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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, 1998
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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
Cumulative Convertible Preferred 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
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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
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The aggregate market value of the voting stock is based on $26.50 per share
held by nonaffiliates of the registrant as of January 31, 1999 was $65,829,525.
The number of shares of the registrant's common stock, par value $1.00 per
share, issued and outstanding December 31, 1998 was 3,978,392.
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Part I
Item I
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 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 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 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 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, 1998, the
Company had consolidated assets of approximately $684 million, deposits of
approximately $579 million, and shareholders' equity of approximately $66
million.
As of December 31, 1998, 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 274 full-time equivalent
employees as of the same date. Company subsidiaries operated 22 full service
offices and one loan production office.
Matewan National Bank
The Bank, organized as a national bank in 1913, maintains its executive office
and Money Center in Williamson, West Virginia. The Bank conducts operations at
its branch offices in Matewan, Delbarton, Kermit, Williamson, Gilbert, Logan,
and Danville, West Virginia. The Bank operates drive-in facilities at each of
its locations. The Money Center, in addition to serving as a centralized
location for all of the lending departments of the Bank, also serves as a loan
production office, a loan support office, and the headquarters for the financial
services division of the Bank. The Bank opened two new de novo branch offices in
VanSant and Lebanon, Virginia in 1997 and an additional office in Tazewell,
Virginia in 1998.
The Bank also maintains offices in Pikeville, Shelby Valley, Ferrell's Creek,
Phelps, and Sidney, Kentucky, and operates drive-in facilities at each of its
locations. 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 net impact of the FSB acquisitions, the de novo branches opened
in Virginia, and the closed offices was that the Bank closed out 1998 as an
institution with $581 million in total assets, $493 million in total deposits,
$58.5 million in shareholders' equity, and sixteen full service banking offices,
and 238 employees. Effective in January of 1999, the Bank acquired an additional
five offices with assets of approximately $39 million and liabilities of
approximately $46 million from FSB.
The Bank provides a full range of commercial banking services. It offers
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. The Bank, through Matewan Insurance and
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Investments, Inc., a wholly owned subsidiary, also offers a wide range on
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.
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 of the Fund's
authorized capital stock by the Company for $1 million. Additional shares were
authorized, issued, and purchased by the Company for an additional $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. The Fund had total assets and capital of $835 thousand at
December 31, 1998.
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 the Bank.
In July of 1998, the Bank and FSB filed the appropriate documents with
regulatory authorities to transfer the headquarters of FSB from Pikeville to
Paintsville and to transfer all interests in all FSB offices except Paintsville
from FSB to the Bank. This transaction, consummated in January of 1999, resulted
in the transfer of five FSB offices with assets of $39 million and liabilities
of $46 million to the Bank.
FSB 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, 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 19% for 1998,
approximately 9% for 1997, and approximately 6% for 1996. FSB had total assets
of $101 million, deposits of $93 million, $7 million in shareholders' equity,
six offices, and 36 employees at December 31, 1998.
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Mergers and Acquisitions
On February 24, 1999, the Company entered into an Agreement and Plan of
Reorganization (the Agreement) with BB&T Corporation (BB&T), a North Carolina
corporation under which the Company will merge into BB&T and BB&T will become
the surviving company. At the effective time of the merger, each share of the
Company's common stock and preferred stock issued and outstanding will be
converted into the right to receive shares of BB&T stock. The merger is subject
to the approval of the Company's shareholders and applicable regulatory
authorities. Pending the appropriate approvals, the transaction is expected to
be consummated in the third quarter of 1999. The Company has granted BB&T the
option, exercisable under certain circumstances, to purchase up to 19.9% of the
Company's shares of common stock outstanding.
On April 9, 1999, the Company and BB&T agreed to extend the due diligence period
in the Agreement between the two companies to provide BB&T with the opportunity
to conduct further due diligence and to provide the parties with the opportunity
to renegotiate the proposed transaction if possible or if necessary. As
originally executed on February 24, 1999, the Agreement allowed BB&T to
terminate the transaction on the basis of its due diligence review at any time
through April 9, 1999. As amended, the Agreement provides that the due diligence
period will run through April 28, 1999.
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 28 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
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.
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.
The Company depends on dividends from its subsidiaries that are subject to the
regulations of these respective regulators. Based on the prescribed regulatory
limitations of the OCC, the Bank has no dividend capacity at present. Based on
limitations imposed by the OTS, FSB has approximately $1.160 million of dividend
capacity as of December 31, 1998.
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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
made it subject to these reporting 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), permits bank holding companies to acquire banks located in states other
than the bank holding company's home state. Riegle-Neal also allows national
banks and state banks with different home states to merge across state lines,
unless the home state of the participating bank enacted legislation prior to May
31, 1997, that expressly prohibits interstate mergers. Additionally, the act
allows branch banking across state lines, unless the state where the new branch
will be located enacted legislation restricting or prohibiting de novo
interstate branching on or before May 31, 1997. West Virginia, Kentucky, and
Virginia did not enact any legislation restricting interstate branch banking.
Year 2000 Readiness Disclosure
The Company recognizes the potential risks associated with the Year 2000 (Y2K)
issue. The crux of the problem lies in the ability of computer systems and other
technological applications and codes to recognize the four full digits in the
year 2000 instead of just the last two digits. On January 1, 2000, applications
that use dates for computations, comparisons, and sorting will fail or produce
incorrect results if these last two digits (00) are recognized as 1900 instead
of 2000. This risk not only lies in computer systems and applications, but,
among other things, telephones and communication systems, security systems,
heating and cooling systems, facsimile machines, elevators, and copiers. Any
everyday function or apparatus that employs microchip or computer technology is
vulnerable to Y2K risk.
The ability of a financial institution to promptly and accurately capture,
record, process, and communicate financial transactions and related data is
pivotal to maintenance of its ongoing operations and its customers' trust.
Inability to comply with Y2K could impair a financial institution's ability to
maintain either. In view of this potential risk, the Company has undertaken a
comprehensive Year 2000 project to address issues that may affect it and its
customers. The Company began its Year 2000 project in the last half of 1997
under the guidance of senior management with oversight by the Board of
Directors.
The Company's Y2K project consists of five phases: Awareness, Assessment,
Remediation, Validation, and Implementation. The Awareness phase began with the
commencement of the Year 2000 project in late 1997 and the organization at that
time of a Year 2000 task force comprised of senior management representing the
major functional areas of the Company. Immediately, members of the task force
began a process of updating the Board of Directors, management, and employees
about issues relating to Y2K and the implications to the Company and its
customers. As well, the task force met regularly to discuss Y2K issues and
developments, participated in seminars and conference calls to stay attuned to
Y2K developments, initiated contacts with third party vendors and service
providers, and began the initial phase of assessing and taking inventory of the
Company's own critical systems and hardware. By the end of 1997, the Company had
completed its Awareness phase. However, the Company maintains an ongoing effort
to keep its employees and customers current and informed on Y2K issues.
As part of the ongoing Y2K readiness effort, the Company spent a good deal of
time in the Assessment phase identifying its critical Information Technology
(IT) systems and determining what systems software, hardware, equipment, and
critical components were noncompliant with respect to Y2K, determining
replacement alternatives, and assessing the amount of expenditure involved.
Included in this phase was an assessment of both the internal Y2K readiness and
the ability of third party providers to remediate their own Y2K issues. During
the Assessment phase, the Company determined the following general areas as most
susceptible to Y2K issues: (i) major third party provider IT systems and
peripheral hardware, (ii) internal IT systems and hardware, (iii) disruption to
customer business, and (iv) Non IT systems and infrastructure, including data
and
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voice communications, basic utilities, transportation, and physical plant. The
Assessment phase was largely completed by the second quarter of 1998.
The Remediation phase consisted primarily of Company third party providers
implementing changes needed to their systems to become compliant with Y2K
issues, testing such changes either in concert with the Company or
independently, and communicating the status of such tests to the Company. It
also involved the Company making the requisite changes to its own internal IT
systems and satisfying itself on the susceptibility to and readiness for Y2K of
significant customers. Completion of this stage was critical to the Company
beginning the testing and validation of its core operating systems which began
in the third quarter of 1998. The Company estimates the remediation phase to be
approximately 75% complete as of December 31, 1999.
The Validation phase of the Y2K project began in July of 1998 when the Company
and its major third party providers conducted testing on the core IT systems
applications and related hardware. Applications related to loans, deposits, and
general ledger have been tested and validated as compliant. Testing on secondary
applications should be completed by April of 1999 and validated by June of 1999.
The Validation phase is expected to continue into the third quarter of 1999 with
testing of more specific IT and non IT functions. The Company estimates the
validation phase to be approximately 50% complete as of December 31, 1998. Once
validated, the Company and its third party providers will begin the
Implementation phase. In the Implementation phase, remediated systems and
applications will be fine-tuned and final programs put into service before
January 1, 2000. The Implementation phase is anticipated to begin sometime in
the third quarter of 1999.
Most of the Company's major IT systems are contracted through major nationally
prominent vendors and service providers. These providers represent some of the
leading and most recognizable firms in the world in their respective lines of
business. Most of the critical third party providers have indicated to the
Company the capacity and resources to remediate, test, and implement Year 2000
issues. The Company has monitored the Y2K progress of these third party
providers, both in conjunction with and independent of its own testing, and has
determined that an acceptable level of progress has been achieved to date.
An integral part of the Company's operations concerns nontechnology or
noninformation systems exposure, primarily facilities and equipment. Year 2000
nonreadiness could adversely affect availability of such basic utilities as
telephone, gas, electrical service, transportation, heating, and cooling. The
Company has completed an inventory of its facilities and has tested or plans to
develop tests applicable to its equipment for Year 2000 compliance. Outside
companies, primarily utilities, providing these services have indicated to the
Company their own Year 2000 readiness and, to date, the Company is unaware of
any noninformation system provider whose Year 2000 unreadiness would materially
impact the Company's operations.
Interruption and disruption of customer services and business is another
potential risk inherent in Y2K readiness. Among other things, the ability of
major commercial customers and classes of credit customers to repay loans
according to scheduled terms could be impaired, thereby increasing Company
delinquency levels, nonperforming asset levels, and ultimately loan loss reserve
levels. Inability of customers to consummate such simple transactions as cashing
checks or accessing an ATM could undermine the credibility of the Company as a
viable financial service provider in its market areas. Part of the Company's Y2K
action plan incorporates steps aimed at raising customer awareness of potential
Year 2000 problems such as mass mailings, holding public information seminars,
and providing Year 2000 information sheets in branch lobbies and drivethroughs.
Moving beyond the simple education of its customer base, this plan has
undertaken to identify Year 2000 vulnerability of its major credit and deposit
customers. Customers above an established dollar threshhold have been contacted
and provided questionnaires to complete to determine Y2K readiness.
The potential exists for general economic disruptions on global, national, and
regional scales related to Year 2000 issues. The impact of such could materially
adversely affect the Company. Systems failures, both internal and external,
could subject the Company to future litigation. The likelihood of such events
and their impact on the Company can not be reasonably estimated at this time.
The Company is in the process of developing contingency plans in the event that
it or one of its major third party providers fails to complete all phases of the
Y2K project. The Company anticipates having contingency plans for both mission
critical applications and secondary systems and applications by the fourth
quarter of 1999.
For 1998, the Company incurred approximately $82 thousand in period expenses
relative to Y2K testing. An additional expense of $400 thousand is estimated for
the additional testing, validation, and implementation for 1999. Additional
purchases of equipment which is Y2K compliant and retirement of noncomplying
equipment is not expected to have a material impact beyond normal course of
business purchase and replacements. Actual capital expenditures related to such
projects
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are estimated to be approximately $900 thousand. The expense of such purchases
will be depreciated over the useful life of the equipment employing the
Company's present depreciation schedules. Retirement of noncompliant equipment
will generate 1999 expense, although the amount is not anticipated to be
material. The likelihood exists that the Company's third party providers will
attempt to recover some of their own Y2K costs in the form of future price
increases when the current contracts are renewed. Management's assessment is
that the overall direct cost to the Company of compliance with Year 2000 issues
will not be material.
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 changed
accordingly. In the five West Virginia counties of the Company's general market
area, thirteen institutions that would be classified as banks or thrifts and
three credit unions operate thirty-eight offices. These offices range from
affiliates of nationally prominent bank holding companies to locally owned unit
banks. In terms of market share, the Company currently would be ranked first in
terms of deposits.
Kentucky: In the five county Kentucky market area, twelve institutions
representing banks or thrifts and two credit unions operate sixty-four offices.
The Kentucky market differs somewhat from that of West Virginia in that, prior
to 1998, no major out of state companies had 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 competitor in the
Company's market area is affiliated with a Kentucky based holding company. In
August of 1998, Star Bancorp of Cincinnati acquired Trans Financial Bank, N.A.,
the second largest competitor in the Company's market area. 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 four subsequent
new branches. The Company has not operated in Virginia long enough to have
acquired any significant market share. Like the Company's West Virginia market,
the range of competitors runs the spectrum of large, nationally prominent
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 prominent insurance and investment companies
chartered unitary thrift holding companies in 1997. This trend should be one
that 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.
One additional factor that could potentially impact both short-term and long-
term merger and acquisition activity in Company markets is the Financial
Accounting Standards Board's (FASB) ultimate pronouncement on the continued use
of pooling of interests accounting as a permissable method in accounting for
mergers and acquisitions. Under current pooling of interests accounting
treatment, combinations qualifying for such do not record any goodwill at the
consummation of the transaction. Nor do they incur any subsequent long running
amortization expense. Should pooling of interests be eliminated as a legitimate
method of accounting for mergers and acquisitions, the marketability of local
competitors - particularly community banks - could be expected to be drastically
reduced. In the short-term, there might be an immediate rash of merger activity
to take
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advantage of pooling accounting treatment before the current rules change. In
the long-term, only the highest performing community banks would be attractive
acquisition candidates. Less efficient companies could find their marketability
substantially reduced.
Item 2
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-three
offices throughout the Company's market area. Ten of these offices are owned and
thirteen are leased.
Item 3
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.
Item 4
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
Part II
Item 5
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 completed an offering for a new class of 7.5%
Cumulative Convertible Preferred Stock, Series A. 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
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 1998 and 1997 as reported by the National
Association of Securities Dealers, Inc.
1998 1997
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
Fourth Quarter $28.93 $22.00 $.120 $24.09 $20.00 $.110
Third Quarter 24.25 21.25 .120 23.18 17.73 .110
Second Quarter 29.00 23.00 .120 18.18 16.14 .110
First Quarter 28.50 24.13 .110 17.50 15.00 .110
The following table sets forth the high and low sales prices of preferred stock
for each quarterly period during 1998 and 1997 as reported by the National
Association of Securities, Dealers, Inc.
1998 1997
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
Fourth Quarter $34.75 $27.25 $.470 $27.75 $26.00 $.470
Third Quarter 30.38 28.00 .470 28.00 26.25 .470
Second Quarter 32.13 28.13 .470 27.25 24.25 .470
First Quarter 31.00 26.00 .470 25.25 24.25 .470
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As of January 31, 1999, there were 656 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 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. As of December
31, 1998, the Bank had no dividend capacity as defined by the OCC. It is not
anticipated that the Bank will have dividend capacity until the fourth quarter
of 1999. FSB, as of the same date, possesses dividend capacity as determined by
the OTS of approximately $1.147 million. The Company does not anticipate said
limitations as being a deterrent from paying dividends to shareholders in 1999
in that the Company possesses approximately $8 million in cash and investment
securities that could be used toward such dividends before it would be required
to seek a dividend from one of its subsidiaries.
On January 14, 1997, the Company's Board of Directors authorized the repurchase
of up to $3.0 million of the Company's 7.5% Cumulative Convertible Preferred
Stock, Series A. 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 the 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 the tender offer to holders of
its Preferred Stock for a price to be determined via the offering, but in no
event to be less than $24.00 or greater than $26.00 per shares. The Company
subsequently filed an amended Schedule 13E-4 to extend the tender offer an
additional ten days. On June 13, 1997, the Company closed the tender offer and
repurchased 39,042 shares of preferred stock for approximately $1.035 million.
Additional repurchases in privately negotiated transactions resulted in an
additional 142,700 shares being bought back.
8
<PAGE>
Item 6
Selected Financial Data
Table I represents a summary of certain financial data of the Company.
