<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 six months ended June 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
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(registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section13 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
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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 - 3,663,351 shares June 30, 1996
- -----------------------------------------------------------
<PAGE>
Matewan BancShares, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - June 30, 1996,
December 31, 1995, and June 30, 1995
Consolidated statements of income - Six months and three
months ended June 30, 1996 and June 30, 1995
Consolidated statement of changes in shareholders' equity
for the six months ended June 30, 1996 and 1995
Consolidated statements of cash flows for the six months
ended June 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>
June 30 December 31 June 30
------- ----------- -------
ASSETS 1996 1995 1995
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 23,550 $ 23,881 $ 20,342
Federal funds sold 20,223 17,237 11,377
-------- -------- --------
Cash and cash equivalents 43,773 41,118 31,719
Interest bearing deposits
in other banks 2,691 5,704 3,132
Investment securities:
Available-for-sale at
fair value 28,213 32,429 6,970
Held-to-maturity at cost 121,035 73,299 100,210
(Approximate fair value
$118,565 at June 30,1996;
$73,839 at December 31, 1995;
and $101,031 at June 30, 1995)
Loans - net 367,251 228,568 221,944
Premises and equipment 20,608 9,692 9,383
Accrued interest receivable
and other assets 22,219 10,224 9,982
-------- -------- --------
TOTAL ASSETS $605,790 $401,034 $383,340
======== ======== ========
</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>
June 30 December 31 June 30
----------- ------------ -----------
1995 1995 1996
----------- ------------ -----------
<S> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 67,784 $ 44,917 $ 42,451
Interest bearing 441,112 289,470 270,350
---------- ---------- ----------
TOTAL DEPOSITS 508,896 334,387 312,801
Short-term borrowings:
Repurchase agreements 11,765 9,361 14,706
Other 5,102 8,349 8,722
---------- ---------- ----------
TOTAL SHORT TERM
BORROWINGS 16,867 17,710 23,428
Long-term Borrowings 7,859 0 0
Accrued interest payable
and other liabilities 6,401 3,120 3,478
---------- ---------- ----------
TOTAL LIABILITIES 540,023 355,217 339,707
SHAREHOLDERS' EQUITY
Preferred stock 805 0 0
$1 par value; 1,000,000 shares
authorized; 805,000 issued as
of June 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
June 30, 1996, December 31, 1995,
and June 30, 1995, including
20,753, 16,753 and 15,753 shares
in treasury stock
Surplus 29,773 12,182 12,182
Retained earnings 31,768 29,976 27,893
Treasury stock (151) (78) (57)
Net unrealized gain(loss) on
available-for-sale
securities, net of deferred
income taxes (112) 53 (69)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 65,767 45,817 43,633
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 605,790 $ 401,034 $ 383,340
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
(Dollars in thousands, except per share data)
<TABLE>
Six months ended Three months ended
------------------------ -----------------------
June 30, June 30,
--------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 16,762 $ 12,221 $ 9,764 $ 6,262
Interest and dividends
on investment securities:
Taxable 3,873 3,029 2,199 1,556
Tax-exempt 146 61 96 34
Other interest income 743 298 400 152
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 21,524 15,609 12,459 8,004
INTEREST EXPENSE
Deposits 8,276 5,755 4,723 2,997
Short-term borrowings 452 282 324 140
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 8,728 6,037 5,047 3,137
---------- ---------- ---------- ----------
NET INTEREST INCOME 12,796 9,572 7,412 4,867
PROVISION FOR LOAN LOSSES 1,441 829 979 484
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,355 8,743 6,433 4,383
OTHER INCOME
Service fees 1,379 816 819 432
Other 618 421 422 220
Credit life insurance
commissions 293 273 182 139
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 2,290 1,510 1,423 791
OTHER EXPENSES
Salaries and employee
benefits 3,606 3,008 2,142 1,553
Net occupancy 553 483 301 244
Equipment 525 378 311 300
Data Processing 613 332 364 132
Advertising 407 347 274 207
Federal deposit insurance 259 392 73 197
Other 2,912 1,577 1,680 741
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE 8,875 6,517 5,145 3,374
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 4,770 3,736 2,711 1,800
APPLICABLE INCOME TAXES 1,754 1,332 1,004 635
---------- ---------- ---------- ----------
NET INCOME $ 3,016 $ 2,404 $ 1,707 $ 1,165
========== ========== ========== ==========
Preferred Stock Dividends $ 492 $ 0 $ 376 $ 0
========== ========== ========== ==========
Earnings Applicable to
Common Stock $ 2,524 $ 2,404 $ 1,331 $ 1,165
========== ========== ========== ==========
Per Share Earnings
Applicable to Common $.69 $.65 $.36 $.32
Stock ========== ========== ========= =========
Average common shares
outstanding 3,666,266 3,667,500 3,665,943 3,668,304
========== ========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<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) $41,803
Treasury Stock Purchases 0 0 0 0 (35) 0 (35)
