<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM - 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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Commission file number 33-17172
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Matewan BancShares, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 55-0639363
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
Box 100
Second Avenue and Vinson Street
Williamson, West Virginia 25661
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(Address of principal executive offices) (Zip Code)
304 235-1544
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(registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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NONE
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $1.00 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file reports), Yes X No , and (2) has been subject to
--- ---
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock based on $24.875 per share held
by nonaffiliates of the registrant as of January 31, 1997 was $56,287,051.
The number of shares of the registrant's common stock, par value $1.00 per
share, issued and outstanding January 31, 1998 was 3,634,220.
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DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into the Annual Report on
Form 10-K:
Part of Form 10-K into
DOCUMENT which document is
- -------- incorporated
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Portions of the Registrant's Annual Report to Parts I, II, III, and IV
Shareholders for the year ended December 31, 1997
Portion of the Registrant's Proxy Statement for its 1998 Part III
Annual Meeting of Shareholders to be held April 14, 1998
FORM 10-K CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
Annual
Report
Pages
<S> <C> <C> <C>
Part I Item 1 Business............................................................................ 58-63
Item 2 Properties.......................................................................... 64
Item 3 Legal Proceedings................................................................... 64
Item 4 Submission of Matters to a Vote of Shareholders..................................... (b)
Part II Item 5 Market for the Registrant's Common Stock and Related Shareholder Matters............ 10
Item 6 Selected Financial Data............................................................. 8-9
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................................... 6-36
Item 8 Financial Statements and Supplementary Data......................................... 38-57
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. None
Part III Item 10 Directors and Executive Officers of the Registrant.................................. (a)
Item 11 Executive Compensation.............................................................. (b)
Item 12 Security Ownership of Certain Beneficial Owners and Management...................... (b)
Item 13 Certain Relationships and Related Transactions...................................... (b)
</TABLE>
(a) Except as set forth herein, incorporated by reference from the Company's
Proxy Statement for the Annual Meeting of Shareholders on April 14, 1998.
(b) Incorporated by reference from the Company's Proxy Statement for the Annual
Meeting of Shareholders on April 14, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Part IV Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................... (C)
Report of Independent Public Accountants............................................ 37
Consolidated Balance Sheets as of December 31, 1997 and 1996........................ 38
Consolidated Statements of Income for the years ended December 31, 1997,
1996, and 1995.................................................................... 39
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1997, 1996, and 1995........................................... 40
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996, and 1995........................................... 41
</TABLE>
<PAGE>
(C) Financial Statement schedules have been omitted due to the required
information being provided in the consolidated financial statements
or notes thereto.
Exhibits:
3.1 Certificate of Incorporation of Registrant, as amended (1)
3.2 By-laws of Registrant (1)
10.1 Voting and First Refusal Agreement, dated August 6, 1987 between
Dan R. Moore and James H. Harless (1)
10.2 Lease Agreement dated August 1, 1984 between Matewan National Bank and
Harrison and Dora Jude (2)
10.3 Lease Agreement, dated March 5, 1986, between Matewan National Bank and
Mingo Bottling Company (1)
10.4 Lease Agreement, dated December 1, 1988 between Matewan National
Bank and Josephine Hope (3)
10.5 Purchase and Assumption Agreement, dated December 29, 1989, between
Matewan National Bank and the Bank of Danville and First Center
Bancshares, Inc. (4)
10.6 Lease Agreement, dated August 6, 1985 between Price M. Hager Inc. and Fae
W. Ramsey, Et Al; Assignment Agreement between Matewan BancShares,
Inc. dated August 5, 1993; and Amended and Restated Agreement of Lease
dated July 27, 1993 between Fae W. Ramsey, Widow, and Citizens
National Bank of Paintsville (6)
10.7 Lease Agreement, dated April 7, 1994 between Homer and Mary Short and
Matewan Bank FSB (7)
10.8 Lease Agreement, dated December 6, 1994 between K-VA-T Food Stores, Inc.
and Matewan BancShares (7)
10.9 Lease Agreement, dated December 6, 1994 between K-VA-T Food Stores, Inc.
and Matewan BancShares (7)
10.10 Lease Agreement, dated February 7, 1994 between Betty O. Rosen and
Matewan National Bank (7)
10.11 Facility Construction and Consulting Agreement MNB-01 between
International Banking Technologies, Inc. and Matewan BancShares, Inc. (7)
10.12 Facility Construction and Consulting Agreement MNB-02 between
International Banking Technologies, Inc. and Matewan BancShares,
Inc. (7)
10.13 Matewan BancShares, Inc. Employee Retirement Plan (7)
10.14 Agreement dated February 14, 1995, between Electronic Data Systems
Corporation and Matewan BancShares, Inc. (8)
10.16 Lease Agreement, dated December 16, 1996 between K-VA-T Food Stores, Inc.
and Matewan Bank FSB (9)
10.17 Lease Agreement, dated December 6, 1996 between First Union National Bank
of Virginia and Matewan BancShares, Inc. (9)
10.18 Lease Agreement, dated October 15, 1996 between Parkway Plaza Associates
and Matewan Bank FSB (9)
10.19 Deed of Lease, dated November 24, 1997, between B&R Enterprises Inc. and
Matewan BancShares, Inc. (10)
10.20 Lease Agreement, dated September 2, 1997, between K-VA-T Food Stores,
Inc. and Matewan BancShares, Inc. (10)
10.21 Lease Agreement, dated September 2, 1997 , between K-VA-T Food Stores,
Inc. and Matewan BancShares, Inc. (10)
11.1 Computation of Per Share Earnings (5)
12.0 Computation of Ratios (5)
13.1 Annual Report to Shareholders for the fiscal year ended December 31,
1997 (10)
13.2 Proxy Statement to Shareholders for the Annual Meeting on April 14,
1998 (10)
22.1 Subsidiaries of Registrant
Matewan National Bank
Matewan Bank FSB
Matewan Venture Fund, Inc.
23 Consent of Ernst & Young LLP (7)
<PAGE>
(1) Filed as an exhibit of the same number to the Company's Registration
Statement on Form S-1 under the Securities Act of 1933, Registration
No. 33-17172, and incorporated herein by reference.
(2) Filed as an exhibit of the same year to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1987 and incorporated herein by
reference.
(3) Filed as an exhibit of the same year to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988 and incorporated herein by
reference.
(4) Filed as exhibit 2.01 to the Company's Current Report on Form 8-K, dated
January 10, 1990 and incorporated herein by reference.
(5) Filed as an exhibit of the same year to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 and incorporated
herein by reference.
(6) Filed as an exhibit of the same year to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 and incorporated
herein by reference.
(7) Filed as an exhibit of the same year to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994 and incorporated
herein by reference.
(8) Filed as an exhibit to the Company's Pre-effective Amendment No. 1 to Form
S-1 Registration Statement on February 16, 1996 (Registration No. 333-367)
and incorporated herein by reference.
(9) Filed as an exhibit of the same year to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996 and incorporated
herein by reference.
(10) Filed herewith.
Reports on Form 8-K
The following reports on Form 8-K were filed in 1997 and are incorporated
herein by reference:
NONE
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto authorized March 1, 1998.
Matewan BancShares, Inc.
/s/ Dan R. Moore
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Dan R. Moore
Chairman of the Board,
President, and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities listed on March 1, 1998.
/s/ Dan R. Moore /s/ Lee M. Ellis
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Chairman of the Board, Vice President &
President, and Chief Executive Officer Chief Financial Officer
/s/ James H. Harless /s/ Frank E. Ellis
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Director Director
/s/ Lafe P. Ward /s/ Amos J. Hatfield
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Director Director
/s/ George A. Kostas /s/ Sidney Young, Jr.
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Director Director
/s/ Betty Jo Moore /s/ Douglas Hinkle
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Director Director
/s/Don Combs
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Director
<PAGE>
EXHIBIT 10.19
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DEED OF LEASE
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THIS DEED AND AGREEMENT OF LEASE ("Lease") is made and
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entered into this 24th day of November, 1997 by and between
B & R ENTERPRISES, INC., a Virginia corporation ("Landlord") and
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MATEWAN BANCSHARES, INC., a Delaware corporation ("Tenant").
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WITNESSETH:
1. Demised Premises. Landlord, for the term and subject to the provisions
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and conditions hereof, demises and leases to Tenant for a term and rent
hereafter stated, and Tenant rents from Landlord, certain space (the "Demised
Premises") containing 3240 rentable square feet, as shown on the plot plan
provided by William H. Looney and included on Exhibit A attached hereto and made
a part hereof, known as Ramey Chevrolet Four Way Property (the "Building")
located in Tazewell, Virginia and the legal description of which is described on
Exhibit B attached hereto and made a part hereof, together with rights of
ingress and egress thereto, and with the right to use, for parking the portion
of the property designated by the Landlord for parking on Exhibit A.
2. Lease Term. The lease term (the " Lease Term") shall commence
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on the commencement date (the "Commencement Date") which shall be the earlier of
(a) the date Tenant opens for the transaction of business, or (b) ninety (90)
days following the date of this Lease and shall continue for a period of five
(5) years thereafter unless extended or sooner terminated as provided herein.
Upon actual determination by Landlord and Tenant of the Commencement Date and ,
consequently, the Lease Term, Landlord and Tenant shall confirm in writing the
Commencement Date and the termination date of the Lease and Tenant's acceptance
of the Demised Premises in the form attached hereto as Exhibit C. Landlord shall
deliver possession of the Demised Premises prior to the Commencement Date to
Tenant to permit Tenant to make the initial improvements. No rent or additional
rent shall be charged prior to the Commencement Date.
Tenant is granted the right and option (the "Renewal Option") to
extend the term of this Lease for five (5) additional periods of three (3)
years, and, if such
<PAGE>
renewal is effectively exercised, such renewal term (the "Renewal Term") shall
commence upon the expiration of the previous term of this Lease, provided, that:
a. Each option shall be automatically exercised unless
Tenant shall give Landlord written notice at least thirty (30) days prior to the
expiration of the then current term that Tenant does not intend to exercise its
option; and
b. At the time such option is exercised, this Lease shall be
in full force and effect and there shall exist no default by Tenant which
remains uncured beyond any applicable period of grace.
In the event the foregoing option is effectively exercised, all the
terms and conditions contained in this Lease shall continue to apply.
3. Rent.
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a. Initial Term. Tenant agrees to pay to Landlord a
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fixed rent for the Demised Premises during the initial term of this Lease the
sum of Thirty Thousand Dollars ($30,000.00) per annum, such rental to be paid in
advance without demand on the first day of each and every month in twelve (12)
equal monthly installments of Two Thousand Five Hundred Dollars ($2,500,00) per
month. The first monthly payment of rent shall include any prorated rental for
the period from the Commencement Date of the Lease Term to the first day of the
first full calendar month in the Lease Term. Rent will be made payable to B & R
Enterprises, Inc. and mailed to P.O. Box 100, Tazewell, Virginia 24651.
b. Extended Terms. The yearly rental to be paid during
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each extended term of this Lease shall be adjusted to reflect changes in the
cost of living in the manner hereinafter set forth. As used herein, Price Index
shall mean the Consumer Price Index, All Urban Consumers (CPI-U) [1982-84=100]
(All Cities) , as complied and published by the Bureau of Labor Statistics of
the United States Department of Labor. In the event the Price Index should be
computed on a different basis, appropriate adjustments shall be made for the
purpose of the computations hereunder. If the Department of Labor should
discontinue publishing the Price Index, then a comparable index published by
another branch or department of the federal government or by a recognized
financial institution shall be used as the basis for such adjustments. The
yearly rental for each extended term of this Lease shall be determined by
multiplying $30,000 by the quotient resulting from the division of the index
number for the month of the expiring term by the corresponding index number for
the month in which the "Commencement Date" begins.
<PAGE>
4. Use of Demised Premises. Tenant covenants and agrees to use
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and occupy the Demised Premises for the operation of a financial institution and
other uses incidental thereto.
5. Repairs, Alterations and Improvements. Tenant shall, at its
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own cost and expense, make the initial improvements to the Demised Premises
which are described on Exhibit D attached hereto.
Tenant shall, throughout the term of this Lease and any extensions or
renewals thereof, keep the Demised Premises (including the interior surface of
the exterior walls) in as good a repair and condition as the same are in upon
the commencement of this lease, reasonable wear and tear and damage caused by
fire or other casualty excepted. Landlord shall, throughout the termof this
Lease and any extensions or renewals thereof, maintain and cause to be kept in
good repair the foundation, the roof, structural soundness of the floor, the
exterior walls of the Building (excluding the interior surface of the exterior
walls but including the exterior and interior portions of all windows, doors and
plate glass), the heating and air conditioning, the exterior water, sewage and
gas and electrical services up to the point of entry to the Demised Premises.
Any damage to the Demised Premises caused by the failure to maintain the
exterior and structural components shall not be the responsibility of Tenant.
Tenant shall be responsible for providing minor repairs (i.e., less than $500)
to the plumbing and electrical systems for the Building. Landlord shall be
responsible for all major repairs, except those caused by the neglect or actions
of Tenant.
Tenant shall have the right, at its own expense (subject to the prior
written consent of Landlord for substantial improvements), to make any
additional improvements, repairs or alterations to the Demised Premises which it
deems advisable so long as such improvements, repairs or alterations shall not
lessen the value of the Demised Premises or weaken the structural strength of
the Building. Tenant shall keep the Demised Premises free and clear of all liens
of contractors, materialmen, laborers and suppliers with whom it shall contract
for the furnishing of goods and services for the Demised Premises and shall
indemnify and save harmless Landlord from any claims resulting therefrom. Any
improvements made by Tenant which become affixed to the Demised Premises may be
removed by Tenant upon termination of this Lease. Notwithstanding anything set
forth above, Landlord shall have no responsibility for maintaining the
improvements made to the property by Tenant.
6. Completion of Demised Premises. Tenant agrees to accept
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possession of the Demised Premises in an "AS IS" condition. Tenant shall be
responsible for
<PAGE>
all improvements to be made to the Demised Premises to enable Tenant to conduct
its business.
7. Common Area Maintenance. Landlord shall be responsible for the
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maintenance of the parking lot pavement/surface serving the Demised Premises.
Tenant shall be responsible for external cleaning, resurfacing (general
maintenance only), stripping and all other general outside maintenance.
8. Taxes and Insurance. During the term of this Lease, Landlord
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agrees to pay the ad valorem real estate taxes, special assessments and
improvements liens levied against the Demised Premises. Each party agrees to
maintain and pay for fire and extended coverage insurance for their respective
interest in the Demised Premises and each party shall maintain public liability
insurance on the Demised Premises.
9. Inspection; Access. Landlord and its agents or other
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representatives shall be permitted to enter the Demised Premises at reasonable
times upon at least twenty-four (24) hours advance notice to Tenant (i) to
examine, inspect and protect the Demised Premises and the Building and (ii)
during the last three (3) months of the original or any renewal term, to show it
to prospective tenants.
10. Surrender of Demised Premises. Tenant shall, at the end of
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the Lease Term, or any extension thereof, promptly surrender the Demised
Premises in good order and condition and in conformity with the applicable
provisions of this Lease, excepting only reasonable wear and tear.
11. Quiet Enjoyment. Landlord warrants that it is the owner of
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the Demised Premises hereby leased and that Tenant, upon paying the rent and
performing the covenants on its part to be kept and performed, as herein
contained, shall have quiet enjoyment of his term and may peaceably and quietly
hold, use and enjoy the Demised Premises during the term of this Lease.
Landlord warrants and represents that the premises adjacent to the Demised
Premises shall not be used in any manner which interferes with or affects
Tenants' use of the Demised Premises.
12. Eminent Domain. If the Demised Premises (or the use,
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occupancy or access to or of the Demised Premises) shall be taken or condemned
by any governmental or quasi-governmental authority for any public or quasi-
public use or purpose (including sale under threat of such a taking), or if the
Landlord elects to convey title to the condemnor by a deed in lieu of
condemnation, or if all or any portion of the Demised Premises are so taken,
condemned or conveyed and , as a result thereof, in Tenant's reasonable economic
judgment, the Demised Premises cannot be used for Tenant's permitted use as set
forth herein, then this Lease shall cease and terminate as of the date when
title vests in such governmental or quasi-
<PAGE>
governmental authority and the rent shall be abated on the date when such title
vests in such governmental or quasi-governmental authority.
13. Casualty Damage. In the event of damage to or destruction of
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the Demised Premises caused by fire or other casualty, or any such damage or
destruction to the Building or the facilities necessary to provide services and
normal access to the Demised Premises in accordance herewith, Landlord shall
undertake to make repairs and restorations with reasonable diligence as
hereinafter provided, unless this Lease has been terminated by Landlord or
Tenant as hereinafter provided or unless any mortgagee which is entitled to
receive casualty insurance proceeds fails to make available to Landlord a
sufficient amount of such proceeds to cover the cost of such repairs and
restoration. If (i) the damage is of such nature or extent that, in Landlord's
or Tenant's reasonable judgment, more than ninety (90) days would be required
(with normal work crews and hours) to repair and restore the part of the Demised
Premises or Building which has been damaged, or (ii) the Demised Premises or the
Building is so damaged that, in Landlord's reasonable judgment, it is
uneconomical to restore or repair the Demised Premises or the Building, as the
case may be, or (iii) less than one (1) year then remains on the current Lease
Term, Landlord shall so advise Tenant promptly, and either party, in the cases
described in clauses (i) and (iii) above, or Landlord, in the case described in
clause (ii) above, within thirty (30) days after any such damage or destruction
shall have the right to terminate this Lease by written notice to the other, as
of the date specified in such notice, which termination date shall be no later
than thirty (30) days after the date of such notice. In the event of
fire or other casualty damage, provided this Lease is not terminated pursuant to
the terms of this paragraph and is otherwise in full force and effect, Landlord
shall proceed diligently to restore the Demised Premises to substantially its
condition prior to the occurence of the damage. Landlord shall not be obligated
to repair or restore any alterations, additions, fixtures or equipment which
Tenant may have installed (whether or not Tenant has the right or the obligation
to remove the same or is required to leave the same on the Demised Premises as
of the expiration or earlier termination of this Lease) unless Tenant, in a
manner satisfactory to Landlord, assures payment in full of all costs as may be
incurred by Landlord in connection therewith.
Tenant shall, at its sole expense, insure the value of its leasehold
improvements, fixtures, equipment and personal property located in or on the
Demised Premises. If there are any such alterations, fixtures or additions and
Tenant does not assure or agree to assure payment of the cost of restoration or
repair as aforesaid, Landlord shall have the right to restore the Demised
Premises to substantially the same condition as existed prior to the damage
excepting such
<PAGE>
alterations, additions or fixtures.
The validity and effect of this Lease shall not be impaired in any way
by the failure of Landlord to complete repairs and restoration of the Demised
Premises or of the Building within ninety (90) days after commencement of the
work, even if Landlord had in good faith notified Tenant that the repair and
restoration could be completed within such period, provided that Landlord
proceeds diligently with such repair and restoration and provided, further, that
in the event any such repairs delay Tenant from resuming its business at the
Demised Premises for more than one hundred twenty (120) days after the date of
casualty, for any reason, Tenant may terminate this Lease by giving written
notice thereof to Landlord. In the case of damage to the Demised Premises which
is of a nature or extent that Tenant's continued occupancy of all or a part of
the Demised Premises is substantially impaired to the extent that Tenant cannot
conduct its business therein, then the Rent otherwise payable by Tenant
hereunder shall be equitably abated or adjusted from the date of such casualty
throughout the duration of such impairment.
14. Insurance; Indemnification: Waiver of Subrogation. Tenant
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covenants and agrees to exonerate, indemnify, defend, protect and save Landlord,
its representatives and Landlord's managing agent, if any, harmless from and
against any and all claims, demands, expenses, losses, suits and damages as may
be occasioned by reason of (i) any accident or matter occuring on or about the
Demised Premises, causing injury to persons or damage to property (including,
without limitation, the Demised Premises), unless such accident or other matter
resulted in whole or in part from the negligence or otherwise tortious act of
Landlord or Landlord's agents, servants, invitees, or employees, (ii) the
failure of Tenant fully and faithfully to perform the obligations and observe
the conditions of this Lease, and (iii) the negligence or otherwise tortious act
of Tenant, its agents, servants, invitees or employees. Tenant shall maintain
in full force and effect, at its own expense, comprehensive general liability
insurance (including a contractual liability and fire legal liability insurance
endorsement) naming as an additional insured Landlord against claims for bodily
injury, death or property damage in amounts not less than $1,000,000.00 At or
prior to the Commencement Date, Tenant shall deposit certificates evidencing the
insurance coverage required by this paragraph and shall deposit with Landlord
renewals thereof within twenty (20) days of Landlord's written request therefor.
Said policy or policies of insurance or certificates thereof shall have attached
thereto an endorsement that such policy shall not be canceled without at least
thirty (30) days prior written notice to Landlord that no act or omission of
Tenant shall invalidate the interest of Landlord under said insurance and
expressly waiving all rights of subrogation as set forth below.
<PAGE>
At Landlord's request, Tenant shall provide Landlord with a letter from an
authorized representative of its insurance carrier stating that Tenant's current
and effective insurance coverage complies with the requirements contained
herein.
Landlord and Tenant hereby release the other from any and all
liability or responsibility to the other or anyone claiming through or under
them by way of subrogation or otherwise for any loss or damage to property
covered by insurance then in force, even if any such fire or other casualty
occurrence shall have been caused by the fault or negligence of the other party,
or anyone for whom such party may be responsible. Landlord and Tenant further
agree to provide such endorsements for said insurance policies required
hereunder agreeing to the waiver of subrogation as required herein.
Landlord covenants and agrees to exonerate, indemnify, defend, protect
and save Tenant, harmless from and against any and all claims, demands,
expenses, losses, suits and damages as may be occasioned by reason of (i) any
accident or matter occuring on or about the Building, causing injury to persons
or damage to property (excluding the Demised Premises) , unless such accident or
other matter resulted from the negligence or otherwise tortious act of Tenant or
Tenant's agents, servants, invitees or employees, (ii) the failure of Landlord
fully and faithfully to perform the obligations and observe the conditions of
this Lease, and (iii) the negligence or otherwise tortious act of Landlord, its
agents, servants, invitees or employees. Landlord shall maintain in full force
and effect, at its own expense, comprehensive general liabliity insurance
(including a contractual liability and fire legal liability insurance
endorsement) against claims for bodily injury, death or property damage in
amounts not less than $1,000,000.00 , and shall maintain in full force and
effect " all risk" property damage insurance in an amount equal to the full
replacement value of the Building, including the Demised Premises, as such may
change from time to time.
15. Signage. During the term of this Lease, Tenant shall be
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permitted to place signs at the locations marked on Exhibit A in conformity with
the sign specifications described on Exhibit E and approved by the Landlord.
Tenant shall remove said signs when the term of this Lease shall terminate.
16. Utilities. Tenant shall pay all charges for all utilities and
---------
services used by it and supplied by Landlord, public utility or public authority
or any other person, firm or corporation.
Landlord shall maintain the necessary mains, conduits, wires and cable
to bring water, gas and electricity to the Demised Premises. Landlord shall be
responsible for providing meters which provide service solely to the Demised
Premises.
<PAGE>
17. Covenants of Landlord. Landlord warrants, represents and
---------------------
covenants as follows:
a. Landlord warrants that it is the owner of the Demised Premises
and that the same is free and clear of liens and encumbrances, except as
provided in any non-disturbance agreement delivered herewith.
b. Landlord has the authority to execute this Lease.
c. To the best of its knowledge, there are no known defects or
structural, electrical, plumbing, heating or air conditioning problems with the
Demised Premises.
d. To the best of its knowledge, the Demised Premises complies with
all federal, state and local laws, regulations, building and fire codes.
e. To the best of its knowledge, Landlord covenants and represents
the availability of all utilities, access, zoning or any other fact bearing upon
the suitability or adaptability of the Demised Premises for uses contemplated
by the Tenant.
f. Landlord covenants that it will not lease property within one
mile of the Demised Premises, during the term of this Lease, to another bank or
financial institution.
18. Default; Termination of Lease. In the event that Tenant
-----------------------------
should default in the payment of the rent reserved herein, or in the event that
Tenant becomes bankrupt, insolvent or makes an assignment for the benefit of
creditors, or if a receiver is appointed for the business of Tenant, or in the
event that Tenant defaults in the performance of any of its other obligations
hereunder, then Landlord may, at its election, (1) terminate this Lease
forthwith and/or (2) reenter and repossess the Demised Premises without notice
or demand therefor other than as is hereinafter in this paragraph provided.
Should default in the payment of rent herein occur, then, in addition to its
other rights hereunder, Landlord may, at its election, declare all of the
balance of the rental for the remaining term of this Lease immediately due and
payable. No default or breach of any covenant hereunder shall be deemed to have
occurred on the part of Tenant until written notice of such default or breach
shall have been given to Tenant and the said Tenant shall have failed to remedy
such default or breach within fifteen (15) days after receiving said notice.
Any waiver of any default hereunder shall not be construed to be a waiver of the
rights of Landlord in the event of a subsequent or other default. Reentry and
repossession by Landlord shall not prejudice any remedies which Landlord may
otherwise have under appropriate state laws for the recovery of the arrears of
rent or for damages for the breach of this Agreement.
In the event of a default by Landlord of its covenants and warranties
set forth
<PAGE>
herein, or Landlord defaults in the performance of its obligations hereunder,
and any of these events go unremedied within fifteen (15) days after receiving
notice thereof, Tenant may, at its option, terminate this Lease forthwith or
pursue such other remedies as may be available to it for the breach of this
Agreement.
19. Waste. Tenant shall not commit waste in or upon the
-----
Demised Premises, and, upon the expiration or termination of this Lease, will
redeliver the Demised Premises to Landlord in good condition and repair, subject
only to reasonable wear and tear.
20. Subordination; Non-Disturbance and Attornment. This Lease
---------------------------------------------
and the estate, interest and rights hereby created are subordinate to any
mortgage now or hereafter placed upon the Demised Premises, including, without
limitation, any mortgage on any leasehold estate, and to all renewals,
modifications, consolidations, replacements and extensions of same as well as
any substitutions therefor. Tenant agrees that in the event any person, firm,
corporation or other entity acquires the right to possession of the Demised
Premises, including any mortgagee or holder of any estate or interest having
priority over this Lease, Tenant shall, if requested by such person, firm,
corporation or other entity, attorn to and become the tenant of such person,
firm, corporation or other entity, upon the same terms and conditions as are set
forth herein for the balance of the Lease Term, provided, however, that Tenant
receives a non-disturbance agreement from any such mortgagee or holder of any
estate or interest having priority over this Lease. Tenant's obligation to
subordinate its interest hereunder and to attorn to such prior interest holder
is expressly conditioned upon Tenant receiving the foregoing non-disturbance
agreement. Notwithstanding the foregoing, any mortgagee may, at any time,
subordinate its mortgage to this Lease, without Tenant's consent, by notice in
writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution and delivery,
and, in that event, such mortgagee shall have the same rights with respect to
this Lease as though it had been executed prior to the execution and delivery of
the mortgage. Tenant, if requested by Landlord, shall execute any such
instruments in recordable form as may be reasonably required by Landlord in
order to confirm or effect the subordination or priority of this Lease, as the
case may be, and the attornment of Tenant to future landlords in accordance with
the terms of this paragraph.
Provided this Lease shall at all times be in full force and effect and
provided, further, that there shall exist no Event of Default by Tenant
hereunder, the right of possession by Tenant to possess and quietly enjoy the
Demised Premises and any or all of Tenant's rights under this Lease shall not be
affected in any way or disturbed by any lender doing business with Landlord in
the exercise of any such
<PAGE>
lender's rights under any formal agreements between such lender and Landlord.
Tenant shall not be named as a party defendant to any foreclosure of any lien of
any mortgage for the purpose of terminating this Lease, and Tenant shall not, by
an such foreclosure, be in any other way foreclosed from its rights under this
Lease.
In the event that any such lender or its successors or assigns comes
into possession of the Demised Premises or acquires the leasehold interest of
Landlord by foreclosure of any mortgage between any such lender and Landlord, or
by proceedings on any note executed by Landlord in favor of any such lender or
otherwise, this Lease shall not be terminated by any such foreclosure or
proceedings; and this Lease shall continue in full force and effect upon
Tenant's attornment, as provided herein, as a direct lease between Tenant and
any such lender upon the same terms, covenants, conditions and agreements set
forth in this Lease.
In the event that the Demised Premises or Landlord's leasehold
interest therein is sold or otherwise disposed of pursuant to any right or power
contained in any mortgage or any note between any such lender and Landlord, or
as a result of proceedings thereon, this Lease shall not be terminated or
affected thereby, and the purchaser of the Demised Premises or of Landlord's
leasehold interest therein or any person or entity acquiring title thereto shall
so acquire it, subject to this Lease; and this Lease shall continue in full
force and effect upon Tenant's attornment, as provided herein, as a direct lease
between Tenant and any party acquiring title to Landlord's leasehold interest
therein, as aforesaid, upon the same terms, covenants, conditions and agreements
set forth in this Lease.
In the event that there is a current mortgagee or lender with an
interest in the Demised Premises which is superior to the interest of Tenant
hereunder, Landlord and Tenant hereby agree that on or before the date of
execution of this Lease by Tenant, Landlord shall deliver a non-disturbance
agreement to Tenant in a form and content reasonably acceptable to Landlord,
executed by such mortgagee or lender and expressly stating the agreement of such
mortgagee or lender to comply with the provisions of this paragraph.
21. Estoppel Certificate. Tenant shall, at any time and from time
--------------------
to time, execute, acknowledge and deliver to Landlord a statement in writing
certifying:
g. that this Lease is unmodified and in full force and
effect (or if there has been any modification thereof, that the same is in full
force and effect modified);
h. that Landlord is not in default under this Lease (or
if any such default exists the specific nature and extent thereof); and
i. that date to which rent and other charges have been
paid in
<PAGE>
advance, if any.
22. Brokers. Each party represents and warrants to the other that
-------
they have not made any agreement or taken any action which may cause anyone to
become entitled to a commission as a result of the transaction contemplated by
this Lease, and each will indemnify and defend the other form any and all
claims, actual or threatened, for compensation by any such third person by
reason of such party's breach of their representation or warranty contained in
this paragraph.
23. Notice. Any notice to be given to Tenant hereunder may be
------
given by certified mail, return receipt requested, addressed to Tenant at:
Matewan Bancshares
P.O. Box 100
Williamson, WV 25661
and such notice shall be deemed to have been given at the time of the posting of
such mail. Any notice to be given to the Landlord hereunder shall be given in
the same manner and to the same effect when addressed to Landlord in care of:
B & R Enterprises, Inc.
P.O. Box 100
Tazewell, VA 24651
Such addresses for notice may be changed from time to time by either party
giving notice to the other party of such change as provided herein.
24. Liens. Tenant will keep the Demised Premises and the
-----
center free and clear of all mechanics' liens or other liens on account of work
done for Tenant or persons claiming under it.
25. Relationship of Parties. Nothing contained herein will be
-----------------------
deemed or construed by the parties hereto, nor by any third party, as creating
the relationship of principal and agent or of partnership or of joint venture
between the parties hereto, it being understood and agreed that neither the
method of computation of rent, nor any other provision contained herein nor any
acts of the parties herein, will be deemed to create any relationship between
the parties hereto other than the relationship of Landlord and Tenant.
26. Non-Waiver or Defaults. No waiver of any default by Tenant
----------------------
to take any action on account of such default if such default persists or is
repeated, and no express waiver shall effect any default other than the default
specified in the express waiver, and that only for the time and to the extent
therein stated. The acceptance by Landlord of rent with knowledge of the breach
of any of the covenants of this Lease by Tenant shall not be deemed a waiver of
any such breach.
27. Binding Effect. The covenants and agreements herein
--------------
contained shall extend to and be binding upon the parties hereto, their
respective heirs, personal
<PAGE>
representatives, successors and assigns.
28. Marginal Titles. The marginal titles appearing in this
---------------
lease are for reference only and shall not be considered a part of this Lease or
in any way to modify, amend or affect the provisions thereof.
29. Short Form Lease. The parties hereto agree that at or
----------------
prior to the commencement of the term, they will execute, acknowledge and
deliver a short form of Lease to the end that same may be recorded among the
records of the county in which the Demised Premises is located.
30. Governing Law. This Lease shall be governed by and
-------------
construed in accordance with the laws of the State of Virginia.
31. Assignment and Subletting. Tenant shall not assign or
-------------------------
sublet the Demised Premises without the prior written consent of the Landlord,
except that Tenant may assign or sublet the Demised Premises to an affiliate of
Bank and, in the case of a Bank merger or asset purchase, to the surviving
entity.
IN WITNESS WHEREOF, the corporate parties by their corporate officers
------------------
thereunto duly authorized, hereto have caused their names to be hereunto signed,
all as of the day and date first above written.
B & R ENTERPRISES, INC.,
a Virginia corporation,
<PAGE>
By
-------------------------------------
Its
-----------------------------------
MATEWAN BANCSHARES, INC.,
a Delaware corporation,
By
-------------------------------------
Its
-----------------------------------
EXHIBIT A
(Building)
Begin Map
<PAGE>
(End Map)
EXHIBIT A
(Parking)
Begin map
(End Map)
<PAGE>
THIS DEED, made and entered into, this the 12th day of August, 1968, by and
between James C. Ramey and Peggy E. Ramey, his wife, parties of the first part,
and B & R Enterprises, Inc., a Virginia corporation, party of the second part;
WITNESSETH:
----------
<PAGE>
That for and in consideration of the sum of One Dollar ($1.00) in hand
paid, and other valuable consideration, the receipt of which is hereby
acknowledged, the said James C. Ramey and Peggy E. Ramey, each in his own right
and each as consort of the other, parties of the first part, do hereby grant and
convey, with covenants of general warranty of title, unto the said B & R
Enterprises, Inc., a corporation party of the second part, all of those eleven
(11) certain lots or parcels of land, situate and being in the Town of Tazewell,
Tazewell County, Virginia, at Four Way, on the north side of Highway No. 19-460,
and on the west side of Highway No. 16 and south of Walnut Street, being the
same property which was conveyed to the parties of the first part herein by Sam
Hammed and wife by deed dated the 29th day of May, 1963, which said deed is
found of record in the Clerk's Office of Tazewell County, Virginia, in Deed Book
305, at page 274, and which said real estate is therein described as follows,
to-wit:
"That certain lot designated as Four Way and being the lot lying to the
north of Highway NO. 19 & 460 which was conveyed to Sam Hammed by C. Henry
Harman and wife by deed dated March 31, 1944, of record in the Clerk's Office of
the Circuit Court of Tazewell County, Virginia, in Deed Book 157, page 285, and
Lots Nos. Fifty-Three (53), Fifty-Four (54), Fifty-Five (55), Fifty-Six (56),
Fifty-Seven (57) and the eastern forty-five (45) feet of Lot No. Fifty-Eight
(58), Ninety (90), Ninety-One (91), Ninety-Two (92), and Ninety-Three (93), as
shown and designated on a plat on a plat with certificate by C. Henry Harman and
Lettie W. Harman, his wife, dated October 7, 1944, as "Land of C. Henry Harman
Divided", which plat and certificate are of record in the
Exhibit B
Book 343 Page 672
Clerk's Office of the Circuit Court of Tazewell County, Virginia in
Deed Book 160, page 18.
"It is understood by and between the parties hereto that this
conveyance is made subject to the exceptions, conditions, reservations and
restrictions set forth in the aforesaid certificate and plat and referred to in
said deeds, and is also made
<PAGE>
subject to the easement of the Appalachian Electric Power Company granted to it
by C. Henry Harman and wife by deed dated October 7, 1944, of record in said
Clerk's Office in Deed Book 159, page 515, to which reference is hereby made."
WITNESS the following signatures and seals.
, (SEAL)
----------------------------
James C. Ramey
, (SEAL)
----------------------------
Peggy L. Ramey
State of Virginia,
County of Tazewell, to-wit:
I, Phyllis Neel , a Notary Public in and for
--------------------------------------
the County of Tazewell, in the State of Virginia, do hereby certify that James
C. Ramey and Peggy E. Ramey, his wife, whose names are signed to the foregoing
writing, bearing date on the 12th day of August, 1968, have each acknowledged
the same before me, in my County and State aforesaid.
My commission expires Sept. 26, 1970 .
-----------------------------
Given under my hand, this 2nd day of October, 1968.
------
Phyllis Neel
--------------------------------------
Notary Public
VIRGINIA: In the Clerk's Office of Tazewell Circuit Court Oct. 2 19 68
-------- ----
This deed was presented and upon the annexed Certificate of acknowledgement
admitted to record at 10:15 am The taxes imposed by 58:54 (a) & (b) of the Code
have been paid. Teste:
C.E. Barrett , Deputy Clerk
-------------------
EXHIBIT C
---------
FORM OF
CONFIRMATION OF LEASE TERM
<PAGE>
THIS CONFIRMATION OF LEASE TERM is made this 24th day of
-------------------------------- ----
November, 1997, between B & R ENTERPRISES, INC. ("Landlord")
- -------- -----------------------
and MATEWAN BANCSHARES, INC. ("Tenant").
------------------------
Landlord and Tenant have entered into a certain Agreement of Lease
(the "Lease") dated November 24, 1997, demising certain space consisting of 3240
rentable square feet. All of the capitalized terms herein shall have the same
respective definitions as set forth in the Lease.
