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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________.
Commission file number 0-26032.
AREA BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
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Kentucky 61-0902343
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
230 Frederica Street
Owensboro, KY 42301
(Address of Principal Executive Office) (Zip Code)
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Registrant's telephone number, including area code: (502) 926-3232
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
No Par Value Common Stock
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The Registrant estimates that the aggregate market value of the Registrant's
common stock held by nonaffiliates on March 12, 1999 was $264,328,000, (based
upon reports of beneficial ownership that approximately 57.9% of the shares are
so owned by nonaffiliates).
The number of shares outstanding of the Registrant's common stock as of March
12, 1999:
16,972,552 Shares Common Stock, No Par Value
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TABLE OF CONTENTS
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PART I
ITEM 1. BUSINESS
(A) General Description 4
(B) Affiliated Banks 4
(C) Bank-Related Subsidiaries and Affiliates 5
(D) Executive Officers of the Registrant 6
(E) Employees 7
(F) Supervision and Regulation 7
(G) Governmental Monetary Policy 10
(H) Economic Conditions 10
(I) Competition 11
(J) Statistical Disclosure 12
ITEM 2. PROPERTIES 13
ITEM 3. LEGAL PROCEEDINGS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 15
ITEM 7a. MARKET RISK 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 15
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 15
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 15
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ITEM 11. EXECUTIVE COMPENSATION 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 16
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PART I
Item 1. BUSINESS
(A) GENERAL DESCRIPTION
Area Bancshares Corporation ("Area" or the "Corporation") a multi-bank
holding company was incorporated in Kentucky in 1976 and is registered under the
Bank Holding Company Act of 1956, as amended. On December 31, 1998, Area owned
12 financial institutions, all located in Kentucky. Four are national banks,
seven are state banks, and one is a federal thrift (collectively referred to as
"banks" or "affiliated banks").
The affiliated banks provide a wide range of financial services, such
as accepting demand and time deposits; providing checking and money market
accounts; making commercial, consumer and mortgage loans; issuing and servicing
credit cards; leasing; issuing credit life, accident and health, and property
and casualty insurance; providing trust services for personal and corporate
customers; providing safe deposit facilities; and providing alternative
investments and brokerage services. Area has six active non-active bank
affiliates that provide services incidental to Area's operations.
The parent company furnishes specialized services to its affiliated
banks and subsidiaries including supervision, administration and review of loan
portfolios; administration of investment portfolios, insurance programs and
employee benefit plans; and assistance with respect to accounting and operating
systems and procedures, personnel, marketing, cash management services and
equipment management. Charges for these services are based on the nature and
extent of the services provided.
During August 1998, Area acquired NationsBank of Kentucky, N.A., a
wholly-owned subsidiary of NationsBank Corporation.
On August 25, 1998, Area announced plans to merge with Peoples Bancorp
of Winchester which is headquartered in Winchester, Kentucky. Peoples Bancorp is
a one-bank holding company for Peoples Commercial Bank. Area and Peoples Bancorp
completed their merger in January, 1999.
(B) AFFILIATED BANKS
The twelve affiliated banks had 64 banking locations at December 31,
1998. These banks serve both agricultural and metropolitan areas. The location
and certain other information about the affiliated banks are given below:
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December 31, 1998
Affiliated Banks Total Assets (000)
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Alliance Bank, FSB $184,258
124 N. Main Street
Somerset, Kentucky 42501
Bowling Green Bank and Trust Company, N.A 190,333
1820 Scottsville Road
Bowling Green, Kentucky 42103
Broadway Bank &Trust 4,676
1601 Broadway
Paducah, Kentucky 42001
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December 31, 1998
Affiliated Banks Total Assets (000)
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Citizens Deposit Bank $ 42,212
100 Main Street
Calhoun, Kentucky 42327
First City Bank and Trust Company 418,229
1002 South Virginia Street
Hopkinsville, Kentucky 42240
First & Peoples Bank 53,673
110 E. Main Street
Springfield, Kentucky 40069
HNB Bank, N.A 190,393
101 N. Main Street
Harlan, Kentucky 40831
Jefferson Banking Company 95,514
4201 Shelbyville Road
Louisville, Kentucky 40207
The New Farmers National Bank of Glasgow 167,981
701 Columbia, Box 248
Glasgow, Kentucky 42142
The Owensboro National Bank 525,637
230 Frederica Street
Owensboro, Kentucky 42301
Southern Deposit Bank 75,293
102 West Park Square, Box 130
Russellville, Kentucky 42276
The Vine Street Trust Company 218,182
360 E. Vine Street
Lexington, Kentucky 40507
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(C) BANK-RELATED SUBSIDIARIES AND AFFILIATES
On May 12, 1986, ONB Bank Services, Inc., was formed as a nonbank
subsidiary of The Owensboro National Bank. ONB Bank Services, Inc. is a
contractual subscriber for U.S. Clearing Corporation Brokerage programs, and
furnishes brokerage services, investment advisory services and related
investment services for the affiliated banks under the name of Audubon
Securities.
Area Services, Inc. was formed on July 8, 1991 as a wholly owned
nonbank subsidiary of the Corporation. Area Services is engaged in the purchase
of nonperforming loans secured by real estate.
During April 1992, VST Financial Services, Inc. was formed as a
wholly-owned subsidiary of The Vine Street Trust Company for the purpose of
originating and facilitating the processing of loans guaranteed by the Small
Business Administration.
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On April 20, 1994, ABC Credit Corporation ("ABC Credit") was formed as
a nonbank subsidiary of First City Bank and Trust Company. Substantially all of
the assets of ABC Credit were sold during the second quarter of 1998. ABC Credit
operated as a consumer finance company under the Kentucky Consumer Loan Company
Act, K.R.S. 288.410 et seq.
ONB Investment Services, Inc. (formally known as Ixtlan Holdings, Inc.)
was formed on August 26, 1994 as a nonbank subsidiary of The Owensboro National
Bank. This company is no longer active.
(D) EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Corporation as of
March 15, 1999, their positions with the Corporation on that date, the period
during which the executive officers have served and the other positions held by
them with the Corporation's affiliated banks and subsidiaries during the past
five years are set forth below:
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Parent Company Position
Name and Address Age Position Commenced Other Positions
---------------- --- -------- --------- ---------------
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Thomas R. Brumley 60 President, 1990 President and CEO of
Owensboro, Kentucky Chief Executive Officer The Owensboro National
and Director Director-1996 Bank from 1983 to 1990
Edward F. Johnson 63 Senior Vice President, 1987 First Senior Vice President
Owensboro, Kentucky Operations of The Owensboro
National Bank
Donald A. Leibee 54 Senior Vice President, 1990 First Vice President and
Owensboro, Kentucky Loan Administration Chief Lending Officer of
The Owensboro National
Bank from 1984 to 1990
John S. Penn 47 Executive Vice President 1997 President and Chief Executive
Lexington, Kentucky and Director Officer of Cardinal
Bancshares, Inc. from 1996
to 1997 and President and
Chief Operating Officer of
Cardinal Bancshares, Inc. from
1987 to 1996.
Timothy O. Shelburne 42 Senior Vice President, 1995 Vice President and Compliance
Owensboro, Kentucky General Counsel Officer for The Owensboro
National Bank from
1993 to 1994
John A. Ray 43 Executive Vice President- 1998 President and CEO of The
Owensboro, Kentucky Chief Financial Officer Owensboro National Bank
from 1997 to 1998. First Senior
Vice President of Finance
of The Owensboro National
Bank from 1993 to 1994
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(E) EMPLOYEES
On December 31, 1998, the Corporation had 718 full-time employees and
186 part-time employees. The employees of the Corporation are not represented by
unions. The relationship between management and employees of the Corporation is
considered good.
(F) SUPERVISION AND REGULATION
Company Regulation
The Corporation is a registered holding company under the Bank Holding
Company Act of 1956, as amended (the "Federal Bank Holding Company Act") and is
regulated by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). In addition, the Corporation is subject to the provisions of
Kentucky's banking laws regulating bank acquisitions and certain activities of
controlling bank shareholders. The regulatory provisions discussed below are
intended and designed for the protection of depositors in the Corporation's
subsidiary banks, and are not for the protection of shareholders.
As a bank holding company, the Corporation is required to file an
annual report with the Federal Reserve and such additional information as the
Federal Reserve may require. The Federal Reserve and the Kentucky Department of
Financial Institutions (the "Kentucky Department") may also conduct examinations
of the Corporation to determine whether it is in compliance with applicable
Federal and Kentucky banking laws and regulations.
The Federal Bank Holding Company Act also requires every bank holding
company to obtain prior approval from the Federal Reserve before acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank which is not already majority owned or controlled by that bank holding
company. Acquisition of any additional banks would require prior approval from
both the Federal Reserve and the Kentucky Department of Financial Institutions.
Under Kentucky law, a holding company may not acquire a bank located in
Kentucky, if the acquisition would cause the Kentucky deposits controlled by the
acquiring holding company to exceed 15% of the total deposits of all banks in
Kentucky. This limitation does not currently restrict the ability of the
Corporation to pursue acquisitions of financial institutions in Kentucky.
Area and any other bank holding company located in Kentucky may now
acquire a bank located in another state, and any bank holding company located
outside of Kentucky may acquire a Kentucky-based bank, regardless of state laws
to the contrary. In either case, deposit-percentage limits, aging requirements,
and other restrictions apply. National and state-chartered banks may branch
across state lines by acquiring banks in other states.
The Federal Bank Holding Company Act further provides that the Federal
Reserve will not approve any acquisition, merger or consolidation which would
result in a monopoly, substantially lessen competition, or otherwise function as
a restraint of trade, unless the anti-competitive effects of the proposed
transaction are clearly outweighed in the public interests in meeting the
convenience and needs of the community to be served.
In addition to having the right to acquire ownership or control of
other banks, the Corporation is authorized to acquire ownership or control of
nonbanking companies, provided the activities of such companies are so closely
related to banking or managing or controlling banks that the Federal Reserve
considers such activities to be proper to the operation and control of banks.
Regulation Y, promulgated by the Federal Reserve, sets forth those activities
which are regarded as closely related to banking or managing or controlling
banks and, thus, are permissible activities for bank holding companies, subject
to approval by the Federal Reserve in individual cases.
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Federal Reserve policy requires a bank holding company to act as a
source of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not be warranted. Under these provisions, a bank holding company may be required
to loan money to its subsidiaries in the form of capital notes or other
instruments which qualify for capital under regulatory rules. Any loans by the
holding company to such subsidiary banks are likely to be unsecured and
subordinated to such bank's depositors and perhaps to its other creditors.
Federal Securities Laws
The Corporation is subject to various federal securities laws,
including the Securities Act of 1933 (the "1933 Act") and the Securities
Exchange Act of 1934 (the "1934 Act"). The 1933 Act regulates the distribution
or public offering of securities, while the 1934 Act regulates trading in
securities that are already issued and outstanding. Both Acts provide civil and
criminal penalties for misrepresentations and omissions in connection with the
sale of securities, and the 1934 Act also prohibits market manipulation and
insider trading.
Pursuant to the 1934 Act, the Corporation files annual, quarterly and
current reports with the Securities and Exchange Commission. In addition, the
Corporation and its directors, executive officers and 5% shareholders are
subject to certain additional reporting requirements, including requirements
governing the submission of proxy statements and reports of beneficial ownership
of the Corporation's securities.
Bank Regulation
The national banks are subject to regulation and examination by the
Office of the Comptroller of the Currency (the "OCC") and by the Federal Deposit
Insurance Corporation (the "FDIC"). The Kentucky state banks are subject to
regulation and examination by the Kentucky Department of Financial Institutions
and by the FDIC. The federal thrift is subject to regulation, supervision and
examination by the Office of Thrift Supervision. Effective January 1999 the
federal thrift was converted to a state chartered bank.
Restrictions on Payment of Dividends
The principal source of the Corporation's income consists of dividends
from its subsidiary banks, and there are certain limitations on the payment of
dividends by the subsidiary banks.
The prior approval of the OCC or the Kentucky Department of Financial
Institutions, as applicable, is required if the total of all dividends declared
by the subsidiary bank in any calendar year exceeds the bank's net profits, as
defined, for that year combined with its retained net profits for the preceding
two calendar years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. In addition, both federal and state law
impose capital limitations on the ability of the Corporation to pay dividends.
The Office of Thrift Supervision limits the amount of dividends that can be paid
to 50% of the risk-based capital excess.
Capital Adequacy
The Corporation and its subsidiary banks are required to comply with
the capital adequacy standards established by the Federal Reserve and the
appropriate federal banking regulator in the case of its banking subsidiaries.
There are two basic measures of capital adequacy for bank holding companies that
have been promulgated by the Federal Reserve: a risk-based measure and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in risk profile among banks
and bank holding companies, to account for off-balance-sheet exposure, and to
minimize disincentives for holding liquid assets. Assets and off-balance-sheet
items are assigned to broad risk categories, each with appropriate weights. The
resulting capital ratios represent capital as a percentage of total
risk-weighted assets and off-balance-sheet items.
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The minimum guideline for the ratio of total capital to risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) is 8%. At least half of total capital must consist of common stock,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").
At December 31, 1996, the Corporation's consolidated total risk-based capital
ratio and its Tier 1 risk-based capital ratio (i.e., the ratio of Tier 1 capital
to risk-weighted assets) were 13.08% and 11.82%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier 1 capital to average assets, less goodwill and certain
other intangible assets, of 3% for bank holding companies that meet certain
specified criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a leverage ratio of at
least 3%, plus an additional cushion of 100 to 200 basis points. The
Corporation's leverage ratio at December 31, 1996 was 8.29%. The guidelines also
provide that bank holding companies experiencing internal growth or making
acquisitions will be expected to maintain strong capital positions substantially
above the minimum supervisory levels without significant reliance on intangible
assets. Furthermore, the Federal Reserve has indicated that it will consider a
tangible Tier 1 capital leverage ratio (deducting all intangibles) and other
indicia of capital strength in evaluating proposals for expansion or new
activities.
Support of Subsidiary Institutions
Under Federal Reserve policy, the Corporation is expected to act as a
source of financial strength for, and to commit resources to support, each of
its banking subsidiaries. This support may be required at times when, absent
such Federal Reserve policy, the Corporation may not be inclined to provide it.
In addition, any capital loans by a bank holding company to any of its banking
subsidiaries are subordinate in right of payment to deposits and to certain
other indebtedness of the banking subsidiaries. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a federal
bank regulatory agency to maintain the capital of a banking subsidiary will be
assumed by the bankruptcy trustee and entitled to a priority of payment.
A depository institution insured by the FDIC can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC, in
connection with (1) the default of a commonly controlled FDIC-insured depository
institution or (2) any assistance provided by the FDIC to any commonly
controlled FDIC-insured depository institution "in danger of default." "Default"
is defined generally as the appointment of a conservator or receiver, and "in
danger of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors, secured creditors, and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The subsidiary depository institutions of the Corporation are
subject to these cross-guarantee provisions. As a result, any loss suffered by
the FDIC in respect of these subsidiaries would likely result in assertion of
the cross-guarantee provisions, the assessment of such estimated losses against
the depository institution's banking affiliates, and a potential loss of the
Corporation's investment in its other subsidiary depository institutions.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1971
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized) and are required to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, relating to
institutions in the three undercapitalized categories, the severity of which
will depend upon the capital category in which the institution is placed.
Generally, subject to a narrow exception, the banking regulator must appoint a
receiver or conservator for an institution that is critically undercapitalized.
The federal banking agencies have specified by regulation the relevant capital
level for each category.
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An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
obligation of a controlling holding company to fund a capital restoration plan
is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except in accordance with an accepted capital restoration plan
or with FDIC approval. In addition, the appropriate federal banking agency may
treat an undercapitalized depository institution in the same manner as it treats
a significantly undercapitalized institution, if it determines that those
actions are necessary.
At December 31, 1998, the Corporation and each of the affiliated banks
had the requisite capital levels to qualify as well-capitalized.
Other Regulation
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Bank Holding Company Act on any extension of
credit to the bank holding company or any of its subsidiaries, on investment in
the stock or other securities of the bank holding company or its subsidiaries,
and on the taking of such stock or securities as collateral for loans to any
borrower. In addition, a bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection with any
extension of credit or provision of any property or services.
The subsidiary banks are also subject to the provisions of the
Community Reinvestment Act of 1977, which requires the appropriate federal
regulator to assess the bank's record in meeting the credit needs of the
communities served by the bank, including low and moderate income neighborhoods.
All of the Corporation's subsidiary banks have CRA ratings of satisfactory or
above.
Other areas subject to regulations by federal and state authorities
include reserves, deposits, investments, loans, mergers, issuance of securities,
establishment of branches and other various aspects of operations
(G) GOVERNMENTAL MONETARY POLICY
The Corporation's earnings are affected by the policies of regulatory
authorities, including the Federal Reserve. Federal Reserve monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future. Because of
changing conditions in the economy and in the money markets, as a result of
actions by monetary and fiscal authorities, interest rates, credit availability
and deposit levels may change due to circumstances beyond the control of the
Corporation. The Corporation cannot predict what the future policies of the
Federal Reserve will be, nor their effect on its future earnings.
(H) ECONOMIC CONDITIONS
The twelve affiliated banks operate in seven separate Western Kentucky
counties and five separate Eastern Kentucky counties.
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The local economies that each of the banks operate in are currently
expanding. During 1998, the unemployment rate in the markets served by the
affiliated banks has fallen. The local agricultural economies have been strong;
however, lower agricultural prices in late 1998 may prove stressful. The
manufacturing economies are expanding with several manufacturing plants in each
banking area expanding and adding employees. The housing market is strong in all
the banking areas with demand out-stripping supply in several markets.
(I) COMPETITION
The banking business in Kentucky is highly competitive and the
affiliated banks compete not only with banks and thrifts, but with finance and
personal loan companies, credit unions, and other financial institutions which
are active in the affiliated banks' markets. In addition, the affiliated banks
compete for customer funds with other investment alternatives available through
investment brokers, insurance companies, finance companies and other
institutions.
Listed below is each affiliated bank, its county of operations, the
total deposits of that county, the deposits of the affiliated bank, and the
percentage of the county's deposits that each affiliated bank controls. The
total deposits within the county include all FDIC insured institutions. The
information is for June 30, 1998 and was provided by the Federal Deposit
Insurance Corporation.
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Affiliated
Affiliated Total Affiliated Bank Percent
Bank County County Deposits (000) Bank Deposits (000) of Total
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Alliance Bank, FSB Pulaski $ 673,558 $169,563 25.17%
124 N. Main Street
Somerset, KY 42501
Bowling Green Bank Warren 1,126,393 154,544 13.72%
and Trust Company, N.A
1820 Scottsville Road
Bowling Green, KY 42103
Broadway Bank & Trust McCraken 1,100,526 0 0%
1601 Broadway
Paducah, Ky 42001
(Opened October 1998)
Citizens Deposit Bank McLean 118,553 30,372 25.62%
100 Main Street
Calhoun, KY 42327
First City Bank and Christian $ 571,224 $188,338 32.97%
Trust Company
1002 E. Main Street
Hopkinsville, KY 42240
First & Peoples Bank Washington 164,237 49,191 29.95%
110 E. Main Street
Springfield, KY 40069
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Affiliated
Affiliated Total Affiliated Bank Percent
Bank County County Deposits (000) Bank Deposits (000) of Total
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HNB Bank, N.A Harlan 283,039 168,585 59.56%
101 N. Main Street
Harlan, KY 40831
Jefferson Banking Jefferson 12,849,302 73,074 0.57%
Company
4201 Shelbyville Rd
Louisville, KY 40207
The New Farmers Barren 422,745 128,772 30.46%
National Bank of
Glasgow
701 Columbia, Box 248
Glasgow, KY 42142
The Owensboro National Daviess 1,124,284 336,626 29.94%
Bank
230 Frederica St
Owensboro, KY 42301
Southern Deposit Bank Logan 315,013 61,996 19.68%
102 West Park Square
Box 130
Russellville, KY 42276
The Vine Street Trust Fayette 3,151,940 140,766 4.47%
Company
360 E. Vine Street
Lexington, KY 40507
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Total $21,900,814 $1,501,827 6.86%
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(J) Statistical Disclosure
Specific financial information required to be included under Item I of
this Form 10-K is incorporated herein by reference to the Annual Report to
Shareholders for the fiscal year ended December 31, 1998, and listed below along
with a page reference where the information can be found in the Annual Report to
Shareholders.
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Description of Financial Information Required Reference
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Summary of average balance sheets, net interest
income and interest rates Table 1, Page 23
Summary of changes in net interest income Table 2, Page 24
Interest rate sensitivity Management's Discussion
and Analysis, Pages 19-20
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<TABLE>
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Description of Financial Information Required Reference
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Allocation of the allowance for loan losses Table 5, Page 27
Summary of loan loss experience Table 4, Page 26
Carrying amounts of securities Management's Discussion
and Analysis, Page 12
Maturities and average yields of securities Table 3, Page 25
Other borrowing information Table 7, Page 29
Non-performing assets Management's Discussion
and Analysis, Page 15
Average deposits and rates paid Table 6, Page 28
Loan portfolio information Management's Discussion
and Analysis, Page 13
</TABLE>
ITEM 2. PROPERTIES
The corporate offices of Area Bancshares Corporation are located at 230
Frederica Street, Owensboro, Kentucky 42301. Information as of December 31, 1998
about the properties of the affiliated banks follows:
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<CAPTION>
Number of Number of
Affiliated Banks Leased Facilities (1) Owned Facilities (1)
- ---------------- --------------------- --------------------
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Alliance Bank, FSB 0 7
124 N. Main Street
Somerset, KY 42501
Bowling Green Bank & 5 3
Trust Company, N. A.
