or 13.9% from
December, 1997 to September, 1998. Consumer credit card loans decreased
$220,000, or 4.9%. Residential real estate loans increased $19.4 million, or
11.3% from December 31, 1997 to September 30, 1998, due to a strong demand for
home equity loans and home refinancing. Real estate construction loans increased
19.1%, or $10.4 million, for the same period. This increase in construction
loans is one indication of a moderately strong local economy.
10
<PAGE> 13
Management is anticipating loan growth of less than 10% for the fourth quarter
of 1998. 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, 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>
September Percent December Percent
1998 of Total 1997 of Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural $190,990 27.19% $167,655 25.74%
Real estate:
Construction and
land development 65,036 9.26% 54,624 8.39%
Residential 191,491 27.26% 172,124 26.43%
Commercial 168,619 24.01% 155,348 23.86%
Consumer
Credit cards 4,258 0.61% 4,478 0.69%
Installments 81,801 11.65% 96,739 14.85%
Lease financing 141 0.02% 266 0.04%
-------- ------- -------- -------
Total Gross Loans 702,336 100.00% 651,234 100.00%
======= =======
Less:
Unearned income 1,955 1,476
Allowance for
loan losses 10,411 7,837
-------- --------
Total Net Loans $689,970 $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 and interest rates have decreased to the 6.5% to 7.00% level
for 30 year mortgages. New housing starts have remained relatively constant for
the third 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.
11
<PAGE> 14
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 $2.6 million, or 32.8% from December 31, 1997 to September
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 1.49% at September 30, 1998 as compared to
1.23% at December 31, 1997. The allowance for loan losses at September 30, 1998,
and December 31, 1997, provided 98.49% 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 0.19% during
the third quarter of 1998 as compared to 0.27% for the same period one year ago.
At September 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 Sept 30 June 30 March 31 Dec 31 Sept 30
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 9,141 $8,415 $7,836 $7,651 $6,939
Loans charged-off 488 833 441 889 528
Loans recovered 155 221 82 210 117
------- ------ ------ ------ ------
Net charge-offs (recoveries) 333 612 359 679 411
Provision for loan losses charged
to expense 1,603 1,338 938 865 1,123
------- ------ ------ ------ ------
Balance at end of period $10,411 $9,141 $8,415 $7,837 $7,651
======= ====== ====== ====== ======
Allowance for loan losses as
a percentage of average
loans outstanding for
the period 1.49% 1.33% 1.27% 1.23% 1.27%
Allowance for loan losses as a
percentage of nonperforming
assets and loans 90 days past
due outstanding at end of
the period 98.49% 104.78% 157.30% 164.97% 267.52%
Annualized QTD net charge-offs as
a percentage of average loans
outstanding for the period 0.19% 0.36% 0.22% 0.43% 0.27%
Annualized YTD net charge-offs as
a percentage of average loans
outstanding for the period 0.25% 0.29% 0.22% 0.26% 0.19%
</TABLE>
12
<PAGE> 15
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 September 30, 1998, nonperforming assets were $6.7 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 0.96% at September 30, 1998, compared to 0.41% at December 31, 1997 and
0.38% at September 30, 1997. The increase in nonperforming assets is primarily
due to the addition of two large secured loans. Management is unable to estimate
the amount of recovery on the loans at this time.
Total nonperforming loans to total average loans increased from 0.29% at
December 31, 1997, to 0.85% at September 30, 1998. Loans past due 90 days or
more as a percentage of total average loans increased to 0.55% as of September
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 and third quarters and will remain strong throughout the remainder of
1998.
Net loans charged off during the third quarter of 1998 were $333,000 compared to
a $411,000 for the same period of 1997. Further detail of loan charge-offs and
recoveries is presented in the table "Allowance for Loan Losses."
