<PAGE>
Filed Pursuant to rule 424(b)1
File No. 333-367
700,000 SHARES
[LOGO OF MATEWAN BANCSHARES, INC.]
7 1/2% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
Matewan BancShares, Inc., a Delaware corporation ("Matewan" or the
"Company"), is offering (the "Offering") 700,000 shares of 7 1/2% Cumulative
Convertible Preferred Stock, Series A (the "Convertible Preferred Stock").
Matewan, a bank holding company headquartered in Williamson, West Virginia,
serves as the parent of Matewan National Bank (the "Bank") and Matewan Bank,
FSB (the "Thrift" and, together with the Bank, the "Banking Subsidiaries").
Matewan's outstanding common stock, par value $1.00 per share (the "Common
Stock"), is traded over-the-counter on the Nasdaq National Market under the
symbol "MATE."
The primary purpose of the Offering is to finance approximately one-half of
the $28.6 million purchase price of the acquisition by Matewan of Bank One,
Pikeville, N.A. ("Pikeville"), from Banc One Corporation ("Banc One"). See
"The Acquisition."
The Convertible Preferred Stock will be listed on the Nasdaq SmallCap Market
under the symbol "MATEP."
SEE "RISK FACTORS" ON PAGES 10 AND 11 OF THIS PROSPECTUS FOR A DISCUSSION OF
MATERIAL RISKS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE
NOT INSURED BY THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION
INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
----------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO THE
PUBLIC(1) DISCOUNT COMPANY(2)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Per Share . . . . . . . . . . . . . $25.00 $1.50 $23.50
Total(3) . . . . . . . . . . . . . . $17,500,000 $1,050,000 $16,450,000
</TABLE>
- --------
(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $400,000.
(3) The Company has granted an option to the Underwriter, exercisable within
30 days of the date of this Prospectus, to purchase up to 105,000
additional shares of Convertible Preferred Stock at the Price to Public,
less the Underwriting Discount shown above, solely to cover over-
allotments, if any. If the over-allotment option is exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to the Company
will be $20,125,000, $1,207,500 and $18,917,500, respectively. See
"Underwriting."
----------------
The shares of Convertible Preferred Stock are offered by the Underwriter,
subject to prior sale, when, as and if delivered to and accepted by it, and
subject to its right to reject orders in whole or in part. Delivery of the
shares of Convertible Preferred Stock is expected against payment therefor on
or about March 4, 1996, at the offices of Wheat, First Securities, Inc.,
Richmond, Virginia.
WHEAT FIRST BUTCHER SINGER
The date of this Prospectus is February 27, 1996.
<PAGE>
[LOGO OF MATEWAN BANCSHARES, INC.]
[MAP SHOWING MARKET AREA]
THE COMPANY REGARDS ITS MARKET AS THE SEVEN-COUNTY AREA SHOWN ABOVE (MINGO,
LOGAN AND BOONE COUNTIES IN WEST VIRGINIA AND PIKE, MARTIN, JOHNSON AND FLOYD
COUNTIES IN KENTUCKY, COLLECTIVELY, THE "MARKET"). ALL DEPOSIT AND DEPOSIT
MARKET SHARE DATA INCLUDED IN THE PROSPECTUS IS BASED ON FDIC BRANCH DEPOSIT
DATA AS OF JUNE 30, 1994.
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE CONVERTIBLE
PREFERRED STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF
1934. SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is not intended to be complete and is qualified in its
entirety by the more detailed information and the consolidated financial
statements and the related notes thereto appearing elsewhere in this
Prospectus. All per share data of Matewan included in this Prospectus have been
restated to reflect a 300% stock dividend paid in May 1993, a 300% stock
dividend paid in May 1994 and a 10% stock dividend paid by Matewan in June
1995. Unless otherwise specified in this Prospectus, the term "Offering" as
used herein refers to the Company's Offering of 700,000 shares of Convertible
Preferred Stock at $25.00 per share, and does not include the exercise of the
Underwriter's over-allotment option.
MATEWAN BANCSHARES, INC.
Matewan, a bank holding company headquartered in Williamson, West Virginia,
provides through the Bank, organized in 1913, and the Thrift, organized in
1994, a broad range of financial services. Matewan has 13 offices located in
southwestern West Virginia and eastern Kentucky. At September 30, 1995, Matewan
had total assets of $389.5 million, total deposits of $324.0 million and total
shareholders' equity of $44.5 million. Matewan ranked third in its Market based
on total deposits.
Matewan's strategy is to become the leading provider of financial services in
its Market by offering customers innovative products through convenient
delivery systems and a well-trained, sales-oriented work force. Management
believes that effective employment of technology in providing financial
services, coupled with a commitment to customer service, affords Matewan with a
distinct competitive advantage in its Market. In implementing its strategy,
management emphasizes the following:
. Technology to enhance products and delivery systems. The Company uses
sophisticated technology to enhance its delivery systems. Matewan offers
its retail customers 24-hour banking by touch-tone phone by means of an
interactive voice response system, and in 1996, Matewan will offer its
retail customers the ability to access account information, transfer
funds and pay certain bills via personal computer. The Company currently
utilizes personal computer technology to enable its commercial customers
to access cash management services via interlinks with Matewan's
mainframe system. The Company also maintains an integrated PC-based
server network system that provides immediate interaction among all
operating functions of the Banking Subsidiaries, thereby enhancing
internal communication and customer service. In addition, the Company's
sophisticated credit rating and pricing models enable the Banking
Subsidiaries to price their loan products to reflect credit risk more
accurately.
. Customer service and convenience. Through extended lobby and drive-up
hours, Saturday and Sunday banking hours and alternative delivery
systems, Matewan offers convenient service to customers. Because the
Banking Subsidiaries have integrated consumer platforms, customers of
Matewan can obtain full banking services at any branch office. All but
one of the 13 branch offices of the Company are open on Saturdays, and
its two supermarket branches are open 363 days a year. No other bank in
its Market offers comparable extended service hours.
. Dedicated, sales-oriented work force. Matewan has historically devoted
significant resources to training its work force and instilling a sales-
oriented culture to promote customer service and market penetration. In
addition to extensive orientation and training of new employees with an
emphasis on the individual's job assignment, the Company also provides
regular continuing education and training to all employees. To further
promote customer service, the Company emphasizes performance-based
compensation, as an increasing percentage of employees have their total
compensation, and all employees have at least a portion of their
compensation, based on incentive programs.
The Company's strategy has enabled it to enjoy a compound annual asset growth
rate of 16.9% over the last decade, with assets increasing from $72.8 million
on December 31, 1984, to $389.5 million at September 30, 1995. The Company's
utilization of technology and commitment to cost control has resulted in
3
<PAGE>
an average efficiency ratio of 54.20% for the five years ended December 31,
1994. The Company's returns on average assets were 1.40% and 1.28% (annualized)
for the year ended December 31, 1994, and the nine months ended September 30,
1995, respectively.
PENDING ACQUISITION
Matewan has entered into a stock purchase agreement (the "Purchase
Agreement") with Banc One, providing for Matewan's purchase of 100% of the
outstanding capital stock of Pikeville, a national bank subsidiary of Banc One,
for $28.6 million in cash (the "Acquisition"). Following the Acquisition,
Matewan will operate Pikeville as a separate subsidiary under the name "Matewan
National Bank/Kentucky." At September 30, 1995, Pikeville had total assets of
$221.0 million, total deposits of $181.5 million and total shareholder's equity
of $19.4 million.
The proceeds of the Offering will be used to fund approximately one-half of
the $28.6 million purchase price of the Acquisition. Consummation of the
Acquisition is not a condition to closing of the Offering. In the event that
the Acquisition is not consummated, Matewan will use the net proceeds from the
Offering for general corporate purposes. See "Use of Proceeds."
REASONS FOR THE ACQUISITION
The following summarizes the major reasons for the Acquisition and the
benefits Matewan expects will accrue to its operations from the Acquisition:
. Appeal of Pikeville Market. Management views Pikeville and Pike County,
Kentucky as the most attractive segments in Matewan's Market. Pikeville,
Kentucky is a regional hub of economic activity and provides the area
with financial, medical, legal and retail services. Pike County has the
largest population of any county in its Market.
. Increased Market Share. Following the Acquisition, Matewan will increase
its market share of deposits from fourth to second in Pike County and
from third to first in its Market. Management believes that economic
growth in its Market will continue to provide a favorable climate in
which to conduct Matewan's business.
. Increased Operating Efficiencies. After the Acquisition, Matewan will be
able to realize operating efficiencies by consolidating certain
branches, combining data processing operations and leveraging the
capabilities of its existing back-office support functions. Management
estimates that, within one year following the Acquisition, it can
realize expense savings of $1.2 million, or approximately 15% of
Pikeville's 1994 non-interest expense, which will reduce Pikeville's
efficiency ratio to levels approximating Matewan's. See "Risk Factors--
Integration of Pikeville" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Anticipated Operating
Effect of Acquisition on Matewan."
. Revenue Enhancement Opportunities. Pikeville's profitability levels are
below those being realized by Matewan. The Acquisition will provide
Matewan with increased revenue enhancement opportunities through
expanded customer service and convenience for Pikeville's customer base.
Matewan will extend its existing alternative delivery systems and
extended banking hours to Pikeville's operations. The Acquisition will
also permit Matewan to apply its existing training programs to
Pikeville's work force to develop a sales-oriented culture to promote
customer service and further Pikeville's market penetration.
For a discussion of the potential risks to Matewan inherent in the
Acquisition, see "Risk Factors--Negative Effect of Acquisition on Regulatory
Capital" and "--Integration of Pikeville."
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Convertible Preferred
Stock
Offered by the Compa-
ny..................... 700,000 shares
Convertible Preferred
Stock
Outstanding after the
Offering............... 700,000 shares
Offering Price.......... $25.00 per share
Use of Proceeds......... Net proceeds of the Offering are estimated to be
approximately $16.1 million and will be used to fund
approximately one-half of the $28.6 million purchase price
of the Acquisition. See "Use of Proceeds," "The Company" and
"The Acquisition."
Nasdaq SmallCap
Market Symbol.......... "MATEP"
Liquidation Preference.. $25.00 per share
Dividends............... Cumulative annual dividend at a rate of 7.5%, or $1.875 per
share, payable in quarterly installments commencing on June
15, 1996.
Conversion.............. Convertible into shares of Common Stock at a price of $22.00
per share of Common Stock.
Redemption.............. Redeemable at the option of Matewan, on or after March 15,
2000, at a price of $26.125 per share, declining annually to
$25.00 per share in 2006.
Voting Rights........... None, except as required by law.
</TABLE>
RISK FACTORS
When deciding whether to invest in the Convertible Preferred Stock,
prospective investors should consider the following material risks associated
with an investment in the Company: the risk that the Acquisition may not be
consummated; the negative effect of the Acquisition on Matewan's regulatory
capital levels; the risk that Matewan will not be able to successfully
integrate Pikeville into its operations; regional economic factors that affect
both Matewan and Pikeville; the scope and effect of financial institution
regulation and possible legislation on both Matewan and Pikeville; the effects
of general economic conditions and monetary policies; and the potential lack of
liquidity in the Convertible Preferred Stock. See "Risk Factors."
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
MATEWAN BANCSHARES, INC.
The following selected consolidated financial data for the five years ended
December 31, 1994, are derived from the consolidated financial statements of
the Company. The selected consolidated financial data for the nine months ended
September 30, 1995 and 1994, are derived from unaudited consolidated financial
statements. The unaudited consolidated financial statements include all
adjustments (consisting of normal recurring adjustments) which management of
the Company considers necessary for a fair presentation of the financial
position and the results of operations for these periods. Operating results for
the nine months ended September 30, 1995, are not necessarily indicative of the
results that may be expected for the entire year ended December 31, 1995. The
information shown below should be read in conjunction with the consolidated
financial statements, the related notes thereto and other financial information
of Matewan included elsewhere in this Prospectus. See "The Company" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED
SEPTEMBER 30, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME FOR THE PERIOD:
Total interest income.. $ 23,898 $ 20,857 $ 28,524 $ 27,428 $ 28,444 $ 29,853 $ 28,067
Total interest ex-
pense................. 9,329 7,713 10,543 9,774 11,631 15,234 15,403
Net interest income.... 14,569 13,144 17,981 17,654 16,813 14,619 12,664
Provision for loan
losses................ 1,261 1,293 1,643 1,285 1,343 1,507 1,203
Non-interest income.... 2,267 2,099 2,802 2,395 2,409 1,959 1,805
Non-interest expense... 9,961 8,406 11,259 10,372 9,897 9,391 8,238
Income before income
taxes................. 5,614 5,544 7,881 8,392 7,982 5,680 5,028
Applicable income tax-
es.................... 2,009 2,000 2,876 3,269 2,919 2,068 1,538
Net income............. 3,605 3,544 5,005 5,123 5,063 3,612 3,490
BALANCE SHEET DATA:
Total assets........... 389,513 366,290 371,410 342,949 329,156 323,627 301,923
Loans--net............. 228,274 210,539 214,744 195,853 172,764 168,097 170,343
Securities available
for sale.............. 9,032 9,782 11,051 921 922 951 894
Securities held to ma-
turity................ 96,565 97,082 98,930 98,814 106,263 105,513 89,496
Federal funds sold..... 20,503 14,519 4,770 14,032 18,090 21,200 14,255
Deposits............... 324,039 306,363 310,647 291,153 281,116 271,271 252,512
Shareholders' equity... 44,465 40,930 41,803 38,032 33,952 29,959 27,124
PER SHARE DATA:
Net income............. 0.98 0.97 1.36 1.40 1.38 0.98 0.95
Cash dividends......... 0.30 0.20 0.31 0.28 0.28 0.23 0.16
Book value............. 12.12 11.16 11.40 10.37 9.25 8.17 7.40
AVERAGE SHARES OUTSTAND-
ING.................... 3,668 3,668 3,668 3,668 3,668 3,668 3,668
KEY RATIOS:
PERFORMANCE:
Return on average as-
sets.................. 1.28% 1.33% 1.40% 1.56% 1.57% 1.18% 1.28%
Return on average
shareholders' equity.. 11.29 12.03 12.39 14.12 16.44 12.56 13.01
Net interest margin.... 5.75 5.46 5.53 5.88 5.73 5.23 5.05
Non-interest expense to
average assets........ 3.55 3.17 3.14 3.16 3.07 3.07 3.03
Efficiency ratio....... 59.16 55.15 54.17 51.73 51.49 56.65 56.94
Ratio of earnings to
fixed charges: (1)
Excluding interest on
deposits.............. 13.64x 20.59x 18.63x 36.71x 22.17x 8.68x 8.54x
Including interest on
deposits.............. 1.60 1.72 1.75 1.86 1.69 1.37 1.33
LIQUIDITY AND CAPITAL:
Average loans to aver-
age deposits.......... 70.19% 66.29% 67.14% 64.69% 61.85% 64.27% 67.75%
Dividend payout ratio.. 28.77 19.05 22.82 20.34 20.58 23.08 17.02
Average shareholders'
equity to average as-
sets.................. 11.37 11.10 11.27 11.07 9.55 9.39 9.85
Tier 1 leverage ratio.. 11.01 10.65 10.76 10.49 9.63 8.50 8.10
Risk-based capital:
Tier 1 capital ratio... 18.17 17.71 17.98 17.63 17.61 15.05 13.73
Total capital ratio ... 19.29 18.96 19.23 18.88 18.86 16.15 14.77
ASSET QUALITY:
Net charge-offs to av-
erage loans outstand-
ing................... 0.95 0.76 0.82 0.44 0.51 0.80 0.48
Non-performing loans to
total period-end
loans................. 1.22 1.05 1.08 0.65 1.75 1.21 1.52
Non-performing assets
to total period-end
assets................ 0.88 0.65 0.67 0.42 1.04 0.77 1.19
Allowance for loan
losses to total peri-
od-end loans.......... 1.14 1.46 1.35 1.49 1.41 1.18 1.08
Allowance for loan
losses to non-perform-
ing loans............. 93.85 139.25 125.14 230.79 80.35 97.66 71.09
</TABLE>
- --------
(1) The ratio of earnings to fixed charges has been computed by dividing income
before taxes and fixed charges by fixed charges. Fixed charges include
interest expense, but not rent expense, as the interest component of rent
expense is not significant.
6
<PAGE>
BANK ONE, PIKEVILLE, N.A.
The following selected financial data for the three years ended December 31,
1994, are derived from the financial statements of Pikeville. The selected
financial data for the nine months ended September 30, 1995 and 1994, are
derived from unaudited financial statements. The unaudited financial statements
include all adjustments (consisting of normal recurring adjustments) which
management of Pikeville considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the nine months ended September 30, 1995, are not necessarily
indicative of the results that may be expected for the entire year ended
December 31, 1995. The information shown below should be read in conjunction
with the financial statements and the related notes thereto of Pikeville
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C>
INCOME FOR THE PERIOD:
Total interest income....... $ 13,601 $ 13,225 $ 17,580 $ 17,364 $ 17,997
Total interest expense...... 5,858 4,542 6,237 5,865 7,669
Net interest income......... 7,743 8,683 11,343 11,499 10,328
Provision for loan losses... 675 1,524 2,064 1,312 1,200
Non-interest income......... 973 1,184 1,129 1,226 1,287
Non-interest expense........ 6,764 5,671 7,644 7,593 7,667
Income before income taxes.. 1,277 2,672 2,764 3,820 2,748
Applicable income taxes..... 400 869 840 1,200 800
Cumulative effect adjust-
ment--change in accounting
for income taxes........... -- -- -- 272 --
Net income.................. 877 1,803 1,924 2,348 1,948
BALANCE SHEET DATA:
Total assets................ 221,019 227,258 225,871 242,150 234,153
Loans--net.................. 164,191 163,607 165,154 142,383 126,164
Securities available for
sale....................... 3,567 21,674 30,749 -- --
Securities held to maturi-
ty......................... 9,299 11,479 10,666 78,282 74,829
Securities purchased under
agreement to resell........ 25,674 12,047 1,123 -- 12,475
Deposits.................... 181,509 185,760 183,070 194,370 206,877
Shareholder's equity........ 19,369 19,863 19,343 20,323 19,846
KEY RATIOS:
PERFORMANCE:
Return on average assets.... 0.52% 1.08% 0.82% 1.02% 0.84%
Return on average sharehold-
er's equity................ 6.03 12.41 9.46 11.73 9.84
Net interest margin......... 4.98 5.21 5.32 5.44 4.89
Non-interest expense to av-
erage assets............... 4.01 3.40 3.26 3.29 3.37
Efficiency ratio............ 77.60 57.47 61.29 59.67 66.01
LIQUIDITY AND CAPITAL:
Average loans to average de-
posits..................... 92.78 82.24 81.35 64.34 62.47
Average shareholder's equity
to average assets.......... 8.66 8.56 8.48 8.43 8.61
Tier 1 leverage ratio....... 8.59 8.62 8.38 8.17 8.23
Risk-based capital:
Tier 1 capital ratio........ 10.52 10.36 10.10 11.86 14.03
Total capital ratio......... 11.77 11.61 11.35 13.11 15.28
ASSET QUALITY:
Net charge-offs to average
loans outstanding.......... 1.58 0.41 0.43 0.25 0.74
Non-performing loans to to-
tal period-end loans....... 2.42 0.94 1.10 0.40 2.34
Non-performing assets to to-
tal period-end assets...... 1.92 0.75 0.88 0.29 1.46
Allowance for loan losses to
total period-end loans..... 2.20 2.77 2.95 2.48 2.04
Allowance for loan losses to
non-performing loans....... 90.93 294.32 268.93 611.68 86.88
</TABLE>
7
<PAGE>
RECENT DEVELOPMENTS
MATEWAN RECENT UNAUDITED RESULTS
For the fourth quarter of 1995, net income increased to a record $1.6
million, or 10.5% over the fourth quarter of 1994. Net income per share was
$0.44 for the fourth quarter of 1995, as compared to $0.40 per share for the
same period in 1994. For the year ended December 31, 1995, net income increased
4.3% to a record $5.2 million. Net income per share was $1.42 for 1995, as
compared to $1.36 for 1994. Return on average assets was 1.67% (annualized) for
the fourth quarter of 1995 and 1.38% for the year.
The following table sets forth certain recent financial data of the Company
at the date and for the periods indicated. Financial data at December 31, 1995,
and for the three months and year ended December 31, 1995, are unaudited. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation have been included.
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1995
------------------ -----------------
(IN THOUSANDS, EXCEPT PER
SHARE AND RATIO DATA)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets.............................. $401,034 $401,034
Loans - net............................... 228,568 228,568
Deposits.................................. 334,387 334,387
Shareholders' equity...................... 45,817 45,817
INCOME STATEMENT DATA:
Net interest income....................... 5,229 19,798
Provision for loan losses................. 647 1,908
Net income................................ 1,615 5,220
PER SHARE DATA:
Net income................................ 0.44 1.42
Dividends................................. 0.10 0.38
Book value................................ 12.49 12.49
PERFORMANCE DATA:
Return on average assets.................. 1.67% 1.38%
Return on average shareholders' equity.... 14.47 12.09
Net interest margin....................... 5.90 5.78
Efficiency ratio.......................... 48.34 56.23
</TABLE>
The net interest margin was 5.90% for the fourth quarter of 1995 and remained
strong at 5.78% for the full year 1995 compared to 5.53% for the full year
1994. Aggressive loan pricing in a generally declining interest rate
environment was the primary reason for maintaining healthy margins during the
year. During the year, Matewan continued to focus on cost control. Non-interest
expense was 3.7% lower in the fourth quarter than in any other quarter in 1995,
and the efficiency ratio for the fourth quarter was 48.34% versus 56.23% for
the year.
8
<PAGE>
PIKEVILLE RECENT UNAUDITED RESULTS
The following table sets forth certain unaudited financial data of Pikeville
at December 31, 1995, and for the year then ended.
<TABLE>
<CAPTION>
AT OR FOR THE
YEAR ENDED
DECEMBER 31, 1995
-----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Total assets................................................. $224,874
Loans - net.................................................. 150,762
Deposits..................................................... 190,664
Shareholder's equity......................................... 19,482
INCOME STATEMENT DATA:
Net interest income.......................................... 10,066
Provision for loan losses.................................... 941
Net income................................................... 1,154
PERFORMANCE DATA:
Return on average assets..................................... 0.51%
Return on average shareholder's equity....................... 5.94
Net interest margin.......................................... 4.83
Efficiency ratio............................................. 76.60
</TABLE>
9
<PAGE>
RISK FACTORS
Before investing in the shares of Convertible Preferred Stock offered
hereby, prospective investors should give special consideration to the
material risks described below, together with all of the other information
appearing elsewhere in this Prospectus.
ACQUISITION MAY NOT BE CONSUMMATED
It is not a condition of the Offering that the Acquisition be consummated
prior to or simultaneous with the Offering. There is a risk that the
Acquisition may not be consummated. Although the parties have obtained all
necessary regulatory approvals, the statutory waiting period during which the
United States Department of Justice may challenge the Acquisition on anti-
trust grounds will not expire until March 1, 1996. Consummation of the
Acquisition is also subject to a number of other conditions beyond the control
of Matewan, including the requirement that Pikeville not have experienced a
material adverse change and that Matewan shall have received the proceeds from
the Loan (as defined below). See "The Acquisition." In the event that the
Acquisition is not consummated, Matewan intends to utilize the net proceeds of
the Offering for general corporate purposes. In such event, management will
have substantial discretion in applying the net proceeds to be received by
Matewan.
NEGATIVE EFFECT OF ACQUISITION ON REGULATORY CAPITAL
The Acquisition will have a negative effect on the regulatory capital ratios
of Matewan. Assuming consummation of the Acquisition and the issuance of the
Convertible Preferred Stock, Matewan's capital ratios at September 30, 1995,
under regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), would be affected as follows: the total risk-based capital
ratio would decrease from 19.29% to 12.65%, the Tier 1 capital ratio would
decrease from 18.17% to 11.12% and the Tier 1 leverage ratio would decrease
from 11.01% to 7.62%. Notwithstanding these decreases, the Banking
Subsidiaries and Pikeville will continue to maintain the requisite capital
levels to qualify under regulatory guidelines as "well capitalized"
institutions.
The following table sets forth, as of September 30, 1995, capital ratios of
Matewan; the pro forma capital ratios of Matewan, after giving effect to the
Acquisition; the pro forma capital ratios of Matewan after giving effect to
the Acquisition and the Offering; and the minimum capital ratios required by
regulation. See "Supervision and Regulation--Capital Adequacy."
<TABLE>
<CAPTION>
AFTER AFTER ACQUISITION REGULATORY
ACTUAL ACQUISITION AND OFFERING MINIMUMS
------ ----------- ----------------- ----------
<S> <C> <C> <C> <C>
Total risk-based capital
ratio................... 19.29% 8.86% 12.65% 8.00%
Tier 1 capital ratio..... 18.17 7.61 11.12 4.00
Tier 1 leverage ratio.... 11.01 5.24 7.62 3.00-5.00
</TABLE>
INTEGRATION OF PIKEVILLE
While Matewan has in the past made other acquisitions, Matewan has never
made an acquisition as large as Pikeville. The future growth and profitability
of Matewan will depend on the success of Matewan's integration of Pikeville's
operations. Historically, Pikeville has not achieved the same level of
financial results as Matewan, and the integration of Pikeville into Matewan
could adversely affect Matewan's financial performance. Matewan's ability to
successfully integrate Pikeville into Matewan's current operations will depend
on a number of factors, including: (i) its ability to improve Pikeville's
operating efficiency; (ii) its ability to devote adequate personnel to
integrate Pikeville's operations into Matewan's operations, while still
managing its existing operations effectively; (iii) its ability to improve
Pikeville's operating results; and (iv) its ability to effectuate cost savings
from the Acquisition. No assurance can be given that Matewan will be able to
integrate successfully Pikeville, that the operation of Pikeville will not
adversely affect Matewan's profitability, or that Matewan will be able to
manage effectively its growth resulting from the Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Anticipated Operating Effect of Acquisition on Matewan."
10
<PAGE>
REGIONAL ECONOMIC FACTORS
Matewan's offices are located in a seven-county area in southwestern West
Virginia and eastern Kentucky. The economy in Matewan's Market is directly and
indirectly dependent on the coal industry. The economy also benefits from
various governmental infrastructure projects and assistance programs. These
infrastructure projects have been substantially completed, and no assurance
can be given that funds will be provided for future projects. A downturn in
the coal industry or a decline in governmental expenditures could negatively
impact the value of collateral securing loans held in Matewan's portfolio, the
ability of borrowers to repay such loans in accordance with original terms and
demand for Matewan's loans, deposits and other products.
FINANCIAL INSTITUTION REGULATION AND POSSIBLE LEGISLATION
Matewan, the Banking Subsidiaries and Pikeville are subject to extensive
regulation and supervision. The regulatory authorities have broad discretion
in connection with their supervision, examination and enforcement activities
and policies. Among other powers, the regulatory authorities may impose
restrictions on the operation of a financial institution, may require the
classification of assets by an institution and may dictate an increase in an
institution's allowance for loan losses. Any change in the applicable
statutes, regulations or policies or in the regulatory structure, whether by
the Federal Reserve, the Office of the Comptroller of the Currency (the
"OCC"), the Office of Thrift Supervision (the "OTS"), the Federal Deposit
Insurance Corporation (the "FDIC") or Congress, could have a material impact
on Matewan, the Bank, the Thrift or Pikeville and their respective operations.
See "Supervision and Regulation."
ECONOMIC CONDITIONS AND MONETARY POLICIES
Economic conditions and monetary policies beyond Matewan's control may have
a significant impact on Matewan's operations, including such matters as
changes in net interest income from one period to another. Examples of such
conditions and policies include: (i) the strength of credit demand by
customers; (ii) the percentage of deposits that must be held in the form of
non-earning cash reserves; (iii) the introduction and growth of new investment
instruments and transaction accounts by non-bank financial competitors; and
(iv) changes in the general levels of interest rates, including changes
resulting from Federal Reserve monetary activities.
POTENTIAL LACK OF LIQUIDITY
The Common Stock has only recently been listed on the Nasdaq National
Market, and there is limited trading in the Common Stock. Prior to the
Offering, there has been no public market in the Convertible Preferred Stock.
Although the Convertible Preferred Stock will be listed on the Nasdaq SmallCap
Market, there can be no assurance that an active trading market in the
Convertible Preferred Stock will develop or, if developed, that such market
will be sustained after the Offering.
11
<PAGE>
THE COMPANY
Matewan, which was incorporated in 1984 under the laws of the State of
Delaware, is a registered bank holding company headquartered in Williamson,
West Virginia. Matewan was organized for the purpose of serving as the holding
company for the Bank and is also the holding company for the Thrift. The
principal business of Matewan is directing, planning and coordinating the
business activities of the Bank and the Thrift, and the financial condition
and results of operations of Matewan are primarily dependent upon the
operations of these entities. At September 30, 1995, Matewan had total assets
of $389.5 million, total deposits of $324.0 million and total shareholders'
equity of $44.5 million.
The Bank was organized as a national bank in 1913 in Matewan, West Virginia.
The Bank maintains its executive offices in Williamson, West Virginia, and has
banking offices in Matewan, Gilbert, Delbarton, Kermit, Danville and Logan,
West Virginia. In May 1994, the Bank opened the Money Center in Williamson,
West Virginia, which, in addition to centralizing all of the lending
departments of the Bank, serves as a loan production office, a loan support
office and the headquarters for the financial services division of the Bank.
The Bank has a total of nine offices.
The Thrift was organized and established as a federally chartered de novo
savings bank in 1994. The Thrift operates two traditional offices located in
Coal Run and Paintsville, Kentucky, and two supermarket branches located in
Pikeville and Goody, Kentucky.
Matewan's Market is developing an increasingly diverse economy. The coal
industry is the local economy's principal industry, and demand for the type of
coal found in the Company's Market, bituminous, has increased. Clean air
legislation has prompted consumers of coal, predominately utilities, to burn
low-sulfur coal, such as the type of bituminous coal found in the Market, that
emits fewer pollutants. The Market's coal mining industry is complemented by
wholesale trade, retail trade and service industries. Infrastructure projects,
such as the construction of the Highway 119 corridor, are improving access to
the area and are expected to facilitate future economic growth. Pikeville,
Kentucky, is a regional hub of economic activity and provides the area with
financial, medical, legal and retail services. See "Risk Factors--Regional
Economic Factors."
Matewan's strategy is to become the leading provider of financial services
in its Market by offering customers innovative products through convenient
delivery systems and a well-trained, sales-oriented work force. Management
believes that effective use of technology in providing financial services,
coupled with a commitment to customer service, affords Matewan a competitive
advantage in its Market. In implementing this strategy, management emphasizes
the following:
. Technology to enhance products and delivery systems. The Company has
extensively utilized sophisticated technology to enhance its delivery
systems. Matewan offers its retail customers 24-hour banking by touch-
tone phone by means of an interactive voice response system. In 1996,
Matewan will offer its retail customers the ability to access account
information, transfer funds and pay certain bills via personal computer.
The Company currently utilizes personal computer technology that enables
commercial customers to access cash management services via interlinks
with Matewan's main frame system. The Company also maintains an
integrated PC-based server network system that provides immediate
interaction among all operating functions of the Banking Subsidiaries,
thereby enhancing internal communication and customer service. In
addition, the Company's sophisticated credit rating and pricing models
enable the Banking Subsidiaries to price their loan products to reflect
credit risk more accurately.
. Customer service and convenience. Through the use of two supermarket
branches and other alternative delivery systems and extended banking
hours of service, the Banking Subsidiaries offer convenient service to
customers. Because the Banking Subsidiaries have integrated consumer
platforms, customers of Matewan can obtain full banking services at any
branch office. All but one of the 13 branch offices of the Banking
Subsidiaries are open on Saturday. The two supermarket branches are open
363 days a year, including Sunday from 1:00 p.m. to 6:00 p.m. and for
full banking hours on most holidays. During the week, seven of the 13
branches have extended hours, with 7:00 a.m. to 7:00 p.m. drive-up
service and 9:00 a.m. to 5:00 p.m. lobby service for stand-alone
branches and 9:00 a.m.
12
<PAGE>
to 8:00 p.m. service for supermarket branches. No other bank offers
comparable extended service hours in its Market.
. Dedicated, sales-oriented work force. Matewan has historically devoted
significant resources to training its work force and instilling a sales-
oriented culture to promote customer service and market penetration. In
addition to extensive orientation and training of new employees with an
emphasis on the individual's job assignment, the Company also provides
regular continuing education and training of all employees. It is the
Company's policy to reimburse employees for all business-related courses
taken at local universities, and the Company has sponsored graduate
level courses through Marshall University at its offices for its
employees and local residents. To further promote customer service, the
Company emphasizes performance-based compensation, with an increasing
percentage of employees having their total compensation, and all
employees having a portion of their compensation, based on incentive
programs.
Implementation of this strategy has enabled the Company to enjoy a compound
annual asset growth rate of 16.9% over the last decade, with assets increasing
from $72.8 million on December 31, 1984, to $389.5 million on September 30,
1995. The Company's utilization of technology and commitment to cost control
has resulted in an average efficiency ratio of 54.20% for the five years ended
December 31, 1994. The Company's returns on average assets were 1.40% and
1.28% (annualized) for the year ended December 31, 1994, and the nine months
ended September 30, 1995, respectively.
