<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, 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
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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 - 3,636,650 shares September 30, 1997
- ----------------------------------------------------------------
<PAGE>
Matewan BancShares, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - September 30, 1997,
December 31, 1996, and September 30, 1996
Consolidated statements of income - Nine months and three months
ended September 30, 1997 and September 30, 1996
Consolidated statement of changes in shareholders' equity for
the nine months ended September 30, 1997 and 1996
Consolidated statements of cash flows for the nine months ended
September 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
<TABLE>
<CAPTION>
September 30 December 31 September 30
------------ ----------- ------------
1997 1996 1996
---- ---- ----
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 17,806 $ 29,721 $ 25,196
Interest bearing deposits 5,968 6,034 6,012
Federal funds sold 19,835 28,928 17,318
-------- -------- --------
Cash and cash equivalents 43,609 64,683 48,526
Investment securities:
Available-for-sale at
fair value 18,010 25,411 26,183
Held-to-maturity at cost 138,496 122,569 119,895
(Approximate fair value
$138,661 at September 30, 1997;
$122,427 at December 31, 1996;
and $120,664 at September 30,
1996)
Loans - net 388,275 370,801 368,616
Premises and equipment 20,564 20,871 20,732
Accrued interest receivable
and other assets 25,020 22,851 22,095
-------- -------- --------
TOTAL ASSETS $633,974 $627,186 $606,047
======== ======== ========
</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
------------ ----------- ------------
1997 1996 1996
LIABILITIES AND ------------ ----------- ------------
SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Deposits:
Non-interest bearing $ 70,587 $ 78,464 $ 64,789
Interest bearing 467,465 444,844 438,993
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TOTAL DEPOSITS 538,052 523,308 503,782
Short-term borrowings:
Repurchase agreements 8,258 10,118 12,363
Other 8,781 13,101 10,015
---------- ---------- ----------
TOTAL SHORT TERM
BORROWINGS 17,039 23,219 22,378
Long-term Borrowings 7,139 7,579 7,771
Accrued interest payable
and other liabilities 7,001 5,502 5,423
---------- ---------- ----------
TOTAL LIABILITIES 569,231 559,608 539,354
SHAREHOLDERS' EQUITY
Preferred stock 805 805 805
$1 par value; 1,000,000 shares
authorized; 805,000 issued as
of September 30, 1997, December 31,
1996, and September 30, 1996 ($25 per
share liquidation preference),
including 176,042, 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
September 30, 1997, December 31,
1996, and September 30, 1996,
including 47,354, 23,953 and
23,453 shares in treasury stock
Surplus 29,773 29,773 29,773
Retained earnings 35,980 33,590 32,712
Treasury stock (5,456) (206) (195)
Net unrealized gain(loss) on
available-for-sale
securities, net of deferred
income taxes (43) (68) (86)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 64,743 67,578 66,693
---------- ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 633,974 $ 627,186 $ 606,047
========== ========== ==========
</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,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 30,447 $ 26,608 $ 10,480 $ 9,846
Interest and dividends
on investment securities:
Taxable 6,715 5,995 2,190 2,122
Tax-exempt 409 276 130 130
Other interest income 947 992 222 249
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 38,518 33,871 13,022 12,347
INTEREST EXPENSE
Deposits 15,819 12,994 5,438 4,718
Short-term borrowings 829 780 167 328
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 16,648 13,774 5,605 5,046
---------- ---------- ---------- ----------
NET INTEREST INCOME 21,870 20,097 7,417 7,301
PROVISION FOR LOAN LOSSES 2,051 2,105 976 664
---------- ---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 19,819 17,992 6,441 6,637
OTHER INCOME
Service fees 3,033 2,195 1,139 816
Other 579 1,047 34 429
Credit life insurance
commissions 261 409 114 116
---------- ---------- ---------- ----------
TOTAL OTHER INCOME 3,873 3,651 1,287 1,361
OTHER EXPENSES
Salaries and employee
benefits 6,585 5,722 1,916 2,116
Net occupancy 1,000 844 297 291
Equipment 1,090 856 381 331
Data Processing 1,036 812 355 199
Advertising 505 633 145 226
Federal deposit insurance 282 269 71 10
Other 5,828 5,019 2,040 2,107
---------- ---------- ---------- ----------
TOTAL OTHER EXPENSE 16,326 14,155 5,205 5,280
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 7,366 7,488 2,523 2,718
APPLICABLE INCOME TAXES 2,605 2,729 855 975
---------- ---------- ---------- ----------
NET INCOME $ 4,761 $ 4,759 $ 1,668 $ 1,743
========== ========== ========== ==========
Preferred Stock Dividends $ 1,058 $ 852 $ 352 $ 360
========== ========== ========== ==========
Earnings Applicable to
Common Stock $ 3,703 $ 3,907 $ 1,316 $ 1,383
========== ========== ========== ==========
Per Share Earnings
Applicable to Common $1.01 $1.07 $.36 $.38
