<PAGE> 1
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 For the Fiscal Year Ended December 31, 1997
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.
AREA BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-0902343
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
230 Frederica Street
Owensboro, KY 42301
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (502) 926-3232
Securities Registered Pursuant to Section 12(b) of the Act: None
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 Form10-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 nonaffiliates on March 18, 1998 was $234,166,000, (based
upon reports of beneficial ownership that approximately 60.53% of the shares are
so owned by nonaffiliates).
The number of shares outstanding of the Registrant's common stock as of March
18, 1998:
15,630,802 Shares Common Stock, No Par Value
1
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I
<S> <C>
Page
ITEM 1 BUSINESS
(A) General Description 4
(B) Affiliated Banks 4
(C) Bank-Related Subsidiaries and Affiliates 5
(D) Executive Officers of the Registrant 6
(E) Employees 6
(F) Supervision and Regulation 7
(G) Governmental Monetary Policy 10
(H) Competition 11
(I) Statistical Disclosure 12
ITEM 2 PROPERTIES 13
ITEM 3 LEGAL PROCEEDINGS 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5 MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6 SELECTED FINANCIAL DATA 15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 7a MARKET RISK 15
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 15
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 15
ITEM 11 EXECUTIVE COMPENSATION 15
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 16
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 16
</TABLE>
3
<PAGE> 4
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, 1997, the Corporation had
direct control of three affiliated commercial banks and indirect control of
seven additional commercial banks through the ownership of holding companies,
all of which are located in Kentucky, of which four are national banks, six are
state banks, and one is a federal thrift (collectively referred to as banks or
affiliated 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 eleven affiliated banks had 52 banking locations at December 31,
1997. These banks serve both agricultural and metropolitan areas. The location
and certain other information about the affiliated banks are given below:
<TABLE>
<CAPTION>
December 31, 1997
Affiliated Banks Total Assets (000)
---------------- ------------------
<S> <C>
Alliance Bank, FSB $189,149
124 N. Main Street
Somerset, Kentucky 42501
Bowling Green Bank and Trust Company, N.A 175,727
1820 Scottsville Road
Bowling Green, Kentucky 42103
Citizens Deposit Bank 44,521
100 Main Street
Calhoun, Kentucky 42327
First City Bank and Trust Company 286,204
1002 South Virginia Street
Hopkinsville, Kentucky 42240
First & Peoples Bank 57,136
110 E. Main Street
Springfield, Kentucky 40069
</TABLE>
4
<PAGE> 5
<TABLE>
<S> <C>
HNB Bank, N.A 174,065
101 N. Main Street
Harlan, Kentucky 40831
Jefferson Banking Company 82,316
4201 Shelbyville Road
Louisville, Kentucky 40207
The New Farmers National Bank of Glasgow 162,209
701 Columbia, Box 248
Glasgow, Kentucky 42142
The Owensboro National Bank 475,668
230 Frederica Street
Owensboro, Kentucky 42301
Southern Deposit Bank 77,974
102 West Park Square, Box 130
Russellville, Kentucky 42276
The Vine Street Trust Company 177,104
360 E. Vine Street
Lexington, Kentucky 40507
</TABLE>
(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.
During April 1992, VST Financial Services, Inc. was formed as a
wholly-owned subsidiary of The Vine Street Trust Company for the purpose of
originating and facilitating the processing of small business administration
guaranteed loans.
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, 1997, ABC Credit had ten offices operating in
Kentucky with net loans outstanding of $11,234,000.
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.
5
<PAGE> 6
(D) EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Corporation as of
March 15, 1998, 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 59 President, 1990 President and CEO of
Owensboro, Kentucky Chief Executive Officer The Owensboro National
and Director Director-1996 Bank from 1983 to 1990
Jack H. Brown 48 Senior Vice President, 1997 Chief Financial Officer
Lexington, Kentucky Chief Financial Officer of Cardinal Bancshares, Inc.
from 1992 to 1997 and
Treasurer of Cardinal
Bancshares, Inc. from
1988 to 1992
Edward F. Johnson 62 Senior Vice President, 1987 First Senior Vice President
Owensboro, Kentucky Operations 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 S. Penn 46 Executive Vice President 1997 President and Chief Executive
Lexington, Kentucky Director-1997 Officer of Cardinal
Bancshares, Inc. from 1996
to 1997 and President and
Chief Operating Officer of
Cardinal Bancshares, Inc. from
1987 to 1996.
Timothy O. Shelburne 41 Senior Vice President, 1995 Vice President and Compliance
Owensboro, Kentucky General Counsel Officer for The Owensboro
National Bank from
1993 to 1994
John A. Ray 42 Treasurer 1998 President and CEO of The
Owensboro, Kentucky Owensboro National Bank
from 1997. First Senior
Vice President of Finance
of The Owensboro National
Bank from 1993 to 1994
</TABLE>
(F) EMPLOYEES
On December 31, 1997, the Corporation had 720 full-time employees and 219
part-time employees. None of the employees of the Corporation are represented by
unions. The relationship between management and employees of the Corporation is
considered good.
6
<PAGE> 7
(G) 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 Banking 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, as of June 1, 1997, national and
state-chartered banks may branch interstate through acquisitions of banks in
other states.
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 are 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.
7
<PAGE> 8
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.
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. The federal thrift is subject to regulation, supervision and
examination by the Office of Thrift Supervision as its primary regulator.
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.
The Office of Thrift Supervision limits the amount of dividends that can be paid
to 50% of the risk-based capital excess.
8
<PAGE> 9
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 Tier 1 Capital to 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, 1997, the Corporation had a Tier 1 leverage ratio of
9.54%, a Tier 1 risk-based ratio of 13.24%, and a total risk-based ratio of
14.50%.
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 institution and correcting its
problems, the FDIC Act mandates that the institution be placed in receivership.
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>
9
<PAGE> 10
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 downgrading 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, 1997, 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.
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
(H) 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.
10
<PAGE> 11
(H) ECONOMIC CONDITIONS
As outlined in Item 1 (B). Business, Affiliated Banks, the eleven
affiliated banks operate in six separate Western Kentucky counties and five
separate Eastern Kentucky counties.
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 Commonwealth of Kentucky. The unemployment rate has fallen during
1997 in both the Commonwealth and the local economies of the Banks. 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.
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 FDIC insured institutions. The
information is for June 30, 1997 and was provided by the Federal Deposit
Insurance Corporation.
<TABLE>
<CAPTION>
Affiliated
Affiliated Total Affiliated Bank Percent
Bank County County Deposits (000) Bank Deposits (000) of Total
---- ------ --------------------- ------------------- --------
<S> <C> <C> <C> <C>
Alliance Bank, FSB Pulaski $ 607,482 $ 88,451 14.6%
124 N. Main Street
Somerset, KY 42501
Bowling Green Bank Warren 1,036,931 148,003 14.3%
and Trust Company, N.A
1820 Scottsville Road
Bowling Green, KY 42103
Citizens Deposit Bank McLean 115,925 29,805 25.7%
100 Main Street
Calhoun, KY 42327
First City Bank and Christian 589,464 174,321 29.6%
Trust Company
1002 E. Main Street
Hopkinsville, KY 42240
First & Peoples Bank Washington 162,034 50,019 30.9%
110 E. Main Street
Springfield, KY 40069
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
Affiliated
Affiliated Total Affiliated Bank Percent
Bank County County Deposits (000) Bank Deposits (000) of Total
---- ------ --------------------- ------------------- --------
<S> <C> <C> <C> <C>
HNB Bank, N.A Harlan 270,913 105,491 38.9%
101 N. Main Street
Harlan, KY 40831
Jefferson Banking Jefferson 11,974,390 68,567 .6%
Company
4201 Shelbyville Rd
Louisville, KY 40207
The New Farmers Barren 438,831 124,267 28.3%
National Bank of
Glasgow
701 Columbia, Box 248
Glasgow, KY 42142
The Owensboro National Daviess 1,128,624 342,724 30.4%
Bank
230 Frederica St
Owensboro, KY 42301
Southern Deposit Bank Logan 304,787 44,624 14.6%
102 West Park Square
Box 130
Russellville, KY 42276
The Vine Street Trust Fayette 3,063,978 120,828 3.9%
Company --------- ------- ---
360 E. Vine Street
Lexington, KY 40507
Total $19,693,359 $1,297,100 6.6%
=========== ========== ===
</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, 1997, and listed below along
with a page reference where the information can be found in the Annual Report to
Shareholders.
12
<PAGE> 13
Description of Financial Information Required Reference
Summary of average balance sheets, net interest
income and interest rates Table 1, Page 12
Summary of changes in net interest income Table 2, Page 13
Interest rate sensitivity Management's Discussion
and Analysis, Page 9
Allocation of the allowance for loan losses Table 7, Page 18
Summary of loan loss experience Table 6, Page 17
Carrying amounts of securities Table 3, Page 14
Maturities and average yields of securities Table 4, Page 15
Other borrowing information Table 10, Page 20
Non-performing assets Table 8, Page 18
Average deposits and rates paid Table 9, Page 19
Loan portfolio information Table 5, Page 16
ITEM 2. PROPERTIES
The corporate offices of Area Bancshares Corporation are located at 230
Frederica Street, Owensboro, Kentucky 42301. Information as of December 31, 1997
relative to the properties of the affiliated banks follow:
<TABLE>
<CAPTION>
Number of Number of
Affiliated Banks Leased Facilities (1) Owned Facilities (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
Alliance Bank, FSB 0 2
124 N. Main Street
Somerset, KY 42501
Bowling Green Bank 3 4
and Trust Company, N
1820 Scottsville Road
Bowling Green, KY 421
Citizens Deposit Bank 0 1
100 Main Street
Calhoun, KY 42327
First City Bank and 2 5
Trust Company
1002 E. Main Street
Hopkinsville, KY 42240
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Number of Number of
Affiliated Banks Leased Facilities (1) Owned Facilities (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
First & Peoples Bank 0 2
110 E. Main Street
Springfield, KY 40069
HNB Bank, N.A 1 3
101 N. Main Street
Harlan, KY 40831
Jefferson Banking 0 1
Company
4201 Shelbyville Rd
Louisville, KY 40207
The New Farmers 4 7
National Bank of
Glasgow
701 Columbia, Box 248
Glasgow, KY 42142
The Owensboro National 3 8
Bank
230 Frederica St
Owensboro, KY 42301
Southern Deposit Bank 0 3
102 West Park Square
Box 130
Russellville, KY 42276
The Vine Street Trust 2 1
Company -- --
360 E. Vine Street
Lexington, KY 40507
Total 15 37
== ==
</TABLE>
(1) Does not include ATM locations.
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.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The required information is incorporated herein by reference from page 54
of the Area Bancshares Corporation's 1997 Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are incorporated herein by reference from page 2
of the Area Bancshares Corporation 1997 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL 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 1997 Annual Report.
ITEM 7a. MARKET RISK
Information required for this item is incorporated herein by reference
form page 9 of Area Bancshares Corporation 1997 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 52 of
the Area Bancshares Corporation 1997 Annual Report. Also, unaudited quarterly
financial information for the Corporation and its subsidiaries is incorporated
by reference from page 11 of the Area Bancshares Corporation 1997 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 11 of the Proxy Statement of Area Bancshares Corporation
for its 1998 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 1998
Annual meeting of shareholders.
15
<PAGE> 16
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
1998 Annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required for this item is incorporated herein by reference
from page 14 of Area Bancshares Corporation's Proxy Statement for its 1998
Annual meeting of shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPOTS 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, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997,
1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended December 31,
1997, 1996 and 1995
Unaudited quarterly financial information of Area Bancshares and
its subsidiaries.
Independent Auditors' Report - page 22.
2. Supplemental Schedule
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:
EXHIBIT INDEX
<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
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
10.4(4)* Cardinal Bancshares, Inc. 1989 Restricted Stock
Option Plan, as amended April 16,1 992
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
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
13.1 1997 Annual Report to Shareholders
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
</TABLE>
18
<PAGE> 19
27.1 Financial Data Schedule (EDGAR version only)
- --------------------
(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.
INSERT 16A
See Exhibit Index on page 16.
(b) Reports on Form 8-K.
The Registrant filed two Reports on Form 8-K during the last quarter of
1997:
Form 8-K, dated October 14, 1997, reporting:
Item 2 - Acquisition and Disposition of Assets;
Item 7 - Financial Statements and Exhibits.
Form 8-K/A, dated October 15, 1997, reporting:
Item 2 - Acquisition and Disposition of Assets;
Item 7 - Financial Statements and Exhibits.
19
<PAGE> 20
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 24, 1998 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 24, 1998 By: /s/ C. M. Gatton
------------------------ ------------------------------------------
C. M. Gatton
Chairman of the Board
Date: March 24, 1998 By: /s/ Raymond C. McKinney
------------------------ ------------------------------------------
Raymond C. McKinney
Vice Chairman of the Board
Date: March 24, 1998 By: /s/ Anthony G. Bittel
------------------------ ------------------------------------------
Anthony G. Bittel, Director
Date: March 24, 1998 By: /s/ Samual A. B. Boone
------------------------ ------------------------------------------
Samual A. B. Boone, Director
Date: March 24, 1998 By: /s/ Thomas R. Brumley
------------------------ ------------------------------------------
Thomas R. Brumley
President and Chief Executive Officer,
Director
Date: March 24, 1998 By: /s/ Gary H. Latham
------------------------ ------------------------------------------
Gary H. Latham, Director
Date: March 24, 1998 By: /s/ John S. Penn
------------------------ ------------------------------------------
John S. Penn, Executive Vice President,
Director
Date: March 24, 1998 By: /s/ Allan R. Rhodes
------------------------ ------------------------------------------
Allan R. Rhodes, Director
Date: March 24, 1998 By: /s/ David W. Smith, Jr.
------------------------ ------------------------------------------
David W. Smith, Jr., Director
Date: March 24, 1998 By: /s/ William H. Thompson
------------------------ ------------------------------------------
William H. Thompson, Director
Date: March 24, 1998 By: /s/ Pollard White
------------------------ ------------------------------------------
Pollard White, Director
20
<PAGE> 21
Date: March 24, 1998 By: /s/ Jack H. Brown
------------------------ ------------------------------------------
Jack H. Brown, Senior Vice President,
Chief Financial Officer
Date: March 24, 1998 By: /s/ John A. Ray
------------------------ ------------------------------------------
John A. Ray, Treasurer
Date: March 24, 1998 By: /s/ Gary R. White
------------------------ ------------------------------------------
Gary R. White, Controller
(Principal Accounting Officer)
21
<PAGE> 1
EXHIBIT 13.1
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONTENTS
Letter to Shareholders
1
Consolidated Five Year Selected Financial Data
2
Financial Review
3-21
Independent Auditors' Report
22
Consolidated Balance Sheets
23
Consolidated Statements of Income
24
Consolidated Statements of Shareholders' Equity
25-26
Consolidated Statements of Cash Flows
27-28
Notes to Consolidated Financial Statements
29-52
Corporate Information
53
Market for Common Stock and Related Shareholder Matters
54
Area Bancshares Corporation - Officers and Directors
55
Alliance Bank, FSB - Officers and Directors
56
Bowling Green Bank and Trust Company, N.A. - Officers and Directors
56
Citizens Deposit Bank - Officers and Directors
56
First City Bank and Trust Company - Officers and Directors
57
First & Peoples Bank - Officers and Directors
58
HNB Bank, N.A. - Officers and Directors
58
Jefferson Banking Company - Officers and Directors
58
The New Farmers National Bank of Glasgow - Officers and Directors
59
The Owensboro National Bank - Officers and Directors
60
Southern Deposit Bank - Officers and Directors
61
The Vine Street Trust Company - Officers and Directors
62
ABC Credit Corporation - Officers and Directors
63
Vine Street Financial, Inc. - Officers and Directors
63
<PAGE> 2
1
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
DEAR SHAREHOLDER:
The following financial information reflects an excellent year for Area
Bancshares Corporation in all significant performance indices. It should be
noted once again, that all financial information is presented as though the
September 30, 1997 merger of Area and Cardinal Bancshares, Inc. existed prior to
that date. In other words, all statements have been restated to reflect the
combined numbers which is in accordance with various regulatory requirements.
This tends to distort some information and you should read carefully the
discussion that accompanies the financials.
The merger of Cardinal into Area has gone remarkably well and is a
testimonial to the high professional level of skill of all persons involved in
the process. New products as well as new processes, i.e. statement imaging, have
been instituted in all affiliates successfully.
A long term corporate goal, development of career paths for everyone
with the organization, was clearly realized in 1997, with promotions from within
for two individuals to the title of President and Chief Executive Officer of an
affiliate bank. John A. Ray was so named to lead Owensboro National Bank after
14 years in several capacities, both with affiliate banks and with the holding
company. Richard N. "Rick" Wilson assumed leadership of Bowling Green Bank &
Trust Company with the unique background of having started with that bank on a
part-time basis while in high school. Both have exhibited a sincere desire to
promote the welfare of all stakeholders in Area Bancshares Corporation, their
communities, employees and shareholders.
The pace of change in the financial world is a high velocity one
requiring us to think differently; reorder our priorities; and develop quicker
responses. We must understand that change is without a conscience; has no
favorites; and takes no prisoners. Survivors are those who not only adapt, but
also actually embrace change for the opportunity it presents.
Our desire is to do everything possible to respond to competitive
challenges through communication channels that increase both productivity and
customer service levels. To stay focused. Initiate positive responses. Problem
solve. Be innovative. Use imagination. Search for strengths. Develop new
directions. In other words to be all that we can be in 1998, and beyond.
We welcome the approximately 1,200 shareholders from Cardinal and thank
you for your confidence and assistance.
