<PAGE>
FORM - 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the nine months ended September 30, 1996
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Commission file number 33-17172
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Matewan BancShares, Inc.
------------------------
(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
- ------------------------- --------
(Address of principal executive offices) (Zip Code)
304 235-1544
------------
(registrant's telephone number, including area code)
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), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
-- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
------------------------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1 Par Value - 3,660,651 shares September 30, 1996
- ----------------------------------------------------------------
<PAGE>
Matewan BancShares, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1996,
December 31, 1995, and September 30, 1995
Consolidated statements of income - Nine months and three
months ended September 30, 1996 and 1995
Consolidated statement of changes in shareholders' equity
for the nine months ended September 30, 1996 and 1995
Consolidated statements of cash flows for the nine months
ended September 30, 1996 and 1995
Notes to consolidated financial statements
Item 2. Manangement's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31 September 30
------------ ----------- ------------
ASSETS 1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 25,196 $ 23,881 $ 15,335
Federal funds sold 17,318 17,237 20,503
-------- -------- --------
Cash and cash equivalents 42,514 41,118 35,838
Interest bearing deposits
in other banks 6,012 5,704 675
Investment securities:
Available-for-sale at
fair value 26,183 32,429 9,032
Held-to-maturity at cost 119,895 73,299 96,565
(Approximate fair value
$120,664 at September 30, 1996;
$73,839 at December 31, 1995;
and $101,031 at September 30,
1995)
Loans - net 368,616 228,568 228,274
Premises and equipment 20,732 9,692 9,742
Accrued interest receivable
and other assets 22,095 10,224 9,387
-------- -------- --------
TOTAL ASSETS $606,047 $401,034 $389,513
======== ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30 December 31 September 30
----------------------------------------
1996 1995 1995
----------- ----------- -----------
<S> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 64,789 $ 44,917 $ 42,722
Interest bearing 438,993 289,470 281,317
---------- ---------- ----------
TOTAL DEPOSITS 503,782 334,387 324,039
Short-term borrowings:
Repurchase agreements 12,363 9,361 13,968
Other 10,015 8,349 3,755
---------- ---------- ----------
TOTAL SHORT TERM
BORROWINGS 22,378 17,710 17,723
Long-term Borrowings 7,771 0 0
Accrued interest payable
and other liabilities 5,423 3,120 3,286
---------- ---------- ----------
TOTAL LIABILITIES 539,354 355,217 345,048
SHAREHOLDERS' EQUITY
Preferred stock 805 0 0
$1 par value; 1,000,000 shares
authorized; 805,000 issued as
of September 30, 1996 ($25 per
share liquidation preference)
Common Stock - $1 par value 3,684 3,684 3,684
10,000,000 shares authorized;
3,684,104 shares outstanding at
September 30, 1996, December 31,
1995, and September 30, 1995,
including 23,453, 16,753 and 16,253
shares in treasury stock
Surplus 29,773 12,182 12,182
Retained earnings 32,712 29,976 28,727
Treasury stock (195) (78) (68)
Net unrealized gain(loss) on
available-for-sale
securities, net of deferred
income taxes (86) 53 (60)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 66,693 45,817 44,465
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 606,047 $ 401,034 $ 389,513
========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Nine months ended Three months ended
----------------------- ------------------------
September 30, September 30,
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 26,608 $ 18,719 $ 9,846 $ 6,498
Interest and dividends
on investment securities:
Taxable 5,995 4,651 2,122 1,622
Tax-exempt 276 96 130 35
Other interest income 992 432 249 134
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 33,871 23,898 12,347 8,289
INTEREST EXPENSE
Deposits 12,994 8,885 4,718 3,130
Other borrowings 780 444 328 162