13
<PAGE> 16
NONPERFORMING ASSETS AND PAST DUE LOANS
(in thousands)
<TABLE>
<CAPTION>
--------------------------------------------------------------------
1998 1997
--------------------------------------------------------------------
Quarter Ending Sept 30 June 30 March 31 Dec 31 Sept 30
====================================================================
<S> <C> <C> <C> <C> <C>
Avg loans, net of unearned income $698,576 $685,645 $660,896 $636,559 $603,579
======== ======== ======== ======== ========
Nonaccrual loans $ 5,918 $ 3,875 $ 4,179 $ 1,836 $ 1,856
Renegotiated or restructured loans 0 0 0 0 0
-------- -------- -------- -------- --------
Total nonperforming loans 5,918 3,875 4,179 1,836 1,856
Other real estate owned, net 720 752 753 687 352
Other non-performing assets 78 23 94 107 67
-------- -------- -------- -------- --------
Total nonperforming assets $ 6,716 $ 4,650 $ 5,026 $ 2,630 $ 2,275
======== ======== ======== ======== ========
Loans 90 days or more past due
and still accruing $ 3,855 $ 4,075 $ 323 $ 2,120 $ 585
Total nonperforming loans as a
percentage of total avg loans 0.85% 0.57% 0.63% 0.29% 0.31%
Total nonperforming assets as a
percentage of total avg loans, ORE
and other nonperforming assets 0.96% 0.68% 0.76% 0.41% 0.38%
Loans 90 days past due as a
percentage of total avg loans 0.55% 0.59% 0.05% 0.33% 0.10%
</TABLE>
DEPOSITS
Total deposits increased $47 million, or 6.3% from $748.4 million at December
31, 1997 to $795.4 million at September 30, 1998. The increase is due primarily
to customers investing in time deposits over $100,000 and increases in consumer
CD's. Total interest bearing deposits increased $42.2 million from December 31,
1997 to September 30, 1998. Noninterest bearing demand deposits increased $4.8
million, or 3.8% in the first nine months of 1998 from December 31, 1997. From
December 31, 1997 to September 30, 1998, interest bearing transaction accounts
decreased $3.3 million, or 2.5%, while money market accounts and savings
accounts decreased $3.5 million or 6.1%, and increased $5.4 million, or 4.8%
respectively.
Federal funds purchased and securities sold under agreements to repurchase
decreased $846,000, or 1.4% from December 31, 1997 to September 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 September 30,
1998, none of the repurchased agreements were brokered. The Company had no
federal funds purchased as of September 30, 1998, or December 31, 1997. 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
14
<PAGE> 17
borrowings. At September 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 47.5%, 49.5% and 48.6% of total deposits at
September 30, 1998, December 31, 1997 and September 30, 1997, respectively.
Large certificates of deposits represents 12.6% of total deposits at September
30, 1998, and is higher than 9.4% at December 31, 1997 and 10.2% at September
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 nine months ended September
30, 1998, totaled $11.7 million. For the same period, net cash used by investing
activities totaled $36.8 million consisting primarily of proceeds from
maturities and sales of investment securities of $59 million, cash outflows of
$52.1 million in investment securities purchases, and a $50.6 million increase
in loans outstanding. Net cash provided by financing activities of $25.6 million
consisted of an increase in demand deposits of $1.4 million, an increase in
savings deposits of $1.9 million, an increase in time deposits of $43.7 million
and a decrease in other borrowings of $18.0 million. The payment of $2.8 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, 1998 and
December 31, 1997 was 10.64% and 10.33%, respectively. The Company's book value
per share, increased from $26.57 at December 31, 1997 to $28.03 at September 30,
1998. The Company's Tier I risk based capital ratio, total risk based capital
ratio and leverage capital ratio at September 30, 1998 were 12.57%, 13.82% and
10.05, 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.
15
<PAGE> 18
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 September 30, 1998:
16
<PAGE> 19
INTEREST RATE SENSITIVITY ANALYSIS
as of September 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 $259,464 $ 66,335 $348,941 $ 25,641 -- $ 700,381
Less: Allowance for
loan losses -- -- -- -- $ (10,411) (10,411)
-------- -------- -------- -------- --------- ---------
Net loans
259,464 66,335 348,941 25,641 (10,411) 689,970
Investment securities 22,699 37,473 95,874 42,238 -- 198,284
Federal funds sold 9,700 -- -- -- -- 9,700
-------- -------- -------- -------- --------- ---------
Total earning assets
291,863 103,808 444,815 67,879 (10,411) 897,954
Cash and other assets -- -- -- -- 92,597 92,597
-------- -------- -------- -------- --------- ---------
Total assets $291,863 $103,808 $444,815 $ 67,879 $ 82,186 $ 990,551
