ITEM 2 - PROPERTIES
The Company, through its subsidiaries, owns or leases buildings used in the normal course of its business. The main offices of the Company at 801 Broad Street, Chattanooga, Tennessee, are located in a 125,000 square-foot office building, owned by the Company. The Company also owns a 54,000 square foot, six story office building adjacent to the main offices, as well as a five story parking facility with approximately 22,500 square-feet of rental space located across the street. The book value of these three facilities was $4.8 million as of December 31, 1997. No property owned by the Company is subject to a mortgage.
As of December 31, 1997, the net book value of the Pioneer Bank's branch facilities was $5.1 million. Pioneer Bank's 22 branches are mostly stand-alone commercial buildings. All of them are located within Hamilton County, Marion County and Sequatchie County, Tennessee. The average size of each branch is approximately 3,000 square feet. Pioneer Bank leases two facilities located in two area shopping malls and leases one facility located inside the Wall-Mart store in Kimball, Tennessee. All of the leases have remaining terms of less than five years and certain of these leases may have renewal options. Pioneer Bank has one new branch awaiting regulatory approval. It will be located in the Wall-Mart/Gunbarrel store in Chattanooga, Tennessee. As of December 31, 1997, Valley Bank's nine branch facilities had a book value of $2.8 million whereas Valley's 18,000 square foot main office located at 401 North Main Street, Sweetwater, Tennessee had a book value of $2.0 million. Valley Bank opened a tenth branch in Decatur, Tennessee in Meigs County subsequent to year end, but has no immediate construction plans for any additional branches in 1998. Valley Bank branches are approximately 3,000 square feet in size. As of December 31, 1997, the book value of Pioneer Bank, f.s.b.'s branch office was $724,415. Pioneer Bank, f.s.b. leases the Dalton facility and owns the Ringgold Road branch which has a land lease from the holding company. All leases have remaining terms of less than five years and certain of these leases may have renewal options. Pioneer Bank, f.s.b. is scheduled to open a new facility on Highway 2A in Ft. Ogelthorpe, Georgia by the summer of 1998. See Notes to Consolidated Financial Statements for further information with respect to the amounts at which bank premises, equipment and other real estate are carried.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
Various claims and lawsuits are pending against the Company and the Banks in the normal course of their business. Although the amount of any ultimate liability with respect to such matters cannot be determined, in the opinion of management, after consultation with legal counsel, those claims and lawsuits, when resolved, should not have a material adverse effect on the consolidated results of operation or financial condition of the Company and its subsidiaries.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders by solicitation of proxies or otherwise during the fourth quarter of the Company's fiscal year ended December 31, 1997.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
On May 21, 1996 the Company's Board approved a 2-for-1 stock split, effected in the form of a 100% stock dividend, effective June, 1996. All stock prices, dividends, shares outstanding and earnings per share have been restated to reflect the 100% stock dividend. There is no established or active trading market for the Company's $.01 par value Common Stock, and it is not listed or traded on any securities exchange, Nasdaq or other over-the-counter market. The following table sets forth, based primarily upon the limited trading information available from a Southeast regional brokerage company which makes a market in the Company's Common Stock, the high and low stock prices of shares of Common Stock during each quarter of the last two years. This information may not reflect all trades or the actual or market value of shares of the Company's Common Stock.
The table also sets forth the dividends paid per share of Common Stock for each quarter of the last two years.
As of February 16, 1998, there were approximately 804 holders of record of the Company's Common Stock.
The Company expects its practice of paying quarterly dividends on its Common Stock will continue, although future dividends will continue to depend upon the Company's earnings, capital requirements, financial condition and other factors.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following table presents selected historical financial information for the Company. The financial data in the table reflects the financial position of the Company for the five years ended December 31, 1997. The financial data in the following table is derived from the historical financial statements of the Company and is adjusted to reflect the 2 for 1 stock split effected in the form of a 100% stock dividend in 1996. All prior period financial statement data for the fiscal years ended December 31, 1993 to December 31, 1995 has been restated to reflect the pooling of interests method of accounting used for the Sweetwater Valley Corp. merger that occurred in 1995. This information should be read in conjunction with the historical financial statements and the notes thereto of the Company set forth in Item 8 of this Report.
(1) On December 1, 1995, the Company issued 959,912, adjusted for the 2-for-1 stock split, effected as a 100% stock dividend, that occurred in June, 1996, shares of its Common Stock in connection with the consummation of the merger between Sweetwater Valley Corp and Pioneer Banchares, Inc. (the "Merger"). The Company's total assets increased by approximately $170 million via the Merger due to the pooling of interests method of accounting. The pooling of interests method of accounting requires that all costs associated with the Merger be expensed as incurred, i.e. no capitalization. Accordingly, noninterest expense increased 17.3% in 1995 compared to 1994. The material noninterest expenses related to the Merger included legal, accounting and consulting fees. Other factors causing noninterest expense to increase included the following: (i) intangible asset amortization increased $400,000 from 1994 to 1995, due primarily to the core deposit intangible asset created with the purchase of three NationsBank branches in Marion County, Tennessee (the "Marion Purchase"); (ii) $176,000 of post retirement benefit liabilities were expensed as a result of SFAS 106, and: (iii) advertising expense increased $125,000 to accompany the Marion Purchase, to capitalize on a Chattanooga bank competitor's name change and to generally enhance our presence in our communities.
FORWARD-LOOKING STATEMENTS
Certain written and oral statements made by or on behalf of the Company may constitute "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995. 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, changes in governmental fiscal, monetary and supervisory policies, deposit levels, loan demand, loan collateral values, securities portfolio values, failure of assumptions underlying the establishment of reserves for loan losses, the possible effects of the year 2000 problem on the Company, including such problems at the Company's vendors, counterparties and customers and the impact of competition. The Company cautions that such factors are not exclusive. 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 and are based on certain expectations and estimates of the Company which are subject to risks and changes in circumstances that are not within the Company's control.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PIONEER BANCSHARES, INC.
The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company and its subsidiaries during the past three years. The discussion and analysis is intended to supplement and highlight information contained in the accompanying consolidated financial statements and related notes to the consolidated financial statements and the selected financial data presented elsewhere in this Report. The financial data discussed herein reflects the merger of Sweetwater Valley Corp. ("SVC") with and into the Company (the "Merger") in November, 1995, that was accounted for as a pooling of interests. All per share data have been adjusted from 1993 to 1996 for the 2-for-1 stock split, effected as a 100% stock dividend, that occurred in 1996.
SUMMARY
Net income for 1997 was $9.7 million, an 8.5% increase from the Company's net income of $8.9 million in 1996. Net income for 1996 was $1.9 million or 27% above the 1995 net income of $7.1 million. Net income per common share for 1997 was 8.8% higher than in 1996 and in 1996 was 26.5% higher compared to 1995. Pretax income for 1997 increased $1.9 million or 15.6% from 1996.
The increase in net income from 1996 to 1997 occurred for the following two principal reasons: increased yields on earning assets and increased interest rate margins. First, the yield on average earning assets rose 46 basis points from 7.89% in 1996 to 8.35% in 1997, whereas the rate paid on average interest bearing liabilities increased by only 13 basis points from 4.30% in 1996 to 4.43% in 1997. Net interest rate margins increased to 4.70% for the twelve months ending December 31, 1997, compared to 4.38% for the same period in 1996.
FINANCIAL CONDITION
Earning Assets
Average earning assets in 1997 increased $80.6 million or 10.8% over 1996 primarily due to an increase in average loans outstanding. The average earning asset mix continued to change during 1997 with loans at 70%, investment securities at 28% and other earning asset categories at 2%. In 1996, loans were 63%, investment securities 36% and other earning assets 1%. The mix of earning assets during 1997 contributed to the higher yield on earning assets due to the fact that the loan portfolio earned approximately 254 basis points more during 1997 than the investment security portfolio. The mix of earning assets is monitored to anticipate and respond to favorable interest rate movements in an effort to increase the return on earning assets.
Loan Portfolio
The Company's average loans, net of unearned income, for 1997 were $583.7 million, an increase of $115.0 million or 24.5% over $468.7 million in average loans for 1996. Average loans in 1996 were 27.4% or $100.7 million higher than the average loans were in 1995. From year end 1996 to year end 1997, actual loans outstanding increased 24.2% or $126.5 million from $523.3 million to $649.8 million, respectively. From year end 1995 to year end 1996, actual loans outstanding increased 24.1% or $101.7 million. Loan growth for 1997 was primarily funded through increased deposit growth, prepayments and
maturities from the investment portfolio, increases in repurchase agreements and increases in FHLB borrowings. The Company's commercial, financial and agricultural loan category had the best dollar volume increase in 1997 from 1996, with a $62 million or 58.7% increase. This group as a percentage of the loan portfolio also had the largest change from 20% to 25.7%. Real estate construction loans increased $17.3 million or 46.4%, residential real estate mortgage loans increased $33.9 million or 24.6%, commercial real estate mortgage loans decreased $2.9 million or 1.9%, consumer credit cards increased $317,000 or 7.6% , and consumer installment loans increased $15.8 million or 19.5% over the same period. Over the past three years the loan portfolio has been shifting away from commercial real estate lending toward more consumer and residential real estate lending, because the competitive rate environment has reduced the risk/return reward to a minimum.
The majority of the Company's loan growth from 1996 to 1997 occurred at Pioneer Bank. Outstanding loans, net of unearned income, at Pioneer Bank increased 23.8% or $99.3 million from 1996 to 1997 and increased $81.5 million or 24.4% from 1995 to 1996. During 1997, loans totaling $6.9 million or 1.1% of total loans were transferred to Pioneer Bank, f.s.b. This loan transfer included $1.1 million in commercial, financial and agricultural loans, $2.4 million in residential real estate mortgage loans and $3.4 million in commercial real estate mortgage loans. Loan growth in 1997, net of transfers to Pioneer f.s.b was as follows: the commercial financial and agricultural loans increased 50.5%, real estate construction loans increased 42.8%, residential real estate mortgage increased 17.3%, commercial real estate mortgages increased 1.2%, consumer installment loans increased 25.7% and consumer credit card loans increased 6.1%. Valley Bank's loan portfolio, net of unearned income, increased $16.4 million or 15.2% from 1996 to 1997, and increased $20.0 million or 22.7% from 1995 to 1996. From year end 1996 to year end 1997, the majority of the increase in Valley Bank's loans occurred in real estate construction, residential real estate mortgage, commercial real estate mortgage, and consumer installment loans, resulting in increases of 55.2%, 23.2%, 7.9% and 1%, respectively. Commercial, financial and agricultural loans decreased 4.2%, and consumer credit card loans increased 29.3% from year end 1996 to year end 1997. Pioneer f.s.b's loan portfolio, net of unearned income increased $3.6 million or 52.9% during 1997. In 1997, real estate mortgage loans increased $3.3 million or 36.6%, and consumer installment loans increased $1.4 million.
