<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1999
Commission File Number 0-26032
AREA BANCSHARES CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
INCORPORATED IN KENTUCKY IRS EMPLOYER ID NUMBER
NO. 61-0902343
230 FREDERICA STREET
OWENSBORO, KENTUCKY 42301
- --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (270) 926-3232
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class: Common stock
No Par Value
Shares Outstanding: As of October 31, 1999: 16,586,474
1
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AREA BANCSHARES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements 3
Unaudited consolidated balance sheets, September 30, 1999, December 31, 1998 3
and September 30, 1998
Unaudited consolidated statements of income, three and nine months ended 4
September 30, 1999 and 1998
Unaudited consolidated statements of comprehensive income, three and nine months ended
September 30, 1999 and 1998 5
Unaudited consolidated statements of shareholders' equity, year ended December 31,
1998 and nine months ended September 30, 1999 6
Unaudited consolidated statements of cash flows nine months ended
September 30, 1999 and 1998 7
Notes to unaudited consolidated financial statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Results of operations 13
Financial position 24
Liquidity 27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
</TABLE>
2
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1999 1998 1998
ASSETS
<S> <C> <C> <C>
Cash and due from banks $ 73,589 $ 122,654 $ 73,114
Interest bearing deposits with banks 5,384 8,434 8,103
Federal funds sold -- 14,000 4,000
Securities:
Available for sale (amortized cost of $317,869, $292,394 and $383,412) 352,943 340,874 415,889
Held to maturity (fair value of $130,341, $124,553, and $121,678) 129,155 117,869 114,205
----------- ----------- -----------
TOTAL SECURITIES 482,098 458,743 530,094
----------- ----------- -----------
Mortgage loans held for sale 8,871 14,208 7,702
Loans, net of unearned discount 1,588,399 1,412,567 1,326,459
Less allowance for loan losses 23,499 21,651 21,574
----------- ----------- -----------
NET LOANS 1,564,900 1,390,916 1,304,885
----------- ----------- -----------
Premises and equipment, net 44,496 41,267 36,338
Goodwill and other intangible assets 33,929 34,342 37,972
Other assets 48,200 47,801 43,207
=========== =========== ===========
TOTAL ASSETS $ 2,261,467 $ 2,132,365 $ 2,045,415
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 241,440 $ 251,950 $ 204,830
Interest-bearing 1,435,802 1,439,914 1,382,190
----------- ----------- -----------
TOTAL DEPOSITS 1,677,242 1,691,864 1,587,020
----------- ----------- -----------
Federal funds purchased 78,001 1,107 46,865
Securities sold under agreements to repurchase 117,920 111,441 95,982
Notes payable to the U.S. Treasury 22,878 1,054 5,543
Advances from the Federal Home Loan Bank 78,883 41,309 41,593
Other borrowings 257 15,815 22,357
Accrued expenses and other liabilities 23,010 31,562 23,333
----------- ----------- -----------
TOTAL LIABILITIES 1,998,191 1,894,152 1,822,693
----------- ----------- -----------
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 September 30, 1999, 16,586,474 December 31, 1998,
15,669,729 and September 30, 1998, 15,643,776 28,460 24,397 24,358
Paid-in capital 36,687 35,632 35,632
Retained earnings 176,100 147,474 142,655
Deferred compensation on restricted stock (538) (612) (637)
ESOP and MRP loan obligations (216) (216) (337)
Accumulated other comprehensive income 22,783 31,538 21,051
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 263,276 238,213 222,722
----------- ----------- -----------
Commitments and contingent liabilities
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,261,467 $ 2,132,365 $ 2,045,415
=========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $33,273 $ 28,479 $ 96,146 $ 84,230
Interest bearing deposits with banks 84 116 276 274
Federal funds sold 21 324 986 1,915
Taxable securities 4,792 4,446 14,327 14,160
Tax exempt securities 1,997 2,257 5,921 5,713
------- -------- -------- --------
TOTAL INTEREST INCOME 40,167 35,622 117,656 106,292
------- -------- -------- --------
Interest expense:
Interest on deposits 14,274 15,126 44,838 43,877
Interest on borrowings 3,081 1,818 7,647 6,381
------- -------- -------- --------
TOTAL INTEREST EXPENSE 17,355 16,944 52,485 50,258
------- -------- -------- --------
Net interest income 22,812 18,678 65,171 56,034
Provision for loan losses 145 534 501 1,247
------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,667 18,144 64,670 54,787
------- -------- -------- --------
Non-interest income:
Commissions and fees on fiduciary activities 1,377 1,109 4,083 3,537
Service charges on deposit accounts 2,467 1,943 6,838 5,469
Other service charges, commissions and fees 1,524 1,371 4,358 4,661
Security gains (losses), net 896 (9) 21,279 116
Gains on sales of loans, net 256 270 1,015 2,910
Other non-interest income 193 121 1,428 317
------- -------- -------- --------
TOTAL NON-INTEREST INCOME 6,713 4,805 39,001 17,010
------- -------- -------- --------
Non-interest expenses:
Salaries and employee benefits 8,621 8,078 26,257 23,179
Net occupancy expense 1,416 1,097 4,021 2,913
Furniture and equipment expense 1,504 1,167 4,561 3,208
Federal deposit insurance 83 62 220 217
Data processing expense 1,176 936 4,046 2,797
Other non-interest expenses 5,472 5,359 15,859 15,011
------- -------- -------- --------
TOTAL NON-INTEREST EXPENSES 18,272 16,699 54,964 47,325
------- -------- -------- --------
Income before income tax expense 11,108 6,250 48,707 24,472
Income tax expense 3,354 1,730 15,177 7,194
======= ======== ======== ========
NET INCOME $ 7,754 $ 4,520 $ 33,530 $ 17,278
======= ======== ======== ========
Per common share:
Net income-basic $ 0.46 $ 0.29 $ 1.98 $ 1.11
-diluted $ 0.45 $ 0.28 $ 1.96 $ 1.09
Cash dividends $ 0.05 $ 0.04 $ 0.145 $ 0.11
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
1999 1998
<S> <C> <C>
Net income $ 7,754 $ 4,520
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period (3,669) 1,166
Less reclassification adjustment for gains (losses) included
in net income 582 (6)
-------- --------
Other comprehensive income (4,251) 1,172
-------- --------
COMPREHENSIVE INCOME $ 3,503 $ 5,692
======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
1999 1998
<S> <C> <C>
Net income $ 33,530 $ 17,278
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period 5,076 9,618
Less reclassification adjustment for gains (losses) included
in net income 13,831 75
-------- --------
Other comprehensive income (8,755) 9,543
-------- --------
COMPREHENSIVE INCOME $ 24,775 $ 26,821
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND NINE MONTHS ENDED
SEPTEMBER 30, 1999 (AMOUNTS IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED DEFERRED ESOP AND ACCUMULATED TOTAL
STOCK- STOCK- CAPITAL EARNINGS COMPENSATION MRP LOAN OTHER
SHARES AMOUNT ON OBLIGATIONS COMPREHENSIVE
RESTRICTED INCOME
STOCK
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 15,576,916 $ 24,254 $35,632 $ 126,104 $(612) $ (337) $ 11,508 $ 196,549
Net income 22,626 22,626
Cash dividends declared ($0.155
per share) (2,420) (2,420)
Repurchase of common stock (3,000) (5) (76) (81)
Stock options exercised,
including tax benefits 92,238 143 1,145 1,288
Amortization of deferred
compensation on restricted
stock 100 100
Net restricted stock issued 3,575 5 95 (100) --
Repayment of ESOP loan 121 121
obligations
Change in other comprehensive
income (loss), net of tax 20,030 20,030
---------- --------- ------- --------- ----- ------ -------- ---------
Balance, December 31, 1998 15,669,729 24,397 35,632 147,474 (612) (216) 31,538 238,213
Net income 33,530 33,530
Cash dividends declared ($0.145
per share) (2,446) (2,446)
Repurchase of common stock (484,781) (844) (11,577) (12,421)
Stock options exercised,
including tax benefits 101,558 62 1,055 336 1,453
Amortization of deferred
compensation on restricted
stock 74 74
Common stock issued 1,299,968 4,845 8,783 13,628
Change in other comprehensive
income (loss), net of tax (8,755) (8,755)
---------- --------- ------- --------- ----- ------ -------- ---------
Balance, September 30, 1999 16,586,474 $ 28,460 $36,687 $ 176,100 $(538) $ (216) $ 22,783 $ 263,276
========== ========= ======= ========= ===== ====== ======== =========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 33,530 $ 17,278
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 501 1,247
