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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED REQUIRED, EFFECTIVE OCTOBER 7,
1996] For the Fiscal Year Ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from __________ to __________.
Commission file number 0-26032.
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AREA BANCSHARES CORPORATION
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Kentucky 61-0902343
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(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
- ----------------------------------------------------------------------------------------------------------
230 Frederica Street
Owensboro, KY 42301
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(Address of Principal Executive Office) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (502) 926-3232
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Securities Registered Pursuant to Section 12(b) of the Act: None
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Securities Registered Pursuant to Section 12(g) of the Act:
No Par Value Common Stock
(Title of Class)
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. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The Registrant estimates that the aggregate market value of the Registrant's
common stock held by non affiliates on March 17, 1997 was $131,592,000, (based
upon reports of beneficial ownership that approximately 52.75% of the shares
are so owned by nonaffiliates).
The number of shares outstanding of the Registrant's common stock as of March
17, 1997:
11,338,328 Shares Common Stock, No Par Value
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
ITEM 1. BUSINESS ............................................................................... 3
(A) General Description ............................................................... 3
(B) Affiliated Banks .................................................................. 3
(C) Bank-Related Subsidiaries and Affiliates .......................................... 3
(D) Executive Officers of the Registrant .............................................. 4
(E) Employees ......................................................................... 4
(F) Supervision and Regulation ........................................................ 4
(G) Governmental Monetary Policy ...................................................... 8
(H) Economic Conditions ............................................................... 8
(I) Competition ....................................................................... 8
(J) Statistical Disclosure ............................................................ 9
ITEM 2. PROPERTIES ............................................................................. 10
ITEM 3. LEGAL PROCEEDINGS ...................................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .................................... 10
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .................................................................... 10
ITEM 6. SELECTED FINANCIAL DATA ................................................................ 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .............................................................. 11
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................................ 11
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ............................................................... 11
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ..................................... 11
ITEM 11. EXECUTIVE COMPENSATION ................................................................. 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ............................................................................. 11
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ......................................... 11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K ............................................................................... 11
</TABLE>
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PART I
ITEM 1. BUSINESS
(A) GENERAL DESCRIPTION
Area Bancshares Corporation (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 December 31, 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 which 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
Corporation 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 parent company furnishes specialized services to its affiliated
banks and subsidiaries including supervision, administration and review of loan
portfolios; administration of investment portfolios, insurance programs and
employee benefit plans; and assistance with respect to accounting and operating
systems and procedures, personnel, marketing, cash management services and
equipment management. Charges for these services are based on the nature and
extent of the services provided.
(B) AFFILIATED BANKS
The six affiliated banks had 36 banking locations at December 31,
1996. These banks serve both agricultural and metropolitan areas. The location
and certain other information about the affiliated banks are given below:
The Owensboro National Bank is located in Owensboro, Kentucky. As of
December 31, 1996, the bank had total assets of $464,812,000. The Owensboro
National Bank serves customers in Daviess County.
First City Bank and Trust Company is located in Hopkinsville, Kentucky
and serves customers primarily in Christian County. Total assets of this
affiliated bank were $266,718,000 on December 31, 1996.
Bowling Green Bank and Trust Company, N.A. is located in Bowling
Green, Kentucky. Bowling Green Bank and Trust had assets totaling $171,083,000
on December 31, 1996. The bank serves customers in Warren County.
The New Farmers National Bank of Glasgow, Kentucky serves customers
primarily in Barren County. Assets of this bank totaled $161,638,000 on
December 31, 1996.
Southern Deposit Bank, Russellville, Kentucky had assets of
$76,319,000 on December 31, 1996. This affiliate serves customers in Logan
County.
Citizens Deposit Bank of Calhoun, Kentucky serves customers primarily
in McLean County and ended 1996 with total assets of $39,544,000.
(C) BANK-RELATED SUBSIDIARIES AND AFFILIATES
On May 12, 1986, ONB Bank Services, Inc., was formed as a nonbank
subsidiary of The Owensboro National Bank. ONB Bank Services, Inc. is a
contractual subscriber for U.S. Clearing Corporation Brokerage programs, and
furnishes brokerage services, investment advisory services and related
investment services for the affiliated banks under the name of Audubon
Securities.
Area Services, Inc. was formed on July 8, 1991 as a wholly owned
nonbank subsidiary of the Corporation. Area Services is engaged in the purchase
of nonperforming loans secured by real estate.
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On April 20, 1994, ABC Credit Corporation ("ABC Credit") was formed as
a nonbank subsidiary of First City Bank and Trust Company. ABC Credit operates
as a consumer finance company under the Kentucky Consumer Loan Company Act,
K.R.S. 288.410 et seq. As of December 31, 1996, ABC Credit had eight offices
operating in Kentucky with net loans outstanding of $8,955,000.
ONB Investment Services, Inc. (formally known as Ixtlan Holdings,
Inc.) was formed on August 26, 1994 as a nonbank subsidiary of The Owensboro
National Bank.
(D) EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Corporation as of
March 15, 1997, the Corporation offices held by these executive officers on
that date, the period during which the executive officers have served as such
and the other positions held with the Corporation by these officers during the
past five years are set forth below:
<TABLE>
<CAPTION>
PARENT COMPANY POSITION
NAME AND ADDRESS AGE POSITION COMMENCED OTHER POSITIONS
---------------- --- -------------- --------- ---------------
<S> <C> <C> <C> <C>
Thomas R. Brumley 58 President, 1990 President and CEO of
Owensboro, Kentucky Chief Executive Officer The Owensboro National
and Director Director-1996 Bank from 1983 to 1990
Edward F. Johnson 61 Senior Vice President, 1987 First Senior Vice
Owensboro, Kentucky Operations President of The
Owensboro National
Bank
Donald A. Leibee 53 Senior Vice President, 1990 First Vice President and
Owensboro, Kentucky Loan Administration Chief Lending Officer of
The Owensboro National
Bank from 1984 to 1990
John A. Ray 41 Senior Vice President, 1994 First Senior Vice
Owensboro, Kentucky Chief Financial Officer President of Finance of
The Owensboro National
Bank from 1993 to 1994,
Executive Vice President
and COO for First
Federal Savings and
Loan Association from
1992 to 1993 and First
Senior Vice President of
Finance from 1985 to
1992 for The Owensboro
National Bank
Timothy O. Shelburne 40 Senior Vice President, 1995 Vice President and
Owensboro, Kentucky General Counsel Compliance Officer for
The Owensboro National
Bank from 1993 to 1994
</TABLE>
(E) EMPLOYEES
On December 31, 1996, the Corporation had 491 full-time employees and
168 part-time employees. None of the employees of the Corporation is
represented by unions. The relationship between management and employees of the
Corporation is considered good.
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(F) SUPERVISION AND REGULATION
COMPANY REGULATION-GENERAL
The Corporation is a registered holding company under the Bank Holding
Company Act of 1956, as amended (the "Federal Bank Holding Company Act") and is
regulated under such act by the Board of Governors of the Federal Reserve
System (the "Federal Reserve"). In addition, the Corporation is subject to the
provisions of Kentucky's banking laws regulating bank acquisitions and certain
activities of controlling bank shareholders. The regulatory provisions
hereinafter discussed are intended and designed for the protection of
depositors in the Corporation's subsidiary banks, and are not for the
protection of shareholders.
As a bank holding company, the Corporation is required to file an
annual report with the Federal Reserve and such additional information as the
Federal Reserve may require. The Federal Reserve and the Kentucky Department of
Financial Institutions (the "Kentucky Department") may also conduct
examinations of the Corporation to determine whether it is in compliance with
applicable Federal and Kentucky banking laws and the regulations promulgated
thereunder.
The Federal Bank Holding Company Act also requires every bank holding
company to obtain prior approval from the Federal Reserve before acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank which is not already majority owned or controlled by that bank holding
company. Acquisition of any additional banks would require prior approval from
both the Federal Reserve and the Kentucky Department of Financial Institutions.
Under Kentucky law, a holding company may not acquire a bank located in
Kentucky, if the acquisition would cause the Kentucky deposits controlled by
the acquiring holding company to exceed 15% of the total deposits of all banks
in Kentucky. This limitation does not currently restrict the ability of the
Corporation to pursue acquisitions of financial institutions in Kentucky.
On September 29, 1994, the President of the United States signed into
law the "Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994"
(the "Interstate Branching Act'). This law, which became effective on September
29, 1995, repealed the prior statutory restrictions on interstate acquisitions
of banks by bank holding companies so that bank holding companies located in
Kentucky may now acquire a bank located in another state, and any bank holding
company located outside of Kentucky may lawfully acquire a Kentucky-based bank,
regardless of state laws to the contrary, in either case subject to certain
deposit-percentage, aging requirements, and other restrictions. The Interstate
Banking Act also generally provides that, after June 1, 1997, national and
state-chartered banks may branch interstate through acquisitions of banks in
other states. By adopting legislation prior to that date, a state has the
ability either to "opt in" and accelerate the date after which interstate
branching is permissible or to "opt out" and prohibit interstate branching
altogether. Whether Kentucky will "opt-out" of the provisions of the Interstate
Banking Act prior to June 1, 1997 is unknown. The full extent of the provisions
of the Interstate Banking Act and its effect upon the Corporation is unknown at
this time.
The Federal Bank Holding Company Act further provides that the Federal
Reserve will not approve any acquisition, merger or consolidation (1) which
would result in a monopoly, (2) which would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business
of banking in any part of the United States, (3) the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the county or (4) which in any other manner would be restraint of
trade, unless the anticompetitive effects of the proposed transaction is
clearly outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community to be served.
In addition to having the right to acquire ownership or control of
other banks, the Corporation is authorized to acquire ownership or control of
nonbanking companies, provided the activities of such companies are so closely
related to banking or managing or controlling banks that the Federal Reserve
considers such activities to be proper to the operation and control of banks.
Regulation Y, promulgated by the Federal Reserve, sets forth those activities
which are regarded as closely related to banking or managing or controlling
banks and, thus, are permissible activities for bank holding companies, subject
to approval by the Federal Reserve in individual cases.
Federal Reserve policy requires a bank holding company to act as a
source of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not be warranted. Under these provisions, a bank holding company may be
required to loan money to its subsidiaries in the form of capital notes or
other instruments which qualify for capital under regulatory rules. Any loans
by the holding company to such subsidiary banks are likely to be unsecured and
subordinated to such bank's depositors and perhaps to its other creditors.
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FEDERAL SECURITIES LAWS
The Corporation is subject to various federal securities laws,
including the Securities Act of 1933 (the "1933 Act") and the Securities
Exchange Act of 1934 (the "1934 Act"). The 1933 Act regulates the distribution
or public offering of securities, while the 1934 Act regulates trading in
securities that are already issued and outstanding. Both Acts provide civil and
criminal penalties for misrepresentations and omissions in connection with the
sale of securities, and the 1934 Act also prohibits market manipulation and
insider trading.
