<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1998
Commission File Number 0-26032
AREA BANCSHARES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
INCORPORATED IN KENTUCKY IRS EMPLOYER ID NUMBER
NO. 61-0902343
230 FREDERICA STREET
OWENSBORO, KENTUCKY 42301
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (502) 926-3232
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class: Common stock
No Par Value
Shares Outstanding: As of October 31, 1998: 15,666,536
<PAGE> 2
AREA BANCSHARES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements 3
Unaudited consolidated balance sheets, September 30, 1998, December 31, 1997
and September 30, 1997 3
Unaudited consolidated statements of income, three and nine months ended September 30, 1998
and 1997 4
Unaudited consolidated statements of shareholders' equity, year ended December 31, 1997
and nine months ended September 30, 1998 5
Unaudited consolidated statements of cash flows, nine months ended September 30, 1998
and 1997 6
Notes to unaudited consolidated financial statements 8
Item 2. Management's discussion and analysis of financial condition and results of operations 11
Results of operations 12
Financial position 20
Liquidity 23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE> 3
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1998 1997 1997
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 73,114 $ 84,378 $ 66,313
Interest bearing deposits with banks 8,103 5,804 4,777
Federal funds sold 4,000 -- 17,150
Trading account securities -- 45,873 50,886
Securities:
Available for sale (amortized cost of $383,412 and $324,731, respectively) 415,889 342,513 316,811
Held to maturity (fair value of $121,678 and $122,781, respectively) 114,205 116,811 117,416
----------- ----------- -----------
TOTAL SECURITIES 530,094 459,324 434,227
----------- ----------- -----------
Mortgage loans held for sale 7,702 9,817 6,117
Loans, net of unearned discount 1,326,459 1,227,307 1,204,274
Less allowance for loan losses 21,574 19,887 20,016
----------- ----------- -----------
NET LOANS 1,304,885 1,207,420 1,184,258
----------- ----------- -----------
Premises and equipment, net 36,338 29,710 29,822
Goodwill and other intangible assets 37,972 15,312 15,902
Other assets 43,207 43,811 39,492
----------- ----------- -----------
TOTAL ASSETS $ 2,045,415 $ 1,901,449 $ 1,848,944
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Non-interest-bearing deposits $ 204,830 $ 196,776 $ 175,308
Interest-bearing deposits 1,382,190 1,236,356 1,221,362
----------- ----------- -----------
TOTAL DEPOSITS 1,587,020 1,433,132 1,396,670
----------- ----------- -----------
Federal funds purchased 46,865 38,691 55,032
Securities sold under agreements to repurchase 95,982 109,861 94,118
Notes payable to the U.S. Treasury 5,543 19,581 24,414
Advances from the Federal Home Loan Bank 41,593 84,336 67,767
Other borrowings 22,357 397 649
Accrued expenses and other liabilities 23,333 18,902 20,881
----------- ----------- -----------
TOTAL LIABILITIES 1,822,693 1,704,900 1,659,531
----------- ----------- -----------
Preferred stock, no par value; authorized 500,000 shares; none issued -- -- --
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding September 30, 1998, 15,643,776, December 31, 1997,
15,576,917, September 30, 1997, 15,551,567 24,358 24,254 24,214
Paid-in capital 35,632 35,632 35,624
Retained earnings 142,655 126,104 120,933
Deferred compensation on restricted stock (637) (612) (633)
ESOP loan obligations (337) (337) (458)
Accumulated other comprehensive income 21,051 11,508 9,733
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 222,722 196,549 189,413
Commitments and contingent liabilities
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,045,415 $ 1,901,449 $ 1,848,944
=========== =========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $ 28,479 $28,438 $ 84,230 $ 82,668
Interest bearing deposits with banks 116 74 274 226
Federal funds sold 324 195 1,915 738
Interest and dividends on securities:
Taxable securities 4,446 4,879 14,160 14,701
Tax exempt securities 2,257 1,907 5,713 4,998
-------- ------- -------- --------
TOTAL INTEREST INCOME 35,622 35,493 106,292 103,331
-------- ------- -------- --------
Interest expense:
Interest on deposits 15,126 13,714 43,877 39,962
Interest on borrowings 1,818 2,529 6,381 6,937
-------- ------- -------- --------
TOTAL INTEREST EXPENSE 16,944 16,243 50,258 46,899
-------- ------- -------- --------
Net interest income 18,678 19,250 56,034 56,432
Provision for loan losses 534 1,130 1,247 2,415
-------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 18,144 18,120 54,787 54,017
-------- ------- -------- --------
Non-interest income:
Commission and fees on fiduciary activities 1,109 1,109 3,537 3,139
Service charges on deposit accounts 1,943 1,715 5,469 4,999
Other service charges, commissions and fees 1,371 1,113 4,661 3,794
Security gains (losses), net (9) 1 116 8
Gains on sales of loans, net 270 507 2,910 1,148
Other income 121 209 317 740
-------- ------- -------- --------
TOTAL NON-INTEREST INCOME 4,805 4,654 17,010 13,828
-------- ------- -------- --------
Non-interest expenses:
Salaries and employee benefits 8,078 7,534 23,179 21,874
Net occupancy expense 1,097 1,057 2,913 3,020
Furniture and equipment expense 1,167 1,202 3,208 3,328
Federal deposit insurance 62 62 217 166
Data processing expense 936 860 2,797 2,383
Other 5,359 5,413 15,011 15,112
-------- ------- -------- --------
TOTAL NON-INTEREST EXPENSES 16,699 16,128 47,325 45,883
-------- ------- -------- --------
Income before income tax expense 6,250 6,646 24,472 21,962
Income tax expense 1,730 1,857 7,194 6,401
-------- ------- -------- --------
NET INCOME $ 4,520 $ 4,789 $ 17,278 $ 15,561
======== ======= ======== ========
Per common share:
Net income-basic $ 0.29 $ 0.31 $ 1.11 $ 1.02
-diluted $ 0.28 $ 0.30 $ 1.09 $ 0.98
Cash dividends $ 0.04 $ 0.03 $ 0.11 $ 0.09
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED
SEPTEMBER 30, 1998 (AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED DEFERRED ESOP AND ACCUMULATED TOTAL
STOCK- STOCK- CAPITAL EARNINGS COMPENSATION MRP LOAN OTHER
SHARES AMOUNT ON OBLIGATIONS COMPREHENSIVE
RESTRICTED INCOME
STOCK
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 15,514,223 24,197 35,142 107,581 (469) (628) 3,560 169,383
Net income 20,809 20,809
Cash dividends declared ($.125
per Share) (2,523) (2,523)
Repurchase of common stock (24,674) (39) (483) (522)
Stock options exercised,
including tax benefits 81,938 87 490 503 1,080
Amortization of deferred
compensation on restricted 83 83
stock
Net restricted stock issued 5,430 9 217 (226) --
Repayment of ESOP and MRP loan
obligations 291 291
Change in other comprehensive
income, net of tax 7,948 7,948
---------- -------- -------- --------- ------- ----- ------- --------
Balance, December 31, 1997 15,576,917 24,254 35,632 126,104 (612) (337) 11,508 196,549
Net income 17,278 17,278
Cash dividends declared ($.11 (1,718) (1,718)
per share)
Stock options exercised,
including tax benefits 63,284 98 897 995
Restricted stock issued 3,575 6 94 (100) --
Amortization of deferred
compensation on restricted 75 75
stock
Change in other comprehensive
income, net of tax 9,543 9,543
---------- -------- -------- --------- ------- ----- ------- --------
Balance, September 30, 1998 15,643,776 $ 24,358 $ 35,632 $ 142,655 $ (637) $(337) $21,051 $222,722
========== ======== ======== ========= ======= ===== ======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,278 $ 15,561
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 1,247 2,415
Depreciation, amortization and accretion, net 2,597 4,049
Gain on sales of securities and loans, net (3,026) (1,156)
Loss (Gain) on sales of other real estate owned 43 10
Loss (Gain) on disposals of equipment 10 39
Deferred income taxes (1,845) (201)
Proceeds from sales of trading account securities 19,760 29,637
Proceeds from maturities of trading account securities 99,994 116,000
Purchases of trading account securities (73,870) (152,600)
Originations of mortgage loans held for sale (93,030) (65,904)
Proceeds from sales of mortgage loans held for sale 95,501 105,648
Other, net 3,277 (187)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 67,936 53,311
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of NationsBank of Kentucky, N.A., net of cash and
due from banks (32,665) --
Decrease (increase) in interest bearing deposits with banks (2,299) 1,107
Proceeds from sales of securities available for sale 13,935 33,356
Proceeds from sales of securities held to maturity -- --
Proceeds from maturities of securities available for sale 179,693 85,968
Proceeds from maturities of securities held to maturity 4,899 3,274
Calls of securities available for sale 5,020 --
Calls of securities held to maturity 2,582 1,472
Purchases of securities available for sale (253,409) (101,172)
Purchases of securities held to maturity (2,956) (24,824)
Decrease (Increase) in federal funds sold 37,780 (3,503)
Loans originated, net of principal collected on loans (29,671) (84,539)
Net purchases of premises and equipment (8,135) (3,686)
Proceeds from sale of ABC Credit Corporation's loans 13,568 11
Proceeds from sales of other real estate owned 588 237
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (71,070) (92,299)
-------- --------
</TABLE>
CONTINUED
6
<PAGE> 7
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 41,329 $ 2,271
Increase in federal funds purchased 8,174 10,936
Decrease in securities sold under agreements to repurchase (22,089) (11,182)
Increase (decrease) in notes payable to the U.S. Treasury (14,038) 15,531
Increase (decrease) in advances from the Federal Home Loan Bank (42,743) 18,454
Increase (decrease) in other borrowings 21,960 (5,696)
Proceeds from issuance of common stock and stock options exercised, net 995 560
Repurchase of common stock -- (516)
Cash dividends paid (1,718) (1,980)
-------- --------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES (8,130) 28,378
-------- --------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (11,264) (10,610)
CASH AND DUE FROM BANKS, JANUARY 1 84,378 76,923
======== ========
CASH AND DUE FROM BANKS, SEPTEMBER 30 $ 73,114 $ 66,313
======== ========
Cash flow information:
Income tax payments $ 4,667 $ 4,925
Interest payments 51,631 46,755
Non-cash transactions:
Loans transferred to other assets 2,546 1,455
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE> 8
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q
and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair
presentation have been reflected in the accompanying consolidated
financial statements. Results of interim periods are not necessarily
indicative of results to be expected for the full year.
