<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1996
Commission File Number 0-26032
AREA BANCSHARES CORPORATION
------------------------------------------------
(Exact name of registrant as specified in its charter)
INCORPORATED IN KENTUCKY IRS EMPLOYER ID NUMBER
No. 61-0902343
230 FREDERICA STREET
OWENSBORO, KENTUCKY 42301
------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (502) 926-3232
Former name, former address and former fiscal year, if changed since
last report: N/A
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 period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
(1) Yes X No (2) Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
Class: Common stock
No Par Value
Shares Outstanding: As of July 31, 1996, 7,583,299
<PAGE>
AREA BANCSHARES CORPORATION
Table of Contents
<TABLE>
<CAPTION>
PART I - Financial Information Page Number
<S> <C>
Item 1. Financial Statements
Unaudited consolidated balance sheets, June 30, 1996
and December 31, 1995 3
Unaudited consolidated statements of income, three
months and six months ended June 30, 1996 and 1995 4
Unaudited consolidated statements of shareholders'
equity, six months ended June 30, 1996 and year ended
December 31, 1995 5
Unaudited consolidated statements of cash flows, six
months ended June 30, 1996 and year ended December 31,
1995 6
Notes to consolidated financial statements 8
Item 2. Management's discussion and analysis of financial
condition and results of operations
Results of operation 11
Financial position 15
Liquidity 17
PART II - Other Information
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters To A Vote of Security
Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
AREA BANCSHARES CORPORATION AND
SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Amount in thousands)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Cash and due from banks $ 42,982 $ 52,738
Interest bearing deposits with banks 457 262
Federal funds sold and securities
purchased under agreements to resell 950 100
Trading account securities 49,837 50,403
Investment securities:
Available for sale (amortized cost
of $227,222 and $211,905, respectively) 229,757 215,845
Held to maturity (fair value of $97,096
and $98,319, respectively) 94,843 94,015
--------- ---------
Total investment securities 324,600 309,860
--------- ---------
Mortgage loans held for sale 25,366 24,430
Loans, net of unearned discount 632,181 623,766
Less allowance for loan losses 12,101 12,025
--------- ---------
Net loans 620,080 611,741
--------- ---------
Premises and equipment, net 20,677 18,563
Accrued interest receivable 11,834 11,399
Intangible assets 13,198 14,315
Other assets 15,876 16,259
--------- ---------
Total assets $1,125,857 $1,110,070
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits $ 141,231 $ 134,876
Interest-bearing deposits 678,949 673,246
---------- ----------
Total deposits 820,180 808,122
---------- ----------
Federal fund purchased 37,325 30,175
Securities sold under agreements to
repurchase 85,278 120,965
Notes payable to the U.S. Treasury 19,469 4,601
Advances from the Federal Home Loan Bank 20,650 12,452
Other borrowings 17,072 13,823
Accrued expenses and other liabilities 12,847 11,358
---------- ----------
Total liabilities 1,012,821 1,001,496
---------- ----------
Preferred stock, no par value; authorized
500,000 shares; none issued - -
Common stock, no par value; authorized
16,000,000 shares; issued and outstanding:
June 30, 1996, 7,583,942; December 31,
1995, 7,618,714 17,671 17,823
Paid-in capital 10,000 10,000
Retained earnings 84,208 78,699
Deferred compensation on restricted stock (491) (509)
Net unrealized gains on securities available
for sale, net of tax 1,648 2,561
---------- -----------
Total shareholders' equity 113,036 108,574
Commitments and contingent liabilities
Total liabilities and shareholders'
equity $1,125,857 $1,110,070
========= ==========
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
1996 1995 1996 1995
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Interest income:
Loans, including
fees $14,989 $13,985 $29,888 $27,517
Interest bearing
deposits with banks 6 4 12 8
Federal funds sold
and securities
purchased under
agreements to resell 266 160 571 213
Interest and dividends
on investment securities:
U.S. Treasury securities
and Federal agencies
securities 3,338 3,187 6,510 6,295
Obligations of states
and political
subdivisions 1,403 1,470 2,821 2,926
Other 264 238 545 464
------- ------- -------- -------
Total interest
income 20,266 19,044 40,347 37,423
------- ------- -------- -------
Interest expense:
Interest on
deposits 7,691 6,921 15,294 13,203
Short-term
borrowings 1,581 2,263 3,210 4,649
Other borrowings 190 99 351 215
------- ------- -------- -------
Total interest
expense 9,462 9,283 18,855 18,067
------- ------- -------- -------
Net interest
income 10,804 9,761 21,492 19,356
Provision for loan
losses 372 1,803 602 2,196
------- ------- -------- -------
Net interest income
after provision for
loan losses 10,432 7,958 20,890 17,160
------- ------- -------- -------
Non-interest income:
Commissions and
fees on fiduciary
activities 760 615 1,516 1,303