Depreciation, amortization and accretion, net 5,240 2,597
Gain on sales of securities and loans, net (22,294) (3,026)
Loss (gain) on sales of other real estate owned (14) 43
Loss (gain) on disposals of equipment (45) 10
Deferred income taxes (3,717) (1,845)
Proceeds from sales of trading account securities -- 19,760
Proceeds from maturities of trading account securities -- 99,994
Purchases of trading account securities -- (73,870)
Purchases of mortgage loans held for sale (89,487) (93,030)
Proceeds from sales of mortgage loans held for sale 95,391 95,501
Other, net 3,700 3,277
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 22,805 67,936
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of NationsBank of Kentucky, N.A., net of cash and
due from banks -- (32,665)
Decrease (increase) in interest bearing deposits with banks 3,050 (2,299)
Proceeds from sales of securities available for sale 403 13,935
Proceeds from sales of securities held to maturity -- --
Proceeds from maturities of securities available for sale 281,589 179,693
Proceeds from maturities of securities held to maturity 29,556 4,899
Calls of securities available for sale 4,788 5,020
Calls of securities held to maturity 339 2,582
Purchases of securities available for sale (287,286) (253,409)
Purchases of securities held to maturity (14,345) (2,956)
Decrease in federal funds sold and securities
purchased under agreements to resell 36,128 37,780
Loans originated, net of principal collected on loans (76,621) (29,671)
Purchases of premises and equipment, net (5,652) (8,135)
Cash and cash equivalents from acquisitions 7,249 --
Proceeds from sale of ABC Credit loans -- 13,568
Proceeds from sales of other real estate owned 885 588
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES (19,917) (71,070)
--------- ---------
</TABLE>
CONTINUED
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $(160,821) $ 41,329
Increase in federal funds purchased 76,894 8,174
Increase (decrease) in securities sold under agreements to repurchase 4,429 (22,089)
Increase (decrease) in notes payable to the U.S. Treasury 21,824 (14,038)
Increase (decrease) in advances from the Federal Home Loan Bank 35,748 (42,743)
Increase (decrease) in other borrowings (15,558) 21,960
Proceeds from issuance of common stock and stock options exercised 398 995
Repurchase of common stock (12,421) --
Cash dividends paid (2,446) (1,718)
--------- ---------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES (51,953) (8,130)
--------- ---------
DECREASE IN CASH AND DUE FROM BANKS (49,065) (11,264)
CASH AND DUE FROM BANKS, JANUARY 1 122,654 84,378
--------- ---------
CASH AND DUE FROM BANKS, SEPTEMBER 30 $ 73,589 $ 73,114
========= =========
Cash flow information:
Income tax payments $ 13,300 $ 4,667
Interest payments 52,758 51,631
Non-cash transactions:
Loans transferred to other assets 1,132 2,546
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
8
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do not
include all information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been reflected in the accompanying consolidated
financial statements. Results of interim periods are not necessarily indicative
of results to be expected for the full year.
The accounting and reporting policies of Area Bancshares Corporation ("Area")
and its subsidiaries conform to generally accepted accounting principles and
general practices within the banking industry. The consolidated financial
statements include the accounts of Area and its wholly-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation. A full description of significant accounting policies as well as
a complete set of footnotes are presented in the 1998 annual report to
shareholders.
As noted in the footnotes to its annual report of Form 10-K, Area utilizes
interest rate swaps, which are derivative financial instruments, for hedging
purposes to reduce exposure to adverse changes in interest rates. All of the
interest rate swaps are accounted for as "hedges" and relate to specific assets
or liabilities or groups of assets or liabilities.
NOTE 2. NET INCOME PER COMMON SHARE
Basic earnings per share are calculated by dividing net income by the weighted
average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the increase in the average shares
outstanding that would have resulted from the exercise of dilutive stock
options.
The components of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
1999 1998 1999 1998
------- ------- --------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
NET INCOME, BASIC AND DILUTED $ 7,754 $ 4,520 $ 33,530 $17,278
======= ======= ========= =======
Average shares outstanding 16,874 15,642 16,901 15,631
Effect of dilutive securities 195 278 231 280
------- ------- --------- -------
Average shares outstanding including dilutive securities 17,069 15,921 17,132 15,911
======= ======= ========= =======
NET INCOME PER SHARE, BASIC $ 0.46 $ 0.29 $ 1.98 $ 1.11
======= ======= ========= =======
NET INCOME PER SHARE, DILUTIVE $ 0.45 $ 0.28 $ 1.96 $ 1.09
======= ======= ========= =======
</TABLE>
9
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NOTE 3. SECURITIES
The amortized cost and approximate market values of securities as of September
30, 1999 and December 31, 1998 are as follows:
AVAILABLE FOR SALE
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------- ------- ------ --------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $191,036 $ 110 $1,315 $189,831
Mortgage-backed securities 75,791 392 495 75,688
Obligations of state and political subdivisions 23,575 233 252 23,556
Equity and other securities 27,467 36,702 301 63,868
-------- ------- ------ --------
BALANCE AT SEPTEMBER 30, 1999 $317,869 $37,437 $2,363 $352,943
======== ======= ====== ========
</TABLE>
During the first nine months of 1999, the after-tax net unrealized gain reported
as a separate component of equity (accumulated other comprehensive income)
decreased from $31,538,000 on December 31, 1998 to $22,783,000 on September 30,
1999, thus decreasing shareholders' equity. The decrease was largely the result
of the sale of securities with net gains of $13,831,000 that were realized.
The amortized cost of equity and other securities increased from $17,613,000 on
December 31, 1998 to $27,467,000 on September 30, 1999 largely as a result of an
increase in short-term money market accounts from $297,000 on December 31, 1998
to $10,209,000 on September 30, 1999. The increase in these short-term money
market accounts was funded by the sale of the equity securities referred to
above.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
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 state and political subdivisions 18,694 1,075 13 19,756
Equity and other securities 17,613 45,413 231 62,795
======== ======= ====== ========
BALANCE AT DECEMBER 31, 1998 $292,394 $49,021 $ 541 $340,874
======== ======= ====== ========
</TABLE>
HELD TO MATURITY
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1999
Obligations of state and political subdivisions $ 129,155 $ 2,834 $ 1,648 $ 130,341
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Obligations of state and political subdivisions $117,869 $ 6,863 $ 179 $ 124,553
========= ========= ========= =========
</TABLE>
10
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NOTE 4. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", was issued in June 1998. SFAS
No. 133 standardizes the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts. Under the standard,
entities are required to carry all derivative instruments in the statement of
financial position at fair value. The accounting for changes in the fair value
(i.e. gains or losses) of a derivative instrument depends on whether it has been
designed and qualifies as part of a hedging relationship and if so, the reason
for holding it. If certain conditions are met, entities may elect to designate a
derivative instrument as a hedge against exposure to changes in fair values,
cash flows or foreign currencies. If the hedged exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk hedged. If the hedged exposure is a
cash flow exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive income
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is reported
in earnings immediately. Accounting for foreign currency hedges is similar to
the accounting for fair value and cash flow hedges. If the derivative instrument
is not designated as a hedge, the gain or loss is recognized in earnings in the
period of change.