Sincerely yours,
Thomas R. Brumley
President and
Chief Executive Officer
<PAGE> 3
2
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT RATIOS
AND PER SHARE DATA) 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR-END TOTALS
Assets $1,901,449 $1,796,290 $1,778,559 $1,622,509 $1,458,428
Securities available for sale 342,513 320,413 355,217 310,991 --
Securities held to maturity 116,811 97,120 94,015 124,724 315,339
Loans, net of unearned discount 1,227,307 1,147,060 1,091,867 983,049 830,757
Deposits 1,433,132 1,394,399 1,223,556 1,175,373 1,029,344
Long-term debt and other borrowings 84,336 49,313 30,619 60,839 11,983
Shareholders' equity 196,549 169,383 149,724 128,373 129,411
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS
Total interest income $ 139,249 $ 136,835 $ 132,088 $ 102,975 $ 99,006
Total interest expense 63,643 64,410 64,330 42,452 43,471
Provision for loan losses 3,271 4,849 4,824 4,976 3,751
Non-interest income 18,322 28,238 18,413 13,804 18,680
Non-interest expenses 61,357 65,912 64,414 61,099 47,528
Income taxes 8,491 10,016 4,487 1,278 5,587
Net income 20,809 19,886 12,446 6,974 17,588
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA(1)
Net income-basic $ 1.35 $ 1.28 $ .81 $ .46 $ 1.23
Net income-diluted 1.33 1.26 .79 .45 1.21
Cash dividends .125 .107 .09 .08 .07
Book value as of December 31 12.62 10.92 9.68 8.43 8.44
- ----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AND CAPITAL MEASURES
Return on average total assets 1.18% 1.15% .75% .47% 1.18%
Return on average shareholders' equity 11.32% 12.38% 9.04% 5.27% 15.41%
Percentage of average shareholders' equity to
average total assets 10.39% 9.28% 8.26% 8.85% 7.67%
Dividend payout ratio(2) 9.26% 7.79% 8.88% 12.24% 5.98%
- ----------------------------------------------------------------------------------------------------------------------------
CASH BASIS FINANCIAL DATA(3)
Net income-basic $ 1.48 $ 1.42 $ .96 $ .61 $ 1.40
Net income-diluted 1.45 1.40 .95 .60 1.37
Return on average tangible assets 1.30% 1.29% .90% .63% 1.33%
Return on average tangible shareholders' equity 13.58% 15.54% 12.50% 8.22% 21.21%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated for all stock dividends and stock splits.
(2) Dividend payout ratio reflects Area Bancshares Corporation's payout ratio
prior to the Cardinal Bancshares, Inc. merger.
(3) Cash basis calculations exclude intangible assets and the related
amortization expense.
<PAGE> 4
3
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CORPORATE OVERVIEW
Area Bancshares Corporation ("Area") is a multi-bank holding company
headquartered in Owensboro, Kentucky. Area is comprised of ten banks and one
thrift ("banking affiliates") conducting business through offices in Kentucky.
The banking affiliates provide a wide range of financial services, such as
accepting demand and time deposits; providing checking and money market
accounts; making commercial, consumer and mortgage loans; issuing and servicing
credit cards; leasing; issuing credit life, accident and health, and property
and casualty insurance; providing trust services for personal and corporate
customers; providing safe deposit facilities; and providing alternative
investments and brokerage services. Area has six active non-bank affiliates
which provide services incidental to Area's operations.
The following information is management's analysis of the operations of
Area for the years 1995 through 1997 and its financial condition as of December
31, 1997 and 1996. This analysis should be read in conjunction with the
accompanying consolidated financial statements and notes thereto beginning on
page 23. During 1997 Area and Cardinal Bancshares, Inc. ("Cardinal") merged in a
transaction accounted for as a pooling-of-interests. Accordingly, all
discussions contained herein of prior results have been presented as if Area and
Cardinal were combined for all periods presented.
EARNINGS ANALYSIS SUMMARY
Earnings for 1997 reflect record net income of $20,809,000, an increase
of $923,000 or 4.6% over 1996 net earnings of $19,886,000 and a $8,363,000 or
67.2% increase from 1995 net income of $12,446,000. Basic earnings per share
were at record levels increasing to $1.35 in 1997 from $1.28 in 1996 and $.81 in
1995. Diluted earnings per share were also at a record level of $1.33 in 1997
compared to $1.26 in 1996 and $.79 in 1995. (Earnings per share have been
retroactively restated to reflect a 3-for-2 stock split effected in the form of
a dividend in December 1996.) A number of nonrecurring items affected net income
during 1996 and hence the comparability of 1997 with 1996. Substantially all of
the assets of Cardinal Credit Corporation were sold providing an after-tax gain
of $4,316,000, investment securities classified as available for sale were sold
for an after-tax gain of $1,868,000, certain stock option plans were amended
resulting in an after-tax charge to earnings totaling $1,122,000 and a loss
associated with Security First Network Bank and its spin-off amounted to
$1,605,000 on an after-tax basis were all recorded during 1996. (See page 10 for
a detailed description and analysis of these items). After adjusting earnings
for these items, Area would have reported net income of $16,429,000 for 1996.
The increase in net income from 1996 to 1997 would have been $4,380,000 or
26.7%.
Return on average assets ("ROAA") was 1.18%, 1.15%, and .75% in 1997,
1996, and 1995, respectively. The increase in 1997 from 1996 was due to the
growth in net income exceeding the growth in average assets, while the increase
in 1996 as compared to 1995 was due primarily to an after tax gain totaling
$4,316,000 recognized in 1996 on the sale of Cardinal Credit Corporation. Return
on average shareholders' equity totaled 11.32% in 1997, 12.38% in 1996 and 9.04%
in 1995.
<TABLE>
<CAPTION>
(In thousands, except
percentages) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income after taxes $ 20,809 $ 19,886 $ 12,446
Average assets 1,769,363 1,730,731 1,665,338
Average shareholders' equity 183,784 160,628 137,614
Return on average assets 1.18% 1.15% .75%
Return on average shareholders' equity 11.32% 12.38% 9.04%
Average shareholders' equity to average assets 10.39% 9.28% 8.26%
Shareholders' equity to assets-December 31 10.34% 9.43% 8.42%
</TABLE>
NET INTEREST INCOME
Net interest income, Area's primary source of revenue, is the
difference between interest income and interest expense. Sources of interest
income include interest on loans and investments while interest expense is paid
on deposits and borrowings. The amount of net interest income is the result of a
number of factors, including the volumes of interest-earning assets and
interest-bearing liabilities and the interest rates earned and paid. Also the
amount of earning assets funded by interest-free sources (largely shareholders'
equity and non-interest bearing deposits) impacts net interest income.
Net interest income increased $3,181,000 or 4.4% to $75,606,000 in 1997
from $72,425,000 in 1996. Taxable-equivalent net interest income (taxable
interest income plus tax-free interest income restated at a taxable equivalent
less interest expense) was $79,110,000 in 1997 and $75,677,000 in 1996. The 1997
increase was largely due to a higher level of earning assets and an improvement
in the net interest margin from 4.69% in 1996 to 4.77% in 1997. Average earning
assets grew 2.7% or $43,405,000 from 1996 to 1997 while average interest bearing
liabilities increased $8,126,000 or .6%. Increases in non-interest bearing
deposits and shareholders' equity primarily funded the growth in earning assets.
<PAGE> 5
4
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
The net interest margin is net interest income, on a taxable equivalent
basis (all tax-free interest restated as if it were taxable), expressed as a
percentage of average earning assets. The margin is influenced by a number of
factors including the composition of earning assets as well as interest bearing
liabilities, the general interest rate environment and the amount of earning
assets funded with interest-free funds (largely equity and non-interest bearing
deposits). The net interest margin increased during 1997 as compared to 1996
primarily as a result of a reduction of .08% (from 4.68% in 1996 to 4.60% in
1997) in the cost of interest bearing liabilities. In addition, the impact of
non-interest bearing liabilities contributed .06% to the improvement in the net
interest margin.
<TABLE>
<CAPTION>
NET INTEREST SPREAD AND MARGIN
(Taxable-Equivalent Basis) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield on interest earning assets 8.62% 8.68% 8.75%
Rate on interest bearing liabilities 4.60% 4.68% 4.80%
- --------------------------------------------------------------------------------
NET INTEREST SPREAD 4.02% 4.00% 3.95%
Non-interest bearing funds contribution .75% .69% .64%
- --------------------------------------------------------------------------------
NET INTEREST MARGIN 4.77% 4.69% 4.59%
- --------------------------------------------------------------------------------
</TABLE>
Net interest income and margin were affected by rising rates in early
1997 followed by falling rates during the second half of 1997 while increasing
rates significantly impacted 1996. Table 1 on page 12 contains a summary of
average balance sheets, net interest income, and margins for 1997, 1996, and
1995. Table 2 on page 13 provides the components of changes in net interest
income for 1997 and 1996 when compared to 1996 and 1995, respectively.
Prior years: Net interest income totaled $72,425,000 in 1996 and $67,758,000 in
1995. The increase for 1996 was $4,667,000 or 6.9%. Taxable-equivalent net
interest income increased $4,562,000 or 6.4% to $75,677,000 in 1996 from
$71,115,000 in 1995. The 1996 increase was due to a higher level of earning
assets and an improved net interest margin.
PROVISION FOR LOAN LOSSES
Each of Area's affiliate banks make provisions for possible loan losses
in amounts estimated to be sufficient to maintain the allowance for loan losses
at a level considered necessary by management to absorb estimated losses in the
loan portfolios. The provision for loan losses during 1997 was $3,271,000,
compared to $4,849,000 in 1996. The lower provision in 1997 reflects the
continuing improvement in the loan portfolio, as indicated by reductions in the
ratios of non-performing loans to total loans and net charge-offs as a percent
of average loans. Table 6 on page 17 provides a detailed analysis of the loan
loss experience for the years ending December 31, 1993 through 1997.
Prior years: The provision for loan losses during 1996 was $4,849,000 versus
$4,824,000 in 1995. These provisions reflect the relatively consistant level of
nonperforming assets as indicated in Table 8 on page 18.
NON-INTEREST INCOME
Non-interest income is a significant source of revenue for Area,
contributing approximately 11.6% in 1997 and 17.1% in 1996 of total revenues.
Area continues to develop existing products and services as well as create new
ones in order to enhance non-interest income. The level of competition within
the financial services industry continues to put pressure on Area's ability to
increase its net interest income, thus making the growth of recurring
non-interest income an important aspect of Area's strategy. The major recurring
categories of non-interest income include commissions and fees on fiduciary
activities, service charges on deposit accounts, other service charges, and
other income. These recurring sources of non-interest income totaled $16,927,000
in 1997 and $16,061,000 in 1996, an increase of $866,000 or 5.4%. Additionally,
non-interest income is derived from other non-recurring sources such as
securities gains and gains on the sales of loans, which may vary significantly
from period to period. For 1997, total non-interest income decreased $9,916,000
or 35.1%, to $18,322,000 from $28,238,000 in 1996. The primary reason for this
decrease was a gain totaling $8,230,000 recorded in 1996 on the sale of
substantially all of the assets of Cardinal Credit Corporation.
Commissions and fees on fiduciary activities totaling $4,264,000
increased $630,000 or 17.3% in 1997 when compared to 1996. This increase was the
result of increases in both assets under management and fees charged.
Service charges on deposit accounts totaled $6,675,000 during 1997, an
increase of $275,000 or 4.3% over 1996. An increase in deposits subject to
service charges was primarily responsible for this increase.
Other service charges, commissions and fees increased $285,000 or 6.0%
to $5,036,000 when compared to 1996. This increase was largely the result of an
increase in ATM fees. Net securities gains decreased $3,244,000 to $21,000 in
1997 compared to 1996. This decrease was the result of sales of securities
available for sale during the fourth quarter of 1996 which resulted in a gain of
$2,874,000.
<TABLE>
<CAPTION>
NON-INTEREST INCOME
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions and fees on fiduciary activities $ 4,264 $ 3,634 $ 2,879
Service charges on deposit accounts 6,675 6,400 5,770
Other service charges, commissions and fees 5,036 4,751 5,610
Securities gains, net 21 3,265 1,139
Gains on sales of loans, net 1,374 8,912 970
Other income 952 1,276 2,045
- --------------------------------------------------------------------------------
TOTAL $18,322 $28,238 $18,413
================================================================================
</TABLE>
<PAGE> 6
5
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Gains on sales of loans, net, totaled $1,374,000 during 1997, a
decrease of $7,538,000 or 84.6% from 1996. This decrease was largely the result
of a gain in the amount of $8,230,000 recorded in 1996 related to the sale of
substantially all of the assets of Cardinal Credit Corporation. Excluding the
gain on Cardinal Credit Corporation, gains on the sales of mortgage loans would
have increased $692,000 due to increased activity in the sale of mortgage loans.
Other non-interest income decreased $324,000 or 25.4% to $952,000 in
1997 when compared to 1996. This decrease was the result of decreases in gains
on the sale of other real estate and fixed assets.
Prior years: During 1996, non-interest income grew $9,825,000 or 53.4% to
$28,238,000. Recurring non-interest income (non-interest income excluding gains
on sales of securities and loans) declined $243,000 or 1.5% to $16,061,000.
Commissions and fees on fiduciary activities rose $755,000 or 26.2% to
$3,634,000 during 1996. This increase was the result of increases in both assets
under management and fees charged.
Service charges on deposit accounts and other service charges,
commissions and fees, rose 10.9% to $6,400,000 and declined 15.3% to $4,751,000,
respectively. The increase in service charges on deposit accounts was largely
due to an increase in deposits subject to service charges and the addition of
Citizens Deposit Bancshares in the fourth quarter of 1995, while the decrease in
other service charges, commissions and fees was the result of a reduction in
mortgage activity caused by rising interest rates in the first half of 1996.
Net securities gains increased $2,126,000 to $3,265,000 in 1996
compared to 1995. The increase was primarily the result of sales of securities
available for sale which resulted in a gain of $2,874,000.
Gains on the sales of loans totaled $8,912,000 during 1996, an increase
of $7,942,000 from 1995. This increase was the result of the sale of Cardinal
Credit Corporation at a pre-tax gain of $8,230,000.
Other non-interest income decreased $769,000 or 37.6% to $1,276,000 in
1996 when compared to 1995. The decrease was primarily the result of a gain
totaling $324,000 on the sale of deposits recorded in 1995 and a litigation
settlement of $359,000 also recorded in 1995.
NON-INTEREST EXPENSES
<TABLE>
<CAPTION>
NON-INTEREST EXPENSES
(In thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $29,133 $31,907 $30,603
Net occupancy expense 4,074 4,139 4,006
Furniture and equipment expense 4,488 4,438 4,081
Federal deposit insurance 238 1,264 1,681
Data processing expense 3,215 3,193 2,749
Other 20,209 20,971 21,294
- --------------------------------------------------------------------------------
TOTAL $61,357 $65,912 $64,414
================================================================================
</TABLE>
Non-interest expenses decreased $4,555,000 or 6.9% to $61,357,000
during 1997 as compared to 1996. A number of transactions during 1996 affected
the comparability of non-interest expenses between 1997 and 1996. During 1996
the assets of Cardinal Credit Corporation were sold, Security First Network Bank
was spun-off to shareholders, a one-time stock compensation expense was incurred
in connection with amendments to certain stock option plans and payment of a
special FDIC assessment on SAIF-insured deposits was made. None of these
non-interest expenses affected 1997. Table 11 on page 21 contains 1996
non-interest expenses as reported and the various transactions described above.
The following table sets forth the components of non-interest expenses, as
adjusted, and will be used for the discussion of changes in non-interest
expenses from 1996 to 1997:
NON-INTEREST EXPENSES, AS ADJUSTED (SEE TABLE 11 ON PAGE 21)
<TABLE>
<CAPTION>
(In thousands) 1997 1996 Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $29,133 $28,138 $ 995
Net occupancy expense 4,074 3,821 253
Furniture and equipment expense 4,488 3,921 567
Federal deposit insurance 238 508 (270)
Data processing expense 3,215 3,013 202
Other 20,209 19,525 684
- -------------------------------------------------------------------------------
TOTAL $61,357 $58,926 $ 2,431
===============================================================================
</TABLE>
Salaries and employee benefits increased $995,000 or 3.5% to
$29,133,000 in 1997 compared to $28,138,000 in 1996. This increase was largely
the result of normal salary increases.
Net occupancy expense totaled $4,074,000 in 1997 compared to $3,821,000
in 1996. The $253,000 or 6.6% increase from the prior year was largely the
result of the cost of additional branches.
Federal deposit insurance decreased $270,000 or 53.1% to $238,000 in
1997 as a result of reduced rates.
Data processing expenses totaled $3,215,000 during 1997, an increase of
$202,000 or 6.7% over 1996. The increase was primarily the result of an effort
to enhance data processing capabilities to meet internal and customer needs.
Other non-interest expenses increased $684,000 or 3.5% to $20,209,000
in 1997 when compared to 1996. The increase was largely the result of increases
in professional fees, insurance (other than FDIC insurance), and customer
relations/marketing expenses.
YEAR 2000 COMPLIANCE
In August 1997 management initiated a company-wide review of all
computer systems and applications 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 at a cost
of approximately $1,200,000.
<PAGE> 7
6
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Prior years: The sale of Cardinal Credit Corporation, the spin-off of Security
First Network Bank, the one-time stock compensation expense incurred in
connection with amendments to certain stock option plans and the payment of a
special FDIC assessment on SAIF-insured deposits, discussed above, affected 1996
as compared to 1995. The following table eliminates those non-interest expenses
from the reported non-interest totals:
<TABLE>
<CAPTION>
NON-INTEREST EXPENSES
(In thousands) 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Non-interest expenses, as reported $65,912 $64,414
Less: Cardinal Credit non-interest expense 2,556 4,695
SFNB non-interest expense 1,985 4,093
Stock compensation expense 1,719 --
FDIC special insurance assessment 726 --
-------
Non-interest expense, as adjusted $58,926 $55,626
================================================================================
</TABLE>
Non-interest expenses, as adjusted, increased $3,300,000 or 5.9% to
$58,926,000 in 1996 from $55,626,000 in 1995. Approximately $1,203,000 or 36.5%
of this increase was the full year impact of the acquisition of Citizens Deposit
Bancshares, which occurred in the fourth quarter of 1995.
