<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, 1997
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Commission file number 33-17172
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Matewan BancShares, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 55-0639363
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(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
Box 100
Second Avenue and Vinson Street
Williamson, West Virginia 25661
- ------------------------- --------
(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 - 3,643,790 shares June 30, 1997
- -----------------------------------------------------------
<PAGE>
Matewan BancShares, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - June 30, 1997,
December 31, 1996, and June 30, 1996
Consolidated statements of income - Six months and three months
ended June 30, 1997 and June 30, 1996
Consolidated statement of changes in shareholders' equity for
the six months ended June 30, 1997 and 1996
Consolidated statements of cash flows for the six months ended
June 30, 1997 and 1996
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 1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 28,280 $ 29,721 $ 23,550
Interest bearing deposits 6,226 6,034 2,691
Federal funds sold 18,836 28,928 20,223
-------- -------- --------
Cash and cash equivalents 53,342 64,683 46,464
Investment securities:
Available-for-sale at
fair value 21,062 25,411 28,213
Held-to-maturity at cost 136,475 122,569 121,035
(Approximate fair value
$136,053 at June 30,1997;
$122,427 at December 31, 1996;
and $118,565 at June 30, 1996)
Loans - net 381,780 370,801 367,251
Premises and equipment 20,531 20,871 20,608
Accrued interest receivable
and other assets 25,743 22,851 22,219
-------- -------- --------
TOTAL ASSETS $638,933 $627,186 $605,790
======== ======== ========
</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
------- ----------- -------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 68,297 $ 78,464 $ 67,784
Interest bearing 461,283 444,844 441,112
---------- ---------- ----------
TOTAL DEPOSITS 529,580 523,308 508,896
Short-term borrowings:
Repurchase agreements 13,319 10,118 11,765
Other 12,977 13,101 5,102
---------- ---------- ----------
TOTAL SHORT TERM BORROWINGS 26,296 23,219 16,867
Long-term Borrowings 7,293 7,579 7,859
Accrued interest payable
and other liabilities 9,710 5,502 6,401
---------- ---------- ----------
TOTAL LIABILITIES 572,879 559,608 540,023
SHAREHOLDERS' EQUITY
Preferred stock 805 805 805
$1 par value; 1,000,000 shares
authorized; 805,000 issued as
of June 30, 1997, December 31,
1996, and June 30, 1996 ($25 per
share liquidation preference),
including 102,842, 0, and 0 shares
in treasury stock
Common Stock - $1 par value 3,684 3,684 3,684
10,000,000 shares authorized;
3,684,104 shares outstanding at
June 30, 1997, December 31, 1996,
and June 30, 1996, including
40,314, 23,953 and 20,753 shares
in treasury stock
Surplus 29,773 29,773 29,773
Retained earnings 35,101 33,590 31,768
Treasury stock (3,247) (206) (151)
Net unrealized gain(loss) on
available-for-sale
securities, net of deferred
income taxes (62) (68) (112)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 66,054 67,578 65,767
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 638,933 $ 627,186 $ 605,790
========== ========== ==========
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>
<CAPTION>
Six months ended Three months ended
---------------- ------------------
June 30, June 30,
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $19,967 $16,762 $10,183 $ 9,764
Interest and dividends
on investment securities:
Taxable 4,525 3,873 2,277 2,199
Tax-exempt 279 146 141 96
Other interest income 725 743 328 400
------- ------- ------- -------
TOTAL INTEREST INCOME 25,496 21,524 12,929 12,459
INTEREST EXPENSE
Deposits 10,381 8,276 5,279 4,723
Short-term borrowings 662 452 259 324
------- ------- ------- -------
TOTAL INTEREST EXPENSE 11,043 8,728 5,538 5,047
------- ------- ------- -------
NET INTEREST INCOME 14,453 12,796 7,391 7,412
PROVISION FOR LOAN LOSSES 1,075 1,441 694 979
------- ------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,378 11,355 6,697 6,433
OTHER INCOME
Service fees 1,894 1,379 1,026 819
Other 545 618 217 422
Credit life insurance
commissions 147 293 79 182
------- ------- ------- -------
TOTAL OTHER INCOME 2,586 2,290 1,322 1,423
OTHER EXPENSES
Salaries and employee
benefits 4,669 3,606 2,341 2,142
Net occupancy 703 553 346 301
Equipment 709 525 349 311
Data Processing 681 613 335 364
Advertising 360 407 139 274
Federal deposit insurance 211 259 108 73
Other 3,788 2,912 1,960 1,680
------- ------- ------- -------
TOTAL OTHER EXPENSE 11,121 8,875 5,578 5,145
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 4,843 4,770 2,441 2,711