TABLE I-FIVE YEAR SELECTED FINANCIAL SUMMARY (RESTATED-See Note 1)
(In Thousands of Dollars)
<TABLE>
<CAPTION>
YEARS ENDED December 31, 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PERIOD END BALANCES:
Total Assets.............................. $683,634 $643,623 $626,050 $400,067 $370,092
Total Earning Assets...................... 618,667 582,798 553,743 357,237 332,371
Total Deposits............................ 579,132 535,274 523,308 334,387 310,647
Shareholders' Equity...................... 66,887 64,606 66,537 44,920 41,012
INCOME FOR THE PERIOD:
Total interest Income..................... 55,351 51,997 46,384 32,442 28,524
Total interest Expense.................... 24,874 22,525 18,869 12,644 10,543
Net Interest Income....................... 30,477 29,472 27,515 19,798 17,981
Provision for Loan Losses................. 4,887 2,609 2,945 1,908 1,643
Non-interest Income....................... 5,340 5,366 4,699 3,302 2,802
Non-interest Expense...................... 21,838 22,313 19,339 13,165 12,577
Net Income Before Taxes................... 9,092 9,916 9,930 8,027 6,563
Applicable Income Taxes................... 2,969 3,417 3,612 2,913 2,349
Net Income................................ 6,123 6,499 6,318 5,114 4,214
Net Income Available to Common
Shareholders............................. 4,956 5,129 5,082 5,114 4,214
PER SHARE DATA:
Net Income Available to Common
Shareholders, Basic & Diluted............ $ 1.24 $ 1.28 $ 1.26 $ 1.27 $ 1.04
Common Shareholders' Equity............... 13.48 12.76 11.96 11.13 10.16
Common Cash Dividends..................... .47 .44 .40 .35 .28
Preferred Cash Dividends.................. 1.88 1.88 1.54 0 0
KEY PERFORMANCE RATIOS:
NET INCOME TO:
Average Assets......................... .92% 1.04% 1.13% 1.35% 1.17%
Average Shareholders'
Equity.............................. 9.33% 9.92% 10.29% 12.06% 10.43%
Average Shareholders' Equity
to Average Assets...................... 9.90% 10.52% 10.94% 11.19% 11.27%
Net Interest Margin....................... 5.10% 5.29% 5.49% 5.78% 5.53%
Non-interest Income to
Average Assets......................... .81% .86% .84% .87% .78%
Non-interest Expense to
Average Assets......................... 3.29% 3.58% 3.45% 3.48% 3.51%
Efficiency Ratio.......................... 60.97% 64.05% 60.03% 56.99% 60.52%
RISK-BASED CAPITAL MEASURES:
Tier 1 Risk-Based Ratio................... 12.52% 12.88% 13.93% 17.50% 17.64%
Total Risk-Based Ratio.................... 13.77% 14.13% 15.18% 18.71% 18.89%
Leverage Capital Ratio.................... 8.57% 8.59% 8.80% 10.79% 10.59%
OTHER SIGNIFICANT MEASURES:
Dividend Payout........................... 37.67% 34.14% 31.72% 27.38% 27.10%
Percent Change in Dividend................ 7.71% 9.09% 14.29% 25.00% 9.60%
Percent Change in Net Income.............. (3.37%) .92% (.63%) 21.36% (17.74%)
Percent Change in Total assets............ 6.22% 2.81% 56.49% 8.10% 7.91%
Equity Growth............................. 3.53% (2.90%) 48.12% 9.53% 7.84%
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED December 31, 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ASSET QUALITY:
Net Charge-offs to Average
Loans Outstanding.......................... .89% .81% .89% .84% .82%
Non-Performing Loans to Total
Year End Loans............................. 1.21% .87% 1.45% 1.14% 1.08%
Non-Performing Assets to Total
Year End Assets............................ .89% .69% .85% .65% .51%
Allowance for Loan Losses to
Total Year End Loans....................... 1.47% 1.36% 1.59% 1.28% 1.35%
Allowance for Loan Losses to
Non-Performing Loans....................... 120.9% 156.5% 135.6% 144.0% 168.2%
<CAPTION>
AVERAGE BALANCE SHEETS (In Thousands of Dollars)
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S>.......................................... <C> <C> <C> <C> <C>
Assets:
Cash and Due from Banks..................... $ 22,539 $ 22,108 $ 22,189 $ 17,391 $ 16,891
Interest Bearing Deposits................... 7,200 1,643 2,948 683 3,584
Investment Securities....................... 160,287 153,096 140,354 108,634 104,686
Federal Funds Sold.......................... 9,993 21,419 18,439 11,613 13,710
Loans - Net................................. 419,767 381,216 339,865 221,844 203,278
Bank Premises & Equipment................... 20,602 20,350 18,346 9,412 8,364
Other Assets................................ 22,432 22,815 19,196 9,156 8,161
-------- -------- -------- -------- --------
Total Assets................................ $662,820 $622,647 $561,337 $378,733 $358,674
======== ======== ======== ======== ========
Liabilities and Shareholders' Equity:
Deposits:
Transaction Accounts....................... $149,378 $148,931 $130,187 $ 83,135 $ 82,048
Savings Deposits........................... 90,462 76,510 76,906 52,624 52,551
Time Deposits.............................. 319,609 301,376 262,271 180,518 168,162
Borrowed Funds............................. 29,797 22,116 23,119 15,885 13,098
Accrued Liabilities & Other................. 7,957 8,203 7,430 4,183 2,404
-------- -------- -------- -------- --------
Total Liabilities........................... 597,203 557,136 499,913 336,345 318,263
Shareholders' Equity........................ 65,617 65,511 61,424 42,388 40,411
-------- -------- -------- -------- --------
Total Liabilities & Equity.................. $662,820 $622,647 $561,337 $378,733 $358,674
======== ======== ======== ======== ========
</TABLE>
* Certain amounts for the years 1997 through 1994 above have been restated for
the effects of reconcilement errors discovered in 1998. These restatements had
the effect of reducing net income in those years by $116 thousand, $144
thousand, $106 thousand, and $791 thousand, respectively, representing per share
adjustments of $.03, $.04, $.03, and $.19, respectively.
See the management discussion and analysis for discussion of acquisition
activity for matters that affect the comparability of the above information.
Item 7
MANAGEMENT'S DISCUSSION and ANALYSIS of FINANCIAL CONDITION and RESULTS of
OPERATIONS
INTRODUCTION
Matewan BancShares, Inc. (The Company) is a bank holding company headquartered
in Williamson, West Virginia. Company subsidiaries consist of a commercial bank
(Matewan National Bank or the "Bank"), a federally chartered 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 community banking related. It identifies as its core market
area a fifteen county region across three states. The West Virginia market
includes Mingo, Logan, Boone, Lincoln, and Wayne counties. The Kentucky market
incorporates Pike, Floyd, Johnson, Letcher, and Martin counties. The Virginia
market area consists of Buchanan, Tazewell, Wise, Washington, and Russell
counties. The Bank has 16 full service offices and one loan office providing
services to customers in this general market area. 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. FSB is authorized to
engage in all permissible 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, 1998, the Company had assets of approximately $682
10
<PAGE>
million, total net loans in excess of $441 million, and total deposits in excess
of $577 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 Management
Discussion and Analysis 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 operation.
SUMMARY FINANCIAL RESULTS
The Company's net income for 1998 was approximately $6.123 million, a decrease
of approximately 5.8% from the prior year. Net earnings available to common
shareholders, basic and diluted, was approximately $4.956 million. This also
represents a decrease of approximately 3.4% from prior year levels. Net income
available for common shareholders of $5.129 million in 1997 represents a $47
thousand increase (.9%) from 1996 levels.
Company performance in 1998 was impacted four factors: (i)tightening net
interest margin, (ii) higher provisions for loan losses, (iii) lower levels of
noninterest expenses and (iv) lower noninterest income. Net interest income for
1998 increased in terms of total volume by $1.005 million (3.4%) despite the net
interest margin falling to 5.10% from 5.29% for 1997. The Company's 1998 margin
represents the lowest in seven years.
Loan loss provision increased $2.278 million (87.3%) in 1998 from 1997 levels.
Noninterest income decreased by $26 thousand (.48%) in 1998 from 1997.
Noninterest expense decreased approximately $475 thousand in 1998 from 1997. The
combination of higher net interest income and lower operating expenses were not
sufficient to reduce the negative impact of lower noninterest income and higher
loan loss provisions. Income tax expense was approximately $448 thousand lower
in 1998 than for 1997. Preferred dividends was approximately $203 thousand lower
for the same period.
Company performance in 1997 was likewise significantly impacted by tightening of
the interest margin (5.29% from 5.49% in 1996). Net interest margin in terms of
absolute dollars increased $1.957 million (7.1%) over prior year levels.
Earnings improvements were generated by the higher net interest income, lower
provisions for loan losses ($336 thousand or 11.4%) and higher levels of
noninterest income ($667 thousand or 14.2%). These improvements were
insufficient to offset the noninterest expense increase of $2.974 million
(15.4%). Net income before taxes was approximately $14 thousand lower in 1997
than for 1996. Some of the 1997 increases in net interest margin, noninterest
income, and noninterest expense were attributable to 1997 being the first twelve
month period that operations acquired in the Kentucky purchase, the financing
costs, and the amortization of intangibles relative to that purchase were
included in the Company's consolidated financial statements.
Return on average assets (ROA) measures how effectively the Company utilizes its
assets to produce its net income. The Company's ROA for 1998 was .92% compared
to 1.04% for 1997, and 1.13% for 1996. Return on average equity (ROE) reveals
how much income is earned in relation to the equity of the Company. The
Company's 1998 ROE was 9.33% compared to 9.92% in 1997 and 10.29% in 1996. 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 calculations. The Company's
approximately $6.210 million repurchase of its outstanding common and preferred
shares in 1997 and 1998 has only begun to produce a beneficial financial
statement impact (improved ROE) on average equity in the current year.
Table I portrays growth in both total assets and equity from 1994 through 1998.
This growth can be attributed to the management plan that has systematically
produced expansions and acquisitions in the market area in which the Company has
identified and operates. In 1994, the Company formed FSB, 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 most 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 opened an additional office in
Tazewell, Virginia in April of 1998. The Bank also opened two additional
supermarket branch offices in Lebanon and Vansant, Virginia. In July and
November of
11
<PAGE>
1998, the Company filed the appropriate applications to transfer the corporate
headquarters of FSB to Paintsville and convert the remaining five FSB offices to
offices of the Bank. The conversions should become effective in January of 1999.
These acquisitions, expansions, and increased market penetration in the
Company's core market area have accounted for the five year growth.
Table I also depicts that pretax income decreased $824 thousand (approximately
8.3%) in 1998. Pretax income experienced a nominal decline in the previous year.
For the same two year period, aftertax income decreased approximately 5.8% in
1998 after increasing 2.9% in 1997. Earnings available for common shareholders
decreased 3.4% and increased .92% in the same respective periods. In terms of
earnings per share measures, 1998 levels represented a $.04 per share decrease
from prior year levels (3%). 1997 and 1996 levels represent a $.02 increase and
$.01 decrease, respectively, over the comparable prior year level. Comparable
changes for 1995 and 1994 were an increase of $.23 and a decline of $.23,
respectively. Over the past five years, book value per common share has
increased steadily from a level of $10.16 per share in 1994 to $13.48 at the end
of 1998.
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.
The Private Securities Regulation Act of 1995 indicates the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by senior
corporate management. The discussion regarding the Company's interest rate risk
position in the section entitled "Market Risks", the section entitled "Summary
of Consolidated Nonperforming Assets", the section entitled "Allowance for Loan
Losses", the previous section entitled "Market for Company's Stock", and the
section entitled "Impact of Year 2000" contain statements that may be forward-
looking. In addition to these specific sections, forward-looking statements are
contained in the Management's Discussion and Analysis of Financial Condition and
Results of Operations. These forward-looking statements involve risks and
uncertainties, including changes in general economic conditions and the
Company's (as well as third party) ability to effectively address the Year 2000
issues. Although the Company believes such forward-looking statements are
reasonable, actual results may differ materially from the results discussed in
these forward-looking statements.
MERGER AND ACQUISITION
On February 24, 1999, the Company entered into an Agreement and Plan of
Reorganization (the Agreement) with BB&T Corporation, a North Carolina
corporation. Under the Agreement, the Company will merge into BB&T and BB&T will
be the surviving company. At the effective time of the merger, each share the
Company's common and preferred stock issued and outstanding will be converted
into the right to receive BB&T stock. The merger is subject to the approval of
the Company's shareholders and applicable regulatory authorities. The Company
has granted BB&T the option, exercisable under certain circumstances, to
purchase up to 19.9% of the Company's shares of common stock outstanding.
On April 9, 1999, the Company and BB&T agreed to extend the due diligence period
in the Agreement between the two companies to provide BB&T with the opportunity
to conduct further due diligence and to provide the parties with the opportunity
to renegotiate the proposed transaction if possible or if necessary. As
originally executed on February 24, 1999, the Agreement allowed BB&T to
terminate the transaction on the basis of its due diligence review at any time
through April 9, 1999. As amended, the Agreement provides that the due diligence
period will run through April 28, 1999.
On September 28, 1995, the Company entered into a definitive agreement
(Agreement) with Banc One Corporation and Bank One Kentucky Corporation under
which the Company agreed to purchase from Bank One Kentucky Corporation one
hundred percent (100%) of the voting stock of Bank One, Pikeville, N.A.
franchise (Kentucky), subject to the appropriate regulatory approvals.
Consummation of this transaction occurred March 15, 1996, using the purchase
method of accounting, 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 income. Kentucky was subsequently
merged into the Bank in September of 1997.
12
<PAGE>
FINANCIAL CONDITION
The Company's primary sources of revenue are generated by its earning assets.
The 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, 1998.
Average earning assets increased $39.87 million or 7.2% in 1998 over 1997. Core
growth in the Company's market area accounting for most of the increase. Average
net loans increased approximately $38.55 million (or 10.1%) and average
investment securities increased approximately $7.19 million (4.7%) over the same
period in 1997. Average interest bearing deposits increased approximately $5.56
million (338.2%) and average federal funds sold decreased approximately $11.43
million (53.3%) for 1998 versus 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% on the increase with core growth in the Company's market area
accounting for the remainder. Average net loans increased approximately $41.351
million (or 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 interest bearing liabilities are the primary source of funds that
support the Company's earning assets. In 1998, average interest bearing
liabilities increased approximately $35.75 million (7.5%). Average transaction
accounts decreased approximately $4.11 million (5.2%), average savings deposits
increased $13.95 million (18.2%), average time deposits increased $18.233
million (6.0%), and average purchased funds, primarily commercial repurchase
agreements, increased approximately $7.68 million (34.7%)in 1998 versus 1997.
In 1997, average interest bearing liabilities increased approximately $50.169
million (11.7%). Average transaction accounts increased approximately $12,403
million (8.4%), 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.
TABLE II-Analysis of Earning Assets and Interest Bearing Liabilities
(In Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS: YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
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................. $125,802 $11,821 9.40% $110,167 $11,245 10.21% $ 95,230 $10,158 10.67%
Real Estate................ 168,447 16,845 10.00% 148,007 15,086 10.19% 130,139 13,403 10.30%
Consumer................... 125,518 15,986 12.74% 123,042 14,815 12.04% 114,496 13,022 11.37%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Loans................ $419,767 44,652 10.64% $381,216 $41,146 10.79% $339,865 36,583 10.76%
-------- ------- ----- -------- ------- ----- -------- ------- -----
SECURITIES
Taxable.................... 152,201 9,338 6.14% 143,189 9,158 6.40% 132,317 8,248 6.23%
Tax-Exempt................. 8,086 439 5.43% 9,907 528 5.33% 8,037 419 5.21%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Securities........... 160,287 9,777 6.10% 153,096 9,686 6.33% 140,354 8,667 6.18%
-------- ------- ----- -------- ------- ----- -------- ------- -----
FEDERAL FUNDS SOLD......... 9,993 561 5.61% 21,419 1,077 5.03% 18,439 994 5.39%
INTEREST BEARING
DEPOSITS IN BANKS.......... 7,200 361 5.01% 1,643 88 5.36% 2,948 140 4.76%
-------- ------- ----- -------- ------- ----- -------- ------- -----
TOTAL EARNING
ASSETS................... $597,247 55,351 9.27% $557,374 $51,997 9.33% $501,606 $46,384 9.25%
-------- ======= ===== -------- ======= ===== -------- ======= =====
NON-EARNING ASSETS:
Other Assets............. 65,573 65,273 59,731
-------- -------- --------
TOTAL ASSETS............... $662,820 $622,647 $561,337
======== ======== ========
</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.