Service charges
on deposit accounts 1,284 1,082 2,496 2,111
Other service
charges, commissions
and fees 992 955 1,956 2,044
Securities gains, net 445 827 431 755
Gains on sales of
mortgage loans, net 105 235 181 492
Gains (losses) on
sales of other real
estate owned, net (4) 25 (7) 117
Other 96 107 221 360
-------- -------- -------- -------
Total non-
interest
income 3,678 3,846 6,794 7,182
-------- -------- -------- -------
Non-interest expenses:
Salaries and
employee benefits 4,567 4,151 8,994 8,190
Net occupancy
expense 548 512 1,210 1,025
Furniture and
equipment expense 580 481 1,139 923
Federal deposit
insurance 12 419 37 844
Data processing
expense 487 397 928 821
Other 3,215 3,021 6,098 6,001
-------- -------- -------- -------
Total non-
interest expenses 9,409 8,981 18,406 17,804
-------- -------- -------- -------
Income before
income tax expense 4,701 2,823 9,278 6,538
Income tax expense 1,286 580 2,507 1,505
-------- -------- -------- -------
Net income $ 3,415 $ 2,243 $ 6,771 $5,033
======== ======== ======== =======
Weighted average
common stock and
common stock
equivalent shares 7,598 7,621 7,604 7,628
Per common and
common equivalent
stock:
Net income $ .45 $ .29 $ .89 $ .66
Cash dividends $ .04 $ .035 $ .075 $ .065
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996
(Amounts in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Net Unrealized
Compensation on Securities
Deferred Gains (losses)
Common Stock Paid-in Retained on Restricted Available
Shares Amount Capital Earnings Stock For Sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended
December 31, 1995
Balance
December 31,
1994 7,625,539 $17,854 $10,000 $68,267 $(475) $(3,556) $ 92,090
Net income 11,582 11,582
Cash dividends declared
($.135 per share) (1,026) (1,026)
Repurchase
of common
stock (9,575) (44) (168) (212)
Sale of
Treasury
stock 750 6 6
Restricted
stock
issued 6,500 29 127 (156) -
Amortization
of deferred
compensation
on restricted stock 17 17
Restricted
stock
forfeitures (4,500) (22) (83) 105 -
Change in
unrealized
losses on
securities
available for sales
net of taxes 6,117 6,117
------- ------- ------ ------ ------- ------ ------
Balance
December 31,
1995 7,618,714 17,823 10,000 78,699 (509) 2,561 108,574
Six Months Ended June 30, 1996
Net income January through
June 30, 1996 6,771 6,771
Cash dividends declared
($.075 per share) (567) (567)
Repurchase of
common
stock (34,772) (152) (695) (847)
Amortization
of deferred
compensation
on restricted
stock 18 18
Change in
unrealized
gains on
securities
available
for sale,
net of tax (913) (913)
------- ------ ------- ------- -------- --------- ----------
Balance
June 30,
1996 7,583,942 $17,671 $10,000 $84,208 $(491) $1,648 $113,036
========== ======= ======= ======= ====== ====== ========
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Cash flows from operating activities: 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Net income $ 6,771 $ 5,033
Adjustments to reconcile net
income to net cash provided by (used in)
operating activities:
Provision for loan losses 602 2,196
Depreciation, amortization and
accretion, net 2,460 1,075
Gain on sales of securities, net (431) (755)
Gain on sales of mortgage loans, net (181) (492)
Loss (gain) on sales of other real estate
owned 7 (117)
Gain on disposals of equipment (15) (4)
Deferred income taxes (150) 341
Proceeds from sales of trading account
securities 62,738 83,030
Proceeds from maturities of trading
account securities 36,500 -
Purchases of trading account securities (98,637) (92,857)
Purchases of mortgage loans held for sale (31,111) (48,151)
Proceeds from sales of mortgage loans held
for sale 46,311 55,220
Other, net 3,697 2,245
---------- ---------
Net cash provided by (used in)
operating activities 28,561 6,764
---------- ---------
Cash flows from investing activities:
Increase in interest bearing deposits
with banks (195) (238)
Proceeds from sales of securities
available for sale 3,807 26,833
Proceeds from sales of securities held
to maturity
Proceeds from maturities of securities
available for sale 29,000 28,500
Proceeds from maturities of securities
held to maturity 1,887 2,053
Calls of securities available for sale 3,144 1,613
Calls of securities held to maturity 2,939
Purchases of securities available for sale (50,824) (56,454)
Purchases of securities held to maturity (5,521) (3,728)
Decrease (increase) in federal funds sold
and securities purchased under agreements
to resell (850) 4,019
Loans originated, net of principal collected
on loans (26,912) (1,499)
Purchases of premises and equipment (3,221) (1,825)
Proceeds from sales of other real estate
owned 5 635
Proceeds from sales of premises and equipment 2 6
------- --------
Net cash provided by (used in) investing
activities (46,739) (85)
------- --------
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
Cash flows from financing activities: 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C>
Increase in deposits $12,058 $13,330
Increase (decrease) in Federal funds
purchased 7,150 (36,275)
Increase (decrease) in securities sold
under agreements to repurchase (35,687) 4,299
Increase in notes payable to the U.S.