INCOME TAX EXPENSE
Income tax expense was $8,491,000 for 1997, a $1,525,000 decrease from
the $10,016,000 reported in 1996. This decrease reflects a higher level of
tax-exempt interest income in 1997 ($6,903,000 compared to $5,830,000 in 1996)
and a slightly lower income before income taxes ($29,300,000 in 1997 compared to
$29,902,000 in 1996). The effective tax rate for 1997 was 29.0% compared to
33.5% in 1996. The effective tax rate differs from the marginal income tax rate
of 35.0% in both 1997 and 1996, primarily as a result of tax-exempt income.
Prior years: Income tax expense for 1996 was $10,016,000, an increase of
$5,529,000 from $4,487,000 recorded in 1995. This increase was largely the
result of a higher level of pretax income. The effective tax rates for years
ended December 31, 1996 and 1995 were 33.5% and 26.5%, respectively (see note 13
for further analysis of changes in effective rates).
BALANCE SHEET ANALYSIS
TOTAL ASSETS
AT DECEMBER 31
(AMOUNTS IN MILLIONS)
<TABLE>
<S> <C>
1993 $1,458,428,000
1994 1,622,509,000
1995 1,778,559,000
1996 1,796,290,000
1997 1,901,449,000
</TABLE>
SECURITIES
The securities portfolio consists principally of debt securities that
are used as a source of income, liquidity, and collateral for certain deposits
and other short-term borrowings.
The securities portfolio is classified into three categories: held to
maturity ("HTM"), available for sale ("AFS"), and trading account securities.
Securities that management has the intent and ability to hold to maturity are
included in the HTM category and are reported at amortized cost. The HTM
portfolio is comprised of obligations of states and political subdivisions.
Within the category of AFS are all other securities, except trading account
securities, that may be held for indefinite periods. These securities may be
sold in response to changes in interest rates, changes in prepayment risks,
increases in loan demand, general liquidity needs, and other similar factors.
AFS securities are reported at fair value with unrealized gains and losses
reported, net of deferred taxes, as a component of shareholders' equity. Trading
account securities are securities that are purchased and held for the purpose of
selling in the near term. Trading account securities are reported at fair value
with unrealized gains and losses included in net income.
At December 31, 1997, total securities (including trading account
securities) were $505,197,000 compared to $461,410,000 the prior year-end, an
increase of $43,787,000 or 9.5%. Table 3 on page 14 contains additional
information on the composition and carrying amounts of the securities portfolio.
Table 4 on page 15 provides the carrying amounts, maturities and average yields
as of December 31, 1997, of the securities portfolio.
As of December 31, 1997 net unrealized gains related to securities
available for sale were $11,508,000, net of deferred taxes, compared to
$3,560,000, net of deferred taxes, on December 31, 1996. The increase in market
value from December 31, 1996 to December 31, 1997 can primarily be attributed to
increases in the market value of equity securities.
LOANS
LOANS BY TYPE
(AT DECEMBER 31, 1997)
<TABLE>
<CAPTION>
<S> <C>
CONSUMER 17.1%
COMMERCIAL 29.1%
REAL ESTATE 53.8%
</TABLE>
<PAGE> 8
7
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Total loans (including loans held for sale) increased $68,852,000 or
5.9% to $1,237,124,000 at December 31, 1997 from $1,168,272,000 on December 31,
1996.
Loans are Area's primary earning assets, representing 71.8% and 69.7%
of average earning assets during 1997 and 1996, respectively. Area's loans are
made predominantly within each individual bank's market area.
The loan portfolio is diversified between commercial, real estate, and
consumer loans as indicated in the chart below. Table 5 on page 16 provides
supplementary information regarding the composition of the loan portfolio.
COMPOSITION OF LOAN PORTFOLIO
<TABLE>
<CAPTION>
(In thousands, except
percentages) December 31
--------------------------------------------
1997 1996
---- ----
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Commercial loans $ 357,133 29.1% $ 313,104 27.3%
Real estate loans 660,825 53.8% 616,750 53.8%
Consumer loans and Other loans 209,349 17.1% 217,206 18.9%
- -------------------------------------------------------------------------------
TOTAL $1,227,307 100.0% $1,147,060 100.0%
===============================================================================
</TABLE>
Commercial loans increased to $357,133,000 or 29.1% of the loan
portfolio on December 31, 1997, from $313,104,000 or 27.3% of the loan portfolio
on December 31, 1996. This growth is the result of the affiliated banks' efforts
to attract quality commercial accounts within their market areas. The loan mix
within the commercial loan portfolio is diverse and covers a broad range of
borrowers. As a matter of policy, loan concentrations within a particular
industry or borrower are continuously monitored and controlled.
The real estate loan portfolio consists of loans secured by real estate
made to both individuals and businesses. As of December 31, 1997 the real estate
loan portfolio totaled $660,825,000 or 53.8% of total loans, an increase of
$44,075,000 from December 31, 1996. The increase in real estate loans generally
reflects the economic growth experienced throughout Kentucky, as well as new
customers and the results of cross-selling efforts to existing customers.
The consumer loan portfolio includes loans made to individuals for
automobiles, second mortgages and other consumer installment loans. Consumer
loans totaled $209,349,000 or 17.1% of total loans on December 31, 1997 compared
to $217,206,000 or 18.9% of total loans on December 31, 1996.
DEPOSITS
DEPOSIT MIX
<TABLE>
<CAPTION>
(In thousands, except
percentages) December 31
---------------------------------------------
1997 1996
---- ----
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Non-interest bearing demand $ 196,776 13.7% $ 196,565 14.1%
Interest bearing demand 223,820 15.6% 331,807 23.8%
Savings 293,578 20.5% 158,555 11.4%
Certificates of deposit of
$100,000 or more 138,555 9.7% 132,457 9.5%
Other time 580,403 40.5% 575,015 41.2%
- -------------------------------------------------------------------------------
TOTAL DEPOSITS $1,433,132 100.0% $1,394,399 100.0%
===============================================================================
</TABLE>
Core deposits are the principal source of funds available for lending
and investing activities. At December 31, 1997 deposit totals were
$1,433,132,000, an increase of $38,733,000 or 2.8% from December 31, 1996 totals
of $1,394,399,000. This increase was largely the result of a marketing effort to
attract core deposits.
During 1997, total deposits averaged $1,385,089,000 and represented
83.6% of average earning assets compared to $1,373,319,000 and 85.1% during
1996.
The average amount and average rate paid on deposits classified as to
non-interest-bearing demand, interest-bearing demand, savings, and time deposits
is presented in Table 9 on page 19.
DEPOSITS BY TYPE
(AT DECEMBER 31, 1997)
<TABLE>
<S> <C>
NON-INTEREST BEARING DEMAND 13.7%
INTEREST BEARING DEMAND 15.6%
SAVINGS 20.5%
CD'S GREATER THAN $100,000 9.7%
TIME 40.5%
</TABLE>
<PAGE> 9
8
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
OTHER BORROWINGS
Additional sources of funding for Area are various other borrowings,
defined as federal funds purchased and securities sold under agreements to
repurchase, notes payable to the U.S. Treasury and advances from the Federal
Home Loan Bank. Other borrowings totaled $252,866,000 on December 31, 1997, an
increase of $38,950,000 or 18.2% from $213,916,000 on December 31, 1996. This
increase was primarily due to the need for additional funds as a result of the
growth in the loan portfolio exceeding the growth in deposits. Table 10 on page
20 provides additional information relative to year-end balances, average
balances outstanding during the year, and weighted average interest rates paid
during the year on other borrowings
CAPITAL RESOURCES
The capital ratios of Area have consistently exceeded the
"well-capitalized" level for regulatory capital requirements of financial
institutions, as the table below indicates:
CAPITAL RATIOS
<TABLE>
<CAPTION>
Regulatory
December 31 Capital Requirements
- ----------------------------------------------------------------------------------------
Well Minimum
1997 1996 Capitalized Requirements
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 9.54% 8.86% 5.00% 4.00%
Tier I risk-based capital ratio 13.24% 12.93% 6.00% 4.00%
Total risk-based capital ratio 14.50% 14.19% 10.00% 8.00%
</TABLE>
Dividends received from the affiliate bank subsidiaries are the
primary source of funds available for payment of cash dividends to
shareholders, for acquisitions and for debt repayment. State and federal
banking regulations require minimum capital levels to be maintained and impose
certain restrictions on the amount of cash dividends that subsidiaries can pay
to their parent company in any given year.
At December 31, 1997 the book value per share was $12.62, an increase
of $1.70 or 15.6% from $10.92 at December 31, 1996. (Per share data have been
retroactively restated to reflect a 3-for-2 stock split effected in the form of
a dividend in December 1996). This increase was primarily the result of the
retention of $18,286,000 from 1997 earnings (net income of $20,809,000 less
dividends paid of $2,523,000) and the increase totaling $7,948,000 in unrealized
gains on securities available for sale, net of taxes.
During 1994, Area increased the authorized shares from 10,000,000 to
16,000,000 and declared a 3-for-2 stock split effected in the form of a
dividend. In December 1996 a 3-for-2 stock split was effected in the form of a
dividend.
On September 30, 1997, in connection with the merger of Cardinal
Bancshares, the number of authorized shares was increased from 16,000,000 to
50,000,000. In conjunction with the merger, Area issued 4,205,722 shares of
common stock.
SHAREHOLDERS' EQUITY
AT DECEMBER 31
(AMOUNTS IN MILLIONS)
<TABLE>
<S> <C>
1993 $129,411,000
1994 128,373,000
1995 149,724,000
1996 169,383,000
1997 196,549,000
</TABLE>
CREDIT RISK MANAGEMENT
ASSET QUALITY
Area believes that sound lending requires the management of credit risk
through diversification of the loan portfolio and the application of policies
and procedures designed to foster sound underwriting and credit monitoring
practices.
Credit approval functions are locally-based and include a review
process to ensure that sound and consistent credit decisions are made. Each
credit request is analyzed and passed through an approval process to ensure that
proper documentation and company-wide standards are met before credit is
extended. Once credit has been extended, the borrower's financial condition is
monitored to maintain credit quality. In addition, a holding company credit
review function reviews, tests, and monitors credit quality on an ongoing basis.
<TABLE>
<CAPTION>
ASSET QUALITY RATIOS December 31
--------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-performing assets/total assets .28% .28% .32%
Net loan charge-offs/average loans .17% .24% .38%
Reserve/loans 1.62% 1.63% 1.63%
Reserve/non-performing assets 371.9% 364.9% 315.7%
</TABLE>
<PAGE> 10
9
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
A uniform credit risk rating system is utilized by all affiliated
banks, allowing risk to be analyzed and controlled on a consistent company-wide
basis. When credits reach a predetermined level of risk, they are placed on a
"watch list" category. This credit risk rating system drives the process of
determining the adequacy of the allowance for loan losses and the amount of the
provision for loan losses.
Non-performing loans, excluding loans classified as contractually past
due 90 days or more but still accruing, decreased $554,000 to $2,173,000 during
1997 from $2,727,000 on December 31, 1996. This reduction was the result of
pay-downs and charge-offs during the year. The ratio of non-performing assets to
total assets remained unchanged at .28% as of December 31, 1997 from December
31, 1996. Table 8 on page 18 provides detail of the nonperforming assets.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation reserve for estimated
losses inherent in the loan portfolio. It is management's policy to maintain the
allowance for loan losses at a level sufficient to absorb all estimated losses
inherent in the loan portfolio. Management assesses the adequacy of the
allowance for loan losses quarterly. However, actual losses could differ
significantly from the amounts estimated by management. The allowance for loan
losses is increased by the provision for loan losses and recoveries while it is
decreased by charged-off loans.
The allowance for loan losses totaled $19,887,000 or 1.62% of total
loans on December 31,1997. This compared with $18,663,000 or 1.63% of total
loans at December 31, 1996. As a percentage of non-performing assets, the
allowance balances represented 371.9% and 364.9% on December 31, 1997 and 1996,
respectively. Table 6 on page 17 contains additional information summarizing
loan loss experience while Table 7 on page 18 provides a detailed allocation of
the allowance for loan losses.
ASSET-LIABILITY MANAGEMENT
Asset-liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate risk. Liquidity management
involves planning to meet anticipated funding needs and interest rate risk
management attempts to provide the optimal level of net interest income, while
managing exposure to risks associated with interest rate movements.
LIQUIDITY
Core deposits have historically provided Area with a major source of
stable and relatively low-cost funding. Secondary sources 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.
In the normal course of business, the affiliated banks as well as Area have
established lines of credit for short-term borrowings for the management of
daily liquidity needs. At December 31, 1997, these unused lines of credit
aggregated $158,065,000.
During the year ended December 31, 1997, cash and due from banks
increased $7,455,000. Operating activities provided $36,048,000 of cash,
investing activities used $104,328,000 of cash, while financing activities
provided $75,737,000 of cash during 1997. Cash from increased deposits and
additional short-term borrowings was used to increase loans, including loans
held for sale, by $68,852,000.
INTEREST RATE RISK
For financial institutions, interest rate movements can have an impact
on net interest income, and hence net income. The primary objective of interest
rate risk management is to control and monitor the effects of those functions
and their impact on net income. At Area, interest sensitivity analysis is
combined with computer simulation techniques to measure the exposure of earnings
to interest rate movements.
Management views computer simulations as a more relevant measurement of
the impact of changes in interest rates on net interest income than other
techniques that use interest rate sensitivity gap analysis. Area uses a net
interest income simulation model to measure near-term (next 12 months) risk due
to changes in interest rates. The model incorporates substantially all of Area's
assets and liabilities, together with forecasted changes in the balance sheet
mix and assumptions that reflect the current interest rate environment. Balance
sheet changes are based on forecasted changes in loans, securities and deposits
as well as historical pricing spreads. The model is updated at least quarterly
with the current balance sheet structure and the current forecast of expected
balance sheet changes. Management uses the model to simulate the effect of
immediate and sustained parallel shifts upward and downward in the yield curve
of 50 basis points (.50%) and 100 basis points (1.00%).
The table on the following page illustrates the simulation analysis,
using the methodology described above, of the impact of a 50 and 100 basis point
upward and downward movement in interest rates on net interest income and
earnings per share.
<PAGE> 11
10
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MOVEMENTS IN INTEREST RATES FROM
DECEMBER 31, 1997 RATES
INCREASE DECREASE
-------- --------
<S> <C> <C> <C> <C>
Simulated impact in the
next 12 months compared
with December 31,1997 +100bp +50bp -50bp -100bp
------- ----- ----- ------
Net interest income increase
(decrease) $(2,047) $(681) $ 129 $ 946
Net income per share-basic
increase (decrease) (.09) (.03) .01 .04
Net income per share-diluted
increase (decrease) (.09) (.03) .01 .04
</TABLE>
DESCRIPTION OF NONRECURRING ITEMS
AFFECTING 1996
Cardinal Credit Corporation
In May 1996, Cardinal completed the sale of substantially all of the
assets of its subsidiary, Cardinal Credit Corporation, to Norwest Financial
Kentucky, Inc. Cardinal recorded an after-tax gain of $4,316,000 in connection
with such sale and the related termination of Cardinal Credit Corporation's
business. The net cash proceeds of the sale were invested in short-term
securities.
Sale of Securities Available for Sale
During the fourth quarter of 1996, securities available for sale were
sold resulting in an after-tax gain of $1,868,000.
Stock Option Amendments
During the fourth quarter of 1996, a one-time after-tax charge totaling
$1,122,000 was recorded on amendments to certain stock option plans. These
amendments were approved by Cardinal stockholders.
Security First Network Bank ("SFNB")
In May 1996, Cardinal effected the spin-off of its wholly-owned
subsidiary, SFNB Cardinal stockholders received on a pro rata basis the
distribution of 2,398,908 shares of SFNB's common stock. The terms and
conditions of the spin-off were set forth in the First Amended and Restated Plan
of Distribution adopted by the Board of Directors of Cardinal on October 5,
1995. Prior to the spin-off, Cardinal recognized losses totaling $1,605,000 on
an after-tax basis.
MERGERS - PENDING
In March 1998, the Company 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 and is
subject to regulatory approval. The transaction is expected to close in the
third quarter of 1998.
IMPACT OF NEW ACCOUNTING STANDARDS
In 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information". SFAS No. 130 defines comprehensive income 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. The statement requires
comprehensive income to be reported in a financial statement that is displayed
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Area does not
expect the implementation of this statement to have a material effect on the
consolidated financial statements.
SFAS No. 131 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 report 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.
<PAGE> 12
11
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
UNAUDITED SUMMARY QUARTERLY FINANCIAL INFORMATION
UNAUDITED SUMMARY QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
1997 Quarter Ended 1996 Quarter Ended
(In thousands, ---------------------------------------- ----------------------------------------
except per share data) Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $33,454 $34,384 $35,493 $35,918 $34,692 $34,130 $34,042 $33,971
Interest expense 15,328 15,328 16,243 16,744 16,665 16,115 15,867 15,763
- --------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 18,126 19,056 19,250 19,174 18,027 18,015 18,175 18,208
Provision for loan losses 711 574 1,130 856 1,068 1,241 1,034 1,506
Non-interest income 4,583 4,591 4,654 4,494 4,109 12,925 4,178 7,026
Non-interest expenses 14,536 15,219 16,128 15,474 16,601 16,827 15,526 16,958
Income tax expense 2,242 2,302 1,857 2,090 1,215 5,124 1,658 2,019
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,220 $ 5,552 $ 4,789 $ 5,248 $ 3,252 $ 7,748 $ 4,135 $ 4,751
====================================================================================================================
Net income per common share:
Basic $ .34 $ .36 $ .31 $ .34 $ .21 $ .49 $ .27 $ .31
Diluted $ .34 $ .36 $ .30 $ .33 $ .21 $ .49 $ .26 $ .30
- --------------------------------------------------------------------------------------------------------------------
Dividends per share(1) $ .03 $ .03 $ .03 $ .035 $ .023 $ .027 $ .027 $ .03
</TABLE>
(1) Per share data have been retroactively restated to reflect a 3-for-2 stock
split effected in the form of a dividend in December 1996.