The executive offices of Matewan are located at Second Avenue and Vinson
Street, Williamson, West Virginia, 25661, and the telephone number at this
address is (304) 235-1544.
THE ACQUISITION
TERMS AND CONDITIONS OF THE ACQUISITION
Pursuant to the Purchase Agreement with Banc One, Matewan will purchase 100%
of the outstanding capital stock of Pikeville for $28.6 million in cash. After
the Acquisition, Matewan will operate Pikeville as a separate subsidiary,
under the name "Matewan National Bank/Kentucky."
Matewan will fund the purchase price of the Acquisition from (i) estimated
net proceeds of the Offering in the amount of $16.1 million, (ii) $550,000 in
cash and cash equivalents (excluding $400,000 in expenses associated with the
Acquisition) and (iii) a ten-year loan to the holding company in an original
principal amount of $12.0 million (the "Loan"), which will bear interest at
the rate of 2.0% per annum above the five-year Treasury note yield on the date
of the loan, repricing after five years. Matewan will pledge 100% of the
common stock of its subsidiary, the Bank, and a key-man life insurance policy
on the life of Dan R. Moore, Chief Executive Officer, with a face amount of $5
million, as collateral for the Loan.
Matewan and Banc One, for federal income tax purposes, will elect to treat
the purchase of the outstanding stock of Pikeville as a purchase of
Pikeville's assets pursuant to Section 338(h)(10) of the Internal Revenue Code
of 1986, as amended (the "Code"). One result of a 338(h)(10) election is that
Pikeville's tangible and intangible assets with a fair market value in excess
of their adjusted tax bases will receive a "step-up" in basis for federal
income tax purposes. To the extent the adjusted tax basis of intangible
property (such as core deposit intangibles, other intangibles and goodwill) is
stepped up (which is anticipated as a result of the Acquisition), Matewan will
receive the benefit of amortization deductions with respect to those assets.
Banc One has agreed to remove the derivatives portfolio of Pikeville at or
before the closing of the Acquisition and to indemnify Pikeville and Matewan
for all expenses or losses accruing or arising after September 28, 1995,
relating to the derivatives portfolio. In addition, Banc One has agreed to
indemnify Pikeville and Matewan for costs or losses relating to certain
litigation and to share costs or losses with Pikeville and Matewan and to
indemnify Pikeville and Matewan above certain limits for certain other
litigation. Banc One will also indemnify Pikeville and Matewan with respect to
certain employment and employee benefit matters, as well as for inaccuracies
in the representations and warranties made to Matewan resulting in losses in
excess of $100,000. These indemnities are for differing periods of time of not
less than three years.
13
<PAGE>
The closing of the Acquisition is contingent upon satisfaction of a number
of conditions, including without limitation: (i) the approval of the Federal
Reserve which was received on February 15, 1996, and expiration of the
statutory waiting period, during which period the United States Department of
Justice may challenge the Acquisition on anti-trust grounds, which waiting
period will expire on March 1, 1996; (ii) closing of the Loan; (iii)
consummation of the Offering; and (iv) the satisfaction of a number of other
conditions which are beyond the control of Matewan, including the requirement
that Pikeville not have experienced a material adverse change. In the event
that the Purchase Agreement is terminated by reason of Matewan's failure, for
any reason, to fund the purchase price, Matewan is obligated to pay Banc One a
fee equal to $250,000.
REASONS FOR THE ACQUISITION
The following summarizes the major objectives of the Acquisition and the
benefits Matewan expects will accrue to its operations from the Acquisition.
Appeal of Pikeville Market. Management views Pikeville and Pike County,
Kentucky, as the most attractive segments in Matewan's Market. Pike County has
the largest population of any county in the Market. Pikeville, Kentucky, is a
regional hub of economic activity and provides the area with financial,
medical, legal and retail services.
Increased Market Share. Upon consummation of the Acquisition, Matewan will
increase its market share of deposits from fourth to second in Pike County and
from third to first in its Market. Management believes that economic growth in
its Market will continue to provide a favorable climate in which to conduct
Matewan's business. The following table reflects, based on the latest publicly
available data, the pro forma effects (after closing two offices) that the
Acquisition will have on Matewan's branch network, deposits and deposit market
share at June 30, 1994:
<TABLE>
<CAPTION>
HISTORICAL(/1/) PRO FORMA FOR ACQUISITION(/1/)
-------------------------- ----------------------------------
CURRENT DEPOSIT DEPOSIT
NUMBER OF MARKET NUMBER OF MARKET
OFFICES DEPOSITS SHARE OFFICES DEPOSITS SHARE
--------- -------- ------- ----------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Mingo County, WV........ 6 $206.7 53.9% 6 $ 206.7 53.9%
Pike County, KY(/2/).... 3 10.5 1.3 8 204.7 25.6
Logan County, WV........ 2 28.9 8.0 2 28.9 8.0
Boone County, WV........ 1 60.7 28.2 1 60.7 28.2
Johnson County,
KY(/2/)................ 1 -- -- 1 -- --
Floyd County, KY........ -- -- -- -- -- --
Martin County, KY....... -- -- -- -- -- --
--- ------ ---- -------- ----------- ---------
Total for Seven Coun-
ties................. 13 $306.8 12.6% 18 $500.9 20.5%
=== ====== ==== ======== =========== =========
</TABLE>
--------
(/1/) All historical and pro forma deposit and market share data is as of
June 30, 1994.
(/2/) Two of the Company's Pike County offices and the Company's Johnson
County office were opened after June 30, 1994.
The following table shows the pro forma comparative market position of
Matewan in its Market, after giving effect to the Acquisition, as of June 30,
1994:
<TABLE>
<CAPTION>
DEPOSITS PERCENTAGE
INSTITUTION (IN MILLIONS) OF DEPOSITS
----------- ------------- -----------
<S> <C> <C>
Matewan BancShares, Inc............................ $500.9 20.5%
Pikeville National Corporation..................... 458.5 18.8
Banc One Corporation............................... 304.8 12.5
Trans Financial Bancorp............................ 277.7 11.4
First Prestonsburg Bancshares...................... 131.1 5.4
Citizens National Corporation...................... 128.7 5.3
Ten remaining institutions......................... 637.3 26.1
</TABLE>
All of Matewan's and Pikeville's offices are located within approximately a
35-mile radius of Matewan's headquarters. As Matewan is already serving
depositors and borrowers in the Market, the Company
14
<PAGE>
is familiar with these areas. The customer base of Pikeville includes
approximately 92,600 households as customers, having approximately 17,450
deposit accounts with Pikeville. Matewan believes that by acquiring this
depositor base it will have significant future growth opportunities to provide
mortgage loans, consumer loans and other financial services to these
depositors.
Increased Operating Efficiencies. Management anticipates that the Company
will realize significant operating efficiencies and expense savings by means
of the consolidation of operations of Matewan and Pikeville. In addition to
the elimination of management fees paid by Pikeville to Banc One, management
expects to generate additional expense savings through the assimilation of
data processing functions and the consolidation of two branches (one
additional branch was closed by Pikeville in December 1995). Management also
anticipates more efficiently utilizing the current operating systems of
Matewan by spreading the cost of such systems over a larger asset base. In
particular, management anticipates effective utilization of the technological
investment made by Matewan over a much larger customer base, providing
Pikeville customers the services currently provided to Matewan's existing
customer base, but without a proportional increase in personnel or equipment.
Management estimates that, within one year following the Acquisition, it can
recognize cost savings of $1.2 million, or approximately 15% of Pikeville's
1994 non-interest expense, which would reduce Pikeville's efficiency ratio to
levels approximating Matewan's historical efficiency ratio. See "Risk
Factors--Integration of Pikeville" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Anticipated Operating Effect
of Acquisition on Matewan."
Revenue Enhancement Opportunities. Pikeville's profitability levels are
below those being realized by Matewan. The Acquisition will provide Matewan
with increased revenue enhancement opportunities through expanded customer
service and convenience for Pikeville's customer base. Matewan will extend its
existing alternative delivery systems and extended banking hours to
Pikeville's operations. The Acquisition will also permit Matewan to apply its
existing training programs to Pikeville's work force to develop a sales-
oriented culture to promote customer service and further Pikeville's market
penetration.
USE OF PROCEEDS
The net proceeds from the sale of the Convertible Preferred Stock offered
hereby will be used to fund approximately one-half of the estimated costs of
the Acquisition, consisting of the $28.6 million purchase price and
capitalized estimated costs and expenses of $400,000. The sources of funds
needed to fund these amounts are described below:
<TABLE>
<S> <C>
Estimated net proceeds of Offering............................ $16,050,000
Long-term debt................................................ 12,000,000
Cash and cash equivalents..................................... 950,000
-----------
$29,000,000
</TABLE>
If the Acquisition is not consummated, the net proceeds from the Offering
will be used for general corporate purposes, including funding of further
expansion of Matewan's business and possible acquisitions of other financial
service businesses. Matewan has no current arrangements or understandings with
respect to any acquisition other than the Acquisition.
To the extent that the over-allotment option granted to the Underwriter is
exercised, the net proceeds from the sale of any additional shares purchased
will be used for general corporate purposes. Pending application of the net
proceeds of the Offering, Matewan plans to invest the net proceeds in short-
term, investment-grade securities or money market instruments.
15
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of Matewan at
September 30, 1995, and is adjusted to give effect to the consummation of the
Acquisition and the issuance of 700,000 shares of Convertible Preferred Stock
offered hereby.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
--------------------
AS
ACTUAL ADJUSTED(1)
------- -----------
(DOLLARS IN
LONG-TERM DEBT THOUSANDS)
<S> <C> <C>
Note payable--$12.0 million note with interest at 2.0%
per annum above the
five-year Treasury note yield at the date of the loan,
repricing after five years and due in monthly
installments over ten years........................... $ -- $12,000 (2)
SHAREHOLDERS' EQUITY
Preferred Stock--$1.00 par value; 1,000,000 shares
authorized, no shares outstanding at September 30,
1995; as adjusted, 700,000 shares of Convertible
Preferred Stock, Series A (aggregate liquidation value
$17,500,000) authorized and outstanding (1)........... -- 17,500
Common Stock--$1.00 par value; 10,000,000 shares
authorized; 3,684,104 shares outstanding at September
30, 1995, including 16,253 shares in treasury......... 3,684 3,684
Capital surplus........................................ 12,182 10,732
Retained earnings...................................... 28,727 28,727
Treasury stock......................................... (68) (68)
Net unrealized loss on available-for-sale securities... (60) (60)
------- -------
Total shareholders' equity......................... 44,465 60,515
------- -------
Total long-term debt and shareholders' equity...... $44,465 $72,515
======= =======
</TABLE>
- --------
(1) Assumes that 700,000 shares of Convertible Preferred Stock are sold at
$25.00 per share and that the net proceeds from the Offering are
approximately $16.05 million. If the Underwriter's over allotment option
is exercised in full, 805,000 shares of Convertible Preferred Stock would
be sold resulting in net proceeds from the Offering of approximately
$18.52 million.
(2) Indebtedness incurred to fund a portion of the purchase price for the
Acquisition. If the Acquisition is not consummated, such indebtedness will
not be incurred.
16
<PAGE>
COMMON STOCK PRICE RANGE AND DIVIDENDS
The Common Stock is traded on the Nasdaq National Market under the symbol
"MATE." Prior to its listing on the Nasdaq National Market on June 1, 1994,
there was no established trading market for the Common Stock. At December 31,
1995, there were approximately 610 holders of record of the Common Stock and
3,667,351 shares outstanding.
The following table sets forth the high and low sales prices of the Common
Stock for each quarter since the listing of the Common Stock on the Nasdaq
National Market on June 1, 1994:
<TABLE>
<CAPTION>
PRICE RANGE CASH DIVIDENDS
------------- DECLARED PER
HIGH LOW COMMON SHARE
------ ------ --------------
<S> <C> <C> <C>
1994:
First Quarter.................................... $ -- $ -- $0.057
Second Quarter................................... 24.55 18.18 0.064
Third Quarter.................................... 20.00 17.27 0.064
Fourth Quarter................................... 18.86 14.09 0.127
1995:
First Quarter.................................... 18.18 15.23 0.091
Second Quarter................................... 20.50 17.27 0.091
Third Quarter.................................... 20.50 18.50 0.100
Fourth Quarter................................... 21.38 19.50 0.100
1996:
First Quarter (through February 27, 1996)........ 21.50 18.50 0.100
</TABLE>
On February 22, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $18.50 per share.
On January 10, 1995, Matewan's Board of Directors authorized the repurchase
of up to 100,000 shares of its Common Stock. As of the date of this
Prospectus, a total of 2,700 shares have been purchased for a total of
$54,700. Purchases may be made from time to time, subject to regulatory
requirements, in the open market or in privately negotiated transactions.
Purchased shares may be used from time to time for various corporate purposes.
Matewan currently intends to continue to pay regular quarterly cash
dividends on the Common Stock, subject to Matewan's needs for funds. However,
Matewan's dividend policy is subject to the discretion of the Board of
Directors. In determining whether to continue such dividend payments and in
establishing the amount of any dividends to be paid, the Board will consider
Matewan's earnings, capital requirements and financial condition, prospects
for future earnings, federal economic and regulatory policies, general
business conditions and other relevant factors, certain of which are beyond
the control of Matewan.
The primary source of funds for dividends paid by Matewan to its
shareholders is the dividend income received from its Banking Subsidiaries,
and after the Acquisition, from Pikeville. The ability of the Banking
Subsidiaries and Pikeville to pay dividends is regulated by the OCC, in the
case of the Bank and Pikeville, and the OTS, in the case of the Thrift, and,
in certain cases, requires the approval of such agencies. The OCC and the OTS
also have the authority to prohibit a regulated depository institution from
engaging in what in such agency's opinion constitutes an unsafe or unsound
practice for conducting business. Depending upon the financial condition of
the depository institution, payment of dividends could be deemed to constitute
such an unsafe or unsound practice. In addition, a depository institution may
not pay a dividend or otherwise make a capital distribution if the payment
thereof would cause such institution to fail to satisfy its capital
requirements. Due to regulatory dividend limits, it is not anticipated that
Pikeville will be in a position to declare dividends before the fourth quarter
of 1996. See "Supervision and Regulation--Payment of Dividends."
Although management believes that the Banking Subsidiaries will be able to
generate sufficient earnings to pay dividends to Matewan in amounts sufficient
to fund the payment of dividends on the Convertible Preferred
17
<PAGE>
Stock, to continue Matewan's current dividend policy with respect to the
Common Stock and to service the interest and principal payments on the
indebtedness incurred to fund the Acquisition, there can be no assurance that
the Banking Subsidiaries and Pikeville will be able to generate such earnings
or to pay such dividends. To the extent that the Banking Subsidiaries and
Pikeville are unable to generate sufficient earnings or to pay sufficient
dividends to enable Matewan to pay full dividends on both the Convertible
Preferred Stock and the Common Stock, Matewan would be required to pay all
cumulative dividends on the Convertible Preferred Stock before paying any
dividends on the Common Stock. See "Description of Capital Stock."
18
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma condensed consolidated balance sheet as of September
30, 1995, and the pro forma condensed consolidated statements of income for
the nine months ended September 30, 1995, and the year ended December 31,
1994, give effect to the acquisition of 100% of the outstanding capital stock
of Pikeville by Matewan. The pro forma information is based on the historical
financial statements of Matewan and Pikeville, giving the effect to the
proposed Acquisition under the purchase method of accounting and the
assumptions and adjustments in the accompanying notes to the pro forma
financial statements.
The pro forma statements have been prepared by Matewan's management based
upon the financial statements of Pikeville. These pro forma statements may not
be indicative of the results that actually would have occurred if the
Acquisition had been in effect on the dates indicated or which may be obtained
in the future. In addition, minor differences may result from rounding. The
pro forma financial statements should be read in conjunction with the
financial statements and notes of Matewan and Pikeville included elsewhere in
this Prospectus.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-----------------------------------------------
AS REPORTED
------------------
PRO FORMA PRO FORMA
MATEWAN PIKEVILLE ADJUSTMENTS CONSOLIDATED
-------- --------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents..... $ 35,838 $ 6,334 $ (950)(a) $ 41,222
Interest bearing deposits in
other banks.................. 675 -- -- 675
Securities purchased under
agreements to resell......... -- 25,674 -- 25,674
Held-to-maturity securities... 96,565 9,299 302 (b) 106,166
Available-for-sale
securities................... 9,032 3,567 -- 12,599
Loans, net.................... 228,274 164,191 (412)(b) 392,053
Premises and equipment........ 9,742 8,948 18,690
Accrued interest receivable
and other assets............. 9,387 3,006 10,393 (b) 22,786
-------- -------- ------- --------
Total assets.............. $389,513 $221,019 $ 9,333 $619,865
======== ======== ======= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Non-interest bearing........ $ 42,722 $ 24,540 $ -- $ 67,262
Interest bearing............ 281,317 156,969 652 (b) 438,938
-------- -------- ------- --------
Total..................... 324,039 181,509 652 506,200
Short-term borrowings:
Federal funds purchased..... -- 14,815 -- 14,815
Repurchase agreements....... 13,968 -- -- 13,968
Other....................... 3,755 2,076 -- 5,831
-------- -------- ------- --------
Total..................... 17,723 16,891 -- 34,614
Long-term debt................ -- -- 12,000 (a) 12,000
Accrued interest payable and
other liabilities............ 3,286 3,250 -- 6,536
-------- -------- ------- --------
Total liabilities......... 345,048 201,650 12,652 559,350
Shareholders' equity.......... 44,465 19,369 (3,319)(a,b) 60,515
-------- -------- ------- --------
Total liabilities and
shareholders' equity..... $389,513 $221,019 $ 9,333 $619,865
======== ======== ======= ========
</TABLE>
See notes to pro forma condensed consolidated financial statements
(unaudited).
19
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------------------
AS REPORTED
------------------
PRO FORMA PRO FORMA
MATEWAN PIKEVILLE ADJUSTMENTS CONSOLIDATED
------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO
DATA)
<S> <C> <C> <C> <C>
Interest income.............. $23,898 $13,601 $ 98 (c1,4) $37,597
Interest expense............. 9,329 5,858 308 (c2,5) 15,495
------- ------- ------- -------
Net interest income ......... 14,569 7,743 (210) 22,102
Provision for loan losses.... 1,261 675 -- 1,936
------- ------- ------- -------
Net interest income after
provision for loan losses .. 13,308 7,068 (210) 20,166
Other income................. 2,267 973 -- 3,240
Other expenses............... 9,961 6,764 770 (c3,6) 17,495
------- ------- ------- -------
Income before income taxes... 5,614 1,277 (980) 5,911
Applicable income taxes...... 2,009 400 (392)(c7) 2,017
------- ------- ------- -------
Net income................... 3,605 877 (588) 3,894
Preferred dividends.......... -- -- (984)(d) (984)
------- ------- ------- -------
Net income applicable to
Common Stock................ $ 3,605 $ 877 $(1,572) $ 2,910
======= ======= ======= =======
Average common shares
outstanding................. 3,668 3,668
Net income per share
applicable to Common Stock
............................ $ 0.98 $ 0.79
======= =======
Ratio of earnings to combined
fixed charges and preferred
stock dividends:
Excluding interest on
deposits.................... 13.64x 2.17x
Including interest on
deposits.................... 1.60 1.25
</TABLE>
See notes to pro forma condensed consolidated financial statements (unaudited).
20
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------
AS REPORTED
------------------
PRO FORMA PRO FORMA
MATEWAN PIKEVILLE ADJUSTMENTS CONSOLIDATED
------- --------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO
DATA)
<S> <C> <C> <C> <C>
Interest income.............. $28,524 $17,580 $ 131 (c1,4) $46,235
Interest expense............. 10,543 6,237 411 (c2,5) 17,191
------- ------- ------- -------
Net interest income ......... 17,981 11,343 (280) 29,044
Provision for loan losses.... 1,643 2,064 -- 3,707
------- ------- ------- -------
Net interest income after
provision for loan losses .. 16,338 9,279 (280) 25,337
Other income................. 2,802 1,129 -- 3,931
Other expenses............... 11,259 7,644 1,027 (c3,6) 19,930
------- ------- ------- -------
Income before income taxes... 7,881 2,764 (1,306) 9,339
Applicable income taxes...... 2,876 840 (523)(c7) 3,193
------- ------- ------- -------
Net income................... 5,005 1,924 (784) 6,145
Preferred dividends.......... -- -- (1,313)(d) (1,313)
------- ------- ------- -------
Net income per share
applicable to Common Stock.. $ 5,005 $ 1,924 $(2,097) $ 4,832
======= ======= ======= =======
Average common shares
outstanding................. 3,668 3,668
Net income per share
applicable to Common Stock
............................ $ 1.36 $ 1.32
======= =======
Ratio of earnings to combined
fixed charges and preferred
stock dividends:
Excluding interest on
deposits.................... 18.63x 2.62x
Including interest on
deposits.................... 1.75 1.37
</TABLE>
See notes to pro forma condensed consolidated financial statements (unaudited).
21
<PAGE>
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Pursuant to the Purchase Agreement, Matewan will pay Banc One $28.6 million
in cash for the purchase of 100% of the outstanding capital stock of Pikeville
and will incur estimated related costs and expenses of $400,000. The pro forma
financial statements assume that the Acquisition will be accounted for as a
purchase.
(a) Reflects the proceeds of the Offering, the increase in long-term debt,
and the reduction in cash as a result of the Acquisition (in thousands):
<TABLE>
<S> <C>
Estimated net proceeds of the Offering....... $16,050
Long-term debt............................... 12,000
Cash and cash equivalents.................... 950
-------
Purchase price and related costs............. $29,000
=======
(b) Under purchase accounting, Pikeville's assets and liabilities are
required to be adjusted to their estimated fair values. The estimated fair
value adjustments have been determined by Matewan based upon available
information set forth in the notes to Pikeville's financial statements
included elsewhere in this Prospectus and other information available to
management. No assurance can be given that such estimated fair values
represent fair values that would ultimately be determined at the effective
date of the Acquisition. Following are the pro forma adjustments made to
reflect Pikeville's fair values at September 30, 1995 (in thousands):
<CAPTION>
NET ASSETS
-------------------
INCREASE (DECREASE)
<S> <C>
Amounts as reported by Pikeville................ $19,369
Fair value adustments:
Investments................................... 302
Loans......................................... (412)
Deposit base intangibles...................... 2,997
Certificates of deposit....................... (652)
Costs in excess of net assets of
company acquired............................. 7,396
-------
$29,000
=======
</TABLE>
(c) For purposes of determining the pro forma effect of the Acquisition on
Matewan's consolidated statement of income, the following pro forma
adjustments have been made:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
1 Decrease in interest income resulting from the use
of cash,
at an assumed interest rate of 5.0%............... $ (36) $ (48)
2 Interest expense on $12,000 of long-term debt at
7.5% over 10 years
(assuming no principal reductions in the periods
presented)........................................ (675) (900)
3 Amortization of deposit base intangibles over the
estimated lives
of the deposit relationships on an accelerated ba-
sis............................................... (493) (657)
4 Amortization/accretion of adjustments to invest-
ments and loans................................... 134 179
5 Amortization/accretion of adjustments to certifi-
cates of deposit.................................. 367 489
6 Amortization of cost in excess of net assets ac-
quired over 20 years.............................. (277) (370)
7 Decrease in income tax provision associated with
adjustments....................................... 392 523
----- -----
$(588) $(784)
===== =====
</TABLE>
(d) Reflects quarterly dividends at an annual rate of 7.5% as if the
Convertible Preferred Stock had been outstanding as of the beginning of each
period.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is designed to provide a better understanding of
the results of operations and the financial condition of the Company. This
discussion should be read in conjunction with the information included under
"Prospectus Summary," "Risk Factors," "The Company," "The Acquisition,"
"Business" and the consolidated financial statements and the related notes
thereto of Matewan included elsewhere in this Prospectus.
ANTICIPATED OPERATING EFFECT OF ACQUISITION ON MATEWAN
The major objectives of the Acquisition and the benefits Matewan expects
will accrue to its operations from the Acquisition include expansion of its
presence in the attractive Pikeville market, increased share in Matewan's
Market, increased operating efficiences resulting from the consolidation of
operations, revenue enhancement resulting from expanded customer service and
the development of a sales-oriented work force at Pikeville. See "The
Acquisition--Reasons for the Acquisition."
There are a number of factors which will affect the financial impact of the
Acquisition to Matewan, including, but not limited to, the ability of Matewan
to realize expense savings and to enhance operating revenues, the expenses
associated with the Acquisition, such as interest expense on Acquisition debt,
foregone income on the funds used in the Acquisition, the amortization of
intangibles and the costs of the Acquisition and the dividends on the
Convertible Preferred Stock. See "Risk Factors--Integration of Pikeville."
Management believes that, based on the historical core earnings of Pikeville
and the operating efficiencies and expense savings that can be achieved as a
result of the consolidation of the operations of Matewan and Pikeville, the
Acquisition of Pikeville will generate sufficient earnings to offset the
expenses and costs associated with the Acquisition as described above, with
the result that the Acquisition will be accretive to earnings per share within
one year and thereafter.
Management expects to generate expense savings through the assimilation of
data processing and mortgage origination functions and the consolidation of
two branches. Pikeville has historically paid management, data processing and
other fees to Banc One pursuant to inter-company agreements. Matewan plans to
convert data processing, mortgage origination and other systems concurrently
with closing of the Acquisition and anticipates a net reduction of such
outlays of approximately $700,000 annually. The application of Matewan's lower
fixed cost structure to the operations of Pikeville and the recent termination
of 25 data processing employees by Pikeville will generate the majority of
these expense savings. Management also anticipates cost savings through the
consolidation of two Pikeville branches into existing Matewan offices by June
30, 1996. The consolidation of these two offices is expected to reduce the
expenses of the combined company by approximately $500,000 in the first year.
Given the proximity of these offices to existing Matewan branches, management
does not anticipate significant account run-off. In addition, the historical
financial results of Pikeville reflect the costs associated with operation of
a branch closed by Pikeville on December 31, 1995, prior to the Acquisition.
The deposits of this branch totalled $4.0 million, and the annual expenses
historically associated with the operation of this facility were an estimated
$150,000.
As a result of effecting the Acquisition, Matewan will be able to avoid
incurring certain non-recurring expenses previously incurred by Pikeville.
During the nine months ended September 30, 1995, Pikeville incurred a one-time
charge of approximately $500,000 associated with severance and retention bonus
programs implemented by Banc One prior to the Acquisition. Matewan does not
anticipate any additional expenses related to this program. The income
statement for Pikeville for the period ended September 30, 1995, also reflects
a one-time charge of approximately $300,000, to conform Pikeville's
depreciation lives for fixed assets to those of Banc One.
In addition to the currently quantifiable cost reductions described above,
Matewan believes that the Acquisition will permit more efficient utilization
of Matewan's current infrastructure. While Matewan has
23
<PAGE>
enjoyed an average efficiency ratio of 54.20% for the five years ended
December 31, 1994, by effecting the Acquisition, Matewan will increase its
total earning assets by approximately 57.3% and increase its full-time
employee work force by only 44.6%. In addition, Matewan will make available to
Pikeville's customers the banking technology services currently provided by
Matewan to its existing customer base, thereby reducing the per customer cost
of Matewan's investment in such technology. As a result of greater utilization
of the management and technology investments made by Matewan, management
anticipates that the combined company will generate significant additional net
interest income without incurring proportional non-interest expense, thereby
achieving proportionately higher earnings than Matewan currently achieves.
Management of Matewan also believes that the earnings of the combined
company will be increased by incremental revenue enhancements that are
anticipated to be achieved through the more convenient banking services
provided by the Banking Subsidiaries relative to Pikeville's current banking
hours and through the PC-based and telephone banking services currently
provided by the Banking Subsidiaries that are not currently offered by
Pikeville. Management also anticipates that over time and through Matewan's
training programs, it will be able to instill a sales-oriented culture in the
work force of Pikeville that will result in increased revenue through the sale
of additional deposit and non-deposit products.
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
SUMMARY
Net income for the first nine months of 1995 was $3.6 million, or $0.98 per
share, versus $3.5 million, or $0.97 per share, for the same period in 1994.
Return on average assets was 1.28% and 1.33% for each of the nine-month
periods ended September 30, 1995 and September 30, 1994, respectively. Return
on average equity was 11.29% and 12.03% for the respective nine-month periods.
FINANCIAL CONDITION
Total assets at September 30, 1995, increased $23.2 million from September
30, 1994. This level of growth and the concurrent asset mix reflect both
increased loan demand and the diminished appeal of holding investment
securities in the interest rate environment prevalent over this period of
time. Deposits increased $17.7 million and short-term borrowings increased
$2.1 million over this time period.
Net loans have increased $17.7 million from September 30, 1994, reflecting
levels of 58.6% and 57.5% of total assets as of September 30, 1995, and 1994,
respectively. Deposit growth of $17.7 million, or 5.8%, for the 12-month
period ended September 30, 1995, funded almost all of this loan growth.
Investment securities decreased $1.3 million from September 30, 1994,
representing 27.1% of the Company's total assets at September 30, 1995, versus
29.2% for the comparable prior period. Cash and cash equivalent balances
increased $7.8 million while interest bearing deposits in other banks
decreased $2.6 million during the 12-month period ended September 30, 1995.
Virtually all of this growth in earning assets was funded through increased
deposits and short-term borrowings. Fixed assets increased $979,000 during the
12-month period ended September 30, 1995. Commencement of operations of a new
office in Paintsville and two new supermarket offices account for most of the
increases, together with installation of data processing equipment related to
the conversion to Electronic Data Systems Corporation ("EDS").
Non-interest bearing deposits increased $867,000, or 2.1%, and interest
bearing deposits increased $16.8 million, or 6.4%, in the 12-month period
ended September 30, 1995. The Company's deposit pricing strategy has enabled
the Company to minimize the effect on earnings from rising interest rate
pressures. Short-term borrowings increased $2.1 million, or 13.7%, from
September 30, 1994. Factors contributing to these changes are the volatile
nature of these types of funds (primarily tax deposits) and the increasing
placement of public funds in accounts of this nature. Other liabilities
decreased $120,000, or 3.5%, over the same time period.
24
<PAGE>
Internal capital retention has allowed for growth in shareholders' equity of
$2.7 million, or 8.5% annualized, and $2.9 million, or 10.2% annualized, in
the nine months ended September 30, 1995 and September 30, 1994, respectively.
Equity capital as a percentage of total assets was 11.4% and 11.2% at
September 30, 1995, and September 30, 1994, respectively. The Company is also
required to meet certain regulatory capital requirements for capital on a
risk-adjusted basis. See "Supervision and Regulation--Capital Adequacy."
On January 10, 1995, the Board of Directors authorized the Company to
purchase an additional 100,000 shares of Common Stock. During the nine months
ended September 30, 1995, the Company repurchased 2,300 shares of Common Stock
for a total purchase price of $46,500 and resold 3,000 shares for a total
sales price of $57,000. The Company may repurchase its own shares from time to
time, subject to regulatory requirements, in the open market or in privately
negotiated transactions. Treasury shares may be resold from time to time for
various corporate purposes.
The Thrift established branch offices in two supermarkets in Goody and
Pikeville, Kentucky, on May 19 and June 26, 1995, respectively.
On February 14, 1995, the Company executed a contract with EDS. Although the
immediate objective of the agreement was the outsourcing of the core back-
office and data processing operations of the Company, the strategic
implications of the association with EDS for the Company will enable the
Company to provide greater services to its customers.
RESULTS OF OPERATIONS
Net interest income was $14.6 million for the nine-month period ended
September 30, 1995, versus $13.1 million for the nine-month period ended
September 30, 1994. This increase of $1.5 million, or 10.8%, was attributable
to the improvement in the Company's net interest margin. The net interest
margin (net interest income divided by average earning assets) for the nine
months ended September 30, 1995, was 5.75%, versus 5.46% for the same period
in 1994. Improved yields on the loan portfolio, combined with relatively
stable costs of funds, served to increase the net interest margin over the
nine-month prior year period.
The Company's provision for loan losses for the nine months ended September
30, 1995, was approximately $32,000 lower than for the same period in 1994,
despite a higher level of non-performing assets in the 1995 period. Non-
performing loans (nonaccrual loans and loans past due greater than 90 days)
were $2.8 million at September 30, 1995, versus $2.2 million at September 30,
1994. The percentage of allowance for loan losses to total non-performing
loans was 93.9% and 139.3% at September 30, 1995 and 1994, respectively.
25
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Balance at beginning of period.................. $ 2,932 $ 2,961
------------- -------------
Loans charged-off............................... (1,938) (1,390)
Recoveries...................................... 385 251
------------- -------------
Net charge-offs................................. (1,553) (1,139)
Provision for loan losses....................... 1,261 1,293
------------- -------------
Balance at the end of period.................... $ 2,640 $ 3,115
============= =============
Non-performing loans............................ $ 2,813 $ 2,237
Ratio of allowance for loan losses to non-
performing loans............................... 93.85% 139.25%
Ratio of allowance for loan losses to total
loans.......................................... 1.14 1.46
</TABLE>
Starting in the fourth quarter of 1994 and continuing throughout 1995, the
Company began a comprehensive program to restructure or dispose of problem or
higher-risk loans. At the implementation of this program, management recognized
that the adoption of such an aggressive posture could entail having to absorb
some additional charges to the allowance for loan losses that could be higher
than historical levels. Management also recognized that these charges would be
incurred over a period of time in which continuing provisions for loan losses
would need to be made to reflect any additional credit exposure in the loan
portfolio. Management, however, determined at the outset of the program that
there existed sufficient coverage in the allowance for loan losses to absorb
the effect of these anticipated charge-offs without requiring any additional
reserves, and, on an ongoing basis, provisions for loan losses would continue
to be made to reflect any ongoing additional exposure to the loan portfolio.