APPLICABLE INCOME TAXES 1,750 1,754 886 1,004
------- ------- ------- -------
NET INCOME $ 3,093 $ 3,016 $ 1,555 $ 1,707
======= ======= ======= =======
Preferred Stock Dividends $ 706 $ 492 $ 394 $ 376
======= ======= ======= =======
Earnings Applicable to
Common Stock $ 2,387 $ 2,524 $ 1,161 $ 1,331
======= ======= ======= =======
Per Share Earnings
Applicable to Common Stock $.65 $.69 $.32 $.36
======= ======= ======= =======
Average common shares
outstanding 3,652,915 3,666,266 3,646,432 3,665,953
========== ========== ========== ==========
</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
Gain 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>
<TABLE>
<CAPTION>
Net
Unrealized
Gain 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, 1997 $805 $3,684 $29,773 $33,590 ($206) ($68) $67,578
Treasury Stock Purchases 0 0 0 0 (3,041) 0 (3,041)
Change in net unrealized gain on
available-for-sale securities, net of
deferred income taxes 0 0 0 0 0 6 6
Dividends on Common Stock 0 0 0 (876) 0 0 (876)
($.24 per share)
Net income 0 0 0 3,093 0 0 3,093
Dividends on Preferred Shares 0 0 0 (706) 0 0 (706)
($.596 per share) ---- ------ ------- ------- ----- ----- ------
Balance June 30, 1997 $805 $3,684 $29,773 $35,101 ($3,247) ($62) $66,054
==== ====== ======= ======= ======= ==== =======
</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,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 3,093 $ 3,016
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 642 495
AMORTIZATION 600 256
PROVISION FOR LOAN LOSSES 1,075 1,441
PROVISION FOR DEFERRED TAXES 430 10
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS (3,497) (3,159)
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES 3,854 1,400
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,197 3,459
INVESTING ACTIVITIES
NET CASH RECEIVED IN ACQUISITION OF
BANK 0 16,430
PROCEEDS FROM SALES OF
AVAILABLE-FOR-SALE SECURITIES 0 0
PROCEEDS FROM MATURITIES OF
AVAILABLE-FOR-SALE SECURITIES 6,308 12,933
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 13,504 27,383
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (1,948) (8,442)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (27,440) (60,669)
NET CHANGE IN LOANS (12,054) (6,246)
PURCHASES OF PREMISES
AND EQUIPMENT (321) (837)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 19 0
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (21,932) (19,448)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS 6,272 (8,077)
NET CHANGE IN SHORT-TERM
BORROWINGS 3,077 (1,319)
PROCEEDS FROM SALE OF PREFERRED
STOCK 0 18,396
PROCEEDS FROM LONG TERM NOTE 0 8,000
PAYMENTS ON LONG TERM NOTE (286) (141)
PURCHASE OF TREASURY STOCK (3,041) (73)
CASH DIVIDENDS PAID (1,628) (1,155)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 4,394 15,631
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (11,341) (358)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 64,683 46,822
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 53,342 $ 46,464
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
June 30, 1997
(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,
1997. 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, 1996.
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. In January 1997, the Board of Directors of the Company approved the use of up
to $3.00 million to repurchase outstanding preferred shares.
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 preferred
shareholders to repurchase 114,500 outstanding preferred shares at a price to be
determined via the offering, but in no event to be less than $24 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 million. Subsequently, the Company in privately negotiated
transactions purchased an additional 58,300 shares for approximately $1.545
million.
4. 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.
Accordingly, the consolidated financial statements include the operations of
Kentucky only from the date of acquisition. The aggregate purchase price was
approximately $29.35 million, which includes costs of acquisition. The Company
financed this transaction with proceeds from the issuance of convertible stock,
long term debt, and available cash. The Company incurred amortizing intangible
expenses related to this transaction of approximately $493 thousand and $388
thousand as of June 30, 1997 and June 30, 1996, respectively.
<PAGE>
5. At June 30, 1997, the recorded investment in impaired loans under Statement
No. 114 was $11.15 million (of which $3.74 million were on a nonaccrual basis).
Included in this amount is $3.23 million of impaired loans for which the related
allowance for credit losses is $1.67 million and $7.92 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, 1997
approximated $11.65 million.