Treasury 14,868 16,342
Increase (decrease) in advances from the
Federal Home Loan Bank 8,198 (9,875)
Increase (decrease) in other borrowings 3,249 (2,660)
Repurchase of common stock (847) -
Cash dividends paid (567) (495)
----------- ----------
Net cash provided by (used in)
financing activities 8,422 (15,334)
----------- ----------
Decrease in cash and due form banks (9,756) (8,655)
Cash and due from banks, January 1 52,738 55,324
----------- ----------
Cash and due from banks, June 30 $42,982 $46,669
=========== ==========
Cash flow information:
Income tax payments $ 2,200 $1,800
Interest payments $18,730 $17,189
Non-cash transactions:
Loans transferred to other assets $ 513 $ 623
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996 AND 1995
NOTE 1. Summary of Significant Accounting Policies
The accompanying interim unaudited consolidated financial
statements have been prepared in accordance with the
instructions to Form 10-Q and, therefore, do no include all
information and footnotes required by generally accepted
accounting principles for complete financial statements. In
the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered
necessary for a fair presentation have been reflected in the
accompanying consolidated financial statements. Results of
interim periods are not necessarily indicative of results to
be expected for the full year.
The accounting and reporting policies of Area
Bancshares Corporation, (the "Corporation") and its
subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry.
The consolidated financial statements include the accounts of
Area Bancshares Corporation and its whollyowned subsidiaries.
All significant inter-company accounts and transactions have
been eliminated in consolidation. A full description of
significant accounting policies is presented in the 1995 annual
report to shareholders.
NOTE 2. Presentation of Cash Flows
For purposes of reporting cash flows, cash and due from
banks include cash on hand and amounts due from banks. Cash
flows from deposits, federal funds purchased, securities sold
under agreements to repurchase, notes payable to the U.S.
Treasury, advances from the Federal Home Loan Bank, and other
borrowings are treated as net increases or decreases.
NOTE 3. Earnings Per Common and Common Equivalent Share
For 1996 and 1995, earnings per common and common equivalent
share are determined by dividing net income by the weighted
average number of common and common equivalent shares
outstanding during the year. Dilutive common stock equivalents
related to the stock option plan were determined using the
treasury stock method. Earnings per share and common equivalent
share assuming full dilution are the same as earnings per
common and common equivalent share.
NOTE 4. Investment Securities
Securities issued by states and political subdivisions are held
to maturity while all other securities are available for
sale. The amortized cost and approximate market values
of
investment securities as of June 30, 1996 and December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Available for Sale
(Amounts in thousands)
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
June 30, 1996
U.S. Treasury and Federal
Agencies $173,773 $ 367 $1,055 $173,085
Mortgage-Backed Securities 41,706 1,802 593 42,915
Other Debt Securities 11,743 2,025 11 13,757
-------- -------- ------ --------
Balance at June 30, 1996 $227,222 $4,194 $1,659 $229,757
======== ======== ====== ========
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996 AND 1995
(continued)
NOTE 5.Investment Securities (continued)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1995
U.S. Treasury and Federal
Agencies $166,622 $1,644 $ 840 $167,426
Mortgage-Backed Securities 41,489 2,491 349 43,631
Other Debt Securities 3,794 994 - 4,788
-------- ------ ------- --------
Balance at
December 31, 1995 $211,905 $5,129 $ 1,189 $215,845
======== ====== ======= ========
<CAPTION>
Held to Maturity
(Amounts in thousands)
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
June 30, 1996
States and Political
Subdivisions $94,843 $3,189 $936 $97,096
======= ====== ==== =======
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
December 31, 1995
States and Political
Subdivisions $94,015 $4,407 $103 $98,319
======= ====== ==== =======
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996 AND 1995
(continued)
NOTE 6. Accounting Matters
The Financial Accounting Standards Board issued several
statements during 1995 which were effective for the Corporation
beginning in 1996.
SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets
and for Long-Lived Assets to Be Disposed Of", requires that
longlived assets be reviewed for appropriate valuation. Should
events or changes in circumstances indicate the future cash
flows from the assets to be less than the carrying value,
a loss should be recognized based upon the fair value of
the asset. Long-lived
assets to be disposed of will be reported at the lower of
carrying value or fair value less cost to sell. For a
banking
organization,
capital assets and other real estate acquired in satisfaction
of debt would be the most likely assets subject to this
pronouncement. Because the Corporation's other real estate
assets are carried at the lower of cost or fair value minus
estimated selling costs, and capital assets are deployed in
operating facilities, the adoption of SFAS No. 121 does not
have a significant effect on the Corporation's financial position
or results of operations.