The result of this disposition program was an increase in charge-offs, but a
decline in the loan loss provision for the nine months ended September 30,
1995. Management does not anticipate this level of net charge-offs or level of
additions to non-performing loans to continue.
Non-interest income increased $168,000, or 8.0%, during the first nine months
of 1995 when compared to the same period in 1994. Service fees and other fees
generally increased in the current year due to an update in the service fee
schedule and normal business growth. Income attributable to sales of other
financial services increased $249,000 in the first nine months of 1995 over
same period in 1994, due predominantly to the growth in the Bank's financial
services division. Sales of credit insurance reflected a decline in commission
income of $133,000 in 1995 from 1994, due to the credit insurance underwriters'
tightening their eligibility standards, thereby adversely affecting sales
volumes.
Non-interest expenses increased $1.6 million, or 18.5%, for the first nine
months of 1995 over the same period in 1994. Most of these increases were
related to start-up and operating expenses incurred in 1995 in opening the
second full service office of the Thrift and its two supermarket offices.
Higher personnel, marketing and occupancy expenses, in particular, were
experienced. Offsetting in part the higher non-interest expense was the refund
by the FDIC of assessments paid on deposits insured by the Bank Insurance Fund
(the "BIF") of $189,000, which was realized in the third quarter of 1995.
In comparing the nine-month periods ended September 30, 1995, and September
30, 1994, net income before taxes increased $70,000, or 1.3%. Applicable income
taxes increased by $9,000, or 0.5%, in the nine-month period ended September
30, 1995, over the same period in 1994. The effective income tax rate for the
first nine months of 1995 was 35.8%, versus 36.1% for the first nine months of
1994. These decreases reflect both changes in composition of the Company's
earnings and favorable tax effects attributable to the Thrift. Net income after
income taxes increased $61,000, or 1.7%, for the nine months ended September
30, 1995, over the same period for 1994, a consequence of a less favorable
interest rate environment and operating expenses connected with opening new
offices of the Thrift.
26
<PAGE>
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1994
SUMMARY FINANCIAL RESULTS
Matewan's net income of $5.0 million, or $1.36 per share, earned in 1994
represents an approximate 2.3% decrease from the $5.1 million, or $1.40 per
share, earned in 1993. This decline in net income is attributable to a higher
provision for loan losses, higher operating costs primarily associated with
organizing the Thrift and the relocation of the corporate offices of Matewan
from Matewan, West Virginia, to Williamson, West Virginia.
Matewan's net income of $5.1 million, or $1.40 per share, in 1993 represents
an approximate 1.2% increase over the $5.0 million, or $1.38 per share, earned
in 1992. This increase in net income is attributable to growth of
approximately $13.8 million in Matewan's balance sheet, a decline in the cost
of funds during 1993 and an increase in the net interest margin. The benefits
of both the 5.0% growth in net interest income and the 4.3% reduction in the
provision for loan losses during 1993 were offset somewhat by a 0.6% decrease
in non-interest income, a 4.8% increase in non-interest operating expense and
a 12.0% increase in income tax expense.
Matewan's return on average assets for 1994 was 1.40% compared to 1.56% for
1993 and 1.57% for 1992. Matewan's 1994 return on average equity was 12.39%
compared to 14.12% in 1993 and 16.44% in 1992. It has been Matewan's policy to
retain a substantial portion of earnings to help fund Matewan's internal
growth and future expansion.
27
<PAGE>
TABLE I--FIVE YEAR SELECTED FINANCIAL SUMMARY
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................ $371,410 $342,949 $329,156 $323,627 $301,923
Total earning assets........ 332,371 309,627 298,162 295,884 275,988
Total deposits.............. 310,647 291,153 281,116 271,271 252,512
Shareholders' equity........ 41,803 38,032 33,951 29,959 27,124
INCOME FOR THE PERIOD:
Total interest income....... 28,524 27,428 28,444 29,853 28,067
Total interest expense...... 10,543 9,774 11,631 15,234 15,403
Net interest income......... 17,981 17,654 16,813 14,619 12,664
Provision for loan losses... 1,643 1,285 1,343 1,507 1,203
Non-interest income......... 2,802 2,395 2,409 1,959 1,805
Non-interest expense........ 11,259 10,372 9,897 9,391 8,238
Applicable income taxes..... 2,876 3,269 2,919 2,068 1,538
Net income.................. 5,005 5,123 5,063 3,612 3,490
PER SHARE DATA:
Net income.................. 1.36 1.40 1.38 0.98 0.95
Book value.................. 11.40 10.37 9.25 8.17 7.40
Cash dividends.............. 0.31 0.28 0.28 0.23 0.16
KEY RATIOS:
Return on average assets.... 1.40% 1.56% 1.57% 1.18% 1.28%
Return on average sharehold-
ers' equity................ 12.39 14.12 16.44 12.56 13.01
Average shareholders' equity
to average assets.......... 11.27 11.07 9.55 9.39 9.85
OTHER SIGNIFICANT MEASURES:
Dividend payout............. 22.82 20.34 20.58 23.08 17.02
Percentage change in divi-
dend....................... 9.60 .00 25.00 40.35 21.28
Percentage change in net in-
come....................... (2.30) 1.18 40.19 3.47 28.32
Percentage change in total
assets..................... 8.30 4.19 1.71 7.19 32.67
Percentage change in equi-
ty......................... 9.92 12.02 13.32 10.45 11.79
AVERAGE BALANCE SHEET DATA:
ASSETS
Cash and due from banks..... $ 16,891 $ 12,555 $ 11,797 $ 10,253 $ 8,758
Interest bearing deposits... 3,584 209 123 28 1,320
Investment securities....... 104,686 106,122 104,650 95,107 73,665
Federal funds sold.......... 13,710 11,723 17,256 15,202 17,477
Loans--net.................. 203,278 181,996 171,605 168,993 158,439
Premises and equipment...... 8,364 7,139 7,335 7,448 6,875
Other assets................ 8,161 7,985 9,650 9,243 5,725
-------- -------- -------- -------- --------
Total assets................ $358,674 $327,729 $322,416 $306,274 $272,259
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLD-
ERS' EQUITY
Deposits:
Transaction accounts...... $ 82,048 $ 74,280 $ 73,547 $ 64,614 $ 56,970
Savings deposits.......... 52,551 43,947 43,817 36,806 34,844
Time deposits............. 168,162 163,067 160,107 161,519 142,059
Borrowed funds.............. 13,098 7,706 10,994 11,862 8,676
Accrued liabilities and oth-
er.......................... 2,404 2,458 3,159 2,714 2,889
-------- -------- -------- -------- --------
Total liabilities........... 318,263 291,458 291,624 277,515 245,438
Shareholders' equity........ 40,411 36,271 30,792 28,759 26,821
-------- -------- -------- -------- --------
Total liabilities and share-
holders' equity............ $358,674 $327,729 $322,416 $306,274 $272,259
======== ======== ======== ======== ========
</TABLE>
28
<PAGE>
See the discussion of "Expansion Activity" below for matters that affect the
comparability of the above information.
The growth in both total assets and equity from 1990 through 1994 reflected
in Table I is attributable to a management plan that has expanded the market
area in which Matewan operates. Matewan acquired a new office in Danville,
West Virginia, pursuant to a purchase and assumption transaction in 1990. In
1994, Matewan formed the Thrift and opened offices in Coal Run and
Paintsville, Kentucky. These acquisitions and increased market penetration
have accounted for much of this five-year growth.
EXPANSION ACTIVITY
On January 3, 1994, Matewan contributed capital of $4.0 million to form the
Thrift, which commenced operations on that date. The Thrift's operations
contributed 57.0% of the asset growth that Matewan experienced in 1994 over
1993 and did not have a material impact on Matewan's results of operations in
1994.
In April 1990, the Bank acquired $43.0 million in assets (including $2.7
million in intangible assets) and assumed $43.0 million in liabilities,
consisting of the principal assets and liabilities of the Danville, West
Virginia branch of the Bank of Danville, for a purchase price of $1.4 million.
This transaction was accounted for as a purchase and, accordingly, the results
of operations of the Danville branch of the Bank of Danville have been
included in the consolidated results of operations from the date of
consummation.
FINANCIAL CONDITION
Matewan's primary revenues are generated by its earning assets, while its
primary expenses incurred to fund these assets are its various interest
bearing liabilities. Average earning assets increased approximately $25.2
million, or 8.4%, in 1994 over 1993. Average net loans outstanding increased
$21.3 million, or 11.7%, while average investment securities decreased $1.4
million, or 1.4%, and average interest bearing deposits in banks increased
$3.3 million, or 1,614.8%. Average federal funds sold increased $2.0 million,
or 16.9%. The majority of the increase in average assets is attributable to
the Thrift.
29
<PAGE>
TABLE II--ANALYSIS OF EARNING ASSETS AND INTEREST BEARING LIABILITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE (1) INTEREST YIELD (2) BALANCE (1) INTEREST YIELD (2) BALANCE (1) INTEREST YIELD (2)
----------- -------- --------- ----------- -------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning assets:
Loans:
Commercial.......... $ 65,186 $ 6,168 9.46% $ 67,749 $ 6,452 9.52% $ 63,296 $ 6,572 10.38%
Real estate......... 70,119 7,023 10.02 58,025 6,374 10.98 49,361 5,718 11.58
Installment......... 67,973 8,371 12.32 56,222 7,240 12.88 58,948 7,703 13.07
-------- ------- -------- ------- -------- -------
Total loans.......... 203,278 21,562 10.61 181,996 20,066 11.03 171,605 19,993 11.65
Securities:
Taxable............. 103,759 6,205 5.98 105,016 6,923 6.59 101,911 7,646 7.50
Tax-exempt.......... 927 58 6.26 1,106 85 7.69 2,739 214 7.81
-------- ------- -------- ------- -------- -------
Total securities..... 104,686 6,263 5.98 106,122 7,008 6.60 104,650 7,860 7.51
Federal funds sold... 13,710 551 4.02 11,723 348 2.97 17,256 585 3.39
Interest bearing
deposits in banks... 3,584 148 4.13 209 6 2.87 123 6 4.88
-------- ------- -------- ------- -------- -------
Total earning
assets.............. 325,258 28,524 8.77 300,050 27,428 9.14 293,634 28,444 9.69
------- ----- ------- ----- ------- -----
Non-earning assets... 33,416 27,679 28,782
-------- -------- --------
Total assets......... $358,674 $327,729 $322,416
======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest bearing liabilities:
Transaction accounts.. $ 37,592 $ 1,142 3.04 $ 34,183 $ 993 2.90 $ 35,375 $ 1,251 3.54
Savings deposits.... 52,551 1,817 3.46 43,947 1,564 3.56 43,817 1,801 4.11
Time deposits....... 168,162 7,137 4.24 163,067 6,982 4.28 160,107 8,202 5.12
Purchased funds..... 13,098 447 3.41 7,706 235 3.05 10,994 377 3.43
-------- ------- -------- ------- -------- -------
Total interest
bearing
liabilities......... 271,403 10,543 3.88 248,903 9,774 3.93 250,293 11,631 4.65
------- ----- ------- ----- ------- -----
Non-interest bearing
liabilities and
shareholders'
equity:
Demand deposits..... 44,456 40,097 38,172
Accrued expenses and
other.............. 2,404 2,458 3,159
Total shareholders'
equity............. 40,411 36,271 30,792
-------- -------- --------
Total non-interest
bearing liabilities
and shareholders'
equity.............. 87,271 78,826 72,123
-------- -------- --------
Total liabilities and
shareholders'
equity.............. $358,674 $327,729 $322,416
======== ======== ========
Net interest income.. $17,981 $17,654 $16,813
======= ======= =======
Spread.............. 4.89% 5.21% 5.04%
===== ===== =====
Net interest
margin............. 5.53% 5.88% 5.73%
===== ===== =====
</TABLE>
- --------
(1) Non-accrual loans are included in average balances.
(2) Yields on tax-exempt securities are on a pre-tax basis and do not
represent tax equivalent yields.
Average earning assets increased $6.4 million, or 2.2%, in 1993 over 1992.
Average net loans outstanding increased $10.4 million, or 6.1%, while average
investment securities volume increased $1.4 million, or 1.4%. This increase is
attributable to core growth within Matewan's Market. Average federal funds
sold decreased $5.5 million, or 32.0%.
Average interest bearing liabilities are the primary source of funds that
support Matewan's earning assets. In 1994, average interest bearing
liabilities increased $22.5 million, or 9.0%. Average transaction accounts
30
<PAGE>
increased $3.4 million, or 10.0%, average savings deposits increased $8.6
million, or 19.6%, average time deposits increased $5.1 million, or 3.1%, and
average purchased funds, primarily commercial repurchase agreements, increased
$5.4 million, or 70.0%, from 1994 to 1993. In 1993, average interest bearing
liabilities decreased $1.4 million, or 0.6%. Average time deposits and savings
deposits increased $3.1 million, or 1.5%, over 1992. Average transaction
accounts and purchased funds, primarily commercial repurchase agreements,
declined $4.5 million, or 9.7%, versus 1992.
LOAN PORTFOLIO
Matewan offers a variety of lending services, including commercial and
financial, real estate and consumer loans. Matewan, similar to other financial
institutions, also offers off-balance sheet instruments to its customers to
aid them in meeting their requirements for liquidity, credit enhancement and
interest rate protection.
Matewan has no foreign loans or loan concentrations to individual or related
borrowers which exceed 10% of total loans. Matewan grants loans to customers
primarily in southwestern West Virginia and eastern Kentucky. Although Matewan
has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their obligations is directly and indirectly dependent upon
the coal industry. Accordingly, a downturn in the coal industry could impact
the value of collateral held as security for the loan portfolio and the
ability of the borrowers to repay in accordance with original terms.
Historically, management has closely monitored coal-related credits and has
been successful in limiting credit exposure during times of downward economic
trends in the industry.
LOAN PORTFOLIO ANALYSIS
The Company's lending philosophy is to maintain a strategic asset mix
wherein the loan portfolio comprises approximately 65.0% of the Company's
total assets. More specifically, the targeted mix of the loan portfolio is
equally distributed among the real estate, commercial, and consumer
categories. By policy, the Company strives to achieve and maintain a loan-to-
deposit ratio of between 70.0% to 75.0%. The primary geographic focus for all
categories of lending is the Market.
Real estate loans represent the largest component of the Company's loan
portfolio at December 31, 1994, and September 30, 1995. The dollar volume of
real estate loans outstanding made within this market area is in excess of
91.0% of the total real estate portfolio. One-to-four family residential real
estate represents most of the collateral for this category. Matewan's loan
policy contains uniform and minimum standards for determining creditworthiness
of potential real estate borrowers, requiring conformity to FNMA and FHLMC
requirements, including debt-to-worth and loan-to-appraised-value ratios.
Maximum standards for loan-to-value ratios for the majority of real estate
lending are 80.0% for one-to-four-family residences, 75.0% for land
development, and 65.0% for raw, unimproved land. In addition, minimum
standards regarding downpayment, loan term, and risk-based loan rates are
employed by the Company.
Individually, commercial loans represent the largest and most concentrated
risks in the loan portfolio. In terms of geographic concentration, the dollar
volume of outstanding loans in this portfolio made within the Company's Market
is in excess of 92.0% of the commercial loans outstanding. The majority of the
loans in this category are collateralized with commercial real estate and
equipment. Minimum commercial loan underwriting and documentation standards
include, among other requirements, current financial information,
demonstration of sufficient cash flow to service the loan, adequate and
perfected lien position and sufficient collateral coverage. Minimum standards
similarly exist for downpayment, term of loan, and risk-based interest rate
determination, all dependent on the nature and type of credit involved. The
Company's loan policy prescribes, for the most part, variable-rate pricing
based on a predetermined and prominently recognized index.
Consumer loans represent the second-largest component of the loan portfolio
in terms of dollar volume. The dollar volume of consumer loans made within the
Company's Market represent in excess of 91.0% of the consumer loan portfolio.
Automobile loans comprise the largest single type of consumer credit, or
approximately one-half of the total consumer portfolio. Matewan's loan policy
mandates minimum underwriting standards
31
<PAGE>
based upon the nature of credit involved, including the applicant's employment
history, disposable income and debt-to-income ratios, credit score,
downpayment requirement, loan term, and collateral. While Company policy
emphasizes secured lending, unsecured consumer credits within established
guidelines are permitted by policy.
By definition, credit concentrations consist of direct, indirect and
contingent liabilities exceeding 25.0% of the Company's capital base.
Concentrations are considered to involve a single borrower, affiliated
borrowers, or a group of borrowers engaged in, or dependent on, a single
industry. Two major types of credit concentrations exist for the Company:
those delineated by loan category and those of a single-industry
concentration. Loan categories having concentrations in excess of 25.0% of the
Company's capital base are: (i) those secured by one-to-four family
residences; (ii) those secured by automobiles, (iii) those secured by
commercial real estate and equipment; and (iv) those characterized as
unsecured consumer loans. The other major type of concentration relates to the
general overall reliance on the coal industry. The Company attempts to
diversify somewhat by: (i) avoiding concentration of, or reliance on, one
company and its employees or suppliers; (ii) avoiding concentration of, or
reliance on, one or a few independent coal operators or contractors; and (iii)
spreading the commercial portfolio throughout western West Virginia and
eastern Kentucky.
Over 68.0% of those households in the Market own their domiciles, which have
a median dwelling value of $40,489. Median annual household income for the
Market is $18,888, with approximately 40.0% of the households having annual
incomes in excess of $25,000. Mining is the dominant industry in the local
economy, followed by, in no particular order, education, government services
and health care. Blue-collar occupations dominate employment, representing
nearly 56.0% of the work force.
At December 31, 1994, one-to-four-family residential real estate secured
35.0% of the loan portfolio, commercial equipment and vehicles secured 12.0%,
automobiles secured 17.0% and commercial real estate secured 11.0%.
Principally all of the commercial real estate securing the loans noted above
is within Matewan's Market, where such real estate values have not been
significantly affected by the substantial fluctuations that have caused
collateral value problems in other regions of the country. No other individual
category makes up 10.0% or more of the loan portfolio. The following table
shows the components of Matewan's loan portfolio:
TABLE III--CONSOLIDATED SUMMARY OF LOANS AND NON-PERFORMING ASSETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial loans................... $ 64,821 $ 69,372 $ 65,144 $ 65,970 $ 69,577
Real estate loans.................. 76,908 66,638 54,225 45,711 42,101
Consumer loans..................... 77,564 65,107 57,963 60,436 62,361
-------- -------- -------- -------- --------
Gross loans........................ 219,293 201,117 177,332 172,117 174,039
Less: Unearned income............. 1,617 2,303 2,098 2,014 1,839
-------- -------- -------- -------- --------
Total loans........................ 217,676 198,814 175,234 170,103 172,200
Less: Allowance for loan losses... 2,932 2,961 2,470 2,006 1,857
-------- -------- -------- -------- --------
Net loans.......................... $214,744 $195,853 $172,764 $168,097 $170,343
======== ======== ======== ======== ========
</TABLE>
From December 31, 1993, to December 31, 1994, real estate loans increased
$10.3 million, or 15.4%, due to increased origination of residential loans.
Consumer loans increased $12.4 million, or 19.1%, due largely to
32
<PAGE>
increased purchases of dealer paper for automobiles and consumer goods, while
commercial loans declined $4.6 million, or 6.6%, reflecting the Company's de-
emphasis of lending to customers engaged directly in the coal industry.
At December 31, 1993, net loans were $195.9 million, as compared to $172.8
million at December 31, 1992. Commercial loans remained generally flat,
increasing $4.2 million, or 6.5%. Real estate loans increased $12.4 million,
or 22.9%, and consumer loans increased $7.1 million, or 12.3%.
As Table III illustrates, Matewan has a relatively balanced loan portfolio,
with an increasing proportion of the portfolio in consumer and residential
real estate loans. The maturity distribution of Matewan's gross loans as of
December 31, 1994, is summarized in the following table:
TABLE IV--REMAINING MATURITIES OF LOANS
(IN THOUSANDS)
<TABLE>
<CAPTION>
LOANS MATURING OR REPRICING
WITHIN
-----------------------------
BALANCE AFTER
DECEMBER 31, ONE YEAR ONE TO FIVE FIVE
1994 OR LESS YEARS YEARS
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Commercial loans.................... $ 64,821 $ 44,124 $ 19,034 $ 1,663
Real estate loans................... 76,908 11,589 58,984 6,335
Consumer loans...................... 77,564 30,821 39,141 7,602
-------- -------- -------- --------
Gross loans........................ $219,293 $ 86,534 $117,159 $ 15,600
======== ======== ======== ========
Loans due after one year:
With floating rates............... $ 1,092
========
With predetermined rates.......... $131,667
========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is based upon senior management's review of
the loan portfolio, historical charge-off experience, composition of the loan
portfolio, loan volume, current economic conditions and other relevant
factors. The provision for loan losses in a period, less net charge-offs in a
period, represents the change in the allowance for loan losses in that period.
In management's judgment, the allowance for loan losses is maintained at a
level adequate to provide for potential losses on existing loans and loan
commitments.
Accrual of interest is generally discontinued when a loan becomes 90 days
past due as to principal or interest. When interest accruals are discontinued,
unpaid interest credited to income in the current year is reversed, and
interest accrued in prior years is charged to the allowance for loan losses.
Management may elect to continue the accrual of interest when the estimated
net realizable value of collateral is sufficient to cover the principal
balance and accrued interest and the loan is in the process of collection. A
non-accrual loan may be restored to an accrual basis when interest and
principal payments are brought current and prospects for future payments are
no longer in doubt.
The allowance for loan losses at December 31, 1994, was $2.9 million
compared to $3.0 million at December 31, 1993, a decrease of approximately
1.0%. This decrease reflects higher net charge-offs on the loan portfolio in
1994 as management focused on problem credits in the consumer and commercial
sector. Net charge-offs increased 110.6% in 1994 from 1993 levels. Based upon
economic expectations, reviews of credit relationships by management and the
level of non-performing assets, management continued aggressive charge- offs
of potentially uncollectible loans. The allowance for loan losses at December
31, 1993, was $3.0 million compared with $2.5 million at December 31, 1992, an
increase of 19.9%. Net charge-offs decreased 9.7% in 1993 over 1992. This
charge-off posture is reflected in increased recoveries in 1993 and 1994.
33
<PAGE>
The following tables show the analysis of the allowance for loan losses and
the allocation of allowance for loan losses:
TABLE V--ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at end of period........... $214,744 $195,853 $172,764 $168,097 $170,343
Average loans outstanding
during period.............. 203,278 181,996 171,605 168,993 158,439
Balance of allowance for
loan losses at beginning of
period..................... 2,961 2,470 2,006 1,857 1,132
Net charge-offs:
Commercial................ 854 318 477 653 572
Real estate............... 69 92 163 197 160
Consumer.................. 1,205 804 634 911 448
-------- -------- -------- -------- --------
Total loans charged off..... 2,128 1,214 1,274 1,761 1,180
Recoveries of loans
previously charged off:
Commercial................ 107 156 192 176 161
Real estate............... 55 36 26 32 11
Consumer.................. 294 228 177 195 242
-------- -------- -------- -------- --------
Total recoveries............ 456 420 395 403 414
-------- -------- -------- -------- --------
Net charge-offs............. 1,672 794 879 1,358 766
Additions to allowance:
Provision for loan
losses................... 1,643 1,285 1,343 1,507 1,203
Increase incident to
acquisition.............. -- -- -- -- 288
-------- -------- -------- -------- --------
Balance at end of period.... $ 2,932 $ 2,961 $ 2,470 $ 2,006 $ 1,857
======== ======== ======== ======== ========
Ratio of net charge-offs
during period
to average loans........... 0.82% 0.44% 0.51% 0.80% 0.48%
======== ======== ======== ======== ========
Ratio of the allowance to
non-performing loans....... 125.14 230.79 80.35 97.66 71.09
======== ======== ======== ======== ========
Ratio of allowance to
period-end loans........... 1.35 1.49 1.41 1.18 1.08
======== ======== ======== ======== ========
</TABLE>
TABLE VI--ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991 DECEMBER 31, 1990
------------------- ------------------- ------------------- ------------------- -------------------
ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY ALLOCATION CATEGORY
OF AS OF % OF AS OF % OF AS OF % OF AS OF % OF AS OF %
ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS ALLOWANCE OF LOANS
---------- -------- ---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......... $2,106 29.5% $2,150 34.5% $1,438 36.7% $1,000 38.3% $ 735 40.4%
Real estate........ 210 35.1 305 33.1 315 30.6 300 26.6 453 24.5
Consumer........... 616 35.4 506 32.4 717 32.7 706 35.1 669 35.1
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
$2,932 100.0% $2,961 100.0% $2,470 100.0% $2,006 100.0% $1,857 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
</TABLE>
CONSOLIDATED SUMMARY OF NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, loans more than 90 days
past due and other real estate owned. In 1994, Matewan's non-performing loans
increased by $1.0 million, or 72.3%, to 1.08% of total loans.
34
<PAGE>
Matewan's collateral position on these credits provides a basis to work
through collection efforts of delinquent loans in an orderly fashion. The 1994
increase in non-performing loans is not related to any one significant credit
relationship or industry downturn. Management continues to monitor these types
of assets to evaluate, control and ensure that their ultimate disposition does
not have a material negative impact on Matewan's financial position. The gross
interest income that would have been recorded on non-accrual loans during
1994, if the loans had been current in accordance with their original terms
and outstanding throughout the period, was $141,000. The amount of interest
income on those loans that was included in net income during 1994 was
$161,000.
The following table depicts the relative levels of non-performing assets for
the last five years:
TABLE VII--CONSOLIDATED SUMMARY OF NON-PERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Non-accrual loans.................... $1,743 $1,037 $2,838 $1,969 $1,676
Loans past due 90 days............... 600 246 236 85 936
------ ------ ------ ------ ------
Total non-performing loans.......... 2,343 1,283 3,074 2,054 2,612
Other real estate owned.............. 137 156 352 446 972
------ ------ ------ ------ ------
Total non-performing assets......... $2,480 $1,439 $3,426 $2,500 $3,584
====== ====== ====== ====== ======
Non-performing loans as a percentage
of total loans....................... 1.08% 0.65% 1.75% 1.21% 1.52%
====== ====== ====== ====== ======
Non-performing assets as a percentage
of total assets...................... 0.67% 0.42% 1.04% 0.77% 1.19%
====== ====== ====== ====== ======
</TABLE>
Matewan adopted Financial Accounting Standards Board Statement No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), effective
January 1, 1995. SFAS 114 requires that impaired loans be measured at the
present value of expected future cash flows discounted at the loan's original
effective interest rate or, as a practical expedient, at the loan's observable
market price of the fair value of the collateral if the loan is collateral
dependent. The adoption of SFAS 114 has not had a material effect on Matewan's
financial statements, accounting policies, income recognition or the
comparability of its Industry Guide 3 disclosures.
INVESTMENT PORTFOLIO AND OTHER EARNING ASSETS
The second-largest component of earning assets is investment securities.
Matewan's investment portfolio consists primarily of United States government
and federal agency obligations. Matewan's portfolio is designed to enhance
liquidity while providing acceptable rates of return.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and Matewan has the ability at
the time of purchase to hold debt securities to maturity, such securities are
classified as investments held-to-maturity and carried at amortized cost. Debt
securities purchased for an indefinite period of time, including securities
that management intends to utilize as part of its asset/liability strategy or
which may be sold for various reasons, and marketable equity securities are
classified as available-for-sale and carried at fair value. Unrealized holding
gains and losses on securities classified as available-for-sale, net of the
related tax effect, are carried as a separate component of shareholders'
equity.
Matewan does not hold investment securities for trading purposes. Matewan
adopted the provisions of Financial Accounting Standards Board Statement No.
115 ("SFAS 115"), the new standard for investments held as of or acquired
after January 1, 1994. In accordance with SFAS 115, prior period financial
statements have not been restated to reflect the change in accounting
principle. The balance of the shareholders' equity account at January 1, 1994,
was increased approximately $127,000 (net of deferred income taxes) to reflect
the unrealized
35
<PAGE>
holding gains on securities classified as available-for-sale previously
carried at amortized cost. At December 31, 1994, unrealized holding losses on
available-for-sale securities, net of deferred income taxes, of $143,000 have
been recorded as a separate component of shareholders' equity.
TABLE VIII--INVESTMENT SECURITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
U.S. FEDERAL STATE AND OTHER WEIGHTED
TREASURY AGENCIES MUNICIPAL SECURITIES TOTAL YIELD
-------- -------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994
Maturity:
Within 1 year......... $16,469 $17,698 $ 102 $ 399 $ 34,668 5.56%
After 1 year through 5
years................ 11,958 57,879 1,196 -- 71,033 6.11
After 5 years through
10 years............. -- 1,911 10 -- 1,921 9.53
After 10 years........ -- 256 4 2,099 2,359 6.03
------- ------- ------ ------ --------
Total carrying value
(1).................... $28,427 $77,744 $1,312 $2,498 $109,981 5.99
======= ======= ====== ====== ========
Market value............ $28,001 $75,156 $1,299 $2,499 $106,955
Purchase yield.......... 5.25% 6.28% 5.23% 5.92% 5.99%
Average maturity (in
years)................. 1.05 2.47 2.96 16.81 2.09
DECEMBER 31, 1993
Amortized cost.......... $23,006 $67,003 $ 538 $1,253 $ 98,814 6.16
Market value............ 30,493 68,424 566 1,253 100,736
Purchase yield.......... 5.36% 6.49% 7.12% 6.00% 6.16%
Average maturity (in
years)................. 1.41 2.21 1.69 20.00 2.36
DECEMBER 31, 1992
Amortized cost.......... $23,006 $81,543 $1,442 $ 272 $106,263 6.98
Market value............ 23,514 83,330 1,507 272 108,623
Purchase yield.......... 6.20% 7.20% 7.05% 6.00% 6.98%
Average maturity (in
years)................. 1.35 3.37 1.82 20.00 3.01
</TABLE>
- --------
(1) Available-for-sale securities are carried at fair value, and held-to-
maturity securities are carried at amortized cost.
During 1994, Matewan increased its investment holdings by $11.2 million, or
11.3%. Investment in United States Treasury issues declined $1.6 million to
25.8% of the total portfolio (down from 30.0% in 1993). In contrast, given
attractive yields, investment in federal agency issues, state and municipal
issues and other securities increased in 1994 in terms of both volume and
proportion of the investment portfolio. Federal agency investments increased
approximately $10.7 million (representing 70.7% of the portfolio, as compared
to 68.0% in 1993). Investments in state and municipal issues increased
$774,000 and investments in other securities increased $1.2 million in 1994,
representing 3.5% of the investment portfolio as compared to 2.0% in 1993.
During 1993, Matewan decreased its investment holdings by $7.4 million, or
7.0%. Most of this decrease was directed towards funding increased loan
commitments. Holdings of United States Treasury issues increased in terms of
both dollar volume (by $7.0 million, or 30.5%) and portfolio mix (from 21.0%
to 30.4%) at December 31, 1993, as compared to December 31, 1992, levels.
Conversely, United States agency and state and municipal issues experienced
declines in both volume (a $15.4 million decline) and portfolio mix (to 68.4%
from 78.1%).
Although Matewan's year-end investment in federal funds sold decreased $9.3
million in 1994 from prior year levels, average federal funds sold for the
year were $2.0 million higher in 1994 than in 1993. Core deposit growth
provided Matewan the majority of the funds available for these investments.
Matewan's activity in federal funds investments should be assessed in the
context of evolving economic market forces and Matewan's overall
asset/liability management. Management desires to keep federal funds sold
levels high enough to maintain sufficient liquidity, while balancing these
liquidity needs with a desire to maintain
36
<PAGE>
an adequate return on earning assets. As interest rates declined throughout
1993, the differential between yields on federal funds sold and on investment
securities falling within the parameters of Matewan's investment policy
narrowed, providing less incentive to commit substantial amounts of funds to
either alternative. At the same time, loan demand in most of Matewan's Market
picked up appreciably. Despite the fact that market rates for most loan
categories were likewise declining, the differential between market yields on
loans and yields on either federal funds sold or most investment securities
was much wider. Given the combination of strong local loan demand and the
yields available on those loans within parameters defined in Matewan's
asset/liability policy, management chose to reduce its investment in federal
funds sold over the course of 1993. Conversely, the combination of increasing
interest rates experienced in 1994 and greater liquidity provided by Matewan's
expanding deposit base made purchases of both investment securities and
federal funds more attractive.
DEPOSITS
Matewan primarily uses deposits to fund its lending activities and
investment portfolio. Deposit accounts, including checking, savings,
certificates of deposit and short-term borrowings, are obtained primarily from
Matewan's Market.
