<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1998
Commission File Number 0-26032
AREA BANCSHARES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
INCORPORATED IN KENTUCKY IRS EMPLOYER ID NUMBER
NO. 61-0902343
230 FREDERICA STREET
OWENSBORO, KENTUCKY 42301
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (502) 926-3232
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class: Common stock
No Par Value
Shares Outstanding: As of July 31, 1998: 15,642,416
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AREA BANCSHARES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
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<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited consolidated balance sheets, June 30, 1998 and December 31, 1997 3
Unaudited consolidated statements of income, three and six months ended June 30, 1998
and 1997 4
Unaudited consolidated statements of shareholders' equity, year ended December 31, 1997
and six months ended June 30, 1998 5
Unaudited consolidated statements of cash flows, six months ended June 30, 1998
and 1997 6
Notes to consolidated financial statements 8
Item 2. Management's discussion and analysis of financial condition and results of operations 11
Results of operations 11
Financial position 18
Liquidity 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 77,326 $ 84,378
Interest bearing deposits with banks 9,090 5,804
Federal funds sold 8,000 --
Trading account securities -- 45,873
Securities:
Available for sale (amortized cost of $394,875 and $324,731, respectively) 425,575 342,513
Held to maturity (fair value of $119,854 and $122,781, respectively) 113,900 116,811
----------- -----------
TOTAL SECURITIES 539,475 459,324
----------- -----------
Mortgage loans held for sale 13,483 9,817
Loans, net of unearned discount 1,194,565 1,227,307
Less allowance for loan losses 20,109 19,887
----------- -----------
NET LOANS 1,174,456 1,207,420
----------- -----------
Premises and equipment, net 32,459 29,710
Goodwill and other intangible assets 13,960 15,312
Other assets 41,228 43,811
----------- -----------
TOTAL ASSETS $ 1,909,477 $ 1,901,449
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits $ 190,499 $ 196,776
Interest-bearing deposits 1,284,526 1,236,356
----------- -----------
TOTAL DEPOSITS 1,475,025 1,433,132
----------- -----------
Federal funds purchased 20,789 38,691
Securities sold under agreements to repurchase 101,683 109,861
Notes payable to the U.S. Treasury 22,497 19,581
Advances from the Federal Home Loan Bank 48,691 84,336
Other borrowings 2,712 397
Accrued expenses and other liabilities 20,496 18,902
----------- -----------
TOTAL LIABILITIES 1,691,893 1,704,900
----------- -----------
Preferred stock, no par value; authorized 500,000 shares; none issued -- --
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding June 30, 1998, 15,638,516, December 31, 1997, 15,576,917 24,350 24,254
Paid-in capital 35,632 35,632
Retained earnings 138,722 126,104
Deferred compensation on restricted stock (662) (612)
ESOP loan obligations (337) (337)
Accumulated other comprehensive income 19,879 11,508
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 217,584 196,549
Commitments and contingent liabilities
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,909,477 $ 1,901,449
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $27,512 $ 27,453 $55,751 $54,230
Interest bearing deposits with banks 89 77 158 152
Federal funds sold 1,129 253 1,591 543
Interest and dividends on securities:
Taxable securities 4,991 4,954 9,714 9,822
Tax exempt securities 1,554 1,647 3,456 3,091
------- -------- ------- -------
TOTAL INTEREST INCOME 35,275 34,384 70,670 67,838
------- -------- ------- -------
Interest expense:
Interest on deposits 14,569 13,187 28,751 26,248
Interest on borrowings 2,252 2,141 4,563 4,408
------- -------- ------- -------
TOTAL INTEREST EXPENSE 16,821 15,328 33,314 30,656
------- -------- ------- -------
Net interest income 18,454 19,056 37,356 37,182
Provision for loan losses 101 574 713 1,285
------- -------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,353 18,482 36,643 35,897
------- -------- ------- -------
Non-interest income:
Commission and fees on fiduciary activities 1,169 974 2,428 2,030
Service charges on deposit accounts 1,727 1,657 3,526 3,284
Other service charges, commissions and fees 1,886 1,214 3,290 2,537
Security gains (losses), net -- (14) 125 7
Gains on sales of loans, net 2,372 566 2,640 734
Other income 100 194 196 582
------- -------- ------- -------
TOTAL NON-INTEREST INCOME 7,254 4,591 12,205 9,174
------- -------- ------- -------
Non-interest expenses:
Salaries and employee benefits 7,589 7,176 15,101 14,340
Net occupancy expense 879 991 1,816 1,963
Furniture and equipment expense 998 1,099 2,041 2,126
Federal deposit insurance 131 64 155 104
Data processing expense 1,056 739 1,861 1,523
Other 5,047 5,150 9,652 9,699
------- -------- ------- -------
TOTAL NON-INTEREST EXPENSES 15,700 15,219 30,626 29,755
------- -------- ------- -------
Income before income tax expense 9,907 7,854 18,222 15,316
Income tax expense 3,020 2,302 5,464 4,544
------- -------- ------- -------
NET INCOME $ 6,887 $ 5,552 $12,758 $10,772
======= ======== ======= =======
Per common share:
Net income-basic $ 0.44 $ 0.36 $ 0.82 $ 0.69
-diluted $ 0.43 $ 0.35 $ 0.80 $ 0.68
Cash dividends $ 0.035 $ 0.03 $ 0.07 $ 0.06
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS
ENDED JUNE 30, 1998 (AMOUNTS IN
THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED DEFERRED ESOP AND ACCUMULATED TOTAL
STOCK-SHARES STOCK-AMOUNT CAPITAL EARNINGS COMPENSATION MRP LOAN OTHER
ON OBLIGATIONS COMPREHENSIVE
RESTRICTED INCOME
STOCK
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 15,514,223 24,197 35,142 107,581 (469) (628) 3,560 169,383
Net income 20,809 20,809
Cash dividends declared ($.125
per Share) (2,523) (2,523)
Repurchase of common stock (24,674) (39) (483) (522)
Stock options exercised,
including tax benefits 81,938 87 490 503 1,080
Amortization of deferred
compensation on restricted stock 83 83
Net restricted stock issued 5,430 9 217 (226) --
Repayment of ESOP and MRP loan
obligations 291 291
Change in other comprehensive
income (loss), net of tax 7,948 7,948
---------- --------- ------- --------- ----- ----- -------- ---------
Balance, December 31, 1997 15,576,917 24,254 35,632 126,104 (612) (337) 11,508 196,549
Net income 12,758 12,758
Cash dividends declared ($.07
per share) (1,092) (1,092)
Stock options exercised,
including tax benefits 58,024 91 857 948
Restricted stock issued 3,575 5 95 (100) --
Amortization of deferred
compensation on restricted 50 50
stock
Change in other comprehensive
income (loss), net of tax 8,371 8,371
---------- --------- ------- --------- ----- ----- -------- ---------
Balance, June 30, 1998 15,638,516 $ 24,350 $35,632 $ 138,722 $(662) $(337) $ 19,879 $ 217,584
========== ========= ======= ========= ===== ===== ======== =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,758 $ 10,772
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 713 1,285
Depreciation, amortization and accretion, net 1,542 2,678
Gain on sales of securities and loans, net (2,765) (741)
Loss (Gain) on sales of other real estate owned 41 1
Loss (Gain) on disposals of equipment (11) (4)
Deferred income taxes (1,745) (113)
Proceeds from sales of trading account securities 19,760 19,757
Proceeds from maturities of trading account securities 99,994 75,000
Purchases of trading account securities (73,870) (101,723)
Purchases of mortgage loans held for sale (92,166) (39,750)
Proceeds from sales of mortgage loans held for sale 88,856 70,591
Other, net 1,417 (1,511)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ 54,524 $ 36,242
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase (decrease) in interest bearing deposits with banks (3,286) 565
Proceeds from sales of securities available for sale 2,652 25,987
Proceeds from sales of securities held to maturity -- --
Proceeds from maturities of securities available for sale 82,253 59,148
Proceeds from maturities of securities held to maturity 3,543 2,960
Calls of securities available for sale 2,000 --
Calls of securities held to maturity 1,441 1,008