Management of the Company sought higher loan growth in 1997 over previous years, while at the same time maintaining high credit quality. In 1995, the economy began to slow and the Federal Reserve decreased interest rates, thus spurring construction and, therefore, real estate construction loans. In 1996, the Federal Reserve generally maintained interest rates at the same levels as in late 1995 which encouraged further growth. In 1997, the national economy continued to generate moderate growth with low inflation. Meanwhile, economic growth for the State of Tennessee and the Chattanooga MSA have been moderate, but Tennessee's home ownership rate is at an historic high. Firm housing affordability and extensive efforts to extend financing to lower income buyers have been principal factors in the rise in residential real estate loans. This trend is reflected in the shift in loan mix, as well as in the growth of the overall portfolio. At the end of the first quarter of 1997, the Federal Reserve increased interest rates 25 basis points and rates remained relatively stable before declining in the late third, and early fourth quarters. The downward trend in rates encouraged refinancing of existing residential mortgage loans and growth in new residential mortgage loans. Non-residential building in Tennessee and the Chattanooga MSA have also been very strong. Spurred by ongoing commercial and hotel projects, as well as single family residential home demand, construction companies are the most active job creators in the state. Demand for office and industrial space remains strong and several of the state's metropolitan areas possess among the tightest office and industrial vacancy rates nationwide. This strength is reflected in the growth in the loan portfolio. Company management will seek additional loan and deposit growth in 1998, but the amount of such growth, if any, will depend upon general economic conditions, including whether or not the Federal Reserve
decreases or maintains current interest rate levels. Management anticipates economic conditions to be favorable for continued growth in the loan portfolio through 1998. In addition to overall growth, an emphasis will be placed on the loan portfolio mix among commercial, real estate and consumer loans to enhance the yield of the loan portfolio. For example, the Company has put increased emphasis on increasing consumer loans via consumer credit cards, indirect automobile loans and, through Center, small consumer loans. As the Company strives to increase consumer loans, the threat of increased personal bankruptcies must be considered. Through its credit policies and procedures, Company management believes an increased dollar volume in consumer loans can be achieved without materially increasing the risk of incurring additional loan losses due to personal bankruptcies. In addition, management is committed to providing new products for not only consumer loans, but also real estate and commercial loans. There has not, however, been a concentration in lending to any one industry or segment.
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. Loans made by a bank for recapitalization or acquisitions (including acquisitions by management or employees) which result in a material change in the borrower's financial structure to a highly leveraged condition are considered HLT loans. The Company had no foreign loans or loans to lesser developed countries as of December 31, 1997.
The Loan Portfolio table shows the classifications of loans by major category at December 31, 1997, and for each of the preceding four years. The second table shows maturities of certain loan classifications and an analysis of the rate structure for such loans due in over one year.
LOAN PORTFOLIO (in thousands)
SELECTED LOAN MATURITY AND INTEREST RATE SENSITIVITY as of December 31, 1997 (in thousands)
Investment Portfolio
The Company's investment securities portfolio decreased 18.5% or $46.5 million from year end 1996 to year end 1997. The average balance of the investment securities portfolio has decreased since 1995 in order to fund loan growth, with the exception of 1995, when there was an increase in funds available for investment resulting from the Marion Purchase. The Company maintains an investment strategy of seeking portfolio yields within acceptable risk levels, as well as providing liquidity. The Company maintains two classifications of investment securities: "Held to Maturity" and "Available for Sale." Prior to December 1995, management placed only bank-qualified, municipal securities exempt from federal income taxation, as well as non-bank qualified taxable municipal securities in the "Held to Maturity" classification. In December, 1995, management reclassified the municipal securities to "Available for Sale" and various mortgage backed agency securities to "Held to Maturity." The Financial Accounting Standards Board ("FASB") provided all corporations a moratorium from November 15, 1995, to December 31, 1995, to reassess their securities classifications (FASB 115). This window of opportunity allowed the Company to reclassify securities as "Held to Maturity" or "Available for Sale" without "tainting" the investment portfolio. The "Available for Sale" securities are carried at fair market value, whereas the "Held to Maturity" securities are carried at book value (or at fair value, as of transfer date, if transferred from "Available for Sale" to "Held to Maturity" via the FASB moratorium). As a consequence, with a higher percentage of securities being placed in the "Available for Sale" category, the Company's accounting capital is more volatile than it would be should a larger percentage be placed in the "Held to Maturity" category. Due to the inverse relationship between bond prices and interest rates, as market rates increase, bond prices decrease as does accounting capital on an after tax basis. In a decreasing rate environment, bond prices increase as does capital. Although capital is more volatile, management has discretion, with respect to the "Available for Sale" securities, to proactively adjust to favorable market conditions in order to provide liquidity and realize gains on the sales of securities. The Company intends to continue to categorize all future investment security purchases as "Available for Sale." The changes in values in the investment securities portfolio are not taken into account in determining regulatory capital requirements.
During 1997, average investment securities decreased $39.8 million or 14.7%. Average investment securities during 1996 decreased $9 million or 3.2% from 1995 average levels. The decrease in securities of $46.5 million as of year end 1996 to year end 1997, consisted primarily of decreasing state and political subdivision obligations by $18.7 million or 23.1% from $80.9 million in 1996 to $62.2 million in 1997.
During 1997, gross proceeds from investment securities sales were $83.4 million, representing 36.2% of the average portfolio for the year. Net gains associated with the sales were $293,723, which accounted for 3% of noninterest income. Gross proceeds from investment securities sold during 1996 totaled $52.3 million, resulting in a net realized gain of $297,003, representing 3.6% of noninterest income. Although the Company intends to actively administer the investment portfolio and take advantage of market rate fluctuations, management does not believe a disproportionate share of noninterest income will be produced by securities gains. Over the course of 1997, market interest rates on bonds decreased, thus generally enhancing the market values of the investment securities. At year end 1997, gross unrealized gains in the "Available for Sale" portfolio amounted to $2.1 million and unrealized losses amounted to $58,410. Whereas at the same point in time in 1996, the gross unrealized gains in the "Available for Sale" portfolio were $2.3 million and the gross unrealized losses totaled $567,000. At the end of 1997, gross unrealized gains in the "Held-To-Maturity" portfolio were $211,000 and unrealized losses amounted to $20,763. At the year end of 1996, the gross unrealized gains in the "Held To Maturity" portfolio were $29,205 and unrealized losses amounted to $119,265. As of December 31, 1997, the net unrealized security gain, net of tax effect, contributes a $1 million increase in accounting capital or 27.8 cents per share to the Company's common stock book value.
Prior to 1993, the Company invested in taxable securities due to the lack of preferential treatment afforded tax-exempt securities under the alternative minimum tax laws. In 1993, the Company moved from the "Alternative Minimum Tax" method to the "Regular Corporate Tax" method and municipal securities became more attractive on a tax equivalent basis, offering wider spreads than U. S. Treasury securities and were purchased when available. Upon achieving a targeted volume of municipal securities in mid-1994, the strategy shifted to focus on improving the balance of the maturity distribution and enhancing total yield, as well as providing for liquidity. The following table sets forth the carrying amount of the investment securities portfolio at the end of each of the last three years.
INVESTMENT PORTFOLIO (in thousands)
The maturities and weighted average yields of the investment securities portfolio at the end of 1997 are presented in the following table using primarily the stated maturities excluding the effects of prepayments. The total mortgage backed securities for 1997 and 1996 were $32.2 million and $33.1 million, respectively. As of December 31, 1997, the average expected life was 1.9 years. The average expected life of the total investment security portfolio at December 31, 1997, was 3.1 years with an average tax equivalent yield of 6.46%. Taxable equivalent adjustments, using a 34 percent tax rate, have been made in calculating yields on tax-exempt obligations.
As of December 31, 1997, except for the U.S. Government and its agencies, there was not any issuer who represented 10% or more of shareholders' equity within the investment portfolio.
During 1997, average federal funds sold increased $5.3 million or 60.8% from 1996 levels. Whereas, from 1995 to 1996, average federal funds sold decreased $14.4 million or 62.2%. These short-term investments constituted $14.1 million or 1.7% of average earning assets in 1997 and $9 million or 1.2% in 1996. The increase in 1997 is due primarily to an increase in deposits and other borrowings to fund future loan growth rather than short-term investments. Management expects the average balance in federal funds sold to decrease in 1998 from the average in 1997 subject to growth in the loan portfolio.
The balance of interest earning deposits held with other banks was $528,417 at year-end 1997 and $495,617 at year end 1996. These assets account for less than 1% of total earning assets.
INVESTMENT PORTFOLIO MATURITY SCHEDULE Securities Maturing as of December 31, 1997 (in thousands)
Deposits and Short-term Borrowings
The Company's average deposits and short-term borrowings increased $74 million or 10.1% from 1996 to 1997. Within this growth, average interest bearing liabilities increased $70.9 million or 11.6%, while average noninterest bearing deposits increased $3.1 million or 2.6%. Average deposits and short-term borrowings increased $82.2 million or 12.7% from 1995 to 1996. Within this growth, average interest
bearing liabilities increased $73.9 million or 13.8%, while average noninterest bearing deposits increased $8.2 million or 7.3%. The majority of the growth since 1995 reflects the Company's strategy of consistently emphasizing deposit growth, as deposits are the primary source of funding for balance sheet growth. Management remains dedicated to pursuing various avenues to develop its deposit base through product enhancements, improved customer service, employee education regarding cross selling bank products and services, and deposit acquisitions such as the Marion Purchase,
For Pioneer Bank, average interest bearing transaction deposits and average savings deposits, increased 11.1% and 21.6%, respectively, from 1996 to 1997, and increased 3.73% and 11.76%, respectively from 1995 to 1996. The largest dollar growth in average deposits at Pioneer Bank during 1997 occurred in savings deposits and certificates of deposit over $100,000. For 1997, average savings deposits increased $15.3 million or 21.8% and certificates of deposit over $100,000 increased $14.7 million or 33.3%. The growth during 1997 occurred due to ongoing promotional efforts and special rates introduced for limited time periods.
Valley Bank experienced an increase in average interest bearing transaction deposits of 10.6% and a slight decrease in average savings deposits of 3.9%, respectively, from 1996 to 1997, and had slight increases of 2.5% and 2.7%, respectively from 1995 to 1996. The largest growth in average deposits at Valley Bank during 1997 occurred in investment certificates of deposit under $100,000 and interest demand accounts. For 1997, average certificates of deposit under $100,000 increased $9.5 million or 15.2% and interest demand accounts increased $2.2 million or 12.6%. The growth during 1997 occurred due to special rates with ongoing promotions.