Pursuant to the 1934 Act, the Corporation files annual, quarterly and
current reports with the Securities and Exchange Commission. In addition, the
Corporation and its directors, executive officers and 5% shareholders are
subject to certain additional reporting requirements, including requirements
governing the submission of proxy statements and reports of beneficial
ownership of the Corporation's securities.
BANK REGULATION
The national banks are subject to regulation and examination by the
Office of the Comptroller of the Currency (the "OCC") and by the Federal
Deposit Insurance Corporation (the "FDIC"). The Kentucky state banks are
subject to regulation and examination by the Kentucky Department of Financial
Institutions and by the FDIC.
RESTRICTIONS ON PAYMENT OF DIVIDENDS
The principal source of the Corporation's income consists of dividends
from its subsidiary banks, and there are certain limitations on the payment of
dividends by the subsidiary banks.
The prior approval of the OCC or the Kentucky Department of Financial
Institutions, as applicable, is required if the total of all dividends declared
by the subsidiary bank in any calendar year exceeds the bank's net profits, as
defined, for that year combined with its retained net profits for the preceding
two calendar years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. In addition, both federal and state law
impose capital limitations on the ability of the Corporation to pay dividends.
CAPITAL REQUIREMENTS
GENERAL
Regulatory agencies measure capital adequacy within a framework that
makes capital requirements sensitive to the risk profile of the individual
banking institutions. The guidelines define capital as either Tier 1 capital
(primarily shareholders equity) or Tier 2 capital (certain debt instruments and
portion of the reserve for loan losses). There are two measures of capital
adequacy for bank holding companies and their subsidiary banks: the Tier 1
leverage ratio and the risk-weighted assets, and total capital (Tier 1 plus
Tier 2) must equal 8% of risk-weighted assets. These are minimum requirements,
however, and institutions experiencing internal growth or making acquisitions,
as well as institutions with supervisory or operational weaknesses, will be
expected to maintain capital positions well above these minimum levels.
At December 31, 1996, the Corporation had a Tier 1 leverage ratio of
9.88%, a Tier 1 risk-based ratio of 14.33%, and a total risk-based ratio of
15.58%.
PROMPT CORRECTIVE ACTION
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the
"FDIC Act") imposes a regulatory matrix which requires the federal banking
agencies to take prompt corrective action to deal with depository institutions
that fail to meet their minimum capital requirements or are otherwise in a
troubled condition. The prompt corrective action provisions require
undercapitalized institutions to become subject to an increasingly stringent
array of restrictions, requirements and prohibitions, as their capital levels
deteriorate and supervisory problems mount. Should these corrective measures
prove unsuccessful in recapitalizing the institutions and correcting its
problems, the FDIC Act mandates that the institution be placed in receivership.
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Pursuant to regulations promulgated under the FDIC Act, the corrective
actions that the banking agencies either must or may take are tied primarily to
an institution's capital levels. In accordance with the framework adopted by
the FDIC Act, the banking agencies have developed a classification system,
pursuant to which all banks and thrifts will be placed into one of five
categories: well-capitalized institutions, adequately capitalized institutions,
undercapitalized institutions, significantly undercapitalized institutions and
critically undercapitalized institutions. The capital thresholds established
for each of the categories are as follows:
<TABLE>
<CAPTION>
Total
Risk-Based Tier 1 Risk-
Capital Category Tier 1 Capital Capital Based Capital Other
- ---------------- -------------- ------- ------------- -----
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject
to a capital
directive
Adequately Capitalized 4% or more 8% or more 4% or more --
Undercapitalized less than 4% less than 8% less than 4% --
Significantly Undercapitalized less than 3% less than 6% less than 3% --
Critically Undercapitalized 2% or less -- -- --
tangible equity
</TABLE>
The undercapitalized, significantly and critically undercapitalized
categories overlap; therefore, a critically undercapitalized institution would
also be an undercapitalized institution and a significantly undercapitalized
institution. This overlap ensures that the remedies and restrictions prescribed
for undercapitalized institutions will also apply to institutions in the lowest
two categories.
The down-grading of an institution's category is automatic in two
situations: (1) whenever an otherwise well-capitalized institution is subject
to any written capital order or directive, and (2) where an undercapitalized
institution fails to submit or implement a capital restoration plan or has its
plan disapproved. The Federal banking agencies may treat institutions in the
well-capitalized, adequately capitalized and undercapitalized categories as if
they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels.
All insured institutions regardless of their level of capitalization
are prohibited by the FDIC Act from paying any dividend or making any other
kind of capital distribution or paying any management fee to any controlling
person if following the payment or distribution the institution would be
undercapitalized. While the prompt corrective action provisions of the FDIC Act
contain no requirements or restrictions aimed specifically at adequately
capitalized institutions, other provisions of the FDIC Act and the agencies'
regulations relating to deposit insurance assessments, brokered deposits and
interbank liabilities treat adequately capitalized institutions less favorably
than those that are well-capitalized.
At December 31, 1996, the Corporation and each of the affiliated banks
had the requisite capital levels to qualify as well-capitalized.
OTHER REGULATION
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Bank Holding Company Act on any extension
of credit to the bank holding company or any of its subsidiaries, on investment
in the stock or other securities of the bank holding company or its
subsidiaries, and on the taking of such stock or securities as collateral for
loans to any borrower. In addition, a bank holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit or provision of any property or services.
The subsidiary banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the OCC or the FDIC, as
applicable, in connection with its regular examination of a bank, to assess the
bank's record in meeting the credit needs of the communities served by the
bank, including low and moderate income neighborhoods. All of the subsidiary
banks of the Corporation have CRA ratings of satisfactory or above.
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Other areas subject to regulations by federal and state authorities
include reserves, deposits, investments, loans, mergers, issuance of
securities, establishment of branches and other various aspects of operations
(G) GOVERNMENTAL MONETARY POLICY
The earnings of the Corporation are affected by the policies of
regulatory authorities, including the Federal Reserve System. Federal Reserve
System monetary policies have had a significant effect on the operating results
of commercial banks in the past and are expected to continue to do so in the
future. Because of changing conditions in the economy and in the money markets,
as a result of actions by monetary and fiscal authorities, interest rates,
credit availability and deposit levels may change due to circumstances beyond
the control of the Corporation. Future policies of the Federal Reserve System
and other authorities cannot be predicted, nor can their effect on future
earnings be predicted.
(H) ECONOMIC CONDITIONS
As outlined in Item 1 (B). Business, Affiliated Banks, the six
affiliated banks operate in six separate Western Kentucky counties. Selected
economic characteristics from the 1990 census in provided below:
<TABLE>
<CAPTION>
Owensboro First City Bowling Green New Farmers Southern Citizens
Bank National Bank Bank Bank National Bank Deposit Deposit
- ---- ------------- ---- ---- ------------- ------- -------
County Daviess Christian Warren Barren Logan McLean
- --------- ------- --------- ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Population 87,189 68,941 76,673 34,001 24,416 9,628
Persons per
household 2.58 2.73 2.52 2.54 2.60 2.59
Owner occupied
housing units 22,744 21,636 28,819 13,136 6,824 2,941
Renter occupied
units 10,292 11,564 18,727 9,294 2,478 731
Median value 48,000 42,400 57,600 43,300 41,200 36,200
% unemployed 6.9% 9.8% 7.0% 8.4% 6.8% 8.8%
Median household
income 24,399 21,032 24,175 19,546 21,279 20,474
</TABLE>
The local economies that each of the banks operate in are currently
expanding. The unemployment rate in several of the counties has fallen below
the rate of the state of Kentucky. The local agricultural economies have been
strong with above average yields and prices for the various products grown. The
manufacturing economies are expanding with several manufacturing plants in each
banking area expanding and adding employees. The housing market is strong in
all the banking areas with demand out-stripping supply in several markets.
(I) COMPETITION
The banking business in Kentucky is highly competitive and the
affiliated banks compete not only with banks and thrifts, but with finance and
personal loan companies, credit unions, and other financial institutions which
are active in the areas in which the affiliated banks operate. In addition, the
affiliated banks compete for customer funds with other investment alternatives
available through investment brokers, insurance companies, finance companies,
and other institutions.
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Listed below is each affiliated bank, its county of operations, the
total deposits of that county, the deposits of the affiliated bank, and the
percentage of total deposits within the county that each affiliated bank
controls. The total deposits within the county include all banks, savings and
loans, credit unions, and savings banks. The information is for June 30, 1996
and was provided by Sheshunoff Information Services Inc.
<TABLE>
<CAPTION>
Affiliated Total Affiliated Affiliated
Bank County County Deposits Bank Deposits Bank Percent of Total
---------- ------ --------------- ------------- ---------------------
<S> <C> <C> <C> <C>
The Owensboro National Bank Daviess $1,186,714 $333,951 28.1%
First City Bank and Trust Company Christian 633,619 162,600 25.7%
Bowling Green Bank and Trust
Company, N.A. Warren 980,170 134,664 13.7%
The New Farmers National Bank Barren 374,395 121,299 32.4%
Southern Deposit Bank Logan 304,258 60,127 19.8%
Citizens Deposit Bank McLean 108,804 29,051 26.7%
---------- -------- ----
Total $3,587,960 $841,692 23.5%
========== ======== ====
</TABLE>
(J) STATISTICAL DISCLOSURE
Specific financial information required to be included under Item I of
this form 10-K is incorporated herein by reference to the Annual Report to
Shareholders for the fiscal year ended December 31, 1996, and listed below
along with a page reference where the information can be found in the Annual
Report to Shareholders:
<TABLE>
<CAPTION>
Description of Financial Information Required Reference
--------------------------------------------- ---------
<S> <C>
Summary of average balance sheets, net interest
income and interest rates Table 1, Page 11
Summary of changes in net interest income Table 2, Page 12
Interest rate sensitivity Table 11, Page 20
Allocation of the allowance for loan losses Table 7, Page 17
Summary of loan loss experience Table 6, Page 16
Carrying amounts of investment securities Table 3, Page 13
Maturities and average yields of investment securities Table 4, Page 14
Short-term borrowing information Table 10, Page 19
Non-performing assets Table 8, Page 17
Average deposits and rates paid Table 9, Page 18
Loan portfolio information Table 5, Page 15
</TABLE>
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ITEM 2. PROPERTIES
The corporate offices of Area Bancshares Corporation are located at
230 Frederica Street, Owensboro, Kentucky 42301. Information as of December 31,
1996 relative to the properties of the affiliated companies follow:
<TABLE>
<CAPTION>
Number of Number of
Affiliated Company Leased Facilities (1) Owned Facilities (1)
- ------------------ --------------------- --------------------
<S> <C> <C>
Bowling Green Bank and Trust Company, N.A.