The accounting and reporting policies of Area Bancshares Corporation
("Area") and its subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry. The
consolidated financial statements include the accounts of Area and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. A full description
of significant accounting policies as well as a complete set of
footnotes are presented in the 1997 annual report to shareholders.
NOTE 2. COMPREHENSIVE INCOME
Area adopted FASB Statement No. 130, "Reporting Comprehensive Income",
during the first quarter of 1998. This Statement established standards
for reporting and displaying comprehensive income and its components.
Comprehensive income is defined as "the change in equity (net assets)
of a business enterprise during a period from transactions and other
events and circumstances from non-owner sources. It includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners." Comprehensive
income for Area includes net income and unrealized gains and losses on
securities available for sale. The following tables set forth the
components of comprehensive income for the three and nine months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1998 1997
------- -------
<S> <C> <C> <C> <C>
(Amounts in thousands)
Net income $ 4,520 $ 4,789
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 1,178 2,825
Less: Reclassification adjustment for gains (losses)
included in net income 6 1,172 (1) 2,826
------ ------- ----- -------
COMPREHENSIVE INCOME $ 5,692 $ 7,615
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1998 1997
------- -------
(Amounts in thousands)
<S> <C> <C> <C> <C>
Net income $17,278 $15,561
Other comprehensive income, net of tax:
Unrealized gains on securities:
Unrealized holding gains (losses) arising during period 9,468 6,168
Less: Reclassification adjustment for gains (losses)
included in net income (75) 9,543 (5) 6,173
------ ------- ----- -------
COMPREHENSIVE INCOME $ 26,821 $21,734
======== =======
</TABLE>
8
<PAGE> 9
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
NOTE 3. NET INCOME PER COMMON SHARE
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the increase in the average
shares outstanding that would have resulted from the exercise of
dilutive stock options.
The components of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1998 1997 1998 1997
------- ------- ------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
NET INCOME, BASIC AND DILUTED $ 4,520 $ 4,789 $17,278 $15,561
======= ======= ======= =======
Average shares outstanding 15,642 15,520 15,631 15,281
Effect of dilutive securities 279 355 280 577
------- ------- ------- -------
Average shares outstanding including dilutive securities 15,921 15,875 15,911 15,858
======= ======= ======= =======
NET INCOME PER SHARE, BASIC $ 0.29 $ 0.31 $ 1.11 $ 1.02
======= ======= ======= =======
NET INCOME PER SHARE, DILUTIVE $ 0.28 $ 0.30 $ 1.09 $ 0.98
======= ======= ======= =======
</TABLE>
NOTE 4. SECURITIES
The amortized cost and approximate market values of securities as of
September 30, 1998 and December 31, 1997 are as follows:
AVAILABLE FOR SALE
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $287,032 $ 2,885 $127 $289,790
Mortgage-backed securities 60,954 1,004 29 61,929
Obligations of state and political subdivisions 17,791 1,076 -- 18,867
Equity and other securities 17,635 27,839 171 45,303
======== ======= ==== ========
BALANCE AT SEPTEMBER 30, 1998 $383,412 $32,804 $327 $415,889
======== ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $232,694 $ 1,095 $436 $233,353
Mortgage-backed securities 55,959 719 110 56,568
Obligations of state and political subdivisions 16,115 752 -- 16,867
Equity and other securities 19,963 15,824 62 35,725
======== ======= ==== ========
BALANCE AT DECEMBER 31, 1997 $324,731 $18,390 $608 $342,513
======== ======= ==== ========
</TABLE>
9
<PAGE> 10
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
NOTE 4. SECURITIES (CONTINUED)
HELD TO MATURITY
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Obligations of state and political subdivisions $114,205 $ 7,491 $ 18 $121,678
======== ======= ==== ========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Obligations of state and political subdivisions $116,811 $ 6,485 $515 $122,781
======== ======= ==== ========
</TABLE>
NOTE 5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information",
changes the way public companies report information about segments of
their business in their annual financial statements and requires them
to report selected segment information in their quarterly reports to
shareholders beginning in 1999. SFAS No. 131 requires that companies
disclose segment data based on how management makes decisions about
allocating resources to segments and measures their performance. SFAS
No. 131 is effective for fiscal years beginning after December 15,
1997. Area does not expect the implementation of SFAS No. 131 to have a
material effect on the consolidated financial statements.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," addresses disclosure of such benefit plans
and is effective for fiscal years beginning after December 31, 1997.
Area does not anticipate a significant impact on the consolidated
financial statements when making these new disclosures.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998. SFAS No. 133 standardizes the
accounting for derivative instruments, including certain derivative
instruments embedded in other contracts. Under the standard, entities
are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the
fair value (i.e. gains or losses) of a derivative instrument depends on
whether it has been designed and qualifies as part of a hedging
relationship and if so, on the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposure to changes in fair values, cash flows
or foreign currencies. If the hedged exposure is a fair value exposure,
the gain or loss on the derivative instrument is recognized in earnings
in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk hedged. If the hedged exposure
is a cash flow exposure, the effective portion of the gain or loss on
the derivative instrument is reported initially as a component of other
comprehensive income and subsequently reclassified into earnings when
the forecasted transaction affects earnings. Any amounts excluded from
the assessment of hedge effectiveness as well as the ineffective
portion of the gain or loss is reported in earnings immediately.
Accounting for foreign currency hedges is similar to the accounting for
fair value and cash flow hedges. If the derivative instrument is not
designated as a hedge, the gain or loss is recognized in earnings in
the period of change.
Area must adopt SFAS No. 133 by January 1, 2000, however early adoption
is permitted. On adoption, the provisions of SFAS No. 133 must be
applied prospectively. Area has not determined the impact that SFAS No.
133 will have on its financial statements and believes that such
determination will not be meaningful until closer to the date of
initial adoption.