1820 Scottsville Road
Bowling Green, KY 421
Broadway Bank & Trust 1 0
1601 Broadway
Paducah, KY 42001
Citizens Deposit Bank 0 1
100 Main Street
Calhoun, KY 42327
First City Bank and 3 6
Trust Company
1002 E. Main Street
Hopkinsville, KY 42240
First & Peoples Bank 0 2
110 E. Main Street
Springfield, KY 40069
</TABLE>
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<TABLE>
<CAPTION>
Number of Number of
Affiliated Banks Leased Facilities (1) Owned Facilities (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
HNB Bank, N.A. 2 7
101 N. Main Street
Harlan, KY 40831
Jefferson Banking 1 1
Company
4201 Shelbyville Rd.
Louisville, KY 40207
The New Farmers 1 5
National Bank of
Glasgow
701 Columbia, Box 248
Glasgow, KY 42142
The Owensboro National 3 9
Bank
230 Frederica St.
Owensboro, KY 42301
Southern Deposit Bank 0 3
102 West Park Square
Box 130
Russellville, KY 42276
The Vine Street Trust 4 0
Company
360 E. Vine Street
Lexington, KY 40507
-- --
Total 20 44
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</TABLE>
(1) Does not include ATM locations.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Corporation's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders, through the
solicitation of proxies or otherwise.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The required information is incorporated herein by reference from page
62 of the Area Bancshares Corporation's 1998 Annual Report. The Corporation did
not make any sales of unregistered securities during the last three fiscal
years.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are incorporated herein by reference from page
2 of the Area Bancshares Corporation 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information relating to the Corporation's financial condition, results
of operations, liquidity, and capital resources is incorporated herein by
reference from pages 3 through 30 of the Area Bancshares Corporation 1998 Annual
Report.
ITEM 7a. MARKET RISK
Market risk information is incorporated herein by reference form page
19 of Area Bancshares Corporation 1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Area Bancshares Corporation and
Subsidiaries are incorporated herein by reference from pages 32 through 60 of
the Area Bancshares Corporation 1998 Annual Report. Also, unaudited quarterly
financial information for the Corporation and its subsidiaries is incorporated
by reference from page 10 of the Area Bancshares Corporation 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Corporation's independent auditors,
nor any disagreements between the management of Area Bancshares Corporation and
its independent auditors relating to accounting or financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required for this item is incorporated herein by reference
from pages 6 through 11 of Area Bancshares Corporation's Proxy Statement for its
1999 Annual meeting of shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required for this item is incorporated herein by reference
from pages 8 and 9 of Area Bancshares Corporation's Proxy Statement for its 1999
Annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required for this item is incorporated herein by reference
from pages 2 through 5 of Area Bancshares Corporation's Proxy Statement for its
1999 Annual meeting of shareholders.
15
<PAGE> 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required for this item is incorporated herein by reference
from page 18 of Area Bancshares Corporation's Proxy Statement for its 1999
Annual meeting of shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPOTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Area Bancshares
Corporation and its subsidiaries are incorporated by reference to Item
8.
Consolidated financial statements of Area Bancshares Corporation and
Subsidiaries:
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Comprehensive Income - Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended December
31, 1998, 1997 and 1996
Unaudited quarterly financial information of Area Bancshares
and its subsidiaries.
Independent Auditors' Report - page 31.
2. Supplemental Schedule
Schedules are omitted because they are not required or not applicable,
or the required information is shown in the financial statements or in
notes thereto.
3. Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
<S> <C>
3.1 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.)
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
<S> <C>
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.)
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.)
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
<S> <C>
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.)
11.1 Statement regarding Computation of Per Share Earnings
(included in Annual Report as note 15)
13.1 1998 Annual Report to Shareholders
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- --------------------
* The indicated exhibit is a compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Registrant filed one Report on Form 8-K on November 12, 1998. The
item reported was Item 5- Other Events.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
Area Bancshares Corporation
Date: March 26, 1999 By: /s/ Thomas R. Brumley
------------------------------------- ---------------------------------------
Thomas R. Brumley, President and
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 26, 1999 /s/ C. M. Gatton
-------------------------------------- ---------------------------------------
C. M. Gatton
Chairman of the Board
Date: March 26, 1999 /s/ Raymond C. McKinney
------------------------------------- ---------------------------------------
Raymond C. McKinney
Vice Chairman of the Board
Date: March 26, 1999 /s/ Anthony G. Bittel
------------------------------------- ---------------------------------------
Anthony G. Bittel, Director
Date: March 26, 1999 /s/ Samual A. B. Boone
------------------------------------- ---------------------------------------
Samual A. B. Boone, Director
Date: March 26, 1999 /s/ Thomas R. Brumley
------------------------------------- ---------------------------------------
Thomas R. Brumley
President and Chief Executive Officer,
Director
Date: March 26, 1999 /s/ Cecile W. Garmon
------------------------------------- ----------------------------------------
Cecile W. Garmon, Director
Date: March 26, 1999 /s/ Gary H. Latham
------------------------------------- ----------------------------------------
Gary H. Latham, Director
Date: March 26, 1999 /s/ Ralph L. Oliver
------------------------------------- ----------------------------------------
Ralph L. Oliver, Director
Date: March 26, 1999 /s/ John S. Penn
------------------------------------- -------------------------------------
John S. Penn, Executive Vice President,
Director
Date: March 26, 1999 /s/ Allan R. Rhodes
------------------------------------- -------------------------------------
Allan R. Rhodes, Director
Date: March 26, 1999 /s/ Jim R. Shelby
------------------------------------- ----------------------------
Jim R. Shelby, Director
Date: March 26, 1999 /s/ David W. Smith, Jr.
------------------------------------- -------------------------------------
David W. Smith, Jr., Director
</TABLE>
19
<PAGE> 20
SIGNATURES (continued)
<TABLE>
<S> <C>
Date: March 26, 1999 /s/ Don Vitale
------------------------------------- -----------------------------------------
Don Vitale, Director
Date: March 26, 1999 /s/ Pollard White
------------------------------------- -----------------------------------------
Pollard White, Director
Date: March 26, 1999 /s/ John A. Ray
------------------------------------- -----------------------------------------
John A. Ray, Executive Vice President-
Chief Financial Officer
(Principal Financial Officer)
Date: March 26, 1999 /s/ Gary R. White
------------------------------------- -----------------------------------------
Gary R. White, Controller
(Principal Accounting Officer)
</TABLE>
20
<PAGE> 1
EXHIBIT 13.1
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
CONTENTS
Letter to Shareholders
1
Consolidated Five Year Selected Financial Data
2
Financial Review
3-30
Independent Auditors' Report
31
Consolidated Balance Sheets
32
Consolidated Statements of Income
33
Consolidated Statements of Comprehensive Income
34
Consolidated Statements of Shareholders' Equity
34-35
Consolidated Statements of Cash Flows
36-37
Notes to Consolidated Financial Statements
38-60
Corporate Information
61
Market for Common Stock and Related Shareholder Matters
62
Area Bancshares Corporation - Officers and Directors
63
Alliance Bank, FSB - Officers and Directors
64
Bowling Green Bank and Trust Company, N.A. - Officers and Directors
64
Broadway Bank and Trust - Officers and Directors
64
Citizens Deposit Bank - Officers and Directors
65
First City Bank and Trust Company - Officers and Directors
65
First & Peoples Bank - Officers and Directors
65
HNB Bank, N.A. - Officers and Directors
66
Jefferson Banking Company - Officers and Directors
66
Peoples Commercial Bank - Officers and Directors
67
The New Farmers National Bank of Glasgow - Officers and Directors
68
The Owensboro National Bank - Officers and Directors
69
Southern Deposit Bank - Officers and Directors
70
The Vine Street Trust Company - Officers and Directors
71
Vine Street Financial, Inc. - Officers and Directors
71
<PAGE> 2
1
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
Dear Shareholder:
We are pleased to present the following information reflecting net
income for 1998 of $22,626,000 or $1.45 per share. The accompanying management's
discussion provides a detailed analysis of each significant operating area for
your review.
A lot of time and effort has been directed at Y2K readiness. Area does
not anticipate a material business interruption as a result of Year 2000. We
encourage each of you to review your systems for possible glitches.
The successful assimilation of NationsBank of Kentucky; the de novo
start up of Broadway Bank and Trust in Paducah; the preparation for the merger
with Peoples Commercial Bank, Winchester, were all accomplished because of the
dedicated efforts of employees throughout the Company.
Alliance Bank, Somerset has switched to a state chartered bank from a
Federal Savings Bank effective January 1999. Area is now comprised of four
nationally chartered banks and nine state chartered banks.
Some of you may not realize that our Southern Deposit Bank,
Russellville is the bank that Jesse James robbed, or that Owensboro National
Bank's charter dates back to 1860.
We were saddened this past year by the death of William H. Thompson,
one of the founders of this Company. Bill was a dedicated director who gave his
time and wisdom selflessly to the development of Area Bancshares Corporation. He
is greatly missed.
Thanks to all who have contributed to the successes of 1998.
Most sincerely,
/s/ Thomas R. Brumley
Thomas R. Brumley
President and
Chief Executive Officer
<PAGE> 3
2
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Five Year Selected Financial Data
<TABLE>
<CAPTION>
(In thousands, Except Ratios
and Per Share Data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year-End Totals
Assets $2,132,365 $1,901,449 $1,796,290 $1,778,559 $1,622,509
Securities available for sale 340,874 342,513 320,413 355,217 310,991
Securities held to maturity 117,869 116,811 97,120 94,015 124,724
Loans, net of unearned discount 1,412,567 1,227,307 1,147,060 1,091,867 983,049
Deposits 1,691,864 1,433,132 1,394,399 1,223,556 1,175,373
Long-term debt and other borrowings 170,726 252,866 213,916 232,756 258,939
Shareholders' equity 238,213 196,549 169,383 149,724 128,373
- --------------------------------------------------------------------------------------------------------------------------
Earnings
Total interest income $ 143,576 $ 139,249 $ 136,835 $ 132,088 $ 102,975
Total interest expense 67,890 63,643 64,410 64,330 42,452
Provision for loan losses 1,628 3,271 4,849 4,824 4,976
Non-interest income 22,605 18,322 28,238 18,413 13,804
Non-interest expenses 64,741 61,357 65,912 64,414 61,099
Income taxes 9,296 8,491 10,016 4,487 1,278
Net income 22,626 20,809 19,886 12,446 6,974
- --------------------------------------------------------------------------------------------------------------------------
Per Share Data (1)
Net income-basic $ 1.45 $ 1.35 $ 1.28 $ .81 $ .46
Net income-diluted 1.42 1.33 1.26 .79 .45
Cash dividends .155 .125 .107 .09 .08
Book value as of December 31 15.20 12.62 10.92 9.68 8.43
- --------------------------------------------------------------------------------------------------------------------------
Performance and Capital Measures
Return on average total assets 1.18% 1.18% 1.15% .75% .47%
Return on average shareholders' equity 10.62% 11.32% 12.38% 9.04% 5.27%
Percentage of average shareholders' equity to
average total assets 11.14% 10.39% 9.28% 8.26% 8.85%
Dividend payout ratio 10.69% 9.26% 7.79% 8.88% 12.24%
- --------------------------------------------------------------------------------------------------------------------------
Cash basis financial data (2)
Net income-basic $ 1.61 $ 1.48 $ 1.42 $ .96 $ .61
Net income-diluted 1.58 1.45 1.40 .95 .60
Return on average tangible assets 1.33% 1.30% 1.29% .90% .63%
Return on average tangible shareholders' equity 13.17% 13.58% 15.54% 12.50% 8.22%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Restated for all stock dividends and stock splits.
(2) Cash basis calculations exclude intangible assets and the related
amortization expense.
<PAGE> 4
3
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CORPORATE OVERVIEW
Area Bancshares Corporation ("Area") is a multi-bank holding company
headquartered in Owensboro, Kentucky. Area is comprised of eleven banks and one
thrift ("banking affiliates") conducting business in offices throughout
Kentucky. The banking affiliates provide a wide range of financial services,
such as accepting demand and time deposits; providing checking and money market
accounts; making commercial, consumer and mortgage loans; issuing and servicing
credit cards; leasing; issuing credit life, accident and health, and property
and casualty insurance; providing trust services for personal and corporate
customers; providing safe deposit facilities; and providing alternative
investments and brokerage services. Area has six active non-bank affiliates that
provide services incidental to Area's operations.
The following information is management's analysis of the operations of Area for
the years 1996 through 1998 and its financial condition as of December 31, 1997.
It provides information which is not otherwise apparent from the consolidated
financial statements and related footnotes and is intended to assist the reader
in evaluating Area's performance. This analysis should be read with the
accompanying Consolidated Financial Statements and related notes thereto
beginning on page 32.
MERGERS AND ACQUISITIONS
During August 1998, Area acquired NationsBank of Kentucky, N.A., a wholly-owned
subsidiary of NationsBank Corporation. NationsBank of Kentucky, N.A. had assets
totaling $133.00 million, net of certain deposits that were retained by
NationsBank of Kentucky, N.A., loans of $84.00 million and deposits amounting to
$133.00 million. 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.
As a result of the acquisition, approximately $22.03 million of intangibles were
recognized.
On August 25, 1998, Area announced plans to merge with Peoples Bancorp of
Winchester ("Peoples") which is headquartered in Winchester, Kentucky. Peoples
is a one-bank holding company for Peoples Commercial Bank. Total assets of
Peoples are approximately $165.00 million. In January 1999 Area issued 1.30
million shares of its common stock in conjunction with the merger. The Peoples
merger is not reflected in the accompanying financial statements since the
merger closed in January 1999. This merger will be accounted for as a
pooling-of-interests; however, Area's financial condition and results of
operations will not be restarted.
During 1997 Area and Cardinal Bancshares, Inc. merged in a transaction accounted
for as a pooling-of-interests. The financial information in this Annual Report
has been restated to reflect this merger for all periods presented.
<PAGE> 5
4
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
RESULTS OF OPERATIONS
SUMMARY
Area reported net income of $22.63 million for 1998 compared to $20.81 million
during 1997 and $19.89 million in 1996. Basic earnings per share were $1.45 in
1998, $1.35 in 1997 and $1.28 in 1996. Diluted earnings per share increased 6.8%
to $1.42 in 1998, compared to $1.33 in 1997 and $1.26 in 1996. The improvement
in net income between 1998 and 1997 was attributable to three factors: (i) an
increase in net interest income (on a taxable equivalent basis) totaling $0.73
million from $79.11 million in 1997 to $79.84 million in 1998 due primarily to
earning asset growth; (ii) a reduction totaling $1.64 million in the provision
for loan losses arising from an improvement in the quality of the loan
portfolio; and (iii) an increase in non-interest income from $18.32 million
during 1997 to $22.61 million for 1998 driven principally by increases in
deposit and trust fees from $10.93 million in 1997 to $12.40 million in 1998 as
well as a gain totaling $2.07 million on the sale of ABC Credit Corporation's (a
wholly-owned consumer finance company) loan portfolio.
Area's 1997 net income increased $.92 million or 4.6% from 1996, however a
number of nonrecurring items affected net income during 1996 and hence the
comparability of 1997 to 1996. Substantially all of the assets of Cardinal
Credit Corporation were sold providing an after-tax gain of $4.32 million,
investment securities classified as available for sale were sold for an
after-tax gain of $1.87 million, certain stock option plans were amended
resulting in an after-tax charge to earnings totaling $1.12 million and a loss
associated with Security First Network Bank and its spin-off amounting to $1.61
million on an after-tax basis were all recorded during 1996. After adjusting
earnings for these items, Area would have reported net income of $16.43 million
for 1996. On an adjusted basis, the increase in net income from 1996 to 1997
would have been $4.38 million or 26.7%.
<TABLE>
<CAPTION>
Results of Operations-Summary
(In thousands,except percentages and per share data) 1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income after taxes $ 22,626 $ 20,809 $ 19,886
Basic earnings per share 1.45 1.35 1.28
Diluted earnings per share 1.42 1.33 1.26
Return on average assets 1.18% 1.18% 1.15%
Return on average shareholders' equity 10.62% 11.32% 12.38%
</TABLE>
NET INTEREST INCOME
The largest source of Area's revenue is net interest income which is the
difference between interest income and interest expense. Sources of interest
income include interest on loans and investments while interest expense includes
interest paid on deposits and borrowings. The amount of net interest income is
the result of a number of factors, including the volumes of interest-earning
assets and interest-bearing liabilities and the interest rates earned and paid.
In addition, the amount of interest-bearing assets funded by interest-free
sources (largely shareholders' equity and non-interest bearing deposits) impacts
net interest income.
Changes in net interest income are frequently measured by two percentages: net
interest margin and net interest spread. Net interest margin is expressed as net
interest income (on a tax equivalent basis) divided by average earning assets.
Net interest spread is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Both of these percentages are reported on a taxable equivalent
basis. Net interest margin is greater than net interest spread as a result of
interest income earned on interest-earning assets and funded by
non-interest-bearing funds such as demand deposits and shareholders' equity.
<PAGE> 6
5
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
Net interest income increased 0.1% to $75.69 million in 1998 from $75.61 million
in 1997. On a taxable equivalent basis, net interest income rose to $79.84
million in 1998 from $79.11 million in 1997, an increase of $0.73 million or
0.9%. The net interest margin declined 31 basis points (a basis point is equal
to one hundredth of a percent) to 4.46% in 1998 from 4.77% in 1997. The average
rate on earning assets declined from 8.62% in 1997 to 8.26% in 1998. This
decrease was largely the result of a reduction in the yield of the loan
portfolio caused by loan refinancings, strong competition for quality loans and
a relatively flat yield curve. The cost of interest bearing deposits totaled
4.46% in 1998 compared to 4.47% in 1997. The cost of borrowed funds decreased 17
basis points to 5.32% during 1998 from 5.49% in 1997, primarily as a result of a
decrease in the average rate paid on federal funds purchased and securities sold
under agreements to repurchase from 5.14% in 1997 to 4.73% in 1998. The impact
of non-interest bearing funds was constant at .75% in both 1998 and 1997.
Average interest-earning assets increased $131.68 million or 7.9% to $1.79
billion in 1998 from $1.66 billion in 1997, while the largest component, average
loans, increased to $1.26 billion from $1.19 billion during the past year.
Average interest-bearing liabilities grew $107.05 million or 7.7% in 1998 to
$1.49 billion from $1.38 billion. Increases in interest-bearing deposits
accounted for all of this growth. As a result of the growth in average
interest-bearing deposits during the year, Area reduced its average borrowings
from $174.45 million in 1997 to $165.21 million in 1998.
Net interest income increased $3.35 million or 4.6% to $75.69 million in 1997
from $72.34 million in 1996. Taxable-equivalent net interest income was $79.11
million in 1997 and $75.68 million in 1996. The 1997 increase was largely due to
a higher level of earning assets and an improvement in the net interest margin
from 4.69% in 1996 to 4.77% in 1997. Average earning assets grew 2.7% or $43.41
million from 1996 to 1997 while average interest bearing liabilities increased
$8.13 million or 0.6%. Increases in non-interest bearing deposits and
shareholders' equity primarily funded the growth in earning assets. The net
interest margin increased during 1997 as compared to 1996 primarily as a result
of a reduction of 8 basis points (from 4.68% in 1996 to 4.60% in 1997) in the
cost of interest bearing liabilities. In addition, the impact of non-interest
bearing liabilities contributed 6 basis points to the improvement in the net
interest margin.
<TABLE>
<CAPTION>
Net Interest Spread and Margin
(Taxable-equivalent basis) 1998 1997 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield on interest earning assets 8.26% 8.62% 8.68%
Rate on interest bearing liabilities 4.55% 4.60% 4.68%
----------------------------------------------------------------------------------
Net Interest Spread 3.71% 4.02% 4.00%
Non-interest bearing funds contribution .75% .75% .69%
----------------------------------------------------------------------------------
Net Interest Margin 4.46% 4.77% 4.69%
==================================================================================
</TABLE>
Table 1 on page 23 contains a summary of average balance sheets, net interest
income and net interest margins for 1998, 1997 and 1996. Table 2 on page 24
provides the components of the change in net interest income for 1998 and 1997
when compared to 1997 and 1996, respectively.
<PAGE> 7
6
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
NON-INTEREST INCOME
Continuing non-interest income, which excludes gains on the sale of loans and
securities, increased 12.8% to $19.09 million in 1998 from $16.93 million in
1997. Area's diverse sources of non-interest income generated largely from
traditional banking activities was responsible for this growth. Significant
growth occurred in several areas with commissions and fees on fiduciary
activities, service charges on deposit accounts and other service charges,
commissions and fees all reflecting double digit percentage increases during
1998. The table that follows shows the components of non-interest income for
1998, 1997 and 1996:
<TABLE>
<CAPTION>
Non-Interest Income Dollar Change
(In thousands) 1998 1997 1996 1998 vs 1997 vs
1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions and fees on
fiduciary activities $ 4,852 $ 4,264 $ 3,634 $ 588 $ 630
Service charges on deposit
accounts 7,548 6,675 6,400 873 275
Other service charges,
commissions and fees 6,283 5,036 4,751 1,247 285
Other income 410 952 1,276 (542) (324)
------------------------------------------------------------------------------------------------
Continuing non-interest income 19,093 16,927 16,061 2,166 866
Securities gains, net 108 21 3,265 87 (3,244)
Gains on the sales of loans, net 3,404 1,374 8,912 2,030 (7,538)
------------------------------------------------------------------------------------------------
Total $22,605 $18,322 $28,238 $4,283 $ (9,916)
================================================================================================
</TABLE>
Commissions and fees on fiduciary activities were $4.85 million in 1998, an
increase of 13.8% over $4.26 million earned in 1997. Successful new business
development efforts and continued strength in the equity markets led to this
revenue growth. The increase in 1997's commissions and fees on fiduciary
activities over 1996 of 17.3% or $0.63 million was due largely to strong equity
markets.
