<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 three months ended March 31, 1999
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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 section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1 Par Value - 4,087,867 shares March 31, 1999
- ------------------------------------------------------------
<PAGE>
Matewan BancShares, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - March 31, 1999,
December 31, 1998, and March 31, 1998
Consolidated statements of income - Three months ended
March 31, 1999 and March 31, 1998
Consolidated statement of changes in shareholders' equity
for the three months ended March 31, 1999 and 1998
Consolidated statements of cash flows for the three months
ended March 31, 1999 and 1998
Notes to consolidated financial statements
Item 2. Management'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>
Restated
March 31 December 31 March 31
-------- ----------- --------
ASSETS 1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 20,966 $ 22,420 $ 16,886
Interest bearing deposits
in other banks 197 13,855 3,653
Federal funds sold 19,815 485 12,720
-------- -------- --------
Cash and cash equivalents 40,978 36,760 33,259
Investment securities:
Available-for-sale at
fair value 43,869 50,521 37,220
Held-to-maturity at cost 113,233 111,976 122,849
(Approximate fair value
$113,287 at March 31,1999;
$112,495 at December 31, 1998;
and $123,260 at March 31, 1998)
Loans - net 439,465 441,830 408,124
Premises and equipment 20,246 20,420 20,730
Accrued interest receivable
and other assets 21,889 22,127 22,770
-------- -------- --------
TOTAL ASSETS $679,680 $683,634 $644,952
======== ======== ========
</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>
Restated
March 31 December 31 March 31
-------- ----------- --------
LIABILITIES AND 1999 1998 1998
SHAREHOLDERS' EQUITY ---- ---- ----
<S> <C> <C> <C>
Deposits:
Non-interest bearing $ 71,002 $ 73,883 $ 71,580
Interest bearing 510,784 505,249 470,559
-------- ----------- ----------
TOTAL DEPOSITS 581,786 579,132 542,139
Short-term borrowings:
Repurchase agreements 10,971 13,658 12,520
FHLB advances 0 5,000 4,975
Other 1,574 1,262 2,767
-------- ----------- ----------
TOTAL SHORT TERM
BORROWINGS 12,545 19,920 20,262
Long-term Borrowings
FHLB advances 6,307 6,559 6,214
Notes payable 6,308 6,475 6,830
-------- ----------- ----------
TOTAL LONG TERM
BORROWINGS 12,615 13,034 13,044
Accrued interest payable
and other liabilities 5,235 4,661 4,046
-------- ----------- ----------
TOTAL LIABILITIES 612,181 616,747 579,491
SHAREHOLDERS' EQUITY
Preferred stock 717 805 805
$1 par value; 1,000,000 shares
authorized; 717,360 issued as of
March 31, 1999; 804,600 issued as
of December 31, 1998; and 805,000
issued as of March 31, 1998; including
187,242, 187,242 and 176,842 shares in
treasury stock, respectively
($25 per share liquidation preference)
Common Stock - $1 par value 4,162 4,052 4,052
10,000,000 shares authorized;
4,162,189 share outstanding at
March 31, 1999, including 75,122
shares in treasury stock; 4,052,514
shares outstanding at December 31,
1998 and March 31, 1998, including
74,122 and 49,884 shares in treasury
stock
Surplus 38,777 38,799 38,799
Retained earnings 30,337 29,616 27,503
Treasury stock (6,445) (6,416) (5,601)
Net unrealized gain(loss)
on available-for-sale
securities, net of income
taxes (49) 31 (97)
-------- ----------- ----------
TOTAL SHAREHOLDERS' EQUITY 67,499 66,887 65,461
-------- ----------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $679,680 $ 683,634 $ 644,952
======== =========== ==========
</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>
Three months ended
------------------
March 31,
---------
1999 1998
---- -----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 11,346 $ 10,570
Interest and dividends
on investment securities:
Taxable 2,229 2,346
Tax-exempt 105 112
Other interest income 156 160
---------- -----------
TOTAL INTEREST INCOME 13,836 13,188
INTEREST EXPENSE
Deposits 5,921 5,523
Short-term borrowings 282 350