SFAS No. 122, "Accounting for Mortgage Servicing Rights", applies
to all companies with mortgage banking operations. SFAS
No. 122 requires capitalization of mortgage servicing rights,
regardless of whether they were acquired through
purchase
or origination
activities. Prior to issuance of SFAS No. 122, only
purchased
mortgage servicing rights were capitalized. The new
standard
effectively eliminates the accounting distinction between
originated and purchased mortgage servicing rights. The
Corporation's mortgage acquisition operations include selling
loans serviced released, retaining
servicing of loans sold, purchasing servicing rights, and
selling servicing rights. As such, implementation of this
new standard has not had a significant effect on the
Corporation's financial position or results of operations.
SFAS No. 123, "Accounting for Stock-Based Compensation",
introduces
the use of a new fair value based method of accounting for
stockbased compensation arrangements, but permits companies to
retain the intrinsic value based method prescribed by
Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued
to
Employees." Under the fair value based method of
accounting,
compensation expense is recognized for stock options and
other
equity instruments granted to employees based upon their fair
value at the grant date. The intrinsic value based method
prescribed by APB No. 25 recognizes compensation cost for
stock options when the option price is less than the market
value of the underlying stock. Companies not following the new
fair value method are required to provide expanded disclosure
of net income and earnings per share as if
they had adopted the fair value accounting method.
The
Corporation has elected to continue using the intrinsic value
based method and will provide expanded disclosures related to
the fair value method of accounting for stock-based
compensation.
NOTE 7. Intangibles
Goodwill and core deposit intangibles arise from
purchase transactions. Goodwill is amortized on a straight-line
basis over a 10 year period. Core deposit intangibles are
amortized on a straight-line basis over the estimated lives of
the deposits which average 10 years. At June 30, 1996 and
December 31, 1995, the unamortized balances of goodwill were
$8,412,000
and
$9,016,000, and core deposit intangibles were $4,786,000
and $5,299,000, respectively.
<PAGE>
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Corporation is a multi-bank holding company incorporated
in Kentucky in 1981 and registered under the Bank Holding
Company Act of 1956, as amended. On June 30, 1996, the
Corporation had direct control of three affiliated commercial
banks and indirect control of three additional commercial banks
through the ownership of holding companies, all of which
are located in Kentucky. Of the six affiliated banks,
three are national
banks and three are state banks.
The Corporation and its subsidiaries engage in retail and
commercial banking and related financial services. In
connection with these services, the company provides the usual
products and services of retail and commercial banking such as
deposits, commercial loans, personal loans, and trust services.
The principal service of the Corporation consists of making
loans. The principal markets for these loans are businesses
and individuals. These loans are made at the offices of the
affiliated banks and subsidiaries, and some are sold on the
secondary market. Additionally, the Corporation engages in
activities that are closely related to banking, including
mortgage banking, investment brokerage, and consumer finance.
The discussion that follows is intended to provide
additional insight into the Corporation's financial condition
and results of operations. This discussion should be read in
conjunction with the consolidated financial statements and
accompanying notes presented in Item 1 of Part I of this
report.
A. Results of Operations
Net income for the quarter ended June 30, 1996 was $3,415,000
or $.45 per share compared to $2,243,000 or $.29 per share for
the same period last year, an increase of $1,172,000 or 52.3%
and $.16 per
share or 55.2% respectively. Year-to-date earnings were
$6,771,000 or $.89 per share compared to 5,033,000 or $.66 per
share in 1995. The year-to-date increases were $1,738,000 or
34.5% and $.23 per share or 34.8%, respectively. Earnings
improved for the quarter largely as a result of an
increase in net interest income of $999,000 (taxable
equivalent) and a reduction in the provision for loans losses
of $1,431,000 offset by a decrease in non-
interest income and an increase
in non-interest expenses of $168,000 and $428,000,
respectively. Earnings for the six months ended June 30, 1996,
increased as a result of an increase of $2,066,000 in net
interest income (taxable equivalent), a reduction in the
provision for loan losses of $1,594,000, by a decline in non-
interest income of $388,000 and a $602,000 increase in non-
interest expenses. The following table show the components of
net income on a taxable equivalent basis.
