<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, 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
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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 - 4,125,004 shares June 30, 1999
- -----------------------------------------------------------
<PAGE>
Matewan BancShares, Inc.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated balance sheets - June 30, 1999,
December 31, 1998, and June 30, 1998
Consolidated statements of income - Six months and three months
ended June 30, 1999 and June 30, 1998
Consolidated statement of changes in shareholders' equity for
the six months ended June 30, 1999 and 1998
Consolidated statements of cash flows for the six months ended
June 30, 1999 and 1998
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 1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Cash and due from banks $ 23,571 $ 22,420 $ 24,731
Interest bearing deposits 212 13,855 13,385
Federal funds sold 31,905 485 16,670
-------- -------- --------
Cash and cash equivalents 55,688 36,760 54,786
Investment securities:
Available-for-sale at
fair value 41,613 50,521 41,817
Held-to-maturity at cost 126,910 111,976 112,542
(Approximate fair value
$123,912 at June 30, 1999;
$112,495 at December 31, 1998;
and $112,991 at June 30, 1998)
Loans - net 438,299 441,830 434,981
Premises and equipment 21,369 20,420 20,620
Accrued interest receivable
and other assets 22,834 22,127 21,495
-------- -------- --------
TOTAL ASSETS $706,713 $683,634 $686,241
======== ======== ========
</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 December 31 June 30
---- ----------- -------
1999 1998 1998
LIABILITIES AND ---- ---- ----
SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Deposits:
Non-interest bearing $ 86,476 $ 73,883 $ 83,439
Interest bearing 519,499 505,249 491,152
-------- -------- --------
TOTAL DEPOSITS 605,975 579,132 574,591
Short-term borrowings:
Repurchase agreements 11,009 13,658 16,001
FHLB advances 0 5,000 5,000
Other 3,701 1,262 5,303
-------- -------- --------
TOTAL SHORT TERM
BORROWINGS 14,710 19,920 26,304
Long-term Borrowings
FHLB advances 6,055 6,559 5,980
Notes payable 6,129 6,475 6,672
-------- -------- --------
TOTAL LONG TERM
BORROWINGS 12,184 13,034 12,652
Accrued interest payable
and other liabilities 5,829 4,661 6,503
-------- -------- --------
TOTAL LIABILITIES 638,698 616,747 620,050
SHAREHOLDERS' EQUITY
Preferred stock 687 805 805
$1 par value; 1,000,000
shares authorized; 687,010
issued as of June 30, 1999;
804,600 issued as of December
31, 1998; and 805,000 issued
as of ($25 per share liquidation
preference), including 187,242
shares in treasury stock
Common Stock - $1 par value 4,200 4,052 4,052
10,000,000 shares authorized;
4,200,126 shares outstanding at
June 30, 1999, including
75,122 shares in treasury stock;
4,052,514 shares outstanding at
December 31, 1998 and June 30,
1998, including 74,122 and
62,722 shares in treasury stock
Surplus 38,769 38,799 38,799
Retained earnings 31,144 29,616 28,394
Treasury stock (6,445) (6,416) (5,809)
Net unrealized gain(loss)
on available-for-sale
securities, net of
deferred
income taxes (340) 31 (50)
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 68,015 66,887 66,191
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $706,713 $683,634 $686,241
======== ======== ========
</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>
Six months ended Three months ended
------------------- ------------------
June 30, June 30,
-------- --------
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 22,110 $ 21,663 $ 10,764 $11,093
Interest and dividends
on investment securities:
Taxable 4,555 4,701 2,326 2,355
Tax-exempt 209 223 104 111
Other interest income 418 330 262 170
-------- -------- -------- -------
TOTAL INTEREST INCOME 27,292 26,917 13,456 13,729
INTEREST EXPENSE
Deposits 11,888 11,245 5,967 5,722
Short-term borrowings 568 729 286 379
-------- -------- -------- -------
TOTAL INTEREST EXPENSE 12,456 11,974 6,253 6,101
-------- -------- -------- -------
NET INTEREST INCOME 14,836 14,943 7,203 7,628