Area must adopt SFAS No. 133 (as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133") by January 1, 2001, however early adoption is
permitted. On adoption, the provisions of SFAS No. 133 must be applied
prospectively. Area has not determined the impact that SFAS No. 133 will have on
its financial statements and believes that such determination will not be
meaningful until closer to the date of adoption.
NOTE 5. INTANGIBLES
The excess cost over fair value of net assets acquired in purchase business
combinations (goodwill) of $30,767,000 and $30,564,000 net of accumulated
amortization as of September 30, 1999 and December 31, 1998, respectively, is
being amortized predominately over a 10-20 year period on a straight-line basis.
Other intangible assets consist of the value of core deposits purchased of
approximately $2,412,000 and $2,915,000, net of accumulated amortization, as of
September 30, 1999 and December 31, 1998, respectively, which is being amortized
by an accelerated method over ten years and a purchased bank charter of $750,000
and $863,000 as of September 30, 1999 and December 31, 1998, respectively, which
is being amortized over a 10-year period on a straight-line basis. Amortization
expense for the three-month periods ended September 30, 1999 and 1998 was
$868,000 and $712,000, respectively. Amortization expense for the nine-month
periods ended September 30, 1999 and 1998 was $2,605,000 and $2,057,000,
respectively.
NOTE 6. BUSINESS COMBINATIONS (COMPLETED MERGERS AND ACQUISITIONS)
On August 23, 1998 Area acquired NationsBank of Kentucky, N.A., a wholly-owned
subsidiary of NationsBank Corporation (now known as Bank America Corporation).
NationsBank of Kentucky, N.A. had total assets of approximately $133,000,000,
net of certain deposits that were retained by NationsBank of Kentucky, N.A.,
loans of approximately $84,000,000 and deposits of approximately $113,000,000.
The acquisition was accounted for under the purchase method of accounting and,
accordingly, the results of NationsBank of Kentucky, N.A. have been included in
Area's consolidated statements since the date of acquisition. In conjunction
with the acquisition, approximately $22,030,000 of intangibles were recorded.
On January 4,1999, Area merged with Peoples Bancorp of Winchester, which is
headquartered in Winchester, Kentucky. Peoples Bancorp of Winchester had total
assets of $165,000,000, loans of $99,219,000 and deposits of $146,199,000.
Peoples Bancorp of Winchester was a one-bank holding company for Peoples
Commercial Bank. Area issued approximately 1,300,000 shares of its common stock
in conjunction with the merger. This acquisition was accounted for as a
pooling-of-interests; however, due to the relative size of Peoples Bancorp of
Winchester's financial condition and results of operations to that of Area, the
historical financial statements of Area have not been restated to reflect this
combination.
11
<PAGE> 12
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NOTE 7. PENDING ACQUISITIONS
On August 25, 1999 Area announced the signing of definitive agreements providing
for the cash purchase of Peoples Bank of Murray, Murray, Kentucky; Dees Bank of
Hazel, Hazel, Kentucky; Bank of Lyon County, Eddyville, Kentucky; and Bank of
Livingston County, Tiline, Kentucky. Area will pay $77,750,000 in cash for these
banking companies. On June 30, 1999, total assets of the four banking companies
were $382,033,000, total loans were $230,822,000 and total capital was
$45,395,000. The transaction, which will be accounted for as a purchase
transaction, is expected to be consummated during January of 2000, pending
shareholder approval, regulatory approval and other customary conditions of
closing. This transaction has no effect on the financials presented in this Form
10-Q.
On October 4, 1999 Area and The Eifler Group announced the signing of definitive
agreements providing for the cash purchase of The Eifler Group's investment
business. Under terms of the agreements, The Eifler Group will become associated
with Area Services, Inc., a wholly owned subsidiary of Area and will manage
Area's non-deposit investment product line under the name Area Investment
Services. This transaction closed during the fourth quarter of 1999 and
therefore has no effect on the financials presented in this Form 10-Q.
NOTE 8. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Area is a multi-bank holding company that was incorporated in Kentucky in 1976
and is registered under the Bank Holding Company Act of 1956, as amended. On
September 30, 1999, Area directly controlled five affiliated commercial banks
and indirectly controlled eight additional commercial banks through the
ownership of holding companies, all of which are located in Kentucky. Of the
banks controlled by Area, four are national banks and nine are state banks.
Area and its subsidiaries engage in retail and commercial banking. In connection
with these services, Area provides the usual products and services of retail and
commercial banking such as deposits, commercial loans, personal loans and trust
services. The principal business of Area consists of making loans. The principal
markets for these loans are businesses and individuals. These loans are made at
the offices of the affiliated banks and subsidiaries, and some are sold on the
secondary market.
The discussion that follows is intended to provide additional insight into
Area's financial condition and results of operations which includes the
acquisition of NationsBank of Kentucky, N.A. since August 23, 1998 and the
merger with Peoples Bancorp of Winchester since January 4, 1999 (see Note 6 in
the accompanying unaudited financial statements for details of these
transactions). Where considered significant, the impact of these transactions on
Area's results of operations and financial condition is discussed. This
discussion should be read with the consolidated financial statements and
accompanying notes presented in Item 1 of Part I of this report.
12
<PAGE> 13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q and the
exhibits to this quarterly report that are not statements of historical fact
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act (the "Act"). In addition, certain statements in
future filings by Area with the Securities and Exchange Commission, in press
releases, and in oral and written statements made by or with the approval of
Area that are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (1) projections of revenues, income or loss,
earnings or loss per share, the payment or non-payment of dividends, capital
structure and other financial items; (2) statements of Area's plans and
objectives, including those relating to products or services; (3) statements of
future economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
Forward-looking statements involve risks and uncertainties that may cause actual
results to differ materially from those in such statements. Factors that could
cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (2) the effects of and changes in trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and monetary
fluctuations; (4) the timely development and acceptance of new products and
services and perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits; (6) technological
changes; (7) acquisitions; (8) the ability to increase market share and control
expenses; (9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with which Area
and its subsidiaries must comply; (10) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board; (11) changes in Area's organization,
compensation and benefit plans; (12) the costs and effects of litigation and of
unexpected or adverse outcomes in such litigation; and (13) Area's success
managing the risks involved in the foregoing. Such forward-looking statements
speak only as of the date on which the statements are made, and Area undertakes
no obligation to update any forward-looking statement to reflect events or
circumstances after the date on which a statement is made to reflect the
occurrence of unanticipated events.
A. RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 1999 was $7,754,000 versus
$4,520,000 in the same period of 1998. Diluted earnings per share were $0.45
compared to $0.28 for the same period in 1998. The increase during the current
quarter from the third quarter of 1998 was $3,234,000 or 71.5% for net income
and $0.17 or 60.7% per diluted share. The improved earnings during the quarter
compared to the third quarter of 1998 were largely the result of an increase in
security gains (losses) from $(9,000) in the third quarter of 1998 to $896,000,
an increase in net interest income on a taxable equivalent basis totaling
$4,193,000, a decrease in the provision for loan losses totaling $389,000 and an
increase in non-interest income excluding security gains of $1,003,000 or 20.8%.
These increases in net income were partially off-set by a $1,573,000 increase in
non-interest expenses. The gains on the sale of securities reflect Area's
ongoing strategy to improve the performance of its investment portfolio through
repositioning portions of the portfolio as market conditions change.