Service charges on deposit accounts reached $7.55 million in 1998, compared to
$6.68 million in 1997, an increase of $0.87 million or 13.0%. The growth in 1998
was due to increases in deposits subject to service charges, added efforts to
collect a greater percentage of fees assessed and higher activity fees. The
increase during 1997 compared to 1996, which totaled $0.28 million, was due
largely to growth in deposits subject to service charges.
Other service charges, commissions and fees totaled $6.28 million in 1998, an
increase of $1.25 million or 24.8% from 1997. This increase was the result of
commission income on security brokerage activity, growth in loan servicing fees
as a result of increases in loans serviced and an increase in credit card
interchange fees due to strong growth in customer credit card usage. During 1997
other service charges, commissions and fees increased $0.29 million or 6.0% to
$5.04 million when compared to 1996. The increase during 1997 was largely the
result of an increase in ATM fees which were implemented in 1997.
Security gains totaled $0.11 million in 1998 compared to $0.02 million in 1997
and $3.27 million in 1996.
<PAGE> 8
7
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
Gains on the sales of loans were $3.40 million in 1998 and $1.37 million in
1997. During 1998 Area recognized a gain in the amount of $2.07 million on the
sale of approximately $11.50 million of loans from ABC Credit Corporation, a
wholly-owned consumer finance company. The decrease from 1996 to 1997 was
primarily the result of gains totaling $8.23 million that Area recognized during
1996 on the sale of loans from Cardinal Credit Corporation, a wholly-owned
consumer finance company.
NON-INTEREST EXPENSE
Non-interest expense increased 5.5% to $64.74 million in 1998, compared to
$61.36 million in 1997 and $58.93 million in 1996 (1996 has been adjusted for
non-recurring items, see table 8 on page 30 for details). The increase in
non-interest expense in 1998 was due in part to increased salary and employee
benefits as well as enhancements to Area's data processing capabilities.
In 1998 Area incurred pre-tax non-interest expenses totaling $0.50 million
related to the acquisition of NationsBank of Kentucky, N.A. Excluding these
charges, non-interest expenses increased 4.6% or $2.84 million from 1997 to
1998.
Salaries and employee benefits is the largest component of non-interest expense,
comprising 47.8% and 47.5% of total non-interest expense in 1998 and 1997,
respectively. Salaries and employee benefits increased 6.2% in 1998, following a
3.5% increase in 1997. Salaries and employee benefits increased in 1998 due to
higher staff levels, normal salary increases and severance benefits paid to
employees whose positions were eliminated as a result of the acquisition of
NationsBank of Kentucky, N.A. The increase in 1997 over 1996 was largely the
result of merit increases.
Net occupancy expense increased 1.1% to $4.12 million after increasing 6.6% to
$4.07 million in 1997. Net occupancy expense grew in 1998 largely as a result of
higher lease expense. Increases in lease expense in 1998 and 1997 were a result
of new branch offices.
Furniture and equipment expense decreased 4.8% in 1998, following a 14.5%
increase in 1997. Furniture and equipment expense decreased in 1998 due to
reduced maintenance and repair costs.
Data processing expense grew 26.3% to $4.06 million in 1998 following an
increase of $0.20 million or 6.7% in 1997. The increase in both 1998 and 1997
was primarily the result of enhancements in Area's data processing capabilities
to meet internal and customer needs as well as Year 2000 expenditures discussed
in detail on the following page.
Advertising and community relations expense increased in 1998 to $3.01 million
after a decline of $5 thousand in 1997. The increase in 1998 was related to new
marketing programs and the implementation of a sales culture while the decline
in 1997 was due to cost savings associated with the Cardinal Bancshares, Inc.
merger.
Professional fees were up in both 1998 and 1997, increasing $0.33 million or
10.8% in 1998 and $0.77 million or 33.2% during 1997 compared to 1996. The
increases in both years were primarily the result of legal, accounting and
consulting fees incurred in merger and acquisition activities.
Amortization of intangibles increased $0.34 million or 13.6% to $2.86 million
after decreasing $0.17 million or 6.4% in 1997. The increase in 1998 was the
result of the acquisition of NationsBank of Kentucky, N.A. which was accounted
for using the purchase method of accounting. See "Mergers and Acquisitions" on
page 3 for details of this transaction.
<PAGE> 9
8
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
The following table provides a summary of changes in non-interest expense for
the past three years:
<TABLE>
<CAPTION>
Non-Interest Expense Dollar Change
(In thousands) 1998 1997 1996 (1) 1998 vs 1997 vs
1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $30,935 $29,133 $28,138 $ 1,802 $ 995
Net occupancy expense 4,117 4,074 3,821 43 253
Furniture and equipment expense 4,273 4,488 3,921 (215) 567
Federal deposit insurance 253 238 508 15 (270)
Data processing expense 4,062 3,215 3,013 847 202
Advertising and community relations 3,013 2,784 2,789 229 (5)
Insurance and taxes 2,497 2,452 2,672 45 (220)
Professional fees 3,424 3,091 2,320 333 771
Amortization of intangibles 2,860 2,518 2,691 342 (173)
Other 9,307 9,364 9,053 (57) 311
-----------------------------------------------------------------------------------------------------
Total $64,741 $61,357 $58,926 $ 3,384 $ 2,431
=====================================================================================================
</TABLE>
(1) Adjusted for sale of Cardinal Credit, Security First Network Bank
spin-off, a one-time stock compensation expense and a payment of a special
SAIF assessment on SAIF-insured deposits. See Table 8 on page 30 for a
detailed schedule.
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
which may lead to misinterpretation between year 2000 and year 1900. The result
could lead to, among other things, errors in computations that use dates, lost
transaction records, incorrect interest calculations, inaccessible funds and
inoperable ATMs. 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. 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 problem(s) 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 was began in August 1997 and is complete.
<PAGE> 10
9
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
The assessment phase defined the size and complexity of the problem(s) and the
resources necessary to address Year 2000 issues. During this phase Area
comprehensively reviewed of 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 dependents 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. The third parties that have been determined as not significant sources of
risk have been requested to certify as to their Year 2000 readiness. 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 December 31, 1998, the remediation
phase was approximately 90% complete and is expected to be finished during the
first quarter of 1999.
The testing phase encompasses actual testing of the new/renovated systems to
ensure compliance. An independent consultant will assist management in
conducting this phase. The testing phase was approximately 20% completed as of
December 31, 1998, and is expected to be completed by June 30, 1999.
The final phase, validation, involves testing the new/renovated software and
systems with actual data. This phase was approximately 15% complete as of
December 31, 1998, and is expected to be completed by June 30, 1999.
Total cost to date, which includes consultants, software and hardware, has been
approximately $2.70 million. Management estimates that the remaining cost to
ensure Year 2000 readiness should not exceed $0.90 million. A significant
portion 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
$2.00 million of the estimated total cost of $3.6 million is for capital
expenditures that will be depreciated over their useful lives.
Management is currently completing a detailed contingency plan which will
address the most reasonably likely scenarios of disruptions caused by Year 2000.
The precise plans utilized will depend upon the exact problems which develop.
Disruptions could range from discrete application-specific problems which can be
easily resolved to systematic failures affecting the banking industry (or other
industries) as a whole. Area cannot identify every disruption that may affect it
but has identified certain critical problems that may arise.
<PAGE> 11
10
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
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 and 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.
INCOME TAXES
Income tax expense was $9.30 million in 1998 and $8.49 million in 1997. The
increase during 1998 reflects a higher level of taxable income. The effective
tax rate during 1998 was 29.1% compared to 29.0% in 1997. The effective tax rate
differs from the marginal tax rate of 35.0% in both 1998 and 1997, primarily as
a result of tax-exempt income. Income tax expense decreased $1.53 million from
1996 to 1997. This decrease reflected a higher level of tax-exempt interest
income in 1997 ($6.90 million compared to $5.83 million in 1996) and a slightly
lower income before income taxes. The effective tax rate was 33.5% during 1996.
INTERIM FINANCIAL DATA
The following table provides unaudited summary quarterly financial results of
operations for the years ended December 31, 1998 and 1997. These results of
operations contain all normal and recurring adjustments necessary for a fair and
consistent presentation.
Unaudited Summary Quarterly Financial Information
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 Quarter Ended 1997 Quarter Ended
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $35,395 $35,275 $35,622 $37,284 $33,454 $34,384 $35,493 $35,918
Interest expense 16,493 16,821 16,944 17,632 15,328 15,328 16,243 16,744
----------------------------------------------------------------------------------------------------------------------------
Net interest income 18,902 18,454 18,678 19,652 18,126 19,056 19,250 19,174
Provision for loan losses 612 101 534 381 711 574 1,130 856
Non-interest income 4,951 7,254 4,805 5,595 4,583 4,591 4,654 4,494
Non-interest expenses 14,926 15,700 16,699 17,416 14,536 15,219 16,128 15,474
Income tax expense 2,444 3,020 1,730 2,102 2,242 2,302 1,857 2,090
----------------------------------------------------------------------------------------------------------------------------
Net income $ 5,871 $ 6,887 $ 4,520 $ 5,348 $ 5,220 $ 5,552 $ 4,789 $ 5,248
============================================================================================================================
Net income per common share:
Basic $ 0.38 $ 0.44 $ 0.29 $ 0.34 $ 0.34 $ 0.36 $ 0.31 $ 0.34
Diluted 0.37 0.43 0.28 0.34 0.34 0.36 0.30 0.33
Dividends per share 0.035 0.035 0.04 0.045 0.03 0.03 0.03 0.035
</TABLE>
<PAGE> 12
11
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Area Bancshares Corporation and Subsidiaries
BALANCE SHEET ANALYSIS
Area's financial condition as of December 31, 1998 and 1997, is presented in the
comparative balance sheets of the Consolidated Financial Statements. The
following discussion addresses securities, loans, deposits, borrowings, capital
resources, liquidity and interest rate risk. This discussion is provided to
assist the reader in evaluating Area's financial condition.
Total Assets
At December 31
(Amounts in Millions)
<TABLE>
<CAPTION>
ANNUAL REPORT GRAPH YEAR OR AMOUNTS OR
PAGE NUMBER NAME CATEGORY PERCENTAGES
- ------------- ----- -------- -----------
<S> <C> <C> <C>
11 Total Assets 1994 $1,622.5
1995 1,778.6
1996 1,796.3
1997 1,901.4
1998 2,132.4
</TABLE>
SECURITIES
Average total securities available for sale and held to maturity represented
26.1%, 26.7% and 28.3% of average earning assets during 1998, 1997 and 1996,
respectively. The portfolio continues to be weighted heavily towards U.S.
Treasury and Federal agency securities as the table below indicates. During 1998
the securities portfolio decreased $0.58 million or 0.13% to $458.74 million.
Table 3 on page 25 provides the carrying amounts, maturities and average yields
as of December 31, 1998, of the securities portfolio.
<TABLE>
<CAPTION>
Securities (Percent of total carrying amounts)
December 31
1998 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and Federal Agencies 41.3% 50.8% 56.6%
Mortgage-backed securities 15.0% 12.3% 14.7%
Obligations of states and political subdivisions 30.0% 29.1% 24.2%
Equity and other securities 13.7% 7.8% 4.5%
-------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
===========================================================================================
</TABLE>
As of December 31, 1998, Area's securities portfolio included $340.87 million of
securities classified as available-for-sale and $117.87 million of securities
classified as held-to-maturity. Net unrealized gains related to securities
available for sale (which is reported in accumulated other comprehensive income
in the shareholders' equity section of the Consolidated Balance Sheet) on
December 31, 1998 were $31.54 million (net of taxes), compared to $11.51 million
(net of taxes) on December 31, 1997 and $3.60 million (net of taxes) on December
31, 1996. The increase in market value during all three years can primarily be
attributed to increases in the market value of equity securities. The equity and
other securities portfolio is largely comprised of the common stock of bank
holding companies which operate within the Commonwealth of Kentucky.
<PAGE> 13
12
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
The carrying amounts of the securities portfolio at the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
Available for sale securities December 31
(In thousands) 1998 1997 1996
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and Federal agencies $189,464 $233,353 $236,505
Mortgage-backed securities 68,859 56,568 61,336
Obligations of states and political subdivisions 19,756 16,867 3,944
Equity and other securities 62,795 35,725 18,628
----------------------------------------------------------------------------------------------------
Total $340,874 $342,513 $320,413
====================================================================================================
Held to maturity securities
Obligations of states and political subdivisions $117,869 $116,811 $ 97,120
----------------------------------------------------------------------------------------------------
Total $117,869 $116,811 $ 97,120
====================================================================================================
Total Securities $458,743 $459,324 $417,533
====================================================================================================
</TABLE>
LOANS
Total loans, excluding loans held for sale, increased $185.26 million or 15.1%
to $1.41 billion in 1998 and $80.25 million or 7.0% to $1.23 billion in 1997.
Excluding loans acquired as a result of the acquisition of NationsBank of
Kentucky, loans grew $101.33 million in 1998. In both 1998 and 1997, the growth
in outstanding loans was significantly impacted by the sale of fixed-rate
long-term loans which were originated largely as a result of the refinancing
boom experienced during these years. The servicing of these fixed-rate loans has
been retained, providing Area with a stable and significant source of
non-interest income. Loans comprise the largest portion of Area's earning
assets, representing 70.2% and 71.8% of average earning assets in 1998 and 1997,
respectively.
Area's affiliated banks lend to customers within their geographic markets. In
addition to loans made to individuals for personal needs, the affiliated banks
loan funds to commercial customers in various businesses including agribusiness,
manufacturing, retailing and wholesaling. The loans originated by the affiliated
banks are reviewed by Area. The review process ensures that loan administration,
credit quality and loan documentation are in compliance with corporate loan
standards and policies.
<PAGE> 14
13
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
The composition of the loan portfolio as of December 31 is presented in the
table below:
<TABLE>
<CAPTION>
Loan Portfolio
(In thousands, except percentages) December 31
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 503,173 $ 357,133 $ 313,104 $ 311,309 $294,705
Real estate-construction 43,055 49,979 39,484 20,467 23,296
Real estate-mortgage 674,357 610,846 577,266 503,168 468,408
Consumer installment
and other loans 191,982 209,349 217,206 256,923 196,640
------------------------------------------------------------------------------------------------------------------
Total loans $1,412,567 $1,227,307 $1,147,060 $1,091,867 $983,049
==================================================================================================================
<CAPTION>
Percentage of loans by category to total loans:
December 31
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial 35.62% 29.10% 27.30% 28.51% 29.98%
Real estate-construction 3.05% 4.07% 3.44% 1.88% 2.37%
Real estate-mortgage 47.74% 49.77% 50.32% 46.08% 47.65%
Consumer installment
and other loans 13.59% 17.06% 18.94% 23.53% 20.00%
------------------------------------------------------------------------------------------------------------------
Total loans 100.00% 100.00% 100.00% 100.00% 100.00%
==================================================================================================================
</TABLE>
Commercial loans increased $146.04 million or 40.9% to $503.17 million during
1998 and $44.03 million or 14.1% in 1997 to $357.13 million. In addition to
$12.87 million of commercial loans added through the acquisition of NationsBank
of Kentucky, N.A., $63.19 million were purchased from a correspondent bank.
Excluding these two transactions, commercial loans grew $69.98 million or 19.6%
during 1998 as a result of Area's efforts to attract small-to-medium-sized
businesses in various industries within its primary markets. The loan mix within
the commercial loan portfolio is diverse and covers a broad range of borrowers.
The portfolio includes loans secured by real estate as well as other business
assets. As a matter of policy, loan concentrations within a particular industry
or borrower are continuously monitored and controlled.
The real estate loan portfolio consists largely of loans secured by residential
real estate. As of December 31, 1998 and 1997 the real estate portfolio totaled
$717.41 million or 50.8% of total loans and $660.83 million or 53.8% of total
loans, respectively. Excluding $58.75 million of real estate loans acquired from
NationsBank of Kentucky, N.A., total real estate loans declined $2.17 million
from year-end 1997 to year-end 1998 largely as a result of a significant
increase in refinancings and the desire of residential real estate customers to
obtain long-term fixed rate loans. These fixed rate loans were then sold to
secondary investors with the servicing retained by Area.
Consumer loans decreased $17.37 million or 8.3% to $191.98 million in 1998 and
$7.86 million or 3.6% to $209.35 million in 1997. Excluding $12.31 million of
consumer loans acquired as a result of the NationsBank of Kentucky, N.A.
acquisition and ABC Credit Corporation's sale of $11.50 million of consumer
loans (as previously discussed), consumer loans declined $18.18 million.
Consumer loans represented 13.59% of total loans as of December 31, 1998 and
17.06% as of December 31, 1997. The decline experienced over the past three
years has largely been the result of competitive pressures which reduced rates
and the credit quality of new loans to levels Area chose not to meet. The
consumer loan portfolio consists of loans made to individuals for automobiles,
personal needs and second mortgages.
In addition to the loan portfolio discussed above, Area serviced loans for
others of approximately $247.9 million, $149.2 million and $123.1 million at
December 31, 1998, 1997 and 1996, respectively.
<PAGE> 15
14
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
Loans by Type
(At December 31, 1998)
<TABLE>
<CAPTION>
ANNUAL REPORT GRAPH YEAR OR AMOUNTS OR
PAGE NUMBER NAME CATEGORY PERCENTAGES
- ------------- ----- -------- -----------
<S> <C> <C> <C>
14 Loans by Type Consumer 13.6%
Commercial 35.6%
Real Estate 50.8%
</TABLE>
ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
Each of Area's affiliate banks expenses an amount for possible loan losses. This
amount is called the provision for loan losses and increases the allowance for
loan losses. Actual losses on loans are charged against the allowance for loan
losses. The allowance for loan losses at December 31, 1998 was $21.65 million or
1.53% of loans outstanding compared to $19.89 million or 1.62% of loans
outstanding at the end of 1997. The allowance for loan losses equaled 851.1% and
501.9% of nonperforming loans as of December 31, 1998 and 1997, respectively. As
a percentage of underperforming assets (defined and discussed in the following
section), the allowance for loan losses totaled 513.2% on December 31, 1998 and
371.9% as of December 31, 1997. This increase was the result of an increase in
the allowance for loan losses and a reduction in underperforming assets. The
adequacy of the allowance for loan losses is monitored on a quarterly basis and
is based on management's evaluation of several key factors, including: the
quality of the current portfolio, current national and local economic
conditions, concentrations in loan types, evaluation of problem loans, and a
review of historical charge-off and recovery experience.
The provision for loan losses during 1998 was $1.63 million compared to $3.27
million in 1997 and $4.85 million in 1996. The decrease in the provision over
the past three years reflects the improvement in the loan portfolio, as
indicated by the reduction in total underperforming assets shown in the table
included with the discussion of underperforming assets in the following section.
Charge-offs, net of recoveries, decreased $1.05 million during 1998 to $1.00
million due to a reduced level of loans charged-off. Net charge-offs as a
percent of average loans outstanding were 0.08%, 0.17% and 0.24% during 1998,
1997 and 1996, respectively.
<PAGE> 16
15
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
The table below presents a summary analysis of loan loss experience for the most
recent five years with details found in Table 4 on page 26. Additionally, Table
5 on page 27 shows the allocation of the allowance for loan losses.
<TABLE>
<CAPTION>
Loan Loss Experience
(In thousands, except percentages) Year Ended December 31
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning allowance for loan
losses $ 19,887 $ 18,663 $ 17,814 $ 16,370 $ 13,770
Additions through acquisitions 1,137 -- -- 554 --
Reduction through divestiture -- -- (1,334) -- --
Losses charged off (2,679) (3,647) (4,611) (5,396) (3,203)
Recoveries of losses charged off 1,678 1,600 1,945 1,462 827
Provision for loan losses 1,628 3,271 4,849 4,824 4,976
------------------------------------------------------------------------------------------------------------
Ending allowance for loan losses $ 21,651 $ 19,887 $ 18,663 $ 17,814 $ 16,370
============================================================================================================
Loans outstanding at
December 31 $ 1,412,567 $ 1,227,307 $ 1,147,060 $ 1,091,867 $ 983,049
Average loans for the year $ 1,256,499 $ 1,189,975 $ 1,123,900 $ 1,048,093 $ 922,374
Allowance as a percentage of
year-end loans 1.53% 1.62% 1.63% 1.63% 1.66%
Allowance as a percentage of
average loans 1.72% 1.67% 1.66% 1.70% 1.77%
Net charge-offs as a percentage
of average loans 0.08% 0.17% 0.24% 0.38% 0.26%
Allowance as a percentage of
underperforming assets 513.2% 371.9% 364.9% 315.7% 203.1%
</TABLE>
UNDERPERFORMING ASSETS
Underperforming assets consist of: (1) nonaccrual loans on which the ultimate
collectibility of the full amount of interest is uncertain, (2) loans past due
90 days or more as to principal or interest, and (3) other real estate owned. A
summary of underperforming assets at December 31 follows:
<TABLE>
<CAPTION>
Underperforming Assets
(In thousands) December 31
1998 1997 1996 1995 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,787 $2,173 $2,727 $3,559 $4,316
Loans contractually past due 90
days or more as to interest or
principal payments and still
accruing 757 1,789 1,217 899 1,585
------------------------------------------------------------------------------
Total nonperforming loans 2,544 3,962 3,944 4,458 5,901
Other real estate owned 1,675 1,386 1,171 1,185 2,158
------------------------------------------------------------------------------
Total underperforming assets $4,219 $5,348 $5,115 $5,643 $8,059
==============================================================================
</TABLE>
<PAGE> 17
16
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
Underperforming assets as a percentage of total loans and other real estate
owned were 0.30% on December 31, 1998, a decrease from 0.44% on December 31,
1997. The decrease in underperforming assets during 1998 was led by a $1.03
million reduction in loans past due 90 days or more as to principal or interest.