10
<PAGE> 11
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
NOTE 6. INTANGIBLES
The excess cost over fair value of net assets acquired in purchase
business combinations (goodwill) of $34,888,000 and $11,717,000 net of
accumulated amortization as of September 30, 1998 and December 31,
1997, respectively, is being amortized over a 10-20 year period on a
straight-line basis. Other intangible assets consist of the value of
core deposits purchased of approximately $3,084,000 and $3,595,000, net
of accumulated amortization, as of September 30, 1998 and December 31,
1997, respectively, which is being amortized by an accelerated method
over ten years. Amortization expense for goodwill for the three and
nine month periods ended September 30, 1998 was $546,000 and
$1,553,000, while amortization of core deposit premium was $166,000 and
$504,000 during the same periods.
NOTE 7. BUSINESS COMBINATIONS
During 1997 Area and Cardinal Bancshares, Inc. 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 Bancshares, Inc. were combined for all periods presented.
On August 23, 1998 Area acquired NationsBank of Kentucky, N.A., a
wholly-owned subsidiary of NationsBank Corporation. NationsBank of
Kentucky, N.A. had total assets of approximately $133,000,000, net of
certain deposits that were retained by NationsBank of Kentucky, N.A.,
loans of approximately $84,000,000 and deposits of approximately
$113,000,000. The acquisition was accounted for under the purchase
method of accounting and, accordingly, the results of NationsBank of
Kentucky, N.A. have been included in Area's consolidated statements
since the date of acquisition. In conjunction with the acquisition,
approximately $ 24,726,000 of intangibles were recorded.
On August 25, 1998, Area announced plans to merge with Peoples Bancorp
of Winchester which is headquartered in Winchester, Kentucky. Peoples
Bancorp of Winchester is the $145,000,000 of assets one-bank holding
company for Peoples Commercial Bank. Area will issue approximately
1,300,000 shares of its common stock in conjunction with the merger.
The merger is expected to close in the first quarter of 1999. This
acquisition is intended to be accounted for as a pooling-of-interests;
however, due to the relative size of Peoples Bancorp of Winchester's
financial condition and results of operations to that of Area, the
historical financial statements of Area will not be restated to reflect
this combination.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Area is a multi-bank holding company incorporated in Kentucky in 1976
and registered under the Bank Holding Company Act of 1956, as amended.
On September 30, 1998, the Corporation had direct control of three
affiliated commercial banks, indirect control of seven additional
commercial banks through the ownership of holding companies and
indirect control of one federal thrift through the ownership of a
holding company, all of which are located in Kentucky. Of the banks
controlled by Area, four are national banks, six are state banks and
one is a federal thrift.
Area and its subsidiaries engage in retail and commercial banking and
related financial services. In connection with these services, Area
provides the usual products and services of retail and commercial
banking such as deposits, commercial loans, personal loans and trust
services. The principal business of Area consists of making loans. The
principal markets for these loans are businesses and individuals. These
loans are made at the offices of the affiliated banks and subsidiaries,
and some are sold on the secondary market. Additionally, Area engages
in activities that are closely related to banking, including mortgage
banking and investment brokerage.
The discussion that follows is intended to provide additional insight
into Area's financial condition and results of operations. This
discussion should be read in conjunction with the consolidated
financial statements and accompanying notes presented in Item 1 of Part
I of this report.
11
<PAGE> 12
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q and
the exhibits hereto which are not statements of historical fact
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the "Act"). In addition, certain
statements in future filings by Area with the Securities and Exchange
Commission, in press releases, and in oral and written statements made
by or with the approval of Area which are not statements of historical
fact constitute forward-looking statements within the meaning of the
Act. Examples of forward-looking statements include, but are not
limited to: (1) projections of revenues, income or loss, earnings or
loss per share, the payment or non-payment of dividends, capital
structure and other financial items; (2) statements of plans and
objectives of Area or its management or Board of Directors, including
those relating to products or services; (3) statements of future
economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects,"
"intends," "targeted," and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of
identifying such statements.
Forward-looking statements involve risks and uncertainties which may
cause actual results to differ materially from those in such
statements. Facts that could cause actual results to differ from those
discussed in the forward-looking statements include, but are not
limited to: (1) the strength of the U.S. economy in general and the
strength of the local economies in which operations are conducted; (2)
the effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and
monetary fluctuations; (4) the timely development of and acceptance of
new products and services and perceived overall value of these products
and services by users; (5) changes in consumer spending, borrowing and
saving habits; (6) technological changes; (7) acquisitions; (8) the
ability to increase market share and control expenses; (9) the effect
of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which Area
and its subsidiaries must comply; (10) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory
agencies as well as the Financial Accounting Standards Board; (11)
changes in Area's organization, compensation and benefit plans; (12)
the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; and (13) the success of Area at managing
the risks involved in the foregoing. Such forward-looking statements
speak only as of the date on which such statements are made, and Area
undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which such statement
is made to reflect the occurrence of unanticipated events.
A. RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1998 was $ 4,520,000
versus $4,789,000 in the same period of 1997. Diluted earnings per
share were $0.28 compared to $0.30 for the same period in 1997. The
decrease for the current quarter from the third quarter of 1997 was
$269,000 or 5.6% for net income and $0.02 or 6.7% per diluted share.
The reduced earnings during the quarter were largely the result of a
decrease in net interest income (taxable equivalent basis) totaling
$465,000 and an increase in non-interest expenses amounting to
$571,000. This reduction in net income was off-set by a $596,000
reduction in the provision for loan losses. The increase in
non-interest expenses was largely the result of merger-related expenses
associated with the NationsBank acquisition (see note 7).
Merger-related expenses incurred in the current quarter amounted to
approximately $549,000 ($357,000 after-tax).
Year-to-date earnings were $17,278,000 compared to $15,561,000 for the
first three quarters of 1997. Diluted earnings per share totaled $1.09
for 1998 compared to $0.98 during 1997. The year-to-date increases were
$1,717,000 or 11.0% for net income and $0.11 or 11.2% per diluted
share. Earnings for the nine months ended September 30, 1998 reflected
an increase in net interest income (taxable equivalent basis) of
$169,000 or .3%, a reduction in the provision for loan losses totaling
$1,168,000 or 48.4% as a result of the improved quality of the loan
portfolio, an increase of $3,182,000 or 23.0% in non-interest income
due in large part to the sale of the loan portfolio of ABC Credit
Corporation (a wholly-owned consumer finance company) during the second
quarter of 1998 for a pre-tax gain totaling $2,068,000 ($1,344,000
after-tax) and an increase of $1,442,000 or 3.1% in non-interest
expenses. Excluding the $549,000 ($357,000 after-tax) of merger-related
expenses discussed above, non-interest expenses would have increased
$893,000 or 1.9%.
12
<PAGE> 13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
A. RESULTS OF OPERATIONS (CONTINUED)
Return on average assets totaled 1.00% (annualized, excluding the
$357,000 after-tax merger-related expenses) during the quarter ended
September 30, 1998 and 1.17 % (annualized, excluding the $1,344,000
after-tax gain on the sale of ABC Credit Corporation's loan portfolio
and the $357,000 after-tax merger-related expenses) for the first nine
months of the year compared to 1.07% (annualized) and 1.19%
(annualized) for the same periods in 1997. Return on average equity was
8.84% (annualized, excluding the $357,000 after-tax merger-related
expenses) for the quarter ended September 30, 1998 and 10.45%
(annualized, excluding the $1,344,000 after-tax gain on the sale of ABC
Credit Corporation's loan portfolio and the $357,000 after-tax
merger-related expenses) for the first nine months of the year versus
9.99% (annualized) and 11.51% (annualized) for similar periods during
1997.