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 13,774 9,329 5,046 3,292
---------- ---------- ---------- ----------
NET INTEREST INCOME 20,097 14,569 7,301 4,997
PROVISION FOR LOAN LOSSES 2,105 1,261 664 432
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,992 13,308 6,637 4,565
OTHER INCOME
Service fees 2,195 1,273 816 457
Other 1,047 574 429 153
Credit life insurance
commissions 409 420 116 147
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 3,651 2,267 1,361 757
OTHER EXPENSES
Salaries and employee
benefits 5,722 4,581 2,116 1,573
Net occupancy 844 747 291 250
Equipment 856 551 331 173
Data Processing 812 414 199 82
Advertising 633 556 226 209
Federal deposit insurance 269 378 10 (14)
Other 5,019 2,734 2,107 1,171
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE 14,155 9,961 5,280 3,444
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 7,488 5,614 2,718 1,878
APPLICABLE INCOME TAXES 2,729 2,009 975 677
---------- ---------- ---------- ----------
NET INCOME $ 4,759 $ 3,605 $ 1,743 $ 1,201
========== ========== ========== ==========
Preferred Stock Dividends $ 852 $ 0 $ 360 $ 0
========== ========== ========== ==========
Earnings Applicable to
Common Stock $ 3,907 $ 3,605 $ 1,383 $ 1,201
========== ========== ========== ==========
Applicable to Common Stock:
Earnings per Share $1.07 $.98 $.38 $.33
Dividends per Share .32 .30 .12 .10
========== ========== ========== ==========
Average common shares
outstanding 3,664,598 3,667,696 3,661,269 3,668,088
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Net
Unrealized
Loss on
Available-
Preferred Common Capital Retained Treasury for-Sale
Stock Stock Surplus Earnings Stock Securities Total
--------- ------- --------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1995 0 $3,349 $6,460 $32,185 ($48) ($143) $41,803
Treasury Stock Purchases 0 0 0 0 (46) 0 (46)
Treasury Stock Sales 0 0 31 0 26 0 57
Change in net unrealized loss on
available-for-sale securities, net of
deferred income taxes 0 0 0 0 0 83 83
Dividends on Common Stock 0 0 0 (1,034) 0 0 (1,034)
($.3025 per share)
Common Stock Dividend (10%) 0 335 5,691 (6,026) 0 0 0
Cash Paid on Fractional Shares 0 0 0 (3) 0 0 (3)
Net income 0 0 0 3,605 0 0 3,605
--------- --------- --------- --------- ------- ------- --------
Balance September 30, 1995 0 $3,684 $12,182 $28,727 ($68) ($60) $44,465
========= ========= ========= ========= ======= ======== ========
<CAPTION>
Net
Unrealized
Gain on
Available-
Preferred Common Capital Retained Treasury for-Sale
Stock Stock Surplus Earnings Stock Securities Total
--------- ------- --------- ---------- ------ ---------- --------
Balance January 1, 1996 $0 $3,684 $12,182 $29,976 ($78) $53 $45,817
Treasury Stock Purchases 0 0 0 0 (117) 0 (117)
Change in net unrealized gain on
available-for-sale securities, net of
deferred income taxes 0 0 0 0 0 (139) (139)
Dividends on Common Stock 0 0 0 (1,171) 0 0 (1,171)
($.32 per share)
Net income 0 0 0 4,759 0 0 4,759
Issuance of Preferred Shares 805 0 17,591 0 0 0 18,396
Dividends on Preferred Shares 0 0 0 (852) 0 0 (852)
($1.0582 per share) --------- --------- --------- --------- ------- -------- --------
Balance September 30, 1996 $805 $3,684 $29,773 $32,712 ($195) ($86) $66,693
========= ========= ========= ========= ======= ======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30, September 30,
1996 1995
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 4,759 $ 3,605
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 779 521
AMORTIZATION 393 470
PROVISION FOR LOAN LOSSES 2,105 1,261
PROVISION FOR DEFERRED TAXES 81 4
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS (11,210) (349)
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES 3,343 (681)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 250 4,831
INVESTING ACTIVITIES
NET CASH RECEIVED IN ACQUISITION OF
BANK 16,430 0
PROCEEDS FROM SALES OF
AVAILABLE-FOR-SALE SECURITIES 0 0
PROCEEDS FROM MATURITIES OF
AVAILABLE-FOR-SALE SECURITIES 19,517 8,261
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 29,452 34,742
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (10,138) (6,089)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (64,612) (32,696)
NET CHANGE IN INTEREST BEARING
DEPOSITS IN OTHER BANKS (308) 2,201