Treasury Stock Sales 0 0 31 0 26 0 57
Change in net unrealized loss on
available-for-sale securities,
net of deferred income taxes 0 0 0 0 0 74 74
Dividends on Common Stock 0 0 0 (667) 0 0 (667)
($.1818 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 2,404 0 0 2,404
--------- --------- --------- --------- ------- ------- --------
Balance June 30, 1995 0 $3,684 $12,182 $27,893 ($57) ($69) $43,633
========= ========= ========= ========= ======= ======= ========
<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, 1996 $0 $3,684 $12,182 $29,976 ($78) $53 $45,817
Treasury Stock Purchases 0 0 0 0 (73) 0 (73)
Change in net unrealized gain on
available-for-sale securities,
net of deferred income taxes 0 0 0 0 0 (165) (165)
Dividends on Common Stock 0 0 0 (732) 0 0 (732)
($.20 per share)
Net income 0 0 0 3,016 0 0 3,016
Issuance of Preferred Shares 805 0 17,591 0 0 0 18,396
Dividends on Preferred Shares 0 0 0 (492) 0 0 (492)
($.596 per share) --------- --------- --------- --------- ------- ------- --------
Balance June 30, 1996 $805 $3,684 $29,773 $31,768 ($151) ($112) $65,767
========= ========= ========= ========= ======= ======= ========
</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 six months ended
June 30, June 30,
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 3,016 $ 2,404
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 495 343
AMORTIZATION 256 277
PROVISION FOR LOAN LOSSES 1,441 829
PROVISION FOR DEFERRED TAXES 10 33
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS (3,232) (842)
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES 1,400 (567)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,386 2,477
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 12,933 7,261
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 27,383 24,540
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (8,442) (3,034)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (60,669) (25,990)
NET CHANGE IN INTEREST BEARING
DEPOSITS IN OTHER BANKS 3,013 (256)
NET CHANGE IN LOANS (6,246) (8,029)
PURCHASES OF PREMISES
AND EQUIPMENT (837) (639)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 0 165
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (16,435) (5,982)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS (8,077) 2,154
NET CHANGE IN SHORT-TERM
BORROWINGS (1,319) 8,431
PROCEEDS FROM SALE OF PREFERRED
STOCK 18,396 0
PROCEEDS FROM LONG TERM NOTE 8,000 0
PAYMENTS ON LONG TERM NOTE (141) 0
CASH DIVIDENDS PAID (1,155) (670)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 15,704 9,915
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,655 6,410
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 41,118 25,309
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 43,773 $ 31,719
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
June 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 criterea evaluated to determine such classification parallel those employed
by banking regulatory authorities.
At June 30, 1996, the recorded investment in impaired loans under Statement No.
114 was $5.66 million (of which $842 thousand were on a nonaccrual basis).
Included in this amount is $2.368 million of impaired loans for which the
related allowance for credit losses is $1.398 million and $3.295 million of
impaired loans that do not have a specific allowance for credit losses. The
average recorded investment in impaired loans during the six month period ended
June 30, 1996, approximated $6.75 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.
5. 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.
6. 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.
7. The preliminary proforma unaudited results of operations for the six month
period ended June 30, 1996, and June 30, 1995, assuming consummation of the
purchase transaction (Note 4), issuance of the convertible preferred stock (Note
6), and execution of the note payable (Note 5) as of January 1, 1995, was as
follows:
<TABLE>
<CAPTION>
Six months ended June 30
1996 1995
----------- -----------
(000's omitted, except
per share data)
<S> <C> <C>
Total revenues $28,180 $30,836
Net income 3,026 2,314
Net income per share applicable
to common stock .62 .43
</TABLE>
8. 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 June 30, 1996, have increased approximately $205 million since
December 31, 1995, and $222 million since June 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 negative asset growth of less than two percent in the six month
period and asset growth in excess of three percent in the annual period ended
June 30, 1996. Deposits have increased approximately $175 million and $196
million and short term borrowings decreased approximately $843 thousand and $6.6
million over the semiannual and annual intervals, respectively. To fund the
acquisition, the Company incurred $8.0 million of long-term debt and
successfully completed a preferred stock offering that netted proceeds of $18.39
million. Retained earnings increased approximately $1.8 million from December
31, 1995, to June 30, 1996, and approximately $3.8 million in the twelve month
period ended June 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 June 30, 1996, compared to
December 31, 1995, and June 30, 1995, reflects several notable differences. Net
loans have increased approximately $139 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 second quarter.