The following table provides selected operating data, per share data,
selected ratios and average balances for the three and nine month
periods ended September 30, 1998 and 1997:
EXHIBIT 1: HIGHLIGHTS
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
3 MONTHS ENDED SEPTEMBER 30 9 MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE 1998 1997 CHANGE
------- ------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Net income $ 4,520 $ 4,789 $ (269) $ 17,278 $ 15,561 $ 1,717
Net income (1) 4,877 4,789 88 16,291 15,561 730
PER SHARE DATA
Basic earnings per share 0.29 0.31 (0.02) 1.11 1.02 0.09
Basic earnings per share (1) 0.31 0.31 --- 1.04 0.99 0.05
Diluted earnings per share 0.28 0.30 (0.02) 1.09 0.98 0.10
Diluted earnings per share (1) 0.31 0.30 0.01 1.02 0.98 0.04
Cash dividends per share 0.04 0.03 0.005 0.11 .09 .015
Book value at September 30 14.24 12.18 2.06 14.24 12.18 2.06
Market price at September 30 26.00 19.50 6.50 26.00 19.50 6.50
SELECTED RATIOS AND DATA
Return on assets .93% 1.07% (.14%) 1.24% 1.19% .05%
Return on assets (1) 1.00% 1.07% (.07%) 1.17% 1.19% (.02%)
Return on equity 8.19% 9.99% (1.80%) 11.09% 11.51% (.42%)
Return on equity (1) 8.84% 9.99% (1.15%) 10.45% 11.51% (1.06%)
Efficiency ratio 68.08% 64.92% 3.16% 62.13% 63.01% (.88%)
Efficiency ratio (1) 65.84% 64.92% .92% 63.12% 63.01% .11%
Net interest margin 4.36% 4.78% (.42%) 4.49% 4.81% (.32%)
Equity-to-assets 10.89% 10.24% .65% 10.89% 10.24% .65%
Reserve for loan losses to lns 1.63% 1.66% (.03%) 1.63% 1.66% (.03%)
Reserve for loan losses to
nonperforming loans 823.4% 506.2% 317.2% 823.4% 506.2% 317.2%
Nonperforming lns to total lns .20% .33% (.13%) .20% .33% (.13%)
AVERAGE BALANCES
Total assets $1,929,862 $1,782,643 $147,219 $1,866,412 $1,750,751 $115,661
Earning assets 1,795,460 1,676,197 119,263 1,755,546 1,639,743 115,803
Shareholders' equity 218,961 190,179 28,782 208,374 180,825 27,549
</TABLE>
(1) Excludes $1,344,000 after-tax ($2,068,000 pre-tax) gain on the sale
of ABC Credit Corporation's loan portfolio which occurred in the second
of quarter of 1998 and $357,000 after-tax ($549,000 pre-tax)
merger-related expenses incurred in the third quarter of 1998.
13
<PAGE> 14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
CASH BASED EARNINGS
Area believes it is important to also disclose cash based earnings,
which excludes intangible asset amortization. Although Area believes
these calculations are helpful in understanding the performance of
Area, cash based earnings should not be considered a substitute for net
income or cash flow as indicators of Area's financial performance or
its ability to generate liquidity. The following presents the cash
based net income and various cash based performance ratios:
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
3 MONTHS ENDED SEPTEMBER 30 9 MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE 1998 1997 CHANGE
------ ------ ------ ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net income $4,520 $4,789 $ (269) $17,278 $ 15,561 $ 1,717
Add back:
Goodwill amortization 546 459 87 1,553 1,371 182
Other intangible asset amortization 166 167 (1) 504 517 (13)
------ ------ ------ ------- -------- -------
Total intangible asset amortization 712 626 86 2,057 1,888 169
Less: Tax effect 106 58 48 224 181 43
------ ------ ------ ------- -------- -------
CASH BASED NET INCOME $5,126 $5,357 $ (231) $19,111 $ 17,268 $ 1,843
====== ====== ====== ======= ======== =======
Per share data
Cash based basic earnings per share $ 0.33 $ 0.35 $(0.02) $ 1.22 $ 1.13 $ 0.09
Cash based diluted earnings per share 0.32 0.34 (0.02) 1.20 1.09 0.11
Performance ratios (annualized)
Cash based return on tangible assets 1.07% 1.21% (.14%) 1.38% 1.33% .05%
Cash based return on tangible equity 10.07% 12.32% (2.25%) 13.37% 14.03% (.66%)
Cash based efficiency ratio 65.20% 62.40% 2.80% 59.43% 60.42% (.99%)
</TABLE>
NET INTEREST INCOME
The largest component of Area's operating income is net interest
income. Net interest income is the difference between interest earned
on earning assets and interest expense on interest bearing liabilities.
For purposes of this discussion, interest income earned on tax-exempt
securities and loans is adjusted to a fully-taxable equivalent basis to
facilitate comparison with interest earned which is subject to
statutory taxation.
Changes in net interest income generally occur due to fluctuations in
the balance and/or mix of interest-earning assets and interest-bearing
liabilities, and changes in their corresponding interest yields and
costs.
Net interest income, on a tax equivalent basis, decreased $465,000 or
2.3% to $19,725,000 during the quarter ended September 30, 1998. The
net interest margin (which is computed by dividing net interest income
on a fully taxable equivalent basis by average earning assets)
decreased from 4.78% during the quarter ended September 30, 1997 to
4.36% during the current quarter. This decrease was largely the result
of a decrease in the average rate on earning assets from 8.62% in the
third quarter of 1997 to 8.10% in the current quarter. A shift in the
composition of earning assets from higher yielding loans to lower
yielding investments, competitive pressures on loan pricing, a
relatively flat yield curve and accelerated loan prepayments were
primarily responsible for the decrease in the average rate on earning
assets. As a partial off-set, the average rate on interest bearing
liabilities decreased from 4.61% to 4.50%. These changes resulted in a
decrease of .41% in the net interest spread for the current quarter
versus the same period in 1997. For the nine months ended September 30,
1998, net interest income, on a tax equivalent basis, increased
$169,000 or .3% to $59,160,000 over the same period in 1997. The net
interest margin was 4.49% for the year-to-date period, a decrease of
.32% from 4.81% recorded during the first nine months of 1997. The
decrease in the net interest margin was the result of a decrease of
.32% to 8.31% on the yield of earning assets during the current period
and an increase of .03% to 4.59% in the rate paid on interest bearing
liabilities.
14
<PAGE> 15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
NET INTEREST INCOME (CONTINUED)
The following presents the components of net income on a taxable
equivalent basis:
CONDENSED STATEMENT OF INCOME-TAXABLE EQUIVALENT BASIS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE 1998 1997 CHANGE
------- ------- ------ -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
Interest income $35,622 $35,493 $ 129 $106,292 $103,331 $ 2,961
Taxable-equivalent adjustment 1,047 940 107 3,126 2,559 567
------- ------- ----- -------- -------- -------
Interest income-taxable equivalent 36,669 36,433 236 109,418 105,890 3,528
Interest expense 16,944 16,243 701 50,258 46,899 3,359
------- ------- ----- -------- -------- -------
Net interest income-taxable equivalent 19,725 20,190 (465) 59,160 58,991 169
Provision for loan losses 534 1,130 (596) 1,247 2,415 (1,168)
Non-interest income 4,805 4,654 151 17,010 13,828 3,182
Non-interest expenses 16,699 16,128 571 47,325 45,883 1,442
------- ------- ----- -------- -------- -------
Income before income taxes 7,297 7,586 (289) 27,598 24,521 3,077
Income taxes 1,730 1,857 (127) 7,194 6,401 793
Taxable-equivalent adjustment 1,047 940 107 3,126 2,559 567
------- ------- ----- -------- -------- -------
NET INCOME $ 4,520 $ 4,789 $(269) $ 17,278 $ 15,561 $ 1,717
======= ======= ===== ======== ======== =======
</TABLE>
The following table summarizes the fully-taxable equivalent interest
spread, which is the difference between the average yield on earning
assets and the average rate on interest bearing liabilities as well as
the net interest margin, which is the fully-taxable equivalent net
interest income divided by the average earning assets for the three and
nine months ended September 30, 1998 and 1997.