902 College Street
Bowling Green, KY 42102 4 4
First City Bank and Trust Company
1002 South Virginia Street
Hopkinsville, KY 42240 2 5
The New Farmers National Bank of Glasgow
701 Columbia, Box 248
Glasgow, KY 42142 1 6
The Owensboro National Bank
230 Frederica Street
Owensboro, KY42301 1 9
Southern Deposit Bank
102 West Park Square, Box 130
Russellville, KY 42276 0 3
Citizens Deposit Bank
100 Main Street
Calhoun, KY 42327 0 1
ABC Credit Corporation
230 Frederica Street
Owensboro, KY42301 9 0
(1) Does not include ATM locations.
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Corporation (Area Bancshares Corporation and Subsidiaries) is
involved in various claims and legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on the Corporation's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the
fiscal year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The required information is incorporated herein by reference from page
53 of the Area Bancshares Corporation's 1996 Annual Report.
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ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are incorporated herein by reference from
page 2 of the Area Bancshares Corporation 1996 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information relating to the Corporation's financial condition,
results of operations, liquidity, and capital resources is incorporated herein
by reference from pages 3 through 21 of the Area Bancshares Corporation 1996
Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Area Bancshares Corporation and
Subsidiaries are incorporated herein by reference from pages 22 through 51 of
the Area Bancshares Corporation 1996 Annual Report. Also, unaudited quarterly
financial information for the Corporation and its subsidiaries is incorporated
by reference from page 10 of the Area Bancshares Corporation 1996 Annual
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Corporation's Independent
Auditors, nor any disagreements between the management of Area Bancshares
Corporation and its Independent Auditors relating to accounting or financial
disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required for this item is incorporated herein by reference
from pages 6 through 12 of the Proxy Statement of Area Bancshares Corporation
for its 1997 Annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required for this item is incorporated herein by reference
from pages 8 and 9 of Area Bancshares Corporation's Proxy Statement for its
1997 Annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required for this item is incorporated herein by reference
from pages 3 through 5 of Area Bancshares Corporation's Proxy Statement for its
1997 Annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required for this item is incorporated herein by reference
from page 15 of Area Bancshares Corporation's Proxy Statement for its 1997
Annual meeting of shareholders
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Area Bancshares
Corporation and its subsidiaries are incorporated by reference to
Item 8.
Consolidated financial statements of Area Bancshares Corporation
and Subsidiaries:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31,
1996, 1995 and 1994
11
<PAGE> 12
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December
31, 1996, 1995 and 1994
Unaudited quarterly financial information of Area Bancshares and its
subsidiaries.
2. Supplemental Schedule
Independent Auditors' Report - page 22.
Schedules are omitted because they are not required or not applicable,
or the required information is shown in the financial statements or in
notes thereto.
3. Exhibits:
Index to Exhibits Description of Exhibits
Exhibit 3.1 Articles of Incorporation of Area Bancshares
Corporation as amended. (1).
Exhibit 3.2 Bylaws of Area Bancshares Corporation as amended.
(1).
Exhibit 10.1 Form of Restricted Stock Plan Agreement. (1) (2).
Exhibit 10.2 Form of 1994 Stock Option Plan. (1) (2).
Exhibit 10.3 Memorandum dated September 18, 1996
regarding executive officer incentive
compensation is incorporated by reference
to Exhibit 10.1 of Form 10-Q of Area
Bancshares Corporation dated September 30,
1996. (2)
Exhibit 13.1 Area Bancshares Corporation 1996 Annual Report.
Exhibit 27 Financial Data Schedule (For SEC purposes only)
(b) Reports on Form 8K.
(1) Incorporated by reference to the same exhibit in the registrant's Form
10-A dated June 30, 1995.
(2) The indicated exhibit is a compensatory plan required to be filed as
an exhibit to this Form 10-K.
(b) Reports on Form 8K.
Form 8K, dated November 19, 1996, Item 5.
To report the 3-for-2 stock split effected in the form of a dividend.
Additional information:
The Securities and Exchange Commission maintains a web site which
contains reports, proxy and information statements, and other
information pertaining to registrants that file electronically with
the Commission including the Corporation. The web site address is:
(http://www.sec.gov).
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Area Bancshares Corporation
Date: March 17, 1997 By /s/ Thomas R. Brumley
----------------- -----------------------------------
Thomas R. Brumley, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 17, 1997 /s/ C. M. Gatton
----------------- -----------------------------------
C. M. Gatton, Chairman of the Board
Date: March 17, 1997 /s/ Raymond McKinney
----------------- -----------------------------------
Raymond McKinney, Vice Chairman
of the Board
Date: March 17, 1997 /s/ Anthony G. Bittel
----------------- -----------------------------------
Anthony G. Bittel, Director
Date: March 17, 1997 /s/ Thomas R. Brumley
----------------- -----------------------------------
Thomas R. Brumley, President and Chief
Executive Officer, Director
Date: March 17, 1997 /s/ Gary H. Latham
----------------- -----------------------------------
Gary H. Latham, Director
Date: March 17, 1997 /s/ Allan R. Rhodes
----------------- -----------------------------------
Allan R. Rhodes, Director
Date: March 17, 1997 /s/ David W. Smith, Jr.
----------------- -----------------------------------
David W. Smith, Jr., Director
Date: March 17, 1997 /s/ William H. Thompson
----------------- -----------------------------------
William H. Thompson, Director
Date: March 17, 1997 /s/ Pollard White
----------------- -----------------------------------
Pollard White, Director
Date: March 17, 1997 /s/ Cy M. Williamson
----------------- -----------------------------------
Cy M. Williamson, Director
Date: March 17, 1997 /s/ John A. Ray
----------------- -----------------------------------
John A. Ray, Senior Vice President,
Chief Financial Officer
13
<PAGE> 1
EXHIBIT 13
23
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks (notes 13 and 17) $ 55,516 $ 52,738
Interest bearing deposits with banks 4,484 262
Federal funds sold and securities purchased under agreements to resell 2,000 100
Trading account securities 43,877 50,403
Securities (notes 3, 11, and 13):
Available for sale (amortized cost $211,291 in 1996 and $211,905 in 1995) 216,349 215,845
Held to maturity (fair value $101,122 in 1996 and $98,319 in 1995) 97,120 94,015
------------ ------------
TOTAL SECURITIES 313,469 309,860
------------ ------------
Mortgage loans held for sale 21,212 24,430
Loans, net of unearned discount (notes 4 and 23) 679,844 623,766
Less allowance for loan losses (note 5) 12,289 12,025
------------ ------------
NET LOANS 667,555 611,741
------------ ------------
Premises and equipment (note 6) 21,409 18,563
Other assets (notes 7 and 14) 41,316 41,973
------------ ------------
TOTAL ASSETS $ 1,170,838 $ 1,110,070
============ ============
LIABILITIES
Deposits:
Non-interest bearing demand $ 149,055 $ 134,876
Interest bearing demand 175,003 189,474
Savings 114,617 83,807
Certificates of deposit of $100,000 or more (notes 9 and 10) 56,460 48,549
Other time (note 10) 350,016 351,416
------------ ------------
TOTAL DEPOSITS 845,151 808,122
------------ ------------
Federal funds purchased 49,486 30,175
Securities sold under agreements to repurchase (note 11) 95,130 120,965
Notes payable to the U.S. Treasury 8,883 4,601
Advances from the Federal Home Loan Bank (note 12) 32,537 12,452
Other borrowings (note 13) 4,446 13,823
Other liabilities (note 14) 12,675 11,358
------------ ------------
TOTAL LIABILITIES 1,048,308 1,001,496
------------ ------------
SHAREHOLDERS' EQUITY (notes 15 and 17)
Preferred stock, no par value; authorized 500,000 shares; none issued --
Common stock, no par value; authorized shares: 1996, 16,000,000;
1995, 16,000,000; issued and outstanding shares: 1996, 11,360,757;
1995, 7,618,714 17,718 17,823
Paid-in capital 10,000 10,000
Retained earnings 91,994 78,699
Deferred compensation on restricted stock (469) (509)
Net unrealized gains on securities available for sale, net of tax (note 3) 3,287 2,561
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 122,530 108,574
Commitments and contingent liabilities (notes 18 and 20)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,170,838 $ 1,110,070
============ ============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 2
24
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED
DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $61,649 $56,954 $48,103
Interest bearing deposits with banks 102 23 24
Federal funds sold 608 388 457
U.S. Treasury securities and Federal agencies securities 13,263 13,059 9,052
Obligations of states and political subdivisions 5,661 5,827 5,829
Other 1,217 968 999
------- ------- --------
TOTAL INTEREST INCOME 82,500 77,219 64,464
------- ------- --------
INTEREST EXPENSE:
Deposits (note 9) 30,647 27,786 20,561
Short-term borrowings 6,920 8,964 5,894
Other borrowings 732 492 579
------- ------- --------
TOTAL INTEREST EXPENSE 38,299 37,242 27,034
------- ------- --------
NET INTEREST INCOME 44,201 39,977 37,430
Provision for loan losses (note 5) 1,369 2,830 3,185
------- ------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 42,832 37,147 34,245
------- ------- --------
NON-INTEREST INCOME:
Commissions and fees on fiduciary activities 3,172 2,741 2,262
Service charges on deposit accounts 5,144 4,552 4,087
Other service charges, commissions and fees 4,043 4,391 4,286
Securities gains, net (note 3) 3,216 831 44
Gains on sales of mortgage loans, net 349 598 297
Gains on sales of other real estate owned, net 68 196 905
Other income 611 481 649
------- ------- --------
TOTAL NON-INTEREST INCOME 16,603 13,790 12,530
------- ------- --------
NON-INTEREST EXPENSES:
Salaries and employee benefits (note 18) 18,207 16,821 15,155
Net occupancy expense 2,507 2,187 2,091
Furniture and equipment expense 2,338 2,124 1,728
Federal deposit insurance 49 847 1,617
Data processing expense 1,995 1,615 1,906
Loss on trust investments (note 16) -- -- 4,920
Other 12,816 12,172 10,353
------- ------- --------
TOTAL NON-INTEREST EXPENSES 37,912 35,766 37,770
------- ------- --------
Income before income taxes 21,523 15,171 9,005
Income tax expense (note 14) 5,968 3,589 1,493
------- ------- --------
NET INCOME $15,555 $11,582 $ 7,512
======= ======= ========
NET INCOME PER COMMON SHARE $ 1.37 $ 1.01 $ .66
======= ======= ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 3
25
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED NET UNREALIZED
COMPENSATION GAINS (LOSSES) ON
ON SECURITIES
COMMON STOCK PAID-IN RETAINED RESTRICTED AVAILABLE
SHARES AMOUNT CAPITAL EARNINGS STOCK FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 5,091,645 $17,909 $10,000 $62,458 $(157) $ -- $ 90,210
Impact of change in
accounting for securities
at January 1, 1994, net
of tax 958 958
Net income 7,512 7,512
Cash dividends declared
($.12 per share) (916) (916)
3-for-2 stock split (note 1) 2,545,619
Repurchase of common
stock (40,300) (226) (787) (1,013)
Stock options exercised
(note 15) 28,575 171 171
Purchase of 4,500 shares
for restricted stock
(note 15) (318) (318)
Change in unrealized losses
on securities available for
sale, net of tax (note 5) (4,514) (4,514)
---------- ------- ------- ------- ----- ------ --------
Balance, December 31,