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME - TAXABLE EQUIVALENT BASIS
(Amounts in thousands, except per share data)
3 MONTHS ENDED 6/30 6 MONTHS ENDED 6/30
1996 1995 CHANGE 1996 1995 CHANGE
<S> <C> <C> <C> <C> <C> <C>
Interest income $20,266 $19,044 $1,222 $40,347 $37,423 $2,924
Taxable-equivalent
adjustment 786 830 (44) 1,580 1,650 (70)
------- ------- ------- ------- ------- ---------
Interest income-taxable
equivalent 21,052 19,874 1,178 41,927 39,073 2,854
Interest expense 9,462 9,283 179 18,855 18,067 788
------- ------- ------ ------- ------- ------
Net interest income-
taxable equivalent 11,590 10,591 999 23,072 21,006 2,066
Provision for loan
losses 372 1,803 (1,431) 602 2,196 (1,594)
Non-interest income 3,678 3,846 (168) 6,794 7,182 (388)
Non-interest expenses 9,409 8,981 428 18,406 17,804 602
------- ------- ------ ------- ------- ------
Income before income
taxes 5,487 3,653 1,834 10,858 8,188 2,670
Income taxes 1,286 580 706 2,507 1,505 1,002
Tax equivalent adjustment 786 830 (44) 1,580 1,650 (70)
------- ------- ------ ------- ------- ------
Net income $ 3,415 $ 2,243 $1,172 $ 6,771 $ 5,033 $1,738
======= ======= ====== ======= ======= ======
Net income per share $ .45 $ .29 $ .16 $ .89 $ .66 $ .23
===== ===== ===== ===== ===== =====
</TABLE>
<PAGE>
Net Interest Income
The largest component of the Corporation's operating income is
net interest income. Net interest income is the difference
between interest earned on earning assets and interest expense
on interest bearing liabilities. For
purposes of this discussion, interest
income earned on tax-exempt securities and loans is adjusted
to a fully-taxable equivalent basis to facilitate comparison
with interest earned which is subject to statutory taxation.
Changes in net interest income generally occur due to
fluctuations in the balances and/or mixes of interest-earning
assets and interestbearing liabilities, and changes in their
corresponding interest yields and costs.
The following table summarizes the fully-taxable equivalent
interest spread, which is the difference between the average
yield on earning assets and the average rate on interest bearing
liabilities as well as the net interest margin, which is the
fully-taxable equivalent net interest income divided by the
average earning assets for the three and six months ended June
30, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
3 MONTHS ENDED 6/30 6 MONTHS ENDED 6/30
1996 1995 CHANGE 1996 1995 CHANGE
<S> <C> <C> <C> <C> <C> <C>
Average rate on earning
assets 8.44% 8.51% -.07% 8.51% 8.45% .06%
totaled $3,678,000 and $6,794,000 for the
three and six month periods ended June 30, 1996. These amounts
represent decreases of $168,000 or 4.4%
and $388,000 or 5.4%, respectively,
when compared to 1995 period totals. Commissions and fees
on fiduciary activities increased $145,000 or 23.6% in the
second quarter of 1996 and $213,000 or 16.3% for the six month
period as a result of increases in both assets under
management and fees charged. Service charges on deposit
accounts increased $202,000 or 18.7% to $1,284,000 and
$385,000 or 18.2% to $2,496,000, respectively, for the
three and six months ended June 30, 1996, when compared to
similar period totals in 1995, due largely to increases in
deposits subject to service charges and fees charged for services
provided. Other service charges, commissions and fees
increased $37,000 or 3.9% for the quarter ended June 30, 1996
while decreasing $88,000 or 4.3% for the six months ended June
30, 1996 when compared to the same periods of 1995. Securities
gains decreased $382,000 or 46.2% to $445,000 and $324,000 or
42.9% for the three and six month periods ending June 30, 1996
primarily as a result of a gain in the amount of $890,000
during the second quarter of 1995 on a security held as
available for sale. Gains on sales of mortgage loans
decreased $130,000 or 55.3% and $311,000 or 63.2% for the
quarter and year-to-date periods respectively when compared to
1995 periods. These decreases were the result of reduced
mortgage sales activity caused by rising interest rates.