The increase reflects a level of 61.0% of total assets versus a pre-acquisition
level of just under 57.0%. Deposit growth attributable to both the acquisition
and normal core market growth for the six month and twelve month periods in the
financial statements ended June 30, 1996, have supported this loan growth.
Investment securities have increased approximately $43.5 million since December
31, 1995, and $42.1 million since June 30, 1995. Investment securities comprise
approximately 24.6% of the Company's total assets versus 18.3% at December 31,
1995. Cash and cash equivalent balances increased approximately $2.7 million and
$12.1 million from December 31, 1995 and June 30, 1996, respectively. Interest
bearing deposits in other banks decreased approximately $3.0 million and
approximately $400 thousand, respectively, in the six month and twelve month
periods ended June 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 $10.9 million
and $11.2 million during the six month and twelve month periods ended June 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 purchase price allocation, goodwill, and
organizational expenditures related to the Pikeville
<PAGE>
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 June 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 $22.8 million and $25.3
million and interest bearing deposits increased approximately $152 million and
$171 million in the six month period since December 31, 1995, and in the twelve
month period since June 30, 1995, respectively. The acquisition of Bank One,
Pikeville and subsequent consolidation of its deposits with the other affiliates
of the Company account for most of the increase. All depository
<PAGE>
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 decreased $1.3 million and $6.6 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 $3.3 million and $2.9 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 $1.55 million and $3.7 million in the respective time periods.
Issuance of a new class of preferred shares netted another $18.39 million in new
capital in the first half of 1996. Equity capital as a percentage of total
assets was 10.86%, 11.42%, and 11.38% at June 30, 1996, December 31, 1995, and
June 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 14.97% at June 30, 1996,
and 19.21% at June 30, 1995. The percentage at December 31, 1995, was 19.06%.
The primary reason for the decrease at June 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
SUMMARY
Net income for the first half of 1996 was approximately $3.016 million,
representing earnings per share applicable to common stock of $.69, versus
$2.404 million, or $.65 per share for the same period in 1995. Net income for
the second quarter of 1996 was $1.707 million or $.36 per share versus $1.165
million or $.32 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 1.16% and
1.30% for the six month period ended June 30, 1996, and June 30, 1995,
respectively. Return on Average Assets for the year ended December 31, 1995, was
1.38%. Return on Average Equity was 10.50% and 11.41% for the respective six
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 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 sometime in the second half of
1996. In addition, two new supermarket offices in Abingdon, Virginia and Van
Sant, Virginia are expected to commence business within approximately the same
time frame. The fourth office, a combination financial services, business
development, and loan production office, will be opened in Richlands, Virginia
by the end of July.
RESULTS OF OPERATIONS
Net interest income was $12.796 million for the six month period ended June 30,
1996, versus $9.572 million for the six month period ended June 30, 1995. Under
normal circumstances, in the rising interest rate
<PAGE>
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
six months ended June 30, 1996 was 5.52% versus 5.73% for the same period in
1995, an erosion of less than 4%. Net interest margin for the second quarter of
1996 was 5.45% versus 5.77% for the second 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 six months ended June 30, 1996,
was approximately $612 thousand higher than for the same period in 1995. Net
charge-off activity increased to $1.387 million from $965 thousand for the same
respective periods. The provison for the second quarter of 1996 was $979
thousand versus $484 for the second quarter of 1995. Non-performing loans (loans
past due greater than ninety days plus nonaccrual loans) approximated $5.521
million at June 30, 1996, versus $2.799 million at June 30, 1995. These levels
represent approximately 1.28% and 1.10% 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 for the first half of 1996 produced a ratio of
allowance for loan losses to non-performing loans of 128.84%. A similar
calculation for the first half of 1995 produced a ratio of 99.89%. The ratio of
allowance for loan losses to gross loans was 1.65% and 1.24% for the six month
periods ended June 30, 1996, and June 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 $780 thousand during the first six 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 a full
quarter contribution from Pikeville, and normal business growth. Sales of credit
insurance in the same periods translated into commissions approximately $20
thousand greater in 1996 than for the same six month period in 1995. High loss
experiences by the Company's credit insurance underwriters resulted in the
underwriters' companies tightening eligibility standards for
<PAGE>
policies issued in the Company's market area. Sales volumes have accordingly
remained flat. Non-interest income for the second quarter of 1996 was $1.423
million versus $791 thousand for the second quarter of 1996. The full quarter of
operations realized from the Pikeville franchise accounts for the largest
portion of the increase.