13
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES & YEAR ENDED YEAR ENDED YEAR ENDED
SHAREHOLDERS' EQUITY: DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
INTEREST BEARING AVERAGE COST AVERAGE COST AVERAGE COST
LIABILITIES: BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction Accounts...... $ 75,607 2,969 3.93% $ 79,719 $ 2,848 3.57% $ 67,256 $ 2,217 3.30%
Savings Deposits........... 90,462 2,795 3.09% 76,510 2,307 3.02% 76,906 2,321 3.02%
Time Deposits.............. 319,609 17,666 5.53% 301,376 16,221 5.38% 262,271 13,337 5.09%
Purchased Funds............ 29,797 1,444 4.85% 22,116 1,149 5.20% 23,119 994 4.30%
-------- ------- ----- -------- ------- ----- -------- ------- -----
TOTAL INTEREST BEARING
LIABILITIES................ 515,475 24,874 4.83% 479,721 22,525 4.70% 429,552 18,869 4.39%
-------- ------- ----- -------- ------- ----- -------- ------- -----
NON-INTEREST BEARING
LIABILITIES & CAPITAL
Demand Deposits.......... 73,771 69,212 62,931
Accrued Expenses and
Other.................... 6,800 7,162 6,533
Total Shareholders'
Equity................... 66,774 66,552 62,321
-------- -------- --------
TOTAL NON-INTEREST
BEARING LIABILITIES &
CAPITAL.................. 147,345 142,926 131,785
-------- -------- --------
TOTAL LIABILITIES &
CAPITAL.................. $662,820 $622,647 $561,337
======== ======== ========
NET INTEREST INCOME........ $30,477 $29,472 $27,515
======= ======= =======
SPREAD..................... 4.44% 4.63% 4.86%
===== ===== =====
NET INTEREST MARGIN........ 5.10% 5.29% 5.49%
===== ===== =====
</TABLE>
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.
Loans represent the biggest component of the Company's average earning asset mix
approximating in excess of 70% of Company average earning assets and in excess
of 63% of Company average total assets. 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%). The
Company maintained an average loan to deposit ratio of just over 75% for 1998.
The targeted mix of the loan portfolio is equally distributed towards the real
estate, commercial, and consumer categories. As of December 31, 1998, the actual
distribution was 41% real estate, 29% consumer and 30% commercial. The
comparable distributions at December 31, 1997 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 where the real estate involved represents collateral and not
the primary source of repayment, (ii) those secured by automobiles, (iii) those
secured by commercial real estate and equipment, where the collateral often
represents the primary source of repayment, 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'
14
<PAGE>
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 3% of the total net portfolio.
The majority of loans outstanding are collateralized by real estate, commercial
equipment, and personal consumer goods. At December 31, 1998, one to four
family residential real estate secured approximately 40% of the net loan
portfolio, commercial equipment and vehicles secured approximately 8%,
automobiles secured approximately 19%, commercial real estate secured
approximately 13%, and generally unsecured loans approximately 5%. 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 5% 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 (75%) for
land development, and sixty-five (65%) for raw, unimproved residential land. In
addition, minimum standard parameters regarding downpayment, 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 the smallest component of the Company's loan
portfolio. Commercial loans also represent 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. 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 commercial loan pricing for the most
part to be variable rate pricing off some predetermined and prominently
recognized index - usually Wall Street Journal Prime.
The population of the fifteen county core market area declined during the decade
of 1980 to 1990, before reversing course in the early 1990s. A majority of
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 $20 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 since 1994, 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 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.
15
<PAGE>
The following table shows the composition of the Company's loan portfolio:
TABLE III-Consolidated Summary of Loans and Non-Performing Assets
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Years Ended
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Commercial Loans........ $136,248 $118,999 $108,240 $ 63,581 $ 64,821
Real Estate Loans....... 183,175 157,290 144,693 88,197 76,908
Consumer Loans.......... 129,127 127,365 125,163 80,796 77,564
-------- -------- -------- -------- --------
Subtotal................ 448,550 403,654 378,096 232,574 219,293
Less: Unearned Income... 146 543 1,309 1,033 1,617
-------- -------- -------- -------- --------
Subtotal................ 448,404 403,111 376,787 231,541 217,676
Less: Reserve for Loan
Losses............... 6,574 5,478 5,986 2,973 2,932
-------- -------- -------- -------- --------
Net Loans............... $441,830 $397,633 $370,801 $228,568 $214,744
======== ======== ======== ======== ========
</TABLE>
At December 31, 1998, net loans approximated $441 million as compared to $398
million on December 31, 1997. The increase over this period of just over $44
million represents an increase of just under 11%. In this same period of time,
real estate loans increased approximately $25.9 million (16.5%), consumer loans
increased approximately $1.8 million (1.4%), and commercial loans increased
approximately $17.2 million or 14.5%. Growth in all loan categories represents
normal core business growth within the Company's defined market area.
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.
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, 1998 is
summarized as follows in Table IV:
TABLE IV-Remaining Maturities of Loans
(In Thousands of Dollars)
<TABLE>
<CAPTION>
BALANCE AFTER
DECEMBER 31, ONE YEAR 1 TO 5 FIVE
1998 OR LESS YEARS YEARS
------------ -------- -------- -------
<S> <C> <C> <C> <C>
Commercial Loans............. $136,248 $ 94,847 $ 37,302 $ 4,099
Real Estate Loans............ 183,175 57,467 75,352 50,356
Consumer Loans............... 129,127 45,124 77,468 6,535
-------- -------- -------- -------
Total Loans.................. $448,850 $197,438 $190,122 $60,990
======== ======== ======== =======
Loans Due After One Year:
With Floating Rates....... $ 3,878
========
With Predetermined Rates.. $247,234
========
</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.
The Company applies Financial Accounting Standards Board 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.
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 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, specific loan review, 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 unless management deems the collection of
all of the principal and interest
16
<PAGE>
due on the note under its original terms is unlikely. When interest accruals are
discontinued, unpaid interest credited to income in the current year is
reversed, and interest accrued in prior years is charged to the allowance for
loan losses. Management may elect to continue the accrual of interest when the
estimated net realizable value of collateral is sufficient to cover the
principal balance and accrued interest and the loan is in the process of
collection. 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, 1998 was approximately $6.574
million, an increase of approximately $2 million over the balance as of December
31, 1997. The ratio of net charge-offs to average net loans was .89% in 1998 as
compared to .81% in 1997. 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 120.9% and 156.5% as of December 31, 1998 and 1997,
respectively. The ratio of non-performing loans to total year end loans were
1.21% and .87% for 1998 and 1997, respectively. The ratio of loan loss provision
to net charge-offs was 128.9% and 83.7% for 1998 and 1997, respectively.
Since late 1994, management has moved to position the loan portfolio for the
future by aggressively working out problem credits, particularly in the consumer
and commercial sector. Over this period of time, the Company has maintained a
comprehensive program concerning the restructuring of or disposing of problem or
higher risk credits. 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 could result in some credits becoming
classified assets. The allowance for loan loss increased from $5.5 million at
December 31, 1997 to $6.6 million at December 31, 1998. The increase in
allowance reflects a provision for loan losses in 1998 of $4.9 million versus
$2.6 million in 1997. The additional provision is required due to increases in
non-performing loans, delinquencies, charge-offs, and considering the results of
a year end 1998 OCC examination. Based upon economic expectations, extensive
reviews of credit relationships by management, specific evaluation of each
nonperforming loan, and the level of nonperforming assets, management maintained
its dual posture throughout 1998 of aggressively liquidating problem credits and
maintaining adequate levels in the allowance for loan losses. Management further
maintained its vigilant and aggressive approach towards identifying, monitoring,
and treating problem credits, both actual and anticipated. 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
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Amount of Loans Outstanding
at End of Period $448,404 $403,111 $376,787 $231,541 $217,676
======== ======== ======== ======== ========
Daily Average Amount of Loans 425,203 386,502 345,062 221,844 203,278
======== ======== ======== ======== ========
Balance of Allowance For Loan
Losses at beginning of Period $ 5,478 $ 5,986 $ 2,973 $ 2,932 $ 2,961
Loans Charged Off:
Commercial 370 438 436 533 854
Consumer 3,739 3,391 2,996 1,724 1,205
Real Estate 406 312 306 137 69
-------- -------- -------- -------- --------
Total Loans Charged Off 4,515 4,141 3,738 2,394 2,128
-------- -------- -------- -------- --------
Recoveries of Loans Previously
Charged Off:
Commercial 127 102 142 104 107
Consumer 542 766 492 411 294
Real Estate 55 156 20 12 55
Total Recoveries 724 1,024 654 527 456
Net Loans Charged Off -------- -------- -------- -------- --------
Additions to Allowance: 3,791 3,117 3,084 1,867 1,672
-------- -------- -------- -------- --------
Charged to Expense 4,887 2,609 2,945 1,908 1,643
Incidental to Acquisition 3,152
-------- -------- -------- -------- --------
Balance at End of Period $ 6,574 $ 5,478 $ 5,986 $ 2,973 $ 2,932
======== ======== ======== ======== ========
Ratio of Net Charge-Offs During Period
to Average Loans .89% 0.81% 0.89% 0.84% 0.82%
======== ======== ======== ======== ========
Ratio of Loan Loss Provision
to Net Charge-offs 128.9% 83.7% 95.5% 102.2% 98.3%
Ratio of Allowance for Loan ======== ======== ======== ======== ========
Losses to Nonperforming Loans 120.9% 156.5% 135.6% 144.0% 168.2%
======== ======== ======== ======== ========
Ratio of Allowance for Loan
Losses to Loans Outstanding 1.47% 1.36% 1.59% 1.28% 1.35%
======== ======== ======== ======== ========
</TABLE>
Any analysis of the composition of the Company's Allowance for Loan Losses
begins with an overall assessment of composition of the underlying loan
portfolio. Historically, the Company's targeted mix in its loan portfolio was
weighted towards an equal consumer, real estate, and commercial
17
<PAGE>
distribution. Concurrently, the Company, after setting aside specific reserves
for identified problem credits, allocates the Allowance for Loan Losses
consistent with the exposure inherent in the underlying credits.
Real estate loans represent the segment of the loan portfolio with the most
enduring underlying collateral and the most stable and predictable charge-off
pattern over the last five years. The overwhelming majority of the real estate
credits are secured by property within the Company's market area. Short of some
macroeconomic catastrophe that would impact the real estate portfolio as a
whole, there exists little risk in the sort of concentration (beyond geographic
concentration) that management anticipates could create significant additional
exposure.
Commercial loans represent the second largest portion of the loan portfolio and
account for the second largest allocation of the Allowance for Loan Losses. The
very nature of the commercial loan requires a higher allocation in terms of both
proportion and dollar volume to the overall loan portfolio even though the loans
are generally well collateralized. Because of the larger individual credit
inherent with a commercial loan, the impact of one deteriorating loan has much
wider implications for the Company than for an individual consumer or real
estate loan. Commercial credits also represent the largest single component of
specific reserves identified to be set aside in the allocation of the Allowance
for Loan Losses. Commercial loans also possess one additional concentration risk
factor. They are heavily dependent on the health of the coal industry.
Despite being the smallest component of the loan portfolio, consumer loans
represent its largest underlying collective credit risk. Net charge-offs on
consumer loans as a percent of average consumer loans over the last three years
have proven stable and predictable with ratios of 2.55% for 1998, 2.13% for
1997, and 2.19% for 1996. However, as Table V demonstrates, these stable ratios
are produced from dollar volumes for net charge-offs far in excess of those
experienced in other segments of the loan portfolio. Despite these relatively
stable ratios, consumer loans represent the most volatile sort of credits in the
loan portfolio. They also represent the class of loans most vulnerable to a
local or broader economic downturn. While stable historical trends enable the
Company to make relatively safe assumptions about anticipated future exposure in
the consumer loan portfolio as a function of its size, substantial changes in
economic conditions could be expected to impact the consumer loan portfolio and
subsequent allocations more quickly and substantially than the other classes of
loans. During 1998, delinquencies in consumer loans rose substantially and,
turnover in the Company's collection department prevented a prompt response to
the increasing delinquencies.
TABLE VI-Allocation of Allowance for Loan Losses
(In Thousands of Dollars)
<TABLE>
<CAPTION>
December 31, 1998 1997 1996 1995 1994
Allocation Category Allocation Category Allocation Category Allocation Category Allocation Category
of as % of as % of as % of as % of as %
Allowance of Loans Allowance of Loans Allowance of Loans Allowance of Loans Allocation of Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $2,244 30.4% $1,933 29.4% $1,996 28.6% $ 955 27.3% $2,106 29.5%
Real Estate 1,158 40.8% 901 39.0% 1,141 38.3% 638 37.9% 210 35.1%
Consumer 3,172 28.8% 2,644 31.6% 2,849 33.1% 1,380 34.8% 616 35.4%
------ ------ ------ ------ ------ ----- ------ ----- ------ -----
$6,574 100.00% $5,478 100.00% $5,986 100.0% $2,973 100.0% $2,932 100.0%
====== ====== ====== ====== ====== ===== ====== ===== ====== =====
</TABLE>
The Company methodology in determining the amount and proportion of the
Allowance for Loan Losses is a four step process. The first involves
identification of specific credit risks in the loan portfolio and determining
the anticipated loss associated with such credits. After allocating allowance
for these specific credits, the Company then estimates potential exposure in
certain homogenous classes of loans (automobiles and credit cards, for example)
based on historical experience and current trends prevalent in such classes.
After setting aside reserves for these homogenous classes, the Company
determines allocations for the remaining unreserved loans based on the
application of five year average net charge-off ratios for each category of
loans (real estate, commercial, and consumer). After setting aside reserves for
these categories, the Company allocates any remaining portion of the allowance
to the individual categories based on the proportional mix of each category to
the overall loan portfolio. To the extent that there is any allowance left to
make this final calculation, the Company does not feel compelled to provide
additional reserves.
CONSOLIDATED SUMMARY OF NON-PERFORMING ASSETS
Non-performing assets consist of non-accrual loans, restructured loans whose
terms have been changed because a change in the financial position of the
borrower, and other real estate owned.
At December 31, 1998, non-performing assets increased by approximately $1.6
million over prior year levels, or approximately 37.0%, to .89% of total assets
as compared to .69% of total assets at December 31, 1997. The increase was
attributable to placement of the credits of one large commercial customer in
nonaccrual status due to bankruptcy proceedings. This loan is well secured and
management does not expect significant losses. Excluding the loan, non-
performing assets actually declined from 1997. Management has evaluated
underlying collateral values and repayment potential of all nonperforming
assets, has determined that sufficient reserves have been provided to cover any
anticipated losses on such assets, and has deemed further exposure to earnings
of these credits to be immaterial. Management continues to vigilantly monitor
these types of assets to
18
<PAGE>
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 non-accrual status in 1998, if interest had been accrued on these loans based
upon their original terms, income before taxes would have increased by
approximately $619. A total of approximately $181 in interest was actually
received on these accounts. Of the loans classified as troubled debt
restructurings, a total of approximately $14 thousand of interest would have
been earned in 1998 had these loans been paid according to their original terms.
Approximately $63 thousand was actually earned on these accounts in 1998.
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 Non-Performing Assets
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Non-Performing Assets:
Non-Accruing Loans........... $4,787 $2,987 $4,416 $1,995 $1,743
Troubled debt
restructurings............... 650 513 0 70 0
------ ------ ------ ------ ------
Total Non-Performing
Loans....................... 5,437 3,500 4,416 2,065 1,743
Other Real Estate Owned...... 652 943 879 524 137
------ ------ ------ ------ ------
Total Non-performing
Assets...................... $6,089 $4,443 $5,295 $2,589 $1,880
====== ====== ====== ====== ======
Non-Performing Loans as a
percent of total loans...... 1.21% .87% 1.17% .89% .80%
====== ====== ====== ====== ======
Non-Performing Assets as a
percent of total assets..... .89% .69% .85% .65% .51%
====== ====== ====== ====== ======
Loans Past Due 90 days....... $4,086 $1,791 $1,044 $ 618 $ 600
====== ====== ====== ====== ======
</TABLE>
At December 31, 1998, the recorded investment in impaired loans was $15.923
million (of which $4.787 million were on a nonaccrual basis). Included in this
amount was $1.733 million of impaired loans for which the relative allowance for
credit losses is $.782 million and $14.189 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, 1998 approximated $13.431
million. For the year ended December 31, 1998, the Company recognized interest
income on those impaired loans of $.988 million, which included $.990 million of
interest income recognized using the cash basis method of income recognition.
At December 31, 1997, the recorded investment in impaired loans 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.
INVESTMENT PORTFOLIO AND OTHER EARNING ASSETS
The second largest component of earning assets is investment securities. In
terms of average daily balances, investment securities represent 24% of the
Company's total assets and 27% of its earning assets. 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.