NET CHANGE IN LOANS (2,737) (14,791)
PURCHASES OF PREMISES
AND EQUIPMENT (1,245) (1,181)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 0 170
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (13,641) (9,383)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS (13,601) 13,392
NET CHANGE IN SHORT-TERM
BORROWINGS 4,192 2,726
PROCEEDS FROM SALE OF PREFERRED
STOCK 18,396 0
PROCEEDS FROM LONG TERM NOTE 8,000 0
PAYMENTS ON LONG TERM NOTE (229) 0
CASH DIVIDENDS PAID (1,971) (1,037)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 14,787 15,081
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,396 10,529
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 41,118 25,309
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 42,514 $ 35,838
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
September 30, 1996
(Dollars in thousands)
1. The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the interim period are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, refer to the consolidated financial statements
and footnotes thereto included in Matewan BancShares, Inc. and Subsidiaries'
annual report on Form 10-K for the year ended December 31, 1995.
2. The financial statements presented herein reflect Matewan BancShares, Inc.
and its consolidated subsidiaries, Matewan National Bank, Matewan Bank FSB,
Matewan National Bank/Kentucky and Matewan Venture Fund, Inc.
3. On January 1, 1995, the Company adopted 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 collateral
dependent loans. The adoption and implementation of this standard did not have a
material effect on the Company's financial statements, accounting policies,
nonperforming loans, or determination of the adequacy of the allowance for loan
losses.
For definitional purposes of the Company, a loan is considered "impaired" in the
context of Statement 114 when it is assigned an internal classification rating
of substandard, doubtful, or loss, and it is incorporated into the Company's
watch list. The internal classifications that define a credit as impaired and
the criteria evaluated to determine such classification parallel those employed
by banking regulatory authorities.
At September 30, 1996, the recorded investment in impaired loans under Statement
No. 114 was $9.81 million (of which $1.659 million were on a nonaccrual basis).
Included in this amount is $2.762 million of impaired loans for which the
related allowance for credit losses is $1.694 million and $7.041 million of
impaired loans that do not have a specific allowance for credit losses. The
average recorded investment in impaired loans during the nine month period ended
September 30, 1996, approximated $7.09 million.
<PAGE>
4. On September 28, 1995, the Company entered into a definitive agreement with
Banc One Corporation and Bank One Kentucky Corporation under which Matewan
BancShares, Inc. would acquire via cash purchase all of the outstanding common
stock of the Bank One, Pikeville N.A. franchise. Consummation of this
transaction was completed on March 15, 1996, using the purchase method of
accounting. Effective March 16, 1996, the former Bank One, Pikeville N.A.
commenced business at its seven office locations as Matewan National
Bank/Kentucky ("Pikeville"). Absorption of the Pikeville franchise upon
consummation into the Matewan system increased total consolidated assets
approximately $204 million and total consolidated deposits approximately $183
million.
On March 15, 1996, the Company executed a note payable for $8.0 million
representing a partial source of funds to finance the Pikeville acquisition. The
note repayment schedule was amortized for a 10 year payback priced 7.75%. The
loan will reprice only at its five year anniversary date on the basis of a 200
basis point over five year Treasury Note differential.
On March 4, 1996, the Company closed a stock offering for a new class of
convertible preferred stock. Concurrent with this closing and the subsequent
exercise of the underwriter's overallotment option, the Company issued 805,000
shares of preferred stock and received a capital infusion of approximately
$18.396 million, representing the total net proceeds. This new class of stock
carries a 7.5% dividend and may not be converted for a period of four years.