Average deposits and short-term borrowings increased $26.9 million, or 9.3%,
in 1994 from 1993 levels. The increasing interest rate environment prevalent
during much of 1994 and Matewan's growth efforts in its core markets combined
to produce significant increases across every deposit and borrowing category.
In contrast, in the declining interest rate environment of 1993, average
deposits and short-term borrowings increased by $500,000, or an annual growth
rate of 0.2%. Average transaction accounts decreased by $1.1 million, or 3.4%,
and average borrowed funds decreased by $3.3 million, or 29.9%, from 1992
levels, while average savings deposits increased by $130,000, or 0.3%, and
average time deposits increased by $3.0 million, or 1.9%, over 1992 average
levels. Matewan also experienced growth of average demand deposit accounts of
$1.9 million, or 5.0%, in 1993.
SHORT-TERM BORROWINGS
Short-term borrowings consist of the Treasury tax and loan account and
commercial repurchase agreements. The amount in the Treasury tax and loan
account is directly related to the amount of payroll in the Market and the
frequency of government withdrawals. Commercial repurchase agreements
represent overnight transactions whereby certain commercial customers invest
in liquid interest bearing liabilities. Average commercial repurchase
agreements increased $5.9 million, or 123.0%, in 1994, after decreasing $2.5
million, or 34.0%, in 1993. As a general rule, an increasing interest rate
environment and generally better liquidity characteristics made commercial
repurchase agreements a much more attractive investment alternative during
1994.
TABLE IX--SHORT-TERM BORROWINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED DECEMBER
31,
---------------------------------------
1994 1993 1992
------------ ----------- ------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------- ---- ------ ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Treasury tax and loan account:
As of year-end...................... $ 2,908 3.65% $5,714 2.76% $ 6,836 2.65%
Average balance..................... 2,346 2.69 2,881 2.97 3,402 2.98
Maximum month-end................... 5,577 -- 6,954 -- 6,866 --
Commercial repurchase agreements:
As of year-end...................... $12,089 3.14% $5,876 2.64% $ 5,096 2.81%
Average balance..................... 10,752 3.79 4,825 3.14 7,293 3.55
Maximum month-end................... 14,934 -- 5,885 -- 14,659 --
</TABLE>
37
<PAGE>
ASSET/LIABILITY MATURITY AND INTEREST RATE SENSITIVITY
Asset/liability management is the planning, implementation and control
process for determining asset mix and maturity features relative to liability
maturities. A major goal of asset/liability management is to maximize the net
interest margin within acceptable levels of risk of changes in interest rates.
The principal tool for such a process is management of Matewan's interest-
sensitive assets to interest-sensitive liabilities.
Matewan is liability sensitive in the "one-year-and-under" category.
Accordingly, a decrease in interest rates should benefit Matewan while an
increase in interest rates should adversely impact the net interest margin.
However, it has been management's experience that relatively modest movements
in interest rates have not had a material effect on Matewan's net interest
margin.
Matewan's management recognizes the exposure that exists from the
concentration of large "jumbo" certificates of deposit, and as part of the
asset/liability policy matches both rates and maturities so Matewan will not
have a liquidity problem or allow income to be significantly affected by a
change in interest rates. Management feels that Matewan's cash position is
sufficient to cover any payments necessary on "jumbo" certificates. In
addition, a major portion of the transaction accounts have attributes of core
deposits and, therefore, are not extremely interest-sensitive.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest-rate sensitive" and
by monitoring an institution's interest-rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest-rate-
sensitivity gap is defined as the difference between the amount of interest
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest-rate-
sensitive assets exceeds the amount of interest-rate-sensitive liabilities. A
gap is considered negative when the amount of interest-rate-sensitive
liabilities exceeds the amount of interest-rate-sensitive assets. During a
period of rising interest rates, a negative gap would be expected to adversely
affect net interest income, while a positive gap would be expected to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would be expected to result in an increase in net
interest income while a positive gap would be expected to adversely affect net
interest income.
The following table sets forth the amount of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1994, which are
estimated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown. The amounts of assets and
liabilities which reprice or mature during a particular period were determined
in accordance with the earlier of the term to repricing or the contractual
terms of the asset.
The table is intended to provide an approximation of the projected repricing
of assets and liabilities at December 31, 1994, on the basis of contractual
maturities, anticipated repayments and scheduled rate adjustments within a
three-month period and subsequent selected time intervals. The loan amounts in
the table reflect principal balances expected to be redeployed and/or repriced
as a result of contractual amortization and anticipated early payoffs of
adjustable-rate loans and fixed-rate loans and as a result of contractual rate
adjustments on adjustable-rate loans. For loans on one-to-four-family
residential properties, projected annual repayment rate was projected to be
8.67% annually. Commercial loans have a projected payment rate of 8.85% of the
portfolio within one year. Consumer loans have a projected payment rate of
23.9% of the portfolio for one year.
38
<PAGE>
TABLE X--ASSET AND LIABILITY MATURITY AND RATE SENSITIVITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
0-90 91-180 181-365 TOTAL 1-5 OVER
DAYS DAYS DAYS 1 YEAR YEARS 5 YEARS TOTAL
--------- --------- --------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Loans................... $ 53,340 $ 11,788 $ 21,406 $ 86,534 $117,159 $15,600 $219,293
Investments............. 15,731 7,507 13,699 36,937 72,783 261 109,981
Interest-bearing
deposits............... 2,876 -- -- 2,876 -- -- 2,876
Federal funds sold and
other.................. 4,770 -- -- 4,770 -- -- 4,770
--------- --------- --------- --------- -------- ------- --------
Total earning assets.... 76,717 19,295 35,105 131,117 189,942 15,861 336,920
LIABILITIES:
Savings and transaction
accounts............... 128,638 -- -- 128,638 -- -- 128,638
CD's $100,000 and over.. 17,978 11,718 16,846 46,542 13,591 -- 60,133
Other time.............. 21,188 15,971 14,100 51,259 26,487 -- 77,746
--------- --------- --------- --------- -------- ------- --------
Total deposits.......... 167,804 27,689 30,946 226,439 40,078 -- 266,517
Other borrowings........ 14,597 -- 400 14,997 -- -- 14,997
--------- --------- --------- --------- -------- ------- --------
Total interest bearing
liabilities............ 182,401 27,689 31,346 241,436 40,078 -- 281,514
--------- --------- --------- --------- -------- ------- --------
Interest sensitivity
gap.................... $(105,684) $ (8,394) $ 3,759 $(110,319) $149,864 $15,861 $ 55,406
========= ========= ========= ========= ======== ======= ========
Cumulative gap.......... $(105,684) $(114,078) $(110,319) $(110,319) $ 39,545 $55,406 $ 55,406
========= ========= ========= ========= ======== ======= ========
Cumulative gap as a
percentage of earning
assets................. (31.37)% (33.86)% (32.74)% (32.74)% 11.74% 16.44% 16.44%
========= ========= ========= ========= ======== ======= ========
</TABLE>
Management believes that the simulation of net interest income in different
interest rate environments provides a more meaningful measure of interest rate
risk. Income simulation analysis captures not only the potential of all assets
and liabilities to mature or reprice, but also the probability that they will
do so. Income simulation also addresses the relative interest-rate
sensitivities of these items, and projects their behavior over an extended
period of time. Finally, income simulation permits management to assess the
probable effects on the balance sheet not only of changes in interest rates,
but also of proposed strategies for responding to them.
The Company's income simulation model analyzes interest rate sensitivity by
projecting net interest income over the next 12 months. Holding prevailing
rates constant, the model projects the mix of accounts within the loan
portfolio and deposit base. In addition to projecting the mix of accounts
within the loan portfolio and deposit base, the Company must also make certain
assumptions regarding the movement of the rates on its assets and liabilities,
especially in its deposit rates.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to satisfy demands for deposit withdrawals, lending
commitments and other needs. Matewan's liquidity is based on a stable deposit
base. Matewan holds certain liquid assets such as cash and federal funds sold
to help meet certain liquidity needs. In addition, Matewan holds other
marketable assets (over $11.0 million of available-for-sale investments at
December 31, 1994) which can easily be converted to cash if the need arises.
Matewan continues to have the ability to attract short-term sources of funds
such as repurchase agreements to help meet its liquidity needs.
In December 1993, the Bank joined the FHLB of Pittsburgh. In January 1994,
the Thrift joined the FHLB of Cincinnati. The FHLBs provided an alternative
source of borrowings for the Banking Subsidiaries, thereby providing
additional sources of liquidity.
39
<PAGE>
Matewan's cash and cash equivalents, represented by cash and due from banks
and federal funds sold, are a product of its operating, investing and
financing activities. Cash and cash equivalents from operating activities $8.2
million, $7.3 million and $7.5 million in 1994, 1993 and 1992. Net cash used
in investing activities increased significantly from $7.2 million in 1992 to
$18.1 million in 1993 and to $36.3 million in 1994. These increases primarily
relate to the net increase in lending activities. Net cash provided by
financing activities related primarily to the net increase in deposits for all
three years presented, while 1992's increase was offset by a decrease in
short-term borrowings. Over the past three years, Matewan has reduced its cash
and cash equivalents by 25.0% in an effort to maximize earnings, without
sacrificing liquidity.
A central principle in Matewan's capital planning process is to attain
sufficiently high levels of profitability to ensure that capital adequacy is
maintained while generating a consistent flow of dividends. Both Matewan and
the Banking Subsidiaries are required to meet certain regulatory requirements
for capital on a risk-adjusted basis. See "Supervision and Regulation--Capital
Adequacy."
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the amount by which the interest income generated from
earning assets exceeds the interest expenses associated with funding those
assets, is the most significant component of net income. Net interest income
in 1994 was $18.0 million, up 2.0% from the 1993 level. Net interest income
for 1993 was $17.6 million, a 5.0% increase over 1992. As Table XI below
illustrates, the 1994 increase was primarily a function of Matewan's growth in
earning assets. Despite a short-term liability-sensitive position, Matewan
also managed to decrease its cost of average interest bearing liabilities in
1994 over 1993. In 1994, the yield on average earning assets for Matewan
declined 37 basis points from 1993 levels, while the cost of average interest
bearing liabilities declined 5 basis points from 1993 levels, resulting in a
32 basis point decrease in the spread during the period.
The 1993 increase was due to changes in both volume and in rate. Declining
interest rates throughout 1993 influenced interest income on earning assets
more significantly than interest expense for interest bearing liabilities,
despite the fact that Matewan, as a liability-sensitive company, did realize
substantial cost savings due to declining costs of funds. Overall market rates
began to decline in 1991. Possessing a negative short-term liability gap,
Matewan was able to reprice its funds more rapidly than it was required to
reprice its assets. In 1993, with rates stabilizing, the ability of Matewan to
generate additional cost savings through further deposit rate reductions
diminished. The gap between the decline in yield on average earning assets and
decline in cost of average interest bearing liabilities began to decrease. In
1993, the yield on average earning assets for Matewan declined 55 basis points
from 1992 levels, while the cost of average interest bearing liabilities
declined 72 basis points from 1992 levels, resulting in a 17 basis point
increase in the spread during the period.
40
<PAGE>
TABLE XI--VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
(IN THOUSANDS)
<TABLE>
<CAPTION>
INTEREST INCOME/EXPENSE
-----------------------
1994 VS. 1993 1993 VS. 1992
FOR THE YEAR ENDED INCREASE (DECREASE) INCREASE (DECREASE)
DECEMBER 31, DUE TO CHANGE IN DUE TO CHANGE IN
----------------------- ----------------------- ------------------------
1994 1993 1992 VOLUME RATE TOTAL VOLUME RATE TOTAL
------- ------- ------- ------ ------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans:
Commercial............. $ 6,168 $ 6,452 $ 6,572 $ (243) $ (41) $ (284) $ 445 $ (565) $ (120)
Real estate............ 7,023 6,374 5,718 1,242 (593) 649 964 (308) 656
Consumer............... 8,371 7,240 7,703 1,458 (327) 1,131 (352) (111) (463)
------- ------- ------- ------ ------- ------ ------ ------- -------
Total loans............. 21,562 20,066 19,993 2,457 (961) 1,496 1,057 (984) 73
Securities:
Taxable................ 6,205 6,923 7,646 (82) (636) (718) 227 (950) (723)
Tax-exempt............. 58 85 214 (13) (14) (27) (126) (3) (129)
------- ------- ------- ------ ------- ------ ------ ------- -------
Total securities........ 6,263 7,008 7,860 (95) (650) (745) 101 (953) (852)
Federal funds sold...... 551 348 585 66 137 203 (170) (67) (237)
Interest bearing
balances with other
banks.................. 148 6 6 137 5 142 2 (2) --
------- ------- ------- ------ ------- ------ ------ ------- -------
Total earning assets.... 28,524 27,428 28,444 2,565 (1,469) 1,096 990 (2,006) (1,016)
Interest bearing
liabilities:
Demand deposits........ 1,142 993 1,251 101 48 149 (41) (217) (258)
Savings deposits....... 1,817 1,564 1,801 298 (45) 253 5 (242) (237)
Time deposits.......... 7,137 6,982 8,202 220 (65) 155 149 (1,369) (1,220)
Purchase funds......... 447 235 377 181 31 212 (104) (38) (142)
------- ------- ------- ------ ------- ------ ------ ------- -------
Total interest bearing
liabilities............ 10,543 9,774 11,631 800 (31) 769 9 (1,866) (1,857)
------- ------- ------- ------ ------- ------ ------ ------- -------
Net interest income..... $17,981 $17,654 $16,813 $1,765 $(1,438) $ 327 $ 981 $ (140) $ 841
======= ======= ======= ====== ======= ====== ====== ======= =======
</TABLE>
Note: The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
During 1994, interest income increased 4.0% over prior-year levels. This
increase was realized primarily due to 15.6% and 10.2% increases in interest
on consumer and real estate loans, respectively. In contrast, commercial loan
income was 4.4% lower in 1994. Average investment securities decreased as did
the yields realized on the investment portfolio for 1994. Consequently,
investment income declined 10.6% from 1993. In contrast, average federal funds
sold and interest earned on federal funds sold increased 16.9% and 58.3%,
respectively, in 1994. Substantially higher levels for average interest
bearing deposits and the interest earned on such deposits contributed
approximately $142,000 more to interest income in 1994 than in the prior year.
During 1993, interest income declined 3.6% from 1992. This decline was
realized despite growth of 6.1% in average loans outstanding and of 0.4% in
loan income. Average investment securities increased 1.4% and related
investment income declined 10.8% over the same period. Management continued to
reduce its tax-exempt holdings due to limitations imposed by the Tax Reform
Act of 1986. Likewise, average federal funds sold and interest earned on
federal funds sold declined 32.1% and 40.5%, respectively, in 1993.
Interest expense increased 7.9% in 1994 after declining 16.0% in 1993.
Average interest bearing liabilities increased approximately 9.0% in 1994
after decreasing 0.6% in 1993. The increase in interest expense is due to the
significant growth in interest bearing liability volumes for 1994. Interest
expense declined 16.0% in 1993 after declining 23.7% in 1992. Average interest
bearing liabilities declined approximately 0.6% in 1993 after increasing 3.0%
in 1992. The decline in interest expense was due to the significant decline in
interest rates during 1993 and 1992.
While Matewan experienced an increase in net interest income in 1994, it
also realized a decrease in the net yield on earning assets (net interest
margin) for the first time since 1988. The net yield on earning assets for
1994 was 5.53% as compared to 5.88% for 1993. A 37 basis point decline in the
yield on average earning assets was partially offset by a decline in the cost
of average interest bearing liabilities of 5 basis points. In addition,
average non-interest bearing deposits grew $4.4 million in 1994, providing an
additional source of low-cost
41
<PAGE>
funds. The net interest margin in 1993 was 5.88% as compared to 5.73% for
1992. A 55 basis point decline in the yield on average earning assets was
exceeded by a 72 basis point decrease in the cost of interest bearing
liabilities.
OTHER INCOME
TABLE XII--OTHER INCOME
<TABLE>
<CAPTION>
INCREASE (DECREASE)
-------------------------------
YEAR ENDED DECEMBER 31, 1994 OVER 1993 1993 OVER 1992
----------------------- -------------- ---------------
1994 1993 1992 AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Service fees............ $ 1,624 $ 1,504 $ 1,252 $120 7.98% $ 252 20.13%
Other income............ 371 222 181 149 67.11 41 22.65
Commissions on credit
life insurance......... 690 637 740 53 8.32 (103) (13.92)
Gain on sale of assets.. 117 32 236 85 265.63 (204) (86.44)
------- ------- ------- ---- ------ ----- ------
Total other income...... $ 2,802 $ 2,395 $ 2,409 $407 16.99% $ (14) (0.58)%
======= ======= ======= ==== ====== ===== ======
</TABLE>
Non-interest income increased approximately 17.0% in 1994 over 1993 levels.
For 1994, service fee income increased approximately 8.0% due to increased
volumes corresponding to the growth in deposit levels. Other income increased
approximately 67.0% in 1994, with most of the gain attributable to sales by
Matewan's financial services division. Commission income on credit insurance
products increased approximately 8.3% due to normal growth in the consumer
loan portfolio. Gain on sale of assets increased more than twofold due to
gains realized on the sale of repossessed properties.
Non-interest income decreased in 1993 after experiencing annual increases in
the prior two years. For 1993, service fee income increased due to generally
higher operating volumes. Commission income decreased by approximately 13.9%,
due primarily to lower commission rates paid on credit insurance products.
Other income increased in 1993 due to the incidental nature of the sort of
transactions involved and not due to any fundamental economic reason. Gain on
sales of assets decreased in 1993 due to the inclusion in prior year totals of
several transactions that were realized in 1992 reflecting final sale of
certain Matewan properties through eminent domain proceedings. These
transactions were of an extraordinary and non-recurring nature and not
reflective of typical activity in this income category.
OTHER EXPENSES
TABLE XIII--OTHER EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
------------------------------
YEAR ENDED DECEMBER 31, 1994 OVER 1993 1993 OVER 1992
------------------------- -------------- ---------------
1994 1993 1992 AMOUNT PERCENT AMOUNT PERCENT
-------- -------- ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits............... $ 4,991 $ 4,880 $ 4,275 $111 2.27% $ 605 14.15%
Net occupancy........... 626 481 556 145 30.15 (75) (13.49)
Advertising............. 543 485 463 58 11.96 22 4.75
Federal deposit insur-
ance and
regulatory assess-
ments.................. 757 718 691 39 5.43 27 3.91
Other................... 4,342 3,808 3,912 534 14.02 (104) (2.66)
-------- -------- ------- ---- ----- ----- ------
$ 11,259 $ 10,372 $ 9,897 $887 8.55% $ 475 4.80%
======== ======== ======= ==== ===== ===== ======
</TABLE>
42
<PAGE>
Total other expenses increased approximately 8.6% from 1993 to 1994 and 4.8%
from 1992 to 1993. The majority of the increase in 1994 was related to start-
up costs of $350,000 associated with the organization of the Thrift. The
majority of the increase for 1993 was due to start-up expenses related to the
formation of Matewan Financial Services, the Bank's insurance and investment
division.
Tightening of net interest spreads requires heavier emphasis on both
maintaining control of non-interest expenses and leveraging these expenses
over a wider range of business volume, and thereby maximizing the efficiency
of such expenses. The "efficiency ratio" is calculated by dividing total non-
interest expenses by the sum of net interest income and non-interest income.
Matewan realized efficiency ratios of 54.2%, 51.7% and 51.5% for 1994, 1993
and 1992, respectively. The increase in 1994 is largely a function of
increased costs related to the Thrift as mentioned previously and narrowing
interest margins.
Salaries and employee benefits increased only 2.3% in 1994, after rising
14.2% in 1993. Staffing expenses related to the Company's financial services
division, increasing health-care benefit expenses and normal salary increases
were the primary reasons for the increases. The increases were $111,000 and
$605,000 from 1993 to 1994 and from 1992 to 1993, respectively. The relatively
modest growth rates are a further reflection of management's ongoing
commitment to controlling non-interest expenses. Net occupancy expenses,
relatively constant in 1993 and 1992, increased approximately 30.2% in 1994.
Capital expenditures related to the Thrift, the relocation of the corporate
and administrative offices to Williamson and the construction activity of the
Money Center office were the primary reasons for the increase.
Advertising costs fluctuate with management's evaluation of the benefit to
be gained from additional media exposure. Management determined that
additional advertising would be beneficial, leading to increases of $58,000
for 1994 and $22,000 for 1993.
Premiums and assessments paid to the FDIC, OCC and OTS increased $39,000, or
5.4%, in 1994, due to higher deposit volumes. The same premiums increased only
$27,000 in 1993 due to the risk level assigned to the Bank.
Consistent with the overall impact of the various projects undertaken by
Matewan in 1994, other operating expenses increased $534,000, or 14.0%, in
1994 after posting a decrease of $104,000, or 2.7%, in 1993. Other operating
expenses consist of several components, most of which (such as telephone,
postage and data processing expense) have shown increases that are
attributable to expansion of the Company's activities, market area and
customer base.
APPLICABLE INCOME TAXES
Income tax expense was $2.9 million in 1994, $3.3 million in 1993 and $2.9
million in 1992, for effective tax rates of 36.5% in 1994, 39.0% in 1993 and
36.6% in 1992. Matewan's inability to find immediate and viable tax-free
investment alternatives was the major factor behind the increase in the
effective tax rate in 1993. Management is actively pursuing tax favored
investments which carry attractive yields in an attempt to maximize earnings
and reduce Matewan's effective tax rate.
EFFECTS OF CHANGING PRICES
The consolidated financial statements and related data included herein have
been prepared in accordance with generally accepted accounting principles
which require the measurement of Matewan's financial position and results of
operations in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Virtually all
of Matewan's assets and liabilities are monetary in nature. As a result,
levels of and changes in interest rates have a more significant impact on
Matewan's performance than the effects of general levels of inflation.
43
<PAGE>
BUSINESS
COMPETITION
The Market is characterized by intense competition in all aspects and areas
of its business from commercial banks, savings and loan associations, mutual
savings banks and other financial institutions, many of which have greater
financial resources than Matewan and the Banking Subsidiaries. After giving
effect to the Acquisition, Matewan will have a 20.5% deposit share of the
Market. Matewan's management believes that it is able to compete with other
institutions by providing innovative products through convenient delivery
systems and a well-trained, sales oriented work force supported by
sophisticated technology.
PROPERTIES
Matewan maintains its executive offices in Williamson, West Virginia. The
Bank and the Thrift operate 13 offices throughout Matewan's Market. Seven of
these offices are owned and six are leased. Pikeville's principal offices are
located in Pikeville, Kentucky, in a six-story, steel frame building with
approximately 74,000 square feet of space. Additionally, Pikeville operates
seven branch banking facilities, six of which are owned.
LEGAL PROCEEDINGS
Neither Matewan nor any of its subsidiaries is a party to any litigation
other than litigation which is routine in the business of Matewan, and which,
if decided adversely to Matewan, would materially adversely affect the
financial condition of Matewan.
Pikeville is a party to ordinary routine litigation incidental to its
business. In connection with the Acquisition, Banc One will, pursuant to the
terms of the Purchase Agreement, retain certain of this litigation.
Additionally, Banc One will also provide limited indemnification of Matewan
and Pikeville in connection with certain remaining litigation. Accordingly, if
the Acquisition is consummated, an unfavorable decision to Pikeville would not
have a material adverse effect on Pikeville (or ultimately, Matewan).
EMPLOYEES
At September 30, 1995, Matewan and Pikeville had 231 and 110 full-time
equivalent employees, respectively.
44
<PAGE>
MANAGEMENT
DIRECTORS
Matewan's Board of Directors currently consists of seven persons. Each of
the directors of Matewan is also a director of each of the Banking
Subsidiaries. The following table sets forth the names of the members of the
Board of Directors of Matewan, their ages, the year in which each became a
director of Matewan (or its predecessor, the Bank) and the amount of Common
Stock and the percent thereof beneficially owned by each director on December
31, 1995.
<TABLE>
<CAPTION>
BENEFICIAL
DIRECTOR OWNERSHIP PERCENT
NAME AGE SINCE OF SHARES OF CLASS
---- --- -------- ---------- --------
<S> <C> <C> <C> <C>
James H. Harless....................... 76 1960 433,670(1) 11.83%
Dan R. Moore........................... 55 1979 735,385(1)(2) 20.05
Frank E. Ellis......................... 68 1988 251,986(3) 6.87
Lafe P. Ward........................... 70 1968 107,900 2.94
George A. Kostas....................... 65 1988 110,210(4) 3.01
Amos J. Hatfield....................... 69 1988 87,787(5) 2.39
Sidney R. Young, Jr.................... 71 1978 20,521 0.56
Betty Jo Moore......................... 55 1994 343,145(6) 9.36
All directors and officers as a group
(12 persons).......................... 1,429,399 38.98
</TABLE>
- --------
(1) Includes 392,240 shares as to which Mr. Moore has sole voting power
pursuant to an agreement dated August 6, 1987, entered into between Mr.
Moore and Mr. Harless in connection with the merger of Matewan and Guyan
Bancshares, Inc., pursuant to which Mr. Harless granted Mr. Moore an
irrevocable proxy to vote shares held of record or beneficially by Mr.
Harless at all meetings of shareholders of Matewan for so long as Mr.
Moore remains Chairman of Matewan.
(2) Includes 343,145 shares held of record by Mr. Moore and his wife, members
of their family and affiliates.
(3) Includes 203,500 shares held of record by the Frank Ellis Trust.
(4) Includes 65,964 shares of record held by Mr. Kostas and his wife.
(5) Includes 70,188 shares of record held by Mr. Hatfield and his wife, and
7,920 shares of record held by his wife and son as to which Mr. Hatfield
disclaims beneficial ownership.
(6) Includes 343,145 shares held by Mrs. Moore and her husband, members of
their family and affiliates, but excludes shares subject to the voting
agreement between Messrs. Moore and Harless.
The respective addresses of Mr. and Mrs. Moore, Mr. Harless and Mr. Ellis
are Box 26, Matewan, West Virginia, 25678, Drawer H, Gilbert, West Virginia,
25621, and 4 Tanglewood, Cincinnati, Ohio, 45221, respectively.
EXECUTIVE OFFICERS
The following table sets forth certain information about the principal
executive officers of Matewan, each of whom is selected by the Board of
Directors and each of whom holds office at the discretion of the Board of
Directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Dan R. Moore............ 55 Chairman of the Board, President and Chief Executive Officer
Pauline Roberson........ 72 Vice President and Secretary
Tim Edwards............. 46 Chief Operations Officer
Lee M. Ellis............ 40 Vice President and Chief Financial Officer
Anna Ward............... 36 Vice President of Administration
</TABLE>
45
<PAGE>
BIOGRAPHICAL INFORMATION
The following is a brief description of the principal occupation and
business experience for the last five years of each director and executive
officer of Matewan named above.
Dan R. Moore is the Chairman of the Board, President and Chief Executive
Officer of Matewan and the Bank and is Chairman of the Board of the Thrift and
has acted in these capacities for the Bank since 1979, for Matewan since its
formation in 1984, and for the Thrift since its formation in 1993.
James H. Harless is Chairman of the Board of International Industries, Inc.,
a holding company for various industrial companies, primarily mining and
timbering.
Frank E. Ellis is President of Frank Ellis, M.D. Associates, Inc.
Lafe P. Ward is an attorney with Ward and Associates, L.L.P., and general
counsel for Matewan.
George A. Kostas is President of Aracoma Drug Company, Inc., a pharmacy.
Amos J. Hatfield is the owner of Gilbert Furniture Company.
Sidney R. Young, Jr. retired in 1986 as President and Chief Operating
Officer for McNamee Resources, Inc., a position he held for the previous seven
years.
Betty Jo Moore is President of Moore Ford, Lincoln, Mercury, Inc., Moore
Chevrolet, Inc., and Moore Chrysler, Inc.
Pauline Roberson was appointed Vice President and Secretary of Matewan and
the Bank in 1984 and the Thrift in 1993.
Tim Edwards was appointed Chief Operations Officer in 1993, and prior to
that was the President of United National Bank, Webster Springs, West
Virginia, a position he held for three years.
Lee M. Ellis became Vice President of the Bank in 1988 and Vice President
and Chief Financial Officer of Matewan in 1992 and of the Thrift in 1993.
Anna Ward was appointed Vice President of Administration for Matewan in 1993
and the Bank in 1992. Prior to that time, she was an auditor for the Bank.
Dan R. Moore and Betty Jo Moore are married. Anna Ward is Lafe P. Ward's
daughter-in-law. Lee M. Ellis is Frank E. Ellis' son. Other than the
foregoing, no directors or executive officers are related.
EXECUTIVE OFFICERS' COMPENSATION
The following table sets forth information about aggregate compensation
received from Matewan and its subsidiaries by the chief executive officer of
Matewan, who was the only executive officer who received aggregate
compensation in excess of $100,000 during the fiscal years ended December 31,
1994, 1993 and 1992. Matewan does not have any stock option or other stock-
based compensation plans.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($)
- --------------------------- ----------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Dan R. Moore 1994 180,508 27,667 --
Chairman of the Board, Presi-
dent 1993 166,265 33,119 --
and Chief Executive Officer 1992 152,810 19,628 --
</TABLE>
46
<PAGE>
The following table indicates, for purposes of illustration, the approximate
annual retirement benefits (including qualified plan and supplemental plan)
upon retirement to participants at December 31, 1994, at selected remuneration
and years of service classifications, at age 65:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFITS
ON CREDITED YEARS OF SERVICE
MONTHLY COMPENSATION ON ---------------------------------------
AN ANNUALIZED BASIS 15 20 25 30 35
----------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$160,000 $36,000 $48,000 $60,000 $72,000 $84,000
140,000 31,500 42,000 52,500 63,000 73,500
120,000 27,000 36,000 45,000 54,000 63,000
100,000 22,500 30,000 37,500 45,000 52,500
80,000 18,000 24,000 30,000 36,000 42,000
60,000 13,500 18,000 22,500 27,000 31,500
40,000 9,000 12,000 15,000 18,000 21,000
</TABLE>
At the end of fiscal year 1994, Mr. Moore had 31 years of credited service
under the Plan.
For the 1995 plan year, the normal retirement benefit under the Plan is
0.85% of average monthly compensation up to covered compensation plus 1.5% of
average monthly compensation in excess of covered compensation times years of
employment up to a maximum of 35 years. Benefits are not subject to deduction
for Social Security or other offset amounts.
CERTAIN TRANSACTIONS
The Bank has made various loans to its directors and officers and to
directors and officers of Matewan and the Banking Subsidiaries. Loans to this
group and their related entities totalled $4,208,000, $3,633,000 and
$2,448,000 at December 31, 1994, 1993 and 1992, respectively. These loans were
made in the ordinary course of business, were made on substantially the same
terms, including interest rate and collateral, as those prevailing at the same
time for comparable transactions with persons other than directors or
officers, and did not involve more than the normal risk of collectibility or
present other unfavorable features.
During the years ended December 31, 1994, 1993 and 1992, Matewan and its
subsidiaries paid legal fees of approximately $36,000, $16,732 and $23,159,
respectively, to the law firm of Ward and Associates, L.L.P. Mr. Ward, a
director of Matewan, is a principal in the firm and as a result may receive an
indirect benefit from the payment of legal fees.
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<PAGE>
SUPERVISION AND REGULATION
The following discussion sets forth certain of the material elements of the
regulatory framework applicable to banks and thrifts and their bank holding
companies and provides certain specific information related to Matewan.
Supervision, regulation, and examination of Matewan, the Bank, the Thrift and
Pikeville by the bank regulatory agencies are intended primarily for the
protection of depositors rather than holders of Matewan's capital stock. Any
change in applicable law or regulation may have a material effect on Matewan's
business.
GENERAL
Matewan is a bank holding company registered with the Federal Reserve under
the Bank Holding Company Act of 1956, as amended ("BHC Act"). As such, Matewan
and its non-bank subsidiaries are subject to the supervision, examination and
reporting requirements of the BHC Act and the regulations of the Federal
Reserve. In addition, as a savings and loan holding company, Matewan is also
registered with the OTS as a savings and loan holding company and is subject
to regulation, supervision, examination and reporting requirements of the OTS.
The BHC Act requires every bank holding company to obtain the prior approval
of the Federal Reserve before: (i) it may acquire direct or indirect ownership
or control of any voting shares of any bank if, after such acquisition, the
bank holding company will directly or indirectly own or control more than 5.0%
of the voting shares of the bank; (ii) it or any of its subsidiaries, other
than a bank, may acquire all or substantially all of the assets of any bank;
or (iii) it may merge or consolidate with any other bank holding company.
Similar federal statutes require savings and loan holding companies and other
companies to obtain the prior approval of the OTS before acquiring direct or
indirect ownership or control of a savings association.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business
of banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to
consider the financial and managerial resources and future prospects of the
bank holding companies and banks concerned and the convenience and needs of
the community to be served. Consideration of financial resources generally
focuses on capital adequacy which is discussed below.