19
<PAGE>
TABLE VIII-Investment Securities
(In Thousands of Dollars)
<TABLE>
<CAPTION>
U.S. Federal State & Other Weighted
Treasury Agencies Municipal Securities Total Yield
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Maturity:
Within 1 Year........................... $ 6,004 $ 9,279 $ 2,404 $ 0 $ 17,687 5.96%
After 1 Year Through 5 Years............ 996 59,398 3,891 0 64,285 6.00%
After 5 Years Through 10 Years.......... 0 57,573 1,149 0 58,722 6.42%
After 10 Years.......................... 0 16,216 1,459 4,128 21,803 6.46%
------- -------- ------- ------ -------- -----
Total carrying value.................... $ 7,000 $142,466 $ 8,903 $4,128 $162,497 6.21%
======= ======== ======= ====== ======== =====
Estimated fair value.................... $ 7,068 $142,973 $ 8,846 $4,129 $163,016
Yield at purchase....................... 6.27% 6.26% 5.29% 6.54% 6.21%
Average maturity (in years)............. .58 5.89 7.62 21.08 6.14
DECEMBER 31, 1997
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 carrying value.................... $ 8,967 $122,867 $10,842 $5,304 $147,980 6.36%
Estimated fair 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
</TABLE>
During 1998, the Company increased its investment holdings by approximately
$2.072 million. Investment in U.S. Treasury issues decreased approximately
$7.084 million to comprise approximately 4% of the total portfolio (down from 9%
in the prior year). Investment in Federal Agency issues increased approximately
$8.982 million in 1998 from 1997, representing approximately 88% and 83% of the
investment portfolio mix for both years, respectively. Investment in State &
Municipal issues increased $211 thousand in 1998 from 1997 representing
approximately 5% of the investment portfolio for both years. Investments in
other securities declined nominally in terms of volume ($37 thousand decrease in
1998) approximating less than 3% of the total investment portfolio.
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 in 1998 in terms of
both average balances and year end levels. For the year, average federal funds
sold were approximately $11.426 million lower in 1998 than in 1997. The level
for December 31, 1998 was approximately $3.935 million lower than for the same
point in time in 1997.
Any assessment of the Company's activity in federal funds investments needs to
be evaluated in the context of evolving economic market forces, evolving
alternative sources of short term investments, 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 1998 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 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 1998 purchases and to pay a premium for what call
protection it could find. In addition, the Company also found that overnight
deposits at F.H.L.B. Pittsburgh provided essentially the same liquidity as
federal funds positions with slightly better yields. In addition, despite
generally lower interest rate levels for 1998 and an increasingly competitive
lending environment producing generally lower loan yields for the same period,
strong loan demand continued to make lending the more lucrative option in 1998
than any other investment options.
DEPOSITS
The Company primarily uses deposits to fund its lending activities and
investment portfolio. Deposit accounts, including checking, savings, and
certificates of deposit, are obtained primarily from the market area which the
Company serves. Average deposits increased approximately $32.632 million or 6.2%
from 1997 levels. Growth of core business in both the Company's mature and newer
markets accounted for most of the increase. Overall, funds proved more expensive
for 1998 than for 1997, with the cost of interest bearing liabilities
experiencing a 13 basis point increase in the
20
<PAGE>
current year. Consolidated jumbo certificates of deposit as of December 31, 1998
and 1997 were $129.267 million and $111.538 million, respectively. Jumbo
certificates are defined as deposits with minimum denominations of $100 thousand
and maximum maturities of one year. Table XII in the section entitled "Market
Risks" provides the maturity schedule and the average cost weighted by dollars
within each maturity distribution for Time Deposits in excess of $100,000.
For 1997, 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 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 $111.538 million and $111.305
million, respectively.
OTHER BORROWINGS
Short-term borrowings consist of the Treasury Tax and Loan Account, Commercial
Repurchase Agreements, and Borrowings from F.H.L.Bs 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 decreased approximately $161 thousand
in 1998 (1.1%), after increasing approximately $3.696 million (or 34.4%) in
1997. As a general rule, an 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 1998 and 1997 compared to 1996. Average Short-term
Borrowings from F.H.L.B. were insignificant for most of 1998. The Bank did have
an overnight draw outstanding on at F.H.L.B. Pittsburgh at December 31, 1998,
which management had determined would be repaid in the first week of 1999.
TABLE IX.- Short-Term Borrowings
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
TREASURY TAX AND LOAN ACCOUNT: AMOUNT RATE AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C> <C> <C>
As of Year-End.............. $ 1,262 4.26% 6,838 5.25% $ 8,101 3.62%
Average Balance............. 1,882 5.70% 2,495 5.25% 3,105 3.88%
Maximum Month End........... 6,734 7,203 8,101
COMMERCIAL REPURCHASE
AGREEMENTS:
As of Year-End.............. $13,658 2.89% $14,588 3.47% $10,118 3.19%
Average Balance............. 14,285 2.94% 14,446 2.89% 10,750 3.53%
Maximum Month End........... 16,498 16,358 13,413
F.H.L.B. BORROWINGS AND
OTHER:
As of Year-End.............. $ 5,000 4.95% $ 7,500 5.63% $ 5,000 3.61%
Average Balance............. 48 5.75% 41 6.86% 41 5.78%
Maximum Month End........... 5,000 7,500 5,000
</TABLE>
On March 15, 1996, the Company executed a note payable for $8.0 million. 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.
As of December 31, 1998, the Bank had outstanding obligations of $6.559 million
to Federal Home Loan Bank of Pittsburgh on repayment schedules ranging from a
one year bullet to a ten year amortizing payback. The section entitled "Market
Risks" depicts the annual principal due distribution on such obligations.
TABLE X.- Long-Term Borrowings
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1998 1997 1996
NOTE PAYABLE:
<S> <C> <C> <C> <C> <C> <C>
As of Year-End........... $6,345 7.75% $6,991 7.75% $7,579 7.75%
Average Balance.......... 6,685 7.75% 7,283 7.75% 6,167 7.75%
Maximum Month End........ 6,937 7,529 8,000 -
F.H.L.B. BORROWINGS AND
OTHER:
As of Year-End........... $6,559 6.23% $1,170 6.23% $ 0 -
Average Balance.......... 6,522 6.01% 32 6.23% 0 -
Maximum Month End........ 6,689 1,170 0
</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
21
<PAGE>
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 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 F.H.L.B. 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, 1998 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
(In Thousands of Dollars)
<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.................. $105,505 $29,470 $ 48,961 $ 183,936 $208,567 $ 56,047 $448,550
Investments............ 4,356 3,506 9,825 17,687 64,285 80,525 162,497
Interest Bearing
Deposits.............. 13,856 0 0 13,856 0 0 13,856
Fed Funds Sold......... 485 0 0 485 0 0 485
--------- ------- --------- --------- -------- -------- --------
Total Earning
Assets................. 124,202 32,976 58,786 215,964 272,852 136,572 625,388
Liabilities
Savings & Transaction
accounts............... 171,846 0 0 171,846 0 0 171,846
CDs > 100,000.......... 30,287 20,727 41,214 92,228 35,943 1,096 129,267
Other Time............. 40,001 39,227 83,665 162,893 41,120 123 204,136
--------- ------- --------- --------- -------- -------- --------
Total Deposits......... 242,134 59,954 124,879 426,967 77,063 1,219 505,249
Other Borrowings....... 20,337 426 2,071 22,834 7,124 2,996 32,954
--------- ------- --------- --------- -------- -------- --------
Total Interest
bearing
Liabilities............ 262,471 60,380 126,950 449,801 84,187 4,215 538,203
--------- ------- --------- --------- -------- -------- --------
Interest Sensitivity
Gap.................... (138,269) (27,404) (68,164) (233,837) 188,665 132,357 87,185
========= ======== ========= ========= ======== ======== ========
Cumulative Gap......... $(138,269) (165,673) (233,837) (233,837) (45,172) 87,185 87,185
========= ======== ========= ========= ======== ======== ========
Cumulative Gap as %
of Total earning
Assets (22.11%) (26.49%) (37.39%) (37.39%) (7.22%) 13.94% 13.94%
========= ======== ========= ========= ======== ======== ========
</TABLE>
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 come 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 eight years and has been able to maintain adequate liquidity to provide
for changes in interest rates and for changes in loan and deposit demands.
22
<PAGE>
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 (ALCO) 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 to interest rate
shocks, employing simulation models mentioned earlier. 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
and potential runoff 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. Assumptions incorporated are inherently uncertain and, as a
result, the model can not precisely measure net income or precisely predict the
impact of fluctuations in interest rates on net interest income. Actual results
may differ from simulated results due to such factors as timing, magnitude and
frequency of interest rate changes, changes in market conditions, and changes in
management strategies. Earnings simulations are performed assuming 100 and 200
basis point shocks up and down.
Company policy measures acceptable levels of interest rate sensitivity to the
above shocks as a percent of change in net interest income, as a percent of
change in pretax net income, and as a percent of change in return on average
assets. Acceptable levels of sensitivity per current policy are +/- 8 percent of
net interest income, +/- 20 percent of pretax net income, and +/- 20 percent of
return on average assets. Based on the 100 and 200 basis point shock tests
performed on balance sheets of the Company's material operating subsidiaries
(the Bank and FSB) as of December 31, 1998, management does not believe that any
parameter being evaluated for change via the simulation modeling would generate
any changes to the consolidated Company measured parameters that would be out of
tolerance with accepted Company policies.
Shock tests based on 100 and 200 basis point changes were performed on the
Company's two major subsidiaries as of December 31, 1998. In terms of impact on
pretax earnings, the maximum exposure to pretax earnings was determined to exist
in a scenario assuming a 200 basis point rate increase ($1.75 million reduction
in pretax earnings). In a declining rate environment, a scenario assuming a 200
basis point decrease improved pretax earnings by $1.85 million.
Table XII following represents the contractual balances of the Company's
balance sheet financial instruments at the expected maturity (or repricing date
where appropriate) as well as the fair value of these balance sheet instruments
as of December 31, 1998 and December 31, 1997.
23
<PAGE>
Table XII - Financial Asset/Liability Maturity/Repricing
For the year ended December 31, 1998
Year of Maturity/Repricing
<TABLE>
<CAPTION>
There- Fair
1999 2000 2001 2002 2003 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash & Due From $ - $ - $ - $ - $ - $ 22,420 $ 22,420 $ 22,420
Ave Wtd Rate - - - - - - -
Fed Funds Sold 485 - - - - - 485 485
Ave Wtd Rate 4.75% - - - - - 4.75%
Interest Bearing
Deposits 13,855 - - - - - 13,855 13,855
Ave Wtd Rate 4.75% - - - - - 4.75%
Available-for-sale
Securities 50,521 50,521
U.S. Governments 1,004 - - - - - 1,004
Ave Wtd Rate 6.27% - - - - - 6.27%
Federal Agencies 3,971 5,010 9,073 4,971 3,224 14,963 14,963
Ave Wtd Rate 5.92% 6.01% 5.59% 6.00% 6.25% 6.58 6.11%
State & Municipal 860 892 203 846 622 1,494 4,930
Ave Wtd Rate 4.47% 4.14% 4.10% 4.03% 3.88% 4.19% 4.16%
Other - - - - - 3,388 3,388
Ave Wtd Rate - - - - - 6.21% 6.21%
Held-til-maturity
Securities 111,976 112,495
U.S. Governments 5,000 996 - - - - 5,996
Ave Wtd Rate 6.31% 6.06% - - - - 6.27%
Federal Agencies 5,308 12,964 6,198 7,494 10,464 58,826 101,254
Ave Wtd Rate 5.84% 6.01% 6.25% 6.30% 6.41% 6.43% 6.33%
State & Municipal 1,544 497 492 339 - 1,114 3,986
Ave Wtd Rate 5.30% 5.03% 5.11% 5.27% - 7.76% 5.93%
Other - - - - - 740 740
Ave Wtd Rate - - - - - 7.67% 7.67%
Total Loans, Net 441,830 443,099
Commercial Loans
Fixed Rate 16,875 13,830 7,675 5,060 7,070 4,284 54,794
Ave Wtd Rate 9.01% 9.80% 9.89% 9.65% 9.25% 9.13% 9.37%
Variable Rate 75,915 77 779 16 85 161 77,033
Ave Wtd Rate 8.47% 10.01% 7.63% 10.55% 9.80% 11.27% 8.47%
Nonaccrual - - - - - 4,421 4,421
Real Estate Loans
Fixed Rate 27,365 21,705 18,447 17,981 10,048 60,060 155,606
Ave Wtd Rate 9.49% 10.12% 9.94% 9.88% 8.94% 8.62% 9.09%
Variable Rate 25,458 1,482 215 134 22 67 27,378
Ave Wtd Rate 8.67% 8.30% 8.11% 8.72% 8.99% 8.05% 8.64%
Nonaccrual - - - - - 191 191
Consumer Loans
Fixed Rate 36,506 29,755 22,348 14,814 7,495 2,459 113,377
Ave Wtd Rate 11.33% 11.27% 11.00% 10.74% 10.52% 9.94% 11.09%
Variable Rate 6,355 937 333 182 105 - 7,912
Ave Wtd Rate 10.72% 9.84% 11.48% 13.58% 10.23% - 10.70%
Nonaccrual - - - - - 175 175
Open Ended Consumer Loans
Fixed Rate 1,320 441 5 1 - - 1,767
Ave Wtd Rate 17.59% 17.49% 17.86% 18.00% - - 17.57%
Variable Rate 300 280 266 255 244 4,552 5,896
Ave Wtd Rate 14.45% 14.39% 14.39% 14.39% 14.39% 14.39% 14.40%
Financial Liabilities
Demand Deposits (with no
stated maturity) - - - - - 72,295 72,295 72,295
Interest Bearing
Transaction Accts 82,411 - - - - - 82,411 82,411
Ave Wtd Rate 3.60% - - - - - 3.60%
Savings Deposits 89,435 - - - - - 89,435 89,435
Ave Wtd Rate 3.10% - - - - - 3.10%
Time Deposits 333,403 337,214
Time Deposits over
$100,000 94,788 21,734 8,368 1,290 4,551 1,096 131,827
Ave Wtd Rate 5.63% 6.00% 5.68% 6.67% 5.78% 6.23% 5.64%
Other Time
Deposits 160,332 30,389 6,979 2,192 1,561 123 201,576
Ave Wtd Rate 4.94% 5.76% 5.60% 6.12% 5.33% 5.74% 5.11%
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
There- Fair
1999 2000 2001 2002 2003 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Borrowings:
Short Term Borrowings:
Commercial Repurchase
Agreements 13,658 - - - - - 13,658 13,658
Ave Wtd Rate 2.89% - - - - - 2.89%
F.H.L.B. Advances 5,000 - - - - - 5,000 5,000
Ave Wtd Rate 5.50% - - - - - 5.50%
Other 1,262 - - - - - 1,262 1,262
Ave Wtd Rate 4.38% - - - - - 4.38%
Long Term Borrowings:
F.H.L.B. Borrowings 2,224 1,085 1,151 1,218 309 572 6,559 6,648
Ave Wtd Rate 5.46% 5.80% 5.80% 5.80% 5.94% 6.23% 5.73%
Long term Notes 820 746 805 870 940 2,294 6,475 6,475
Ave Wtd Rate 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
</TABLE>
For the year ended December 31, 1997
Year of Maturity/Repricing
<TABLE>
<CAPTION>
There- Fair
1999 2000 2001 2002 2003 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Financial Assets:
Cash & Due From $ - $ - $ - $ - $ - $ 22,570 $ 22,570 $ 22,570
Ave Wtd Rate - - - - - - -
Fed Funds Sold 4,420 - - - - - 4,420 4,420
Ave Wtd Rate 5.38% - - - - - 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 12.51% 11.28% 11.75% 11.39% 11.64% 9.25% 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%
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%
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
There- Fair
1999 2000 2001 2002 2003 after Total Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 303,953 306,423
Time Deposits over
$100,000 79,092 21,077 8,473 351 2,545 - 111,538
Ave Wtd Rate 5.59% 6.19% 6.16% 6.67% 5.40% - 5.77%
Time Deposits 133,654 37,936 16,283 2,028 2,037 477 192,415
Ave Wtd Rate 5.18% 5.93% 5.93% 5.85% 5.76% 6.24% 5.33%
Other Borrowings:
Commercial Repurchase
Agreements 14,431 - - - - - 14,431 14,431
Ave Wtd Rate 3.47% - - - - - 3.47%
F.H.L.B. 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 718 782 848 914 986 3,913 8,161 8,021
Ave Wtd Rate 7.58% 7.58% 7.57% 7.58% 7.58% 7.48% 7.53%
</TABLE>
While various simulation model tests have produced outcomes that are within
tolerance of Company policy, management acknowledges the fact that the economic
and competitive environment of the past year has created constraining pressures
on the Company's net interest margin and, by extension, its net income.