Fourth quarter net income was $5,248,000 in 1997 compared to $4,751,000
in 1996, an increase of $497,000 or 10.5%. On a per share basis, basic earnings
rose to $.34 from $.31, an increase of $.03 or 9.7%, while diluted earnings rose
to $.33 from $.30, an increase of $.03 or 10.0% (earnings per share have been
retroactively restated to reflect a 3-for-2 stock split effected in the form of
a dividend in December 1996).
Net interest income improved by $966,000 for the last three months of
1997 compared to the same period last year. This increase was the result of a
higher level of earning assets and an improved margin.
The provision for loan losses decreased by $650,000 or 43.2% to
$856,000 for the quarter ended December 31, 1997, when compared to the final
three months of 1996.
Non-interest income totaled $4,494,000 for the fourth quarter of 1997,
a decrease of $2,532,000 or 36.0% from the same period in 1996. This decrease
was largely the result of security gains totaling $2,874,000 recorded on the
sale of securities classified as available for sale during the final quarter of
1996 compared to a gain of $18,000 during the fourth quarter of 1997.
Non-interest expenses decreased $1,484,000 or 8.8% to $15,474,000
during the quarter ended December 31, 1997 when compared to the same period in
1996. This decrease was largely the result of a nonrecurring expense totaling
approximately $1,719,000 related to amendments of certain stock option plans
recorded in the fourth quarter of 1996.
<PAGE> 13
12
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 1
SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND INTEREST RATES
The following summarizes the average consolidated balance sheets by
major type of account, the interest earned and interest paid, and the average
yields and average rates paid for each of the three years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
INTEREST INTEREST INTEREST
(IN THOUSANDS, EXCEPT AVERAGE INCOME YIELD/ AVERAGE INCOME YIELD/ AVERAGE INCOME YIELD/
PERCENTAGES) BALANCE OR EXPENSE RATE BALANCE OR EXPENSE RATE BALANCE OR EXPENSE RATE
------- ---------- ---- ------- ---------- ---- ------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Interest bearing
deposits with banks $ 5,296 $ 293 5.53% $ 7,086 $ 369 5.21% $ 6,889 $ 412 5.98%
Federal funds sold 19,296 1,034 5.36% 26,608 1,435 5.39% 22,173 1,220 5.50%
Securities(1)
Taxable 321,888 19,533 6.07% 358,390 22,710 6.34% 373,380 23,803 6.38%
Tax exempt 120,524 10,407 8.63% 97,590 9,082 9.31% 97,460 9,292 9.53%
Loans(2) and (3) 1,189,975 111,486 9.37% 1,123,900 106,491 9.48% 1,048,093 100,718 9.61%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 1,656,979 142,753 8.62% 1,613,574 140,087 8.68% 1,547,995 135,445 8.75%
===================================================================================================================================
Non-earning assets
net of allowance for
loan losses 112,384 -- -- 117,157 -- -- 117,343 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,769,363 $ 142,753 -- $1,730,731 -- -- $1,665,338 -- --
===================================================================================================================================
Interest bearing
liabilities:
Interest bearing demand
deposits $ 241,637 $ 6,817 2.82% $ 314,542 $ 9,385 2.98% $ 315,101 $ 9,470 3.01%
Savings deposits 258,859 8,383 3.24% 159,904 4,548 2.84% 145,332 4,212 2.90%
Time deposits 708,155 38,862 5.49% 724,305 40,520 5.59% 666,211 37,727 5.66%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
DEPOSITS 1,208,651 54,062 4.47% 1,198,751 54,453 4.54% 1,126,644 51,409 4.56%
- -----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased
and securities sold under
agreements to repurchase 107,324 5,520 5.14% 104,534 5,494 5.26% 130,893 7,178 5.48%
Notes payable to the U.S.
Treasury 10,990 607 5.52% 7,486 383 5.12% 10,024 519 5.18%
Advances from the Federal
Home Loan Bank 51,131 3,090 6.04% 49,400 3,348 6.78% 64,370 4,732 7.35%
Other borrowings 5,006 364 7.27% 14,805 732 4.94% 6,928 492 7.10%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 1,383,102 63,643 4.60% 1,374,976 64,410 4.68% 1,338,859 64,330 4.80%
- -----------------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
liabilities:
Demand deposits 176,438 -- -- 174,568 -- -- 169,479 -- --
Other liabilities 26,039 -- -- 20,559 -- -- 19,386 -- --
Shareholders' equity 183,784 -- -- 160,628 -- -- 137,614 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY $1,769,363 -- -- $1,730,731 -- -- $1,665,338 -- --
===================================================================================================================================
Net interest spread(4) -- 4.02% -- 4.00% -- 3.95%
Impact of non-interest
bearing sources and other
changes in balance sheet
composition -- .75% -- .69% -- .64%
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND
MARGIN(5) $ 79,110 4.77% $ 75,677 4.69% $ 71,115 4.59%
===================================================================================================================================
</TABLE>
(1) Yields on municipal securities have been computed on a tax equivalent
basis. The federal income tax rate used was 35% for all years
(2) Nonaccrual loan balances are included. Loan interest income computed on a
tax equivalent basis using 35% for all years.
(3) Loan fees are not material.
(4) Net interest spread is the difference between the average rate of interest
earned on interest-earning assets and the average rate of interest expense
on interest-bearing liabilities.
(5) Net interest margin is net interest income divided by interest-earning
assets.
<PAGE> 14
13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 2
SUMMARY OF CHANGES IN NET INTEREST INCOME
The following shows the changes in interest income and interest expense
due to changes in volume and changes in rate for each of the two years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 VS 1996 1996 VS 1995
------------------------------- -------------------------------
TOTAL VARIANCE DUE TO: TOTAL VARIANCE DUE TO:
(IN THOUSANDS) CHANGE VOLUME RATE* CHANGE VOLUME RATE*
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans(1) $ 4,995 $ 6,173 $(1,178) $ 5,773 $ 7,047 $(1,274)
Investment securities(1) (1,852) (232) (1,620) (1,303) (1,007) (296)
Federal funds sold (401) (392) (9) 215 236 21
Interest bearing deposits with banks (76) (99) 23 (43) 64 (107)
- -----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 2,666 5,450 (2,784) 4,642 6,340 (1,698)
==================================================================================================================
Interest Expense:
Interest bearing demand deposits (2,568) (2,054) (514) (85) 45 (130)
Savings deposits 3,835 3,203 632 336 407 (71)
Time deposits (1,658) (895) (763) 2,793 3,014 (221)
Federal funds purchased and securities
sold under an agreement to repurchase 26 166 (140) (1,684) (1,394) (290)
Notes payable to the U.S. Treasury 224 194 30 (136) (130) (6)
Advances from the Federal Home
Loan Bank (258) 104 (362) (1,384) (1,017) (367)
Other borrowings (368) (712) 344 240 211 29
- -----------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE (767) 6 (773) 80 1,136 (1,056)
==================================================================================================================
NET INTEREST INCOME $ 3,433 $ 5,444 $(2,011) $ 4,562 $ 5,204 $ (642)
==================================================================================================================
</TABLE>
(1) Taxable equivalent basis.
* Changes in interest income and interest expense not arising solely from
rate or volume variances are allocated to change due to volume and change
due to rate in proportion to the relationship of the absolute dollar
amounts of the change in each.
<PAGE> 15
14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 3
CARRYING AMOUNTS OF SECURITIES
The carrying amounts of securities at the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE SECURITIES DECEMBER 31
(IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
U.S. Treasury and Federal agencies $233,353 $236,505 $256,461
Mortgage-backed securities 56,568 61,336 86,165
Obligations of states and political subdivisions 16,867 3,944 2,957
Equity and other securities 35,725 18,628 9,634
- ------------------------------------------------------------------------------------
TOTAL $342,513 $320,413 $355,217
====================================================================================
<CAPTION>
HELD TO MATURITY SECURITIES DECEMBER 31
(IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
Obligations of states and political subdivisions $116,811 $ 97,120 $ 94,015
- ------------------------------------------------------------------------------------
TOTAL $116,811 $ 97,120 $ 94,015
====================================================================================
</TABLE>
Trading account securities are carried at fair value with unrealized
gains and losses included in earnings. AFS securities 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. HTM securities are stated
at cost adjusted for amortization of premiums and accretion of discounts.
Area does not acquire securities with the purpose of realizing trading
profits, however it is advantageous to acquire and hold larger than normal
amounts of U.S. Treasury and qualifying Federal agency securities at the end of
each calendar quarter for the purpose of minimizing state taxes. Typically,
these securities are purchased for settlement on or about the last day of each
quarter and sold on or about the first day of the following quarter. These
securities generally have final maturities of three months or less and have
limited market risk.
AFS securities consist of U.S. Treasury, Federal agency as well as
state and municipal securities including adjustable and fixed rate mortgage
backed securities, and collateralized mortgage obligations ranging in maturity
from one month to 30 years. Some securities in this category may have interest
rates that may subject them to prepayment risk from the underlying mortgages
which can result in reducing or extending their average lives. As a result of
these variables, some securities in the AFS category may have more price
volatility than similar maturity non-mortgage backed securities that have
fixed-rate coupons. AFS securities include all securities not classified as HTM
or trading account securities.
HTM securities are those that Area has the positive intent and ability
to hold to maturity. Securities in this category consist of state and municipal
securities ranging in maturity from one month to 15 years.
<PAGE> 16
15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 4
MATURITIES AND AVERAGE YIELDS OF SECURITIES AS OF DECEMBER 31, 1997
The carrying amount, maturities, and average yields are summarized as
follows:
AVAILABLE FOR SALE SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
(IN THOUSANDS, WITHIN ONE YEAR THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
EXCEPT PERCENTAGES) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 74,378 6.31% $ 28,397 6.58% -- -- -- -- $102,775 6.39%
U.S. Government
agencies 36,615 6.01% 92,902 5.99% 1,061 6.57% -- -- 130,578 6.00%
Obligations of states
and political
subdivisions 266 6.64% 311 7.28% 1,888 7.48% 14,402 7.99% 16,867 7.90%
Mortgage-backed
securities 5,836 6.92% 12,505 6.86% 23,554 6.60% 14,673 7.17% 56,568 6.84%
Other securities 2,667 5.11% -- -- -- -- -- -- 2,667 5.11%
Equity securities -- -- -- -- -- -- 33,058 1.55% 33,058 1.55%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $119,762 6.22% $134,115 6.20% $ 26,503 6.66% $ 62,133 4.37% $342,513 5.91%
==================================================================================================================================
</TABLE>
HELD TO MATURITY SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
(IN THOUSANDS, WITHIN ONE YEAR THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
EXCEPT PERCENTAGES) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of
states and
political
subdivisions(1) $ 6,512 11.76% $ 13,799 10.44% $ 31,578 9.49% $ 64,922 8.49% 116,811 9.17%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 6,512 11.76% $ 13,799 10.44% $ 31,578 9.49% $ 64,922 8.49% 116,811 9.17%
==================================================================================================================================
</TABLE>
(1) Yield on tax-exempt securities are computed on a fully taxable-equivalent
basis using a marginal income tax rate of 35%.
<PAGE> 17
16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 5
LOAN PORTFOLIO
The amount of loans outstanding at the indicated dates is shown below
according to the type of loan:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PERCENTAGES) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial $ 357,133 $ 313,104 $ 311,309 $294,705 $224,766
Real estate - construction 49,979 39,484 20,467 23,296 23,861
Real estate - mortgage 610,846 577,266 503,168 468,408 441,167
Consumer installment and
other loans 209,349 217,206 256,923 196,640 140,963
---------- ---------- ---------- -------- --------
TOTAL LOANS $1,227,307 $1,147,060 $1,091,867 $983,049 $830,757
========== ========== ========== ======== ========
</TABLE>
Percentage of loans by category to total loans:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Commercial 29.10% 27.30% 28.51% 29.98% 27.06%
Real estate - construction 4.07% 3.44% 1.88% 2.37% 2.87%
Real estate - mortgage 49.77% 50.32% 46.08% 47.65% 53.10%
Consumer 17.06% 18.94% 23.53% 20.00% 16.97%
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
</TABLE>
In the normal course of business, Area both purchases and sells loans.
As of December 31, 1997, $9,817,000 of loans were held for sale.
<PAGE> 18
17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 6
SUMMARY OF LOAN LOSS EXPERIENCE
The following is an analysis of the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT ---------------------------------------------------------------------
PERCENTAGES) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Beginning allowance
for loan losses $ 18,663 $ 17,814 $ 16,370 $ 13,770 $ 9,836
Additions through
acquisitions -- -- 554 -- 3,499
Reduction through
divestiture -- (1,334) -- -- (1,295)
Charge offs:
Commercial 909 1,124 2,452 1,700 844
Real estate 210 72 385 603 1,373
Consumer 2,528 3,415 2,559 900 714
- -------------------------------------------------------------------------------------------------------------
TOTAL CHARGE OFFS 3,647 4,611 5,396 3,203 2,931
- -------------------------------------------------------------------------------------------------------------
Recoveries:
Commercial 721 1,017 937 338 530
Real estate 182 117 104 152 164
Consumer 697 811 421 337 216
- -------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 1,600 1,945 1,462 827 910
- -------------------------------------------------------------------------------------------------------------
Net charge offs (recoveries):
Commercial 188 107 1,515 1,362 314
Real estate 28 (45) 281 451 1,209
Consumer 1,831 2,604 2,138 563 498
- -------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE OFFS 2,047 2,666 3,934 2,376 2,021
- -------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 3,271 4,849 4,824 4,976 3,751
- -------------------------------------------------------------------------------------------------------------
ENDING ALLOWANCE FOR
LOAN LOSSES $ 19,887 $ 18,663 $ 17,814 $ 16,370 $ 13,770
=============================================================================================================
Average loans for the
year $ 1,189,975 $ 1,123,900 $ 1,048,093 $ 922,374 $ 897,770
Allowance as a percentage
of year-end loans 1.62% 1.63% 1.63% 1.66% 1.66%
Allowance as a percentage
of average loans 1.67% 1.66% 1.70% 1.77% 1.53%
Net charge-offs as a
percentage of average
loans .17% .24% .38% .26% .23%
Allowance as a percentage
of non-performing assets 371.9% 364.9% 315.7% 203.1% 260.0%
</TABLE>
<PAGE> 19
18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 7
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
In the following summary, the allowance for loan losses has been
allocated according to the amount deemed to be reasonably necessary to provide
for losses within each category of loans. While this is an allocation, the
allowance for loan losses can be used to absorb losses in any category. The
amount of the allowance applicable to each category and the percentage of loans
in each category to total loans follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PERCENTAGES)
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
---------------------- ---------------------- ---------------------- ---------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE LOANS TO ALLOWANCE LOANS TO ALLOWANCE LOANS TO ALLOWANCE LOANS TO ALLOWANCE LOANS TO
FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL FOR LOAN TOTAL
LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS LOSSES LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,226 29.10% $ 4,212 27.30% $ 4,461 28.51% $ 3,771 29.98% $ 3,199 27.06%
Real estate 5,460 53.84% 5,160 53.76% 3,134 47.96% 3,981 50.02% 3,556 55.97%
Consumer 5,873 17.06% 5,546 18.94% 6,088 23.53% 3,285 20.00% 1,877 16.97%
Unallocated 2,328 N/A 3,745 N/A 4,131 N/A 5,333 N/A 5,138 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
$19,887 100.00% $18,663 100.00% $17,814 100.00% $16,370 100.00% $13,770 100.00%
=================================================================================================================================
</TABLE>
TABLE 8
NONPERFORMING ASSETS
The following schedule shows the dollar amount of assets at December 31
which were nonperforming, nonaccrual loans, loans contractually past due 90 days
or more as to interest or principal payments and still accruing, and other real
estate owned:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------------------------
(IN THOUSANDS) 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Nonperforming assets:
Nonaccrual loans $2,173 $2,727 $3,559 $4,316 $1,804
Loans contractually past due
90 days or more as to
interest or principal
payments and still
accruing 1,789 1,217 899 1,585 743
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING LOANS 3,962 3,944 4,458 5,901 2,547
Other real estate owned 1,386 1,171 1,185 2,158 2,748
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING
ASSETS $5,348 $5,115 $5,643 $8,059 $5,295
=====================================================================================================================
</TABLE>
<PAGE> 20
19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 9
DEPOSIT INFORMATION
Information relative to the average balances, average rates, year-end
balances, and the changes from 1996 to 1997 are presented below:
<TABLE>
<CAPTION>
AMOUNT/RATE
(IN THOUSANDS, EXCEPT PERCENTAGES) 1997 1996 CHANGE
<S> <C> <C> <C>
Non-Interest Bearing Demand
Average Balance $ 176,438 $ 174,568 $ 1,870
Average Rate -- -- --
Year-End Balance 196,776 196,565 211
Interest Bearing Demand
Average Balance 241,637 314,542 (72,905)
Average Rate 2.82% 2.98% (.16%)
Year-End Balance 223,820 331,807 (107,987)
Savings Deposits
Average Balance 258,859 159,904 98,955
Average Rate 3.24% 2.84% .40%
Year-End Balance 293,578 158,555 135,023
Time Deposits
Average Balance 708,155 724,305 (16,150)
Average Rate 5.49% 5.59% (.10%)
Year-End Balance 718,958 707,472 11,486
Total Deposits
Average Balance 1,385,089 1,373,319 11,770
Average Rate 3.90% 3.97% .07%
Year-End Balance 1,433,132 1,394,399 38,733
</TABLE>
The maturity of time deposits of $100,000 or more issued by Area at
December 31, 1997 is summarized in the following table:
<TABLE>
<CAPTION>
TIME DEPOSITS OF $100,000
OR MORE
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<S> <C>
Three months or less $ 48,278
Over three through twelve months 48,150
Over twelve months 42,127
--------
TOTAL $138,555
========
</TABLE>
The following is a brief description of the characteristics of each
category of deposits presented above:
Non-interest bearing accounts are unlimited transaction accounts that
can be accessed by check, ACH, ATM, and in person.