The preliminary proforma unaudited results of operations for the nine month
period ended September 30, 1996, and September 30, 1995, assuming consummation
of the purchase transaction, issuance of the convertible preferred stock, and
execution of the note payable as of January 1, 1995, was as follows:
<TABLE>
<CAPTION>
Nine months ended September 30
1996 1995
-------------- --------------
<S> <C> <C>
(000's omitted, except
per share data)
Total revenues $41,888 $36,140
Net income 4,708 3,805
Net income per share applicable
to common stock 1.08 .83
</TABLE>
5. In June 1996, the Financial Accounting Standards Board issued Statement 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, which provides new accounting and reporting standards for sales,
securitization, and servicing of receivables and other financial assets and
extinguishment of liabilities. The provisions of the Statement are to be applied
to transactions occurring after December 31, 1996. The adoption of Statement 125
is not expected to have a material impact on the Company's financial statements.
<PAGE>
MATEWAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets at September 30, 1996, have increased approximately $205 million
since December 31, 1995, and approximately $217 million since September 30,
1995. The acquisition of Bank One, Pikeville on March 15, 1996 accounted for the
majority of the increase. Excluding the impact of the Pikeville acquisition, the
Company experienced annualized asset growth of less than one percent in the nine
month period and asset growth in excess of three percent in the annual period
ended September 30, 1996. Deposits levels have increased approximately $169
million and $180 million and short term borrowings have increased approximately
$4.6 million and $4.7 million over the nine month and annual intervals,
respectively. The Company funded the $28.6 million acquisition via an $8.0
million long-term note, a successful preferred stock offering that netted
proceeds of $18.39 million, and retained earnings. Retained earnings increased
approximately $2.7 million from December 31, 1995, to September 30, 1996, and
approximately $3.9 million in the twelve month period ended September 30, 1996.
The increases are due to the retention of earnings, net of dividends paid.
The asset structure of the Company's balance sheet at September 30, 1996,
compared to December 31, 1995, and September 30, 1995, reflects several notable
differences. Net loans have increased approximately $140 million from December
31, 1995, mainly due to the Pikeville acquisition and subsequent consolidation.
Further, loan demand in the Company's core market area has been strong in the
same period. The increase reflects a level of 60.8% of total assets versus a
pre-acquisition level of just under 57.0%. Deposit growth attributable to the
acquisition and normal core market growth for the nine month and twelve month
periods in the financial statements ended September 30, 1996, have supported
this loan growth. Investment securities have increased approximately $40.4
million since December 31, 1995, and $40.5 million since September 30, 1995.
Investment securities comprise approximately 24.1% of the Company's total assets
versus 26.4% at December 31, 1995. Cash and cash equivalent balances increased
approximately $1.4 million and $6.7 million from December 31, 1995 and September
30, 1996, respectively. Interest bearing deposits in other banks increased
approximately $308 thousand and approximately $5.3 million, respectively, in the
nine month and twelve month periods ended September 30, 1996. Virtually all of
the changes in overall earning asset levels over these respective time periods
paralleled activity in deposits and short-term borrowings. Fixed assets
increased approximately $11.0 million and $10.9 million during the nine month
and twelve month periods ended September 30, 1996. Almost all of the increases
are attributable to the absorption of the fixed assets of the newly acquired
franchise and additional data communication and data processing enhancements
related to its conversion to the Company's operating system. Other assets
increased approximately $11.9 million since December 31, 1995, mainly due to the
excess of purchase
<PAGE>
price over the fair value of assets acquired related to the Pikeville
acquisition.
The Company's policy is to maintain a strategic asset mix wherein the loan
portfolio represents approximately sixty-five percent (65%) of total assets.
More specifically, the desired targeted mix within the loan portfolio is equally
distributed among the commercial, consumer, and real estate loan categories.