(Amounts in thousands, except percentages)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 CHANGE 1998 1997 CHANGE
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Average rate on earning assets (1) 8.10% 8.62% (.52%) 8.31% 8.63% (.32%)
Average rate on interest
bearing liabilities (1) 4.50% 4.61% (.11%) 4.59% 4.56% .03%
Net interest spread (1) 3.60% 4.01% (.41%) 3.72% 4.07% (.35%)
Net interest margin (1) 4.36% 4.78% (.42%) 4.49% 4.81% (.32%)
Average earning assets $1,795,460 $1,676,197 $119,263 $1,755,546 $1,639,743 $115,803
Average interest bearing liabilities 1,493,575 1,397,501 96,074 1,460,494 1,376,550 83,944
</TABLE>
(1) Amounts annualized
PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained at a level adequate to
absorb probable losses. Management determines the adequacy of the
allowance based upon reviews of individual loans, evaluation of the
risk characteristics of the loan portfolio, including the impact of
current economic conditions on the borrowers' ability to repay, past
collection and loss experience and such other factors, which in
management's judgment, deserve current recognition. However, actual
losses could differ significantly from the amount estimated by
management. The allowance for loan losses is established by charges to
operating earnings.
15
<PAGE> 16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
PROVISION FOR LOAN LOSSES (CONTINUED)
An analysis of the changes in the allowance for loan losses and
selected ratios follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) THREE MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE
----------- ---------- --------
<S> <C> <C> <C>
Balance, June 30 $ 20,109 $ 19,474 $ 635
Additions through acquisitions 1,137 -- 1,137
Provision for loan losses 534 1,130 (596)
Loan loss recoveries 287 252 35
Loans charged off 493 840 (347)
----------- ---------- --------
BALANCE, SEPTEMBER 30 $ 21,574 $ 20,016 $ 1,558
=========== ========== ========
Average loans, net of unearned income $ 1,258,863 $1,201,043 $ 57,820
Provision for loan losses to average loans (1) .17% .38% (.21%)
Net loan charge-offs (recoveries) to average loans (1) .07% .20% (.13%)
Allowance for loan losses to end of period loans 1.63% 1.66% (.03%)
Allowance for loan losses to nonperforming loans 823.4% 506.2% 317.2%
(1) Amounts annualized
</TABLE>
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) NINE MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE
----------- ---------- --------
<S> <C> <C> <C>
Balance, December 31 $ 19,887 $ 18,663 $ 1,224
Additions through acquisitions 1,137 -- 1,137
Provision for loan losses 1,247 2,415 (1,168)
Loan loss recoveries 1,126 1,263 (137)
Loans charged off 1,823 2,325 (502)
----------- ---------- --------
BALANCE, SEPTEMBER 30 $ 21,574 $ 20,016 $ 1,558
=========== ========== ========
Average loans, net of unearned income $ 1,215,728 $1,178,125 $ 37,603
Provision for loan losses to average loans (1) .14% .27% (.13%)
Net loan charge-offs (recoveries) to average loans (1) .08% .12% (.04%)
Allowance for loan losses to end of period loans 1.63% 1.66% (.03%)
Allowance for loan losses to nonperforming loans 823.4% 506.2% 317.2%
</TABLE>
(1) Amounts annualized
The provision for loan losses decreased $596,000 or 52.7% to $534,000
for the quarter ended September 30, 1998 and decreased $1,168,000 or
48.4% to $1,247,000 during the nine months ended September 30, 1998
compared to the same periods last year. The decreases for both the
three and nine month periods ended September 30, 1998 were primarily
the result of a decrease in nonperforming assets from $5,440,000 on
September 30, 1997 to $4,425,000 on September 30, 1998 and an overall
improvement in the quality of the loan portfolio.
The provision for loan losses as a percentage of average loans totaled
.17% (annualized) for the quarter ended September 30, 1998 compared to
.38% (annualized) for the quarter ended September 30, 1997. For the
nine month period ended September 30, 1998, the provision for loan
losses as a percentage of average loans decreased to .14% (annualized)
from .27% (annualized) during the same period in 1997. These decreases
reflected the continued improvement in the quality of loans as
discussed more completely herein under "Asset Quality" on page 21.
16
<PAGE> 17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
PROVISION FOR LOAN LOSSES (CONTINUED)
Net loan charge-offs (loan charge-offs less recoveries) to average
loans decreased to .07% (annualized) for the quarter ended September
30, 1998 from .20% (annualized) for the quarter ended September 30,
1997, as a result of a reduced level of charge-offs and decreased to
.08% for the nine months ended September 30, 1998 compared to .12% for
the same period in 1997 due also to a reduced level of charge-offs.
The allowance for loan losses was 1.63% of total loans on September 30,
1998, as compared to the December 31, 1997 level of 1.62% and 1.66% on
September 30, 1997.
NON-INTEREST INCOME
The following table sets forth the components of non-interest income
for the three and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE 1998 1997 CHANGE
------- ------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 1,109 $1,109 $ -- $ 3,537 $ 3,139 $ 398
Service charges on deposit accounts 1,943 1,715 228 5,469 4,999 470
Other service charges, commissions and fees 1,371 1,113 258 4,661 3,794 867
Security gains (losses), net (9) 1 (10) 116 8 108
Gains on sales of loans (net) 270 507 (237) 2,910 1,148 1,762
Other income 121 209 (88) 317 (423)
------- ------ ----- ------- -------- ------
TOTAL $ 4,805 $4,654 $ 151 $17,010 $ 13,828 $3,182
======= ====== ===== ======= ======== ======
</TABLE>
Non-interest income totaled $4,805,000 and $17,010,000 for the three
and nine month periods ended September 30, 1998. These amounts
represent increases of $151,000 or 3.2 % for the current quarter and
$3,182,000 or 23.0% for the nine months ended September 30, 1998, when
compared to 1997 period totals. Commissions and fees on fiduciary
activities remained unchanged at $1,109,000 in the third quarter of
1998 and increased $398,000 or 12.7% to $3,537,000 for the nine month
period largely as a result of increases in the value of assets managed
and successful new business development efforts. Service charges on
deposit accounts increased $228,000 or 13.3 % to $1,943,000 and
$470,000 or 9.4 % to $5,469,000 respectively, for the three and nine
months ended September 30, 1998, when compared to similar period totals
in 1997, due primarily to increases in deposits subject to service
charges. Other service charges, commissions and fees totaled $1,371,000
and $4,661,000 for the third quarter of 1998 and year-to-date periods
ended September 30, 1998. The increases were $258,000 or 23.2% and
$867,000 or 22.9% respectively, for the three and nine month periods
ended September 30, 1998. The increases for the quarter and
year-to-date periods were largely the result of newly implemented fees
on ATM usage, loan servicing fees and fees earned on outsourcing
official checks. Securities gains (net) totaled $116,000 for the nine
months ended September 30, 1998 compared to $8,000 for the first nine
months of 1997. Gains on sales of loans decreased $237,000 to $270,000
and increased $1,762,000 to $2,910,000 for the three and nine month
periods ended September 30, 1998. Gains on sales of loans for the nine
months ended September 30, 1998 were favorably impacted by a gain
totaling $2,068,000 from the sale during the second quarter of 1998 of
ABC Credit Corporation's loan portfolio (ABC Credit Corporation is a
wholly-owned consumer finance subsidiary of Area). The sale of ABC
Credit Corporation's loan portfolio, which totaled approximately
$11,500,000 of consumer loans, is not expected to impact the future
earnings of Area. Other income totaled $121,000 during the three months
ended September 30, 1998 and $317,000 for the nine months ended
September 30, 1998. These amounts represent decreases of $88,000 or
42.1% and $423,000 or 57.2 %, respectively. The decreases for both the
quarter and year-to-date periods were primarily the result of a
decrease in mortgage acquisition income.