Purchases of securities available for sale (153,000) (80,830)
Purchases of securities held to maturity (1,993) (22,748)
Decrease (Increase) in federal funds sold (8,000) 11,747
Loans originated, net of principal collected on loans 18,362 (41,871)
Purchases of premises and equipment (4,558) (2,196)
Proceeds from sale of ABC Credit loans 13,568 --
Proceeds from sales of other real estate owned 187 228
Proceeds from sales of premises and equipment -- 11
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (46,831) (45,991)
----------- -----------
</TABLE>
CONTINUED
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 41,893 $ (10,711)
Decrease in federal funds purchased (17,902) (1,946)
Decrease in securities sold under agreements to repurchase (8,178) (7,258)
Increase (decrease) in notes payable to the U.S. Treasury 2,916 16,822
Decrease in advances from the Federal Home Loan Bank (35,645) 32,719
Decrease in other borrowings 2,315 (202)
Proceeds from issuance of common stock and stock option exercised -- 308
Repurchase of common stock 948 (516)
Cash dividends paid (1,092) (1,319)
----------- -----------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES (14,745) 27,897
----------- -----------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (7,052) 18,148
CASH AND DUE FROM BANKS, JANUARY 1 84,348 76,923
----------- -----------
CASH AND DUE FROM BANKS, JUNE 30 $ 77,326 $ 95,071
=========== ===========
Cash flow information:
Income tax payments $ 4,650 $ 3,800
Interest payments $ 33,394 $ 30,296
Non-cash transactions:
Loans transferred to other assets $ 1,592 $ 880
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q
and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair
presentation have been reflected in the accompanying consolidated
financial statements. Results of interim periods are not necessarily
indicative of results to be expected for the full year.
The accounting and reporting policies of Area Bancshares Corporation
("Area") and its subsidiaries conform to generally accepted
accounting principles and general practices within the banking
industry. The consolidated financial statements include the accounts
of Area and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation. A full description of significant accounting policies
is presented in the 1997 annual report to shareholders as well as a
complete set of footnotes.
NOTE 2. COMPREHENSIVE INCOME
Area adopted FASB Statement No. 130, "Reporting Comprehensive
Income", during the first quarter of 1998. This Statement established
standards for reporting and displaying comprehensive income and its
components. Comprehensive income is defined as "the change in equity
(net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner
sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to
owners." Comprehensive income for Area includes net income and
unrealized gains and losses on securities available for sale. The
following tables set forth the components of comprehensive income for
the three and six months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997
--------- ---------
<S> <C> <C> <C> <C>
(Amounts in thousands)
Net income $ 6,887 $ 5,552
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 6,502 (698)
Less: Reclassification adjustment for gains (losses)
included in net income 0 6,502 (9) (689)
-------- --------- -------- ---------
COMPREHENSIVE INCOME $ 13,389 $ 4,863
========= =========
SIX MONTHS ENDED JUNE 30
1998 1997
--------- ---------
(Amounts in thousands)
Net income $ 12,758 $ 10,772
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 8,371 3,347
Less: Reclassification adjustment for gains (losses)
included in net income 81 8,290 5 3,342
-------- --------- -------- ---------
COMPREHENSIVE INCOME $ 21,048 $ 14,114
========= =========
</TABLE>
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
NOTE 3. NET INCOME PER COMMON SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the
period.
Diluted earnings per share gives effect to the increase in the
average shares outstanding that would have resulted from the exercise
of dilutive stock options.
The components of basic and diluted earnings per share as prescribed
by SFAS 128, "Earnings per Share," are as follows:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
(UNAUDITED) (UNAUDITED)
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
NET INCOME, BASIC AND DILUTED $ 6,887 $ 5,552 $12,758 $10,772
======= ======= ======= =======
Average shares outstanding 15,635 15,506 15,624 15,526
Effect of dilutive securities 285 287 281 286
------- ------- ------- -------
Average shares outstanding including dilutive securities 15,920 15,793 15,905 15,812
======= ======= ======= =======
NET INCOME PER SHARE, BASIC $ .44 $ .36 $ .82 $ .69
======= ======= ======= =======
NET INCOME PER SHARE, DILUTIVE $ .43 $ .35 $ .80 $ .68
======= ======= ======= =======
</TABLE>
NOTE 4. SECURITIES
The amortized cost and approximate market values of securities as of
June 30, 1998 and December 31, 1997 are as follows:
AVAILABLE FOR SALE
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ------- ---- --------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $294,543 $ 1,309 $346 $295,506
Mortgage-backed securities 62,252 773 121 62,904
Obligations of state and political subdivisions 16,207 710 20 16,897
Equity and other securities 21,873 28,395 -- 50,268
======== ======= ==== ========
BALANCE AT JUNE 30, 1998 $394,875 $31,187 $487 $425,575
======== ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ------- ---- --------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $232,694 $ 1,095 $436 $233,353
Mortgage-backed securities 55,959 719 110 56,568
Obligations of state and political subdivisions 16,115 752 -- 16,867
Equity and other securities 19,963 15,824 62 35,725
======== ======= ==== ========
BALANCE AT DECEMBER 31, 1997 $324,731 $18,390 $608 $342,513
======== ======= ==== ========
</TABLE>
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
NOTE 4. SECURITIES (CONTINUED)
HELD TO MATURITY
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ------- ---- --------
<S> <C> <C> <C> <C>
JUNE 30, 1998
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS $113,900 $ 5,991 $ 37 $119,854
======== ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ------- ---- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
OBLIGATIONS OF STATE AND POLITICAL SUBDIVISIONS $116,811 $ 6,485 $515 $122,781
======== ======= ==== ========
</TABLE>
NOTE 5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related
Information", changes the way public companies report information
about segments of their business in their annual financial statements
and requires them to report selected segment information in their
quarterly reports to shareholders. SFAS No. 131 requires that
companies disclose segment data based on how management makes
decisions about allocating resources to segments and measures their
performance. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. Area does not expect the implementation of
SFAS No. 131 to have a material effect on the consolidated financial
statements.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the
fair value (i.e. gains or losses) of a derivative instrument depends
on whether it has been designed and qualifies as part of a hedging
relationship and if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposure to changes in fair values, cash
flows or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized
in earnings in the period of change together with the offsetting loss
or gain on the hedged item attributable to the risk hedged. If the
hedged exposure is a cash flow exposure, the effective portion of the
gain or loss on the derivative instrument is reported initially as a
component of other comprehensive income (outside earnings) and
subsequently reclassified into earnings when the forecasted
transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion
of the gain or loss is reported in earnings immediately. Accounting
for foreign currency hedges is similar to the accounting for fair
value and cash flow hedges. If the derivative instrument is not
designated as a hedge, the gain or loss is recognized in earnings in
the period of change.
