<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended June 30, 1999
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: (270) 926-3232
--------------
Former name, former address and former fiscal year,
if changed since last report: N/A
---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class: Common stock
No Par Value
Shares Outstanding: As of July 31, 1999: 16,851,804
1
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AREA BANCSHARES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
<S> <C> <C>
Item 1. Financial Statements 3
Unaudited consolidated balance sheets, June 30, 1999, December 31, 1998 3
and June 30, 1998
Unaudited consolidated statements of income, three and six months ended 4
June 30, 1999 and 1998
Unaudited consolidated statements of comprehensive income, three and six months ended
June 30, 1999 and 1998 5
Unaudited consolidated statements of shareholders' equity, year ended December 31,
1998 and six months ended June 30, 1999 6
Unaudited consolidated statements of cash flows, three and six months ended
June 30, 1999 and 1998 7
Notes to unaudited consolidated financial statements 9
Item 2. Management's discussion and analysis of financial condition and results of operations 12
Results of operations 13
Financial position 22
Liquidity 25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
2
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 JUNE 30
1999 1998 1998
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 89,618 $ 122,654 $ 77,326
Interest bearing deposits with banks 6,528 8,434 9,090
Federal funds sold 10,611 14,000 8,000
Securities:
Available for sale (amortized cost of $350,866, $292,394 and $394,875) 392,662 340,874 425,575
Held to maturity (fair value of $127,227, $124,553, and $119,854) 124,643 117,869 113,900
----------- ----------- -----------
TOTAL SECURITIES 517,305 458,743 539,475
----------- ----------- -----------
Mortgage loans held for sale 10,239 14,208 13,483
Loans, net of unearned discount 1,521,306 1,412,567 1,194,565
Less allowance for loan losses 23,553 21,651 20,109
----------- ----------- -----------
NET LOANS 1,497,753 1,390,916 1,174,456
----------- ----------- -----------
Premises and equipment, net 45,235 41,267 32,459
Goodwill and other intangible assets 34,892 34,342 13,960
Other assets 46,275 47,801 41,228
----------- ----------- -----------
TOTAL ASSETS $ 2,258,456 $ 2,132,365 $ 1,909,477
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 238,148 $ 251,950 $ 190,499
Interest-bearing 1,485,504 1,439,914 1,284,526
----------- ----------- -----------
TOTAL DEPOSITS 1,723,652 1,691,864 1,475,025
----------- ----------- -----------
Federal funds purchased 74,563 1,107 20,789
Securities sold under agreements to repurchase 109,818 111,441 101,683
Notes payable to the U.S. Treasury 15,842 1,054 22,497
Advances from the Federal Home Loan Bank 35,158 41,309 48,691
Other borrowings 256 15,815 2,712
Accrued expenses and other liabilities 30,618 31,562 20,496
----------- ----------- -----------
TOTAL LIABILITIES 1,989,907 1,894,152 1,691,893
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 500,000 shares; none issued -- -- --
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding June 30, 1999, 16,856,596, December 31, 1998, 15,669,729
and June 30, 1998, 15,638,516 29,050 24,397 24,350
Paid-in capital 35,632 35,632 35,632
Retained earnings 177,611 147,474 138,722
Deferred compensation on restricted stock (562) (612) (662)
ESOP and MRP loan obligations (216) (216) (337)
Accumulated other comprehensive income 27,034 31,538 19,879
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 268,549 238,213 217,584
----------- ----------- -----------
Commitments and contingent liabilities
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,258,456 $ 2,132,365 $ 1,909,477
=========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $31,627 $27,512 $62,873 $55,751
Interest bearing deposits with banks 89 89 192 158
Federal funds sold 240 1,129 965 1,591
Taxable securities 4,799 4,991 9,535 9,714
Tax exempt securities 1,966 1,554 3,924 3,456
------- ------- ------- -------
TOTAL INTEREST INCOME 38,721 35,275 77,489 70,670
------- ------- ------- -------
Interest expense:
Interest on deposits 14,868 14,569 30,564 28,751
Interest on borrowings 2,229 2,252 4,566 4,563
------- ------- ------- -------
TOTAL INTEREST EXPENSE 17,097 16,821 35,130 33,314
------- ------- ------- -------
Net interest income 21,624 18,454 42,359 37,356
Provision for loan losses 192 101 356 713
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,432 18,353 42,003 36,643
------- ------- ------- -------
Non-interest income:
Commissions and fees on fiduciary activities 1,367 1,169 2,706 2,428
Service charges on deposit accounts 2,205 1,727 4,371 3,526
Other service charges, commissions and fees 1,510 1,886 2,834 3,290
Security gains (losses), net 17,786 -- 20,383 125
Gains on sales of loans, net 334 2,372 759 2,640
Other non-interest income 111 100 1,235 196
------- ------- ------- -------
TOTAL NON-INTEREST INCOME 23,313 7,254 32,288 12,205
------- ------- ------- -------
Non-interest expenses:
Salaries and employee benefits 8,546 7,589 17,636 15,101
Net occupancy expense 1,322 879 2,605 1,816
Furniture and equipment expense 1,567 998 3,057 2,041
Federal deposit insurance 69 131 137 155
Data processing expense 1,366 1,056 2,870 1,861
Other non-interest expenses 5,531 5,047 10,387 9,652
------- ------- ------- -------
TOTAL NON-INTEREST EXPENSES 18,401 15,700 36,692 30,626
------- ------- ------- -------
Income before income tax expense 26,344 9,907 37,599 18,222
Income tax expense 8,846 3,020 11,823 5,464
======= ======= ======= =======
NET INCOME $17,498 $ 6,887 $25,776 $12,758
======= ======= ======= =======
Per common share:
Net income-basic $ 1.03 $ 0.44 $ 1.52 $ 0.82
-diluted 1.02 0.43 1.50 0.80
Cash dividends 0.05 0.035 0.09 0.07
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30
1999 1998
<S> <C> <C>
Net income $ 17,498 $ 6,887
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period (5,925) 6,502
Less reclassification adjustment for gains included in net income 11,561 0
-------- -------
Other comprehensive income (17,486) 6,502
-------- -------
COMPREHENSIVE INCOME $ 12 $13,389
======== =======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
<S> <C> <C>
Net income $ 25,776 $12,758
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period 8,745 8,452
Less reclassification adjustment for gains included in net income 13,249 81
-------- -------
Other comprehensive income (4,504) 8,371
-------- -------
COMPREHENSIVE INCOME $ 21,272 $21,129
======== =======
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND SIX MONTHS ENDED JUNE 30, 1999
(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 RESTRICTED OBLIGATIONS COMPREHENSIVE
STOCK INCOME
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 15,576,916 $ 24,254 $35,632 $126,104 $(612) $ (337) $ 11,508 $196,549
Net income 22,626 22,626
Cash dividends declared
($.155 per share) (2,420) (2,420)
Repurchase of common stock (3,000) (5) (76) (81)
Stock options exercised,
including tax benefits 92,238 143 1,145 1,288
Amortization of deferred
compensation on
restricted stock 100 100
Net restricted stock issued 3,575 5 95 (100) ----
Repayment of ESOP loan
obligations 121 121
Change in other comprehensive
income (loss), net of tax 20,030 20,030
---------- ------- ------- -------- ----- ----- ------- --------
Balance, December 31, 1998 15,669,729 24,397 35,632 147,474 (612) (216) 31,538 238,213
Net income 25,776 25,776
Cash dividends declared
($.095 per share) (1,606) (1,606)
Repurchase of common stock (116,312) (200) (2,848) (3,048)
Stock options exercised,
including tax benefits 3,210 8 31 39
Amortization of deferred
compensation on
restricted stock 50 50
Common stock issued 1,299,969 4,845 8,784 13,629
Change in other comprehensive
income (loss), net of tax (4,504) (4,504)
Balance, June 30, 1999 16,856,596 $29,050 $35,632 $177,611 $(562) $(216) $27,034 $268,549
========== ======= ======= ======== ===== ===== ======= ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 25,776 $ 12,758
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 356 713
Depreciation, amortization and accretion, net 3,095 1,542
Gain on sales of securities and loans, net (21,142) (2,765)
Loss on sales of other real estate owned 2 41
(Gain) on disposals of equipment (25) (11)
Deferred income taxes 3,043 (1,745)
Proceeds from sales of trading account securities -- 19,760
Proceeds from maturities of trading account securities -- 99,994