Real estate loans represent the largest component of the Company's loan
portfolio. The majority of the real estate loans are of the one-to-four family
residential nature. Consumer loans represent the second largest category of the
loan portfolio. Automobile loans approximate 50% of the total consumer
portfolio. Commercial loans represent the smallest component of the Company's
loan portfolio. All classes of loans are subject to minimum acceptable
underwriting standards regarding downpayment, term, equity, loan-to-value
measures and collateral coverage, adequate cash flow and debt coverage, and
credit history, among other things. The primary focus for all categories of
lending is the seven county market area in southern West Virginia and eastern
Kentucky that the Company has identified as its core market. As a point of fact,
the overwhelming majority of the loans outstanding on both September 30, 1996,
and 1995, respectively, for each loan portfolio category are to customers within
this core market.
By definition, two major credit concentrations exist for the Company: (1) those
delineated by loan category as a proportion of the Company's capital base, and
(2)that of a single industry concentration. Loan categories that exceed 25% of
the Company's capital base are: (1) those secured by one-to-four family
residences, (2) those secured by automobiles, (3) those secured by commercial
real estate and equipment, and (4) those characterized as unsecured loans. The
other type of concentration relates to the general overall reliance on the coal
industry prevalent in the Company's market area. Given the market area's
dependence on this industry, avoidance of this type of concentration by the
Company is neither likely nor practical.
Although the Company has a diversified loan portfolio, a substantial portion of
its debtors' ability to honor their obligations is dependent on the coal
industry. Accordingly, a downturn in the coal industry could impact both the
value of collateral held as security and the ability to repay contracts in
accordance with original terms. The Company attempts to mitigate this
sensitivity somewhat by spreading the portfolio throughout eastern Kentucky,
southern West Virginia, and western Virginia. While the bulk of both the lending
and deposit taking functions of the Company are currently in its present seven
county market area, some geographic diversification may be realized by engaging
in business in contiguous counties.
Non-interest bearing deposits increased approximately $20.9 million and $23.1
million and interest bearing deposits increased approximately $150 million and
$158 million in the nine month period since December 31, 1995, and in the twelve
month period since September 30, 1995, respectively. The acquisition of Bank
One, Pikeville and subsequent consolidation of its deposits with the other
<PAGE>
affiliates of the Company account for most of the increase. All depository
subsidiaries of the Company have interest rate structures that offer yields that
have been consistently competitive with other deposit products available in the
market over these same time periods. This deposit pricing posture has enabled
the Company to partially insulate earnings from rising interest rate pressures.
Short term borrowings increased $4.6 million and $4.7 million over the same time
periods. Factors contributing to these changes are the volatile nature of these
types of funds (primarily tax deposits and public funds), the increasing
placement of public funds in accounts of this nature, and the fact that, in the
interest rate environment prevalent over the periods addressed, these types of
accounts possess most of the unattractive features of money market accounts.
Other liabilities increased approximately $2.3 million and $2.1 million,
respectively, over the same time periods. The majority of the increase is
attributable to the impact of the acquisition and subsequent consolidation of
the Pikeville franchise.
Internal capital retention has primarily allowed for equity growth of
approximately $2.74 million and $3.98 million in the respective time periods.
Issuance of a new class of preferred shares provided another $18.386 million in
new capital in March of 1996. Equity capital as a percentage of total assets was
11.00%, 11.42%, and 11.42% at September 30, 1996, December 31, 1995, and
September 30, 1995, respectively. The Company is now required to meet certain
regulatory capital requirements for capital on a risk-adjusted basis. Risk
adjustment allows for the inclusion of off-balance sheet items such as unused
credit commitments, exclusion of certain no-risk assets, as well as inclusion of
other factors that may cause additional risk to the Company. The Company's risk-
weighted capital to risk-weighted asset percentage was 15.57% at September 30,
1996, and 19.23% at September 30, 1995. The percentage at December 31, 1995, was
19.06%. The primary reason for the decrease at September 30, 1996, from other
prior period levels was the dual effect of absorbing approximately $9.2 million
in goodwill and intangibles related to the Pikeville acquisition and absorbing
the Pikeville asset mix. This decrease also demonstrated the effect of the Bank
One, Pikeville acquisition enabling the Company to better leverage its capital.