Interest bearing demand include both limited and unlimited transaction
accounts that can be accessed by check, ACH, ATM, and in person.
Savings accounts are interest bearing accounts that are not accessible
by check, but are accessible by ACH, ATM, and in person.
Time deposits consist of certificates of deposit with balances under
$100,000 with fixed maturities of 14 days to four years. Certificates of deposit
greater than $100,000 generally command premium pricing and have maturities
usually less than one year.
<PAGE> 21
20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 10
OTHER BORROWING INFORMATION
Information relative to federal funds purchased and securities sold
under agreements to repurchase, notes payable to the U.S. Treasury, advances
from the Federal Home Loan Bank, and other borrowings is presented below:
(IN THOUSANDS, EXCEPT PERCENTAGES)
<TABLE>
<CAPTION>
AMOUNT/RATE
1997 1996 CHANGE
<S> <C> <C> <C>
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase
- -----------------------------------
Amount outstanding at December 31 $148,552 $149,396 $ (844)
Maximum amount outstanding at any month-end 149,151 186,192 (37,041)
Average amount outstanding during the year 107,324 104,534 2,790
Weighted average interest rate during the year 5.14% 5.26% (.12%)
Notes Payable to the U.S. Treasury
- ----------------------------------
Amount outstanding at December 31 19,581 8,883 10,698
Maximum amount outstanding at any month-end 24,415 26,228 (1,813)
Average amount outstanding during the year 10,990 7,486 3,504
Weighted average interest rate during the year 5.52% 5.12% .40%
Advances from the Federal Home Loan Bank
- ----------------------------------------
Amount outstanding at December 31 84,336 49,313 35,023
Maximum amount outstanding at any month-end 96,942 53,555 43,387
Average amount outstanding during the year 51,131 49,400 1,731
Weighted average interest rate during the year 6.04% 6.78% (.74%)
Other Borrowings
- ----------------
Amount outstanding at December 31 397 6,324 (5,927)
Maximum amount outstanding at any month-end 9,789 40,236 (30,447)
Average amount outstanding during the year 5,006 14,805 (9,799)
Weighted average interest rate during the year 7.27% 4.94% 2.33%
</TABLE>
<PAGE> 22
21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 11
ANALYSIS OF NON-INTEREST EXPENSE
Non-interest expenses as reported adjusted for the sale of Cardinal
Credit Corporation, Security First Network Bank spin-off to shareholders, a
one-time stock compensation expense incurred in connection with amendments to
certain stock options plans and a payment of a special SAIF assessment on
SAIF-insured deposits.
<TABLE>
<CAPTION>
1996 SECURITY STOCK SAIF 1996
AS CARDINAL FIRST NETWORK COMPENSATION SPECIAL AS
REPORTED CREDIT BANK EXPENSE ASSESSMENT ADJUSTED
-------- ------ ---- ------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $31,907 $(1,321) $ (729) $(1,719) $ -- $28,138
Net occupancy expense 4,139 (266) (52) -- -- 3,821
Furniture and equipment
expense 4,438 (91) (426) -- -- 3,921
Federal deposit insurance 1,264 -- (30) -- (726) 508
Data processing expense 3,193 (22) (158) -- -- 3,013
Other 20,971 (856) (590) -- -- 19,525
------------------------------------------------------------------------------------------------------------------
TOTAL $65,912 $(2,556) $(1,985) $(1,719) $(726) $58,926
==================================================================================================================
</TABLE>
<PAGE> 23
22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Area Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of Area Bancshares
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Area Bancshares
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Louisville, Kentucky
February 20, 1998
<PAGE> 24
23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 84,378 $ 76,923
Interest bearing deposits with banks 5,804 5,884
Federal funds sold -- 13,647
Trading account securities 45,873 43,877
Securities:
Available for sale (amortized cost $324,731 in 1997 and $314,948 in 1996) 342,513 320,413
Held to maturity (fair value $122,781 in 1997 and $101,122 in 1996) 116,811 97,120
----------- -----------
TOTAL SECURITIES 459,324 417,533
----------- -----------
Mortgage loans held for sale 9,817 21,212
Loans, net of unearned discount 1,227,307 1,147,060
Less allowance for loan losses 19,887 18,663
----------- -----------
NET LOANS 1,207,420 1,128,397
----------- -----------
Premises and equipment 29,710 29,428
Goodwill and other intangible assets 15,312 17,472
Other assets 43,811 41,917
----------- -----------
TOTAL ASSETS $ 1,901,449 $ 1,796,290
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing demand $ 196,776 $ 196,565
Interest bearing demand 223,820 331,807
Savings 293,578 158,555
Certificates of deposit of $100,000 or more 138,555 132,457
Other time 580,403 575,015
----------- -----------
TOTAL DEPOSITS 1,433,132 1,394,399
----------- -----------
Federal funds purchased 38,691 49,486
Securities sold under agreements to repurchase 109,861 99,910
Notes payable to the U.S. Treasury 19,581 8,883
Advances from the Federal Home Loan Bank 84,336 49,313
Other borrowings 397 6,324
Other liabilities 18,902 18,592
----------- -----------
TOTAL LIABILITIES 1,704,900 1,626,907
----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 500,000 shares; none issued -- --
Common stock, no par value; authorized shares: 1997, 50,000,000;
1996, 16,000,000; issued and outstanding shares: 1997, 15,576,916;
1996, 15,514,222 24,254 24,197
Paid-in capital 35,632 35,142
Retained earnings 126,104 107,581
Deferred compensation on restricted stock (612) (469)
ESOP and MRP loan obligations (337) (628)
Net unrealized gains on securities available for sale 11,508 3,560
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 196,549 169,383
Commitments and contingent liabilities
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,901,449 $ 1,796,290
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 25
24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $111,486 $106,491 $100,692
Interest bearing deposits with banks 293 369 412
Federal funds sold 1,034 1,435 1,220
Taxable securities 19,533 22,710 23,803
Tax exempt securities 6,903 5,830 5,961
-------- -------- --------
TOTAL INTEREST INCOME 139,249 136,835 132,088
-------- -------- --------
INTEREST EXPENSE:
Deposits 54,062 54,453 51,409
Federal funds purchased and securities sold under
agreements to repurchase 5,520 5,494 7,178
Advances from the Federal Home Loan Bank 3,090 3,348 4,732
Other borrowings 971 1,115 1,011
-------- -------- --------
TOTAL INTEREST EXPENSE 63,643 64,410 64,330
-------- -------- --------
NET INTEREST INCOME 75,606 72,425 67,758
Provision for loan losses 3,271 4,849 4,824
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 72,335 67,576 62,934
-------- -------- --------
NON-INTEREST INCOME:
Commissions and fees on fiduciary activities 4,264 3,634 2,879
Service charges on deposit accounts 6,675 6,400 5,770
Other service charges, commissions and fees 5,036 4,751 5,610
Securities gains, net 21 3,265 1,139
Gains on sales of loans, net 1,374 8,912 970
Other income 952 1,276 2,045
-------- -------- --------
TOTAL NON-INTEREST INCOME 18,322 28,238 18,413
-------- -------- --------
NON-INTEREST EXPENSES:
Salaries and employee benefits 29,133 31,907 30,603
Net occupancy expense 4,074 4,139 4,006
Furniture and equipment expense 4,488 4,438 4,081
Federal deposit insurance 238 1,264 1,681
Data processing expense 3,215 3,193 2,749
Other 20,209 20,971 21,294
-------- -------- --------
TOTAL NON-INTEREST EXPENSES 61,357 65,912 64,414
-------- -------- --------
Income before income taxes 29,300 29,902 16,933
Income tax expense 8,491 10,016 4,487
-------- -------- --------
NET INCOME $ 20,809 $ 19,886 $ 12,446
======== ======== ========
NET INCOME PER SHARE: BASIC $ 1.35 $ 1.28 $ .81
======== ======== ========
DILUTED $ 1.33 $ 1.26 $ .79
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 26
25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED ESOP NET UNREALIZED
COMPENSATION AND GAINS (LOSSES) ON
ON MRP SECURITIES
COMMON STOCK PAID-IN RETAINED RESTRICTED LOAN AVAILABLE
SHARES AMOUNT CAPITAL EARNINGS STOCK OBLIGATIONS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994, as previously
reported 7,625,539 $17,854 $10,000 $ 68,267 $(475) $ -- $(3,556) $ 92,090
Adjustment for
acquisition accounted
for using the pooling-
of-interests method 2,531,763 5,924 20,911 11,185 -- (1,058) (679) 36,283
---------- ------- ------- -------- ----- ------- ------- --------
Balance, December 31,
1994, as adjusted 10,157,302 23,778 30,911 79,452 (475) (1,058) (4,235) 128,373
Net income 12,446 12,446
Cash dividends declared
($.09 per share) (2,166) (2,166)
Issuance of common stock 3,287 8 8
Repurchase of common
stock (12,385) (51) (168) (219)
Stock options exercised,
including tax benefits 163,936 388 1,700 684 2,772
Restricted stock issued 2,000 7 44 (51) --
Amortization of deferred
compensation on
restricted stock 17 17
Repayment of ESOP and
MRP loan obligations 215 215
Net unrealized gain on
securities transferred from
held-to-maturity to
available for sale 723 723
Change in unrealized gains
on securities available for
sale, net of taxes 7,555 7,555
---------- ------- ------- -------- ----- ------- ------- --------
Balance, December 31, 1995 10,314,140 24,130 32,611 90,292 (509) (843) 4,043 149,724
Net income 19,886 19,886
Cash dividends declared
($.107 per share) (2,461) (2,461)
Issuance of common stock 156,106 364 4,632 4,996
Repurchase of common
stock (190,906) (445) (2,804) (1,066) (4,315)
Stock options exercised,
including tax benefits 64,211 148 703 292 1,143
3-for-2 stock split 5,170,671 --
Spin-off of SFNB 638 638
Amortization of deferred
compensation on
restricted stock 40 40
Repayment of ESOP and
MRP loan obligations 215 215
Change in unrealized gains
on securities available for
sale net of taxes (483) (483)
---------- ------- ------- -------- ----- ------- ------- --------
Balance, December 31, 1996 15,514,222 $24,197 $35,142 107,581 $(469) $ (628) $ 3,560 $169,383
</TABLE>
(CONTINUED)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 27
26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DEFERRED ESOP NET UNREALIZED
COMPENSATION AND GAINS (LOSSES) ON
ON MRP SECURITIES
COMMON STOCK PAID-IN RETAINED RESTRICTED LOAN AVAILABLE
SHARES AMOUNT CAPITAL EARNINGS STOCK OBLIGATIONS FOR SALE TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income 20,809 20,809
Cash dividends declared
($.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
Net restricted stock issued 5,430 9 217 (226) --
Amortization of deferred
compensation on
restricted stock 83 83
Repayment of ESOP and
MRP loan obligations 291 291
Change in unrealized gains
on securities available for
sale, net of tax 7,948 7,948
---------- ------- ------- -------- ----- ------- ------- --------
BALANCE, DECEMBER 31,
1997 15,576,916 $24,254 $35,632 $126,104 $(612) $ (337) $11,508 $196,549
========== ======= ======= ======== ===== ======= ======= ========
</TABLE>
<PAGE> 28
27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,809 $ 19,886 $ 12,446
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 3,271 4,849 4,824
Depreciation, amortization and accretion, net 4,826 6,458 4,431
Gain on sales of securities, net (21) (3,265) (1,139)
Gain on sales of loans, net (1,374) (8,912) (970)
Deferred income taxes (160) (339) 939
Proceeds from sales of trading account securities 39,510 85,954 178,112
Proceeds from maturities of trading account securities 157,000 98,000 12,000
Purchases of trading account securities (198,461) (177,367) (198,997)
Purchase and origination of mortgage loans held for sale (110,268) (128,817) (119,452)
Proceeds from sales of mortgage loans held for sale 123,037 132,447 117,991
Other, net (2,123) 4,011 (3,859)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,048 32,905 6,326
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits with banks 80 (1,278) (4,429)
Net (increase) decrease in federal funds sold 13,647 (3,472) 4,204
Proceeds from sales of securities available for sale 37,068 75,726 85,202
Proceeds from maturities and calls of securities available for sale 114,642 109,079 118,214
Proceeds from maturities and calls of securities held to maturity 6,019 4,882 14,794
Purchases of securities available for sale (160,893) (162,791) (198,398)
Purchases of securities held to maturity (25,414) (10,885) (13,129)
Loans originated, net of principal collected (85,674) (107,571) (102,023)
Purchases of premises and equipment (4,767) (7,770) (7,570)
Proceeds from sales of other real estate owned 841 376 1,967
Proceeds from sales of premises and equipment 123 149 347
Proceeds from sales of loans -- 33,551 --
Purchase of Citizens Deposit Bancshares, net of cash and
due from banks -- -- (3,423)
Spin-off of subsidiary -- (764) --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (104,328) (70,768) (104,244)
--------- --------- ---------
</TABLE>
(CONTINUED)
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 29
28
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits $ 38,733 $ 58,208 $ 125,889
Increase (decrease) in federal funds purchased (10,795) 19,311 (9,575)
Increase (decrease) in securities sold under agreements to repurchase 9,951 (27,985) 3,155
Increase (decrease) in notes payable to the U.S. Treasury 10,698 4,282 (4,529)
Increase (decrease) in advances from the Federal Home Loan Bank 35,023 19,924 (30,220)
Increase (decrease) in other borrowings (5,636) (32,927) 15,201
Proceeds from stock options exercised and issuance of common stock 808 5,864 2,096
Repurchase of common stock (522) (4,315) (219)
Cash dividends paid (2,523) (2,486) (2,141)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 75,737 39,876 99,657
--------- --------- ---------
Increase in cash and due from banks 7,455 2,013 1,739
Cash and due from banks, beginning of year 76,923 74,910 73,171
--------- --------- ---------
CASH AND DUE FROM BANKS, END OF YEAR $ 84,378 $ 76,923 $ 74,910
========= ========= =========
Supplemental cash flow information:
Income tax payments $ 6,050 $ 8,183 $ 3,345
Interest payments $ 63,213 $ 64,079 $ 62,632
Non-cash transactions:
Loans transferred to other assets $ 2,029 $ 1,038 $ 1,178
Securities held to maturity
transferred to available for sale -- -- $ 29,166
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 30
29
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
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., and The New Farmers
National Bank of Glasgow, Citizens Deposit Bancshares and subsidiary, a
wholly owned bank holding company which includes Citizens Deposit Bank,
and Area Services, Inc., a wholly owned non-bank subsidiary. Also
included is Cardinal Bancshares, Inc., a bank and thrift holding
company whose subsidiaries include: The Vine Street Trust Company and
its principal subsidiary, VST Financial Services; HNB Bank, N.A.,
Alliance Bank, FSB, First & Peoples Bank, The Jefferson Banking Company
and Cardinal Data Services Corporation. The Corporation and its
subsidiaries are primarily engaged in commercial and personal banking
services and the consumer finance business throughout the Commonwealth
of Kentucky. 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 dates of the consolidated balance sheets and revenues and
expenses for the periods. Actual results could differ from those
estimates. Generally accepted accounting principles 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
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 held to maturity are those securities which management has
the intent and ability to hold to maturity, and are stated at amortized
cost.
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 and 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.
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.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of aggregate cost
or market value.
<PAGE> 31
30
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 all other 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 collectability 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.
Impaired loans are measured based on the present value of future cash
flows discounted at the loan's contractual interest rate or fair value
of the collateral if the loan is collateral dependent. The Corporation
does not apply the impairment criteria to individual 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.
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 are 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.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess cost over fair value of net assets acquired in purchase
business combinations (goodwill) of $10,704,000 and $12,015,000 net of
accumulated amortization as of December 31, 1997 and 1996,
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 $3,595,000 and $4,294,000, net
of accumulated amortization, as of December 31, 1997 and 1996,
respectively, which is being amortized by an accelerated method over
ten years and a purchased bank charter of $1,013,000 and $1,163,000 as
of December 31, 1996 and 1995, respectively, which is being amortized
over a ten-year period on a straight-line basis. The Corporation
assesses impairment of goodwill and other intangible assets by
comparing the carrying amounts with the projected undiscounted future
net cash flows. Based on this assessment, the Corporation determined
that there was no impairment of these intangible assets as December 31,
1997.
OTHER ASSETS
Included in other assets is real estate acquired in settlement of
loans, which is 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.
<PAGE> 32
31
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MORTGAGE SERVICING RIGHTS
The Corporation accounts for mortgage servicing rights in accordance
with Statement of Financial Accounting Standards No. 125, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities ("SFAS 125"). SFAS 125, which superseded Statement of
Financial Accounting Standards No. 122, Accounting for Mortgage
Servicing Rights, requires that rights to service mortgage loans for
others be recognized as assets, without regard to whether those assets
were acquired in purchase transactions or through loan originations.
The carrying value of mortgage servicing rights and the related
amortization are evaluated in relation to estimated future net
servicing revenues. The Corporation evaluates the value of the mortgage
servicing rights by considering market prices for similar assets and
the results of valuation techniques to the extent available in the
circumstances. Impairment and subsequent adjustments, if any, are
recognized by a valuation allowance and a charge against servicing
income.
INTEREST RATE SWAPS
The Corporation uses interest rate swaps to manage its sensitivity to
interest rate risk. These off-balance-sheet financial instruments are
employed to hedge the inherent interest rate risk of specific
on-balance-sheet assets or liabilities, rather than for speculative
trading.