PROVISION FOR LOAN LOSSES 1,669 1,516 838 758
-------- -------- -------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,167 13,427 6,365 6,870
OTHER INCOME
Service fees 2,127 1,942 1,025 989
Other 56 208 20 74
Gain on sale of assets 534 77 530 0
Commissions 232 279 114 143
-------- -------- -------- -------
TOTAL OTHER INCOME 2,949 2,506 1,689 1,206
OTHER EXPENSES
Salaries and employee
benefits 4,144 4,423 2,091 2,258
Net occupancy 671 695 329 367
Equipment 838 766 445 390
Data Processing 868 644 448 310
Telephone 439 433 202 202
Marketing 334 359 129 185
Dealer fees 518 422 247 258
Goodwill & intangibles 498 539 253 264
Legal & auditing 354 257 236 137
Contract labor 296 151 116 46
Losses on sales &
writedowns 394 262 148 120
Local business & franchise
taxes 448 468 231 233
Other 1,745 1,548 862 841
-------- -------- -------- -------
TOTAL OTHER EXPENSE 11,547 10,967 5,737 5,611
-------- -------- -------- -------
INCOME BEFORE INCOME TAXES 4,569 4,966 2,317 2,465
APPLICABLE INCOME TAXES 1,550 1,603 786 800
-------- -------- -------- -------
NET INCOME $ 3,019 $ 3,363 $ 1,531 $ 1,665
======== ======== ======== =======
Preferred Stock Dividends $ 511 $ 585 $ 228 $ 290
Earnings Applicable to
Common Stock $ 2,508 $ 2,778 $ 1,303 $ 1,375
======== ======== ======== =======
Per Share Earnings
Applicable,
Basic and Diluted $.62 $.70 $.32 $.35
======== ======== ======== =======
Average common shares
outstanding (thousands) 4,060 3,994 4,144 3,992
======== ======== ======== =======
Dividends per common share $.24 $.23 $.12 $.12
======== ======== ======== =======
</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) $65,763
Adjustment to reflect restatement
of prior year earnings 0 0 0 (1,157) 0 0 (1,157)
-------- -------- -------- ------- ------- ----- -------
Restated balance January 1, 1998 805 3,684 29,773 35,927 (5,530) (53) 64,606
Adjustment for effect of a
10% common stock dividend 0 368 9,026 (9,394) 0 0 0
-------- -------- -------- ------- ------- ----- ------
805 4,052 38,799 26,533 (5,530) (53) 64,606
Comprehensive Income:
Net income 0 0 0 3,363 0 0 3,363
Other Comprehesive Income
net of tax:
Unrealized losses on
available-for-sale securities 0 0 0 0 0 3 3
-------
Comprehensive income 3,366
Dividends on Common Stock 0 0 0 (911) 0 0 (911)
($.23 per share)
Treasury Stock Purchases 0 0 0 0 (279) 0 (279)
Cash on fractional shares 0 0 0 (6) 0 0 (6)
Dividends on Preferred Shares 0 0 0 (585) 0 0 (585)
($.938 per share) -------- -------- -------- ------- ------- ----- -------
Balance June 30, 1998 $805 $4,052 $38,799 $28,394 ($5,809) ($50) $66,191
======= ======= ======== ======= ======= ===== =======
</TABLE>
<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 January 1, 1999 $ 805 $4,052 $38,799 $29,616 ($6,416) $ 31 $66,887
Comprehensive Income:
Net income 0 0 0 3,019 0 0 3,019
Other Comprehesive Income
net of tax:
Unrealized losses on
available-for-sale securities 0 0 0 0 0 (371) (371)
------
Comprehensive income 2,648
Conversion of Preferred Stock to
Common Stock (118) 148 (30) 0 0 0 0
Treasury Stock Purchases 0 0 0 0 (29) 0 (29)
Dividends on Common Stock 0 0 0 (980) 0 0 (980)
($.24 per share)
Dividends on Preferred Shares 0 0 0 (511) 0 0 (511)
($.938 per share) ----- ------ ------- ------- ------- ----- -------
Balance June 30, 1998 $687 $4,200 $38,769 $31,144 ($6,445) ($340) $68,015
===== ====== ======= ======= ======= ===== =======
</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,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
NET INCOME $ 3,019 $ 3,363
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION 654 666
AMORTIZATION 620 585
PROVISION FOR LOAN LOSSES 1,669 1,516
PROVISION FOR DEFERRED TAXES 0 0
GAIN ON SALE OF ASSETS (1) (28)
NET CHANGE IN ACCRUED INTEREST
RECEIVABLE AND OTHER ASSETS (1,040) 2,671
NET CHANGE IN ACCRUED INTEREST
PAYABLE AND OTHER LIABILITIES 1,168 (580)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,089 8,193
INVESTING ACTIVITIES
PROCEEDS FROM SALES OF
AVAILABLE-FOR-SALE SECURITIES 0 0
PROCEEDS FROM MATURITIES OF
AVAILABLE-FOR-SALE SECURITIES 15,866 6,982