Year-to-date earnings were $33,530,000 compared to $17,278,000 during the first
three quarters of 1998. Diluted earnings per share totaled $1.96 in 1999
compared to $1.09 during the first nine months of 1998. The year-to-date
increases were $16,252,000 or 94.1% for net income and $0.87 or 79.8% per
diluted share. Earnings for the nine months ended September 30, 1999 reflected
an increase in security gains from $116,000 in the first nine months of 1998 to
$21,279,000, an increase in net interest income on a taxable equivalent basis of
$9,281,000, a reduction in the provision for loans losses of $746,000 and an
increase in non-interest income excluding security gains of $828,000 or 4.9%.
Non-interest income during the first nine months of 1998 included a gain
totaling $2,068,000 on the sale of a subsidiary's loan portfolio. An increase of
$7,639,000 in non-interest expenses partially offset these increases in
earnings.
13
<PAGE> 14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
A. RESULTS OF OPERATIONS (CONTINUED)
Area believes that the most meaningful comparison of the results of operations
excludes nonrecurring items. During the current quarter security gains in the
amount of $582,000 after-tax ($896,000 pre-tax) were recorded. During the third
quarter of 1998 security losses totaling $6,000 after-tax ($9,000 pre-tax) were
recorded in addition to merger-related expenses of $357,000 after-tax ($549,000
pre-tax) in connection with the NationsBank acquisition (see Note 6 in the
accompanying unaudited financial statements). Net income during the third
quarter of 1999 and 1998, adjusted for these items, totaled $7,172,000 or $0.42
per diluted share and $4,883,000 or $0.31 per diluted share, respectively. Core
operating net income increased $2,289,000 or 46.9% while core operating diluted
earnings per share increased $0.11 or 35.5% from the third quarter of 1998.
Several items affected the first nine months of both 1999 and 1998. During the
nine months ended September 30, 1999 Area recorded security gains of $13,831,000
after-tax ($21,279,000 pre-tax), a favorable insurance settlement totaling
$615,000 after-tax ($945,000 pre-tax) and $122,000 of after-tax merger-related
adjustments which enhanced net income. During the first nine months of 1998
security gains totaled $75,000 after-tax ($116,000 pre-tax), a consumer loan
subsidiary sold its loan portfolio for a gain of $1,344,000 after-tax
($2,068,000 pre-tax) and $357,000 after-tax ($549,000 pre-tax) of merger-related
expenses were recorded in connection with the NationsBank acquisition (see Note
6 in the accompanying unaudited financial statements). Net income for the first
nine months of 1999, adjusted for these items, totaled $18,962,000 or $1.11 per
diluted share compared to $16,216,000 or $1.02 per diluted share earned during
the first nine months of 1998. Core operating net income increased $2,746,000 or
16.9% while core operating diluted earnings per share decreased $0.09 or 8.8%.
The following table reconciles net income as reported with core operating net
income:
<TABLE>
<CAPTION>
CORE OPERATING NET INCOME 3 MONTHS ENDED 9 MONTHS ENDED
(Amounts in thousands) SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
------- ------ -------- --------
<S> <C> <C> <C> <C>
Net income as reported $ 7,754 $4,520 $ 33,530 $ 17,278
Add or (deduct) net of taxes:
Security transactions (582) 6 (13,831) (75)
Insurance settlement -- -- (615) --
Merger/acquisition-related adjustments -- 357 (122) 357
Gain on sale of a subsidiary's loans -- -- -- (1,344)
------- ------ -------- --------
CORE OPERATING NET INCOME $ 7,172 $4,883 $ 18,962 $ 16,216
======= ====== ======== ========
</TABLE>
Return on average assets was 1.37% (annualized) in the third quarter of 1999
compared to 0.93% (annualized) during the same period of 1998. Core operating
return on average assets (excluding the items discussed above) totaled 1.27%
(annualized) during the quarter ended September 30, 1999 compared to 1.00% for
the same period in 1998. Return on average equity was 11.49% (annualized) for
the quarter ended September 30, 1999 compared to 8.19% (annualized) during the
third quarter of 1998. Core operating return on average equity (excluding the
items discussed above) was 10.62% (annualized) for the quarter ended September
30, 1999 and 8.85% (annualized) for the third quarter of 1998.
Return on average assets was 2.00% (annualized) for the first nine months of
1999 compared to 1.24% (annualized) during the same period of 1998. Core
operating return on average assets (excluding the items discussed above) totaled
1.13% (annualized) during the nine months ended September 30, 1999 compared to
1.16% (annualized) for the same period in 1998. Return on average equity was
16.87% (annualized) for the first three quarters of 1999 compared to 11.09%
(annualized) during the same period of 1998. Core operating return on average
equity (excluding the nonrecurring items discussed above) was 9.54% (annualized)
for the nine-months ended September 30, 1999 and 10.40% (annualized) for the
same period of 1998.
14
<PAGE> 15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
A. RESULTS OF OPERATIONS (CONTINUED)
The following table provides selected operating data, per share data, selected
ratios and average balances for the three and nine-month periods ended September
30, 1999 and 1998:
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 CHANGE 1999 1998 CHANGE
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Net income $ 7,754 $ 4,520 $ 3,234 $ 33,530 $ 17,278 $ 16,252
Core operating net income (1) 7,172 4,883 2,289 18,962 16,216 2,746
PER SHARE DATA
Basic earnings per share 0.46 0.29 0.17 1.98 1.11 0.87
Core operating basic earnings per share (1) 0.43 0.31 0.12 1.12 1.04 0.08
Diluted earnings per share 0.45 0.28 0.17 1.96 1.09 0.87
Core operating diluted earnings per share (1) 0.42 0.31 0.11 1.11 1.02 0.09
Cash dividends per share 0.05 0.04 0.01 0.145 0.11 0.035
Book value at September 30 15.87 14.24 1.63 15.87 14.24 1.63
Market price at September 30 28.81 26.00 2.81 28.81 26.00 2.81
SELECTED RATIOS AND DATA
Return on assets (2) 1.37% 0.93% 0.44% 2.00% 1.24% 0.76%
Core operating return on assets (1)(2) 1.27% 1.00% 0.27% 1.13% 1.16% (0.03%)
Return on equity (2) 11.49% 8.19% 3.30% 16.87% 11.09% 5.87%
Core operating return on equity (1)(2) 10.62% 8.85% 1.77% 9.54% 10.40% (0.86%)
Efficiency ratio 59.65% 68.08% (8.43%) 51.16% 62.13% (10.97%)
Efficiency ratio (1) 61.45% 65.81% (4.36%) 64.12% 63.95% 0.17%
Net interest margin (2) 4.55% 4.36% 0.19% 4.40% 4.49% (0.09%)
Equity-to-assets 11.64% 10.89% 0.75% 11.64% 10.89% 0.75%
Allowance for loan losses to loans 1.48% 1.63% (0.15%) 1.48% 1.63% (0.15%)
Allowance for loan losses to
nonperforming loans 698.8% 823.4% (124.6%) 698.8% 823.4% (124.6%)
Nonperforming loans to total loans 0.21% 0.20% 0.01% 0.21% 0.20% 0.01%
</TABLE>
(1) Excludes items presented in the Core Operating Net Income table above.
(2) Percentages annualized.
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
AVERAGE BALANCES
Total assets $2,245,352 $1,929,862 $2,246,619 $1,866,412
Earning assets 2,085,291 1,795,460 2,078,568 1,755,546
Shareholders' equity 267,837 218,961 265,796 208,374
</TABLE>
15
<PAGE> 16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
CORE OPERATING CASH BASED EARNINGS
Area believes it is important to also disclose cash based core operating net
income, which excludes nonrecurring items and intangible asset amortization.