---------- -----------
TOTAL INTEREST EXPENSE 6,203 5,873
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NET INTEREST INCOME 7,633 7,315
PROVISION FOR LOAN LOSSES 831 758
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,802 6,557
OTHER INCOME
Service fees 1,102 953
Other 36 134
Commission income 118 136
Gain on sale of assets 4 77
---------- -----------
TOTAL OTHER INCOME 1,260 1,300
OTHER EXPENSES
Salaries and employee
benefits 2,053 2,165
Net occupancy 342 328
Equipment 393 376
Data Processing 420 334
Telephone 237 231
Marketing 205 174
Dealer fees 271 164
Goodwill & intangibles
expense 245 275
Legal & auditing 118 120
Contract labor 180 105
Losses on sales &
writedowns 246 142
Local business & franchise taxes 217 235
Other 883 707
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TOTAL OTHER EXPENSE 5,810 5,356
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INCOME BEFORE INCOME TAXES 2,252 2,501
APPLICABLE INCOME TAXES 764 803
---------- -----------
NET INCOME 1,488 1,698
Preferred Stock Dividends 283 290
---------- -----------
EARNINGS APPLICABLE TO COMMON STOCK $1,205 $1,408
========== ===========
Per Share Earnings Applicable, Basic and Diluted $.30 $.35
========== ===========
Average common shares
outstanding 4,004,059 3,995,642
========== ===========
Dividends per common share $.12 $.11
========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Other
Preferred Common Capital Retained Treasury Comprehensive
Stock Stock Surplus Earnings Stock Income Total
---------- -------- ------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1997 as
previously reported $ 805 $ 3,684 $29,773 $ 37,084 ($5,530) ($53) $65,763
Adjustment to reflect
restatement of
prior year earnings 0 0 0 (1,151) 0 0 (1,151)
------ -------- ------- ----------- ------- ------ -------
Restated balance January
1, 1998 805 3,684 29,773 35,933 (5,530) (53) 64,612
Adjustment for effect of a
10% Common Stock Dividend 0 368 9,026 (9,394) 0 0 0
------ -------- ------- ----------- ------- ------ -------
805 4,052 38,799 26,539 (5,530) (53) 64,612
Comprehensive Income:
Net income 0 0 0 1,698 0 0 1,698
Other Comprehensive Income
net of tax:
Unrealized losses on
available-for-sale securities 0 0 0 0 0 (44) (44)
-------
Comprehensive income 1,654
Treasury Stock Purchases 0 0 0 0 (71) 0 (71)
Dividends on Common Stock 0 0 0 (438) 0 0 (438)
($.11 per share)
Cash paid on fractional shares 0 0 0 (6) 0 0 (6)
Dividends on Preferred Shares
($.463 per share) 0 0 0 (290) 0 0 (290)
------ -------- ------- ---------- ------- ------ -------
Balance March 31, 1998 $ 805 $ 4,052 $38,799 $ 27,503 ($5,601) ($97) $65,461
====== ======== ======= ========== ======= ====== =======
<CAPTION>
Other
Preferred Common Capital Retained Treasury Comprehensive
Stock Stock Surplus Earnings Stock Income Total
---------- -------- ------- ---------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1999 $ 805 $ 4,052 $38,799 $ 29,616 ($6,416) $ 31 $66,887
Comprehensive Income:
Net income 0 0 0 1,488 0 0 1,488
Other Comprehensive Income
net of tax:
Unrealized losses on
available-for-sale securities 0 0 0 0 0 (80) (80)
-------
Comprehensive income 1,408
Conversion of Preferred Stock
to Common Stock (88) 110 (22) 0 0 0 0
Treasury Stock Purchases 0 0 0 0 (29) 0 (29)
Dividends on Common Stock 0 0 0 (484) 0 0 (484)
($.12 per share)
Dividends on Preferred Shares
($.463 per share) 0 0 0 (283) 0 0 (283)
------ -------- ------- ---------- ------- ------ -------
Balance March 31, 1998 $717 $4,162 $38,777 $30,337 ($6,445) ($49) $67,499
====== ======== ======= ========== ======= ====== =======
</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 three months ended
March 31, March 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 1,486 $ 1,698
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 319 319
AMORTIZATION 312 296
PROVISION FOR LOAN LOSSES 831 758
PROVISION FOR DEFERRED TAXES - -
GAIN ON SALE OF ASSETS - (2)
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS (7) 1,798
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES 499 (3,031)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,440 1,836