Interest income and expense for each interest rate swap contract is
accrued over the term of the agreement as an adjustment to the yield of
the related asset or liability. Similarly, transaction fees are
deferred and amortized through income and expense over the lives of the
agreements. The fair value of the interest rate swaps is not included
in the financial statements.
NET INCOME PER COMMON SHARE
Effective December 31, 1997, the Corporation adopted FASB Statement No.
128, "Earnings Per Share", which requires the computation and
disclosure of basic and diluted net income per share. Prior years' net
income per share amounts have been restated to reflect the adoption of
FASB Statement No. 128. Basic net income per common share is determined
by dividing net income by the weighted average number of shares of
common stock outstanding. Diluted net income per share is determined by
dividing net income by the weighted average number of shares of common
stock outstanding plus the weighted average number of shares that would
be issued upon exercise of dilutive options assuming proceeds are used
to repurchase shares pursuant to the treasury stock method.
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 AND ASSET DISPOSITIONS
On November 16, 1995, the Corporation acquired Citizens Deposit
Bancshares, ("Citizens Bancshares") for cash and notes payable of
approximately $7,560,000. 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.
<PAGE> 33
32
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS AND ASSET DISPOSITIONS (CONTINUED)
The aggregate fair value of net assets acquired in the Citizens
Bancshares acquisition included the following:
IN THOUSANDS
<TABLE>
<S> <C>
Cash and due from banks $ 723
Federal funds sold 2,000
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.
The spin-off of Security First Network Bank ("SFNB") from the
Corporation was effected pursuant to the First Amended and Restated
Plan of Distribution. Under the Plan of Distribution, following a
payment of a $3,000,000 cash dividend from SFNB, the Corporation
effected the distribution by delivering prorata to each of its
shareholders of record on the record date for the distribution all of
the outstanding shares of SFNB's common stock (2,398,908 shares). As a
result of the distribution, the Corporation no longer owns any interest
in SFNB.
Summary financial data related to SFNB as of May 23, 1996, the date of
the spin-off, follows:
IN THOUSANDS
<TABLE>
<S> <C>
Cash and due from banks $ 764
Interest bearing deposits in banks 3,657
Securities available for sale 14,216
Loans, net 20,637
Premises and equipment 3,959
Other assets 870
Deposits 42,644
Advances from Federal Home Loan Bank 1,230
Other liabilities 867
Stockholders' equity (638)
</TABLE>
During the period from January 1, 1996 to May 23, 1996, and for the
year ended December 31, 1995, SFNB's net loss before income taxes was
($1,482,000), and ($1,983,000), respectively.
On May 14, 1996, the Corporation completed the sale of substantially
all of the assets of Cardinal Credit Corporation ("Cardinal Credit") to
Norwest Financial Kentucky, Inc. The Corporation recorded a gain of
approximately $8,230,000 in connection with such sale, which is
included in gains on sales of loans in the accompanying consolidated
statements of income. As part of the agreement with Norwest, the
Corporation agreed that for three years it would not engage, within the
market area of Cardinal Credit, in the consumer finance business in the
same or substantially similar manner in which Cardinal Credit engaged
in that business. The agreement does not, however preclude any
subsidiary from engaging in this banking business, including the
origination of consumer loans, as currently conducted.
<PAGE> 34
33
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS AND ASSET DISPOSITIONS (CONTINUED)
On September 30, 1997, Area consummated a merger with Cardinal
Bancshares, Inc. of Lexington, Kentucky. Area exchanged 2.7391 shares
of its stock for each share of Cardinal for a total of 4,205,722 shares
issued. This transaction was accounted for as a pooling-of-interests.
The following table presents a restatement of net interest income, net
income, and net income per share to reflect this pooling-of-interests
transaction:
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AREA
BANCSHARES CARDINAL
CORPORATION BANCSHARES, INC. COMBINED
<S> <C> <C> <C>
Nine months ended September 30, 1997
(unaudited)
Net interest income $ 34,884 $21,548 $56,432
Net income 11,169 4,392 15,561
Net income per share - basic 1.01
Net income per share - diluted .97
Year Ended December 31, 1996
Net interest income $ 44,201 $28,224 $72,425
Net income 15,555 4,331 19,886
Net income per share - basic 1.28
Net Income per share - diluted 1.26
Year Ended December 31, 1995
Net interest income $ 39,977 $27,781 $67,758
Net income 11,582 864 12,446
Net income per share - basic .81
Net income per share - diluted .79
</TABLE>
3. SECURITIES
Trading Account Securities
Gross realized losses on the sales of trading account securities were
approximately $15,000, $24,000 and $21,000 in 1997, 1996, and 1995,
respectively. There were no realized gains on the sales of trading
account securities in 1997, 1996 or 1995.
Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and approximate
fair value of securities available for sale at December 31, 1997 and
1996, are as follows:
<PAGE> 35
34
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
IN THOUSANDS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 AMORTIZED UNREALIZED UNREALIZED FAIR
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 states and political subdivisions 16,115 752 -- 16,867
Equity and other securities 19,963 15,824 62 35,725
-------- ------- ------ --------
TOTALS $324,731 $18,390 $ 608 $342,513
======== ======= ====== ========
<CAPTION>
DECEMBER 31, 1996 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $235,523 $ 1,601 $ 619 $236,505
Mortgage-backed securities 60,959 732 355 61,336
Obligations of states and political subdivisions 3,898 51 5 3,944
Equity and other securities 14,568 4,233 173 18,628
-------- ------- ------ --------
TOTALS $314,948 $ 6,617 $1,152 $320,413
======== ======= ====== ========
</TABLE>
Gross gains of approximately $80,000, $3,395,000 and $1,378,000 and
gross losses of approximately $44,000, $106,000 and $218,000 were
realized on sales of securities available for sale in 1997, 1996, and
1995 respectively.
Effective December 1, 1995, a one-time reassessment of the
Corporation's securities held to maturity was undertaken, as permitted
by the Financial Accounting Standards Board's special report related to
the implementation of FASB Statement No. 115. In connection with that
reassessment, the Corporation transferred securities held to maturity
with an amortized cost of $29,166,000 to securities available for sale
in order to permit more responsiveness to changes in interest rates and
other balance sheet management factors.
Securities Held to Maturity
The amortized cost, gross unrealized gains and losses, and approximate
fair value of securities held to maturity at December 31, 1997 and
1996, are as follows:
IN THOUSANDS
<TABLE>
DECEMBER 31, 1997 AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Obligations of states and political subdivisions $116,811 $ 6,485 $ 515 $122,781
======== ======= ====== ========
DECEMBER 31, 1996
Obligations of states and political subdivisions $ 97,120 $ 4,669 $ 667 $101,122
======== ======= ====== ========
</TABLE>
Contractual Maturities
The amortized cost and approximate fair value of securities at December
31, 1997, by contractual maturity, are shown on the following page.
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.
<PAGE> 36
35
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
<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 $110,982 $111,260 $ 6,512 $ 6,618
Due after one year through five years 121,242 121,610 13,799 14,607
Due after five years through ten years 2,856 2,948 31,578 33,692
Due after ten years 13,729 14,402 64,922 67,864
Equity securities 19,963 35,725 -- --
-------- -------- -------- --------
268,772 285,945 116,811 122,781
Mortgage-backed securities 55,959 56,568 -- --
-------- -------- -------- --------
TOTALS $324,731 $342,513 $116,811 $122,781
======== ======== ======== ========
</TABLE>
Securities with a par value of approximately $223,373,000 and
$238,196,000 at December 31, 1997 and 1996, respectively, were pledged
to secure public and trust deposits, securities sold under agreements
to repurchase and Federal Home Loan Bank advances.
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS 1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 357,133 $ 313,104
Real estate-construction 49,979 39,484
Real estate-mortgage 610,846 577,266
Installment and other, net of unearned discount 209,349 217,206
---------- ----------
TOTALS $1,227,307 $1,147,060
========== ==========
</TABLE>
The maturity dates of loans are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
DUE AFTER ONE
DECEMBER 31, 1997 DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 283,411 $ 54,862 $ 18,860 $ 357,133
Real estate-construction 49,979 -- -- 49,979
All other loans 410,293 327,472 82,430 820,195
---------- ---------- ---------- ----------
TOTALS $ 743,683 $ 382,334 $ 101,290 $1,227,307
========== ========== ========== ==========
</TABLE>
<PAGE> 37
36
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS, (CONTINUED)
Commercial, financial and agricultural loans with maturities over one
year at December 31, 1997 are summarized below based on contractual
rates of interest:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
<S> <C>
Maturities over one year with variable rates of interest $16,560
Maturities over one year with fixed rates of interest 57,162
-------
TOTAL $73,722
=======
</TABLE>
The principal amount of loans serviced for the benefit of others at
December 31, 1997 and 1996 totaled approximately $149,216,000 and
$123,112,000, respectively.
The principal amount of nonaccrual loans at December 31, 1997, 1996 and
1995 totaled approximately $2,173,000, $2,727,000 and $3,559,000,
respectively. Interest that would have been recorded if all such loans
were on a current status in accordance with original terms was
approximately $155,000, $342,000, and $344,000 in 1997, 1996, and 1995,
respectively. The amount of interest income that was recorded for such
loans was approximately $13,000, $118,000, and $72,000 in 1997, 1996,
1995, respectively.
<TABLE>
<CAPTION>
INFORMATION REGARDING IMPAIRED LOANS FOLLOWS: 1997 1996 1995
IN THOUSANDS
<S> <C> <C> <C>
Recorded investment $6,248 $6,398 $9,086
Impaired loans with valuation allowance 5,133 3,549 5,976
Amount of valuation allowance 977 903 1,652
Amount of impaired loans without valuation allowance 1,115 2,849 3,110
Average recorded investment 6,176 7,635 9,243
Interest recognized during impairment 740 459 1,698
</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>
YEAR ENDED DECEMBER 31
IN THOUSANDS 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 18,663 $ 17,814 $ 16,370
Effect of business combinations and asset dispositions -- (1,334) 554
Provision for loan losses 3,271 4,849 4,824
Loans charged off 3,647 (4,611) (5,396)
Recoveries of loans previously charged off 1,600 1,945 1,462
-------- -------- --------
BALANCE AT END OF YEAR $ 19,887 $ 18,663 $ 17,814
======== ======== ========
</TABLE>
<PAGE> 38
37
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
1997 1996
IN THOUSANDS
<S> <C> <C>
Bank premises $31,404 $30,436
Furniture and equipment 25,351 22,387
Leasehold improvements 3,513 3,463
------- -------
60,268 56,286
Less accumulated depreciation and amortization 30,558 26,858
------- -------
TOTALS $29,710 $29,428
======= =======
</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, 1997 and 1996,
OREO aggregated approximately $1,386,000 and $1,171,000, respectively.
8. CAPITALIZED SERVICING RIGHTS
An analysis of capitalized servicing rights for the year ended December
31, 1997 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS PURCHASED ORIGINATED TOTAL
--------- ---------- -----
<S> <C> <C> <C>
Balance, December 31, 1996 $196 $ 82 $278
Amounts capitalized 113 430 543
Sales (142) -- (142)
Amortization (23) (82) (105)
---- ---- ----
BALANCE, DECEMBER 31, 1997 $144 $430 $574
==== ==== ====
</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 by considering
prices for similar assets and the results of valuation techniques to
the extent available in the circumstances. Impairment and subsequent
adjustments, if any, are recognized by a valuation allowance and a
charge against servicing income. The estimated fair value of
capitalized servicing rights as of December 31, 1997 was approximately
$1,101,000.
9. DEPOSITS
Interest expense on certificates of deposit of $100,000 or more was
approximately $7,482,000, $7,462,000 and $5,982,000 for 1997, 1996 and
1995, respectively.
<PAGE> 39
38
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. DEPOSITS (CONTINUED)
At December 31, 1997, the scheduled maturities of certificates of
deposit are as follows:
IN THOUSANDS
<TABLE>
<S> <C>
Year of maturity
1998 $452,839
1999 196,251
2000 53,287
2001 6,294
2002 9,139
2003 and there after 1,148
--------
TOTAL $718,958
========
</TABLE>
At December 31, 1997 and 1996 the Corporation had $298,000 and no
brokered deposits, respectively.
10. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information pertaining to securities sold under agreements to
repurchase follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
DOLLARS IN THOUSANDS
Amount outstanding at December 31 $109,861 $ 99,910 $127,895
Average amount outstanding during the year 86,528 90,050 119,762
Maximum amount outstanding at any month-end 109,861 115,814 131,939
Weighted average interest rate:
As of year-end 4.99% 4.54% 5.16%
Paid during year 5.06% 4.95% 5.50%
</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> 40
39
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. 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. Certain information with respect to
the outstanding advances from the FHLB is summarized below:
<TABLE>
<CAPTION>
IN THOUSANDS DECEMBER 31, 1997 DECEMBER 31, 1996
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
YEAR OF MATURITY AMOUNT RATE AMOUNT RATE
<S> <C> <C> <C> <C>
1997 $ -- -- $14,641 5.50%
1998 42,105 6.28% 2,369 5.51%
1999 4,206 6.11% 4,423 6.14%
2000 10,171 6.71% 220 7.22%
2001 2,842 6.33% 3,134 6.31%
2002-2006 12,555 6.41% 12,389 6.40%
2007-2011 9,986 7.59% 10,123 7.58%
2012 and thereafter 2,471 6.95% 2,014 6.53%
------- ---- ------- ----
TOTALS $84,336 6.52% $49,313 6.32%
======= ==== ======= ====
</TABLE>
Scheduled principal repayments on advances from the FHLB at December
31, 1997, are approximately $43,101,000, $4,969,000, $10,941,000,
$3,038,000 and $5,370,000 for 1998 through 2002, respectively, and
$16,917,000 thereafter.
12. OTHER BORROWINGS
<TABLE>
<CAPTION>
Other borrowings consist of the following: DECEMBER 31
IN THOUSANDS 1997 1996
<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%. $ -- $375
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 annual installments
of $10,269 plus interest with a final maturity of
April 1, 2003. The interest rate at December 31,
1997 was 4.62%. 61 71
</TABLE>
<PAGE> 41
40
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. OTHER BORROWINGS (CONTINUED)
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
<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%. -- 4,000
Line of credit payable to a bank, due June 30,
1997. Interest was payable quarterly at the prime
rate minus .5% as of December 31, 1996 (7.75% at
December 31, 1996). -- 1,250
Cardinal Bancshares, Inc. Affiliates Employee Stock
Ownership Plan (ESOP) note payable to a bank in
annual principal installments of $26,015 through
December 1999. Interest is payable quarterly at the
prime rate. 52 78
Cardinal Bancshares, Inc. Affiliates Employee Stock
Ownership Plan (ESOP) note payable to a bank in
annual principal installments of $94,875 through
December 2000. Interest is payable quarterly at the
prime rate. 284 380
First Federal Management Retention Plan (MRP) note
payable to a bank in annual principal installments
of $18,211 through December 1997. Interest was
payable quarterly at the prime rate. -- 18
Mutual Federal Management Retention Plan (MRP) note
payable to a bank in annual principal installments
of $75,900 through December 1998. Interest was
payable quarterly at the prime rate. -- 152
TOTALS $397 $6,324
</TABLE>
Scheduled principal repayments on other borrowings at December 31,
1997, are approximately $131,000, $131,000, $104,000, $10,000, and
$10,000 for 1998 through 2002, respectively, and $11,000 thereafter.
13. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
IN THOUSANDS 1997 1996 1995
<S> <C> <C> <C>
Income taxes applicable to operations:
Current $8,651 $10,355 $ 3,548
Deferred (160) (339) 939
------ ------- -------
Total applicable to operations 8,491 10,016 4,487
</TABLE>
<PAGE> 42
41
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Charged (credited) to components of shareholders' equity:
Net unrealized securities gains (losses) 4,280 856 (4,406)
Income tax benefit of stock options and grants (272) (275) (684)
------- ------- -------
TOTAL INCOME TAXES $12,499 $10,597 $ (603)
======= ======= =======
</TABLE>
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 1997 1996 1995
<S> <C> <C> <C>
Tax expense at statutory rates $ 10,257 $ 10,381 $ 5,909
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends (net of
non-deductible interest) (2,366) (1,938) (2,003)
Amortization of intangibles 584 587 505
Dividend in excess of tax basis of SFNB -- 789 --
Other, net 16 197 76
-------- -------- --------
TOTALS $ 8,491 $ 10,016 $ 4,487
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to the
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 1997 and December 31, 1996, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 6,265 $ 5,894
Deferred compensation 1,076 1,058
Other 60 145
-------- --------
Total gross deferred tax assets 7,401 7,097
-------- --------
Deferred tax liabilities
Purchase accounting adjustments 2,599 3,073
Unrealized gain on securities available for sale 6,349 2,069
Pension expense 640 682
Depreciation 429 463
Accounting differences on securities 586 499
Leasing operations 865 697
FHLB stock dividends 1,109 737
Other 384 317
-------- --------
Total gross deferred tax liabilities 12,961 8,537
-------- --------
NET DEFERRED TAX LIABILITY $ (5,560) $ (1,440)
======== ========
</TABLE>
14. STOCK OPTION AND RESTRICTED STOCK PLANS
The Corporation has stock option and restricted stock plans for key
employees. As of December 31, 1997, the Corporation had 102,127 shares
available for issuance under these plans.
<PAGE> 43
42
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
Stock options granted under the option program are at the market price
on the date of grant except for certain limited stock options discussed
below. Each option is for one share of common stock. All options become
exercisable over five-to-ten-year period from the date of grant.
During 1995 through 1997 the Corporation issued 27,930 shares of
restricted common stock to certain key employees. The vesting periods
range from 1996 to 2004. 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.