Accordingly, the Company seeks to maintain a comfortable balance between yields
on its earning assets and its requirements for liquidity. Similarly, the Company
strives to maintain its core funding base in the face of proliferating sources
of competition without sacrificing prudent pricing strategies. The Company views
its investment portfolio primarily as a source of liquidity and safety.
Consequently, it does not normally adjust the portfolio to changes in the yield
curve to improve or enhance yields beyond repricing maturing securities.
Approximately 85% of the Company's consumer and real estate loans are fixed rate
instruments with projected cash flows and maturities of much longer duration
than the deposits and other borrowings with which they are funded. This
imbalance between loan and funding cash flows became more pronounced in the low
interest rate environment prevalent in 1998. Time deposits increased
approximately $29.450 million in 1998 over 1997 year end levels. Time deposits
maturing in less than one year increased approximately $42.374 million over the
same time interval. At the same time, loans scheduled for maturity or repricing
within a one year time frame increased only $6.8 million. Obviously, such a
liability sensitive mismatch incurs a certain amount of interest rate risk
should rates on funding rise before the loans mature or pay off. Part of this
potential risk is offset by a commercial loan portfolio that is approximately
60% variable, most immediately repriceable. The Company also increased its
positions slightly in long term borrowings from F.H.L.B. in 1998. However, just
as the interest rate environment of 1998 encouraged borrowers to tie up low
rates for longer periods of time, it similarly discouraged investors and
depositors from applying the same time horizon to their investment decisions.
This inevitable mismatch and the Company's increasing vulnerability to short
term interest rate increases characterize the greatest interest rate risk issue
facing the Company.
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
"F.H.L.B." of Pittsburgh. This move has had two beneficial consequences for the
Company. First of all, from an investment perspective the equity position in
F.H.L.B. has provided a strong and steady source of dividend income. Secondly,
membership in F.H.L.B. 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, 1998, the Bank had an unused $184 million
borrowing capacity with F.H.L.B. of Pittsburgh.
In January of 1994, FSB acquired membership in the Federal Home Loan Bank
"F.H.L.B." of Cincinnati. FSB's charter under the Office of Thrift Supervision
and consequent status as a Qualified Thrift Lender mandated 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 $12.853 million, $9.8
26
<PAGE>
million, and $10.700 million in 1998, 1997, and 1996, respectively. Net cash and
cash equivalents used in investing activities approximated $52.399 million,
$42.635 million, and $26.599 million for 1998, 1997, and 1996. Loan and
investment security funding activities are the primary components of investing
activities. Financing activities provided the Company approximately $36.198
million, $9.513 million, and $33.591 million in cash and cash equivalents in
1998, 1997 and 1996, 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 activity has been predominantly a deposit
and short term borrowing function.
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, 1998 total
equity as a percent of total assets, the "Leverage Ratio", for the Company
approximated 10.04%. As far as the Company's three affected subsidiaries were
concerned, their respective capital ratios are as follows:
<TABLE>
<CAPTION>
Matewan Matewan Matewan To Be
BancShares National Bank Well
Bank FSB Capitalized
<S> <C> <C> <C> <C>
Total Capital to Risk
Weighted Assets 13.77% 13.41% 12.99% 10.00%
Tier 1 Capital to Risk
Weighted Assets 12.52% 12.16% 12.04% 6.00%
Tier 1 Capital to
Average Assets 8.57% 8.19% 7.76% 5.00%
</TABLE>
All measures are substantially in excess of minimum levels required under the
Act. 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 and received a net capital infusion of
approximately $18.396 million, representing the total net proceeds to the
Company. The Company may not force conversion on this class of stock until March
0f 2000, although preferred shareholders may force conversion anytime. Since
1996, the Company repurchased 187,242 shares of the preferred class for
approximately $5.171 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 1998 was $30.477 million, an increase of approximately
3.4% over the 1997 level. As was noted in the discussion related to Table II,
the net interest margin declined nineteen basis points in 1998 from the 1997
level. The increase experienced in 1998 for interest income (6.5% increase) was
accompanied by a decline in yield on earning assets (six basis points). Most of
the increase in dollar volume was loan driven. Average loans outstanding for
1998 increased approximately $38 million, more than compensating for a fifteen
basis point decline in yield on loans. However the impact of any increases in
interest income on net interest income was diluted by 1998 increases in overall
interest expense (10.4% increase) and the cost of interest bearing liabilities
(thirteen basis points). Average funds for the year increased approximately $36
million in 1998. Net interest margin was nineteen basis points lower in 1998
than in 1997 (5.10% versus 5.29%).
Interest income for 1998 increased approximately $3.354 million in 1998. Loan
interest income, despite a decrease in yields, improved approximately $3.5
million in 1998. Competition for loan business in particular intensified on both
a regional and national basis. The Company found itself facing intense rate
pressure from traditional local competitors and an expanding array of out-of-
area financial service concerns. Investment security interest experienced a $91
thousand improvement in 1998. Increases in volumes in investment securities were
more than sufficient to offset a twenty-five basis point decline in yield on the
investment portfolio. Interest on federal funds sold declined $516 thousand, a
function of average lower fed funds balances and a declining interest rate
environment. Increases in interest income from interest bearing deposits
produced approximately $273 thousand in additional interest income in 1998, with
most of the gain being volume driven.
Interest expense for 1998 increased approximately $2.349 million. Approximately
61% of the increase
27
<PAGE>
was attributable to time deposits, although all classes of fund sources
experienced dollar volume increases. Average interest bearing liabilities
increased approximately $36 million (8% increase) in 1998. Despite a generally
declining interest rate environment, most classes of interest bearing
liabilities experienced upward rate pressure. 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.
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.
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 fed 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.
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. 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.
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. Further discussion of net interest income or its components is
included in the sections titled "Summary Financial Results" or "Financial
Condition".
TABLE XIII-Volume Analysis of Changes in Interest Income and Expense
(In Thousands of Dollars)
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Interest Income/Expense Due to Change In Due to Change In
1998 1997 1996 Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans
Commercial.............................. $11,821 $11,245 $10,158 $ 1,598 $(1,022) $ 576 $ 1,578 $ (491) $ 1,087
Real Estate............................ 16,845 15,086 13,403 2,079 (320) 1,759 1,775 (92) 1,683
Consumer............................... 15,986 14,815 13,022 298 873 1,171 1,016 777 1,793
------- ------- ------- ------- ------- ------ ------- ------- -------
TOTAL LOANS............................... 44,652 41,146 36,583 3,976 (470) 3,506 4,369 194 4,563
SECURITIES:
Taxable................................ 9,338 9,158 8,248 580 (400) 180 683 227 910
Tax-Exempt............................. 439 528 419 ( 97) 8 (89) 99 10 109
------- ------- ------- ------- ------- ------ ------- ------- -------
TOTAL SECURITIES.......................... 9,777 9,686 8,667 483 (392) 91 782 237 1,019
FEDERAL FUNDS SOLD........................ 561 1,077 994 (574) 58 (516) 156 (73) 83
Interest Bearing
Balances with other Banks............... 361 88 140 298 (25) 273 (68) 16 (52)
------- ------- ------- ------- ------- ------ ------- ------- -------
TOTAL EARNING ASSETS...................... 55,351 51,997 46,384 4,183 (829) 3,354 5,239 374 5,613
INTEREST BEARING LIABILITIES
Demand Deposits......................... 2,969 2,848 2,217 148 269 121 438 193 631
Savings Deposits........................ 2,795 2,307 2,321 426 62 488 (14) 0 (14)
Time Deposits........................... 17,666 16,221 13,337 968 477 1,445 2,087 797 2,884
Purchase Funds.......................... 1,444 1,149 994 400 (105) 295 (48) 203 155
------- ------- ------- ------- ------- ------ ------- ------- -------
TOTAL INTEREST
BEARING LIABILITIES..................... 24,874 22,525 18,869 1,646 703 2,349 2,463 1,194 3,656
------- ------- ------- ------- ------- ------ ------- ------- -------
NET INTEREST INCOME....................... $30,477 $29,472 $27,515 $ 2,537 $(1,532) $1,005 $ 2,776 $ (819) $ 1,957
======= ======= ======= ======= ======= ====== ======= ======= =======
</TABLE>
28
<PAGE>
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.
OTHER INCOME
TABLE XIV - OTHER INCOME
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Increase (Decrease)
1998 Over 1997 1997 Over 1996
1998 1997 1996 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Service Fees............. $4,047 $4,096 $3,011 $(49) (1.20%) $ 1,085 36.03%
Other Income............. 466 562 553 (96) (17.08%) 9 1.63%
Commission Income........ 590 614 770 (24) (3.91%) (156) (20.26%)
Gain on sale of assets... 237 94 365 143 152.13% (271) (74.25%)
------ ------ ------ ---- ------ ------- ------
Total Other Income....... $5,340 $5,366 $4,699 (26) (.48%) $ 667 14.19%
====== ====== ====== ==== ====== ======= ======
</TABLE>
Non-interest income decreased less than 1% in 1998 from 1997 levels. Service fee
income experienced a nominal decrease of approximately 1%. Other income
experienced a decline of approximately 17%. Prior period levels of other income
were stronger by comparison than current period levels due to the inclusion of
some nonrecurring transactions relative to the Kentucky acquisition that were
not repeated in 1998. Commission income was approximately 4% lower in 1998 than
in 1997 due to the third consecutive year of declining volumes of credit
insurance sales. 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 increased approximately 152% in
1998 over 1997. Most of the increase was the result of the disposition of closed
Company facilities.
Non-interest 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, predominantly
credit insurance income, decreased approximately 20% in 1997, the second
consecutive annual decline due, for essentially the same reasons given in the
previous paragraph. Gain on sale of assets decreased approximately 74% due to a
lower level of activity experienced at the Company in 1997 than for 1996.
OTHER EXPENSES
Table XV - Other Expenses
(In Thousands of Dollars)
<TABLE>
<CAPTION>
Increase (Decrease)
1998 Over 1997 1997 Over 1996
1998 1997 1996 Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C> <C>
Salaries and Benefits.... $ 8,277 $ 8,759 $ 7,877 $ (482) (5.50%) $ 882 11.20%
Net Occupancy............ 1,389 1,409 1,254 (20) (1.42%) 155 12.36%
Equipment................ 1,539 1,440 1,114 99 6.88% 326 29.26%
Data Processing.......... 1,334 1,390 1,121 (56) (4.03%) 269 24.00%
Telephone................ 848 603 632 245 40.63% (29) (4.59%)
Marketing................ 734 632 852 102 16.14% (220) (25.82%)
Loan Fees................ 899 636 354 263 41.35% 282 79.66%
Legal & Auditing......... 517 703 465 (186) (26.46%) 238 51.18%
Contract Labor........... 677 332 141 345 103.29% 191 135.46%
Goodwill & Intangibles... 1,120 1,168 984 (48) (4.11%) 184 18.70%
Other.................... 4,504 5,241 4,545 (737) (14.06%) 696 15.31%
------- ------- ------- ----- ------ ------ ------
$21,838 $22,313 $19,339 (475) (2.13%) $2,974 15.38%
======= ======= ======= ===== ====== ====== ======
</TABLE>
Total noninterest expenses decreased approximately 2% in 1998 from 1997 and
increased approximately 15% in 1997 from 1996. The increase for 1997 is
attributable to several factors, the primary one being the impact from Kentucky,
from whom inclusion of a full year's worth of operations in 1997 was realized
for the first time. Resolution of contingencies relating to the Kentucky
operations resulted in estimated liabilities being reduced by $770 thousand. In
addition, Company affiliates opened one new office in 1998 and two in 1997, 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, although the rate of increase leveled off in
1998. The ratio of noninterest expense to average assets decreased to 3.29% in
1998 from 3.58% in
29
<PAGE>
1997. The same ratio increased to 3.58% from 3.45% in 1997 from 1996.
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 possessed efficiency ratios of
60.03% in 1996, 64.05% in 1997, and 60.97% in 1998. The three year trend is
largely a function of increased costs related to (i) the Kentucky acquisition,
absorption, and merger, (ii) subsequent opening of twelve new offices since
1994, and (iii) the installation of a new telephone/communications system in
1997.
Salaries and benefits decreased approximately $482 thousand (5%) in 1998 after
increasing approximately $882 thousand (11%) in 1997. Increasing efficiencies
generated by the merger of Kentucky and the absorption of the FSB offices have
been the primary reason for the decline in the face of expenses related to the
new offices, increasing health-care expenses, and normal salary increases.
Net occupancy expenses decreased approximately $20 thousand (1%) in 1998 and
increased $155 thousand (12%) in 1997. Capital expenditures related to the new
offices and the new telephone system were the other major items contributing to
the increase.
Equipment and furniture expense increased approximately 7% from 1997 to 1998 and
approximately 29% from 1996 to 1997. Relocation of the Company operations center
from Matewan to Pikeville was responsible for most of the increase. Kentucky
related expenditures, capital expenditures related to the new offices, and the
telephone usage account for most of the increase experienced in 1997.
Data processing expense decreased approximately 4% in 1998 following an increase
of approximately 24% in 1997. Economies of scale created by the merger of
Kentucky and the Bank were realized over the entire operating year in 1998.
Kentucky consolidation, operation, and conversion expenses were the primary
force behind the 1997 increases.
Telephone expense increased approximately 40% in 1998, after declining
approximately 5% in 1997. Increased volume for a full year on the Company's new
phone system were the primary reason for the increase.
Marketing expenses fluctuated with management's evaluation of the benefit to be
gained from additional media exposure. Management determined that advertising
expenditures could be employed more favorably in marketing projects in 1998.
Therefore, advertising expense for 1998 increased approximately 16%. The
decrease experienced for 1997 was a function of management's assessment that
expenditures could be employed more favorably in other projects.
Fees paid for the origination and production of loans, predominantly real estate
and automobile loans, increased approximately 41% in 1998 and 80% in 1997. Both
increases were a function of the Company maintaining an aggressive and
competitive lending program.
Legal and auditing expenses decreased approximately 26% in 1998 and increased
approximately 51% in 1997. Legal expenses tend to be more volatile than auditing
expenses due to the nature of ongoing litigation. Legal expenses are also a
function of specific cases encountered in the normal course of business. Legal
expenses were responsible for much of the volatility in this item.
Contract labor increased approximately 104% in 1998 after increasing
approximately 135% in 1997. As the Company continued to outsource a significant
number of operating functions over this period of time, increases in contract
labor expense were realized accordingly.
Intangible expenses, mainly goodwill and core deposit intangibles, declined
approximately 4% in 1998 following an increase of approximately 19% in 1997. The
latter increase was mainly a function of the inclusion of goodwill and core
deposit amortization attributable to the Kentucky acquisition for a full year
for the first time in 1997.
Other expenses decreased approximately $737 thousand (14%) in 1998 after
increasing approximately $696 thousand (15%) in 1997.
APPLICABLE INCOME TAXES
30
<PAGE>
Income tax expense was $2.969 million in 1998, $3.417 million in 1997, and
$3.612 million in 1996. The Company's effective tax rate for the past three
years has been 32.7% for 1998, 34.5% for 1997, and 36.4% for 1996. Decreasing
tax expense and effective rates over the three year period reflect changes in
the composition of Company earnings, favorable tax effects attributable to FSB,
and the reorganization of the Company's subsidiaries to take advantage of some
available tax savings opportunities. In addition, 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.
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 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.
FORWARD LOOKING STATEMENTS
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
corporate management. This Annual Report, including the Management's Discussion
and Analysis of Financial Condition and Results of Operations, contains forward-
looking statements that involve risk and uncertainty. In order to comply with
the terms of the safe harbor, the Company note that a variety of factors could
cause its actual results and experience to differ materially from anticipated
results or other expectations expressed in those forward-looking statements.