Gains (losses) on sales of other real estate decreased $29,000
to $(4,000) and $124,000 to $(7,000) for the three and six
month periods due to reduced sales of other real estate.Other
non-interest income fell $11,000 or 10.3% to
$96,000 and $139,000 or 38.6% to $221,000 for the three and
six month periods ending June 30, 1996. The decrease for the
six month period was the result of legal fees recovered
during the first quarter of 1995 from prior years totaling
$125,000. Non-interest Expense
</TABLE>
<TABLE>
The following table sets forth the components of non-interest
expense for the three and six months ended June 30, 1996:
<CAPTION>
(Amounts in thousands)
3 MONTHS ENDED 6/30 6 MONTHS ENDED 6/30
1996 1995 CHANGE 1996 1995 CHANGE
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $4,567 $4,151 $416 $8,994 $8,190 $804
Net occupancy expense 548 512 36 1,210 1,025 185
Furniture and equipment
expense 580 481 99 1,139 923 216
Federal deposit insurance 12 419 (407) 37 844 (807)
Data processing expense 487 397 90 928 821 107
Other 3,215 3,021 194 6,098 6,001 97
------ ------ ---- ------ ------ ----
TOTAL $9,409 $8,981 $428 $18,406 $17,804 $602
===== ====== ==== ======= ======= ====
</TABLE>
<PAGE>
Non-interest Expense (continued)
Non-interest expenses when compared to 1995 period totals,
increased $428,000 or 4.8% in the second quarter and $602,000 or
3.4% for the six months ended June 30, 1996. Salaries and
employee benefits increased $416,000 or 10.0%
to $4,567,000 for the second quarter and $804,000 or 9.8% to
$8,994,000 for the six month period. The
increase for the six month period is the result of
additional staff required to support the current and future
growth as well as the acquisition of a new affiliate in the
third quarter of 1995. The new affiliate accounted for $246,000
of the six month increase. Net occupancy expense increased
$36,000 or 7.0%
to
$548,000 and $185,000 or 18.0% for the three and six month
periods ending June 30, 1996. The increase for the six month
period was largely the result of six new branches and the
acquisition of a new affiliate in the fourth quarter of 1995.
Federal deposit insurance decreased $407,000 or 97.1% to $12,000
during the quarter ended June 30, 1996, when compared to 1995
period totals, and $807,000 or 95.6% to $37,000 for the six
months ended June 30, 1996, as a result of a reduction in the
rate charged by the Federal Deposit Insurance Corporation.
Data processing expenses increased $90,000 or
22.7% to
$487,000 and $107,000 or 13.0% to $928,000 for the second
quarter and year-to-date periods. The increases were the
result of the Corporation's efforts to enhance its data
processing capabilities
to meet internal and customer needs. Other non-interest
expenses increased $194,000 or 6.4% to $3,215,000 and $97,000
or 1.6%
to
$6,098,000 for the three and six month periods when compared to
1995 period totals.
B. Financial Position
Total assets increased $15,787,000 or 1.4% to $1,125,857,000
from December 31, 1995 to June 30, 1996.
Earning assets totaled $1,033,391,000 on June 30, 1996, an
increase of $24,570,000 or 2.4% over December 31, 1995.
Loans, including loans held for sale, grew $9,351,000 to
$657,547,000 during the six months ended June 30, 1996. Loans,
including loans held for sale, represent the largest category
of earning assets comprising
63.6%
of
earning assets as of June 30, 1996 and 64.3% on December 31,
1995.
Short-term investments, which include interest-bearing deposits
with banks, federal funds sold and securities purchased under
agreements to resell and trading account securities, totaled
$51,244,000
on
June 30, 1996, an increase of $479,000 or 1.0% from year
end balances.
Investment securities represent 31.4% of earning assets.
They
totaled $324,600,000 on June 30, 1996, an increase of $14,740,000
or
4.8% over December 31, 1995 balances.
Deposits grew by $12,058,000 or 1.5% to $820,180,000
from
$808,122,000 on December 31, 1995. Both non-interest bearing
and interest bearing deposits grew from year-end totals,
with noninterest bearing deposits increasing $6,355,000 or 4.7%
and interest bearing deposits gaining $5,703,000 or .8%.
Borrowed funds, which include federal funds purchased,
securities sold under agreements to repurchase, notes payable
to the U.S. Treasury, advances from the Federal Home Loan
Bank, and other borrowings decreased by $2,222,000 to
$179,794,000
from
$182,016,000 on December 31, 1995.
Capital Resources
Shareholders' equity totaled $113,036,000 at June 30, 1996,
an
increase of $4,462,000 or 4.1% from December 31, 1995. Out of
net income of $6,771,000 during the first six months of 1996,
$5,509,000 was retained after paying dividends to shareholders
of $567,000 and purchasing common stock of $695,000. The net
unrealized gains
on
securities available for sale, net of taxes were $1,648,000 at
June 30, 1996, compared to net unrealized gains of $2,561,000 at
year-end 1995. Increasing market interest rates during 1996
were responsible for the market value decline of the securities
available for sale.
The shareholders' equity-to-asset ratio was 10.04% at June 30,
1996 compared to 9.78% on December 31, 1995, exceeding the
regulatory level of 6.00% required for "well-
capitalized" financial institutions.
Book values per share were $14.90 and $14.25 at June 30, 1996
and December 31, 1995, respectively.
<PAGE>
Capital Resources (continued)
<TABLE>
A summary of the capital ratios are shown below.