The Corporation applies APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, except for certain limited
stock options, no compensation cost has been recognized. Compensation
cost related to limited stock options was $0, $1,969,000 and $250,000
during 1997, 1996, and 1995. Compensation cost related to the
restricted stock plan was $83,000, $40,000, and $17,500 during 1997,
1996, and 1995, respectively.
STOCK OPTION PLANS
Under the incentive stock option 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 for 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 five to ten years. Options are granted at
the discretion of the Board of Directors and vest evenly over the
option period.
A summary of the status of the Corporation's stock option plan as of
December 31, 1997, 1996, 1995 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
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 564,553 $ 6.88 557,138 $ 5.92 667,406 $ 6.19
Granted 41,223 16.19 98,197 14.53 94,279 11.94
Exercised (87,302) 10.60 (57,585) 8.13 (91,841) 7.27
Forfeited (9,420) 14.48 (33,197) 11.21 (112,706) 11.34
-------- ------ -------- ------ -------- ------
OUTSTANDING AT END
OF YEAR 509,054 $ 6.86 564,553 $ 6.88 557,138 $ 5.92
-------- ------ -------- ------ -------- ------
Options exercisable at
year-end 500,156 $ 6.70 45,197 $ 8.29 24,254 $ 7.99
Weighted-average fair value
of options granted during
the year $ 6.21 $ 7.79 $ 7.51
</TABLE>
<PAGE> 44
43
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
Had compensation cost for the Corporation's stock option plan been
determined consistent with the fair value method describedin FASB
Statement No. 123, the Corporation's net income and earnings per share
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income:
As reported $20,809,000 $19,886,000 $12,446,000
Proforma $20,145,000 $19,718,000 $12,368,000
Net income per share:
As reported - basic $ 1.35 $ 1.28 $ .81
- diluted 1.33 1.26 .79
Proforma - basic 1.31 1.27 .80
- diluted 1.29 1.25 .79
</TABLE>
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 1997, 1996, and 1995,
respectively: dividend yield of .75% for all years; expected volatility
of 20% for all years; a risk-free interest rate of 6.53% for 1997,
5.43% - 6.42% for 1996 and 5.38% - 7.32% for 1995.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- -------------- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 1.83 - $ 9.13 313,230 9.76 $ 2.57 313,230 $ 2.57
10.08 - 11.59 67,123 9.28 10.92 67,123 10.92
14.48 - 16.11 128,701 8.62 15.18 119,803 15.13
------- ---- ------ ------- ------
509,054 9.41 $ 6.86 500,156 $ 6.70
======= ==== ====== ======= ======
</TABLE>
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.
<PAGE> 45
44
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
A summary of the status of the Corporation's restricted stock award
plan as of December 31, 1997, 1996, and 1995 and changes during the
years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
SHARES SHARES SHARES
------ ------ ------
<S> <C> <C> <C>
Outstanding at beginning
of year 34,600 39,000 38,250
Granted 18,180 -- 9,750
Vested -- 4,400 2,250
Forfeited 12,750 -- 6,750
------ ------ ------
OUTSTANDING AT END OF YEAR 40,030 34,600 39,000
====== ====== ======
</TABLE>
15. REGULATORY MATTERS
Bank regulations require depository institutions to maintain cash
reserves relating to customer deposits. At December 31, 1997 the Bank's
cash reserve requirements were approximately $11,605,000.
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, 1997,
retained earnings of the Banks were approximately $41,204,000. At
January 1, 1998, there were approximately $21,140,000 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, 1997, the Corporation's
Tier 1 and total risk-based capital ratios were 13.24% and 14.50%,
respectively. The leverage ratio was 9.54% at December 31, 1997. At
December 31, 1997, the Corporation and the Banks exceeded the minimum
regulatory capital requirements.
As of December 31, 1997 and 1996, the most recent notifications 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.
<PAGE> 46
45
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. REGULATORY MATTERS (CONTINUED)
The Corporation and its most significant subsidiary's actual capital
amounts and ratios are presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------
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 $169,651 9.54% $ 71,120 4.00% $ 88,900 5.00%
The Owensboro National Bank 34,512 7.80% 17,695 4.00% 22,119 5.00%
TIER 1 RISK-BASED CAPITAL RATIO:
(Tier 1 Capital to Risk Weighted
Assets)
CONSOLIDATED $169,651 13.24% $ 51,249 4.00% $ 76,873 6.00%
The Owensboro National Bank 34,512 11.93% 11,569 4.00% 17,353 6.00%
TOTAL RISK-BASED CAPITAL RATIO:
(Risk Based Capital to Risk
Weighted Assets)
CONSOLIDATED $185,714 14.50% $102,497 8.00% $128,121 10.00%
The Owensboro National Bank 38,133 13.18% 23,137 8.00% 28,216 10.00%
<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 $151,463 8.86% $ 68,382 4.00% $ 85,472 5.00%
The Owensboro National Bank 32,317 7.75% 16,682 4.00% 20,852 5.00%
TIER 1 RISK-BASED CAPITAL RATIO:
(Tier 1 Capital to Risk Weighted
Assets)
CONSOLIDATED $151,463 12.93% $ 46,853 4.00% $ 70,284 6.00%
The Owensboro National Bank 32,317 11.12% 11,628 4.00% 17,442 6.00%
</TABLE>
<PAGE> 47
46
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. 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 $166,154 14.19% $ 93,674 8.00% $117,092 10.00%
The Owensboro National Bank 35,959 12.37% 23,256 8.00% 29,071 10.00%
</TABLE>
16. NET INCOME PER COMMON SHARE AND SHAREHOLDERS' EQUITY CHANGES
The following table presents the numerators (net income) and
denominators (average shares outstanding) for the basic and diluted net
income per share computations:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1997 1996 1995
<S> <C> <C> <C>
Net income, basic and diluted $20,809 $19,886 $12,446
Average shares outstanding 15,366 15,521 15,413
Effect of dilutive securities 282 262 293
------- ------- -------
Average shares outstanding including
dilutive securities 15,648 15,783 15,706
======= ======= =======
NET INCOME PER SHARE - BASIC $ 1.35 $ 1.28 $ .81
NET INCOME PER SHARE - DILUTED $ 1.33 $ 1.26 $ .79
</TABLE>
On November 19, 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. On September 30, 1997, the
Corporation increased the authorized shares from 16,000,000 to
50,000,000. All per share information in these consolidated financial
statements has been restated to give effect to the stock split.
17. RETIREMENT PLANS
The Corporation maintains noncontributory defined benefit pension plans
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.
<PAGE> 48
47
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. RETIREMENT PLANS (CONTINUED)
The following table sets forth the aforementioned plan's funded status
and the components of net pension cost (income):
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
<S> <C> <C> <C>
Actuarial present value of benefit
obligations at December 31:
Vested benefit obligation $ 7,510 $ 7,116 $ 6,905
======== ======== ========
Accumulated benefit obligation 7,723 7,283 7,025
======== ======== ========
Projected benefit obligation 10,707 9,822 9,444
Plan assets at fair value 13,220 11,718 11,036
-------- -------- --------
Plan assets in excess of projected
benefit obligation 2,513 1,896 1,592
Unrecognized net loss 134 841 1,175
Unrecognized prior service cost 489 554 729
Unamortized portion of net asset at January 1, 1987
being amortized over approximately 17 years (783) (909) (1,035)
-------- -------- --------
PREPAID PENSION COST (INCLUDED IN OTHER ASSETS) $ 2,353 $ 2,382 $ 2,461
======== ======== ========
Net pension income includes the following (income)
expense components:
Service cost-benefits earned during the year $ 629 $ 700 $ 459
Interest cost on projected benefit obligation 727 675 564
Actual return on assets (2,174) (1,527) (2,246)
Net amortization and deferral 1,139 572 1,479
-------- -------- --------
NET PENSION COST $ 321 $ 420 $ 256
======== ======== ========
</TABLE>
The discount rates used in determining the actuarial present value of
the projected benefit obligation at December 31, 1997, 1996 and 1995
were 7.00%, 7.50% and 7.25%, respectively. The rate of increase in
future compensation levels used in determining the actuarial present
value of the projected benefit obligation at December 31, 1997, 1996
and 1995 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 1997, 1996 and 1995 the Corporation's expense totaled approximately
$533,000, $265,000, and $296,000, respectively.
18. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1997 1996 1995
<S> <C> <C> <C>
Advertising and business development $ 2,784 $ 2,789 $ 2,731
Bank shares tax 1,669 1,743 1,594
Professional fees 3,091 2,320 3,110
Other 12,665 14,119 13,859
------- ------- -------
TOTALS $20,209 $20,971 $21,294
======= ======= =======
</TABLE>
<PAGE> 49
48
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Interest rates swap contracts are entered into as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap
contracts are exchanges of interest payments, such as fixed-rate
payments for floating-rate payments, based on a notional principal
amount, which is an agreed-upon amount upon which calculations of
interest payments to be exchanged are based, and is significantly
greater than the amount at risk. The primary risk associated with swaps
is the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contract.
Two of the banks have entered into interest rate swap contracts with
notional amounts outstanding of $13,662,000 and $752,000 at December
31, 1997 and 1996, respectively. As of December 31, 1997, the banks are
fixed-rate payors at a weighted average rate of 8.00% over the term of
the contracts, and receive interest at prime less 1.12%, which was
7.38%. The market value of these interest rate swap contracts was
$13,414,000 and $752,000 at December 31, 1997 and 1996, respectively.
21. COMMITMENTS AND CONTINGENCIES
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. 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 letters of
credit, at December 31, 1997 and 1996 were approximately $344,309,000
and $282,940,000, respectively. Approximately $37,888,000 of these
commitments were fixed rate and $306,421,000 were variable rate at
December 31, 1997. 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.
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 $15,817,000 and $20,824,000 in letters of credit
outstanding at December 31, 1997 and 1996, respectively.
<PAGE> 50
49
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1997, there were various pending legal actions and
proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate result of these
legal actions and proceedings will not have a material adverse effect
upon the consolidated financial position or results of operations of
the Corporation.
22. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
IN THOUSANDS DECEMBER 31, 1997 DECEMBER 31, 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Financial Asset:
Cash and short-term investments $ 90,182 $ 90,182 $ 96,454 $ 96,454
Trading account securities 45,873 45,873 43,877 43,877
Securities available for sale 342,513 342,513 320,413 320,413
Securities held to maturity 116,811 122,781 97,120 101,122
Mortgage loans held for sale 9,817 9,817 21,212 21,212
Loans, net 1,207,420 1,212,342 1,128,397 1,133,821
Financial Liabilities:
Deposits 1,433,132 1,437,943 1,394,399 1,362,749
Federal funds purchased and securities
sold under agreements to repurchase 148,552 148,649 149,396 149,450
Notes payable to the U.S. Treasury 19,581 19,581 8,883 8,883
Advances from the Federal Home Loan
Bank 84,336 84,726 49,313 50,605
Other borrowings 397 397 6,324 6,324
Commitments -- -- -- --
Interest rate swaps -- (248) -- --
</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.
<PAGE> 51
50
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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 the obligations with the counterparties. At the
reporting date, no significant fair value differences exist on
commitments to extend credit and standby letters of credit.
Interest Rate Swaps
The fair value of interest rate swaps used for hedging purposes is the
estimated amount that the Corporation would receive or pay to terminate
the swap agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap
counterparties.
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.
<PAGE> 52
51
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Area Bancshares Corporation (Parent
Company) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
CONDENSED BALANCE SHEETS (IN THOUSANDS) 1997 1996
<S> <C> <C>
ASSETS
Cash on demand deposit with bank subsidiary $ 911 $ 709
Securities available for sale 35,667 22,237
Investments in:
Bank and bank holding company subsidiaries 166,476 145,829
Nonbank subsidiaries 527 494
Other assets 2,906 4,137
-------- --------
TOTAL ASSETS $206,487 $173,406
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowings $ 336 $ --
Other liabilities 9,602 4,023
Shareholders' equity 196,549 169,383
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $206,487 $173,406
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
CONDENSED INCOME STATEMENTS (IN THOUSANDS) 1997 1996 1995
<S> <C> <C> <C>
INCOME
Dividends from bank and bank holding company subsidiaries $ 8,450 $ 15,910 $ 10,425
Interest from subsidiaries 191 95 207
Securities gains, net -- 3,269 --
Other 4,288 4,609 2,125
-------- -------- --------
TOTAL INCOME 12,929 23,883 12,757
-------- -------- --------
EXPENSES
Interest on short-term borrowed funds 6 701 401
Salaries and employee benefits 3,290 2,968 1,418
Other 2,858 2,160 1,253
-------- -------- --------
TOTAL EXPENSES 6,154 5,829 3,072
-------- -------- --------
</TABLE>
<PAGE> 53
52
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
Income before income taxes and equity in undistributed
earnings of subsidiaries 6,775 18,054 9,685
Applicable income tax expense (benefit) (681) 735 (275)
-------- -------- --------
Income before equity in undistributed earnings of subsidiaries 7,456 17,319 9,960
Equity in undistributed earnings of subsidiaries 13,353 2,567 2,486
-------- -------- --------
NET INCOME $ 20,809 $ 19,886 $ 12,446
======== ======== ========
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
Cash flows from operating activities:
Net income $ 20,809 $ 19,886 $ 12,446
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries (13,353) (2,567) (2,486)
Gain on sales of securities, net -- (3,269) --
Other, net (655) (694) 156
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,801 13,356 10,116
-------- -------- --------
Cash flows from investing activities:
Purchases of securities (5,917) (11,981) (7,356)
Sales and maturities of securities 1,155 15,591 30
Net decrease (increase) in demand loans to nonbank
subsidiaries -- (825) 1,905
Investment in subsidiaries 400 (5,317) (8,528)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (4,362) (2,532) (13,949)
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in other borrowings $ -- $ (9,740) $ 4,340
Proceeds from stock options exercised 808 5,864 2,096
Repurchase of common stock (522) (4,315) (219)
Cash dividends paid (2,523) (2,486) (2,141)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,237) (10,677) 4,076
-------- -------- --------
Increase in cash 202 147 243
Cash at beginning of year 709 562 319
-------- -------- --------
CASH AT END OF YEAR $ 911 $ 709 $ 562
======== ======== ========
</TABLE>
24. RELATED PARTY TRANSACTIONS
Loans to officers, directors, and entities of which these individuals
are principal owners were approximately $55,249,000 and $53,031,000 at
December 31, 1997 and 1996, respectively. During 1997, $46,757,000 of
new loans or advances on existing loans were made to these related
parties. Repayments from such persons totaled $44,539,000. 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.
<PAGE> 54
53
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CORPORATE INFORMATION
CORPORATION HEADQUARTERS
230 Frederica Street
Owensboro, Kentucky 42301
AFFILIATED COMPANIES
Alliance Bank, FSB The New Farmers National
124 N. Main Street Bank of Glasgow
Somerset, KY 42501 701 Columbia, Box 248
Glasgow, KY 42142
Bowling Green Bank and The Owensboro National Bank
Trust Company, N.A. 230 Frederica Street
902 College Street Owensboro,KY 42301
Bowling Green, KY 42102
Citizens Deposit Bank Southern Deposit Bank
100 Main Street 102 West Park Square, Box 130
Calhoun, KY 42327 Russellville, KY 42276
First City Bank and The Vine Street Trust Company
Trust Company 360 E. Vine Street
1002 South Virginia Street Lexington,KY 40507
Hopkinsville, KY 42240
First & Peoples Bank ABC Credit Corporation
110 E. Main Street 230 Frederica Street
Springfield, KY 40069 Owensboro, KY 42301
HNB Bank, N.A. Vine Street Financial, Inc.
101 N. Main Street 5901-C Peachtree-Dunwoody
Harlan,KY 40831 Suite 420
Atlanta, GA 30328
Jefferson Banking Company
4201 Shelbyville Road
Louisville, KY 40207
STOCK TRANSFER AND
DIVIDEND PAYING AGENT
UMB Bank, N.A.
Securities Transfer Division
928 Grand Ave.
Kansas City, Missouri 64141
(816)-860-7761
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Suite 2600
400 West Market Street
Louisville, Kentucky 40202
FINANCIAL REPORTS
Additional copies of this 1997 Annual Report and copies of Area Bancshares'
Annual Report to the Securities and Exchange Commission on Form 10-K may be
obtained without charge by written request to Jack H. Brown, Senior Vice
President, Chief Financial Officer at the Corporate Headquarters.
ANNUAL MEETING
The annual meeting of shareholders of Area Bancshares Corporation will be held
at the main office of Area Bancshares, 230 Frederica Street, Owensboro,
Kentucky, at 11:00 a.m. Central time, on May 18, 1998.
NASDAQ STOCK MARKET INFORMATION
The NASDAQ Stock Market is a highly-regulated electronic securities market
comprised of competing market makers whose trading is supported by a
communications network linking them to quotation dissemination, trade reporting,
and order execution systems. This market also provides specialized automation
services for screen-based negotiations of transactions, on-line comparison of
transactions, and a range of informational services tailored to the needs of the
securities industry, investors and issuers. The NASDAQ Stock Market consists of
two distinct market tiers: The NASDAQ National Market and The NASDAQ Small-Cap
Market. The NASDAQ stock market is operated by The NASDAQ Stock Market, Inc., a
wholly-owned subsidiary of the National Association of Securities Dealers, Inc.
COMMON STOCK LISTING
NASDAQ National Market
Trading Symbol: AREA
INFORMATION VIA THE INTERNET
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 Area
Bancshares Corporation. The web site address is: (http://www.sec. gov).
<PAGE> 55
54
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The table below lists the NASDAQ price quotes and dividend data for
Area Bancshares Corporation over the past two years.
MARKET PRICES AND DIVIDENDS (1)
<TABLE>
<CAPTION>
High Low Per Share Dividends
---- --- -------------------
<S> <C> <C> <C> <C>
1996:
1st quarter $16.83 $15.50 $.023
2nd quarter 18.33 15.67 .027
3rd quarter 18.33 17.00 .027
4th quarter 21.00 17.00 .03
1997:
1st quarter $23.50 $20.50 $.03
2nd quarter 23.25 19.75 .03
3rd quarter 23.00 19.50 .03
4th quarter 25.00 18.87 .035
</TABLE>
(1) Adjusted for all stock splits.