INVESTING ACTIVITIES
PROCEEDS FROM MATURITIES OF
AVAILABLE-FOR-SALE SECURITIES 8,146 4,816
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 17,971 19,335
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (1,516) (17,234)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (19,273) (6,656)
NET CHANGE IN LOANS 1,534 (11,249)
PROCEEDS FROM SALES OF PURCHASES
AND EQUIPMENT 0 119
PURCHASES OF PREMISES
AND EQUIPMENT (145) (621)
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES 6,717 (11,490)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS 2,654 6,865
NET CHANGE IN SHORT-TERM
BORROWINGS (7,375) (8,315)
NET CHANGE IN LONG-TERM
BORROWINGS (419) 4,883
ACQUISITION OF TREASURY SHARES (29) (71)
CASH PAID ON FRACTIONAL SHARES - (6)
CASH DIVIDENDS PAID (770) (732)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES (5,939) 2,624
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,218 (7,030)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 36,760 40,289
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 40,978 $ 33,259
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
MARCH 31, 1999
(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,
1999. 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, 1998.
2. The financial statements presented herein reflect Matewan BancShares, Inc.
and its consolidated subsidiaries, The Matewan National Bank, Matewan Bank FSB,
and Matewan Venture Fund, Inc.
3. On March 10, 1998, the Board of Directors authorized a 10% common stock
dividend payable to shareholders of record on April 1, 1998. Average shares
outstanding and per share amounts included in the consolidated financial
statements and notes have been adjusted for this dividend.
4. At March 31, 1999, the recorded investment in impaired loans under Statement
No. 114 was $18.99 million (of which $4.96 million were on a nonaccrual basis).
Included in this amount is $5.52 million of impaired loans for which the related
allowance for credit losses is $961 thousand and $13.47 million of impaired
loans that do not have a specific allowance for credit losses. The average
recorded investment in impaired loans during the twelve month period ended March
31, 1999 approximated $15.69 million.
5. The accounting and reporting policies of the Company conform to generally
accepted accounting principles and to general practices within the banking
industry. The accompanying financial statements reflect Matewan BancShares, Inc.
and its consolidated subsidiaries, The Matewan National Bank, Matewan Bank FSB,
and Matewan Venture Fund, Inc. All intercompany balances and transactions have
been eliminated in consolidation. During 1998, the Company discovered that prior
year reconciliations of certain general ledger accounts were not done properly,
and, as a result, certain amounts were not written off in those prior years,
principally 1994. Accordingly, prior year financial statements have been
restated. Retained earnings at January 1, 1998, as has been previously reported,
has been reduced by $1.151 million.
6. On February 25, 1999, the Company entered into an Agreement and
<PAGE>
Plan of Reorganization (Agreement) with BB&T Corporation (BB&T), a North
Carolina corporation. Under the Agreement, the Company will merge into BB&T,
with BB&T being the surviving company. At the effective time of the merger, each
share of Company common and preferred stock issued and outstanding will be
converted into the right to receive merger consideration. Based on BB&T's
closing price on February 24, 1999, Company shareholders will receive .9333
shares of BB&T stock for each share of Company common stock and 1.166 shares of
BB&T stock for each share of Company preferred stock. The merger is subject to
the approval of the Company's shareholders and applicable regulatory
authorities. The Company has granted BB&T the option, exercisable under certain
circumstances, to purchase up to 19.9% of the Company's shares of common stock
outstanding. On April 27, 1999, the Company and BB&T amended the Agreement.