Other real estate owned, which is carried at the lower of cost or fair market
value, represents real estate acquired by Area or one of its affiliated banks in
partial or total satisfaction of loans. Other real estate owned increased
slightly to $1.68 million as of December 31, 1998 from $1.39 million as of
December 31, 1997. Over the past five years, other real estate owned has
remained relatively constant ranging from a low of approximately $1.17 million
to a high of $2.16 million.
Management is not aware of any material amounts of loans outstanding where there
is significant uncertainty as to the ability of the borrower to comply with the
terms of the loan that have not been included in the table above. In addition,
as of December 31, 1998, there were no significant other interest-earning assets
classified as nonperforming or past due 90 days or more.
DEPOSITS
Total deposits increased $258.73 million to $1.69 billion at December 31, 1998,
compared to $1.43 billion a year earlier. Excluding deposits acquired as a
result of the acquisition of NationsBank of Kentucky, N.A., deposits grew
$146.14 million or 10.2%. The increase in 1998 was the result of increases
totaling $203.56 million in interest-bearing deposits and $55.17 million
increase in non-interest-bearing deposits.
All categories of interest-bearing deposits grew during 1998. Interest-bearing
demand deposits grew $61.28 million or 27.4% to $285.10 million, savings
deposits increased $64.93 million or 22.1% to $358.51 million, certificates of
deposits of $100 thousand or more grew $16.41 million to $154.97 million and
other time deposits ended the year at $641.34 million, reflecting an increase of
$60.93 million or 10.5%. The growth experienced in all of Area's
interest-bearing deposit categories was the result of a concentrated effort to
attract core deposits. In addition, as a result of the declining rate
environment experienced over the past several years, many customers have
increased their liquidity by shifting funds into immediately accessible deposits
(interest bearing transaction deposits).
Interest-earning assets are funded primarily by core deposits which serve as the
principal source of funds available for lending and investing activities. Total
deposits averaged $1.51 billion in 1998 and represented 84.4% of average earning
assets compared to $1.39 billion and 83.6% in 1997.
The average amount and average rate paid on deposits classified as to
non-interest bearing demand, interest bearing demand, savings and other time
deposits is presented in table 6 on page 28.
Deposits by Type
(At December 31, 1998)
<TABLE>
<CAPTION>
ANNUAL REPORT GRAPH YEAR OR AMOUNTS OR
PAGE NUMBER NAME CATEGORY PERCENTAGES
- ------------- ----- -------- -----------
<S> <C> <C> <C>
16 Deposits by Type Non-int Bearing 14.9%
Int Bearing Dem 16.9%
Savings 21.2%
CD's>100,000 9.2%
Time 37.8%
</TABLE>
<PAGE> 18
17
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
OTHER BORROWINGS
Area's primary source of funding for earning assets is customers' deposits;
however, outside sources are also used. These outside sources include: federal
funds purchased and securities sold under agreement to repurchase which include
short-term borrowings from commercial customers as part of a cash management
service, notes payable to the U.S. Treasury that are short-term borrowings in
connection with treasury, tax and loan deposits, Federal Home Loan Bank advances
which generally include intermediate-term borrowings by Area's affiliate banks
that are members of the Federal Home Loan Bank, and other borrowings. Other
borrowings totaled $170.73 million on December 31, 1998 and $252.87 million on
December 31, 1997, a decrease of $82.14 million or 32.5%. Average other
borrowings as a percentage of average earning assets decreased from 10.5% in
1997 to 9.24% in 1998. Area decreased its reliance on other borrowings during
1998 as deposit and equity growth outpaced loan and security growth. Management
does not rely on any one source of liquidity and has managed other borrowings in
response to different factors such as cost, term and conditions of the loan. The
table below presents the average borrowings for 1998 and 1997. Table 7 on page
29 provides additional information for 1998 and 1997 relative to year-end
balances, average balances, maximum amount outstanding and weighted average
interest rates paid on other borrowings.
<TABLE>
<CAPTION>
Average Other Borrowings
(In thousands) 1998 1997 Change
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities sold
under agreements to repurchase $96,310 $107,324 $(11,014)
Notes payable to U.S. Treasury 7,002 10,990 (3,988)
Advances from the Federal Home Loan Bank
and other borrowings 61,893 56,137 5,756
-------------------------------------------------------------------------------------------
Total $165,205 $174,451 $(9,246)
===========================================================================================
</TABLE>
CAPITAL RESOURCES
Area's total shareholders' equity increased $41.66 million or 21.2% to $238.21
million at December 31, 1998, compared to $196.55 million at December 31, 1997.
The growth was due to the retention of $20.21 million of net income after paying
dividends totaling $2.42 million. Additionally, an increase in accumulated other
comprehensive income of $20.03 million contributed to the growth of
shareholders' equity during 1998. Net unrealized gains on securities available
for sale accounted for all of the increase in accumulated other comprehensive
income.
During the fourth quarter of 1998, Area repurchased 3 thousand shares of its
common stock in the open market for an average price of $26.88 per share. These
shares represent the total shares repurchased under the 100 thousand share
repurchase program approved by the Board of Directors in 1998.
<PAGE> 19
18
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
Banking industry regulators have defined capital requirements for banks and bank
holding companies. Area's tier 1 and total risk-based capital ratios as of
December 31, 1998 totaled 11.82% and 13.08%, respectively, which were well above
the minimum requirements of 4.00% for tier 1 and 8.00% for total risk-based
capital. Comparative percentages for tier 1 and total risk-based capital ratios
as of December 31, 1997 were 13.24% and 14.50%. Regulatory authorities have also
established a minimum "leverage" ratio of 4.00%, which has been defined as tier
1 equity to average quarterly assets. At December 31, 1998, Area's leverage
ratio was 8.29%, compared to 9.54% a year earlier. The slight decrease from
year-end 1997 to year-end 1998 in Area's regulatory capital ratios was largely
the result of an increase in goodwill related to the acquisition of NationsBank
of Kentucky, N.A. For purposes of regulatory capital computations, goodwill is
deducted from capital.
Area's subsidiary banks maintain risk-based capital and leverage ratios above
the "well-capitalized" category as defined by the FDIC. The "well capitalized"
category requires tier 1 and total risk-based ratios of at least 6.00% and
10.00%, respectively, and a minimum leverage ratio of 5.00%. Note 14 to the
Consolidated Financial Statements provides information concerning the capital
ratios of Area's most significant subsidiary.
The following table provides information regarding Area's capital ratios and
regulatory requirements as of December 31, 1998 and 1997:
Capital Ratios
<TABLE>
<CAPTION>
December 31 Regulatory
1998 1997 Capital Requirements
Well Minimum
Capitalized Requirements
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 8.29% 9.54% 5.00% 4.00%
Tier 1 risk-based capital ratio 11.82% 13.24% 6.00% 4.00%
Total risk-based capital ratio 13.08% 14.50% 10.00% 8.00%
</TABLE>
At December 31, 1998 the book value per share was $15.20, an increase of $2.58
or 20.4% from $12.62 at December 31, 1997. The increase was primarily the result
of the retention of 1998 earnings less dividends paid ($1.29 of book value per
share) and the increase in accumulated other income ($1.28 of book value per
share). Net unrealized gains on securities available for sale comprised all of
the accumulated other income as of December 31, 1998 and 1997.
During January 1999, Area completed its merger with Peoples Bancorp of
Winchester by exchanging 1,300,000 shares of common stock for all 75,000 shares
of Peoples Bancorp. The transaction was accounted for using the
pooling-of-interests method of accounting.
On September 30, 1997, in connection with the merger with Cardinal Bancshares,
Area increased its authorized shares from 16,000,000 to 50,000,000. In
connection with the merger, Area issued 4,205,722 shares of common stock.
Shareholder's Equity
At December 31
(Amounts in Millions)
<TABLE>
<CAPTION>
ANNUAL REPORT GRAPH YEAR OR AMOUNTS OR
PAGE NUMBER NAME CATEGORY PERCENTAGES
- ------------- ----- -------- -----------
<S> <C> <C> <C>
18 Shareholder's Equity 1994 $128.4
1995 149.7
1996 169.4
1997 196.5
1998 238.2
</TABLE>
<PAGE> 20
19
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
ASSET-LIABILITY MANAGEMENT
Asset-liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate risk. The goal of liquidity
management is to provide adequate funds to meet loan demand and any potential
unexpected deposit withdrawals. This goal is accomplished by consistent core
deposit growth, holding adequate liquid assets in the form of securities and
maintaining unused capacity to borrow funds. The objective of interest rate risk
management is to provide the optimal level of net interest income, while
managing exposure to risks associated with interest rate movements. This
objective is accomplished through management of Area's balance sheet during
changing interest rate environments.
LIQUIDITY
At December 31, 1998, Area had approximately $244.99 million of cash and due
from banks, securities and other short-term investments maturing or repricing
within one year compared to $262.30 million as of a year earlier.
Core deposits have historically provided Area with a major source of stable and
relatively low-cost funding. Secondary sources include federal funds purchased,
securities sold under agreements to repurchase, notes payable to the U.S.
Treasury, advances from the Federal Home Loan Bank and other borrowings. Average
core deposits funded 84.4% of average earning assets during 1998 and 83.6%
during 1997. When average shareholders' equity is added to core deposits, the
percentage of average earning assets funded with stable sources increases to
96.3% during 1998 and 94.7% in 1997.
In the normal course of business, the affiliated banks as well as Area have
established lines of credit for short-term borrowings for the management of
daily liquidity needs. At December 31, 1998, the unused lines of credit
aggregated $268.06 million.
INTEREST RATE RISK
For financial institutions, interest rate movements can have a critical impact
on net interest income, and hence net income. The primary objective of interest
rate risk management is to control and monitor the effects of those fluctuations
and their impact on net income. Management considers interest rate risk to be
the most significant market risk.
Management views computer simulations as a more relevant measurement of the
impact of changes in interest rates on net interest income than other techniques
that use interest rate sensitivity gap analysis. Area uses a net interest income
simulation model to measure near-term (next 12 months) risk due to changes in
interest rates. The model incorporates substantially all of Area's assets and
liabilities together with forecasted changes in the balance sheet mix and
assumptions that reflect the current interest rate environment. Balance sheet
changes are based on forecasted changes in loans, securities and deposits as
well as historical pricing spreads. The model is updated at least quarterly with
the current balance sheet structure and the current forecast of expected balance
sheet changes. These assumptions are inherently uncertain and, as a result, the
model cannot precisely measure net interest income or exactly predict the impact
of fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing and amount of interest rate changes
as well as changes in market conditions and management strategies. Management
uses the model to simulate the effect of immediate and sustained parallel shifts
upward and downward in the yield curve of 50 basis points (0.50%) and 100 basis
points (1.00%).
<PAGE> 21
20
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
Area's interest rate risk management focuses on maintaining consistent growth in
net interest income within Board-approved policy limits. Area's management
monitors and manages interest rate risk to maintain an acceptable level of
change in net interest income as a result of changes in interest rates.
The following table illustrates the simulation analysis, using the methodology
described above, of the impact of a 50 and 100 basis point upward and downward
movement in interest rates on net interest income and earnings per share.
<TABLE>
<CAPTION>
Interest Rate Simulation Sensitivity Analysis
(In thousands except per share data) Movements in interest rates from
December 31, 1998 rates
Simulated impact in the next 12 months Increase Decrease
compared with December 31, 1998 +100 bp +50 bp -50 bp -100 bp
------- ------ ------ -------
<S> <C> <C> <C> <C>
Net interest income increase (decrease) $(2,225) $(1,325) $ 626 $1,612
Net income per share-basic increase (decrease) (0.09) (0.06) 0.03 0.07
Net income per share-diluted increase (decrease) (0.09) (0.05) 0.03 0.07
</TABLE>
Given an immediate and sustained parallel shift upward of 100 basis points to
the yield curve used in the simulation model, Area estimates that its net
interest income for Area would decrease by $2.23 million or 2.9% over the next
year. Estimated earnings per share would decrease by $0.09 or 6.3% over this
same period. A 100 basis point immediate and sustained parallel shift downward
in the yield curve would increase net interest income by an estimated $1.61
million or 2.1% over one year while increasing earnings per share $0.07 or 5.0%.
All of the above changes in net interest income are within the policy guidelines
established by the Board of Directors.
In order to assist in reducing the exposure to interest rate fluctuations and to
manage liquidity, Area sells virtually all long-term fixed-rate, single-family
residential mortgages that are originated. These loans are underwritten
according to Federal Home Loan Mortgage Corporation or Federal National Mortgage
Association guidelines and are sold upon origination. In addition to the use of
core deposits, which fund the primary portion of earning assets, Area's
affiliate banks borrow long-term from the Federal Home Loan Bank to provide
funds within time frames that are not available or are only available at higher
costs through retail sources. Finally, management continually evaluates other
interest rate risk management opportunities, including the use of derivative
financial instruments. Management believes that hedging instruments currently
available are not cost effective, and therefore minimizes the use of derivatives
except in limited circumstances. As of December 31, 1998, Area had entered into
interest rate swap contracts with notional amounts outstanding of $54 million.
Note 19 to the Consolidated Financial Statements provides additional details of
off-balance sheet financial instruments.
<PAGE> 22
21
- --------------------------------------------
Area Bancshares Corporation and Subsidiaries
IMPACT OF NEW 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, on 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 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 adoption.
FORWARD LOOKING STATEMENTS
Certain statements contained in this Annual Report 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
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.
<PAGE> 23
22
--------------------------------------------
Area Bancshares Corporation and Subsidiaries
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.
<PAGE> 24
23
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 1
SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND INTEREST RATES
The following summarizes the average consolidated balance sheets by
major type of account, the interest earned and interest paid, and the average
yields and average rates paid for each of the three years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
Interest Interest Interest
(In thousands, except Average Income Yield/ Average Income Yield/ Average Income Yield/
percentages) Balance Or Expense Rate Balance Or Expense Rate Balance Or Expense Rate
------- ---------- ------ --------- ---------- ------ -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Interest bearing
deposits with banks $ 7,441 $ 398 5.35% $ 5,296 $ 293 5.53% $ 7,086 $ 369 5.21%
Federal funds sold 58,258 3,070 5.27% 19,296 1,034 5.36% 26,608 1,435 5.39%
Securities (1)
Taxable 333,951 18,652 5.59% 321,888 19,533 6.07% 358,390 22,710 6.34%
Tax exempt 132,508 11,757 8.87% 120,524 10,407 8.63% 97,590 9,082 9.31%
Loans (2) and (3) 1,256,499 113,857 9.06% 1,189,975 111,486 9.37% 1,123,900 106,491 9.48%
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,788,657 147,734 8.26% 1,656,979 142,753 8.62% 1,613,574 140,087 8.68%
=============================================================================================================================
Non-earning assets
net of allowance for
loan losses 123,329 -- -- 112,384 -- -- 117,157 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $1,911,986 $147,734 -- $1,769,363 $142,753 -- $1,730,731 -- --
=============================================================================================================================
Interest bearing liabilities:
Interest bearing demand
deposits $ 237,753 $ 7,424 3.12% $ 241,637 $ 6,817 2.82% $ 314,542 $ 9,385 2.98%
Savings deposits 327,687 9,908 3.02% 258,859 8,383 3.24% 159,904 4,548 2.84%
Time deposits 759,503 41,767 5.50% 708,155 38,862 5.49% 724,305 40,520 5.59%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 1,324,943 59,099 4.46% 1,208,651 54,062 4.47% 1,198,751 54,453 4.54%
=============================================================================================================================
Federal funds purchased
and securities sold under
agreements to repurchase 96,310 4,637 4.81% 107,324 5,520 5.14% 104,534 5,494 5.26%
Notes payable to the U.S.
Treasury 7,002 390 5.57% 10,990 607 5.52% 7,486 383 5.12%
Advances from the Federal
Home Loan Bank and
other borrowings 61,893 3,764 6.08% 56,137 3,454 6.15% 64,205 4,080 6.35%
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 1,490,148 67,890 4.55% 1,383,102 63,643 4.60% 1,374,976 64,410 4.68%
- -----------------------------------------------------------------------------------------------------------------------------
Non-interest bearing
liabilities:
Demand deposits 185,391 -- -- 176,438 -- -- 174,568 -- --
Other liabilities 23,410 -- -- 26,039 -- -- 20,559 -- --
Shareholders' equity 213,037 -- -- 183,784 -- -- 160,628 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders'
equity $1,911,986 -- -- $1,769,363 -- -- $1,730,731 -- --
=============================================================================================================================
Net interest spread (4) -- 3.71% -- 4.02% -- 4.00%
Impact of non-interest
bearing sources and other
changes in balance sheet
composition -- .75% -- .75% -- .69%
Net interest income and
margin (5) $ 79,844 4.46% $ 79,110 4.77% $ 75,677 4.69%
=============================================================================================================================
</TABLE>
(1) Yields on municipal securities have been computed on a tax equivalent
basis. The federal income tax rate used was 35% for all years.
(2) Nonaccrual loan balances are included. Loan interest income computed on a
tax equivalent basis using 35% for all years.
(3) Loan fees are not material.
(4) Net interest spread is the difference between the average rate of interest
earned on interest-earning assets and the average rate of interest expense
on interest bearing liabilities.
(5) Net interest margin is net interest income divided by interest-earning
assets.
<PAGE> 25
24
-----------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 2
SUMMARY OF CHANGES IN NET INTEREST INCOME
The following shows the changes in interest income and interest expense
due to changes in volume and changes in rate for each of the two years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 vs 1997 1997 vs 1996
-------------------------------- -------------------------------
Total Variance due to: Total Variance due to:
(In thousands) Change Volume Rate(*) Change Volume Rate(*)
------- ------- ------- ------- ------- -------
Interest Income:
<S> <C> <C> <C> <C> <C> <C> <C>
Loans (1) $ 2,371 $ 6,106 $(3,735) $ 4,995 $ 6,202 $(1,207)
Investment securities (1) 469 1,769 (1,300) (1,852) (366) (1,486)
Federal funds sold 2,036 2,053 (17) (401) (397) (4)
Interest bearing deposits with banks 105 115 (10) (76) (89) 13
- ----------------------------------------------------------------------------------------------------------------
Total interest income 4,981 10,043 (5,062) 2,666 5,350 (2,684)
================================================================================================================
Interest Expense:
Interest bearing demand deposits 607 (111) 718 (2,568) (2,079) (489)
Savings deposits 1,525 2,111 (586) 3,835 3,133 702
Time deposits 2,905 2,824 81 (1,658) (913) (745)
Federal funds purchased and securities
sold under an agreement to repurchase (880) (456) (424) 26 148 (122)
Notes payable to the U.S. Treasury (217) (222) 5 224 167 57
Advances from the Federal Home
Loan Bank and other borrowings 307 249 58 (626) (526) (100)
================================================================================================================
Total interest expense 4,247 4,395 (148) (767) (70) (697)
================================================================================================================
Net interest income $ 734 $ 5,648 $(4,914) $ 3,433 $ 5,420 $(1,987)
================================================================================================================
</TABLE>
(1) Taxable equivalent basis.
(*)Changes in interest income and interest expense not arising solely from
rate or volume variances are allocated to change due to volume and change
due to rate in proportion to the relationship of the absolute dollar
amounts of the change in each.
<PAGE> 26
25
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 3
MATURITIES AND AVERAGE YIELDS OF SECURITIES AS OF DECEMBER 31, 1998
The carrying amount, maturities, and average yields are summarized as
follows:
Available for sale securities
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------------------------------------------
After One After Five
(In thousands, Within One Year Through Five Years Through Ten Years After Ten Years Total
except percentages) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $30,282 6.35% $ 10,185 6.26% -- -- -- -- $ 40,467 6.33%
U.S. Government
agencies 59,375 6.00% 89,622 5.72% -- -- -- -- 148,997 5.83%
Obligations of states
and political
subdivisions 209 7.79% 81 6.21% 3,312 7.36% 16,154 7.85% 19,756 7.76%
Mortgage-backed
securities 1,877 6.12% 4,563 6.22% 46,163 6.12% 16,256 7.14% 68,859 6.37%
Other securities 97 4.30% -- -- -- -- -- -- 97 4.30%
Equity securities -- -- -- -- -- -- 62,698 1.26% 62,698 1.26%
- -------------------------------------------------------------------------------------------------------------------
Total $91,840 6.12% $104,451 5.79% $49,475 6.20% $95,108 3.38% $340,874 5.27%
===================================================================================================================
</TABLE>
Held to maturity securities
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------------
After One After Five
(In thousands, Within One Year Through Five Years Through Ten Years After Ten Years Total
except percentages) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of
states and
political
subdivisions(1) $3,713 10.35% $8,820 9.82% $45,367 9.18% $59,970 8.32% $117,869 8.83%
- ----------------------------------------------------------------------------------------------------------------
Total $3,713 10.35% $8,820 9.82% $45,367 9.18% $59,970 8.32% $117,869 8.83%
================================================================================================================
</TABLE>
(1) Yield on tax-exempt securities are computed on a fully taxable-equivalent
basis using a marginal income tax rate of 35%.