======== ======== ======== ======== ========= =========
<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 $ 42,561 $ 37,097 $ 49,754 $ -- -- $ 129,412
Money market accts -- 27,176 27,176 -- -- 54,352
Savings deposits -- 11,572 93,403 11,572 -- 116,547
Other time deposits 87,515 134,518 41,525 -- 263,583
25
CD's of $100,000
or more 54,659 13,044 9 -- 100,081
32,369
Federal funds purchased
and securities sold
under agreements
to repurchase 59,593 -- -- -- -- 59,593
Other borrowings 10,000 -- 10,000 -- -- 20,000
-------- --------- -------- -------- --------- ---------
Total interest bearing
Liabilities 11,606 --
232,038 265,022 234,902 743,568
Non-interest bearing
demand deposits -- -- -- -- $ 131,439 131,439
Other liabilities -- -- -- -- 10,262 10,164
Stockholders' equity -- -- -- -- 105,282 105,380
-------- --------- -------- -------- --------- ---------
Total liabilities and
Stockholders' equity $232,038 $265,022 $234,902 $ 11,606 $ 246,983 $ 990,551
======== ========= ======== ======== ========= =========
Interest sensitivity gap $ 59,825 $(161,214) $209,913 $ 56,273
Cumulative interest
sensitivity gap $ 59,825 $(101,389) $108,524 $164,797
Cumulative interest
sensitivity gap as a
percentage of
total earning assets 6.66% -11.29% 12.09% 18.35%
</TABLE>
17
<PAGE> 20
In analyzing the interest rate sensitivity at September 30, 1998, the Company is
found to be liability sensitive in the less than twelve-month categories in the
amount of $101.4 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, 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 nine months ended September 30, 1998 decreased $63,000, or
0.8% over the same period in 1997. Changes in basic earnings per share for the
first nine months of 1998 decreased by $.02, or 0.9% to $2.01 from $2.03 for the
same period one-year ago. Changes in diluted net income per share were identical
during the same periods. For the first nine months of 1998 compared to the same
period last year, net interest income increased by $3.8 million and noninterest
income increased by $1.2 million; however, noninterest expense increased by $3.6
million and the loan loss provision and provision for income taxes increased by
$1.1 million and $419,000, respectively. Annualized return on average assets for
the nine months ending September 30, 1998 was 1.02% as compared to 1.10% for the
same period last year. The annualized return on average equity for the first
nine months of 1998 was 9.89%, compared to 10.62% for the same period in 1997.
All net income calculations are before merger related expenses. The pre-tax
merger related expenses incurred through September 30, 1998 are $490,297.
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, 1998 and
1997.
18
<PAGE> 21
CONSOLIDATED AVERAGE BALANCE SHEET
INTEREST INCOME/EXPENSE AND
YIELD/RATES
<TABLE>
<CAPTION>
Taxable Equivalent Basis
(in thousands) Three months ended
September 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 $ 698,576 $ 16,177 9.26% $ 603,579 $14,418 9.56%
Investment securities 204,349 3,233 6.33% 222,757 3,498 6.28%
Other earning assets 11,599 213 7.35% 14,492 196 5.41%
--------- --------- ---- --------- -------
Total earning assets 914,524 19,623 8.58% 840,828 18,112 8.62%
Allowance for loan losses (10,050) (7,185)
Cash and other assets 91,232 87,989
--------- ---------
TOTAL ASSETS $ 995,706 $ 921,632
--------- =========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 135,690 804 2.37% $124,737 855 2.74%
Savings deposits 116,241 972 3.34% 106,959 866 3.24%
Time deposits 312,415 4,135 5.29% 298,462 3,971 5.32%
Time deposits of $100,000 or more 98,293 1,431 5.82% 72,020 1,034 5.74%
Federal funds purchased and securities
sold under agreement to repurchase 63,065 857 5.44% 64,690 706 4.37%
Other borrowings 20,000 304 6.06% 18,754 268 5.72%
--------- --------- ---- -------- ------- ----
Total interest bearing liabilities 745,704 8,503 4.56% 685,622 7,700 4.49%
--------- ------- ====
Net interest spread $ 11,120 4.02% $10,412 4.13%
========= ======= ====
Noninterest bearing demand deposits 133,641 126,918
Accrued expenses and other liabilities 11,250 10,861
Stockholders' equity 105,111 98,231
--------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 995,706 $ 921,632
========= ---======
Net yield on earning assets 4.86% 4.95%
==== ====
Taxable equivalent adjustment:
Loans $ 21 $ 39
Investment securities 331 390
--------- =======
Total adjustment $ 352 $ 429
========= =======
</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 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 $ 682,545 $ 46,781 9.14% $ 565,884 $ 38,808 9.14%
Investment securities 206,508 9,849 6.36% 241,117 11,705 6.47%
Other earning assets 16,445 799 6.49% 13,032 545 5.58%
--------- --------- --------- ---------
Total earning assets 905,498 57,429 8.46% 820,033 51,058 8.30%
Allowance for loan losses (8,422) (6,479)