1994 7,625,539 17,854 10,000 68,267 (475) (3,556) 92,090
Net income 11,582 11,582
Cash dividends declared
($.135 per share) (1,026) (1,026)
Repurchase of common
stock (9,575) (44) (168) (212)
Stock options exercised
(note 15) 750 6 6
Restricted stock issued 6,500 29 127 (156) --
Amortization of deferred
compensation on restricted
stock (note 15) 17 17
Restricted stock forfeitures
(note 15) (4,500) (22) (83) 105 --
Change in unrealized gains
on securities available for
sale, net of taxes (note 3) 6,117 6,117
---------- ------- ------- ------- ----- ------ --------
Balance, December 31,
1995 7,618,714 $17,823 $10,000 $78,699 $(509) $2,561 $108,574
Net income 15,555 15,555
Cash dividends declared
($.107 per share) (1,211) (1,211)
Repurchase of common
stock (47,190) (110) (1,066) (1,176)
Stock options exercised
(note 15) 3,000 5 17 22
3-for-2 stock split (note 1) 3,786,233 --
Amortization of deferred
compensation on restricted
stock (note 15) 40 40
Change in unrealized gains on
securities available for sale,
net of tax (note 3) 726 726
---------- ------- ------- ------- ----- ------ --------
BALANCE, DECEMBER 31,
1996 11,360,757 $17,718 $10,000 $91,994 $(469) $3,287 $122,530
========== ======= ======= ======= ===== ====== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 4
26
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 15,555 $ 11,582 $ 7,512
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,369 2,830 3,185
Depreciation, amortization and accretion, net 4,001 3,588 3,519
Gain on sales of securities, net (3,216) (831) (44)
Gain on sales of mortgage loans, net (349) (598) (297)
Gain on sales of other real estate owned (68) (196) (905)
(Gain) loss on disposal of equipment (15) 201 (13)
Deferred income taxes 312 687 (175)
Proceeds from sales of trading account securities 85,954 178,112 120,105
Proceeds from maturities of trading account securities 98,000 12,000 36,911
Purchases of trading account securities (177,367) (198,997) (149,785)
Purchase and origination of mortgage loans held for sale (104,993) (106,516) (125,581)
Proceeds from sales of mortgage loans held for sale 108,560 104,892 154,329
Other, net 1,937 (2,571) (737)
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,680 4,183 48,024
---------- ---------- ----------
Cash flows from investing activities:
Purchase of Citizens Deposit Bancshares, net of cash and
due from banks (note 2) -- (3,423) --
Decrease in interest bearing deposits with banks -- -- 724
Increase in interest bearing deposits (4,222) (81) --
Proceeds from sales of securities available for sale 25,462 45,346 31,475
Proceeds from maturities and calls of securities available for sale 65,391 55,171 57,157
Proceeds from maturities and calls of securities held to maturity 4,882 10,997 7,466
Purchases of securities available for sale (83,680) (95,105) (126,539)
Purchases of securities held to maturity (10,885) (10,140) (10,614)
Decrease (increase) in federal funds sold and securities
purchased under agreements to resell (1,900) 5,919 7,710
Loans originated, net of principal collected on loans (60,482) (10,621) (84,545)
Purchases of premises and equipment (4,949) (2,651) (2,170)
Proceeds from sales of other real estate owned 309 1,932 2,616
Proceeds from sales of premises and equipment 42 -- 91
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (70,032) (2,656) (116,629)
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 5
27
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995, 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits $ 37,029 $ 30,896 $ 4,417
Increase (decrease) in Federal funds purchased 19,311 (9,575) 33,800
Increase (decrease) in securities sold under agreements to repurchase (25,835) 407 32,996
Increase (decrease) in notes payable to the U.S. Treasury 4,282 (4,529) (20,487)
Increase (decrease) in advances from the Federal Home Loan Bank 20,085 (28,411) 29,930
Increase (decrease) in other borrowings (9,377) 8,331 5,389
Proceeds from stock options exercised 22 6 171
Repurchase of common stock (1,176) (212) (1,013)
Cash dividends paid (1,211) (1,026) (916)
Purchase of shares for restricted stock -- -- (318)
--------- -------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 43,130 (4,113) 83,969
--------- -------- --------
Increase (decrease) in cash and due from banks 2,778 (2,586) 15,364
Cash and due from banks, beginning of year 52,738 55,324 39,960
--------- -------- --------
CASH AND DUE FROM BANKS, END OF YEAR $ 55,516 $ 52,738 $ 55,324
========= ======== ========
Cash flow information:
Income tax payments $ 4,000 $ 2,825 $ 4,843
Interest payments $ 37,960 $ 36,366 $ 26,297
Non-cash transactions:
Loans transferred to other assets $ 997 $ 1,050 $ 1,418
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 6
28
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Area
Bancshares Corporation, (the "Corporation") and its wholly owned bank
subsidiaries, The Owensboro National Bank and subsidiary, First City Bank
and Trust Company and its subsidiary, ABC Credit Corporation, Southern
Deposit Bank, Commonwealth Bancorp of Glasgow and subsidiaries, a wholly
owned bank holding company which includes Bowling Green Bank and Trust
Company, N.A., The New Farmers National Bank of Glasgow, and Citizens
Deposit Bancshares and subsidiary, a wholly owned bank holding company
which includes Citizens Deposit Bank (collectively, the "Banks") and Area
Services, Inc., a wholly owned non-bank subsidiary. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities as of the date of
the consolidated balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates. Generally accepted
accounting principals also require disclosure of contingent assets and
liabilities at the date of the financial statements. Material estimates
that are particularly susceptible to significant change in the near-term
are related to the determination of the allowance for loan losses.
SECURITIES
Effective January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 115,"Accounting for Certain Investments in
Debt and Equity Securities." SFAS No. 115 requires investments in equity
securities that have a readily determinable fair value and investments in
debt securities to be classified into three categories, as follows: held
to maturity securities, trading securities, and securities available for
sale.
Under SFAS No. 115, classification of debt securities as held
to maturity is based on the Corporation's positive intent and ability to
hold such securities to maturity. Securities held to maturity are stated
at amortized cost.
Amortization of premiums and discounts are recorded by a method which
approximates a level yield, unless there is a decline in value which is
considered to be other than temporary, in which case the cost basis of
such security is written down to fair value and the amount of the
write-down is included in earnings.
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account
securities, and valued at fair value with unrealized gains and losses
included in earnings.
Securities classified as available for sale, which are reported at fair
value with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of shareholders' equity,
include all securities not classified as trading account securities or
securities held to maturity. These include securities used as part of the
Corporation's asset/liability strategy which may be sold in response to
changes in interest rates, repayment risk, the need or desire to increase
capital, and other similar factors. Gains or losses on sales of securities
available for sale are recognized at the time of sale, based upon the
specific identification of the security sold, and are included in
non-interest income in the consolidated statements of income.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of aggregate cost or
market value.
<PAGE> 7
29
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are stated at unpaid principal, reduced by unearned discount.
Interest income on discount-basis loans is recognized using a method which
approximates the interest method. Interest on loans is recognized using
the interest method on principal amounts outstanding during the period.
The recognition of interest income on loans is discontinued at the earlier
of 90 days or when in the opinion of management the collection of
principal or interest is doubtful. Interest received on non-accrual loans
is either applied to principal or recorded as interest income according to
management's judgement as to collectibility of principal. A non-accrual
loan may be restored to an accruing status when principal and interest are
no longer past due and unpaid and future collection of principal and
interest on a timely basis is not in doubt. Loan fees are not significant.
As of January 1, 1995, the Corporation adopted SFAS Nos. 114 and 118,
"Accounting by Creditors for Impairment of a Loan" and "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures,"
respectively. These statements require that impaired loans be measured
based on the present value of future cash flows discounted at the loan's
observable market price or fair value of the collateral if the loan is
collateral dependent. The Corporation does not apply SFAS No. 114 to loans
which are part of a large group of smaller-balance homogeneous loans, such
as residential mortgage and consumer loans. Such loans are collectively
evaluated for impairment. The implementation of these accounting standards
has not had a significant impact on the Corporation's financial position
or results of operations.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for loan losses inherent in the loan
portfolio. Management determines the adequacy of the allowance based upon
reviews of individual credits, recent loss experience, current economic
conditions and such other factors, which in management's judgment deserve
current recognition in estimating loan losses. The allowance is increased
by the provision for loan losses and reduced by net charge-offs.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization, which is computed on either the straight-line or
declining-balance methods over the estimated useful lives of the assets.
Gains or losses on disposition are reflected in current earnings.
Maintenance and repairs are charged to expense as incurred.
OTHER ASSETS
Included in other assets is real estate acquired in settlement of loans,
which are carried at the lower of cost or fair value, net of selling
costs. Fair value is the amount that the Corporation could reasonably
expect to receive for these assets in a sale between a willing buyer and a
willing seller. Any write-downs to fair value at the date of acquisition
are charged to the allowance for loan losses. Costs relating to holding
real estate acquired in settlement of loans are charged against income as
incurred. Included in other assets is goodwill of approximately $7,818,000
and $9,016,000, net of amortization, for December 31, 1996 and 1995,
respectively, which is being amortized by the straight-line method over 10
years. The Corporation assesses impairment of excess cost over fair value
of net assets acquired by comparing the carrying amount with the projected
undiscounted future net cash flows. Based on this calculation, the
Corporation determined that there was no impairment of this intangible
asset at December 31, 1996. Also included in other assets is the value of
core deposits purchased of approximately $4,294,000 and $5,299,000, net of
amortization, for December 31, 1996 and 1995, respectively, which is being
amortized by an accelerated method over ten years.
<PAGE> 8
30
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE SERVICING RIGHTS
As of January 1, 1996, the Corporation adopted SFAS No. 122, "Accounting
for Mortgage Servicing Rights." 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 eliminated the accounting distinction between originated and
purchased mortgage servicing rights. The implementation of this accounting
standard has not had a significant impact on the Corporation's financial
position or results of operations.