Since September, 1997, when Pioneer Bank, f.s.b. began operations, there has been an increase of $560,000 in interest demand balances, and an increase of $528,000 in savings balances. There were no balances in these accounts when Pioneer Bank, f.s.b. began operations. Certificates of less than $100,000 increased $714,000 or 8.9% since beginning operations. Approximately $8.7 million of certificates less than $100,000 were initially transferred to Pioneer Bank, f.s.b. from Pioneer in October, 1997. Total deposits at Pioneer Bank, f.s.b. as of December 31, 1997, was $15.3 million or $6.5 million more than were transferred from Pioneer in October, 1997. This deposit growth represents an increase of 74% in three months.
From year end 1996 to year end 1997, total deposits and other borrowings of the Company increased $80.9 million or 10.6%. The largest portion of the growth during 1997 was in FHLB borrowings increasing $28 million or 280%. From year end 1996 to year end 1997, interest bearing transaction deposits and savings accounts increased $12.0 million or 5.2%, certificates of deposit over $100,000 increased $14.5 million or 25.8% and other time deposits of less than $100,000 increased $28.2 million or 10.1%. From year end 1996 to year end 1997, noninterest bearing transaction deposits increased $1.1 million or less than 1%.
From year end 1995 to year end 1996, total deposits and other borrowings of the Company increased $61.9 million or 8.8%. The largest portion of the growth during 1996 was in savings deposits increasing $23.1 million or 26.2%. From year end 1995 to year end 1996, interest bearing transaction deposits increased $2.1 million or 1.8%, certificates of deposit over $100,000 increased $4.6 million or 9% and other time deposits of less than $100,000 increased $2.8 million or 1.0%. From year end 1995 to year end 1996, noninterest bearing transaction deposits decreased $2.2 million or 1.8%.
Regarding the Company's deposit mix, savings deposits and both interest bearing and noninterest bearing transaction deposits accounted for 49.1% of total average deposits during 1997. For 1996, these relatively low cost deposits equaled 49.2% of all deposits and for 1995 they represented 50.2%. The decrease of 1.0% from 1995 to 1996 reflects the change in customer preferences for higher earning certificates of deposits. The large certificates of deposit, representing 9.8% of the total average deposits in 1997, increased from 8.4% in 1996, and is also higher than the 8.5% level in 1995. For the last three years time deposits under $100,000 have remained stable at 41.1%, 42.4% and 41.3% of average deposits for 1997, 1996 and 1995, respectively. The maturities of the time deposits over and under $100,000 issued by the Company as of December 31, 1997, are summarized in the following table:
MATURITIES OF TIME DEPOSITS as of December 31, 1997 (in thousands)
Borrowed funds consist of short-term borrowings, primarily federal funds purchased, securities sold under agreements to repurchase with our commercial customers and short-term borrowings from the Federal Home Loan Bank. Average federal funds purchased and average securities sold under agreements to repurchase increased $15.1 million or 31.8% in 1997, $11.1 million or 30.8% in 1996 and $19.6 million or 118.3% in 1995. Much of the 1996 and 1997 growth occurred through an emphasis seeking new cash management accounts using commercial repurchase agreements. Average borrowings from the Federal Home Loan Bank increased by $10.1 million or 107.1% in 1997 and $9.4 million in 1996, the initial year of borrowings. The Company has increased its borrowings from the Federal Home Loan Bank to facilitate growth in the loan portfolio.
SHORT - TERM BORROWINGS
Capital Resources
The Company's stockholders' equity increased $6.0 million or 6.4% to $99.9 million as of December 31, 1997, compared with $93.9 million at the end of 1996, and $87.6 million at year end 1995. Retention of earnings and unrealized appreciation on securities "Available for Sale" accounted for all the increases in stockholders' equity during 1997. The growth in stockholders' equity in 1997 was slowed somewhat by an increase in the payment of $3.5 million in dividends on the Company's Common Stock and purchases of $1.2 million in treasury stock by the Company.
Unrealized appreciation of investment securities "Available for Sale" accounted for an increase of $238,014 in stockholders' equity as of December 31, 1997. Excluding the securities "Available for Sale" adjustment, stockholders' equity was $98.9 million as of year end 1997, compared to $93.1 million for 1996, an increase of $5.8 million or 6.2%.
Dividends of $3.5 million were declared on the Company's Common Stock in 1997, an increase of $187,995 or 5.8% from 1996. The 1997 annual dividend per common share was $.92 as compared to $.87 in 1996 adjusted for the 2 for 1 stock split in June, 1996. The dividend payout ratio for 1997, defined as common dividends declared as a percentage of net income available to common stockholders, was 35.4% in 1997 compared to 36.4% and 40.2% for 1996 and 1995, respectively. The Company presently intends to continue a dividend payout similar to the historical levels, subject to declaration by the Board of Directors.
The Company owned 29,479 shares of treasury stock accounted for at $1.1 million as of year end 1997 and 15,269 shares of treasury stock accounted for at $558,784 as of year end 1996. The shares are recorded on the balance sheet using the cost method for both dates. The treasury stock will generally be available for the Company's Employee Stock Ownership Plan ("ESOP"), exercises of options and other corporate stock plan purposes.
No new Common Stock or Preferred Stock was issued by the Company during 1997.
A strong capital position promotes depositor and investor confidence and provides a foundation for profitability and future growth of the organization. The Company's five-year compound annual growth rate in stockholders' equity of 5.84% was primarily achieved through reinvested earnings.
Average stockholders' equity as a percentage of total average assets is one measure used to determine capital strength. The ratio of average shareholders' equity to average assets for 1997 was 10.54% compared to 10.71% in 1996 and 11.33% in 1995.
RETURNS ON EQUITY AND ASSETS
The various federal bank regulators, including the Federal Reserve and the FDIC, have risk-based capital requirements for assessing bank holding company and bank capital adequacy. These standards define capital and establish minimum capital standards in relation to assets and off-balance sheet exposures, as adjusted for credit risks. Capital is classified into two tiers. For bank holding companies, Tier 1 or "core" capital consists of common shareholders' equity, qualifying noncumulative perpetual preferred stock and minority interests in the common equity accounts of consolidated subsidiaries, reduced by goodwill, other intangible assets and certain investments in other corporations ("Tier 1 Capital"). Tier 2 Capital consists of Tier 1 Capital, as well as a limited amount of the allowance for possible loan losses, certain hybrid capital instruments (such as mandatory convertible debt), subordinated and perpetual debt and non-qualifying perpetual preferred stock ("Tier 2 Capital").
At December 31, 1994, a risk-based capital measure and a minimum ratio standard was fully phased in, with a minimum total capital ratio of 8.00% and Tier 1 Capital equal to at least 50% of total capital. The Federal Reserve also has a minimum leverage ratio of Tier 1 Capital to total assets of 3%. The 3% Tier 1 Capital to total assets ratio constitutes the leverage standard for bank holding companies and BIF-insured state-chartered non-member banks, and will be used in conjunction with the risk-based ratio in determining the overall capital adequacy of banking organizations. The FDIC has similar capital requirements for BIF-insured state-chartered non-member banks.
The Federal Reserve and the FDIC have emphasized the capital standards are supervisory minimums and an institution would be permitted to maintain such minimum levels of capital only if it were rated a composite "one" under the regulatory rating systems for bank holding companies and banks. All other bank holding companies are required to maintain a leverage ratio of 3% plus at least 1% to 2% of additional capital. These rules further provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain capital positions substantially above the minimum supervisory levels and comparable to peer group averages, without significant reliance on intangible assets. The Federal Reserve continues to consider a "tangible Tier 1 leverage ratio" in evaluation proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1 Capital, to total average assets less all intangibles. The percentage ratios for the Company, as calculated under the guidelines, were 12.91% and 13.99% for Tier 1 and Tier 2, respectively, at year-end 1997. The tangible Tier 1 leverage ratio for the Company in 1997 was 10.29%. The regulatory capital ratios of the Company currently exceed the minimum ratios of 5% leverage capital, 6% Tier 1 and 10% Tier 2 required in 1997 for "well capitalized" banks as defined by federal regulators. The Federal Reserve Board has not advised the Company of any specific minimum leverage ratio applicable to it. See "Supervision and Regulation - Capital"
The following table sets forth the regulatory capital calculations of the Company and its subsidiaries on a consolidated basis as of December 31, 1997, 1996 and 1995, calculated in accordance with the applicable requirement of the Federal Reserve in effect on such date:
RISK BASED-CAPITAL CALCULATION (in thousands)
BALANCE SHEET MANAGEMENT
Liquidity Management
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 the its customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs.
The primary function of asset/liability management is not only to assure adequate liquidity in order for the Company to meet the needs of its customer base, but to maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities so the Company can profitably deploy its assets. Both assets and liabilities are considered sources of liquidity funding and both are, therefore, monitored on a daily basis.
The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and maturities of investment securities. Real estate and commercial, financial and agricultural loan payments are becoming an increasingly important source of liquidity for the Company as this portfolio continues to grow. Total loans, less unearned income, maturing in one year or less amounted to $297.9 million or 45.8% of the total loan portfolio at December 31, 1997. Investment securities maturing in the same time frame totaled $59.9 million or 29.2% of the investment securities portfolio at year-end 1997.
Additional sources of liquidity are the investments in federal funds sold and prepayments from the mortgage backed securities from the investment portfolio.
The liability portion of the balance sheet provides liquidity through various customers' interest bearing and noninterest bearing deposit accounts. Securities sold under agreements to repurchase and other short-term borrowings, including advances from the Federal Home Loan Bank of Cincinnati, are additional sources of liquidity and basically represent the Company's incremental borrowing capacity. These sources of liquidity are short-term in nature and are used as necessary to fund asset growth and meet short-term liquidity needs. At year-end 1997, the Company held $24.1 million of additional securities available for pledging as repurchase agreements and had $70 million of federal funds purchased lines available and unused.
Interest Rate Sensitivity Management
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 with a view to maintaining a mix of assets and liabilities that respond to changes in interest rates within an acceptable time frame, thereby managing the effect of interest rate movements on net interest income. 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 differences are interest sensitivity gaps: three months or less, three to twelve months, one to five years, over five years and on a cumulative basis. The following table shows interest sensitivity gaps for these different intervals as of December 31, 1997 and 1996.