Pursuant to the provisions of paragraph 2 of the Lease, Landlord and
Tenant, intending to be legally bound hereby, acknowledge and agree that the
Commencement Date shall be the 22nd day of February , 1998, and that the term of
---- ---------
the Lease shall end on the 22nd day of February , 2003, at 11:59 p.m., unless
---- ---------
sooner terminated or extended, as provided in the Lease. As supplemented
hereby, the Lease shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have duly executed this
------------------
Confirmation of Lease Term this 24th day of November , 1997.
---- -----------
LANDLORD:
B & R ENTERPRISES, INC., a
Virginia corporation
By
-------------------------------------
Its
-----------------------------------
TENANT
MATEWAN BANCSHARES, INC., a
Delaware corporation
By
-------------------------------------
Its
-----------------------------------
<PAGE>
EXHIBIT 10.20
- -------------
LEASE AGREEMENT
---------------
THIS INDENTURE made and entered into upon this 2nd day of September, 1997,
--- ---------
by and between K-V-A-T Food Stores, Inc., a corporation duly created, organized
and existing under and by virtue of the Laws of the Commonwealth of Virginia,
with its registered office located at 329 North Main St., Grundy, Virginia,
(hereinafter called "Lessor") of the first part, and Matewan Bancshares, Inc., a
banking corporation duly created, organized and existing under and by virtue of
the Laws of the State of Delaware, with its registered office located at Second
and Vincent Streets, Williamson, West Virginia, (hereinafter called "Lessee") of
the second part,
WITNESSETH: That whereas Lessor presently operates a Food City
Supermarket (hereinafter referred to as the "Store") located at Box 700, Hwy 83,
in the unincorporated community of Vansant, Buchanan County, Virginia; and
Whereas, Lessee desires to establish and operate banking and depository
facilities (hereinafter referred to as the "Banking Facility") in said Store on
terms and conditions hereinafter set forth; and
Whereas, Lessor desires that Lessee establish and operate such Banking
Facility in said Store on the terms and conditions hereinafter set forth;
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth and benefits accruing to the parties
hereto, other good and valuable considerations and the rentals to be paid by
Lessee to Lessor, the parties hereto agree as follows:
1. LEASE OF SPACE. Subject to the terms and conditions of this lease
--------------
agreement (hereinafter referred to as "lease"), Lessor hereby leases and rents
to Lessee and Lessee hereby rents and leases from Lessor a space containing
approximately 477 square feet of floor space in the building occupied by the
Store (hereinafter referred to as the "store building") which space hereinafter
<PAGE>
referred to as ("premises") is designated "Bank" and outlined in red on the
diagram (floor plan) hereto attached, marked "Exhibit A" and made a part hereof
by reference. Lessee shall be granted ingress to and egress from said Premises
for Lessee, its officers, employees and customers, by and through the front
entrance, vestibules and sales area of the building occupied by the Store, and
Lessee shall have the right to install a night depository unit and an automated
teller machine, the approximate locations of which are shown on said diagram
(floor plan).
2. TERM. (a) This lease is made and accepted for a term which shall
----
begin on the Commencement Date, as hereinafter defined, and run until five (5)
years thereafter, unless extended as hereinafter provided.
(b) The Commencement Date shall be on the first (1st) day of the
calendar month coming next after the following conditions are satisfied:
(1) The Improvement Work, as such term is defined in Section 8 of this
lease, is substantially completed in accordance with the approved Plans and
Specifications; and
(2) All required consents or approvals of the Federal Reserve, the
Comptroller of the Currency, Federal Deposit Insurance Corporation, the
Commissioner of Banking for the state of Lessee's incorporation, or any other
Federal or State regulatory agency having jurisdiction over Lessee (the
"Regulatory Agency") shall have been obtained to open and maintain the Banking
Facility for banking business at the location of the premises hereby leased.
Lessee shall promptly make an application to any such Regulatory Agency for the
issuance of a permit to operate a retail banking and depository facility in the
Store; exercise due diligence to obtain same; and immediately give Lessor notice
when the permit has been issued.
(3) Pursuant to the provisions of Section 2, as hereinabove stated and
in accordance with section 8 hereof, Lessee shall complete all of the aforesaid
conditions and Lessee shall also open and begin normal banking business within
four (4) months from the date of this lease. Lessor has the exclusive option to
terminate said lease in the event Lessee does not comply completely with all of
the aforesaid provisions and conditions of said lease, by the above specified
time.
<PAGE>
(c) As soon as the Commencement Date may be determined as hereinabove
provided, the parties hereto agree to execute and deliver in duplicate a
Commencement Date Agreement, using the form, a copy of which is hereto attached,
marked "Exhibit B", and made a part hereof by reference, for the purpose of
being attached to and becoming a part of their respective copy of this lease,
but failure of the parties, or either of them, to execute and deliver such
agreement shall not preclude establishing such date by appropriate evidence
should the need to do so arise.
(d) Lessee shall have the right to occupy the Premises prior to said
Commencement Date for the sole purpose of making the improvements hereinafter
referred to as the Improvement Work, as provided for in Section 8 hereof and not
for the conduct of Lessee's banking business, provided that if contingencies are
not met. Lessee shall be responsible for restoring Premises. Any such occupancy
of the Premises by Lessee shall be subject to the terms and conditions of this
lease. If Lessee begins to conduct business in the Premises prior to the
Commencement Date, Lessee shall pay rent, pro rata, according to the rent stated
in Section 3 hereof for the number of days which Lessee so conducts Lessee's
business.
3. RENT. Lessee shall pay to Lessor as rent for the Premises an amount
----
equal to Thirty Thousand Dollars ($30,000) per annum for the original term of
-------
this lease, which rent shall be payable in equal monthly installments of Two
Thousand Five Hundred Dollars ($2,500) each, in advance, commencing on the
------
Commencement Date and continuing to be due on the first day and not later than
the fifth day of each calendar month during the term of this lease. All rent
shall be payable to Lessor at its registered office shown above or as otherwise
directed by Lessor.
4. OPTION TO EXTEND. Lessee shall have the option to extend the term
----------------
of this lease for three (3) successive additional periods of five (5) years
each. Said options shall be exercised automatically unless Lessee, gives Lessor
notice of Lessee's desire not to exercise the option. Such extension rights are
further subject to Lessee's not being in default under any of the terms and
provisions of this lease. The notice not to exercise the option for any five
(5) year extension shall be given at least one-hundred eighty (180) days prior
to the end of the immediately preceding term of this lease. The first automatic
extension of this lease shall be upon the same rental, terms and conditions as
are set forth in this Lease Agreement. Rental for the second and third renewal
terms of this lease, shall be the an amount equal to the original rental, as
defined in section 3 hereof,
<PAGE>
multiplied by a fraction. Said fraction shall be defined as consisting of a
numerator, which shall be the index number (the "Index Number") indicated under
the United States index column of the Consumer Price Index for Urban Wage
Earners and Clerical Workers (the "CPI") (1982-1984=100) as promulgated by the
United States Department of Labor, for the month immediately preceding the month
and year in which the said renewal term shall commence and a denominator, which
shall be the Index Number for the CPI for the month and year in which the
original commencement date of this Lease occurs,. If there shall at the time be
no such CPI, the parties shall use the most comparable substitute index in
determining rent escalation for said renewal periods. Notwithstanding the above,
all other terms and conditions of this Lease Agreement shall remain in full
force and effect during the second and third renewal periods.
5. USE AND OCCUPANCY. (a) Lessee shall have the right to use and
-----------------
occupy the Premises for the sole purpose of establishing and operating a retail
banking and depository facility for the benefit and convenience of the public
and for no other use and purpose, except that Lessee may offer at the Banking
Facility such services or products as are customarily offered by Lessee at its
other retail banking facilities, provided that such services and products are
not in competition and do not compete with services and products customarily
offered for sale by Lessor in its stores. Lessee shall have the exclusive right
to provide or promote retail banking or other depository services in the Store.
Notwithstanding anything to the contrary stated herein, Lessee shall have the
non-exclusive right to provide or promote the following services in the Bank:
the sale of tickets to musical, theatrical, sporting, and other public events;
financial planning; estate planning; sale of insurance; and travel planning and
reservation services, provided that such rights do not violate any terms and
conditions or any exclusive rights granted by Lessor's Landlord in the Prime
Lease. Lessee's exclusive right hereunder to provide retail banking and other
depository services in the Store shall not limit or restrict Lessor's right to
make change, cash checks, verify checks, arrange for check verification, sell
money orders, or to transact or conduct any other commercial or financial
activity or service which, in Lessor's sole discretion, Lessor deems necessary
for the proper and adequate operation of the Store.
(b) In order to provide Lessee's customers with free and clear access
to the Banking Facility, Lessor shall not place any display case or other
fixture or articles within six (6) feet of the Banking Facility that would
restrict free and
<PAGE>
clear access to the Banking Facility.
(c) In the event that Lessee desires to include a night depository in
the operation of the Banking Facility, and said night depository is to be
located in an area outside the Banking Facility, then, in that event, Lessee
shall acquire written approval of Lessor regarding the proposed location of said
Night depository prior to commencing any installation of said night depository.
In the event of the installation of a night depository it is agreed that Lessee
shall be responsible, at its sole cost and expense, for the installation,
maintenance, and operation of any such night depository, and the location of any
such night depository shall be deemed to be an appurtenance to the Premises and
a part of the Banking facility for all purposes of this lease. The installation
of any such night depository shall be performed in accordance with the terms and
conditions of Section 8 hereof.
(d) If Lessee elects to include an automated teller machine in the
operation of the Banking Facility, Lessee shall be responsible, at its sole cost
and expense, for the installation, maintenance, and operation of any such
automated teller machine, and the location of any such automated teller machine
shall be deemed to be an appurtenance to the Premises and a part of the Banking
Facility for all purposes of this lease. The installation of any such automated
teller machine shall be performed in accordance with the terms and conditions of
Section 8 hereof. Lessee may make available to any one or more banking or
depository institutions, including savings and loan associations or credit
unions, the use of any such automated teller machine installed by Lessee, and
Lessor shall permit such other banking or depository instituitons, including
savings and loan associations or credit unions, to share the use of any such
automated teller machine.
(e) Lessee shall have the right to use jointly with Lessor a sufficient
part of the parking area serving the building in which Premises are located for
the parking of vehicles of its employees and customers, and vehicles being used
in the normal course of Lessee's business, with the right of ingress to and
egress from said parking area. No additional rent shall be charged for use of
said parking area.
(f) Lessee shall maintain and conduct the operation of the Banking
Facility in a first-class and proper manner. Lessee shall comply with all
applicable federal, state and local laws, rules, regulations, and ordinances
governing the
<PAGE>
establishment and operation of the Banking Facility. Lessee shall not block or
restrict the aisles, passageways, vestibules, entrances, exits, or sidewalks of
the Store so as to interfere with Lessor's business. Lessee's operation of the
Banking Facility shall be subject to such limitations, restrictions, or rules as
Lessor may from time to time impose, including, without limitation, any rule
pertaining to the parking of motor vehicles of Lessee, its employees, agents or
representatives, and any rule restricting the Banking Facility's hours of
operation to the same hours the Store is open to the public. Lessee shall not
have a key to the Store. When the Store is closed and not open to the public for
business, Lessee and its employees shall have access to the Store only with the
consent of Lessor and only when an employee or other representative of Lessor is
present. Lessee shall not use the Premises for any illegal purpose or violate
any statute, regulation, rule or order of any governmental body, nor create or
allow to exist any nuisance or trespass, nor use the Premises in any manner to
vitiate Lessor's insurance or increase the rate of Lessor's insurance premiums,
nor deface or injure the Premises nor overload the floor of the Premises. Lessee
agrees that it shall observe and comply with the "Rules and Regulations" hereto
attached, marked "Exhibit C", and made a part hereof by reference.
6. EMPLOYEES. (a) Lessee shall cause its employees to comply with all
---------
reasonable rules and regulations from time to time prescribed by Lessor
pertaining to employee ingress, egress, and parking. All persons employed by
Lessee in conncetion with the operation of the Banking Facility shall be and
remain Lessee's employees for all purposes, and Lessee shall, at its own cost
and expense, maintain worker's compensation coverage, unemployment compensation
coverage, and any other insurance which may be required by law with respect to
such employees. Lessee's employees, while working at the Banking Facility,
shall be entitled to use the toilet facilities and break room or lounge provided
by Lessor for the convenience of Lessor's employees. Lessee shall be solely
responsible for all acts and omissions of its employees. Lessor shall provide
an adequate number of parking spaces at the Store for employees of Lessee
working at the Banking Facility. Lessee shall employ all persons necessary for
the operation and maintenance of the Banking Facility and such employees of
Lessee shall at all times conduct themselves toward the customers and employees
of Lessor, and toward all other persons in the Store courteously and in a
manner to promote the best interests of the Store.
(b) Lessee shall be solely responsible for providing security for the
Banking
<PAGE>
Facility, and acknowledges that Lessor is not an insurer for the Banking
Facility and that Lessor does not undertake to provide any security for the
Banking Facility. Subject to reasonable rules and regulations of Lessor, lessee
shall have the right to have a security guard in the Banking Facility at all
times that Store is open for business and any such security guard shall be and
remain an employee or contractor of Lessee only.
7. NON-EMPLOYEE SERVICES. It is contemplated that persons not employed
---------------------
by Lessee must have access to the Banking Facility for time to time for the
purpose of servicing, maintaining, and otherwise performing services in
connection with the Banking Facility. Any such non-employee shall have access
to the Store and the Banking Facility during the Store's normal business hours,
provided that such non-employees shall not block or restrict the aisles,
passageways, vestibules, entrances, exits or sidewalks of the Store so as to
interfere with Lessor's business.
8. IMPROVEMENT WORK. (a) Lessee shall have the right to expand the
----------------
store building and improve (herein referred to as the "Improvement Work") the
Premises by expanding and installing banking and depository facilities therein
so that the Premises may be used for the operation of a retail banking and
depository facility in accordance with Section 5 hereof. The Improvement Work
shall be in accordance with the terms and conditions of this Section 8 of this
lease.
(b) The Improvement Work shall be done in accordance with plans and
specifications (hereinafter referred to as the "Plans and Specifications")
provided by Lessee for the use and benefit of Lessor and Lessee. Lessee, within
thirty (30) days from the date of this lease, shall furnish Lessor with said
Plans and Specifications for Lessor's review and approval. The Plans and
Specifications shall be subject to the prior approval of Lessor. Lessor shall
promptly, and not later than five (5) days after receipt of a set thereof,
approve or reject the Plans and Specifications submitted to Lessor by Lessee.
Lessee, within thirty (30) days after the approval of the Plans and
Specifications by Lessor, shall begin the work to improve the Premises, and the
Improvement Work shall be completed by Lessee in accordance with the approved
Plans and Specifications within four (4) months from the date of this lease. In
connection with the Improvement Work, Lessee specifically agrees that
improvements shall not affect the structure, roof, or floor of the store
building except in connection with the installation of a
<PAGE>
vault, a night depository unit or any automated teller machine, or otherwise
adversely affect any area of the store building other than the Premises, or
affect the peaceful enjoyment of Lessor.
(c) Lessee shall, at its sole cost and expense, pay the cost of the
Improvement Work, including the cost of the Plans and Specifications therefor.
Neither Lessee nor any contractor engaged by Lessee shall have any right to
create any charge or lien against the store building or the land on which the
store building is located on account of the Improvement Work, and this lease
shall not be construed to authorize any charge or lien against the store
building or the land on which the store building is located on account of the
Improvement Work or any work, services, or materials relating thereto. Lessee
covenants and warrants unto Lessor that Lessee will discharge of record, within
ten (10) days following actual notice by Lessee, from whatever source, of its
filing, any mechanic's, or materialmen's or other similar lien against the
Premises, the store building or the land on which the store building is located
for work or material claimed to have been furnished to Lessee or the Premises.
(d) Lessor shall have the right to approve the contractor or
contractors, as the case may be, selected by Lessee to perform the Improvement
Work, but such approval shall not be arbitrarily nor unreasonably withheld.
(e) Lessor shall have the right to inspect the construction of the
Improvement Work from time to time.
(f) The Plans and Specifications and the contract for the Improvement
Work may contain such other terms and provisions not in conflict with nor
contrary to this Section 8 as Lessee may elect.
(g) Lessee, at its sold cost and expense, shall furnish all
improvements, fixtures, equipment, and furnishings which it deems necessary or
desirable for the establishment and operation of the Banking Facility, and shall
pay all costs of improvement of the Premises necessary for the installation of
such items. Notwithstanding any attachment or affixation of the Banking Facility
or any part thereof to the Premises, or the manner, mode, extent, or nature of
any such attachment or affixation, the Banking Facility and each part thereof
will be, and shall at all times continue to be, personal property, and shall not
at any time become or be deemed to be fixtures or in any other manner a part of
the
<PAGE>
Premises or the store building. All permits, licenses and authorizations
required in connection with the Improvement Work shall be obtained and paid for
by Lessee as the same are required.
(h) Lessee shall make no alterations or additions of any kind beyond
the scope of the Improvement Work in or to the Premises or the Banking Facility
without first obtaining Lessor's written consent, and all such work shall be
subject to the provisions of this Section 8.
(i) In event of disagreement between Lessor and Lessee as to whether
any construction complies with the Plans and Specifications or whether any
construction is complete and ready for use and occupancy, the disagreement shall
be determined by any architect selected by Lessee, representing Lessee, and any
architect selected by Lessor, representing Lessor. If said two architects
cannot agree, the two shall select a third person who shall also be an
architect, and the decision of the three, by a majority vote, shall terminate
the disagreement. All of said architects shall be licensed to practice
architecture in the state in which the store building is located. Each party
shall pay its architect and the expense of the third architect shall be shared
equally.
(j) Times stated in this Section 8 shall not be of the essence of the
contract so long as the work or obligation concerned is carried on with
reasonable diligence and without unreasonable daily (delays caused by acts of
God or material shortages beyond the control of the party obligated are
recognized as reasonable).
(k) Lessor shall not be liable for any damage to Lessee's property
arising from the operations of the contractor relating to the Improvement Work.
Said contractor shall provide public liablilty and property damage insurance for
the protection of Lessor and Lessee on account of injuries to persons or damage
to such persons' property (including property of Lessor and Lessee) arising from
the contractor's operations in the amount of One Million Dollars ($1,000,000)
for property damage; One Million Dollars ($1,000,000) for injuries to any one
person; and One Million Dollars ($1,000,000) for injuries occurring in any one
accident. The contractor shall furnish builders' risk insurance on the work
covered by the contract. Upon request by Lessor, Lessee shall obtain from
Lessee's Contractor, and provide to Lessor, any certificates of insurance which
may be necessary to provide evidence of the insurance coverage described herein.
<PAGE>
9. MAINTENANCE. (a) Lessee shall, at its sole cost and expense,
-----------
maintain the Banking Facility in good order and repair, including, without
limitation, telephone or other lines for computer/data processing and
transmission for the Banking Facility, and shall, at its sole cost and expense,
provide and maintain janitorial services for the Premises.
(b) Lessee shall be liable for and shall repair or restore any loss or
damage of the Premises or store building caused by the negligence or intentional
acts of Lessee, or by the negligence or intentional acts of its agents,
employees, or representatives when acting in the course of their employment,
except that Lessee shall not be liable for nor required to restore loss or
damage caused by fire or explosion, or resulting from any casualty which
normally may be insured against by fire insurance with extended coverage. Fire
and extended coverage insurance shall be carried and maintained on the store
building pursuant to the terms and conditions of the Prime Lease as that term is
defined in Section 18 hereof.
(c) Anytime that an Automatic Teller or Night Depository shall
malfunction, Lessee shall affect repairs on same within twenty-four (24) hours
of notification of said malfunction.
10. UTILITIES. Lessor agrees to furnish to the Banking Facility at
---------
Lessor's sole cost and expense all overhead lighting, electricity, heat and air
conditioning for the operation of the Banking Facility. Lessee shall furnish at
Lessee's sole cost and expense all telephone and computer/data processing and
transmission services, including all lines, cables and connections necessary for
the operation of the Banking Facility.
11. INSURANCE. Lessee shall maintain, with respect to the Premises,
---------
Comprehensive General Liability Insurance with a combined single limit of at
least Five Million Dollars ($5,000,000.00) and Employer's liability insurance of
not less than One Million Dollars ($1,000,000.00) and Lessor shall be made an
additional insured under the Comprehensive General Liablilty policy. Evidence
of such coverage shall be furnished to Lessor at the commencement date. Lessee
shall provide fire insurance and extended coverage for itself on the modular
banking unit, equipment, furnishings, and other items of personalty which it
<PAGE>
places in the premises. In the event that Lessor's insurance is increased at
said location because of Lessee's bank facility being located inside said store,
then Lessee agrees to pay the amount of said increase.
12. INDEMNITY. (a) Lessee shall indemnify, protect, and save harmless
---------
Lessor from damage, loss, liability, or expense, including attorneys fees and
court costs, on account of injuries to persons or damage to property arising or
resulting from the ownership or operation of the Banking Facility during the
term of this lease, except such injuries or damage arising from negligence of
Lessor, its agents, or employees.
(b) Lessor shall indemnify, protect, and save harmless Lessee from
damage, loss, liability, or expense, including attorneys fees and court costs,
on account of injuries to persons or damage to property arising or resulting
from the operation of the Store during the term of this lease, except such
injuries or damage arising from negligence of Lessee, its agents, or employees.
(c) In the event of concurring negligence of Lessor and Lessee, Lessor
and Lessee shall share liabilities and expenses arising thereunder in proportion
to their negligence.
13. TAXES. Lessee shall pay all ad valorem taxes levied or assessed
-----
against its modular banking unit and other property located in said Premises.
Lessor shall pay all ad valorem taxes levied or assessed against the Premises.
14. SURRENDER. Lessee agrees that it shall, before the termination of
---------
this lease, remove its modular banking unit, furnishings, equipment, and all
other personal property belonging to and being the property of Lessee from the
premises, provided that at the time of removal Lessee is not in default in the
payment of rent or any other term or provision of this lease, and restore the
Premises to as good a condition as Lessee received same from Lessor, loss or
damage by fire, storm, earthquake, or other casualty, and ordinary wear and tear
from reasonable use excepted. Lessee shall pay Lessor for any physical damage
caused by the installation or removal of Lessee's improvements, fixtures,
furnishings, equipment, or personal property, and surrender peaceful possession
of the Premises to Lessor at the termination of this lease.
15. DEFAULT. (a) In event Lessee shall be in default in the payment of
-------
rent hereunder in full and shall not cure such default within twenty (20) days
<PAGE>
after receipt of written notice from Lessor specifying the default, Lessor shall
have the right, without further notice and legal process (but only during the
continuance of such default), of terminating this lease. Thereupon, this lease
shall be at an end, except for the purposes of enforcing the rights then accrued
hereunder and rights to future rentals to accrue hereunder, and Lessee will at
once surrender, release and turn over possession of said Premises to Lessor. If
such possession is not immediately surrendered, Lessor may re-enter said
Premises and take possession thereof, removing all persons and property
therefrom, using such force as may be necessary without being deemed guilty of
any manner of trespass, or forcible entry, or detainer, all other notice
provided by law for the termination of tenancy and all legal process being
hereby expressly waived.
(b) If Lessee shall default in the performance or observance of any
covenant, agreement or condition contained in this lease to be performed or
observed by Lessee, other than an obligation to pay rent, and shall not cure
such default within thirty (30) days after receipt of written notice from Lessor
specifying the default, or shall not within said period commence to cure such
default and thereafter prosecute the curing of such default to completion with
due diligence, Lessor may, at its option, at once, without notice to Lessee or
anyone else, terminate this lease, and upon the termination hereof at the option
of Lessor as aforesaid, or at the expiration, by lapse of time, of the term
hereby demised, Lessee will, at once, surrender, release and turn over
possession of said Premises to Lessor and, if such possession is not immediately
surrendered, Lessor may re-enter said Premises and take possession thereof,
removing all persons and property therefrom, using such force as may be
necessary without being deemed guilty of any manner of trespass, or forcible
entry, or detainer, all other notice provided by law for the termination of
tenancy and all legal process being hereby expressly waived; or Lessor may, at
its option, without waiving any right to terminate this lease or any claim for
breach of contract, at any time thereafter cure such default for the account of
Lessee and Lessee shall, on demand, reimburse Lessor therefor and save lessor
harmless therefrom, provided that Lessor may cure any such default prior to the
expiration of said waiting period, but after notice to Lessee, if the curing of
such default prior to the expiration of said waiting period is reasonably
necessary to protect Lessor, or to prevent injury or damage to persons or
property.
(c) In case of any default, whether or not this Lease is terminated,
Lessee will
<PAGE>
indemnify Lessor against all loss of rent and other payments provided herein, if
any, to be paid by Lessee to Lessor between the time of default or termination
and the expiration of the term of this Lease. It is understood that at the time
of termination or reentry, or any time thereafter, Lessor may rent the Premises
for a term which may expire after the expiration of the term of this Lease
without releasing Lessee from any liability whatsoever; that Lessee shall be
liable for expenses incurred by Lessor in connection with obtaining possession
of the Leased Premises and in connection with any re-letting, including without
limitation, reasonable attorneys fees and reasonable brokers' fees; and that any
monies collected for said re-letting shall be applied first to the foregoing
expenses and then to payment of rental and all other payments which may be due
to Lessor from Lessee. Said indemnification of Lessor by Lessee shall be
accomplished by payments made on the days on which said Rentals and other
payments would have been due and payable hereunder if this agreement had not
terminated.
(d) The rights and remedies herein given Lessor on account of default
or breach by Lessee under this lease are cumulative and in addition to the
rights and remedies afforded Lessor by law and/or equity for such defaults or
breaches.
16. DAMAGE. If by fire, storm, earthquake, or other casualty, the
------
Premises or any other part of the store building are destroyed or damaged to the
extent that Lessee is deprived of occupancy or use of the Premises, and if such
damage or destruction can be substantially repaired within thirty (30) days from
the date of such damage or destruction, then such damage or destruction shall be
substantially repaired pursuant to the terms and conditions of the Prime Lease
(as such term is defined in Section 18 hereof) within thirty (30) days from the
date of such damage or destruction and all rent payable hereunder by Lessee
shall be abated to the extent that Lessee is unable to occupy and use the
Premises. In the event such damage or destruction cannot be substantially
repaired within such thirty-day period, Lessee and Lessor shall each have the
right and option to terminate this lease by giving ten (10) days' prior written
notice to the other. Notwithstanding anything herein to the contrary, in the
event of any destruction or damage to the store building or the Premises, Lessee
shall be solely responsible for repairing and/or restoring, at its sole cost and
expense, the modular banking unit, furnishings, equipment and all other property
of Lessee located in the Premises and used in connection with the operation of
the Banking Facility.
<PAGE>
17. CONDEMNATION. If a material part of the store building shall be
------------
taken or condemned under the power of eminent domain or is conveyed or leased in
lieu of such taking, this lease shall terminate as of the date title vests in
the condemning authority. If any portion of the Store parking area is taken or
condemned under the power of eminent domain or is conveyed or leased in lieu of
such taking and, in the opinion of Lessor, continuance of the operation of the
Store is undesirable as a result thereof, Lessor may elect to terminate this
lease concurrently with Lessor's closing of the Store, and if Lessor elects to
so terminate this lease, then this lease shall terminate and all rights and
liabilities of the parties thereafter accruing shall cease and terminate as if
the date of such termination were the date originally set for the expiration of
the term of this lease. Lessee hereby assigns to Lessor any and all right,
title, or interest it may have in and to any award made in any such condemnation
proceeding, except if any award includes an amount in compensation for loss of
business profits by Lessee or for moving the property of Lessee, that part of
such award is not hereby assigned to Lessor and Lessee will be entitled to the
amount paid for Lessee's loss of profits and for the moving of Lessee's
property.
18. PRIME LEASE. (a) The term "Prime Lease", as such term is referred
-----------
to in this lease, means that certain Lease Agreement entered into by and between
Fred Shortt, Eva Farmer et. al., as Landlord, and Smith Realty, as Tenant,
covering the land occupied by Store in which Premises are located, and dated
March 24, 1981.
(b) This lease is executed by Lessor and Lessee as a sublease under
said Prime Lease, and shall be subject and subordinate to all of the terms and
conditions of said Prime Lease. Subject to the provisions of Section 4 hereof,
upon the termination of said Prime Lease for any reason, this lease shall
terminate. In the event that said Prime Lease is terminated and Lessor
continues to occupy said store building and operate said store, whether as
tenant or owner, this lease shall not terminate, but remain in effect until the
earlier of: 1. Cessation of operation of said store by Lessor, or, 2. Its term,
including any extension thereof, expires. In the event that Lessor ceases
operations in said store and relocates within a one-mile radius of the store
building within one year of cessation of operations, Lessee shall have the
opportunity to relocate with Lessor. The relocation of Lessee with Lessor shall
be contingent upon: 1. The approval by Lessor of Lessee's bank facility plans,
2. Where applicable, Lessee's maintaining operations at both the old and new
facilities, 3. Monthly rental
<PAGE>
from Lessee in the new store building shall increase in proportion to Lessor's
increased occupancy costs and, 4. Said relocation does not violate any terms and
conditions or any exclusive rights granted previously by Lessor's landlord,
pursuant to the Prime Lease for the new store building.
(c) Lessee agrees that this lease is and shall be subordinate and
subject to the lien of any first mortgage, deed to secure debt, deed of trust,
or other instrument in the nature thereof which may now or hereafter affect or
encumber the fee title to the Premises and the land upon which the store
building is located. The preceding sentence pertaining to the subordination of
this lease to any first mortgage, security deed, or other instrument in the
nature thereof shall be self-operative, and no further instrument or
subordination shall be required by the holder of any such instrument affecting
or encumbering the fee title of the Premises or the land upon which the store
building is located. In confirmation of such subordination, Lessee shall, upon
demand, at any time or times, execute, acknowledge, and deliver to Lessor or the
holder of any such mortgage, deed to secure debt, deed of trust, or other
instrument, without expense, any and all instruments that may be requested by
lessor or such holder to evidence the subordination of this lease and all rights
hereunder to the lien of any such mortgage, deed to secure debt, deed of trust,
or other instrument, and each renewal, modification, consolidation, replacement,
and extension thereof.
(d) Lessor covenants and warrants that it has obtained all requisite
consent to the subletting of Premises to Lessee, and that is has the unqualified
right to enter into this lease agreement and sublet Premises to Lessee.
19. ASSIGNMENT. Lessee shall not, without the prior written consent of
----------
Lessor, assign, hypothecate, or otherwise transfer this lease or any interest
hereunder, or sublease the Premises or any part thereof, or permit the use of
the Premises by any party other than Lessee, except that the automated teller
machine may be used by persons other than the Lessee as such sharing is
permitted by Section 5 (d) hereof. Any consent to an assignment or sublease
shall not nullify this provision, and all later assignments or subleases shall
be made likewise only after the prior written consent of Lessor is obtained in
each instance. Unless otherwise expressly agreed to by Lessor in writing, no
sublease or assignment by Lessee shall relieve Lessee of any liability
hereunder.
20. BANKRUPTCY. (a) For the purpose of this lease, bankruptcy of
----------
<PAGE>
Lessee shall mean and include any one or more of the following events or
conditions:
(1) Lessee is adjudicated a bankrupt;
(2) A receiver is appointed for Lessee or a major part of Lessee's
property, including Lessee's interest in Premises, and such receivership is not
vacated and discharged within ninety (90) days;
(3) Lessee shall seek reorganization, arrangement, composition,
readjustment, compromise, or similar debtor relief with respect to its debts or
obligations under any federal or state bankruptcy, insolvency, or debtor relief
statute;
(4) Lessee, whether voluntarily or involuntarily, takes advantage of
any debtor relief proceedings under any present of future law, whereby the rent
or any part thereof is, or is proposed to be reduced, or payment thereof is, or
is proposed to be deferred;
(5) Lessee makes an assignment for the benefit of its creditors;
(6) Lessee's interests hereunder shall be levied upon or sold under
execution or other legal process;
(7) Lessee is found to be insolvent in any proceedings other than
bankruptcy; or
(8) Lessee is closed or taken over by any Regulatory Agency.
(b) Subject to the terms and conditions of subsection (c) of this
section, in the event of bankruptcy of Lessee, Lessor, at any time after the
occurence of the bankruptcy and during the continuation of the bankruptcy and on
thirty (30) days notice to Lessee and to Lessee's legal representative (which
shall include a trustee in bankruptcy, receiver, or other like officer), if any,
may terminate this lease and retake possession of the Premises.
<PAGE>
(c) Notwithstanding any other provision of this lease, in the event the
Lessee or its successors or assignees shall become insolvent, bankrupt,
or make an assignment for the benefit of creditors, or if it or their interests
hereunder shall be levied upon or sold under execution or other legal
process, or in the event the bank to be operated on the premises is closed,
or is taken over by the banking authority of the State or other bank supervisory
authority, the Lessor may terminate the lease only with the concurrence of
said State banking authority or other bank supervisory authority, and any such
authority shall in any event have the election to either continue or terminate
the lease, provided, that in the event this lease is terminated, the maximum
claim of Lessor for damages or indemnity for injury resulting from the
rejection or abandonment of the unexpired lease shall in no event be in an
amount exceeding the rent reserved by the lease, without acceleration, for
the year next succeeding the date of the surrender of the premises to the
landlord, or the date of re-entry of the landlord, whichever first occurs,
whether before or after the closing of the bank, plus an amount equal to the
unpaid rent accrued, without acceleration, up to such date.
21. TRADE NAME. Lessee shall buy and pay for its own supplies and
-----------
other items of personalty in its own trade name and upon its own credit and
shall make no contract of any kind or nature whatsoever in the name of Lessor
or in the name of any other business entity or enterprise owned in whole or in
part by Lessor. Nothing herein contained shall constitute the parties as
partners or co-venturers to render either party liable for the debts or
liabilities of the other.
23. USUFRUCT. This lease shall create the relationship of landlord
--------
and tenant between Lessor and Lessee; no estate shall pass out of Lessor, and
lessee has only a usufruct which is not subject to levy and sale and may not be
assigned except by Lessor's consent.
24. CAPTIONS. Section captions used in this lease are for the
--------
convenience of reference only and do not constitute a substantive part of this
lease.
25. GOVERNING LAW. This lease is deemed to have been executed in
-------------
<PAGE>
the state in which the Store is located and shall be governed by and construed
in accordance with the laws of such state.
27. ENTIRE AGREEMENT. This lease constitutes the sole and entire
----------------
agreement between the parties hereto with respect to Lessee's leasing of the
Premises and its establishment and operation of the Banking Facility, and no
amendment or modification of this lease shall be binding unless it is reduced to
writing and signed by both parties hereto. No representation, inducement,
promise, understanding, or agreement regarding such matters not included in this
lease shall be binding upon the parties hereto or either of them. If any term
or provision of this lease shall be invalid or unenforceable, the remaining
terms and provisions hereof shall not be affected thereby. If the application
of any term or provision of this lease to any person or circumstance shall to
any extent be invalid or unenforceable, such term or provision shall remain
applicable as to those persons or circumstances to which it shall be valid and
enforceable and each term and provision of this lease shall be valid and
enforceable to the fullest extent permitted by law.
28. EXECUTION. This lease may be executed in any number of
---------
counterparts, each of which shall be deemed an original and any of which shall
be deemed to be complete in itself and may be introduced into evidence or used
for any purpose without the production of the other counterparts.
29. NOTICES. Any notice herein provided for may be delivered
-------
personally to an officer or the registered agent of the party to be notified, or
by United States certified or registered mail directed as follows:
To Lessor: K-VA-T Food Stores, Inc.
P.O. Box 769
Grundy, Virginia 24614
Attention: Mr. Jack C. Smith
To Lessee: Matewan BancShares Inc.
Second and Vincent Streets
<PAGE>
Williamson, West Virginia
Attention: Mr. Lee Ellis
30. SUCCESSORS AND ASSIGNS. Each of the provisions of this
----------------------
agreement shall extend to, and shall, as the case may require, bind or inure to
the benefit of not only the Lessor and Lessee, but also their respective
successors and assigns, and any bank or other corporation with which Bank may be
merged or consolidated.
(Signature page to follow)
IN WITNESS WHEREOF, Lessor and Lessee have executed this agreement by and
through their duly authorized officers and caused their seals to be
<PAGE>
hereunto affixed, upon the day and year first above written.
Signed, sealed, and delivered By:
by the officers of Lessor in -----------------------------------
the presence of:
-----------------------------------
Title
- -----------------------------------
Unofficial Witness
Attest:
-------------------------------
Secretary
- -----------------------------------
Notary Public
Lessor
(NOTARIAL SEAL)
(CORPORATE SEAL)
My commission expires
-------------
Signed, sealed, and delivered By:
by the officers of Lessee in -----------------------------------
the presence of:
-----------------------------------
Title
- -----------------------------------
Unofficial Witness
Attest:
-------------------------------
Secretary
- -----------------------------------
Notary Public Lessee
(NOTARIAL SEAL) (BANK/ASSOCIATION SEAL)
My commission expires
"EXHIBIT A"
<PAGE>
(TO BE ATTACHED LATER)
<PAGE>
"EXHIBIT B"
COMMENCEMENT DATE AGREEMENT
---------------------------
COMMONWEALTH OF VIRGINIA,
BUCHANAN COUNTY
THIS AGREEMENT made and entered into upon this day of 1997, by
---- -------
and between K-VA-T Food Stores, Inc., (hereinafter referred to as "Lessor"),
and Matewan BancShares, Inc., (hereinafter refeerred to as "Lessee").