31
<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, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. 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
managements, 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 represent fairly, in
all material respects, the consolidated financial position of Matewan
BancShares, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Charleston, West Virginia
April 12, 1999
32
<PAGE>
Item 8
Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) Restated -
Note 1
ASSETS 1998 1997
-------- --------
<S> <C> <C>
Cash and due from banks..................................... $ 22,420 $ 22,570
Interest bearing deposits
in other banks............................................. 13,855 14,299
Federal funds sold.......................................... 485 4,420
-------- --------
Cash and cash equivalents................................... 36,760 41,289
Investment securities:
Available-for-sale at fair value........................... 50,521 24,881
Held-to-maturity........................................... 111,976 135,544
(Approximate fair value of $112,495 and
$135,778 at December 31, 1998 and 1997)
Loans, net.................................................. 441,830 397,633
Premises and equipment...................................... 20,420 20,545
Accrued interest receivable
and other assets........................................... 22,127 24,731
-------- --------
TOTAL ASSETS................................................ $683,634 $643,623
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing....................................... $ 73,883 $ 77,698
Interest bearing........................................... 505,249 457,576
-------- --------
Total Deposits.............................................. 579,132 535,274
Short-term borrowings:
Repurchase agreements...................................... 13,658 14,431
Federal Home Loan Bank advances............................ 5,000 7,500
Other...................................................... 1,262 6,646
-------- --------
Total Short-term Borrowings................................. 19,920 28,577
Long-term borrowings:
Federal Home Loan Bank advances............................ 6,559 1,170
Notes Payable.............................................. 6,475 6,991
-------- --------
Total Long-term Borrowings.................................. 13,034 8,161
Accrued interest payable
and other liabilities...................................... 4,661 7,005
-------- --------
TOTAL LIABILITIES........................................... 616,747 579,017
SHAREHOLDERS' EQUITY
Convertible Preferred stock, Series A, 7.5%
$1 par value; 1,000,000 shares authorized; 804,600
and 805,000 issued and outstanding on December 31,
1998 and 1997, respectively, including 187,242 and
176,842 shares in treasury stock ($15,434 aggregate
liquidation value)........................................ 805 805
Common Stock - $1 par value; 10,000,000
shares authorized; 4,052,514 and 3,684,104 shares
outstanding at December 31, 1998 and 1997, respectively,
including 74,122 and 49,884 shares in treasury stock...... 4,052 3,684
Capital Surplus............................................. 38,799 29,773
Retained earnings........................................... 29,616 35,927
Treasury stock.............................................. (6,416) (5,530)
Accumulated other comprehensive
Income.................................................... 31 (53)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.................................. 66,887 64,606
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $683,634 $643,623
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
33
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data) Restated - Note 1
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.................... $44,652 $41,146 $36,583
Interest and dividends
on investment securities:
Taxable...................................... 9,338 9,158 8,248
Tax-exempt................................... 439 528 419
Other interest income......................... 922 1,165 1,134
------- ------- -------
TOTAL INTEREST INCOME.......................... 55,351 51,997 46,384
INTEREST EXPENSE
Deposits...................................... 23,430 21,376 17,875
Other borrowings.............................. 1,444 1,149 994
------- ------- -------
TOTAL INTEREST EXPENSE......................... 24,874 22,525 18,869
------- ------- -------
NET INTEREST INCOME............................ 30,477 29,472 27,515
PROVISION FOR LOAN LOSSES...................... 4,887 2,609 2,945
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES.................... 25,590 26,863 24,570
OTHER INCOME
Service fees.................................. 4,047 4,096 3,011
Other income.................................. 466 562 553
Commission income............................. 590 614 770
Gain on sale of assets........................ 237 94 365
------- ------- -------
TOTAL OTHER INCOME............................. 5,340 5,366 4,699
OTHER EXPENSES
Salaries and employee benefits................ 8,277 8,759 7,877
Net occupancy................................. 1,389 1,409 1,254
Equipment..................................... 1,539 1,440 1,114
Data processing............................... 1,334 1,390 1,121
Telephone..................................... 848 603 632
Marketing..................................... 734 632 852
Loan fees..................................... 899 636 354
Legal & Auditing.............................. 517 703 465
Contract Labor................................ 677 332 141
Goodwill and intangibles...................... 1,120 1,168 984
Other......................................... 4,504 5,241 4,545
------- ------- -------
TOTAL OTHER EXPENSE............................ 21,838 22,313 19,339
------- ------- -------
INCOME BEFORE INCOME TAXES..................... 9,092 9,916 9,930
APPLICABLE INCOME TAXES........................ 2,969 3,417 3,612
------- ------- -------
NET INCOME..................................... 6,123 6,499 6,318
PREFERRED STOCK DIVIDENDS...................... 1,167 1,370 1,236
------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK............ $ 4,956 $ 5,129 $ 5,082
======= ======= =======
PER SHARE EARNINGS, BASIC AND DILUTED.......... $1.24 $1.28 $1.26
======= ======= =======
Average common shares outstanding.............. 3,989 4,010 4,030
====== ====== ======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
34
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (RESTATED NOTE 1)
<TABLE>
<CAPTION>
Other
Accumulated
Preferred Common Capital Retained Treasury Comprehensive
Stock Stock Surplus Earnings Stock Income Total
--------- ------ ------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995,
as previously reported $ 0 $3,684 $12,182 $29,976 ($78) $ 53 $45,817
Adjustment to reflect restatement
of prior year earnings (897) (897)
---- ------ ------- ------- ------- ---- -------
Restated Balance, January 1, 1996 0 3,684 12,182 29,079 (78) 53 44,920
Comprehensive Income:
Net income 0 0 0 6,318 0 0 6,318
Other Comprehensive Income
net of tax:
Change in net unrealized loss on
available-for-sale securities 0 0 0 0 0 (121) (121)
-------
Comprehensive income 6,197
Issuance of Preferred Shares 805 0 17,591 0 0 0 18,396
Treasury Stock Purchases 0 0 0 0 (128) 0 (128)
Dividends on Common Stock
($.40 per share) 0 0 0 (1,612) 0 0 (1,612)
Dividends on Preferred Stock
($1.54 per share) 0 0 0 (1,236) 0 0 (1,236)
---- ------ ------- ------- ------- ---- -------
Balance December 31, 1996 $805 $3,684 $29,773 $32,549 ($206) ($68) $66,537
Comprehensive Income:
Net income 0 0 0 6,499 0 0 6,499
Other Comprehensive Income
net of tax:
Change in net unrealized loss on
available-for-sale securities 0 0 0 0 0 15 15
------
Comprehensive income 6,514
Treasury Stock Purchases 0 0 0 0 (5,324) 0 (5,324)
Dividends on Common Stock
($.44 per share) 0 0 0 (1,751) 0 0 (1,751)
Dividends on Preferred Stock
($1.875 per share) 0 0 0 (1,370) 0 0 (1,370)
---- ------ ------- ------- ------- ---- -------
Balance December 31, 1997 $805 $3,684 $29,773 $35,927 ($5,530) ($53) $64,606
Adjustment for effect of a
10% Common Stock Dividend 0 368 9,026 (9,394) 0 0 0
Cash Paid on fractional shares 0 0 0 (6) 0 0 (6)
---- ------ ------- ------- ------- ---- -------
805 4,052 38,799 26,527 (5,530) (53) 64,600
Comprehensive Income:
Net income 0 0 0 6,123 0 0 6,123
Other Comprehensive Income
net of tax:
Change in net unrealized loss on
available-for-sale securities 0 0 0 0 0 84 84
-------
Comprehensive income 6,207
Treasury Stock Purchases 0 0 0 0 (886) 0 (886)
Dividends on Common Stock
($.47 per share) 0 0 0 (1,867) 0 0 (1,867)
Dividends on Preferred Stock
($1.875 per share) 0 0 0 (1,167) 0 0 (1,167)
---- ------ ------- ------- ------- ---- -------
Balance December 31, 1998 $805 $4,052 $38,799 $29,616 ($6,416) $31 $66,887
==== ====== ======= ======= ======= ==== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
35
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Restated -
Note 1
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 6,123 $ 6,499 $ 6,318
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 1,305 1,209 1,100
NET AMORTIZATION 1,431 1,148 1,125
PROVISION FOR LOAN LOSSES 4,887 2,609 2,945
PROVISION FOR DEFERRED TAXES (665) 58 148
(GAIN) LOSS ON SALE OF ASSETS (33) (94) (365)
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS 1,484 (3,189) (825)
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES (1,860) 1,624 254
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,672 9,864 10,700
INVESTING ACTIVITIES
NET CASH RECEIVED IN ACQUISITION
OF SUBSIDIARY 0 0 15,822
PROCEEDS FROM MATURITIES OF
AVAILABLE-FOR-SALE SECURITIES 15,589 14,360 21,275
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 77,983 31,954 39,794
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (41,180) (13,826) (12,130)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (54,560) (44,893) (76,915)
NET CHANGE IN LOANS (49,084) (29,441) (12,741)
PURCHASES OF PREMISES
AND EQUIPMENT (1,866) (1,475) (1,704)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 719 686 0
------- ------- --------
NET CASH USED IN INVESTING
ACTIVITIES (52,399) (42,635) (26,599)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS 43,858 11,966 5,559
NET CHANGE IN SHORT TERM
BORROWINGS (8,657) 5,358 5,033
PROCEEDS FROM SALE OF PREFERRED STOCK 0 0 18,396
PROCEEDS FROM LONG TERM BORROWING 6,200 1,170 8,000
PRINCIPAL PAYMENTS ON LONG TERM BORROWINGS (1,327) (588) (421)
TREASURY STOCK PURCHASES (886) (5,324) (128)
CASH PAID ON FRACTIONAL SHARES
FROM STOCK DIVIDEND (6) 0 0
CASH DIVIDENDS PAID (2,984) (3,069) (2,848)
------- ------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 36,198 9,513 33,591
------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,529) (23,258) 17,692
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 40,289 63,547 45,855
------- ------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $36,760 $40,289 $ 63,547
======= ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
36
<PAGE>
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies (Dollars in Thousands)
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 and Restatement of Financial Statements
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. During 1998, the Company discovered that prior year
reconciliations of certain general ledger accounts were not done properly and,
as a result, certain amounts were not written off in those prior years,
principally 1994. Accordingly, prior year financial statements have been
restated. Retained earnings at January 1, 1996, as previously reported, has been
reduced by $897. Net income for 1997 and 1996 has been reduced from amounts
previously reported by $116 ($.03 per share) and $144 ($.04 per share),
respectively.
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.
37
<PAGE>
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
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.
Components of Allowance for Loan Losses are determined by (1) setting aside
specific reserves for individually identified credits, (2) setting aside
reserves for certain homogenous categories of loans based on historical charge-
off patterns for such categories and any other perceived underlying risks deemed
unique to such categories, and (3) setting aside reserves for the remaining
classes of loans based on historical charge-off trends for these particular
classes. Any remaining allowance is allocated to particular classes of loans
based on proportional relationship to the overall loan portfolio.
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.
38
<PAGE>
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 on a loan when, in
the determination of management, the collectability of both principal and
interest is deemed unlikely. 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
39
<PAGE>
over the life of the related loan.
Employee Benefit Plans
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.
In February, 1998, the Financial Accounting Standards Board issued Statement
132, "Employers' Disclosure about Pension and Other Postretirement Benefits - an
amendment of Statements No. 87, 88, and 106." This statement revises employers'
disclosures about pension and other post retirement benefit plans, but does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis and eliminates certain disclosures that
are no longer useful as they were when Statements No. 87, 88, and 106 were
issued. The Statement is effective for fiscal years beginning after December 15,
1997, and its adoption did not have a significant impact on the financial
statements.
Basic and Diluted Earnings Per Share
Basic earnings per share is determined by dividing net income by the weighted
average number of shares outstanding. Diluted earnings per share is determined
by dividing net income by the weighted average number of shares outstanding
increased by the number of shares that would be issued assuming the conversion
of preferred stock would be dilutive. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Basic and diluted
earnings per share are the same for the periods presented as the conversion of
preferred stock would be anti-dilutive. The Company has not issued any other
potentially dilutive securities.
Stockholders' Equity
In 1998, the Company adopted the provisions of the Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement No.
130 establishes new rules for the reporting and display of comprehensive income
and its components. The Statement requires that certain financial activity
previously recorded directly in stockholders' equity be reported as an
adjustment to net income in determining comprehensive income. The adoption of
this standard had no impact on the Company's financial position, results of
operations, or cash flows.
Operating Segments
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and
40
<PAGE>
Related Information." The Statement requires disclosure about an enterprise's
operating segments in annual and interim reports issued to shareholders. The
Statement defines an operating segment as a component of an enterprise that
engages in business activities that generate revenue and incur expense, and the
operating results of which are reviewed by the chief operating decision maker in
the determination of resource allocation and performance. The Company's business
activities are currently confined to one segment which is community banking. The
Company offers its customers a full range of services through traditional
branches, offices, sophisticated technology, ATMs, and other delivery channels.
The financial information is of the Company's community banking segment and no
further disclosure is necessary.
2. Acquisition Activity (Dollars in Thousands, Except Per Share Data)
On February 24, 1999, the Company entered into an Agreement and Plan of
Reorganization with BB&T Corporation (BB&T), a North Carolina corporation. Under
the Agreement, the Company will merge into BB&T, with BB&T being the surviving
company. At the effective time of the merger, each share of Company common and
preferred stock issued and outstanding will be converted into the right to
receive shares of BB&T stock. The merger is subject to the approval of the
Company's shareholders and applicable regulatory authorities. The Company has
granted BB&T the option, exercisable under certain circumstances, to purchase up
to 19.9% of the Company's shares of common stock outstanding.
On March 15, 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, adding
total assets of approximately $204,000 and deposits of approximately $183,000.
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 Company has acquired banks in prior years in acquisitions accounted for
using the purchase method of accounting. The purchase prices were allocated to
the identifiable tangible and intangible assets acquired and liabilities assumed
based upon their estimated fair value as of the date of acquisition. Deposit
base intangibles, included in other assets in the consolidated balance sheets,
approximated $2,094 and $2,749 at December 31, 1998 and 1997, net of
accumulated amortization approximating $3,154 and $2,499 at December 31, 1998
and 1997. Goodwill, included in other assets in the
41
<PAGE>
consolidated balance sheets, approximated $7,934 and $8,375 at December 31, 1998
and 1997, net of accumulated amortization approximating $1,190 and $749 at
December 31, 1998 and 1997. Amortization of deposit base intangibles and
goodwill approximated $1,096 in 1998, $1,168 in 1997, and $980 in 1996.
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, 1998
-------------------------------------------
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 $ 42,063 $166 $ (13) $ 42,216
Obligations of states and
political subdivisions 4,887 41 (11) 4,917
Other securities 3,519 0 (131) 3,388
-------- ---- ----- --------
Total $50,469 $207 $(155) $ 50,521
======== ==== ===== ========
Held-to-Maturity Securities
U.S. Treasury securities and
obligations of U.S government
agencies $107,250 $724 $(146) $107,828
Obligations of states and
political subdivisions 3,986 100 (161) 3,925
Other securities 740 2 0 742
-------- ---- ----- --------
Total $111,976 $826 $(307) $112,495
======== ==== ===== ========
<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
======= ==== ===== ========
</TABLE>
42
<PAGE>
Held-to-Maturity Securities
<TABLE>
<S> <C> <C> <C> <C>
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>
The amortized cost and estimated fair values of investment securities at
December 31, 1998, by contractural maturity, are shown in the following table.
Expected maturities may differ from contractural 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 $ 5,795 $ 5,835
Due after one year through five years 24,761 24,841
Due after five years through ten years 15,196 15,257
Due after ten years 1,198 1,202
Equity securities 3,519 3,386
-------- --------
$ 50,469 $ 50,521
======== ========
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Held-to-maturity
Due in one year or less $ 11,852 $ 11,922
Due after one year through five years 39,444 39,723
Due after five years through ten years 43,465 43,686
Due after ten years 17,215 17,164
-------- --------
$111,976 $112,495
======== ========
</TABLE>
The Company sold no investment securities in the three year period ended
December 31, 1998.
At December 31, 1998 and 1997, investment securities with carrying amounts of
$56,857 and $52,766, respectively were pledged to secure public deposits and for
other purposes.
43
<PAGE>
4. Loans (Dollars in thousands)
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
--------- ---------
<S> <C> <C>
Commercial and financial loans $136,248 $118,999
Real estate loans 183,175 157,290
Consumer loans 129,127 127,365
-------- --------
Gross loans 448,550 403,654
Less unearned income (146) (543)
-------- --------
Total loans 448,404 403,111
Less allowance for loan losses (6,574) (5,478)
-------- --------
Net loans $441,830 $397,633
======== ========
</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.