The allocations used for the interest rate sensitivity report below were based on the maturity schedules for the loans and deposits and the duration schedules for the investment securities. Federal funds sold and purchased and agreements to repurchase were allocated to the three month category. The Federal Home Loan Borrowings were allocated according to their respective maturity dates. All other interest bearing deposits were allocated 15% to the three month category, 20% to the less than one year category, 45% to the less than five year category and the remainder to the over 5 year category. As shown in the following table, as of December 31, 1997, 67% of the Company's interest bearing liabilities will reprice within a year compared to 43% of all interest earning assets for the same period. Accordingly, if interest rates increase suddenly, rates on liabilities will increase faster than interest bearing assets, in the less than one year period, and the net interest margin will be adversely affected. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. In addition, the interest rate spread between an asset and its supporting liability can vary significantly while the timing of repricing for both the asset and the liability remains the same, thus impacting net interest income. This is referred to as basis risk and, generally, relates to the possibility that the repricing characteristics of short-term assets tied to the Company's prime lending rate are different from those of short-term funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities which are not reflected in the interest sensitivity analysis report. Prepayments may have significant effects on the Company's net interest margin. Because of these factors and in a static test, interest sensitivity gap reports may not provide a complete assessment of the Company's exposure to changes in interest rates. Management utilizes computerized interest rate simulation analysis to determine
the Company's interest rate sensitivity. The table below indicates the Company is in a liability sensitive gap position for the first year, then moves into an asset sensitive position. Overall, due to the factors cited, current simulation results indicates a relatively low sensitivity to parallel shifts in interest rates. A liability sensitive company will generally benefit from a falling interest rate environment as the cost of interest bearing liabilities falls faster than the yields on interest bearing assets, thus creating a widening of the net interest margin. Conversely, an asset sensitive company will benefit from a rising interest rate environment as the yields on earning assets rise faster than costs of interest bearing liabilities. Management also evaluates economic conditions, the pattern of market interest rates and competition to determine the appropriate mix and repricing characteristics of assets and liabilities required to produce a targeted net interest margin.
INTEREST RATE SENSITIVITY ANALYSIS as of December 31, (in thousands)
RESULTS OF OPERATIONS
Net Interest Income
Net interest income is the principal component of a financial institution's income stream and represents the difference or spread between interest and fee income generated 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 income. The discussion of net interest income is presented on a taxable equivalent basis, unless otherwise noted, to facilitate comparisons among various taxable and tax-exempt assets.
Net interest income for 1997 increased $6.2 million or 19.0% over 1996, $4.7 million or 16.7% in 1996 over 1995 and $705,000 or 2.6% in 1995 over 1994. Increased volumes and rates of earning assets account for the increases since 1994. The schedule on pages 42 and 43 provides the detail of changes in interest income, interest expense and net interest income due to changes in volumes and rates.
Interest income increased $10.2 million or 17.2% in 1997 from 1996, increased $7.9 million or 15.6% in 1996 from 1995, and increased $8.8 million or 20.9% in 1995 from 1994. The 1997 increase in interest income resulted from a 10.8% increase in the volume of average earning assets, as well as by a 46 basis point increase in the average interest rate earned on assets. The largest percentage of growth in average assets occurred in the loan portfolio, $115 million, while the average rate earned on the loan portfolio increased 33 basis points. Through these increases, the loan portfolio produced an additional $12 million or 29.2% in interest income in 1997 over 1996. The yield on the investment security portfolio increased 18 basis points from 6.40% in 1996 to 6.58% in 1997. Although the yield increased, the average volume decreased $39.8 million or 14.7%, and interest income on investment securities decreased $2.1 million or 12.4% from 1996 to 1997. Federal funds sold and other earning assets increased in average volume by $5.4 million or 57.8% from 1996 to 1997, and showed an increase in average rates earned of nine basis points.
The 1996 increase in interest income resulted from an 11.4% increase in the volume of average earning assets, as well as by a 29 basis point increase in the average interest rate earned on assets. The greatest percentage of growth in average assets occurred in the loan portfolio, $100.7 million, while the average rate earned on the loan portfolio increased 21 basis points. Through these increases, the loan portfolio produced an additional $9.6 million or 30.5% in interest income in 1996 over 1995. The yield on the investment security portfolio decreased five basis points from 6.45% in 1995 to 6.40% in 1996. With the yield declining and the average volume decreasing $9 million or 3.2%, interest income on investment securities decreased $714,000 or 3.9% from 1995 to 1996. Federal funds sold and other earning assets decreased in average volume by $14.1 million or 60.4%, and showed a decrease in average rates earned of 74 basis points.
Total interest expense increased by $3.3 million or 14.2% in 1996 from 1995, due to an increase in interest bearing liabilities of $74 million or 13.8% and a two basis point increase in the average rate paid on interest bearing liabilities. Interest expense on interest bearing deposits increased $2.4 million or 11.5% as the result of a three basis point increase in rates and a $53.4 million or 10.7% increase in the average volume. The $20.5 million increase in average borrowed funds, (including interest bearing liabilities not classified as deposits), coupled with a 27 basis point decrease in their rates resulted in an $837,000 or 47.9% increase in interest expense for this category.
The trend in net interest income is commonly evaluated in terms of average rates using the net interest margin and the interest rate spread. The net interest margin, or the net yield on earning assets, is computed by dividing fully taxable equivalent net interest income by average earning assets. This ratio represents the difference between the average yield returned on average earning assets and the average rate paid for all funds used to support those earning assets, including both interest bearing and noninterest bearing sources of funds. The net interest margin increased 32 basis points in 1997 to 4.70%, preceded by a 20 basis point increase in 1996 to 4.38% from 4.18% in 1995. The net cost of funds, defined as interest expense divided by average earning assets, increased 13 basis points to 3.64% in 1997 from 3.51% in 1996. The yield on earning assets increased 46 basis points to 8.35% in 1997 from 7.89% in 1996. Comparing 1996 to 1995, the yield on earning assets rose 29 basis points, while the rate paid on interest bearing liabilities increased two basis points. From 1995 to 1996 the net cost of funds increased nine basis points and the net interest margin increased 20 basis points.
The interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest bearing sources of funds. The interest rate spread eliminates the impact of noninterest bearing funds and gives a direct perspective on the effect of market interest rate movements. During recent years, the net interest margins and interest rate spreads have been under intense pressure to maintain historical levels, due in part to tax laws discouraging investment in tax-exempt instruments, intense competition for funds with non-bank institutions and changing regulatory supervision for some financial intermediaries. The pressure was not unique to the Company and was experienced by the banking industry nationwide. As a result of changes in the overall asset and liability mix during 1997 and of the general economic factors, the interest rate spread increased from 1996 to 1997. The net interest rate spread in 1997 increased 33 basis points to 3.92% from the 1996 spread of 3.59%, as the yields earned on earning assets increased faster than the cost of interest bearing liabilities. In 1996, the net interest spread increased from 1995 by 27 basis points.
See the accompanying schedules entitled "Rate/Volume Variance Analysis" and "Consolidated Average Balances, Interest Income/Expense and Yields/Rates" for more information.
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CONSOLIDATED AVERAGE BALANCES, INTEREST INCOME/EXPENSE AND YIELDS/RATES Taxable Equivalent Basis (in thousands)
RATE VOLUME VARIANCE REPORT Taxable Equivalent Basis (in thousands)
Provision for Loan Losses, Net Charge-Offs and Allowance for Loan Losses
The provision for loan losses is the expense of providing an allowance or reserve for anticipated future losses on loans. The amount of the provisions for each period is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of loan portfolio quality, the value of collateral and general economic factors.
The economic outlook for Southeastern Tennessee and Northwestern Georgia, where the Company does business, is cautious. Tennessee's economy has slowed moderately reflecting structural changes in the manufacturing industry. The economy in Northwestern Georgia remains strong, due to the large presence of carpet manufacturers who are supplying the strong housing market with new carpet. In the Company's markets, real estate values continue to rise as interest rates eased and housing sales increased. On a regional basis, the economic improvement in these markets has had an effect on most regional bank holding companies and is reflected by stronger asset growth. A continued healthy economy will probably hold the level of net charge-offs and delinquencies for 1998 at or below historical peer group averages. Stable levels of interest rates since early 1997 have facilitated the growth of real estate development and lending. See "Effects of Inflation and Changing Prices" and "Business - Fiscal and Monetary Policy."
Should the economy continue to grow at a moderate pace, improved property values and commercial developments will enhance the asset quality of the loan portfolio and, therefore, lower the probability for further write-downs, charge-offs and the transfer of currently performing loans to a nonaccrual status in the real estate and commercial loan categories. The mix of loans in the commercial real estate construction and development portfolios are balanced in areas such as office buildings, retail stores, apartment buildings, health care facilities and industrial warehouses. In addition, the Banks' lending review monitors large real estate credits on a continuing basis.
During recent years, the Company has strengthened its review process of the larger loans in its portfolio and has imposed stricter underwriting standards in order to reduce the effect economic cycles might have on credit quality. Loan review procedures, including such techniques as loan grading, are constantly used by the Company's loan review department in order to ensure potential problem loans are identified early in order to lessen any potentially negative impact problem loans may have on the Company's earnings. Automated loan reports are prepared and used in conjunction with the identification and monitoring of such loans on a monthly basis. Management's involvement continues throughout the process and includes participation in the work-out process and recovery activity. These formalized procedures are monitored internally by the loan review area whose work is supplemented by internal audit, the Company's external audit and regulatory agencies who provide an additional level of review on an annual basis. Such review procedures are quantified in monthly, quarterly and annual reports to senior management and are used in determining whether such loans represent potential losses to the Company. A determination of a potential loss will result in a charge to the provision for loan losses, thereby increasing the allowance for possible loan losses available for the potential risk. Management monitors the entire loan portfolio in an attempt to identify problem loans so credit risks in the portfolio can be timely identified and an appropriate allowance maintained.
The following table sets forth information with respect to the Company's loans, net of unearned income, and the allowance for loan losses for the five years ended December 31, 1997.
SUMMARY OF LOAN LOSS EXPERIENCE (in thousands)
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 credit 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 $2.1 million or 36.1% in 1997, and at year-end was 1.34% of average loans compared to 1.23% at December 31, 1996 and 1.60% at December 31, 1995. The large increase in the provision charged to income was because management wanted to increase the provision for possible loan losses as a percentage of average loans back to its historical levels. As shown in the table below, management determined that at December 31, 1997, approximately 26% of the allowance for loan losses was related to commercial, financial and agricultural loans, 59% was related to real estate loans and 15% was related to consumer installment loans. The allowance allocations for 1997 and 1996 are shown in the following table.
ALLOCATION OF LOAN LOSS RESERVE
ALLOWANCE FOR LOAN LOSSES AND RISK ELEMENTS
Interest on loans is normally accrued from the date an advance is made. The performance of loans is evaluated primarily on the basis of a review of each customer relationship over a period of time and the judgment of lending officers as to the ability of borrowers to meet the repayment terms of loans. If there is reasonable doubt as to the repayment of a loan in accordance with the agreed terms, the loan may be placed on a nonaccrual basis pending the sale of any collateral or a determination as to whether sources of repayment exist. This action may be taken even though the financial condition of the borrower or the collateral may be sufficient ultimately to reduce or satisfy the obligation. Generally, when a loan is placed on a nonaccrual basis, all payments are applied to reduce principal to the extent necessary to eliminate doubt as to the repayment of the loan. Any interest income on a nonaccrual loan is recognized only on a cash basis. See "Nonperforming Assets."