Under the amended Agreement, Company shareholders will receive .67 shares of
BB&T common stock for each share of the Company's common stock and .8375 shares
of BB&T common stock for each share of the Company's preferred stock.
<PAGE>
MATEWAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
Total assets at March 31, 1999 have decreased approximately $3.9 million since
December 31, 1998 and have increased approximately $34.7 million since March 31,
1998. Deposits have decreased approximately $2.6 million and increased
approximately $39.6 million and short term borrowings decreased approximately
$7.3 million and $7.7 million over the same respective quarterly and annual
intervals. Long term borrowings have decreased approximately $419 thousand and
$429 thousand over the same respective intervals. Retained earnings increased
approximately $721 thousand from December 31, 1998, to March 31, 1999, and
decreased approximately $6.5 million in the twelve month period ended March 31,
1999. The accounting impact of the 10% common stock dividend declared in the
first quarter of 1998 was the reason for the latter decrease.
The asset structure of the Company's balance sheet at March 31, 1999, compared
to December 31, 1998, and March 31, 1998, has changed, as far as overall
composition. Cash and cash equivalents increased approximately $4.2 million
since December 31, 1998 and $7.7 million since March 31, 1998. Investments
decreased approximately $5.4 million since December 31, 1998 and $2.9 million
since March 31, 1998. Loans decreased approximately $2.4 million since December
31, 1998 and approximately $31.4 million since March 31, 1998. Earning asset
levels in both the quarter and annual periods have been supported by
corresponding growth patterns in deposits and short term borrowings over the
same respective periods.
Regarding the loan portfolio, Company 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 in terms of both number of loans and dollar volume. 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 in
terms of both number of loans and dollar volume. Automobile loans approximate
50% of the total consumer portfolio.
Commercial loans represent the smallest component of the Company's loan
portfolio, but also the largest and most concentrated risks therein.
All classes of loans are subject to minimum acceptable underwriting standards
regarding downpayment, term, equity, loan-to-value measures
<PAGE>
and collateral coverage, adequate cash flow and debt coverage, and credit
history, among other things. The primary geographic focus for all categories of
lending is the sixteen county market area in southern West Virginia, eastern
Kentucky, and western Virginia that the Company has identified as its core
market. As a point of fact, the overwhelming majority of the loans outstanding
on both March 31, 1999, and 1998, 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 classified as unsecured consumer loans.
The other type of concentration relates to the general overall reliance on the
coal industry prevalent in the Company's core 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 maintains 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 sixteen
county market area, some geographic diversification may be realized by engaging
in business in contiguous counties.
Non-interest bearing deposits decreased approximately $2.8 million in the three
months since December 31, 1998 and decreased $578 thousand in the twelve month
period since March 31, 1998. Interest bearing deposits increased approximately
$5.5 million and $40.2 million in the same respective periods of time. All
depository subsidiaries of the Company have interest rate structures that offer
returns 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 $7.3 million and $7.7 million over
these same intervals of time. Factors contributing to these changes are the
volatile nature of these types of funds (primarily tax deposits), an 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 negative features of money market accounts. Long
term borrowings decreased approximately $419 thousand and $429 thousand in the
three month and twelve month periods ended March 31, 1999. Other liabilities
increased approximately $574 thousand and $1.2 million, respectively, over the
same respective time periods.