Area must adopt SFAS No. 133 by January 1, 2000, however early
adoption is permitted. On adoption, the provisions of SFAS No. 133
must be applied prospectively. Area has not determined the impact
that SFAS No. 133 will have on its financial statements and believes
that such determination will not be meaningful until closer to the
date of initial adoption.
10
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
NOTE 6. INTANGIBLES
The excess cost over fair value of net assets acquired in purchase
business combinations (goodwill) of $9,770,000 and $10,704,000 net of
accumulated amortization as of June 30, 1998 and December 31, 1997,
respectively, is being amortized over a 10-20 year period on a
straight-line basis. Other intangible assets consist of the value of
core deposits purchased of approximately $3,252,000 and $3,595,000,
net of accumulated amortization, as of June 30, 1998 and December 31,
1997, respectively, which is being amortized by an accelerated method
over ten years and a purchased bank charter of $938,000 and
$1,013,000 as of June 30, 1998 and December 31, 1997, respectively,
which is being amortized over a ten-year period on a straight-line
basis. Amortization expense for goodwill, core deposits and purchased
bank charter for the three and six month periods ended June 30, 1998
was $555,000 and $934,000; $168,000 and $343,000; $37,500 and
$75,000, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Area is a multi-bank holding company incorporated in Kentucky in 1981
and registered under the Bank Holding Company Act of 1956, as
amended. On June 30, 1998, the Corporation had direct control of
three affiliated commercial banks, indirect control of seven
additional commercial banks through the ownership of holding
companies and indirect control of one federal thrift through the
ownership of a holding company, all of which are located in Kentucky.
Of the banks controlled by Area, four are national banks, six are
state banks and one is a federal thrift.
Area and its subsidiaries engage in retail and commercial banking and
related financial services. In connection with these services, Area
provides the usual products and services of retail and commercial
banking such as deposits, commercial loans, personal loans and trust
services. The principal business of Area 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, Area engages in activities that are closely related to
banking, including mortgage banking and investment brokerage.
The discussion that follows is intended to provide additional insight
into Area's financial condition and results of operations. This
discussion should be read in conjunction with the consolidated
financial statements and accompanying notes presented in Item 1 of
Part I of this report.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
and the exhibits hereto which are not statements of historical fact
constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act (the "Act"). In addition,
certain statements in future filings by Area with the Securities and
Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of Area which are not
statements of historical fact constitute forward-looking statements
within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (1) projections of revenues, income
or loss, earnings or loss per share, the payment or non-payment of
dividends, capital structure and other financial items; (2)
statements of plans and objectives of Area or its management or Board
of Directors, including those relating to products or services; (3)
statements of future economic performance; and (4) statements of
assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar
expressions are intended to identify forward-looking statements but
are not the exclusive means of identifying such statements.
11
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
FORWARD LOOKING STATEMENTS (CONTINUED)
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such
statements. Facts that could cause actual results to differ from
those discussed in the forward-looking statements include, but are
not limited to: (1) the strength of the U.S. economy in general and
the strength of the local economies in which operations are
conducted; (2) the effects of and changes in trade, monetary and
fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve System; (3) inflation,
interest rate, market and monetary fluctuations; (4) the timely
development of and acceptance of new products and services and
perceived overall value of these products and services by users; (5)
changes in consumer spending, borrowing and saving habits; (6)
technological changes; (7) acquisitions; (8) the ability to increase
market share and control expenses; (9) the effect of changes in laws
and regulations (including laws and regulations concerning taxes,
banking, securities and insurance) with which Area and its subsidiary
must comply; (10) the effect of changes in accounting policies and
practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board; (11) changes in Area's
organization, compensation and benefit plans; (12) the costs and
effects of litigation and of unexpected or adverse outcomes in such
litigation; and (13) the success of Area at managing the risks
involved in the foregoing.
Such forward-looking statements speak only as of the date on which
such statements are made, and Area undertakes no obligation to update
any forward-looking statement to reflect events or circumstances
after the date on which such statement is made to reflect the
occurrence of unanticipated events.
A. RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1998 was $6,887,000 or
$0.44 for basic earnings per share and $0.43 for diluted earnings per
share compared to $5,552,000, $0.36 and $0.35 for the same period in
1997. The increases for the current quarter over the second quarter
of 1997 were $1,335,000 or 24.0%, $0.08 or 22.2% for basic earnings
per share and $0.08 or 22.9% for diluted earnings per share.
Year-to-date earnings were $12,758,000 or $0.82 for basic earnings
per share and $0.80 for diluted earnings per share. The year-to-date
increases were $1,986,000 or 18.4%, $0.13 or 18.8% and $0.12 or
17.6%, respectively when compared to $10,772,000, $0.69 and $0.68
earned during the first six months of 1997. Earnings improved for the
quarter largely as a result of an increase in non-interest income of
$2,663,000 or 58.0%. The improvement in non-interest income for the
quarter included a pre-tax gain totaling $2,068,000 ($1,344,000
after-tax) on the sale of the loan portfolio of ABC Credit
Corporation, a wholly-owned consumer finance company. The sale of ABC
Credit Corporation's loan portfolio, which included approximately
$11,500,000 of consumer loans, is not expected to impact the future
earnings of Area. In addition, the provision for loan losses
decreased $473,000 or 82.4% to $101,000 as a result of improved loan
quality while non-interest expenses increased $481,000 or 3.2% to
$15,700,000. Earnings for the six months ended June 30, 1998,
reflected an increase in net interest income (taxable equivalent) of
$530,000 or 1.6%, a reduction in the provision for loan losses
totaling $572,000 or 44.5% as a result of the improved quality of the
loan portfolio and an increase of $3,031,000 or 33.0% in non-interest
income due in large part to the sale of ABC Credit Corporation
discussed above. Return on average assets totaled 1.19% (annualized,
excluding the $1,344,000 after-tax gain on the sale of ABC Credit
Corporation) during the quarter ended June 30, 1998 and 1.24%
(annualized, excluding the $1,344,000 after-tax gain on the sale of
ABC Credit Corporation) for the first six months of the year compared
to 1.28% (annualized) and 1.24% (annualized) for the same periods in
1997. Return on average equity was 10.85% (annualized, excluding the
$1,344,000 after-tax gain on the sale of ABC Credit Corporation) for
the quarter ended June 30, 1998 and 11.28% (annualized, excluding the
$1,344,000 gain on the sale of ABC Credit Corporation) for the first
half of the year versus 12.54% (annualized) and 12.24% (annualized)
for similar periods during 1997.