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.
<PAGE>
MATEWAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net income for the nine month period ended September 30, 1996 was approximately
$4.759 million, representing earnings per share applicable to common stock of
$1.07, versus $3.605 million, or $.98 per share for the same period in 1995. Net
income for the third quarter of 1996 was $1.743 million or $.38 per share versus
$1.201 million or $.33 per share for the same period in 1995.Earnings per share
for the year ended December 31, 1995 was $1.42. Return on Average Assets was
1.17% and 1.28% for the nine month periods ended September 30, 1996 and 1995,
respectively. Return on Average Assets for the year ended December 31, 1995, was
1.38%. Return on Average Equity was 10.46% and 11.29% for the respective nine
month time periods and 12.49% for the year ended December 31, 1995. The lower
measures for the 1996 periods represent the impact of (1) the absorption of the
Bank One, Pikeville asset base into the Company, (2) expenses incurred related
to the acquisition, and (3) the effect of the preferred stock issuance diluting
the consolidated impact of the net earnings generated for the Company from the
new affiliate.
ACQUISITION AND EXPANSION ACTIVITY
On September 28, 1995, the Company entered into a definitive agreement with Banc
One Corporation and Bank One Kentucky Corporation under which Matewan
BancShares, Inc. would acquire via cash purchase all of the outstanding common
stock of the Bank One, Pikeville N.A. franchise. Consummation of the transaction
was completed March 15, 1996. The Pikeville franchise resumed operations as a
wholly owned subsidiary of Matewan BancShares, Inc. as Matewan National
Bank/Kentucky. At March 15, 1996, Pikeville had total assets of approximately
$204 million, deposits of approximately $183 million and capital of
approximately $20 million. The Company funded this acquisition with long-term
debt of approximately $8 million, a capital stock offering of $18.39 million,
and available cash.
In the month of June 1996, Matewan Bank FSB, the Company's wholly-owned federal
savings bank, filed applications with the Office of Thrift Supervision for the
opening of four new branch offices. A full service branch office for
Prestonsburg, Kentucky is scheduled for opening in October of 1996. In addition,
a new supermarket office in Abingdon, Virginia opened on September 1, 1996.
Opening of a similar outlet in Van Sant, Virginia is expected before the end of
the first quarter of 1997. The fourth office, a combination financial services,
business development, and loan production office, opened in Richlands, Virginia
in mid July.
OPERATING PERFORMANCE
Net interest income was $20.097 million for the nine month period ended
September 30, 1996, versus $14.569 million for the nine month
<PAGE>
period ended September 30, 1995. Under normal circumstances, in the rising
interest rate environment experienced in the first half of 1996, an institution
that is liability sensitive in the short run would expect an unfavorable
reaction in net interest income as interest-bearing liabilities reprice at
higher rates faster than interest-earning assets reprice. Because the Company
has exercised such vigilance in maintaining its funds pricing positions, as
interest rates increased, net interest income was not as vulnerable to erosion.
Actual Net Interest Margin (net interest income divided by average earning
assets) for the nine months ended September 30, 1996 was 5.50% versus 5.75% for
the same period in 1995, an erosion of less than 4%. Net interest margin for the
third quarter of 1996 was 5.46% versus 5.79% for the third quarter of 1995. The
Company continues to be liability sensitive and accordingly future increases in
market interest rates would generally adversely impact net interest income,
while decreases in market interest rates would generally have a positive impact.
The Company's provision for loan losses for the nine months ended September 30,
1996, was approximately $844 thousand higher than for the same period in 1995.
Net charge-off activity was $2.334 million through the third quarter of 1996
versus $1.553 million for the same period in 1995. The provison for the third
quarter of 1996 was $664 thousand versus $432 for the third quarter of 1995.