WITNESSED: That whereas Lessor and Lessee entered into a lease
agreement (hereinafter referred to as "lease), dated September 2, 1997, for the
use and occupancy of the Premises therein described and located in the building
occupies by the Store operated by Lessor at Box 799 Hwy 82, Food City Shopping
Center, Vansant, VA, and all conditions for determination of the Commencement
Date of the term of said lease have been met.
NOW, THEREFORE, pursuant to the provisions of the Section 2 of said lease,
Lessor and Lessee mutually agree that the Commencement Date of the term of said
lease is October 1, 1997, and that said term of said lease shall expire at
midnight Eastern Standard Time on September 30, 2002, unless extended or earlier
terminated as provided for in said lease.
IN WITNESS WHEREOF, Lessor and Lessee have executed this agreement by and
through their duly authorized officers and caused their seals to be hereunto
affixed upon the day and year first above written.
BY: BY:
-------------------------------- -----------------------------------
-------------------------------- -----------------------------------
(Title) (Title)
Attest: Attest:
---------------------------- -----------------------------
Secretary Secretary
<PAGE>
"EXHIBIT C"
RULES AND REGULATIONS
---------------------
1. Lessee shall keep open for business and operate the Banking Facility
during such days and hours as have been agreed upon in writing by Lessor and
Lessee under Schedule 1 of this Exhibit C and make no subsequent changes in
store days or hours without Lessor's prior written consent which consent shall
not be arbitrarily nor unreasonably withheld by Lessor.
2. The sidewalks and public portions of the store building such as
entrances, passages, vestibules, and aisles, shall not be obstructed or
encumbered by Lessee or used for any purpose other than ingress and egress to
and from the Premises.
3. No projections shall be attached by Lessee to the outside walls of
the store building without the prior written consent of Lessor.
4. No sign, advertisement, notice, or other lettering shall be
exhibited, inscribed, painted or affixed by Lessee on any part of the outside or
interior walls of the store building without obtaining the prior written consent
of Lessor. Signs on doors to the Premises shall, at Lessee's expense, be
inscribed, Lessee, Lessor may remove same without any liability and may charge
the expenses incurred by such removal to Lessee. Lessee may display on the
exterior of the Banking Facility temporary, tasteful signs giving notice of
holidays and such other information as is required to be posted in the Banking
Facility by any Regulatory Agency.
5. No display cases or other articles shall be put in front of or
affixed to any part of the exterior of the store building, nor placed in the
interior of the Store without the prior written consent of Lessor.
6. Lessee shall not in any way deface any part of the Premises or the
store building.
7. No cooking shall be done or permitted by Lessee in the Premises.
<PAGE>
8. No part of the Premises shall be used for manufacturing,
distribution, or the storage of merchandise, or for the sale of merchandise,
goods or property of any kind at auction.
9. Lessee shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with shoppers in the Store.
10. Neither Lessee, nor nay of Lessee's servants, employees, agents,
visitors, or licenses, shall at any time bring or keep in the Premises any
inflammable, combustible or explosive fluid, or chemical substance, other than
reasonable amounts of cleaning fluids or solvents required in the normal
operation of Lessee's business.
11. With the exception of daily money shipments and deliveries, the
moving in or out of any safes, freight, furniture, or bulky matter of any
description must take place during the hours which Lessor or its agent may
determine from time to time.
12. Lessor shall have the right to prohibit any advertising by Lessee
which, in Lessor's opinion, tends to impair the reputation of the Store or its
desirability as a Store for the public to shop, and upon written notice from
Lessor, Lessee shall refrain from or discontinue such advertising.
<PAGE>
SCHEDULE 1
EXHIBIT C
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DAYS AND HOURS BANKING FACILITY WILL BE OPEN FOR THE CONDUCT OF BUSINESS
1. The Banking Facility will be open for the conduct of business on the days
and no less than the hours hereinafter specified:
Monday 10:00__a.m. - __7__p.m.
Tuesday 10:00__a.m. - __7__p.m.
Wednesday 10:00 a.m. - __7__p.m.
Thursday 10:00__a.m. - __7__p.m.
Friday 10:00__a.m. - __7__p.m.
Saturday 10:00__a.m. - __7__p.m.
Sunday to be determined by Banking Facility
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2. The Banking Facility will be closed for business on the following holidays:
The Bank shall be closed for no more than those holidays observed by the
Banking Industry as set by the Federal Reserve System of the United States.
Note: If a holiday mentioned above is on a Sunday, then the Banking
Facility may be closed for business on the immediately succeeding Monday.
The foregoing is hereby approved by LESSOR AND LESSEE.
On behalf of LESSOR: On behalf of LESSEE:
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Title Title
Date Date
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<PAGE>
EXHIBIT 10.21
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LEASE AGREEMENT
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THIS INDENTURE made and entered into upon this 2nd day of September, 1996,
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by and between K-V-A-T Food Stores, Inc., a corporation duly created, organized
and existing under and by virtue of the Laws of the Commonwealth of Virginia,
with its registered office located at 329 North Main St., Grundy, Virginia,
(hereinafter called "Lessor") of the first part, and Matewan Bancshares, Inc., a
banking corporation duly created, organized and existing under and by virtue of
the Laws of the State of Delaware, with its registered office located at Second
and Vincent Streets, Williamson, West Virginia, (hereinafter called "Lessee") of
the second part,
WITNESSETH: That whereas Lessor is presently constructing a Food City
Supermarket (hereinafter referred to as the "Store") located at Virginia Highway
694 and Pittston Avenue, in the Town of Lebanon, Russell County, Virginia; and
Whereas, Lessee desires to establish and operate banking and depository
facilities (hereinafter referred to as the "Banking Facility") in said Store on
terms and conditions hereinafter set forth; and
Whereas, Lessor desires that Lessee establish and operate such Banking
Facility in said Store on the terms and conditions hereinafter set forth;
NOW, THEREFORE, for and in consideration of the premises, the mutual
covenants and agreements herein set forth and benefits accruing to the parties
hereto, other good and valuable considerations and the rentals to be paid by
Lessee to Lessor, the parties hereto agree as follows:
1. LEASE OF SPACE. Subject to the terms and conditions of this lease
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agreement (hereinafter referred to as "lease"), Lessor hereby leases and rents
to Lessee and Lessee hereby rents and leases from Lessor a space containing
approximately 645 square feet of floor space in the building occupied by the
<PAGE>
Store (hereinafter referred to as the "store building") which space hereinafter
referred to as ("premises") is designated "Bank" and outlined in red on the
diagram (floor plan) hereto attached, marked "Exhibit A" and made a part hereof
by reference. Lessee shall be granted ingress to and egress from said Premises
for Lessee, its officers, employees and customers, by and through the front
entrance, vestibules and sales area of the building occupied by the Store, and
Lessee shall have the right to install a night depository unit and an automated
teller machine, the approximate locations of which are shown on said diagram
(floor plan).
2. TERM. (a) This lease is made and accepted for a term which shall
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begin on the Commencement Date, as hereinafter defined, and run until five (5)
years thereafter, unless extended as hereinafter provided.
(b) The Commencement Date shall be on the first (1st) day of the
calendar month coming next after the following conditions are satisfied:
(1) The Improvement Work, as such term is defined in Section 8 of this
lease, is substantially completed in accordance with the approved Plans and
Specifications; and
(2) All required consents or approvals of the Federal Reserve, the
Comptroller of the Currency, Federal Deposit Insurance Corporation, the
Commissioner of Banking for the state of Lessee's incorporation, or any other
Federal or State regulatory agency having jurisdiction over Lessee (the
"Regulatory Agency") shall have been obtained to open and maintain the Banking
Facility for banking business at the location of the premises hereby leased.
Lessee shall promptly make an application to any such Regulatory Agency for the
issuance of a permit to operate a retail banking and depository facility in the
Store; exercise due diligence to obtain same; and immediately give Lessor notice
when the permit has been issued.
(3) Pursuant to the provisions of Section 2, as hereinabove stated and
in accordance with section 8 hereof, Lessee shall complete all of the aforesaid
conditions and Lessee shall also open and begin normal banking business
concurrent with the opening of the Store. In the event that Lessee suffers a
delay in regulatory approval, through no fault of the Lessee, Lessor shall
extend
<PAGE>
the date of commencement of banking operations, an additional period which shall
be the lesser of: (i) the period of said regulatory delay; or (ii) (4) months
after the opening of the Store. Lessor has the exclusive option to terminate
said lease in the event Lessee does not comply completely with all of the
aforesaid provisions and conditions of said lease, by the above specified time.
(c) As soon as the Commencement Date may be determined as hereinabove
provided, the parties hereto agree to execute and deliver in duplicate a
Commencement Date Agreement, using the form, a copy of which is hereto attached,
marked "Exhibit B", and made a part hereof by reference, for the purpose of
being attached to and becoming a part of their respective copy of this lease,
but failure of the parties, or either of them, to execute and deliver such
agreement shall not preclude establishing such date by appropriate evidence
should the need to do so arise.
(d) Lessee shall have the right to occupy the Premises prior to said
Commencement Date for the sole purpose of making the improvements hereinafter
referred to as the Improvement Work, as provided for in Section 8 hereof and not
for the conduct of Lessee's banking business, provided that if contingencies are
not met. Lessee shall be responsible for restoring Premises. Any such occupancy
of the Premises by Lessee shall be subject to the terms and conditions of this
lease. If Lessee begins to conduct business in the Premises prior to the
Commencement Date, Lessee shall pay rent, pro rata, according to the rent stated
in Section 3 hereof for the number of days which Lessee so conducts Lessee's
business.
3. RENT. Lessee shall pay to Lessor as rent for the Premises an amount
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equal to Thirty Thousand Dollars ($30,000) per annum for the original term of
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this lease, which rent shall be payable in equal monthly installments of Two
Thousand Five Hundred Dollars ($2,500) each, in advance, commencing on the
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Commencement Date and continuing to be due on the first day and not later than
the fifth day of each calendar month during the term of this lease. All rent
shall be payable to Lessor at its registered office shown above or as otherwise
directed by Lessor.
4. OPTION TO EXTEND. Lessee shall have the option to extend the term
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of this lease for three (3) successive additional periods of five (5) years
each. Said options shall be exercised automatically unless Lessee, gives Lessor
notice of Lessee's desire not to exercise the option. Such extension rights are
further subject to Lessee's not being in default under any of the terms and
provisions of
<PAGE>
this lease. The notice not to exercise the option for any five (5) year
extension shall be given at least one-hundred eighty (180) days prior to the end
of the immediately preceding term of this lease. The first automatic extension
of this lease shall be upon the same rental, terms and conditions as are set
forth in this Lease Agreement. Rental for the second and third renewal terms of
this lease, shall be the an amount equal to the original rental, as defined in
section 3 hereof, multiplied by a fraction. Said fraction shall be defined as
consisting of a numerator, which shall be the index number (the "Index Number")
indicated under the United States index column of the Consumer Price Index for
Urban Wage Earners and Clerical Workers (the "CPI") (1982-1984=100) as
promulgated by the United States Department of Labor, for the month immediately
preceding the month and year in which the said renewal term shall commence and a
denominator, which shall be the Index Number for the CPI for the month and year
in which the original commencement date of this Lease occurs. If there shall at
the time be no such CPI, the parties shall use the most comparable substitute
index in determining rent escalation for said renewal periods. Notwithstanding
the above, all other terms and conditions of this Lease Agreement shall remain
in full force and effect during the second and third renewal periods.
5. USE AND OCCUPANCY. (a) Lessee shall have the right to use and
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occupy the Premises for the sole purpose of establishing and operating a retail
banking and depository facility for the benefit and convenience of the public
and for no other use and purpose, except that Lessee may offer at the Banking
Facility such services or products as are customarily offered by Lessee at its
other retail banking facilities, provided that such services and products are
not in competition and do not compete with services and products customarily
offered for sale by Lessor in its stores. Lessee shall have the exclusive right
to provide or promote retail banking or other depository services in the Store.
Notwithstanding anything to the contrary stated herein, Lessee shall have the
non-exclusive right to provide or promote the following services in the Bank:
the sale of tickets to musical, theatrical, sporting, and other public events;
financial planning; estate planning; sale of insurance; and travel planning and
reservation services, provided that such rights do not violate any terms and
conditions or any exclusive rights granted by Lessor's Landlord in the Prime
Lease. Lessee's exclusive right hereunder to provide retail banking and other
depository services in the Store shall not limit or restrict Lessor's right to
make change, cash checks, verify checks, arrange for check verification, sell
money
<PAGE>
orders, or to transact or conduct any other commercial or financial activity or
service which, in Lessor's sole discretion, Lessor deems necessary for the
proper and adequate operation of the Store.
(b) In order to provide Lessee's customers with free and clear access
to the Banking Facility, Lessor shall not place any display case or other
fixture or articles within six (6) feet of the Banking Facility that would
restrict free and clear access to the Banking Facility.
(c) In the event that Lessee desires to include a night depository in
the operation of the Banking Facility, and said night depository is to be
located in an area outside the Banking Facility, then, in that event, Lessee
shall acquire written approval of Lessor regarding the proposed location of said
Night depository prior to commencing any installation of said night depository.
In the event of the installation of a night depository it is agreed that Lessee
shall be responsible, at its sole cost and expense, for the installation,
maintenance, and operation of any such night depository, and the location of any
such night depository shall be deemed to be an appurtenance to the Premises and
a part of the Banking facility for all purposes of this lease. The installation
of any such night depository shall be performed in accordance with the terms and
conditions of Section 8 hereof.
(d) If Lessee elects to include an automated teller machine in the
operation of the Banking Facility, Lessee shall be responsible, at its sole cost
and expense, for the installation, maintenance, and operation of any such
automated teller machine, and the location of any such automated teller machine
shall be deemed to be an appurtenance to the Premises and a part of the Banking
Facility for all purposes of this lease. The installation of any such automated
teller machine shall be performed in accordance with the terms and conditions of
Section 8 hereof. Lessee may make available to any one or more banking or
depository institutions, including savings and loan associations or credit
unions, the use of any such automated teller machine installed by Lessee, and
Lessor shall permit such other banking or depository instituitons, including
savings and loan associations or credit unions, to share the use of any such
automated teller machine.
(e) Lessee shall have the right to use jointly with Lessor a sufficient
part of the parking area serving the building in which Premises are located for
the parking of vehicles of its employees and customers, and vehicles being used
in the normal course of Lessee's business, with the right of ingress to and
egress
<PAGE>
from said parking area. No additional rent shall be charged for use of
said parking area.
(f) Lessee shall maintain and conduct the operation of the Banking
Facility in a first-class and proper manner. Lessee shall comply with all
applicable federal, state and local laws, rules, regulations, and ordinances
governing the establishment and operation of the Banking Facility. Lessee shall
not block or restrict the aisles, passageways, vestibules, entrances, exits, or
sidewalks of the Store so as to interfere with Lessor's business. Lessee's
operation of the Banking Facility shall be subject to such limitations,
restrictions, or rules as Lessor may from time to time impose, including,
without limitation, any rule pertaining to the parking of motor vehicles of
Lessee, its employees, agents or representatives, and any rule restricting the
Banking Facility's hours of operation to the same hours the Store is open to the
public. Lessee shall not have a key to the Store. When the Store is closed and
not open to the public for business, Lessee and its employees shall have access
to the Store only with the consent of Lessor and only when an employee or other
representative of Lessor is present. Lessee shall not use the Premises for any
illegal purpose or violate any statute, regulation, rule or order of any
governmental body, nor create or allow to exist any nuisance or trespass, nor
use the Premises in any manner to vitiate Lessor's insurance or increase the
rate of Lessor's insurance premiums, nor deface or injure the Premises nor
overload the floor of the Premises. Lessee agrees that it shall observe and
comply with the "Rules and Regulations" hereto attached, marked "Exhibit C", and
made a part hereof by reference.
6. EMPLOYEES. (a) Lessee shall cause its employees to comply with all
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reasonable rules and regulations from time to time prescribed by Lessor
pertaining to employee ingress, egress, and parking. All persons employed by
Lessee in conncetion with the operation of the Banking Facility shall be and
remain Lessee's employees for all purposes, and Lessee shall, at its own cost
and expense, maintain worker's compensation coverage, unemployment compensation
coverage, and any other insurance which may be required by law with respect to
such employees. Lessee's employees, while working at the Banking Facility,
shall be entitled to use the toilet facilities and break room or lounge provided
by Lessor for the convenience of Lessor's employees. Lessee shall be solely
responsible for all acts and omissions of its employees. Lessor shall provide
an adequate number of parking spaces at the Store for employees of Lessee
working at the Banking Facility. Lessee shall employ all persons
<PAGE>
necessary for the operation and maintenance of the Banking Facility and such
employees of Lessee shall at all times conduct themselves toward the customers
and employees of Lessor, and toward all other persons in the Store courteously
and in a manner to promote the best interests of the Store.
(b) Lessee shall be solely responsible for providing security for the
Banking Facility, and acknowledges that Lessor is not an insurer for the Banking
Facility and that Lessor does not undertake to provide any security for the
Banking Facility. Subject to reasonable rules and regulations of Lessor,
Lessee shall have the right to have a security guard in the Banking Facility at
all times that Store is open for business and any such security guard shall be
and remain an employee or contractor of Lessee only.
7. NON-EMPLOYEE SERVICES. It is contemplated that persons not employed
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by Lessee must have access to the Banking Facility for time to time for the
purpose of servicing, maintaining, and otherwise performing services in
connection with the Banking Facility. Any such non-employee shall have access
to the Store and the Banking Facility during the Store's normal business hours,
provided that such non-employees shall not block or restrict the aisles,
passageways, vestibules, entrances, exits or sidewalks of the Store so as to
interfere with Lessor's business.
8. IMPROVEMENT WORK. (a) Lessee shall have the right to improve
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(herein referred to as the "Improvement Work") the Premises by installing
banking and depository facilities therein so that the Premises may be used for
the operation of a retail banking and depository facility in accordance with
Section 5 hereof. The Improvement Work shall be in accordance with the terms
and conditions of this Section 8 of this lease.
(b) The Improvement Work shall be done in accordance with plans and
specifications (hereinafter referred to as the "Plans and Specifications")
provided by Lessee for the use and benefit of Lessor and Lessee. Lessee, within
thirty (30) days from the date of this lease, shall furnish Lessor with said
Plans and Specifications for Lessor's review and approval. The Plans and
Specifications shall be subject to the prior approval of Lessor. Lessor shall
promptly, and not later than five (5) days after receipt of a set thereof,
approve or reject the Plans and Specifications submitted to Lessor by Lessee.
Lessee, within thirty (30) days after the approval of the Plans and
Specifications by Lessor, shall begin the work
<PAGE>
to improve the Premises, and the Improvement Work shall be completed by Lessee
in accordance with the approved Plans and Specifications within four (4) months
from the date of this lease. In connection with the Improvement Work, Lessee
specifically agrees that improvements shall not affect the structure, roof, or
floor of the store building except in connection with the installation of a
vault, a night depository unit or any automated teller machine, or otherwise
adversely affect any area of the store building other than the Premises, or
affect the peaceful enjoyment of Lessor.
(c) Lessee shall, at its sole cost and expense, pay the cost of the
Improvement Work, including the cost of the Plans and Specifications therefor.
Neither Lessee nor any contractor engaged by Lessee shall have any right to
create any charge or lien against the store building or the land on which the
store building is located on account of the Improvement Work, and this lease
shall not be construed to authorize any charge or lien against the store
building or the land on which the store building is located on account of the
Improvement Work or any work, services, or materials relating thereto. Lessee
covenants and warrants unto Lessor that Lessee will discharge of record, within
ten (10) days following actual notice by Lessee, from whatever source, of its
filing, any mechanic's, or materialmen's or other similar lien against the
Premises, the store building or the land on which the store building is located
for work or material claimed to have been furnished to Lessee or the Premises.
(d) Lessor shall have the right to approve the contractor or
contractors, as the case may be, selected by Lessee to perform the Improvement
Work, but such approval shall not be arbitrarily nor unreasonably withheld.
(e) Lessor shall have the right to inspect the construction of the
Improvement Work from time to time.
(f) The Plans and Specifications and the contract for the Improvement
Work may contain such other terms and provisions not in conflict with nor
contrary to this Section 8 as Lessee may elect.
(g) Lessee, at its sold cost and expense, shall furnish all
improvements, fixtures, equipment, and furnishings which it deems necessary or
desirable for the establishment and operation of the Banking Facility, and shall
pay all costs of improvement of the Premises necessary for the installation of
such items.
<PAGE>
Notwithstanding any attachment or affixation of the Banking Facility or any part
thereof to the Premises, or the manner, mode, extent, or nature of any such
attachment or affixation, the Banking Facility and each part thereof will be,
and shall at all times continue to be, personal property, and shall not at any
time become or be deemed to be fixtures or in any other manner a part of the
Premises or the store building. All permits, licenses and authorizations
required in connection with the Improvement Work shall be obtained and paid for
by Lessee as the same are required.
(h) Lessee shall make no alterations or additions of any kind in or to
the Premises or the Banking Facility without first obtaining Lessor's written
consent, and all such work shall be subject to the provisions of this Section 8.
(i) In event of disagreement between Lessor and Lessee as to whether
any construction complies with the Plans and Specifications or whether any
construction is complete and ready for use and occupancy, the disagreement shall
be determined by any architect selected by Lessee, representing Lessee, and any
architect selected by Lessor, representing Lessor. If said two architects
cannot agree, the two shall select a third person who shall also be an
architect, and the decision of the three, by a majority vote, shall terminate
the disagreement. All of said architects shall be licensed to practice
architecture in the state in which the store building is located. Each party
shall pay its architect and the expense of the third architect shall be shared
equally.
(j) Times stated in this Section 8 shall not be of the essence of the
contract so long as the work or obligation concerned is carried on with
reasonable diligence and without unreasonable daily (delays caused by acts of
God or material shortages beyond the control of the party obligated are
recognized as reasonable).
(k) Lessor shall not be liable for any damage to Lessee's property
arising from the operations of the contractor relating to the Improvement Work.
Said contractor shall provide public liablilty and property damage insurance for
the protection of Lessor and Lessee on account of injuries to persons or damage
to such persons' property (including property of Lessor and Lessee) arising from
the contractor's operations in the amount of One Million Dollars ($1,000,000)
for property damage; One Million Dollars ($1,000,000) for injuries to any one
person; and One Million Dollars ($1,000,000) for injuries occurring in any one
<PAGE>
accident. The contractor shall furnish builders' risk insurance on the work
covered by the contract. Upon request by Lessor, Lessee shall obtain from
Lessee's Contractor, and provide to Lessor, any certificates of insurance which
may be necessary to provide evidence of the insurance coverage described herein.
9. MAINTENANCE. (a) Lessee shall, at its sole cost and expense,
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maintain the Banking Facility in good order and repair, including, without
limitation, telephone or other lines for computer/data processing and
transmission for the Banking Facility, and shall, at its sole cost and expense,
provide and maintain janitorial services for the Premises.
(b) Lessee shall be liable for and shall repair or restore any loss or
damage of the Premises or store building caused by the negligence or intentional
acts of Lessee, or by the negligence or intentional acts of its agents,
employees, or representatives when acting in the course of their employment,
except that Lessee shall not be liable for nor required to restore loss or
damage caused by fire or explosion, or resulting from any casualty which
normally may be insured against by fire insurance with extended coverage. Fire
and extended coverage insurance shall be carried and maintained on the store
building pursuant to the terms and conditions of the Prime Lease as that term is
defined in Section 18 hereof.
(c) Anytime that an Automatic Teller or Night Depository shall
malfunction, Lessee shall affect repairs on same within twenty-four (24) hours
of notification of said malfunction.
10. UTILITIES. Lessor agrees to furnish to the Banking Facility at
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Lessor's sole cost and expense all overhead lighting, electricity, heat and air
conditioning for the operation of the Banking Facility. Lessee shall furnish at
Lessee's sole cost and expense all telephone and computer/data processing and
transmission services, including all lines, cables and connections necessary for
the operation of the Banking Facility.
11. INSURANCE. Lessee shall maintain, with respect to the Premises,
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Comprehensive General Liability Insurance with a combined single limit of at
least Five Million Dollars ($5,000,000.00) and Employer's liability insurance of
not less than One Million Dollars ($1,000,000.00) and Lessor shall be made an
<PAGE>
additional insured under the Comprehensive General Liablilty policy. Evidence
of such coverage shall be furnished to Lessor at the commencement date. Lessee
shall provide fire insurance and extended coverage for itself on the modular
banking unit, equipment, furnishings, and other items of personalty which it
places in the premises. In the event that Lessor's insurance is increased at
said location because of Lessee's bank facility being located inside said store,
then Lessee agrees to pay the amount of said increase.
12. INDEMNITY. (a) Lessee shall indemnify, protect, and save harmless
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Lessor from damage, loss, liability, or expense, including attorneys fees and
court costs, on account of injuries to persons or damage to property arising or
resulting from the ownership or operation of the Banking Facility during the
term of this lease, except such injuries or damage arising from negligence of
Lessor, its agents, or employees.
(b) Lessor shall indemnify, protect, and save harmless Lessee from
damage, loss, liability, or expense, including attorneys fees and court costs,
on account of injuries to persons or damage to property arising or resulting
from the operation of the Store during the term of this lease, except such
injuries or damage arising from negligence of Lessee, its agents, or employees.
(c) In the event of concurring negligence of Lessor and Lessee, Lessor
and Lessee shall share liabilities and expenses arising thereunder in proportion
to their negligence.
13. TAXES. Lessee shall pay all ad valorem taxes levied or assessed
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against its modular banking unit and other property located in said Premises.
Lessor shall pay all ad valorem taxes levied or assessed against the Premises.
14. SURRENDER. Lessee agrees that it shall, before the termination of
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this lease, remove its modular banking unit, furnishings, equipment, and all
other personal property belonging to and being the property of Lessee from the
premises, provided that at the time of removal Lessee is not in default in the
payment of rent or any other term or provision of this lease, and restore the
Premises to as good a condition as Lessee received same from Lessor, loss or
damage by fire, storm, earthquake, or other casualty, and ordinary wear and tear
from reasonable use excepted. Lessee shall pay Lessor for any physical damage
caused by the installation or removal of Lessee's improvements, fixtures,
furnishings, equipment, or personal property, and surrender peaceful possession
<PAGE>
of the Premises to Lessor at the termination of this lease.
15. DEFAULT. (a) In event Lessee shall be in default in the payment of
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rent hereunder in full and shall not cure such default within twenty (20) days
after receipt of written notice from Lessor specifying the default, Lessor shall
have the right, without further notice and legal process (but only during the
continuance of such default), of terminating this lease. Thereupon, this lease
shall be at an end, except for the purposes of enforcing the rights then accrued
hereunder and rights to future rentals to accrue hereunder, and Lessee will at
once surrender, release and turn over possession of said Premises to Lessor. If
such possession is not immediately surrendered, Lessor may re-enter said
Premises and take possession thereof, removing all persons and property
therefrom, using such force as may be necessary without being deemed guilty of
any manner of trespass, or forcible entry, or detainer, all other notice
provided by law for the termination of tenancy and all legal process being
hereby expressly waived.
(b) If Lessee shall default in the performance or observance of any
covenant, agreement or condition contained in this lease to be performed or
observed by Lessee, other than an obligation to pay rent, and shall not cure
such default within thirty (30) days after receipt of written notice from Lessor
specifying the default, or shall not within said period commence to cure such
default and thereafter prosecute the curing of such default to completion with
due diligence, Lessor may, at its option, at once, without notice to Lessee or
anyone else, terminate this lease, and upon the termination hereof at the option
of Lessor as aforesaid, or at the expiration, by lapse of time, of the term
hereby demised, Lessee will, at once, surrender, release and turn over
possession of said Premises to Lessor and, if such possession is not immediately
surrendered, Lessor may re-enter said Premises and take possession thereof,
removing all persons and property therefrom, using such force as may be
necessary without being deemed guilty of any manner of trespass, or forcible
entry, or detainer, all other notice provided by law for the termination of
tenancy and all legal process being hereby expressly waived; or Lessor may, at
its option, without waiving any right to terminate this lease or any claim for
breach of contract, at any time thereafter cure such default for the account of
Lessee and Lessee shall, on demand, reimburse Lessor therefor and save lessor
harmless therefrom, provided that Lessor may cure any such default prior to the
expiration of
<PAGE>
said waiting period, but after notice to Lessee, if the curing of such default
prior to the expiration of said waiting period is reasonably necessary to
protect Lessor, or to prevent injury or damage to persons or property.
(c) In case of any default, whether or not this Lease is terminated,
Lessee will indemnify Lessor against all loss of rent and other payments
provided herein, if any, to be paid by Lessee to Lessor between the time of
default or termination and the expiration of the term of this Lease. It is
understood that at the time of termination or reentry, or any time thereafter,
Lessor may rent the Premises for a term which may expire after the expiration of
the term of this Lease without releasing Lessee from any liability whatsoever;
that Lessee shall be liable for expenses incurred by Lessor in connection with
obtaining possession of the Leased Premises and in connection with any re-
letting, including without limitation, reasonable attorneys fees and reasonable
brokers' fees; and that any monies collected for said re-letting shall be
applied first to the foregoing expenses and then to payment of rental and all
other payments which may be due to Lessor from Lessee. Said indemnification of
Lessor by Lessee shall be accomplished by payments made on the days on which
said Rentals and other payments would have been due and payable hereunder if
this agreement had not terminated.
(d) The rights and remedies herein given Lessor on account of default
or breach by Lessee under this lease are cumulative and in addition to the
rights and remedies afforded Lessor by law and/or equity for such defaults or
breaches.
16. DAMAGE. If by fire, storm, earthquake, or other casualty, the
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Premises or any other part of the store building are destroyed or damaged to the
extent that Lessee is deprived of occupancy or use of the Premises, and if such
damage or destruction can be substantially repaired within thirty (30) days from
the date of such damage or destruction, then such damage or destruction shall be
substantially repaired pursuant to the terms and conditions of the Prime Lease
(as such term is defined in Section 18 hereof) within thirty (30) days from the
date of such damage or destruction and all rent payable hereunder by Lessee
shall be abated to the extent that Lessee is unable to occupy and use the
Premises. In the event such damage or destruction cannot be substantially
repaired within such thirty-day period, Lessee and Lessor shall each have the
right and option to terminate this lease by giving ten (10) days' prior written
notice to the other. Notwithstanding anything herein to the contrary, in the
event of any destruction or damage to the store building or the Premises, Lessee
shall be
<PAGE>
solely responsible for repairing and/or restoring, at its sole cost and expense,
the modular banking unit, furnishings, equipment and all other property of
Lessee located in the Premises and used in connection with the operation of the
Banking Facility.
17. CONDEMNATION. If a material part of the store building shall be
------------
taken or condemned under the power of eminent domain or is conveyed or leased in
lieu of such taking, this lease shall terminate as of the date title vests in
the condemning authority. If any portion of the Store parking area is taken or
condemned under the power of eminent domain or is conveyed or leased in lieu of
such taking and, in the opinion of Lessor, continuance of the operation of the
Store is undesirable as a result thereof, Lessor may elect to terminate this
lease concurrently with Lessor's closing of the Store, and if Lessor elects to
so terminate this lease, then this lease shall terminate and all rights and
liabilities of the parties thereafter accruing shall cease and terminate as if
the date of such termination were the date originally set for the expiration of
the term of this lease. Lessee hereby assigns to Lessor any and all right,
title, or interest it may have in and to any award made in any such condemnation
proceeding, except if any award includes an amount in compensation for loss of
business profits by Lessee or for moving the property of Lessee, that part of
such award is not hereby assigned to Lessor and Lessee will be entitled to the
amount paid for Lessee's loss of profits and for the moving of Lessee's
property.
18. PRIME LEASE. (a) The term "Prime Lease", as such term is referred
-----------
to in this lease, means that certain Lease Agreement entered into by and between
Marathon Realty Corporation, as Landlord, and K-VA-T Food Stores, Inc., as
Tenant, covering the land and building occupied by Store in which Premises are
located, and dated August 1, 1987.
(b) This lease is executed by Lessor and Lessee as a sublease under
said Prime Lease, and shall be subject and subordinate to all of the terms and
conditions of said Prime Lease. Subject to the provisions of Section 4 hereof,
upon the termination of said Prime Lease for any reason, this lease shall
terminate. In the event that said Prime Lease is terminated and Lessor
continues to occupy said store building and operate said store, whether as
tenant or owner, this lease shall not terminate, but remain in effect until the
earlier of: 1. Cessation of operation of said store by Lessor, or, 2. Its term,
including any extension thereof, expires. In the event that Lessor ceases
operations in said
<PAGE>
store and relocates within a one-mile radius of the store building within one
year of cessation of operations, Lessee shall have the opportunity to relocate
with Lessor. The relocation of Lessee with Lessor shall be contingent upon: 1.
The approval by Lessor of Lessee's bank facility plans, 2. Where applicable,
Lessee's maintaining operations at both the old and new facilities, 3. Monthly
rental from Lessee in the new store building shall increase in proportion to
Lessor's increased occupancy costs and, 4. Said relocation does not violate any
terms and conditions or any exclusive rights granted previously by Lessor's
landlord, pursuant to the Prime Lease for the new store building.
(c) Lessee agrees that this lease is and shall be subordinate and
subject to the lien of any first mortgage, deed to secure debt, deed of trust,
or other instrument in the nature thereof which may now or hereafter affect or
encumber the fee title to the Premises and the land upon which the store
building is located. The preceding sentence pertaining to the subordination of
this lease to any first mortgage, security deed, or other instrument in the
nature thereof shall be self-operative, and no further instrument or
subordination shall be required by the holder of any such instrument affecting
or encumbering the fee title of the Premises or the land upon which the store
building is located. In confirmation of such subordination, Lessee shall, upon
demand, at any time or times, execute, acknowledge, and deliver to Lessor or the
holder of any such mortgage, deed to secure debt, deed of trust, or other
instrument, without expense, any and all instruments that may be requested by
lessor or such holder to evidence the subordination of this lease and all rights
hereunder to the lien of any such mortgage, deed to secure debt, deed of trust,
or other instrument, and each renewal, modification, consolidation, replacement,
and extension thereof.
(d) Lessor covenants and warrants that it has obtained all requisite
consent to the subletting of Premises to Lessee, and that is has the unqualified
right to enter into this lease agreement and sublet Premises to Lessee.
19. ASSIGNMENT. Lessee shall not, without the prior written consent of
----------
Lessor, assign, hypothecate, or otherwise transfer this lease or any interest
hereunder, or sublease the Premises or any part thereof, or permit the use of
the Premises by any party other than Lessee, except that the automated teller
machine may be used by persons other than the Lessee as such sharing is
permitted by Section 5 (d) hereof. Any consent to an assignment or sublease
shall not nullify this provision, and all later assignments or subleases shall
be
<PAGE>
made likewise only after the prior written consent of Lessor is obtained in
each instance. Unless otherwise expressly agreed to by Lessor in writing, no
sublease or assignment by Lessee shall relieve Lessee of any liability
hereunder.
20. BANKRUPTCY. (a) For the purpose of this lease, bankruptcy of
----------
Lessee shall mean and include any one or more of the following events or
conditions:
(1) Lessee is adjudicated as bankrupt;
(2) A receiver is appointed for Lessee or a major part of Lessee's
property, including Lessee's interest in Premises, and such receivership is not
vacated and discharged within ninety (90) days;
(3) Lessee shall seek reorganization, arrangement, composition,
readjustment, compromise, or similar debtor relief with respect to its debts or
obligations under any federal or state bankruptcy, insolvency, or debtor relief
statute;
(4) Lessee, whether voluntarily or involuntarily, takes advantage of
any debtor relief proceedings under any present of future law, whereby the rent
or any part thereof is, or is proposed to be reduced, or payment thereof is, or
is proposed to be deferred;
(5) Lessee makes an assignment for the benefit of its creditors;
(6) Lessee's interests hereunder shall be levied upon or sold under
execution or other legal process;
(7) Lessee is found to be insolvent in any proceedings other than
bankruptcy; or
(8) Lessee is closed or taken over by any Regulatory Agency.
(b) Subject to the terms and conditions of subsection (c) of this
section, in the event of bankruptcy of Lessee, Lessor, at any time after the
occurence of the
<PAGE>
bankruptcy and during the continuation of the bankruptcy and on thirty (30) days
notice to Lessee and to Lessee's legal representative (which shall include a
trustee in bankruptcy, receiver, or other like officer), if any, may terminate
this lease and retake possession of the Premises.
(c) Notwithstanding any other provision of this lease, in the event the
Lessee or its successors or assignees shall become insolvent, bankrupt,
or make an assignment for the benefit of creditors, or if it or their interests
hereunder shall be levied upon or sold under execution or other legal
process, or in the event the bank to be operated on the premises is closed,
or is taken over by the banking authority of the State or other bank supervisory
authority, the Lessor may terminate the lease only with the concurrence of
said State banking authority or other bank supervisory authority, and any such
authority shall in any event have the election to either continue or terminate
the lease, provided, that in the event this lease is terminated, the maximum
claim of Lessor for damages or indemnity for injury resulting from the rejection
or abandonment of the unexpired lease shall in no event be in an amount
exceeding the rent reserved by the lease, without acceleration, for the year
next succeeding the date of the surrender of the premises to the landlord, or
the date of re-entry of the landlord, whichever first occurs, whether before or
after the closing of the bank, plus an amount equal to the unpaid rent accrued,
without acceleration, up to such date.