The BHC Act was amended by the interstate banking provisions of the Riegle-
Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Banking Act"), which became effective on September 29, 1995. The Interstate
Banking Act repealed the prior statutory restrictions on interstate
acquisitions of banks by bank holding companies, such that Matewan and any
other bank holding company located in West Virginia or Kentucky may now
acquire a bank located in any other state, and any bank holding company
located outside West Virginia or Kentucky may lawfully acquire any West
Virginia-based bank or Kentucky-based bank, regardless of state law to the
contrary in either case subject to certain deposit-percentage, aging
requirements, and other restrictions. The Interstate Banking Act also
generally provides that, after June 1, 1997, national and state-chartered
banks may branch interstate through acquisitions of banks in other states. By
adopting legislation prior to that date, a state has the ability either to
"opt in" and accelerate the date after which interstate branching is
permissible or "opt out" and prohibit interstate branching altogether. As of
the date of this Prospectus, neither West Virginia nor Kentucky has "opted in"
or "opted out." Assuming no state action prior to June 1, 1997, Matewan would
be able to consolidate the Banking Subsidiaries and Pikeville into a single
bank with interstate branches following that date.
The BHC Act generally prohibits Matewan from (i) engaging in activities
other than banking or managing or controlling banks or other permissible
subsidiaries and (ii) acquiring or retaining direct or indirect control of any
company engaged in any activities other than those activities determined by
the Federal Reserve to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining
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<PAGE>
whether a particular activity is permissible, the Federal Reserve must
consider whether the performance of such an activity reasonably can be
expected to produce benefits to the public, such as greater convenience,
increased competition or gains in efficiency, that outweigh possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. For example,
factoring accounts receivable, acquiring or servicing loans, leasing personal
property, conducting discount securities brokerage activities, performing
certain data processing services, acting as agent or broker in selling credit
life insurance and certain other types of insurance in connection with credit
transactions and performing certain insurance underwriting activities all have
been determined by the Federal Reserve to be permissible activities of bank
holding companies. The BHC Act does not place territorial limitations on
permissible non-banking activities of bank holding companies. Despite prior
approval, the Federal Reserve has the power to order a bank holding company or
its subsidiaries to terminate any activity or to terminate its ownership or
control of any subsidiary when it has reasonable cause to believe that
continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness or stability of any bank
subsidiary of that bank holding company.
Matewan is required to register annually with the Commissioner of Banking of
West Virginia (the "Commissioner") and to pay a registration fee to the
Commissioner based on the total amount of bank deposits in banks with respect
to which Matewan is a bank holding company. Although legislation allows the
Commissioner to prescribe the registration fee, it limits the fee to ten
dollars per million dollars of deposits rounded off to the nearest million
dollars. Matewan is also subject to regulation and supervision by the
Commissioner.
Matewan is required to secure the approval of the West Virginia Board of
Banking before acquiring ownership or control of more than 5.0% of the voting
shares or substantially all of the assets of any institution, including
another bank located in West Virginia. West Virginia and Kentucky banking laws
prohibit any bank or bank holding company from acquiring shares of a bank if
the acquisition would cause the combined deposits of all banks in West
Virginia or Kentucky, with respect to which it is a bank holding company, to
exceed 20.0% and 15.0%, respectively, of the total deposits of all depository
institutions in that state. As of June 30, 1994, the total deposits of the
Banking Subsidiaries in West Virginia were less than 2.0% of the total
deposits in West Virginia. As of June 30, 1994, giving effect to the
Acquisition, Pikeville and the Thrift would have held less than 1.0% of the
total deposits in Kentucky.
Each of the Banking Subsidiaries and Pikeville is a member of the FDIC, and
as such, its deposits are insured by the FDIC to the maximum extent provided
by law. Each is also subject to numerous state and federal statutes and
regulations that affect its business, activities, and operations, and each is
supervised and examined by one or more state or federal bank regulatory
agencies.
Each of the Bank and Pikeville is subject to regulation, supervision and
examination by the OCC and the FDIC. The Thrift is subject to regulation,
supervision and examination by the OTS and the FDIC. The OCC and the OTS
regularly examine the respective operations of the Bank, Pikeville and the
Thrift and are given authority to approve or disapprove mergers,
consolidations, the establishment of branches and similar corporate actions.
The federal banking regulators also have the power to prevent the continuance
or development of unsafe or unsound banking practices or other violations of
law.
PAYMENT OF DIVIDENDS
Matewan is a legal entity separate and distinct from its Banking
Subsidiaries and other subsidiaries. The principal sources of cash flow of
Matewan, including cash flow to pay dividends to its stockholders, are
dividends from the Banking Subsidiaries. There are statutory and regulatory
limitations on the payment of dividends by these depository institution
subsidiaries to Matewan, as well as by Matewan to its stockholders.
Both the Bank and Pikeville are required by federal law to obtain the prior
approval of the OCC for the payment of dividends if the total of all dividends
declared by the bank in any year would exceed the total of (i)
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<PAGE>
the bank's net profits (as defined and interpreted by regulation) for that
year, plus (ii) the retained net profits (as defined and interpreted by
regulation) for the proceeding two years, less any required transfers to
surplus. In addition, national banks may only pay dividends to the extent that
their retained net profits (including the portion transferred to surplus)
exceed statutory bad debts (as defined by regulation). The Thrift is subject
to the OTS' regulations governing dividend payments and other capital
distributions. Under those regulations, a savings association that is well
capitalized is permitted to declare dividends of up to the greater of (i) the
sum of 100.0% of its current net income plus one-half of its capital in excess
of the minimum regulatory requirements or (ii) 75.0% of its net income during
the most recent four-quarter period.
If, in the opinion of a federal banking regulator, a bank or thrift under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution's capital base to an
inadequate level would be an unsafe and unsound banking practice. Under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a
depository institution may not pay any dividend if payment would cause it to
become undercapitalized or if it already is undercapitalized. See "--Prompt
Corrective Action." Moreover, the federal banking regulators have issued
policy statements that provide that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
At September 30, 1995, under dividend restrictions imposed under federal
laws and regulations, the Banking Subsidiaries, without obtaining governmental
approvals, could declare aggregate dividends to Matewan of approximately $5.1
million. On December 28, 1995, a dividend of $5.0 million was declared by the
Bank. Of this amount, $950,000 will be used to fund a portion of the purchase
price of the Acquisition and related expenses.
CAPITAL ADEQUACY
Matewan, the Banking Subsidiaries and Pikeville are required to comply with
the capital adequacy standards established by the Federal Reserve in the case
of Matewan, the OCC in the case of the Bank and Pikeville and the OTS in the
case of the Thrift. There are three basic measures of capital adequacy for
bank holding companies that have been promulgated by the Federal Reserve; two
of which are risk-based measures and one of which is a leverage measure. All
applicable capital standards must be satisfied for a bank holding company to
be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and
bank holding companies, to account for off-balance-sheet exposure and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights.
The resulting capital ratios represent capital as a percentage of total risk-
weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital ("Total Capital") to
risk-weighted assets (including certain off-balance-sheet items, such as
standby letters of credit) ("Total Capital Ratio") is 8.0%. At least one-half
of Total Capital must consist of common stock, minority interests in the
equity accounts of consolidated subsidiaries, noncumulative perpetual
preferred stock, and a limited amount of cumulative perpetual preferred stock,
less goodwill and certain other intangible assets ("Tier 1 Capital"). The
remainder may consist of subordinated debt, other preferred stock and a
limited amount of loan loss reserves ("Tier 2 Capital"). At September 30,
1995, Matewan's consolidated Total Capital Ratio and its Tier 1 Capital Ratio
(i.e., the ratio of Tier 1 Capital to risk-weighted assets) were 19.29% and
18.17%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio of Tier 1 Capital to average assets, less goodwill and certain other
intangible assets (the "Tier 1 Leverage Ratio"), of 3.0% for bank holding
companies that meet
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<PAGE>
certain specified criteria, including having the highest regulatory rating.
All other bank holding companies generally are required to maintain a Tier 1
Leverage Ratio of at least 3.0%, plus an additional cushion of 100 to 200
basis points. Matewan's Leverage Ratio at September 30, 1995, was 11.01%. The
guidelines also provide that bank holding companies experiencing internal
growth or making acquisitions will be expected to maintain strong capital
positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve
has indicated that it will consider a "tangible Tier 1 Capital Leverage Ratio"
(deducting all intangibles) and other indicia of capital strength in
evaluating proposals for expansion or new activities.
The Bank, the Thrift and Pikeville are subject to risk-based and leverage
capital requirements adopted by their respective federal banking regulator,
which are substantially similar to those adopted by the Federal Reserve for
bank holding companies. Each of the Banking Subsidiaries and Pikeville was in
compliance with applicable minimum capital requirements as of September 30,
1995. Neither Matewan, any of the Banking Subsidiaries or Pikeville has been
advised by any federal banking agency of any specific minimum capital ratio
requirement applicable to it.
Failure to meet capital guidelines could subject a depository institution to
a variety of enforcement remedies, including issuance of a capital directive,
the termination of deposit insurance by the FDIC, a prohibition on the taking
of brokered deposits, and other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
"--Prompt Corrective Action."
The federal bank regulators continue to indicate their desire to raise
capital requirements applicable to banking organizations beyond their current
levels. In this regard, the Federal Reserve, the OCC and the FDIC have,
pursuant to FDICIA, proposed an amendment to the risk-based capital standards
that would calculate the change in an institution's net economic value
attributable to increases and decreases in market interest rates and would
require banks with excessive interest rate risk exposure to hold additional
amounts of capital against such exposure. The OTS has already included an
interest-rate risk component in its risk-based capital guidelines for the
savings associations that it regulates, including the Thrift.
SUPPORT OF SUBSIDIARY BANKS
Under Federal Reserve policy, Matewan is expected to act as a source of
financial strength for, and to commit resources to support, each of the
Banking Subsidiaries and Pikeville after the Acquisition. This support may be
required at times when, absent such Federal Reserve policy, Matewan may not be
inclined to provide it. In addition, any capital loans by a bank holding
company to any of its banking subsidiaries are subordinate in right of payment
to deposits and to certain other indebtedness of such institutions. In the
event of a bank holding company's bankruptcy, any commitment by the bank
holding company to a federal bank regulatory agency to maintain the capital of
a banking subsidiary will be assumed by the bankruptcy trustee and entitled to
a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(i) the default of a commonly controlled FDIC-insured depository institution
or (ii) any assistance provided by the FDIC to any commonly controlled FDIC-
insured depository institution "in danger of default." "Default" is defined
generally as the appointment of a conservator or receiver, and "in danger of
default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is
subordinate to claims of depositors, secured creditors, and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution. The Banking Subsidiaries are, and Pikeville after the
Acquisition will be, subject to these cross-guarantee provisions. As a result,
any loss suffered by the FDIC in respect of any of these subsidiaries would
likely result in assertion of the cross-guarantee provisions, the assessment
of such estimated losses against the
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subsidiary's depository institution affiliates, and a potential loss of
Matewan's investments in such other subsidiaries.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the
problems of undercapitalized institutions. Under this system, which became
effective in December 1992, the federal banking regulators are required to
establish five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and to take certain mandatory supervisory actions, and are
authorized to take other discretionary actions, with respect to institutions
in the three undercapitalized categories, the severity of which will depend
upon the capital category in which the institution is placed. Generally,
subject to a narrow exception, FDICIA requires the banking regulator to
appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation
the relevant capital level for each category.
Under the final agency rules implementing the prompt corrective action
provisions, an institution is deemed to be well capitalized if the institution
(i) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of
6.0% or greater, and a Tier 1 Leverage Ratio of 5.0% or greater and (ii) is
not subject to any written agreement, order, capital directive or prompt
corrective action directive issued by the appropriate federal banking agency.
An institution with a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital
Ratio of 4.0% or greater and a Tier 1 Leverage Ratio of 4.0% or greater is
considered to be adequately capitalized. A depository institution that has a
Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than
4.0% or a Tier 1 Leverage Ratio of less than 4.0% is considered to be
undercapitalized. A depository institution that has a Total Capital Ratio of
less than 6.0%, a Tier 1 Capital Ratio of less than 3.0% or a Tier 1 Leverage
Ratio of less than 3.0% is considered to be significantly undercapitalized,
and an institution that has a tangible equity capital to assets ratio equal to
or less than 2.0% is deemed to be critically undercapitalized. For purposes of
the regulation, the term "tangible equity" includes core capital elements
counted as Tier 1 Capital for purposes of the risk-based capital standards,
plus the amount of outstanding cumulative perpetual preferred stock (including
related surplus), minus all intangible assets with certain exceptions. A
depository institution may be deemed to be in a capitalization category that
is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary
depository institution meets its capital restoration plan, subject to certain
limitations. The obligation of a controlling holding company under FDICIA to
fund a capital restoration plan is limited to the lesser of 5.0% of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches or engaging in any new line of business, except in
accordance with an accepted capital restoration plan or with the approval of
the FDIC. In addition, the appropriate federal banking agency is given
authority with respect to any undercapitalized depository institution to take
any of the actions described below, if it determines "that those actions are
necessary to carry out the purpose" of FDICIA.
For those institutions that are significantly undercapitalized or
undercapitalized and either fail to submit an acceptable capital restoration
plan or fail to implement an approved capital restoration plan, the
appropriate federal banking agency must require the institution to take one or
more of the following actions: (i) sell enough shares, including voting
shares, to become adequately capitalized; (ii) merge with (or be sold to)
another institution (or holding company), but only if grounds exist for
appointing a conservator or receiver; (iii) restrict certain transactions with
banking affiliates as if the "sister bank" exception to the requirements of
Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict
transactions with bank or non-bank affiliates; (v) restrict interest rates
that the institution pays on deposits to "prevailing rates" in the
institution's "region;" (vi) restrict asset growth or reduce total assets;
(vii) alter, reduce or terminate activities; (viii) hold a new election of
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<PAGE>
directors; (ix) dismiss any director or senior executive officer who held
office for more than 180 days immediately before the institution became
undercapitalized, provided that in requiring dismissal of a director or senior
officer, the agency must comply with certain procedural requirements,
including the opportunity for an appeal in which the director or officer will
have the burden of proving his or her value to the institution; (x) employ
"qualified" senior executive officers; (xi) cease accepting deposits from
correspondent depository institutions; (xii) divest certain nondepository
affiliates which pose a danger to the institution; or (xiii) be divested by a
parent holding company. In addition, without the prior approval of the
appropriate federal banking agency, a significantly undercapitalized
institution may not pay any bonus to any senior executive officer or increase
the rate of compensation for such an officer.
At September 30, 1995, each of the Banking Subsidiaries and Pikeville had
the requisite capital levels to qualify as well capitalized.
FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a new risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The new
system, which went into effect on January 1, 1994 and replaced a transitional
system that the FDIC had utilized for the 1993 calendar year, assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based
on a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator, information which the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to
which it is assigned. Under the final risk-based assessment system, as well as
the prior transitional system, there are nine assessment risk classifications
(i.e., combinations of capital groups and supervisory subgroups) to which
different assessment rates are applied.
Assessment rates for the first half of 1995 for members of both the BIF and
the Savings Association Insurance Fund (the "SAIF"), as they had been during
1994, ranged from 23 basis points (0.23% of deposits) for an institution in
the highest category (i.e., "well capitalized" and financially sound) to 31
basis points (0.31% of deposits) for an institution in the lowest category
(i.e., "undercapitalized" and "substantial supervisory concern").
The FDIA requires that the SAIF and BIF funds each be recapitalized until
reserves reach a designated ratio of at least 1.25% of the deposits insured by
that fund. The SAIF is not expected to be recapitalized until 2002. SAIF
reserves have not grown as quickly as the BIF reserves due to a number of
factors, including the fact that a significant portion of SAIF premiums have
been and are currently being used to make payments on the FICO bonds issued in
the late 1980s by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation.
The designated reserve ratio for the BIF was reached in May 1995. In August
1995, the FDIC reduced the assessment rates for BIF members. Under the revised
assessment schedule, which became effective on June 1, 1995, BIF-insured
institutions were to pay assessments ranging from 0.04% of deposits to 0.31%
of deposits, with an average assessment rate of 4.5 basis points. Refunds,
with interest, were paid to BIF-insured institutions for assessments they had
paid for the period beginning on June 1, 1995, and the Bank received $189,601.
Subsequently, on November 14, 1995, the FDIC voted to reduce annual
assessments to the legal minimum of $2,000 for all BIF-insured institutions
except those that are not well capitalized and are assigned to the higher
supervisory risk categories.
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At the same time, the FDIC elected to retain the existing assessment range
of 23 to 31 basis points for SAIF members for the foreseeable future given the
undercapitalized nature of that insurance fund. As a result of the BIF premium
reduction, institutions that are required to pay SAIF premiums, such as the
Thrift, are likely to be subject to a significant competitive disadvantage
relative to BIF-insured institutions, pending any legislative action to remedy
the disparity. The FDIC has recognized that the disparity may have adverse
consequences for such institutions, including reduced earnings and an impaired
ability to raise funds in capital markets and to attract deposits. Further, it
is not currently known whether institutions that are required to pay SAIF
premiums will be required to pay higher deposit insurance premiums in the
future.
On July 28, 1995, the FDIC, the Treasury Department and the OTS released
statements outlining a proposed plan (the "Proposed Plan") to recapitalize the
SAIF, certain features of which were subsequently approved by the House of
Representatives and the Senate of the United States in bills that provided for
different resolutions of the BIF-SAIF disparity. In negotiations between
members of the Banking Committees of the House and Senate to reconcile the
differences in the two bills, it was agreed on November 7, 1995, that the
current Budget Reconciliation Package will focus on the financial problems of
the SAIF. Under the Committee Agreement, all SAIF-member institutions will pay
a special assessment to recapitalize the SAIF, and the assessment base for the
payments on the FICO bonds would be expanded to include the deposits of both
BIF- and SAIF-insured institutions. The amount of the special assessment
required to recapitalize the SAIF is currently estimated to be approximately
80 basis points (0.80% of deposits), somewhat less than the 85 basis point
assessment that had been previously estimated as necessary. The special
assessment would be payable some time in 1996 based on the amount of SAIF-
insured deposits held on March 31, 1995. The Committee Agreement will also
permit BIF-insured institutions holding deposits subject to SAIF assessments
to reduce such SAIF deposits by 20.0% in computing the institutions' special
assessment. There is some question as to whether either BIF-insured
institutions acquiring SAIF-insured institutions after March 31, 1995, or
SAIF-insured institutions that go out of existence prior to the enactment of
the Budget Reconciliation legislation will be required to pay any special
assessment under the current language of the legislation. If an 80 basis point
assessment were assessed against the Thrift's deposits as of March 31, 1995,
the thrift would be required to pay a special assessment on its SAIF-insured
deposits of $184,520. In accordance with generally accepted accounting
principles, the Thrift had not recorded an accrual for the special assessment
at December 31, 1995. If this amount had been assessed and paid as of
September 30, 1995, the Thrift's Tier 1 Leverage Ratio, Tier 1 Capital Ratio,
and Total Capital Ratio on that date would have been 9.4%, 18.1%, and 18.1%,
respectively, down from 9.8%, 18.9%, and 18.9%, respectively. The special
assessment paid by the Thrift would be at least partially offset by a
reduction in insurance premiums paid by the Thrift if, as expected, the FDIC
were to reduce SAIF premiums to BIF levels following payment of the special
assessment and recapitalization of the SAIF.
The members of the Banking Committees also agreed that the new legislation
will provide that an insurance fund cannot assess regular insurance
assessments when it has a reserve ratio of 1.25% or more except on those
member institutions that have been found to have "moderately severe" or
"unsatisfactory" financial, operational or compliance weaknesses. Neither of
the Banking Subsidiaries nor Pikeville has been so classified by the OCC or
the OTS. Accordingly assuming that the legislation is adopted as described
above and that the BIF and the SAIF maintain a 1.25% reserve ratio, the
Banking Subsidiaries and Pikeville would pay substantially reduced regular
deposit insurance assessments as long as they maintained their regulatory
status. The Budget Reconciliation Package would also provide for the merger of
the BIF and SAIF on January 1, 1998, with such merger being conditioned upon
the prior elimination of the thrift charter. The committee members also agreed
that, as early as possible in 1996, Congress should consider and act upon
separate legislation to eliminate the thrift charter and to abolish the OTS
and transfer its functions to the OCC, the FDIC, and the Federal Reserve. If
adopted, such legislation would require that Matewan, as a federal savings
bank, convert to a bank charter.
The management of Matewan cannot predict whether the above legislation or
any other legislative proposal will be enacted as described above or, if
enacted, the amount of any special SAIF assessment, whether ongoing SAIF
premiums will be reduced to a level equal to that of BIF premiums or whether,
if thrifts are required to convert to a bank charter, there will be any relief
from the additional tax liabilities that would be incurred upon
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the recapture of their bad debt reserves. It also cannot be predicted whether
some other legislative action will be taken to address the BIF-SAIF disparity
and what consequences such action could have for SAIF members. A significant
increase in SAIF insurance premiums, either absolutely or relative to BIF
premiums, a significant one-time fee to recapitalize the SAIF or a significant
tax liability associated with the recapture of the bad debt reserve could have
an adverse effect on the operating expenses and results of operations of
Matewan.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is
in an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC.
SAFETY AND SOUNDNESS STANDARDS
The FDIA, as amended by FDICIA and the Riegle Community Development and
Regulatory Improvement Act of 1994, requires the federal bank regulatory
agencies to prescribe standards, by regulations or guidelines, relating to
internal controls, information systems and internal audit systems, loan
documentation, credit underwriting, interest rate risk exposure, asset growth,
asset quality, earnings, stock valuation and compensation, fees and benefits
and such other operational and managerial standards as the agencies deem
appropriate. The federal bank regulatory agencies have adopted, effective
August 9, 1995, a set of guidelines prescribing safety and soundness standards
pursuant to FDICIA, as amended. The guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth
and compensation, fees and benefits. In general, the guidelines require, among
other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal shareholders. The federal banking agencies determined
that stock valuation standards were not appropriate. In addition, the agencies
adopted regulations that authorize, but do not require, an agency to order an
institution that has been given notice by an agency that it is not satisfying
any of such safety and soundness standards to submit a compliance plan. If,
after being so notified, an institution fails to submit an acceptable
compliance plan or fails in any material respect to implement an accepted
compliance plan, the agency must issue an order directing action to correct
the deficiency and may issue an order directing other actions of the types to
which an undercapitalized association is subject under the "prompt correction
action" provisions of FDICIA. See "--Prompt Corrective Action." If an
institution fails to comply with such an order, the agency may seek to enforce
such order in judicial proceedings and to impose civil money penalties. The
federal bank regulatory agencies also proposed guidelines for asset quality
and earnings standards.
DEPOSITOR PREFERENCE
The Omnibus Budget Reconciliation Act of 1993 provides that deposits and
certain claims for administrative expenses and employee compensation against
an insured depository institution would be afforded a priority over other
general unsecured claims against such an institution in the "liquidation or
other resolution" of such an institution by any receiver.
DESCRIPTION OF CAPITAL STOCK
GENERAL
Matewan's authorized capital stock consists of 10,000,000 shares of Common
Stock and 1,000,000 shares of preferred stock, par value $1.00 per share (the
"Preferred Stock"), issuable in one or more series. As of December 31, 1995,
there were 3,667,351 shares of Common Stock and no shares of Preferred Stock
issued and outstanding. After consummation of the Offering, there will be
outstanding 700,000 shares of Convertible Preferred Stock, which is a series
of Preferred Stock. The capital stock of Matewan does not represent or
constitute a deposit account and is not insured by the FDIC.
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COMMON STOCK
Dividends. Matewan may pay dividends as declared from time to time by the
Board of Directors out of funds legally available therefor, subject to certain
restrictions. Although quarterly cash dividends have been paid on the Common
Stock since 1980, and the Board of Directors of Matewan has indicated its
intention to continue to pay cash dividends on the Common Stock, no assurance
can be given that any dividends will be declared or, if declared, what the
amount of the dividends will be or whether such dividends, once declared, will
continue. Payment of dividends on the Common Stock will also be subject to the
prior payment in full of the dividends payable on the Convertible Preferred
Stock. See "Common Stock Price Range and Dividends" and "--Convertible
Preferred Stock--Dividends."
Voting Rights. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by the stockholders. Such stockholders do
not have cumulative voting rights in the election of directors.
Liquidation. In the event of any liquidation, dissolution or winding up of
Matewan, the holders of the Common Stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of Matewan available for distribution. If Preferred Stock is issued, as
contemplated by the Offering, the holders thereof may have a priority over the
holders of the Common Stock in the event of liquidation or dissolution. See
"--Convertible Preferred Stock--Liquidation."
Preemptive Rights. Holders of the Common Stock are not entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock is not subject to redemption.
PREFERRED STOCK
Under the Certificate of Incorporation, the Board of Directors of Matewan or
a duly authorized committee thereof has the power, without further action by
the stockholders, to provide for the issuance of Preferred Stock in one or
more series and to fix the voting powers, designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, by adopting a resolution or resolutions
creating and designating such series. Variations between different series may
be created by the Board of Directors with respect to voting rights, if any;
the rate of dividends, if any; the priority of payment thereof and the right
to cumulation thereof, if any; redemption terms and conditions; and the right
of conversion, if any.
CONVERTIBLE PREFERRED STOCK
The following description of the material terms and provisions of the shares
of Convertible Preferred Stock to be issued in the Offering is subject and
qualified in its entirety by reference to the certificate to Matewan's
Certificate of Incorporation authorizing the Convertible Preferred Stock and
the resolutions of Matewan's Board of Directors setting forth the terms and
conditions of the Convertible Preferred Stock. Except as described below, the
Convertible Preferred Stock will rank on a parity with the Common Stock.
Dividends. Holders of shares of the Convertible Preferred Stock will be
entitled to receive, when and as declared by the Board of Directors of
Matewan, out of assets of Matewan legally available for payment, an annual
cash dividend of 7.5% of the stated value, or initially $1.875 per share.
Dividends on the Convertible Preferred Stock will be cumulative from the date
of issue and will be payable quarterly on March 15, June 15, September 15, and
December 15 of each year commencing June 15, 1996, at such annual rate. The
initial dividend for the period commencing March 4, 1996 to, but not
including, June 15, 1996 will be $.526 per share and will be payable on June
15, 1996. Dividends payable on the Convertible Preferred Stock for any period
less than a full dividend period shall be computed on the basis of a 360-day
year consisting of twelve 30-day months. Dividends payable on the Convertible
Preferred Stock for each full dividend period shall be computed by dividing
the annual dividend rate by four. Each such dividend will be payable to
holders of record as they appear on the stock register of Matewan on such
record dates, not more than 60 days nor less than ten days preceding the
payment dates, as shall be fixed by the Board of Directors. In the event that
full cumulative dividends on the Convertible Preferred Stock have not been
paid when due, Matewan may not declare or pay any dividends or make other
distributions (other than dividends payable in shares of Common Stock or other
capital stock of
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Matewan ranking junior to the Convertible Preferred Stock with respect to the
payment of dividends and upon liquidation, dissolution or winding up, or
options, warrants or rights to subscribe for or purchase such shares) on its
Common Stock. Additionally, Matewan may not declare or pay dividends on any
other capital stock of Matewan ranking junior to the Convertible Preferred
Stock with respect to the payment of dividends, or purchase, redeem or
otherwise acquire any shares of Convertible Preferred Stock (other than with
funds previously deposited in trust for the redemption of shares of
Convertible Preferred Stock pursuant to any sinking fund) or any other shares
of capital stock of Matewan ranking on a parity with or junior to the
Convertible Preferred Stock (except by conversion into or exchange for capital
stock of Matewan ranking junior to the Convertible Preferred Stock as to
payment of dividends and upon liquidation, dissolution or winding up).
Conversion Rights. Each share of Convertible Preferred Stock will be
convertible into shares of Common Stock at $22.00, except that, if shares of
Convertible Preferred Stock are called for redemption, the conversion right on
such shares of Convertible Preferred Stock will terminate at the close of
business on the date fixed for redemption unless Matewan shall default in
making payment of the amount payable upon such redemption.
The price per share of Common Stock at which the Convertible Preferred Stock
is convertible is subject to adjustment in certain events, including: the
issuance of Common Stock as a dividend or distribution on the Common Stock;
the issuance to all holders of Common Stock of certain rights or warrants
entitling them to subscribe for or purchase Common Stock at less than the
current market price (as defined in the certificate); subdivisions and
combinations of the Common Stock; and the distribution to all holders of
Common Stock of capital stock (other than additional shares of Common Stock)
or evidences of indebtedness of Matewan or assets (excluding cash dividends or
distributions from retained earnings) or rights or warrants to subscribe for
or purchase any of its securities (excluding those rights or warrants
previously referred to in this sentence).
In the case of any consolidation or merger to which Matewan is a party and
as a result of which holders of Common Stock shall be entitled to receive
securities, cash or other property with respect to or in exchange for such
Common Stock, or in case of any sale or conveyance to another corporation of
the property of Matewan as an entirety or substantially as an entirety, or in
case of any reclassification or change in outstanding shares of Common Stock
(other than a change in par value, or from par value to no par value or from
no par value to par value, or as a result of a subdivision or combination of
the Common Stock), there will be no adjustment of the conversion rate but the
holder of each share of Convertible Preferred Stock then outstanding will have
the right thereafter to convert such share into the kind and amount of
securities, cash or other property which such holder would have owned or have
been entitled to receive immediately after such consolidation or merger, sale
or conveyance or reclassification or change had such share been converted
immediately prior to the effective date of such consolidation or sale or
conveyance or reclassification or change. The adjustments described in this
paragraph shall be subject to further adjustments as appropriate that shall be
as nearly equivalent as may be practicable to the relevant adjustment provided
for in the preceding paragraph and in this paragraph. If, in the case of any
such consolidation, merger, sale or conveyance, the stock or other securities
and property receivable thereupon by a holder of shares of Common Stock
includes shares of stock, securities or other property or assets (including
cash) of any entity other than the successor or acquiring entity, as the case
may be, in such consolidation, merger, sale or conveyance, then Matewan shall
enter into an agreement with such other entity for the benefit of the holders
of Convertible Preferred Stock that shall contain such provisions to protect
the interests of such holders as the Board of Directors shall reasonably
consider necessary by reason of the foregoing.
No adjustment in the conversion rate will be required unless such adjustment
would require a change of at least $0.01 in the conversion rate then in
effect; provided, however, that any adjustment that would otherwise be
required to be made shall be carried forward and taken into account in any
subsequent adjustment. Matewan reserves the right to make any reduction in the
conversion rate in addition to those required in the foregoing provisions as
Matewan in its discretion shall determine to be advisable in order that
certain stock-related distributions hereafter made by Matewan to its
stockholders shall not be taxable. Except as stated above, the
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conversion rate will not be adjusted for the issuance of Common Stock or any
securities convertible into or exchangeable for Common Stock or carrying the
right to purchase any of the foregoing.
No fractional shares of Common Stock or securities representing fractional
shares of Common Stock will be issued upon conversion. Any fractional interest
in a share of Common Stock resulting from conversion will be paid in cash
based on the current market price of Common Stock.
Upon conversion no adjustments will be made for accrued dividends and,
therefore, shares of Convertible Preferred Stock surrendered for conversion
during the period between the close of business on any dividend payment record
date and the opening of business on the corresponding dividend payment date
(except shares called for redemption on a date during such period) must be
accompanied by payment of an amount equal to the dividend payable on such
shares on such dividend payment date.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of Matewan, the holders of shares of
the Convertible Preferred Stock will be entitled to receive out of the assets
of Matewan available for distribution to stockholders, before any distribution
is made to holders of Common Stock or any other class of Matewan's capital
stock ranking junior to the Convertible Preferred Stock or any other class of
Matewan's capital stock ranking junior to the Convertible Preferred Stock as
to liquidation payments, liquidating distributions in the amount of $25.00 per
share of the Convertible Preferred Stock, plus accrued but unpaid dividends to
but excluding the date of final distribution, but the holders of the shares of
the Convertible Preferred Stock will not be entitled to receive the
liquidation price of such shares until the liquidation preference of any other
shares of Matewan's capital stock ranking senior to the Convertible Preferred
Stock with respect to the rights upon liquidation, dissolution or winding up
shall have been paid (or a sum set aside therefor sufficient to provide for
payment) in full. If upon any voluntary or involuntary liquidation,
dissolution or winding up of Matewan, the assets of Matewan shall be
insufficient to make such full payments to holders of the Convertible
Preferred Stock and any other preferred stock ranking on a parity with the
Convertible Preferred Stock with respect to rights upon liquidation,
dissolution or winding up, then such assets shall be distributed pro rata
among the holders of the Convertible Preferred Stock or any other such
preferred stock. After payment of the full amount of the liquidating
distribution to which they are entitled, the holders of the Convertible
Preferred Stock will not be entitled to any further participation in any
distribution of assets by Matewan. Neither a consolidation or merger of
Matewan with or into another corporation nor a merger of another company with
or into Matewan nor a sale, lease or conveyance of all or any part of
Matewan's property or business shall be considered a liquidation, dissolution
or winding up of Matewan; however, any reorganization of Matewan required by
any court or administrative body in order to comply with any provision of law
shall be deemed to be a liquidation, dissolution and winding up of Matewan
unless the preferences, limitations, rights and restrictions granted to or
imposed upon the Convertible Preferred Stock are not adversely affected by
such reorganization.
Because Matewan is a holding company, its rights, the rights of its
creditors and of its stockholders, including the holders of the shares of the
Convertible Preferred Stock offered hereby, to participate in the assets of
any subsidiary upon the latter's liquidation or recapitalization may be
subject to the prior claims of the subsidiary's creditors except to the extent
that Matewan may itself be a creditor with recognized claims against the
Subsidiary.