<PAGE> 27
26
-----------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 4
SUMMARY OF LOAN LOSS EXPERIENCE
The following is an analysis of the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(In thousands, except
percentages) 1998 1997 1996 1995 1994
Beginning allowance
for loan losses $ 19,887 $ 18,663 $ 17,814 $ 16,370 $ 13,770
Additions through
acquisitions 1,137 -- -- 554 --
Reduction through
divestiture -- -- (1,334) -- --
Charge offs:
Commercial 589 909 1,124 2,452 1,700
Real estate 132 210 72 385 603
Consumer 1,958 2,528 3,415 2,559 900
- ---------------------------------------------------------------------------------------------------------
Total charge offs 2,679 3,647 4,611 5,396 3,203
=========================================================================================================
Recoveries:
Commercial 804 721 1,017 937 338
Real estate 174 182 117 104 152
Consumer 700 697 811 421 337
- ---------------------------------------------------------------------------------------------------------
Total recoveries 1,678 1,600 1,945 1,462 827
=========================================================================================================
Net charge offs (recoveries):
Commercial (215) 188 107 1,515 1,362
Real estate (42) 28 (45) 281 451
Consumer 1,258 1,831 2,604 2,138 563
- ---------------------------------------------------------------------------------------------------------
Total net charge offs 1,001 2,047 2,666 3,934 2,376
=========================================================================================================
Provision for loan losses 1,628 3,271 4,849 4,824 4,976
- ---------------------------------------------------------------------------------------------------------
Ending allowance for
loan losses $ 21,651 $ 19,887 $ 18,663 $ 17,814 $ 16,370
=========================================================================================================
Average loans for the
year $ 1,256,499 $1,189,975 $ 1,123,900 $1,048,093 $922,374
Allowance as a percentage
of year-end loans 1.53% 1.62% 1.63% 1.63% 1.66%
Allowance as a percentage
of average loans 1.72% 1.67% 1.66% 1.70% 1.77%
Net charge-offs as a
percentage of average
loans .08% .17% .24% .38% .26%
Allowance as a percentage
of non-performing assets 513.2% 371.9% 364.9% 315.7% 203.1%
</TABLE>
<PAGE> 28
27
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 5
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
In the following summary, the allowance for loan losses has been
allocated according to the amount deemed to be reasonably necessary to provide
for losses within each category of loans. While this is an allocation, the
allowance for loan losses can be used to absorb losses in any category. The
amount of the allowance applicable to each category and the percentage of loans
in each category to total loans follows:
<TABLE>
<CAPTION>
(In thousands, except percentages) Year Ended December 31
---------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------- --------------------- ---------------------- --------------------- -----------------------
Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
for loan of loans to for loan of loans to for loan of loans to for loan of loans to for loan of loans to
losses total loans losses total loans losses total loans losses total loans losses total loans
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,553 35.62% $ 6,226 29.10% $ 4,212 27.30% $ 4,461 28.51% $ 3,771 29.98%
Real estate 6,459 50.79% 5,460 53.84% 5,160 53.76% 3,134 47.96% 3,981 50.02%
Consumer 3,850 13.59% 5,873 17.06% 5,546 18.94% 6,088 23.53% 3,285 20.00%
Unallocated 4,789 N/A 2,328 N/A 3,745 N/A 4,131 N/A 5,333 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
$21,651 100.00% $19,887 100.00% $18,663 100.00% $17,814 100.00% $16,370 100.00%
==================================================================================================================================
</TABLE>
<PAGE> 29
28
-----------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 6
DEPOSIT INFORMATION
Information relative to the average balances, average rates, year-end
balances, and the changes from 1997 to 1998 are presented below:
<TABLE>
<CAPTION>
Amount/Rate
(In thousands, except percentages) 1998 1997 Change
<S> <C> <C> <C>
Non-Interest Bearing Demand
Average Balance $ 185,391 $ 176,438 $ 8,953
Average Rate -- -- --
Year-End Balance 251,950 196,776 55,174
Interest Bearing Demand
Average Balance 237,753 241,637 (3,884)
Average Rate 3.12% 2.82% 0.30%
Year-End Balance 285,102 223,820 61,282
Savings Deposits
Average Balance 327,687 258,859 68,828
Average Rate 3.02% 3.24% (0.22%)
Year-End Balance 358,511 293,578 64,933
Time Deposits
Average Balance 759,503 708,155 51,348
Average Rate 5.50% 5.49% 0.01%
Year-End Balance 796,301 718,958 77,343
Total Deposits
Average Balance 1,510,334 1,385,089 125,245
Average Rate 3.91% 3.90% 0.01%
Year-End Balance 1,691,864 1,433,132 258,732
</TABLE>
The maturity of time deposits of $100,000 or more issued by Area at
December 31, 1998 is summarized in the following table:
<TABLE>
<CAPTION>
Time Deposits of $100,000
or more
December 31, 1998
(In thousands) -------------------------
<S> <C>
Three months or less $ 61,338
Over three through twelve months 69,057
Over twelve months 24,570
--------
Total $154,965
========
</TABLE>
<PAGE> 30
29
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 7
OTHER BORROWING INFORMATION
Information relative to federal funds purchased and securities sold under
agreements to repurchase, notes payable to the U.S. Treasury, advances from the
Federal Home Loan Bank, and other borrowings is presented below:
(In thousands, except percentages)
<TABLE>
<CAPTION>
Amount/Rate
1998 1997 Change
<S> <C> <C> <C>
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase
- --------------------------------------
Amount outstanding at December 31 $112,548 $148,552 $(36,004)
Maximum amount outstanding at any month-end 142,847 149,151 (6,304)
Average amount outstanding during the year 98,065 107,324 (9,259)
Weighted average interest rate during the year 4.73% 5.14% (0.41%)
Notes Payable to the U.S. Treasury
- ----------------------------------
Amount outstanding at December 31 1,054 19,581 (18,527)
Maximum amount outstanding at any month-end 22,497 24,415 (1,918)
Average amount outstanding during the year 7,002 10,990 (3,988)
Weighted average interest rate during the year 5.57% 5.52% 0.05%
Advances from the Federal Home Loan Bank
And Other Borrowings
- ----------------------------------------
Amount outstanding at December 31 57,124 84,733 (27,609)
Maximum amount outstanding at any month-end 93,346 101,948 (8,602)
Average amount outstanding during the year 61,893 56,137 5,756
Weighted average interest rate during the year 6.08% 6.15% (0.07%)
</TABLE>
<PAGE> 31
30
-----------------------------------------------
Area Bancshares Corporation and Subsidiaries
Table 8
ANALYSIS OF NON-INTEREST EXPENSE
Non-interest expenses as reported adjusted for the sale of Cardinal
Credit Corporation, Security First Network Bank spin-off to shareholders, a
one-time stock compensation expense incurred in connection with amendments to
certain stock options plans and a payment of a special SAIF assessment on
SAIF-insured deposits.
<TABLE>
<CAPTION>
1996 Security Stock SAIF 1996
As Cardinal First Network Compensation Special As
Reported Credit Bank Expense Assessment Adjusted
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Salaries and employee
benefits $31,907 $(1,321) $ (729) $(1,719) $ -- $28,138
Net occupancy expense 4,139 (266) (52) -- -- 3,821
Furniture and equipment
expense 4,438 (91) (426) -- -- 3,921
Federal deposit insurance 1,264 -- (30) -- (726) 508
Data processing expense 3,193 (22) (158) -- -- 3,013
Other 20,971 (856) (590) -- -- 19,525
- --------------------------------------------------------------------------------------------------------
Total $65,912 $(2,556) $(1,985) $(1,719) $(726) $58,926
========================================================================================================
</TABLE>
<PAGE> 32
31
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Independent Auditors' Report
The Board of Directors and Shareholders
Area Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of Area Bancshares
Corporation and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, comprehensive income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Area Bancshares
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/KPMG LLP
Louisville, Kentucky
March 2, 1999
<PAGE> 33
32
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Balance Sheets
December 31, 1998 and 1997
(Amount in thousands, except share data)
<TABLE>
<CAPTION>
December 31 December 31
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 122,654 $ 84,378
Interest bearing deposits with banks 8,434 5,804
Federal funds sold 14,000 --
Trading account securities -- 45,873
Securities:
Available for sale (amortized cost $292,394 and $324,731, respectively) 340,874 342,513
Held to maturity (fair value $124,553 and $122,781, respectively) 117,869 116,811
----------- -----------
Total securities 458,743 459,324
----------- -----------
Mortgage loans held for sale 14,208 9,817
Loans, net of unearned discount 1,412,567 1,227,307
Less allowance for loan losses 21,651 19,887
----------- -----------
Net loans 1,390,916 1,207,420
----------- -----------
Premises and equipment, net 41,267 29,710
Goodwill and other intangible assets 34,342 15,312
Other assets 47,801 43,811
----------- -----------
Total assets $ 2,132,365 $ 1,901,449
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 251,950 $ 196,776
Interest bearing demand 285,102 223,820
Savings 358,511 293,578
Certificates of deposit of $100,000 or more 154,965 138,555
Other time 641,336 580,403
----------- -----------
Total deposits 1,691,864 1,433,132
----------- -----------
Federal funds purchased 1,107 38,691
Securities sold under agreements to repurchase 111,441 109,861
Notes payable to the U.S. Treasury 1,054 19,581
Advances from the Federal Home Loan Bank 41,309 84,336
Other borrowings 15,815 397
Accrued expenses and other liabilities 31,562 18,902
----------- -----------
Total liabilities 1,894,152 1,704,900
----------- -----------
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: 1998, 15,669,729; 1997, 15,576,916 24,397 24,254
Paid-in capital 35,632 35,632
Retained earnings 147,474 126,104
Deferred compensation on restricted stock (612) (612)
ESOP and MRP loan obligations (216) (337)
Accumulated other comprehensive income 31,538 11,508
----------- -----------
Total shareholders' equity 238,213 196,549
Commitments and contingent liabilities ----------- -----------
Total liabilities and shareholders' equity $ 2,132,365 $ 1,901,449
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 34
33
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 1998, 1997, and 1996
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income:
Loans, including fees $113,857 $111,486 $106,491
Interest bearing deposits with banks 398 293 369
Federal funds sold 3,070 1,034 1,435
Taxable securities 18,652 19,533 22,710
Tax exempt securities 7,599 6,903 5,830
-------- -------- --------
Total interest income 143,576 139,249 136,835
-------- -------- --------
Interest expense:
Deposits 59,099 54,062 54,453
Federal funds purchased and securities sold under
agreements to repurchase 4,640 5,520 5,494
Advances from the Federal Home Loan Bank 3,517 3,090 3,348
Other borrowings 634 971 1,115
-------- -------- --------
Total interest expense 67,890 63,643 64,410
-------- -------- --------
Net interest income 75,686 75,606 72,425
Provision for loan losses 1,628 3,271 4,849
-------- -------- --------
Net interest income after provision for loan losses 74,058 72,335 67,576
-------- -------- --------
Non-interest income:
Commissions and fees on fiduciary activities 4,852 4,264 3,634
Service charges on deposit accounts 7,548 6,675 6,400
Other service charges, commissions and fees 6,283 5,036 4,751
Securities gains (losses), net 108 21 3,265
Gains on sales of loans, net 3,404 1,374 8,912
Other income 410 952 1,276
-------- -------- --------
Total non-interest income 22,605 18,322 28,238
-------- -------- --------
Non-interest expenses:
Salaries and employee benefits 30,935 29,133 31,907
Net occupancy expense 4,117 4,074 4,139
Furniture and equipment expense 4,273 4,488 4,438
Federal deposit insurance 253 238 1,264
Data processing expense 4,062 3,215 3,193
Other 21,101 20,209 20,971
-------- -------- --------
Total non-interest expenses 64,741 61,357 65,912
-------- -------- --------
Income before income tax expense 31,922 29,300 29,902
Income tax expense 9,296 8,491 10,016
-------- -------- --------
Net income $ 22,626 $ 20,809 $ 19,886
======== ======== ========
Net income per common share:
Basic $ 1.45 $ 1.35 $ 1.28
======== ======== ========
Diluted $ 1.42 $ 1.33 $ 1.26
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 35
34
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income $22,626 $20,809 $ 19,886
Other Comprehensive income, net of tax:
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period 20,100 7,962 1,639
Less reclassification adjustment for
gains included in net income 70 14 2,122
------- ------- --------
Other comprehensive income 20,030 7,948 (483)
------- ------- --------
Comprehensive income $42,656 $28,757 $ 19,403
======= ======= ========
</TABLE>
Consolidated Statements of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Deferred ESOP
Compensation and Accumulated
on MRP Other
Common Stock Paid-in Retained Restricted Loan Comprehensive
Shares Amount Capital Earnings Stock Obligations Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995 10,314,140 24,130 $32,611 $90,292 $(509) $(843) $4,043 $149,724
Net income 19,886 19,886
Cash dividends declared
($.107 per share) (2,461) (2,461)
Issuance of common stock 156,106 364 4,632 4,996
Repurchase of common
stock (190,906) (445) (2,804) (1,066) (4,315)
Stock options exercised,
including tax benefits 64,211 148 703 292 1,143
3-for-2 stock split 5,170,671 --
Spin-off of subsidiary 638 638
Amortization of deferred
compensation on
restricted stock 40 40
Repayment of ESOP and
MRP loan obligations 215 215
Change in accumulated
other comprehensive
income (483) (483)
Balance, December 31, ---------- ------ ------ ------- ---- ---- ----- -------
1996 15,514,222 24,197 35,142 107,581 (469) (628) 3,560 169,383
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
<PAGE> 36
35
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity (continued)
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Deferred ESOP
Compensation and Accumulated
on MRP Other
Common Stock Paid-in Retained Restricted Loan Comprehensive
Shares Amount Capital Earnings Stock Obligations Income Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income 20,809 20,809
Cash dividends declared
($.125 per share) (2,523) (2,523)
Repurchase of common
stock (24,674) (39) (483) (522)
Stock options exercised,
including tax benefits 81,938 87 490 503 1,080
Net restricted stock issued 5,430 9 217 (226) --
Amortization of deferred
compensation on
restricted stock 83 83
Repayment of ESOP and
MRP loan obligations 291 291
Change in accumulated
other comprehensive
income 7,948 7,948
---------- ------- ------- -------- ----- ----- ------- --------
Balance, December 31,
1997 15,576,916 24,254 35,632 126,104 (612) (337) 11,508 196,549
Net income 22,626 22.626
Cash dividends declared
($.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
Net restricted stock issued 3,575 5 95 (100) --
Amortization of deferred
compensation on
restricted stock 100 100
Repayment of ESOP and
MRP loan obligations 121 121
Change in accumulated
other comprehensive
income 20,030 20,030
---------- ------- ------- -------- ----- ----- ------- --------
Balance, December 31,
1998 15,669,729 $24,397 $35,632 $147,474 $(612) $(216) $31,538 $238,213
========== ======= ======= ======== ===== ===== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 37
36
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,626 $ 20,809 $ 19,886
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 1,628 3,271 4,849
Depreciation, amortization and accretion, net 6,921 4,826 6,458
Gain on sales of securities, net (108) (21) (3,265)
Gain on sales of loans, net (3,404) (1,374) (8,912)
Deferred income taxes 225 (160) (339)
Proceeds from sales of trading account securities 19,760 39,510 85,954
Proceeds from maturities of trading account securities 99,994 157,000 98,000
Purchases of trading account securities (73,870) (198,461) (177,367)
Purchase and origination of mortgage loans held for sale (172,047) (110,268) (128,817)
Proceeds from sales of mortgage loans held for sale 168,473 123,037 132,447
Other, net (1,559) (2,123) 4,011
--------- --------- ---------
Net cash provided by operating activities 68,639 36,046 32,905
--------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits with banks (2,630) 80 (1,278)
Net (increase) decrease in federal funds sold 27,780 13,647 (3,472)
Proceeds from sales of securities available for sale 15,934 37,068 75,726
Proceeds from maturities and calls of securities available for sale 296,322 114,642 109,079
Proceeds from maturities and calls of securities held to maturity 9,439 6,019 4,882
Purchases of securities available for sale (275,905) (160,893) (162,791)
Purchases of securities held to maturity (8,475) (25,414) (10,885)
Loans originated, net of principal collected (114,765) (85,674) (107,571)
Purchases of premises and equipment (14,648) (4,767) (7,770)
Proceeds from sales of other real estate owned 905 841 376
Proceeds from sales of premises and equipment 79 123 149
Proceeds from sales of loans 13,568 -- 33,551
Purchase of Nations Bank of Kentucky, N.A., net of cash and
due from banks (32,663) -- --
Spin-off of subsidiary -- -- (764)
--------- --------- ---------
Net cash used in investing activities (85,059) (104,328) (70,768)
--------- --------- ---------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
<PAGE> 38
37
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 1998, 1997, 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from financing activities:
Increase in deposits $ 146,138 $ 38,733 $ 58,208
Increase (decrease) in federal funds purchased (37,584) (10,795) 19,311
Increase (decrease) in securities sold under agreements to repurchase (6,630) 9,951 (27,985)
Increase (decrease) in notes payable to the U.S. Treasury (18,527) 10,698 4,282
Increase (decrease) in advances from the Federal Home Loan Bank (43,027) 35,023 19,924
Increase (decrease) in other borrowings 15,539 (5,636) (32,927)
Proceeds from stock options exercised and issuance of common stock 1,288 808 5,864
Repurchase of common stock (81) (522) (4,315)
Cash dividends paid (2,420) (2,523) (2,486)
--------- -------- --------
Net cash provided by financing activities 54,696 75,737 39,876
--------- -------- --------
Increase in cash and due from banks 38,276 7,455 2,013
Cash and due from banks, beginning of year 84,378 76,923 74,910
--------- -------- --------
Cash and due from banks, end of year $ 122,654 $ 84,378 $ 76,923
========= ======== ========
Supplemental cash flow information:
Income tax payments $ 9,900 $ 6,050 $ 8,183
Interest payments $ 68,838 $ 63,213 $ 64,079
Non-cash transactions:
Loans transferred to other assets $ 483 $ 2,029 $ 1,038
</TABLE>
See accompanying notes to consolidated statements.
<PAGE> 39
38
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Area
Bancshares Corporation (the "Corporation") and its wholly owned
subsidiaries, The Owensboro National Bank and subsidiary, First City
Bank and Trust Company and its subsidiary, ABC Credit Corporation,
Broadway Bank and Trust, Southern Deposit Bank, Commonwealth Bancorp of
Glasgow and subsidiaries, a wholly owned bank holding company which
includes Bowling Green Bank and Trust Company, N.A., and The New
Farmers National Bank of Glasgow, Citizens Deposit Bancshares and
subsidiary, a wholly owned bank holding company which includes Citizens
Deposit Bank, and Area Services, Inc., a wholly owned non-bank
subsidiary. Also included is Cardinal Bancshares, Inc., a bank and
thrift holding company whose subsidiaries include: The Vine Street
Trust Company and its principal subsidiary, Vine Street Financial; HNB
Bank, N.A., Alliance Bank, FSB, First & Peoples Bank, Jefferson Banking
Company and Cardinal Data Services Corporation. The Corporation and its
subsidiaries are primarily engaged in commercial and personal banking
services and the consumer finance business throughout the Commonwealth
of Kentucky. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Use of Estimates
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the consolidated balance sheets and revenues and
expenses for the periods. Actual results could differ from those
estimates. Generally accepted accounting principles also require
disclosure of contingent assets and liabilities at the date of the
financial statements. Material estimates that are particularly
susceptible to significant change in the near-term are related to the
determination of the allowance for loan losses.
Securities
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account
securities and valued at fair value with unrealized gains and losses
included in earnings.
Securities held to maturity are those securities which management has
the intent and ability to hold to maturity, and are stated at amortized
cost.
Securities classified as available for sale, which are reported at fair
value with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of shareholders' equity,
include all securities not classified as trading account securities or
securities held to maturity. These include securities used as part of
the Corporation's asset/liability strategy and may be sold in response
to changes in interest rates, repayment risk, the need or desire to
increase capital, and other similar factors. Gains or losses on sales
of securities available for sale are recognized at the time of sale,
based upon the specific identification of the security sold, and are
included in non-interest income in the consolidated statements of
income.
Amortization of premiums and discounts are recorded by a method which
approximates a level yield, unless there is a decline in value which is
considered to be other than temporary, in which case the cost basis of
such security is written down to fair value and the amount of the
write-down is included in earnings.
Mortgage Loans Held for Sale
Mortgage loans held for sale are stated at the lower of aggregate cost
or market value.
<PAGE> 40
39
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Loans
Loans are stated at unpaid principal, reduced by unearned discount.
Interest income on discount-basis loans is recognized using a method
which approximates the interest method. Interest on all other loans is
recognized using the interest method on principal amounts outstanding
during the period. The recognition of interest income on loans is
discontinued at the earlier of 90 days or when in the opinion of
management the collection of principal or interest is doubtful.
Interest received on non-accrual loans is either applied to principal
or recorded as interest income according to management's judgment as to
collectability of principal. A non-accrual loan may be restored to an
accruing status when principal and interest are no longer past due and
unpaid and future collection of principal and interest on a timely
basis is not in doubt. Loan fees are not significant.
Impaired loans are measured based on the present value of future cash
flows discounted at the loan's contractual interest rate or fair value
of the collateral if the loan is collateral dependent. The Corporation
does not apply the impairment criteria to individual loans which are
part of a large group of smaller-balance homogeneous loans, such as
residential mortgage and consumer loans. Such loans are collectively
evaluated for impairment.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for loan losses inherent in the
loan portfolio. Management determines the adequacy of the allowance
based upon reviews of individual credits, recent loss experience,
current economic conditions and such other factors, which in
management's judgment deserve current recognition in estimating loan
losses. The allowance is increased by the provision for loan losses and
reduced by net charge-offs.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization, which are computed on either the straight-line or
declining-balance methods over the estimated useful lives of the
assets. Gains or losses on disposition are reflected in current
earnings. Maintenance and repairs are charged to expense as incurred.