Cash and other assets 89,973 88,408
--------- ---------
TOTAL ASSETS $ 987,049 $ 901,962
========== =========
Liabilities and Stockholders' Equity
Interest bearing liabilities:
Interest bearing demand deposits $ 137,594 2,537 2.46% $ 123,084 2,505 2.71%
Savings deposits 115,145 2,854 3.31% 105,977 2,528 3.17%
Time deposits 308,631 12,293 5.31% 295,938 11,516 5.18%
Time deposits of $100,000 or more 91,058 3,956 5.80% 71,052 2,958 5.54%
Federal funds purchased and securities
Sold under agreement to repurchase 66,032 2,318 4.69% 64,153 2,071 4.30%
Other borrowings 26,102 1,150 5.87% 14,554 609 5.58%
---------- --------- --------- ---------
Total interest bearing liabilities 744,562 25,108 4.50% 674,758 22,187 4.38%
========= =========
Net interest spread $ 32,321 3.96% $ 28,871 3.92%
========= =========
Noninterest bearing demand deposits 131,004 122,940
Accrued expenses and other liabilities 10,067 8,990
Stockholders' equity 101,416 95,274
---------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 987,049 $ 901,962
========== =========
Net yield on earning assets 4.76% 4.69%
======= ====
Taxable equivalent adjustment:
Loans $ 69 $ 104
Investment securities 1,075 1,418
========= ========
Total adjustment $ 1,144 $ 1,522
========= ========
</TABLE>
20
<PAGE> 23
The net yield on earning assets decreased 9 basis points from the third quarter
of 1997 to the third quarter of 1998, 4.95% to 4.86%, respectively. The decrease
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 $6.7 million, or 5.3%. On a tax equivalent
basis, interest income on earning assets increased $1.5 million, or 8.3% due to
an increase of $73.7 million, or 8.7% 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 $94.9 million, or 15.7%, while the average balance of
securities decreased $18.4 million, or 8.3% and the average balance of other
earning assets, primarily federal funds sold, decreased $2.9 million, or 20%. As
a percentage of total earning assets, loans increased from 71.8% to 76.3%,
investment securities decreased from 26.5% to 22.3%, and other earning assets
decreased from 1.7% to 1.4%, for the third quarter of 1997 and the third quarter
of 1998, respectively. Rates earned on loans decreased 30 basis points, while
rates earned on investment securities increased 5 basis points. The rates earned
on other earning assets increased 194 basis points. The rate on total earning
assets decreased 4 basis points. Interest expense on interest bearing
liabilities increased $803,000, or 10.4% in the third quarter of 1998 compared
to the same period last year. Average balances on interest bearing liabilities
increased by $60.1 million, or 8.8%. The average balances of interest bearing
demand deposits increased from third quarter of 1997 to third quarter of 1998 by
$10.9 million, or 8.8%. Savings accounts increased for the same time periods by
$9.3 million, or 8.7%. The rates paid on these types of accounts during the
three months ending September 30, 1998, and 1997, decreased 37 and increased 10
basis points, respectively. The average balance of time deposits, including time
deposits over $100,000, increased $40.2 million, or 10.9% and the rate paid
increased 2 basis points. Net interest spread and net interest spread rate from
the third quarter 1997 to the third quarter 1998 increased by $708,000 and
decreased 11 basis points, respectively.
The net yield on earning assets increased 7 basis points to 4.77% for the first
nine months of 1998 from 4.69% 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 $8.1 million, or 6.6%. On a tax equivalent
basis, interest income on earning assets increased $6.4 million, or 12.5% due to
an increase of $85.5 million, or 10.4% 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 $116.7 million, or 20.6%, while the average balance of
securities decreased $34.6 million, or 14.4% and the average balance of other
earning assets, primarily federal funds sold, increased $3.4 million, or 26.2%.
As a percentage of total earning assets, loans increased from 69% to 75.4%,
investment securities decreased from 29.4% to 22.8%, and other earning assets
increased from 1.6% to 1.8%, for the first nine months of 1997 and 1998,
respectively. Rates earned on loans were unchanged, while rates earned on
investment securities decreased 11 basis points. The rates earned on other
earning assets increased 91 basis points. The rate on total earning assets
increased 16 basis points. Interest expense on interest bearing liabilities
increased $2.9 million, or 13.2% in the first nine months of 1998 compared to
the same period last year. Average balances on interest bearing liabilities
increased by $69.8 million, or 10.3%. The
21
<PAGE> 24
average balances of interest bearing demand deposits increased from the first
nine months of 1997 to the first nine months of 1998 by $14.5 million, or 11.8%.