Although Area believes these calculations are helpful in understanding the
performance of Area, cash based core operating net income should not be
considered a substitute for net income or cash flow as indicators of Area's
financial performance or its ability to generate liquidity. The following
presents the cash based core operating net income and various cash based
performance ratios:
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 CHANGE 1999 1998 CHANGE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Core operating net income (1) $7,172 $4,883 $2,289 $18,962 $16,216 $2,746
Add back:
Goodwill and other intangible amortization 868 712 156 f2,605 2,057 548
Less: tax effect 153 106 47 461 224 237
------ ------ ------ ------- ------- ------
715 606 109 2,144 1,833 311
------ ------ ------ ------- ------- ------
CASH BASED CORE OPERATING NET INCOME $7,887 $5,489 $2,398 $21,106 $18,049 $3,057
====== ====== ====== ======= ======= ======
</TABLE>
(1) Excludes items presented in the Core Operating Net Income table above.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 CHANGE 1999 1998 CHANGE
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per share data
Cash based core operating basic earnings per share $ 0.47 $ 0.35 $ 0.12 $ 1.25 $ 1.15 $ 0.10
Cash based core operating diluted earnings per share 0.46 0.34 0.12 1.23 1.13 0.10
Performance ratios (annualized)
Cash based core operating return on tangible assets 1.41% 1.14% 0.27% 1.28% 1.31% (0.03%)
Cash based core operating return on tangible equity 13.37% 10.80% 2.57% 12.22% 12.63% (0.41%)
Cash based core operating efficiency ratio 58.53% 63.59% (5.06%) 61.07% 61.83% (0.76%)
</TABLE>
NET INTEREST INCOME
The largest component of Area's operating income is net interest income. Net
interest income is the difference between interest earned on earning assets and
interest expense on interest bearing liabilities. For purposes of this
discussion, interest income earned on tax-exempt securities and loans is
adjusted to a fully taxable equivalent basis to facilitate comparison with
interest earned which is subject to statutory taxation.
Changes in net interest income generally occur due to fluctuations in the
balance and/or mix of interest-earning assets and interest-bearing liabilities,
and changes in their corresponding interest yields and costs.
16
<PAGE> 17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NET INTEREST INCOME (CONTINUED)
Net interest income, on a tax equivalent basis, increased $4,193,000 or 21.3% to
$23,918,000 during the quarter ended September 30, 1999. Area's net interest
margin (which is computed by dividing net interest income on a fully taxable
equivalent basis by average earning assets) increased from 4.36% during the
quarter ended September 30, 1998 to 4.55% during the current quarter.
Competitive pressures on loan pricing and a relatively flat yield curve caused
the average rate on earning assets to decrease from 8.10% in the third quarter
of 1998 to 7.85% in the third quarter of 1999. As an offset, the average rate on
interest bearing liabilities decreased from 4.50% to 4.03% largely as a result
of the maturity of higher-priced certificates of deposits issued three-to-five
years ago and the funding of those withdrawals with borrowed funds. These
changes resulted in an increase of 0.22% in the net interest spread for the
current quarter versus the same period in 1998.
For the nine months ended September 30, 1999, net interest income, on a tax
equivalent basis, increased $9,281,000 or 15.7% to $68,441,000 over the same
period in 1998. The net interest margin was 4.40% for the year-to-date period, a
decrease of 0.09% from 4.49% recorded during the first nine months of 1998. The
decrease in the net interest margin was the result of a decrease of 0.53% to
7.78% in the yield of earning assets during the current period and a smaller
decrease of 0.50% to 4.09% in the rate paid on interest bearing liabilities.
The following presents the components of net income on a taxable equivalent
basis:
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 CHANGE 1999 1998 CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $40,167 $35,622 $ 4,545 $117,656 $106,292 $ 11,364
Taxable-equivalent adjustment 1,106 1,047 3,270 3,126 59 144
------- ------- -------- -------- -------- --------
Interest income-taxable equivalent 41,273 36,669 4,604 120,926 109,418 11,508
Interest expense 17,355 16,944 52,485 50,258 2,227 411
------- ------- -------- -------- -------- --------
Net interest income-taxable equivalent 23,918 19,725 4,193 68,441 59,160 9,281
Provision for loan losses 145 534 (389) 501 1,247 (746)
Non-interest income 6,713 4,805 1,908 39,001 17,010 21,991
Non-interest expenses 18,272 16,699 1,573 54,964 47,325 7,639
------- ------- -------- -------- -------- --------
Income before income taxes 12,214 7,297 4,917 51,977 27,598 24,379
Income taxes 3,354 1,730 1,624 15,177 7,194 7,983
Taxable-equivalent adjustment 1,106 1,047 3,126 59 3,270 144
------- ------- -------- -------- -------- --------
NET INCOME $ 7,754 $ 4,520 $ 3,234 $ 33,530 $ 17,278 $ 16,252
======= ======= ======== ======== ======== ========
</TABLE>
The table on the following page summarizes the fully-taxable equivalent interest
spread, which is the difference between the average yield on earning assets and
the average rate on interest bearing liabilities as well as the net interest
margin, which is the fully-taxable equivalent net interest income divided by the
average earning assets for the three and nine-months ended September 30, 1999
and 1998.
17
<PAGE> 18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NET INTEREST INCOME (CONTINUED)
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1999 1998 CHANGE 1999 1998 CHANGE
---------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Average rate on earning assets (1) 7.85% 8.10% (0.25%) 7.78% 8.31% (0.53%)
Average rate on interest
bearing liabilities (1) 4.03% 4.50% (0.47%) 4.09% 4.59% (0.50%)
Net interest spread (1) 3.82% 3.60% 0.22% 3.69% 3.72% (0.03%)
Net interest margin (1) 4.55% 4.36% 0.19% 4.40% 4.49% (0.09%)
Average earning assets $2,085,291 $1,795,460 $ 289,831 $2,078,568 $1,755,546 $ 323,022
Average interest bearing liabilities 1,708,006 1,493,575 214,431 1,713,828 1,460,494 253,334
</TABLE>
(1) Amounts annualized
PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained at a level management believes is
adequate to absorb estimated losses inherent in the portfolio. Management
determines the adequacy of the allowance based upon reviews of individual loans,
evaluation of the risk characteristics of the loan portfolio, including the
impact of current economic conditions on the borrowers' ability to repay, past
collection and loss experience and such other factors that in management's
judgment deserve current recognition. However, actual losses could differ
significantly from the amount estimated by management. The allowance for loan
losses is established by charges to operating earnings.
An analysis of the changes in the allowance for loan losses and selected ratios
follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1999 1998 CHANGE 1999 1998 CHANGE
---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 23,553 $ 20,109 $ 3,444 $ 21,651 $ 19,887 $ 1,764
Additions through acquisitions -- 1,137 (1,137) 1,857 1,137 720
Provision for loan losses 145 534 (389) 501 1,247 (746)
Loan loss recoveries 271 287 (16) 1,216 1,126 90
Loans charged off 470 493 (23) 1,726 1,823 (97)
---------- ---------- --------- ---------- ---------- ---------
BALANCE, SEPTEMBER 30 $ 23,499 $ 21,574 $ 1,925 $ 23,499 $ 21,574 $ 1,925
========== ========== ========= ========== ========== =========
Average loans, net of unearned income $1,531,922 $1,258,863 $ 273,059 $1,509,659 $1,215,728 $ 293,931
Provision for loan losses to average loans (1) 0.04% 0.17% (0.13%) 0.04% 0.14% (0.10%)
Net loan charge-offs to average loans (1) 0.05% 0.07% (0.02%) 0.05% 0.08% (0.03%)
Allowance for loan losses to end of period loans 1.48% 1.63% (0.15%) 1.48% 1.63% (0.15%)
Allowance for loan losses to nonperforming loans 698.8% 823.4% (124.6%) 698.8% 823.4% (124.6%)
</TABLE>
(1) Amounts annualized
The provision for loan losses decreased $389,000 or 72.8% to $145,000 for the
quarter ended September 30, 1999 compared to the same period last year and
decreased $746,000 or 59.8% during the nine months ended September 30, 1999 when
compared to the first nine months of 1998.