Goodwill and Other Intangible Assets
The excess cost over fair value of net assets acquired in purchase
business combinations (goodwill) of $30,564,000 and $10,704,000 net of
accumulated amortization as of December 31, 1998 and 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 $2,915,000 and $3,595,000, net
of accumulated amortization, as of December 31, 1998 and 1997,
respectively, which is being amortized by an accelerated method over
ten years and a purchased bank charter of $863,000 and $1,013,000, net
of accumulated amortization as of December 31, 1998 and 1997,
respectively, which is being amortized over a ten-year period on a
straight-line basis. The Corporation assesses impairment of goodwill
and other intangible assets by comparing the carrying amounts with the
projected undiscounted future net cash flows. Based on this assessment,
the Corporation determined that there was no impairment of these
intangible assets as of December 31, 1998.
Other Assets
Included in other assets is real estate acquired in settlement of
loans, which is carried at the lower of cost or fair value, net of
selling costs. Fair value is the amount that the Corporation could
reasonably expect to receive for these assets in a sale between a
willing buyer and a willing seller. Any write-downs to fair value at
the date of acquisition are charged to the allowance for loan losses.
Costs relating to holding real estate acquired in settlement of loans
are charged to expense as incurred.
<PAGE> 41
40
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Interest Rate Swaps
The Corporation uses interest rate swaps to manage its sensitivity to
interest rate risk. These off-balance-sheet financial instruments are
employed to hedge the inherent interest rate risk of specific
on-balance-sheet assets or liabilities, rather than for speculative
trading.
Interest income and expense for each interest rate swap contract is
accrued over the term of the agreement as an adjustment to the yield of
the related asset or liability. Similarly, transaction fees are
deferred and amortized through income and expense over the lives of the
agreements. The fair value of the interest rate swaps is not included
in the financial statements.
Net Income Per Common Share
Basic net income per common share is determined by dividing net income
by the weighted average number of shares of common stock outstanding.
Diluted net income per share is determined by dividing net income by
the weighted average number of shares of common stock outstanding plus
the weighted average number of shares that would be issued upon
exercise of dilutive options assuming proceeds are used to repurchase
shares pursuant to the treasury stock method.
Statements of Cash Flows
For purposes of the consolidated statements of cash flows, the
Corporation considers all cash and non-interest bearing deposits with
banks to be cash equivalents.
Segment Information
Area provides a broad range of financial services to individuals,
corporations and others through its thirteen banks located throughout
Kentucky. These services include receiving deposits, making various
types of loans, providing trust and brokerage services, and safe
deposit facilities. Operations are managed and financial performance
reviewed and evaluated by the President, Chief Executive Officer at the
subsidiary bank level. All subsidiary banks are considered by
management to comprise only one operating segment.
2. Business Combinations and Asset Dispositions
The spin-off of Security First Network Bank ("SFNB") from the
Corporation was effected pursuant to the First Amended and Restated
Plan of Distribution. Under the Plan of Distribution, following a
payment of a $3,000,000 cash dividend from SFNB, the Corporation
effected the distribution by delivering prorata to each of its
shareholders of record on the record date for the distribution all of
the outstanding shares of SFNB's common stock (2,398,908 shares).
<PAGE> 42
41
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Business Combinations and Asset Dispositions (continued)
Summary financial data related to SFNB as of May 23, 1996, the date of
the spin-off, follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Cash and due from banks $ 764
Interest bearing deposits in banks 3,657
Securities available for sale 14,216
Loans, net 20,637
Premises and equipment 3,959
Other assets 870
Deposits 42,644
Advances from Federal Home Loan Bank 1,230
Other liabilities 867
Stockholders' equity (638)
</TABLE>
During the period from January 1, 1996 to May 23, 1996, and for the
year ended December 31, 1995, SFNB's net loss before income taxes was
($1,482,000), and ($1,983,000), respectively.
On May 14, 1996, the Corporation completed the sale of substantially
all of the assets of Cardinal Credit Corporation ("Cardinal Credit") to
Norwest Financial Kentucky, Inc. The Corporation recorded a gain of
approximately $8,230,000 in connection with such sale, which is
included in gains on sales of loans in the accompanying consolidated
statements of income. As part of the agreement with Norwest, the
Corporation agreed that for three years it would not engage, within the
market area of Cardinal Credit, in the consumer finance business in the
same or substantially similar manner in which Cardinal Credit engaged
in that business. The agreement does not, however preclude any
subsidiary from engaging in this banking business, including the
origination of consumer loans, as currently conducted.
On September 30, 1997, Area consummated a merger with Cardinal
Bancshares, Inc. of Lexington, Kentucky. Area exchanged 2.7391 shares
of its stock for each share of Cardinal for a total of 4,205,722 shares
issued. This transaction was accounted for as a pooling-of-interests.
<PAGE> 43
42
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Business Combinations and Asset Dispositions (continued)
The following table presents a restatement of net interest income, net
income, and net income per share to reflect this pooling-of-interests
transaction:
<TABLE>
<CAPTION>
(In thousands, except per share data)
Area
Bancshares Cardinal
Corporation Bancshares, Inc. Combined
<S> <C> <C> <C>
Nine months ended September 30, 1997
(unaudited)
Net interest income $34,884 $21,548 $56,432
Net income 11,169 4,392 15,561
Net income per share - basic 1.01
Net income per share - diluted .97
Year Ended December 31, 1996
Net interest income $44,201 $28,224 $72,425
Net income 15,555 4,331 19,886
Net income per share - basic 1.28
Net Income per share - diluted 1.26
</TABLE>
On August 23, 1998, the Corporation acquired certain assets and
liabilities from NationsBank of Kentucky, N.A. for cash of
approximately $36,833,000. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of
operations of the Corporation include the income and expense from these
assets and liabilities from the date of acquisition.
The aggregate fair value of net assets acquired from NationsBank of
Kentucky, N.A. included the following:
<TABLE>
<S> <C>
Cash and due from banks $ 4,170
Federal funds sold 41,780
Securities 1,627
Loans, net 83,932
Premises and equipment 1,382
Other assets 449
Deposits (112,594)
Other liabilities (8,638)
---------
Net assets acquired $ 12,108
=========
</TABLE>
During April 1998, the Corporation completed the sale of substantially
all of the assets of ABC Credit Corporation, a wholly-owned consumer
finance company. The Corporation recorded a pre-tax gain of
approximately $2,068,000 in connection with this sale which is included
in gains on sales of loans in the accompanying Consolidated Statements
of Income.
<PAGE> 44
43
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Securities
Trading Account Securities
Gross realized losses on the sales of trading account securities were
approximately $0, $15,000 and $24,000 in 1998, 1997, and 1996,
respectively. There were no realized gains on the sales of trading
account securities in 1998, 1997 or 1996.
Securities Available for Sale
The amortized cost, gross unrealized gains and losses, and approximate
fair value of securities available for sale at December 31, 1998 and
1997, are shown as follows:
<TABLE>
<CAPTION>
In thousands
December 31, 1998 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $187,993 $ 1,697 $226 $189,464
Mortgage-backed securities 68,094 836 71 68,859
Obligations of states and political subdivisions 18,694 1,075 13 19,756
Equity and other securities 17,613 45,413 231 62,795
-------- ------- ---- --------
Totals $292,394 $49,021 $541 $340,874
======== ======= ==== ========
<CAPTION>
December 31, 1997 Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $232,694 $ 1,095 $436 $233,353
Mortgage-backed securities 55,959 719 110 56,568
Obligations of states and political subdivisions 16,115 752 -- 16,867
Equity and other securities 19,963 15,824 62 35,725
-------- ------- ---- --------
Totals $324,731 $18,390 $608 $342,513
======== ======= ==== ========
</TABLE>
Gross gains of approximately $113,000, $80,000 and $3,395,000 and gross
losses of approximately $15,000, $44,000 and $106,000 were realized on
sales of securities available for sale in 1998, 1997, and 1996,
respectively.
Securities Held to Maturity
The amortized cost, gross unrealized gains and losses, and approximate
fair value of securities held to maturity at December 31, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
In thousands
Amortized Unrealized Unrealized Fair
December 31, 1998 Cost Gains Losses Value
<S> <C> <C> <C> <C>
Obligations of states and political subdivisions $117,869 $6,863 $179 $124,553
======== ====== ==== ========
December 31, 1997
Obligations of states and political subdivisions $116,811 $6,485 $515 $122,781
======== ====== ==== ========
</TABLE>
<PAGE> 45
44
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Securities (continued)
Contractual Maturities
The amortized cost and approximate fair value of securities at December
31, 1998, by contractual maturity, are shown on the following page.
Actual maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
In thousands Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 89,293 $ 89,866 $ 7,855 $ 8,162
Due after one year through five years 98,986 99,888 19,154 20,556
Due after five years through ten years 3,150 3,312 32,091 34,228
Due after ten years 15,258 16,154 58,769 61,607
Equity securities 17,613 62,795 -- --
-------- -------- -------- --------
224,300 272,015 117,869 124,553
Mortgage-backed securities 68,094 68,859 -- --
-------- -------- -------- --------
Totals $292,394 $340,874 $117,869 $124,553
======== ======== ======== ========
</TABLE>
Securities with a par value of approximately $276,184,000 and
$223,373,000 at December 31, 1998 and 1997, respectively, were pledged
to secure public and trust deposits, securities sold under agreements
to repurchase and Federal Home Loan Bank advances.
4. Loans
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31
In thousands 1998 1997
<S> <C> <C>
Commercial, financial and agricultural $ 503,173 $ 357,133
Real estate-construction 43,055 49,979
Real estate-mortgage 674,357 610,846
Installment and other, net of unearned discount 191,982 209,349
---------- ----------
Totals $1,412,567 $1,227,307
========== ==========
</TABLE>
The maturity dates of loans are as follows:
<TABLE>
<CAPTION>
In thousands
Due after one
December 31, 1998 Due in one year through Due after
year or less five years five years Total
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $363,816 $ 93,447 $ 45,910 $ 503,173
Real estate-construction 43,055 -- -- 43,055
All other loans 432,100 298,013 136,226 866,339
-------- -------- -------- ----------
Totals $838,971 $391,460 $182,136 $1,412,567
======== ======== ======== ==========
</TABLE>
<PAGE> 46
45
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Loans, (continued)
Commercial, financial and agricultural loans with maturities over one
year at December 31, 1998 are summarized below based on contractual
rates of interest:
<TABLE>
<CAPTION>
December 31, 1998
<S> <C>
Maturities over one year with variable rates of interest $ 43,306
Maturities over one year with fixed rates of interest 96,051
--------
Total $139,357
========
</TABLE>
The principal amount of loans serviced for the benefit of others at
December 31, 1998 and 1997 totaled approximately $247,933,000 and
$149,216,000, respectively.
The principal amount of nonaccrual loans at December 31, 1998, 1997 and
1996 totaled approximately $1,787,000, $2,173,000 and $2,727,000,
respectively. Interest that would have been recorded if all such loans
were on a current status in accordance with original terms was
approximately $153,000, $155,000 and $342,000 in 1998, 1997, and 1996,
respectively. The amount of interest income that was recorded for such
loans was approximately $17,000, $13,000 and $118,000 in 1998, 1997 and
1996, respectively.
Information regarding impaired loans follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
In thousands
Recorded investment $5,283 $6,248 $6,398
Impaired loans with valuation allowance 3,368 5,133 3,549
Amount of valuation allowance 598 977 903
Amount of impaired loans without valuation allowance 1,914 1,115 2,849
Average recorded investment 5,765 6,176 7,635
Interest recognized during impairment 541 740 459
</TABLE>
The Corporation recognized interest income on impaired loans using two
methods of accounting. Interest received on non accrual loans is either
applied to principal or recorded as interest income according to
management's judgement as to collectability of principal while all
other impaired loans use the accrual basis method. Under the cash basis
method, cash interest payments are recorded as income, limited to that
amount that would have been recognized on the recorded investment at
the contractual interest rate.
5. Allowance for Loan Losses
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31
In thousands 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $19,887 $18,663 $17,814
Effect of business combinations and asset dispositions 1,137 -- (1,334)
Provision for loan losses 1,628 3,271 4,849
Loans charged off 2,679 3,647 (4,611)
Recoveries of loans previously charged off 1,678 1,600 1,945
------- ------- -------
Balance at end of year $21,651 $19,887 $18,663
======= ======= =======
</TABLE>
<PAGE> 47
46
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Premises and Equipment
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
December 31
1998 1997
<S> <C> <C>
In thousands
Bank premises $39,885 $31,404
Furniture and equipment 32,456 25,351
Leasehold improvements 3,512 3,513
------- -------
75,853 60,268
Less accumulated depreciation and amortization 34,586 30,558
------- -------
Totals $41,267 $29,710
======= =======
</TABLE>
7. Other Real Estate Owned
Other real estate owned (OREO) includes properties that the
Corporation's subsidiaries have taken title in full or partial
satisfaction of repayment obligations. At December 31, 1998 and 1997,
OREO aggregated approximately $1,675,000 and $1,386,000, respectively.
8. Deposits
Interest expense on certificates of deposit of $100,000 or more was
approximately $8,269,000, $7,482,000 and $7,462,000 for 1998, 1997 and
1996, respectively.
At December 31, 1998, the scheduled maturities of certificates of
deposit are as follows:
<TABLE>
<CAPTION>
In thousands
<S> <C>
Year of maturity
1999 $601,500
2000 140,088
2001 26,179
2002 15,111
2003 9,746
2004 and thereafter 3,677
--------
Total $796,301
========
</TABLE>
<PAGE> 48
47
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Securities Sold Under Agreements to Repurchase
Information pertaining to securities sold under agreements to
repurchase follows:
<TABLE>
<CAPTION>
December 31
1998 1997 1996
<S> <C> <C> <C>
Dollars in thousands
Amount outstanding at December 31 $111,441 $109,861 $ 99,910
Average amount outstanding during the year 93,067 86,528 90,050
Maximum amount outstanding at any month-end 111,441 109,861 115,814
Weighted average interest rate:
As of year-end 3.11% 4.99% 4.54%
Paid during year 4.80% 5.06% 4.95%
</TABLE>
The Corporation has repurchase agreements where the collateral remains
under its control as well as agreements where the counterparty
maintains control of the collateral.
10. Advances from the Federal Home Loan Bank
The Banks are members of the Federal Home Loan Bank of Cincinnati
("FHLB") and, accordingly, are eligible to borrow from the FHLB. The
Banks pledge FHLB stock and certain first mortgage loans as collateral
for these advances. The aggregate balance of these mortgages must equal
150% of the outstanding advances. Certain information with respect to
the outstanding advances from the FHLB is summarized below:
<TABLE>
<CAPTION>
In thousands December 31, 1998 December 31, 1997
Weighted Weighted
Average Average
Interest Interest
Year of maturity Amount Rate Amount Rate
<S> <C> <C> <C> <C>
1998 $ -- -- $42,105 6.28%
1999 4,101 6.27% 4,206 6.11%
2000 10,124 6.74% 10,171 6.71%
2001 2,502 7.19% 2,842 6.33%
2002 4,695 6.56% 4,962 6.20%
2003-2007 7,701 6.99% 8,213 6.55%
2008-2012 9,976 7.50% 9,801 7.63%
2013 and thereafter 2,210 6.37% 2,036 6.92%
------- ---- ------- ----
Totals $41,309 6.52% $84,336 6.52%
======= ==== ======= ====
</TABLE>
Scheduled principal repayments on advances from the FHLB at December
31, 1998 are approximately $5,221,000, $11,177,000, $2,972,000,
$4,972,000, $2,763,000 for 1999 through 2003, respectively, and
$14,204,000 thereafter.
<PAGE> 49
48
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Other Borrowings
Other borrowings consist of the following:
<TABLE>
<CAPTION>
December 31
In thousands 1998 1997
<S> <C> <C>
Revolving credit $50,000,000 promissory note dated April 1, 1993 at a
varying rate of interest equal to the lesser of prime or the adjusted
LIBOR rate plus .50% with a final maturity of June 30, 2000. The
interest rate at December 31, 1998 was 6.07%. $15,550 $ --
Promissory note, dated March 27, 1991, at a varying rate of interest
equal to The Owensboro National Bank's one-year certificate of deposit
rate adjusted annually, payable in annual installments of $10,269 plus
interest with a final maturity of April 1, 2003. The interest rate at
December 31, 1998 was 4.62%. 50 61
Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership Plan
(ESOP) note payable to a bank in annual principal installments of
$26,015 through December 1999. Interest is payable quarterly at the
prime rate. 26 52
Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership Plan
(ESOP) note payable to a bank in annual principal installments of
$94,875 through December 2000. Interest is payable quarterly at the
prime rate. 189 284
------- ----
Totals $15,815 $397
======= ====
</TABLE>
Scheduled principal repayments on other borrowings at December 31, 1998
are approximately $131,000, $15,654,000, $10,000, $10,000, and $10,000
for 1999 through 2003, respectively, and $0 thereafter.
12. Income Taxes
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
In thousands 1998 1997 1996
<S> <C> <C> <C>
Income taxes applicable to operations:
Current $9,071 $8,651 $10,355
Deferred 225 (160) (339)
------ ------ -------
Total applicable to operations 9,296 8,491 10,016
</TABLE>
<PAGE> 50
49
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Income Taxes (continued)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Charged (credited) to components of shareholders' equity:
Accumulated other comprehensive income 10,744 4,280 856
Income tax benefit of stock options and grants -- (272) (275)
------- ------- -------
Total income taxes $20,040 $12,499 $10,597
======= ======= =======
</TABLE>
The following table presents a reconciliation of the provision for
income taxes as shown in the consolidated statements of income with
that which would be computed by applying the statutory federal income
tax rate of 35% to income taxes.
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
<S> <C> <C> <C>
Tax expense at statutory rates $ 11,173 $ 10,257 $ 10,381
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends (net of
non-deductible interest) (2,570) (2,366) (1,938)
Amortization of intangibles 639 584 587
Dividend in excess of tax basis of SFNB -- -- 789
Other, net 54 16 197
-------- -------- --------
Totals $ 9,296 $ 8,491 $ 10,016
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to the
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 1998 and December 31, 1997, are as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 6,429 $ 6,265
Deferred compensation 1,111 1,076
Other 55 60
------- -------
Total gross deferred tax assets 7,595 7,401
------- -------
Deferred tax liabilities
Purchase accounting adjustments 2,209 2,599
Unrealized gain on securities available for sale 17,093 6,349
Pension expense 815 640
Depreciation 706 429
Accounting differences on securities 810 586
Leasing operations 589 865
FHLB stock dividends 1,518 1,109
Other 384 384
------- -------
Total gross deferred tax liabilities 24,124 12,961
------- -------
Net deferred tax liability $16,529 $ 5,560
======= =======
</TABLE>
Based upon historical and projected levels of taxable income,
management believes it is more likely than not that the Corporation
will realize the income tax benefits of its deductible temporary
differences. Accordingly, no valuation allowance for deferred tax
assets was recorded at December 31, 1998 and 1997.
<PAGE> 51
50
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option and Restricted Stock Plans
The Corporation has stock option and restricted stock plans for key
employees. As of December 31, 1998, the Corporation had 92,864 shares
available for issuance under these plans.
Stock options granted under the option program are at the market price
on the date of grant except for certain limited stock options discussed
below. Each option is for one share of common stock. All options become
exercisable over five-to-ten-year periods from the date of grant.
During 1996 through 1998 the Corporation issued shares of restricted
common stock to certain key employees. The vesting periods range from
1997 to 2005. The amount recorded for the restricted stock issued is
based on the market value of the Corporation's common stock on the
award dates and the unearned portion is shown as deferred compensation
in the consolidated balance sheets in shareholders' equity.
The Corporation applies APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, except for certain limited
stock options, no compensation cost has been recognized. Compensation
cost related to limited stock options was $0, $0 and $1,969,000 during
1998, 1997, and 1996. Compensation cost related to the restricted stock
plan was $100,000, $83,000 and $40,000 during 1998, 1997, and 1996,
respectively.
Stock Option Plans
Under the incentive stock option plan, the Corporation may grant
options to selected executive officers, other highly-compensated
employees, and directors of the Corporation. Under the plan the
exercise price of each option equals the market price of the
Corporation's stock on the date of grant except that for any owner of
10% or more of the total combined voting power of the Corporation the
option price is 110% of the market price on the date of grant. The
maximum term of an option is five to ten years. Options are granted at
the discretion of the Board of Directors and vest evenly over the
option period.
A summary of the status of the Corporation's stock option plan as of
December 31, 1998, 1997, 1996 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 509,054 $ 6.86 564,553 $ 6.88 557,138 $ 5.92
Granted -- -- 41,223 16.19 98,197 14.53
Exercised (92,243) 11.22 (87,302) 10.60 (57,585) 8.13
Forfeited (466) 6.39 (9,420) 14.48 (33,197) 11.21
------- ------ ------- ------ ------- ------
Outstanding at end
of year 416,345 $ 5.89 509,054 $ 6.86 564,553 $ 6.88
------- ------ ------- ------ ------- ------
Options exercisable at
year-end 408,691 $ 5.70 500,156 $ 6.70 45,197 $ 8.29
Weighted-average fair value
of options granted during
the year N/A $ 6.21 $ 7.79
</TABLE>
<PAGE> 52
51
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option and Restricted Stock Plans (continued)
Had compensation cost for the Corporation's stock option plan been
determined consistent with the fair value method described in FASB
Statement No. 123, the Corporation's net income and earnings per share
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1996
<S> <C> <C> <C>
Net income:
As reported $22,626,000 $20,809,000 $19,886,000
Proforma $22,626,000 $20,145,000 $19,718,000
Net income per share:
As reported - basic $ 1.45 $ 1.35 $ 1.28
- diluted 1.42 1.33 1.26
Proforma - basic 1.45 1.31 1.27
- diluted 1.42 1.29 1.25
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. No options were granted
in 1998. The following weighted-average assumptions used for grants in
1997 and 1996, respectively: dividend yield of .75% for both years;
expected volatility of 20% for both years; a risk-free interest rate of
6.53% for 1997 and 5.43% for 1996.