Savings accounts increased for the same time periods by $9.2 million, or 8.7%.
The rates paid on these types of accounts during the nine months ending
September 30, 1998, and 1997, decreased 25 and increased 14 basis points,
respectively. The average balance of time deposits, including time deposits over
$100,000, increased $32.7 million, or 8.9% and the rate paid increased 16 basis
points. Net interest spread and net interest spread rate increased from the
first nine months of 1997 to the first nine months of 1998 by $3.5 million and 4
basis points, respectively.
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
1998 1997 Change 1998 1997 Change
---------------------- ----------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Trust income $ 477 $ 408 16.91% $ 1,363 $ 1,195 14.06%
Service charge on deposit accounts 1,194 1,063 12.32% 3,528 3,109 13.48%
Net securities gains (losses) 84 221 (61.99)% 92 283 (67.49)%
Other income 897 1,061 (15.46)% 3,298 2,457 34.23%
========== =========== ======= =======
TOTAL $ 2,652 $ 2,753 (3.67)% $ 8,281 $ 7,044 17.56%
========== =========== ======= =======
</TABLE>
Trust fees increased $69,000 or 16.9% for the three months ended September 30,
1998, as compared to the quarter ended September 30, 1997. Service charges
increased $131,000, or 12.32% from the third quarter of 1997 compared to the
third quarter of 1998. The increase in service charges is attributable to a new
fee structure implemented during the third quarter of 1997 and to the growth in
deposits. Net securities gains of $84,000 were realized in the third quarter of
1998, compared to gains of $221,000 realized in the same period of 1997. Other
noninterest income decreased $164,000, or 15.5% for the third quarter 1998
compared to the third quarter of 1997. The decrease in other noninterest income
is primarily attributable to a higher one-time increase in miscellaneous income
during the same quarter in the prior year.
Trust fees increased $168,000 or 14.1% for the nine months ended September 30,
1998, as compared to the quarter ended September 30, 1997. Service charges
increased $419,000, or 13.5% from the third quarter of 1997 compared to the
third quarter of 1998. The increase in service charges is attributable to a new
fee structure implemented during the third quarter of 1997 and to the growth in
deposits. Net securities gains of $92,000 were realized in the first nine months
of 1998 compared to gains of $283,000 realized in the same period of 1997. Other
noninterest income increased $841,000, or 34.2% for the nine months ending
September 30, 1998 compared to the same period last year. The increase in other
noninterest income is primarily attributable the sale of Company real estate
properties, which in management's opinion, were no longer needed for continuing
operations, and to the fees collected from the long-term mortgage department,
where
22
<PAGE> 25
long-term mortgages are sold to the thirdary loan market, and from Pioneer
Securities, Inc., a wholly owned subsidiary of Pioneer Bank.
NONINTEREST EXPENSE
Salaries and benefits increased $849,000, or 23.1% for the three months ending
September 30, 1998, as compared to September 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 $163,000, or 18.1%
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 decreased $375,000, or 13.39% for the third quarter ending
September 30, 1998, compared to the same period last year. The decrease in other
noninterest expenses is primarily attributable to decreases in office supplies
expenses, accounting and auditing fees and other miscellaneous charge-offs.
Salaries and benefits increased $2.5 million, or 21.8% for the nine months
ending September 30, 1998, as compared to September 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
$220,000, or 7.9%. Management anticipates the level of spending for occupancy
expense to remain at this level through year-end. Other expenses increased
$865,000, or 13.1% for the nine months ending September 30, 1998, compared to
the same period last year. The increase in other noninterest expense is
primarily attributable to increases in long-term mortgage appraisal fees, FDIC
and State assessments, legal fees and other miscellaneous expenses.