6. In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement No. 125, "Accounting for Transfers and Servicings of Financial Assets
and Extinguishments of Liabilities," which was applicable to the Company January
1, 1997. In October 1996, the FASB agreed to defer the effective date for one
year for the following transactions: securities lending, repurchase agreements,
dollar rolls, and other similarly secured transactions. Statement No. 125
establishes the standards for determining whether certain transfers of financial
assets should be considered sales of all or part of the assets or secured
borrowings. Statement 125 also establishes standards for settlements of
liabilities through the transfer of assets to a creditor or obtaining an
unconditional release and whether these settlements should prove the debt
extinguished. The adoption of this standard is not expected to have a material
impact on the Company's financial statements.
7. In February 1997, the FASB issued Statement No. 128, "Earnings Per Share,"
(Statement 128) which simplifies the computation of earnings per share available
for common shareholders and make such computation more comparable to
international accounting standards. Under Statement 128, primary earnings per
share will be replaced with "basic" earnings per share and will be computed by
dividing income available to common shareholders by average common shares
outstanding (exclusive of the impact of common stock equivalents). Fully diluted
earnings per share will be renamed "Diluted" and Statement 128 requires that
both computations be shown on the face of the income statement with equal
prominence except for entities with simple capital structures and then only
basic earnings per share will be required. Statement 128 is effective for
interim and annual financial statements ending after December 15, 1997. The
Company does not expect Statement 128 to have a material impact on its 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, 1997, have increased approximately $11.7 million since
December 31, 1996, and $33.1 million since June 30, 1996. The Company
experienced annualized growth in each time period of 3.7% and 5.5% percent,
respectively. Deposits have decreased approximately $1.4 million and $13.0
million over the same respective periods. Short term borrowings increased
approximately $10.7 million and $17.1 million over the same intervals. Retained
earnings increased approximately $1.5 million from December 31, 1996, to June
30, 1997, and approximately $3.3 million in the twelve month period ended June
30, 1997.
The asset structure of the Company's balance sheet at June 30, 1997, compared to
December 31, 1996, and June 30, 1996, has changed, as far as overall
composition, as follows. Cash and cash equivalents have decreased $11.1 million
since December 31, 1996 (representing currently 8.3% of total assets versus
10.3% at year end), but have increased $6.9 million since June 30, 1996
(approximately 7.7% of total assets). Investments have increased approximately
$9.6 million since December 1, 1996 and $8.2 million since June 30, 1996. These
totals represent 24.6%, 23.5% and 24.6% of total outstanding assets for each
time period. Loans have increased approximately $11.0 million since December 31,
1996 (to 60% of total assets versus 59%) and $14.5 million since June 30, 1996
(61% of total assets). Growth in earning assets in the six month period has been
funded by a combination of declines in cash and cash equivalents previously
noted and increases in short term borrowings. Earning asset growth in the twelve
month period has been funded predominantly by increasing deposit and short term
borrowings. Loan and deposit growth that has taken place in both periods of time
has predominantly been a function of growth in the Company's core market areas.
Regarding the loan portfolio, it is the Company's policy 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 thirteen county market area in southern West Virginia, eastern
Kentucky, and western Virginia that
<PAGE>
the Company has identified as its core market. As a point of fact, the
overwhelming majority of the loans outstanding on both June 30, 1997, and 1996,
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
thirteen county market area, some geographic diversification may be realized by
engaging in business in contiguous counties.
Non-interest bearing deposits decreased approximately $10.2 million in the six
months since December 31, 1996 (to 10.7% of total assets compared to 12.5%) and
increased $513 thousand in the twelve month period since June 30, 1996 (11.2% of
total assets). Interest bearing deposits increased approximately $16.5 million
and $18.9 million in the same respective periods of time (representing 72.2%,
71.0%, and 72.8% of total assets respectively). True deposit growth for the
first half of 1997 was masked by a series of transactions wherein a large
commercial customer transferred some short term working capital funds that had
been placed in one of the Company's banking affiliates late in the fourth
quarter of 1996 and whose departure in the first quarter of 1997 was
anticipated. These particular funds, which were never regarded as core in
nature, had the dual impact of inflating December 1996 final totals and
understating true first half 1997 core deposit growth. 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 helped the
Company to insulate earnings from rising interest rate pressures. Short term
borrowings increased $3.1 million and $9.4 million over these same time periods.
Factors contributing to these changes are the volatile nature of these types of
funds (primarily tax deposits), 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 many of
the
<PAGE>
attractive features (namely, short term duration and liquidity) of money market
accounts. Other liabilities increased approximately $4.2 million and $3.3
million, respectively, over the same time periods.