<PAGE>
Internal capital retention has allowed for equity growth of approximately $612
thousand in the first three months of 1999 and $2.1 million in the twelve month
period ended March 31, 1999. Equity capital as a percentage of total assets was
9.93%, 9.78%, and 10.15% at March 31, 1999, December 31, 1998, and March 31,
1998, 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 14.22% at March 31, 1999,
and 14.54% at March 31, 1998. The percentage at December 31, 1998, was 13.77%.
Management is not aware of any trends, events, or uncertainties, either
favorable or unfavorable, that are reasonably likely to have a material effect
on the Company's liquidity, capital resources, or results of operations. There
are no current recommendations by regulatory authorities which, if implemented,
would have a material effect on the Company. The Company has no outstanding
loans that have been classified for regulatory purposes as loss, doubtful,
substandard, or special mention that result from trends or uncertainties which
management reasonably expects to materially impact future operating results,
liquidity, or capital resources.
The Private Securities Regulation Act of 1995 indicates the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by senior
corporate management. Forward-looking statements are contained in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations. These forward-looking statements involve risks and uncertainties,
including changes in general economic conditions and the Company's (as well as
third party) ability to effectively address the Year 2000 issues. Although the
Company believes such forward-looking statements are reasonable, actual results
may differ materially from the results discussed in these forward-looking
statements.
YEAR 2000
The ability of a financial institution to promptly and accurately capture,
record, process, and communicate financial transactions and related data is
pivotal to maintenance of its ongoing operations and its customers' trust.
Inability to comply with Y2K could impair a financial institution's ability to
maintain either. In view of this potential risk, the Company has undertaken a
comprehensive Year 2000 project to address issues that may affect it and its
customers. The Company began its Year 2000 project in the last half of 1997
under the guidance of senior management with oversight by the Board of
Directors.
The Company's Y2K project consists of five phases: Awareness, Assessment,
Remediation, Validation, and Implementation. The Awareness phase began with the
commencement of the Year 2000
<PAGE>
project in late 1997 and the organization at that time of a Year 2000 task force
comprised of senior management representing the major functional areas of the
Company. Immediately, members of the task force began a process of updating the
Board of Directors, management, and employees about issues relating to Y2K and
the implications to the Company and its customers. As well, the task force met
regularly to discuss Y2K issues and developments, participated in seminars and
conference calls to stay attuned to Y2K developments, initiated contacts with
third party vendors and service providers, and began the initial phase of
assessing and taking inventory of the Company's own critical systems and
hardware. By the end of 1997, the Company had largely completed its Awareness
phase. However, the Company maintains an ongoing effort to keep its employees
and customers current and informed on Y2K issues.
As part of the ongoing Y2K readiness effort, the Company spent a good deal of
time in the Assessment phase identifying its critical Information Technology
(IT) systems and determining what systems software, hardware, equipment, and
critical components were noncompliant with respect to Y2K, determining
replacement alternatives, and assessing the amount of expenditure involved.
Included in this phase was an assessment of both the internal Y2K readiness and
the ability of third party providers to remediate their own Y2K issues. During
the Assessment phase, the Company determined the following general areas as most
susceptible to Y2K issues: (i) major third party provider IT systems and
peripheral hardware, (ii) internal IT systems and hardware, (iii) disruption to
customer business, and (iv) Non IT systems and infrastructure, including data
and voice communications, basic utilities, transportation, and physical plant.
The Assessment phase was largely completed by the second quarter of 1998.
The Remediation phase consisted primarily of Company third party providers
implementing changes needed to their systems to become compliant with Y2K
issues, testing such changes either in concert with the Company or
independently, and communicating the status of such tests to the Company. It
also involved the Company making the requisite changes to its own internal IT
systems and satisfying itself on the susceptibility to and readiness for Y2K of
significant customers. Completion of this stage was critical to the Company
beginning the testing and validation of its core operating systems which began
in the third quarter of 1998.
The Validation phase of the Y2K project began in July of 1998 when the Company
and its major third party providers conducted testing on the core IT systems
applications and related hardware. Applications related to loans, deposits, and
general ledger have been tested and validated as compliant. Testing on secondary
applications should be completed by April of 1999 and validated by June of 1999.