21. TRADE NAME. Lessee shall buy and pay for its own supplies and
-----------
other items of personalty in its own trade name and upon its own credit and
shall make no contract of any kind or nature whatsoever in the name of Lessor
or in the name of any other business entity or enterprise owned in whole or in
part by Lessor. Nothing herein contained shall constitute the parties as
partners or co-venturers to render either party liable for the debts or
liabilities of the other.
23. USUFRUCT. This lease shall create the relationship of landlord
--------
and tenant between Lessor and Lessee; no estate shall pass out of Lessor, and
lessee has only a usufruct which is not subject to levy and sale and may not be
assigned except by Lessor's consent.
<PAGE>
24. CAPTIONS. Section captions used in this lease are for the
--------
convenience of reference only and do not constitute a substantive part of this
lease.
25. GOVERNING LAW. This lease is deemed to have been executed in
-------------
the state in which the Store is located and shall be governed by and construed
in accordance with the laws of such state.
27. ENTIRE AGREEMENT. This lease constitutes the sole and entire
----------------
agreement between the parties hereto with respect to Lessee's leasing of the
Premises and its establishment and operation of the Banking Facility, and no
amendment or modification of this lease shall be binding unless it is reduced to
writing and signed by both parties hereto. No representation, inducement,
promise, understanding, or agreement regarding such matters not included in this
lease shall be binding upon the parties hereto or either of them. If any term
or provision of this lease shall be invalid or unenforceable, the remaining
terms and provisions hereof shall not be affected thereby. If the application
of any term or provision of this lease to any person or circumstance shall to
any extent be invalid or unenforceable, such term or provision shall remain
applicable as to those persons or circumstances to which it shall be valid and
enforceable and each term and provision of this lease shall be valid and
enforceable to the fullest extent permitted by law.
28. EXECUTION. This lease may be executed in any number of
---------
counterparts, each of which shall be deemed an original and any of which shall
be deemed to be complete in itself and may be introduced into evidence or used
for any purpose without the production of the other counterparts.
29. NOTICES. Any notice herein provided for may be delivered
-------
personally to an officer or the registered agent of the party to be notified, or
by United States certified or registered mail directed as follows:
To Lessor: K-VA-T Food Stores, Inc.
P.O. Box 769
Grundy, Virginia 24614
Attention: Mr. Jack C. Smith
<PAGE>
To Lessee: Matewan BancShares Inc.
Second and Vincent Streets
Williamson, West Virginia
Attention: Mr. Lee Ellis
30. SUCCESSORS AND ASSIGNS. Each of the provisions of this
----------------------
agreement shall extend to, and shall, as the case may require, bind or inure to
the benefit of not only the Lessor and Lessee, but also their respective
successors and assigns, and any bank or other corporation with which Bank may be
merged or consolidated.
(Signature page to follow)
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed this agreement by and
through their duly authorized officers and caused their seals to be hereunto
affixed, upon the day and year first above written.
Signed, sealed, and delivered By:
by the officers of Lessor in -----------------------------------
the presence of:
-----------------------------------
Title
- -----------------------------------
Unofficial Witness
Attest:
-------------------------------
Secretary
- -----------------------------------
Notary Public
Lessor
(NOTARIAL SEAL)
(CORPORATE SEAL)
My commission expires
--------------
Signed, sealed, and delivered By:
by the officers of Lessee in -----------------------------------
the presence of:
-----------------------------------
Title
- -----------------------------------
Unofficial Witness
Attest:
-------------------------------
Secretary
- -----------------------------------
Notary Public Lessee
(NOTARIAL SEAL) (BANK/ASSOCIATION SEAL)
My commission expires
<PAGE>
"EXHIBIT A"
(TO BE ATTACHED LATER)
<PAGE>
"EXHIBIT B"
COMMENCEMENT DATE AGREEMENT
---------------------------
COMMONWEALTH OF VIRGINIA,
RUSSELL COUNTY
THIS AGREEMENT made and entered into upon this day of 1997, by
---- -------
and between K-VA-T Food Stores, Inc., a corporation duly created, organized and
existing under and by virtue of the Laws of the Commonwealth of Virginia,
(hereinafter called "Lessor") , and Matewan BancShares, Inc., a banking
corporation duly created, organized and existing under and by virtue of the Laws
of the State of Delaware, (hereinafter called "Lessee").
WITNESSED: That whereas Lessor and Lessee entered into a lease
agreement (hereinafter referred to as "lease), dated September 2, 1997, for the
use and occupancy of the Premises therein described and located in the building
occupies by the Store operated by Lessor at Virginia Highway 694 and Pittston
Avenue, Lebanon Virginia and all conditions for determination of the
Commencement Date of the term of said lease have been met.
NOW, THEREFORE, pursuant to the provisions of the Section 2 of said lease,
Lessor and Lessee mutually agree that the Commencement Date of the term of said
lease is December 1, 1997, and that said term of said lease shall expire at
midnight Eastern Standard Time on November 30, 2002, unless extended or earlier
terminated as provided for in said lease.
IN WITNESS WHEREOF, Lessor and Lessee have executed this agreement by and
through their duly authorized officers and caused their seals to be hereunto
affixed upon the day and year first above written.
BY: BY:
-------------------------------- -----------------------------------
-------------------------------- -----------------------------------
(Title) (Title)
Attest: Attest:
---------------------------- -----------------------------
Secretary Secretary
<PAGE>
"EXHIBIT B"
COMMENCEMENT DATE AGREEMENT
---------------------------
, COUNTY
- --------------- -------------------
THIS AGREEMENT made and entered into upon this day of , 19 ,
---- -------- --
by and between (Hereinafter referred to as "Lessor") and
-----------------
(Hereinafter referred to as "Lessee").
- ---------------
WITNESSED: That whereas Lessor and Lessee entered into a lease agreement
(hereinafter referred to as "lease), dated , 19 , for the use and
---------- ---
occupancy of the Premises therein described and located in the building occupies
by the Store operated by Lessor at and all conditions for
------------------
determination of the Commencement Date of the term of said lease have been met.
NOW, THEREFORE, pursuant to the provisions of the Section 2 of said lease,
Lessor and Lessee mutually agree that the Commencement Date of the term of said
lease is , 19 , and that said term of said lease shall expire at
------------ ----
midnight Time on , 19 , unless extended or earlier
---------- --------- ---
terminated as provided for in said lease.
IN WITNESS WHEREOF, Lessor and Lessee have executed this agreement by and
through their duly authorized officers and caused their seals to be hereunto
affixed upon the day and year first above written.
By: By:
------------------------------- -----------------------------------
(Title) (Title)
Attest: Attest:
--------------------------- ----------------------------------
Secretary Secretary
Lessor Lessee
(Corporate Seal) (Corporate Seal)
<PAGE>
"EXHIBIT C"
RULES AND REGULATIONS
---------------------
1. Lessee shall keep open for business and operate the Banking Facility
during such days and hours as have been agreed upon in writing by Lessor and
Lessee under Schedule 1 of this Exhibit C and make no subsequent changes in
store days or hours without Lessor's prior written consent which consent shall
not be arbitrarily nor unreasonably withheld by Lessor.
2. The sidewalks and public portions of the store building such as
entrances, passages, vestibules, and aisles, shall not be obstructed or
encumbered by Lessee or used for any purpose other than ingress and egress to
and from the Premises.
3. No projections shall be attached by Lessee to the outside walls of
the store building without the prior written consent of Lessor.
4. No sign, advertisement, notice, or other lettering shall be
exhibited, inscribed, painted or affixed by Lessee on any part of the outside or
interior walls of the store building without obtaining the prior written consent
of Lessor. Signs on doors to the Premises shall, at Lessee's expense, be
inscribed, Lessee, Lessor may remove same without any liability and may charge
the expenses incurred by such removal to Lessee. Lessee may display on the
exterior of the Banking Facility temporary, tasteful signs giving notice of
holidays and such other information as is required to be posted in the Banking
Facility by any Regulatory Agency.
5. No display cases or other articles shall be put in front of or
affixed to any part of the exterior of the store building, nor placed in the
interior of the Store without the prior written consent of Lessor.
6. Lessee shall not in any way deface any part of the Premises or the
store building.
7. No cooking shall be done or permitted by Lessee in the Premises.
8. No part of the Premises shall be used for manufacturing,
distribution, or the storage of merchandise, or for the sale of merchandise,
goods or property of
<PAGE>
any kind at auction.
9. Lessee shall not make, or permit to be made, any unseemly or
disturbing noises or disturb or interfere with shoppers in the Store.
10. Neither Lessee, nor any of Lessee's servants, employees, agents,
visitors, or licenses, shall at any time bring or keep in the Premises any
inflammable, combustible or explosive fluid, or chemical substance, other than
reasonable amounts of cleaning fluids or solvents required in the normal
operation of Lessee's business.
11. With the exception of daily money shipments and deliveries, the
moving in or out of any safes, freight, furniture, or bulky matter of any
description must take place during the hours which Lessor or its agent may
determine from time to time.
12. Lessor shall have the right to prohibit any advertising by Lessee
which, in Lessor's opinion, tends to impair the reputation of the Store or its
desirability as a Store for the public to shop, and upon written notice from
Lessor, Lessee shall refrain from or discontinue such advertising.
<PAGE>
SCHEDULE 1
EXHIBIT C
---------
DAYS AND HOURS BANKING FACILITY WILL BE OPEN FOR THE CONDUCT OF BUSINESS
1. The Banking Facility will be open for the conduct of business on the days
and no less than the hours hereinafter specified:
Monday 10:00__a.m. - __7__p.m.
Tuesday 10:00__a.m. - __7__p.m.
Wednesday 10:00 a.m. - __7__p.m.
Thursday 10:00__a.m. - __7__p.m.
Friday 10:00__a.m. - __7__p.m.
Saturday 10:00__a.m. - __7__p.m.
Sunday to be determined by Banking Facility
------------------------------------
2. The Banking Facility will be closed for business on the following holidays:
The Bank shall be closed for no more than those holidays observed by the
Banking Industry as set by the Federal Reserve System of the United States.
Note: If a holdiay mentioned above is on a Sunday, then the Banking
Facility may be closed for business on the immediately succeeding Monday.
The foregoing is hereby approved by LESSOR AND LESSEE.
On behalf of LESSOR: On behalf of LESSEE:
- ---------------------------------- --------------------------------------
Title Title
Date Date
------------------------------ ----------------------------------
<PAGE>
EXHIBIT 13.1
1997 Annual Report
[Photograph of SIGN]
In a day when banks have trouble differentiating themselves, one financial
institution stands alone for growth, profitability and investment...
Matewan BancShares.
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Message From The President
- --------------------------------------------------------------------------------
[PHOTOGRAPH OF DAN R. MOORE]
"The Company
constructed four
new [Express Banks]
offices in south-
western Virginia as
well as four new
offices in eastern
Kentucky. Additional
offices are planned
for both markets
in 1998."
To Our Shareholders:
I am pleased to submit to you the Annual Report of Matewan BancShares.
This Report provides information detailing another successful year for Matewan
BancShares. The year was highlighted by three major initiatives: 1) the Company
continued the market expansion program that began in 1996 and managed the
associated expenses to prevent earnings dilution; 2) the Company implemented
initiatives made possible by the Riegle-Neal Bank and Branch Efficiency Act; and
3) the Company promoted a major expansion of its insurance and investments sales
activities.
Matewan BancShares continued its expansion program by strategically placing
Matewan Banks' "Express Banks" throughout eastern Kentucky and southwestern
Virginia. These full-service offices are located in supermarkets or built to
function as stand-alone offices. They are designed to leverage construction
capital and ongoing overhead expenses. Between January 1, 1996, and December 31,
1997, the Company constructed four new offices in southwestern Virginia as well
as four new offices in eastern Kentucky. Additional offices are planned for both
markets in 1998.
As is common with any new business, the start-up expense for these offices has a
detrimental effect on earnings until the offices begin producing a sufficient
level of revenue to offset expenses. This process normally takes 12-to-24
months.
Concurrent with the financial impact of the ongoing expansion program, the
Company's performance during 1997 continued to be impacted by the cost
associated with the acquisition of Bank One, Pikeville, N.A. Kentucky, which
occurred on March 15, 1996. This was a significant acquisition relative to the
size of our Company, and has had a meaningful effect on the overall financial
performance of the Company. Matewan BancShares' primary goal when we began the
expansion was to manage the program to the point that earnings would grow
sufficiently to offset the ongoing cost of expansion and to prevent the dilution
of earnings.
Total revenue has increased each quarter throughout 1997. Total interest income
for 1997 was $51,997,000, and the total of non-interest income was $5,366,000.
This compares to a total of interest income for 1996 of $46,384,000 and non-
interest income of $4,699,000. The 1996 totals include 9-1/2 months of income
resulting from the Kentucky acquisition. Greater competition, along with the
increased cost of funds associated with the development of new markets, caused
the net interest margin to be reduced from 5.49 percent in 1996 to 5.29 percent
in 1997. The total of non-interest expenses remains above normal levels
primarily due to costs associated with the expansion program. The total of non-
interest expenses for 1997 was $22,119,000 versus $19,100,000 for 1996. The 1996
expense includes 9-1/2 months of operating the Kentucky acquisition.
The centerpiece of our expansion program for the past two years was, of course,
the Kentucky acquisition. The balance of the program has involved the building
of de novo offices that normally have deficit operating results in the initial
phase of their operation. The challenge has been to generate sufficient earnings
elsewhere in the Company to prevent a dilution of overall earnings. Management
is pleased that the growth in revenue relative to expense has the Company
gaining the desired leverage from the program. Except for the impact caused from
additional office openings, the Company is on track to realize substantial
profitable growth from the expansion program.
The second major initiative was made possible by the Riegle-Neal Interstate
Banking and Branch Efficiency Act, which became fully effective on June 1, 1997.
This act allowed Matewan BancShares to merge the newly acquired Matewan National
Bank/Kentucky charter and our original Matewan National Bank charter into a
single company. Additionally, offices located in the Virginia market that were
part of the Matewan Bank, FSB charter were also brought under the umbrella of
Matewan National Bank.
These changes to our organizational structure will provide opportunities for
increased efficiency in several areas of operation. This structure lends itself
very well to efficient loan underwriting and loan administration. Many other
opportunities for increased efficiencies
1
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Message From The President
- --------------------------------------------------------------------------------
[PHOTOGRAPH OF DAN MOORE]
"Our involvement in
insurance and
investments, through
our subsidiary,
Matewan Insurance
and Investment, Inc.,
differentiates our
Company from many
other banking
competitors."
are presented in every area of the Company's operation. The merger of the
offices into Matewan National Bank occurred in the latter part of the year. It
is expected to yield positive benefits in 1998.
The third major initiative of the Company during the past year involved
expanding the scope of our Insurance and Investment Division. The Company
entered into an agreement with Acordia of West Virginia, Inc., which allows a
subsidiary of Matewan BancShares to begin offering a complete line of personal
and business insurance products throughout our markets in Virginia, Kentucky and
West Virginia. The agreement was negotiated in April, but training and various
organizational requirements were only completed in time for an October date to
begin business. This relationship has been created to increase Matewan
BancShares' product lines to include several credit-related products.
We expect that this new venture into insurance sales, coupled with a previously
established investment sales department, will make a significant contribution to
the non-interest revenue budgetary goals of our Company. Previously perceived
lines that existed to differentiate the many different financial products and
services are becoming increasingly blurred, and soon will be non-existent.
Insurance and financial companies of all types are venturing into each other's
lines of business. Our involvement in insurance and investments, through our
subsidiary, Matewan Insurance and Investments, Inc., differentiates our Company
from many other banking competitors.
The financial highlights for 1997 demonstrate that the growth and earnings
strategy employed by the Company has been effective.
The assets of the Company grew over $17,000,000 from the end of 1996 to
$644,858,000 at the end of 1997. The average balance of total assets increased
from $561,337,000 during 1996 to $622,647,000 for the year 1997. The average
balance of deposits grew during 1997 to $526,817,000 from the 1996 average
balance of $469,364,000. The total of loans outstanding grew from a 1996 average
balance of $339,865,000 to the 1997 average total balance of $381,216,000. The
Company has demonstrated consistent growth in assets, deposits and equity since
1993. The five-year summary information provided in the Report portrays
annualized average rates of growth since December 31, 1993 of 17 percent for
both assets and deposits and 20 percent for loans outstanding.
Net income, before income taxes, totaled $10,110,000 for 1997 and was slightly
down from the 1996 total of $10,169,000. The income comparisons reflect the
impact of expenses associated with the expansion program. Net income for 1997
equaled $6,615,000 compared to $6,462,000 for 1996.
Net income available to common shareholders is calculated net of dividends paid
on preferred stock. The total of dividends paid on preferred stock in 1997 was
approximately $1,370,000 compared to $1,236,000 in 1996. This served to reduce
net income available to common shareholders by $.375 per share in 1997 and
$.3375 per share in 1996.
Obviously, the financial impact from paying dividends on preferred stock is
significant to common shareholders. For this reason, the Company initiated a
program in the second quarter to repurchase a portion of the preferred shares
outstanding. This effort resulted in the Company repurchasing in excess of
176,000 shares which will positively impact common shareholders by $.09 per
share in 1998.
Earnings per share available to common shareholders was $1.44 in 1997 versus
$1.43 in 1996. Shareholders of common stock were paid dividends totaling $.48
per share in 1997 compared to $.44 in 1996, an increase of 9 percent. This is
the fifth consecutive year that cash dividends to shareholders have been
increased. The dividend paid for 1997 represents an increase of 70 percent over
the 1993 dividend paid of $.28 per share.
Embodied in the financial section of this Report is an immense amount of detail
on the financial structure of the Company as well as the performance measures
for the year 1997 and previous periods. The following financial ratios and
information, coupled with the growth
2
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[PHOTOGRAPH OF DAN MOORE]
"Management is
excited about the
potential that
exists for the
company in 1998."
[MAP OF MARKETS]
and earnings information discussed on page 2, will provide a financial snapshot
of the Company for its most current year.
The net interest margin remains strong for 1997 at 5.29 percent. However, this
is down from the 1996 margin of 5.49 percent and the five-year average of 5.59
percent. Non-interest income to average assets has trended upward from the five-
year low in 1993 of .73 percent to .86 percent in 1997. Non-interest expense to
total assets has increased from the five-year low of 3.16 percent in 1992 to
3.55 percent in 1997.
The Company continues to maintain a strong capital position as the average level
of shareholder equity has increased from the five-year low in 1993 of
$36,271,000 to a high in 1997 of $66,552,000. The ending balance of shareholder
equity was $65,763,000 and reflects the repurchase of nearly $5,324,000 of
preferred and common stock which is now held as treasury stock.
Asset quality continues to be favorable as measured by net charge offs to
average loans outstanding. This ratio is .81 percent for 1997 and was reduced
from .89 percent in 1996. Non-performing loans decreased from 1.45 percent of
outstanding loans in 1996 to 1.19 percent in 1997. Non-performing assets to
total assets fell from 1.01 percent in 1996 to .89 percent in 1997.
The market value of the common stock would tend to indicate that the assessment
by the investment community of the performance of the Company in 1997 has been
favorable. The market value of the stock increased from a low of $16.50 per
share in the first quarter of the year to a high in the fourth quarter of
$26.50. The total common stock market capitalization value of the Company, in
terms of year to year comparison, increased $22,600,000 during the year to a
total of $90,400,000 on December 31, 1997.
Management is excited about the potential that exists for the Company in 1998.
Our focus will continue to be on expanding our delivery system through new
offices, particularly in our Kentucky and Virginia markets. Our strategy will
continue to emphasize expansion that is tempered by our ability to generate
revenues sufficient to mitigate any dilution of earnings and therefore will be
governed by the overall earnings posture of the Company. At present, our plans
include additional offices in Virginia and Kentucky during 1998. The first
office to open in 1998 will be located in Tazewell, Virginia.
The Company is presently positioned and has sufficient resources and
infrastructure to expand through acquisition. Opportunities for growth in our
defined market area as well as in markets that are contiguous to our present
market area will be considered.
We expect to remain focused on increasing non-interest revenue through the sale
of insurance and investment products. The year 1998 will be the first full year
of insurance sales, and we anticipate a successful year.
I will close by expressing my appreciation to our employees, shareholders and
directors for your support of the Company. Our goal is to grow the franchise and
to increase shareholder value. Our success will translate into benefits for our
employees, the communities we serve, and our shareholders.
Sincerely,
/s/ Dan R. Moore
DAN R. MOORE
President and Chairman of the Board
3
<PAGE>
[MAP AND PHOTOS OF SERVICE AREA]
ValueBanking
4
<PAGE>
[MAP AND PHOTOS OF SERVICE AREA]
There's an exciting spirit pulsating across eastern Kentucky, southern West
Virginia and southwestern Virginia. It's a renewed spirit of energy, growth and
prosperity. The hardworking people of the Tri-State, along with our rich natural
resources and well-traveled highways, are creating an attractive environment for
commerce and tourism. At the heart of it all is Matewan BancShares. We're not
just a participant in the region's success; we're continually setting the pace
by providing technologically advanced financial services, such as full-service,
24-hour phone and PC banking... immediate account access from ATMs around the
globe... comprehensive business banking, including cash management... insurance
and investment services... and convenient in-store banking every day of the
week. No wonder more and more individuals, families and businesses are turning
to Matewan Banks for our unique brand of banking... ValueBanking. We stand alone
in our market for growth, profitability and investment.
A Vibrant Part of an Expanding Market
5
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
[PIE CHART OF
LOAN VOLUME BY STATE]
[PIE CHART OF
DEPOSIT CONCENTRATION
BY COUNTY]
INTRODUCTION
Matewan BancShares, Inc. (the Company) is a bank holding company headquartered
in Williamson, West Virginia. The Company's subsidiaries consist of a commercial
bank (Matewan National Bank or the "Bank"), a federally chartered "de novo"
savings bank (Matewan Bank FSB or "FSB"), and a venture capital company (Matewan
Venture Fund, Inc. or the "Fund"). The Company considers all of its principal
business activities to be banking related. It identifies as its core market area
the fifteen county region consisting of Mingo, Logan, Boone, Lincoln, and Wayne
counties in West Virginia, Pike, Floyd, Johnson, Letcher, and Martin counties in
Kentucky, and Buchanan, Tazewell, Wise, Washington, and Russell counties in
Virginia. The Bank has 15 full service offices and one loan office providing
services to customers in southern West Virginia, eastern Kentucky, and western
Virginia. These locations include offices of the former Matewan National
Bank/Kentucky (Kentucky) which was merged into the Bank in the third quarter of
1997. FSB, which is domiciled in Kentucky, presently has 6 offices in eastern
Kentucky. It is authorized to engage in all permissable thrift related
activities in any of its offices. The Fund was formed to develop new business,
rehabilitate and expand existing businesses, and expand the economic stability
of southern West Virginia. As of December 31, 1997, the Company had assets in
excess of $644 million, total net loans in excess of $397 million, and total
deposits in excess of $535 million.
The accompanying consolidated financial statements have been prepared by the
management of the Company in conformity with generally accepted accounting
principles. Financial information appearing throughout this annual report is
consistent with that reported in the consolidated financial statements. The
following is designed to assist readers of the consolidated financial statements
in understanding the significant changes in the Company's financial condition
and results of operations.
6
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[GRAPH OF
NET INCOME]
[GRAPH OF
RETURN ON AVERAGE ASSETS]
[GRAPH OF
TOTAL ASSETS]
SUMMARY FINANCIAL RESULTS
The Company's net income for 1997 was approximately $6.615 million. Net earnings
available to common shareholders, basic and diluted, was approximately $5.245
million. These numbers represent increases of approximately 2.4% and .3% from
levels attained in the previous year. Net income available for common
shareholders of $5.226 million in 1996 represents a nominal increase from the
$5.220 million realized in 1995.
Company performance in 1997 was impacted by a tightening net interest margin,
lower provisions for loan losses, and higher levels of both noninterest income
and noninterest expenses. Net interest income for 1997 actually increased in
terms of total volume by $1.957 million (7.1%). However, the actual net interest
margin was 5.29% compared to 5.49% for 1996. The former margin represents the
lowest in six years. Loan loss provision decreased $336 thousand (11.4%) in 1997
from 1996 levels. Noninterest income increased by $667 thousand (14.1%) in 1997
over 1996. However, the combination of lower loan loss provisions and higher
levels of noninterest income experienced in 1997 were not nearly enough to
offset increases in noninterest expense of approximately $3.019 million (15.8%)
incurred in 1997. Some of the 1997 increases in both noninterest income and
noninterest expenses recognize that operations acquired in the Kentucky purchase
provided twelve months worth of contribution in 1997 versus slightly over nine
months worth in 1996. Likewise, costs incurred by the Company to finance the
acquisition including amortization of goodwill, experienced twelve months of
activity in 1997 compared to nine months in 1996. Company net income levels for
1997 represent record levels for earnings in terms of absolute dollars.
Company performance in 1996 was significantly impacted by both the acquisition
and absorption of Kentucky and the completion of a preferred stock offering in
the first quarter of the year. Company performance in 1996 was largely a
function of the increases experienced over the prior year in net interest margin
($7.717 million or 38.9%) and non interest income ($1.397 million or 42.3%) more
than compensating for the increases experienced over the prior year relative to
loan loss provision ($1.037 million or 54.4%), non interest expenses ($6.111
million or 47.0%), and income tax expense ($724 thousand or 24.3%). Net interest
margin for 1996 was 5.49% versus 5.78% for 1995.
Return on average assets (ROA) measures how effectively the Company utilizes its
assets to produce its net income. The Company's ROA for 1997 was 1.06% compared
to 1.15% for 1996, and 1.38% for 1995. Return on average equity (ROE) reveals
how much income is earned in relation to the equity of the Company. The
Company's 1997 ROE was 9.94% compared to 10.37% in 1996 and 12.09% in 1995. The
relative declines over this three year period are more a function of the
Company's capital structure than any significant weakness in earnings. As can be
seen, ROE will fluctuate with earnings, however, ROE will not fluctuate
proportionally with net income due to changes in the equity structure of the
Company. It has been the Company's policy to retain a substantial portion of
earnings to help fund the growth the Company is experiencing and fund future
expansion. In addition, the impact of acquiring and absorbing Kentucky into the
Company has not yet had a positive impact on ROA and ROE calculations. The
Company's approximately $5.324 million repurchase of its outstanding common and
preferred shares in 1997 has not produced the beneficial financial statement
impact on average equity that would be realized over the course of a full year.
7
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Table I represents a summary of certain financial data of the Company.
Table I. Five Year Selected Financial Summary
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Years ended December 31
1997 1996 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Period end balances:
Total assets.................................... $644,858 $627,186 $401,034 $371,410 $342,949
Total earning assets............................ 582,798 553,743 357,237 332,371 309,627
Total deposits.................................. 535,274 523,308 334,387 310,647 291,153
Shareholders' equity............................ 65,763 67,578 45,817 41,803 38,032
Income for the period:
Total interest income........................... 51,997 46,384 32,442 28,524 27,428
Total interest expense.......................... 22,525 18,869 12,644 10,543 9,774
Net interest income............................. 29,472 27,515 19,798 17,981 17,654
Provision for loan losses....................... 2,609 2,945 1,908 1,643 1,285
Noninterest income.............................. 5,366 4,699 3,302 2,802 2,395
Noninterest expense............................. 22,119 19,100 12,989 11,259 10,372
Net income before taxes......................... 10,110 10,169 8,203 7,881 8,392
Applicable income taxes......................... 3,495 3,707 2,983 2,876 3,269
Net income...................................... 6,615 6,462 5,220 5,005 5,123
Net income available to common
shareholders................................... 5,245 5,226 5,220 5,005 5,123
Per share data:
Net income available to common
shareholders, basic & diluted.................. $ 1.44 $ 1.43 $ 1.42 $ 1.36 $ 1.40
Common shareholders' equity..................... 14.35 13.44 12.49 11.40 10.37
Common cash dividends........................... .48 .44 .38 .31 .28
Preferred cash dividends........................ 1.88 1.54 -- -- --
Key performance ratios:
Net income to:
Average assets................................. 1.06% 1.15% 1.38% 1.40% 1.56%
Average shareholders' equity................... 9.94 10.37 12.09 12.39 14.12
Average shareholders'equity to
average assets................................. 10.69 11.10 11.40 11.27 11.07
Net interest margin............................. 5.29 5.49 5.78 5.53 5.88
Noninterest income to average assets............ .86 .84 .87 .78 .73
Noninterest expense to average assets........... 3.55 3.40 3.43 3.14 3.16
Efficiency ratio................................ 63.49 59.29 56.23 54.17 51.73
Risk-based capital measures:
Tier 1 risk-based ratio......................... 13.16% 13.87% 17.89% 17.98% 17.63%
Total risk-based ratio.......................... 14.41 15.63 19.09 19.23 18.88
Leverage capital ratio.......................... 8.47 9.64 11.64 10.76 10.49
Other significant measures:
Dividend payout................................. 33.03% 30.85% 26.82% 22.82% 20.34%
Percent change in dividend...................... 9.09 15.79 22.59 9.60
Percent change in net income.................... 2.40 .11 4.30 (2.30) 1.18
Percent change in total asset................... 2.81 56.39 7.98 8.30 4.19
Equity growth................................... (2.68) 47.50 9.60 9.92 12.02
Asset quality:
Net charge-offs to average
loans outstanding.............................. .81% .89% .84% .82% .44%
Non-performing loans to total
year end loans................................. 1.19 1.45 1.14 1.08 .65
Non-performing assets to total
year end assets................................ .89 1.01 .78 .67 .42
Allowance for loan losses to total
year end loans................................. 1.36 1.59 1.28 1.35 1.49
Allowance for loan losses to
non-performing loans........................... 114.65 109.63 113.78 125.14 230.79
</TABLE>
8
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Average Balance Sheets
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks......................... $ 22,108 $ 22,189 $ 17,391 $ 16,891 $ 12,555
Interest bearing deposits....................... 1,643 2,948 683 3,584 209
Investment securities........................... 153,096 140,354 108,634 104,686 106,122
Federal funds sold.............................. 21,419 18,439 11,613 13,710 11,723
Loans net....................................... 381,216 339,865 221,844 203,278 181,996
Bank premises & equipment....................... 20,350 18,346 9,412 8,364 7,139
Other assets.................................... 22,815 19,196 9,156 8,161 7,985
-------------------------------------------------------
Total Assets.................................... $622,647 $561,337 $378,733 $358,674 $327,729
=======================================================
Liabilities and Shareholders' Equity:
Deposits:
Transaction accounts........................... $148,931 $130,187 $ 83,135 $ 82,048 $ 74,280
Savings deposits............................... 76,510 76,906 52,624 52,551 43,947
Time deposits.................................. 301,376 262,271 180,518 168,162 163,067
Borrowed funds................................. 22,116 23,119 15,885 13,098 7,706
Accrued liabilities & other..................... 7,162 6,533 3,392 2,404 2,458
-------------------------------------------------------
Total liabilities............................... 556,095 499,016 335,554 318,263 291,458
Shareholders' equity............................ 66,552 62,321 43,179 40,411 36,271
-------------------------------------------------------
Total Liabilities & Shareholders' Equity........ $622,647 $561,337 $378,733 $358,674 $327,729
=======================================================
</TABLE>
See the discussion of acquisition activity for matters that affect the
comparability of the above information.
[GRAPH OF
EARNINGS PER SHARE
BASIC AND DILUTED]
Table I portrays consistent growth in both total assets and equity from 1993
through 1997. This growth can be attributed to the management plan that has
systematically produced expansions and acquisitions in the market area in which
the Company operates. In 1994, the Company formed a "de novo" thrift subsidiary,
and opened two offices in Pikeville, Kentucky and Paintsville, Kentucky. In
1995, FSB opened two more offices located in supermarkets in Pikeville and
Goody, Kentucky. In 1996, FSB opened offices in Prestonsburg and Whitesburg,
Kentucky and Richlands and Abingdon, Virginia. In addition, in the first quarter
of 1996, the Company consummated the purchase of Kentucky, providing an
additional four offices in Pike County, Kentucky. In 1997, with true interstate
banking a viable option for offices in the Company's market area, Kentucky was
merged into the Bank and the Virginia offices of FSB were converted to offices
of the Bank. The Bank also opened two additional supermarket branch offices in
Lebanon and Vansant, Virginia. These acquisitions, expansions, and increased
market penetration in the Company's core market area have accounted for this
five year growth.
Table I also depicts that pretax income declined .58% and aftertax income
experienced growth of approximately 2.37% in 1996. Earnings available for common
shareholders increased .36% in 1997. One of management's goals in the 1996
acquisition of Kentucky was for the acquisition to be accretive to the common
shareholders of the Company. This goal was realized in terms of earnings per
share measures. Company performance for 1997 remained accretive to common
shareholders. Earnings per share available to common shareholders of $1.44, both
basic and diluted, represents a $.01 increase over the comparable prior year
measure. Actual dollar level for earnings available to common shareholders of
$5.245 million represents a new
9
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
[GRAPH OF
BOOK VALUE PER SHARE]
[GRAPH OF
DIVIDENDS PER SHARE]
[GRAPH OF
DIVIDEND DATA]
record for the Company. Net earnings for 1996 experienced 23.97% and 23.79%
increases for pretax and aftertax levels, respectively. In terms of earnings per
share, this represents a $.01 increase in the current year, following a $.06
increase in 1995. Comparable changes for 1994 and 1993 were a decline of $.04
and an increase of $.02, respectively. Over the past five years, book value per
common share has increased steadily from a level of $10.37 per share in 1993 to
$14.35 at the end of 1997.
Management is not aware of any trends, events, or uncertainties, either
favorable or unfavorable, that are reasonably likely to have a material effect
on the Company's liquidity, capital resources, or results of operations. There
are no current recommendations by regulatory authorities which, if implemented,
would have a material effect on the Company. The Company has no outstanding
loans that have been classified for regulatory purposes as loss, doubtful
substandard, or special mention that result from trends or uncertainties which
management reasonably expects to materially impact future operating results,
liquidity, or capital resources.
Market for Company's Stock
The Company's common stock (symbol: MATE) is listed for trading on the National
Association of Securities Dealers Automated Quotation System National Market
System. Prior to its listing on June 1, 1994, there existed no trading market
for the Company's common stock.
In March of 1996, the Company successfully completed an offering for a new class
of 7.5% Cumulative Convertible Preferred Stock, Series A. Concurrent with this
closing and the subsequent exercise of the underwriter's overallotment option,
the Company issued 805 thousand shares of preferred stock generating a capital
infusion of approximately $18.396 million, representing the net proceeds. The
Company's new class of preferred stock is currently traded on the National
Association of Securities Dealers Automated Quotation System Small-Cap Market
under the symbol MATEP.
The following table sets forth the high and low sales prices of common stock for
each quarterly period during 1997 and 1996 as reported by the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
High Low Dividend High Low Dividend
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter.............. $26.50 $22.00 $.12 $18.50 $17.00 $.12
Third Quarter............... 25.50 19.50 .12 18.75 16.00 .12
Second Quarter.............. 20.00 17.75 .12 19.00 16.25 .10
First Quarter............... 19.25 16.50 .12 21.50 18.00 .10
</TABLE>
The following table sets forth the high and low sales prices of preferred stock
for each quarterly period during 1997 and 1996 as reported by the National
Association of Securities Dealers, Inc.
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
High Low Dividend High Low Dividend
------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Fourth Quarter.............. $27.75 $26.00 $.47 $25.75 $24.25 $.47
Third Quarter............... 28.00 26.25 .47 26.00 24.00 .47
Second Quarter.............. 27.25 24.25 .47 26.25 24.00 .47
First Quarter............... 25.25 24.25 .47 26.00 25.00 .14
</TABLE>
10
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
As of January 31, 1997, there were 673 holders of record of the Company's stock
and 67 holders of record of the Company's preferred stock.
The Company currently intends to pay regular quarterly cash dividends on its
common stock, subject to the Company's needs for funds. However, the Company'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 the Company'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 the
Company.
On January 14, 1997, the Company's Board of Directors authorized the repurchase
of its 7.5% Cumulative Convertible Preferred Stock, Series A for an amount of up
to $3.0 million. In April, 1997, the Board authorized the repurchase of 114,500
shares of the Preferred Stock via a tender offer to be issued in the second
quarter and subsequent repurchase of another 120,000 shares via open market
transactions subsequent to consummation of all tender offer transactions. To
this end, on April 30, 1997, the Company filed a Schedule 13E-4 with the
Securities and Exchange Commission for the purpose of issuing a tender offer to
holders of its Preferred Stock to repurchase the 114,500 shares at a price to be
determined via the offering, but in no event to be less than $24.00 or greater
than $26.50 per share. The Company subsequently filed an amended Schedule 13E-4
to extend the original tender offer another ten days. On June 13, the Company
closed the tender offer and repurchased 39,042 shares of preferred stock for
approximately $1.035 million. Subsequently, the Company repurchased another
137,000 shares for approximately $3.755 million in privately negotiated
transactions.
On January 10, 1995, the Company's Board of Directors authorized the repurchase
of up to 100,000 shares of its common stock. 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.
EXPANSION ACTIVITY
On September 28, 1995, the Company entered into a definitive agreement
(Agreement) with Banc One Corporation and Banc One Kentucky Corporation under
which the Company agreed to purchase from Banc One Kentucky Corporation one
hundred percent (100%) of the voting stock of the Bank One, Pikeville N.A.
("Pikeville") franchise, subject to the appropriate regulatory approvals.