During the first six months of 1997, consummation of the Company's tender offer
for its preferred stock, in conjunction with the execution of regular treasury
stock repurchases on its common shares more than neutralized any gains inherent
in realizing normal internal capital retention levels. As a consequence of
treasury stock activity in this time period (approximately $3.0 million) total
shareholder equity decreased by approximately $1.5 million. In the twelve month
period, the impact of treasury stock transactions on equity capital levels
resulted in a net increase in total equity of $287 thousand. Equity capital as a
percentage of total assets was 10.34%, 10.77%, and 10.86% at June 30, 1997,
December 31, 1996, and June 30, 1996, 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 14.21% at
June 30, 1997, and 14.97% at June 30, 1996. The percentage at December 31, 1996,
was 15.63%.
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 available for common share holders for the first half of 1997 was
approximately $2.387 million, representing earnings per share applicable to
common stock of $.65, versus $2.524 million, or $.69 per share for the same six
month period in 1996. Earnings per share for the year ended December 31, 1996
was $1.43. Net income available for common shareholders for the second quarter
of 1997 was $1.161 million ($.32 per shares) compared to $1.311 million ($.36
per share) for the same three month period in 1996. Return on Average Assets was
1.01% and 1.16% for the six month periods ended June 30, 1997, and June 30,
1996, respectively. Return on Average Assets was 1.00% and 1.11% for quarters
ending on the same respective dates. Return on Average Assets for the year ended
December 31, 1996, was 1.15%. Return on Average Equity was 9.25% and 10.50% for
the respective six month time periods and 10.37% for the year ended December 31,
1996.
ACQUISITION ACTIVITY
On March 15, 1996, the Company acquired all of the outstanding common stock of
the Bank One, Pikeville, N.A. franchise (Kentucky). The Kentucky franchise
commenced operations as a wholly owned subsidiary of Matewan BancShares, Inc. At
March 15, 1996, Kentucky had total assets of approximately $204 million,
deposits of approximately $183 million and capital of approximately $20 million.
The Company funded this cash acquisition with long-term debt of approximately $8
million, a capital stock offering of $16.25 million, and available cash.
RESULTS OF OPERATIONS
Net interest income was $14.453 million for the six month period ended June 30,
1997, versus $12.796 million for the same six month period ended June 30, 1996.
The increase of approximately $1.657 million was a function of the Company
managing its net interest margin through its core business base and the fact
that the Kentucky acquisition contributed earnings for the full six month period
in 1997 versus only slightly more than a full quarter for the same period in
1996. In this regard, comparing the second quarter operating levels should prove
more insructive in that they represent the first full time period of
consolidated operations. Net interest income in the second quarter of 1997 was
actually $25 thousand lower than for the same period in 1996. Under normal
circumstances, in the rising interest rate environment experienced in the second
quarter of 1997, institutions that are liability sensitive in the short run
would expect an unfavorable reaction in net interest income as interest-bearing
liabilities reprice at lower rates faster than interest-earning assets reprice.
Because the Company has exercised such extreme vigilance in maintaining its
funds pricing positions, as interest rates increased, net interest income has
not been as vulnerable to erosion. Actual Net Interest Margin (net interest
income divided by average earning
<PAGE>
assets) for the six month period ended June 30, 1997 was 5.27% versus 5.52% for
the same period in 1996, an erosion of approximately 4.5%. Net Interest Margins
for the respective quarters ended June 30, 1997 and 1996 were 5.31% and 5.45%,
respectively. 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, 1997
was approximately $366 thousand lower than for the same period in 1996. Net
charge-off activity decreased to $1.278 million from $1.387 million for the same
respective periods. Non-performing loans (loans past due greater than ninety
days plus nonaccrual loans) approximated $6.028 million at June 30, 1997, versus
$4.796 million at June 30, 1996. These levels represent approximately 1.56% and
1.28% of the gross loans outstanding for each respective period. The Company's
ratio of allowance for loan losses to non-performing loans was 99.52% as of June
30, 1997. A similar calculation for the first half of 1996 produced a ratio of
128.84%. The ratio of allowance for loan losses to gross loans was 1.49% and
1.65% for the six month periods ended June 30, 1997, and June 30, 1996,
respectively. The Company maintains an extremely aggressive position in dealing
with the workout or liquidation of higher risk accounts. On the basis of its
review of the loan portfolio, and improvements in net charge-offs, 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 $296 thousand during the first six months of 1997
when compared to the same period in 1996. Service fees and other fees generally
increased in the period due to changes in the service fee schedule from the
earlier period and normal business growth. Sales of credit insurance in the same
periods translated into commissions approximately $146 thousand lower in 1997
than for the same period in 1996. 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 declined accordingly. For the three month period ended June 30,
1997 overall noninterest income levels were approximately $101 thousand lower
than for the same period in 1996.