NONINTEREST EXPENSE
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Percent Ended September 30, Percent
------------------ -------------------
1998 1997 Change 1998 1997 Change
------- ------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and benefits $ 4,527 $ 3,678 23.08% $ 13,915 $ 11,427 21.77%
Net occupancy expense 1,063 900 18.11% 3,012 2,792 7.88%
Other expense 2,426 2,801 (13.39%) 7,482 6,617 13.08%
------- ------- -------- --------
TOTAL $ 8,016 $ 7,379 8.63% $ 24,409 $ 20,836 17.15%
======= ======== ======== ========
</TABLE>
PROVISION FOR INCOME TAXES
The Company's provision for income taxes decreased $150,000, or 10.9% to $1.2
million for the three months ended September 30, 1998, as compared to $1.3
million for the same period in 1997. The effective tax rate was 32.3% for the
three months ended September 30, 1998 as compared to 32.5% for September 30,
1997. The Company's provision for income taxes increased $419,000, or 12.9% to
$3.7 million for the nine months ended September 30, 1998, as compared to $3.2
million for the same period in 1997. The effective tax rate was 32.8% for the
nine months ended September 30, 1998 as compared to 30.04% for September 30,
1997. This increase is attributable
23
<PAGE> 26
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.
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 nine-step
approach to attaining Year 2000 compliance. The nine 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.
24
<PAGE> 27
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 will be completed by March 31, 1999, at the point of
the conversion to the First American systems. 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
(b) Reports on Form 8-K.
26
<PAGE> 29
During the third quarter of 1998, the Company filed the following
report on Form 8-K. Current Report on Form 8-K dated September 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: November 15, 1998 /s/ Rodger B. Holley
--------------------
Rodger B. Holley
Chairman, President and CEO
Date: November 15, 1998 /s/ Gregory B. Jones
--------------------
Gregory B. Jones
Executive Vice President and Treasurer
28
<PAGE> 31
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description Page
<S> <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 Net Earnings per Share
27 Financial Data Schedule (for SEC use only) 30-31
</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 September 30, 1998 1997
---- ----
Basic earnings per common share computation:
<S> <C> <C>
Numerator:
Net Income .............................. $2,573,000 $2,858,000
Denominator:
Average common shares outstanding ....... 3,735,872 3,732,695
Basic earnings per common share ............ $ 0.69 $ 0.77
Diluted earnings per common share
Computation:
Numerator:
Net Income
Denominator: .............................. $2,573,000 $2,858,000
Average common shares outstanding ....... 3,732,695 3,735,872
Dilutive stock options 1,970 --
Dilutive average common shares
Outstanding ........................... 3,737,842 3,732,695
Diluted earnings per common share ..... $ .69 $ 0.77
</TABLE>
30
<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, 1998 1997
---- ----
<S> <C> <C>
Basic earnings per common share computation:
Numerator:
Net Income ........................ $ 7,503,000 $7,566,000
Denominator:
Average common shares outstanding . 3,735,872 3,732,695
Basic earnings per common share
Diluted earnings per common share ...... $ 2.01 $ 2.03
Computation:
Numerator:
Net Income ........................ $ 3,503,000 $7,566,000
Denominator:
Average common shares outstanding.. 3,735,872 3,732,695
Dilutive stock options .......... 1,970 --
Dilutive average common share
Outstanding....................... 3,737,842 3,732,695
Diluted earnings per common share. $ 2.01 $ 2.03
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PIONEER BANCSHARES, INC. FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 47,433
<INT-BEARING-DEPOSITS> 663,975
<FED-FUNDS-SOLD> 9,700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 170,902
<INVESTMENTS-CARRYING> 27,382
<INVESTMENTS-MARKET> 27,642
<LOANS> 702,336
<ALLOWANCE> 10,411
<TOTAL-ASSETS> 990,551
<DEPOSITS> 795,414
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,164
<LONG-TERM> 20,000
0
0
<COMMON> 38
<OTHER-SE> 105,342
<TOTAL-LIABILITIES-AND-EQUITY> 990,551
<INTEREST-LOAN> 46,712
<INTEREST-INVEST> 9,546
<INTEREST-OTHER> 27
<INTEREST-TOTAL> 56,285
<INTEREST-DEPOSIT> 21,640
<INTEREST-EXPENSE> 25,108
<INTEREST-INCOME-NET> 31,177
<LOAN-LOSSES> 3,879
<SECURITIES-GAINS> 92
<EXPENSE-OTHER> 24,409
<INCOME-PRETAX> 11,170
<INCOME-PRE-EXTRAORDINARY> 11,170
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,503
<EPS-PRIMARY> 2.01
<EPS-DILUTED> 2.01
<YIELD-ACTUAL> 4.76
<LOANS-NON> 5,918
<LOANS-PAST> 3,855
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,099
<ALLOWANCE-OPEN> 7,651
<CHARGE-OFFS> 1,762
<RECOVERIES> 458
<ALLOWANCE-CLOSE> 10,411
<ALLOWANCE-DOMESTIC> 10,411
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