Purchases of trading account securities -- (73,870)
Purchases of mortgage loans held for sale (70,968) (92,166)
Proceeds from sales of mortgage loans held for sale 75,337 88,856
Other, net 4,746 1,417
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 20,220 54,524
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest bearing deposits with banks 1,906 (3,286)
Proceeds from sales of securities available for sale 9,580 2,652
Proceeds from sales of securities held to maturity -- --
Proceeds from maturities of securities available for sale 116,624 82,253
Proceeds from maturities of securities held to maturity 26,597 3,543
Calls of securities available for sale 3,200 2,000
Calls of securities held to maturity 1,576 1,441
Purchases of securities available for sale (166,540) (153,000)
Purchases of securities held to maturity (7,694) (1,993)
Decrease (increase) in federal funds sold and securities
purchased under agreements to resell 25,517 (8,000)
Loans originated, net of principal collected on loans (8,736) 18,362
Purchases of premises and equipment (5,252) (4,558)
Cash and cash equivalents from acquisitions 7,249 --
Proceeds from sale of ABC Credit loans -- 13,568
Proceeds from sales of other real estate owned 478 187
Proceeds from sales of premises and equipment 230 --
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 4,735 (46,831)
--------- ---------
</TABLE>
CONTINUED
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $(114,411) $ 41,893
Increase (decrease) in federal funds purchased 73,456 (17,902)
Decrease in securities sold under agreements to repurchase (3,673) (8,178)
Increase in notes payable to the U.S. Treasury 14,788 2,916
Decrease in advances from the Federal Home Loan Bank (7,977) (35,645)
Increase (decrease) in other borrowings (15,559) 2,315
Proceeds from issuance of common stock and stock options exercised 39 948
Repurchase of common stock (3,048) --
Cash dividends paid (1,606) (1,092)
--------- --------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES (57,991) (14,745)
--------- --------
DECREASE IN CASH AND DUE FROM BANKS (33,036) (7,052)
CASH AND DUE FROM BANKS, JANUARY 1 122,654 84,348
--------- --------
CASH AND DUE FROM BANKS, JUNE 30 $ 89,618 $ 77,326
========= ========
Cash flow information:
Income tax payments $ 7,400 $ 4,650
Interest payments $ 35,238 $ 33,394
Non-cash transactions:
Loans transferred to other assets $ 1,132 $ 1,592
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
8
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999 AND 1998
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 1998
annual report to shareholders.
As noted in the footnotes to its annual report of Form 10-K, Area
utilizes interest rate swaps, which are derivative financial
instruments, for hedging purposes to reduce exposure to adverse
changes in interest rates. All of the interest rate swaps are
accounted for as "hedges" and relate to specific assets or
liabilities or groups of assets or liabilities.
NOTE 2. NET INCOME PER COMMON SHARE
Basic earnings per share are 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 SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
(Amounts in thousands, except per share data)
NET INCOME, BASIC AND DILUTED $17,498 $ 6,887 $25,776 $12,758
======= ======= ======= =======
Average shares outstanding 16,916 15,635 16,916 15,624
Effect of dilutive securities 248 285 249 281
------- ------- ------- -------
Average shares outstanding including dilutive securities 17,164 15,920 17,165 15,905
======= ======= ======= =======
NET INCOME PER SHARE, BASIC $ 1.03 $ 0.44 $ 1.52 $ 0.82
======= ======= ======= =======
NET INCOME PER SHARE, DILUTIVE $ 1.02 $ 0.43 $ 1.50 $ 0.80
======= ======= ======= =======
</TABLE>
9
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999 AND 1998
NOTE 3. SECURITIES
The amortized cost and approximate market values of securities as of
June 30, 1999 and December 31, 1998 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 $ 227,689 $ 266 $ 1,374 $ 226,581
Mortgage-backed securities 70,205 570 780 69,995
Obligations of state and political subdivisions 20,201 310 183 20,328
Equity and other securities 32,771 43,326 339 75,758
========= ======== ======== =========
BALANCE AT JUNE 30, 1999 $ 350,866 $ 44,472 $ 2,676 $ 392,662
========= ======== ======== =========
</TABLE>
During the first six months of 1999, the after-tax net unrealizable
gain/(loss) reported as a separate component of equity (accumulated
other comprehensive income) decreased from $31,538,000 to $27,034,000
on June 30, 1999, thus decreasing shareholders' equity. The decrease
was largely the result of the sale of securities with gains that were
realized.
The amortized cost of equity and other securities increased from
$17,613,000 to $32,587,000 during the six months ended June 30, 1999
as a result of an increase in short-term money market accounts from
$297,000 on December 31, 1998 to $15,651,000 on June 30, 1999. Funds
to increase these short-term money market accounts were obtained as a
result of the sale of equity securities.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
U.S. Treasury and federal agencies $ 187,993 $ 1,697 $ 226 $ 189,464
Mortgage-backed securities 68,094 836 71 68,859
Obligations of state and political subdivisions 18,894 1,075 13 19,756
Equity and other securities 17,613 45,413 231 62,795
========= ========= ======== =========
BALANCE AT DECEMBER 31, 1998 $ 292,394 $ 49,021 $ 541 $ 340,874
========= ========= ======== =========
<CAPTION>
HELD TO MATURITY
(Amounts in thousands)
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
JUNE 30, 1999
Obligations of state and political subdivisions $ 124,643 $ 3,402 $ 818 $ 127,227
========= ======== ========= =========
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Obligations of state and political subdivisions $ 117,869 $ 6,863 $ 179 $ 124,553
========= ======== ========= =========
</TABLE>
10
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1999 AND 1998
NOTE 4. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("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, the reason for holding it. If certain
conditions are met, entities may elect to designate a derivative
instrument as a hedge against 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 (as amended by SFAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133") by January 1, 2001,
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 adoption.
NOTE 5. INTANGIBLES
The excess cost over fair value of net assets acquired in purchase
business combinations (goodwill) of $31,525,000 and $30,564,000 net
of accumulated amortization as of June 30 , 1999 and December 31,
1998, respectively, is being amortized predominately over a 10-20
year period on a straight-line basis. Other intangible assets consist
of the value of core deposits purchased of approximately $2,579,000
and $2,915,000, net of accumulated amortization, as of June 30, 1999
and December 31, 1998, respectively, which is being amortized by an
accelerated method over ten years and a purchased bank charter of
$788,000 and $863,000 as of June 30, 1999 and December 31, 1998,
respectively, which is being amortized over a 10-year period on a
straight-line basis. Amortization expense for the three-month periods
ended June 30, 1999 and 1998 was $861,000 and $761,000, respectively.
Amortization expense for the six-month periods ended June 30, 1999
and 1998 was $1,737,000 and $1,352,000, respectively.
NOTE 6. BUSINESS COMBINATIONS
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 $22,030,000 of intangibles were recorded.
On January 4,1999, Area merged with Peoples Bancorp of Winchester,
which is headquartered in Winchester, Kentucky. Peoples Bancorp of
Winchester had total assets of $165,000,000 and was a one-bank
holding company for Peoples Commercial Bank. Area issued
approximately 1,300,000 shares of its common stock in conjunction
with the merger. This acquisition was 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 has not
been restated to reflect this combination.
11
<PAGE> 12
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Area is a multi-bank holding company that was incorporated in
Kentucky in 1976 and is registered under the Bank Holding Company
Act of 1956, as amended. On June 30, 1999, Area directly controlled
five affiliated commercial banks and indirectly controlled eight
additional commercial banks through the ownership of holding
companies, all of which are located in Kentucky. Of the banks
controlled by Area, four are national banks and nine are state
banks.