<CAPTION>
Regulatory
Capital Requirements
June 30 December 31 June 30 Well Minimum
1996 1995 1995 Capitalized Required
<S> <C> <C> <C> <C> <C>
Leverage Ratio 9.36% 8.64% 8.82% 5.00% 3.00%
Tier I Risk Based
Capital Ratio 14.16% 13.59% 13.82% 6.00% 4.00%
Total Risk Based
Capital Ratio 15.42% 14.85% 15.08% 10.00% 8.00%
</TABLE>
Asset Quality
At June 30, 1996, the allowance for loan and lease losses
was $12,101,000 or 1.91% of quarter end loans, as
compared to
$12,025,000 or 1.93% of loans at December 31, 1995. The ratio
of the allowance for loan and lease losses to non-performing
assets declined to 278.8% at June 30, 1996, compared with
289.6% at December 31, 1995 largely as a result of an increase
from $1,092,000 to $1,341,000 in other real estate owned
and in substance foreclosures. Non-performing assets
consist of non-accrual loans, loans past due ninety days or
more that are still accruing interest, restructured loans, and
other real estate owned and in-substance foreclosures.
Currently, net charge-offs are at .17% (annualized) of average
year-to-date loans.
The following schedule shows the dollar amount of assets at June
30, 1996 and December 31, 1995, which were nonaccrual
loans, loans contractually past due ninety days or more as
to interest or principal payments and still accruing,
restructured loans, and other real estate and in-substance
foreclosures:
<TABLE>
<CAPTION>
(In thousands)
June 30 December 31
1996 1995
<S> <C> <C>
Nonperforming assets:
Nonaccrual loans $2,466 $2,777
Loans contractually past
due ninety days or more as
to interest or principal
payments and still accruing 533 283
Restructured loans - -
------ ------
Total nonperforming and restructured
loans 2,999 3,060
Other real estate owned and
in-substance foreclosures 1,341 1,092
------ ------
Total nonperforming assets $4,340 $4,152
====== ======
</TABLE>
The allowance for loan and lease losses is maintained at a
level that is sufficient to absorb the losses that, in the
reasonable opinion and judgment of management, are known and
inherent in the loan portfolio. Management's evaluation includes an
analysis of the overall quality of the loan portfolio,
historical loan loss
experience, loan delinquency trends, and the economic
conditions within the Corporation's marketing area. Additional
allocations for the allowance are based on specifically
identified potential loss situations.
<PAGE>
The allowance for loan and lease losses is allocated by category
of loan and by a percentage distribution of the allowance
allocation. An allocation of the allowance for loan and lease
losses is an estimate of the portion which will be used to
cover future chargeoffs in each loan category, but does not
preclude any portion of the allowance allocated to one type of
loan from being used to cushion losses of another loan type.
This allocation is determined by the estimated loss within
each loan pool as well as any specific allocations that
may
be assigned to specific loans within the same portfolio section
with the remainder being assigned to
the
unallocated category. The following table shows the allocation
of the allowance for loan and lease losses by category of loan
at June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
Allowance for Percent Allowance for Percent
loan losses of total loan losses of total
<S> <C> <C> <C> <C>
Commercial $3,939,000 32.6% $3,481,000 28.9%
Real estate 1,496,000 12.4% 1,218,000 10.1%
Consumer 3,613,000 29.9% 3,233,000 26.9%
Unallocated 3,053,000 25.1% 4,093,000 34.1%
---------- ----- ---------- -----
$12,101,000 100.0% $12,025,000 100.0%
=========== ====== =========== ======
</TABLE>
A continuous and comprehensive loan review program is maintained
by the Corporation for each affiliate bank. The purpose of
these reviews is to provide periodic review and inspection of
loans to ensure the safety, liquidity, and profitability
of the loan portfolio. The Corporation's loan
review
department is entrusted
with the responsibility to identify foreseeable problems,
measure compliance with established loan and operating polices,
and provide objective loan portfolio appraisals to the Board
of Directors and management.
C. Liquidity
Core deposits have historically provided the Corporation
with a major source of stable and relatively low-cost funding.
Secondary sources of liquidity include federal funds
purchased, securities sold under agreements to repurchase,
notes payable to the U.S. Treasury, advances from the
Federal Home Loan Bank, and other borrowings.
As of June 30, 1996, 72.8% of total assets were funded by core
deposits while 16.0% were funded with secondary sources of
liquidity discussed above, compared to 72.8% and 16.4%,
respectively, for the year ended December 31, 1995.
The loan-to-deposit ratio fell from 77.2% on December 31, 1995
to 77.1% on June 30, 1996. Interest Rate Sensitivity
Interest rate sensitivity has traditionally been measured by gap
analysis, which represents the difference between assets and
liabilities that reprice in certain time periods. This method,
while useful, has a number of limitations as it is a static point
intime measurement and does not take into account the varying
degrees of sensitivity to interest rates within the balance
sheet. As shown in the following table, on a static-gap basis,
the cumulative ratio of interest sensitive assets to interest
sensitive liabilities in a one-year time frame was 85.3%,
and the cumulative gap as a percentage of
total assets was (9.9%). Because of inherent
limitations of gap analysis, Area Bancshares uses a simulation
model to more realistically measure its sensitivity to changing
interest rates. Management monitors the rate sensitivity
and liquidity positions on an ongoing basis and, when
necessary, appropriate action is taken to minimize any adverse
effects of rapid interest rate movements or any unexpected
liquidity concerns.