12
<PAGE> 13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
A. RESULTS OF OPERATIONS (CONTINUED)
The following table provides selected operating data, per share data,
selected ratios and average balances for the three and six month
periods ended June 30, 1998 and 1997:
EXHIBIT 1
HIGHLIGHTS
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30 6 MONTHS ENDED JUNE 30
1998 1997 CHANGE 1998 1997 CHANGE
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Operating data:
Taxable equivalent net interest income $ 19,493 $ 19,973 $ (480) $ 39,435 $ 38,905 $ 530
Provision for loan losses 101 574 (473) 713 1,285 (572)
Non-interest income 7,254 4,591 2,663 12,205 9,174 3,031
Non-interest expenses 15,700 15,219 481 30,626 29,755 871
Income taxes 3,020 2,302 718 5,464 4,544 920
Taxable-equivalent adjustment 1,039 917 122 2,079 1,723 356
Net income 6,887 5,552 1,335 12,758 10,772 1,986
Per share data
Basic earnings per share $ 0.44 $ 0.36 $ 0.08 $ 0.82 $ 0.69 $ 0.13
Diluted earnings per share 0.43 0.35 0.08 0.80 0.68 0.12
Cash dividends per share .035 0.03 0.005 0.07 0.06 0.01
Selected ratios and data
Return on assets (1) 1.19% 1.28% (.09%) 1.24% 1.24% --
Return on equity (1) 10.85% 12.54% (1.69%) 11.28% 12.24% (.96%)
Efficiency ratio (1) 63.62% 62.31% 1.31% 61.78% 62.02% (.24%)
Net interest margin 4.45% 4.86% (.41%) 4.55% 4.80% (.25%)
Equity-to-assets 11.39% 10.04% 1.35% 11.39% 10.04% 1.35%
Reserve for loan losses to loans 1.68% 1.66% .02% 1.68% 1.66% .02%
Reserve for loan losses to
nonperforming loans 705.3% 329.1% 376.1% 705.3% 329.1% 376.1%
Taxable equivalent net interest income
Average balances
Total assets $1,864,768 $1,741,076 $123,692 $1,834,161 $1,734,512 $ 99,649
Earning assets 1,751,116 1,643,242 107,874 1,735,258 1,621,214 114,044
Shareholders' equity 205,693 177,368 28,325 202,993 176,071 26,922
</TABLE>
(1) Excludes $1,344,000 after-tax ($2,068,000 pre-tax) gain on the
sale of ABC Credit Corporation during the second quarter 1998.
13
<PAGE> 14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
CASH BASED EARNINGS
Area believes it is important to also disclose cash based earnings,
which excludes intangible asset amortization. Although Area believes
these calculations are helpful in understanding the performance of
Area, cash based earnings should not be considered a substitute for
net income or cash flow as indicators of Area's financial performance
or its ability to generate liquidity. The following presents the cash
based net income and various cash based performance ratios:
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
3 MONTHS ENDED JUNE 30 6 MONTHS ENDED JUNE 30
1998 1997 CHANGE 1998 1997 CHANGE
------ ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Net income $6,887 $5,552 $ 1,335 $12,758 $10,772 $1,986
Add back:
Goodwill amortization 555 418 137 934 834 100
Other intangible asset amortization 206 175 31 418 350 68
------ ------ ------- ------- ------- ------
Total intangible asset 761 593 168 1,352 1,184 168
amortization
Less: Tax effect 72 61 11 146 123 23
------ ------ ------- ------- ------- ------
CASH BASED NET INCOME $7,576 $6,084 $ 1,492 $13,964 $11,833 $2,131
====== ====== ======= ======= ======= ======
Per share data
Cash based basic earnings per share $ 0.48 $ 0.39 $ 0.09 $ 0.89 $ 0.76 $ 0.13
Cash based diluted earnings per share 0.48 0.39 0.09 0.88 0.75 0.13
Cash based return on tangible assets 1.64 1.41% .23% 1.53% 1.38% .15%
Cash based return on tangible equity 15.84% 15.15% .69% 14.83% 14.88% (.05%)
Cash based efficiency ratio 55.85% 59.88% (4.03%) 56.69% 59.55% (2.86%)
</TABLE>
NET INTEREST INCOME
The largest component of Area's operating income is net interest
income. Net interest income is the difference between interest earned
on earning assets and interest expense on interest bearing
liabilities. For purposes of this discussion, interest income earned
on tax-exempt securities and loans is adjusted to a fully-taxable
equivalent basis to facilitate comparison with interest earned which
is subject to statutory taxation.
Changes in net interest income generally occur due to fluctuations in
the balance and/or mix of interest-earning assets and
interest-bearing liabilities, and changes in their corresponding
interest yields and costs.
Net interest income, on a tax equivalent basis, decreased $480,000 or
2.4% to $19,493,000 for the quarter ended June 30, 1998. The net
interest margin decreased from 4.86% during the quarter ended June
30, 1997 to 4.45% during the current quarter. This decrease was
largely the result of a decrease in the average rate on earning
assets from 8.59% during the second quarter of 1997 to 8.30% in the
current quarter plus an increase in the average rate on interest
bearing liabilities from 4.40% to 4.80%. These changes resulted in a
decrease of .69% in the net interest spread. For the six months ended
June 30, 1998, net interest income, on a tax equivalent basis,
increased $530,000 or 1.4% to $39,435,000 over the same period in
1997, as a result of an increase totaling $74,844,000 in average net
earning assets (average earning assets less average interest bearing
liabilities). The net interest margin was 4.55% for the year-to-date
period, a decrease of .25% from 4.80% recorded during the first six
months of 1997. The decrease in the net interest margin was the
result of a decrease of .20% to 8.38% on earning assets during the
current period and an increase of .25% to 4.62% in the rate paid on
interest bearing liabilities.
14
<PAGE> 15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
NET INTEREST INCOME (CONTINUED)
The following presents the components of net income on a taxable
equivalent basis:
CONDENSED STATEMENT OF INCOME-TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 CHANGE 1998 1997 CHANGE
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
Interest income $35,275 $34,384 $ 891 $70,670 $67,838 $ 2,832
Taxable-equivalent adjustment 1,039 917 122 2,079 1,723 356
------- ------- ------- ------- ------- -------
Interest income-taxable equivalent 36,314 35,301 1,013 72,749 69,561 3,188
Interest expense 16,821 15,328 1,493 33,314 30,656 2,658
------- ------- ------- ------- ------- -------
Net interest income-taxable equivalent 19,493 19,973 (480) 39,435 38,905 530
Provision for loan losses 101 574 (473) 713 1,285 (572)
Non-interest income 7,254 4,591 2,663 12,205 9,174 3,031
Non-interest expenses 15,700 15,219 481 30,626 29,755 871
------- ------- ------- ------- ------- -------
Income before income taxes 10,946 8,771 2,175 20,301 17,039 3,262
Income taxes 3,020 2,302 718 5,464 4,544 920
Taxable-equivalent adjustment 1,039 917 122 2,079 1,723 356
------- ------- ------- ------- ------- -------
NET INCOME $ 6,887 $ 5,552 $ 1,335 $12,758 $10,772 $ 1,986
======= ======= ======= ======= ======= =======
NET INCOME PER SHARE-BASIC $ 0.44 $ 0.36 $ 0.08 $ 0.82 $ 0.69 $ 0.13
NET INCOME PER SHARE-DILUTED 0.43 0.35 0.08 0.80 0.68 0.12
</TABLE>
The following table summarizes the fully-taxable equivalent interest
spread, which is the difference between the average yield on earning
assets and the average rate on interest bearing liabilities as well
as the net interest margin, which is the fully-taxable equivalent net
interest income divided by the average earning assets for the three
and six months ended June 30, 1998 and 1997.