Area and its subsidiaries engage in retail and commercial banking.
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. Area also 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 which
includes the acquisition of NationsBank of Kentucky, N.A. since
August 23, 1998 and the merger with Peoples Bancorp of Winchester
since January 4, 1999 (see Note 6 in the accompanying unaudited
financial statements for details of these transactions). Where
appropriate, the impact of these transactions on Area's results of
operations and financial condition will be discussed, otherwise it
can be assumed that they were not material. This discussion should be
read with the consolidated financial statements and accompanying
notes presented in Item 1 of Part I of this report.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q
and the exhibits to this quarterly report that 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 that 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 Area's plans and objectives, 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 that may
cause actual results to differ materially from those in such
statements. Factors 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 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) Area's success managing the risks involved
in the foregoing. Such forward-looking statements speak only as of
the date on which the statements are made, and Area undertakes no
obligation to update any forward-looking statement to reflect events
or circumstances after the date on which a statement is made to
reflect the occurrence of unanticipated events.
12
<PAGE> 13
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
A. RESULTS OF OPERATIONS
Net income for the quarter ended June 30, 1999 was $17,498,000
versus $6,887,000 in the same period of 1998. Diluted earnings per
share were $1.02 compared to $0.43 for the same period in 1998. The
increase during the current quarter from the second quarter of 1998
was $10,611,000 or 154.1% for net income and $0.59 or 137.2% per
diluted share. The improved earnings during the quarter were largely
the result of an increase in security gains from none in the second
quarter of 1998 to $17,786,000 in the similar period in 1999, an
increase in net interest income on a taxable equivalent basis totaling
$3,217,000, an increase in non-interest income amounting to
$16,059,000 (included is an increase of $17,786,000 in security gains
off-set by a reduction totaling $2,038,000 in gains on the sale of
loans). These increases in net income were partially off-set by a
$2,701,000 increase in non-interest expenses. The gains on the sale of
securities reflect Area's ongoing strategy to improve the performance
of its investment portfolio through repositioning portions of the
portfolio as market conditions change.
Year-to-date earnings were $25,776,000 compared to $12,758,000 for the
first two quarters of 1998. Diluted earnings per share totaled $1.50
for 1999 compared to $0.80 during the same period in 1998. The
year-to-date increases were $13,018,000 or 102.0% for net income and
$0.70 or 87.5% per diluted share. Earnings for the six months ended
June 30, 1999 reflected an increase in security gains from $125,000 in
the first six months of 1998 to $20,383,000 in the first half of 1999,
an increase in net interest income on a taxable equivalent basis of
$5,088,000 or 12.9%, a reduction in the provision for loans losses of
$357,000 and an increase of $20,083,000 or 164.5% in non-interest
income (included in this increase is an increase of $20,258,000 in
security gains off-set by a reduction totaling $1,881,000 in gains on
sales of loans). An increase of $6,066,000 or 19.8% in non-interest
expenses partially offset these increases in earnings.
Area believes that the most meaningful comparison of the results of
operations excludes nonrecurring items. During the current quarter
security gains in the amount of $11,561,000 after-tax ($17,786,000
pre-tax) were recorded. During the second quarter of 1998 a consumer
loan subsidiary sold its loan portfolio for a gain of $1,344,000
after-tax ($2,068,000 pre-tax). There were no security gains in the
second quarter of 1998. Net income during the first quarters of 1999
and 1998, adjusted for these items, totaled $5,937,000 or $0.35 per
diluted share and $5,543,000 or $0.35 per diluted share, respectively.
Adjusted net income increased $394,000 or 7.1% while adjusted diluted
earnings per share remained unchanged at $0.35 from the second quarter
of 1998.
Several items affected the first six months of both 1999 and 1998.
During the six months ended June 30, 1999 Area recorded security gains
of $13,249,000 after-tax ($20,383,000 pre-tax), a favorable insurance
settlement totaling $615,000 after-tax ($945,000 pre-tax) and $122,000
of after-tax merger-related adjustments which enhanced net income. For
the first six months of 1998 security gains totaled $81,000 after-tax
(($125,000 pre-tax) and a consumer loan subsidiary sold its loan
portfolio for a gain of $1,344,000 after-tax ($2,068,000 pre-tax). Net
income for the first half of 1999, adjusted for these items, totaled
$11,790,000 or $0.69 per diluted share compared to $11,333,000 or
$0.71 per diluted share earned during the first half of 1998. Adjusted
net income increased $457,000 or 4.0% while adjusted diluted earnings
per share decreased $0.02 or 2.8%. The following table reconciles net
income as reported with adjusted net income:
<TABLE>
<CAPTION>
ADJUSTED NET INCOME 3 MONTHS ENDED 6 MONTHS ENDED
(Amount in thousands) JUNE 30 JUNE 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income as reported $ 17,498 $ 6,887 $ 25,776 $ 12,758
Add or (deduct) net of taxes:
Security gains (11,561) -- (13,249) (81)
Insurance settlement -- -- (615) --
Merger-related adjustments -- -- (122) --
Gain on sale of a subsidiary's loans -- (1,344) -- (1,344)
-------- ------- -------- --------
ADJUSTED NET INCOME $ 5,937 $ 5,543 $ 11,790 $ 11,333
======== ======= ======== ========
</TABLE>
13
<PAGE> 14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
A. RESULTS OF OPERATIONS (CONTINUED)
Return on average assets was 3.13% (annualized) in the second quarter
of 1999 compared to 1.50% (annualized) during the same period of 1998.
Adjusted return on average assets (excluding the items discussed
above) totaled 1.06% (annualized) during the quarter ended June 30,
1999 compared to 1.20% for the same period in 1998. Return on average
equity was 25.66% (annualized) for the quarter ended June 30, 1999
compared to 13.43% during the second quarter of 1998. Adjusted return
on average equity (excluding the items discussed above) was 8.71%
(annualized) for the quarter ended June 30, 1999 and 10.81% for the
second quarter of 1998.
Return on average assets was 2.31% (annualized) for the first six
months of 1999 compared to 1.40% (annualized) during the same period
of 1998. Adjusted return on average assets (excluding the items
discussed above) totaled 1.06% (annualized) during the six months
ended June 30, 1999 compared to 1.25% for the same period in 1998.
Return on average equity was 19.63% (annualized) for the first half of
1999 compared to 12.67% during the same period of 1998. Adjusted
return on average equity (excluding the nonrecurring items discussed
above) was 8.98% (annualized) for the six-months ended June 30, 1999
and 11.26% for the same period of 1998.
The following table provides selected operating data, per share data,
selected ratios and average balances for the three and six-month
periods ended June 30, 1999 and 1998:
EXHIBIT 1: HIGHLIGHTS
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Net income $17,498 $6,887 $ 10,611 $25,776 $12,758 $13,018
Adjusted net income (1) 5,937 5,543 394 11,790 11,333 457
PER SHARE DATA
Basic earnings per share 1.03 0.44 0.59 1.52 0.82 0.70
Adjusted basic earnings per share (1) 0.35 0.35 -- 0.70 0.73 (0.03)
Diluted earnings per share 1.02 0.43 0.59 1.50 0.80 0.70
Adjusted diluted earnings per share (1) 0.35 0.35 -- 0.69 0.71 (0.02)
Cash dividends per share 0.05 0.035 0.015 0.095 0.07 0.025
Book value at June 30 15.93 13.91 2.02 15.93 13.91 2.02
Market price at June 30 27.13 34.00 (6.87) 27.13 34.00 (6.87)
SELECTED RATIOS AND DATA
Return on assets (annualized) 3.13% 1.50% 1.63% 2.31% 1.40% 0.91%
Adjusted return on assets (annualized)(1) 1.06% 1.20% (0.14%) 1.06% 1.25% (0.19%)
Return on equity (annualized) 25.66% 13.43% 12.23% 19.63% 12.67% 6.96%
Adjusted return on equity (annualized)(1) 8.71% 10.81% (2.10%) 8.98% 11.26% (2.28%)
Efficiency ratio 39.98% 58.70% (18.72%) 47.77% 59.31% (11.54%)
Efficiency ratio (1) 65.17% 63.62% 1.55% 65.56% 61.94% 3.62%
Net interest margin (annualized) 4.43% 4.45% (0.02%) 4.33% 4.55% (0.22%)
Equity-to-assets 11.89% 11.39% 0.50% 11.89% 11.39% 0.50%
Allowance for loan losses to loans 1.55% 1.68% (0.13%) 1.55% 1.68% (0.13%)
Allowance for loan losses to
nonperforming loans 1,374.2% 705.3% 668.9% 1,374.2% 705.3% 668.9%
Nonperforming loans to total loans 0.11% 0.24% (0.13%) 0.11% 0.24% (0.13%)
</TABLE>
(1) Excludes items presented in the Adjusted Net Income table above.