Consummation of this transaction occurred March 15, 1996, using the purchase
method of accounting. On March 18, 1996, Pikeville resumed operations as Matewan
National Bank/Kentucky ("Kentucky") adding total assets of approximately $204
million and deposits of approximately $183 million to the consolidated totals of
the Company. Kentucky contributed approximately 84% of the growth experienced by
the Company in 1996 and 29% of its consolidated net income. Kentucky was
subsequently merged into the Bank in September of 1997.
On January 3, 1994, the Company contributed capital of $4 million to form FSB, a
wholly-owned federal savings bank subsidiary of the Company. FSB commenced
operations on the same date. Its business volume comprised approximately 12.92%
of Company business volume in 1997 compared to approximately 10.15% overall
business volume in 1996.
11
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
FSB contributed approximately 9% and 6% of the Company's consolidated net income
for the years 1997 and 1996, respectively.
FINANCIAL CONDITION
The Company's primary sources of revenue are generated by its earning assets,
while its primary expenses are incurred by the funding of these assets with
various interest bearing liabilities. Following is a discussion of earning
assets and interest bearing liabilities for the three years in the period ended
December 31, 1997.
Average earning assets increased $55.768 million or 11.1% in 1997 over 1996.
Inclusion of Kentucky operations for the full twelve months in 1997 versus
inclusion for nine and one-half months in the prior year accounted for
approximately 25% of the increase with core growth in the Company's market area
accounting for the remainder. Average net loans increased approximately $41.351
million (12.2%) and average investment securities increased approximately
$12.742 million (9.1%) over the same period in 1996. Average interest bearing
deposits decreased approximately $1.305 million (44.3%) and average federal
funds sold increased approximately $2.980 million (16.2%) for 1997 versus 1996.
Average earning assets increased approximately $158.832 million or 46.3% in 1996
over 1995. Consolidation of Kentucky's average asset balances for the nine and
one-half month period that it was an affiliate of the Company accounted for
approximately 87.4% of the increase. Average net loans outstanding increased
approximately $118.021 million (53.2%, of which 80.5% was attributable to
Kentucky) while average investment securities volume increased approximately
$31.72 million (29.2%, nearly all attributable to Kentucky) and average interest
bearing deposits increased approximately $2.265 million (331.6%). Average
federal funds sold increased approximately $6.8 million (58.8%).
Average interest bearing liabilities are the primary source of funds that
support the Company's earning assets. In 1997, average interest bearing
liabilities increased approxi-mately $50.376 million (11.7%). Average
transaction accounts increased approximately $18.744 million (14.4%), average
savings deposits decreased $.396 million (.5%), average time deposits increased
$39.105 million (14.9%), and average purchased funds, primarily commercial
repurchase agreements, decreased approximately $1.003 million (4.3%) in 1997
versus 1996.
In 1996, average interest bearing liabilities increased approximately $140.916
million (48.8%). Average transaction accounts increased approximately $28.768
million (79.7%), average savings deposits increased $24.197 million (45.9%),
average time deposits increased $80.718 million (44.5%), and average purchased
funds, primarily commercial repurchase agreements, increased approximately
$7.234 million (45.5%) in 1996 over 1995. Most of the increases were
attributable to Kentucky.
12
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
TABLE II. Analysis of Earning Assets and Interest Bearing Liabilities
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------ ----------------------------- --------------------------
Earning Assets: Average Yield Average Yield Average Yield
Loans Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------ ----------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $110,167 $11,245 10.21% $ 95,230 $10,158 10.67% $ 65,091 $ 6,851 10.53%
Real estate.............................. 148,007 15,086 10.19 130,139 13,403 10.30 80,683 8,470 10.50
Consumer................................. 123,042 14,815 12.04 114,496 13,022 11.37 76,070 10,003 13.15
------------------------------ ----------------------------- --------------------------
Total loans............................... 381,216 41,146 10.79 339,865 36,583 10.76 221,844 25,324 11.42
Securities
Taxable.................................. 143,189 9,158 6.40 132,317 8,248 6.23 106,138 6,272 5.91
Tax exempt............................... 9,907 528 5.33 8,037 419 5.21 2,496 146 5.85
------------------------------ ----------------------------- --------------------------
Total securities.......................... 153,096 9,686 6.33 140,354 8,667 6.18 108,634 6,418 5.91
Federal funds sold........................ 21,419 1,077 5.03 18,439 994 5.39 11,613 660 5.68
Interest bearing deposits
in banks................................. 1,643 88 5.36 2,948 140 4.75 683 40 5.86
------------------------------ ----------------------------- --------------------------
Total earnings assets..................... 557,374 $51,997 9.33% 501,606 $46,384 9.25% 342,774 $32,442 9.46%
=================== ================= ===============
Non-earning assets:
Other assets............................. 65,273 59,731 35,959
--------- --------- ---------
Total assets.............................. $622,647 $561,337 $378,733
========= ========= =========
</TABLE>
Nonaccrual loans are included in average balances.
Yields on tax exempt securities are on a pretax basis and do not represent tax
equivalent yields.
<TABLE>
<CAPTION>
Liabilities and Shareholders' Equity
Year Ended Year Ended Year Ended
December 31, 1997 December 31, 1996 December 31, 1995
------------------------------ ----------------------------- --------------------------
Average Cost Average Cost Average Cost
Interest Bearing Liabilities: Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------ ----------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts..................... $ 79,719 $ 2,848 3.57% $ 67,256 $ 2,217 3.30% $ 38,488 $ 1,185 3.08%
Savings deposits......................... 76,510 2,307 3.02 76,906 2,321 3.02 52,709 1,770 3.36
Time deposits............................ 301,376 16,221 5.38 262,271 13,337 5.09 181.554 9,112 5.02
Purchased funds.......................... 22,116 1,149 5.20 23,119 994 4.30 15,885 577 3.63
------------------------------ ----------------------------- --------------------------
Total interest bearing liabilities........ 479,721 22,525 4.70 429,552 18,869 4.39 288,636 12,644 4.38
------------------- ----------------- ---------------
Noninterest bearing
liabilities and capital:
Demand deposits.......................... 69,212 62,931 43,526
Accrued expenses and other............... 7,162 6,533 3,392
Total shareholders' equity............... 66,552 62,321 43,179
--------- --------- ---------
Total noninterest bearing liabilities
and capital.............................. 142,926 131,785 90,097
--------- --------- ---------
Total liabilities and capital............. $622,647 $561,337 $378,733
========= ========= =========
Net interest income....................... $29,472 $27,515 $19,798
======== ======== ========
Spread.................................... 4.63% 4.86% 5.08%
====== ====== ======
Net interest margin....................... 5.29% 5.49% 5.78%
====== ====== ======
</TABLE>
13
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
[GRAPH OF
LOANS OUTSTANDING]
[PIE CHART OF
LOAN PORTFOLIO DISTRIBUTION]
[PIE CHART OF
LOAN PORTFOLIO DISTRIBUTION
BY COLLATERAL]
LOAN PORTFOLIO
The Company offers a variety of lending services, including commercial and
financial, real estate and consumer loans. The Company, 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.
The Company's philosophy with regard to the lending function is to maintain a
strategic asset mix wherein the loan portfolio represents approximately sixty-
five percent (65%) of the Company's total assets and a loan to deposit ratio of
seventy-five percent (75%). More specifically, the targeted mix of the loan
portfolio is equally distributed towards the real estate, commercial, and
consumer categories. At December 31, 1997, the actual distribution was 39% real
estate, 33% consumer, and 28% commercial. The comparable distributions at
December 31, 1996 were not significantly different. The primary focus for all
categories of lending is the fifteen county market area in southern West
Virginia, eastern Kentucky, and western Virginia that the Company has identified
as its core market.
By definition, credit concentrations consist of direct, indirect, or contingent
liabilities exceeding twenty five percent (25%) of the Company's capital base.
Concentrations are considered to involve a single borrower, an affiliated
borrower, a group of borrowers engaged in or dependent on a single industry, or
a group of borrowers with similar credit categorizations. The Company has no
foreign loans or loan concentrations to individual or related borrowers which
exceed 10% of total loans. By definition, two major types of concentrations
exist for the Company: (i) those delineated by loan category and (ii) that of a
single industry concentration. Loan categories having in excess of twenty-five
percent (25%) 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 type of concentration relates to the general overall
reliance on the coal industry prevalent throughout the Company's market area.
Given the market area's dependence on this industry, the Company's avoidance of
concentration is neither likely nor practical.
Although the Company has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their obligations is 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. The Company attempts to
diversify this particular concentration somewhat by (i) avoiding concentration
of, or reliance on, one company or one company and its employees, suppliers, or
independent coal operators or contractors, (ii) spreading the commercial
portfolio throughout its market area in southern West Virginia, eastern Kentucky
and western Virginia, and (iii) engaging in business involving different coal
companies and different types of coal. 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. The direct
coal related credits in the Company's loan portfolio actually represents less
than 5% of the total net portfolio.
The majority of loans outstanding are collateralized by real estate, commercial
equipment, and personal consumer goods. At December 31, 1997, one to four family
residential real estate
14
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
secured approximately 36% of the net loan portfolio, commercial equipment and
vehicles secured approximately 6%, automobiles secured approximately 18%, and
commercial real estate secured approximately 13%. Principally all of the
commercial real estate securing the loans noted above is within the market area
served by the Company, where such real estate values have not been significantly
affected by the significant fluctuations which have caused the collateral value
problems in other regions of the country. No other individual category makes up
10% or more of the loan portfolio.
Real estate loans represent the largest component of the Company's loan
portfolio. The majority of real estate loans outstanding in terms of both dollar
volume and number of loans have been made within the identified core market area
of the Company. One to four family residential real estate represents most of
the collateral for this category. Company loan policy maintains uniform and
minimum standards for determining creditworthiness of potential real estate
borrowers, requiring conformity to FNMA and FHLMC standard requirements,
including debt/worth and loan/appraised value ratios. Maximum allowable levels
for loan/value ratios for the most prevalent types of real estate lending are
eighty percent (80%) for one to four family residences, seventy-five percent
(75%) for land development, and sixty-five percent (65%) for raw, unimproved
residential land. In addition, minimum standard parameters regarding down
payment, loan term, and risk-based determined loan rates are employed by the
Company.
Consumer loans represent the second largest component of the Company's loan
portfolio in terms of dollar volume. The majority of the Company's consumer
loans have been made within the Company's core market area. Automobile loans
comprise the largest single type of consumer credit category, approximating one-
half of the total consumer portfolio. Loan policy mandates minimum underwriting
standards depending on the nature of credit involved, including the applicant's
employment history, disposable income and debt/income ratios, net worth, credit
scores, downpayment requirements, loan terms, and collateral. While Company
policy emphasizes secured lending, unsecured consumer credits within established
guidelines is permitted by policy.
Commercial loans represent both the smallest component of the Company's loan
portfolio and the largest and most concentrated risks found therein. In terms of
geographic concentration, the majority of the dollar volume of outstanding loans
in this portfolio category have been made within the Company's core market area.
The majority of the loans in this category are collateralized with either coal
mining equipment and/or coal trucks or other commercial real estate or
equipment. Minimum commercial loan underwriting and documentation standards
include, among other requirements, current financial information, demonstration
of adequate cash flow, adequate and perfected lien positions, and sufficient
collateral coverage and insurance. Minimum standards similarly exist for
downpayment and/or equity coverage, loan term, and risk-based interest rate
determination - all dependent on the nature and type of credit involved. Loan
policy prescribes for the most part variable rate pricing of some predetermined
and prominently recognized index - usually Wall Street Journal Prime.
The population of the fifteen county core market area declined substantially
during the decade of 1980 to 1990, before reversing course in the early 1990s.
Total households, which tend to be larger in this market than most national
averages, similarly fell over the same time period,
15
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
although not as drastically as population readings would suggest. A majority of
these households (approximately 70%) own their domiciles which have a median
dwelling value in excess of $40 thousand. Median household income for the area
is just below $19 thousand, with approximately forty percent (40%) of the
households having incomes in excess of $25 thousand. As the Company has expanded
its market area and locations over the last several years, it has tended to find
that its newer markets possess demographic profiles well above these levels.
Mining, of course, remains the dominant industry in the local economy, however,
the dominant employers in the market are, in no particular order, education,
government services, and health care services. Blue collar occupations dominate
most employment readings representing over fifty percent (50%) of the work
force. It is important to reiterate that the single most powerful industrial
factor operating in the core market area relates to the dependence directly and
indirectly on the coal industry. The following table shows the composition of
the Company's loan portfolio:
TABLE III. Consolidated Summary of Loans
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands) Years ended December 31
1997 1996 1995 1994 1993
-------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial loans................. $118,999 $108,240 $ 63,581 $ 64,821 $ 69,372
Real estate loans................ 157,290 144,693 88,197 76,908 66,638
Consumer loans................... 127,365 125,163 80,796 77,564 65,107
-------------------------------------------------
Subtotal......................... 403,654 378,096 232,574 219,293 201,117
Less: Unearned income............ 543 1,309 1,033 1,617 2,303
-------------------------------------------------
Subtotal......................... 403,111 376,787 231,541 217,676 198,814
Less: Reserve for loan losses.... 5,478 5,986 2,973 2,932 2,961
-------------------------------------------------
Net loans........................ $397,633 $370,801 $228,568 $214,744 $195,853
=================================================
</TABLE>
At December 31, 1997, net loans approximated $398 million as compared to $371
million on December 31, 1996. Real estate loans increased approximately $12.6
million (8.7%). Consumer loans increased approximately $2.2 million (1.8%).
Commercial loans increased approximately $10.8 million or 9.9%. Growth in all
loan categories represents normal core business growth within the Company's
defined market area.
At December 31, 1996, net loans approximated $371 million as compared to $228
million on December 31, 1995. Real estate loans increased approximately $56.5
million (64.1%). Approximately 80% or $45.2 million of this increase could be
attributed to Kentucky. Consumer loans increased approximately $44.4 million, of
which approximately $35 million or 78.8% of the increase could be attributed to
Kentucky. Commercial loans increased approximately $43.4 million or 68.2%.
Kentucky accounted for approximately $34.5 million or 79% of the increase in
volume.
As Table III illustrates, the Company has a relatively balanced loan portfolio
with increasing emphasis being placed on the commercial and real estate markets.
The maturity distribution of the Company's gross loans at December 31, 1997 is
summarized as follows in Table IV:
16
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[GRAPH OF
LOAN COVERAGE]
TABLE IV. Remaining Maturities of Loans
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance After
December 31 One Year 1 To 5 Five
1997 Or Less Years Years
-----------------------------------------
<S> <C> <C> <C> <C>
Commercial loans............... $118,999 $ 85,062 $ 31,552 $ 2,385
Real estate loans.............. 157,290 56,553 86,138 14,599
Consumer loans................. 127,365 47,268 71,920 8,177
-----------------------------------------
Total loans.................... $403,654 $188,883 $189,610 $25,161
=========================================
Loans due after one year:
With floating rates........... $ 5,519
===========
With predetermined rates...... $209,252
===========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries are credited to the
allowance. On January 1, 1995, the Company adopted Financial Accounting
Standards Board (FASB) Statement No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by FASB Statement No. 118. Under this
standard, the allowance for loan losses related to loans that are identified for
evaluation in accordance with Statement 114 is based on discounted cash flows
using the loan's initial effective interest rate or the fair value of the
collateral for certain collateral dependent loans. Prior to 1995, the allowance
for loan losses related to these loans was based on undiscounted cash flows or
the fair value of collateral for collateral dependent loans. The adoption of
this pronouncement did not materially impact the Company's financial statements,
accounting policies, non-performing loans, or determination of the adequacy of
the allowance for loan losses.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated loan losses. Management's periodic evaluation of
the adequacy of the allowance is based on the Company's past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrowers' ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, current economic conditions, and other relevant factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received of impaired
loans that is susceptible to significant change.
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.
For a given period, the provision for loan losses, less net charge-offs,
comprises the allowance for loan losses for that period. In management's
judgement, the allowance for loan losses is maintained at a level adequate to
absorb potential losses on existing loans and loan commitments.
Accrual of interest is generally discontinued when a loan becomes ninety 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
17
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
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. Loans in foreclosure and liquidation proceedings are immediately
placed on nonaccrual status. A nonaccrual loan may be restored to an accrual
basis when interest and principal payments are made current, the credit performs
in accordance with contractual terms for a reasonable period of time, and
prospects for future payments are no longer in doubt.
The allowance for loan losses at December 31, 1997 was approximately $5.478
million compared to approximately $5.986 million in 1996, a decline of
approximately $.508 million or 8.5%. The ratio of net charge-offs to average net
loans was .81% in 1997 as compared to .89% in 1996. The ratio of allowance for
loan losses to non-performing loans, the "coverage ratio," provides a
quantifiable estimate of the coverage available in the loan loss allowance
towards problem credits. The coverage ratio was 114.65% and 109.64% for the
years 1997 and 1996, respectively. The ratio of non-performing loans to total
year end loans were 1.19% and 1.45% for 1997 and 1996, respectively. The ratio
of loan loss provision to net charge-offs was 83.7% and 95.5% for 1997 and 1996,
respectively.
Management aggressivelly pursues problem credits in all segments of its
portfolio, and maintains a comprehensive program of restructuring or disposing
of problem loans. At the implementation of this program, management recognized
that the adoption of such an aggressive posture would entail having to absorb
some charges to the loan loss allowance that could, at least initially, be of a
substantially heavier volume than historical comparisons would suggest.
Management also recognized that dealing with some of these problem credits in
this aggressive manner would result in some credits becoming classified assets
and being reported as classified assets that in prior years would not have been
recognized as such. Accordingly, non-performing levels were anticipated to be
much heavier than prior period comparisons would indicate, although it was the
opinion of management that these higher levels of non-performing loans did not
contain an additional proportionate level of credit exposure. Management further
recognized that these anticipated charges and reclassifications would be
occurring in a period of time in which normal and continuing provisions to loan
loss allowance to reflect and to cover current period loan activity would also
have to be made. In connection with the acquisition of Kentucky in 1996, problem
credits and related allowance for loan losses increased and higher charge-offs
were incurred in both 1996 and 1997 as these credits have been subjected to
continuous management attention. Management determined at the outset that (i)
there existed sufficient coverage in the loan loss allowance at that time to
absorb the effect of anticipated higher charge-offs without any accompanying
increase in the provision and (ii) on an ongoing basis, provisions to loan loss
allowance would continue to be made to reflect any additional exposure to the
loan portfolio. Management further maintained its vigilant and aggressive
approach towards identifying, monitoring, and treating problem credits, both
actual and anticipated.
18
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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
1997 1996 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding at end of year..................... $403,111 $376,787 $231,541 $217,676 $198,814
==========================================================
Daily average amount of loans.................................. $386,502 $345,062 $221,844 $203,278 $181,996
==========================================================
Balance of allowance for loan losses at beginning of year...... $ 5,986 $ 2,973 $ 2,932 $ 2,961 $ 2,470
Loans charged off:
Commercial.................................................... 438 436 533 854 318
Consumer...................................................... 3,391 2,996 1,724 1,205 804
Real estate................................................... 312 306 137 69 92
----------------------------------------------------------
Total loans charged off........................................ 4,141 3,738 2,394 2,128 1,214
Recoveries of loans previously charged off:
Commercial.................................................... 102 142 104 107 156
Consumer...................................................... 766 492 411 294 228
Real estate................................................... 156 20 12 55 36
----------------------------------------------------------
Total recoveries............................................... 1,024 654 527 456 420
----------------------------------------------------------
Net loans charged off.......................................... 3,117 3,084 1,867 1,672 794
Additions to allowance:
Charged to expense............................................ 2,609 2,945 1,908 1,643 1,285
Incidental to acquisition..................................... 3,152
----------------------------------------------------------
Balance at end of year......................................... $ 5,478 $ 5,986 $ 2,973 $ 2,932 $ 2,961
==========================================================
Ratio of net charge-offs during year to average loans.......... 0.81% 0.89% 0.84% 0.82% 0.44%
==========================================================
Ratio of loan loss provision to net charge-offs................ 83.7% 95.5% 102.2% 98.3% 161.8%
==========================================================
Ratio of allowance for loan losses to non-performing loans..... 114.7% 109.6% 113.8% 125.1% 230.8%
==========================================================
</TABLE>
TABLE VI. Allocation of Allowance for Loan Losses
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995 1994 1993
Allocation Category Allocation Category Allocation Category Allocation Category Allocation Category
of as a % of as a % of as a % of as a % of as a %
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......... $1,933 29.4% $1,996 28.6% $ 955 27.3% $ 2,106 29.5% $ 2,150 34.5%
Real estate........ 901 39.0 1,141 38.3 638 37.9 210 35.1 305 33.1
Consumer........... 2,644 31.6 2,849 33.1 1,380 34.8 616 35.4 506 32.4
------------------------------------------------------------------------------------------------------------
$5,478 100.0% $5,986 100.0% $2,973 100.0% $ 2,932 100.0% $ 2,961 100.0%
============================================================================================================
</TABLE>
CONSOLIDATED SUMMARY OF NON-PERFORMING ASSETS
Non-performing assets consist of nonaccrual loans, loans more than ninety days
past due, and other real estate owned.
At December 31, 1997, non-performing assets declined by approximately $.618
million from prior year levels, or approximately 9.7%, to .88% of total assets
as compared to 1.01% of total assets at December 31, 1996. The decrease was
attributable to a combination of management's increasingly aggressive posture in
dealing with problem credits, the desire for a conservatively valued loan
portfolio, and overall collection efforts. Management continues to vigilantly
19
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
monitor these types of assets to evaluate, control, and insure that their
ultimate disposition does not have a material negative impact on the Company's
financial position. Of the loans held in nonaccrual status in 1997, if interest
had been accrued on these loans based upon their original terms, income before
taxes would have increased by approximately $499 thousand. A total of
approximately $143 thousand in interest was actually received on these accounts.
Other real estate owned, which is recorded at the lower of cost or market,
represents the real estate of which the Company has taken ownership in full or
partial satisfaction of loans. Approximately 35.2% of the other real estate
owned is of a nonresidential nature.
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>
1997 1996 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-performing assets:
Nonaccruing loans................................... $2,987 $4,416 $1,995 $1,743 $1,037
Loans past due 90 days.............................. 1,791 1,044 618 600 246
----------------------------------------------------------
Total non-performing loans........................... 4,778 5,460 2,613 2,343 1,283
Other real estate owned............................. 943 879 524 137 156
----------------------------------------------------------
Total non-performing assets.......................... $5,721 $6,339 $3,137 $2,480 $1,439
==========================================================
Non-performing loans as a percent of total loans..... 1.19% 1.45% 1.13% 1.08% .65%
==========================================================
Non-performing assets as a percent of total assets... .89% 1.01% .78% .67% .42%
==========================================================
Troubled debt restructurings......................... $ 513 $ -- $ 70 $ -- $ 141
==========================================================
</TABLE>
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 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 and implementation of this standard has not had a
material effect on the Company's financial statements.
At December 31, 1997, the recorded investment in impaired loans under Statement
No. 114 was $11.040 million (of which $2.987 million were on a nonaccrual
basis). Included in this amount was $1.532 million of impaired loans for which
the relative allowance for credit losses is $.705 million and $9.508 million of
impaired loans that do not have a specific allowance for credit losses. The
average recorded investment in impaired loans for the year ended December 31,
1997 approximated $10.895 million. For the year ended December 31, 1997, the
Company recognized interest income on those impaired loans of $.712 million,
which included $.739 million of interest income recognized using the cash basis
method of income recognition.
At December 31, 1996, the recorded investment in impaired loans under Statement
No. 114 was $10.922 million (of which $1.733 million were on a nonaccrual
basis). Included in this amount was $1.986 million of impaired loans for which
the relative allowance for credit losses
20
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[PIE CHART OF
INVESTMENT
PORTFOLIO DISTRIBUTION]
is $.756 million and $8.936 million of impaired loans that do not have a
specific allowance for credit losses. The average recorded investment in
impaired loans for the year ended December 31, 1996 approximated $9.525 million.
INVESTMENT PORTFOLIO AND OTHER EARNING ASSETS
The second largest component of earning assets is investment securities. The
Company's investment portfolio is comprised predominantly of United States
Government and Federal Agency obligations. The Company's portfolio is designed
to enhance liquidity while providing acceptable rates of return. By achieving
this, the investment portfolio helps promote the Company's asset/liability
management.
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Company has the ability at the
time of purchase to hold securities to maturity on a longer term basis, they are
classified as investments held to maturity and carried at amortized historical
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.
The Company does not hold investment securities for trading purposes. The
Company adopted the provisions of Financial Accounting Standards Board Statement
No. 115 ("SFAS 115"), the current standard for investments held as of or
acquired after 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 the shareholders' equity account at January 1, 1994
was increased approximately $127 thousand (net of deferred income taxes of $30
thousand) to reflect the unrealized holding gains on securities classified as
available-for-sale previously carried at amortized cost. At December 31, 1997
unrealized holding losses on available-for-sale securities, net of deferred
income taxes, of approximately $53 thousand, have been recorded as a separate
component of shareholders' equity.
21
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
TABLE VIII. Investment Securities
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
U.S. Federal State & Other Weighted
Treasury Agencies Municipal Securities Total Yield
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1997
Maturity:
Within 1 year....................... $ 7,083 $ 17,227 $ 2,563 $ -- $ 26,873 5.56%
After 1 year through 5 years........ 7,001 73,988 4,610 189 85,788 6.15
After 5 years through 10 years...... -- 32,366 226 -- 32,592 6.74
After 10 years...................... -- 9,903 1,293 3,976 15,172 7.61
--------------------------------------------------------------------
Total carrying value................ $14,084 $133,484 $ 8,692 $4,165 $160,425 6.31%
====================================================================
Estimated fair value................ $14,125 $133,657 $ 8,707 $4,170 $160,659
Purchase yield...................... 5.94% 6.40% 5.30% 6.49% 6.31%
Average maturity (in years)......... .88 4.38 8.59 21.27 4.74
December 31, 1996
Total book value.................... $ 8,967 $122,867 $10,842 $5,304 $147,980 6.36%
Market value........................ $ 8,963 $122,657 $10,905 $5,313 $147,838
Purchase yield...................... 5.61% 6.38% 5.93% 6.77% 6.36%
Average maturity (in years)......... 1.04 3.53 6.34 22.18 4.25
December 31, 1995
Total book value.................... $11,932 $ 88,049 $ 3,476 $2,271 $105,728 6.24%
Market value........................ $12,015 $ 88,492 $ 3,490 $2,271 $106,268
Purchase yield...................... 5.62% 6.39% 4.74% 6.00% 6.24%
Average maturity (in years)......... .97 2.50 2.06 20.00 2.09
</TABLE>
During 1997, the Company increased its investment holdings by approximately
$12.445 million. Investment in U.S. Treasury issues increased approximately
$5.117 million to comprise approximately 9% of the total portfolio (up from 6%
in the prior year). Investment in federal agency issues increased approximately
$10.617 million in 1997 from 1996, representing approximately 83% of the
investment portfolio mix for both years. Investment in state & municipal issues
declined $2.150 million in 1997 from 1996 representing approximately 5% of the
investment portfolio (down from 7% in the prior year). Investments in other
securities declined in terms of both volume ($1.139 million decrease) and
proportion of the investment portfolio (approximately a 1% drop) in 1997 from
prior year levels.
The Company's investment in federal funds sold decreased approximately $24.508
million in 1997 from prior year levels, a level more a function of timing for
year end funds settlements in 1997 than in actual federal funds activity. For
the year, average federal funds sold were approximately $2.980 million higher in
1997 than in 1996.
Any assessment of the Company's activity in federal funds investments needs to
be evaluated in the context of evolving economic market forces and the Company's
overall asset/liability management. Management desires to maintain federal funds
sold levels high enough to maintain sufficient liquidity, while balancing these
liquidity needs with a desire to maintain an adequate return on earning assets.
At the declining interest rate levels prevalent in 1997, especially near year
end, the differential between yields on federal funds sold and investment
securities falling within the existing parameters of the Company's investment
policy was often minimal, providing little incentive for committing substantial
amounts of funds to either alternative. Complicating the situation was the fact
that the declining interest rate
22
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[GRAPH OF
TOTAL DEPOSITS]
[PIE CHART OF
FUNDS DISTRIBUTION]
environment exerted additional pressure on the investment portfolio's overall
yield by generating a significant amount of call activity for those classes of
securities that had call features. To provide protection for the yield in its
investment portfolio, the Company found itself forced both to extend maturities
on its 1997 purchases and to pay a premium for what call protection it could
find. In addition, despite generally lower interest rate levels for 1997 and an
increasingly competitive lending environment producing generally lower loan
yields for the same period, strong loan demand made lending the more viable
option in 1997 than any other investment options.
DEPOSITS
The Company 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
the market area which the Company serves. Average deposits increased
approximately $34.334 million or 6.9% from 1996 levels. The inclusion of
Kentucky numbers for the full twelve month period in 1997 instead of the nine
and one-half month period for 1996 accounted for part of the increase. Growth of
core business in both of the Company's mature and newer markets accounted for
the remainder. Despite a generally softer overall interest rate environment in
1997, increasing competitive pressure in these markets increased overall cost of
funds for the Company by forty-four basis points (or 11.5%). Consolidated jumbo
certificates of deposit as of December 31, 1997 and 1996 were $77.060 million
and $65.439 million, respectively. Jumbo certificates are defined as deposits
with minimum denominations of $100 thousand and maximum maturities of one year.
For 1996, average deposits and short-term borrowings increased approximately
$155 million or 31.8% in 1996 from 1995 levels. Approximately $137 million of
this increase, or 88%, was a direct consequence of Kentucky's contribution to
the consolidated totals. The remainder was a consequence of growth in the
Company's established core market. Despite increasingly aggressive competition
for funds in its market area, in 1996 the Company was able to maintain funds at
a level that was only one basis point more expensive than for 1995. The
aggregate amount of consolidated jumbo certificates of deposit for the Company
was $65.439 million and $42.950 million, at December 31, 1996 and 1995,
respectively. Kentucky was responsible for 97.8% of the increase experienced in
the twelve month period ended December 31, 1996.
OTHER BORROWINGS
Short-term borrowings consist of the Treasury Tax and Loan Account, Commercial
Repurchase Agreements, and Borrowings from FHLBs and others. The amount in the
Treasury Tax and Loan accounts is directly related to the amount of payroll in
the market area 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 approximately $3.696 million in 1997,
an approximately 34% increase, after decreasing approximately $2.113 million (or
16.4%) in 1996. As a general rule, a decreasing interest rate environment and
generally better liquidity characteristics make Commercial Repurchase Agreements
a much more attractive and viable investment alternative in the type of economic
environment experienced in 1997 compared to the prior year. Average short-term
borrowings from FHLB were insignificant for most of 1997. The Bank did have an
overnight draw outstanding on its Flexline at FHLB Pittsburgh at December 31,
1997, which management had determined would be repaid in the first week of 1998.
23
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
TABLE IX. Short-Term Borrowings
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Amount Rate Amount Rate Amount Rate
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Treasury tax and loan account:
As of year end...................... $ 6,838 5.25% $ 8,101 3.62% $ 3,349 5.15%
Average balance..................... 2,495 5.25% 3,105 3.88% 2,807 4.08%
Maximum month end................... 7,203 8,101 6,615
Commercial repurchase agreements:
As of year end...................... $14,588 3.47% $10,118 3.19% $ 9,361 4.20%
Average balance..................... 14,446 2.89% 10,750 3.53% 12,863 3.71%
Maximum month end................... 16,358 13,413 14,695
FHLB borrowings and other:
As of year end...................... $ 7,500 5.63% $ 5,000 3.61% $ 5,000 6.05%
Average balance..................... 306 6.86 41 5.78% 69 5.95%
Maximum month end................... 7,500 5,000 5,000
</TABLE>
On March 15, 1996, the Company executed a note payable for $8.0 million,
representing a partial source of funds to finance the Kentucky acquisition. The
note repayment schedule was amortized for a ten year payback priced at 7.75%.
The loan will reprice only at its five year anniversary date on the basis of a
200 basis point differential over the five year Treasury Note.
On December 22, 1997, the Bank borrowed $1.170 million from Federal Home Loan
Bank of Pittsburgh. The advance repayment schedule was amortized and scheduled
on a ten year payback at 6.23%.
TABLE X. Long-Term Borrowing
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
Amount Rate Amount Rate Amount Rate
------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NOTE PAYABLE:
As of year end $6,991 7.75% $7,579 7.75% $ -- --%
Average balance 7,283 7.75% 6,167 7.75% -- --
Maximum month end 7,529 8,000 --
FHLB BORROWINGS AND OTHER:
As of year end $1,170 6.23% $ -- -- $ -- --
Average balance 32 6.23% -- -- -- --
Maximum month end 1,170 -- --
</TABLE>
ASSET/LIABILITY MATURITY AND RATE SENSITIVITY
Asset and liability management is responsible for the planning, implementation,
and control processes for determining asset mix and maturity features relative
to liability maturities in such a way that net interest margin will be
maximized. A major tool for such a process is gap management of the Company's
interest sensitive assets to interest sensitive liabilities.
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
24
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[GRAPH OF
INTEREST SENSITIVITY GAP]
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
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 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 Company is liability sensitive in the one year and under category, or
"negatively gapped". Accordingly, a decrease in interest rates should benefit
the Company while an increase in interest rates will exert pressure on the net
interest margin. The earnings of the Company are sufficient to withstand the
short-term negative gap position, should a moderate increase in interest rates
occur. Should a large rate increase occur, management would consider liquidating
available-for-sale investments and loans or borrowing from FHLB. These proceeds
would be placed in short-term investments.
The Company'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 the Company will
not have a liquidity problem or allow income to be significantly affected by a
change in interest rates. Management feels that the cash position is strong
enough to cover any payments necessary on "jumbo" certificates. In addition,
management feels that a major portion of the transaction accounts have
attributes of core deposits and, therefore, are not extremely interest
sensitive.
The following table sets forth the amount of interest earning assets and
interest bearing liabilities outstanding at December 31, 1997 distributed on the
basis of contractual maturities and/or scheduled rate adjustments in the periods
of time designated.
TABLE XI. 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............................... $ 110,946 $ 30,097 $ 47,840 $ 188,883 $189,610 $ 25,161 $403,654
Investments......................... 4,694 7,422 14,757 26,873 85,788 47,764 160,425
Interest bearing deposits........... 14,299 -- -- 14,299 -- -- 14,299
Fed. funds sold & other............. 4,420 -- -- 4,420 -- -- 4,420
-------------------------------------------------------------------------------
Total earning assets................. 134,359 37,519 62,597 234,475 275,398 72,925 582,798
LIABILITIES
Savings and transaction accounts.... 153,623 -- -- 153,623 -- -- 153,623
CD's $100,000 and over.............. 27,747 16,547 34,574 78,868 32,492 178 111,538
Other time deposits................. 57,600 33,190 43,088 133,878 58,285 252 192,415
-------------------------------------------------------------------------------
Total deposits....................... 238,970 49,737 77,662 366,369 90,777 430 457,576
Other borrowings.................... 28,758 180 357 29,295 3,521 3,922 36,738
-------------------------------------------------------------------------------
Total interest bearing liabilities... 267,728 49,917 78,019 395,664 94,298 4,352 494,314
-------------------------------------------------------------------------------
Interest sensitivity gap............. (133,369) (12,398) (15,422) (161,189) 181,100 68,573 88,484
===============================================================================
Cumulative gap....................... $(133,369) $(145,767) $(161,189) $(161,189) $ 19,911 $ 88,484 $ 88,484
===============================================================================
Cumulative gap as % of
total earning assets................ (22.88)% (25.01)% (27.66)% (27.66)% 3.42% 15.18% 15.18%
===============================================================================
</TABLE>
25
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
The Company does not manage its interest rate risk simply by employing static
maturity and repricing reports. The Company also employs a dynamic modeling
process that projects the impact of different interest rate scenarios on
earnings and Return on Assets over a twelve month period. A substantial portion
of the Company's loans and deposits comes from its retail base and does not
automatically reprice on a contractual basis in reaction to changing interest
rate levels. Accordingly, the Company has not experienced the earnings
volatility suggested by its liability sensitive gap position depicted above. The
Company has maintained a net interest margin in excess of 5.00% in each of the
last seven years and has been able to maintain adequate liquidity to provide for
changes in interest rates and for changes in loan and deposit demands. The
earnings simulation models that the Company employs incorporate assumptions
based on historical experiences involving customer behavior and funds
disintermediation in a variety of interest rate environments. They also reflect
the Company's pricing position versus both local in-market competition and
broader out-of-market alternatives.
MARKET RISKS
The Company's success is dependent on its ability to manage interest rate risk.
Interest rate risk (IRR) can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Other risks, namely
credit risk and liquidity risk, are inherent in the normal course of business in
the industry in which the Company operates. However, it is management's
conviction that IRR provides the most significant market risk to the Company
with far more potential to materially and immediately effect both the overall
financial condition and results of operations. The Company does not engage in
any trading activities, so it possesses no exposure to market risk via this type
of activity. Furthermore, the Company does not currently utilize any financial
derivatives to manage either market risk or IRR risk.