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 CHANGE 1998 1997 CHANGE
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Average rate on earning assets (1) 8.30% 8.59% (.29%) 8.38% 8.58% (.20%)
Average rate on interest bearing
liabilities (1) 4.80% 4.40% .40% 4.62% 4.37% .25%
Net interest spread (1) 3.50% 4.19% (.69%) 3.76% 4.21% (.45%)
Net interest margin (1) 4.45% 4.86% (.41%) 4.55% 4.80% (.25%)
Average earning assets $1,751,116 $1,643,242 $107,874 $1,735,258 $1,621,214 $114,044
Average interest bearing
liabilities 1,402,905 1,392,043 10,862 1,443,679 1,404,479 39,200
</TABLE>
(1) Amounts annualized
15
<PAGE> 16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained at a level adequate to
absorb probable losses. Management determines the adequacy of the
allowance based upon reviews of individual loans, evaluation of the
risk characteristics of the loan portfolio, including the impact of
current economic conditions on the borrowers' ability to repay, past
collection and loss experience and such other factors, which in
management's judgment, deserve current recognition. However, actual
losses could differ significantly from the amount estimated by
management. The allowance for loan losses is established by charges
to operating earnings.
An analysis of the changes in the allowance for loan losses and
selected ratios follows:
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1998 1997 CHANGE
---------- ---------- --------
<S> <C> <C> <C>
Balance, March 31 $ 20,283 $ 19,045 $ 1,238
Provision for loan losses 101 574 (473)
Loan loss recoveries 432 554 (122)
Loans charged off 707 699 (8)
---------- ---------- --------
BALANCE, JUNE 30 $ 20,109 $ 19,474 $ 635
========== ========== ========
Average loans, net of unearned income $1,170,340 $1,170,928 $ (588)
Provision for loan losses to average loans (1) .03% .20% (.17%)
Net loan charge-offs (recoveries) to average loans (1) .09% .05% .04%
Allowance for loan losses to end of period loans 1.68% 1.66% .02%
Allowance for loan losses to nonperforming loans 705.33% 329.12% 376.21%
(1) Amounts annualized
(Amounts in thousands, except percentages) SIX MONTHS ENDED JUNE 30
1998 1997 CHANGE
---------- ---------- --------
Balance, December 31 $ 19,887 $ 18,663 $ 1,224
Provision for loan losses 713 1,285 (572)
Loan loss recoveries 839 1,011 (172)
Loans charged off 1,330 1,485 (155)
---------- ---------- --------
BALANCE, JUNE 30 $ 20,109 $ 19,474 $ 635
========== ========== ========
Average loans, net of unearned income $1,193,803 $1,154,889 $ 38,914
Provision for loan losses to average loans (1) .12% .22% (.10%)
Net loan charge-offs (recoveries) to average loans (1) .08% .08% --
Allowance for loan losses to end of period loans 1.68% 1.66% .02%
Allowance for loan losses to nonperforming loans 705.33% 329.12% 376.21%
</TABLE>
(1) Amounts annualized
The provision for loan losses decreased $473,000 or 82.4% to $101,000
for the quarter ended June 30, 1998 and decreased $572,000 or 44.5%
to $713,000 during the six months ended June 30, 1998 compared to the
same periods last year. The decreases for both the three and six
month periods ended June 30, 1998 were primarily the result of a
decrease in nonperforming assets from $7,435,000 on June 30, 1997 to
$4,556,000 on June 30, 1998.
The provision for loan losses as a percentage of average loans
totaled .03% (annualized) for the quarter ended June 30, 1998
compared to .20% (annualized) for the quarter ended June 30, 1997.
For the six month period ended June 30, 1998, the provision for loan
losses as a percentage of average loans decreased to .12%
(annualized) from .22% (annualized) for the same period in 1997.
These decreases reflected the continued improvement in the quality of
loans.
16
<PAGE> 17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
PROVISION FOR LOAN LOSSES (CONTINUED)
Net loan charge-offs (loan charge-offs less recoveries) to average
loans increased to .09% (annualized) for the quarter ended June 30,
1998 from .05% (annualized) for the quarter ended June 30, 1997, as a
result of a slightly reduced level of recoveries while remaining
unchanged at .08% for the six months ended June 30, 1998 compared to
the same period in 1997.
The allowance for loan losses increased to 1.68% of total loans on
June 30, 1998, as compared to the December 31, 1997 level of 1.62%
primarily as a result of a decrease in loans outstanding as well as
reduced net charge-off experience during the quarter.
NON-INTEREST INCOME
The following table sets forth the components of non-interest income
for the three and six months ended June 30, 1998 and 1997:
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1998 1997 CHANGE 1998 1997 CHANGE
------ ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $1,169 $ 974 $ 195 $ 2,428 $2,030 $ 398
Service charges on deposit accounts 1,727 1,657 70 3,526 3,284 242
Other service charges, commissions and fees 1,886 1,214 672 3,290 2,537 753
Security gains (losses), net -- (14) 14 125 7 118
Gains on sales of mortgage loans (net) 2,372 566 1,806 2,640 734 1,906
Other income 100 194 (94) 196 582 (386)
------ ------- ------- ------- ------ -------
TOTAL $7,254 $ 4,591 $ 2,663 $12,205 $9,174 $ 3,031
====== ======= ======= ======= ====== =======
</TABLE>
Non-interest income totaled $7,254,000 and $12,205,000 for the three
and six month periods ended June 30, 1998. These amounts represent
increases of $2,663,000 or 58.0% for the current quarter and
$3,031,000 or 33.0% for the six months ended June 30, 1998, when
compared to 1997 period totals. Commissions and fees on fiduciary
activities increased $195,000 or 20.0% to $1,169,000 in the second
quarter of 1998 and $398,000 or 19.6% to $2,428,000 for the six month
period largely as a result of increases in the value of assets
managed and successful new business development efforts. Service
charges on deposit accounts increased $70,000 or 4.2% to $1,727,000
and $242,000 or 7.4% to $3,526,000 respectively, for the three and
six months ended June 30, 1998, when compared to similar period
totals in 1997, due primarily to increases in deposits subject to
service charges. Other service charges, commissions and fees totaled
$1,886,000 and $3,290,000 for the second quarter of 1998 and
year-to-date ended June 30, 1998. The increases were $672,000 or
55.4% and $753,000 or 29.7% respectively, for the three and six month
periods ended June 30, 1998. The increases for the quarter and
year-to-date periods were largely the result of newly implemented
fees on ATM usage, loan servicing fees and fees earned on outsourcing
official checks. Securities gains (net) totaled $125,000 for the six
months ended June 30, 1998 compared to $7,000 for the first half of
1997. Gains on sales of loans increased $1,806,000 to $2,372,000 and
$1,906,000 to $2,640,000 for the three and six month periods ended
June 30, 1998. Gains on sales of loans were favorably impacted by a
gain totaling $2,068,000 from the sale during the second quarter of
1998 of ABC Credit Corporation, a wholly-owned consumer finance
company. The sale of ABC Credit Corporation's loan portfolio, which
totaled approximately $11,500,000 of consumer loans, is not expected
to impact the future earnings of Area. Other income totaled $100,000
during the three months ended June 30, 1998 and $196,000 for the six
months ended June 30, 1998. These amounts represent decreases of
$94,000 or 48.5% and $386,000 or 66.3%, respectively. The decreases
for both the quarter and year-to-date periods were primarily the
result of a decrease in mortgage acquisition income.