14
<PAGE> 15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
A. RESULTS OF OPERATIONS (CONTINUED)
EXHIBIT 1: HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30 JUNE 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
AVERAGE BALANCES
Total assets $2,242,668 $1,846,768 $2,247,263 $1,834,161
Earning assets 2,055,774 1,751,116 2,075,151 1,735,258
Shareholders' equity 273,486 205,693 264,758 202,993
</TABLE>
ADJUSTED CASH BASED EARNINGS
Area believes it is important to also disclose adjusted cash based
earnings, which excludes nonrecurring items and 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 adjusted cash based net income and various
cash based performance ratios:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages and per share data)
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Adjusted net income (1) $5,937 $5,543 $ 394 $11,790 $11,333 $457
Add back:
Goodwill and other intangible amortization 861 761 100 1,737 1,352 385
Less: tax effect 153 72 81 307 146 161
------ ------ ------ ------- ------- ----
708 689 19 1,430 1,206 224
------ ------ ------ ------- ------- ----
ADJUSTED CASH BASED NET INCOME $6,645 $6,232 $ 413 $13,220 $12,539 $681
====== ====== ====== ======= ======= ====
</TABLE>
(1) Excludes items presented in the Adjusted Net Income table above.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Per share data
Adjusted cash based basic earnings per share $ 0.39 $ 0.40 $(0.01) $ 0.78 $ 0.80 $(0.02)
Adjusted cash based diluted earnings per share 0.39 0.39 -- 0.77 0.79 (0.02)
Performance ratios (annualized)
Adjusted cash based return on tangible assets 1.21% 1.35% (0.14%) 1.21% 1.39% (0.18%)
Adjusted cash based return on tangible equity 11.19% 13.06% (1.87%) 11.61% 13.42% (1.81%)
Adjusted cash based efficiency ratio 62.12% 55.85% (6.27%) 63.00% 56.68% (6.32%)
</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.
15
<PAGE> 16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
NET INTEREST INCOME (CONTINUED)
Net interest income, on a tax equivalent basis, increased $3,217,000
or 16.5% to $22,710,000 during the quarter ended June 30, 1999. Area's
net interest margin (which is computed by dividing net interest income
on a fully taxable equivalent basis by average earning assets)
decreased from 4.45% during the quarter ended June 30, 1998 to 4.43%
during the current quarter. Competitive pressures on loan pricing, a
slight shift in the composition of earning assets from higher yielding
loans to lower yielding investments and a relatively flat yield curve
caused the average rate on earning assets to decrease from 8.30% in
the second quarter of 1998 to 7.77% in the second quarter of 1999. As
an offset, the average rate on interest bearing liabilities decreased
from 4.80% to 4.04% largely as a result of the maturity of
higher-priced certificates of deposits issued three-to-five years ago.
These changes resulted in an increase of 0.23% in the net interest
spread for the current quarter versus the same period in 1998.
For the six months ended June 30, 1999, net interest income, on a tax
equivalent basis, increased $5,088,000 or 12.9% over the same period
in 1998. The net interest margin was 4.33% for the year-to-date
period, a decrease of 0.22% from 4.55% recorded during the first six
months of 1998. The decrease in the net interest margin was the result
of a decrease of 0.64% to 7.74% in the yield of earning assets during
the current period and a smaller decrease of 0.49% to 4.13% in the
rate paid on interest bearing liabilities.
The following presents the components of net income on a taxable
equivalent basis:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest income $38,721 $35,275 $ 3,446 $77,489 $70,670 $ 6,819
Taxable-equivalent adjustment 1,086 1,039 47 2,164 2,079 85
------- ------- ------- ------- ------- --------
Interest income-taxable equivalent 39,807 36,314 3,493 79,653 72,749 6,904
Interest expense 17,097 16,821 276 35,130 33,314 1,816
------- ------- ------- ------- ------- --------
Net interest income-taxable equivalent 22,710 19,493 3,217 44,523 39,435 5,088
Provision for loan losses 192 101 91 356 713 (357)
Non-interest income 23,313 7,254 16,059 32,288 12,205 20,083
Non-interest expenses 18,401 15,700 2,701 36,692 30,626 6,066
------- ------- ------- ------- ------- --------
Income before income taxes 27,430 10,946 16,484 39,763 20,301 19,462
Income taxes 8,846 3,020 5,826 11,823 5,464 6,359
Taxable-equivalent adjustment 1,086 1,039 47 2,164 2,079 85
------- ------- ------- ------- ------- --------
NET INCOME $17,498 $ 6,887 $10,611 $25,776 $12,758 $ 13,018
======= ======= ======= ======= ======= ========
</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
months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Average rate on earning assets (1) 7.77% 8.30% (0.53%) 7.74% 8.38% (0.64%)
Average rate on interest
bearing liabilities (1) 4.04% 4.80% (0.76%) 4.13% 4.62% (0.49%)
Net interest spread (1) 3.73% 3.50% 0.23% 3.61% 3.76% (0.15%)
Net interest margin (1) 4.43% 4.45% (0.02%) 4.33% 4.55% (0.22%)
Average earning assets $2,055,774 $1,751,116 304,658 $2,075,151 $1,735,258 339,893
Average interest bearing liabilities 1,698,489 1,402,905 295,584 1,713,828 1,443,679 270,149
</TABLE>
(1) Amounts annualized
16
<PAGE> 17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained at a level management
believes is 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 that in management's judgment deserve current recognition.
However, actual losses could differ significantly from the amount
estimated by management. The allowance for loan losses is established
by charges to operating earnings.
An analysis of the changes in the allowance for loan losses and
selected ratios follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 23,616 $ 20,283 $ 3,333 $ 21,651 $ 19,887 $ 1,764
Additions through acquisitions -- -- -- 1,857 -- 1,857
Provision for loan losses 192 101 91 356 713 (357)
Loan loss recoveries 453 432 20 945 839 106
Loans charged off 708 707 1 1,256 1,330
---------- ---------- -------- ---------- ---------- --------
BALANCE, JUNE 30 $ 23,553 $ 20,109 $ 3,444 $ 23,553 $ 20,109 $ 3,444
========== ========== ======== ========== ========== ========
Average loans, net of unearned income $1,511,706 $1,170,340 $341,366 $1,498,343 $1,193,803 $304,540
Provision for loan losses to average
loans (1) 0.05% 0.03% 0.02% 0.05% 0.12% (0.07%)
Net loan charge-offs to average loans (1) 0.07% 0.09% (0.02%) 0.04% 0.08% (0.04%)
Allowance for loan losses to end of
period loans 1.55% 1.68% (0.13%) 1.55% 1.68% (0.13%)
Allowance for loan losses to nonperforming
loans 1,374.2% 705.3% 668.9% 1,374.2% 705.3% 668.9%
</TABLE>
(1) Amounts annualized
The provision for loan losses increased $91,000 or 90.1% to $192,000
for the quarter ended June 30, 1999 compared to the same period last
year and decreased $357,000 or 50.1% during the six months ended June
30, 1999 when compared to the first six months of 1998. The increase
for the three-month period ended June 30, 1999 primarily resulted from
an increase of $341,366,000 in average loans. The decrease for the
six-month period ended June 30, 1999 largely resulted from a decrease
in nonperforming loans from $2,851,000 on June 30, 1998 to $1,714,000
on June 30, 1999 and an overall improvement in the quality of the loan
portfolio.