Optional Redemption. The Convertible Preferred Stock is not subject to any
mandatory redemption or sinking fund provision. The Convertible Preferred
Stock is redeemable as a whole or in part at the option of Matewan for cash on
at least 30 but not more than 60 days' notice at any time or from time to time
on or after March 15, 2000. With respect to any such redemption, the
Convertible Preferred Stock will be redeemable at the following redemption
prices per share, together in each case with accrued but unpaid dividends to
but excluding the date fixed for redemption, if redeemed during the 12-month
period beginning on:
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<TABLE>
<CAPTION>
REDEMPTION PRICE
PER SHARE OF
CONVERTIBLE
YEAR PREFERRED STOCK
---- ----------------
<S> <C>
March 15, 2000............................................ $26.125
March 15, 2001............................................ 25.938
March 15, 2002............................................ 25.750
March 15, 2003............................................ 25.563
March 15, 2004............................................ 25.375
March 15, 2005............................................ 25.188
March 15, 2006 and thereafter............................. 25.000
</TABLE>
If full cumulative dividends on the Convertible Preferred Stock have not
been paid, the Convertible Preferred Stock may not be redeemed in part and
Matewan may not purchase or acquire any shares of the Convertible Preferred
Stock other than pursuant to a purchase or exchange offer made on the same
terms to all holders of the Convertible Preferred Stock. If fewer than all the
outstanding shares of the Convertible Preferred Stock are to be redeemed,
Matewan will select those to be redeemed by lot or on a pro rata basis or by
any other method deemed by Matewan to be equitable (with adjustments to avoid
fractional shares). Any shares of the Convertible Preferred Stock for which a
notice of redemption has been given may be converted into shares of Common
Stock at any time before the close of business on the date fixed for the
redemption. Any such redemption would require the prior approval of the
Federal Reserve Board. See "--Convertible Preferred Stock--Other Aspects."
Voting Rights. Holders of Convertible Preferred Stock will not have any
voting rights except as set forth below or as otherwise from time to time
expressly required by law. So long as any shares of Convertible Preferred
Stock remain outstanding, Matewan shall not, without the affirmative vote of
the holders of at least a majority of the shares of Convertible Preferred
Stock outstanding at the time, given in person or by proxy, at a meeting
(voting separately as one class): (i) authorize, create or issue, or increase
the authorized or issued amount of, any class or series of stock ranking prior
to the Convertible Preferred Stock with respect to payment of dividends or the
distribution of assets upon liquidation, dissolution or winding up; (ii)
authorize, create or issue, or increase the authorized or issued amount of,
any class or series of stock (including any class or series of preferred
stock) which ranks on a parity with the Convertible Preferred Stock as to
dividends upon liquidation, dissolution or winding up ("Parity Stock") unless
the Certificate of Incorporation or certificate creating or authorizing such
class or series provide that if in any case the stated dividends or amounts
payable upon liquidation, dissolution or winding up are not paid in full on
the Convertible Preferred Stock and all outstanding shares of Parity Stock,
the shares of all Parity Stock shall share ratably in the payment of
dividends, including accumulations (if any) in accordance with the sums which
would be payable on all Parity Stock if all dividends in respect of all shares
of Parity Stock were paid in full, and on any distribution of assets upon
liquidation, dissolution or winding up ratably in accordance with the sums
which would be payable in respect of all shares of Parity Stock if all sums
payable were discharged in full; or (iii) amend, alter or repeal the
provisions of the Certificate of Incorporation, whether by merger,
consolidation or otherwise, so as to materially and adversely affect any
right, preference, privilege or voting power of such shares of Convertible
Preferred Stock or the holders thereof; provided, however, that any increase
in the amount of the authorized preferred stock or any outstanding series of
preferred stock or any other capital of Matewan, or the creation and issuance
of other series of preferred stock or any outstanding series of preferred
stock or any other capital of Matewan, or the creation and issuance of other
series of preferred stock including Convertible Preferred Stock, or of any
other capital stock of Matewan, in each case ranking on a parity with or
junior to the Convertible Preferred Stock with respect to the payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up shall not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Convertible Preferred Stock shall have
been redeemed or sufficient funds shall have been deposited in trust to effect
such redemption.
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Other Aspects. It is Matewan's intention that the Convertible Preferred
Stock offered hereby will qualify as Tier 1 Capital under the Federal Reserve
Board's capital adequacy guidelines for bank holding companies. Under
regulations recently adopted by the Federal Reserve Board, in order for
perpetual preferred stock so to qualify, any redemption of such stock by
Matewan must be subject to prior Federal Reserve Board approval unless the
Federal Reserve Board determines that such approval is not required.
The Convertible Preferred Stock will be listed on the Nasdaq SmallCap
Market. Wachovia Bank of North Carolina, N.A., will serve as transfer agent of
the Convertible Preferred Stock.
CERTAIN PROVISIONS OF DELAWARE LAW AND OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BYLAWS
There are provisions in Delaware law and in Matewan's Certificate of
Incorporation and Bylaws which are intended to discourage non-negotiated
takeover attempts. These provisions are intended to avoid costly takeover
battles and lessen Matewan's vulnerability to a hostile change in control,
thereby enhancing the possibility that the Board of Directors can maximize
stockholder value in connection with an unsolicited offer to acquire Matewan.
However, anti-takeover provisions can also have the effect of depressing
Matewan's stock price because they are an impediment to potential investors
and their ability to gain control of Matewan, and thus discourage activities
such as unsolicited merger proposals, acquisitions or tender offers by which
stockholders might otherwise receive enhanced consideration for their shares.
Authorized Capital Stock. Matewan's Certificate of Incorporation authorizes
10,000,000 shares of Common Stock, of which 3,667,351 shares were outstanding
at December 31, 1995. The Certificate of Incorporation also authorizes
1,000,000 shares of Preferred Stock, of which 700,000 shares of Convertible
Preferred Stock will be issued and outstanding upon consummation of the
Offering. The remaining shares of authorized but unissued Common Stock and
Preferred Stock may be issued by the Board without further stockholder
approval, except as may be required with respect to a particular transaction
by applicable law or by regulatory agencies having jurisdiction over Matewan
and could be utilized to deter future attempts to gain control of Matewan.
Vote Required for Certain Actions. Matewan's Certificate of Incorporation
contains a provision which provides that certain business combinations require
the affirmative vote of at least 66 2/3% of the Company's outstanding shares
of voting stock. These "supermajority" voting requirements could result in the
Company's Board and management exercising a stronger influence over any
proposed takeover by refusing to approve a business combination and by
obtaining sufficient additional votes, including votes obtained through the
issuance of additional shares to parties friendly to their interests, to
preclude the 66 2/3% stockholder approval requirement. Matewan's Certificate
of Incorporation also provides that the provisions designed to protect Matewan
from unfriendly takeover attempts can only be amended by an affirmative vote
of at least 66 2/3% of Matewan's outstanding shares of voting stock.
Constituency Provision. Another provision of Matewan's Certificate of
Incorporation requires the Company's Board of Directors, when evaluating
merger proposals, tender offers or similar proposals to consider factors other
than economic benefit to stockholders, examples of which include, without
limitation, the following: the social and economic impact the acquisition of
Matewan would have on the community it serves and the effect of the
acquisition upon employees, depositors, customers and vendors. Additionally,
provisions in the Certificate of Incorporation set forth certain actions which
Matewan's Board of Directors may take in opposition to an offer to acquire
Matewan. These provisions permit Matewan's Board of Directors to recognize its
responsibilities to these constituent groups, to Matewan and its subsidiaries
and to the communities they serve.
Section 203. Section 203 of the Delaware General Corporation Law ("Section
203") would prohibit a "business combination" (as defined in Section 203,
generally including mergers, sales and leases of assets, issuances of
securities, and similar transactions) by the Company or a subsidiary with an
"interested shareholder" (as defined in Section 203, generally the beneficial
owner of 15% or more of the Common Stock)
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within three years after the person or entity becomes an interested
shareholder, unless (i) prior to the person or entity becoming an interested
shareholder, the business combination or the transaction pursuant to which
such person or entity became an interested shareholder shall have been
approved by the Company's Board of Directors, (ii) upon consummation of the
transaction in which he became an interested shareholder, the interested
shareholder holds at least 85% of the Common Stock (excluding shares held by
persons who are both officers and directors and shares held by certain
employee benefit plans) or (iii) the business combination is approved by the
Company's Board of Directors and by the holders of at least two-thirds of the
outstanding Common Stock, excluding shares owned by the interested
shareholder.
One of the effects of Section 203 may be to prevent highly leveraged
takeovers, which depend upon getting access to the acquired corporation's
assets to support or repay the debt and to prevent certain coercive
acquisition tactics. By requiring approval of the holders of two-thirds of the
shares held by disinterested shareholders for business combinations involving
an interested shareholder, Section 203 may prevent any interested shareholder
from taking advantage of its position as a substantial, if not controlling,
shareholder and engaging in transactions with the Company that may not be fair
to the Company's other shareholders or that may otherwise not be in the best
interests of the Company, its shareholders, and other constituencies.
For similar reasons, however, these provisions may make more difficult or
discourage an acquisition of the Company, or the acquisition of control of the
Company by a principal shareholder, and thus the removal of incumbent
management, since a business combination within the specified three-year
period that is not approved by a majority of the Board of Directors prior to
the transaction in which a person becomes an interested shareholder will
require the approval of the Board of Directors and the holders of two-thirds
of the shares held by disinterested shareholders. In addition, to the extent
that Section 203 discourages takeovers that would result in the change of the
Company's management, such a change may be less likely to occur.
CERTAIN INCOME TAX CONSEQUENCES
GENERAL
The following summary of certain federal income tax consequences of the
purchase, ownership, and disposition of shares of the Convertible Preferred
Stock is for general information only, and is not tax advice. Except where
noted, the summary deals only with shares of Convertible Preferred Stock held
by United States holders and does not deal with special situations, including,
without limitation, the ownership of shares of Convertible Preferred Stock by
S corporations, exempt organizations, dealers in securities, insurance
companies, foreign persons, tax exempt organizations or financial
institutions. Furthermore, the discussion below is based upon the provisions
of the Code and regulations, rulings and judicial decisions thereunder as of
the date hereof, and such authorities may be repealed, revoked or modified so
as to result in federal income tax consequences different from those discussed
below. PERSONS CONSIDERING THE PURCHASE, OWNERSHIP OR DISPOSITION OF
CONVERTIBLE PREFERRED STOCK SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING
THE FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS,
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION AND ANY CHANGES IN APPLICABLE LAWS.
FEDERAL TAXES
Distributions. Distributions on the shares of Convertible Preferred Stock
(other than distributions of Common Stock pursuant to the exercise of
conversion rights and distributions in redemption of the shares of Convertible
Preferred Stock subject to section 302(b) of the Code) will constitute
dividends for federal income tax purposes to the extent paid from current or
accumulated earnings and profits of the Company (as determined under federal
income tax principles). In general, a corporate holder of preferred stock that
owns less than 20.0% of the stock of the issuer (excluding for purposes of
determining such percentage stock described in section 1504(a)(4) of the Code)
may deduct from its income 70.0% of dividends received on such stock (the
"dividends received deduction"). Under pending legislative proposals, the
dividends received deduction would be reduced to 50.0% with respect to
dividends paid after January 31, 1996. Any corporate holder of shares of
Convertible
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Preferred Stock that is otherwise eligible for the dividends received
deduction will be allowed that deduction with respect to dividends paid on the
Convertible Preferred Stock.
Any distributions on the Convertible Preferred Stock in excess of the
Company's current and accumulated earnings and profits will, to that extent,
not be eligible for the dividends received deduction. Such excess will
generally be treated as a tax-free return of capital to the extent of a
holder's basis in its shares of Convertible Preferred Stock. Distributions
that are treated as a return of capital will reduce a holder's basis in the
shares of Convertible Preferred Stock and may subject the holder to tax, at
ordinary or capital gain rates, when distributions are made in excess of the
holder's remaining basis in its shares of Convertible Preferred Stock or if
there is a subsequent sale or redemption of the holder's shares of Convertible
Preferred Stock. Under present law, the net capital gain (i.e., the excess of
net long-term capital gain over net short-term capital loss) of an individual
taxpayer is subject to tax at a rate of 28.0% if that rate is lower than the
individual's regular tax rate, but the net capital gain of a corporation is
taxed at the same rate as ordinary income with graduated rates up to 35.0%.
Under pending legislative proposals, the net capital gain of a corporation
would be subject to an alternative rate of 28.0% if that rate is less than the
corporation's regular tax rate, and an individual taxpayer would be allowed a
deduction for 50.0% of net capital gain, so that the effective tax rate on the
net capital gain of an individual in the highest marginal rate bracket of
39.6% would be 19.8%.
The Code contains several limitations on the availability of the dividends
received deduction that would apply even if distributions on the Convertible
Preferred Stock do not exceed the Company's current or accumulated earnings
and profits. Section 246A of the Code reduces the dividends received deduction
allowed to a corporate holder that has incurred indebtedness "directly
attributable" to its investment in portfolio stock. Section 246(c) of the Code
requires that, in order to be eligible for the dividends received deduction, a
corporation must generally hold the shares of preferred stock for a 46-day
minimum holding period (91 days if the corporation receives dividends on
preferred stock which are attributable to a period or periods aggregating in
excess of 366 days). That section excludes from such holding period any period
during which a holder has certain options or contractual obligations with
respect to substantially identical stock and grants the Internal Revenue
Service broad authority to promulgate prospective regulations excluding from a
holding period any period during which a holder has diminished its risk of
loss by holding one or more other positions with respect to substantially
identical stock. Furthermore, section 1059 of the Code limits the benefit of
the dividends received deduction by requiring a corporate holder that receives
certain "extraordinary dividends" to reduce its basis in the shares of
preferred stock with respect to which the dividend was received by the untaxed
portion of the dividend. Under present law, if the reduction in basis of stock
exceeds the basis in the stock with respect to which an extraordinary dividend
is received, the excess is taxed as gain when such stock is sold or exchanged.
Under pending legislative proposals, such a reduction in basis would result in
immediate gain recognition.
Redemption Premium. Under section 305 of the Code and the Treasury
Regulations thereunder, if the redemption price of shares of preferred stock
exceeds the issue price by more than a de minimis amount, the excess may be
taxable as a constructive distribution of additional stock to the holder taken
into account under principles similar to those applicable to original issue
discount on debt instruments. If such a constructive distribution were to
occur, a holder could be required to recognize ordinary income for tax
purposes without receiving a corresponding distribution of cash. An issuer's
right to redeem stock results in constructive distribution treatment only if,
based on all the facts and circumstances as of the issue date, redemption
pursuant to the right is more likely than not to occur. Under a safe harbor in
the regulations, an issuer's right to redeem is not treated as more likely
than not to occur if (i) the issuer and the holder are not related by more
than 20.0% common ownership, (ii) there are no plans, arrangements or
agreements that effectively require or are intended to compel the issuer to
redeem and (iii) exercise of the right to redeem would not reduce the yield of
the stock, as determined under principles similar to those applicable to
original issue discount on debt instruments. However, even if redemption is
more likely than not to occur, constructive distribution treatment does not
apply if the redemption premium is solely in the nature of a penalty for
premature redemption and is paid as a result of changes in economic or market
conditions over which neither the issuer nor the holder has legal or practical
control. The Company believes that the redemption premium on the Convertible
Preferred Stock should not be
62
<PAGE>
considered to result in constructive distribution treatment. However, no
assurance can be given that such position will not be challenged, or, if
challenged, will be upheld. If the redemption premium were considered to
result in a constructive distribution, the amount deemed to be received by the
holder in any period would be treated as a dividend taxable as ordinary income
to the extent of the Company's earnings and profits, subject to the rules
relating to the dividends received deduction discussed above (including the
rules of section 1059 of the Code relating to extraordinary dividends), and
the excess would be treated as a return of capital to the extent of the
holder's tax basis in the Convertible Preferred Stock, and as a gain to the
extent it exceeds such basis.
Redemption. A redemption of shares of Convertible Preferred Stock for cash
will be a taxable event to a holder thereof. A redemption of shares of
Convertible Preferred Stock for cash will be treated as a distribution that is
taxable as a dividend to the extent of the Company's current or accumulated
earnings and profits under section 302 of the Code, unless, taking into
account the attribution of ownership rules of section 318 of the Code, the
redemption (i) results in a "complete redemption" of all of the stock of the
Company owned by the stockholder under section 302(b)(3) of the Code, (ii) is
"substantially disproportionate" with respect to the stockholder under section
302(b)(2) of the Code or (iii) is "not essentially equivalent to a dividend"
with respect to the stockholder under section 302(b)(1) of the Code. If any of
such tests is met, a redemption of the shares of Convertible Preferred Stock
will result in a gain or loss equal to the difference between the amount of
cash received (less any portion thereof attributable to declared but unpaid
dividends, which will generally be taxable as ordinary dividend income) and
the holder's tax basis in the shares of Convertible Preferred Stock redeemed.
Such gain or loss will be a capital gain or loss if the shares of Convertible
Preferred Stock were held as capital assets. If none of such tests is met, the
full amount received in the redemption will be treated as a dividend taxable
as ordinary income to the extent of the Company's earnings and profits,
subject to the rules relating to the dividends received deduction discussed
above (including the rules of section 1059 of the Code relating to
extraordinary dividends), and the excess will be treated as a return of
capital to the extent of the holder's tax basis in the Convertible Preferred
Stock, and as a gain to the extent it exceeds such basis.
Conversion to Common Stock. Except for cash paid in lieu of fractional
shares of Common Stock, no gain or loss will be recognized on a conversion of
shares of Convertible Preferred Stock into shares of Common Stock. Dividend
income may be recognized, however, to the extent cash or Common Stock is
received in payment of dividends in arrears. The tax basis for the shares of
Common Stock received upon conversion (other than shares, if any, taxed as a
dividend upon receipt) will be equal to the tax basis of the shares of
Convertible Preferred Stock converted, less the reduction in basis
attributable to fractional shares, and, provided that the shares of
Convertible Preferred Stock were held as capital assets, the holding period of
the shares of Common Stock will include the holding period of the shares of
Convertible Preferred Stock converted.
Adjustment of Conversion Price. Adjustments to the conversion price of the
shares of Convertible Preferred Stock to reflect certain distributions with
respect to the Common Stock may result in constructive distributions taxable
to the holders of the shares of Convertible Preferred Stock as a dividend. If
such a constructive distribution were to occur, a holder of Convertible
Preferred Stock could be required to recognize ordinary income for tax
purposes, without receiving a corresponding distribution of cash.
Backup Withholding. A holder of shares of Convertible Preferred Stock may be
subject to backup withholding at the rate of 31.0% with respect to dividends
or the proceeds of a sale, exchange or redemption of shares of Convertible
Preferred Stock if such holder fails to provide a taxpayer identification
number, fails to certify to exempt status or fails to report in full dividend
and interest income. Any amount withheld under the backup withholding rules
will be allowed as a refund or credit against such holder's federal income tax
liability, provided the required information is furnished to the Internal
Revenue Service.
STATE AND LOCAL TAXES
Persons purchasing Convertible Preferred Stock may be subject to state or
local taxation in various state or local jurisdictions, including those in
which they transact business or reside. The state and/or local tax treatment
of Persons purchasing Convertible Preferred Stock may not conform to the
federal income tax consequences
63
<PAGE>
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in Convertible Preferred Stock.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Matewan and Wheat, First Securities, Inc. (the "Underwriter"), the Underwriter
has agreed to purchase from Matewan, and Matewan has agreed to sell to the
Underwriter, 700,000 shares of Convertible Preferred Stock.
The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the Underwriter's obligations is such
that it is committed to purchase and pay for all of the above shares of
Convertible Preferred Stock if any are purchased.
The Underwriter proposes to offer the shares of Convertible Preferred Stock
directly to the public at the public offering price set forth on the cover
page of this Prospectus and to certain securities dealers at such price less a
concession not in excess of $.85 per share of Convertible Preferred Stock. The
Underwriter may allow, and such selected dealers may re-allow, a concession
not in excess of $.10 per share of Convertible Preferred Stock to certain
brokers and dealers. After the Offering, the price to public, concessions and
reallowances to dealers may be changed by the Underwriter.
Matewan has granted the Underwriter an option, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to a maximum of
105,000 additional shares of Convertible Preferred Stock to cover over-
allotments, if any, at the same price per share as the initial 700,000 shares
to be purchased by the Underwriter from Matewan. To the extent that the
Underwriter exercises this option, the Underwriter will be committed, subject
to certain conditions, to purchase such additional shares of Convertible
Preferred Stock. The Underwriter may purchase such shares only to cover over-
allotments made in connection with this Offering.
In connection with the Offering, the Underwriter may engage in passive
market making transactions in the Common Stock on the Nasdaq National Market
immediately prior to the commencement of sales in the Offering, in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Passive market making consists of displaying bids on the
Nasdaq National Market limited by the bid prices of independent market makers
and purchases limited by such prices and effected in response to order flow.
Net purchases by a passive market maker on each day are limited to a specific
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified prior period and must be discontinued when
such limit is reached. Passive market making may stabilize the market price of
the Common Stock at a level above that which might otherwise prevail and, if
commenced, may be discontinued at any time.
Of the 700,000 shares of Convertible Preferred Stock to be sold pursuant to
the Offering, the Underwriter has accepted the Company's request to sell up to
50,000 shares to persons designated by the Company at the public offering
price set forth on the cover page of this Prospectus.
The Company and the directors and executive officers of the Company have
agreed that, following the Offering, they will not dispose of any shares of
Common Stock or Convertible Preferred Stock (other than by gift to a person
who agrees not to sell or by operation of law) for a period of 180 days after
the date hereof without the prior written consent of the Underwriter.
Matewan has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"), or to contribute to payments that the Underwriter may be
required to make in respect thereof.
The Underwriter provides investment banking and other services to the
Company on a regular basis. The Underwriter is acting as financial advisor to
the Company in connection with the Acquisition, for which services the
Underwriter will receive aggregate fees of $275,000, of which $50,000 has been
paid, and the remainder of which will be paid at consummation of the
Acquisition. The Company has also agreed to reimburse the Underwriter for its
reasonable out-of-pocket expenses in connection with such services, including,
without limitation, travel expenses and reasonable fees and disbursements of
its legal counsel.
64
<PAGE>
LEGAL MATTERS
The legality of the shares of the Convertible Preferred Stock offered hereby
will be passed upon by Jackson & Kelly, Charleston, West Virginia, counsel to
Matewan. Certain legal matters in connection with the Offering will be passed
on for the Underwriter by Alston & Bird, Washington, D.C.
EXPERTS
The consolidated financial statements of Matewan and its subsidiaries and of
Pikeville at December 31, 1994 and 1993 and for each of the three years in the
period ended December 31, 1994, included in this Prospectus and Registration
Statement, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports thereon appearing elsewhere herein, and are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
Matewan is subject to the informational requirements of the Exchange Act and
in accordance therewith files reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy statements and other information can be inspected and copied at public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
located at 7 World Trade Center, New York, New York 10048 and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments and supplements thereto, the "Registration
Statement") under the Securities Act, with respect to the Convertible
Preferred Stock. This Prospectus omits certain information contained in the
Registration Statement, certain items of which are contained in exhibits to
the Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
Convertible Preferred Stock, reference is made to the Registration Statement,
including the exhibits filed as a part thereof, which may be inspected at the
principal office of the Commission without charge at 450 Fifth Street, N.W.,
Washington, D.C. 20549.
Copies of the Registration Statement may be obtained from the Commission at
its principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. Statements contained in this
Prospectus as to the contents of any contract or other document are not
necessarily complete, and, where the contract or the document has been filed
as an exhibit to the Registration Statement, each such statement is qualified
in all respects by reference to the applicable document filed with the
Commission.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993............. F-3
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992........................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1994, 1993 and 1992........................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Unaudited Interim Consolidated Financial Statements...................... F-18
Consolidated Balance Sheets as of September 30, 1995 and 1994
(Unaudited)............................................................. F-19
Consolidated Statements of Income for the Nine Months Ended September 30,
1995 and 1994 (Unaudited)............................................... F-20
Consolidated Statements of Shareholders' Equity for the Nine Months Ended
September 30, 1995 and 1994 (Unaudited)................................. F-21
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1995 and 1994 (Unaudited)........................................... F-22
Notes to Consolidated Financial Statements (Unaudited)................... F-23
</TABLE>
BANK ONE, PIKEVILLE, N.A.
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F-25
Balance Sheets as of December 31, 1994 and 1993.......................... F-26
Statements of Income for the Years Ended December 31, 1994, 1993 and
1992.................................................................... F-27
Statements of Shareholder's Equity for the Years Ended December 31, 1994,
1993 and 1992........................................................... F-28
Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and
1992.................................................................... F-29
Notes to Financial Statements............................................ F-30
Unaudited Interim Financial Statements................................... F-39
Balance Sheets as of September 30, 1995 and 1994 (Unaudited)............. F-40
Statements of Income for the Nine Months Ended September 30, 1995 and
1994 (Unaudited)........................................................ F-41
Statements of Shareholder's Equity for the Nine Months Ended
September 30, 1995 and 1994 (Unaudited)................................. F-42
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and
1994 (Unaudited)........................................................ F-43
Notes to Financial Statements (Unaudited)................................ F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Matewan BancShares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Matewan
BancShares, Inc. and subsidiaries as of December 31, 1994 and 1993, and the
related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Matewan
BancShares, Inc. and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 4 to the financial statements, the Company changed its
method of accounting for certain investment securities as of January 1, 1994.
Ernst & Young LLP
Charleston, West Virginia
February 1, 1995, except for Note 14,
as to which the date is May 19, 1995
F-2
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 20,539 $ 17,584
Federal funds sold......................................... 4,770 14,032
-------- --------
Cash and cash equivalents.................................. 25,309 31,616
Interest bearing deposits in other banks................... 2,876 2
Marketable equity securities (cost of $990)................ -- 921
Investment securities:
Available-for-sale at fair value......................... 11,051 --
Held-to-maturity (approximate fair value of $95,904 and
$100,736 at December 31, 1994 and 1993)................. 98,930 98,814
Loans, net................................................. 214,744 195,853
Premises and equipment..................................... 9,252 7,634
Accrued interest receivable and other assets............... 9,248 8,109
-------- --------
Total assets........................................... $371,410 $342,949
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing..................................... $ 44,130 $ 45,461
Interest bearing......................................... 266,517 245,692
-------- --------
Total deposits......................................... 310,647 291,153
Short-term borrowings:
Repurchase agreements.................................... 12,089 5,876
Other.................................................... 2,908 5,714
Accrued interest payable and other liabilities............. 3,963 2,174
-------- --------
Total liabilities...................................... 329,607 304,917
SHAREHOLDERS' EQUITY
Preferred stock--$1.00 par value; 1,000,000 shares
authorized; none issued...................................
Common stock--$1.00 par value; 10,000,000 shares
authorized; 3,349,344 shares outstanding at December 31,
1994, including 15,640 treasury shares; 837,336 shares
outstanding at December 31, 1993, including 3,660 treasury
shares.................................................... 3,349 837
Capital surplus............................................ 6,460 8,972
Retained earnings.......................................... 32,185 28,322
Treasury stock............................................. (48) (30)
Net unrealized loss on available-for-sale securities....... (143) (69)
-------- --------
Total shareholders' equity............................. 41,803 38,032
-------- --------
Total liabilities and shareholders' equity............. $371,410 $342,949
======== ========
</TABLE>
See notes to consolidated financial statements
F-3
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans........................... $21,562 $20,066 $19,993
Interest and dividends on investment securities:
Taxable.............................................. 6,205 6,923 7,646
Tax-exempt........................................... 58 85 214
Federal funds sold and other........................... 699 354 591
------- ------- -------
Total interest income.................................. 28,524 27,428 28,444
Interest expense:
Deposits............................................. 10,096 9,539 11,254
Short-term borrowings................................ 447 235 377
------- ------- -------
Total interest expense................................. 10,543 9,774 11,631
------- ------- -------
Net interest income.................................... 17,981 17,654 16,813
Provision for loan losses.............................. 1,643 1,285 1,343
------- ------- -------
Net interest income after provision for loan losses.... 16,338 16,369 15,470
Other income:
Service charges and fees............................. 1,624 1,504 1,252
Credit life insurance commissions.................... 690 637 740
Gain on sale of assets............................... -- 32 236
Other................................................ 488 222 181
------- ------- -------
Total other income..................................... 2,802 2,395 2,409
Other expenses:
Salaries and employee benefits....................... 4,991 4,880 4,275
Net occupancy........................................ 626 481 556
Advertising.......................................... 543 485 463
Federal deposit insurance and regulatory
assessments......................................... 757 718 691
Other................................................ 4,342 3,808 3,912
------- ------- -------
Total other expenses................................... 11,259 10,372 9,897
------- ------- -------
Income before income taxes............................. 7,881 8,392 7,982
Applicable income taxes................................ 2,876 3,269 2,919
------- ------- -------
Net income............................................. $ 5,005 $ 5,123 $ 5,063
======= ======= =======
Net income per common share............................ $ 1.36 $ 1.40 $ 1.38
======= ======= =======
Average common shares outstanding...................... 3,668 3,668 3,668
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
AVAILABLE-
COMMON CAPITAL RETAINED FOR-SALE
STOCK SURPLUS EARNINGS TREASURY STOCK SECURITIES TOTAL
------ ------- -------- -------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1992................... $ 209 $9,600 $20,220 $(30) $ (39) $29,960
Net income--1992........ -- -- 5,063 -- -- 5,063
Dividends on common
stock ($.28 per
share)................. -- -- (1,042) -- -- (1,042)
Change in net unrealized
loss on marketable
equity securities...... -- -- -- -- (29) (29)
------ ------ ------- ---- ----- -------
Balances at December 31,
1992................... 209 9,600 24,241 (30) (68) 33,952
Net income--1993........ -- -- 5,123 -- -- 5,123
Dividends on common
stock ($.28 per
share)................. -- -- (1,042) -- -- (1,042)
Four-for-one stock split
in the form of a 300%
stock dividend......... 628 (628) -- -- -- --
Change in net unrealized
loss on marketable
equity securities...... -- -- -- -- (1) (1)
------ ------ ------- ---- ----- -------
Balances at December 31,
1993................... 837 8,972 28,322 (30) (69) 38,032
Adjustment to beginning
balance for change in
accounting method, net
of deferred income
taxes.................. -- -- -- -- 127 127
Net income--1994........ -- -- 5,005 -- -- 5,005
Dividends on common
stock ($.31 per
share)................. -- -- (1,142) -- -- (1,142)
Four-for-one stock split
in the form of a 300%
stock dividend......... 2,512 (2,512) -- -- -- --
Change in net unrealized
loss on available-for-
sale securities, net of
deferred income taxes.. -- -- -- -- (201) (201)
Acquisition of treasury
shares................. -- -- -- (18) -- (18)
------ ------ ------- ---- ----- -------
Balances at December 31,
1994................... $3,349 $6,460 $32,185 $(48) $(143) $41,803
====== ====== ======= ==== ===== =======
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 5,005 $ 5,123 $ 5,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation..................................... 658 593 599
Amortization..................................... 547 480 472
Provision for loan losses........................ 1,643 1,285 1,343
Deferred income taxes (benefit).................. 140 (204) (145)
Gain on sale of assets........................... (117) (33) (236)
Net change in accrued interest receivable and
other assets.................................... (1,432) (6) 829
Net change in accrued interest payable and other
liabilities..................................... 1,790 19 (381)
------- ------- -------
Net cash provided by operating activities.......... 8,234 7,257 7,544
INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale
securities........................................ 25,937 -- --
Purchases of available-for-sale securities......... (5,971) -- --
Proceeds from maturities of held-to-maturity
securities........................................ 10,000 -- --
Purchases of held-to-maturity securities........... (40,680) -- --
Proceeds from maturities of investment securities.. -- 52,567 45,928
Purchases of investment securities................. -- (45,382) (46,886)
Net change in interest bearing deposits in other
banks............................................. (2,874) 121 --
Net change in loans................................ (20,535) (24,373) (6,010)
Purchases of premises and equipment................ (2,346) (1,028) (497)
Proceeds from sale of premises and equipment....... 187 20 225
------- ------- -------
Net cash used in investing activities.............. (36,282) (18,075) (7,240)
FINANCING ACTIVITIES
Net change in deposits............................. 19,494 10,036 9,845
Net change in short-term borrowings................ 3,407 (342) (8,131)
Repayment of notes payable......................... -- -- (42)
Cash dividends paid................................ (1,142) (1,042) (1,042)
Purchase of treasury stock......................... (18) -- --
------- ------- -------
Net cash provided by financing activities.......... 21,741 8,652 630
------- ------- -------
(Decrease) increase in cash and cash equivalents... (6,307) (2,166) 934
Cash and cash equivalents at beginning of year..... 31,616 33,782 32,848
------- ------- -------
Cash and cash equivalents at end of year........... $25,309 $31,616 $33,782
======= ======= =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Matewan BancShares, Inc. and its
Subsidiaries (the Company) conform to generally accepted accounting principles
and to general practices within the banking industry. The following is a
summary of the more significant policies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Matewan BancShares, Inc. and its wholly-owned subsidiaries, Matewan National
Bank, Matewan Bank, FSB, and Matewan Venture Fund, Inc. The Company considers
all of its principal business activities to be bank related. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash and
due from banks and federal funds sold as cash and cash equivalents.