PROCEEDS FROM MATURITIES OF
HELD-TO-MATURITY SECURITIES 28,500 40,755
PURCHASES OF AVAILABLE-FOR-SALE
SECURITIES (7,576) (23,910)
PURCHASES OF HELD-TO-MATURITY
SECURITIES (43,434) (17,777)
NET CHANGE IN LOANS 1,862 (38,864)
PURCHASES OF PREMISES
AND EQUIPMENT (1,913) (1,080)
PROCEEDS FROM SALE OF
PREMISES AND EQUIPMENT 283 375
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (6,412) (33,519)
FINANCING ACTIVITIES
NET CHANGE IN DEPOSITS 26,843 39,317
NET CHANGE IN SHORT-TERM
BORROWINGS (5,210) (2,273)
NET CHANGE IN LONG-TERM BORROWINGS (850) 4,491
ACQUISITION OF TREASURY STOCK (29) (279)
CASH PAID ON FRACTIONAL SHARES 0 (6)
CASH DIVIDENDS PAID (1,503) (1,505)
-------- --------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 19,251 39,745
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 18,928 14,419
CASH AND EQUIVALENTS AT BEGINNING OF YEAR 36,760 41,524
-------- --------
CASH AND EQUIVALENTS AT END OF PERIOD $ 55,688 $ 55,943
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MATEWAN BANCSHARES, INC. AND SUBSIDIARIES
JUNE 30, 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 June 30, 1999, the recorded investment in impaired loans under Statement
No. 114 was $15.77 million (of which $5.47 million were on a nonaccrual basis).
Included in this amount is $2.45 million of impaired loans for which the related
allowance for credit losses is $991 thousand and $13.32 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 June
30, 1999, approximated $16.39 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 1999, the Company discivered 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 $1.157 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. On July
27, 1999, the requisite majority of Company shareholders approved the merger
agreement.
<PAGE>
MATEWAN BANCSHARES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FINANCIAL CONDITION
Total assets at June 30, 1999, have increased approximately $23.1 million since
December 31, 1998, and $20.5 million since June 30, 1998. The Company
experienced annualized growth in each time period of 6.8% and 3.0% percent,
respectively. Deposits have increased approximately $26.8 million and $31.4
million and short term borrowings decreased approximately $5.2 million and $11.6
million over the same periods. Long term borrowings have decreased approximately
$850 thousand and $468 thousand over the same respective intervals. Retained
earnings increased approximately $1.5 million from December 31, 1998, to June
30, 1999, and approximately $2.8 million in the twelve month period ended June
30, 1998.
The asset structure of the Company's balance sheet at June 30, 1999, compared to
December 31, 1998, and June 30, 1998, has changed, as far as overall
composition. Cash and cash equivalents has increased approximately $18.9 million
since December 31, 1998 and approximately $902 thousand since June 30, 1998.
Investments increased $6.0 million since December 31, 1998 and $14.2 million
since June 30, 1998. The proportion of the investment portfolio classified as
available-for-sale on June 30, 1999, decreased to twenty-five percent (25%)
compared to thirty-one percent (31%) on December 31, 1998 and twenty-seven
percent (27%) on June 30, 1998. Loans have decreased approximately $3.5 million
since December 31, 1998 and increased approximately $3.3 million since June 31,
1998. The second quarter 1999 decline was a function of the sale of the
Company's $4.2 million credit card portfolio. Growth in earning assets compared
to both prior periods has been funded predominantly by deposit growth. Both loan
and core deposit growth that has taken place in both periods of time has been a
function of growth in the Company's core market areas. Company deposit totals
included approximately $20 million at June 30, 1999 and $15 million at June 30,
1998 in funds of a major commercial customer which would be characterized as
short-term and nonrecurring in nature. Most of these deposits could be
anticipated to leave the Company within thirty days of the respective financial
statement period dates.