The provision for loan losses as a percentage of average loans totaled
0.05% (annualized) for the quarter ended June 30, 1999 compared to
0.03% (annualized) for the quarter ended June 30, 1998. For the
six-month period ended June 30, 1999, the provision for loan losses as
a percentage of average loans decreased to 0.05% (annualized) from
0.12% (annualized) during the same period in 1998. These decreases
reflected the continued improvement in the quality of loans as
discussed more completely under "Asset Quality". These percentages are
low by historical standards and may increase in the future.
Net loan charge-offs (loan charge-offs less recoveries) to average
loans decreased to 0.07% (annualized) for the quarter ended June 30,
1999 from 0.09% (annualized) for the quarter ended June 30, 1998, as a
result of relatively stable net charge-offs and an increase of
$341,366,000 in average loans. Net loan charge-offs decreased to 0.04%
for the six months ended June 30, 1999 compared to 0.08% for the same
period in 1998 due to an increased amount of recoveries and an
increase of $304,540,000 in average loans. These percentages are low
by historical standards and may increase in the future.
The allowance for loan losses was 1.55% of total loans on June 30,
1999, as compared to the December 31, 1998 level of 1.53% and the June
30, 1998 level of 1.68%. This percentage has decreased since June 30,
1998 as a result of loan growth and an improvement in the quality of
the loan portolio.
17
<PAGE> 18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
NON-INTEREST INCOME
The tables that follow set forth the components of non-interest income
for the three and six months ended June 30, 1999 and 1998. The amounts
listed below for the three and six-month periods include adjustments
for the Peoples transaction (see Note 6 in the accompanying unaudited
financial statements) for comparability purposes.
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED JUNE 30
TOTAL AREA PEOPLES AREA NET
1999 1999 1999 (1) 1998 CHANGE
---- ---- -------- ---- ------
<S> <C> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 1,367 $ 3 $ 1,364 $ 1,169 $ 195
Service charges on deposit accounts 2,205 109 2,096 1,727 369
Other service charges, commissions and fees 1,510 68 1,442 1,886 (444)
Security gains (losses), net 17,786 -- 17,786 -- 17,786
Gains on sales of loans (net) 334 10 324 2,372 (2,048)
Other income 111 (10) 121 100 21
------- ------ ------- ------- --------
TOTAL $23,313 $ 180 $23,133 $ 7,254 $ 15,879
======= ====== ======= ======= ========
</TABLE>
(1) Excludes Peoples
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
TOTAL AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
---- ---- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 2,706 $ 3 $ 2,703 $ 2,428 $ 275
Service charges on deposit accounts 4,371 222 4,149 3,526 623
Other service charges, commissions and fees 2,834 127 2,707 3,290 (583)
Security gains (losses), net 20,383 -- 20,383 125 20,258
Gains on sales of loans (net) 759 36 723 2,640 (1,917)
Other income 1,235 (15) 1,250 196 1,054
-------- ----- ------- ------- --------
TOTAL $ 32,288 $ 373 $31,915 $12,205 $ 19,710
======== ===== ======= ======= ========
</TABLE>
(1) Excludes Peoples
Non-interest income totaled $23,313,000 and $32,288,000 for the three
and six-month periods ended June 30, 1999. These amounts represent
increases of $16,059,000 or 221.4% and $20,083,000 or 164.5%,
respectively, when compared to 1998 period totals. Included in the
non-interest income totals for the current quarter and year-to date
period is $180,000 and $373,000, respectively, from Peoples Bancorp of
Winchester ("Peoples"), which merged with Area in January 1999 (see
Note 6 in the accompanying unadudited financial statements). The
merger was accounted for as a pooling-of-interests; however, due to
the relative size of Peoples' financial condition and results of
operations to that of Area, the historical financial statements of
Area have not been restated to reflect this combination. The following
analysis excludes Peoples from current amounts for comparative
purposes (see table above). Commissions and fees on fiduciary
activities increased $195,000 or 16.7% to $1,364,000 in the second
quarter of 1999 and $275,000 or 11.3% to $2,703,000 during the current
six-month period largely as a result of increases in the value of
assets managed and successful new business development efforts.
Service charges on deposit accounts increased $369,000 or 21.4% to
$2,096,000 and $623,000 or 17.7% to $4,149,000, respectively, for the
three and six months ended June 30, 1999, when compared to similar
period totals in 1998, due primarily to increases in deposits subject
to service charges and increases in fees charged. Other service
charges, commissions and fees totaled $1,442,000 and $2,707,000 for
the second quarter of 1999 and year-to-date periods ended June 30,
1999. These amounts reflect decreases of $444,000 or 23.5% and
$583,000 or 17.7%, respectively, for the three and six-month periods
ended June 30, 1999. The decreases for the quarter and year-to-date
periods were largely the result of changes in the reporting of income
and expenses by Area's credit card service provider. Excluding this
change, other service charges, commissions and fees would have
increased $77,000 or 4.1% in the current quarter and decreased $11,000
or 0.3% in the year-to-date period compared to similar periods in
1998. Security gains (net) totaled $17,786,000 in the current quarter
compared to none in the same period of 1998 and $20,383,000 for the
year-to-date period versus $125,000 during the first six months of
1998. These gains on the sale of securities reflect Area's ongoing
strategy to improve the performance of its investment portfolio
through repositioning portions
18
<PAGE> 19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
NON-INTEREST INCOME (CONTINUED)
of the portfolio as market conditions change. Gains on the sales of
loans decreased $2,048,000 or 86.3% to $324,000 in the second quarter
of 1999 compared to the same period in 1998 and decreased $1,917,000
or 72.6% to $723,000 during the year-to-date period. Gains on the
sales of loans were favorably impacted in the second quarter of 1998
by a gain totaling $2,068,000 from the sale of a subsidiary's consumer
loan portfolio. Other income totaled $121,000 during the three months
ended June 30, 1999 and $1,250,000 for the six months ended June 30,
1999. These amounts represent increases of $21,000 or 21.0% and
$1,054,000 or 537.8%, respectively. The increase for the year-to-date
period was primarily the result of an insurance settlement received
during the first quarter of 1999 totaling $945,000 from a loss
occurring in 1994.
NON-INTEREST EXPENSES
The tables that follow set forth the components of non-interest
expenses for the three and six months ended June 30, 1999 and 1998.
The amounts listed below for the three and six-month periods include
adjustments for the Peoples transaction (see Note 6 in the
accompanying unaudited financial statements) for comparability
purposes
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED JUNE 30
TOTAL AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
---- ---- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 8,546 $ 474 $ 8,072 $ 7,589 $ 483
Net occupancy expenses 1,322 19 1,303 879 424
Furniture and equipment expense 1,567 108 1,459 998 461
Federal deposit insurance 69 -- 69 131 (62)
Data processing expense 1,366 29 1,337 1,056 281
Advertising and community relations 903 21 882 808 74
Insurance and taxes 716 36 680 594 86
Professional fees 569 23 546 741 (195)
Amortization of intangibles 861 -- 861 761 100
Other 2,482 223 2,259 2,143 116
-------- ----- -------- -------- -------
TOTAL $ 18,401 $ 933 $ 17,468 $ 15,700 $ 1,768
======== ===== ======== ======== =======
</TABLE>
(1) Excludes Peoples
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
TOTAL AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
---- ---- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 17,636 $ 952 $ 16,684 $ 15,101 $ 1,583
Net occupancy expenses 2,605 44 2,561 1,816 745
Furniture and equipment expense 3,057 297 2,760 2,041 719
Federal deposit insurance 137 -- 137 155 (18)
Data processing expense 2,870 262 2,608 1,861 747
Advertising and community relations 1,670 33 1,637 1,317 320
Insurance and taxes 1,268 72 1,196 1,179 17
Professional fees 1,221 52 1,169 1,501 (332)
Amortization of intangibles 1,737 -- 1,737 1,352 385
Other 4,491 429 4,062 4,303 (241)
--------- ------- -------- -------- -------
TOTAL $ 36,692 $ 2,141 $ 34,551 $ 30,626 $ 3,925
======== ======= ======== ======== =======
</TABLE>
(1) Excludes Peoples
19
<PAGE> 20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
NON-INTEREST EXPENSES (CONTINUED)
Non-interest expenses totaled $18,401,000 and $36,692,000 during the
three and six-month periods ended June 30, 1999. These amounts
represent increases of $2,701,000 or 17.2% and $6,066,000 or 19.8% for
the current quarter and year-to-date periods compared to 1998.