NET INCOME PER COMMON SHARE AND SHAREHOLDERS' EQUITY CHANGES
On April 18, 1994, the Corporation's shareholders increased the
authorized shares from 10,000,000 to 16,000,000. On March 21, 1994, the
Corporation's shareholders declared a 3-for-2 stock split effected in the
form of a dividend to shareholders of record on April 1, 1994, payable
April 20, 1994. On November 18, 1996, the Board of Directors declared a
3-for-2 stock split effected in the form of a dividend to shareholders of
record on December 4, 1996, payable December 16, 1996. All per share
information in these consolidated financial statements has been restated
to give effect to the stock splits.
The weighted average number of shares outstanding, after giving effect to
the stock splits, was 11,389,920 in 1996, 11,427,543 in 1995 and
11,445,804 in 1994.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the
Corporation considers all cash and non-interest bearing deposits with
banks to be cash equivalents.
2. BUSINESS COMBINATIONS
On November 16, 1995, the Corporation acquired Citizens Deposit
Bancshares, ("Citizens Bancshares"), for cash and notes payable of
approximately $7,560,000. Aggregate consideration and acquisition costs
totaled approximately $4,146,000.
The acquisition was accounted for under the purchase method of accounting
and, accordingly, the results of operations of Citizens Bancshares have
been included in the consolidated financial statements since the date of
acquisition.
The aggregate fair value of net assets acquired in the Citizens
Bancshares acquisition included the following:
<TABLE>
<CAPTION>
<S> <C>
IN THOUSANDS
Cash and cash equivalents $ 723
Federal funds sold 2,000
Investment securities 5,316
Loans, net 25,181
Premises and equipment 89
Other assets 843
Deposits (29,411)
Other liabilities (595)
--------
NET ASSETS ACQUIRED $ 4,146
========
</TABLE>
Total revenue and net income from Citizens Bancshares for the
one-and-one-half months beginning November 16, 1995, of approximately
$375,000 and $51,600, respectively, is included in the Corporation's 1995
consolidated statement of income.
<PAGE> 9
31
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES
In conjunction with the adoption of SFAS No. 115 on January 1, 1994, the
Corporation reclassified $182,582,000 of securities to the available for
sale classification from the former investment securities, now held to
maturity, category. At that date, unrealized appreciation on total
securities available for sale was approximately $1,474,000, resulting in an
increase in shareholders' equity of approximately $958,000, net of taxes.
There was no impact on the Corporation's consolidated net income as a
result of the adoption of SFAS No. 115.
Trading Account Securities
Gross realized losses on the sales of trading account securities were
approximately $24,000, $21,000 and $11,000 in 1996, 1995, and 1994,
respectively. There were no realized gains on the sales of trading account
securities in 1996, 1995 or 1994.
Securities Available for Sale
The amortized cost, gross unrealized gains, gross unrealized losses,
and approximate fair value of securities available for sale at December
31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
DECEMBER 31, 1996 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $173,647 $1,049 $ 579 $174,117
Mortgage-backed securities 19,938 245 188 19,995
Equity securities 14,466 4,704 3 19,167
Other securities 3,240 -- 170 3,070
-------- ------ ------ --------
TOTALS $211,291 $5,998 $ 940 $216,349
======== ====== ====== ========
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
Equity securities 3,794 994 -- 4,788
-------- ------ ------ --------
TOTALS $211,905 $5,129 $1,189 $215,845
======== ====== ====== ========
</TABLE>
Gross gains of approximately $3,269,000 and $967,000 and gross losses
of approximately $29,000 and $115,000 were realized on these sales in
1996 and 1995, respectively.
<PAGE> 10
32
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
Securities Held to Maturity
The amortized cost, gross unrealized gains, gross unrealized losses, and
approximate fair value of securities held to maturity at December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Obligations of states and political
subdivisions $97,120 $4,669 $667 $101,122
======= ====== ==== ========
DECEMBER 31, 1995
Obligations of states and political
subdivisions $94,015 $4,407 $103 $ 98,319
======= ====== ==== ========
</TABLE>
Contractual Maturities
The amortized cost and approximate fair value of investment securities
at December 31, 1996, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
IN THOUSANDS COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 65,613 $ 65,864 $ 4,123 $ 4,170
Due after one year through five years 111,274 111,323 14,564 15,328
Due after five years through ten years -- -- 31,283 32,931
Due after ten years -- -- 47,150 48,693
Equity securities 14,466 19,167 -- --
--------- --------- -------- ----------
191,353 196,354 97,120 101,122
Mortgage-backed securities 19,938 19,995 -- --
--------- --------- -------- ----------
TOTALS $ 211,291 $ 216,349 $ 97,120 $ 101,122
========= ========= ======== ==========
</TABLE>
Securities with a par value of approximately $200,878,000 and
$244,060,000 at December 31, 1996 and 1995, respectively, were pledged to
secure public and trust deposits, securities sold under agreements to
repurchase and Federal Home Loan Bank advances.
<PAGE> 11
33
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS 1996 1995
<S> <C> <C>
Commercial $255,779 $235,753
Real estate-construction 23,807 13,043
Real estate-mortgage 261,147 221,507
Installment and other, net of unearned discount 139,111 153,463
-------- --------
TOTALS $679,844 $623,766
======== ========
</TABLE>
The maturity dates of loans are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
DUE AFTER ONE
DECEMBER 31, 1996 DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LOSS FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial $199,401 $ 37,548 $18,830 $255,779
Real estate-construction 23,807 -- -- 23,807
All other loans 216,022 136,557 47,679 400,258
-------- -------- ------- --------
$439,230 $174,105 $66,509 $679,844
======== ======== ======= ========
DECEMBER 31, 1995
Commercial $199,056 $ 28,121 $ 8,576 $235,753
Real estate-construction 13,043 -- -- 13,043
All other loans 216,317 127,682 30,971 374,970
-------- -------- ------- --------
$428,416 $155,803 $39,547 $623,766
======== ======== ======= ========
</TABLE>
Loans with maturities over one year are summarized below based on
contractual rates of interest:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
<S> <C> <C>
Maturities over one year with variable
rates of interest $ 31,606 $ 16,331
Maturities over one year with fixed rates
of interest 209,008 179,019
-------- --------
$240,614 $195,350
======== ========
</TABLE>
<PAGE> 12
34
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS, (CONTINUED)
The principal amount of loans serviced for the Federal National Mortgage
Association at December 31, 1996 and 1995 totaled approximately $51,627,000
and $42,894,000, respectively. The principal amount of loans serviced for
the Federal Home Loan Mortgage Corporation at December 31, 1996 and 1995
totaled approximately $10,384,000 and $10,282,000, respectively.
The principal amount of nonaccrual loans at December 31, 1996 and 1995
totaled approximately $2,120,000 and $2,777,000, respectively. Interest
that would have been recorded if all such loans were on a current status in
accordance with original terms was approximately $267,000, $269,000 and
$148,000 in 1996, 1995, and 1994, respectively. The amount of interest
income that was recorded for such loans was approximately $72,000, $26,000
and $167,000 in 1996, 1995, 1994, respectively.
<TABLE>
<CAPTION>
INFORMATION REGARDING IMPAIRED LOANS AT DECEMBER 31, 1996 FOLLOWS: 1996 1995
<S> <C> <C>
Recorded investment $5,889,000 $8,369,000
Impaired loans with SFAS No. 114 valuation allowance 3,040,000 5,301,000
Amount of SFAS No. 114 valuation allowance 742,000 1,426,000
Amount of impaired loans without SFAS No. 114 valuation allowance 2,849,000 3,068,000
Average recorded investment 7,116,000 8,542,000
Interest recognized during impairment 416,000 1,634,000
</TABLE>
The Corporation recognized interest income on impaired loans using two
methods of accounting. Interest received on non-accrual loans is either
applied to principal or recorded as interest income according to
management's judgement as to collectability of principal while all other
impaired loans use the accrual basis method. Under the cash basis method,
cash interest payments are recorded as income, limited to that amount that
would have been recognized on the recorded investment at the contractual
interest rate.
5. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $12,025 $11,156 $10,170
Addition through acquisitions -- 554 --
Provision for loan losses 1,369 2,830 3,185
Loans charged off (2,578) (3,685) (2,789)
Recoveries of loans previously charged off 1,473 1,170 590
------- ------- -------
BALANCE AT END OF YEAR $12,289 $12,025 $11,156
======= ======= =======
</TABLE>
<PAGE> 13
35
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995
IN THOUSANDS
<S> <C> <C>
Bank premises $23,930 $19,210
Furniture and equipment 14,768 14,475
Leasehold improvements 1,263 985
------- -------
39,961 34,670
Less accumulated depreciation and amortization 18,552 16,107
------- -------
TOTALS $21,409 $18,563
======= =======
</TABLE>
7. OTHER REAL ESTATE OWNED
Other real estate owned (OREO) includes properties that the
Corporation's subsidiaries have taken title in full or partial satisfaction
of repayment obligations. At December 31, 1996 and 1995, OREO aggregated
approximately $1,153,000 and $1,092,000, respectively.
8. CAPITALIZED SERVICING RIGHTS
An analysis of capitalized servicing rights for the year ended December
31, 1996 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS PURCHASED ORIGINATED TOTAL
--------- ---------- -----
<S> <C> <C> <C>
Balance, December 31, 1995 -- -- --
Amounts capitalized $313 $88 $401
Sales (114) -- (114)
Amortization (3) (6) (9)
---- --- ----
BALANCE, DECEMBER 31, 1996 $196 $82 $278
==== === ====
</TABLE>
Capitalized servicing rights are stated at cost less amortization over
the estimated useful lives of the assets. The Corporation evaluates the
carrying value and related amortization of the assets on a quarterly basis
by considering prices for similar assets and the results of valuation
techniques to the extent available in the circumstances. Impairment and
subsequent adjustments in each stratum, if any, is recognized by a
valuation allowance and a charge against servicing income. The estimated
fair value of capitalized servicing rights as of December 31, 1996 was
approximately $350,000.
9. INTEREST ON CERTIFICATES OF DEPOSITS OF $100,000 OR MORE
Interest on certificates of deposit of $100,000 or more was
approximately $3,464,000, $2,605,000 and $2,197,000 for 1996, 1995 and
1994, respectively.
10. BROKERED DEPOSITS
At December 31, 1996, the Corporation had no brokered deposits. At
December 31, 1995 a bank subsidiary had brokered deposits totaling
$5,000,000.