17
<PAGE> 18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
NON-INTEREST EXPENSES
The following table sets forth the components of non-interest expenses
for the three and nine months ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1998 1997 CHANGE 1998 1997 CHANGE
------- ------- ------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 8,078 $ 7,534 $ 544 $23,179 $21,874 $ 1,305
Net occupancy expenses 1,097 1,057 40 2,913 3,020 (107)
Furniture and equipment expense 1,167 1,202 (35) 3,208 3,328 (120)
Federal deposit insurance 62 62 -- 217 166 51
Data processing expense 936 860 76 2,797 2,383 414
Advertising and community relations 777 751 26 2,094 2,071 23
Insurance and taxes 584 495 89 1,763 1,806 (43)
Professional fees 807 931 (124) 2,308 2,072 236
Amortization of intangibles 705 626 79 2,057 1,888 169
Other 2,486 2,610 (124) 6,789 7,275 (486)
------- ------- ----- ------- ------- -------
TOTAL $16,699 $16,128 $ 571 $47,325 $45,883 $ 1,442
======= ======= ===== ======= ======= =======
</TABLE>
Non-interest expenses totaled $16,699,000 and $47,325,000 for the three
and nine month periods ended September 30, 1998. These amounts
represent increases of $571,000 or 3.5% for the current quarter and
$1,442,000 or 3.1% for the nine months ended September 30, 1998, when
compared to 1997 period totals. Included with these non-interest
expense totals is approximately $549,000 ($424,000 of severance
payments and $125,000 of other expenses) related to the acquisition of
NationsBank of Kentucky, N.A. (see note 7) which were incurred during
the third quarter of 1998. Excluding these one-time expenses,
non-interest expenses would have totaled $16,150,000 and $46,776,000
for the three and nine month periods ended September 30, 1998. The
increases in non-interest expenses would have been $22,000 or .1%
during the current quarter and $893,000 or 1.9% for the nine months
ended September 30, 1998. In the following discussion of non-interest
expenses, detail totals for the three and nine month periods ended
September 30, 1998 have not been adjusted (reduced) to reflect the
acquisition of NationsBank of Kentucky, N.A. (see note 7). Salaries and
employee benefits increased $544,000 or 7.2% to $8,078,000 in the third
quarter of 1998 largely as a result of the severance payments discussed
above and increased $1,305,000 or 6.0% to $23,179,000 for the nine
month period as a result of merit increases and severance benefits
noted above. Net occupancy expenses increased $40,000 or 3.8% to
$1,097,000 and decreased $107,000 or 3.5% to $2,913,000 respectively,
for the three and nine months ended September 30, 1998, when compared
to similar period totals in 1997. The decrease for the nine month
period was the result of reduced amounts of depreciation. Furniture and
equipment expenses totaled $1,167,000 and $3,208,000 for the third
quarter of 1998 and year-to-date period ended September 30, 1998. The
decreases were $35,000 or 2.9% and $120,000 or 3.6% respectively, for
the three and nine-month periods ended September 30, 1998 and occurred
largely as a result of a reduced level of repairs and maintenance. Data
processing expenses totaled $936,000 during the current quarter
compared to $860,000 for the same period in 1997 while totaling
$2,797,000 for the nine months ended September 30, 1998 compared to
$2,383,000 for the same period in 1997. The increases, $76,000 or 8.8%
and $414,000 or 17.4% for the quarter and year-to-date periods, were
largely the result of continued enhancements to Area's data processing
capabilities and expenses associated with modifying computer
application systems for the year 2000. Advertising and community
relations increased $26,000 or 3.5% to $777,000 for the current quarter
and $23,000 or 1.1% to $2,094,000 for the nine months ended September
30, 1998 when compared to the same periods in 1997. Professional fees
totaled $2,308,000 for the nine months ended September 30, 1998
compared to $2,072,000 for the same period in 1997. The increase was
$236,000 or 11.4% and was primarily the result of professional fees
incurred due to acquisitions. Other expenses totaled $2,486,000 during
the current quarter compared to $2,610,000 for the same period in 1997
and $6,789,000 for the nine months ended September 30, 1998 compared to
$7,275,000 for the first three quarters of 1997. The decreases were
$124,000 or 4.8% and $486,000 or 6.7% for the quarter and year-to-date
periods, respectively. A reduced level of stationery and printing
expenses associated with the Cardinal Bancshares merger was largely
responsible for these declines.
18
<PAGE> 19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
INCOME TAX EXPENSE
Income tax expense totaled $1,730,000 and $7,194,000 for the three and
nine-month periods ended September 30, 1998 compared to $1,857,000 and
$6,401,000 for the same periods in 1997. The reduced level of income
tax expense for the current three month period was the result of a
lower pre-tax income and higher tax exempt interest. The increased
amount of income tax expense for the year-to-date period was the result
of a higher level of pretax income. The effective tax rate was 27.7%
and 29.4% for the three and nine month periods ended September 30, 1998
compared to 27.9% and 29.1% for the same periods of 1997, respectively.
The effective tax rate differs from the marginal income tax rate of 35%
in both 1998 and 1997, primarily as a result of tax-exempt income and
amortization of goodwill.
YEAR 2000
What is commonly referred to as "Year 2000 or Y2K" presents potential
problems that have received much publicity and may effect many computer
systems currently in use. In these cases, the computer systems record
years in a two-digit format which may lead to misinterpretation between
year 2000 and year 1900. The result could lead to, among other things,
business interruptions and errors in computations that use dates. The
potential costs and uncertainties associated with Year 2000 will depend
not only on the computer hardware and software currently in use at a
specific company, but also the degree to which that company's suppliers
and customers have addressed their individual Year 2000 issues.
In August 1997 management established a formal program to address Year
2000 issues. The program is comprised of five phases: 1) awareness; 2)
assessment; 3) remediation; 4) testing; and 5) validation. As of
September 30, 1998, phases 1 and 2 are complete and phase 3 is
virtually complete. Phase 4, testing, has recently begun and is
scheduled for completion by March 31, 1999. The validation process,
phase 5, will be started during the fourth quarter of 1998. It is
anticipated that phase 5 will be completed by June 30, 1999. An
independent consultant will assist management in conducting the testing
and validation phases. The following table presents each phase and its
estimated percentage completion along with the estimated percentage
completion on December 31, 1998 and December 31, 1999:
MANAGEMENT ESTABLISHED YEAR 2000 FORMAL PROGRAM
<TABLE>
<CAPTION>
PERCENT COMPLETE
PHASE DESCRIPTION 9-30-98 (ACTUAL) 12-31-98 (EST) 12-31-99 (EST)
----- ----------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
1 Awareness 100% 100% 100%
2 Assessment 100% 100% 100%
3 Remediation 75% 90% 100%
4 Testing 25% 75% 100%
5 Validation 0% 20% 100%
</TABLE>
Approximately 90% of existing personal computers company-wide will be
replaced. The primary reason for replacement of the existing personal
computers will be to enable the installation of a wide area network.
The vendor represents that the new personal computers will be Year
2000 ready. Approximately 75% of current software is Year 2000 ready
with the remaining 25% scheduled to be replaced/upgraded by year-end
1998. No other information technology projects have been deferred as
a result of Year 2000 expenditures.
19
<PAGE> 20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
YEAR 2000 (CONTINUED)
Area has reviewed Year 2000 issues with its major business
relationships, defined as those which may have a significant financial
and/or operational impact on Area. Included with this review have been
customers, vendors, counterparties, other non-Area banks, utilities and
various intermediaries (collectively referred to as "third parties").
Area has determined that there are two primary sources of third party
risks that may result in financial losses to Area. The first is loan
customers (primarily business related) of Area's affiliated banks that
may experience financial difficulties as a result of not being Year
2000 compliant. The potential could exist for loan defaults. Major
borrowers have been reviewed using a Year 2000 credit risk assessment
and no material issues were noted. The other third party risk is from
Area's vendors. All mission-critical vendors have been contacted and
have indicated that they will be Year 2000 ready by December 31, 1998.
The third parties that have been determined as not significant sources
of risk are requested to certify as to their Year 2000 readiness. In
addition to obtaining Year 2000 certification regarding equipment and
services, Area will test such equipment and services for Year 2000
readiness. Testing completed so far has not identified material Year
2000 risks associated with these third parties.
Total costs to date, which includes consultants, software and hardware,
have been approximately $2,000,000. Management estimates that the
remaining costs to ensure Year 2000 readiness should not exceed
$1,600,000. A significant portion of these costs are not incremental,
but represent the redeployment of existing staff and information
technology. Additionally, approximately $2,000,000 of the estimated
total costs of $3,600,000 are for capital items that will be
depreciated over their useful lives.
Management is currently completing a detailed contingency plan which
will address the most reasonably likely case scenarios. The plan will
be completed during the fourth quarter of 1998.