The Company's IRR management is the ultimate responsibility of the Board of
Directors. The Asset/Liability Management Committee maintains the ongoing
responsibility for measuring, monitoring, and managing the functions and
processes inherent in IRR oversight. Among other things, this includes
monitoring the Company's gap, as described above, and sensitivity to IRR by
subjecting the balance sheets of the Company's major affiliates tointerest rate
shocks, employing previously mentioned simulation models. Rate shock involves
the complete adjustment in market rates of various magnitude on a static balance
sheet over a specified period of time (twelve months). The impact of such
adjustments on the Company's net interest income, interest income, return on
assets, and economic value are evaluated within the contexts of compliance with
parameters established by Company policies. The Company's simulation model is
based on actual maturity (for fixed rate components) and repricing (for variable
rate components) characteristics of interest sensitive assets and liabilities.
The model anticipates the impact of changing interest rates on prepayment speed
of assets and liabilities. The model also incorporates assumptions concerning
prepayment rates based on historical prepayment speeds. The model further makes
allowances for unique products in the Company's business mix to be accorded
special treatment in the earnings simulations based on unique characteristics.
Earnings simulations are performed assuming 100 and 200 basis point shocks up
and down.
Based on the 100 and 200 basis point shock tests performed on balance sheets as
of December 31, 1997, management does not believe that any parameter being
evaluated for change via the
26
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
simulation modeling would generate a change on any parameter that would be out
of tolerance with accepted Company policies.
Table XII below represents the contractual balances of the Company's balance
sheet financial instruments at the expected maturity date (or repricing date
where appropriate) as well as the fair value of these balance sheet instruments
as of December 31, 1997.
Table XII. Financial Asset/Liability Maturity/Repricing Year of
Maturity/Repricing
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
There- Fair
1998 1999 2000 2001 2002 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash & due from.................. $ $ $ $ $ $22,805 $ 22,805 $22,805
Ave wtd rate.................... -- -- -- -- -- -- --
Fed funds sold................... 4,420 -- -- -- -- -- 4,420 4,420
Ave wtd rate.................... 5.38% -- -- -- -- 5.38%
Interest bearing deposits........ 14,299 -- -- -- -- -- 14,299 14,299
Ave wtd rate.................... 5.78% -- -- -- -- -- 5.78%
Available for sale securities.... -- 24,881 24,881
U.S. Governments................. 1,001 2,020 -- -- -- -- 3,021
Ave wtd rate.................... 6.02% 6.18% -- -- -- -- 6.13%
Federal agencies................. 2,851 2,984 2,002 -- -- 8,094 15,931
Ave wtd rate.................... 5.47% 6.14% 6.04% -- -- 6.85% 6.37%
State & Municipal................ 1,142 1,293 25 100 171 497 3,228
Ave wtd rate.................... 4.38% 4.54% 4.25% 4.70% 4.83% 4.58% 4.51%
Other............................ -- -- -- -- -- 2,701 2,701
Ave wtd rate.................... -- -- -- -- -- 6.64% 6.64%
Held-til-maturity securities..... 135,544 135,778
U.S. Governments................. 6,082 3,985 996 -- -- -- 11,063
Ave wtd rate.................... 5.55% 6.37% 6.06% -- -- -- 5.89%
Federal agencies................. 14,376 10,381 20,178 16,751 21,692 34,175 117,553
Ave wtd rate.................... 5.70% 6.02% 6.38% 6.23% 6.39% 6.94% 6.41%
State & Municipal................ 1,421 1,564 502 955 -- 1,022 5,464
Ave wtd rate.................... 4.94% 5.23% 5.03% 5.09% -- 5.71% 5.35%
Other............................ -- 189 -- -- -- 1,275 1,464
Ave wtd rate.................... -- 4.94% -- -- -- 6.38% 6.20%
Total Loans, Net................. -- -- -- -- -- -- 397,633 398,214
Commercial loans:
Fixed rate...................... 14,518 9,572 12,596 4,080 3,701 4,599 49,066
Ave wtd rate.................... 11.64% 10.23% 9.65% 10.20% 9.97% 9.34% 10.46%
Variable rate................... 68,036 176 62 119 -- -- 68,393
Ave wtd rate.................... 9.72% 9.02% 9.68% 6.00% -- -- 9.73%
Nonaccrual...................... -- -- -- -- -- 1,540 1,540
Real estate loans:
Fixed rate...................... 23,136 26,651 21,530 16,113 16,740 16,495 120,665
Ave wtd rate.................... 9.85% 9.74% 10.46% 10.38% 10.31% 8.45% 9.87%
Variable rate................... 30,467 3,900 968 132 134 64 35,665
Ave wtd rate.................... 9.39% 8.66% 10.48% 10.44% 10.42% 8.39% 9.73%
Nonaccrual...................... -- -- -- -- -- 960 960
Consumer loans:
Fixed rate...................... 39,987 30,368 20,638 12,858 6,369 1,714 111,934
Ave wtd rate.................... 11.73% 11.40% 11.06% 10.89% 11.06% 11.11% 11.38%
</TABLE>
27
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Table XII. Financial Asset/Liability Maturity/Repricing Year of
Maturity/Repricing (Continued)
<TABLE>
<CAPTION>
There- Fair
1998 1999 2000 2001 2002 after Total Value
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Variable rate.................... $ 6,986 $ 775 $ 420 $ 98 $ 79 $ -- $ 8,358
Ave wtd rate..................... 9.39% 8.66% 10.48% 10.44% 10.42% 8.39% 9.73%
Nonaccrual....................... -- -- -- -- -- 487 487
Open ended consumer loans:
Fixed rate....................... 164 161 157 153 149 5,802 6,586
Ave wtd rate..................... 17.73% 17.73% 17.73% 17.73% 17.73% 17.73% 17.73%
Financial liabilities:
Demand deposits (with no
stated maturity).................. -- -- -- -- -- 77,698 77,698 77,698
Interest bearing
Transaction accts................. 76,624 -- -- -- -- -- 76,624 76,624
Ave wtd rate..................... 3.76% -- -- -- -- -- 3.76%
Savings deposits.................. 76,999 -- -- -- -- -- 76,999 76,999
Ave wtd rate..................... 3.10% -- -- -- -- -- 3.10%
Time deposits..................... 212,746 59,013 24,756 2,379 4,582 477 303,953 306,423
Ave wtd rate..................... 5.33% 6.02% 6.01% 5.78% 6.28% 6.24% 5.49%
Other borrowings:
Commercial repurchase
agreements........................ 14,431 -- -- -- -- -- 14,431 14,431
Ave wtd rate..................... 3.47% -- -- -- -- -- 3.47%
FHLB advances..................... 7,500 -- -- -- -- -- 7,500 7,500
Ave wtd rate..................... 5.63% -- -- -- -- -- 5.63%
Other............................. 6,646 -- -- -- -- -- 6,646 6,646
Ave wtd rate..................... 5.25% -- -- -- -- -- 5.25%
Long-term borrowings.............. 718 783 848 914 986 3,913 8,161 8,021
Ave wtd rate..................... 7.58% 7.58% 7.57% 7.58% 7.58% 7.48% 7.53%
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to satisfy demands for deposit withdrawals, lending
commitments, and other needs. The Company's liquidity is based on a stable
deposit base. Additionally, the Company holds certain liquid assets such as cash
and federal funds sold to help meet certain liquidity needs. In addition, the
Company holds other marketable assets which can easily be converted to cash, if
the need arises. The Company continues to have the ability to attract short-term
sources of funds such as repurchase agreements to help meet its liquidity needs.
In December of 1993, the Bank acquired membership in the Federal Home Loan Bank
("FHLB") of Pittsburgh. This move has had two beneficial consequences for the
Company. First of all, from an investment perspective the equity position in
FHLB has provided a strong and steady source of dividend income. Secondly,
membership in FHLB of Pittsburgh improves the Company's ongoing ability to
manage liquidity via access to an immediate line of credit and other sources of
borrowings. As of December 31, 1997, the Bank had an unused $115 million
borrowing capacity with FHLB of Pittsburgh.
In January of 1994, FSB acquired membership in the FHLB of Cincinnati. FSB's
charter under the Office of Thrift Supervision and consequent status as a
Qualified Thrift Lender mandated
28
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
[GRAPH OF
CAPITAL RATIOS]
this investment, but it will derive essentially the same benefits in terms of
income, liquidity, and asset/liability management as outlined in the previous
paragraph.
The Company's cash and cash equivalent position (defined as the sum of cash, due
from banks, interest bearing deposits in other banks, and federal funds sold) is
a function of its operating, investing, and financing activities. Cash and cash
equivalents from operating activities have been relatively stable the last three
years producing levels of approximately $9.963 million, $10.869 million, and
$6.166 million in 1997, 1996, and 1995, respectively. Net cash and cash
equivalents used in investing activities approximated $42.635 million, $26.599
million, and $12.580 million for 1997, 1996, and 1995. Loan and investment
security funding activities are the primary components of investing activities.
Financing activities provided the Company approximately $9.513 million, $33.591
million, and $25.051 million in cash and cash equivalents in 1997, 1996, and
1995, respectively. With the exception of 1996, when the Company generated an
approximately $26.396 million increase in cash and cash equivalents via proceeds
from a long-term note and preferred stock issue, both related to the acquisition
of Kentucky, financing activities have been predominantly deposit and short-term
borrowing functions.
A central principle in the Company's capital planning process is to attain
sufficiently high levels of profitability to insure that capital adequacy is
maintained while generating a consistent flow of dividends. In December of 1992
provision of the FDIC Improvement Act of 1991 (the "Act") related to measurement
and monitoring of capital levels became effective. It also mandated minimum
levels of capital required for an institution to be rated on the basis of
capital. Under final agency rules, an institution will be deemed to be "well
capitalized," the highest rating attainable, if it maintains (i) a Risk-Based
Capital Ratio in excess of 10%, (ii) a Tier 1 Risk-Based Capital Ratio in excess
of 6%, and (iii) a Leverage Ratio in excess of 5%. On December 31, 1997 total
equity as a percent of total assets, the "Leverage Ratio," for the Company
approximated 10.20%. As far as the Company's three affected affiliates were
concerned, their respective capital ratios are as follows:
<TABLE>
<CAPTION>
Matewan Matewan To Be
Matewan National Bank Well
BancShares Bank FSB Capitalized
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital to risk weighted assets 14.41% 15.91% 12.92% 10.00%
Tier 1 capital to risk weighted assets 13.16% 14.66% 11.90% 6.00%
Tier 1 capital to average assets 8.77% 9.60% 6.89% 5.00%
</TABLE>
All measures are substantially in excess of minimum levels required under the
Act. The chart to the left depicts the levels of the Company's three major
regulatory capital ratios for each of the last five years, as well as the
minimum level required for each ratio to maintain status as a "well capitalized"
institution. In every year, the Company has substantially exceeded the minimum
regulatory capital standards required to merit "well capitalized" status.
Increases in capital levels in the past several years have been due to the
substantial accumulation of income retained after the payment of dividends.
On March 4, 1996, the Company closed a stock offering for a new class of 7.5%
Cumulative Convertible Preferred Stock, Series A. Concurrent with this closing
and the underwriter's subsequent overallotment option, the Company issued
805,000 shares of preferred stock
29
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
[GRAPH OF
NET INTEREST MARGIN]
and received a net capital infusion of approximately $18.396 million,
representing the total net proceeds to the Company. This new class of stock may
not be converted for four years. During 1997, the Company repurchased 176,042
shares of the preferred class for approximately $4.796 million in open market
and privately negotiated exchanges.
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the amount by which the interest income generated from
earning assets exceeds the interest expense associated with funding those
assets, is the most significant component of net income. Net interest income for
1997 was $29.472 million, an increase of approximately 7.2% over the 1996 level.
As was noted in the discussion related to Table II, the net interest margin
declined twenty basis points in 1997 from the 1996 level. Increases were
experienced in 1997 for both interest income (12% increase) and yield on earning
assets (eight basis points). Both increases were loan driven. However, the
impact of both increases on net interest income was diluted by 1997 increases in
overall interest expense (19% increase) and the cost of interest bearing
liabilities (thirty-one basis points). Net interest margin was twenty basis
points lower in 1997 than in 1996.
Net interest income in 1996 was $27.515 million, up approximately 39% from the
1995 level. Approximately $6.958 million or 90% of the increase was a direct
function of the Kentucky acquisition. Net interest margin for 1996 was
approximately 29 basis points lower than for 1995. A twenty-one basis point
decline in yield on average assets accounted for most of the drop. Loan yields
suffered the biggest declines, with the overall yield on the loan portfolio
falling 65 basis points from 1995. Without the Kentucky acquisition, the drop in
the loan portfolio would have been 20 basis points. Cost of funds increased one
basis point over prior year levels. Kentucky had a beneficial effect on overall
cost of funds, which would have increased 8 basis points ignoring Kentucky's
impact.
Improvements in interest income for 1997 were predominantly contributed by the
loan portfolio. Eighty one percent (81%) of the increase in interest income was
attributable to the lending function. This increase represents an actual dollar
amount of approximately $4.563 million. This increase was a function of both
volume and rate. Average loan volume was in excess of twelve percent (12%)
higher in 1997 than in 1996. The yield on the loan portfolio improved by three
basis points over the same time period. Investment securities and federal funds
sold contributed approximately $1.102 million in actual dollars (approximately
19%) to the 1997 increase in interest income. Income from interest bearing
deposits registered a relatively insignificant $52 thousand decline in 1997.
During 1996, interest income increased approximately 42.9% over prior year
levels. Kentucky accounted for 84.5% of the increase. The remainder of the
increase was realized primarily due to a contribution from the loan portfolio
(ignoring the effect from Kentucky) of approximately 8.4% higher than prior year
levels. Average loans outstanding without the Kentucky contribution increased
9.4% in 1996 over 1995. Average investment securities volumes increased less
than 1% from the prior year when the Kentucky effect is ignored. From this
combination, investment income increased approximately 2.5% from prior period
levels. Average federal funds sold decreased 15.3% and interest earned on
federal funds sold increased 22.1% in 1995.
30
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Substantially lower levels for average interest bearing deposits resulted in a
reduction of approximately 72.9% in interest income in 1995 from the prior year.
Interest expense increased approximately $3.656 million (19%) in 1997 over 1996
levels. Approximately seventy-eight percent (78%) of the volume increase was
attributable to higher costs on time deposits. Generally higher competitive
rates in the Company's local market area forced the Company to maintain a more
aggressive rate posture than overall market conditions would have otherwise
warranted. Expense for savings deposits experienced a minimal decline as Company
affiliates experienced some disintermediation from the savings deposits to the
higher priced transactional product lines in the deposit portfolio.
Correspondingly, interest bearing transactional deposits accounted for
approximately seventeen percent (17%) of the increased interest expense.
Interest expense increased $6.225 million, or 49.2% in 1996 after increasing
19.9% in 1995. Approximately $4.833 million, or 77.6%, of the increase was
attributable to Kentucky. Average interest bearing liabilities increased
approximately 48.8% in 1996 after experiencing a 6.3% increase in 1995.
Approximately 85.7% of the increase in 1996 was a function of Kentucky's totals.
The increase in interest expense is due to the impact generated via the Kentucky
acquisition, significant growth in interest bearing liability volumes in normal
core markets, and a minor (1 basis point) increase in cost of interest-bearing
funds for 1996.
The Company's net interest margin declined in 1997 approximately twenty basis
points. Company net yield for 1997 was 5.29% as compared to 5.49% for 1996. The
eight basis point improvement that the Company incurred on average earning
assets was insufficient to overcome the thirty-one basis point increase it
simultaneously incurred on its interest bearing sources of funds. The Company
experienced a decrease in net interest margin in 1996 of approximately twenty-
nine basis points. The net yield on earning assets for 1996 was 5.49% as
compared to 5.78% for 1995. A twenty-one basis point decrease in the yield on
average earning assets combined with a one basis point increase in the cost of
average interest bearing liabilities was the primary reason for the decrease.
Average non interest bearing deposits, traditionally a source of low cost funds,
increased 44.6% in 1996 from 1995. Kentucky was responsible for 87.1% of the
increase.
As the graph for Net Interest Margin at the beginning of this section
illustrates, the Company's net interest margin has not fluctuated substantially
since 1993. Further discussion of net interest income or its components is
included in the sections titled "Summary Financial Results" or "Financial
Condition."
31
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
TABLE XIII. Volume Analysis of Changes in Interest Income and Expense
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 Vs. 1996 1996 Vs. 1995
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Due to Change In Due to Change In
1997 1996 1995 Volume Rate Total Volume Rate Total
-------------------------- -------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans:
Commercial................ $11,245 $10,158 $ 6,851 $1,578 $ (491) $1,087 $ 3,215 $ 92 $ 3,307
Real estate............... 15,086 13,403 8,470 1,775 (92) 1,683 5,097 (164) 4,933
Consumer.................. 14,815 13,022 10,003 1,016 777 1,793 4,517 (1,498) 3,019
-------------------------- -------------------------- -----------------------------
Total loans................. 41,146 36,583 25,324 4,369 194 4,563 12,829 (1,570) 11,259
Securities:
Taxable................... 9,158 8,248 6,272 683 227 910 1,620 356 1,976
Tax exempt................ 528 419 146 99 10 109 291 (18) 273
-------------------------- -------------------------- -----------------------------
Total securities............ 9,686 8,667 6,418 782 237 1,019 1,911 338 2,249
Federal funds sold.......... 1,077 994 660 156 ( 73) 83 371 (37) 334
Interest bearing balances
with other banks.......... 88 140 40 (68) 16 (52) 109 (9) 100
-------------------------- -------------------------- -----------------------------
Total earnings assets....... 51,997 46,384 32,442 5,239 374 5,613 15,220 (1,278) 13,942
Interest bearing
liabilities:
Demand deposits............. 2,848 2,217 1,185 438 193 631 942 90 1,032
Savings deposits............ 2,307 2,321 1,770 (14) 0 (14) 745 (194) 551
Time deposits............... 16,221 13,337 9,112 2,087 797 2,884 4,097 128 4,225
Purchased funds............. 1,149 994 577 (48) 203 155 297 120 417
-------------------------- -------------------------- -----------------------------
Total interest
bearing liabilities....... 22,525 18,869 12,644 2,463 1,193 3,656 6,081 144 6,225
-------------------------- -------------------------- -----------------------------
Net interest income......... $29,472 $27,515 $19,798 $2,776 $ (819) $1,957 $ 9,139 $(1,422) $ 7,717
========================== ========================== =============================
</TABLE>
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.
32
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
OTHER INCOME
TABLE XIV. OTHER INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
1997 Over 1996 1996 Over 1995
1997 1996 1995 Amount Percent Amount Percent
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Service fees.................................. $4,096 $3,011 $2,050 $1,085 36.03% $ 961 46.88%
Other income.................................. 838 839 596 (1) (.11) 243 40.77
Commissions on credit life insurance.......... 338 484 553 (146) (30.17) (69) (12.48)
Gain on sale of assets........................ 94 365 103 (271) (74.25) 262 254.37
--------------------------------------------------------------------
Total other income............................ $5,366 $4,699 $3,302 $ 667 14.19% $1,397 42.31%
====================================================================
</TABLE>
[GRAPH OF
NON-INTEREST INCOME]
Noninterest income increased approximately 14% in 1997 over 1996 levels. For
1997, service fee income increased approximately 36% due to increased volumes
attendant with the growth experienced by the Company on deposit levels and the
inclusion of Kentucky activity for the full twelve month period. Other income
was nominally unchanged in 1997 from 1996. Commission income on credit insurance
products decreased approximately 30% in 1997, the second consecutive annual
decline. In addition to tighter underwriting standards implemented in the prior
two years by insurance providers for coverages in the Company's market area,
competition from alternative sources and products for this particular line of
service intensified. Gain on sale of assets decreased approximately 74% due to a
lower level of activity experienced at the Company in 1997 than for 1996.
Noninterest income increased approximately 42% in 1996 over 1995 levels.
Kentucky contributions accounted for 66% of the increase. For 1996, service fee
income increased approximately 47% due to increased volumes attendant with the
growth experienced by the Company on deposit levels. Kentucky activity accounted
for 53% of the increase. Other income increased approximately 41% in 1996.
Kentucky accounted for most of the increase. Commission income on credit
insurance products decreased approximately 12% in 1996 for reasons previously
enumerated. Sales volumes declined accordingly. Gain on sale of assets increased
more than twofold due to some heavy gains realized on the sale of repossessed
properties and some nonrecurring sales related to residuals on maturing lease
receivables.
OTHER EXPENSES
Table XV. Other Expenses
- --------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Increase (Decrease) Increase (Decrease)
1997 over 1996 1996 over 1995
1997 1996 1995 Amount Percent Amount Percent
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and benefits............. $ 8,759 $ 7,877 $ 5,776 $ 882 11.20% $2,101 36.37%
Net occupancy..................... 1,409 1,254 954 155 12.36 300 31.45
Equipment & furniture............. 1,440 1,114 811 326 29.26 303 37.36
Advertising....................... 632 852 708 (220) (25.82) 144 20.34
Regulatory assessments............ 411 206 480 205 99.51 (274) (57.08)
Data processing expense........... 1,390 1,121 563 269 23.99 558 99.11
Other............................. 8,078 6,676 3,697 1,402 21.00 2,979 80.58
---------------------------------------------------------------------
$22,119 $19,100 $12,989 $3,019 15.81% $6,111 47.05
=====================================================================
</TABLE>
33
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
[GRAPH OF
NON-INTEREST EXPENSE]
Total noninterest expenses increased approximately 15% in 1996 from 1997 and
approximately 47% in 1996 from 1995. The increase for 1996 is attributable to
several factors. The major one is the impact felt from Kentucky, whose
conversion and subsequent consolidation accounted for approximately 70% of the
1996 increase. The subsequent merger of Kentucky into the Bank and the inclusion
of a full year's worth of operations contributed to the increase. In addition,
Company affiliates opened two new offices in 1997 and four new offices in 1996,
none of which are in the stage where the revenue generated is sufficient to
cover operating costs. Consequently most measures of overhead for the Company
continue to be high by historic standards. The ratio of noninterest expense to
average assets increased to 3.55% in 1997 from 3.40% in 1996. The same ratio
decreased slightly to 3.40% from 3.43% in 1996 from 1995.
The ability of the Company to maintain satisfactory profit margins is becoming
increasingly vulnerable to its ability to control noninterest expenses.
Increasing pressure on interest spreads would tend to place heavier reliance on
maintaining control of these noninterest expenses. Increasing competitive
pressures would tend to provide a greater incentive for a company to leverage
these expenses over a wider range of business-maximizing the efficiency of such
expenses. The "efficiency ratio" is determined by dividing the total noninterest
expenses by the sum of net interest income and noninterest income. Generally, a
ratio of below 50% is indicative of an extremely efficient operation. For the
past three years, the Company has witnessed an increase in its efficiency ratio
from 56.2% in 1995 to 59.3% in 1996 to 63.5% in 1997. The increasing trend is
largely a function of increased costs related to (i) the Kentucky acquisition,
absorption, and merger, (ii) subsequent opening of eleven new offices since
1994, and (iii) the installation of a new telephone system in 1997.
Salaries and benefits increased approximately $882 thousand (11%) in 1997 after
increasing approximately $2.101 million (36%) in 1996. Approximately 79% of the
1996 increase was attributable to Kentucky. Staffing expenses related to the new
offices, increasing health care expenses, and normal salary increases also were
contributing factors for the increases.
Net occupancy expenses increased approximately $155 thousand (12%) and $300
thousand (31%) in 1997 and 1996, respectively. Kentucky contributed
approximately 81% of the 1996 increase. Capital expenditures related to the new
offices and the new telephone system were the other major items contributing to
the increase.
Advertising costs fluctuate with management's evaluation of the benefit to be
gained from additional media exposure. Management determined that advertising
expenditures could be employed more favorably elsewhere in 1997. Therefore,
advertising expense for 1997 declined approximately $220 thousand (or 25%). The
increase of $144 thousand (20%) experienced for 1996 was deemed beneficial in
view of the Kentucky acquisition.
Equipment and furniture expense increased approximately 29% from 1996 to 1997
and approximately 37% from 1995 to 1996. Kentucky related expenditures, capital
expenditures related to the new offices, and the telephone usage account for
most of the increase experienced in 1997.
Premiums and assessments for Federal Deposit Insurance Corporation, the Office
of the Comptroller of the Currency, and the Office of Thrift Supervision
increased approximately $205 thousand (1007%) in 1997 after decreasing
approximately $274 thousand (37%) in 1996.
34
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Nominal insurance assessments for the BIF-insured institutions accounted for
much of the lower expense in 1996. FSB opted to pay in 1997 what for it had been
an optional one-time special assessment in 1996 after one semiannual assessment
period had passed and then to be assessed at the lower prevalent SAIF rate on an
ongoing basis.
Data processing expense increased approximately $269 thousand, nearly 24% in
1997. Expenses in 1996 increased approximately $558 thousand over 1995. Kentucky
consolidation, operation, and conversion expenses were the primary force behind
the increase of the past two years.
Other expenses increased approximately $1.402 million or 21% in 1997. Generally
higher operating expenses accounted for much of the remaining increase.
APPLICABLE INCOME TAXES
Income tax expense was $3.495 million in 1997, $3.707 million in 1996 and $2.983
million in 1995. The Company's effective tax rate for the past three years has
been 34.6% for 1997, 36.5% for 1996, and 36.4% for 1995. Management has actively
pursued tax favored investments which carry attractive yields in an attempt to
maximize earnings and reduce the Company's effective tax rate over the above
periods.
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement No. 109 "Accounting for Income Taxes" (Statement 109). Statement 109
requires that deferred tax assets and liabilities be determined based upon
differences between the financial reporting and tax bases of assets and
liabilities. The Company adopted Statement 109 on January 1, 1993 on a
prospective basis. The effect of adopting Statement 109 has not been material to
the consolidated financial statements.
IMPACT OF YEAR 2000
Most of the Company's core data and item processing systems, telecommunication
systems, auxiliary and critical support system services are contracted through
major nationally prominent vendors. Primary exposure for the Company resides in
its dependence upon these third party providers for services. The Company has
initiated formal communications with all of its significant outside vendors and
suppliers to determine the extent to which Company systems are vulnerable to
these third parties' ability to remediate their own Year 2000 issues. The
Company has completed the initial assessment phase of its own Year 2000 review
and has determined that any exposure that it has with respect to Year 2000
issues is limited. There is no guarantee that the systems of other companies on
which Company systems rely will be converted timely and would not have an
adverse effect on the Company's systems. Management's assessment is that the
overall cost to the Company of compliance with Year 2000 issues will be
immaterial.
EFFECTS OF CHANGING PRICES
The consolidated financial statements and related data included herein have been
portrayed in accordance with generally accepted accounting principles which
require the measurement of the Company'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. Inflation affects
Company performance by increasing the operating costs that the
35
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
- --------------------------------------------------------------------------------
Company must either absorb or pass on to consumers via increased prices.
Inflation also decreases the Company's purchasing power over time. Virtually all
of the Company's assets and liabilities are monetary in nature. Consequently,
most of the Company's assets and liabilities are subject to conversion into a
fixed amount of dollars independent of any price changes. A substantial amount
of the operating assets of the Company, as for most other companies within the
industry, reprice more frequently than those in other industries. As a result,
interest rates have a more significant impact on the Company's performance than
the effects of general levels of inflation.
The ability of the Company to protect both earnings and future reductions in
purchasing power from the effects of inflation and changing interest rates rests
with a dual ability to improve net interest margin via effective asset/liability
management and making adjustments to its prices for services. Management
practices and policies towards these ends have been described in prior sections
of this analysis.
36
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
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 at December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Charleston, West Virginia
January 30, 1998
37
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data)
Assets 1997 1996
--------------------
<S> <C> <C>
Cash and due from banks.................................................................................... $ 22,805 $ 29,721
Interest bearing deposits in other banks................................................................... 14,299 6,034
Federal funds sold......................................................................................... 4,420 28,928
--------------------
Cash and cash equivalents.................................................................................. 41,524 64,683
Investment securities:
Available-for-sale at fair value.......................................................................... 24,881 25,411
Held-to-maturity.......................................................................................... 135,544 122,569
(Approximate fair value of $135,778 and $122,427 at December 31, 1997 and 1996)
Loans, net................................................................................................. 397,633 370,801
Premises and equipment..................................................................................... 20,545 20,871
Accrued interest receivable and other assets............................................................... 24,731 22,851
--------------------
Total Assets................................................................................................. $644,858 $627,186
====================
Liabilities and shareholders' equity
Liabilities:
Deposits:
Non-interest bearing..................................................................................... $ 77,698 $ 78,464
Interest bearing......................................................................................... 457,576 444,844
--------------------
Total deposits............................................................................................. 535,274 523,308
Short-term borrowings:
Repurchase agreements..................................................................................... 14,431 10,118
Federal Home Loan Bank advances........................................................................... 7,500 5,000
Other..................................................................................................... 6,646 8,101
--------------------
Total short-term borrowings................................................................................ 28,577 23,219
Long-term borrowings:
Federal Home Loan Bank advances........................................................................... 1,170
Notes payable............................................................................................. 6,991 7,579
--------------------
Total long-term borrowings................................................................................. 8,161 7,579
Accrued interest payable and other liabilities............................................................. 7,083 5,502
--------------------
Total liabilities............................................................................................ 579,095 559,608
Shareholders' equity
Convertible preferred stock, Series A, 7.5%................................................................ 805 805
$1 par value; 1,000,000 shares authorized; 805,000 issued and outstanding on December
31, 1997 and 1996, including 176,842 and 0 shares in treasury stock ($15,704 aggregate
liquidation value)
Common stock -- $1 par value; ............................................................................. 3,684 3,684
10,000,000 shares authorized; 3,684,104 shares outstanding at December 31, 1997 and 1996,
including 49,884 and 23,953 shares in treasury stock, respectively
Capital surplus............................................................................................ 29,773 29,773
Retained earnings.......................................................................................... 37,084 33,590
Treasury stock............................................................................................. (5,530) (206)
Net unrealized loss on available-for-sale securities....................................................... (53) (68)
--------------------
Total shareholders' equity................................................................................... 65,763 67,578
--------------------
Total liabilities and shareholders' equity................................................................... $644,858 $627,186
====================
</TABLE>
See accompanying notes to consolidated financial statements
38
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Consolidated Statements of Income
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data)
1997 1996 1995
--------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans........................... $41,146 $36,583 $25,324
Interest and dividends on investment securities:
Taxable............................................. 9,158 8,248 6,272
Tax-exempt.......................................... 528 419 146
Other interest income................................ 1,165 1,134 700
--------------------------
Total interest income.................................. 51,997 46,384 32,442
Interest expense:
Deposits............................................. 21,376 17,875 12,067
Other borrowings..................................... 1,149 994 577
--------------------------
Total interest expense................................. 22,525 18,869 12,644
--------------------------
Net interest income.................................... 29,472 27,515 19,798
Provision for loan losses.............................. 2,609 2,945 1,908
--------------------------
Net interest income after provision for loan losses.... 26,863 24,570 17,890
Other income:
Service fees......................................... 4,096 3,011 2,050
Other................................................ 932 1,204 699
Credit life insurance commissions.................... 338 484 553
--------------------------
Total other income..................................... 5,366 4,699 3,302
Other expenses:
Salaries and employee benefits....................... 8,759 7,877 5,776
Net occupancy........................................ 1,409 1,254 954
Equipment............................................ 1,440 1,114 811
Advertising.......................................... 632 852 708
Regulatory assessments............................... 411 206 480
Data processing...................................... 1,390 1,121 563
Other................................................ 8,078 6,676 3,697
--------------------------
Total other expenses................................... 22,119 19,100 12,989
--------------------------
Income before income taxes............................. 10,110 10,169 8,203
Applicable income taxes................................ 3,495 3,707 2,983
--------------------------
Net income............................................. 6,615 6,462 5,220
Preferred stock dividends.............................. 1,370 1,236 --
--------------------------
Earnings applicable to common stock.................... $ 5,245 $ 5,226 $ 5,220
==========================
Per share earnings, basic and diluted.................. $ 1.44 $ 1.43 $ 1.42
==========================
Average common shares outstanding (in thousands)....... 3,646 3,664 3,668
==========================
</TABLE>
See accompanying notes to consolidated financial statements
39
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
(Dollars in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Available-
Preferred Common Capital Retained Treasury for-Sale
Stock Stock Surplus Earnings Stock Securities Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995..................... $ -- $ 3,349 $ 6,460 $32,185 $ (48) $ (143) $41,803
Treasury stock purchases.................... -- -- -- -- (56) -- (56)
Treasury stock sales........................ -- -- 31 -- 26 -- 57
Change in net unrealized loss on
available-for-sale securities,
net of deferred income taxes............... -- -- -- -- -- 196 196
Common stock dividend (10%)................. -- 335 5,691 (6,026) -- -- --
Cash paid on fractional shares.............. -- -- -- (3) -- -- (3)
Dividends on common stock
($.38 per share)........................... -- -- -- (1,400) -- -- (1,400)
Net income.................................. -- -- -- 5,220 -- -- 5,220
-----------------------------------------------------------------------------
Balance December 31, 1995................... -- 3,684 12,182 29,976 (78) 53 45,817
Treasury stock purchases.................... -- -- -- -- (128) -- (128)
Change in net unrealized loss on
available-for-sale securities,
net of deferred income taxes............... -- -- -- -- -- (121) (121)
Issuance of preferred shares................ 805 -- 17,591 -- -- -- 18,396
Dividends on common stock
($.44 per share)........................... -- -- -- (1,612) -- -- (1,612)
Dividends on preferred stock
($1.54 per share).......................... -- -- -- (1,236) -- -- (1,236)
Net income.................................. -- -- -- 6,462 -- -- 6,462
-----------------------------------------------------------------------------
Balance December 31, 1996................... 805 3,684 29,773 33,590 (206) (68) 67,578
Treasury stock purchases.................... -- -- -- -- (5,324) -- (5,324)
Change in net unrealized loss on
available-for-sale securities,
net of deferred income taxes............... -- -- -- -- -- 15 15
Dividends on common stock
($.48 per share)........................... -- -- -- (1,751) -- -- (1,751)
Dividends on preferred stock
($1.875 per share)......................... -- -- -- (1,370) -- -- (1,370)
Net income.................................. -- -- -- 6,615 -- -- 6,615
-----------------------------------------------------------------------------
Balance December 31, 1997................... $805 $3,684 $29,773 $37,084 $(5,530) $ (53) $65,763
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements
40
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands)
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Operating activities
Net income......................................................................... $ 6,615 $ 6,462 $ 5,220
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation..................................................................... 1,209 1,100 760
Net amortization................................................................. 1,148 1,125 508
Provision for loan losses........................................................ 2,609 2,945 1,908
Provision for deferred taxes..................................................... 136 243 70
(Gain) loss on sale of assets.................................................... (94) (103)
Net change in accrued interest receivable and other assets....................... (3,189) (825) (1,354)
Net change in accrued interest payable and other liabilities..................... 1,529 (181) (843)
-------------------------------
Net cash provided by operating activities.......................................... 9,963 10,869 6,166
Investing Activities
Net cash received in acquisition of subsidiary..................................... -- 15,822 --
Proceeds from maturities of available-for-sale securities.......................... 14,360 21,275 7,925
Proceeds from maturities of held-to-maturity securities............................ 31,954 39,794 47,360
Purchases of available-for-sale securities......................................... (13,826) (12,130) (12,800)
Purchases of held-to-maturity securities........................................... (44,893) (76,915) (38,236)
Net change in loans................................................................ (29,441) (12,741) (15,732)
Purchases of premises and equipment................................................ (1,475) (1,704) (1,371)
Proceeds from sale of premises and equipment....................................... 686 -- 274
-------------------------------
Net cash used in investing activities.............................................. (42,635) (26,599) (12,580)
Finncing Activities
Net change in deposits............................................................. 11,966 5,559 23,740
Net change in short-term borrowings................................................ 5,358 5,033 2,713
Proceeds from sale of preferred stock.............................................. -- 18,396 --
Proceeds from long-term borrowings................................................. 1,170 8,000 --
Principal payments on long-term note............................................... (588) (421) --
Treasury stock purchases........................................................... (5,324) (128) (56)
Treasury stock sales............................................................... -- -- 57
Cash paid on fractional shares from stock dividend................................. -- -- (3)
Cash dividends paid................................................................ (3,069) (2,848) (1,400)
-------------------------------
Net cash provided by financing activities.......................................... 9,513 33,591 25,051
-------------------------------
Net change in cash and cash equivalents............................................ (23,159) 17,861 18,637
Cash and cash equivalents at beginning of year..................................... 64,683 46,822 28,185
-------------------------------
Cash and cash equivalents at end of year........................................... $ 41,524 $ 64,683 $ 46,822
==============================
</TABLE>
See accompanying notes to consolidated financial statements
41
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies (Dollars in Thousands, Except Per
Share Data)
Organization
Matewan BancShares, Inc. (the Company) is a bank holding company with three
financial institution subsidiaries engaged in community banking activities and
providing financial services to individuals and businesses throughout southern
West Virginia, eastern Kentucky, and western Virginia. The Company considers all
of its principal business activities to be banking related.
Principles of Consolidation
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. The accompanying consolidated financial statements include the
accounts of Matewan BancShares, Inc. and its wholly-owned subsidiaries, Matewan
National Bank (the Bank), Matewan Bank FSB (FSB), and Matewan Venture Fund, Inc.
(the Fund). All intercompany balances and transactions have been eliminated in
consolidation. The following is a summary of the more significant policies.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers cash and due
from banks, federal funds sold, and interest-bearing deposits in other banks as
cash and cash equivalents.