<PAGE> 14
36
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The carrying value and fair value of securities sold and the related
repurchase liability at December 31, 1996 are as follows:
U.S. TREASURY OBLIGATIONS
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE WEIGHTED
REPURCHASE OF SECURITIES OF SECURITIES AVERAGE
IN THOUSANDS AMOUNT SOLD SOLD INTEREST RATE
<S> <C> <C> <C> <C>
Overnight $41,696 $47,046 $47,046 4.92%
1-29 Days 11,439 11,664 11,664 5.53%
30-90 Days 764 779 779 5.74%
Over 90 Days 15,640 17,257 17,257 6.12%
------- ------- ------- ----
TOTALS $69,539 $76,746 $76,746 5.30%
======= ======= ======= ====
</TABLE>
U.S. GOVERNMENT AGENCY OBLIGATIONS
<TABLE>
<CAPTION>
CARRYING VALUE FAIR VALUE WEIGHTED
REPURCHASE OF SECURITIES OF SECURITIES AVERAGE
AMOUNT SOLD SOLD INTEREST RATE
<S> <C> <C> <C> <C>
Overnight $25,299 $25,608 $25,608 3.98%
1-29 Days -- -- -- --
30-90 Days 292 302 302 5.25%
Over 90 Days -- -- -- --
------- ------- ------- ----
TOTALS $25,591 $25,910 $25,910 4.00%
======= ======= ======= ====
</TABLE>
Information pertaining to securities sold under agreements to repurchase
follow:
<TABLE>
<CAPTION>
DECEMBER 31
1996 1995 1994
<S> <C> <C> <C>
Amount outstanding at December 31 $ 95,130 $120,965 $120,558
Average amount outstanding during the year 83,551 114,423 92,812
Maximum amount outstanding at any month-end 106,979 125,009 120,558
Weighted average interest rate:
As of year-end 4.58% 5.24% 5.09%
Paid during year 5.04% 5.57% 3.98%
</TABLE>
The Corporation has repurchase agreements where the collateral remains
under its control as well as agreements where the counterparty maintains
control of the collateral.
<PAGE> 15
37
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Banks are members of the Federal Home Loan Bank of Cincinnati
("FHLB") and, accordingly, are eligible to borrow from the FHLB. The Banks
pledge FHLB stock and certain first mortgage loans as collateral for these
advances. The aggregate balance of these mortgages must equal 150% of the
outstanding advances. At December 31, 1996 and 1995, the outstanding
advances from the FHLB were $32,537,000 and $12,452,000, respectively.
Certain information with respect to the outstanding advances from the FHLB
is summarized below:
<TABLE>
<CAPTION>
IN THOUSANDS DECEMBER 31, 1996 DECEMBER 31, 1995
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
YEAR OF MATURITY AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
1996 $ -- -- $ 1,000 5.75%
1997 14,600 5.50% 4,500 5.67%
1998 2,320 5.52% 325 5.65%
1999 4,245 6.17% 255 6.89%
2000 207 7.16% 211 5.88%
2001-2005 4,226 6.26% 1,748 6.03%
2006-2010 4,673 6.61% 2,831 6.58%
2011 and thereafter 2,266 6.87% 1,582 6.82%
------- ---- ------- ----
TOTALS $32,537 5.95% $12,452 6.09%
======= ==== ======= ====
</TABLE>
Scheduled principal repayments on advances from the FHLB at December 31,
1996, are approximately $15,597,000, $2,819,000, $4,788,000, $747,000 and
$3,035,000 for 1997 through 2001, respectively, and $5,551,000 thereafter.
13. OTHER BORROWINGS
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995
<S> <C> <C>
Revolving credit $20,000,000 promissory note dated April 1, 1993 at a
varying rate of interest equal to the lesser of prime or the adjusted
LIBOR rate plus 1.15% with a final maturity of June 30, 1998. The
interest rate at December 31, 1996 was 6.81%. A non-use fee of one-eighth
of one percent of the average unused portion of the note is applied
annually. This fee will be waived by maintaining $150,000 average
compensating balance. No non-use fee was paid in 1996 or 1995. $375 $2,200
Promissory note, dated March 27, 1991, at a varying rate of interest
equal to The Owensboro National Bank's one-year certificate of deposit
rate adjusted annually, payable in twelve annual installments of $10,269
plus interest with a final maturity of April 1, 2003. The interest rate
at December 31, 1996 was 4.62%. 71 82
Promissory note, dated November 16, 1995, at an interest
rate of 6.00% and a maturity date of January 10, 1997. -- 7,541
</TABLE>
<PAGE> 16
38
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. OTHER BORROWINGS (CONTINUED)
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995
<S> <C> <C>
Promissory note, dated August 24, 1995, due August 27, 1997 to the
Student Loan Marketing Association, at a varying rate of interest equal
to the thirteen (13) week U.S. Treasury bill coupon issue yield plus
.67%. The interest rate at December 31, 1996 was 5.887%. The loan is
secured by $4,595,000 in obligations of state political subdivisions.
Additionally, during the term of this loan a subsidiary has agreed to
originate approximately $1,322,000 in Qualified Education Credit loans. 4,000 4,000
------ -------
TOTALS $4,446 $13,823
====== =======
</TABLE>
Scheduled principal repayments on other borrowings at December 31, 1996,
are approximately $4,010,000, $385,000, $10,000, $10,000, and $10,000 for
1997 through 2001, respectively, and $21,000 thereafter.
14. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995 1994
<S> <C> <C> <C>
Income taxes applicable to operations:
Current $5,656 $2,902 $1,668
Deferred 312 687 (175)
------ ------ ------
Total applicable to operations 5,968 3,589 1,493
Charged (credited) to components of shareholders' equity:
Net unrealized securities gains (losses) 391 3,294 (1,915)
Income tax benefit of stock options and grants -- (35) (7)
------ ------ -------
TOTAL INCOME TAXES $6,359 $6,848 $ (429)
====== ====== =======
</TABLE>
<PAGE> 17
39
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. INCOME TAXES (CONTINUED)
The following table presents a reconciliation of the provision for
income taxes as shown in the consolidated statements of income with that
which would be computed by applying the statutory federal income tax rate
of 35% to income taxes.
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995 1994
<S> <C> <C> <C>
Tax expense at statutory rates $ 7,533 $ 5,310 $ 3,152
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends (net of
non-deductible interest) (1,871) (1,943) (2,008)
Amortization of intangibles 411 341 330
Other, net (105) (119) 19
------- ------- -------
TOTALS $ 5,968 $ 3,589 $ 1,493
======= ======= =======
</TABLE>
Deferred taxes aggregate to a net liability of $2,814,000 and $2,698,000
at December 31, 1996 and 1995, respectively, and are included in other
assets and other liabilities in the consolidated balance sheets. The tax
effects of temporary differences that give rise to the significant portions
of deferred tax assets and deferred tax liabilities at December 31, 1996
and December 31, 1995, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 4,322 $ 3,790
Other 50 283
------- -------
Total gross deferred tax assets 4,372 4,073
------- -------
Deferred tax liabilities
Purchase accounting adjustments 2,775 3,395
Unrealized gain on securities available for sale 1,771 1,379
Pension income 682 709
Depreciation 310 398
Accounting differences on securities 499 319
Leasing operations 697 299
Other 452 272
------- -------
Total gross deferred tax liabilities 7,186 6,771
------- -------
NET DEFERRED TAX LIABILITY $(2,814) $(2,698)
======= =======
</TABLE>
15. STOCK OPTION AND RESTRICTED STOCK PLANS
The Corporation has stock option and restricted stock plans for key
employees. As of December 31, 1996, the Corporation had 97,313 shares
available for issuance under these plans.
Stock options granted under the option program are at the market price
on the date of grant. Each option is for one share of common stock. All
options become exercisable over a period of time and expire within a
ten-year period from the date of grant.
During 1994 through 1996 the Corporation issued 16,500 shares of
restricted common stock to certain key employees. The vesting periods range
from 1995 to 2003. The amount recorded for the restricted stock issued is
based on the market value of the Corporation's common stock on the award
dates and the unearned portion is shown as deferred compensation in the
consolidated balance sheets in shareholders' equity.
<PAGE> 18
40
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
The following table presents a summary of stock option and restricted
stock activity adjusted for stock splits:
<TABLE>
<CAPTION>
TOTAL EXERCISABLE EXERCISE
AVAILABLE OPTION SHARES OPTION SHARES PRICE
FOR GRANT OUTSTANDING OUTSTANDING PER SHARE
<S> <C> <C> <C> <C>
Option outstanding,
January 1, 1994 -- 52,993 42,300 $4.00-$7.55
Shares reserved 119,250 -- -- N/A
Options granted (20,250) 20,250 -- $16.00
Restricted stock incentive awards (4,500) -- -- N/A
Options which became exercisable -- -- 7,313 $4.00-$7.55
Options exercised -- (42,867) (42,867) $4.00
------- ------- ------- ------------
Options outstanding,
December 31, 1994 94,500 30,376 6,746 $4.89-$16.00
Shares reserved 9,750 -- -- N/A
Options granted (7,313) 7,313 -- $15.33
Restricted stock incentive awards (9,750) -- -- N/A
Options which became exercisable -- -- 3,206 $4.89-$16.00
Options exercised -- (1,125) (1,125) $4.89
Options forfeited or expired 9,620 (9,620) -- $16.00
------- ------- ------- ------------
Options outstanding,
December 31, 1995 96,807 26,944 8,827 $4.89-$16.00
Options which became exercisable -- -- 2,868 $4.89-$16.00
Options exercised -- (3,000) (3,000) $6.89
Options forfeited or expired 506 (506) (506) $16.00
------- ------- ------- ------------
Options outstanding,
DECEMBER 31, 1996 97,313 23,438 8,189 $4.89-$16.00
======= ======= ======= ============
</TABLE>
At December 31, 1996, the Corporation had two stock-based compensation
plans. The Corporation applies APB Opinion No. 25 and related
interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its stock option plan. The compensation cost
that has been charged against income for its restricted stock plan was
$40,000, $17,500, and $0 during 1996, 1995, and 1994, respectively. Had
compensation cost for the Corporation's stock option plan been determined
consistent with the fair value method described in SFAS No. 123, the
Corporation's net income and earnings per share would have been reduced to
the proforma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $15,555,000 $11,582,000 $7,512,000
Proforma $15,547,000 $11,574,000 $7,508,000
Net income per common share:
As reported $ 1.37 $ 1.01 $ .66
Proforma $ 1.37 $ 1.01 $ .66
</TABLE>
<PAGE> 19
41
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
INCENTIVE STOCK OPTION PLAN
The Corporation has an incentive stock option plan. Under this plan, the
Corporation may grant options to selected executive officers, other
highly-compensated employees, and directors of the Corporation. Under the
plan the exercise price of each option equals the market price of the
Corporation's stock on the date of grant except that to any owner of 10% or
more of the total combined voting power of the Corporation the option price
is 110% of the market price on the date of grant. The maximum term of an
option is ten years. Options are granted at the discretion of the Board of
Directors and vest evenly over the option period.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1996, 1995, and 1994,
respectively: dividend yield of .75% for all years; expected volatility of
20% for all years; risk-free interest rates of 5.43% - 6.42% for 1995 and
5.38% - 7.32% for 1994. No options were granted in 1996.