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- ---------------------------------
Weighted Average Weighted Average
Range of Number Remaining Weighted Average Number Exercise
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Price
--------------- ----------- ---------------- -------------- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.83 - $9.13 278,342 7.95 $ 1.90 278,342 $ 1.90
10.08 - 11.59 44,911 7.44 10.92 44,911 10.82
14.48 - 16.11 93,092 7.20 15.22 85,438 15.16
------- ---- ------ ------- ------
416,345 7.73 $ 5.89 408,691 $ 5.70
======= ==== ====== ======= ======
</TABLE>
Restricted Stock Award Plan
The Corporation has a restricted stock award plan. Under the plan, the
Corporation may grant restricted stock to selected executive officers,
other highly-compensated employees, and directors of the Corporation.
Under the plan the shares generally vest evenly over a five-year period
commencing approximately two to five years after the award is granted.
During the restriction period, the shares covered by the award that are
not vested are not transferable by the award recipient. Moreover, if
the award recipient terminates employment with the Corporation for any
reason during the restriction period, the restricted stock award, to
the extent not already vested, is forfeited as of the date of the
termination. Awards are granted at the discretion of the Board of
Directors.
<PAGE> 53
52
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Stock Option and Restricted Stock Plans (continued)
A summary of the status of the Corporation's restricted stock award
plan as of December 31, 1998, 1997, and 1996 and changes during the
years ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Shares Shares Shares
------ ------ ------
<S> <C> <C> <C>
Outstanding at beginning
of year 40,030 34,600 39,000
Granted 3,575 18,180 --
Vested 5,427 -- 4,400
Forfeited -- 12,750 --
------ ------ ------
Outstanding at end of year 38,178 40,030 34,600
====== ====== ======
</TABLE>
14. Regulatory Matters
Bank regulations require depository institutions to maintain cash
reserves relating to customer deposits. At December 31, 1998 the Bank's
cash reserve requirements were approximately $19,781,000.
The Corporation's principal source of funds is dividends received from
the Banks. Payments of dividends by the Banks are restricted by
national and state banking laws and regulations. At December 31, 1998,
retained earnings of the Banks were approximately $54,380,000. At
January 1, 1999, there was approximately $21,267,000 of these retained
earnings available for the payment of dividends without prior approval
by regulatory authorities.
The Corporation and the Banks are required to maintain minimum rates of
capital to risk-weighted assets and a minimum leverage ratio, as
defined by banking regulators. At December 31, 1998, the Corporation's
Tier 1 and total risk-based capital ratios were 11.82% and 13.08%,
respectively. The leverage ratio was 8.29% at December 31, 1998. At
December 31, 1998, the Corporation and the Banks exceeded the minimum
regulatory capital requirements.
As of December 31, 1998 and 1997, the most recent notifications from
the Federal Reserve Bank categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Corporation must
maintain minimum leverage, Tier 1 risk-based capital, and total
risk-based capital ratios as set forth in the table on the following
page. There are no conditions or events since that notification that
management believes have changed the Corporation's category.
<PAGE> 54
53
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Regulatory Matters (continued)
The Corporation and its most significant subsidiary's actual capital
amounts and ratios are presented in the following table:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
In thousands, except percentages Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio:
(Tier 1 Capital to Average Assets)
Consolidated $171,088 8.29% $ 82,553 4.00% $103,192 5.00%
The Owensboro National Bank 38,198 7.29% 20,970 4.00% 26,213 5.00%
Tier 1 Risk-Based Capital Ratio:
(Tier 1 Capital to Risk Weighted
Assets)
Consolidated $171,088 11.82% $ 57,874 4.00% $ 86,811 6.00%
The Owensboro National Bank 38,198 11.61% 13,162 4.00% 19,744 6.00%
Total Risk-Based Capital Ratio:
(Risk Based Capital to Risk
Weighted Assets)
Consolidated $189,218 13.08% $115,748 8.00% $144,685 10.00%
The Owensboro National Bank 42,188 12.83% 26,325 8.00% 32,906 10.00%
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------
To Be Well Capitalized
For Capital Under Prompt Corrective
In thousands, except percentages Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Leverage Ratio:
(Tier 1 Capital to Average Assets)
Consolidated $169,651 9.54% $ 71,120 4.00% $ 88,900 5.00%
The Owensboro National Bank 34,512 7.80% 17,695 4.00% 22,119 5.00%
Tier 1 Risk-Based Capital Ratio:
(Tier 1 Capital to Risk Weighted
Assets)
Consolidated $169,651 13.24% $ 51,249 4.00% $ 76,873 6.00%
The Owensboro National Bank 34,512 11.93% 11,569 4.00% 17,353 6.00%
Total Risk-Based Capital Ratio:
(Risk Based Capital to Risk
Weighted Assets)
Consolidated $185,714 14.50% $102,497 8.00% $128,121 10.00%
The Owensboro National Bank 38,133 13.18% 23,137 8.00% 28,216 10.00%
</TABLE>
<PAGE> 55
54
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. Net Income Per Common Share and Shareholders' Equity Changes
The following table presents the numerators (net income) and
denominators (average shares outstanding) for the basic and diluted net
income per share computations:
<TABLE>
<CAPTION>
In thousands, except per share data 1998 1997 1996
<S> <C> <C> <C>
Net income, basic and diluted $22,626 $20,809 $19,886
------- ------- -------
Average shares outstanding 15,639 15,366 15,521
Effect of dilutive securities 276 282 262
------- ------- -------
Average shares outstanding including
dilutive securities 15,915 15,648 15,783
------- ------- -------
Net income per share - basic $ 1.45 $ 1.35 $ 1.28
Net income per share - diluted $ 1.42 $ 1.33 $ 1.26
</TABLE>
On November 19, 1996, the Board of Directors declared a 3-for-2 stock
split effected in the form of a dividend to shareholders of record on
December 4, 1996, payable December 16, 1996. On September 30, 1997, the
Corporation increased the authorized shares from 16,000,000 to
50,000,000. All per share information in these consolidated financial
statements has been restated to give effect to the stock split.
16. Retirement Plans
The Corporation maintains a noncontributory defined benefit pension
plan covering substantially all employees who satisfy certain age and
service requirements. The benefits are generally based on years of
service and average compensation, which compensation is generally
computed using the five consecutive years prior to retirement that
yield the highest average. The Corporation's funding policy is to
contribute annually at least the minimum amount required by the
Employee Retirement Income Security Act of 1974, but no more than is
tax deductible.
The following tables set forth the aforementioned plan's change in
benefit obligation and change in plan assets for the years ended
December 31, 1998 and 1997, the weighted-average assumptions as of
December 31, 1998, 1997 and 1996, and the components of net periodic
benefit cost for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in benefit obligation (in thousands)
Benefit obligation at beginning of year $ 10,707 $ 9,822
Service cost 751 629
Interest cost 742 727
Actuarial gain 529 493
Benefits paid (867) (964)
-------- --------
Benefit obligation at end of year 11,862 10,707
-------- --------
</TABLE>
<PAGE> 56
55
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
16. Retirement Plans (continued)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Change in plan assets (in thousands)
Fair value of plan assets at beginning of year 13,220 11,718
Actual return on plan assets 1,428 2,174
Employer contribution 524 292
Benefits paid (867) (964)
-------- --------
Fair value of plan assets at end of year 14,305 13,220
-------- --------
Funded status 2,443 2,513
Unrecognized net actuarial loss (657) (783)
Unrecognized prior service cost 425 489
Prepaid (accrued) benefit cost 349 134
-------- --------
$ 2,560 $ 2,353
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Weighted-average assumptions as of December 31
Discount rate 6.75% 7.00% 7.50%
Expected return on plan assets 8.50% 8.42% 8.43%
Rate of compensation increases 5.00% 5.00% 5.00%
Components of net periodic benefit cost (in thousands)
Service cost $ 751 $ 629 $ 700
Interest cost 742 728 675
Expected return on plan assets 1,114 976 928
Amortization of transition obligations/(asset) (126) (126) (126)
Amortization of prior service cost 64 64 75
Recognized net actuarial loss -- 2 23
------- ----- -----
Net periodic benefit cost $ 317 $ 321 $ 420
======= ===== =====
</TABLE>
Assets in the plan consist primarily of common stocks, mutual funds,
U.S. Government obligations and municipal bonds.
The Corporation sponsors a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all salaried employees.
For 1998, 1997 and 1996 the Corporation's expense totaled approximately
$504,000, $533,000 and $265,000, respectively.
17. Other Operating Expenses
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
<S> <C> <C> <C>
Advertising and business development $ 3,013 $ 2,784 $ 2,789
Bank shares tax 1,885 1,669 1,743
Professional fees 3,424 3,091 2,320
Other 12,779 12,665 14,119
------- ------- -------
Totals $21,101 $20,209 $20,971
======= ======= =======
</TABLE>
<PAGE> 57
56
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Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Concentrations of Credit Risk
The Banks actively engage in lending, primarily in home counties and
adjacent areas, except for mortgage loans held for sale which are
widely dispersed across the United States. The credit exposure is
diversified with secured and unsecured loans to consumers, small
businesses, farmers and corporations. Collateral is received to support
these loans when collateral is deemed necessary. The most significant
categories of collateral include cash on deposit with the Banks,
marketable securities, income producing property, home mortgages, and
consumer durables. Although the Banks have diversified loan portfolios,
a customer's ability to honor loan contracts is reliant upon the
economic stability of the geographic region and/or industry in which he
or she does business. No single industry exceeds 10% of loans.
19. Off-Balance Sheet Financial Instruments
Interest rates swap contracts are entered into as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap
contracts are exchanges of interest payments, such as fixed-rate
payments for floating-rate payments, based on a notional principal
amount, which is an agreed-upon amount upon which calculations of
interest payments to be exchanged are based, and is significantly
greater than the amount at risk. The primary risk associated with swaps
is the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contract.
There were interest rate swap contracts with notional amounts
outstanding of $54,000,000 and $13,662,000 at December 31, 1998 and
1997, respectively. As of December 31, 1998, the corporation pays
fixed-rates at a weighted average rate of 7.63% over the term of the
contracts, and received interest at certain variable rates, which was
7.07%. The market value of these interest rate swap contracts was
($764,000) and ($248,000) at December 31, 1998 and 1997, respectively.
20. Commitments and Contingencies
The Banks are party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
their customers. These financial instruments include commitments to
extend credit and standby letters of credit. These financial
instruments involve to varying degrees elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contract
amount of these instruments. The Banks use the same credit policies in
making commitments and conditional obligations as they do for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. Total commitments to extend credit, excluding letters of
credit, at December 31, 1998 and 1997 were approximately $355,234,000
and $344,309,000, respectively. The creditworthiness of the banks'
customers is evaluated on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Banks
upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies, but may include accounts
receivable, marketable securities, inventory, property, plant and
equipment, residential real estate and income-producing commercial
properties.
Letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that related to extending credit to customers. The Banks had
approximately $14,250,000 and $15,817,000 in letters of credit
outstanding at December 31, 1998 and 1997, respectively.
<PAGE> 58
57
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
20. Commitments and Contingencies (continued)
As of December 31, 1998, there were various pending legal actions and
proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate result of these
legal actions and proceedings will not have a material adverse effect
upon the consolidated financial position or results of operations of
the Corporation.
21. Disclosures About Fair Value of Financial Instruments
The estimated fair value of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
In thousands December 31, 1998 December 31, 1997
Carrying Fair Carrying Fair
Value Value Value Value
<S> <C> <C> <C> <C>
Financial Asset:
Cash and short-term investments $ 145,088 $ 145,088 $ 90,182 $ 90,182
Trading account securities -- -- 45,873 45,873
Securities available for sale 340,874 340,874 342,513 342,513
Securities held to maturity 117,869 124,553 116,811 122,781
Mortgage loans held for sale 14,208 14,208 9,817 9,817
Loans, net 1,390,916 1,385,070 1,207,420 1,212,342
Financial Liabilities:
Deposits 1,691,864 1,698,339 1,433,132 1,437,943
Federal funds purchased and securities
sold under agreements to repurchase 112,548 113,054 148,552 148,649
Notes payable to the U.S. Treasury 1,054 1,054 19,581 19,581
Advances from the Federal Home Loan
Bank 41,309 42,437 84,336 85,726
Other borrowings 15,815 15,826 397 397
Commitments -- -- -- --
Interest rate swaps -- (764) -- (248)
</TABLE>
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Short-Term Investments
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Securities
For securities, fair value equals quoted market price, if available. If
a quoted market price is not available, fair value is estimated using
quoted market prices for similar investments or dealer quotes.
Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is estimated on an
aggregate basis considering market prices and yields sought by the
Banks' normal market outlets including the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association current
delivery prices. The Corporation believes the carrying amount is a
reasonable estimate of fair value.
<PAGE> 59
58
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21. Disclosures About Fair Value of Financial Instruments (continued)
Loans
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit is estimated
by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
Federal Funds Purchased and Securities Sold Under Agreements to
Repurchase The fair value of short-term Federal funds purchased and
securities sold under agreements to repurchase is the amount payable on
demand at the reporting date. The fair value of fixed maturity Federal
funds purchased and securities sold under agreements to repurchase is
estimated by discounting the future cash flows using the rates
currently offered for instruments of similar remaining maturities.
Notes Payable to the U.S. Treasury
The fair value of the notes payable to the U.S. Treasury is the
carrying amount at the reporting date, as no significant fair value
differences exist.
Advances from the Federal Home Loan Bank
The fair value of the advances from the Federal Home Loan Bank is
estimated by discounting the future cash flows using the rates
currently offered for instruments of similar remaining maturities.
Other Borrowings
The fair value of other borrowings is the carrying amount at the
reporting date, as no significant fair value differences exist.
Commitments
The fair value of commitments to extend credit and stand-by letters of
credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. At the
reporting date, no significant fair value differences exist on
commitments to extend credit and standby letters of credit.
Interest Rate Swaps
The fair value of interest rate swaps used for hedging purposes is the
estimated amount that the Corporation would receive or pay to terminate
the swap agreements at the reporting date, taking into account current
interest rates and the current creditworthiness of the swap
counterparties.
Limitations
The fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instruments. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could
significantly affect the estimates. The fair value estimates are based
on financial instruments without attempting to estimate the value of
assets and liabilities that are not financial instruments, such as
premises and equipment and other assets and liabilities. Accordingly,
the fair value estimates are not intended to represent the
Corporation's underlying value in the instruments.
<PAGE> 60
59
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
22. Parent Company Financial Information
Condensed financial information for Area Bancshares Corporation (Parent
Company) are as follows:
<TABLE>
<CAPTION>
December 31
Condensed Balance Sheets (in thousands) 1998 1997
<S> <C> <C>
ASSETS
Cash on demand deposit with bank subsidiary $ 277 $ 911
Securities available for sale 62,744 35,667
Investments in:
Bank and bank holding company subsidiaries 201,169 166,476
Nonbank subsidiaries 1,870 527
Other assets 7,938 2,906
-------- --------
Total assets $273,998 $206,487
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowings $ 16,106 $ 336
Other liabilities 19,679 9,602
Shareholders' equity 238,213 196,549
-------- --------
Total liabilities and shareholders' equity $273,998 $206,487
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
Condensed Income Statements (in thousands) 1998 1997 1996
<S> <C> <C> <C>
Income
Dividends from bank and bank holding company subsidiaries:
Dividends $ 14,686 $ 8,450 $15,910
Interest 141 191 95
Management and service fees 6,044 3,618 2,934
Interest and dividends on securities available for sale 801 622 1,603
Securities gains, net 113 -- 3,269
Other 56 48 72
-------- -------- -------
Total income 21,841 12,929 23,883
-------- -------- -------
Expenses
Interest on short-term borrowed funds 243 6 701
Salaries and employee benefits 5,624 3,290 2,968
Other 3,755 2,858 2,160
-------- -------- -------
Total expenses 9,622 6,154 5,829
-------- -------- -------
Income before income taxes and equity in undistributed
earnings of subsidiaries 12,219 6,775 18,054
Applicable income tax expense (benefit) (1,022) (681) 735
Income before equity in undistributed earnings of subsidiaries 13,241 7,456 17,319
Equity in undistributed earnings of subsidiaries 9,385 13,353 2,567
-------- -------- -------
Net income $ 22,626 $ 20,809 $19,886
======== ======== =======
</TABLE>
<PAGE> 61
60
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Notes to Consolidated Financial Statements (continued)
22. Parent Company Financial Information (continued)
<TABLE>
<CAPTION>
Year Ended December 31
1998 1997 1996
<S> <C> <C> <C>
Condensed Statements of Cash Flows (in thousands)
Cash flows from operating activities:
Net income $ 22,626 $ 20,809 $ 19,886
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries (9,385) (13,353) (2,567)
Gain on sales of securities, net (113) -- (3,269)
Other, net (5,062) (655) (694)
-------- -------- --------
Net cash provided by operating activities 8,066 6,801 13,356
-------- -------- --------
Cash flows from investing activities:
Purchases of securities (268) (5,917) (11,981)
Sales and maturities of securities 2,754 1,155 15,591
Net decrease (increase) in demand loans to nonbank
subsidiaries 636 -- (825)
Investment in subsidiaries (26,500) 400 (5,317)
-------- -------- --------
Net cash used in investing activities (23,378) (4,362) (2,532)
-------- -------- --------
Cash flows from financing activities:
Increase (decrease) in other borrowings 15,891 -- (9,740)
Proceeds from stock options exercised 1,288 808 5,864
Repurchase of common stock (81) (522) (4,315)
Cash dividends paid (2,420) (2,523) (2,486)
-------- -------- --------
Net cash provided by (used in) financing activities 14,678 (2,237) (10,677)
-------- -------- --------
Increase in cash (634) 202 147
Cash at beginning of year 911 709 562
-------- -------- --------
Cash at end of year $ 277 $ 911 $ 709
======== ======== ========
</TABLE>
23. Related Party Transactions
Loans to officers, directors, and entities of which these individuals
are principal owners were approximately $71,714,000 and $55,249,000 at
December 31, 1998 and 1997, respectively. During 1998, $55,548,000 of
new loans or advances on existing loans were made to these related
parties. Repayments from such persons totaled $39,083,000. These loans
were made on substantially the same terms including interest rates and
collateral, as those prevailing at the time for other customers and do
not in the opinion of management involve more than normal credit risk.
<PAGE> 62
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Area Bancshares Corporation and Subsidiaries
CORPORATE INFORMATION
CORPORATION HEADQUARTERS
230 Frederica Street
Owensboro, Kentucky 42301
AFFILIATED COMPANIES
Alliance Bank, FSB Jefferson Banking Company
124 N. Main Street 4201 Shelbyville Road
Somerset, KY 42501 Louisville, KY 40207
Broadway Bank and Trust Peoples Commercial Bank
1601 Broadway Maple & Broadway
Paducah, KY 42001 Winchester, KY 40391
Bowling Green Bank and Trust The New Farmers National
Company, N.A Bank of Glasgow
902 College Street 701 Columbia, Box 248
Bowling Green, KY 42102 Glasgow, KY 42142
Citizens Deposit Bank The Owensboro National Bank
100 Main Street 230 Frederica Street
Calhoun, KY 42327 Owensboro, KY 42301
First City Bank and Southern Deposit Bank
Trust Company 102 West Park Square, Box
1002 South Virginia Street 130
Hopkinsville, KY 42240 Russellville, KY 42276
First & Peoples Bank The Vine Street Trust Company
110 E. Main Street 360 E. Vine Street
Springfield, KY 40069 Lexington,KY 40507
HNB Bank, N.A. Vine Street Financial, Inc.
101 N. Main Street 5901-C Peachtree-Dunwoody
Harlan,KY 40831 Suite 420
Atlanta, GA 30328
STOCK TRANSFER AND
DIVIDEND PAYING AGENT
UMB Bank, N.A.
Securities Transfer Division
928 Grand Ave.
Kansas City, Missouri 64141
(816)-860-7761
INDEPENDENT AUDITORS
KPMG LLP
Suite 2600
400 West Market Street
Louisville, Kentucky 40202
FINANCIAL REPORTS
Additional copies of this 1998 Annual Report and copies of Area Bancshares'
Annual Report to the Securities and Exchange Commission on Form 10-K may be
obtained without charge by written request to John A. Ray, Executive Vice
President, Chief Financial Officer at the Corporate Headquarters.
ANNUAL MEETING
The annual meeting of shareholders of Area Bancshares Corporation will be held
at the main office of Area Bancshares, 230 Frederica Street, Owensboro,
Kentucky, at 11:00 a.m. Central Daylight Saving Time, on May 17, 1998.
NASDAQ STOCK MARKET INFORMATION
The NASDAQ Stock Market is a highly-regulated electronic securities market
comprised of competing market makers whose trading is supported by a
communications network linking them to quotation dissemination, trade reporting,
and order execution systems. This market also provides specialized automation
services for screen-based negotiations of transactions, on-line comparison of
transactions, and a range of informational services tailored to the needs of the
securities industry, investors and issuers. The NASDAQ Stock Market consists of
two distinct market tiers: The NASDAQ National Market and The NASDAQ Small-Cap
Market. The NASDAQ stock market is operated by The NASDAQ Stock Market, Inc., a
wholly-owned subsidiary of the National Association of Securities Dealers, Inc.