Investment Securities
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity and marketable equity
securities are classified as available-for-sale. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of
deferred income taxes, reported in a separate component of shareholders'
equity. The Company does not hold investment securities for trading purposes.
Marketable equity securities consist of an equity interest in mutual funds,
the assets of which are principally U. S. Government securities. To reduce the
carrying amount of the marketable equity securities to their fair value, a
valuation allowance representing the net unrealized loss on such securities
has been established as a component of shareholders' equity. During 1994, the
marketable equity securities, along with the corresponding unrealized loss,
have been reclassified as available-for-sale investment securities.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Realized gains and losses and declines in value
judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the specific identification
method.
Allowance for Loan Losses
In evaluating the adequacy of the allowance for loan losses, management
considers all significant factors that affect the collectibility of the loan
portfolio. The provision for loan losses included in the statements of income
is based upon senior management's review of the loan portfolio, historical
charge-off experience, composition and recent performance of the loan
portfolio, loan volume, current economic conditions, and other relevant
factors. These provisions, less net charge-offs, comprise the allowance for
loan losses. In management's judgment, the allowance for loan losses is
maintained at a level adequate to provide for potential losses on existing
loans.
F-7
<PAGE>
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed principally on the straight-line method over
the estimated useful lives of the assets.
Income Taxes
Deferred income taxes are provided for temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements at the statutory tax rate. The Company and its subsidiaries file
consolidated federal and state income tax returns. Each subsidiary provides
for income taxes on a separate return basis and remits amounts determined to
be currently payable to the Company.
Revenue Recognition
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. The accrual of interest income generally is
discontinued when a loan becomes 90 days past due as to principal or interest.
When interest accruals are discontinued, unpaid interest credited to income in
the current year is reversed, and interest accrued in prior years is charged
to the allowance for loan losses. Management may elect to continue the accrual
of interest when the estimated net realizable value of collateral is
sufficient to cover the principal balance and accrued interest, and the loan
is in the process of collection.
Credit life insurance commissions on loans (principally short-term
installment loans) are being recognized as collected. The use of this method
of recognition does not produce results which are materially different from
that which would have been produced if such commissions were deferred and
amortized as an adjustment of loan yield over the life of the related loan.
Employee Benefit Plan
The Company has a defined benefit pension plan covering substantially all
employees (see Note 11). Pension costs are actuarially determined and charged
to expense. The Company provides no post-employment or post-retirement
benefits other than pension benefits.
Net Income Per Common Share
Net income per common share is computed based on the weighted average number
of common shares outstanding during the applicable period.
2. ACQUISITION ACTIVITY
In 1994, the Company contributed capital of $4,000 to form Matewan Bank, FSB
(FSB), a wholly-owned federal savings bank subsidiary of the Company. FSB
began operations on January 3, 1994, and total assets approximated $21,300 at
December 31, 1994.
The Company has acquired banks in prior years in acquisitions accounted for
using the purchase method of accounting. The purchase prices were allocated to
the identifiable tangible and intangible assets acquired and liabilities
assumed based upon their estimated fair value at the date of consummation.
Intangible assets representing the present value of future net income to be
earned from deposits acquired of approximately $2,730 are being amortized on a
straight-line basis over a period approximating the expected run-off of the
related deposits. Accumulated amortization approximated $877 and $686 at
December 31, 1994 and 1993, respectively.
3. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The bank subsidiary of the Company is required to maintain average reserve
balances with the Federal Reserve Bank or as cash in its vault. The average
amount of those reserve balances for the year ended December 31, 1994,
approximated $3,100.
F-8
<PAGE>
4. INVESTMENT SECURITIES
The Company adopted the provisions of Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of January 1, 1994. In accordance with the Statement, prior
period financial statements have not been restated to reflect the change in
accounting principle. The balance of shareholders' equity was increased by
approximately $127, net of deferred income taxes to reflect the net unrealized
holding gains on securities classified as available-for-sale previously
carried at amortized cost or lower of cost or market.
The following is a summary of available-for-sale securities and held-to-
maturity securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Treasury securities and
obligations of U.S. government
agencies........................ $ 8,988 $ -- $ (36) $ 8,952
Other securities................. 2,280 -- (181) 2,099
------- ------ ------- --------
Total.......................... $11,268 $ -- $ (217) $ 11,051
======= ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Treasury securities and
obligations of U.S. government
agencies........................ $88,668 $ 12 $(2,849) $ 85,831
Mortgage-backed securities....... 8,551 41 (218) 8,374
Obligations of states and
political subdivisions.......... 1,312 10 (23) 1,299
Other securities................. 399 1 -- 400
------- ------ ------- --------
Total.......................... $98,930 $ 64 $(3,090) $ 95,904
======= ====== ======= ========
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
U.S. Treasury securities and
obligations of U.S. government
agencies........................ $86,741 $1,660 $ (65) $ 88,336
Mortgage-backed securities....... 10,282 299 -- 10,581
Obligations of states and
political subdivisions.......... 538 28 -- 566
Other securities................. 1,253 -- -- 1,253
------- ------ ------- --------
Total.......................... $98,814 $1,987 $ (65) $100,736
======= ====== ======= ========
</TABLE>
F-9
<PAGE>
The amortized cost and estimated fair values of investment securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay the obligations without prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less.................................. $ 7,969 $ 7,934
Due after one year through five years.................... 1,019 1,018
Due after five years through ten years................... -- --
Due after ten years...................................... -- --
Equity securities........................................ 2,280 2,099
------- -------
$11,268 $11,051
======= =======
HELD-TO-MATURITY
Due in one year or less.................................. $26,734 $26,533
Due after one year through five years.................... 70,015 67,171
Due after five years through ten years................... 1,921 1,946
Due after ten years...................................... 260 254
------- -------
$98,930 $95,904
======= =======
</TABLE>
The Company sold no investment securities during the three years in the
period ended December 31, 1994.
At December 31, 1994 and 1993, investment securities with carrying amounts
of $35,570 and $19,905, respectively, were pledged to secure public deposits
and for other purposes.
5. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Commercial and financial loans........................... $ 64,821 $ 69,372
Real estate loans........................................ 76,908 66,638
Consumer loans........................................... 77,564 65,107
-------- --------
219,293 201,117
Less unearned income..................................... (1,617) (2,303)
-------- --------
217,676 198,814
Less allowance for loan losses........................... (2,932) (2,961)
-------- --------
Loans--net............................................... $214,744 $195,853
======== ========
</TABLE>
The Company grants commercial and financial, real estate, and consumer loans
primarily to customers in southern West Virginia and eastern Kentucky.
Although the Company has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their obligations is either directly or
indirectly dependent upon the coal industry. Substantially all loans
outstanding are collateralized by real estate, equipment, and personal
consumer goods.
The Company's subsidiaries have granted loans to officers and directors of
the Company and its subsidiaries and to their associates. Related party loans
were made on substantially the same terms, including interest rate and
collateral, as those prevailing at the same time for comparable transactions
with unrelated persons and do not involve more than normal risk of
collectibility.
F-10
<PAGE>
The following presents the activity with respect to related party loans:
<TABLE>
<S> <C>
Balance at January 1, 1994.......................................... $ 3,633
Loans made.......................................................... 2,713
Principal collected................................................. (2,138)
-------
Balance at December 31, 1994........................................ $ 4,208
=======
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 2,961 $ 2,470 $ 2,006
Loans charged off................................. (2,128) (1,214) (1,274)
Loan recoveries................................... 456 420 395
------- ------- -------
Net charge-offs................................... (1,672) (794) (879)
Provision charged to expense...................... 1,643 1,285 1,343
------- ------- -------
Balance at end of year............................ $ 2,932 $ 2,961 $ 2,470
======= ======= =======
</TABLE>
The Company will adopt Financial Accounting Standards Board Statement No.
114, "Accounting by Creditors for Impairment of a Loan," effective January 1,
1995. As a result of applying the new rules, certain impaired loans will be
reported at the present value of expected future cash flows discounted at the
loan's original effective interest rate, or as a practical expedient, at the
loan's observable market price or the fair value of the collateral if the loan
is collateral dependent. The adoption of this standard will not have a
material impact on the Company's financial statements.
7. PREMISES AND EQUIPMENT
The major categories of premises and equipment and related accumulated
depreciation are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------- -------
<S> <C> <C>
Land....................................................... $ 1,992 $ 1,992
Buildings and improvements................................. 8,910 6,708
Furniture and equipment.................................... 3,680 2,921
Construction in progress................................... -- 711
------- -------
14,582 12,332
Less accumulated depreciation.............................. (5,330) (4,698)
------- -------
$ 9,252 $ 7,634
======= =======
</TABLE>
The Company has entered into noncancelable lease agreements (operating
leases) with respect to certain premises and equipment. The minimum annual
rental commitment under these operating leases is: 1995--$280; 1996--$280;
1997--$265; 1998--$130; 1999--$120; with $2,715 of commitments extending
beyond 1999.
Total rent expense, including cancelable and noncancelable leases,
approximated $380, $280, and $210 in 1994, 1993, and 1992.
F-11
<PAGE>
8. SHORT-TERM BORROWINGS
The Company's banking subsidiaries are members of the Federal Home Loan Bank
(FHLB) (Pittsburgh and Cincinnati). One benefit of the banking subsidiaries'
membership in the FHLB is the availability of short-term and long-term
funding, in the form of collateralized advances. The available line of credit
at prevailing market interest rates, at December 31, 1994, approximates
$80,000.
Short-term borrowings consist primarily of commercial repurchase agreements
and other short-term deposits. The weighted average interest rate on short-
term borrowings approximated 3.24% and 2.70% at December 31, 1994 and 1993.
Interest paid on deposits and short-term borrowings approximated $10,365,
$9,895, and $12,125 in 1994, 1993 and 1992.
9. RESTRICTIONS ON SUBSIDIARY DIVIDENDS
The primary source of funds for dividends paid by the Company to its
shareholders is dividends received from its bank subsidiary, Matewan National
Bank. Dividends paid by the Bank are subject to restriction by banking
regulations. The restrictive provision requires approval by the Comptroller of
the Currency if dividends declared in any year exceed the current year's net
income, plus the retained net profits of the two preceding years. During 1995,
the Bank's net retained profits available for distribution to the Company as
dividends, without regulatory approval, approximate $3,050 plus net income for
the interim period through the date of declaration.
10. INCOME TAXES
The income tax provision included in the consolidated statements of income
is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $2,335 $2,994 $2,682
State............................................... 401 479 382
------ ------ ------
Total current......................................... 2,736 3,473 3,064
Deferred:
Federal............................................. 118 (173) (115)
State............................................... 22 (31) (30)
------ ------ ------
Total deferred........................................ 140 (204) (145)
------ ------ ------
Total................................................. $2,876 $3,269 $2,919
====== ====== ======
</TABLE>
The Company incurred no taxes related to securities transactions during the
three year period ended December 31, 1994.
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory federal income tax rate to income
before income taxes is as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at statutory
federal rate.............. $2,679 34.0% $2,853 34.0% $2,714 34.0%
Plus: State income tax net
of federal tax benefits... 280 3.6 317 3.8 232 2.9
------ ---- ------ ---- ------ ----
2,959 37.6 3,170 37.8 2,946 36.9
Increase (decrease) in
taxes resulting from:
Tax-exempt interest...... (34) (.5) (46) (.5) (89) (1.1)
Other.................... (49) (.6) 145 1.7 62 .8
------ ---- ------ ---- ------ ----
Actual tax expense......... $2,876 36.5% $3,269 39.0% $2,919 36.6%
====== ==== ====== ==== ====== ====
</TABLE>
F-12
<PAGE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................... $ 732 $ 788
Accrued employee benefits................................... 138 177
Available-for-sale investments.............................. 74 --
Other....................................................... 7 --
------ ------
Total deferred tax assets..................................... 951 965
Deferred tax liabilities:
Intangible assets........................................... 347 324
Premises and equipment...................................... 119 90
Other....................................................... 91 91
------ ------
Total deferred tax liabilities................................ 557 505
------ ------
Net deferred tax assets....................................... $ 394 $ 460
====== ======
</TABLE>
Income taxes paid approximated $1,825, $3,300, and $2,675 in 1994, 1993, and
1992.
11. EMPLOYEE BENEFIT PLAN
The Company has a contributory defined benefit pension plan (the Plan)
covering substantially all of its employees. The benefits are based on years
of service and the employee's compensation at the date of retirement.
Employees contribute 3% of their wages to the Plan. The Company's funding
policy is to contribute annually the maximum amount that can be deducted for
federal income tax purposes.
The following table sets forth the Plan's funded status and amounts
recognized in the Company's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1994 1993
------ ------
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation................................ $1,624 $1,590
Nonvested benefit obligation............................. 29 37
------ ------
Accumulated benefit obligation............................. 1,653 1,627
Effect of estimated future pay increases................. 295 289
------ ------
Projected benefit obligation............................... 1,948 1,916
Plan assets at fair value.................................. 2,045 2,265
------ ------
Projected benefit obligation less than plan assets......... 97 349
Unrecognized prior service benefit......................... (275) (289)
Unrecognized net asset at transition, net of amortization.. (290) (310)
Unrecognized net loss from past experience different from
that assumed.............................................. 370 136
------ ------
Accrued pension cost included in other liabilities......... $ (98) $ (114)
====== ======
</TABLE>
F-13
<PAGE>
Following is a summary of the components of net periodic pension cost:
<TABLE>
<CAPTION>
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Service cost--benefits earned during the period........ $ 48 $ 44 $ 22
Interest cost on projected benefit obligation.......... 132 120 108
Actual loss (return) on plan assets.................... 93 (177) (163)
Net amortization and deferral.......................... (285) 2 9
----- ----- -----
Net periodic pension benefit........................... $ (12) $ (11) $ (24)
===== ===== =====
</TABLE>
At December 31, 1994 and 1993, a 7% weighted average discount rate and a 3%
rate of increase in future compensation levels was used to determine the
actuarial present value of the projected benefit obligation. The expected
long-term rate of return on plan assets for the three years ended December 31,
1994, was 7%. Plan assets consist principally of United States Treasury and
Agency securities, equity securities, mutual funds, and short-term investment
funds.
In 1994, the Company amended the benefit formula of the defined benefit
pension plan effective January 1, 1995, in conjunction with the formation of a
defined contribution plan. The Company expects to have the defined
contribution plan operational in early 1995.
12. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company offers certain financial
products to its customers to aid them in meeting their requirements for
liquidity, credit enhancement, and interest rate protection. Generally
accepted accounting principles require that these products be accounted for as
contingent liabilities and, accordingly, they are not reflected in the
accompanying financial statements. Following is a discussion of these
products.
Standby Letters of Credit: These agreements are used by the Company's
customers as a means of improving their credit standing in their dealings with
others. Under these agreements, the Company guarantees certain financial
commitments in the event that its customers are unable to satisfy their
obligations. The Company has issued standby letters of credit of approximately
$8,640 as of December 31, 1994.
Loan Commitments: At December 31, 1994, the Company had commitments
outstanding to extend credit of approximately $11,495. These commitments
generally require the customers to maintain certain credit standards.
The Company evaluates each customer's credit worthiness on a case-by-case
basis. Management generally requires collateral to secure these commitments.
The amount of collateral obtained by the Company is based upon management's
credit evaluation of the counterparty. Collateral held varies, but may include
deposits in financial institutions, accounts receivable, inventory, equipment,
and real estate.
Management conducts regular reviews of these commitments and the results are
considered in assessing the adequacy of the Company's allowance for loan
losses. Management does not anticipate any material losses as a result of
these standby letters of credit and loan commitments.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all
F-14
<PAGE>
nonfinancial instruments from its disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate those assets' fair value.
Interest-Bearing Deposits in Other Banks: The carrying amounts reported
in the balance sheets for interest-bearing deposits in other banks
approximate those assets' fair value.
Investment Securities: Fair values for investment securities are based on
quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of similar
instruments.
Loans: The fair values of fixed rate commercial, real estate, and
consumer loans are estimated using discounted cash flow analysis, using
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. For variable rate loans that reprice
frequently and with no significant change in credit risk, fair values are
based on carrying values.
Deposits: The estimated fair values of demand deposits (i.e. interest and
non-interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to their carrying amounts. Fair values
for fixed-rate certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates, currently being offered
on certificates, to a schedule of aggregated expected monthly maturities on
time deposits.
Short-Term Borrowings: The carrying amounts in the balance sheets for
repurchase agreements and other short-term borrowings approximate those
liabilities' fair values.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents............ $ 25,309 $ 25,309 $ 31,616 $ 31,616
Interest-bearing deposits in other
banks............................... 2,876 2,876 2 2
Marketable equity securities......... -- -- 921 921
Investment securities................ 109,981 106,955 98,814 100,736
Loans................................ 214,744 214,696 195,853 203,960
Financial liabilities:
Deposits............................. 310,647 310,540 291,153 291,160
Short-term borrowings................ 14,997 14,997 11,590 11,590
</TABLE>
14. STOCK SPLITS
On May 19, 1995, the Company's Board of Directors authorized a 10% common
stock dividend payable to shareholders of record on June 1, 1995. On April 12,
1994, the Company's Board of Directors authorized a four-for-one stock split
of common shares effected in the form of a 300% stock dividend to shareholders
of record on May 1, 1994. On April 13, 1993, the Company's Board of Directors
authorized a four-for-one stock split of common shares effected in the form of
a 300% stock dividend to shareholders of record on May 28, 1993. Average
shares outstanding and per share amounts included in the consolidated
financial statements and notes have been adjusted for the stock splits.
F-15
<PAGE>
15. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
------- -------
<S> <C> <C>
ASSETS
Cash........................................................ $ 87 $ 147
Investment securities--held to maturity..................... 1,380 --
Investment in banking subsidiaries.......................... 38,328 35,202
Investment in non-bank subsidiary........................... 1,658 1,664
Premises and equipment...................................... 58 709
Other assets................................................ 917 890
------- -------
Total assets................................................ $42,428 $38,612
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Notes payable............................................. $ 137 $ 137
Note payable to non-bank subsidiary....................... 400 400
Other liabilities......................................... 88 43
------- -------
Total liabilities........................................... 625 580
Shareholders' equity........................................ 41,803 38,032
------- -------
Total liabilities and shareholders' equity.................. $42,428 $38,612
======= =======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary.................. $ 5,808 $ 1,242 $ 1,042
Dividends from non-bank subsidiary.............. 64 255 25
Operating expenses, net........................... 59 1 57
------- ------- -------
Income before (excess dividends) equity in
undistributed earnings of subsidiaries........... 5,813 1,496 1,010
(Excess dividends) equity in undistributed
earnings of subsidiaries......................... (808) 3,627 4,053
------- ------- -------
Net income........................................ $ 5,005 $ 5,123 $ 5,063
======= ======= =======
</TABLE>
F-16
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 5,005 $ 5,123 $ 5,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Excess dividends (equity in undistributed
earnings) of subsidiaries.................... 808 (3,627) (4,053)
Change in other assets........................ (27) (76) 27
Change in other liabilities................... 45 22 2
------- ------- -------
Net cash provided by operating activities....... 5,831 1,442 1,039
INVESTING ACTIVITIES
Maturity of interest-bearing deposit............ -- 122 --
Investment in subsidiary........................ (3,351) -- --
Return of investment from subsidiary............ -- 400 --
Purchases of premises and equipment............. -- (709) --
Purchase of investment securities............... (1,380) -- --
------- ------- -------
Net cash used in investing activities........... (4,731) (187) --
FINANCING ACTIVITIES
Cash dividends paid............................. (1,142) (1,042) (1,042)
Purchase of treasury stock...................... (18) -- --
Payment of note payable......................... -- (100) --
------- ------- -------
Net cash used in financing activities........... (1,160) (1,142) (1,042)
------- ------- -------
(Decrease) increase in cash..................... (60) 113 (3)
Cash at beginning of year....................... 147 34 37
------- ------- -------
Cash at end of year............................. $ 87 $ 147 $ 34
======= ======= =======
</TABLE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for 1994 and 1993 is summarized below:
<TABLE>
<CAPTION>
1994
-----------------------------------------
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income.................... $6,771 $6,917 $7,169 $7,667
Interest expense................... 2,464 2,552 2,698 2,829
Net interest income................ 4,307 4,365 4,471 4,838
Provision for loan losses.......... 451 482 360 350
Net income......................... 1,079 1,229 1,236 1,461
Earnings per share................. 0.29 0.34 0.34 0.40
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------------
QUARTER ENDED
-----------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Interest income.................... $6,796 $6,774 $7,002 $6,856
Interest expense................... 2,484 2,489 2,368 2,433
Net interest income................ 4,312 4,285 4,634 4,423
Provision for loan losses.......... 325 329 303 328
Net income......................... 1,224 1,270 1,460 1,169
Earnings per share................. 0.34 0.35 0.40 0.32
</TABLE>
F-17
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets (Unaudited)................................... F-19
Consolidated Statements of Income (Unaudited)............................. F-20
Consolidated Statements of Changes in Shareholders' Equity (Unaudited).... F-21
Consolidated Statements of Cash Flows (Unaudited)......................... F-22
Notes to Consolidated Financial Statements (Unaudited).................... F-23
</TABLE>
F-18
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 15,335 $ 13,521
Federal funds sold......................................... 20,503 14,519
-------- --------
Cash and cash equivalents.................................. 35,838 28,040
Interest bearing deposits in other banks................... 675 3,304
Investment securities:
Available-for-sale at fair value......................... 9,032 9,782
Held-to-maturity at cost (approximate fair value $97,208
at September 30, 1995; $95,904 at December 31, 1994; and
$95,422 at September 30, 1994).......................... 96,565 97,082
Loans--net................................................. 228,274 210,539
Premises and equipment..................................... 9,742 8,763
Accrued interest receivable and other assets............... 9,387 8,780
-------- --------
Total assets........................................... $389,513 $366,290
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing..................................... $ 42,722 $ 41,855
Interest bearing......................................... 281,317 264,508
-------- --------
Total deposits......................................... 324,039 306,363
Short-term borrowings:
Repurchase agreements.................................... 13,968 13,071
Other.................................................... 3,755 2,520
-------- --------
Total short-term borrowings............................ 17,723 15,591
Accrued interest payable and other liabilities............. 3,286 3,406
-------- --------
Total liabilities...................................... 345,048 325,360
SHAREHOLDERS' EQUITY
Preferred Stock--$1.00 par value; 1,000,000 shares
authorized; none issued...................................
Common Stock--$1.00 par value; 10,000,000 shares
authorized; 3,684,104 shares outstanding at September 30,
1995, and 3,349,344 shares outstanding December 31, 1994
and September 30, 1994, including 16,253, 16,104 and
14,640 treasury shares ................................... 3,684 3,349
Surplus.................................................... 12,182 6,460
Retained earnings.......................................... 28,727 31,190
Treasury stock............................................. (68) (30)
Net unrealized loss on available-for-sale securities, net
of income taxes........................................... (60) (39)
-------- --------
Total shareholders' equity............................. 44,465 40,930
-------- --------
Total liabilities and shareholders' equity............. $389,513 $366,290
======== ========
</TABLE>
See notes to consolidated financial statements
F-19
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1995 1994
-------- --------
<S> <C> <C>
Interest income:
Interest and fees on loans.................................. $ 18,719 $ 15,698
Interest and dividends on investment securities:
Taxable..................................................... 4,651 4,660
Tax-exempt.................................................. 96 41
Other interest income......................................... 432 458
-------- --------
Total interest income......................................... 23,898 20,857
Interest expense:
Deposits.................................................... 8,885 7,430
Short-term borrowings....................................... 444 283
-------- --------
Total interest expense........................................ 9,329 7,713
-------- --------
Net interest income........................................... 14,569 13,144
Provision for loan losses..................................... 1,261 1,293
-------- --------
Net interest income after provision for loan losses........... 13,308 11,851
Other income:
Service fees................................................ 1,273 1,221
Other....................................................... 574 325
Credit life insurance commissions........................... 420 553
-------- --------
Total other income............................................ 2,267 2,099
Other expenses:
Salaries and employee benefits.............................. 4,581 3,754
Net occupancy............................................... 747 623
Advertising................................................. 556 359
Federal deposit insurance and regulatory assessments........ 378 568
Other....................................................... 3,699 3,102
-------- --------
Total other expense........................................... 9,961 8,406
-------- --------
Income before income taxes.................................... 5,614 5,544
Applicable income taxes....................................... 2,009 2,000
-------- --------
Net income.................................................... $ 3,605 $ 3,544
======== ========
Net income per share.......................................... $ 0.98 $ 0.97
======== ========
Average common shares outstanding............................. 3,668 3,668
======== ========
</TABLE>
See notes to consolidated financial statements
F-20
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (DOLLARS
IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON
AVAILABLE-
COMMON CAPITAL RETAINED TREASURY FOR-SALE
STOCK SURPLUS EARNINGS STOCK SECURITIES TOTAL
------ ------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994.. $ 837 $ 8,972 $28,322 $(30) $ (69) $38,032
Adjustment to beginning
balance for change in
accounting method, net
of income tax effect.... -- -- -- -- 127 127
Dividends on Common Stock
($0.17 per share)....... -- -- (676) -- -- (676)
Change in net unrealized
loss on available-for-
sale securities, net of
deferred income tax
effect.................. -- -- -- -- (97) (97)
Net income............... -- -- 3,544 -- -- 3,544
Four-for-one stock split
in the form of a 300%
stock dividend.......... 2,512 (2,512) -- -- -- --
------ ------- ------- ---- ----- -------
Balance September 30,
1994.................... $3,349 $ 6,460 $31,190 $(30) $ (39) $40,930
====== ======= ======= ==== ===== =======
Balance January 1, 1995.. $3,349 $ 6,460 $32,185 $(48) $(143) $41,803
Treasury Stock Pur-
chases.................. -- -- -- (46) -- (46)
Treasury Stock Sales..... -- 31 -- 26 -- 57
Change in net unrealized
loss on available-for-
sale securities, net of
deferred income taxes... -- -- -- -- 83 83
Dividends on Common Stock
($0.28 per share)....... -- -- (1,034) -- -- (1,034)
Net income............... -- -- 3,605 -- -- 3,605
Common Stock Dividend
(10%)................... 335 5,691 (6,026) -- -- --
Cash paid on fractional
shares.................. -- -- (3) -- -- (3)
------ ------- ------- ---- ----- -------
Balance September 30,
1995.................... $3,684 $12,182 $28,727 $(68) $ (60) $44,465
====== ======= ======= ==== ===== =======
</TABLE>
See notes to consolidated financial statements
F-21
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................ $ 3,605 $ 3,544
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation.................................... 521 485
Amortization.................................... 470 429
Provision for loan losses....................... 1,261 1,293
Provision for deferred taxes.................... 4 32
Net change in accrued interest receivable and
other assets................................... (349) (736)
Net change in accrued interest payable and other
liabilities.................................... (681) 1,199
------------ ------------
Net cash provided by operating activities......... 4,831 6,246
INVESTING ACTIVITIES
Proceeds from sales of available-for-sale securi-
ties............................................. -- --
Proceeds from maturities of available-for-sale
securities....................................... 8,261 7,000
Proceeds from maturities of held-to-maturity
securities....................................... 34,742 18,138
Purchases of available-for-sale securities........ (6,089) (4,951)
Purchases of held-to-maturity securities.......... (32,696) (27,650)
Net change in interest bearing deposits in other
banks............................................ 2,201 (3,302)
Net change in loans............................... (14,791) (15,979)
Purchases of premises and equipment............... (1,181) (1,636)
Proceeds from sale of premises and equipment...... 170 22
------------ ------------
Net cash used in investing activities............. (9,383) (28,358)
FINANCING ACTIVITIES
Net change in deposits............................ 13,392 15,211
Net change in short-term borrowings............... 2,726 4,001
Cash dividends paid............................... (1,037) (676)
------------ ------------
Net cash provided by financing activities......... 15,081 18,536
------------ ------------
Increase (decrease) in cash and cash equivalents.. 10,529 (3,576)
Cash and equivalents at beginning of year......... 25,309 31,616
------------ ------------
Cash and equivalents at end of period............. $ 35,838 $ 28,040
============ ============
</TABLE>
See notes to consolidated financial statements
F-22
<PAGE>
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS)
1. The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the interim
period are not necessarily indicative of the results that may be expected for
the year ending December 31, 1995. For further information, refer to Matewan's
consolidated financial statements and footnotes thereto for the year ended
December 31, 1994 included elsewhere in this Prospectus.
2. The financial statements presented herein reflect Matewan BancShares,
Inc. and its consolidated subsidiaries, The Matewan National Bank, Matewan
Bank FSB, and Matewan Venture Fund, Inc.
3. The Company adopted Financial Accounting Standards Board Statement No.
114, "Accounting by Creditors for Impairment of a Loan," on January 1, 1995.
Statement No. 114 requires that impaired loans be measured based upon present
value of expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market
price or fair value of collateral if the loan is collateral dependent. The
adoption and implementation of this standard has not had a material effect on
the Company's financial statements.
At September 30, 1995, the recorded investment in impaired loans under
Statement No. 114 was $3,426 (of which $246 were on a nonaccrual basis).
Included in this amount is $1,096 of impaired loans for which the related
allowance for credit losses is $290 and $2,330 of impaired loans that do not
have a specific allowance for credit losses. The average recorded investment
in impaired loans during the nine month period ended September 30, 1995
approximated $3,368.
The Company recognizes interest income on impaired loans using the cash
basis method. For the nine month period ended September 30, 1995, the Company
recognized interest income on impaired loans of $174.
4. On May 19, 1995, the Board of Directors of Matewan BancShares, Inc.
authorized a ten percent (10%) common stock dividend to shareholders of record
as of June 1, 1995. Average shares outstanding and per share amounts included
in the consolidated financial statements and footnotes thereto have been
adjusted to reflect this stock dividend.
5. On September 28, 1995, the Company entered into a definitive agreement
with Banc One Corporation and Bank One Kentucky Corporation under which
Matewan BancShares, Inc. will acquire via cash purchase all of the outstanding
common stock of Bank One, Pikeville N.A. Bank One, Pikeville N.A. operates
eight offices and has total assets of approximately $221,019 and total
deposits of approximately $181,509. Consummation of the transaction is
expected in the first quarter of 1996.
F-23
<PAGE>
BANK ONE, PIKEVILLE, N.A.
FINANCIAL STATEMENTS
DECEMBER 31, 1994
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-25
Balance Sheets as of December 31, 1994 and 1993.......................... F-26
Statements of Income for the Years Ended December 31, 1994, 1993 and
1992.................................................................... F-27
Statements of Shareholder's Equity for the Years Ended December 31, 1994,
1993 and 1992........................................................... F-28
Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and
1992.................................................................... F-29
Notes to Financial Statements............................................ F-30
Unaudited Interim Financial Statements................................... F-39
Balance Sheets as of September 30, 1995 and 1994 (Unaudited)............. F-40
Statements of Income for the Nine Months Ended September 30, 1995 and
1994 (Unaudited)........................................................ F-41
Statements of Shareholder's Equity for the Nine Months Ended
September 30, 1995 and 1994 (Unaudited)................................. F-42
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and
1994 (Unaudited)........................................................ F-43
Notes to Financial Statements (Unaudited)................................ F-44
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholder Bank One, Pikeville, N.A.
We have audited the accompanying balance sheets of Bank One, Pikeville, N.A.
(a wholly-owned second tier subsidiary of BANC ONE CORPORATION) as of December
31, 1994 and 1993, and the related statements of income, shareholder's equity,
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Bank One, Pikeville, N.A.
at December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the financial statements, the Bank changed its
method of accounting for certain investment securities as of January 1, 1994.
As discussed in Note 10 to the financial statements, the Bank changed its
method of accounting for income taxes as of January 1, 1993.