18
<PAGE> 19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
PROVISION FOR LOAN LOSSES (CONTINUED)
The provision for loan losses as a percentage of average loans totaled 0.04%
(annualized) for the quarter ended September 30, 1999 compared to 0.17%
(annualized) for the quarter ended September 30, 1998. For the nine-month period
ended September 30, 1999, the provision for loan losses as a percentage of
average loans decreased to 0.04% (annualized) from 0.14% (annualized) during the
same period in 1998. These decreases reflected the continued improvement in the
quality of loans as discussed more completely under "Asset Quality". These
percentages are low by historical standards and may increase in the future.
Net loan charge-offs (loan charge-offs less recoveries) to average loans
declined to 0.05% (annualized) from 0.07% (annualized) during the quarter ended
September 30, 1999 as a result of relatively stable net charge-offs. Net loan
charge-offs decreased to 0.05% (annualized) for the nine months ended September
30, 1999 compared to 0.08% (annualized) for the same period in 1998 an increase
of $293,931,000 in average loans. These percentages are low by historical
standards and may increase in the future.
The allowance for loan losses was 1.48% of total loans on September 30, 1999, as
compared to the December 31, 1998 level of 1.53% and the September 30, 1998
level of 1.63%. This percentage has decreased since September 30, 1998 as a
result of loan growth and an improvement in the quality of the loan portfolio.
NON-INTEREST INCOME
The tables that follow set forth the components of non-interest income for the
three and nine months ended September 30, 1999 and 1998. The amounts listed
below for the three and nine-month periods include adjustments for the Peoples
transaction (see Note 6 in the accompanying unaudited financial statements) for
comparability purposes.
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED SEPTEMBER 30
TOTAL
AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 1,377 $ -- $ 1,377 $ 1,109 $ 268
Service charges on deposit accounts 2,467 107 2,360 1,943 417
Other service charges, commissions and fees 1,524 67 1,457 1,371 86
Security gains (losses), net 896 -- 896 (9) 905
Gains on sales of loans (net) 256 3 253 270 (17)
Other income 193 (67) 260 121 139
------- -------- -------- ------- --------
TOTAL $ 6,713 $ 110 $ 6,603 $ 4,805 $ 1,798
======= ======== ======== ======= ========
</TABLE>
(1) Excludes Peoples
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
TOTAL
AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 4,083 $ 3 $ 4,080 $ 3,537 $ 543
Service charges on deposit accounts 6,838 329 6,509 5,469 1,040
Other service charges, commissions and fees 4,358 194 4,164 4,661 (497)
Security gains (losses), net 21,279 -- 21,279 116 21,163
Gains on sales of loans (net) 1,015 39 976 2,910 (1,934)
Other income 1,428 (82) 1,510 317 1,193
------- -------- -------- ------- --------
TOTAL $39,001 $ 483 $ 38,518 $17,010 $ 21,508
======= ======== ======== ======= ========
</TABLE>
(1) Excludes Peoples
19
<PAGE> 20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NON-INTEREST INCOME (CONTINUED)
Non-interest income (excluding security gains) has provided Area with a
non-interest-sensitive source of revenue. During the quarter ended September 30,
1999 non-interest income (excluding security gains) represented 19.6% of tax
equivalent net revenue and 20.6% during the first nine months of 1999. This
compares with 19.6% in the third quarter of 1998 and 22.2% for the year-to-date
period of 1998. The decrease from the first nine months of 1998 to the first
nine months of 1999 was largely the result of growth in net interest income on a
taxable equivalent basis. Non-interest income totaled $6,713,000 and $39,001,000
for the three and nine-month periods ended September 30, 1999. These amounts
represent increases of $1,908,000 or 39.7% and $21,991,000 or 129.3%,
respectively, when compared to 1998 period totals. Included in the non-interest
income totals for the current quarter and year-to date period is $110,000 and
$483,000, respectively, from Peoples Bancorp of Winchester ("Peoples"), which
merged with Area in January 1999 (see Note 6 in the accompanying unaudited
financial statements). The merger was accounted for as a pooling-of-interests;
however, due to the relative size of Peoples' financial condition and results of
operations to that of Area, the historical financial statements of Area have not
been restated to reflect this combination. The following analysis excludes
Peoples from current amounts for comparative purposes (see table above).
Commissions and fees on fiduciary activities increased $268,000 or 24.2% to
$1,377,000 in the third quarter of 1999 and $543,000 or 15.4% to $4,080,000
during the current nine-month period largely as a result of successful new
business development efforts. Service charges on deposit accounts increased
$417,000 or 21.5% to $2,360,000 and $1,040,000 or 19.0% to $6,509,000,
respectively, for the three and nine months ended September 30, 1999, when
compared to similar period totals in 1998, due primarily to increases in
deposits subject to service charges and increases in fees charged. Other service
charges, commissions and fees totaled $1,457,000 and $4,164,000 for the third
quarter of 1999 and year-to-date periods ended September 30, 1999. These amounts
reflect an increase of $86,000 or 6.3% and a decrease of $497,000 or 10.7%,
respectively, for the three and nine-month periods ended September 30, 1999. The
decrease for the year-to-date period was largely the result of changes in the
reporting of income and expenses by Area's credit card service provider.
Security gains (net) totaled $896,000 in the current quarter compared to a loss
of $9,000 in the same period of 1998 and $21,279,000 for the year-to-date period
versus $116,000 during the first nine months of 1998. These gains on the sale of
securities reflect Area's ongoing strategy to improve the performance of its
investment portfolio through repositioning portions of the portfolio as market
conditions change. Gains on the sales of loans decreased $17,000 or 6.3% to
$253,000 in the third quarter of 1999 compared to the same period in 1998 and
decreased $1,934,000 or 66.5% to $976,000 during the year-to-date period. Gains
on the sales of loans were favorably impacted in the first nine months of 1998
by a gain totaling $2,068,000 from the sale of a subsidiary's consumer loan
portfolio. Other income totaled $260,000 during the three months ended September
30, 1999 and $1,510,000 for the nine months ended September 30, 1999. These
amounts represent increases of $139,000 or 114.9% and $1,193,000 or 376.3%,
respectively. The increase for the year-to-date period was primarily the result
of an insurance settlement received during the first quarter of 1999 totaling
$945,000 from a loss occurring in 1994.
20
<PAGE> 21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NON-INTEREST EXPENSES
The tables that follow set forth the components of non-interest expenses for the
three and nine months ended September 30, 1999 and 1998. The amounts listed
below for the three and nine-month periods include adjustments for the Peoples
transaction (see Note 6 in the accompanying unaudited financial statements) for
comparability purposes.