Included in the non-interest expenses for the current quarter and
year-to-date periods is approximately $933,000 and $2,141,000,
respectively, from Peoples which merged with Area in January 1999 (see
Note 6 in the accompanying unaudited financial statements). The merger
was accounted for as a pooling-of-interests; however, due to the
relative size of Peoples' financial condition and results of
operations to that of Area, the historical financial statements of
Area have not been restated to reflect this combination. Excluding the
non-interest expenses related to Peoples, total non-interest expenses
increased $1,768,000 or 11.3% from the second quarter of 1998 and
$3,925,000 or 12.8% from the first six months of 1998. The following
analysis excludes Peoples from current amounts for comparative
purposes (see tables above). Salaries and benefits increased $483,000
or 6.4% to $8,072,000 in the second quarter of 1999 and $1,583,000 or
10.5% to $16,684,000 for the six-month period. These increases were
the result of merit increases and the creation of additional positions
to staff Area for future growth. Net occupancy expenses increased
$424,000 or 48.2% and $745,000 or 41.0%. Modernizing several
facilities and adding five new branches accounted for these increases.
Furniture and equipment expenses totaled $1,459,000 and $2,760,000 for
the second quarter of 1999 and year-to-date periods ended June 30,
1999. The increases were $461,000 or 46.2% and $719,000 or 35.2%,
respectively. Depreciation of equipment used to become Year 2000 ready
accounted for a majority of these increases. Data processing expenses
totaled $1,337,000 during the current quarter compared to $1,056,000
for the same period in 1998 while totaling $2,608,000 during the six
months ended June 30, 1999 versus $1,861,000 during the first half of
1998. The increases, $281,000 or 26.6% and $747,000 or 40.1% for the
quarter and year-to-date periods and were largely the result of
continued enhancements to Area's data processing capabilities in
addition to expenses associated with modifying computer application
systems for Year 2000. Advertising and community relations increased
$74,000 or 9.2% to $882,000 during the current quarter and $320,000 or
24.3% to $1,637,000 for the six months ended June 30, 1999 when
compared to the same periods in 1998. Increases in radio advertising
and donations accounted for the majority of the increases for both the
current period and year-to-date periods. Professional fees decreased
$195,000 or 26.3% and $332,000 or 22.1% during the current quarter and
year-to-date periods compared to similar periods in 1999. These
decreases were the result of reduced acquisition activities. Other
non-interest expenses totaled $2,259,000 during the current quarter
compared to $2,143,000 for the same period in 1999 while totaling
$4,062,000 for the six-months ended June 30, 1999 compared to
$4,303,000 during the first half of 1998. The current quarter
reflected an increase of $116,000 or 5.4%. The current year-to-date
total of other non-interest expenses was $241,000 or 5.6% below the
same period in 1998. The decrease for the current six-month period was
largely the result of changes in the reporting of income and expenses
by Area's credit card service provider.
INCOME TAX EXPENSE
Income tax expense totaled $8,846,000 and $11,823,000 for the three
and six-month periods ended June 30, 1999 compared to $3,020,000 and
$5,464,000 for the same periods in 1998. The increased level of income
tax expense for both the current three and six-month periods was the
result of higher pre-tax income. The effective tax rate was 33.6% and
31.4% for the three and six month periods ended June 30, 1999 compared
to 30.5% and 30.0% for the same periods of 1998, respectively. The
effective tax rate differs from the marginal income tax rate of 35% in
both 1999 and 1998, 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 affect many
computer systems currently in use. In these cases, the computer
systems record years in a two-digit format that 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.
20
<PAGE> 21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
YEAR 2000 (CONTINUED)
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.
Additionally, the program has full management support and has a
project manager. The following is a brief discussion of each phase:
The awareness phase involved defining the Year 2000 problems and
establishing an overall strategy. Area defines Year 2000 compliance as
accurately processing date/time data including calculations involving
dates occurring in years 2000 and beyond. The awareness phase began in
August 1997 and is complete.
The assessment phase defined the size and complexity of the problems
and the resources necessary to address Year 2000 issues. During this
phase, Area comprehensively reviewed all computer systems and
applications to determine which ones could be adversely affected by
Year 2000. Area's data processing for its banking affiliates is
performed primarily by a third party vendor. Consequently, Area
depends upon this vendor for its mission-critical data processing. As
of December 31, 1998, this vendor had informed Area that the vendor
had made all reprogramming changes necessary to be Year 2000 ready. In
addition, Area has reviewed Year 2000 issues with its other major
business relationships, defined as those that 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. Area has determined that there
are two primary sources of third party risks within this group that
may result in financial losses. 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
which increases the potential for delays in receiving payments and/or
loan charge-offs. 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 and non-information technology
systems including alarm systems, elevators, HVAC and cash vaults. All
mission-critical vendors have been contacted and have indicated that
they were Year 2000 ready at December 31, 1998. As of December 31,
1998, the assessment phase was completed.
The purpose of the remediation phase is to ensure all date routines
have been corrected to properly address Year 2000 issues. As a result
of Area's reliance upon third party vendors for a portion of its
mission-critical functions, Area is working closely with these
vendors. As of June 30, 1999, the remediation phase was complete.
The testing phase encompasses actual testing of the new/renovated
systems to ensure readiness. An independent consultant has assisted
management in conducting this phase. The testing phase was completed
as of June 30, 1999.
The final phase, validation, involves testing the new/renovated
software and systems with actual data. This phase was 75% complete as
of June 30, 1999 and is expected to be completed by September 30,
1999.
Total cost to date for Area's Year 2000 efforts, which includes
consultants, software and hardware, has been approximately $3,400,000.
Management estimates that the remaining cost to ensure Year 2000
readiness should not exceed $200,000. Significant portions of these
costs are not incremental, but represent the redeployment of existing
staff and information technology. However, there has been an
opportunity cost associated with Year 2000 readiness because the staff
involved would normally be spending their time on other projects.
Finally, approximately $3,000,000 of the total estimated cost of
$3,600,000 is for capital expenditures that will be depreciated over
their useful lives.
Management has completed a detailed contingency plan that addresses
the most reasonably likely scenarios of disruptions caused by Year
2000. The precise plans utilized will depend upon the exact problems
that develop. Disruptions could range from discrete
application-specific problems that can be resolved to systematic
failures affecting the banking industry or other industries as a
whole. Area can not identify every disruption that may affect it but
has identified certain critical problems that may arise. Even with
precautions, occasional interruptions in services provided Area may
occur which could affect Area's ability to provide its services, for
example, interruptions in electrical service can occur from harsh
weather, traffic accidents and other incidents. It is possible that
such interruptions may occur during the Year 2000 changeover period.