Non-performing loans (loans past due greater than ninety days plus nonaccrual
loans) approximated $5.149 million at September 30, 1996, versus $3.136 million
at September 30, 1995. These levels represent approximately 1.38% and 1.36% of
the gross loans outstanding for each respective period. The consolidation of the
Pikeville franchise included an increase to the consolidated Company reserve
position of approximately $3.152 million. Consolidation of the Pikeville loan
loss reserve and its non-performing loans with those of the Company as of
September 30, 1996 produced a ratio of allowance for loan losses to non-
performing loans of 114.48%. A similar calculation for the same time period in
1995 produced a ratio of 84.18%. The ratio of allowance for loan losses to gross
loans was 1.57% and 1.14% for the nine month periods ended September 30, 1996,
and September 30, 1995, respectively. The Company maintains an aggressive
position in dealing with the workout or liquidation of higher risk credits.
Management has determined that (1) there exists sufficient coverage in the loan
loss reserve to absorb the effect of anticipated charge-offs without requiring
any additional reserves and (2) on an ongoing basis, provisions to loan loss
reserve will continue to be made to reflect any ongoing additional exposure to
the loan portfolio. Management has analyzed and evaluated the condition of the
loan portfolio, has made provision for known anticipated losses, and does not
anticipate any further significant losses.
Non-interest income increased $1.384 million during the first nine months of
1996 when compared to the same period in 1995. Service fees and other fees
generally increased due to a change in the service fee schedule, absorption of
two full quarters contribution from Pikeville, and normal business growth. Sales
of credit insurance in the same periods translated into commissions
approximately $11 thousand lower
<PAGE>
in 1996 than for the same nine month period in 1995. High loss experiences by
the Company's credit insurance underwriters resulted in the underwriters'
companies tightening eligibility standards for policies issued in the Company's
market area. Sales volumes have accordingly declined. Non-interest income for
the second quarter of 1996 was $1.361 million versus $757 thousand for the third
quarter of 1996. The contribution from two full quarter of operations realized
from the Pikeville franchise accounts for the largest portion of the increase.
Non-interest expenses increased $4.194 million for the first nine months of 1996
over the same period in 1995. These increases were primarily attributable to the
absorption of two full quarter's worth of operations for Pikeville. As well, the
Company has incurred a full nine months worth of expenses in 1996 related to the
two supermarket offices of Matewan Bank FSB that were opened in the latter part
of the first half of 1995. In addition, two more Matewan Bank FSB offices
commenced business in the third quarter of 1996. For the immediate time period,
these offices have experienced a disproportionate level of expenses relative to
income. Overall, higher equipment and data processing expenses related to the
Company's outsourcing its data processing functions to Electronic Data Systems
(EDS) and converting the Pikeville franchise to the same operating system were
experienced. Otherwise most increases for overhead-related expenses were a
function of normal business growth and activity. The Company incurred
approximately $186 thousand of accounting, legal, and underwriting expenses
related to consummating the Pikeville acquisition and closing the preferred
stock offering. Third quarter non-interest expense levels were approximately
$1.836 million higher than for the third quarter of 1996. Again, most of the
increase is attributable to the absorption of the Pikeville franchise.
For the nine month period ended September 30, 1996, net income before taxes
increased $1.874 million relative to the same time period in 1995. Applicable
income taxes increased by $720 thousand in the nine month period ended September
30, 1996, over the same period in 1995. The effective income tax rate for the
first nine months of 1996 was 36.44% versus 35.79% for the first nine months of
1995. These levels reflect changes in composition of the Company's earnings,
favorable tax effects attributable to Matewan Bank FSB, and the impact of two
full quarters' worth of operation from Pikeville. Net income after income taxes
increased $1.154 million for the nine months ended September 30, 1996, over the
same period for 1995, a consequence of the earnings contribution realized from
the Matewan National Bank/Kentucky franchise being somewhat offset by an
interest rate environment less favorable to a liability sensitive institution,
by expenses connected with closing the preferred stock offering and the new
acquisition, and a loan loss provision that, excluding provisions related to the
new bank, was more than 37% higher than for the comparable prior year period.