Lending officers are responsible for the ongoing review and administration of each particular loan. As such, they make the initial identification of loans which present some difficulty in collection or where circumstances indicate the probability of loss exists. The responsibilities of the lending officers include the collection effort on a delinquent loan. Senior management and the Loan Committee are informed of the status of delinquent and "watch" or problem loans on a monthly basis.
Senior management reviews the allowance for possible loan losses and makes recommendations to the Loan Committee as to loan charge-offs on a monthly basis. The Banks' policies are generally to discontinue the accrual of interest on loans when payment of principal and interest is 90 days or more in arrears and the loans are otherwise considered non-collectible.
At December 31, 1997, 1996 and 1995 loans accounted for on a nonaccrual basis were approximately $1.8 million, $1.7 million and $1.2 million respectively, or 0.28%, 0.33% and 0.27% of the total loans, net of unearned income. The balances of accruing loans past due 90 days or more as to principal and interest payments were $2.1 million, $1.1 million and $383,000 at December 31, 1997, 1996 and 1995, respectively.
The allowance for possible loan losses represents management's assessment of the risks associated with extending credit and its evaluation of the quality of the loan portfolio. Management analyzes the loan portfolio to determine the adequacy of the allowance for possible loan losses and the appropriate provision required to maintain a level considered adequate to absorb anticipated loan losses. In assessing the adequacy of the allowance, management reviews the size, quality and risk of loans in the portfolio. Management also considers such factors as the Banks' loan loss experience, the amount of past due and nonperforming loans, specific known risk, the status and amount of nonperforming assets, underlying
collateral values securing loans, current and anticipated economic conditions and other factors affecting the allowance for potential credit losses.
While it is the Banks' policy to charge off in the current period the loans in which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, management's judgment as to the adequacy of the allowance is necessarily approximate and imprecise.
In assessing the adequacy of the allowance, management relies predominately on its ongoing review of the loan portfolio, which is undertaken both to ascertain whether there are probable losses which must be charged off and to assess the risk characteristics of the portfolio in the aggregate. This review takes into consideration the judgments of the responsible lending officers, senior management and those of bank regulatory agencies who review the loan portfolio as part of the Banks' examination process. A percentage is allocated by loan types, with additional amounts being added for individual problem loans considered to have specific loss potential. While all information available is used by management to recognize losses in the loan portfolio, there can be no assurances future additions to the allowance will not be necessary. Each Bank's Loan Committee reviews the assessments of management in determining the adequacy of the allowance for loan losses.
The Bank's allowances for possible loan losses is also subject to regulatory examinations and determinations as to adequacy. Their review may take into account such factors as the methodology used to calculate the allowance for possible loan loss reserves and the size of the loan loss reserve in comparison to a group of peer banks identified by the regulators. During its routine examinations of banks, the FDIC has, from time to time, required additions to a bank's provision for possible loan losses and allowances for possible loan losses as the regulators' credit evaluations and allowance for possible loan loss methodology have differed from those of the management of such banks. During the last several years, several large bank holding companies, located in various portions of the United States, have substantially increased their provisions and reserves for loan losses following regulatory examinations. Such regulatory examinations have focused on loan quality, particularly the real estate loan section of the loan portfolio. These large bank holding companies have attempted to reduce the credit risks of real estate lending through maximum loan-to-value requirements as well as systematic cash flow and initial customer credit history analyses.
Management believes the $7.8 million in the allowance for possible loan losses at December 31, 1997 (1.21% of total outstanding loans, net of unearned income at such date) was adequate to absorb known risks in the portfolio. No assurance can be given, however, that adverse economic circumstances will not result in increased losses in the Banks' loan portfolios, and require greater provisions for possible loan losses in the future.
FASB STATEMENTS NO. 114 AND 118
The Company adopted FASB Statements No. 114 and No. 118 in the first quarter of 1995. For purposes of these FASB 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 uncollectible. The Directors Loan Committee approves all loan charge-offs. The following table details impaired loans:
IMPAIRED LOANS
Impaired loans are identified according to the two classification methods in the following table:
NONPERFORMING ASSETS
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. Nonperforming assets consist of loans on nonaccrual status, loans renegotiated at more favorable terms than those for similar credits, real estate and other assets acquired in partial or full satisfaction of loan obligations and loans past due 90 days or more.
Nonperforming assets include nonperforming loans and foreclosed real estate held for sale. Nonperforming loans include loans classified as nonaccrual or renegotiated. The Company's policy generally is to place a loan on nonaccrual status when it is contractually past due 90 days or more as to payment of principal or interest. A loan may be placed on nonaccrual status at an earlier date when concerns exist as to the ultimate collectability of principal or interest. At the time a loan is placed on nonaccrual status, interest previously accrued but not collected is reversed and charged against current earnings. Recognition of any interest after a loan has been placed on nonaccrual is accounted for on a cash basis. Loans contractually past due 90 days or more, well secured or guaranteed by financially responsible third parties and in the process of collection are generally not placed on nonaccrual status.
Nonperforming assets at December 31, 1997, were $2.6 million, an increase of $243,000 or 10.2% from year-end 1996. At year end 1996 nonperforming assets were $2.4 million an increase of $473,000 or 24.7% more than at year end 1995. The increase in nonperforming assets during 1997 is attributable primarily to consumer indirect auto loans at Pioneer Bank. Interest on nonaccrual loans is stopped when the loan is so categorized. If interest on such loans had been accrued, such income would have approximated $129,894 for 1997, $150,299 for 1996 and $87,311 for 1995.
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.
At December 31, 1997, nonperforming assets were 0.40% of loans outstanding plus foreclosed real estate held for sale compared to 0.46% for year end 1996 and 0.45% for year end 1995. Loans ninety days past due and still accruing interest as a percentage of total loans was 0.33%, 0.22% and 0.09% for year end 1997, 1996 and 1995, respectively. Although this is an increasing trend the level of charge-offs are well within management's accepted range.
At December 31, 1997, $1.81 million of nonaccrual loans or 98% of total nonaccrual loans were secured. There were no commitments to lend any additional funds on nonaccrual loans at December 31, 1997. Other foreclosed or repossessed assets taken in consideration of loan amounts due the Company, consisting primarily of repossessed automobiles, are classified in other assets at year-end 1997 and account for less than 1% of total assets. The following table summarizes the Company's nonperforming assets for each of the last five years.
NONPERFORMING ASSETS (in thousands)
NONINTEREST INCOME
Noninterest income consists of revenues generated from a broad range of financial services and activities including fee-based services and profits and commissions earned through credit life insurance sales and other activities. In addition, gains or losses realized from the sale of investment portfolio securities are included in noninterest income. Total noninterest income for 1997 increased $1.7 million or 20.7% compared to 1996. Noninterest income for 1996 showed an increase of $1.2 million or 17.1% from 1995.
NONINTEREST INCOME (in thousands)
Fee income from service charges on deposit accounts increased $633,000 or 15.75% in 1997 following a $591,000 or 17.2% increase in 1996. Pioneer Bank increased its deposit base, and revised its schedule of account charges, effective at the beginning of the fourth quarter of 1996, resulting in increased service charges for 1997 over 1996. Emphasis on checking account services, appropriate pricing for transaction deposit accounts and fee collection practices for other deposit services will continue to be important factors to increasing noninterest income for future years.
Trust fees or income from fee-based fiduciary activities increased $61,000 or 3.9% in 1997 compared to the $383,000 or 32.4% increase in 1996. Assets administered by the Trust Division at December 31, 1997 were $577 million compared to $490 million at the end of 1996 and $415 million at year end 1995. Nonrecurring items of noninterest income include sales of investment portfolio securities. Due to the stable interest rate environment of 1997 and successful investment strategies, the Company realized gains on the sale of investment securities in 1997 of $294,000 compared to $297,000 in 1996. Included in other noninterest income are the gains and losses recognized on the sales of assets such as fixed assets and other real estate owned. These gains and losses amounted to less than $100,000 in 1997, 1996 and 1995.
Various recurring noninterest income items include bank services such as travelers check fees, safe deposit box fees, fees on letters of credit, origination fees on long term mortgages and fees on sales of mutual funds and annuities. Pioneer Securities, Inc. ("PSI") is a wholly owned subsidiary of Pioneer Bank and had its second year of operation in 1997. Total income for PSI in 1997 was $623,876 and expenses were $611,704, including taxes and inter-company transactions, providing a net income for the year of $12,172. Total income for PSI in 1996 was $471,000 and expenses were $461,000, including taxes and inter-company transactions, providing a net income for the year of $10,000.
NONINTEREST EXPENSE
Noninterest expense for 1997 increased $3.6 million or 14.1% from 1996, increased $2.9 million or 12.7% in 1996 from 1995. Total salaries and other personnel expenses in 1997 increased $2.2 million or 15.7% from 1996 to a total of $16.1 million at year-end 1997. Salaries in 1996 increased $1.8 million or 14.7% in 1996 from 1995. The increases since 1995 are primarily the result of the addition of approximately 73 full time equivalent employees during 1997 and 25 full time equivalent employees during 1996 and through normal merit pay increases.
Occupancy and equipment expenses increased by $168,000 or 7.9% to $2.3 million in 1997 following a $579,000 or 37.3% increase in 1996. Occupancy and equipment expense in 1997 increased due to the depreciation related to major computer software and hardware upgrades purchased in 1997 and the
expenses related to the new Pioneer Bank branches in Kimball and Dunlap, Tennessee, the new Valley Bank branch in Athens, Tennessee, and the new Pioneer, f.s.b branches in East Ridge, Tennessee and Dalton, Georgia.
NONINTEREST EXPENSES (in thousands)
FDIC insurance in 1997 increased $41,309 or 1299% from 1996. All other noninterest expenses increased by $1.2 million or 12.7% in 1997, compared to a $1.2 million or 14.2% increase in 1996. The other expenses include, among other items, professional service expenses, bank travel and entertainment expenses, telephone, supplies, postage expense and amortization of intangible assets.
The primary factor for the increase in noninterest expense was primarily related to continued bank growth in 1996 and 1997. The increase in 1995 was primarily related to the Merger and the Marion Purchase. In 1995, the Marion Purchase created a core deposit intangible of $7.2 million to be amortized over 10 years. The Merger was accounted for as a pooling of interests and, therefore, all merger related costs (i.e. legal, accounting and consulting fees) were expensed as incurred.