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED SEPTEMBER 30
TOTAL
AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 8,621 $ 430 $ 8,191 $ 8,078 $ 113
Net occupancy expenses 1,416 23 1,393 1,097 296
Furniture and equipment expense 1,504 88 1,416 1,167 249
Federal deposit insurance 83 -- 83 62 21
Data processing expense 1,176 (58) 1,234 936 298
Advertising and community relations 763 39 724 777 (53)
Insurance and taxes 531 48 483 584 (101)
Professional fees 1,016 20 996 807 189
Amortization of intangibles 868 -- 868 705 163
Other 2,294 121 2,173 2,486 (313)
------- ------- ------- ------- -------
TOTAL $18,272 $ 711 $17,561 $16,699 $ 862
======= ======= ======= ======= =======
</TABLE>
(1) Excludes Peoples
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
TOTAL
AREA PEOPLES AREA NET
1999 1999 1999(1) 1998 CHANGE
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $26,257 $ 1,382 $24,875 $23,179 $ 1,696
Net occupancy expenses 4,021 67 3,954 2,913 1,041
Furniture and equipment expense 4,561 385 4,176 3,208 968
Federal deposit insurance 220 -- 220 217 3
Data processing expense 4,046 204 3,842 2,797 1,045
Advertising and community relations 2,433 72 2,361 2,094 267
Insurance and taxes 1,799 120 1,679 1,763 (84)
Professional fees 2,237 72 2,165 2,308 (143)
Amortization of intangibles 2,605 -- 2,605 2,057 548
Other 6,785 550 6,235 6,789 (554)
------- ------- ------- ------- -------
TOTAL $54,964 $ 2,852 $52,112 $47,325 $ 4,787
======= ======= ======= ======= =======
</TABLE>
(1) Excludes Peoples
Non-interest expenses totaled $18,272,000 and $54,964,000 during the three and
nine-month periods ended September 30, 1999. These amounts represent increases
of $1,573,000 or 9.4% and $7,639,000 or 16.1% for the current quarter and
year-to-date periods compared to similar periods in 1998. Included in the
non-interest expenses for the current quarter and year-to-date periods is
approximately $711,000 and $2,852,000, respectively, from Peoples which merged
with Area in January 1999 (see Note 6 in the accompanying unaudited financial
statements). The merger was accounted for as a pooling-of-interests; however,
due to the relative size of Peoples' financial condition and results of
operations to that of Area, the historical financial statements of Area have not
been restated to reflect this combination. Excluding the non-interest expenses
related to Peoples, total non-interest expenses increased $862,000 or 5.2% from
the third quarter of 1998 and $4,787,000 or 10.1% from the first nine months of
1998. The following analysis excludes Peoples from current amounts for
comparative purposes (see tables above). Salaries and benefits increased
$113,000 or 1.4% to $8,191,000 in the third quarter of 1999 and $1,696,000 or
7.3% to $24,875,000 for the nine-month period. These increases were the result
of merit increases and the creation of additional positions to staff Area for
future growth. Net occupancy expenses increased $296,000 or 27.0% and $1,041,000
or 35.7%. Modernizing several facilities and the addition of six new branches
accounted for these increases. Furniture and equipment
21
<PAGE> 22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
NON-INTEREST EXPENSES (CONTINUED)
expenses totaled $1,416,000 and $4,176,000 for the third quarter of 1999 and
year-to-date periods. The increases were $249,000 or 21.3% and $968,000 or
30.2%, respectively. Depreciation of equipment used to become Year 2000 ready
accounted for a majority of these increases. Data processing expenses totaled
$1,234,000 during the current quarter compared to $936,000 for the same period
in 1998 and $3,842,000 during the nine months ended September 30, 1999 versus
$2,797,000 during the first three quarters of 1998. The increases, $298,000 or
31.8% and $1,045,000 or 37.4% for the quarter and year-to-date periods were
largely the result of continued enhancements to Area's data processing
capabilities in addition to expenses associated with modifying computer
application systems for Year 2000. Advertising and community relations decreased
$53,000 or 6.8% to $724,000 during the current quarter and increased $267,000 or
12.8% to $2,361,000 in the nine months ended September 30, 1999 when compared to
the same periods in 1998. Increases in radio advertising and donations accounted
for the majority of the increase the year-to-date period. Professional fees
increased $189,000 or 23.4% in the current quarter and decreased $143,000 or
6.2% during the year-to-date period compared to similar periods in 1999. The
increase during the current period was the result of acquisition activities as
discussed in Note 7 in the accompanying unaudited financial statements. Other
non-interest expenses totaled $2,173,000 during the current quarter compared to
$2,486,000 for the same period in 1998 and $6,235,000 for the nine-months ended
September 30, 1999 compared to $6,789,000 during the first three quarters of
1998. The current quarter reflected a decrease of $313,000 or 12.6% while the
decrease for the nine months ended September 30, 1999 was $554,000 or 8.2%.
These decreases were largely the result of changes in the reporting of income
and expenses by Area's credit card service provider.
INCOME TAX EXPENSE
Income tax expense totaled $3,354,000 and $15,177,000 for the three and
nine-month periods ended September 30, 1999 compared to $1,730,000 and
$7,194,000 for the same periods in 1998. The increased level of income tax
expense for both the current three and nine-month periods was the result of
higher pre-tax income. The effective tax rate was 30.2% and 31.2% for the three
and nine-month periods ended September 30, 1999 compared to 27.7% and 29.4% for
the same periods of 1998, respectively. The effective tax rate differs from the
marginal income tax rate of 35% in both 1999 and 1998 due to the effects of tax
exempt interest and goodwill amortization. The increase in the effective income
tax rate during 1999 is attributable to the $24,235,000 or 99% increase in
pretax accounting income over 1998, resulting primarily from security gains of
$21,279,000 discussed previously.
YEAR 2000
What is commonly referred to as "Year 2000"or "Y2K" presents potential problems
that have received much publicity and may affect many computer systems currently
in use. In these cases, the computer systems record years in a two-digit format
that may lead to misinterpretation between year 2000 and year 1900. The result
could lead to, among other things, business interruptions and errors in
computations that use dates. The potential costs and uncertainties associated
with Year 2000 will depend not only on the computer hardware and software
currently in use at a specific company, but also the degree to which that
company's suppliers and customers have addressed their individual Year 2000
issues.
In August 1997 management established a formal program to address Year 2000
issues. The program is comprised of five phases: (1) awareness; (2) assessment;
(3) remediation; (4) testing; and (5) validation. Additionally, the program has
full management support and has a project manager. The following is a brief
discussion of each phase:
The awareness phase involved defining the Year 2000 problems and establishing an
overall strategy. Area defines Year 2000 compliance as accurately processing
date/time data including calculations involving dates occurring in years 2000
and beyond. The awareness phase began in August 1997 and is complete.
22
<PAGE> 23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
YEAR 2000 (CONTINUED)
The assessment phase defined the size and complexity of the problems and the
resources necessary to address Year 2000 issues. During this phase, Area
comprehensively reviewed all computer systems and applications to determine
which ones could be adversely affected by Year 2000. Area's data processing for
its banking affiliates is performed primarily by a third party vendor.
Consequently, Area depends upon this vendor for its mission-critical data
processing. As of December 31, 1998, this vendor had informed Area that the
vendor had made all reprogramming changes necessary to be Year 2000 ready. In
addition, Area has reviewed Year 2000 issues with its other major business
relationships, defined as those that may have a significant financial and/or
operational impact on Area. Included with this review have been customers,
vendors, counterparties, other non-Area banks, utilities and various
intermediaries. Area has determined that there are two primary sources of third
party risks within this group that may result in financial losses. The first is
loan customers (primarily business related) of Area's affiliated banks that may
experience financial difficulties as a result of not being year 2000 compliant
which increases the potential for delays in receiving payments and/or loan
charge-offs. Major borrowers have been reviewed using a Year 2000 credit risk
assessment and no material issues were noted. The other third party risk is from
Area's vendors and non-information technology systems including alarm systems,
elevators, HVAC and cash vaults. All mission-critical vendors have been
contacted and have indicated that they were Year 2000 ready at December 31,
1998. As of December 31, 1998, the assessment phase was completed.
The purpose of the remediation phase is to ensure all date routines have been
corrected to properly address Year 2000 issues. As a result of Area's reliance
upon third party vendors for a portion of its mission-critical functions, Area
is working closely with these vendors. As of June 30, 1999, the remediation
phase was complete.
The testing phase encompasses actual testing of the new/renovated systems to
ensure readiness. An independent consultant has assisted management in
conducting this phase. The testing phase was completed as of June 30, 1999.
The final phase, validation, involves testing the new/renovated software and
systems with actual data. This phase was complete as of September 30, 1999.