17
<PAGE> 18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
NON-INTEREST EXPENSES
The following table sets forth the components of non-interest
expenses for the three and six months ended June 30, 1998 and 1997:
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 3 SIX MONTHS ENDED JUNE 30
1998 1997 CHANGE 1998 1997 CHANGE
------- ------- ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 7,589 $ 7,176 $ 413 $15,101 $14,340 $ 761
Net occupancy expenses 879 991 (112) 1,816 1,963 (147)
Furniture and equipment expense 998 1,099 (101) 2,041 2,126 (85)
Federal deposit insurance 131 64 67 155 104 51
Data processing expense 1,056 739 317 1,861 1,523 338
Advertising and community relations 808 683 125 1,317 1,385 (68)
Insurance and taxes 594 598 (4) 1,179 1,321 (142)
Professional fees 741 750 (9) 1,501 1,329 172
Other 2,904 3,119 (215) 5,655 5,664 (9)
------- ------- ----- ------- ------- -----
TOTAL $15,700 $15,219 $ 481 $30,626 $29,755 $ 871
======= ======= ===== ======= ======= =====
</TABLE>
Non-interest expenses totaled $15,700,000 and $30,626,000 for the
three and six month periods ended June 30, 1998. These amounts
represent increases of $481,000 or 3.2% for the current quarter and
$871,000 or 2.9% for the six months ended June 30, 1998, when
compared to 1997 period totals. Salaries and employee benefits
increased $413,000 or 5.8% to $7,589,000 in the second quarter of
1998 and $761,000 or 5.3% to $15,101,000 for the six month period
largely as a result of merit increases. Net occupancy expenses
decreased $112,000 or 11.3% to $879,000 and $147,000 or 7.5% to
$1,816,000 respectively, for the three and six months ended June 30,
1998, when compared to similar period totals in 1997, due primarily
to reduced amounts of depreciation. Furniture and equipment expenses
totaled $998,000 and $2,041,000 for the second quarter of 1998 and
year-to-date ended June 30, 1998. The decreases were $101,000 or 9.2%
and $85,000 or 4.0% respectively, for the three and six month periods
ended June 30, 1998 and occurred largely as a result of a reduced
level of repairs and maintenance. Data processing expenses totaled
$1,056,000 during the current quarter compared to $739,000 for the
same period in 1997 while totaling $1,861,000 for the six months
ended June 30, 1998 compared to $1,523,000 for the first half of
1997. The increases, $317,000 or 42.9% and $338,000 or 22.2% for the
quarter and year-to-date periods, were largely the result of
continued enhancements to Area's data processing capabilities and
expenses associated with modifying computer application systems for
the year 2000. Advertising and community relations increased $125,000
or 18.3% to $808,000 for the current quarter and decreased $68,000 or
4.9% to $1,317,000 for the six months ended June 30, 1998 when
compared to the same periods in 1997. The increase for the quarter
was the result radio and television advertising. Professional fees
totaled $1,501,000 for the six months ended June 30, 1998 compared to
$1,329,000 for the same period in 1997. The increase was $172,000 or
12.9% and was primarily the result of consulting fees.
INCOME TAX EXPENSE
Income tax expense totaled $3,020,000 and $5,464,000 for the three
and six month periods ended June 30, 1998 compared to $2,302,000 and
$4,544,000 for the same periods in 1997. The increase in income tax
expense for both the three and six month periods was the result of a
higher level of pretax income. The effective tax rate was 30.5% and
30.0% for the three and six month periods ended June 30, 1998
compared to 29.3% and 29.7% for the same periods of 1997,
respectively. The effective tax rate differs from the marginal income
tax rate of 35% in both 1998 and 1997, primarily as a result of
tax-exempt income and amortization of goodwill.
18
<PAGE> 19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
YEAR 2000
In August 1997 management initiated a company-wide review of all
computer systems and applications in an effort to ensure Year 2000
readiness. This review and related corrective action, if necessary,
is scheduled for completion by the end of 1998. Area expects to incur
internal staff costs related to Year 2000 issues during this period
in addition to replacing obsolete teller equipment and personal
computers at a cost of approximately $2,600,000 to $3,000,000.
Area has included analysis of its customers understanding and
assessment of Year 2000 as part of its credit evaluation.
Additionally, Area is currently working with its vendors to ensure
that they are addressing the issues involved with Year 2000. However,
the business of Area's customers and vendors may be negatively
affected by the Year 2000 issue, and any financial difficulties
incurred by Area's customers and vendors in solving Year 2000 issues
could negatively affect their ability to perform their agreements
with Area. Therefore, there can be no assurance that the failure or
delay of Area's customers, vendors or other third parties in
addressing the Year 2000 issue or the costs involved in such process
will not have a material adverse effect on Area's business, financial
condition and results of operations.
B. FINANCIAL POSITION
Total assets increased $8,028,000 or .4% to $1,909,477,000 from
December 31, 1997 to June 30, 1998. This increase was largely the
result of deposit and shareholders' equity growth partially offset by
a decrease in borrowed funds.
Earning assets totaled $1,764,613,000 on June 30, 1998, an increase
of $16,488,000 or .9% over December 31, 1997. Loans, including loans
held for sale, decreased $29,076,000 to $1,208,048,000 during the six
months ended June 30, 1998 largely as a result of customers
refinancing into long-term fixed-rate loans which were sold. Loans,
including loans held for sale, represent the largest category of
earning assets, comprising 68.5% of earning assets as of June 30,
1998 and 70.8% as of December 31, 1997.
Short-term investments, which include interest-bearing deposits with
banks and federal funds sold totaled $17,090,000 on June 30, 1998, an
increase of $11,286,000 from year-end balances of $5,804,000. This
change was largely the result of an increase in federal funds sold
totaling $8,000,000.
Securities represent 30.6% of earning assets. They totaled
$539,475,000 on June 30, 1998, an increase of $80,151,000 or 17.4%
from December 31, 1997 balances. This change partially reflects the
re-classification of trading account securities into available for
sale.
Deposits totaled $1,475,025,000 on June 30, 1998, an increase of
$41,893,000 or 2.9% from December 31, 1997. Non-interest-bearing
deposits declined $6,277,000 or 3.2% to $190,499,000 from year-end
totals, while interest-bearing deposits increased $48,170,000 or 3.9%
to $1,284,526,000 during the period.
Borrowed funds, which include federal funds purchased, securities
sold under agreements to repurchase, notes payable to the U.S.
Treasury, advances from the Federal Home Loan Bank and other
borrowings decreased by $56,494,000 to $196,372,000 from $252,866,000
on December 31, 1997. Repayment of Federal Home Loan Bank advances
accounted for $35,645,000 of the decrease while a reduction in
federal funds purchased accounted for $17,902,000 of the decline.
Funds for this reduction were obtained from deposit growth and
reductions in loans outstanding.
19
<PAGE> 20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
CAPITAL RESOURCES
Shareholders' equity totaled $217,584,000 at June 30, 1998, an
increase of $21,035,000 or 10.7% from December 31, 1997. Out of net
income of $12,758,000 during the first six months of 1998,
$11,666,000 was retained after paying dividends to shareholders of
$1,092,000. The net unrealized gains on securities available for
sale, net of taxes were $19,879,000 at June 30, 1998, compared to net
unrealized gains of $11,508,000 at year-end 1997. An increase in
unrealized gains on equity securities was largely responsible for
this increase.
The shareholders' equity-to-asset ratio was 11.39% at June 30, 1998
compared to 10.34% on December 31, 1997.
Book value per share was $13.91 and $12.62 at June 30, 1998 and
December 31, 1997, respectively.
