THIS PAPER DOCUMENT IS BEING SUBMITTED PURSUANT TO
RULE 901(d) OF REGULATION S-T
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMEND OCTOBER 16, 1996
FORM 10-Q/A
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
sale, 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 $(49) $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 wholly-
owned 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>
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 long-
lived 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 stock-
based 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 interest-
bearing 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%
Average rate on
interest bearing
liabilities 4.63% 4.70% -.07% 4.61% 4.60% .01%
Net interest spread 3.81% 3.81% 3.90% 3.85% .05%
Net interest margin 4.65% 4.53% .12% 4.68% 4.54% .14%
Average earning
assets $1,003,544 $936,765 $66,779 $990,362 $932,651 $57,711
Average interest
bearing
liabilities $821,978 $791,654 $30,324 $821,783 $792,625 $29,158
</TABLE>
Net interest income, on a tax equivalent basis, increased $999,000
or 9.4% for the quarter ended June 30, 1996, primarily as a result
of an increase in average net earning assets (average earning assets
less average interest bearing liabilities). For the six months
ended June 30, 1996, net interest income, on a tax equivalent basis,
increased $2,066,000 or 9.8% over the same period of 1995, largely
as a result of an increase in average net earning assets (average
earning assets less average interest bearing liabilities). The net
interest margin was 4.68% for the first six months compared to 4.54%
a year earlier. The improvement in the net interest margin was the
result of an increase of .01% in the rate paid on interest bearing
liabilities while the rate on earning assets increased .06% during
the period.
Provision for Loan Losses
The allowance for loan losses is maintained at a level adequate to
absorb probable losses. Management determines the adequacy of the
allowance based upon reviews of individual loans, evaluation of the
risk characteristics of the loan portfolio, including the impact of
current economic conditions on the borrowers' ability to repay, past
collection and loss experience and such other factors, which in
management's judgment, deserve current recognition. However, actual
losses could differ significantly from the amount estimated by
management. The allowance for loan losses is established by charges
to operating earnings.
<TABLE>
An analysis of the changes in the allowance for loan losses and
selected ratios follows:
<CAPTION>
(Amounts in thousands, except percentages)
3 MONTHS ENDED 6/30
1996 1995 CHANGE
<S> <C> <C> <C>
Balance, March 31 $12,330 $11,630 $700
Provision for loan losses 372 1,803 (1,431)
Loan loss recoveries 198 141 57
Loans charged off 799 1,307 (508)
------ ------ ----
Balance, June 30 $12,101 $12,267 $(166)
====== ====== ====
Average loans, net of
unearned income $620,413 $608,778 $11,635
Provision for loan losses
to average loans* .24% 1.18% -.94%
Net loan charge-offs to
average loans* .39% .77% -.38%
Allowance for loan losses
to end of period loans 1.91% 2.04% -.13%
6 MONTHS ENDED 6/30
1996 1995 CHANGE
Balance, January 1 $12,025 $11,156 $869
Provision for loan losses 602 2,196 (1,594)
Loan loss recoveries 644 467 177
Loans charged off 1,170 1,552 (382)
------ ------ ----
Balance, June 30 $12,101 $12,267 $(166)
====== ====== ====
Average loans, net of
unearned income $619,685 $606,175 $13,510
Provision for loan losses
to average loans* .19% .72% -.53%
Net loan charge-offs to
average loans* .17% .36% -.19%
Allowance for loan losses
to end of period loans 1.91% 2.04% -.13%
* amounts annualized
</TABLE>
The provision for loan losses decreased $1,431,000 or 79.4% to
$372,000 for the quarter ended June 30, 1996, and decreased
$1,594,000 or 72.6% to $602,000 during the six months ended June 30,
1996 compared to the same periods last year. The reduction for both
the quarter and six month period was the result of improved loan
quality and reduced levels of net loan charge-offs (loan charge-offs
less recoveries).
The provision for loan losses as a percentage of average loans
totaled .24% (annualized) for the quarter ended June 30, 1996
compared to 1.18% (annualized) for the quarter ended June 30, 1995.
For the six month period ended June 30, 1996, the provision for loan
losses as a percentage of average loans decreased to .19%
(annualized) from .72% (annualized) for the same period in 1995.
These decreases reflected a larger provision in the first quarter of
1995 that was used to increase the reserve as a result of loans
charged off and to provide for the growth that had occurred in the
portfolio.
Net loan charge-offs (loan charge-offs less recoveries) to average
loans decreased to .39% (annualized) from .77% (annualized) for the
quarter ended June 30, 1996, and decreased to .17% (annualized) from
.36% (annualized) for the six months ending June 30, 1996. These
reductions were the result of a decrease in the loans charged-off in
the second quarter of 1996 compared to the second quarter of 1995.
The reduced level of charge-offs during 1996 reflects the improved
quality of the loan portfolio.
The reserve for loan losses represented 1.91% of total loans on June
30, 1996, down slightly from the June 30, 1995 level of 2.04% and
1.93% at year-end. These decreases were primarily the result of
loan growth.
<PAGE>
Non-Interest Income
The following table sets forth the components of non-interest income
for the three and six months ended June 30, 1996 and 1995:
<TABLE>
<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>
Commissions and
fees on fiduciary
activities $760 $615 $145 $1,516 $1,303 $213
Service charges
on deposit
accounts 1,284 1,082 202 2,496 2,111 385
Other service
charges,
commissions and
fees 992 955 37 1,956 2,044 (88)
Securities gains
(net) 445 827 (382) 431 755 (324)
Gains on sales of
mortgage loans
(net) 105 235 (130) 181 492 (311)
Gains (losses) on
sales of other real
estate (net) (4) 25 (29) (7) 117 (124)
Other 96 107 (11) 221 360 (139)
----- ----- ---- ----- ----- ----
TOTAL $3,678 $3,846 $(168) $6,794 $7,182 $(388)
===== ===== ==== ===== ===== ====
</TABLE>
Non-interest income 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>
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 non-
interest 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.
<TABLE>
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:
<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 charge-
offs 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-in-
time 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>
Thomas R. Brumley
Date: August 2, 1996 By: ------------------------------
Thomas R. Brumley
President and Chief Executive
Officer
John A. Ray
Date: August 2, 1996 By: ------------------------------
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>