Stock ========== ========== ========== ==========
Average common shares
outstanding 3,649,412 3,664,598 3,642,520 3,661,269
========== ========== ========== ==========
</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 $45,817
Treasury Stock Purchases 0 0 0 0 (117) 0 (117)
Change in net unrealized gain on
available-for-sale securities, net of
deferred income taxes 0 0 0 0 0 (139) (139)
Dividends on Common Stock
($.32 per share) 0 0 0 (1,171) 0 0 (1,171)
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
($1.0582 per share) 0 0 0 (852) 0 0 (852)
--------- ------- --------- ---------- --------- ---------- --------
Balance September 30, 1996 $805 $3,684 $29,773 $32,712 ($195) ($86) $66,693
========= ======= ========= ========== ========= ========== ========
</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) $67,578
Treasury Stock Purchases 0 0 0 0 (5,250) 0 (5,250)
Change in net unrealized gain on
available-for-sale securities, net of
deferred income taxes 0 0 0 0 0 25 25
Dividends on Common Stock
($.36 per share) 0 0 0 (1,313) 0 0 (1,313)
Net income 0 0 0 4,761 0 0 4,761
Dividends on Preferred Shares
($1.406 per share) 0 0 0 (1,058) 0 0 (1,058)
--------- ------- --------- ---------- --------- ---------- --------
Balance September 30, 1997 $805 $3,684 $29,773 $35,980 ($5,456) ($43) $64,743
========= ======= ========= ========== ========= ========== ========
</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,
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 4,761 $ 4,759
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 892 779
AMORTIZATION 972 393
PROVISION FOR LOAN LOSSES 2,051 2,105
PROVISION FOR DEFERRED TAXES 430 81
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS (3,016) (11,093)
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES 957 3,343
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,047 367
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 9,643 19,517
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 18,910 29,452
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (2,249) (10,138)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (34,857) (64,612)
NET CHANGE IN LOANS (19,525) (2,737)
PURCHASES OF PREMISES
AND EQUIPMENT (576) (1,245)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 29 0
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (28,625) (13,333)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS 14,744 (13,601)
NET CHANGE IN SHORT-TERM
BORROWINGS (6,218) 4,192
PROCEEDS FROM SALE OF PREFERRED
STOCK 0 18,396
PROCEEDS FROM LONG TERM NOTE 0 8,000
PAYMENTS ON LONG TERM NOTE (440) (229)
PURCHASE OF TREASURY STOCK (5,250) (117)
CASH DIVIDENDS PAID (2,332) (1,971)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 504 14,670
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (21,074) 1,704
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 64,683 46,822
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 43,609 $ 48,526
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
September 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, 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. In April, 1997,
the Board authorized the repurchase of 114,500 shares of preferred stock via a
tender offer to be issued in the second quarter and the repurchase of an
additional 120,000 shares via open market transactions subsequent to
consummation of all tender offer transactions.
On April 30, 1997, the Company filed a Schedule 13E-4 with the Securities and
Exchange Commission for the purpose of issuing a tender offer to 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 137,000 shares for approximately $3.755
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,
<PAGE>
long term debt, and available cash. The Company incurred amortizing intangible
expenses related to this transaction of approximately $742 thousand and $502
thousand as of September 30, 1997 and September 30, 1996, respectively.
5. At September 30, 1997, the recorded investment in impaired loans under
Statement No. 114 was $10.62 million (of which $3.70 million were on a
nonaccrual basis). Included in this amount is $2.36 million of impaired loans
for which the related allowance for credit losses is $1.09 million and $8.26
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, 1997 approximated $10.80 million.
6. During 1997, the Financial Accounting Standards Board issued several new
accounting pronouncements which will become effective in 1998. These
pronouncements include SFAS No. 125, "Accounting for Transfers of Assets and
Servicing of Financial Assets and Extinguishments of Liabilities"; SFAS No. 128,
"Earnings Per Share"; SFAF No. 129, "Disclosure of Information about Capital
Structure"; SFAS No. 130, "Reporting Comprehensive Income"; and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company is in the process of fully evaluating these new pronouncements and
expects to adopt them in 1998 in accordance with the requirements. Such adoption
is not expected to have a significant impact on the financial position or
results of operations of the Company.