The Validation phase is expected to continue into the third quarter of 1999 with
testing of more specific IT and non IT functions. Once validated, the Company
and its third party providers will begin the Implementation phase. In the
<PAGE>
Implementation phase, remediated systems and applications will be fine-tuned and
final programs put into service before January 1, 2000.
The Implementation phase is anticipated to begin sometime in the third quarter
of 1999.
Most of the Company's major IT systems are contracted through major nationally
prominant vendors and service providers. These providers represent some of the
leading and most recognizable firms in the world in their respective lines of
business. Most of the critical third party providers have indicated to the
Company the capacity and resources to remediate, test, and implement Year 2000
issues. The Company has monitored the Y2K progress of these third party
providers, both in conjunction with and independent of its own testing, and has
determined that an acceptable level of progress has been achieved to date.
An integral part of the Company's operations concerns nontechnology or
noninformation systems exposure, primarily facilities and equipment. Year 2000
nonreadiness could adversely affect availability of such basic utilities as
telephone, gas, electrical service, transportation, heating, and cooling. The
Company has completed an inventory of its facilities and has tested or plans to
develop tests applicable equipment for Year 2000 compliance. Outside companies,
primarily utilities, providing these services have indicated to the Company
their own Year 2000 readiness and, to date, the Company is unaware of any
noninformation system provider whose Year 2000 unreadiness would materially
impact the Company's operations.
Interruption and disruption of customer services and business is another
potential risk inherent in Y2K readiness. Among other things, the ability of
major commercial customers and classes of credit customers to repay loans
according to scheduled terms could be impaired, thereby increasing Company
delinquency levels, nonperforming asset levels, and ultimately loan loss reserve
levels. Inability of customers to consummate such simple transactions as cashing
checks or accessing an ATM could undermine the credibility of the Company as a
viable financial service provider in its market areas. Part of the Company's Y2K
action plan incorporates steps aimed at raising customer awareness of potential
Year 2000 problems such as mass mailings, holding public information seminars,
and providing Year 2000 information sheets in branch lobbies and drivethroughs.
Moving beyond the simple education of its customer base, this plan has
undertaken to identify Year 2000 vulnerability of its major credit and deposit
customers. Customers above an established dollar threshhold have been contacted
and provided questionnaires to complete to determine Y2K readiness.
The potential exists for general economic disruptions on global, national, and
regional scales related to Year 2000 issues. The impact of such could materially
adversely affect the Company.
<PAGE>
Systems failures, both internal and external, could subject the Company to
future litigation. The likelihood of such events and their impact on the Company
can not be reasonably estimated at this time.
The Company is in the process of developing contingency plans in the event that
it or one of its major third party providers fails to complete all phases of the
Y2K project. The Company anticipates having contingency plans for both mission
critical applications and secondary systems and applications by the fourth
quarter of 1999.
Since January of 1998, the Company incurred approximately $182 thousand in
expenses relative to Y2K testing. An additional expense of $300 thousand is
estimated for the additional testing, validation, and implementation for the
remaining nine months in 1999. Additional purchases of equipment which is Y2K
compliant and retirement of noncomplying equipment is not expected to have a
material impact beyond normal course of business purchase and replacements.
Actual capital expenditures related to such projects are estimated to be
approximately $900 thousand. The expense of such purchases will be depreciated
over the useful life of the equipment employing the present Company depreciation
schedules. Retirement of noncompliant equipment will generate 1999 expense,
although the amount is not anticipated to be material. The likelihood exists
that the Company's third party providers will attempt to recover some of their
own Y2K costs in the form of future price increases when the current contracts
are renewed. Management's assessment is that the overall direct cost to the
Company of compliance with Year 2000 issues will not be material.