The future payment of dividends is solely at the discretion of the
Board of Directors of Area and is dependent upon certain legal and regulatory
considerations and upon the earnings and financial condition of Area and such
other factors as the Area's Board of Directors may, from time to time, deem
relevant. In particular, the prior approval of the Office of the Comptroller of
the Currency or the Kentucky Department of Banking, as applicable, is required
if the total of all dividends declared by any 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 proceeding two calendar years, less any required
transfers to surplus or a fund for the retirement of any preferred stock (the
"net profits limitations"). In addition, both federal and state law impose
capital limitations on the ability of Area and its subsidiaries to pay
dividends. Management does not believe that these restrictions on the payment of
dividends are likely to limit materially the future payment of dividends on
Area's common stock, and currently expects that comparable cash dividends will
continue to be paid in the future.
There are approximately 1,017 holders of record of Area's No Par Value
Common Stock as of December 31, 1997. The closing bid price on Area's common
stock was $28.00 on March 3, 1998.
<PAGE> 56
55
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
AREA BANCSHARES CORPORATION - OFFICERS AND DIRECTORS
EXECUTIVE OFFICERS
C. M. Gatton Chairman of the Board
Raymond C. McKinney Vice Chairman
Thomas R. Brumley President & Chief Executive Officer
John S. Penn Executive Vice President
Edward F. Johnson Senior Vice President, Operations
Donald A. Leibee Senior Vice President, Loan Administration
Jack H. Brown Senior Vice President, Chief Financial Officer
Timothy O. Shelburne Senior Vice President, General Counsel
John A. Ray Treasurer
PRESIDENTS' COUNCIL
Frank O. Bennett President & Chief Executive Officer
Vine Street Financial, Inc.
Larry Cheser President & Chief Executive Officer
First & Peoples Bank
Danny J. Coffey President & Chief Executive Officer
Southern Deposit Bank
Darrell L. Gustafson President & Chief Executive Officer
First City Bank & Trust Company
F. Lee Hess President & Chief Executive Officer
The Vine Street Trust Company
Darrell W. Higginbotham President & Chief Executive Officer
Alliance Bank, FSB
William W. James President & Chief Executive Officer
The New Farmers National Bank
Charles Mann, Jr. President & Chief Executive Officer
Citizens Deposit Bank
Randy Pauley President & Chief Executive Officer
ABC Credit Corporation
John A. Ray President & Chief Executive Officer
The Owensboro National Bank
James Clay Smith President & Chief Executive Officer
Jefferson Banking Company
Kenneth W. Thomas President & Chief Executive Officer
HNB Bank, N. A.
Richard N. Wilson President & Chief Executive Officer
Bowling Green Bank & Trust Company,N.A.
ADMINISTRATIVE OFFICERS
J. Glenn Babb Vice President
David Bowser Chief Internal Auditor
Douglas J. Conkright Vice President, Special Assets
Tammy S. Jones Vice President, Accounting Manager
Brian A. Martin Vice President, Investments Officer
Joe C. Neff, Jr. Vice President, Loan Review
Douglas G. Pace M&I Administrator/Information Security Officer
Thomas H. Pope Vice President, Operations Coordinator
Vikki W. Stephens Human Resource Director
Gary R. White Vice President, Controller
Judith R. Windle Corporate Secretary
DIRECTORS
C. M. Gatton, Chairman John S. Penn * Emeritus
Raymond C. McKinney, Vice Chairman Allan R. Rhodes ** Advisory
Anthony G. Bittel David W. Smith, Jr.
Samual A. B. Boone William H. Thompson
Thomas R. Brumley Don Vitale**
Cecile W. Garmon** Pollard White
Gary H. Latham Cy M. Williamson*
<PAGE> 57
56
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
ALLIANCE BANK, FSB - OFFICERS AND DIRECTORS
OFFICERS
Darrell Higginbotham President, Chief Executive Officer
William E. Jasper Senior Lending Officer
DIRECTORS
W. Clyde Ping, Chairman Loyd G. Jasper
Dan Coomer Herman W. Schoolcraft
Talmadge V. Hayes Nelson Sizemore
J. C. Helton Leo Taylor
Darrell W. Higginbotham Thomas M. Wilkerson
BOWLING GREEN BANK AND TRUST COMPANY, N.A. - OFFICERS AND DIRECTORS
OFFICERS
EXECUTIVE OFFICERS
Thomas R. Brumley Chairman of the Board
Richard N. Wilson President & Chief Executive Officer
Brad Howard Senior Vice President
Ralph Barany Senior Vice President
OFFICERS
Peggy P. Clark Vice President
Carol Kirkman Vice President
Joy Rogers Vice President
Betty Wyatt Vice President
V. Scott Gary Vice President
DIRECTORS
Thomas R. Brumley, Chairman C. M. Gatton *Emeritus
Louis Berman Joe Meng* **Advisory
James W. Brite* Dr. William T. Moore
Henry Carlisle Allan R. Rhodes**
Michael E. Caudill James P. Rogers
Harold S. Evans* Don Vitale
Bob R. Farley Richard N. Wilson
Vernon L. Gary
CITIZENS DEPOSIT BANK - OFFICERS AND DIRECTORS
OFFICERS
Thomas R. Brumley Chairman of the Board
Charles Mann, Jr. President, Chief Executive Officer
Lawrence B. Robertson Executive Vice President
DIRECTORS
Thomas R. Brumley, Chairman Allan R. Rhodes** *Emeritus
Billy H. Brenner Lawrence B. Robertson **Advisory
Charles Mann, Jr. Joseph A. Stirsman*
William E. Quisenberry, Jr. R. T. Tichenor, Jr.*
<PAGE> 58
57
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
FIRST CITY BANK AND TRUST COMPANY - OFFICERS AND DIRECTORS
OFFICERS
EXECUTIVE OFFICERS
Raymond C. McKinney Chairman of the Board
Gary H. Latham Vice Chairman of the Board
Darrell L. Gustafson President, Chief Executive Officer
ADMINISTRATIVE DIVISION
Wendell A. Lynch Senior Vice President, Administration
Kevin Atwood Senior Vice President
Carolyn A. Cobb Vice President, Marketing
Freeda Harrison Vice President, Cashier
LENDING DIVISION
David Moore Vice President, Manager Consumer Loans
Daniel B. Mann Vice President, Commercial Loans
Donald G. Marquess Vice President, Commercial Loans
Randy Newton Vice President, Agribusiness
Judy C. Budias Vice President, Commercial Loans
ASSET MANAGEMENT DIVISION
Brasher P. Mason Senior Vice President, Senior Trust Officer
Marjorie Thompson Vice President, Trust Officer
Wanda P. Boyd Vice President, Trust Officer
Bill McRae Vice President, Trust Officer
Scott Hancock Vice President, Trust Officer
Jeanette R. Settle Vice President, Trust Officer
OPERATIONS DIVISION
Stephen R. Craig Senior Vice President, Operations
AUDUBON FINANCIAL SERVICES
Ken Hatzakorzian Vice President, Manager
DIRECTORS
Cy M. Williamson, Senior Chairman* Wilma C. Garnett** Wynn L. Radford, III
Raymond C. McKinney, Chairman C. M. Gatton Allan R. Rhodes**
Gary H. Latham, Vice Chairman Anna C. Guffey William T. Scheid
J. Glenn Babb* Darrell L. Gustafson Albert W. Sisk
Alan W. Beard Roger E. Jeffers William T. Turner
Richard C. Brasher Jesse V. Keith* Lee T. White
Thomas R. Brumley Edward L. Major Pollard White*
Austin B. Carroll Sam Miles* Frank A. Yost*
K.O. Cayce, Jr.* William H. Nichol
*Emeritus
**Advisory
<PAGE> 59
58
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
FIRST & PEOPLES BANK - OFFICERS AND DIRECTORS
OFFICERS
Larry Cheser President, Chief Executive Officer
DIRECTORS
Fred Edelen, Chairman Larry Cheser
Joe Carpenter Edwin Hamilton
Perry Carrico Hamilton Simms
HNB BANK, N. A. - OFFICERS AND DIRECTORS
OFFICERS
Kenneth W. Thomas President, Chief Executive Officer
Johnny Shepherd Executive Vice President
John Morrissey Vice President, Senior Loan Officer
DIRECTORS
Kenneth W. Thomas, Chairman Robert Frazier
Michael Allison James W. Greene, Jr.
Bruce Ayers Herbert Kelley
Willard Carmical Terry Loving
Vernon J. Cole Donald Parson
Edison Creech Paul Pratt
JEFFERSON BANKING COMPANY - OFFICERS AND DIRECTORS
OFFICERS
James Clay Smith President, Chief Executive Officer
Phillip Marshall Executive Vice President
Phillip S. Poindexter Senior Lending Officer
DIRECTORS
James Clay Smith, Chairman Thomas O. Eifler, Sr.
Van Carlisle C. Barr Schuler
Brad Baumert Walter Wagner
John G. Beam, Jr. Robert Zoeller
Joe Conley
<PAGE> 60
59
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
THE NEW FARMERS NATIONAL BANK OF GLASGOW - OFFICERS AND DIRECTORS
OFFICERS
EXECUTIVE OFFICERS
Thomas R. Brumley Chairman of the Board
William W. James President, Chief Executive Officer
Tommy Ross Executive Vice President, Chief Operating Officer
& Chief Lending Officer
Victoria F. Pennycuff Vice President, Branch Administrator
OFFICERS
F. Gary Pierce Vice President, Commercial Loan Manager
Sandra E. Ross Vice President, Senior Agricultural Loan Officer
DIRECTORS
Thomas R. Brumley, Chairman William W. James **Advisory
A. Follis Crow, III Steven W. Newberry
Don R. Doty Allan R. Rhodes**
Cecile W. Garmon Bobby H. Richardson
C. M. Gatton Freddie L. Travis
<PAGE> 61
60
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
THE OWENSBORO NATIONAL BANK - OFFICERS AND DIRECTORS
<TABLE>
<S> <C>
OFFICERS
EXECUTIVE
Thomas R. Brumley Chairman of the Board
C. M. Gatton Vice Chairman of the Board
John A. Ray President, Chief Executive Officer
Kelly O. Howard Secretary to the Board
COMMERCIAL SALES
Edward J. Schroeder First Senior Vice President
David C. Scott, Jr. Senior Vice President
David D. Toler Senior Vice President
Rebecca J. Millay Vice President
Scott H. McCain Vice President
John L. Oberst, III Vice President
RETAIL SALES
Noble E. Noel First Senior Vice President
Charles S. Brown Vice President, Retail Loan Manager
Edna C. Murphey Vice President, Audubon Investment Manager
B. Sue Johnson Vice President, Branch Manager
Paula K. McIntyre Vice President, Branch Manager
TRUST ADMINISTRATION AND EMPLOYEE BENEFITS
Kenneth R. Cain First Senior Vice President
Gerald W. Saunders Senior Vice President
Jack M. Diamond Vice President, Senior Trust Officer
Amanda L. Emge Vice President, Senior Trust Officer
A. Daniel Oderkirk Vice President, Senior Trust Officer
Patricia C. Drury Vice President, Trust Officer
Brian A. Martin Vice President, Trust Officer
Nina M. Wyatt Vice President, Trust Officer
David A. Leferink Vice President
OPERATIONS SUPPORT DIVISION
Edward F. Johnson First Senior Vice President, Operations Manager
ADMINISTRATIVE SUPPORT DIVISION
Sheri H. Plain Vice President, Director of Marketing
Vikki W. Stephens Vice President, Director of Human Resources
</TABLE>
DIRECTORS
Thomas R. Brumley, Chairman Don Penn Moore, III *Emeritus
Jack E. Darnell, Chairman, Emeritus Helen W. Mountjoy **Advisory
C. M. Gatton, Vice Chairman John A. Ray
Anthony G. Bittel Allan R. Rhodes**
David E. Boswell David W. Smith, Jr.
Gary J. Braswell B. Dean Stanley
Jefferson B. Carpenter Mrs. Harry S. Sutton, Jr.
R. Earl Fischer Thomas N. Thompson
Jerry H. Haase William H. Thompson*
James T. Hines, Jr. Robert E. Watson
John W. Jones John A. Williams
William M. Kuegel, Jr. W. Terry Woodward
William B. Kurtz Patrick E. (Glenn) Wright
<PAGE> 62
61
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SOUTHERN DEPOSIT BANK - OFFICERS AND DIRECTORS
OFFICERS
EXECUTIVE OFFICERS
Thomas R. Brumley Chairman of the Board
R. L. Kirkpatrick, Jr. Chairman of the Board, Emeritus
Danny Coffey President, Chief Executive Officer
John Sheffield Executive Vice President
OFFICERS
Patsy Poore Vice President
DIRECTORS
R. L. Kirkpatrick, Jr., Chairman Jean Kirkpatrick *Emeritus
Thomas R. Brumley Bobbie Martin* **Advisory
Joe Gran Clark, Jr. William McGinnis
Danny Coffey Fred Mudge
William G. Fuqua Allan R. Rhodes**
C. M. Gatton Lee Robey III
Darrell L. Gustafson John Sheffield
<PAGE> 63
62
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
THE VINE STREET TRUST COMPANY - OFFICERS AND DIRECTORS
OFFICERS
F. Lee Hess President, Chief Executive Officer
Gregory M. Shewmaker Private Banking Manager
Charles Verrette Trust Division Manager
George Wallace Senior Lender Officer
DIRECTORS
John D. Stewart, II, Chairman Ardis Hoven
Van Alford, Jr. Greg Milward
Frank Cain Preston Nunnelley
William Chapman Gerald Psimer
F. Lee Hess Joe Rosenberg
Buckner Hinkle, Jr. Ronald C. Switzer
Lennie G. House Derek Vaughan
<PAGE> 64
63
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
ABC CREDIT CORPORATION - OFFICERS AND DIRECTORS
OFFICERS
Randy Pauley President, Chief Executive Officer
John E. Stevenson Vice President, District Supervisor
DIRECTORS
Allan R. Rhodes, Chairman Randy Pauley
J. Glenn Babb John A. Ray
Thomas R. Brumley Cy M. Williamson
Darrell L. Gustafson
VINE STREET FINANCIAL, INC. - OFFICERS AND DIRECTORS
OFFICERS
Frank Bennett President, Chief Executive Officer
DIRECTORS
John S. Penn, Chairman
Jack H. Brown
F. Lee Hess
<PAGE> 1
Exhibit 21.1
Subsidiaries of Registrant State of Incorporation
- -------------------------- ----------------------
Area Services, Inc. Kentucky
Commonwealth Bancorp of Glasgow Kentucky
Bowling Green Bank & Trust Company, N.A. Chartered by the Office of the
Comptroller of the Currency
The New Farmers National Bank Chartered by the Office of the
Comptroller of the Currency
The Owensboro National Bank Kentucky
First City Bank & Trust Company Kentucky
ABC Credit Corporation Kentucky
Southern Deposit Bank Kentucky
Citizens Deposit Bancshares, Inc. Kentucky
Citizens Deposit Bank Kentucky
Cardinal Bancshares, Inc. Kentucky
Jefferson Banking Company Kentucky
First & Peoples Bank Kentucky
Alliance Bank, FSB Chartered by the Office of
Thrift Supervision
The Vine Street Trust Company Kentucky
Vine Street Financial, Inc. Kentucky
HNB Bank, N.A. Chartered by the Office of the
Comptroller of the Currency
Cardinal Data Service Corporation Kentucky
Mutual Insurance Agency, Inc. Kentucky
Mutual Service Corporation Kentucky
<PAGE> 1
Exhibit 23.1 Consent of Independent Auditors
The Board of Directors
Area Bancshares Corporation
We consent to incorporation by reference in the registration statement (Nos.
333-38037, 333-38039, 333-44571 and 333-44573) on Form S-8 of Area Bancshares
Corporation of our report dated February 20, 1998, relating to the consolidated
balance sheets of Area Bancshares Corporation and subsidiaries as of December
31, 1997, and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears in the December 31, 1997,
annual report on Form 10-K of Area Bancshares Corporation.
Louisville, Kentucky
March 27, 1998 /s/ KPMG Peat Marwick LLP
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 84,378
<INT-BEARING-DEPOSITS> 5,804
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 45,873
<INVESTMENTS-HELD-FOR-SALE> 342,513
<INVESTMENTS-CARRYING> 116,811
<INVESTMENTS-MARKET> 122,781
<LOANS> 1,227,307
<ALLOWANCE> 19,887
<TOTAL-ASSETS> 1,901,449
<DEPOSITS> 1,433,132
<SHORT-TERM> 168,133
<LIABILITIES-OTHER> 18,902
<LONG-TERM> 84,733
0
0
<COMMON> 24,254
<OTHER-SE> 172,295
<TOTAL-LIABILITIES-AND-EQUITY> 1,901,449
<INTEREST-LOAN> 111,486
<INTEREST-INVEST> 26,436
<INTEREST-OTHER> 1,327
<INTEREST-TOTAL> 139,249
<INTEREST-DEPOSIT> 54,062
<INTEREST-EXPENSE> 63,643
<INTEREST-INCOME-NET> 75,606
<LOAN-LOSSES> 3,271
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 61,357
<INCOME-PRETAX> 29,300
<INCOME-PRE-EXTRAORDINARY> 20,809
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,809
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.33
<YIELD-ACTUAL> 8.62
<LOANS-NON> 2,173
<LOANS-PAST> 1,789
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 18,663
<CHARGE-OFFS> 3,647
<RECOVERIES> 1,600
<ALLOWANCE-CLOSE> 19,887
<ALLOWANCE-DOMESTIC> 19,887
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,328
</TABLE>