A summary of the status of the Corporation's incentive stock option plan
as of December 31, 1996, 1995, 1994 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ----------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------ -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 26,944 $12.61 30,376 $12.74 52,993 $ 4.49
Granted -- -- 7,313 15.33 20,250 16.00
Exercised 3,000 6.89 1,125 4.89 42,867 4.09
Forfeited 506 16.00 9,620 16.00 -- --
------ ------ ------ ------ ------ ------
OUTSTANDING AT END
OF YEAR 23,438 $13.27 26,944 $12.61 30,376 $12.74
------ ------ ------ ------ ------ ------
Options exercisable at
year-end 8,189 $ 9.30 8,827 $ 7.82 6,746 $ 5.78
Weighted-average fair value
of options granted during
the year N/A $15.33 $16.00
</TABLE>
The following table summarizes information about incentive stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------------------------------------------------------
NUMBER WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12-31-96 CONTRACTUAL LIFE EXERCISE PRICE 12-31-96 PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$4.89-$7.55 6,001 .09 yrs $ 6.14 5,434 $ 5.99
$15.53-$16.00 17,437 3.88 yrs 15.72 2,755 15.82
------ ---- ------ ----- ------
23,438 2.91 YRS $13.27 8,189 $ 9.30
====== ==== ====== ===== ======
</TABLE>
<PAGE> 20
42
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
RESTRICTED STOCK AWARD PLAN
The Corporation has a restricted stock award plan. Under the plan, the
Corporation may grant restricted stock to selected executive officers,
other highly-compensated employees, and directors of the Corporation.
Under the plan the shares generally vest evenly over a five-year period
commencing approximately two to five years after the award is granted.
During the restriction period, the shares covered by the award that are
not vested are not transferable by the award recipient. Moreover, if the
award recipient terminates employment with the Corporation for any reason
during the restriction period, the restricted stock award, to the extent
not already vested, is forfeited as of the date of the termination. Awards
are granted at the discretion of the Board of Directors.
A summary of the status of the Corporation's restricted stock award
plan as of December 31, 1996, 1995, and 1994 and changes during the years
ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
SHARES SHARES SHARES
-------- -------- --------
<S> <C> <C> <C>
Outstanding at beginning
of year 39,000 38,250 33,000
Granted -- 9,750 6,750
Exercised 4,400 2,250 1,500
Forfeited -- 6,750 --
------ ------ ------
OUTSTANDING AT END OF YEAR 34,600 39,000 38,250
====== ====== ======
</TABLE>
16. LOSS ON TRUST INVESTMENTS
In 1994, a bank subsidiary's trust department made certain investments
in government securities that were of good credit quality, however, they
had a high interest rate sensitivity. It was determined that these
investments were inappropriate for the purpose acquired, resulting in a
loss of approximately $4,920,000.
17. REGULATORY MATTERS
The Corporation's principal source of funds is dividends received from
the Banks. Payments of dividends by the Banks are restricted by national
and state banking laws and regulations. At December 31, 1996, retained
earnings of the Banks were approximately $15,977,000. At January 1, 1997,
there were approximately $5,465,000 of these retained earnings available
for the payment of dividends without prior approval by regulatory
authorities.
The Corporation and the Banks are required to maintain minimum rates of
capital to risk-weighted assets and a minimum leverage ratio, as defined by
banking regulators. At December 31, 1996, the Corporation's Tier 1 and
total risk-based capital ratios were 14.33% and 15.58%, respectively. The
leverage ratio was 9.88% at December 31, 1996. At December 31, 1996, the
Corporation and the Banks exceeded the minimum regulatory capital
requirements.
<PAGE> 21
43
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REGULATORY MATTERS (CONTINUED)
Bank regulations require depository institutions to maintain cash
reserves relating to customer deposits. At December 31, 1996, the Banks'
cash reserve requirements were approximately $11,906,000.
As of December 31, 1996 and 1995, the most recent notification from the
Federal Reserve bank categorized the Corporation as well capitalized under
the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Corporation must maintain minimum leverage, Tier
1 risk-based capital, and total risk-based capital ratios as set forth in
the table below. There are no conditions or events since that notification
that management believes have changed the Corporation's category.
The Corporation and its significant subsidiary's actual capital amounts
and ratios are presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
IN THOUSANDS, EXCEPT PERCENTAGES ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
LEVERAGE RATIO:
(Tier 1 Capital to Average Assets)
CONSOLIDATED $107,103 9.88% $43,362 4.00% $54,202 5.00%
The Owensboro National Bank 32,317 7.75% 16,682 4.00% 20,852 5.00%
First City Bank and Trust
Company 18,326 11.41% 10,425 4.00% 13,031 5.00%
Bowling Green Bank and
Trust Company, N.A. 13,414 8.71% 6,160 4.00% 7,700 5.00%
The New Farmers National
Bank of Glasgow 11,439 7.45% 6,141 4.00% 7,676 5.00%
Southern Deposit Bank 5,172 7.39% 2,801 4.00% 3,501 5.00%
TIER 1 RISK-BASED CAPITAL RATIO:
(Tier 1 Capital to Risk Weighted
Assets)
CONSOLIDATED 107,103 14.33% 29,903 4.00% 44,854 6.00%
The Owensboro National Bank 32,317 11.12% 11,628 4.00% 17,442 6.00%
First City Bank and Trust
Company 18,326 11.79% 6,218 4.00% 9,327 6.00%
Bowling Green Bank and Trust
Company, N.A. 13,414 12.65% 4,241 4.00% 6,362 6.00%
The New Farmers National
Bank of Glasgow 11,439 10.17% 4,501 4.00% 6,752 6.00%
Southern Deposit Bank 5,172 12.78% 1,618 4.00% 2,428 6.00%
</TABLE>
<PAGE> 22
44
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
IN THOUSANDS, EXCEPT PERCENTAGES ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
TOTAL RISK-BASED CAPITAL RATIO:
(Risk Based Capital to Risk
Weighted Assets)
CONSOLIDATED $116,484 15.58% $59,805 8.00% $74,756 10.00%
The Owensboro National Bank 35,959 12.37% 23,256 8.00% 29,071 10.00%
First City Bank and Trust
Company 20,276 13.04% 12,436 8.00% 15,545 10.00%
Bowling Green Bank and
Trust Company, N.A. 14,751 13.91% 8,482 8.00% 10,603 10.00%
The New Farmers National
Bank of Glasgow 12,851 11.42% 9,002 8.00% 11,253 10.00%
Southern Deposit Bank 5,681 14.04% 3,237 8.00% 4,046 10.00%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
IN THOUSANDS, EXCEPT PERCENTAGES ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
LEVERAGE RATIO:
(Tier 1 Capital to Average Assets)
CONSOLIDATED $92,041 8.64% $42,612 4.00% $53,264 5.00%
The Owensboro National Bank 30,995 7.29% 17,005 4.00% 21,257 5.00%
First City Bank and Trust
Company 17,639 7.76% 9,091 4.00% 11,363 5.00%
Bowling Green Bank and
Trust Company, N.A. 11,989 7.83% 6,129 4.00% 7,661 5.00%
The New Farmers National
Bank of Glasgow 11,263 7.59% 5,935 4.00% 7,419 5.00%
Southern Deposit Bank 7,268 10.27% 2,831 4.00% 3,538 5.00%
TIER 1 RISK-BASED CAPITAL RATIO:
(Tier 1 Capital to Risk Weighted
Assets)
CONSOLIDATED 92,041 13.59% 27,089 4.00% 40,634 6.00%
The Owensboro National Bank 30,995 11.22% 11,051 4.00% 16,576 6.00%
First City Bank and Trust
Company 17,639 13.04% 5,411 4.00% 8,116 6.00%
Bowling Green Bank and Trust
Company, N.A. 11,989 12.86% 3,730 4.00% 5,595 6.00%
The New Farmers National
Bank of Glasgow 11,263 11.25% 4,003 4.00% 6,004 6.00%
Southern Deposit Bank 7,268 18.80% 1,546 4.00% 2,319 6.00%
</TABLE>
<PAGE> 23
45
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
IN THOUSANDS, EXCEPT PERCENTAGES ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
TOTAL RISK-BASED CAPITAL RATIO:
(Risk Based Capital to Risk
Weighted Assets)
CONSOLIDATED $100,550 14.85% $54,178 8.00% $67,723 10.00%
The Owensboro National Bank 33,605 12.16% 22,101 8.00% 27,626 10.00%
First City Bank and Trust
Company 17,597 13.01% 10,822 8.00% 13,527 10.00%
Bowling Green Bank and Trust
Company, N.A. 13,161 14.11% 7,460 8.00% 9,325 10.00%
The New Farmers National Bank
of Glasgow 12,521 12.51% 8,006 8.00% 10,007 10.00%
Southern Deposit Bank 7,754 20.06% 3,092 8.00% 3,866 10.00%
</TABLE>
18. RETIREMENT PLANS
The Corporation maintains a noncontributory defined benefit pension plan
covering substantially all employees who satisfy certain age and service
requirements. The benefits are generally based on years of service and
average compensation, which compensation is generally computed using the
five consecutive years prior to retirement that yield the highest average.
The Corporation's funding policy is to contribute annually at least the
minimum amount required by the Employee Retirement Income Security Act of
1974, but no more than is tax deductible.
The following table sets forth the aforementioned plan's funded status
and the components of net pension cost (income):
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995 1994
<S> <C> <C> <C>
Actuarial present value of benefit obligations at
December 31:
Vested benefit obligation $3,814 $4,312 $3,084
====== ====== ======
Accumulated benefit obligation $3,914 $4,369 $3,232
====== ====== ======
Projected benefit obligation $5,323 $5,914 $4,291
Plan assets at fair value 7,873 7,950 6,646
------ ------ ------
Plan assets in excess of projected
benefit obligation 2,550 2,036 2,355
Unrecognized net loss 360 1,071 849
Unrecognized prior service cost (221) (240) (259)
Unamortized portion of net asset at January 1, 1987
being amortized over approximately 17 years (740) (842) (944)
------ ------ ------
PREPAID PENSION COST (INCLUDED IN OTHER
ASSETS) $1,949 $2,025 $2,001
====== ====== ======
Net pension income includes the following (income)
expense components:
Service cost-benefits earned during the year $ 419 $ 300 $ 318
Interest cost on projected benefit obligation 424 340 315
Actual return on assets (1,012) (1,505) 81
Net amortization and deferral 245 841 (797)
------ ------ ------
NET PENSION (INCOME) COST $ 76 $ (24) $ (83)
====== ====== ======
</TABLE>
<PAGE> 24
46
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RETIREMENT PLANS (CONTINUED)
The discount rates used in determining the actuarial present value of
the projected benefit obligation at December 31, 1996, 1995 and 1994 were
7.50%, 7.25% and 8.00%, respectively. The rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation at December 31, 1996, 1995 and 1994 was 4.50%.