<PAGE>
MATEWAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets at September 30, 1997, have increased approximately $6.8 million
since December 31, 1996, and $27.9 million since September 30, 1996. The Company
experienced annualized growth in each time period of 1.4% and 4.6% percent,
respectively. Deposits have increased approximately $14.7 million and $34.3
million over the same respective periods. Short term borrowings decreased
approximately $6.2 million and $5.4 million over the same intervals. Retained
earnings increased approximately $2.3 million from December 31, 1996, to
September 30, 1997, and approximately $3.2 million in the twelve month period
ended September 30, 1997.
The asset structure of the Company's balance sheet at September 30, 1997,
compared to December 31, 1996, and September 30, 1996, has changed, as far as
overall composition, as follows. Cash and cash equivalents have decreased $21.0
million since December 31, 1996 (representing currently 6.9% of total assets
versus 10.3% at year end) and have decreased $4.9 million since September 30,
1996 (approximately 8.0% of total assets). Investments have increased
approximately $8.5 million since December 31, 1996 and $10.4 million since
September 30, 1996. These totals represent 24.7%, 23.5% and 24.1% of total
outstanding assets for each time period. Loans have increased approximately
$17.5 million since December 31, 1996 (to 61% of total assets versus 59%) and
$19.7 million since September 30, 1996 (61% of total assets). Growth in earning
assets in the nine month period has been funded by a combination of declines in
cash and cash equivalents previously noted and increases in deposits. Earning
asset growth in the twelve month period has been similarly funded by decreasing
cash levels and increasing deposit levels. 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 September 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 $7.9 million in the nine
months since December 31, 1996 (to 11.1% of total assets compared to 12.5%) and
increased $5.8 million in the twelve month period since September 30, 1996
(10.6% of total assets). Interest bearing deposits increased approximately $22.6
million and $28.5 million in the same respective periods of time (representing
73.7%, 71.0%, and 72.4% of total assets respectively). True deposit growth for
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 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 decreased $6.2 million and $5.4 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 attractive features (namely,
<PAGE>
short term duration and liquidity) of money market accounts. Other liabilities
increased approximately $1.5 million and $1.6 million, respectively, over the
same time periods.
During 1997, consummation of the Company's tender offer for its preferred stock
in the second quarter, 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 $5.3 million) total
shareholder equity decreased by approximately $2.9 million. In the twelve month
period, the impact of treasury stock transactions on equity capital levels
resulted in a net decrease in total equity of $2.0 million. Equity capital as a
percentage of total assets was 10.20%, 10.77%, and 11.00% at September 30, 1997,
December 31, 1996, and September 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 13.93% at September 30, 1997, and 15.57% at September 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 nine month period ended
September 30, 1997 was approximately $3.703 million, representing earnings per
share applicable to common stock of $1.01, versus $3.907 million, or $1.07 per
share for the same nine 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 third quarter of 1997 was $1.316 million ($.36 per share) compared to
$1.383 million ($.38 per share) for the same three month period in 1996. Return
on Average Assets was 1.03% and 1.17% for the nine month periods ended September
30, 1997, and September 30, 1996, respectively. Return on Average Assets was
1.03% and 1.10% 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 9.73% and 10.46% for the respective nine 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. On
September 19, 1997, Kentucky was merged into Matewan National Bank. The
resultant consolidated affiliate closed the third quarter of 1997 with assets in
excess of $556 million.
RESULTS OF OPERATIONS
Net interest income was $21.870 million for the nine month period ended
September 30, 1997, versus $20.097 million for the same nine month period ended
September 30, 1996. The increase of approximately $1.773 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
nine month period in 1997 versus only slightly more than two full quarters for
the same period in 1996. In this regard, comparing the third quarter operating
levels should prove more insightful in that they represent the consistent and
comparable period of consolidated operations. Net interest income in the third
quarter of 1997 was actually $116 thousand higher than for the same period in
1996. Under normal circumstances, in the slightly rising interest rate
environment experienced in the third 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
<PAGE>
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 assets) for the nine month period ended September 30, 1997
was 5.25% versus 5.50% for the same period in 1996, an erosion of less than 5%.
Net Interest Margins for the respective quarters ended September 30, 1997 and
1996 were 5.21% and 5.46%, 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 nine months ended September 30,
1997 was approximately $54 thousand lower than for the same period in 1996. Net
charge-off activity increased slightly to $2.355 million from $2.334 million for
the same respective periods. Non-performing loans (loans past due greater than
ninety days plus nonaccrual loans) approximated $4.302 million at September 30,
1997, versus $5.149 million at September 30, 1996. These levels represent
approximately 1.09% and 1.38% of the gross loans outstanding for each respective
period. The Company's ratio of allowance for loan losses to non-performing loans
was 132.06% as of September 30, 1997. A similar calculation as of the same
period in 1996 produced a ratio of 114.48%. The ratio of allowance for loan
losses to gross loans was 1.44% and 1.57% for the nine month periods ended
September 30, 1997, and September 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 $222 thousand during 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 $148 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 September 30, 1997
overall noninterest income levels were approximately $74 thousand lower than for
the same period in 1996.