FDIC INSURANCE ASSESSMENTS
Pioneer Bank and Valley Bank, Bank Insurance Fund (the "BIF") members, are subject to FDIC deposit insurance assessments. In May, 1997, the FDIC Board of Directors voted to retain the existing BIF and Savings Association Insurance Fund (the "SAIF") assessment schedules of 0 to 27 basis points (annual rates) for the second semiannual period of 1997. On May 20, 1997, the Board voted to collect on behalf of the Financing Corporation (the "FICO") assessments sufficient to meet the funding requirements of the FICO for the remainder of 1997. The FICO rate on BIF-assessable deposits is 1.26 basis points, on an annual basis, and the rate on SAIF-assessable deposits is 6.30 basis points. The Deposit Insurance Funds Act of 1996 (the "Funds Act") authorized the FICO to levy assessments on BIF- and SAIF-assessable deposits, and stipulated that the BIF rate must equal one-fifth the SAIF rate through year-end 1999, or until the insurance funds are merged, whichever occurs first. Under the BIF, each financial institution is assigned into one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- and further assigned into one of three subgroups within a capital group, on the basis of supervisory evaluations by the institution's primary federal and, if applicable, state regulators and other information relevant to the institution's financial condition and the risk posed to the applicable insurance fund. The actual assessment rate applicable to a particular institution will, therefore, depend in part upon the risk assessment classification so assigned to the institution by the FDIC. During the year ended December 31, 1997, Pioneer Bank and Valley Bank paid $26,116 and $18,373, respectively, in BIF deposit insurance premiums, compared to 1996 premiums of $1,500 and $1,680, respectively. Because BIF and SAIF assessments are levied semi-annually, no assessments had been received for Pioneer Bank, f.s.b. as of year-end because Pioneer Bank, f.s.b. did not commence operations until the fourth quarter of 1997. The Company's assessments increased $41,309 or 1299%
from 1996 because the higher rates on the current assessment schedules were not effective until January, 1997. See "Supervision and Regulation - FDIC Insurance Assessments."
INCOME TAXES
Income tax expense increased $1.1 million or 36.4%, in 1997 from 1996 and increased $629,949 or 25.9% in 1996 from 1995. The effective tax rate as a percentage of pretax income was 29.9% in 1997, 25.3% in 1996 and 25.5% in 1995. These tax rates are lower than the statutory Federal tax rate of 34% primarily due to investments in loans and securities earning interest income exempt from Federal taxation.
The Company made marginal decreases in the effective tax rate in 1995 and 1996 by increasing the average holdings in tax-free securities in the investment portfolio, but tax-free municipal income decreased by $209,000 in 1997 increasing the effective tax rate. In 1997, the effective tax rate increased to 88% of the statutory Federal tax rate compared to 74% in 1996 and 75% in 1995.
EFFECTS OF ACCOUNTING CHANGES
FASB Statement Number 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," issued in 1996, establishes financial accounting reporting standards for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, with the exception of any provisions deferred for implementation by the FASB. The new standard became effective January 1, 1997 and superseded FASB Statement Number 122, "Accounting for Mortgage Service Rights". The standard gives accounting recognition to mortgage servicing contracts similarly prescribed in current accounting rules and extends this recognition to servicing contracts for all types of financial assets. However, FASB 125 eliminates the current distinction between "normal" and "excess" servicing fees and will generally reclassify these cash flows into two new types of assets: (1) "servicing assets" and (2) certain related interest-only financial assets known as "interest-only strips receivable." Furthermore, the standard establishes a new accounting approach for distinguishing transfers of financial assets reported as sales from transfers from those reported as borrowings. The overall effect of the new standard on the financial statements was not material. The FASB subsequently issued Statement 127 "Deferral of The Effective Date of Certain Provisions of FASB Statement No. 125". Statement 127 defers for one year the application of Statement 125 as it relates to transfers of financial assets treated as secured borrowings.
Statement of Financial Standards No. 128, "Earnings per Share," establishes standards for computing and presenting earnings per share ("EPS"). This Standard replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the statement of income for entities with complex capital structures, and it requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution, and it is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution occurring if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock sharing in the earnings of the entity. This Standard is effective for financial statements issued for periods ending after December 15, 1997, including interim periods; earlier application is not permitted. This Standard requires restatement of all prior-period EPS data presented. Currently, the difference between the Company's basic and fully diluted EPS is less than one percent.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," establishes standards for the reporting and the presentation of comprehensive income. Other comprehensive income items are to be classified by their nature and by their related accumulated balances in the appropriate financial statements of a company. Generally, other comprehensive income includes transactions not typically recorded as a component of net income such as foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain debt and equity securities. This Standard requires such items be presented with equal prominence on a comparative basis in the appropriate financial statements for fiscal years beginning after December 15, 1997.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards and disclosure requirements for the way companies report information about operating segments, including related product information, both in annual and interim reports issued to stockholders. Operating segments are components of a company about which separate financial information is available and which are used in determining resource allocations and performance results. Information such as segment net earnings, appropriate revenue and expense items and certain balance sheet items are required to be presented, and such amounts are required to be reconciled to the company's combined financial information. The Company will assess the methodologies and reporting for compliance with the Standard. This Standard is effective for financial statements issued for periods ending after December 31, 1997, including interim periods.
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's 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. An independent consulting firm has been engaged to provide a critical review of the Company's Plan and its conversion process. The Company has identified its mission critical systems, both hardware and software, and expects to be substantially Year 2000 compliant by December 31, 1998. The Company expects to spend approximately $1.0 million, over a three year period, to address the Year 2000 problems. As part of its assessment, Company management has been evaluating Year 2000 compliance by its vendors, and to date has not discovered any Year 2000 problems with significant counter-parties it believes are reasonably likely to have a material adverse effect upon the Company. However, the Company has not begun evaluating the effects of the Year 2000 problem on its loan and deposit customers, and 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.
PENDING ACQUISITIONS
The Company does not have any acquisitions pending, but is regularly engaged in evaluating possible acquisitions.
EFFECTS OF INFLATION AND CHANGING PRICES
Inflation generally increases the cost of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. In March, 1997, the Federal Reserve increased interest rates 25 basis points in an effort to contain perceived inflationary pressures through monetary policy. Subsequently, the prime rate has remained unchanged, but the long-term rates on the Treasury yield curve have decreased by approximately 125 basis points through year-end as inflation increased only slightly. Inflation affects financial institutions' increased cost of goods and services purchased, the cost of salaries and benefits, occupancy expense, and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely effect liquidity, earnings, and stockholders' equity. Mortgage originations and refinancings tend to slow as interest rates increase, and can reduce the Bank's earnings from such activities and the income from the sale of residential mortgage loans in the secondary market.
Various information shown elsewhere in this Annual Report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, the summary of net interest income, the maturity distributions and the compositions of the loan and security portfolios and the data on the interest sensitivity of loans and deposits should be considered. See "Business - Fiscal and Monetary Policy."
ITEM 7A
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
Market risk reflects the risk of economic loss resulting from adverse changes in market prices and interest rates. This risk of loss can be reflected in either diminished current market values or reduced potential net interest income in future periods.
The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. The structure of the Company's loan and deposit portfolios is such that a significant decline in the prime rate may adversely impact net market values and interest income. Management seeks to manage this risk through the utilization of various tools, primarily investment securities and FHLB borrowings. The composition and size of the investment portfolio and FHLB borrowing is managed so as to reduce the interest rate risk in the deposit and loan portfolios while at the same time optimizing the yield generated from those portfolios.
The table below presents in tabular form the contractual balances and the estimated fair value of the Company's on-balance sheet financial instruments at their expected maturity dates as of December 31, 1997. The expected maturity categories take into consideration historical prepayment experience as well as management's expectations based on the interest rate environment as of December 31, 1997. For core deposits without contractual maturity (i.e., interest bearing checking, savings and money market accounts), the table presents principal cash flows based on management's judgment concerning their most likely runoff or repricing behaviors. Weighted average variable rates are based on implied forward rates in the yield curve as of December 31, 1997. See "Management's Discussion and Analysis - Balance Sheet Management."
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in the pages listed below.
PIONEER BANCSHARES, INC. and SUBSIDIARIES FINANCIAL STATEMENTS
A TENNESSEE REGISTERED LIMITED LIABILITY PARTNERSHIP
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders Pioneer Bancshares, Inc. Chattanooga, Tennessee
We have audited the accompanying consolidated balance sheets of Pioneer Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Bancshares, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Chattanooga, Tennessee January 30, 1998
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
The accompanying notes are an integral part of the financial statements.
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of the financial statements.
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of the financial statements.
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of the financial statements.
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of the financial statements.
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
The accompanying notes are an integral part of the financial statements.
PIONEER BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies and practices followed by the company are as follows:
DESCRIPTION OF BUSINESS - Pioneer Bancshares, Inc. is a bank holding company which owns 100% of the outstanding stock of Pioneer Bank, Valley Bank and Pioneer Bank, f.s.b. Pioneer Bank has two wholly-owned subsidiaries, Center Finance Company, Inc. (formerly Center Loan and Thrift, a wholly-owned subsidiary of Valley Company) and Pioneer Securities, Inc. Marion Properties, Inc. (formerly a wholly-owned subsidiary of Pioneer Bank) was dissolved during 1996. Pioneer Bank also has two trusteed affiliates, Frontier Corporation and Valley Company. Valley Company has one wholly-owned subsidiary, Oneida Life Insurance Company. The banks and Pioneer Bank's subsidiaries and affiliates provide banking, trust, and investment services in southeast Tennessee and north Georgia. Pioneer Bank's principal office is in Chattanooga, Tennessee, Valley Bank's principal office is in Sweetwater, Tennessee, and Pioneer Bank, f.s.b.'s principal office is in East Ridge, Tennessee.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Pioneer Bancshares, Inc., its wholly-owned subsidiaries and the trusteed affiliates. Frontier Corporation and Valley Company are held in trust for the benefit of Pioneer Bank's stockholder 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 stockholder.
Substantially all intercompany transactions, profits and balances have been eliminated.
CASH AND DUE FROM BANKS - The banks maintain at various financial institutions cash accounts which may exceed federally insured amounts at times.
CASH AND CASH EQUIVALENTS - For purposes of cash flows, the banks consider Federal Funds Sold to be cash equivalents.
INVESTMENT SECURITIES - Investment securities considered held-to-maturity are stated at cost adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. Investment securities considered available-for-sale are adjusted for unrealized holding gains and losses and recorded at fair value. The difference in fair value and cost adjusted for amortization and accretion for securities available-for-sale is shown as a separate component of stockholders' equity net of income tax effects. Gains or losses on disposition are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.
DERIVATIVE FINANCIAL INSTRUMENTS - The banks enter into variable and fixed rate loan commitments with off-balance-sheet risk. The contract amounts and nature and terms of the commitments are disclosed separately in the notes to the consolidated financial statements. The banks hold no other instruments meeting the definition of derivative financial instruments as defined by Statement of Accounting Standards No. 119.