Investment Securities
Management determines the appropriate classification of debt securities at the
time of purchase. 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 or losses, net of deferred
income taxes, reported in a separate component of shareholders' equity. The
Company 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 the amortization of premiums and the
accretion of discounts to maturity, or in the case of mortgage-backed
securities, over the estimated useful 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 is based on the specific
identification method.
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan losses
charged against income. Loans deemed to be uncollectible are charged against the
allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is maintained at a level believed adequate by
management to absorb estimated loan losses. Management's periodic review and
evaluation of the adequacy of the allowance is based on the Company's past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may impair the ability of the borrower to repay (including the timing of
future payments), the estimated value of any underlying collateral, composition
and mix of the loan portfolio, current economic conditions, and other factors
deemed relevant by management. This evaluation is inherently subjective as it
42
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
requires material estimates including the amounts and timing of future cash
flows expected to be received on impaired loans that may be susceptible to
significant change.
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.
Intangible Assets
Intangible assets representing the present value of future net income to be
earned from deposits of acquired affiliates are being amortized on an
accelerated basis over an eight year period, approximating the expected run-off
of the related deposits. Goodwill, the excess of purchase price over the
estimated fair value of net assets acquired, is being amortized on a straight-
line basis over a twenty year period. The carrying amount of goodwill is
evaluated for impairment if facts and circumstances suggest that it may be
impaired. If this evaluation indicates that goodwill will not be recoverable, as
determined based on the estimated undiscounted cash flows of the entity acquired
over the remaining amortization period, the carrying amount of goodwill may be
reduced.
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 and amortization of unearned income are computed by methods
which generally result in level rates of return on principal amounts
outstanding. Amortization of premiums and accretion of discounts has been
deducted from and added to the related interest income.
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 periods is charged to allowance for loan
losses. Management may elect to continue 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. Interest
received on nonaccrual loans generally is either applied against principal or
reported as interest income, according to management's judgement as to the
collectibility of principal. Generally, loans are restored to accrual status
when the obligation becomes current, has performed in accordance with the
contractual terms for a reasonable period of time, and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
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 had such commissions been 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. Pension costs are actuarially determined and charged to expense. The
Company provides no post employment or post retirement benefits other than
pension benefits. The Company also provides a defined contribution plan and a
match of employee contributions to such a plan for all its employees and
affiliate employees.
43
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Basic and Diluted Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
Statement 128 requirements. Basic and diluted earnings per share are the same
for periods presented as the conversion of preferred stock would be anti-
dilutive. The Company has not issued any other potentially dilutive securities.
New Accounting Standards
The Financial Accounting Standards Board has issued several new accounting
pronouncements with provisions becoming effective in 1997 and 1998. These
pronouncements include SFAS No. 125, "Accounting for Transfers of Assets and
Servicing of Financial Assets and Extinguishments of Liabilities;" SFAS No. 129,
"Disclosures of Information about Capital Structures;" SFAS No. 130, "Reporting
Comprehensive Income;" and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Certain provisions of SFAS No. 125 were
applicable in 1997 and their adoption had no significant impact. The Company is
in the process of fully evaluating all the new pronouncements and expects to
adopt them in 1998 in accordance with the requirements. Such adoption is not
expected to have a significant impact on the financial position of the Company
or the results of its operations.
2. Acquisition Activity (Dollars in Thousands, Except Per Share Data)
On March 16, 1996, the Company acquired for cash all of the outstanding common
stock of Bank One, Pikeville, N.A. (Kentucky) from Banc One Corporation. This
transaction was accounted for under the purchase method of accounting.
Accordingly, the consolidated financial statements include operations of
Kentucky only from the date of acquisition. The aggregate purchase price was
approximately $29,350, which includes costs of the acquisition. The Company
financed this transaction with proceeds from the issuance of convertible
preferred stock of approximately $18,396, long-term debt of $8,000, and
available cash of $2,900. The excess of the purchase price over the estimated
fair value of net tangible assets acquired was allocated to deposit base
intangibles of approximately $2,500, which are being amortized on an accelerated
basis over eight years, and goodwill of approximately $8,250, adjusted to $9,122
during 1997, which is being amortized on a straight-line basis over twenty
years.
The following unaudited proforma financial information presents a summary of
consolidated results of operations of the Company and Kentucky, adjusted for the
cost of funding, as if the transaction has occurred at the beginning of each
period presented.
<TABLE>
<CAPTION>
1996 1995
-----------------
<S> <C> <C>
Proforma results of operations (unaudited)
Net interest income............................. $26,270 $27,107
Net income available to common shareholders..... 5,175 4,195
Net income per common share..................... 1.41 1.14
</TABLE>
The year ended December 31, 1997 represents the first full year of consolidated
operations for the Company and Kentucky. Consequently, no proforma results are
presented for 1997. In management's opinion, the unaudited proforma combined
results of operations are not indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of each period
presented or of future operations of the combined companies under the ownership
and management of the Company. On September 19, 1997 Kentucky was merged into
the Company's primary banking subsidiary, Matewan National Bank (the Bank).
The Company has acquired banks in the current and prior years in acquisitions
accounted for using the purchase method of accounting.
44
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
The purchase prices were allocated to the identifiable tangible and intangible
assets acquired and liabilities assumed based upon their estimated fair value as
of the date of acquisition. Deposit base intangibles, included in other assets
in the consolidated balance sheets, approximated $2,749 and $3,508 at December
31, 1997 and 1996, net of accumulated amortization approximating $2,499 and
$1,740 at December 31, 1997 and 1996. Goodwill, included in other assets in the
consolidated balance sheets, approximated $8,375 and $7,921 at December 31, 1997
and 1996, net of accumulated amortization approximating $749 and $310 at
December 31, 1997 and 1996. Amortization of deposit base intangibles and
goodwill approximated $1,168 in 1997, $980 in 1996, and $200 in 1995.
3. Investment Securities (Dollars in Thousands)
The following is a summary of the available-for-sale securities and
held-to-maturity securities.
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale Securities
U.S. Treasury securities and obligations of U.S.
government agencies..................................................... $ 18,945 $ 37 $ (30) $ 18,952
Obligations of states and political subdivisions.......................... 3,196 32 -- 3,228
Other securities........................................................... 2,828 -- (127) 2,701
----------------------------------------------------
Total...................................................................... $ 24,969 $ 69 $(157) $ 24,881
====================================================
Held-to-Maturity Securities
U.S. Treasury securities and obligations of U.S.
government agencies..................................................... $128,616 $502 $(279) $128,839
Obligations of states and political subdivisions........................... 5,464 92 (77) 5,479
Other securities........................................................... 1,464 -- (4) 1,460
----------------------------------------------------
Total...................................................................... $135,544 $594 $(360) $135,778
====================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-Sale Securities
U.S. Treasury securities and obligations of U.S.
government agencies..................................................... $ 18,926 $ 13 $ (15) $ 18,924
Obligations of states and political subdivisions........................... 3,890 27 -- 3,917
Other securities........................................................... 2,709 -- (139) 2,570
----------------------------------------------------
Total...................................................................... $ 25,525 $ 40 $(154) $ 25,411
====================================================
Held-to-Maturity Securities
U.S. Treasury securities and obligations of U.S.
government agencies..................................................... $112,910 $346 $(560) $112,696
Obligations of states and political subdivisions........................... 6,925 69 (6) 6,988
Other securities........................................................... 2,734 9 -- 2,743
----------------------------------------------------
Total...................................................................... $122,569 $424 $(566) $122,427
====================================================
</TABLE>
45
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
The amortized cost and estimated fair values of investment securities at
December 31, 1997, by contractual maturity, are shown in the following table.
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................ $ 4,971 $ 4,994
Due after one year through five years.. 8,574 8,595
Due after five years through ten years. 8,246 8,240
Due after ten years.................... 350 351
Equity securities...................... 2,828 2,701
----------------------
$ 24,969 $ 24,881
======================
</TABLE>
<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
----------------------
<S> <C> <C>
Held-to-maturity
Due in one year or less................ $ 21,879 $ 21,854
Due after one year through five years.. 77,193 77,322
Due after five years through ten years. 24,121 24,250
Due after ten years.................... 12,351 12,352
----------------------
$135,544 $135,778
======================
</TABLE>
The Company sold no investment securities in the three year period ended
December 31, 1997.
At December 31, 1997 and 1996, investment securities with carrying amounts of
$52,766 and $40,500, respectively, were pledged to secure public deposits and
for other purposes.
4. Loans (Dollars in Thousands)
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------------------
<S> <C> <C>
Commercial and financial loans $118,999 $108,240
Real estate loans (primarily residential) 157,290 144,693
Consumer loans 127,365 125,163
-------------------
Gross loans 403,654 378,096
Less unearned income (543) (1,309)
-------------------
Total loans 403,111 376,787
Less allowance for loan losses (5,478) (5,986)
-------------------
Net loans $397,633 $370,801
===================
</TABLE>
The Company grants commercial and financial, real estate, and consumer loans
primarily to customers in southern West Virginia, eastern Kentucky, and
southwestern Virginia. 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.
46
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
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 rates 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, 1997.................................................. $ 3,315
Loans made.................................................................. 827
Principal collected......................................................... (713)
Other changes............................................................... (1,927)
-------
Balance at December 31, 1997................................................ $ 1,502
=======
</TABLE>
5. Allowance for Loan Losses (Dollars in Thousands)
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------
<S> <C> <C> <C>
Balance at beginning of year................................... $ 5,986 $ 2,973 $ 2,932
Loans charged off.............................................. (4,141) (3,738) (2,394)
Loan recoveries................................................ 1,024 654 527
---------------------------
Net charge-offs................................................ (3,117) (3,084) (1,867)
Provision charged to expense................................... 2,609 2,945 1,908
Balance of acquired subsidiary................................. -- 3,152 --
---------------------------
Balance at end of year......................................... $ 5,478 $ 5,986 $ 2,973
===========================
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans considered to be
impaired was $11,040 and $10,922 (of which $2,987 and $1,733 were on a
nonaccrual basis). Included in this amount is $1,532 and $1,986 of impaired
loans for which the related allowance for loan losses is $705 and $756, and
$9,508 and $8,936 of impaired loans that do not have an allowance for loan
losses. The average recorded investment in impaired loans during the years ended
December 31, 1997 and 1996 was approximately $10,895 and $9,525. During the
years ended December 31, 1997 and 1996, the Company recognized interest income
on impaired loans of $712 and $1,225, using the cash basis of income
recognition.
6. Premises and Equipment (Dollars in Thousands)
The major categories of premises and equipment and related accumulated
depreciation are summarized as follows:
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------
<S> <C> <C>
Land........................... $ 4,178 $ 4,273
Buildings and improvements..... 17,916 17,683
Furniture and equipment........ 6,711 6,068
-----------------
28,805 28,024
Less accumulated depreciation.. (8,260) (7,153)
-----------------
$20,545 $20,871
=================
</TABLE>
47
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
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: 1998 - $603; 1999 - $470; 2000 -
$382; 2001 - $265; 2002 - $225; with $1,001 of commitments extending beyond
2002.
Total rent expense, including cancelable and noncancelable leases, net of rental
income of premises, approximated $444, $300, and $450 in 1997, 1996, and 1995.
7. Deposits (Dollars in Thousands)
Included in interest-bearing deposits are various time deposit products. Time
deposits with remaining terms of more than one year at December 31, 1997, have
aggregate maturities of $212,746 in 1998, $59,013 in 1999, $24,756 in 2000,
$2,379 in 2001, and $5,059 in 2002. At December 31, 1997 and 1996, time deposits
exceeding $100 approximated $111,538 and $103,229.
At December 31, 1997 and 1996, the Company held deposits from related parties of
$11,822 and $14,100. Interest paid on deposits, short-term borrowings, and long-
term borrowings approximated $22,227, $18,130, and $12,340 in 1997, 1996, and
1995.
8. Short-Term Borrowings (Dollars in Thousands)
Short-term borrowings consist primarily of commercial repurchase agreements,
short-term advances from the Federal Home Loan Bank (FHLB), and treasury tax and
loan account. The weighted average interest rate on short-term borrowings
approximated 4.45% and 4.04% at December 31, 1997 and 1996.
The Company's banking subsidiaries are members of the FHLB (Pittsburgh and
Cincinnati). One benefit of the banking subsidiaries' membership in FHLB is the
availability of both short-term and long-term funding, in the form of
collateralized advances. The available lines of credit at prevailing market
interest rates, at December 31, 1997, approximated $115,000. At December 31,
1997 and 1996, short-term advances from the FHLB approximated $7,500 and $5,000
at an interest rate of 5.63%
and 3.61%.
9. Long-Term Borrowings (Dollars in Thousands)
Long-term borrowings consist of FHLB advances and a note payable that the
Company secured in March of 1996 to assist in funding the acquisition of
Kentucky.
The balance due on FHLB advances as of December 31, 1997 approximated $1,170 and
is scheduled to mature as follows:
1998 - $80; 1999 - $92; 2000 - $98; 2001 - $104; 2002 - $111; and $685
thereafter. The weighted average interest rate on these advances was 6.23%.
The balance due on long-term borrowings as of December 31, 1997 approximated
$6,991. This debt is secured by the outstanding stock of the Company's primary
subsidiary bank and is payable to a financial institution through April 2006 at
an interest rate of 7.75%. As of December 31, 1997, the Company has complied
with the restrictive covenants in the agreement. The principal is payable over
the next five years as follows: 1998 - $638; 1999 - $690; 2000 - $750; 2001 -
$810; 2002 - $875; and $3,228 thereafter.
48
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
10. Income Taxes (Dollars in Thousands)
The applicable income tax provision included in the consolidated statements of
income is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------
<S> <C> <C> <C>
Current:
Federal $2,896 $3,116 $2,520
State 463 348 393
----------------------
Total current 3,359 3,464 2,913
Deferred
Federal 107 227 56
State 29 16 14
----------------------
Total deferred 136 243 70
----------------------
Total $3,495 $3,707 $2,983
======================
</TABLE>
The Company incurred no taxes related to securities transactions in the three
years in the period ended December 31, 1997.
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>
1997 1996 1995
---------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at
statutory federal rate $3,438 34.0% $3,458 34.0% $2,789 34.0%
Plus: State income tax net of
federal tax benefits 325 3.2 240 2.4 269 3.3
---------------- --------------- ---------------
3,763 37.2 3,698 36.4 3,058 37.3
Increase (decrease) in taxes resulting from:
Tax-exempt interest (235) (2.3) (182) (1.8) (65) (.8)
Other (33) (.3) 191 1.9 (10) (.1)
---------------- --------------- ---------------
Actual tax expense $3,495 34.6% $3,707 36.5% $2,983 36.4%
================ =============== ===============
</TABLE>
49
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31
---------------
1997 1996
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses....................................................... $1,555 $1,705
Deferred revenue................................................................ 414 285
Other liabilities............................................................... 161 340
Accrued employee benefits....................................................... 105 87
Available-for-sale investments.................................................. 35 45
Other........................................................................... 98 18
---------------
Total deferred tax assets........................................................... 2,368 2,480
Deferred tax liabilities:
Intangible assets............................................................... 1,459 1,788
Capitalized costs............................................................... 793 399
Premises and equipment.......................................................... 155 246
Available-for-sale investments.................................................. -- --
---------------
Total deferred tax liabilities...................................................... 2,407 2,433
---------------
Net deferred tax assets............................................................. $ (39) $ 47
===============
</TABLE>
Income taxes paid approximated $3,465, $3,669, and $3,775 in 1997, 1996, and
1995.
11. Employee Benefit Plan (Dollars in Thousands)
The Company has a 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. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Effective January 1, 1995, the Company amended the benefit
formula of the defined benefit pension plan in conjunction with the formation of
a defined contribution plan.
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>
1997 1996
---------------
<S> <C> <C>
Projected benefit obligation:
Vested benefit obligation................................... $1,875 $2,128
Nonvested benefit obligation................................ 45 42
---------------
Accumulated benefit obligation................................ 1,920 2,170
Effect of estimated future pay increases.................... 321 120
---------------
Projected benefit obligation.................................. 2,241 2,290
Plan assets at fair value..................................... 2,646 2,489
---------------
Projected benefit obligation less plan assets................. 405 199
Unrecognized prior service benefit............................ (424) (447)
Unrecognized net asset at transition, net of amortization..... (232) (251)
Unrecognized net loss from past experience
different from that assumed................................. (60) 281
---------------
Accrued pension cost included in other liabilities............ $ (311) $ (218)
===============
</TABLE>
50
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Following is a summary of the components of net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period.. $ 169 $ 180 $ 151
Interest cost on projected benefit obligation... 143 142 141
Actual (return) loss on plan assets............. (297) (143) (428)
Net amortization and deferral................... 83 (57) 265
---------------------
Net periodic pension cost (benefit)............. $ 98 $ 122 $ 129
=====================
</TABLE>
At December 31, 1997 and 1996, a 7% weighted average discount rate and a 3% rate
of increase in future compensation levels were used to determine the actuarial
present value of the projected benefit obligation. The expected long-term rate
of return on the plan assets for the three years in the period ended December
31, 1997, was 7%. Plan assets consist principally of United States Treasury and
agency securities, equity securities, mutual funds, and short-term investment
funds.
The Company sponsors a defined contribution plan begun in 1995 which covers
substantially all employees. Contributions to the plan are based on a percentage
of the employees' contributions to the plan. The Company contributed $39 and $35
to the plan in 1997 and 1996.
12. Commitments and Contingent Liabilities (Dollars in Thousands)
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. The Company's exposure to loss in the event of
nonperformance by the counterparty for commitments to extend credit and standby
letters of credit is the contract or notional amounts of these instruments.
Following is a discussion of these commitments and contingent liabilities.
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 $7,621 and $10,300
as of December 31, 1997 and 1996.
Loan Commitments: At December 31, 1997 and 1996, the Company had commitments
outstanding to extend credit of approximately $21,752 and $22,000. These
commitments generally require the customers to maintain certain credit
standards.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
Management generally requires collateral to secure these commitments. The amount
of collateral obtained by the Company is based on 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. Shareholders' Equity (Dollars in Thousands)
During 1996, the Company sold 805,000 shares of 7.5% Cumulative Convertible
Preferred Stock (Preferred Stock), with an aggregate liquidation value of
$20,125 to assist in funding the acquisition of Kentucky. The Preferred Stock
accrues an annual dividend of $1.875 per share, payable quarterly. In the event
that full cumulative dividends on the Preferred Stock have not been paid when
due, the Company may not declare or pay any dividends or make other
distributions on its common stock. The Company
51
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
has made all of the required quarterly dividend payments on its Preferred Stock
as of December 31, 1997.
Each share of Preferred Stock is convertible into one share of common stock. The
value of the Preferred Stock is fixed at $22 per share upon conversion.
Preferred shareholders have no voting rights, except as required by law. The
Preferred Stock is not subject to any mandatory redemption or sinking fund
provision. The Preferred Stock is redeemable as a whole or in part at the option
of the Company for cash on or after March 15, 2000 at a price of $26.125 per
share, declining annually to $25 per share on March 31, 2006 and thereafter.
In January 1997, the Board of Directors (the Board) of the Company approved the
use of up to $3,000 to repurchase outstanding shares of Preferred Stock. In
April 1997, the Board authorized the repurchase of 114,500 shares of Preferred
Stock via a tender offer to be issued in the second quarter and the repurchase
of an additional 120,000 shares via open market transactions subsequent to
consummation of all tender offer transactions. On April 30, 1997, the Company
filed a Schedule 13E-4 with the Securities and Exchange Commission for the
purpose of issuing a tender offer to holders of Preferred Stock to repurchase
the 114,500 shares at a price to be determined via the offering, but in no event
to be less than $24.00 or greater than $26.50 per share.
On May 30, 1997, the Company filed an amended Schedule 13E-4 to extend the
tender offer an additional 10 days. On June 13, 1997, the Company closed the
tender offer and repurchased 39,042 shares of its Preferred Stock for
approximately $1,035. Separately, the Company in privately negotiated
transactions purchased an additional 137,000 shares for approximately $3,755.
The primary source of funds for dividends paid by the Company to its
shareholders is dividends received from its banking subsidiaries. Dividends paid
by banking subsidiaries are subject to restriction by banking regulations. The
restrictive provisions for a national bank require 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 preceding two years. Similar
restrictive provisions for a federal savings bank limit dividends to the
earnings of the four quarters prior to the dividend declaration. During 1997,
net retained profits available for distribution to the Company as dividends,
without regulatory approval, approximate $4,518 plus net income for the interim
period through the date of declaration.
14. Regulatory Matters (Dollars in Thousands)
The Company and its banking subsidiaries are subject to various regulatory
capital requirements administered by the federal banking agency. Under capital
adequacy guidelines, the Company and its banking subsidiaries must meet specific
capital guidelines that involve quantitative measures of the Company and its
banking subsidiaries' assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Company and its banking
subsidiaries' capital amounts and classification are also subject to qualitative
judgements by regulators about components, risk, weightings, and other factors.
Quantitative measures require the Company and its banking subsidiaries to
maintain minimum amounts and ratios (set forth in the table below) of total,
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1997, that the Company and its banking
subsidiaries meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal Deposit
Insurance Corporation, the Office of the Comptroller of the Currency, and the
Office of Thrift Supervision categorized the Company and its two major
subsidiaries, the Bank and FSB as well capitalized. To be categorized as well
capitalized, minimum total risk-based, Tier I risk-based, And Tier I leverage
ratios as set forth in the following table must be maintained by the Company,
the Bank, and FSB. There are no conditions or events since that notification
that management believes have changed any institution's category. However, the
volatility of the unrealized gain or loss on available-for-sale securities,
which is a component of capital, may affect capital adequacy in the future.
52
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
The Company, the Bank and FSB actual capital amounts and ratios are presented
in the following table.
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
---------------- -------------------------- ---------------------------
Amount Ratio Amount Ratios Amount Ratio
---------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Total Capital (to Risk Weighted Assets):
Matewan Bancshares.......................... $59,825 14.41% 33,194 greater than=8.00 $41,493 greater than=10.00
Matewan National Bank....................... 58,401 15.91 29,361 greater than=8.00 36,701 greater than=10.00
Matewan Bank FSB............................ 6,419 12.92 3,975 greater than=8.00 4,968 greater than=10.00
Tier I Capital (to Risk Weighted Assets):
Matewan Bancshares.......................... 54,637 13.16 16,597 greater than=4.00 24,896 greater than=6.00
Matewan National Bank....................... 53,811 14.66 14,681 greater than=4.00 22,021 greater than=6.00
Matewan Bank FSB............................ 5,911 11.90 1,988 greater than=4.00 2,981 greater than=6.00
Tier I Capital (to Average Assets):
Matewan Bancshares.......................... 54,637 8.77 24,906 greater than=4.00 31,132 greater than=5.00
Matewan National Bank....................... 53,811 9.60 22,421 greater than=4.00 28,027 greater than=5.00
Matewan Bank FSB............................ 5,911 6.89 3,430 greater than=4.00 4,288 greater than=5.00
As of December 31, 1996
Total Capital (to Risk Weighted Assets):
Matewan Bancshares.......................... 60,988 15.53 31,219 greater than=8.00 39,023 greater than=10.00
Matewan National Bank....................... 35,761 14.86 19,254 greater than=8.00 24,068 greater than=10.00
Matewan National Bank/Kentucky.............. 21,903 17.87 9,805 greater than=8.00 12,257 greater than=10.00
Matewan Bank FSB............................ 4,961 11.07 3,586 greater than=8.00 4,483 greater than=10.00
Tier I Capital (to Risk Weighted Assets):
Matewan Bancshare........................... 54,108 13.87 15,609 greater than=4.00 23,414 greater than=6.00
Matewan National Bank....................... 33,220 13.80 9,627 greater than=4.00 14,441 greater than=6.00
Matewan National Bank/Kentucky.............. 20,371 16.62 4,903 greater than=4.00 7,354 greater than=6.00
Matewan Bank FSB............................ 4,544 10.14 1,793 greater than=4.00 2,690 greater than=6.00
Tier I Capital (to Average Assets):
Matewan Bancshares.......................... 54,108 9.64 22,453 greater than=4.00 28,067 greater than=5.00
Matewan National Bank....................... 33,220 9.29 14,310 greater than=4.00 17,888 greater than=5.00
Matewan National Bank/Kentucky.............. 20,371 12.50 6,518 greater than=4.00 8,147 greater than=5.00
Matewan Bank FSB............................ 4,544 8.94 2,033 greater than=4.00 2,542 greater than=5.00
</TABLE>
The banking subsidiaries of the Company are required to maintain average reserve
balances with the Federal Reserve Bank or as cash in their vault. The average
amount of those reserve balances for the year ended December 31, 1997,
approximated $2,934.
53
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
15. Disclosures about Fair Value of Financial Instruments (Dollars in Thousands)
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 practical 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 to 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 sheet 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 future cash flow analyses, 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
noninterest checking, passbook savings, and certain types of money market
accounts) are, by definition, equal to their carrying amounts. Fair value 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 short-term
borrowings approximate those liabilities' fair values.
Long-term borrowings: The fair values of long-term borrowings are estimated
using discounted cash flow analyses based on the company's current incremental
borrowing rates for similar types of borrowing arrangements.
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------------------ ------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents.................. $ 27,225 $ 27,225 $ 58,649 $ 58,649
Interest-bearing Deposits In Other Banks... 14,299 14,299 6,034 6,034
Investment Securities...................... 160,425 160,659 147,980 147,838
Loans...................................... 397,633 398,214 370,801 370,379
Financial Liabilities:
Deposits................................... 535,274 537,744 523,308 525,870
Short-term borrowings...................... 28,577 28,577 23,219 23,219
Long-term Borrowings....................... 8,161 8,021 7,579 7,497
</TABLE>
54
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Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
16. Other Expenses (Dollars in Thousands)
The following details certain items of other expenses for the periods indicated:
<TABLE>
<CAPTION>
Other Expense: 1997 1996 1995
--------------------------
<S> <C> <C> <C>
Telephone..................................................................... $ 610 $ 643 $ 382
Legal & auditing.............................................................. 703 465 269
Dealer fees................................................................... 529 321 23
Core deposit amortization..................................................... 759 672 190
</TABLE>
17. Parent Company Only Condensed Financial Information (Dollars in Thousands)
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
----------------
<S> <C> <C>
Assets
Cash.............................................................................. $ 192 $ 59
Investment securities - available-for-sale........................................ 2,834 3,766
Investment in banking subsidiaries................................................ 70,787 69,573
Investment in nonbanking subsidiary............................................... 849 877
Loans............................................................................. 194 240
Premises & equipment.............................................................. 361 382
Other assets...................................................................... 1,137 887
----------------
Total assets...................................................................... $76,354 $75,784
================
Liabilities and shareholders' equity
Liabilities:
Notes payable.................................................................... $ 137 $ 137
Note payable to nonbank subsidiary............................................... 300 300
Commercial repurchase agreement.................................................. 2,857 --
Long-term borrowings............................................................. 6,991 7,579
Other liabilities................................................................ 306 190
----------------
Total liabilities................................................................. 10,591 8,206
Shareholders' equity.............................................................. 65,763 67,578
----------------
Total liabilities and shareholders' equity........................................ $76,354 $75,784
================
</TABLE>
Condensed Income Statements
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-------------------------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary................................................. $ 6,616 $ 2,200 $ 7,100
Dividends from nonbank subsidiary.............................................. -- -- 58
Operating expenses, net.......................................................... 400 186 18
-------------------------
Income before equity in undistributed
earnings (excess dividends) of subsidiaries................................... 6,216 2,014 7,140
Equity in undistributed earnings (excess
dividends) of subsidiaries..................................................... 399 4,448 (1,920)
-------------------------
Net income....................................................................... 6,615 6,462 5,220
Preferred stock dividends........................................................ 1,370 1,236 --
-------------------------
Net income available to common shareholders...................................... $ 5,245 $ 5,226 $ 5,220
=========================
</TABLE>
55
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
- --------------------------------------------------------------------------------
17. Parent Company Only Condensed Financial Information (Continued)
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
-----------------------------
<S> <C> <C> <C>
Operating activities
Net income $ 6,615 $ 6,462 $ 5,220
Adjustments to reconcile net income to net cash provided by operating activities:
(Equity in undistributed earnings) excess dividends of subsidiaries (399) (4,448) 1,920
Depreciation expense 21 (9) 12
Change in other assets (250) (13) (145)
Change in other liabilities 64 55 47
Change in dividends receivable -- 5,000 (5,000)
-----------------------------
Net cash provided by operating activities 6,051 7,047 2,054
Investing activities
Investment in subsidiary (800) (28,600) --
Return of investment from subsidiary 28 26 697
Purchases of premises and equipment -- (21) (358)
Purchase of investment securities -- (1,577) (793)
Change in net loans 46 -- --
Proceeds from sale of investment securities -- -- --
Proceeds from maturity of investment securities 932 -- --
-----------------------------
Net cash provided by (used in) investing activities 206 (30,172) (454)
Financing activities
Cash dividends paid on common and preferred stock (3,069) (2,848) (1,400)
Purchase of treasury stock (5,324) (128) (56)
Sale of treasury stock -- -- 57
Proceeds from commercial repurchase agreement 2,857 -- --
Cash paid on fractional shares -- -- (3)
Payment of note payable -- -- (100)
Proceeds from long-term borrowings -- 8,000 --
Payments on long-term borrowings (588) (421) --
Proceeds from sale of preferred stock -- 18,396 --
-----------------------------
Net cash provided by (used in) financing activities (6,124) 22,999 (1,502)
-----------------------------
(Decrease) increase in cash 133 (126) 98
Cash at beginning of year 59 185 87
-----------------------------
Cash at end of year $ 192 $ 59 $ 185
=============================
</TABLE>
56
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Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
18. Quarterly Financial Data (Unaudited) (Dollars in Thousands, Except Per Share
Data)
Quarterly financial data for 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 September 30 December 31
---------------------------------------------------
<S> <C> <C> <C> <C>
1997
Interest income............................... $12,567 $12,929 $13,022 $13,479
Interest expense.............................. 5,505 5,538 5,605 5,877
Net interest income........................... 7,062 7,391 7,417 7,602
Provision for loan loss....................... 381 694 976 558
Net income.................................... 1,538 1,555 1,668 1,854
Preferred dividends........................... 311 394 352 313
Net income available to common shareholders... 1,227 1,161 1,316 1,541
Net income per common share................... .34 .32 .36 .42
1996
Interest income............................... $ 9,065 $12,459 $12,347 $12,513
Interest expense.............................. 3,681 5,047 5,046 5,095
Net interest income........................... 5,384 7,412 7,301 7,418
Provision for loan loss....................... 462 979 664 840
Net income.................................... 1,309 1,707 1,743 1,703
Preferred dividends........................... 116 376 360 384
Net income available to common shareholders... 1,193 1,331 1,383 1,319
Net income per common share................... .33 .36 .38 .36
</TABLE>
57
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Description of Business
- --------------------------------------------------------------------------------
General
Matewan BancShares, Inc. (the Company or Registrant) is a registered bank
holding company organized in 1984 for the purpose of acquiring the Matewan
National Bank (the Bank) as a wholly-owned subsidiary. On December 21, 1987, the
Company merged with Guyan Bancshares, Inc. and the Bank was merged with the two
Guyan Bancshares subsidiaries, Gilbert Bank and Trust and American National
Bank, with the Company and the Bank being the surviving entities in the
respective transactions.
The Company organized a new entity, Matewan Venture Fund, Inc. (the Fund), on
December 16, 1988, as a wholly-owned subsidiary of the Company for the purpose
of making venture capital loans and investments within West Virginia. The
Company contributed $1 million in capital to the Fund at the date of formation.
An additional capital contribution of $1 million to the Fund was made during
1989.
The Company established Matewan Bank FSB (the FSB), a wholly-owned federal
savings bank, on November 9, 1993. FSB, headquartered in Pikeville, Kentucky and
authorized to engage in all permissable thrift related activities, commenced
business January 3, 1994. The Company provided an initial $4 million capital
infusion to FSB on the commencement of business. The Company made an additional
$800 thousand infusion of capital to FSB in March of 1997.
On September 28, 1995, the Company entered into a definitive agreement with Banc
One Corporation and Banc One Kentucky Corporation under which the Company agreed
to purchase from Banc One Kentucky Corporation one hundred percent (100%) of the
voting stock of Bank One, Pikeville, N.A. (Pikeville), subject to the
appropriate regulatory approvals. On March 15, 1996, the Company consummated the
$29.4 million acquisition via a cash purchase. Pikeville retained its separate
bank charter and resumed operations as Matewan National Bank/Kentucky
(Kentucky), a wholly-owned subsidiary of the Company. On September 21, 1997,
Kentucky was merged with the Bank.
The Company considers its general market area to be southern West Virginia,
eastern Kentucky, and western Virginia. More specifically, the Company has
identified as its core market the fifteen county market area comprised of Mingo,
Logan, Boone, Lincoln and Wayne counties in West Virginia, Pike, Floyd, Johnson,
Martin, and Letcher counties in Kentucky, and Buchanan, Tazewell, Wise, Russell,
and Washington counties in Virginia. As of December 31, 1997, the Company had
consolidated assets of approximately $645 million and shareholders' equity of
approximately $65.8 million.
Matewan National Bank
The Bank, organized as a national bank in 1913, maintained its executive office
in Matewan, West Virginia from that time until the first quarter of 1994. Since
that time it has maintained its executive office in Williamson, West Virginia.
The Bank also conducts operations at its branch offices in Matewan, Delbarton,
Kermit, Williamson, Gilbert, two locations in Logan, and Danville, West
Virginia. The Bank operates drive-in facilities at each of its locations. In
May of 1994, the Bank opened the Money Center in Williamson, West Virginia. The
Money Center, in addition to serving as a centralized location for all of the
lending departments of the Bank,
58
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
also serves as a loan production office, a state-of-the-art loan support office,
and the headquarters for the financial services division of the Bank. In 1997,
the Bank opened two new de novo branch offices in Vansant and Lebanon, Virginia.
Kentucky, organized and operated under a national bank charter, maintained its
executive office in Pikeville, Kentucky. Kentucky also conducted operations at
its branch offices in Shelby Valley, Ferrell's Creek, Phelps, Sidney, Coal Run,
and South Williamson, Kentucky. On June 30, 1996, Kentucky closed the offices in
Coal Run and South Williamson due to the overlap created between these offices
and existing offices of other Company affiliates in the immediate communities.
Kentucky operates drive-in facilities at each of its locations.
On September 19, 1997, Kentucky merged with the Bank, with the former
surrendering its separate national bank charter in the process. The merger of
the Bank and Kentucky resulted in the creation of a sole national bank affiliate
of the Company with thirteen full service banking offices in West Virginia and
Kentucky. On November 15, 1997, the Bank closed the Sidney, Kentucky office.
On December 26, 1997, the Bank acquired all of the assets and liabilities of the
Abingdon and Richlands, Virginia offices of FSB via a purchase and assumption
transaction. The impact of this acquisition, the merger with Kentucky, and the
de novo branches opened in Virginia in 1997 was that the Bank closed the year as
an institution with $564 million in total assets, $459 million in total
deposits, and fifteen full service banking offices. On January 7, 1998, the Bank
closed the Logan Stratton Street office.
The Bank provides a full range of commercial banking services. It provides
automobile, mobile home, personal household, credit cards, commercial and small
business, construction and permanent real estate, student, and various
government-guaranteed loans, as well as commercial equipment leasing. The Bank
offers a variety of deposit instruments to its customers, such as free checking,
regular checking and NOW accounts, regular and special passbook savings
accounts, money market and index deposit accounts, certificates of deposit, and
IRAs. In addition, certain non-deposit investment alternatives, mainly
commercial repurchase agreements, are available. Other Bank services include
check cashing, check collection, letters of credit, travelers checks, wire
transfers, purchase and redemption of U.S. Government savings bonds, purchase
and redemption of U.S. Government and agency obligations for Bank customers,
certified and cashier checks, notary public services, safe deposit boxes, and
credit life and disability insurance. Through its financial services division,
the Bank, through Matewan Insurance and Investments, Inc., a wholly-owned
subsidiary, also offers a wide range of nontraditional and uninsured financial
products and services, such as mutual fund investments, sale and purchase of
debt and equity securities, annuities, life insurance products, and property and
casualty insurance products.
In April of 1997, the Company and Bank entered into an exclusive agreement with
Acordia of West Virginia to offer a full line of insurance products through all
Bank outlets in West Virginia, Kentucky, and Virginia. Consequently, the Bank's
line of product offerings has been expanded to include homeowner's insurance,
automobile insurance, flood insurance, title insurance, most other types of
property and casualty insurance, as well as most lines of life, health, and
commercial insurance.
59
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Description of Business (Continued)
- --------------------------------------------------------------------------------
Matewan Venture Fund
The Fund was formed on December 16, 1988 as a qualified West Virginia Capital
Company. Operations of the Fund are housed in the Bank's Matewan office. The
Fund was formed primarily for the purpose of making "venture capital loans and
investments" in small and developing companies situated in West Virginia. The
Fund initially was capitalized through the purchase of all (1,000 common shares)
of the Fund's authorized capital stock by the Company for $1 million. An
additional 1,000 shares were authorized, issued, and purchased by the Company
for $1 million in December of 1989. Under West Virginia law, the Company's
investment in the Fund has generated substantial tax credits against West
Virginia tax liabilities. These credits were made available upon the formation
of the Fund. The principal activity of the Fund is making venture capital loans
to and investments in qualified companies.