Non-interest expenses increased $2.358 million for the first half of 1996 over
the same period in 1995. These increases were primarily attributable to the
absorption of a full quarter's worth of operations for Pikeville. As well, the
Company incurred a full six 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. 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.
Second quarter non-interest expense levels were approximately $542 thousand
higher than for the second quarter of 1996. Again, most of the increase is
attributable to the absorption of the Pikeville franchise.
For the six month periods ended June 30, 1996 and June 30, 1995, respectively,
net income before taxes increased $1.034 million. Applicable income taxes
increased by $422 thousand in the six month period ended June 30, 1996, over the
same period in 1995. The effective income tax rate for the first half of 1996
was 36.77% versus 35.65% for the first half 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 a full quarter's worth of
operation from Pikeville. Net income after income taxes increased $612 thousand
for the six months ended June 30, 1996, over the same period for 1995, a
consequence of an interest rate environment less favorable to a liability
sensitive institution, expenses connected with closing the preferred stock
offering and acquiring Matewan National Bank/Kentucky, and a loan loss provision
that was more than 74% 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>
Six months ended
Year-to-date amounts listed through June 30, June 30,
-------- --------
1996 1995
---- ----
<S> <C> <C>
Balance at begining of period $2,973 $2,932
Loans charged-off (1,664) (1,212)
Recoveries 277 247
Increase incidental to acquisition 3,152 0
Provision for loan losses 1,441 829
------ ------
Balance at the end of period $6,179 $2,796
====== ======
Non-performing loans $ 4,796 $2,252
Ratio of net charge-offs to
average loans (annualized) .89% .89%
Ratio of nonperforming loans to
gross loans 1.28% 1.00%
Ratio of nonperforming assets to
total assets .90% .73%
Ratio of allowance for loan losses
to non-performing loans 128.84% 99.89%
Ratio of allowance for loan losses
to gross loans 1.65% 1.24%
</TABLE>
The level of loans classified as troubled, restructured debt was immaterial for
either of the above periods.
<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)
July 31, 1996 By: /s/Dan R. Moore
----------------------------
Dan R. Moore
Chairman of the Board of Directors
and President
July 31, 1996 By: /s/Lee M. Ellis
----------------------------
Lee M. Ellis
Vice President & Chief Financial Officer
<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>
EXHIBIT 11
Computation of Earnings per Share
(dollars in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
ended June 30 ended June 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 17,838 16,604 18,161 15,800
--------- --------- --------- ---------
Total 3,666,266 3,667,500 3,665,943 3,668,304
========= ========= ========= =========
Net Income $3,016 $2,404 $1,707 $1,165
========= ========= ========= =========
Preferred Stock Dividends $492 $0 $376 $0
========= ========= ========= =========
Earnings Per Share
Applicable to Common Stock $.69 $.65 $.36 $.32
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 23,550
<INT-BEARING-DEPOSITS> 2,691
<FED-FUNDS-SOLD> 20,223
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 28,213
<INVESTMENTS-CARRYING> 121,035
<INVESTMENTS-MARKET> 118,565
<LOANS> 367,251
<ALLOWANCE> 6,179
<TOTAL-ASSETS> 605,790
<DEPOSITS> 508,896
<SHORT-TERM> 16,867
<LIABILITIES-OTHER> 6,401
<LONG-TERM> 7,859
<COMMON> 3,684
0
805
<OTHER-SE> 61,278
<TOTAL-LIABILITIES-AND-EQUITY> 605,790
<INTEREST-LOAN> 16,762
<INTEREST-INVEST> 4,019
<INTEREST-OTHER> 743
<INTEREST-TOTAL> 21,524
<INTEREST-DEPOSIT> 8,276
<INTEREST-EXPENSE> 8,728
<INTEREST-INCOME-NET> 12,796
<LOAN-LOSSES> 1,441
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,875
<INCOME-PRETAX> 4,770
<INCOME-PRE-EXTRAORDINARY> 3,016
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,016
<EPS-PRIMARY> .82
<EPS-DILUTED> .69
<YIELD-ACTUAL> 5.52
<LOANS-NON> 3,681
<LOANS-PAST> 1,115
<LOANS-TROUBLED> 937
<LOANS-PROBLEM> 5,664
<ALLOWANCE-OPEN> 2,973
<CHARGE-OFFS> 1,664
<RECOVERIES> 227
<ALLOWANCE-CLOSE> 6,179
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,403
</TABLE>