INSTALLMENT LOANS - Unearned interest, relating principally to installment loans made on a discount basis, is stated at the amount refundable upon prepayment. Interest income on these loans is recognized on scheduled payment dates by use of the sum-of-the-months digits method.
ALLOWANCE FOR LOAN LOSSES - The banks provide for loan losses on a reserve basis and include in operating expenses an estimated amount for credit losses determined by management based on loan loss experience and evaluation of potential loss in the current loan portfolio. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection of interest is doubtful. Certain loans on which the accrual of interest is discontinued are considered impaired and are carried at the fair value of their underlying collateral. Any difference between the loan's fair value and carrying amount is recorded as a reserve for loan losses.
INTEREST INCOME ON LOANS - Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid accrued interest is reversed.
LOAN ORIGINATION FEES - Loan origination fees and related direct incremental loan costs are offset and the resulting net amount is deferred and taken into income as a loan yield adjustment using a method which approximates the level yield method.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less accumulated depreciation. Expenditures for repairs, maintenance and minor improvements are charged to expense as incurred and additions and improvements that significantly extend the lives of assets are capitalized. Upon sale or other retirement of depreciable property, the cost and related accumulated depreciation are removed from the related accounts and any gain or loss is reflected in operations.
Depreciation is provided using straight-line and accelerated methods over the estimated useful lives of the depreciable assets. Deferred income taxes are provided for differences in the computation of depreciation for book and tax purposes.
INTANGIBLE ASSETS - Intangible assets are amortized over the following lives:
The company reviews recoverability of the carrying value of goodwill using projections of future cash flows and future earnings. The company's basis for write-offs of the carrying value of goodwill is based on management's best estimate of the future performance of the affected entity.
FORECLOSED ASSETS - Foreclosed assets are stated at the lower of their carrying amount or current fair value less the cost to sell.
POSTRETIREMENT BENEFITS - The expected cost of providing post-retirement benefits to employees, employee beneficiaries and covered dependents is accrued during the years that employees render services to the banks or related companies.
INCOME TAXES - Deferred income taxes arise from temporary differences between the income tax basis and financial reporting basis of assets and liabilities. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
COMMON STOCK DATA - During 1997, the Company adopted SFAS 128, "Earnings per Share," which specifies the computation, presentation and disclosure requirements for earnings per share. SFAS 128 replaces the presentation of primary and fully diluted earnings per share with basic and diluted net income per share. Basic net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period plus the effect of dilutive common stock equivalents. Previously reported earnings per share have been restated to conform with the new presentation and disclosure requirements of SFAS 128. There was no change in the computation of earnings per share for previously reported years under SFAS 128.
TRUST DEPARTMENT ASSETS - Property (other than cash deposits) held by the banks in a fiduciary or agency capacity for their customers is not included in the consolidated balance sheets, since such items are not assets of the banks.
ADVERTISING COSTS - Advertising costs are charged to expense when incurred. Advertising costs totaled $391,961 for 1997, $387,932 for 1996 and $382,632 for 1995.
ESTIMATES AND UNCERTAINTIES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to prior years' financial statements to conform with the current year presentation.
RESTRICTIONS ON CASH AND DUE FROM BANKS
The company's banking subsidiaries are required to maintain average reserve balances based on a percentage of deposits. The average amounts of these reserves required were approximately $14,721,000 for 1997 and $14,556,000 for 1996.
INVESTMENT SECURITIES
Investment securities are classified into three categories: held-to-maturity, available-for-sale and trading. For securities to be classified as held-to-maturity, the bank must demonstrate the positive intent and ability to hold the securities to maturity. Trading securities, of which the banks have none, are securities bought
and held principally for the purpose of selling them in the near future. Available-for-sale securities are those securities not classified as held-to-maturity or trading.
Investment securities as of December 31, 1997, are summarized as follows:
Investment securities as of December 31, 1996, are summarized as follows:
Included in U.S. Government Agencies are certain mortgage-backed securities which may mature earlier because of principal prepayments. They are as follows:
Securities pledged to secure various public deposits and other balances have an amortized cost of $126,534,828 and a market value of $127,637,005 as of December 31, 1997, and an amortized cost of $137,940,623 and a market value of $138,105,735 as of December 31, 1996.
Proceeds from sales of securities totaled $83,373,393 for 1997, $52,255,678 for 1996 and $35,589,478 for 1995. Gross gains realized on sales totaled $550,423 for 1997, $354,082 for 1996 and $345,433 for 1995. Gross losses realized on those sales totaled $256,700 for 1997, $57,079 for 1996 and $134,368 for 1995.
As permitted by the Financial Accounting Standards Board, the banks made a one-time reclassification of certain securities prior to December 31, 1995. Securities transferred from the held-to-maturity to the available-for-sale classification had amortized cost of $75,752,721 and unrealized gain of $328,486, net of tax, as of the date of transfer. Securities transferred from available-for-sale to held-to-maturity had a carrying value of $78,039,861 and an unrealized loss, net of tax, of $432,649 as of the date of transfer.
LOANS
Loans by type are summarized as follows:
Certain directors of Pioneer Bank, Valley Bank and Pioneer Bank, f.s.b. and companies in which they are principal owners, officers and/or directors were loan customers of the banks during 1997 and 1996. In the opinion of management, such loans are made in the ordinary course of business at normal credit terms including interest rate and collateralization. Loans to these persons and to their related organizations totaled $6,476,194 as of December 31, 1997 and $5,051,576 as of December 31, 1996. During 1997, $6,844,844 of these loans were made and repayments totaled $5,420,226.
Loans, including impaired loans, on which the accrual of interest has been discontinued or reduced totaled $1,835,555 as of December 31, 1997 and $1,744,703 as of December 31, 1996. If interest on such loans had been accrued, such income would have approximated $129,894 for 1997, $150,299 for 1996 and $87,311 for 1995.
ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses are summarized as follows:
Because of uncertainties inherent in the estimation process, management's estimate of credit losses in the loan portfolio and the related allowance may change in the near term. However, the amount of the change that is reasonably possible cannot be estimated.
Impaired loans and related information are as follows:
Interest income on impaired loans is recognized only after the principal balance is deemed current. The allowance for loan losses above is a portion of the banks' total allowance for loan losses.
No interest income was recognized on these loans for the three years ended December 31, 1997.
PREMISES AND EQUIPMENT
Premises and equipment consist of the following:
Depreciation expense is summarized as follows:
DEPOSITS
The aggregate amounts of maturities for time deposits having a remaining term of more than one year as of December 31, 1997, are as follows:
BUSINESS COMBINATION
On June 15, 1995, Pioneer Bank acquired all of the deposits and certain facilities, furnishings and equipment of three NationsBank branches in Marion County in a combination accounted for as a purchase. The results of operations for the three branches are included in the financial statements since the date of acquisition. The total cost of the acquisition was $8,383,409. Deposits of $70,700,471 were also assumed. The total cost of the acquisition exceeded the fair value of the net assets acquired by $7,246,798. The excess is being amortized as a core deposit intangible over ten years.
On November 30, 1995, the company acquired Sweetwater Valley Corp. in a business combination accounted for as a pooling of interests. Sweetwater Valley Corp. was a one bank holding company owning all of the outstanding common stock of Valley Bank. As a part of the merger, Sweetwater Valley Corp. was dissolved. Valley Bank became a wholly-owned subsidiary of the company through the exchange of 479,956 shares of the company's common stock for all of the outstanding stock of Sweetwater Valley Corp. The financial statements for 1995 are based on the assumption that the companies were combined for the full year, and financial statements for prior years have been restated to give effect to the combination.
Separate results of operations for the periods prior to the merger with Sweetwater Valley Corp. are as follows:
PIONEER BANK, F.S.B.
Pioneer Bank, f.s.b. commenced operations as a federal savings bank on September 9, 1997. Eight million dollars was contributed by the company for 100% of the bank's stock. The company funded this contribution by a special dividend from one of its banking subsidiaries.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of Pioneer Bank's financial instruments are as follows:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
CASH AND SHORT-TERM INVESTMENTS - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
INVESTMENT SECURITIES - For securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
LOAN RECEIVABLES - For certain homogeneous categories of loans, such as some residential mortgages, credit card receivables, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
LONG-TERM DEBT - The fair value of the company's long-term debt is estimated using discounted cash flow analysis based on the company's current incremental borrowing rate for similar types of borrowing arrangements.
INCOME TAXES
The income tax provision consists of the following:
Reconciliation of the income tax provision to statutory rates is as follows:
The tax effects of each type of significant item that gave rise to deferred taxes are:
401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN
The company has a 401(k) and Employee Stock Ownership Plan (the plan) covering employees meeting certain age and service requirements. The plan is structured so that employees can contribute to the plan on a tax deductible basis and have their contributions invested in various investment funds offered under the plan. The company may use the plan as a leveraged ESOP to purchase stock in Pioneer Bancshares, Inc. and allocate that stock to employees over a period of time as the ESOP loan used to purchase the stock is paid down. As of December 31, 1997, the plan was not leveraged. The plan permits, but does not require, the company to make an employer matching contribution during any plan year. Employer contributions which represent 50% of the first 6% of employees' contributions to the plan totaled $192,954 for 1997, $167,426 for 1996 and $122,751 for 1995.
An employee stock ownership plan is available for all full-time employees at Valley Bank. All persons employed on the last day of the plan year are eligible to participate in the employee stock ownership plan. As of December 31, 1995, the Valley Bank ESOP was merged into the company's plan. Contributions to the plan were $531,764 for 1997, $294,429 for 1996 and $343,787 for 1995.
The number of allocated shares of the company's common stock held in the ESOP was 90,484 shares as of December 31, 1997, 101,175 shares as of December 31, 1996, and none as of December 31, 1995. As of December 31, 1997, 1996 and 1995, there were no unearned ESOP shares.
The plan issues a put option to any participant who receives a distribution of company stock. The put option permits the participant to sell distributed company stock to the company during two option periods at the fair market value at the date of exercise of the option. The first put option period is a period of at least sixty days beginning on the date of distribution of company stock to the participant. The second put option period is a period of at least sixty days beginning after the next determination of fair market value of company stock by independent appraisal in the plan year following the distribution. As of December 31, 1996, 3,270 allocated shares with a fair value of $120,990 were subject to the put options. No shares were subject to the put options as of December 31, 1997 or 1995.
LONG-TERM INCENTIVE PLAN
The company established a long-term incentive plan (the plan) during 1994 for eligible employees. The total number of shares that may be issued under the plan may not exceed 200,000 shares.
Under the terms of the plan, incentive stock options to purchase shares of the company's common stock are granted at a price not less than the fair market value of the stock at the date of grant. Options may be exercised within ten years after the date the incentive stock option is granted.