<PAGE>
Interest Rate Sensitivity (continued)
<TABLE>
<CAPTION>
(Amounts in thousands)
June 30, 1996
Within 2-3 4-12 Total After Total
1 Month Months Months 1 Year 1 Year
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Interest Bearing Deposits
and Federal Funds Sold $1,407 $ - $ - $1,407 $ - $1,407
Trading Account Securities 49,837 - - 49,837 - 49,837
Investment Securities 63,076 14,532 48,916 126,524 198,076 324,600
Mortgages Held for Sale 25,366 - - 25,366 - 25,366
Loans 216,340 42,545 183,885 442,770 189,411 632,181
------- ------ ------- ------- ------- -------
Total Interest Sensitive
Assets 356,026 57,077 232,801 645,904 387,487 1,033,391
------- ------ ------- ------- ------- --------
Interest Sensitive
Liabilities:
Interest Bearing Transactions
Accounts (1) 268,996 - - 268,996 - 268,996
Other Interest Bearing
Deposits 77,189 59,190 202,383 338,762 71,191 409,953
Federal Funds Purchased 37,325 - - 37,325 - 37,325
Securities Sold Under
Agreements to Repurchase 74,236 619 8,381 83,236 2,042 85,278
Notes Payable to U.S.
Treasury 19,469 - - 19,469 - 19,469
Advances from Federal Home
Loan Bank - 4,500 4,717 9,217 11,433 20,650
Other Borrowings - - - - 17,072 17,072
------- ----- ----- ------- ------- -------
Total Interest Sensitive
Liabilities 477,215 64,309 215,481 757,005 101,738 858,743
------- ------ ------- ------- ------- -------
Interest Sensitivity
Gap $(121,189) $(7,232) $17,320 $(111,101)$285,749 $174,648
========= ======= ======= ========= ======== ========
Cumulative Gap $(121,189) $(128,421) $(111,101) $(111,101) $174,648 $174,648
Cumulative Gap
as a Percentage
of Total Assets (10.7%) (11.4%) (9.9%) (9.9%) 15.5% 15.5%
Cumulative Ratio
of Interest
Sensitive Assets
to Interest
Sensitive
Liabilities 74.6% 76.3% 85.3% 85.3% 120.3% 120.3%
<FN>
<F1>
(1)Interest bearing transaction accounts (NOW's, Money Market
accounts and passbooks) are generally less sensitive to changes
in interest rates than other sources of funds, management has
determined to include these accounts in the "Within 1 Month"
category for gap analysis.
</FN>
</TABLE>
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters To a Vote of Security
Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 11 Statement RE Computation of Earnings Per Share
page 21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AREA BANCSHARES CORPORATION
<TABLE>
<S> <C>
Date: August 2, 1996 By: Thomas R. Brumley
---------------------------------
Thomas R. Brumley
President and Chief
Executive Officer
Date: August 2, 1996 By: John A. Ray
---------------------------------
John A. Ray
Senior Vice President, Chief
Financial Officer
</TABLE>
<PAGE>
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
EXHIBIT 11
Statement RE Computation of Earnings Per Common Share and Common
Equivalent Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Shares of common stock,
beginning 7,599,314 7,621,039 7,618,714 7,625,539
========= ========= ========= =========
Shares of common stock,
ending 7,583,942 7,621,039 7,583,942 7,621,039
========= ========= ========= =========
Computation of weighted
average number of common
and common equivalent shares:
Common shares outstanding
at the beginning of
the period 7,599,314 7,621,039 7,618,714 7,625,539
Weighted average number of
shares issued - - - -
Weighted average number of
shares redeemed 5,124 4,500 18,565 2,287
Weighted average of common
stock equivalent attributable
to stock options granted,
computed under the treasury
stock method 3,514 4,455 3,808 4,455
--------- --------- --------- -----------
Weighted average number of
common and common equivalent
shares (note 3) 7,597,704 7,620,994 7,603,957 7,627,707
========= ========= ========= =========
Earnings and earnings per common and common
equivalent shares: (note 3)
Net income $3,415,000 $2,243,000 $6,771,000 $5,033,000
========== ========== ========== ==========
Earnings per common and common
equivalent share $.45 $ .29 $ .89 $.66
== === === ===
Dividends per share $.04 $.035 $.075 $.065
== === === ===
</TABLE>