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. 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-
<PAGE>
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 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 June 30, 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 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 increased approximately $12.6 million in the six
months since December 31, 1998 and increased $3.0 million in the twelve month
period since June 30, 1998. Interest bearing deposits increased approximately
$14.3 million and $28.3 million in the same respective periods of time. These
increases include the amounts referenced earlier belonging to the large
commercial customer that could be expected to leave the Company before the end
of the next quarter. 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 $5.2 million and
$11.6 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 $850
thousand and $468 thousand in the six month and twelve month periods ended June
30, 1999. Other liabilities
<PAGE>
increased approximately $1.2 million and decreased $674 thousand, respectively,
over the same respective time periods.
Internal capital retention has allowed for equity growth of approximately $1.1
million in the first half of 1999. Total equity capital experienced a $1.8
million increase in the twelve month period ended June 30, 1999. Equity capital
as a percentage of total assets was 9.62%, 9.78%, and 9.80% at June 30, 1999,
December 31, 1998, and June 30, 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 14.42% at
June 30, 1999, and 13.97% at June 30, 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.
<PAGE>
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 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, largely finalized by the second quarter of 1998, has
been completed.
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 was completed by April of 1999 and largely validated
<PAGE>
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 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 ultimatley 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 questionaires to complete to determine Y2K readiness.
<PAGE>
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. 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 $275 thousand in
expenses relative to Y2K testing. An additional expense of $210 thousand is
estimated for the additional testing, validation, and implementation for the
remaining six 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 six months of 1999
was approximately $2.508 million, representing basic and diluted earnings per
share applicable to common stock of $.62, versus $2.778 million, or $.70 per
share for the same period in 1998. For the quarters ending June 30, 1999 and
1998, the same earnings measures were $1.303 million and $1.375 million,
respectively or $.32 per share and $.35 per share, basic and diluted. Basic and
diluted earnings per share for the year ended December 31, 1998 was $1.24.
Return on Average Assets was .89% and 1.06% for the six month periods ended June
30, 1999, and June 30, 1998, respectively. Similar return measures for the
quarterly periods ended on those dates were .89% and 1.04%, respectively. Return
on Average Assets for the year ended December 31, 1998, was .92%. Return on
Average Equity was 9.11% and 10.45% for the respective six month time periods
ended June 30, 1999 and June 30, 1998 and 9.33% for the year ended December 31,
1998.
RESULTS OF OPERATIONS
Net interest income was $14.799 million for the six month period ended June 30,
1999 versus $14.943 million for the six month period ended June 30, 1998.
Comparable levels for three month period ending the same dates were $7.203
million and $7.628 million. The decreases of approximately $144 thousand for the
six month period and $425 for the quarter were a function of both decreasing
volume in the Company's core loan base (including effects from sale of the
credit card portfolio). Actual Net Interest Margin (net interest income divided
by average earning assets) for the six months ended June 30, 1999 was 4.33%
versus 5.22% for the same period in 1998. Net interest margin for the second
quarter of 1998 was 3.64% compared to 5.29% for the second quarter of 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 six months ended June 30, 1999
was approximately $153 thousand higher than for the same period in 1998. Net
charge-off activity increased by approximately $745 thousand in the first half
of 1999 over the first half of 1998. Non-performing loans (nonaccrual loans plus
renegotiated loans) approximated $4.814 million at June 30, 1999, versus $5.456
million at June 30, 1998. These levels represent approximately 1.08% and 1.22%
of the gross loans outstanding for each respective period. The Company's ratio
of allowance for loan losses to non-performing loans of 123.16% as of June 30,
1999. A similar calculation for the first half of 1998 produced a ratio
<PAGE>
of 99.43%. The ratio of allowance for loan losses to gross loans was 1.33% and
1.23% for the six month periods ended June 30, 1999, and June 30, 1998,
respectively. The Company maintains an extremely aggressive postition 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, 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 $443 thousand during the first six months of 1999
when compared to the same period in 1998. Service fees and other fees generally
increased in the current half due to a change in the service fee schedule from
the earlier period and normal business growth. Commission income declined
approximately $47 thousand for the same six month period. Reduced commissions
received for sales of credit insurance products was the major reason for the
decrease. Gain on sale of assets increased approximately $457 thousand, largely
due to the sale of the credit card portfolio. Other income declined
approximately $152 thousand.