A summary of the capital ratios are shown below:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS
JUNE 30 DECEMBER 31 WELL MINIMUM
1998 1997 CAPITALIZED REQUIRED
---- ---- ----------- --------
<S> <C> <C> <C> <C>
Leverage Ratio 9.87% 9.54% 5.00% 4.00%
Tier I Risk Based Capital Ratio 14.14% 13.24% 6.00% 4.00%
Total Risk Based Capital Ratio 15.40% 14.50% 10.00% 8.00%
</TABLE>
ASSET QUALITY
At June 30, 1998, the allowance for loan losses was $20,109,000 or
1.68% of quarter end loans, as compared to 1.62% of loans at December
31, 1997. The ratio of the allowance for loan losses to
non-performing assets increased to 441.4% at June 30, 1998, compared
with 371.9% at December 31, 1997 as a result of an increase in the
allowance for loan losses and a reduction in total nonperforming
assets. Non-performing assets consist of non-accrual loans, loans
past due ninety days or more that are still accruing interest,
restructured loans, and other real estate owned. Currently, net
charge-offs (loan charge-offs less recoveries) are at .08%
(annualized) of average year-to-date loans compared to .08%
(annualized) during the same period in 1997.
Management has determined that the allowance for loan losses be
maintained at a level that is sufficient to absorb the losses that,
in the reasonable opinion and judgment of management, are known and
inherent in the loan portfolio. Management's evaluation includes an
analysis of the overall quality of the loan portfolio, historical
loan loss experience, loan delinquency trends and the economic
conditions within Area's marketing area. Additional allocations for
the allowance are based on specifically identified potential loss
situations.
The allowance for loan losses is allocated by category of loan and by
a percentage distribution of the allowance allocation. An allocation
of the allowance for loan losses is an estimate of the portion which
will be used to cover future charge-offs in each loan category, but
does not preclude any portion of the allowance allocated to one type
of loan from being used to cushion losses of another loan type. This
allocation is determined by the estimated loss within each loan pool
as well as any specific allocations that may be assigned to specific
loans within the same portfolio section with the remainder being
assigned to the unallocated category.
A continuous and comprehensive loan review program is maintained by
Area for each affiliate bank. The purpose of this program is to
provide periodic review and inspection of loans to ensure the safety,
liquidity and profitability of the loan portfolio. Area's loan review
department is entrusted with the responsibility to identify
foreseeable problems, measure compliance with established loan and
operating policies and provide objective loan portfolio appraisals to
the Board of Directors and management.
20
<PAGE> 21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998 AND 1997
ASSET QUALITY (CONTINUED)
The following schedule shows the dollar amount of assets at June 30,
1998, December 31, 1997 and June 30, 1997, which were nonaccrual
loans, loans contractually past due ninety days or more as to
interest or principal payments and still accruing and other real
estate and in-substance foreclosures:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
(In thousands) 1998 1997 1997
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans $2,350 $2,173 $1,967
Loans contractually past due 90 days or more as to
interest or principal and still accruing 501 1,789 3,950
------ ------ ------
TOTAL NONPERFORMING AND RESTRUCTURED LOANS 2,851 3,962 5,917
Other real estate owned 1,705 1,386 1,518
------ ------ ------
TOTAL NONPERFORMING ASSETS $4,556 $5,348 $7,435
====== ====== ======
</TABLE>
C. LIQUIDITY
Deposits have historically provided Area with a major source of
stable and relatively low-cost funding. Secondary sources of
liquidity include federal funds purchased, securities sold under
agreements to repurchase, notes payable to the U.S. Treasury,
advances from the Federal Home Loan Bank and other borrowings.
As of June 30, 1998, 77.2% of total assets were funded by core
deposits while 10.3% were funded with secondary sources of liquidity
discussed above, compared to 75.4% and 13.3%, respectively, as of
December 31, 1997.
The net loan-to-deposit ratio decreased from 84.3% on December 31,
1997 to 79.6% on June 30, 1998 as a result of a decrease in loans
outstanding and an increase in total deposits.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Area's June 30, 1998 analysis of the impact of changes in interest
rates on net interest income over the next 12 months indicates no
significant changes in the Area's exposure to interest rate changes
since December 31, 1997. The table below illustrates the simulation
analysis of the impact of a 50 (.50%) and 100 (1.00%) basis point
upward and downward movement in interest rates. The impact of the
rate movement was simulated as if rates changed immediately from June
30, 1998 levels, and remained constant at those levels thereafter:
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(In thousands, except per share data)
<TABLE>
<CAPTION>
MOVEMENTS IN INTEREST RATES FROM JUNE 30, 1998 RATES
INCREASE DECREASE
<S> <C> <C> <C> <C>
SIMULATED PRE-TAX IMPACT IN THE NEXT 12 MONTHS +100BP +50BP -50BP -100BP
------ ----- ----- ------
Net interest income increase (decrease) $(2,097) $(691) $153 $996
Net income per share-basic increase (decrease) (.09) (.03) .01 .04
Net income per share-diluted increase (decrease (.09) (.03) .01 .04
</TABLE>
21
<PAGE> 22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
JUNE 30, 1998 AND 1997
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters To a Vote of Security Holders
The annual meeting of shareholders was held on May 18, 1998.
The matters that were voted upon included the election of
directors for one-year terms ending 1999 or until their
successors have been elected and qualified.
The outcome of the voting was as follows:
<TABLE>
<CAPTION>
Name Voted For Voted Against Abstained From Voting
---- --------- ------------- ---------------------
<S> <C> <C> <C>
Anthony G. Bittel 11,678,633 0 2,322
Samuel A. B. Boone 11,664,513 0 16,442
Thomas R. Brumley 11,678,633 0 2,322
Cecile W. Garmon 11,678,086 0 2,869
C. M. Gatton 11,678,633 0 2,322
Gary H. Latham 11,678,408 0 2,547
Raymond C. McKinney 11,640,490 0 40,465
John S. Penn 11,676,841 0 4,114
Allan R. Rhodes 11,678,633 0 2,322
David W. Smith, Jr. 11,678,633 0 2,322
William H. Thompson 11,678,633 0 2,322
Don Vitale 11,678,633 0 2,322
Pollard White 11,678,408 0 2,547
</TABLE>
Total outstanding shares eligible to vote were 15,630,802.
Pursuant to Rule 14a-4(c)(1) promulgated under to Securities
Exchange Act of 1934, as amended, shareholders desiring to
present a proposal for consideration at the 1999 Annual
Meeting of Shareholders must notify Area in writing at its
principal office at P.O. Box 786, Owensboro, Kentucky
42302-0786 of the contents of such proposal no later than
November 1, 1998. Failure to timely submit such a proposal
will enable the proxies appointed by management to exercise
their discretionary voting authority when the proposal is
raised at the Annual Meeting of Shareholders without any
discussion of the matter in the proxy statement.
Item 5. Other Information
Pending Mergers. In March 1998, Area entered into an
agreement to acquire NationsBank of Kentucky, N.A., a
wholly-owned subsidiary of NationsBank Corporation.
NationsBank of Kentucky, N.A. has total assets of
approximately $165,000,000, net of certain deposits that
will be retained by NationsBank of Kentucky, N.A. The
acquisition will be accounted for as a purchase. The
transaction, which is subject to regulatory approval, is
expected to close in the third quarter of 1998.