The expected long term rate of return on plan assets utilized for the three
years was 8.50%.
Assets in the plan consist primarily of common stocks, mutual funds,
U.S. Government obligations and municipal bonds.
The Corporation sponsors a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all salaried employees. For
1996, 1995 and 1994 the Corporation's expense totaled approximately
$265,000, $296,000 and $294,000, respectively.
19. CONCENTRATIONS OF CREDIT RISK
The Banks actively engage in lending, primarily in home counties and
adjacent areas, except for mortgage loans held for sale which are widely
dispersed across the United States. The credit exposure is diversified
with secured and unsecured loans to consumers, small businesses, farmers
and corporations. Collateral is received to support these loans when
collateral is deemed necessary. The most significant categories of
collateral include cash on deposit with the Banks, marketable securities,
income producing property, home mortgages, and consumer durables. Although
the Banks have diversified loan portfolios, a customer's ability to honor
loan contracts is reliant upon the economic stability of the geographic
region and/or industry in which they do business. No single industry
exceeds 10% of loans.
20. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The Banks are party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of their
customers and to reduce their exposure to fluctuations in interest rates.
These financial instruments include commitments to extend credit and
standby letters of credit. These financial instruments involve to varying
degrees elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contract amount of
these instruments. The Banks use the same credit policies in making
commitments and conditional obligations as they do for on-balance sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require the payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amount does not necessarily represent future cash requirements.
Total commitments to extend credit, excluding irrevocable letters of
credit, at December 31, 1996 and 1995, were approximately $147,928,000 and
$162,021,000, respectively. Approximately $43,730,000 and $20,088,000 of
these commitments were fixed rate and $104,198,000 and $141,933,000 were
variable rate at December 31, 1996 and 1995, respectively. The
creditworthiness of the Banks' customers is evaluated on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Banks
upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies, but may include accounts
receivable, marketable securities, inventory, property, plant and
equipment, residential real estate and income-producing commercial
properties.
Standby letters of credit are conditional commitments issued by the Banks
to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
related to extending credit to customers. The Banks had approximately
$14,187,000 and $12,246,000 in irrevocable letters of credit outstanding
at December 31, 1996 and 1995, respectively.
<PAGE> 25
47
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1996 1995
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial Asset:
Cash and short-term investments $ 62,000 $ 62,000 $ 53,100 $ 53,100
Trading account securities 43,877 43,877 50,403 50,403
Securities available for sale 216,349 216,349 215,845 215,845
Securities held to maturity 97,120 101,122 94,015 98,319
Mortgage loans held for sale 21,212 21,212 24,430 24,430
Loans, net 667,555 664,298 611,741 609,777
Financial Liabilities:
Deposits 845,151 845,562 808,122 810,316
Federal funds purchased and securities
sold under agreements to repurchase 144,616 144,670 151,140 151,136
Notes payable to the U.S. Treasury 8,883 8,883 4,601 4,601
Advances from the Federal Home Loan
Bank 32,537 32,801 12,452 12,407
Other borrowings 4,446 4,446 13,823 13,823
Commitments -- -- -- --
</TABLE>
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Short-Term Investments
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
For securities, fair value equals quoted market price, if available. If
a quoted market price is not available, fair value is estimated using
quoted market prices for similar investments or dealer quotes.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated on an
aggregate basis considering market prices and yields sought by the Banks'
normal market outlets including the Federal Home Loan Mortgage Corporation
and the Federal National Mortgage Association current delivery prices. The
Corporation believes the carrying amount is a reasonable estimate of fair
value.
Loans
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
<PAGE> 26
48
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposits
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date. The
fair value of fixed-maturity certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
The fair value of short-term Federal funds purchased and securities sold
under agreements to repurchase is the amount payable on demand at the
reporting date. The fair value of fixed maturity Federal funds purchased
and securities sold under agreements to repurchase is estimated by
discounting the future cash flows using the rates currently offered for
instruments of similar remaining maturities.
Notes Payable to the U.S. Treasury
The fair value of the notes payable to the U.S. Treasury is the carrying
amount at the reporting date, as no significant fair value differences
exist.
Advances from the Federal Home Loan Bank
The fair value of the advances from the Federal Home Loan Bank is
estimated by discounting the future cash flows using the rates currently
offered for instruments of similar remaining maturities.
Other Borrowings
The fair value of other borrowings is the carrying amount at the
reporting date, as no significant fair value differences exist.
Commitments
The fair value of commitments to extend credit and stand-by letters of
credit is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
for obligations with the counterparites. At the reporting date, no
significant fair value differences exist on commitments to extend credit
and standby letters of credit.
<PAGE> 27
49
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Limitations
The fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instruments. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on
judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates. The fair value estimates are based on financial
instruments without attempting to estimate the value of assets and
liabilities that are not financial instruments, such as premises and
equipment and other assets and liabilities. Accordingly, the fair value
estimates are not intended to represent the Corporation's underlying value
in the instruments.
22. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Area Bancshares Corporation (Parent
Company) are as follows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS (IN THOUSANDS) 1996 1995
<S> <C> <C>
ASSETS
Cash on demand deposit with bank subsidiary $ 709 $ 562
Securities available for sale 22,237 17,619
Securities held to maturity 10 47
Demand loan to subsidiaries 1,920 1,095
Investments in:
Bank and bank holding company subsidiaries 95,786 98,008
Nonbank subsidiaries 494 401
Other assets 5,397 2,680
-------- --------
TOTAL ASSETS $126,553 $120,412
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowings $ -- $ 9,740
Other liabilities 4,023 2,098
Shareholders' equity 122,530 108,574
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $126,553 $120,412
======== ========
</TABLE>
<PAGE> 28
50
--------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CONDENSED INCOME STATEMENTS (IN THOUSANDS)
INCOME
Dividends from:
Bank and bank holding company subsidiaries $ 15,910 $ 10,425 $ 4,960
Interest from subsidiaries 95 207 144
Securities gains, net 3,269 -- --
Other 4,609 2,125 857
------- ------- -------
TOTAL INCOME 23,883 12,757 5,961
------- ------- -------
EXPENSES
Interest on short-term borrowed funds 701 401 39
Salaries and employee benefits 2,968 1,418 696
Other 2,160 1,253 911
------- ------- -------
TOTAL EXPENSES 5,829 3,072 1,646
------- ------- -------
Income before income taxes and equity in undistributed
earnings of subsidiaries 18,054 9,685 4,315
Applicable income tax expense (benefit) 735 (275) (183)
------- ------- -------
Income before equity in undistributed earnings of subsidiaries 17,319 9,960 4,498
Equity in undistributed earnings of subsidiaries (1,764) 1,622 3,014
------- ------- -------
NET INCOME $ 15,555 $11,582 $ 7,512
======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS) Cash flows from
operating activities:
Net income $ 15,555 $11,582 $ 7,512
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries 1,764 (1,622) (3,014)
Loss (gain) on sales of securities, net (3,269) -- 1
Other, net (694) 156 (1,131)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,356 10,116 3,368
------- ------- -------
Cash flows from investing activities:
Purchases of securities (15,120) (7,356) (18,907)
Sales and maturities of securities 15,591 30 16,377
Net decrease (increase) in demand loans to nonbank
subsidiaries (825) 1,905 (925)
Investment in subsidiaries (750) (7,560) (3,000)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,104) (12,981) (6,455)
------- ------- -------
</TABLE>
<PAGE> 29
51
- --------------------------------------------------
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<Catpion>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from financing activities:
Increase (decrease) in other borrowings $ (9,740) $ 4,340 $ 5,400
Proceeds from stock options exercised 22 6 171
Repurchase of common stock, net (1,176) (212) (1,013)
Cash dividends paid (1,211) (1,026) (916)
Purchase of shares for restricted stock -- -- (318)
--------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (12,105) 3,108 3,324
--------- ------- -------
Increase (decrease) in cash 147 243 237
Cash at beginning of year 562 319 82
--------- ------- -------
CASH AT END OF YEAR $ 709 $ 562 $ 319
========= ======= =======
</TABLE>
23. RELATED PARTY TRANSACTIONS
Loans to officers, directors, and entities of which these individuals
are principal owners were approximately $30,281,000 and $24,648,000 at
December 31, 1996 and 1995, respectively. During 1996, $39,826,000 of new
loans or advances on existing loans were made to these related parties.
Repayments from such persons totaled $34,193,000. These loans were made on
substantially the same terms including interest rates and collateral, as
those prevailing at the time for other customers and do not in the opinion
of management involve more than normal credit risk.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF AREA BANCSHARES INC. FOR THE YEAR ENDED DECEMBER 31,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 55,516
<INT-BEARING-DEPOSITS> 4,484
<FED-FUNDS-SOLD> 2,000
<TRADING-ASSETS> 43,877
<INVESTMENTS-HELD-FOR-SALE> 216,349
<INVESTMENTS-CARRYING> 211,291
<INVESTMENTS-MARKET> 97,120
<LOANS> 679,844
<ALLOWANCE> 12,289
<TOTAL-ASSETS> 1,170,838
<DEPOSITS> 845,151
<SHORT-TERM> 153,499
<LIABILITIES-OTHER> 12,675
<LONG-TERM> 36,983
0
0
<COMMON> 17,718
<OTHER-SE> 104,812
<TOTAL-LIABILITIES-AND-EQUITY> 1,170,838
<INTEREST-LOAN> 61,649
<INTEREST-INVEST> 18,924
<INTEREST-OTHER> 1,927
<INTEREST-TOTAL> 82,500
<INTEREST-DEPOSIT> 30,647
<INTEREST-EXPENSE> 38,299
<INTEREST-INCOME-NET> 44,201
<LOAN-LOSSES> 1,369
<SECURITIES-GAINS> 3,216
<EXPENSE-OTHER> 37,912
<INCOME-PRETAX> 21,523
<INCOME-PRE-EXTRAORDINARY> 15,555
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,555
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
<YIELD-ACTUAL> 4.71
<LOANS-NON> 2,120
<LOANS-PAST> 844
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,025
<CHARGE-OFFS> 2,578
<RECOVERIES> 1,473
<ALLOWANCE-CLOSE> 12,289
<ALLOWANCE-DOMESTIC> 12,289
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,426
</TABLE>