<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 quarter of 1998 was
approximately $1.205 million, representing basic and diluted earnings per share
applicable to common stock of $.30, versus $1.408 million, or $.35 per share for
the same period in 1998. Basic and diluted earnings per share for the year ended
December 31, 1998 was $1.24. Return on Average Assets was .89% and 1.08% for the
three month periods ended March 31, 1999, and March 31, 1998, respectively.
Return on Average Equity was 8.99% and 10.27% for the respective three month
time periods and .92% for the year ended December 31, 1998.
RESULTS OF OPERATIONS
Net interest income was $7.633 million for the three month period ended March
31, 1999 versus $7.315 million for the three month period ended March 31, 1998.
The increase of approximately $318 thousand was a function of increasing volume
in the Company's core business base and the Company managing the net interest
margin of its core business base. Actual Net Interest Margin (net interest
income divided by average earning assets) for the three months ended March 31,
1999 was 5.02% versus 5.15% for the same period in 1998. 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 three months ended March 31,
1999 was approximately $73 thousand higher than for the same period in 1998. Net
charge-off activity increased by approximately $75 thousand in the first quarter
of 1999 over the first quarter of 1998. Net charge-offs approximated loan loss
provision for the first quarter of both 1999 and 1998. Non-performing loans
(nonaccrual loans plus restructured loans) approximated $4.478 million at March
31, 1999, versus $3.380 million at March 31, 1998. These levels represent
approximately 1.23% and .83% of the gross loans outstanding for each respective
period. The Company's ratio of allowance for loan losses to non-performing loans
of 119.99% as of March 31, 1999. A similar calculation for the first quarter of
1998 produced a ratio of 162.10%. The ratio of allowance for loan losses to
gross loans was 1.47% and 1.34% for the three month periods ended March 31,
1999, and March 31, 1998, respectively. The Company maintains an extremely
aggressive position in dealing with the workout or liquidation of higher risk
accounts. 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,
<PAGE>
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 decreased $40 thousand during the first three months of 1999
when compared to the same period in 1998. Service fees and other fees generally
increased in the current quarter due to a change in the service fee schedule
implemented in late 1998 and normal business growth. Commission income declined
approximately $18 thousand for the same three month period. Reduced commissions
received for sales of credit insurance products was the major reason for the
decrease. Other income declined approximately $91 thousand due mainly to the
recognition of some large and nonrecurring gains in the first quarter of 1998.
Non-interest expenses increased $454 thousand for the first three months of 1999
over the same period in 1998. Data processing expenses were approximately $100
thousand higher in the first quarter of 1999 due to Y2K. Loan fees, mainly
dealer fees, were approximately $107 thousand higher in the most recent quarter.
Losses and writedowns on assets were approximately $104 thousand higher in the
current quarter.
For the three month periods ended March 31, 1999 and March 31, 1998,
respectively, net income taxes decreased $39 thousand. The effective income tax
rate for the first three months of 1999 was 33.95% versus 32.11% for the first
three months of 1998. These levels reflect changes in composition of the
Company's earnings, favorable tax effects attributable to Matewan Bank FSB, and
reorganization of some of the Company's subsidiaries to take advantage of some
available tax saving opportunities. Net income after income taxes decreased $212
thousand for the three months ended March 31, 1999, over the same period for
1998. Earnings available to common shareholders decreased $205 thousand ($.05
per share) for the three months ended March 31, 1999 over the same period in
1998.
The Company's success is dependent on its ability to manage interest rate risk.
Interest rate risk (IRR) can be defined as the exposure of the Company's net
interest income to adverse movements in interest rates. Other risks, namely
credit risk and liquidity risk, are inherent in the normal course of business in
the industry in which the Company operates. However, it is management's
conviction that IRR provides the most significant market risk to the Company
with far more potential to materially and immediately effect both the overall
financial condition and results of operations. The Company does not engage in
any trading activities, so it possesses no exposure to market risk via this type
of activity. Furthermore, the Company does not currently utilize any financial
derivatives to manage either market risk or IRR risk.