21
<PAGE> 22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
YEAR 2000 (CONTINUED)
The following table presents each phase and its percentage completion
on June 30, 1999 along with the estimated percentage completion on
September 30, 1999:
<TABLE>
<CAPTION>
MANAGEMENT ESTABLISHED YEAR 2000 FORMAL PROGRAM
PERCENT COMPLETE
PHASE DESCRIPTION JUNE 30, 1999 SEPTEMBER 30, 1999
----- ----------- (ACTUAL) (ESTIMATE)
<S> <C> <C> <C>
1 Awareness 100% 100%
2 Assessment 100% 100%
3 Remediation 100% 100%
4 Testing 100% 100%
5 Validation 75% 100%
</TABLE>
B. FINANCIAL POSITION
Total assets increased $126,091,000 or 5.9% to $2,258,456,000 from
December 31, 1998 and increased $348,979,000 or 18.3% from June 30,
1998. Excluding the merger with Peoples Bancorp of Winchester (see
note 6), assets decreased approximately $38,909,000 or 1.8% from
year-end. Excluding the acquisition of NationsBank of Kentucky, N.A.
and the merger with Peoples Bancorp of Winchester (see Note 6), assets
grew approximately $50,979,000 or 2.7% from June 30, 1998. Assets
averaged $2,242,668,000 in the quarter ended June 30, 1999 compared to
$1,846,768,000 during the same period in 1998. The growth from June
30, 1998 to June 30, 1999 was $395,900,000 or 21.4%. Earning assets
totaled $2,065,989,000 on June 30, 1999, an increase of $158,037,000
or 8.3% over December 31, 1998 and $301,376,000 or 17.1% over June 30,
1998.
SHORT-TERM INVESTMENTS AND SECURITIES
Short-term investments, which include interest-bearing deposits with
banks and federal funds sold, totaled $17,139,000 on June 30, 1999, a
decrease of $5,295,000 from year-end balances of $22,434,000 and an
increase of $49,000 from June 30, 1998.
Securities represent 25.0% of earning assets. They totaled
$517,305,000 on June 30, 1999, an increase of $58,562,000 or 12.8%
from December 31, 1998 and a decrease of $22,170,000 or 4.1% from June
30, 1998. The change for the first three months of 1999 largely
resulted from securities acquired in the merger with Peoples Bancorp
of Winchester (see Note 6). The held-to-maturity and
available-for-sale portfolios as of June 30, 1999 consisted of 43.8%
in U.S. and other government agency securities, 13.5% in
mortgage-backed securities, 28.0% in state and municipal securities
and 14.7% in equity and other securities. The comparable distributions
at December 31, 1998 were 41.3%, 15.0%, 30.0% and 13.7%, respectively.
LOANS
Loans, including loans held for sale increased $104,770,000 or 7.3% to
$1,531,545,000 during the three months ended June 30, 1999 and
$323,497,000 or 26.8% from June 30, 1998. Excluding the merger with
Peoples Bancorp of Winchester (see note 6), loans increased
approximately $5,551,000 or 0.4% during the first six months of 1999.
Loans, including loans held for sale, represent the largest category
of earning assets, comprising 73.6% of earning assets as of June 30,
1999, 74.0% as of December 31, 1998 and 67.7% as of June 30, 1998.
22
<PAGE> 23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
LOANS (CONTINUED)
The following table presents the major categories of loans including
loans held for sale:
<TABLE>
<CAPTION>
(Amounts in thousands)
JUNE 30 DECEMBER 31 JUNE 30
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Commercial $ 549,382 $ 503,173 $ 357,695
Real estate 760,754 731,620 672,770
Consumer installment and other loans 221,409 191,982 177,583
---------- ---------- ----------
TOTAL $1,531,545 $1,426,775 $1,208,048
========== ========== ==========
</TABLE>
DEPOSITS
Deposits totaled $1,723,652,000 on June 30, 1999, an increase of
$31,778,000 or 1.9% from December 31, 1998 and $248,627,000 or 16.9%
from June 30, 1998. Excluding deposits acquired as a result of the
merger with Peoples Bancorp of Winchester (see Note 6), deposits
declined approximately $114,421,000 or 6.8% from December 31, 1998 to
June 30, 1999. Non-interest-bearing deposits declined $13,802,000 or
5.5% to $238,148,000 from year-end totals, while interest-bearing
deposits increased $45,590,000 or 3.1% to $1,485,504,000 during this
period. Average deposits increased $326,591,000 or 22.6% in the six
months ended June 30, 1999 compared to the same period in 1998.
Average non-interest bearing deposits increased $70,314,000 or 42.5%
during the first six months compared to the same period last year
while average interest bearing deposits increased $256,277,000 or
20.0%.
The following table summarizes the composition of deposits as of June
30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
(Amounts in thousands) JUNE 30 DECEMBER 31
1999 1998
---- ----
<S> <C> <C>
Non-interest bearing demand $ 238,148 $ 251,950
Interest bearing deposits:
Interest bearing demand 290,946 285,102
Savings 404,074 358,511
Certificates of deposit of $100,000 or more 155,202 154,965
Other time 635,282 641,336
---------- ----------
Total interest bearing deposits 1,485,504 1,439,914
---------- ----------
TOTAL DEPOSITS $1,723,652 $1,691,864
========== ==========
</TABLE>
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
increased by $64,911,000 or 38.0% to $235,637,000 from $170,726,000 on
December 31, 1998 and increased $39,265,000 or 20.0% from June 30,
1998. Borrowed funds increased from December 31, 1998 and June 30,
1998 as a result of deposit growth not providing sufficient funds to
support the loan growth.
23
<PAGE> 24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
CAPITAL RESOURCES
Shareholders' equity totaled $268,549,000 at June 30, 1999, an
increase of $30,336,000 or 12.7% from December 31, 1998 and
$50,965,000 or 23.4% since June 30, 1998. During the first six months
of 1999, $24,170,000 was retained from net income of $25,776,000 after
paying dividends to shareholders of $1,606,000. An additional source
of shareholders' equity growth during the first six months of 1999 was
common stock issued in the merger with Peoples Bancorp of Winchester
(see Note 6 in the accompanying unaudited financial statements) which
totaled $13,629,000.
The shareholders' equity-to-asset ratio was 11.89% at June 30, 1999
compared to 11.17% on December 31, 1998 and 11.39% as of June 30,
1998.
Book value per share was $15.93, $15.20 and $13.91 at June 30, 1999,
December 31, 1998 and June 30, 1998, respectively
During the second quarter of 1999, Area repurchased 116,312 shares of
its common stock in the open market at an average price of $26.21 per
share. No shares were repurchased in the first quarter of 1999.
A summary of the regulatory capital ratios is shown below:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS
JUNE 30 DECEMBER 31 WELL MINIMUM
1999 1998 CAPITALIZED REQUIRED
---- ---- ----------- --------
<S> <C> <C> <C> <C>
Leverage Ratio 9.39% 8.29% 5.00% 4.00%
Tier I Risk Based Capital Ratio 13.38% 11.82% 6.00% 4.00%
Total Risk Based Capital Ratio 14.59% 13.08% 10.00% 8.00%
</TABLE>
ASSET QUALITY
At June 30, 1999, the allowance for loan losses was $23,553,000 or
1.55% of period-end loans, as compared to 1.53% of loans at December
31, 1998 and 1.68% as of June 30, 1998. The ratio of the allowance for
loan losses to non-performing assets increased to 730.8% at June
30,1999, compared with 513.2% at December 31, 1998. This change was
the 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 0.04% (annualized) of average year-to-date loans
compared to 0.08% (annualized) during the same period in 1998. This
ratio is at an historical low level and may increase in the future.
Management maintains the allowance for loan losses 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 markets. Area bases
additional allocations for the allowance 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.
24
<PAGE> 25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
JUNE 30, 1999 AND 1998
ASSET QUALITY (CONTINUED)
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.