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, 1998 $ 1,502
Loans made 138
Principal collected (414)
-------
Balance at December 31, 1998 $ 1,226
=======
</TABLE>
5. Allowance for Loan Losses (Dollars in Thousands)
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $ 5,478 $ 5,986 $ 2,973
Loans charged off (4,515) (4,141) (3,738)
Loan recoveries 724 1,024 654
------- ------- -------
Net charge-offs (3,791) (3,117) (3,084)
Provision charged to expense 4,887 2,609 2,945
Balance of acquired subsidiary - - 3,152
------- ------- -------
Balance at year end $ 6,574 $ 5,478 $ 5,986
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans considered to be
impaired was $15,923 and $11,040 (of which $4,787 and
44
<PAGE>
$2,987 were on a nonaccrual basis). Included in this amount is $1,733 and $1,532
of impaired loans for which the related allowance for loan losses is $782 and
$705, and $14,189 and $9,508 of impaired loans that as a result of write-downs
or being well secured do not have an allowance for loan losses. The average
recorded investment in impaired loans during the years ended December 31, 1998
and 1997 was approximately $13,431 and $10,895. During the years ended December
31, 1998 and 1997, the Company recognized interest income on impaired loans of
$988 and $712, 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
1998 1997
----------- --------
<S> <C> <C>
Land $ 3,947 $ 4,178
Buildings and improvements 17,210 17,916
Furniture and equipment 7,854 6,711
------- -------
29,011 28,805
Less accumulated depreciation (8,591) (8,260)
------- -------
$20,420 $20,545
======= =======
</TABLE>
The Company has entered into noncancelable lease agreements (operating leases)
with respect to certain premises and equipment. The minimum annual rental
commitment under these operating leases is: 1999 - $635; 2000 - $534; 2001 -
$406; 2002 - $276; 2003 - $100; with $901 of commitments extending beyond 2003.
Total rent expense, including cancelable and noncancelable leases, net of rental
income of premises, approximated $506, $444, and $300 in 1998, 1997, and 1996.
7. Deposits (Dollars in Thousands)
Included in interest-bearing deposits are various time deposit products. Time
deposits outstanding at December 31, 1998, have scheduled maturities of $253,757
in 1999, $53,225 in 2000, $16,498 in 2001, $4,701 in 2002, and $2,081 in 2003,
and $199 thereafter. At December 31, 1998 and 1997, time deposits exceeding $100
approximated $131,827 and $111,538.
At December 31, 1998 and 1997, the Company held deposits from related parties of
$11,647 and $11,822. Interest paid on deposits, short-term borrowings, and long-
term borrowings approximated $24,695, $22,227, and $18,130 in 1998, 1997, and
1996.
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 3.50% and 4.45% at December 31, 1998 and 1997.
45
<PAGE>
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, 1998, approximates $178,000. At December 31,
1998 and 1997, short-term advances from the FHLB approximated $5,000 and $7,500.
at an interest rate of 4.95% and 5.63%.
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, 1998 approximated $6,559 and
is scheduled to mature as follows: 1999 - $2,224, 2000 -$1,085, 2001 - $1,151,
2002 - $1,218, 2003 - $309, and $572 thereafter. The weighted average interest
rate on these advances was 5.73%.
The balance due on long-term borrowing as of December 31, 1998 approximated
$6,345. 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, 1998, the Company has complied
with the restrictive covenants in the agreement. The principal is payable over
the next five years as follows: 1999 - $690; 2000 - $746; 2001 - $805;
2002 - $870; 2003 - $940; and $2,294 thereafter.
10. Income Taxes (Dollars in Thousands)
The applicable income tax provision included in the consolidated statements of
income is summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Current:
Federal $3,592 $2,896 $3,116
State 42 463 348
------ ------ ------
Total current 3,634 3,359 3,464
Deferred
Federal (650) 29 132
State (15) 29 16
------ ------ ------
Total deferred (665) 58 148
------ ------ ------
Total $2,969 $3,417 $3,612
====== ====== ======
</TABLE>
The Company incurred no taxes related to securities transactions in the three
years in the period ended December 31, 1998.
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 as follows:
46
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
--------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at
statutory federal
rate $3,091 34.0% $3,360 34.0% $3,363 34.0%
Plus: State income
tax net of federal
tax benefits 17 0.2 325 3.2 240 2.4
-------------------------------------------------
3,108 34.2 3,685 37.2 3,603 36.4
Increase (decrease)
in taxes from:
Tax-exempt interest (164) (1.8) (235) (2.3) (182) (1.8)
Other 25 .3 (33) (.4) 191 1.8
-------------------------------------------------
Actual tax expense $2,969 32.7% 3,417 34.5% $3,612 36.4%
=================================================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $2,571 $1,555
Deferred revenue 561 414
Other liabilities 11 331
Accrued employee benefits (19) 105
Available-for-sale investments 62 35
Other 1,067 791
------ ------
Total deferred tax assets 4,254 3,061
Deferred tax liabilities:
Intangible assets 1,421 1,629
Capitalized costs 1,062 793
Premises and equipment 347 155
Available-for-sale investments - -
------ ------
Total deferred tax liabilities 2,831 2,577
------ ------
Net deferred tax assets $1,423 $ 654
====== ======
</TABLE>
Income taxes paid approximated $1,685, $3,380, and $3,669 in 1998, 1997, and
1996.
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:
47
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Benefit obligation at beginning of year $2,241 $2,290
Service cost 168 169
Interest cost 156 143
Actuarial gain 29 (216)
Benefits paid (243) (145)
------ ------
Accrued pension cost included in other
liabilities $2,351 $2,241
====== ======
Change in Plan assets
Fair value of plan assets $2,646 $2,489
Actual return of plan assets 386 298
Employer contribution 400 4
Benefits Paid (243) (145)
------ ------
$3,189 $2,646
====== ======
Funded status $ 838 $ 405
Unrecognized net actuarial losses (448) (292)
Unrecognized prior service cost (400) (424)
------ ------
Prepaid (accrued) benefit cost $ (10) $ (311)
====== ======
Components of net periodic benefit cost:
1998 1997
------ ------
Service cost $ 168 $ 169
Interest cost 156 143
Expected return on plan assets (183) (173)
Amortization of prior service costs (23) (23)
Amortization of transition amount (19) (19)
------ ------
Net periodic pension cost (benefit) $ 99 $ 97
====== ======
</TABLE>
At December 31, 1998 and 1997, 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, 1998, 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 to the
plan in 1998 and 1997.
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
48
<PAGE>
for commitments to extend credit and standby letters of credit is the contract
or notational 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 $6,479 and $7,621
as of December 31, 1998 and 1997.
Loan Commitments: At December 31, 1998 and 1997, the Company had commitments
outstanding to extend credit of approximately $32,292 and $21,752. 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 has made all of the required
quarterly dividend payments on its Preferred Stock as of December 31, 1998.
Each share of Preferred Stock is convertible into one and one quarter shares of
common stock. The value of the Preferred Stock is fixed at $20 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
49
<PAGE>
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. As of December
31, 1998, net retained profits available for distribution to the Company as
dividends, without regulatory approval, approximate $1,160 plus net income for
the interim period through the date of declaration. FSB has dividend capacity
for that said amount. The Bank does not possess any dividend capacity at
present. The Company at present has the capacity to fund approximately $8,000 of
dividends without depending on any dividend payments from subsidiaries.
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.
50
<PAGE>
As of December 31, 1998, 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, 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. The Company, the
Bank and FSB actual capital amounts and ratios are presented in the following
table.
<TABLE>
<CAPTION>
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
As of December 31, 1998
Total Capital(to Risk
Weighted Assets):
Matewan BancShares $62,448 13.77% $36,282 (greater than or=)8.00 $45,353 (greater than or=)10.00
Matewan National Bank 53,370 13.41 31,830 (greater than or=)8.00 39,787 (greater than or=)10.00
Matewan Bank FSB 7,599 12.99 4,687 (greater than or=)8.00 5,859 (greater than or=)10.00
Tier I Capital(to Risk
Weighted Assets):
Matewan BancShares $56,779 12.52% $18,141 (greater than or=)4.00 $ 27,212 (greater than or=)6.00
Matewan National Bank 48,397 12.16 15,915 (greater than or=)4.00 23,873 (greater than or=)6.00
Matewan Bank FSB 7,057 12.04 2,345 (greater than or=)4.00 3,517 (greater than or=)6.00
Tier I Capital(to
Average Assets):
Matewan BancShares $56,779 8.57% $26,501 (greater than or=)4.00 $ 33,127 (greater than or=)5.00
Matewan National Bank 48,397 8.18 23,666 (greater than or=)4.00 29,583 (greater than or=)5.00
Matewan Bank FSB 7,057 7.76 4,062 (greater than or=)4.00 5,077 (greater than or=)5.00
<CAPTION>
For Capital
Adequacy To Be Well
Actual Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------------------------ ------------------------------
<S> <C> <C> <C>
As of December 31, 1997
Total Capital(to Risk
Weighted Assets):
Matewan BancShares $58,668 14.13% $33,216 (greater than or=)8.00 $41,520 (greater than or=)10.00
Matewan National Bank 58,489 15.88 29,465 (greater than or=)8.00 36,832 (greater than or=)10.00
Matewan Bank FSB 6,419 12.92 3,975 (greater than or=)8.00 4,968 (greater than or=)10.00
Tier I Capital(to Risk
Weighted Assets):
Matewan BancShares $53,480 12.88% $16,609 (greater than or=)4.00 $ 24,913 (greater than or=)6.00
Matewan National Bank 53,890 14.63 14,734 (greater than or=)4.00 22,101 (greater than or=)6.00
Matewan Bank FSB 5,911 11.90 1,988 (greater than or=)4.00 2,981 (greater than or=)6.00
Tier I Capital(to
Average Assets):
Matewan BancShares $53,480 8.59% $24,906 (greater than or=)4.00 $ 31,132 (greater than or=)5.00
Matewan National Bank 53,890 9.56 22,548 (greater than or=)4.00 28,185 (greater than or=)5.00
Matewan Bank FSB 5,911 6.89 3,430 (greater than or=)4.00 4,288 (greater than or=)5.00
</TABLE>
51
<PAGE>
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, 1998,
approximated $3,198.
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.
52
<PAGE>
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>
1998 1997
--------------------------- -----------------------------
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents $ 22,420 $ 22,420 $ 21,570 $ 21,570
Interest-bearing deposits
in other banks 13,855 13,855 14,299 14,299
Investment securities 162,497 163,016 160,425 160,659
Loans 441,830 443,099 397,633 398,214
Financial liabilities:
Deposits 577,065 580,846 535,274 537,744
Short-term borrowings 19,920 19,920 28,577 28,577
Long-term borrowings 13,034 13,123 8,161 8,021
</TABLE>
16. Parent Company Only Condensed Financial Information (Dollars in Thousands)
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31
1998 1997
-------- --------
<S> <C> <C>
Assets
Cash $ 3,284 $ 192
Investment securities - available-for-sale 4,762 2,834
Investment in banking subsidiaries 65,520 69,630
Investment in nonbanking subsidiary 835 849
Net loans 418 194
Premises & equipment 340 361
Other assets 923 1,137
-------- --------
Total assets $ 76,082 $ 75,197
======== ========
Liabilities and shareholders' equity
Liabilities:
Notes payable $ 130 $ 137
Note payable to nonbank subsidiary 300 300
Commercial Repurchase Agreement 2,319 2,857
Long-term borrowings 6,345 6,991
Other liabilities 101 306
-------- --------
Total liabilities 9,195 10,591
Shareholders' equity 66,887 64,606
-------- --------
Total liabilities and shareholders' equity $ 76,082 $ 75,197
======== ========
</TABLE>
53
<PAGE>
Condensed Income Statements
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiary $ 10,115 $ 6,616 $ 2,200
Dividends from nonbank subsidiary 0 0 0
Operating expenses, net 448 400 186
-------- -------- --------
Income before equity in undistributed
earnings (excess dividends) of subsidiaries 9,667 6,216 2,014
Equity in undistributed earnings (excess
dividends) of subsidiaries
(3,544) 283 4,304
-------- -------- --------
Net income 6,123 6,499 6,318
Preferred stock dividends 1,167 1,370 1,236
-------- -------- --------
Net income available to common shareholders $ 4,956 $ 5,129 $ 5,082
======== ======== ========
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31,
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income $ 6,123 $ 6,499 $ 6,318
Adjustments to reconcile net income to net
cash provided by operating activities:
(Equity in undistributed earnings) excess
dividends of subsidiaries 3,544 (283) (4,304)
Depreciation expense 21 21 (9)
Change in other assets 214 (250) (13)
Change in other liabilities (257) 64 55
Change in dividends receivable 0 0 5,000
-------- -------- --------
Net cash provided by operating activities 9,645 6,051 7,047
Investing activities
Investment in subsidiary 652 (800) (28,600)
Return of investment from subsidiary 14 28 26
Purchases of premises and equipment 0 0 (21)
Purchase of investment securities (1,928) 0 (1,577)
Change in net loans (224) 46 0
Proceeds from sale of investment
securities 0 0 0
Proceeds from maturity of
investment securities 0 932 0
-------- -------- --------
Net cash used in investment activities (1,486) 206 (30,172)
Financing activities
Cash dividends paid on common and preferred
stock (2,984) (3,069) (2,848)
Purchase of treasury stock (886) (5,324) (128)
Proceeds from Commercial Repurchase Agreement (538) 2,857 0
Cash paid on fractional shares (6) 0 0
Proceeds from long-term borrowings 0 0 8,000
Payments on long-term borrowings (653) (588) (421)
Proceeds from sale of preferred stock 0 0 18,396
-------- -------- --------
Net cash provided by (used in) financing
activities (5,067) (6,124) 22,999
-------- -------- --------
</TABLE>
54
<PAGE>
<TABLE>
<S> <C> <C> <C>
(Decrease)increase in cash 3,092 133 (126)
Cash at beginning of year 192 59 185
-------- -------- --------
Cash at end of year $ 3,284 $ 192 $ 59
======== ======== ========
</TABLE>
18. Quarterly Financial Data (Unaudited) (Dollars in Thousands)
Quarterly financial data for 1998 and 1997 is summarized below:
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 September 30 December 31
--------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest income $ 13,188 $ 13,729 $ 14,196 $ 14,238
Interest expense 5,873 6,101 6,447 6,453
Net interest income 7,315 7,628 7,749 7,785
Provision for loan loss 758 758 805 2,566
Net income 1,698 1,665 1,765 995
Preferred dividends 290 290 290 297
Net income available to
common shareholders 1,408 1,375 1,475 698
Net income per common share,
basic and dilutive .35 .35 .37 .17
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 1,738
Preferred dividends 311 394 352 313
Net income available to
common shareholders 1,227 1,161 1,316 1,425
Net income per common share,
basic and dilutive .30 .29 .33 .36
</TABLE>
Reference is made to the Management's Discussion and Analysis Section for
explanations of significant changes to quarterly results.
55
<PAGE>
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
The following table sets forth the names and certain information concerning
the Directors and the executive officers of the Company.
<TABLE>
<CAPTION>
FIRST YEAR PRINCIPAL OCCUPATION
NAME AGE AS DIRECTOR FOR THE PAST FIVE YEARS
------------------------------------ ------ ----------- ----------------------------
<S> <C> <C> <C>
James H. Harless 79 1984 Chairman of the Board of Gilbert
Imported Hardwoods, Inc.; from 1984
through 1987 Chairman of the Board
of Guyan Bancshares, Inc.;
Dan R. Moore 58 1984 Chairman of the Board of Directors,
President, and Chief Executive
Officer of the Company and Matewan
National Bank;
Frank E. Ellis 72 1988 Physician, Frank Ellis &
Associates, Inc.;
Lafe P. Ward 73 1984 Attorney at Law, Ward and
Associates L.C., General Counsel
for the Company;
George A. Kostas 69 1988 Pharmacist, President of Aracoma
Drug Company, Inc.;
Amos J. Hatfield 72 1988 Owner, Gilbert Furniture Company;
Sidney R. Young, Jr. 75 1984 Semi-retired since April, 1986;
President and Chief Operating
Officer for McNamee Resources, Inc.
since 1979;
Betty Jo Moore 58 1994 President of Moore Ford Sales
and Moore Chevrolet, Williamson,
West Virginia;
Douglas Hinkle 64 1996 President of Walter P. Walters
Insurance Agency;
Don Combs 41 1998 President of Combs & Combs;
Pauline Roberson 76 Vice President and Secretary of
Company, Matewan National Bank
since 1984, and Matewan Bank FSB
since 1993;
</TABLE>
56
<PAGE>
<TABLE>
<S> <C> <C>
Lee M. Ellis 44 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 39 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 49 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.
Part III
Item 11
EXECUTIVE OFFICERS' COMPENSATION
COMPENSATION OVERVIEW
During fiscal 1998, 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 $100,000 during the fiscal year ended December 31,
1998. Comparative data is also provided for the previous two fiscal years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
Other
Name and Annual
Principal Fiscal Salary Bonus Compensation
Position Year ($) ($) ($)
--------- ------ -------- ------- ------------
<S> <C> <C> <C> <C>
Dan R. Moore (1) 1998 $231,250 $39,941 $0
Chairman & 1997 216,838 33,925 0
President 1996 204,008 35,914 0
</TABLE>
57
<PAGE>
(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 1998, 1997, or 1996.
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
contributions 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.
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, 1998, 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
58
<PAGE>
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 1998, Mr. Moore had 35 years of service, Mrs.