<PAGE>
The Company's IRR management is the ultimate responsibility of the Board of
Directors. The Asset/Liability Management Committee (ALCO) maintains the ongoing
responsibility for measuring, monitoring, and managing the functions and
processes inherent in IRR oversight. Among other things, this includes
monitoring the Company's gap, as described above, and sensitivity to IRR by
subjecting the balance sheets of the Company's major affiliates to interest rate
shocks, employing simulation models mentioned earlier. Rate shock involves the
complete adjustment in market rates of various magnitude on a static balance
sheet over a specified period of time (twelve months). The impact of such
adjustments on the Company's net interest income, interest income, return on
assets, and economic value are evaluated within the contexts of compliance with
parameters established by Company policies. The Company's simulation model is
based on actual maturity (for fixed rate components) and repricing (for variable
rate components) characteristics of interest sensitive assets and liabilities.
The model anticipates the impact of changing interest rates on prepayment speed
and potential runoff of assets and liabilities. The model also incorporates
assumptions concerning prepayment rates based on historical prepayment speeds.
The model further makes allowances for unique products in the Company's business
mix to be accorded special treatment in the earnings simulations based on unique
characteristics. Assumptions incorporated are inherently uncertain and, as a
result, the model can not precisely measure net income or precisely predict the
impact of fluctuations in interest rates on net interest income. Actual results
may differ from simulated results due to such factors as timing, magnitude and
frequency of interest rate changes, changes in market conditions, and changes in
management strategies. Earnings simulations are performed assuming 100 and 200
basis point shocks up and down.
Company policy measures acceptable levels of interest rate sensitivity to the
above shocks as a percent of change in net interest income, as a percent of
change in pretax net income, and as a percent of change in return on average
assets. Acceptable levels of sensitivity per current policy are +/- 8 percent of
net interest income, +/- 20 percent of pretax net income, and +/- 20 percent of
return on average assets. Based on the 100 and 200 basis point shock tests
performed on balance sheets of the Company's material operating subsidiaries
(the Bank and FSB) as of December 31, 1998, management does not believe that any
parameter being evaluated for change via the simulation modeling would generate
any changes to the consolidated Company measured parameters that would be out of
tolerance with accepted Company policies.
<PAGE>
Analysis of the allowance for Loan Losses (Unaudited)
MATEWAN BANCSHARES, INC AND SUBSIDIARIES
(Amounts listed in thousands)
Three months ended
Year-to-date amounts listed through March 1, March 31,
-------- ---------
1999 1998
---- ----
Balance at beginning of period $6,574 $5,478
Loans charged-off (1,051) (903)
Recoveries 219 146
Provision for loan losses 831 758
------ ------
Balance at the end of period $6,573 $5,479
====== ======
Non-performing loans $5,478 $3,380
Ratio of net charge-offs to
average loans (annualized) 1.14% .75%
Ratio of nonperforming loans to
gross loans 1.23% .83%
Ratio of nonperforming assets to
total assets .92% .64%
Ratio of allowance for loan losses
to non-performing loans 119.99% 162.10%
Ratio of allowance for loan losses
to gross loans 1.47% 1.34%
The level of loans classified as troubled, restructured debt was immaterial for
either of the above periods.
<PAGE>
MATEWAN BANCSHARES, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 Financial Date Schedule
Information included in EX-27 is incorporated herein by reference.
(b) The following reports on Form 8-K were filed in 1999 and are incorporated
herein by reference.
Form 8-K filed March 2, 1999.
<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)
May 10, 1998 By: /s/Dan R. Moore
----------------------------
Dan R. Moore
Chairman of the Board of Directors
and President
May 10, 1998 By: /s/Lee M. Ellis
----------------------------
Lee M. Ellis
Vice President & Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
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<PERIOD-END> MAR-31-1999
<CASH> 20,966
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0
717
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