22
<PAGE> 23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
JUNE 30, 1998 AND 1997
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
3.1(1) Articles of Incorporation of the Registrant, as amended
3.2(2) Bylaws of the Registrant, as amended
10.1(2)* Form of Area Bancshares Corporation Restricted Stock Plan Agreement
10.2(2)* Area Bancshares Corporation 1994 Stock Option Plan
10.3(3)* Memorandum dated September 18, 1996 regarding executive officer
compensation
10.4(4)* Cardinal Bancshares, Inc. 1989 Restricted Stock Option Plan, as amended
April 16,1992
10.5(5)* Cardinal Bancshares, Inc. 1994 Restricted Stock Option Plan
10.6(6)* Cardinal Bancshares, Inc. 1992 Limited Stock Option Plan
10.7(4)* Cardinal Bancshares, Inc. 1992 First Federal Savings Bank Restricted Stock
Option Plan
10.8(7)* Cardinal Bancshares, Inc. 1993 Mutual Federal Savings Bank Restricted Stock
Option Plan
10.9(7)* Amendment Number 1 to Cardinal Bancshares, Inc. 1992 Limited Stock Option
Plan
10.10(6)* Cardinal Bancshares, Inc. VST Financial Services, Inc. Restricted Stock Plan
and Escrow Agreement
10.11(8)* Letter Agreement between the Cardinal Bancshares, Inc. and Michael Karlin
dated December 13, 1993
10.12(5)* Amendment, dated October 26, 1994, to Letter Agreement between Cardinal
Bancshares, Inc. and Michael S. Karlin dated December 13, 1993
10.13(5)* Second Amendment, dated December 30, 1994, to Letter Agreement between
Cardinal Bancshares, Inc. and Michael S. Karlin dated December 13, 1993
10.14(8)* Letter Agreement between Cardinal Bancshares, Inc. and Vincent D. Dailey
dated December 13, 1993
10.15(5)* Amendment, dated December 30, 1994, to Letter Agreement between Cardinal
Bancshares, Inc. and Vincent D. Dailey dated December 13, 1993
</TABLE>
23
<PAGE> 24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
JUNE 30, 1998 AND 1997
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
----------- ----------------------
<S> <C>
10.16(8)* Stock Option Agreement dated December 13, 1993 between Cardinal
Bancshares, Inc. and Michael S. Karlin
10.17(8)* Stock Option Agreement dated December 13, 1993 between Cardinal
Bancshares, Inc. and Vincent S. Dailey
10.18(5)* Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership Plan and Trust
Agreement
10.19(7)* Cardinal Bancshares, Inc. Management Retention Plan and Trust Agreement for
the Benefit of Alliance Savings Bank
11.1 Statement regarding Computation of Per Share Earnings
23.1(1) Consent of Independent Auditors
27.1 Exhibit 27 Financial Data Schedule (For SEC use only)
</TABLE>
-----------------
(1) Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-8 (File No.
333-38037).
(2) Incorporated by reference to the exhibit filed with the
Registrant's Form 10/A1, filed with the Commission on June 30,
1995 (File No. 0-26032).
(3) Incorporated by reference to the exhibit filed with the
Registrant's Quarterly Report on Form 10-Q, dated September 30,
1996 (File No. 0-26032).
(4) Incorporated by reference to the exhibit filed with Cardinal's
Registration Statement on Form S-1 (File No. 33-48129).
(5) Incorporated by reference to the exhibit filed with Cardinal's
Annual Report on Form 10-K for the fiscal year ended December
31, 1994 (File No. 0-20494).
(6) Incorporated by reference to the exhibit filed with Cardinal's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1992 (File No. 0-20494).
(7) Incorporated by reference to the exhibit filed with Cardinal's
Registration Statement on Form SB-2 (File No. 33-60796).
(8) Incorporated by reference to the exhibit filed with Cardinal's
Annual Report on Form 10-KSB for the fiscal year ended December
31, 1993 (File No. 0-20494).
* The indicated exhibit is a compensatory plan or arrangement.
b) Reports on Form 8-K. No reports on Form 8-K have been filed
during the quarter for which this report is filed.
24
<PAGE> 25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
JUNE 30, 1998 AND 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AREA BANCSHARES CORPORATION
Date: August 10, 1998 By: /S/ Thomas R. Brumley
--------------------- --------------------------------------
Thomas R. Brumley
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 1998 By: /S/ Jack H. Brown
--------------------- --------------------------------------
Jack H. Brown
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
Date: August 10, 1998 By: /S/ Gary R. White
--------------------- --------------------------------------
Gary R. White
Vice President, Controller
(Principal Accounting Officer)
25
<PAGE> 1
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
EXHIBIT 11
STATEMENT RE COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1998 1997 1998 1997
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Shares of common stock, beginning 15,630,802 15,493,879 15,576,916 15,514,222
Shares of common stock, ending 15,638,516 15,520,375 15,638,516 15,520,375
Computation of weighted average number of common
and common equivalent shares:
Common shares outstanding at the beginning
of the period 15,630,802 15,493,879 15,576,916 15,514,222
Weighted average number of shares issued 4,685 12,807 47,482 15,629
Weighted average number of shares redeemed 0 901 0 4,686
Weighted average of common stock equivalent
attributable to stock options granted, computed
under the treasury stock method 285,182 287,207 280,795 286,420
---------- ---------- ----------- -----------
Weighted average number of common and common
equivalent shares (note 3) 15,920,669 15,792,992 15,905,193 15,811,585
========== ========== ========== ==========
Earnings and earnings per common and common equivalent
shares (note 3):
Net Income $6,887,000 $5,552,000 $12,758,000 $10,772,000
Earnings per common share-basic $0.44 $0.36 $0.82 $0.69
-diluted $0.43 $0.35 $0.80 $0.68
Dividends per share $0.035 $0.03 $0.07 $0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 77,326
<INT-BEARING-DEPOSITS> 9,090
<FED-FUNDS-SOLD> 8,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 425,575
<INVESTMENTS-CARRYING> 113,900
<INVESTMENTS-MARKET> 119,854
<LOANS> 1,194,565
<ALLOWANCE> 20,109
<TOTAL-ASSETS> 1,909,477
<DEPOSITS> 1,475,025
<SHORT-TERM> 144,969
<LIABILITIES-OTHER> 20,496
<LONG-TERM> 51,403
0
0
<COMMON> 24,350
<OTHER-SE> 193,234
<TOTAL-LIABILITIES-AND-EQUITY> 1,909,477
<INTEREST-LOAN> 55,751
<INTEREST-INVEST> 1,749
<INTEREST-OTHER> 13,170
<INTEREST-TOTAL> 70,670
<INTEREST-DEPOSIT> 28,751
<INTEREST-EXPENSE> 33,314
<INTEREST-INCOME-NET> 37,356
<LOAN-LOSSES> 713
<SECURITIES-GAINS> 125
<EXPENSE-OTHER> 30,626
<INCOME-PRETAX> 18,222
<INCOME-PRE-EXTRAORDINARY> 12,758
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,758
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.80
<YIELD-ACTUAL> 8.38
<LOANS-NON> 2,350
<LOANS-PAST> 501
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,887
<CHARGE-OFFS> 1,330
<RECOVERIES> 839
<ALLOWANCE-CLOSE> 20,109
<ALLOWANCE-DOMESTIC> 20,109
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,735
</TABLE>