The plan includes nonqualified stock options which shall be exercisable only during a term fixed by the Stock Option Committee. The company may elect to grant nonqualified stock options at a price less than the fair market value of the common stock at the time the option is granted.
The plan also allows for granting of stock appreciation rights in connection with grant of an option. Upon exercise of a stock appreciation right, the holder may receive no more than an amount payable in cash and/or in shares of common stock equal to the difference between the fair market value of common stock and the exercise price.
Also included in the plan are detached stock appreciation rights which the Stock Option Committee may grant without granting options. The Committee also determines whether these rights are fully vested upon grant or whether they vest over a specific time period. Upon exercise of a detached stock appreciation right, the holder shall be entitled to a payment equal to the fair market value of one share of common stock on the date exercised, reduced by the fair market value of one share of common stock on the grant date.
Exercise of both stock appreciation rights and detached stock appreciation rights is subject to conditions specified by the plan.
The following table summarizes the activity relating to incentive stock options during 1997, 1996 and 1995:
* Represents 110% of the fair market value of the company's stock as of date of grant. ** Fair market value of the company's stock as of date of grant.
The weighted average exercise price was $38.53 for 1997, $35.61 for 1996 and $33.66 for 1995. The weighted average remaining life of the options outstanding was 9.08 years for 1997, 9.56 years for 1996 and 10 years for 1995. Options exercisable at December 31, 1997, were 11,640 at $33.50 per share. No options were exercisable at December 31, 1996 or December 31, 1995.
The options begin vesting at 30% after the second anniversary date, 60% after the third anniversary date and 100% after the fourth anniversary date.
Statement of Financial Accounting Standards Number 123, "Accounting for Stock Based Compensation," issued in 1995, establishes financial accounting reporting standards for stock based employee compensation plans. The statement defines a fair value based method of accounting for employee stock options and encourages entities to adopt that method. The statement also allows an entity to continue to measure compensation cost of stock options using the intrinsic value based method. The intrinsic value based method requires recording compensation only if stock options are issued at an exercise price below the fair
value of its stock. The fair value based method requires the recognition of compensation cost over the employee's service period using an option pricing model that considers the exercise price, the expected life of the option, volatility of the underlying stock, expected dividends on the stock and the risk-free interest rate over the expected life of the option.
The company has elected to continue recognizing compensation cost using the intrinsic value based method. Compensation cost recognized in 1997, 1996 and 1995 was $0. Under the fair value based method, compensation cost would have been approximately $118,615 for 1997, $0 for 1996 and $0 for 1995. The pro forma effects on the company's net income and earnings per share are as follows:
Assumptions used to estimate the fair value of the options are as follows:
NET INCOME PER SHARE
The reconciliation of the denominators of basic and diluted per share computations is as follows:
POSTRETIREMENT HEALTH CARE PLAN
Pioneer Bank pays group health insurance premiums for non-key employees and their eligible dependents who elected to retire under the enhanced early retirement program as of September 30, 1992. The premiums are paid from the actual date of early retirement until the earlier of the date the participant becomes age 65, the date the participant becomes eligible for participation or coverage under another employer's group health plan, or the date the participant and spouse each would be eligible for Medicare coverage.
Post-retirement expense includes the following components:
The reconciliation of the funded status of the plan to amounts recognized in the company's consolidated balance sheets is as follows:
For measurement purposes, the health care cost trend rate assumed is 10% increased to 11% for all future years, 7% decreased by 1% per year for 1 year and leveling at 6% thereafter in 1996 and 8% decreased by 1% per year for 2 years and leveling at 6% thereafter in 1995. The discount rate used is 7.25% in 1997, 1996 and 1995. A 1% increase in health care cost trend rates for 1997 would increase post-retirement expense by $2,072 and the accumulated benefit obligation by $20,500.
POSTRETIREMENT DEFERRED COMPENSATION PLAN
Valley Bank has a deferred compensation plan covering certain officers and directors. Annual contributions are made to the plan and the assets funding the plan consist of life insurance policies on the employees. Employees receive monthly benefits upon retirement.
Post-retirement expense includes the following components:
The reconciliation of the funded status of the plan to amounts recognized in the company's consolidated financial statements is as follows:
The plan is funded by insurance contracts totaling $2,611,034 for 1997 and $2,528,098 for 1996 which are recorded as assets of Valley Bank and not the plan.
LONG-TERM DEBT
Long-term debt consists of an advance of $38,000,000 from the Federal Home Loan Bank with maturity dates ranging from April, 1998 to November, 1999 and interest rates ranging from 5.35% to 5.95%.
Collateral consists of all Federal Home Loan Bank stock owned by Pioneer and Valley Banks and eligible mortgage collateral.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information concerning securities sold under agreements to repurchase is summarized as follows:
Securities pledged against the repurchase agreements represent a portion of the company's investment portfolio and are held in safekeeping at a correspondent bank.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
The banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, commitments under credit card arrangements and standby letters of credit. Those instruments involve to varying degrees elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments express the extent of involvement the banks have in particular classes of financial instruments.
The banks' exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The banks use the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments.
The banks generally require collateral or other security to support financial instruments with off-balance-sheet credit risk.
Commitments to extend credit are agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The amount drawn on the total commitments was $152,409,622 for 1997 and $109,676,324 for 1996. Certain directors of the banks and companies in which they are the principal owners, officers and/or directors had commitments from the banks in the form of contracts which represent credit risk to the banks. In the opinion of management, these commitments are made in the ordinary course of business. The banks evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the banks on extension of credit is based on management's credit assessment of the counterparty. Collateral held varies but may include accounts receivable; inventory; property, plant and equipment; and existing income-producing commercial properties. The amount collateralized was 77% for 1997 and 69% for 1996.
As of December 31, 1997, loans to one customer and related parties of Pioneer Bank represented 15% of the company's total capital.
STOCK DIVIDEND
During 1996, the Board of Directors authorized a two-for-one stock split, effected as a 100% stock dividend, thereby increasing the number of issued and outstanding shares to 3,759,912. All references in the accompanying financial statements to the number of common shares and per-share amounts for 1995 have been restated to reflect the stock dividend.
PREFERRED STOCK
The Board of Directors is authorized to issue shares of preferred stock in one or more series, and to determine the designations and the powers, preferences and other special rights of each series.
COMMITMENTS
The company is subject to legal proceedings and claims that arise in the ordinary course of business. In management's opinion, the amount of ultimate liability will not materially affect the financial position or results of operations of the company.
REGULATORY MATTERS
The company and banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the company and banks must meet specific capital guidelines that involve quantitative measures of the company and banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The company and banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Pioneer Bank, f.s.b. is required to maintain a ratio of Tier 1 capital to total assets of not less than 8% during the first three years of operations as a condition of approval for deposit insurance by the Federal Deposit Insurance Corporation.
Quantitative measures established by regulation to ensure capital adequacy require the company and banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the company and banks meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal Reserve (for the company) and Federal Deposit Insurance Corporation (for the banks) categorized the company and banks as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized, the company and banks must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the company and banks' category.
SUPPLEMENTAL FINANCIAL DATA
Components of other noninterest expenses in excess of 1% of income for the respective periods are as follows:
CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
Condensed financial statements of Pioneer Bancshares, Inc. are summarized as follows:
CONDENSED BALANCE SHEETS
*Eliminated in Consolidation
CONDENSED STATEMENTS OF INCOME
* Eliminated in Consolidation
CONDENSED STATEMENTS OF CASH FLOWS
* Eliminated in Consolidation
QUARTERLY RESULTS (UNAUDITED) A summary of the unaudited results of operations for each quarter of 1997 and 1996 follows:
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None. PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated herein by reference from the sections entitled "Election of Directors," "Executive Compensation and Other Information" and "Reporting of Stock Ownership by Directors and Executive Officers of the Company" in the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, which is to be filed with the Securities and Exchange Commission.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Information required by this item is incorporated herein by reference from the section entitled "Executive Compensation and Other Information" in the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, which is to be filed with the Securities and Exchange Commission.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated herein by reference from the sections entitled "Holdings of Voting Securities" and "Election of Directors" in the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, which is to be filed with the Securities and Exchange Commission.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated herein by reference from the section entitled "Executive Compensation and Other Information" in the Proxy Statement for the Annual Meeting of Shareholders to be held April 22, 1998, which is to be filed with the Securities and Exchange Commission.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) LIST OF FINANCIAL STATEMENTS The following consolidated financial statements and report of independent auditors of the Company are set forth in this Annual Report on the page numbers indicated.
(a)(2) LIST OF FINANCIAL STATEMENT SCHEDULES Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a)(3) LIST OF EXHIBITS Exhibits - The response to this portion of Item 14 submitted as a separate section of this Report.
(b) Reports on Form 8-K No reports on Form 8-K were filed for the last quarter of 1997
(c) Exhibits
(d) Certain financial statement schedules and exhibits have been omitted because they are not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PIONEER BANCSHARES, INC.
Date: March 25, 1998 By /s/ Rodger B. Holley -------------------------------- Rodger B. Holley Chairman of the Board President & CEO
Date: March 25, 1998 By /s/ Gregory B. Jones -------------------------------- Gregory B. Jones Treasurer
POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rodger B. Holley and Gregory B. Jones, and each of them, his true and lawful attorney-in-fact as agent with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacity, to sign any or all amendments to this Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agents in full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as they might or could be in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and their substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in capacities and on the dates indicated.
Directors Date --------- ----
/s/ Clayton Causby Clayton Causby March 25, 1998
/s/ George M. Clark, III George M. Clark, III March 25, 1998
/s/ Robert T. Farnsworth Robert T. Farnsworth March 25, 1998
/s/ Douglas F. Heuer, III Douglas F. Heuer, III March 25, 1998
/s/ W. O. Hubbuch W. O. Hubbuch March 25, 1998
/s/ Carol H. Jackson Carol H. Jackson March 25, 1998
/s/ Paul D. Kelly Paul D. Kelly, Jr. March 25, 1998
/s/ Ralph L. Kendall Ralph L. Kendall March 25, 1998
/s/Joe N. Little Joe N. Little March 25, 1998
/s/ Frank W. McDonald Frank W. McDonald March 25, 1998
/s/ Sam E. Miles Sam E. Miles, Jr. March 25, 1998
/s/ Kenneth A. Royse Kenneth A. Royse March 25, 1998
/s/ Joseph A. Schmissrauter, Jr. Joseph A. Schmissrauter, Jr. March 25, 1998
/s/ S. M. Warren S. M. Warren March 25, 1998
/s/ Ralph M. West, Jr. Ralph M. West, Jr. March 25, 1998
/s/ Jimmy E. Wilson Jimmy E. Wilson March 25, 1998
EXHIBIT INDEX