Non-interest expenses increased $580 thousand for the first six months of 1999
over the same period in 1998. Most increases for overhead-related expenses were
a function of normal course of business operations.
For the six month periods ended June 30, 1999 and June 30, 1998, respectively,
net income taxes decreased $53 thousand. The effective income tax rate for the
first three months of 1998 was 33.92% versus 32.28% for the first half 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 $344 thousand for the six
months ended June 30, 1999, over the same period for 1998. Earnings available to
common shareholders decreased $270 thousand ($.08 per share) for the six months
ended June 30, 1999 over the same period in 1998.
<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,
--------- ---------
1999 1998
--------- ---------
<S> <C> <C>
Balance at begining of period $ 6,574 $ 5,478
Loans charged-off (2,720) (1,895)
Recoveries 406 326
Provision for loan losses 1,669 1,516
------- -------
Balance at the end of period $5,929 $5,425
====== ======
Non-performing loans $ 4,813 $5,456
Ratio of net charge-offs to
average loans (annualized) 1.05% .77%
Ratio of nonperforming loans to
gross loans 1.08% 1.22%
Ratio of nonperforming assets to
total assets .81% .90%
Ratio of allowance for loan losses
to non-performing loans 123.16% 99.43%
Ratio of allowance for loan losses
to gross loans 1.33% 1.23%
</TABLE>
The level of loans classified as troubled, restructured debt was immaterial for
either of the above periods.
<PAGE>
MATEWAN BANCSHARES, INC.
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 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)
July 31, 1999 By: /s/Dan R. Moore
------------------------
Dan R. Moore
Chairman of the Board
of Directors and
President
July 31, 1999 By: /s/Lee M. Ellis
------------------------
Lee M. Ellis
Vice President & Chief
Financial Officer
<PAGE>
EXHIBIT 11
Computation of Earnings per Share
(dollars in thousands, except shares and per share data)
<TABLE>
<CAPTION>
For the Six Months For the Three Months
ended June 30 ended June 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
PRIMARY:
Average shares outstanding 4,135,397 4,052,514 4,190,996 4,052,514
Impact of Treasury Shares 75,122 58,342 75,122 60,385
--------- --------- --------- ---------
Total 4,060,275 3,994,172 4,115,874 3,992,129
========= ========= ========= =========
Net Income $ 3,019 $ 3,363 $ 1,531 $ 1,665
======= ======= ======= =======
Preferred Stock Dividends $ 511 $ 585 $ 228 $ 290
======= ======= ======= =======
Net Income Available to
Common Shareholders $ 2,508 $ 2,778 $ 1,303 $ 1,375
======= ======= ======= =======
Earnings Per Share
Applicable to Common Stock $.62 $.70 $.32 $.35
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 23,571
<INT-BEARING-DEPOSITS> 212
<FED-FUNDS-SOLD> 31,905
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,613
<INVESTMENTS-CARRYING> 126,910
<INVESTMENTS-MARKET> 123,912
<LOANS> 438,299
<ALLOWANCE> 6,288
<TOTAL-ASSETS> 706,713
<DEPOSITS> 605,975
<SHORT-TERM> 14,710
<LIABILITIES-OTHER> 5,829
<LONG-TERM> 12,184
0
687
<COMMON> 4,200
<OTHER-SE> 63,128
<TOTAL-LIABILITIES-AND-EQUITY> 706,713
<INTEREST-LOAN> 22,073
<INTEREST-INVEST> 4,764
<INTEREST-OTHER> 418
<INTEREST-TOTAL> 27,255
<INTEREST-DEPOSIT> 11,888
<INTEREST-EXPENSE> 12,456
<INTEREST-INCOME-NET> 14,799
<LOAN-LOSSES> 1,669
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,547
<INCOME-PRETAX> 4,569
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,019
<EPS-BASIC> .62
<EPS-DILUTED> .62
<YIELD-ACTUAL> 4.33
<LOANS-NON> 4,164
<LOANS-PAST> 1,681
<LOANS-TROUBLED> 650
<LOANS-PROBLEM> 8,276
<ALLOWANCE-OPEN> 6,574
<CHARGE-OFFS> 2,358
<RECOVERIES> 403
<ALLOWANCE-CLOSE> 6,288
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,200
</TABLE>