<PAGE>
Analysis of the Allowance for Loan Losses (Unaudited)
MATEWAN BANCSHARES, INC AND SUBSIDIARIES
(Amounts listed in thousands)
<TABLE>
<CAPTION>
Nine months ended
Year-to-date amounts listed through September 30, September 30,
------------- -------------
1996 1995
---- ----
<S> <C> <C>
Balance at begining of period $2,973 $2,932
Loans charged-off (2,765) (1,938)
Recoveries 431 385
Increase incidental to acquisition 3,152 0
Provision for loan losses 2,105 1,261
----- -----
Balance at the end of period $5,896 $2,640
===== =====
Non-performing loans $ 5,149 $3,136
Ratio of net charge-offs to
average loans (annualized) .94% .94%
Ratio of nonperforming loans to
gross loans 1.38% 1.36%
Ratio of nonperforming assets to
total assets .96% .93%
Ratio of allowance for loan losses
to non-performing loans 114.48% 84.18%
Ratio of allowance for loan losses
to gross loans 1.57% 1.14%
</TABLE>
The level of loans classified as troubled, restructured debt was immaterial for
either of the above periods.
<PAGE>
MATEWAN BANCSHARES, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 11
Exhibit 27 Financial Date Schedule
Information included in EX-27 is incorporated herein by reference.
(b) Reports on Form 8-K - A Form 8-K was filed on March 28, 1996.
Report on Form 8-K/A - A Form 8-K/A was filed on May 31, 1996.
Information included in the reports filed under (b) is
incorporated herein by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MATEWAN BANCSHARES, INC.
(Registrant)
October 31, 1996 By: /s/Dan R. Moore
----------------------------
Dan R. Moore
Chairman of the Board of Directors
and President
October 31, 1996 By: /s/Lee M. Ellis
----------------------------
Lee M. Ellis
Vice President & Chief Financial Officer
<PAGE>
EXHIBIT 11
Computation of Earnings per Share
(dollars in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the Nine Months For the Three Months
ended September 30 ended September 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 3,684,104 3,684,104 3,684,104 3,684,104
Impact of Treasury Shares 19,506 16,408 22,835 16,016
--------- --------- --------- ---------
Total 3,664,598 3,667,696 3,661,269 3,668,088
========= ========= ========= =========
Net Income $4,759 $ 3,605 $ 1,743 $ 1,201
========= ========= ========= =========
Preferred Stock Dividends $852 $0 $360 $0
========= ========= ========= =========
Earnings Per Share
Applicable to Common Stock $1.07 $.98 $.38 $.33
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,196
<INT-BEARING-DEPOSITS> 6,012
<FED-FUNDS-SOLD> 17,318
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,050
<INVESTMENTS-CARRYING> 121,028
<INVESTMENTS-MARKET> 120,664
<LOANS> 368,616
<ALLOWANCE> 5,896
<TOTAL-ASSETS> 606,047
<DEPOSITS> 503,782
<SHORT-TERM> 22,378
<LIABILITIES-OTHER> 6,401
<LONG-TERM> 7,771
0
805
<COMMON> 3,684
<OTHER-SE> 62,204
<TOTAL-LIABILITIES-AND-EQUITY> 606,047
<INTEREST-LOAN> 26,608
<INTEREST-INVEST> 6,271
<INTEREST-OTHER> 992
<INTEREST-TOTAL> 33,871
<INTEREST-DEPOSIT> 12,995
<INTEREST-EXPENSE> 13,774
<INTEREST-INCOME-NET> 20,097
<LOAN-LOSSES> 2,105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 14,155
<INCOME-PRETAX> 7,488
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,759
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.07
<YIELD-ACTUAL> 5.50
<LOANS-NON> 4,170
<LOANS-PAST> 979
<LOANS-TROUBLED> 980
<LOANS-PROBLEM> 9,803
<ALLOWANCE-OPEN> 2,973
<CHARGE-OFFS> 2,765
<RECOVERIES> 431
<ALLOWANCE-CLOSE> 5,896
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,582
</TABLE>