Currently Area does not anticipate a material business interruption as
a result of Year 2000 and does not expect costs to exceed those
discussed above, however there could be additional risks associated
with Year 2000 issues that are not currently apparent. Such risks could
have a material adverse impact on Area and may cause, among other
things, broad-based system failures, errors in computations using dates
and inability to reconcile internal customer records. Moreover, the
failure of Area's third parties, as defined above, to become Year 2000
ready could result in a material financial risk to Area. If these risks
materialize, Area could experience business interruptions, adverse
action from regulatory authorities, legal liability, significant
financial losses and damage to Area's public relations resulting in
lost future business.
B. FINANCIAL POSITION
Total assets increased $143,966,000 or 7.6% to $2,045,415,000 from
December 31, 1997 and increased $196,471,000 or 10.6% from September
30, 1997. Excluding the acquisition of NationsBank of Kentucky, N.A.
(see note 7), assets grew approximately $11,000,000 or .6% from
year-end and increased approximately $63,000,000 or 3.4% since
September 30, 1997. Assets averaged $1,929,862,000 in the quarter ended
September 30, 1998 compared to $1,782,643,000 during the same period in
1997. The growth was $147,219,000 or 8.3%. Earning assets totaled
$1,894,351,000 on September 30, 1998, an increase of $128,863,000 or
7.3% over December 31, 1997 and $164,643,000 or 9.5% over September 30,
1997.
SHORT-TERM INVESTMENTS AND SECURITIES
Short-term investments, which include interest-bearing deposits with
banks and federal funds sold totaled $12,103,000 on September 30, 1998,
an increase of $6,299,000 from year-end balances of $5,804,000 and a
decrease of $9,824,000 from September 30, 1997. The change from
year-end was largely the result of an increase in federal funds sold
totaling $4,000,000.
20
<PAGE> 21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
SHORT-TERM INVESTMENTS AND SECURITIES (CONTINUED)
Securities represent 28.0 % of earning assets. They totaled
$530,094,000 on September 30, 1998, an increase of $70,770,000 or 15.4%
from December 31, 1997 balances and $95,867,000 or 22.1% from September
30, 1997. The change for the first nine months of 1998 partially
reflects the reclassification of trading account securities into
available for sale. The held-to-maturity and available-for-sale
portfolios as of September 30, 1998 consisted of 54.7% in U.S. and
other government agency securities, 11.7% in mortgage-backed
securities, 25.1% in state and municipal securities and 8.5% in equity
and other securities. The comparable distributions at December 31, 1997
were 50.8%, 12.3%, 29.1% and 7.8%.
LOANS
Loans, including loans held for sale increased $97,037,000 or 7.8% to
$1,334,161,000 during the nine months ended September 30, 1998 and
$123,770,000 or 10.2% from September 30, 1997. Excluding the
acquisition of NationsBank of Kentucky, N.A. (see note 7), loans grew
approximately $13,000,000 or 1.1% during the first nine months of 1998
and approximately $40,000,000 or 3.3% from September 30, 1997. Loans,
including loans held for sale, represent the largest category of
earning assets, comprising 70.4 % of earning assets as of September 30,
1998, 70.8% as of December 31, 1997 and 70.1% as of September 30, 1997.
The following table presents the major categories of loans (including
loans held for sale):
<TABLE>
<CAPTION>
(Amounts in thousands)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1998 1997 1997
<S> <C> <C> <C>
Commercial $ 409,854 $ 357,133 $ 319,998
Real estate 730,412 670,642 671,783
Consumer installment and other loans 193,895 209,349 218,610
---------- ---------- ----------
Total $1,334,161 $1,237,124 $1,210,391
========== ========== ==========
</TABLE>
DEPOSITS
Deposits totaled $1,587,020,000 on September 30, 1998, an increase of
$153,888,000 or 10.7% from December 31, 1997 and $190,350,000 or 13.6%
since September 30, 1997. Excluding the acquisition of NationsBank of
Kentucky, N.A. (see note 7), deposits grew approximately $41,000,000 or
2.9% for the year-to-date period and approximately $77,000,000 or 5.5%
from September 30, 1997. Non-interest-bearing deposits grew $8,054,000
or 4.1% to $204,830,000 from year-end totals, while interest-bearing
deposits increased $145,834,000 or 11.8% to $1,382,190,000 during the
period. Average deposits increased $96,872,000 or 7.0% in the nine
months ended September 30, 1998 compared to the same period in 1997.
Average non-interest bearing deposits increased $497,000 or .3% during
the first three quarters compared to the same period last year while
average interest bearing deposits increased $97,369,000 or 8.1%.
BORROWED FUNDS
Borrowed funds, which include federal funds purchased, securities sold
under agreements to repurchase, notes payable to the U.S. Treasury,
advances from the Federal Home Loan Bank and other borrowings decreased
by $40,526,000 or 16.0% to $212,340,000 from $252,866,000 on December
31, 1997 while decreasing $29,640,000 or 12.2% from September 30, 1997.
Repayment of Federal Home Loan Bank advances accounted for
substantially all of the year-to-date decrease. Funds for this
reduction were obtained from deposit growth that was not invested in
loans or securities.
21
<PAGE> 22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
CAPITAL RESOURCES
Shareholders' equity totaled $222,722,000 at September 30, 1998, an
increase of $26,173,000 or 13.3% from December 31, 1997 and $33,309,000
or 17.6% since September 30, 1997. Out of net income of $17,278,000
during the first nine months of 1998, $15,560,000 was retained after
paying dividends to shareholders of $1,718,000. Accumulated other
comprehensive income was $21,051,000 at September 30, 1998, compared to
$11,508,000 at year-end 1997 and $9,733,000 as of September 30, 1997.
An increase in unrealized gains on equity securities was largely
responsible for the increase in accumulated other comprehensive income.
The shareholders' equity-to-asset ratio was 10.89% at September 30,
1998 compared to 10.34% on December 31, 1997 and 10.24% as of September
30, 1997.
Book value per share was $14.24, $12.62 and $12.18 at September 30,
1998, December 31, 1997 and September 30, 1997, respectively.
A summary of the regulatory capital ratios are shown below:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS
SEPTEMBER 30 DECEMBER 31 WELL MINIMUM
1998 1997 CAPITALIZED REQUIRED
---- ---- ----------- --------
<S> <C> <C> <C> <C>
Leverage Ratio 8.71% 9.54% 5.00% 4.00%
Tier I Risk Based Capital Ratio 12.09% 13.24% 6.00% 4.00%
Total Risk Based Capital Ratio 13.35% 14.50% 10.00% 8.00%
</TABLE>
ASSET QUALITY
At September 30, 1998, the allowance for loan losses was $21,574,000 or
1.63% of quarter end loans, as compared to 1.62% of loans at December
31, 1997 and 1.66% as of September 30, 1997. The ratio of the allowance
for loan losses to non-performing assets increased to 487.5% at
September 30, 1998, compared with 371.9% at December 31, 1997 as a
result of an increase in the allowance for loan losses and a reduction
in total nonperforming assets. Non-performing assets consist of
non-accrual loans, loans past due ninety days or more that are still
accruing interest, restructured loans, and other real estate owned.
Currently, year-to-date net charge-offs (loan charge-offs less
recoveries) are at .08% (annualized) of average year-to-date loans
compared to .12% (annualized) during the same period in 1997.
Management has determined that the allowance for loan losses should be
maintained at a level that is sufficient to absorb the losses that, in
the reasonable opinion and judgment of management, are known and
inherent in the loan portfolio. Management's evaluation includes an
analysis of the overall quality of the loan portfolio, historical loan
loss experience, loan delinquency trends and the economic conditions
within Area's marketing area. Additional allocations for the allowance
are based on specifically identified potential loss situations.
The allocation of the allowance for loan losses is an estimate of the
portion which will be used to cover future charge-offs in each loan
category, but does not preclude any portion of the allowance allocated
to one type of loan from being used to cushion losses of another loan
type. This allocation is determined by the estimated loss within each
loan pool as well as any specific allocations that may be assigned to
specific loans within the same portfolio section with the remainder
being assigned to the unallocated category.
A continuous and comprehensive loan review program is maintained by
Area for each affiliate bank. The purpose of this program is to provide
periodic review and inspection of loans to ensure the safety, liquidity
and profitability of the loan portfolio. Area's loan review department
is entrusted with the responsibility to identify foreseeable problems,
measure compliance with established loan and operating policies and
provide objective loan portfolio appraisals to the Board of Directors
and management.