Matewan Bank FSB
FSB was organized and established as a federally chartered "de novo" savings
bank on November 9, 1993. FSB established corporate headquarters in Pikeville,
Kentucky and commenced business operations at its Pikeville office on January 3,
1994. In November of 1994, FSB commenced operations at a second office located
in Paintsville, Kentucky. In the second quarter of 1995, FSB established two
additional branch offices inside of supermarkets in Pikeville, Kentucky and
Goody, Kentucky. In 1996 FSB opened an additional four offices: a full-service
branch in Prestonsburg, Kentucky; a financial services and business development
branch in Richlands, Virginia; and two additional supermarket branch offices in
Abingdon, Virginia and Whitesburg, Kentucky. On December 26, 1997, FSB
transferred all interests in its offices in Richlands and Abingdon to Matewan
National Bank.
FSB is regulated by the Office of Thrift Supervision (the OTS) and is authorized
to conduct business that includes providing services covering the full range of
thrift related activities. In addition, FSB's charter requires it to maintain
its status as a "Qualified Thrift Lender" by maintaining an asset mix in which
sixty-five percent (65%) of the computed asset base of FSB is invested in
Qualifying Thrift Assets. Qualifying thrift assets include home mortgages, any
loan made on liens securing residential real estate, mobile homes, and personal
household expenditures. It also includes any investments in stock, deposits, or
obligations of most federal and local housing agencies, or any mortgage pool
securities. Fixed assets and repossessed real estate similarly qualify.
FSB's product offerings also include a variety of deposit instruments to its
customers, such as free checking, regular checking and NOW accounts, regular
passbook savings accounts, money market and index deposit accounts, certificates
of deposit, and IRAs. Other FSB services include check cashing, check
collection, letters of credit, travelers checks, wire transfers, purchase and
redemption of U.S. Government savings bonds, purchase of U.S. Government and
agency obligations for FSB customers, certified and cashier checks, notary
public services, safe deposit boxes, electronic tax filing capability, and
credit life and disability insurance.
FSB was initially capitalized in the amount of $4 million by the Company. The
Company made an additional $800 thousand capital infusion in March of 1997.
Operating losses for FSB had been anticipated in the early periods of its
operation as it becomes established in its markets. The FSB's contribution to
the overall earnings of the Company was approximately 9% for 1997, approximately
6% for 1996, and approximately 4% for 1995.
60
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Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Delivery Systems
The Company uses sophisticated technology to enhance its delivery systems. The
Company also maintains an integrated PC-based server network system that
provides immediate interaction among all operating functions of its
subsidiaries, thereby enhancing internal communication and customer service. The
Company offers retail customers 24 hour banking via touch-tone phone by means of
an interactive voice response system. Company affiliates maintain an Automated
Teller Machine (ATM) network of approximately 25 machines in the core market
area. The Company also offers 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 commercial
customers to access cash management services via interlinks with the Company's
mainframe computer. In addition, utilization of such technology enables the
Company to employ sophisticated credit rating and pricing models at its
subsidiaries for the purpose of pricing loan products to reflect credit risk
more accurately.
Summary and Mission Statement
The following table depicts pertinent financial and operational data of all of
the subsidiaries of Matewan BancShares, Inc. as of December 31, 1997 (in
thousands of dollars).
<TABLE>
<CAPTION>
Total Employees
Total Net Total Equity (Full-Time Total
Assets Loans Deposits Capital Equivalent) Offices
<S> <C> <C> <C> <C> <C> <C>
Matewan National Bank $563,732 $347,974 $458,893 $64,877 249 15
Matewan Bank FSB 83,248 49,401 76,494 5,910 45 6
Matewan Venture Fund 849 64 - 849 na na
</TABLE>
As of December 31, 1997, the Company had six officers who regularly provide
services to the Bank, Fund, FSB, or Kentucky. These officers are compensated by
the Bank or FSB. Subsidiaries of the Company had 294 full-time equivalent
employees as of the same date. Company subsidiaries operated 21 full service
offices and one loan production office.
Through its mission statement, the Company targets a goal of being the leading
provider of financial services in the markets in which it operates. Through its
subsidiaries, the Company is engaged in providing a full range of consumer and
commercial financial services throughout southern West Virginia, eastern
Kentucky, and western Virginia.
In the course of its business, the Company competes for loans, deposits, and
other financial product offerings with numerous other banks and financial
institutions throughout its market area, as well as numerous nontraditional and
often nonregulated banking competitors such as brokerage firms, mutual funds,
finance companies, and other types of financial service providers.
Regulation
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended, and is registered as such with, and subject to
supervision by the Federal Reserve Board (the FRB). The FRB may make
examinations of the Company or any of its subsidiaries and has the authority to
regulate certain bank holding company debt.
61
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Description of Business (Continued)
- --------------------------------------------------------------------------------
The Bank is a national bank. The primary regulator of national banks is the
Office of the Comptroller of the Currency (the OCC). FSB is a federal savings
bank. The principal regulator of federal savings banks is the Office of Thrift
Supervision (the OTS). As federally insured institutions and Federal Reserve
members, all are subject to regulation by the Federal Deposit Insurance
Corporation (the FDIC) and the FRB.
The Fund is a qualified West Virginia Capital Company. Its principal regulator
is the West Virginia Economic Development Authority (the WVEDA). It is also
subject to regulation by the FRB.
Legislation
In December of 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to other federal banking statutes. Among other things,
FDICIA requires federal banking regulatory authorities to take "prompt
corrective action" with respect to depository institutions that do not meet
minimum capital requirements. For these purposes, FDICIA established five
capital tiers: (1) well capitalized, (2) adequately capitalized, (3)
undercapitalized, (4) significantly undercapitalized, and (5) critically
undercapitalized. In addition, FDICIA placed certain requirements on management
of banks with more than $500 million in assets to comply with certain internal
control monitoring guidelines. The Bank's growth and the 1997 merger of Kentucky
makes it subject to these requirements beginning in 1998. The federal banking
regulatory agencies have adopted regulations to implement the prompt corrective
action provisions of FDICIA.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (Riegle-
Neal), enacted in September 1994, provides for nationwide interstate banking and
branching. Under Riegle-Neal, interstate acquisitions of banks and/or bank
holding companies in any state by bank holding companies in any other state
became permissable as of September 29, 1995. Interstate branching and
consolidations of existing bank subsidiaries in different states became
permissable on June 1, 1997. The permissability of consolidations and branching
was permitted to be accelerated by "opting-in" by individual states until June
1, 1997. States were also permitted until the same date to adopt legislation to
"opt-out" of interstate branching and consolidations, but in that event the
state choosing to "opt-out" would make its own state banks ineligible to branch
into, or consolidate operations in other states.
Competition
The Company's defined geographic market area stretches across three states,
where it finds itself operating in distinctly different competitive environments
along state lines.
West Virginia: With final enactment of Riegle-Neal, interstate banking became
fully implemented in West Virginia. The competitive environment could be
expected to change accordingly. In the five West Virginia counties of the
Company's general market area, eight institutions that would be classified as
banks or thrifts and three credit unions operate thirty-four offices. These
offices range from affiliates of nationally prominant bank holding companies to
locally owned unit banks. In terms of market share, the Company currently is a
close second to Bank One affiliates. In December of 1996, Bank One announced
that it had signed a
62
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
definitive agreement wherein it would sell some of its offices in this market
area to two non-West Virginia parties. While consummation of this transaction
will add two new competitors (and increase the potential for greater
competition) to the Company's West Virginia markets, it will also lift the
Company to first in terms of market share.
Kentucky: In the five county Kentucky market area, ten institutions representing
banks or thrifts and two credit unions operate sixty-three offices. The Kentucky
market differs somewhat from that of West Virginia in that no major out of state
companies have any significant presence. Kentucky's restrictions on intercounty
banking have tended over the past decade to discourage out of state banking
companies from expanding anywhere in the state except for the major urban
markets. The largest competitors in the Company's market area are affiliated
with Kentucky based holding companies. The smaller competitors tend to be
locally owned unit banks. Most merger or acquisition activity has been
combinations between in-market entities. Currently, the Company maintains the
third highest market share of institutions operating within its Kentucky
markets.
Virginia: Partly because the state of Virginia has had proactive interstate
branching regulations in place for some time, the Virginia market of the Company
is the most competitive and crowded. The Company opened its first office in
Virginia as a de novo branch in July of 1996 and followed with three subsequent
new branches since. The Company has not operated in Virginia long enough to have
acquired any meaningful market share. Like the Company's West Virginia market,
the range of competitors runs the spectrum of large nationally prominant banking
companies to small locally owned community banks. Unlike the Company's Kentucky
markets where the trend in mergers and acquisitions has tended to be local
combinations, merger and acquisition activity in Virginia markets has tended to
involve the larger banking companies.
Under Riegle-Neal, banking companies, particularly those operating along state
borders or with multi-state operations, could expect to find the local
environment much more competitive. This more intense competitive environment
could be in the form of an increased number of traditional banking competitors
operating under the same restrictions and restraints as the Company. Increased
competition could also be realized from less heavily regulated financial
competitors - brokerage firms, mutual funds, consumer finance companies,
insurance companies, credit card companies, and other financial service
companies - that have been competitors for certain financial products for
years. An additional form of increased competition banking companies should
expect to encounter in the immediate future will come from these same nonbank
competitors seeking to expand relationships with their customers by offering a
menu of new financial products - many of which previously had pretty much been
the exclusive domain of banks. Several nationally prominant insurance and
investment companies chartered unitary thrift holding companies in 1997. This
trend should be expected to continue in the foreseeable future. These companies
will possess the capacity to match any financial product line offered by any
local banking company to any desired customers via a distribution system
involving far less infrastructure - and capital investment.
63
<PAGE>
Matewan BancShares, Inc. and Subsidiaries
Description of Business (Continued)
- --------------------------------------------------------------------------------
Properties
The Company and the Bank maintain executive offices in Williamson, West Virginia
in the Bank's main building. The Company's subsidiaries operate twenty-two
offices throughout the Company's market area. Ten of these offices are owned and
twelve are leased.
Legal Proceedings
Neither the Company nor any of its subsidiaries is party to any litigation other
than litigation which is routine in the business of the Company or its
subsidiaries, and which, if decided adversely to the Company or its
subsidiaries, would materially adversely affect the condition, prospects, or
assets of the Company or its subsidiaries.
64
<PAGE>
<TABLE>
<CAPTION>
Directors of Matewan BancShares, Inc
NAME TITLE AGE
<S> <C> <C>
Dan R. Moore Chairman of the Board of Directors, 57
President and Chief Executive
Officer of Matewan BancShares, Inc.
and Matewan National Bank
James H. Harless Chairman of the Board of Directors of 78
Gilbert Imported Hardwoods, Inc.
Frank E. Ellis M.D Physician, Frank Ellis & Associates, Inc. 71
Lafe P. Ward Attorney at Law, Ward & Associates, 72
General Counsel for Matewan BancShares, Inc
Amos J. Hatfield Owner, Gilbert Furniture Company 71
George A. Kostas Pharmacist/President 68
Aracoma Drug Company, Inc.
Sidney Young, Jr. Mining Consultant 74
Betty Jo Moore President, Superior Ford Sales and Moore Chevrolet 57
Doug Hinkle President, Walter P. Walters Insurance Agency 63
Don Combs Partner, Combs and Combs 40
Attorneys at Law
</TABLE>
<PAGE>
Annual Meeting
The Annual Meeting of the Shareholders of Matewan BancShares, Inc. will be held
at 11:00 a.m. on Tuesday, April 14, 1998 at the Charleston Marriott, 200 Lee
Street East, Charleston, West Virginia. Shareholders of record of March 1, 1998
will be eligible to vote on matters brought before the shareholders at this
time.
Stock Listing
The common stock of Matewan BancShares, Inc. trades on the NASDAQ National
Market System under the symbol MATE. The Preferred Stock of the Company is
listed for trading on the NASDAQ Small-Cap Market system under the symbol MATEP.
The firms of Wheat First Union, Scott & Stringfellow, Ferris Baker Watts, Inc.,
and Herzog, Heine, Geduld, Inc. currently make a market in the Company's common
stock.
Transfer Agent
Inquiries regarding shareholder records, stock transfers, changes in ownership
or address, and dividend payment should be directed to the transfer agent at the
following addresses:
Wachovia Bank of North Carolina, N.A.
Corporate Trust Department
P.O. Box 3001
Winston-Salem, North Carolina 27102
For shareholder correspondence and requests for transfer:
Wachovia Shareholder Services
P.O. Box 8217
Boston, Massachusetts 02266-8217
Independent Public Accountants
The independent public accountants of Matewan BancShares, Inc. are Ernst & Young
LLP, Charleston, West Virginia.
Executive Offices
Matewan National Bank
Second Avenue and Vinson Street
Williamson, West Virginia 25661
(304) 235-1544
<PAGE>
MATEWAN BANKS' LOCATIONS
MATEWAN BANCSHARES, INC.
P.O. Box 100
Williamson, WV 25661
(304) 235-1544
MATEWAN NATIONAL BANK
Matewan* Delbarton Kermit*
600 Mate Street Helena Avenue Eastgate Shopping Center
Matewan, WV 25678 Delbarton, WV 25670 Kermit, WV 25674
(304) 426-8221 (304) 475-2560 (304) 393-3347
Williamson* Gilbert* Logan*
Second Avenue & Vinson St. Main Street, Rt. 52 80 Riverview Drive
Williamson, WV 25661 Gilbert, WV 25621 Logan, WV 25601
(304) 235-1544 (304) 664-3295 (304) 752-6100
Danville* Pikeville Downtown* Shelby Valley*
149 Smoot Avenue 334 Main Street 5620 Collins Highway
Danville, WV 25053 Pikeville, KY 41501 Robinson Creek, KY 41560
(304) 369-0022 (606) 433-5500 (606) 639-4377
Ferrell's Creek* Phelps* Richlands
14793 Regina/Belcher Highway 38768 Highway 194 201 Suffolk Avenue
Elkhorn City, KY 41522 Phelps, KY 41564 Richlands, VA 24641
(606) 754-5025 (606) 456-8766 (540) 964-4099
Vansant*# Abingdon*# Lebanon*#
Highway 83 396 Towne Centre Drive Highway 694
Vansant, VA 24656 Abingdon, VA 24210 Lebanon, VA 24266
(540) 935-7400 (540) 623-1965 (540) 889-1330
Tazewell* Money Center
East Fincastle at Fourway 249 Second Avenue
Tazewell, VA 24651 Williamson, WV 25661
(open March 1998) (304) 235-1660
MATEWAN INSURANCE AND INVESTMENTS, INC.
Money Center
249 Second Avenue
Williamson, WV 25661
(304) 235-1660
MATEWAN BANK FSB
Coal Run* Paintsville* Prestonsburg*
1086 North Mayo Trail 300 North Mayo Trail Glen Lyn Plaza
Pikeville, KY 41501 Paintsville, KY 41240 Prestonsburg, KY 41653
(606) 432-4411 (606) 789-4045 (606) 886-0192
Goody*# Pikeville*# Whitesburg*#
Thompson Plaza Towne & Country Plaza 99 Medical Plaza
Goody, KY 41503 Pikeville, KY 41501 Whitesburg, KY 41858
(606) 237-7364 (606) 432-2417 (606) 632-9470
MATEWAN VENTURE FUND
Matewan
600 Mate Street
Matewan, WV 25661
(304) 426-8221
. Denotes 24 Hour ATM locations
# Denotes Food City Supermarket locations
<PAGE>
EXHIBIT 13.2
MATEWAN BANCSHARES, INC.
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 14, 1998
This proxy statement is furnished to shareholders of Matewan BancShares,
Inc. (the "Company") in connection with the solicitation of proxies by the
Board of Directors of the Company for use at its Annual Meeting of
Shareholders (the "Annual Meeting") to be held at 11:00 a.m., local time on
Tuesday, April 14, 1998, at the Charleston Marriott, 200 Lee Street,
Charleston, West Virginia, for the purposes set forth in the Notice of Annual
Meeting of Shareholders.
This Proxy Statement and accompanying form of proxy are first being mailed
or given to shareholders of the Company on or about March 17, 1998.
The principal Executive offices of the Company are located at Second Avenue
and Vinson Street, Williamson, West Virginia.
VOTING RIGHTS AND PROXIES
VOTING RIGHTS
Only shareholders of record of the Company as of the close of business on
March 1, 1998, (the "Record Date") are entitled to notice of and to vote at
the Annual Meeting. On that date, 3,634,220 shares of the Company's common
stock, par value $1.00 per share (the "Common Stock") were issued and
outstanding and were held by approximately 673 holders of record. On February
27, 1996, the Company issued 805,000 shares of Series A Convertible Cumulative
Preferred Stock (the Preferred Shares). Holders of the Preferred Shares are
not entitled to vote in the election of Directors. The Company had no other
classes of equity securities outstanding at that date. Each share of Common
Stock is entitled to one vote on all matters properly presented to the Annual
Meeting. The affirmative vote of the holders of a majority of Common Stock
attending the meeting in person or represented by proxy is necessary to elect
the directors of the Company and, except as otherwise provided, approve each
of the other proposals set forth in this proxy statement for consideration at
the Annual Meeting. The presence, in person or by proxy, of not less than a
majority of the total number of outstanding shares of Common Stock is
necessary to constitute a quorum at the Annual Meeting.
PROXIES
Shares represented by proxies received by the Company will be voted in
accordance with the instructions contained therein. Shares represented by
proxies for which no instruction is given will be voted FOR election of the
directors specified herein and FOR each of the other proposals set forth in
this proxy statement for consideration at the Annual Meeting.
Shareholders are requested to sign, date, mark, and return promptly the
enclosed proxy card in the postage paid envelope provided for this purpose in
order to assure that their shares will be voted. A proxy may be revoked at any
time prior to exercise of the authority granted thereunder. Revocation may be
accomplished by the granting of a later dated proxy with respect to the same
shares, by written notice to the Secretary of the Company at any time prior to
the voting thereof, or by voting in person at the Annual Meeting. Attendance
at the Annual Meeting will not, by itself, revoke a proxy.
The Board of Directors knows of no matters to be presented at the Annual
Meeting other than those described in this proxy statement. If other matters
are properly brought before the Annual Meeting, it is the intention of the
persons named in the proxies to vote the shares to which such proxies relate
in accordance with their best judgement.
The Company will bear the cost of the solicitation of proxies. In addition
to solicitation by mail, officers and regular employees of the Company, who
will receive no compensation in excess of their regular salaries for their
services, may solicit proxies by telephone, telegram, or otherwise. Brokerage
firms, fiduciaries, and other custodians who forward soliciting material to
the beneficial owners of shares of Common Stock held of record by them will be
reimbursed for their reasonable expenses incurred in forwarding such material.
<PAGE>
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
The following table sets forth certain information concerning the amount and
nature of beneficial ownership of the Company's Common Stock by persons known
by the Company to own 5% or more of such Common Stock, and by its directors,
the individuals nominated for director, and its directors and officers as a
"group" (as that term is used in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended) as of January 31, 1998. The amount and nature of
beneficial ownership, except as otherwise noted in the table, represents
shares over which a director, nominee, or officer has sole voting and sole
investment power.
<TABLE>
<CAPTION>
AMOUNT
AND NATURE PERCENT
OF BENEFICIAL OF
BENEFICIAL OWNER INTEREST CLASS
---------------- ------------- -------
<S> <C> <C>
James H. Harless...................................... 387,176(1)(2) 10.65%
Drawer H
Gilbert, West Virginia 25621
Dan R. Moore.......................................... 678,915(1)(3) 18.68%
Box 26
Matewan, West Virginia 25678
Frank E. Ellis........................................ 252,072(4) 6.94%
3308 Jefferson Avenue
Cincinnati, Ohio 45220
Lafe P. Ward.......................................... 91,048(5) 2.51%
George A. Kostas...................................... 110,210(6) 3.03%
Amos J. Hatfield...................................... 89,239(7) 2.46%
Sidney R. Young, Jr................................... 20,521(8) .56%
Betty Jo Moore........................................ 346,371(9) 9.53%
Doug Hinkle........................................... 2,000 .06%
Don Combs............................................. 3,500 .10%
All directors and officers
as a group (14 persons).............................. 1,371,424(10) 37.74%
</TABLE>
- --------
(1) Includes 332,544 shares as to which Mr. Moore has sole voting power
pursuant to an agreement dated August 6, 1987, between Mr. Moore and Mr.
Harless.
(2) Includes 348,384 shares held of record by Mr. Harless, members of his
family, and affiliates.
(3) Includes 336,371 shares held of record by Mr. Moore and his wife, members
of his family, and affiliates.
(4) Includes 207,415 shares of record held by Mr. Ellis, members of his
family, and affiliates as to which Mr. Ellis disclaims beneficial
ownership.
(5) Includes 50,160 shares of record held by Mr. Ward, members of his family,
and affiliates as to which Mr. Ward disclaims beneficial ownership.
(6) Includes 83,018 shares of record held by Mr. Kostas and his wife.
(7) Includes 71,640 shares of record held by Mr. Hatfield and his wife, and
15,716 shares of record held by his wife and son as to which Mr. Hatfield
disclaims beneficial ownership.
(8) Includes 17,001 shares of record held by Mr. Young and his wife.
(9) Includes 332,798 shares held by Ms. Moore and her husband, members of her
family, and affiliates.
(10) Excludes duplicate counting for shares subject to the voting agreement
between Messrs. Moore and Harless and for shares held by Mr. Moore, Ms.
Moore, members of their family, and affiliates.
2
<PAGE>
On August 6, 1987, Messrs. Moore and Harless entered into an agreement in
connection with the merger of the Company 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 the Company for so long as Mr. Moore remains Chairman of the Company. Mr.
Moore intends to vote all such shares (332,544 shares) for the election of
nominees for Director specified herein.
The Company knows of no other person or persons who, beneficially or of
record, own in excess of five percent of the Company's Common Stock. The
Company is not aware of any other arrangements which at a subsequent date may
result in a change of control of the Company.
ELECTION OF DIRECTORS
Each of the nominees for election as a director currently serves as a
director for the Company and has been nominated by the Board of Directors for
re-election as director. The terms of each of the directors of the Company
will expire at the 1998 Annual Meeting. The number of directors of the Company
is presently set at ten, and the Company's certificate of Incorporation and
Bylaws provide that all directors are to be elected for a term of one year or
until their successors are elected and qualified.
If any nominee is unable to serve, the shares represented by all valid
proxies will be voted for the election of such substitute nominee as the Board
of Directors may recommend, or the Board of Directors may amend the Bylaws and
reduce the size of the Board. At this time, the Board knows of no reason why
any nominee might be unable to serve.
The following table sets forth the names and certain information concerning
the Directors, nominees for Director, and the executive officers of the
Company.
<TABLE>
<CAPTION>
FIRST YEAR
NAME AGE AS DIRECTOR PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS
---- --- ----------- --------------------------------------------
<S> <C> <C> <C>
James H. Harless....... 78 1984 Chairman of the Board of Gilbert Imported Hardwoods, Inc.;
from 1984 through 1987 Chairman of the Board of Guyan
Bancshares, Inc.; Nominee for Director
Dan R. Moore........... 57 1984 Chairman of the Board of Directors, President, and Chief
Executive Officer of the Company and Matewan National
Bank; Nominee for Director
Frank E. Ellis......... 71 1988 Physician, Frank Ellis & Associates, Inc.; Nominee for
Director
Lafe P. Ward........... 72 1984 Attorney at Law, Ward and Associates L.C., General Counsel
for the Company; Nominee for Director
George A. Kostas....... 68 1988 Pharmacist, President of Aracoma Drug Company, Inc.;
Nominee for Director
Amos J. Hatfield....... 71 1988 Owner, Gilbert Furniture Company; Nominee for Director
Sidney R. Young, Jr. .. 74 1984 Semi-retired since April, 1986; President and Chief Operating
Officer for McNamee Resources, Inc. from 1979; Nominee
for Director
Betty Jo Moore......... 57 1994 President of Moore Ford Sales and Moore Chevrolet,
Williamson, West Virginia; Nominee for Director
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
FIRST YEAR
NAME AGE AS DIRECTOR PRINCIPAL OCCUPATION FOR THE PAST FIVE YEARS
---- --- ----------- --------------------------------------------
<S> <C> <C> <C>
Douglas Hinkle......... 63 1996 President of Walter P. Walters Insurance Agency;
Nominee for Director
Don Combs.............. 40 1998 President of Combs & Combs; Nominee for Director
Pauline Roberson....... 75 Vice President and Secretary of Company, Matewan National
Bank since 1984, and Matewan Bank FSB since 1993;
Lee M. Ellis........... 43 Vice President of Matewan National Bank since April, 1988;
Vice President and Chief Financial Officer of the Company
and Matewan National Bank from April, 1992 to the present,
and Matewan Bank FSB from November, 1993 to present;
Anna Ward.............. 38 Vice President of Administration for Matewan National Bank
since August 1994; Vice President of Audit Services for the
Company from April, 1993 until August 1994, and for
Matewan National Bank from April 1992 until August 1994;
Timothy E. Edwards..... 48 Vice President of Operations for the Company from
April 1995 and for Matewan National Bank since November
1992; Office Manager of the Gilbert branch of Matewan
National Bank from September 1991 until November, 1992.
President of United National Bank, Webster Springs, WV for
three years prior to September 1991;
</TABLE>
All executive officers of the Company serve at the pleasure of the Board of
Directors and may be removed by the Board at any time.
None of the members of the Board of Directors or any executive officers are
related except that Mr. Dan R. Moore and Ms. Betty Jo Moore are married, Mr.
Lee M. Ellis is the son of Dr. Frank E. Ellis, and Ms. Anna Ward is daughter-
in-law of Mr. Lafe P. Ward.
MEETINGS OF THE BOARD OF DIRECTORS OF THE COMPANY
The Company does not have a standing nominating or compensation committee.
The functions of these committees are performed by the Board of Directors in
its entirety. Directors Douglas Hinkle, Amos Hatfield, George Kostas, James H.
Harless, and Sidney Young serve on the Audit Committee for the Company.
During 1997, the Board of Directors met 10 times, while the Board of
Directors of Matewan National Bank and Matewan Bank FSB met 12 times. No
members of the Board of Directors attended less than 75% of the meetings for
1997. Each director of the Company and Matewan National Bank receives $750 for
each monthly meeting of the Board of Directors of Matewan National Bank
attended. Matewan Bank FSB is prohibited from paying any director fees until
1998. The Company paid an aggregate of $100,529 in Director and Committee fees
in 1997, on a consolidated basis.
4
<PAGE>
EXECUTIVE OFFICERS' COMPENSATION
COMPENSATION OVERVIEW
During fiscal 1997, no cash compensation was paid to any executive officer
of the Company in his or her capacity as such, although certain of the
executive officers received directors fees from the Company. Each of the
executive officers of the Company received compensation from Matewan National
Bank, Matewan Bank FSB, or Matewan National Bank/Kentucky for services
rendered in their capacities as executive officers of those subsidiaries.
The following table sets forth information concerning the Chief Executive
Officer, the only executive officer of the Company who received aggregate
compensation in excess of $100,000 during the fiscal year ended December 31,
1997. Comparative data is also provided for the previous two fiscal years.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
OTHER
NAME AND ANNUAL
PRINCIPAL FISCAL SALARY BONUS COMPENSATION
POSITION YEAR ($) ($) ($)
---------- ------ -------- ------- ------------
<S> <C> <C> <C> <C>
Dan R. Moore (1)........................... 1997 $216,838 $33,925 $0
Chairman & 1996 204,008 35,914 0
President 1995 192,008 38,923 0
</TABLE>
- --------
(1) Matewan National Bank has provided Mr. Moore with the use of an automobile
in the performance of his business duties. The value attributable to
personal use of this automobile is not ascertainable and therefore is not
included in this table.
LONG TERM COMPENSATION
The Company had no stock award, Options/SAR, LTIP Payouts, or any other form
of long term compensation plans in place for fiscal years 1997, 1996, or 1995.
STOCK PLANS
The Company has no stock award, option, or appreciable rights plans in
existence and does not anticipate instituting any such plans in the
foreseeable future.
RETIREMENT PLANS
The Company maintains an Employees' Retirement Plan (the "Plan") which is
available to any employee who has completed at least one year of continuous
service and is at least 21 years old and who elects to make the mandatory
contribution to the Plan.
The Plan provides for monthly payments upon normal retirement at age 65;
there is no early retirement provision under the Plan.
Contributions to the Plan by the Company are those necessary to provide
benefits under the Plan as determined by the application of accepted actuarial
methods and assumptions.
Effective for the Plan years starting after December 31, 1994, mandatory
employee contributions were eliminated.
5
<PAGE>
Monthly pension benefits under the Plan, effective January 1, 1995 are equal
to the sum of .85% of Average Monthly Compensation (defined hereafter) plus
1.50% of Average Monthly Compensation in excess of Covered Compensation
multiplied by the number of years of employment, not to exceed 35 years.
Average Monthly Compensation was defined as monthly compensation averaged over
five consecutive Plan years that produce the highest monthly average within
the last ten years of participation. Accruals on December 31, 1994 are
protected.
The following table illustrates the estimated annual benefits from the Plan
upon retirement to participants at December 31, 1997, at selected remuneration
and years of service classifications.
<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................................ $29,700 $39,500 $49,400 $59,300 $69,200
140,000................................ 27,400 36,500 45,700 54,800 63,900
120,000................................ 22,900 30,500 38,200 45,800 53,400
100,000................................ 18,400 24,500 30,700 36,800 42,900
80,000................................ 13,900 18,500 23,200 27,800 32,400
60,000................................ 9,400 12,500 15,700 18,800 21,900
40,000................................ 5,100 6,800 8,500 10,200 11,900
<CAPTION>
(WITH 31 YEARS PRIOR TO 1995)
---------------------------------------
<S> <C> <C> <C> <C> <C>
150,000................................ N/A N/A N/A N/A 84,300
</TABLE>
A participant's vested interest in his accrued benefit under the Plan is
determined under a vesting schedule which provided for vesting of a
participant's accrued benefit beginning at 20% after three or more years of
service and gradually increasing to 100% after seven years of service. Prior
employee contributions vested immediately.
Effective January 1, 1995, the Company installed a 401(k) savings plan
(401(k) Plan) for all employees 21 years of age with one year of service to be
operated in tandem with its existing defined benefit pension plan. The 401(k)
Plan allows for voluntary pretax salary deferrals up to 15% of compensation.
The Company will match employee salary deferrals at a rate of 25% on the
first 4% of salary deferred. The vesting schedule for these matching
contributions shall begin with 20% after three years of service and increase
in 20% increments until fully vested after 7 years of service.
At the end of fiscal year 1997, Mr. Moore had 34 years of service, Mrs.
Roberson had 34 years, Mr. Ellis had 19 years, Mrs. Ward had 11 years, and Mr.
Edwards had 6 years of credited service under the Plan.
MANAGEMENT EMPLOYMENT CONTRACTS
The Company has no employment agreements with any of its executive officers.
COMPENSATION COMMITTEE REPORT
The Company does not have a Compensation Committee. The Board of Directors
as a whole maintains responsibility for this function as it relates to the
President and Chief Executive Officer of the Company. The President, in
conjunction with the Company's Personnel Department and guided by the
Company's Personnel policies, determines the level of compensation for the
other executive officers of the Company.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy is to provide executive officers with
salaries competitive with those paid by institutions of similar size,
performance, and circumstance.
6
<PAGE>
SALARIES
The compensation package for each executive officer is based upon a review
of selected local and national industry peer group data, evaluation of the
performance of the executive officer, and the annual financial performance of
the Company.
BONUS AWARDS
The Company's subsidiaries have paid in the last six fiscal years an annual
bonus to certain management level employees based on various predefined levels
of performance, incorporating such measures as profitability and growth.
CONCLUSION
Under the compensation programs described above, a moderate portion of the
Company's executive compensation is linked directly to individual and
corporate performance. In the case of the Chief Executive Officer, of the
Company, approximately 14% of his total 1997 compensation consisted of
variable elements linked to Company performance. The Board of Directors
intends to continue the policy of linking a portion of executive compensation
to corporate performance.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the yearly percentage change in
cumulative total shareholder return in the Company's Common Stock since
December 31, 1992 through December 31, 1997. The Company's yearly percentage
change in total shareholder return is compared to the Standard & Poor's 500
Index and a related financial peer group index representing all banks.
The total annual return is computed based on the dual assumptions that each
dividend paid by the Company in the five year period depicted was reinvested
in shares of the Company's Common Stock at the market price on the day of
dividend payment and that the price per share of the Company's stock was that
of closing on December 31, 1997.
The Common Stock of Matewan BancShares, Inc. was listed initially for
trading on the NASDAQ National Market System on June 1, 1994. Prior to that
time, there existed no active market for the Company's Common Stock.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG MATEWAN BANCSHARES, INC., INDUSTRY INDEX AND BROAD MARKET INDEX
<TABLE>
<CAPTION>
Measurement period Industry Broad Market
(Fiscal year Covered) Matewan BancShares, Inc. Index Index
- --------------------- ------------------------ -------- ------------
<S> <C> <C> <C>
Measurement PT--
12/31/92 $100.00 $100.00 $100.00
FYE 12/31/93 $124.30 $118.21 $110.08
FYE 12/31/94 $326.26 $112.14 $111.54
FYE 12/31/95 $466.32 $158.59 $153.45
FYE 12/31/96 $424.98 $219.29 $188.69
FYE 12/31/97 $623.57 $312.61 $251.64
</TABLE>
7
<PAGE>
This report has been prepared by the Board of Directors.
James H, Harless, Dan R. Moore, Frank E. Ellis, Lafe Ward, George Kostas,
Amos Hatfield, Sidney Young, Betty Jo Moore, Douglas Hinkle, and Don Combs.
CERTAIN TRANSACTIONS
Company subsidiaries have made various loans to its directors and officers
and to directors and officers of the Company and its subsidiaries. Loans to
this group and their related entities totalled $1,502,000, $3,315,000, and
$3,392,000 at December 31, 1997, 1996, and 1995, 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 collectability or
present other unfavorable features.
During the year ended December 31, 1997, the Company and its subsidiaries
paid legal fees in the amount of $23,088 to the law firm of Ward and
Associates, L.C. Mr. Ward, a director of the Company, is a principal in the
firm and as a result may receive an indirect benefit from the payment of legal
fees. During the year ended December 31, 1997, the Company and its
subsidiaries paid legal fees in the amount of $172,926 to the law firm of
Combs and Combs. Mr. Combs, a director of the Company, is a principal in the
firm and as a result may receive an indirect benefit from the payment of legal
fees.
APPOINTMENT OF AUDITORS
The Board of Directors has selected the firm of Ernst & Young LLP, certified
public accountants, to act as principal auditors for the Company for the year
ended December 31, 1998. Ernst & Young also served as principal auditors for
the Company for the year ended December 31, 1997. Although the selection and
appointment of independent auditors is not required to be submitted to a vote
of the shareholders, the Board has decided to ask the shareholders to approve
the appointment. If the shareholders do not approve such appointment, the
Board will reconsider its appointment. Approval of the appointment of auditors
will require the affirmative vote of a majority of the total votes cast on
this issue at the Annual Meeting. Representatives of Ernst & Young LLP are
expected to be at the Annual Meeting and will have the opportunity to make a
statement if they desire to do so. Such representatives are also expected to
be available to respond to appropriate questions.
OTHER MATTERS
The Board of Directors knows of no other matters to be presented for action
at the Annual Meeting other than those mentioned above. If any such matters
properly come before the meeting, it is the intention of the persons named in
the accompanying proxy to vote on such matters in accordance with their best
judgement.
SHAREHOLDER PROPOSALS
Shareholders of the Company who desire to present proposals for
consideration by the Company's shareholders at the 1999 Annual Meeting of
Shareholders will be required to advise the Company in writing of the proposal
on or prior to November 1, 1998.
8
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Matewan BancShares, Inc. and Subsidiaries of our report dated January 30,
1998, included in the 1997 Annual Report to Shareholders of Matewan BancShares,
Inc. and Subsidiaries.
/s/ Ernst & Young LLP
Charleston, West Virginia
January 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,805
<INT-BEARING-DEPOSITS> 14,299
<FED-FUNDS-SOLD> 4,420
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,881
<INVESTMENTS-CARRYING> 135,544
<INVESTMENTS-MARKET> 135,778
<LOANS> 403,111
<ALLOWANCE> 5,478
<TOTAL-ASSETS> 644,858
<DEPOSITS> 535,274
<SHORT-TERM> 28,577
<LIABILITIES-OTHER> 7,083
<LONG-TERM> 8,161
0
805
<COMMON> 3,684
<OTHER-SE> 61,274
<TOTAL-LIABILITIES-AND-EQUITY> 644,858
<INTEREST-LOAN> 41,146
<INTEREST-INVEST> 9,686
<INTEREST-OTHER> 1,165
<INTEREST-TOTAL> 51,997
<INTEREST-DEPOSIT> 21,376
<INTEREST-EXPENSE> 22,525
<INTEREST-INCOME-NET> 29,472
<LOAN-LOSSES> 2,609
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 22,119
<INCOME-PRETAX> 10,110
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,615
<EPS-PRIMARY> 1.44
<EPS-DILUTED> 1.44
<YIELD-ACTUAL> 5.29
<LOANS-NON> 2,987
<LOANS-PAST> 1,791
<LOANS-TROUBLED> 513
<LOANS-PROBLEM> 11,040
<ALLOWANCE-OPEN> 5,986
<CHARGE-OFFS> 4,141
<RECOVERIES> 1,024
<ALLOWANCE-CLOSE> 5,478
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,946
</TABLE>