COMMON STOCK LISTING
NASDAQ National Market
Trading Symbol: AREA
INFORMATION VIA THE INTERNET
The Securities and Exchange Commission maintains a web site which contains
reports, proxy and information statements, and other information pertaining to
registrants that file electronically with the Commission including Area
Bancshares Corporation. The web site address is: (http://www.sec.gov).
Area Bancshares maintains a web site which contains a message from the
president, the web site addresses and information on Area affiliates, Area's
most recent annual report, company news, analyst information and Area stock
quotes. The web site address is: (http://www.abcbank.com).
<PAGE> 63
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Area Bancshares Corporation and Subsidiaries
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The table below lists the NASDAQ price quotes and dividend data for
Area Bancshares Corporation over the past two years.
Market Prices and Dividends (1)
<TABLE>
<CAPTION>
High Low Per Share Dividends
---- --- -------------------
<S> <C> <C> <C> <C>
1997:
1st quarter $23.50 $20.50 $ .03
2nd quarter 23.25 19.75 .03
3rd quarter 23.00 19.50 .03
4th quarter 25.00 18.87 .035
1998:
1st quarter $30.50 $22.38 $ .035
2nd quarter 37.88 28.00 .035
3rd quarter 33.88 24.50 .04
4th quarter 29.50 22.75 .045
</TABLE>
(1) Adjusted for all stock splits.
The future payment of dividends is solely at the discretion of the
Board of Directors of Area and is dependent upon certain legal and regulatory
considerations and upon the earnings and financial condition of Area and such
other factors as Area's Board of Directors may, from time to time, deem
relevant. In particular, the prior approval of the Office of the Comptroller of
the Currency or the Kentucky Department of Banking, as applicable, is required
if the total of all dividends declared by any subsidiary bank in any calendar
year exceeds the bank's net profits, as defined, for that year combined with its
retained net profits for the proceeding two calendar years, less any required
transfers to surplus or a fund for the retirement of any preferred stock (the
"net profits limitations"). In addition, both federal and state law impose
capital limitations on the ability of Area and its subsidiaries to pay
dividends. Management does not believe that these restrictions on the payment of
dividends are likely to limit materially the future payment of dividends on
Area's common stock, and currently expects that comparable cash dividends will
continue to be paid in the future.
There are approximately 962 holders of record of Area's No Par Value
Common Stock as of December 31, 1998. The closing bid price on Area's common
stock was $27.44 on March 3, 1999.
<PAGE> 64
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Area Bancshares Corporation and Subsidiaries
Area Bancshares Corporation - Officers and Directors
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
<S> <C> <C> <C>
C. M. Gatton Chairman of the Board
Raymond C. McKinney Vice Chairman
Thomas R. Brumley President & Chief Executive Officer
John S. Penn Executive Vice President
Edward F. Johnson Senior Vice President, Operations
Donald A. Leibee Senior Vice President, Loan Administration
Timothy O. Shelburne Senior Vice President, General Counsel
John A. Ray Executive Vice President & Chief Financial Officer
PRESIDENTS' COUNCIL
Vince Dailey President & Chief Executive Officer
Vine Street Financial, In.
Larry Cheser President & Chief Executive Officer
First & Peoples Bank
Danny J. Coffey President & Chief Executive Officer
Southern Deposit Bank
Scott Cvengros President & Chief Executive Officer
Alliance Bank, FSB
Darrell Gustafson President & Chief Executive Officer
First City Bank & Trust Company
F. Lee Hess President & Chief Executive Officer
The Vine Street Trust Company
Darrell Higginbotham President & Chief Executive Officer
The Owensboro National Bank
William W. James President & Chief Executive Officer
The New Farmers National Bank
Charles Mann, Jr. President & Chief Executive Officer
Citizens Deposit Bank
William H. Pitt, Jr. President & Chief Executive Officer
Peoples Commercial Bank
James Clay Smith President & Chief Executive Officer
Jefferson Banking Company
Kenneth W. Thomas President & Chief Executive Officer
HNB Bank, N. A.
Richard N. Wilson President & Chief Executive Officer
Bowling Green Bank & Trust Company, N.A.
ADMINISTRATIVE OFFICERS
J. Glenn Babb Vice President
David Bowser Chief Internal Auditor
Cynthia Carlton Senior Vice President, Director of Retail Administration
Douglas J. Conkright Vice President, Special Assets
Janna DeMarsh Vice President, Director of Corporate Compliance
Mark duBarry Vice President, Director of Information Services
Tammy S. Jones Vice President, Accounting Manager
Brian A. Martin Vice President, Investments Officer
Joe C. Neff, Jr. Vice President, Loan Review
Douglas G. Pace M&I Administrator/Information Security Officer
Thomas H. Pope Vice President, Operations Coordinator
Vikki W. Stephens Vice President, Human Resource Director
Gary R. White Vice President, Controller
Judith R. Windle Corporate Secretary
DIRECTORS
C. M. Gatton, Chairman Cecile W. Garmon Jimmy R. Shelby *Emeritus
Raymond C. McKinney, Vice Chairman Gary H. Latham David W. Smith, Jr.
Anthony G. Bittel Ralph L. Oliver Don Vitale
Samuel A. B. Boone John S. Penn Pollard White
Thomas R. Brumley Allan R. Rhodes Cy M. Williamson*
</TABLE>
<PAGE> 65
64
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
Alliance Bank, FSB - Officers and Directors
<TABLE>
<S> <C> <C> <C>
OFFICERS
Scott P. Cvengros President, Chief Executive Officer
William E. Jasper Senior Lending Officer
DIRECTORS
W. Clyde Ping, Chairman C. M. Gatton Nelson Sizemore (**) Advisory
Thomas R. Brumley Talmadge V. Hayes Leo Taylor
Dan Coomer J. C. Helton Thomas M. Wilkerson
Scott P. Cvengros Allan R. Rhodes(**)
<CAPTION>
Bowling Green Bank and Trust Company, N.A. - Officers and Directors
<S> <C> <C> <C> <C>
OFFICERS
Executive Officers Chairman of the Board
Thomas R. Brumley President & Chief Executive Officer
Richard N. Wilson Senior Vice President
Brad Howard Senior Vice President
Ralph Barany
OFFICERS
Peggy P. Clark Vice President
Sue Frericks Vice President
V. Scott Gary Vice President
Darin Kellett Vice President
Carol Kirkman Vice President
Treva Mitchell Vice President
Joy Rogers Vice President
Kevin D. Simpson Vice President
Patricia R. Smith Vice President
Betty Wyatt Vice President
DIRECTORS
Thomas R. Brumley, Chairman Harold S. Evans(*) Dr. William T. Moore (*)Emeritus
Louis Berman Bob R. Farley Allan R. Rhodes(**) (**)Advisory
James W. Brite(*) Vernon L. Gary James P. Rogers
Henry Carlisle C. M. Gatton Don Vitale
Thomas A. Donnelly Joe Meng(*) Richard N. Wilson
<CAPTION>
Broadway Bank & Trust - Officers and Directors
<S> <C> <C>
OFFICERS
Brent Gregory President, Chief Executive Officer
Frank V. Ramsey III Executive Vice President
Michael W. Gish Vice President, Senior Trust Administrator
Dan Knowles Vice President, Asset Management
Mindi Whitworth Vice President, Trust Operations Manager
DIRECTORS
Allan Rhodes, Chairman Buddy Smith
Juliette Grumley Brent Gregory
Carney Allen Tom Brumley
Jim Paxton
</TABLE>
<PAGE> 66
65
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
Citizens Deposit Bank - Officers and Directors
OFFICERS
<S> <C> <C> <C> <C> <C>
Thomas R. Brumley Chairman of the Board
Charles Mann, Jr. President, Chief Executive Officer
Lawrence B. Robertson Executive Vice President
DIRECTORS
Thomas R. Brumley, Chairman Allan R. Rhodes(**) (*)Emeritus
Billy H. Brenner Lawrence B. Robertson (**)Advisory
Charles Mann, Jr. Joseph A. Stirsman(*)
William E. Quisenberry, Jr. R. T. Tichenor, Jr.(*)
First City Bank and Trust Company - Officers and Directors
OFFICERS
Executive Officers Chairman of the Board
Raymond C. McKinney, Jr. Vice Chairman of the Board
Gary H. Latham President and Chief Executive Officer
Darrell L. Gustafson Compliance Officer
Janella Kisselbaugh
Administrative Division
Stephen R. Craig Senior Vice President, Finance
Wendell A. Lynch Senior Vice President, Administration
Percy Belt Senior Vice President, Branch Operations
Roy Campbell Vice President, Business Development Officer
Carolyn A. Cobb Vice President, Marketing
Freeda Harrison Vice President, Administration
Ken Hatzakorzian Vice President, Audubon Financial Services
Sandy Blake Vice President, Electronic Banking Officer
Sue Hill Vice President, Branch Manager
Lending Division
Kevin Atwood Senior Vice President, Senior Loan Officer
Judy C. Budias Vice President, Manager Loan Operations
Janet Calhoun Vice President, Manager Mortgage Loan
Steve Greenwell Vice President, Agri Business Loan Officer
Daniel B. Mann Vice President, Commercial Loan Officer
Donald G. Marquess Vice President, Commercial Loan Officer
David Moore Vice President, Manager Consumer Loan
Bill Swinney Vice President, Commercial Loan Officer
Asset Management Division
Brasher P. Mason Senior Vice President, Senior Trust Officer
Wanda P. Boyd Vice President, Senior Trust Officer
Scott Hancock Vice President, Trust Officer
Jeanette R. Settle Vice President, Trust Officer
Marjorie Thompson Vice President, Senior Trust Officer
DIRECTORS
Cy M. Williamson, Senior Chairman(*) Austin B. Carroll Edward L. Major Albert W. Sisk (*)Emeritus
Raymond C. McKinney, Chairman K.O. Cayce, Jr.(*) Bruce McInnis William T. Turner (**)Advisory
Gary H. Latham, Vice Chairman C. M. Gatton Sam Miles(*) Loran Wagoner
J. Glenn Babb(*) Anna C. Guffey William H. Nichol Lee T. White
Alan W. Beard Darrell L. Gustafson Wynn L. Radford, III Pollard White(*)
Richard C. Brasher Roger E. Jeffers Allan R. Rhodes(**)
Thomas R. Brumley Jesse V. Keith(*) William T. Scheid
</TABLE>
<PAGE> 67
66
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
First & Peoples Bank - Officers and Directors
<S> <C> <C>
OFFICERS
Larry Cheser President, Chief Executive Officer
DIRECTORS
Fred Edelen, Chairman C. M. Gatton (**) Advisory
Samuel A. B. Boone Edwin Hamilton
Thomas R. Brumley Allan R. Rhodes(**)
Joe Carpenter Hamilton Simms
Perry Carrico Susan M. Spalding
Larry Cheser
</TABLE>
<TABLE>
<CAPTION>
HNB Bank, N. A. - Officers and Directors
<S> <C> <C>
OFFICERS
Kenneth W. Thomas President, Chief Executive Officer
Johnny Shepherd Executive Vice President
DIRECTORS
Kenneth W. Thomas, Chairman C. M. Gatton (*) Emeritus
Michael Allison James W. Greene, Jr.(*) (**) Advisory
W. Bruce Ayers Herbert Kelley
Donald Brandenburg(**) Wendell Combs(**)
Fred Brown(**) Terry Loving
Thomas R. Brumley Donald Parsons
Vernon J. Cole(*) Paul Pratt
Edison Creech(*) Allan R. Rhodes(**)
Robert Frazier(*) Marvin Wilson, Jr.(**)
</TABLE>
<TABLE>
<CAPTION>
Jefferson Banking Company - Officers and Directors
<S> <C> <C>
OFFICERS
James Clay Smith President, Chief Executive Officer
Phillip S. Poindexter Senior Lending Officer
Arthur L. Turcotte, III Senior Private Banking Officer
DIRECTORS
James Clay Smith, Chairman Frank L. Jones, Jr.
John G. Beam, Jr. C. Barr Schuler
Joe G. Conley Walter C. Wagner, Jr.
Thomas O. Eifler, Sr.
</TABLE>
<PAGE> 68
67
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
Peoples Commercial Bank - Officers and Directors
<S> <C> <C>
EXECUTIVE OFFICERS
Ralph L. Oliver Chairman of the Board
William H. Pitt, Jr. President, Chief Executive Officer
William P. Shearer Executive Vice President, Senior Loan Officer
Randy L. Todd Executive Vice President, Senior Operations Officer
S. Dudley Taylor Senior Vice President, Chief Financial Officer
& Trust Officer
OFFICERS
Phyllis Blanton Vice President, Branch Officer
Gloria Branham Vice President, Mortgage Loan Officer
Brenda Eads Vice President, Cashier
Tracy Trimble Vice President, Commercial Loan Officer
Michael Walters Vice President, Senior Mortgage Loan Officer
DIRECTORS
John T. Bowser, IV Alvin Pasley, Jr.
Eugene Culton, III William H. Pitt, Jr.
David H. Ginter B. Lynn Skaggs
Exie D. Minton S. Dudley Taylor
Richard Monohan Arthur M. Walson
David Oliver John R. Wheatley
Ralph Oliver Eugene T. Woestman
Fred W. Pace
</TABLE>
<PAGE> 69
68
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
The New Farmers National Bank of Glasgow - Officers and Directors
<S> <C> <C>
OFFICERS
EXECUTIVE OFFICERS
Thomas R. Brumley Chairman of the Board
William W. James President, Chief Executive Officer
Tommy K. Ross Executive Vice President, Chief Lending Officer
& Chief Lending Officer
Victoria F. Pennycuff Vice President, Branch Administrator
OFFICERS Vice President, Commercial Loan Manager
Owen D. Lambert Vice President, Operations Manager
Debbie K. Livingston Vice President, Commercial Loan Manager
F. Gary Pierce Vice President, Senior Agricultural Loan Officer
Sandra E. Ross Vice President, Real Estate Loan Manager
Sue H. Young
DIRECTORS
Thomas R. Brumley, Chairman William W. James (**)Advisory
A. Follis Crow, III Steven W. Newberry
Don R. Doty Allan R. Rhodes(**)
Cecile W. Garmon Bobby H. Richardson
C. M. Gatton Freddie L. Travis
</TABLE>
<PAGE> 70
69
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
The Owensboro National Bank - Officers and Directors
<S> <C> <C>
OFFICERS
Executive
Thomas R. Brumley Chairman of the Board
C. M. Gatton Vice Chairman of the Board
Darrell W. Higginbotham President, Chief Executive Officer
Kelly O. Howard Secretary to the Board
COMMERCIAL SALES
Edward H. Schroeder First Senior Vice President
Randy Pauley Senior Vice President
David C. Scott, Jr. Senior Vice President
David D. Toler First Senior Vice President
Jay H. Bell Vice President
Scott H. McCain Vice President
John L. Oberst, III Vice President
RETAIL SALES
Noble E. Noel First Senior Vice President
Charles S. Brown Vice President, Retail Loan Manager
Edna C. Murphey Vice President, Audubon Investment Manager
B. Sue Johnson Vice President, Branch Manager
Paula K. McIntyre Vice President, Branch Manager
TRUST ADMINISTRATION AND EMPLOYEE BENEFITS
Kenneth R. Cain First Senior Vice President
Gerald W. Saunders Senior Vice President
Amanda L. Emge Vice President, Senior Trust Officer
A. Daniel Oderkirk Vice President, Senior Trust Officer
Patricia C. Drury Vice President, Trust Officer
Brian A. Martin Vice President, Senior Trust Officer
Todd L. Rust Vice President, Trust Officer
Susan R. Culver Vice President, Senior Trust Officer
DIRECTORS
Thomas R. Brumley, Chairman William B. Kurtz (**)Advisory
Jack E. Darnell, Chairman, Emeritus Don Penn Moore, III
C. M. Gatton, Vice Chairman Helen W. Mountjoy
Anthony G. Bittel Allan R. Rhodes(**)
David E. Boswell David W. Smith, Jr.
Gary J. Braswell B. Dean Stanley
Jefferson B. Carpenter Mrs. Harry S. Sutton, Jr.
R. Earl Fischer Thomas N. Thompson
Jerry H. Haase Robert E. Watson
Darrell W. Higginbotham John A. Williams
James T. Hines, Jr. W. Terry Woodward
John W. Jones Patrick E. (Glenn) Wright
William M. Kuegel, Jr.
</TABLE>
<PAGE> 71
70
------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
Southern Deposit Bank - Officers and Directors
<S> <C> <C>
OFFICERS
Executive Officers Chairman of the Board
Thomas R. Brumley Chairman of the Board, Emeritus
R. L. Kirkpatrick, Jr. President, Chief Executive Officer
Danny Coffey Executive Vice President
John Sheffield
Officers Vice President
Allison Fuqua Vice President
Patsy Poore Vice President
Trent Spurlock
DIRECTORS
Thomas R. Brumley, Chairman Jean Kirkpatrick (*)Emeritus
R. L. Kirkpatrick, Jr.(*), Chairman Bobbie Martin(*) (**)Advisory
Joe Gran Clark, Jr. William McGinnis
Danny Coffey Fred Mudge
William G. Fuqua Allan R. Rhodes(**)
C. M. Gatton Lee Robey III
Darrell L. Gustafson John Sheffield
</TABLE>
<PAGE> 72
71
- ------------------------------------------------
Area Bancshares Corporation and Subsidiaries
<TABLE>
<CAPTION>
The Vine Street Trust Company - Officers and Directors
<S> <C> <C>
OFFICERS
F. Lee Hess President, Chief Executive Officer
Gregory M. Shewmaker Private Banking Manager
J. Barry Hickey Trust Division Manager
George E. Wallace Senior Lending Officer
DIRECTORS
John D. Stewart, II, Chairman Ardis Hoven (**)Advisory
W. Van Alford, Jr. Ryan R. Mahan
Thomas R. Brumley Greg Milward
Frank Cain Preston Nunnelley
William Chapman Gerald Psimer
Joe Coons Allan R. Rhodes(**)
C. M. Gatton Joe Rosenberg
F. Lee Hess Ronald C. Switzer
Buckner Hinkle, Jr. Derek Vaughan
Lennie G. House
<CAPTION>
Vine Street Financial, Inc. - Officers and Directors
<S> <C>
Vincet C. Dailey President, Chief Executive Officer
DIRECTORS
John S. Penn, Chairman
F. Lee Hess
</TABLE>
<PAGE> 1
EXHIBIT 21.1
<TABLE>
<CAPTION>
Subsidiaries of Registrant Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
Area Services, Inc. Kentucky
Commonwealth Bancorp of Glasgow Kentucky
Bowling Green Bank & Trust Company, N.A. United States
Broadway Bank & Trust Kentucky
The New Farmers National Bank United States
The Owensboro National Bank United States
First City Bank & Trust Company Kentucky
ABC Credit Corporation Kentucky
Southern Deposit Bank Kentucky
Citizens Deposit Bancshares, Inc. Kentucky
Citizens Deposit Bank Kentucky
Cardinal Bancshares, Inc. Kentucky
Jefferson Banking Company Kentucky
First & Peoples Bank Kentucky
Alliance Bank, FSB United States
The Vine Street Trust Company Kentucky
Vine Street Financial, Inc. Kentucky
HNB Bank, N.A. United States
Cardinal Data Service Corporation Kentucky
Mutual Insurance Agency, Inc. Kentucky
Mutual Service Corporation Kentucky
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Auditors
The Board of Directors
Area Bancshares Corporation
We consent to incorporation by reference in the registration statement (Nos.
333-38037, 333-38039, 333-44571 and 333-44573) on Form S-8 of Area Bancshares
Corporation of our report dated March 2, 1999, relating to the consolidated
balance sheets of Area Bancshares Corporation and subsidiaries as of December
31, 1998, and 1997, and the related consolidated statements of income,
comprehensive income, shareholders' equity, and cash flows for each of the years
in the three-year period ended December 31, 1998, which report appears in the
December 31, 1998, annual report on Form 10-K of Area Bancshares Corporation.
/s/ KPMG LLP
Louisville, Kentucky
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 122,654
<INT-BEARING-DEPOSITS> 8,434
<FED-FUNDS-SOLD> 14,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 340,874
<INVESTMENTS-CARRYING> 117,869
<INVESTMENTS-MARKET> 124,553
<LOANS> 1,412,567
<ALLOWANCE> 21,651
<TOTAL-ASSETS> 2,132,365
<DEPOSITS> 1,691,864
<SHORT-TERM> 129,417
<LIABILITIES-OTHER> 31,562
<LONG-TERM> 41,309
0
0
<COMMON> 24,397
<OTHER-SE> 213,816
<TOTAL-LIABILITIES-AND-EQUITY> 2,132,365
<INTEREST-LOAN> 113,857
<INTEREST-INVEST> 26,251
<INTEREST-OTHER> 3,468
<INTEREST-TOTAL> 143,576
<INTEREST-DEPOSIT> 59,099
<INTEREST-EXPENSE> 67,890
<INTEREST-INCOME-NET> 75,686
<LOAN-LOSSES> 1,628
<SECURITIES-GAINS> 108
<EXPENSE-OTHER> 64,741
<INCOME-PRETAX> 31,922
<INCOME-PRE-EXTRAORDINARY> 22,626
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,626
<EPS-PRIMARY> 1.45
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 8.26
<LOANS-NON> 1,787
<LOANS-PAST> 757
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 19,887
<CHARGE-OFFS> 2,679
<RECOVERIES> 1,678
<ALLOWANCE-CLOSE> 21,651
<ALLOWANCE-DOMESTIC> 21,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,789
</TABLE>