The following schedule shows the dollar amount of assets at June 30,
1999, December 31, 1998 and June 30, 1998, which were nonaccrual
loans, loans contractually past due ninety days or more as to interest
or principal payments and still accruing, other real estate owned and
in-substance foreclosures:
<TABLE>
<CAPTION>
(In thousands) JUNE 30 DECEMBER 31 JUNE 30
1999 1998 1998
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $ 695 $ 1,787 $ 2,350
Loans contractually past due 90 days or more as to
interest or principal and still accruing 1,019 757 501
------- ------- -------
TOTAL NONPERFORMING AND RESTRUCTURED LOANS 1,714 2,544 2,851
Other real estate owned 1,509 1,675 1,705
------- ------- -------
TOTAL NONPERFORMING ASSETS $ 3,223 $ 4,219 $ 4,556
======= ======= =======
</TABLE>
C. LIQUIDITY
Deposits have historically provided Area with a major source of stable
and relatively low-cost funding. Secondary sources of liquidity
include federal funds purchased, securities sold under agreements to
repurchase, notes payable to the U.S. Treasury, advances from the
Federal Home Loan Bank and other borrowings.
As of June 30, 1999, 76.3% of total assets were funded by core
deposits while 10.4% were funded with secondary sources of liquidity
discussed above, compared to 79.3% and 8.0%, respectively, as of
December 31, 1998.
The net loan-to-deposit ratio increased from 82.2% on December 31,
1998 to 86.9% on June 30, 1999 as a result of the increase in loans
exceeding the increase in deposits during the period.
25
<PAGE> 26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
JUNE 30, 1999 AND 1998
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Area's June 30, 1999 analysis of the impact of changes in interest
rates on net income over the next 12 months is presented in the
following table. The table below illustrates the simulation analysis
of the impact of a 100 (1.00%) and 200 (2.00%) basis point upward and
downward movement in interest rates. The impact of the rate movement
was simulated as if rates changed immediately from June 30, 1999
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 JUNE 30, 1999 RATES
INCREASE DECREASE
-------- --------
SIMULATED IMPACT IN THE NEXT 12 MONTHS +200BP +100BP -100BP -200BP
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income increase (decrease) $2,037 $ 972 $(2,513) $(4,161)
Net income per share-basic increase (decrease) $ 0.12 $0.06 $ (0.15) $ (0.25)
Net income per share-diluted increase (decrease) $ 0.12 $0.06 $ (0.15) $ (0.24)
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings Not applicable.
Item 2. Changes in Securities Not applicable.
Item 3. Defaults Upon Senior Securities Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on May 17, 1999.
The matters that were voted upon included the election of
directors for one-year terms ending 2000 or until their
successors have been elected and qualified.
The outcome of the voting was as follows:
<TABLE>
<CAPTION>
NAME VOTED FOR VOTED AGAINST ABSTAINED FROM VOTING
---- --------- ------------- ---------------------
<S> <C> <C> <C>
Anthony G. Bittle 12,956,382 0 23,762
Samuel A. B. Boone 12,956,382 0 23,762
Thomas R. Brumley 12,956,382 0 23,762
Cecile W. Garmon 12,956,382 0 23,762
C. M. Gatton 12,956,382 0 23,762
Gary H. Latham 12,956,382 0 23,762
Raymond C. McKinney 12,956,382 0 23,762
Ralph L. Oliver 12,956,382 0 23,762
John S. Penn 12,956,382 0 23,762
Allan R. Rhodes 12,956,382 0 23,762
Jim R. Shelby 12,956,382 0 23,762
David W. Smith, Jr. 12,956,382 0 23,762
Thomas N. Thompson 12,956,382 0 23,762
Don Vitale 12,956,382 0 23,762
Pollard White 12,956,382 0 23,762
Total shares eligible to vote were 16,972,909.
</TABLE>
26
<PAGE> 27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
JUNE 30, 1999 AND 1998
Item 4. Submission of Matters to a Vote of Security Holders (continued)
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 2000 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, 1999. 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
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended
(Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-8, File No.
333-38037.)
3.2 Bylaws of the Registrant, as amended (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.)
10.1* Form of Area Bancshares Corporation Restricted Stock Plan
Agreement (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.)
10.2* Area Bancshares Corporation 1994 Stock Option Plan
(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.)
10.3* Memorandum dated September 18, 1996 regarding executive
officer compensation (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.)
10.4* Cardinal Bancshares, Inc. 1989 Restricted Stock Option
Plan, as amended April 16, 1992 (Incorporated by reference
to the exhibit filed with Cardinal's Registration Statement
on Form S-1, File No. 33-48129.)
10.5* Cardinal Bancshares, Inc. 1994 Restricted Stock Option Plan
(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.)
10.6* Cardinal Bancshares, Inc. 1992 Limited Stock Option Plan
(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.)
10.7* Cardinal Bancshares, Inc. 1992 First Federal Savings Bank
Restricted Stock Option Plan (Incorporated by reference to
the exhibit filed with Cardinal's Registration Statement on
Form S-1, File No. 33-48129.)
10.8* Cardinal Bancshares, Inc. 1993 Mutual Federal Savings Bank
Restricted Stock Option Plan (Incorporated by reference to
the exhibit filed with Cardinal's Registration Statement on
Form SB-2, File No. 33-60796.)
10.9* Amendment Number 1 to Cardinal Bancshares, Inc. 1992
Limited Stock Option Plan (Incorporated by reference to the
exhibit filed with Cardinal's Registration Statement on Form
SB-2, File No. 33-60796.)
10.10* Cardinal Bancshares, Inc. VST Financial Services, Inc.
Restricted Stock Plan and Escrow Agreement (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.)
</TABLE>
27
<PAGE> 28
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
JUNE 30, 1999 AND 1998
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
10.11* Letter Agreement between the Cardinal Bancshares, Inc. and
Michael Karlin dated December 13, 1993 (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.)
10.12* Amendment, dated October 26, 1994, to Letter Agreement
between Cardinal Bancshares, Inc. and Michael S. Karlin
dated December 13, 1993 (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.)
10.13* Second Amendment, dated December 30, 1994, to Letter
Agreement between Cardinal Bancshares, Inc. and Michael S.
Karlin dated December 13, 1993 (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.)
10.14* Letter Agreement between Cardinal Bancshares, Inc. and
Vincent D. Dailey dated December 13, 1993 (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.)
10.15* Amendment, dated December 30, 1994, to Letter Agreement
between Cardinal Bancshares, Inc. and Vincent D. Dailey
dated December 13, 1993 (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.)
10.16* Stock Option Agreement dated December 13, 1993 between
Cardinal Bancshares, Inc. and Michael S. Karlin
(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.)
10.17* Stock Option Agreement dated December 13, 1993 between
Cardinal Bancshares, Inc. and Vincent S. Dailey
(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.)
10.18* Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership
Plan and Trust Agreement (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.)
10.19* Cardinal Bancshares, Inc. Management Retention Plan and
Trust Agreement for the Benefit of Alliance Savings Bank
(Incorporated by reference to the exhibit filed with
Cardinal's Registration Statement on Form SB-2, File No.
33-60796.)
27 Financial Data Schedule (for SEC use only)
*The indicated exhibit is a compensatory plan or arrangement.
(b) Reports on Form 8-K. None
</TABLE>
28
<PAGE> 29
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
JUNE 30, 1999 AND 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AREA BANCSHARES CORPORATION
Date: August 9, 1999 By: /S/ Thomas R. Brumley
------------------------- -----------------------------------
Thomas R. Brumley
President and Chief Executive
Officer
(Principal Executive Officer)
Date: August 9, 1999 By: /S/ John A. Ray
------------------------- -----------------------------------
John A. Ray
Executive Vice President,
Chief Operating Officer
and Chief Financial Officer
(Principal Financial Officer)
Date: August 6, 1999 By: /S/ Gary R. White
------------------------- -----------------------------------
Gary R. White
Vice President, Controller
(Principal Accounting Officer)
29
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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<LOANS> 1,521,306
<ALLOWANCE> 23,553
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0
0
<COMMON> 29,050
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<EXPENSE-OTHER> 36,692
<INCOME-PRETAX> 37,599
<INCOME-PRE-EXTRAORDINARY> 37,599
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,776
<EPS-BASIC> 1.52
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<YIELD-ACTUAL> 7.74
<LOANS-NON> 695
<LOANS-PAST> 1,019
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