Ernst & Young LLP
Charleston, West Virginia
December 29, 1995
F-25
<PAGE>
BANK ONE, PIKEVILLE, N.A.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 6,735 $ 8,879
Securities purchased under agreements to resell............. 1,123 --
-------- --------
Cash and cash equivalents................................... 7,858 8,879
Investment securities:
Available-for-sale at fair value.......................... 30,749 --
Held-to-maturity (approximate fair value of $10,646 and
$80,883 at
December 31, 1994 and 1993).............................. 10,666 78,282
Loans, net.................................................. 165,154 142,383
Premises and equipment...................................... 9,291 9,466
Accrued interest receivable and other assets................ 2,153 3,140
-------- --------
Total assets............................................ $225,871 $242,150
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deposits:
Non-interest bearing...................................... $ 27,497 $ 34,897
Interest bearing.......................................... 155,573 159,473
-------- --------
Total deposits.......................................... 183,070 194,370
Short-term borrowings:
Federal funds purchased and repurchase agreements......... 19,396 22,678
Other..................................................... 1,461 2,911
Accrued interest payable and other liabilities.............. 2,601 1,868
-------- --------
Total liabilities....................................... 206,528 221,827
Shareholder's equity:
Common stock--$10.00 par value; 500,000 shares authorized;
225,000
shares outstanding at December 31, 1994 and 1993.......... 2,250 2,250
Surplus.................................................... 4,436 4,436
Retained earnings.......................................... 12,760 13,637
Net unrealized loss on available-for-sale securities....... (103) --
-------- --------
Total shareholder's equity.............................. 19,343 20,323
-------- --------
Total liabilities and shareholder's equity.............. $225,871 $242,150
======== ========
</TABLE>
See notes to financial statements
F-26
<PAGE>
BANK ONE, PIKEVILLE, N.A.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans........................ $13,863 $11,925 $12,011
Interest and dividends on investment securities:
Taxable........................................... 3,096 4,755 5,139
Tax-exempt........................................ 346 500 482
Federal funds sold and securities purchased under
agreements to resell............................... 275 184 365
------- ------- -------
Total interest income............................... 17,580 17,364 17,997
Interest expense:
Deposits.......................................... 5,352 5,690 7,491
Short-term borrowings............................. 885 175 178
------- ------- -------
Total interest expense.............................. 6,237 5,865 7,669
------- ------- -------
Net interest income................................. 11,343 11,499 10,328
Provision for loan losses........................... 2,064 1,312 1,200
------- ------- -------
Net interest income after provision for loan
losses............................................. 9,279 10,187 9,128
Non-interest income:
Service charges and fees.......................... 826 809 812
Investment securities (losses) gains.............. (30) (1) 131
Other............................................. 333 418 344
------- ------- -------
Total non-interest income........................... 1,129 1,226 1,287
Non-interest expense:
Salaries and employee benefits.................... 3,708 3,969 4,266
Net occupancy..................................... 491 583 521
Equipment expense................................. 239 171 151
Supplies expense.................................. 173 173 147
Other taxes....................................... 226 228 205
Federal deposit insurance......................... 430 492 452
Outside services and processing................... 1,769 1,310 877
Communication and transportation.................. 282 286 312
Other............................................. 326 381 736
------- ------- -------
Total non-interest expense.......................... 7,644 7,593 7,667
------- ------- -------
Income before income taxes.......................... 2,764 3,820 2,748
Applicable income taxes............................. 840 1,200 800
------- ------- -------
Income before cumulative effect of a change in
accounting principle............................... 1,924 2,620 1,948
Cumulative effect on prior years (to December 31,
1992) of change in method of accounting for income
taxes.............................................. -- 272 --
------- ------- -------
Net income.......................................... $ 1,924 $ 2,348 $ 1,948
======= ======= =======
</TABLE>
See notes to financial statements
F-27
<PAGE>
BANK ONE, PIKEVILLE, N.A.
STATEMENTS OF SHAREHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
GAINS
(LOSSES) ON
AVAILABLE-
COMMON RETAINED FOR-SALE
STOCK SURPLUS EARNINGS SECURITIES TOTAL
------ ------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1992....... $2,250 $4,436 $13,164 $ -- $19,850
Dividends on common stock......... -- -- (1,952) -- (1,952)
Net income--1992.................. -- -- 1,948 -- 1,948
------ ------ ------- ------- -------
Balances at December 31, 1992..... 2,250 4,436 13,160 -- 19,846
Dividends on common stock......... -- -- (1,871) -- (1,871)
Net income--1993.................. -- -- 2,348 -- 2,348
------ ------ ------- ------- -------
Balances at December 31, 1993..... 2,250 4,436 13,637 -- 20,323
Accounting change adjustment for
unrealized gains on securities
available for sale, net of taxes
at January 1, 1994............... -- -- -- 1,236 1,236
Dividends on common stock......... -- -- (2,801) -- (2,801)
Net income--1994.................. -- -- 1,924 -- 1,924
Change in unrealized holding
(losses) on securities, available
for sale, net of taxes........... -- -- -- (1,339) (1,339)
------ ------ ------- ------- -------
Balances at December 31, 1994..... $2,250 $4,436 $12,760 $ (103) $19,343
====== ====== ======= ======= =======
</TABLE>
See notes to financial statements
F-28
<PAGE>
BANK ONE, PIKEVILLE, N.A.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 1,924 $ 2,348 $ 1,948
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting for
income taxes................................. -- 272 --
Provision for loan losses..................... 2,064 1,312 1,200
Depreciation and amortization................. 537 527 605
Deferred income tax expense (benefit)......... 89 (87) (157)
Loss (gain) on sales of investment
securities................................... 30 1 (131)
Gain on sales of premises and equipment....... -- -- (16)
Decrease in accrued interest receivable and
other assets................................. 901 510 1,760
Increase (decrease) in accrued interest
payable and other liabilities................ 701 121 (951)
-------- -------- --------
Net cash provided by operating activities....... 6,246 5,004 4,258
INVESTING ACTIVITIES
Purchases of available-for-sale investment
securities..................................... (21,649) -- --
Proceeds from sales of available-for-sale
investment securities.......................... 41,519 -- --
Proceeds from maturities of available-for-sale
investment securities.......................... 12,334 -- --
Proceeds from maturities of held-to-maturity
investment securities.......................... 4,408 -- --
Purchases of investment securities.............. -- (23,465) (22,710)
Proceeds from sales of investment securities.... -- -- 9,839
Proceeds from maturities of investment
securities..................................... -- 19,744 7,478
Net (increase) decrease in loans made to
customers...................................... (24,689) (17,484) 471
Purchases of premises and equipment............. (357) (819) (257)
Proceeds from sales of premises and equipment... -- -- 24
-------- -------- --------
Net cash provided by (used in) investing
activities..................................... 11,566 (22,024) (5,155)
FINANCING ACTIVITIES
Net (decrease) increase in deposits............. (11,300) (12,507) 9,852
Net (decrease) increase in short-term
borrowings..................................... (4,732) 19,377 (1,409)
Cash dividends paid............................. (2,801) (1,871) (1,952)
-------- -------- --------
Net cash (used in) provided by financing
activities..................................... (18,833) 4,999 6,491
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (1,021) (12,021) 5,594
Cash and cash equivalents at beginning of year.. 8,879 20,900 15,306
-------- -------- --------
Cash and cash equivalents at end of year........ $ 7,858 $ 8,879 $ 20,900
======== ======== ========
Supplemental information:
Interest paid................................. $ 6,119 $ 5,998 $ 8,193
Income taxes paid............................. 741 1,153 929
</TABLE>
See notes to financial statements
F-29
<PAGE>
BANK ONE, PIKEVILLE, N.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Bank One, Pikeville, N.A. is a wholly-owned second tier subsidiary of BANC
ONE CORPORATION.
In 1989, the First National Bank of Pikeville was acquired by Key Centurion
Bancshares, Inc. (Key) in a purchase transaction. In May 1993, Key merged with
BANC ONE CORPORATION (the Parent) in a pooling of interests transaction. When
Key was merged into the Parent, the First National Bank of Pikeville was
renamed Bank One, Pikeville, N.A. (the Bank) and became a wholly-owned second
tier subsidiary of the Parent.
The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to general practices within the banking
industry. The Bank considers all of its principal business activities to be
bank related. The following is a summary of the more significant policies.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Bank considers cash and
due from banks and securities purchased under agreement to resell as cash and
cash equivalents.
Investment Securities
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Bank has the
positive intent and ability to hold the securities to maturity. Held-to-
maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value,
with the unrealized gains and losses, net of deferred income taxes, reported
in a separate component of shareholder's equity. The Bank does not hold
investment securities for trading purposes.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
estimated life of the security. Such amortization is included in interest
income from investments. Realized gains and losses and declines in value
judged to be other-than-temporary are included in net securities gains
(losses). The cost of securities sold is based on the security with the
highest cost basis unless the specific securities are identified.
Allowance for Loan Losses
In evaluating the adequacy of the allowance for loan losses, management
considers all significant factors that affect the collectibility of the loan
portfolio. The provision for loan losses included in the statements of income
is based upon senior management's review of the loan portfolio, historical
charge-off experience, composition and recent performance of the loan
portfolio, loan volume, current economic conditions, and other relevant
factors. These provisions, less net charge-offs, comprise the allowance for
loan losses. In management's judgment, the allowance for loan losses is
maintained at a level adequate to provide for potential losses on existing
loans.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation expense is computed principally on the straight-line method over
the estimated useful lives of the assets.
F-30
<PAGE>
Income Taxes
Deferred income taxes are provided for temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements at the statutory tax rate. The Parent and its subsidiaries file a
consolidated federal income tax return which includes the Bank. Each
subsidiary provides for income taxes on a separate return basis and remits
amounts determined to be currently payable to the Parent.
Revenue Recognition
Interest on loans is accrued and credited to operations based upon the
principal amount outstanding. Commercial loans are placed on nonaccrual at the
time the loan is 90 days delinquent unless the credit is well secured and in
the process of collection. Commercial loans are typically charged-off at the
time the loan becomes 180 days delinquent. Residential real estate loans are
typically placed on nonaccrual at the time the loan is 120 days delinquent.
Consumer loans are typically charged-off at 120 days delinquent. In all cases,
loans must be placed or nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
Interest Rate Swaps
Interest rate swap transactions are utilized as part of the Bank's interest
rate risk management strategy by hedging or synthetically altering on-balance
sheet instruments. The interest differential applicable to the interest rate
swaps which hedge or alter specific assets and liabilities is accrued over the
lives of the agreements and reported as an adjustment to the yield and rate of
the underlying assets and liabilities. Fees on interest rate swaps are
deferred and amortized over the lives of the agreements. If the instrument
being hedged or altered by a swap is disposed of, the swap agreement is marked
to market with any resulting gain or loss included in the determination of the
gain or loss from disposition. If the interest rate swap is terminated, the
gain or loss is deferred and amortized over the remaining life of the
terminated swap.
2. PENDING ACQUISITION
During the third quarter 1995, BANC ONE CORPORATION entered into a
definitive agreement to sell all of the outstanding stock of the Bank to
Matewan BancShares, Inc. for $28,600 in cash. It is anticipated that this
transaction will be completed during the first quarter of 1996.
3. RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank or as cash in its vault. The average amount of those reserve
balances for the year ended December 31, 1994, approximated $2,937.
4. INVESTMENT SECURITIES
The Bank adopted the provisions of Financial Accounting Standards Board
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," as of January 1, 1994. In accordance with the Statement, prior
period financial statements have not been restated to reflect the change in
accounting principle. The balance of shareholder's equity was increased by
approximately $1,236, net of deferred income taxes to reflect the net
unrealized holding gains on securities classified as available-for-sale
previously carried at amortized cost or lower of cost or market.
F-31
<PAGE>
The following is a summary of available-for-sale securities and held-to-
maturity securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Treasury and federal
agencies........................ $25,661 $ 15 $ (14) $25,662
Mortgage backed securities....... 5,108 -- (161) 4,947
Other............................ 140 -- -- 140
------- ------ ----- -------
Total.......................... $30,909 $ 15 $(175) $30,749
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
HELD-TO-MATURITY SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1994
U.S. Treasury and federal
agencies........................ $ 1,003 $ -- $ (3) $ 1,000
Obligations of states and
political subdivisions.......... 4,315 97 (13) 4,399
Mortgage backed securities....... 5,348 45 (146) 5,247
------- ------ ----- -------
Total.......................... $10,666 $ 142 $(162) $10,646
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT SECURITIES
-----------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1993
U.S. Treasury and federal
agencies........................ $52,750 $2,002 $ -- $54,752
Obligations of states and
political subdivisions.......... 5,319 381 (31) 5,669
Mortgage backed securities....... 20,073 272 (23) 20,322
Other............................ 140 -- -- 140
------- ------ ----- -------
Total.......................... $78,282 $2,655 $ (54) $80,883
======= ====== ===== =======
</TABLE>
The amortized cost and estimated fair values of investment securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have the right to prepay the obligations without prepayment
penalties.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
<S> <C> <C>
AVAILABLE-FOR-SALE
Due in one year or less.................................. $25,661 $25,662
Due after one year through five years.................... 5,108 4,947
Due after five years through ten years................... -- --
Due after ten years...................................... 140 140
------- -------
$30,909 $30,749
======= =======
HELD-TO-MATURITY
Due in one year or less.................................. $ 1,011 $ 1,032
Due after one year through five years.................... 6,866 6,768
Due after five years through ten years................... 2,169 2,185
Due after ten years...................................... 620 661
------- -------
$10,666 $10,646
======= =======
</TABLE>
F-32
<PAGE>
Gross gains of $387, $2, and $131 and gross losses of $417, $3, and $-0- for
1994, 1993, and 1992, respectively, were realized on sales of investment
securities.
At December 31, 1994 and 1993, investment securities with carrying amounts
of $27,685 and $29,566, respectively, were pledged to secure public deposits
and for other purposes.
5. LOANS
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1994 1993
-------- --------
<S> <C> <C>
Commercial loans......................................... $ 60,057 $ 61,073
Real estate loans........................................ 51,775 54,005
Consumer loans........................................... 60,815 32,981
-------- --------
172,647 148,059
Less unearned income..................................... (2,472) (2,061)
-------- --------
170,175 145,998
Less allowance for loan losses........................... (5,021) (3,615)
-------- --------
Loans--net............................................... $165,154 $142,383
======== ========
</TABLE>
The Bank grants commercial, real estate, and consumer loans to customers in
eastern Kentucky. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their obligations is
either directly or indirectly dependent upon the coal industry. Substantially
all loans outstanding are collateralized by real estate, equipment, and
personal consumer goods.
The Bank has granted loans to officers and directors of the Bank and to
their associates. Related party loans were made on substantially the same
terms, including interest rate and collateral, as those prevailing at the same
time for comparable transactions with unrelated persons and do not involve
more than normal risk of collectibility.
The following presents the activity with respect to related party loans:
<TABLE>
<S> <C>
Balance at January 1, 1994....................................... $ 2,452
Loans made....................................................... 319
Principal collected.............................................. (554)
-------
Balance at December 31, 1994..................................... $ 2,217
=======
</TABLE>
6. ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 3,615 $ 2,622 $ 2,360
Loans charged off................................. (1,018) (682) (1,341)
Loan recoveries................................... 360 363 403
------- ------- -------
Net charge-offs................................... (658) (319) (938)
Provision charged to expense...................... 2,064 1,312 1,200
------- ------- -------
Balance at end of year............................ $ 5,021 $ 3,615 $ 2,622
======= ======= =======
</TABLE>
F-33
<PAGE>
The Bank adopted Financial Accounting Standards Board Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," effective January 1, 1995.
As a result of applying the new rules, certain impaired loans will be reported
at the present value of expected future cash flows discounted at the loan's
original effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The adoption of this standard did not have a material
impact on the Bank's financial statements, nonperforming assets, or income
recognition.
7. PREMISES AND EQUIPMENT
The major categories of premises and equipment and related accumulated
depreciation are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------- -------
<S> <C> <C>
Land....................................................... $ 1,919 $ 1,919
Buildings and improvements................................. 9,815 9,769
Furniture and equipment.................................... 3,690 3,429
------- -------
15,424 15,117
Less accumulated depreciation.............................. (6,133) (5,651)
------- -------
$ 9,291 $ 9,466
======= =======
</TABLE>
The Bank has entered into a noncancelable lease agreement (operating lease)
with respect to certain premises and equipment. The minimum annual rental
commitment under this operating lease is $35 for 1995 and $6 for 1996.
Total rent expense, including cancelable and noncancelable leases, was $39,
$52, and $33 for 1994, 1993, and 1992, respectively.
8. SHORT-TERM BORROWINGS
Short-term borrowings consist primarily of federal funds purchased. The
weighted average interest rate on federal funds purchased approximated 6.52%
and 3.13% at December 31, 1994 and 1993.
9. DIVIDEND RESTRICTIONS
Dividends paid by the Bank are subject to restriction by banking
regulations. The restrictive provision requires approval by the Comptroller of
the Currency if dividends declared in any year exceed the current year's
retained net income, plus the retained net income of the two preceding years.
After December 29, 1995, Pikeville has no dividend paying capacity without
regulatory approval.
10. INCOME TAXES
Effective January 1, 1993, the Bank adopted Financial Accounting Standards
Board Statement No. 109, "Accounting for Income Taxes." Under Statement 109,
the liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Prior to the adoption
of Statement 109, income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expense that were
reported in different years in the financial statements and tax returns and
were measured at the tax rate in effect in the year the difference originated.
F-34
<PAGE>
As permitted by Statement 109, the Bank elected not to restate the financial
statements of any prior periods. The cumulative effect as of January 1, 1993
of adopting Statement 109 decreased net income by $272.
Income tax expense (benefit) included in the statements of income is
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ------- ----
<S> <C> <C> <C>
Current.................................................. $751 $ 1,287 $957
Deferred................................................. 89 (87) (157)
---- ------- ----
Total.................................................... $840 $ 1,200 $800
==== ======= ====
</TABLE>
Income tax expense (benefit) attributable to investment securities (losses)
gains was $(11), $(0), and $45 for 1994, 1993, and 1992, respectively.
A reconciliation between the amount of reported income tax expense and the
amount computed by applying the statutory federal income tax rate to income
before taxes is as follows:
<TABLE>
<CAPTION>
DEFERRED
LIABILITY METHOD METHOD
------------------------------ ---------------
1994 1993 1992
-------------- --------------- ---------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at statutory
federal rate............... $967 35.0% $1,337 35.0% $ 934 34.0%
Changes from statutory rate
resulting from:
Tax-exempt interest in-
come..................... (173) (6.3) (183) (4.8) (166) (6.0)
Other..................... 46 1.7 46 1.2 32 1.1
---- ---- ------ ---- ----- ----
Actual tax expense.......... $840 30.4% $1,200 31.4% $ 800 29.1%
==== ==== ====== ==== ===== ====
</TABLE>
Significant components of the Bank's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1993
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $ 1,757 $ 1,265
Accrued liabilities....................................... 51 42
Capitalized costs......................................... 142 165
Available-for-sale securities............................. 36 --
Other..................................................... -- 276
------- -------
Total deferred tax assets................................... 1,986 1,748
Deferred tax liabilities:
Premises and equipment.................................... 2,477 2,191
Other..................................................... 90 85
------- -------
Total deferred tax liabilities.............................. 2,567 2,276
------- -------
Net deferred tax liabilities................................ $ 581 $ 528
======= =======
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Bank's Parent has a noncontributory pension plan covering substantially
all employees of the Bank and other affiliates of the Parent. The retirement
benefits are based on length of service and the employee's highest five years
of compensation during the last ten years of service. The Parent's funding
policy is to contribute amounts necessary to meet the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974.
F-35
<PAGE>
Employees of the Bank are eligible to participate in the Parent's pension
plan. The Bank's pension liability is limited to making annual payments to the
plan as calculated by its actuaries. Pension expense was $108, $53, and $35
for the years ended December 31, 1994, 1993, and 1992.
The Parent and the Bank sponsor a 401(k) plan which includes substantially
all of the Bank's employees. The Bank is required to make contributions to the
plan in varying amounts. For 1994, 1993, and 1992, expense related to this
plan was $73, $69, and $63, respectively.
In 1992, the Bank participated in Key's employee stock ownership plan which
covered substantially all employees. Contributions were based on salaries and
also included a discretionary component. Employee stock ownership expense
allocated to the Bank during 1992 approximated $475. After 1992, the employee
stock ownership plan was frozen and eventually merged into the Parent's 401(k)
plan.
POSTRETIREMENT BENEFITS OTHER THAN PENSION
The Parent currently sponsors a defined benefit postretirement plan that
covers salaried employees. The plan provides medical, dental, and life
insurance benefits. Benefits are available to retired employees with more than
ten years of service who retire under the normal or early retirement
provisions of the Parent's Retirement Plan. The medical and dental benefits
are contributory, while the life insurance is noncontributory.
Employees of the Bank were eligible to participate in the Parent's defined
postretirement benefit plan effective January 1, 1994. The Bank pre-funds
retiree medical benefits to the extent such benefits are deductible for
federal income tax purposes; however, these funds are not restricted as to use
for such benefits and, therefore, do not meet the definition of plan assets.
For 1994, the expense related to this plan was $37.
12. COMMITMENTS AND CONTINGENT LIABILITIES
During 1994, the Bank became a defendant in a lender liability lawsuit with
the plaintiff seeking unspecified actual, consequential, and punitive damages.
During 1993, the Bank became a defendant in a malicious prosecution lawsuit
with the plaintiff seeking damages for attorney fees, diminished earning
capacity, impairment to business and personal reputation, and mental anguish.
The plaintiff is seeking unspecified monetary damages and punitive damages.
The Bank vigorously disputes all charges in both of these lawsuits and
preliminary hearings and discovery proceedings are in progress. The ultimate
outcome of these lawsuits cannot presently be determined. Accordingly, no
provision for any liability that may result from these lawsuits has been made
in these financial statements.
In the normal course of business, the Bank offers certain financial products
to its customers to aid them in meeting their requirements for liquidity,
credit enhancement, and interest rate protection. Generally accepted
accounting principles require that these products be accounted for as
contingent liabilities and, accordingly, they are not reflected in the
accompanying financial statements. Following is a discussion of these
products.
Standby Letters of Credit: These agreements are used by the Bank's customers
as a means of improving their credit standing in their dealings with others.
Under these agreements, the Bank guarantees certain financial commitments in
the event that its customers are unable to satisfy their obligations. The Bank
has issued standby letters of credit of approximately $1,460 and $1,390 as of
December 31, 1994 and 1993.
Loan Commitments: At December 31, 1994 and 1993, the Bank had commitments
outstanding to extend credit of approximately $18,080 and $11,910. These
commitments generally require the customers to maintain certain credit
standards.
The Bank evaluates each customer's credit worthiness on a case-by-case
basis. Management generally requires collateral to secure these commitments.
The amount of collateral obtained by the Bank is based upon management's
credit evaluation of the counterparty. Collateral held varies, but may include
deposits in financial institutions, accounts receivable, inventory, equipment,
and real estate.
F-36
<PAGE>
Management conducts regular reviews of these commitments and the results are
considered in assessing the adequacy of the Bank's allowance for loan losses.
Management does not anticipate any material losses as a result of these
standby letters of credit and loan commitments.
Interest Rate Swaps: Interest rate swap transactions generally involve the
exchange of fixed and floating rate interest payment obligations without the
exchange of the underlying principal amounts. The Bank uses interest rate swap
transactions as part of its interest rate risk management strategy. The
underlying principal amounts in interest rate swap transactions, or notional
amounts, express the volume of the transactions, but not the amounts subject
to credit risk. At December 31, 1994, the notional amount of interest rate
swap transactions was $48,000. The amount at risk, calculated by estimating
the cost of replacing at current market rates all the outstanding agreements
for which the Bank would incur a loss, was approximately $2,400 at December
31, 1994.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Bank.
The following methods and assumptions were used by the Bank in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheets for cash and cash equivalents approximate those assets' fair value.
Investment Securities: Fair values for investment securities are based on
quoted market prices where available. If quoted market prices are not
available, fair values are based on quoted market prices of similar
instruments.
Loans: The fair values of fixed rate commercial, real estate, and consumer
loans are estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. For variable rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
Deposits: The estimated fair values of demand deposits (i.e. interest and
non-interest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to their carrying amounts. Fair values for
fixed rate certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates, currently being offered on
certificates, to a schedule of aggregated expected monthly maturities on time
deposits.
Short-term Borrowings: The carrying amounts in the balance sheets for
repurchase agreements and other short-term borrowings approximate those
liabilities' fair values.
Interest Rate Swap Agreements: The fair values of interest rate swap
agreements are estimated using dealer quotes. These values represent the costs
to replace all outstanding interest rate swap agreements at current market
rates, taking into consideration the current creditworthiness of the
counterparties.
F-37
<PAGE>
The estimated fair values of the Bank's financial instruments are as follows:
<TABLE>
<CAPTION>
1994 1993
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNTS VALUE AMOUNTS VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments..... $ 7,858 $ 7,858 $ 8,879 $ 8,879
Investment securities............... 41,402 41,382 78,339 80,940
Loans .............................. 165,154 165,880 142,433 144,959
Financial liabilities:
Deposits............................ 183,070 181,484 194,370 192,656
Short-term borrowings............... 20,857 20,857 25,589 25,589
Interest rate swap agreements....... -- (2,427) -- (238)
</TABLE>
F-38
<PAGE>
BANK ONE, PIKEVILLE, N.A. AND SUBSIDIARIES
UNAUDITED INTERIM FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheets as of September 30, 1995 and 1994 (Unaudited)............. F-40
Statements of Income for the Nine Months Ended September 30, 1995 and
1994 (Unaudited)........................................................ F-41
Statements of Shareholder's Equity for the Nine Months Ended
September 30, 1995 and 1994 (Unaudited)................................. F-42
Statements of Cash Flows for the Nine Months Ended September 30, 1995 and
1994 (Unaudited)........................................................ F-43
Notes to Interim Financial Statements (Unaudited)........................ F-44
</TABLE>
F-39
<PAGE>
BANK ONE, PIKEVILLE, N.A.
BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks.................................... $ 6,334 $ 6,797
Securities purchased under agreements to resell............ 25,674 12,047
Cash and cash equivalents..................................
Investment securities:
Available-for-sale at fair value......................... 3,567 21,674
Held-to-maturity......................................... 9,299 11,479
Loans, net................................................. 164,191 163,607
Premises and equipment..................................... 8,948 9,254
Accrued interest receivable and other assets............... 3,006 2,400
-------- --------
Total assets........................................... $221,019 $227,258
======== ========
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Deposits:
Non-interest bearing..................................... $ 24,540 $ 30,022
Interest bearing......................................... 156,969 155,738
-------- --------
Total deposits......................................... 181,509 185,760
Short-term borrowings:
Federal funds purchased and repurchase agreements........ 14,815 17,997
Other.................................................... 2,076 1,433
Accrued interest payable and other liabilities............. 3,250 2,205
-------- --------
Total liabilities...................................... 201,650 207,395
SHAREHOLDER'S EQUITY:
Common stock--$10.00 par value; 500,000 shares authorized;
225,000 shares outstanding at September 30, 1995 and
1994...................................................... 2,250 2,250
Surplus.................................................... 4,436 4,436
Retained earnings.......................................... 12,662 13,420
Net unrealized gain (loss) on available-for-sale
securities................................................ 21 (243)
-------- --------
Total shareholder's equity............................. 19,369 19,863
-------- --------
Total liabilities and shareholder's equity............. $221,019 $227,258
======== ========
</TABLE>
See notes to unaudited financial statements.
F-40
<PAGE>
BANK ONE, PIKEVILLE, N.A.
STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1994
-------- --------
<S> <C> <C>
Interest income:
Interest and fees on loans............................... $11,751 $10,148
Interest and dividends on investment securities:
Taxable.................................................. 1,184 2,687
Tax-exempt............................................... 205 270
Federal funds sold and securities purchased under
agreements to resell...................................... 461 120
-------- --------
Total interest income.................................. 13,601 13,225
Interest expense:
Deposits................................................. 4,978 3,918
Short-term borrowings.................................... 880 624
-------- --------
Total interest expense................................. 5,858 4,542
-------- --------
Net interest income........................................ 7,743 8,683
Provision for loan losses.................................. 675 1,524
-------- --------
Net interest income after provision for loan losses........ 7,068 7,159
Non-interest income:
Service charges and fees................................. 647 613
Investment securities (losses) gains..................... (32) 274
Other.................................................... 358 297
-------- --------
Total non-interest income.............................. 973 1,184
Non-interest expense:
Salaries and employee benefits........................... 3,334 2,790
Net occupancy............................................ 981 697
Other.................................................... 2,449 2,184
-------- --------
Total non-interest expense............................. 6,764 5,671
-------- --------
Income before income taxes................................. 1,277 2,672
Applicable income taxes.................................... 400 869
-------- --------
Net income................................................. $ 877 $ 1,803
======== ========
</TABLE>
See notes to unaudited financial statements.
F-41
<PAGE>
BANK ONE, PIKEVILLE, N.A.
STATEMENTS OF SHAREHOLDER'S EQUITY (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NET
UNREALIZED
HOLDING
GAINS (LOSSES)
ON AVAILABLE-
COMMON RETAINED FOR-SALE
STOCK SURPLUS EARNINGS SECURITIES TOTAL
------ ------- -------- -------------- -------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1994.... $2,250 $4,436 $13,637 $ -- $20,323
Accounting change adjustment
for unrealized gains
on securities available for
sale, net of taxes at
January 1, 1994............... 1,236 1,236
Dividends on common stock...... -- -- (2,020) -- (2,020)
Net income for nine months
ended September 30, 1994...... -- -- 1,803 -- 1,803
Changes in unrealized holding
gains (losses) on securities
available for sale, net of
taxes......................... (1,479) (1,479)
------ ------ ------- ------ -------
Balances at September 30,
1994.......................... 2,250 4,436 13,420 (243) 19,863
====== ====== ======= ====== =======
Balances at January 1, 1995.... $2,250 $4,436 $12,760 (103) 19,343
Dividends on common stock...... -- -- (975) -- (975)
Net income for nine months
ended September 30, 1995...... -- -- 877 -- 877
Change in unrealized holding
gains (losses) on securities
available for sale, net of
taxes......................... -- -- -- 124 124
------ ------ ------- ------ -------
Balances at September 30,
1995.......................... $2,250 $4,436 $12,622 $ 21 $19,369
====== ====== ======= ====== =======
</TABLE>
See notes to financial statements
F-42
<PAGE>
BANK ONE, PIKEVILLE, N.A.
STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
SEPTEMBER 30,
-----------------
1995 1994
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................. $ 877 $ 1,803
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses................................ 675 1,524
Depreciation and amortization............................ 911 417
Deferred income tax expense.............................. 68 67
Loss (gain) on sales of investment securities............ 31 (275)
(Increase) decrease in accrued interest receivable and
other assets............................................ (939) 654
Increase in accrued interest payable and other
liabilities............................................. 513 401
------- --------
Net cash provided by operating activities.................. 2,136 4,591
INVESTING ACTIVITIES
Purchases of available-for-sale investment securities...... (23,011) (8,584)
Proceeds from sales of available-for-sale investment secu-
rities.................................................... 8,247 36,553
Proceeds from maturities of available-for-sale investment
securities................................................ 42,039 12,535
Proceeds from maturities of held-to-maturity investment se-
curities.................................................. 1,370 4,461
Net change in loans........................................ 288 (22,602)
Purchases of premises and equipment........................ (417) (200)
------- --------
Net cash provided by investing activities.................. 28,516 22,163
FINANCING ACTIVITIES
Net decrease in deposits................................... (1,561) (8,610)
Net decrease in short-term borrowings...................... (3,966) (6,159)
Cash dividends paid........................................ (975) (2,020)
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Net cash used in financing activities...................... (6,502) (16,789)
------- --------
Net increase in cash and cash equivalents.................. 24,150 9,965
Cash and cash equivalents at beginning of year............. 7,858 8,879
------- --------
Cash and cash equivalents at end of year................... $32,008 $ 18,844
======= ========
</TABLE>
See notes to financial statements
F-43
<PAGE>
BANK ONE, PIKEVILLE, N.A.
NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1995
(IN THOUSANDS)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1995 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1995. For further information,
refer to the financial statements and footnotes of Bank One, Pikeville, N.A.
included elsewhere herein.
NOTE 2. CURRENT DEVELOPMENTS
During the third quarter of 1995, BANC ONE CORPORATION entered into a
definitive agreement to sell all of the outstanding stock of Bank One,
Pikeville, N.A. to Matewan BancShares, Inc. for $28,600 in cash. It is
anticipated that this transaction will be completed during the first quarter
of 1996. Prior to signing the definitive agreement, the Bank incurred
approximately $500 in retention and severance costs associated with a
restructuring plan. This plan was terminated once the definitive agreement was
signed.
During the nine month period ended September 30, 1995, the Bank revised the
useful lives of certain depreciable assets this change in estimate increased
depreciation expense by approximately $300.
NOTE 3. PENDING LITIGATION
During 1994, the Bank became a defendant in a lender liability lawsuit with
the plaintiff seeking unspecified actual, consequential, and punitive damages.
During 1993, the Bank became a defendant in a malicious prosecution lawsuit
with the plaintiff seeking damages for attorney fees, diminished earning
capacity, impairment to business and personal reputation, and mental anguish.
The plaintiff is seeking unspecified monetary damages and punitive damages.
The Bank vigorously disputes all charges in both of these lawsuits and
preliminary hearings and discovery proceedings are in progress. The ultimate
outcome of these lawsuits cannot presently be determined. Accordingly, no
provision for any liability that may result from these lawsuits has been made
in these financial statements.
F-44
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO OR FROM ANY PERSON TO OR
FROM WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
The Company.............................................................. 12
The Acquisition.......................................................... 13
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
Common Stock Price Range and Dividends................................... 17
Pro Forma Financial Information.......................................... 19
Management's Discussion and Analysis of Financial Conditions and Results
of Operations........................................................... 23
Business................................................................. 44
Management............................................................... 45
Supervision and Regulation............................................... 48
Description of Capital Stock............................................. 55
Certain Income Tax Consequences.......................................... 61
Underwriting............................................................. 64
Legal Matters............................................................ 65
Experts.................................................................. 65
Available Information.................................................... 65
Index to Consolidated Financial Statements............................... F-1
</TABLE>
700,000 SHARES
[LOGO OF MATEWAN BANCSHARES, INC.]
7 1/2% CUMULATIVE
CONVERTIBLE PREFERRED STOCK,
SERIES A
---------------
PROSPECTUS
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WHEAT FIRST BUTCHER SINGER
February 27, 1996