Roberson had 35 years, Mr. Ellis had 20 years, Mrs. Ward had 12 years, and Mr.
Edwards had 7 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.
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 eight 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 15% of his total 1998 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.
Item 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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, 1999. 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 432,030 (1)(2) 10.86
Drawer H
Gilbert, West Virginia 25621
</TABLE>
59
<PAGE>
<TABLE>
<S> <C> <C>
Dan R. Moore 713,843 (1)(3) 17.95%
Box 26
Matewan, West Virginia 25678
Frank E. Ellis 278,278 (4) 7.00%
3308 Jefferson Avenue
Cincinnati, Ohio 45220
Lafe P. Ward 79,692 (5) 2.00%
George A. Kostas 121,230 (6) 3.05%
Amos J. Hatfield 98,162 (7) 2.47%
Sidney R. Young, Jr. 22,573 (8) .57%
Betty Jo Moore 376,940 (9) 9.48%
Doug Hinkle 2,200 .06%
Don Combs 3,850 .10%
All directors and officers
as a group (14 persons) 1,494,259 (10) 37.56%
</TABLE>
(1) Includes 336,903 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 412,202 shares held of record by Mr. Harless, members of his
family, and affiliates.
(3) Includes 376,940 shares held of record by Mr. Moore and his wife, members
of his family, and affiliates.
(4) Includes 228,157 shares of record held by Mr. Ellis, members of his
family, and affiliates as to which Mr. Ellis disclaims beneficial ownership.
(5) Includes 33,976 shares of record held by Mr. Ward, members of his family,
and affiliates as to which Mr. Ward disclaims beneficial ownership.
(6) Includes 91,319 shares of record held by Mr. Kostas and his wife.
(7) Includes 80,875 shares of record held by Mr. Hatfield and his wife, and
17,287 shares of record held by his wife and son as to which Mr. Hatfield
disclaims beneficial ownership.
(8) Includes 18,701 shares of record held by Mr. Young and his wife.
(9) Includes 363,176 shares held by Mrs. 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, Mrs.
Moore, members of their family, and affiliates.
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.
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.
Item 13
Certain Relationships and Related 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 $1,226,000, $1,502,000, and
$3,315,000 at December 31, 1998, 1997, and 1996, 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.
60
<PAGE>
During the year ended December 31, 1998, the Company and its subsidiaries
paid legal fees in the amount of $58,679 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, 1998, the Company and its
subsidiaries paid legal fees in the amount of $186,095 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.
61
<PAGE>
Financial Statements and Supplementary Data
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Cash and due from banks.................................... $ 22,420 $ 21,570
Interest bearing deposits
in other banks............................................ 13,855 14,299
Federal funds sold......................................... 485 4,420
-------- --------
Cash and cash equivalents.................................. 36,760 40,289
Investment securities:
Available-for-sale at fair value.......................... 50,521 24,881
Held-to-maturity.......................................... 111,976 135,544
(Approximate fair value of $112,495 and
$135,778 at December 31, 1998 and 1997)
Loans, net................................................. 441,830 397,633
Premises and equipment..................................... 20,420 20,545
Accrued interest receivable
and other assets.......................................... 22,127 24,731
-------- --------
TOTAL ASSETS............................................... $683,634 $643,623
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing...................................... $ 73,883 $ 77,698
Interest bearing.......................................... 505,249 457,576
-------- --------
Total Deposits............................................. 579,132 535,274
Short-term borrowings:
Repurchase agreements..................................... 13,658 14,431
Federal Home Loan Bank advances........................... 5,000 7,500
Other..................................................... 1,262 6,646
-------- --------
Total Short-term Borrowings................................ 19,920 28,577
Long-term borrowings:
Federal Home Loan Bank advances........................... 6,559 1,170
Notes Payable............................................. 6,475 6,991
-------- --------
Total Long-term Borrowings................................. 13,034 8,161
Accrued interest payable
and other liabilities..................................... 4,661 7,005
-------- --------
TOTAL LIABILITIES.......................................... 616,747 579,017
SHAREHOLDERS' EQUITY
Convertible Preferred stock, Series A, 7.5%
$1 par value; 1,000,000 shares authorized; 804,600
and 805,000 issued and outstanding on December 31,
1998 and 1997, respectively, including 187,242 and
176,842 shares in treasury stock ($15,434 aggregate
liquidation value)........................................ 805 805
Common Stock - $1 par value; 10,000,000
shares authorized; 4,052,514 and 3,684,104 shares
outstanding at December 31, 1998 and 1997, respectively,
including 74,122 and 49,884 shares in treasury stock...... 4,052 3,684
Capital Surplus............................................ 38,799 29,773
Retained earnings.......................................... 29,616 35,927
Treasury stock............................................. (6,416) (5,530)
Accumulated Other Comprehensive
Income.................................................... 31 (53)
-------- --------
TOTAL SHAREHOLDERS' EQUITY................................. 66,887 64,606
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................. $683,634 $643,623
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
62
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans.................... $44,652 $41,146 $36,583
Interest and dividends
on investment securities:
Taxable...................................... 9,338 9,158 8,248
Tax-exempt................................... 439 528 419
Other interest income......................... 922 1,165 1,134
------- ------- -------
TOTAL INTEREST INCOME.......................... 55,351 51,997 46,384
INTEREST EXPENSE
Deposits...................................... 23,430 21,376 17,875
Other borrowings.............................. 1,444 1,149 994
------- ------- -------
TOTAL INTEREST EXPENSE......................... 24,874 22,525 18,869
------- ------- -------
NET INTEREST INCOME............................ 30,477 29,472 27,515
PROVISION FOR LOAN LOSSES...................... 4,887 2,609 2,945
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES...................... 25,590 26,863 24,570
OTHER INCOME
Service fees.................................. 4,047 4,096 3,011
Other income.................................. 466 562 553
Commission income............................. 590 614 770
Gain on sale of assets........................ 237 94 365
------- ------- -------
TOTAL OTHER INCOME............................. 5,340 5,366 4,699
OTHER EXPENSES
Salaries and employee benefits................ 8,277 8,759 7,877
Net occupancy................................. 1,389 1,409 1,254
Equipment..................................... 1,539 1,440 1,114
Data processing............................... 1,334 1,390 1,121
Telephone..................................... 848 603 632
Marketing..................................... 734 632 852
Loan fees..................................... 899 636 354
Legal & Auditing.............................. 517 703 465
Contract Labor................................ 677 332 141
Goodwill and intangibles...................... 1,120 1,168 984
Other......................................... 4,504 5,241 4,545
------- ------- -------
TOTAL OTHER EXPENSE............................ 21,838 22,313 19,339
------- ------- -------
INCOME BEFORE INCOME TAXES..................... 9,092 9,916 9,930
APPLICABLE INCOME TAXES........................ 2,969 3,417 3,612
------- ------- -------
NET INCOME..................................... 6,123 6,499 6,318
PREFERRED STOCK DIVIDENDS...................... 1,167 1,370 1,236
------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK............ $ 4,956 $ 5,129 $ 5,082
======= ======= =======
PER SHARE EARNINGS, BASIC AND DILUTED.......... $1.24 $1.28 $1.26
======= ======= -------
Average common shares outstanding.............. 3,989 4,010 4,030
======= ======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
63
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Other
Accumulated
Preferred Common Capital Retained Treasury Comprehensive
Stock Stock Surplus Earnings Stock Income Total
--------- ------ ------- ------------ --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1995,
as previously reported $ 0 $3,684 $12,182 $29,976 ($78) $ 53 $45,817
Adjustment to reflect restatement
of prior year earnings (897) (897)
----- ------ ------- ------- ----- ----- -------
Restated Balance, January 1, 1996 0 3,684 12,182 29,079 (78) 53 44,920
Comprehensive Income:
Net income 0 0 0 6,318 0 0 6,318
Other Comprehensive Income
net of tax:
Change in net unrealized loss on
available-for-sale securities 0 0 0 0 0 (121) (121)
------
Comprehensive income 6,197
Issuance of Preferred Shares 805 0 17,591 0 0 0 18,396
Treasury Stock Purchases 0 0 0 0 (128) 0 (128)
Dividends on Common Stock
($.40 per share) 0 0 0 (1,612) 0 0 (1,612)
Dividends on Preferred Stock
($1.54 per share) 0 0 0 (1,236) 0 0 (1,236)
----- ------ ------- ------- ----- ----- -------
Balance December 31, 1996 $805 $3,684 $29,773 $32,549 ($206) ($68) $66,537
Comprehensive Income:
Net income 0 0 0 6,499 0 0 6,499
Other Comprehensive Income
net of tax:
Change in net unrealized loss on
available-for-sale securities 0 0 0 0 0 15 15
-------
Comprehensive income 6,514
Treasury Stock Purchases 0 0 0 0 (5,324) 0 (5,324)
Dividends on Common Stock
($.44 per share) 0 0 0 (1,751) 0 0 (1,751)
Dividends on Preferred Stock
($1.875 per share) 0 0 0 (1,370) 0 0 (1,370)
----- ------ ------- ------- ------- ----- -------
Balance December 31, 1997 $805 $3,684 $29,773 $35,927 ($5,530) ($53) $64,606
Adjustment for effect of a
10% Common Stock Dividend 0 368 9,026 (9,394) 0 0 0
Cash Paid on fractional shares 0 0 0 (6) 0 0 (6)
----- ------ ------- ------- ------- ----- -------
805 4,052 38,799 26,527 (5,530) (53) 64,600
Comprehensive Income:
Net income 0 0 0 6,123 0 0 6,123
Other Comprehensive Income
net of tax:
Change in net unrealized loss on
available-for-sale securities 0 0 0 0 0 84 84
------
Comprehensive income 6,207
Treasury Stock Purchases 0 0 0 0 (886) 0 (886)
Dividends on Common Stock
($.47 per share) 0 0 0 (1,867) 0 0 (1,867)
Dividends on Preferred Stock
($1.875 per share) 0 0 0 (1,167) 0 0 (1,167)
----- ------ ------- ------- ------- ----- -------
Balance December 31, 1998 $805 $4,052 $38,799 $29,616 ($6,416) $31 $66,887
===== ====== ======= ======= ======= ===== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
64
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Restated - Note 1
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 6,123 $ 6,499 $ 6,318
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 1,305 1,209 1,100
NET AMORTIZATION 1,431 1,148 1,125
PROVISION FOR LOAN LOSSES 4,887 2,609 2,945
PROVISION FOR DEFERRED TAXES (665) 58 148
(GAIN) LOSS ON SALE OF ASSETS (33) (94) (365)
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS 1,484 (3,189) (825)
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES (1,860) 1,624 254
------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,672 9,864 10,700
INVESTING ACTIVITIES
NET CASH RECEIVED IN ACQUISITION
OF SUBSIDIARY 0 0 15,822
PROCEEDS FROM MATURITIES OF
AVAILABLE-FOR-SALE SECURITIES 15,589 14,360 21,275
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 77,983 31,954 39,794
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (41,180) (13,826) (12,130)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (54,560) (44,893) (76,915)
NET CHANGE IN LOANS (49,084) (29,441) (12,741)
PURCHASES OF PREMISES
AND EQUIPMENT (1,866) (1,475) (1,704)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 719 686 0
------- ------- --------
NET CASH USED IN INVESTING
ACTIVITIES (52,399) (42,635) (26,599)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS 43,858 11,966 5,559
NET CHANGE IN SHORT TERM
BORROWINGS (8,657) 5,358 5,033
PROCEEDS FROM SALE OF PREFERRED STOCK 0 0 18,396
PROCEEDS FROM LONG TERM BORROWINGS 6,200 1,170 8,000
PRINCIPAL PAYMENTS ON LONG TERM BORROWINGS (1,327) (588) (421)
TREASURY STOCK PURCHASES (886) (5,324) (128)
CASH PAID ON FRACTIONAL SHARES
FROM STOCK DIVIDEND (6) 0 0
CASH DIVIDENDS PAID (2,984) (3,069) (2,848)
------- ------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 36,198 9,513 33,591
------- ------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,529) (23,258) 17,692
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 40,289 63,547 45,855
------- ------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $36,760 $40,289 $ 63,547
======= ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
65
<PAGE>
(a) 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)
10.15 Lease Agreement, dated September 1, 1996 between K-VA-T Food
Stores, Inc. and Matewan Bank FSB (9)
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 Agreement and Plan of Reorganization between Matewan BancShares,
Inc. and BB&T Corporation dated February 24, 1999 (11)
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 Deed of Lease, dated November 24, 1997, between B&R Enterprises,
Inc., and Matewan BancShares, Inc. (10)
13.3 Lease Agreement, dated September 2, 1997, between K-VA-T Food
Stores, Inc. and Matewan BancShares, Inc. (10)
13.4 Lease Agreement, dated September 2, 1997 , between K-VA-T Food
Stores, Inc. and Matewan BancShares, Inc. (10)
22.1 Subsidiaries of Registrant
Matewan National Bank
Matewan Bank FSB
Matewan Venture Fund, Inc.
27 Financial Data Schedule (12)
(1) Filed as an exhibit of the same number to the Company's Registration
Statement on
66
<PAGE>
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 as an exhibit of the same year to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and incorporated herein by
reference.
(11) Filed as an exhibit to the Company's Form 8-K on March 2, 1999, and
incorporated herein by reference.
(12) Filed herewith.
Reports on Form 8-K
The following reports on Form 8-K were filed in 1999 and are incorporated
herein by reference:
(a) Date of Report of March 2, 1999.
67
<PAGE>
<TABLE>
<S> <C> <C>
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 Center 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)
Coal Run* Prestonsburg* Whitesburg*#
1086 North Mayo Trail Glen Lyn Plaza 99 Medical Plaza
Pikeville, KY 41501 Prestonsburg, KY 41653 Whitesburg, KY 41858
Goody*# Pikeville*#
Thompson Plaza Towne & Country Plaza
Goody, KY 41503 Pikeville, KY 41501
MATEWAN BANK FSB
Paintsville*
300 North Mayo Trail
Paintsville, KY 41240
MATEWAN VENTURE FUND
Matewan
600 Mate Street
Matewan, WV 25661
(304)426-8221
MATEWAN INSURANCE AND
INVESTMENTS
Money Center
249 Second Avenue
Williamson, WV 25661
(304)235-1660
</TABLE>
* Denotes 24 Hour ATM locations # Denotes Food City Supermarket locations
68
<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, 1999.
Matewan BancShares, Inc.
/s/Dan R. Moore
--------------------
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, 1999.
/s/Dan R. Moore /s/Lee M. Ellis
- ------------------- --------------------
Chairman of the Board, Vice President &
President, and Chief Chief Financial Officer
Executive Officer
/s/James H. Harless /s/Frank E. Ellis
- ------------------- --------------------
Director Director
/s/Lafe P. Ward /s/Amos J. Hatfield
- ------------------- --------------------
Director Director
/s/George A. Kostas /s/Sidney Young, Jr.
- ------------------- --------------------
Director Director
/s/Betty Jo Moore /s/Douglas Hinkle
- ------------------- --------------------
Director Director
/s/Don Combs
- -------------------
Director
69
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-30-1998
<CASH> 22,420
<INT-BEARING-DEPOSITS> 13,855
<FED-FUNDS-SOLD> 485
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,521
<INVESTMENTS-CARRYING> 111,976
<INVESTMENTS-MARKET> 112,495
<LOANS> 441,830
<ALLOWANCE> 6,754
<TOTAL-ASSETS> 683,634
<DEPOSITS> 579,132
<SHORT-TERM> 19,920
<LIABILITIES-OTHER> 4,661
<LONG-TERM> 13,034
0
805
<COMMON> 4,052
<OTHER-SE> 62,030
<TOTAL-LIABILITIES-AND-EQUITY> 683,634
<INTEREST-LOAN> 44,652
<INTEREST-INVEST> 9,777
<INTEREST-OTHER> 922
<INTEREST-TOTAL> 55,351
<INTEREST-DEPOSIT> 23,430
<INTEREST-EXPENSE> 24,874
<INTEREST-INCOME-NET> 30,477
<LOAN-LOSSES> 4,887
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 21,838
<INCOME-PRETAX> 9,092
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,123
<EPS-PRIMARY> 1.24
<EPS-DILUTED> 1.24
<YIELD-ACTUAL> 5.10
<LOANS-NON> 4,787
<LOANS-PAST> 4,086
<LOANS-TROUBLED> 650
<LOANS-PROBLEM> 5,439
<ALLOWANCE-OPEN> 5,478
<CHARGE-OFFS> 4,515
<RECOVERIES> 724
<ALLOWANCE-CLOSE> 6,574
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,029
</TABLE>