Non-interest expenses increased $2.25 million for the first half of 1997 over
the same period in 1996. The majority of the increase is attributable to the
impact of a full six months of activity for Kentucky in 1997 versus the impact
of one quarter plus sixteen days in 1996. For the second quarter of 1997,
noninterest expense was approximately $433 thousand higher than for the same
period in 1996.
<PAGE>
The Company opened four new offices in the second half of 1996 that have become
full cost centers, but for the most part have not generated significant
additional revenues.
For the six month periods ended June 30, 1997, and June 30, 1996, respectively,
net income before taxes increased approximately $73 thousand. Applicable income
taxes decreased by $4 thousand in the six month period ended June 30, 1997 over
the same period in 1996. The effective income tax rate for the first half of
1997 was 36.13% versus 36.77% for the first six months of 1996. These levels
reflect both changes in composition of the Company's taxable earnings and
favorable tax effects attributable to Matewan Bank FSB. Net income after income
taxes increased $77 thousand for the six months ended June 30, 1997, over the
same period for 1996. Earnings available to common shareholders decreased $137
thousand for the six months ended June 30, 1997 over the same period in 1996.
Most of this erosion occurred in the second quarter with earnings per share
available to common shareholders in the second quarter of 1997 declining
approximately $170 thousand from the same period in 1996.
<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,
-------- --------
1997 1996
---- ----
<S> <C> <C>
Balance at begining of period $5,986 $2,973
Loans charged-off (1,690) (1,664)
Recoveries 412 277
Increase incidental to acquisition 0 3,152
Provision for loan losses 1,075 1,441
----- -----
Balance at the end of period $5,783 $6,179
===== =====
Non-performing loans $6,028 $ 4,796
Ratio of net charge-offs to
average loans (annualized) 1.35% .89%
Ratio of nonperforming loans to
gross loans 1.56% 1.28%
Ratio of nonperforming assets to
total assets 1.08% .90%
Ratio of allowance for loan losses
to non-performing loans 99.52% 128.84%
Ratio of allowance for loan losses
to gross loans 1.49% 1.65%
</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, 1997 By: /s/ Dan R. Moore
----------------------------
Dan R. Moore
Chairman of the Board of Directors
and President
July 31, 1997 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 - None
<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
1997 1996 1997 1996
<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 31,189 17,838 37,672 18,161
--------- --------- --------- ---------
Total 3,652,915 3,666,266 3,646,432 3,665,943
========= ========= ========= =========
Net Income $ 3,093 $ 3,016 $ 1,555 $ 1,707
========= ========= ========= =========
Preferred Stock Dividends $ 706 $ 492 $ 394 $ 376
========= ========= ========= =========
Net Income Available to
Common Shareholders $ 2,387 $ 2,524 $ 1,161 $ 1,331
========= ========= ========= =========
Earnings Per Share
Applicable to Common Stock $.65 $.69 $.32 $.36
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 28,280
<INT-BEARING-DEPOSITS> 6,226
<FED-FUNDS-SOLD> 18,836
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 21,062
<INVESTMENTS-CARRYING> 136,475
<INVESTMENTS-MARKET> 136,053
<LOANS> 381,780
<ALLOWANCE> 5,783
<TOTAL-ASSETS> 638,933
<DEPOSITS> 521,925
<SHORT-TERM> 33,951
<LIABILITIES-OTHER> 9,710
<LONG-TERM> 7,293
3,684
0
<COMMON> 805
<OTHER-SE> 61,565
<TOTAL-LIABILITIES-AND-EQUITY> 638,933
<INTEREST-LOAN> 19,967
<INTEREST-INVEST> 4,525
<INTEREST-OTHER> 1,004
<INTEREST-TOTAL> 25,496
<INTEREST-DEPOSIT> 10,381
<INTEREST-EXPENSE> 11,043
<INTEREST-INCOME-NET> 14,453
<LOAN-LOSSES> 1,075
<SECURITIES-GAINS> 2,586
<EXPENSE-OTHER> 0
<INCOME-PRETAX> 11,121
<INCOME-PRE-EXTRAORDINARY> 4,843
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,093
<EPS-PRIMARY> .85
<EPS-DILUTED> .69
<YIELD-ACTUAL> 5.27
<LOANS-NON> 4,379
<LOANS-PAST> 1,432
<LOANS-TROUBLED> 145
<LOANS-PROBLEM> 5,978
<ALLOWANCE-OPEN> 2,973
<CHARGE-OFFS> 1,690
<RECOVERIES> 412
<ALLOWANCE-CLOSE> 5,783
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,384
</TABLE>