22
<PAGE> 23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
ASSET QUALITY (CONTINUED)
The following schedule shows the dollar amount of assets at September
30, 1998, December 31, 1997 and September 30, 1997, which were
nonaccrual loans, loans contractually past due ninety days or more as
to interest or principal payments and still accruing and other real
estate and in-substance foreclosures:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
(In thousands) 1998 1997 1997
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans $1,664 $2,173 $2,220
Loans contractually past due 90 days or more as to
interest or principal and still accruing 956 1,789 1,734
------ ------ ------
TOTAL NONPERFORMING AND RESTRUCTURED LOANS 2,620 3,962 3,954
Other real estate owned 1,805 1,386 1,486
------ ------ ------
TOTAL NONPERFORMING ASSETS $4,425 $5,348 $5,440
====== ====== ======
</TABLE>
C. LIQUIDITY
Deposits have historically provided Area with a major source of stable
and relatively low-cost funding. Secondary sources of liquidity include
federal funds purchased, securities sold under agreements to
repurchase, notes payable to the U.S. Treasury, advances from the
Federal Home Loan Bank and other borrowings.
As of September 30, 1998, 77.6% of total assets were funded by core
deposits while 10.4% were funded with secondary sources of liquidity
discussed above, compared to 75.4% and 13.3%, respectively, as of
December 31, 1997.
The net loan-to-deposit ratio decreased from 84.3% on December 31, 1997
to 82.2% on September 30, 1998 as a result of an increase in total
deposits exceeding the increase in loans during the period.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Area's September 30, 1998 analysis of the impact of changes in interest
rates on net interest income over the next 12 months indicates no
significant changes in the Area's exposure to interest rate changes
since December 31, 1997. The table below illustrates the simulation
analysis of the impact of a 50 (.50%) and 100 (1.00%) basis point
upward and downward movement in interest rates. The impact of the rate
movement was simulated as if rates changed immediately from September
30, 1998 levels, and remained constant at those levels thereafter:
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(In thousands, except per share data)
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES FROM SEPTEMBER 30, 1998 RATES
INCREASE DECREASE
SIMULATED PRE-TAX IMPACT IN THE NEXT 12 MONTHS +100BP +50BP -50BP -100BP
------- ------- ----- ------
<S> <C> <C> <C> <C>
Net interest income (taxable equivalent) increase (decrease) $(2,753) $(1,396) $516 $950
Net income per share-basic increase (decrease) $ (0.11) $ (0.06) 0.02 0.04
Net income per share-diluted increase (decrease) $ (0.17) $ (0.09) 0.03 0.04
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
23
<PAGE> 24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters To a Vote of Security Holders
Not applicable
Pursuant to Rule 14a-4(c)(1) promulgated under to Securities
Exchange Act of 1934, as amended, shareholders desiring to
present a proposal for consideration at the 1999 Annual
Meeting of Shareholders must notify Area in writing at its
principal office at P.O. Box 786, Owensboro, Kentucky
42302-0786 of the contents of such proposal no later than
November 1, 1998. Failure to timely submit such a proposal
will enable the proxies appointed by management to exercise
their discretionary voting authority when the proposal is
raised at the Annual Meeting of Shareholders without any
discussion of the matter in the proxy statement.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1(1) Articles of Incorporation of the Registrant,
as amended
3.2(9) Bylaws of the Registrant, as amended
10.1(2)* Form of Area Bancshares Corporation
Restricted Stock Plan Agreement
10.2(2)* Area Bancshares Corporation 1994 Stock Option
Plan
10.3(3)* Memorandum dated September 18, 1996 regarding
executive officer compensation
10.4(4)* Cardinal Bancshares, Inc. 1989 Restricted
Stock Option Plan, as amended April 16,1992
10.5(5)* Cardinal Bancshares, Inc. 1994 Restricted
Stock Option Plan
10.6(6)* Cardinal Bancshares, Inc. 1992 Limited Stock
Option Plan
10.7(4)* Cardinal Bancshares, Inc. 1992 First Federal
Savings Bank Restricted Stock Option Plan
10.8(7)* Cardinal Bancshares, Inc. 1993 Mutual Federal
Savings Bank Restricted Stock Option Plan
10.9(7)* Amendment Number 1 to Cardinal Bancshares,
Inc. 1992 Limited Stock Option Plan
10.10(6)* Cardinal Bancshares, Inc. VST Financial
Services, Inc. Restricted Stock Plan and
Escrow Agreement
24
<PAGE> 25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
Item 6. Exhibits and Reports on Form 8-K (continued)
Exhibit No. Description of Exhibit
----------- ----------------------
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
27.1 Exhibit 27 Financial Data Schedule (For SEC
use 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).
25
<PAGE> 26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
Item 6. Exhibits and Reports on Form 8-K (continued)
(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).
(9) Incorporated by reference to the exhibit
filed with the Registrant's Registration
Statement on Form S-4 (333-65803).
- - The indicated exhibit is a compensatory plan or arrangement.
b) A report on Form 8-K dated September 21, 1998 was
filed with the United States Securities and Exchange
Commission and reported the following information
under "Item 5-Other Events":
On August 25, 1998, Area Bancshares Corporation
("Area") and Peoples Bancorp of Winchester, Inc.
("Peoples") signed a definitive agreement that
provides for the combination of Peoples and Area.
Area will exchange 17.33 shares of its common stock
for each share of Peoples common stock. Based on
Area's closing price of $29.50 per share on August
21, 1998, and Peoples total outstanding shares, the
transaction would be valued at approximately
$38,500,000 and the exchange value of Peoples stock
would be $511.24 per share. The total purchase price
would be 2.80 times Peoples June 30, 1998, book
value. The combination, which is expected to be
accounted for as a pooling of interests, is expected
to be consummated during the first quarter of 1999,
pending Peoples shareholder approval, regulatory
approval and other customary conditions of closing.
26
<PAGE> 27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
(UNAUDITED)
SEPTEMBER 30, 1998 AND 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AREA BANCSHARES CORPORATION
Date: November 10, 1998 By: /S/ Thomas R. Brumley
------------------------ -------------------------------------
Thomas R. Brumley
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 10, 1998 By: /S/ John A. Ray
------------------------ -------------------------------------
John A. Ray
Executive Vice President,
Chief Financial Officer
(Principal Financial Officer)
Date: November 10, 1998 By: /S/ Gary R. White
------------------------ -------------------------------------
Gary R. White
Vice President, Controller
(Principal Accounting Officer)
27
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 73,114
<INT-BEARING-DEPOSITS> 8,103
<FED-FUNDS-SOLD> 4,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 415,889
<INVESTMENTS-CARRYING> 383,412
<INVESTMENTS-MARKET> 121,678
<LOANS> 1,326,459
<ALLOWANCE> 21,574
<TOTAL-ASSETS> 2,045,415
<DEPOSITS> 1,587,020
<SHORT-TERM> 148,390
<LIABILITIES-OTHER> 23,333
<LONG-TERM> 63,950
0
0
<COMMON> 24,358
<OTHER-SE> 198,364
<TOTAL-LIABILITIES-AND-EQUITY> 2,045,415
<INTEREST-LOAN> 84,230
<INTEREST-INVEST> 19,873
<INTEREST-OTHER> 2,189
<INTEREST-TOTAL> 106,292
<INTEREST-DEPOSIT> 43,877
<INTEREST-EXPENSE> 50,258
<INTEREST-INCOME-NET> 56,034
<LOAN-LOSSES> 1,247
<SECURITIES-GAINS> 116
<EXPENSE-OTHER> 47,325
<INCOME-PRETAX> 24,472
<INCOME-PRE-EXTRAORDINARY> 17,278
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,278
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.09
<YIELD-ACTUAL> 8.31
<LOANS-NON> 1,664
<LOANS-PAST> 956
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,887
<CHARGE-OFFS> 1,823
<RECOVERIES> 1,126
<ALLOWANCE-CLOSE> 21,574
<ALLOWANCE-DOMESTIC> 21,574
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,934
</TABLE>