Non-interest expenses increased $2.17 million for 1997 over the same
<PAGE>
period in 1996. The majority of the increase is attributable to the impact of a
full nine months of activity for Kentucky in 1997 versus the impact of two
quarters plus sixteen days in 1996. For the third quarter of 1997, noninterest
expense was approximately $75 thousand lower than for the same period in 1996.
Lower personnel and marketing expenses were the primary reason. The Company
opened four new offices in the second half of 1996 and one in the third quarter
of 1997 that have become full cost centers, but for the most part have not
generated significant additional revenues.
For the nine month periods ended September 30, 1997, and September 30, 1996,
respectively, net income before taxes decreased approximately $122 thousand.
Applicable income taxes decreased by $124 thousand in the nine month period
ended September 30, 1997 over the same period in 1996. The effective income tax
rate for the nine month period ended September 30, 1997 was 35.37% versus 36.44%
for the first nine 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 $2
thousand for the nine months ended September 30, 1997, over the same period for
1996. Earnings available to common shareholders decreased $204 thousand for the
nine months ended September 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. Further quarterly comparisons indicate
that third quarter 1997 was approximately $67 lower than the third quarter of
1996 for the same measure.
<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,
1997 1996
------------- -------------
<S> <C> <C>
Balance at begining of period $ 5,986 $ 2,973
Loans charged-off (3,088) (2,765)
Recoveries 733 431
Increase incidental to acquisition 0 3,152
Provision for loan losses 2,051 2,105
------- -------
Balance at the end of period $ 5,682 $ 5,896
======= =======
Non-performing loans $ 4,302 $ 5,149
Ratio of net charge-offs to
average loans (annualized) .82% .94%
Ratio of nonperforming loans to
gross loans 1.09% 1.38%
Ratio of nonperforming assets to
total assets .85% .96%
Ratio of allowance for loan losses
to non-performing loans 132.06% 114.48%
Ratio of allowance for loan losses
to gross loans 1.44% 1.57%
</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)
October 31, 1997 By: /s/ Dan R. Moore
------------------------------
Dan R. Moore
Chairman of the Board of Directors
and President
October 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 Nine Months For the Three Months
ended September 30 ended September 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 34,692 19,506 41,584 22,835
--------- --------- --------- ---------
Total 3,649,412 3,664,598 3,642,520 3,661,269
========= ========= ========= =========
Net Income $4,761 $4,759 $1,668 $1,743
========= ========= ========= =========
Preferred Stock Dividends $1,058 $852 $352 $360
========= ========= ========= =========
Net Income Available to
Common Shareholders $3,703 $3,907 $1,316 $1,383
========= ========= ========= =========
Earnings Per Share
Applicable to Common Stock $1.01 $1.07 $.36 $.38
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 22,489
<INT-BEARING-DEPOSITS> 5,968
<FED-FUNDS-SOLD> 16,152
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,010
<INVESTMENTS-CARRYING> 138,496
<INVESTMENTS-MARKET> 138,661
<LOANS> 388,275
<ALLOWANCE> 5,682
<TOTAL-ASSETS> 633,974
<DEPOSITS> 538,052
<SHORT-TERM> 17,039
<LIABILITIES-OTHER> 7,001
<LONG-TERM> 7,139
0
805
<COMMON> 3,684
<OTHER-SE> 60,254
<TOTAL-LIABILITIES-AND-EQUITY> 633,974
<INTEREST-LOAN> 30,447
<INTEREST-INVEST> 7,124
<INTEREST-OTHER> 1,356
<INTEREST-TOTAL> 38,518
<INTEREST-DEPOSIT> 15,819
<INTEREST-EXPENSE> 16,648
<INTEREST-INCOME-NET> 21,870
<LOAN-LOSSES> 2,051
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 16,391
<INCOME-PRETAX> 7,366
<INCOME-PRE-EXTRAORDINARY> 3,873
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,761
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.01
<YIELD-ACTUAL> 5.25
<LOANS-NON> 2,947
<LOANS-PAST> 1,356
<LOANS-TROUBLED> 1,663
<LOANS-PROBLEM> 8,960
<ALLOWANCE-OPEN> 5,986
<CHARGE-OFFS> 3,088
<RECOVERIES> 733
<ALLOWANCE-CLOSE> 5,682
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,889
</TABLE>