Total cost to date for Area's Year 2000 efforts, which includes consultants,
software and hardware, has been approximately $3,400,000. Management estimates
that the remaining cost to ensure Year 2000 readiness should not exceed
$200,000. Significant portions of these costs are not incremental, but represent
the redeployment of existing staff and information technology. However, there
has been an opportunity cost associated with Year 2000 readiness because the
staff involved would normally be spending their time on other projects. Finally,
approximately $3,000,000 of the total estimated cost of $3,600,000 is for
capital expenditures that will be depreciated over their useful lives.
Management has completed a detailed contingency plan that addresses the most
reasonably likely scenarios of disruptions caused by Year 2000. The precise
plans utilized will depend upon the exact problems that develop. Disruptions
could range from discrete application-specific problems that can be resolved to
systematic failures affecting the banking industry or other industries as a
whole. Area can not identify every disruption that may affect it but has
identified certain critical problems that may arise. Even with precautions,
occasional interruptions in services provided Area may occur which could affect
Area's ability to provide its services, for example, interruptions in electrical
service can occur from harsh weather, traffic accidents and other incidents. It
is possible that such interruptions may occur during the Year 2000 changeover
period.
23
<PAGE> 24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
YEAR 2000 (CONTINUED)
The following table presents each phase and its percentage completion on
September 30, 1999 along with the estimated percentage completion on December
31, 1999:
<TABLE>
<CAPTION>
MANAGEMENT ESTABLISHED YEAR 2000 FORMAL PROGRAM
PERCENT COMPLETE
SEPTEMBER 30 DECEMBER 31
PHASE DESCRIPTION 1999 1999
----- ----------- ------------- ------------
(ACTUAL) (ESTIMATE)
<S> <C> <C> <C>
1 Awareness 100% 100%
2 Assessment 100% 100%
3 Remediation 100% 100%
4 Testing 100% 100%
5 Validation 100% 100%
</TABLE>
B. FINANCIAL POSITION
Total assets increased $129,102,000 or 6.1% to $2,261,467,000 from December 31,
1998. Excluding the merger with Peoples Bancorp of Winchester (see note 6 in the
accompanying unaudited financial statements), assets decreased approximately
$35,898,000 or 1.7% from year-end. Assets averaged $2,245,352,000 in the quarter
ended September 30, 1999 compared to $1,929,862,000 during the same period in
1998. The growth in average assets from September 30, 1998 to September 30, 1999
was $315,490,000 or 16.3%. This growth was largely the result of the NationsBank
of Kentucky, N.A. and Peoples Bancorp of Winchester acquisitions (see Note 6 in
the accompanying unaudited financial statements). Earning assets totaled
$2,084,752,000 on September 30, 1999, an increase of $176,800,000 or 9.3% over
December 31, 1998. Loans accounted for virtually all of the growth in earning
assets.
SHORT-TERM INVESTMENTS AND SECURITIES
Short-term investments, which include interest-bearing deposits with banks and
federal funds sold, totaled $5,384,000 on September 30, 1999, a decrease of
$17,050,000 from year-end balances. These funds were invested in higher yielding
investments and loans.
Securities represent 23.1% of earning assets. They totaled $482,098,000 on
September 30, 1999, an increase of $23,355,000 or 5.1% from December 31, 1998.
The change for the first nine months of 1999 largely resulted from securities
acquired in the merger with Peoples Bancorp of Winchester (see Note 6 to the
accompanying unaudited financial statements). The held-to-maturity and
available-for-sale portfolios as of September 30, 1999 consisted of 39.4% in
U.S. and other government agency securities, 15.7% in mortgage-backed
securities, 31.7% in state and municipal securities and 13.2% in equity and
other securities. The comparable distributions at December 31, 1998 were 41.3%,
15.0%, 30.0% and 13.7%, respectively.
LOANS
Loans, including loans held for sale increased $170,495,000 or 11.9% to
$1,597,270,000 during the nine months ended September 30, 1999. Excluding the
merger with Peoples Bancorp of Winchester (see note 6 to the accompanying
unaudited financial statements), loans increased approximately $71,276,000 or
5.0% during the first nine months of 1999. Loans, including loans held for sale,
represent the largest category of earning assets, comprising 76.6% of earning
assets as of September 30, 1999, 74.7% as of December 31, 1998 and 71.1% as of
September 30, 1998.
24
<PAGE> 25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
LOANS (CONTINUED)
The following table presents the major categories of loans including loans held
for sale:
<TABLE>
<CAPTION>
(Amounts in thousands)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
Commercial $ 562,596 $ 503,173 $ 409,854
Real estate 801,204 731,620 730,412
Consumer installment and other loans 233,470 191,982 193,895
---------- ---------- ----------
TOTAL $1,597,270 $1,426,775 $1,334,161
========== ========== ==========
</TABLE>
DEPOSITS
Deposits totaled $1,677,242,000 on September 30, 1999, a decrease of $14,622,000
or 0.9% from December 31, 1998. Excluding deposits acquired as a result of the
merger with Peoples Bancorp of Winchester (see Note 6 to the accompanying
unaudited financial statements) deposits declined approximately $160,821,000 or
9.5% from December 31, 1998 to September 30, 1999. Non-interest-bearing deposits
(excluding deposits acquired through the Peoples merger) declined $26,449,000 or
10.5% to $241,440,000 from year-end totals, partially as a result of commercial
customers desire to maintain higher balances over year-end. Interest-bearing
deposits (excluding deposits acquired through the Peoples merger) decreased
$134,372,000 or 9.3% to $1,435,802,000 during this period. Area's retail
customers are continuing to seek higher yields for their interest bearing
accounts, thus moving funds into alternative investments. This trend has limited
Area's ability to increase its interest bearing deposits. Average deposits
increased $276,148,000 or 18.8% in the nine months ended September 30, 1999
compared to the same period in 1998. Average non-interest bearing deposits
increased $63,610,000 or 36.4% during the first nine months compared to the same
period last year.
The following table summarizes the composition of deposits as of September 30,
1999, December 31, 1998 and September 30, 1998:
<TABLE>
<CAPTION>
(Amounts in thousands)
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1999 1998 1998
---------- ---------- ----------
<S> <C> <C> <C>
Non-interest bearing demand $ 241,440 $ 251,950 $ 204,830
Interest bearing deposits:
Interest bearing demand 277,805 285,102 244,687
Savings 398,520 358,511 341,266
Certificates of deposit of $100,000 or more 160,546 154,965 156,407
Other time 598,931 641,336 639,830
---------- ---------- ----------
Total interest bearing deposits 1,435,802 1,439,914 1,382,190
---------- ---------- ----------
TOTAL DEPOSITS $1,677,242 $1,691,864 $1,587,020
========== ========== ==========
</TABLE>
BORROWED FUNDS
Borrowed funds, which include federal funds purchased, securities sold under
agreements to repurchase, notes payable to the U.S. Treasury, advances from the
Federal Home Loan Bank and other borrowings increased by $127,213,000 or 74.5%
to $297,939,000 from $170,726,000 on December 31, 1998. Borrowed funds increased
as a result of the decline in deposits discussed above and strong loan growth.
25
<PAGE> 26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
CAPITAL RESOURCES
Shareholders' equity totaled $263,276,000 at September 30, 1999, an increase of
$25,063,000 or 10.5% from December 31, 1998. During the first nine months of
1999, $31,084,000 was retained from net income of $33,530,000 after paying
dividends to shareholders of $2,446,000. An additional source of shareholders'
equity growth during the first nine months of 1999 was common stock issued in
the merger with Peoples Bancorp of Winchester (see Note 6 in the accompanying
unaudited financial statements) which totaled $13,628,000. These increases were
partially offset by a decrease totaling $8,755,000 or 27.8% to $22,783,000 in
accumulated other comprehensive income as a result of the sale of securities
with gains/losses that were realized.
The shareholders' equity-to-asset ratio was 11.64% at September 30, 1999
compared to 11.17% on December 31, 1998.
Book value per share was $15.87, $15.20 and $14.24 at September 30, 1999,
December 31, 1998 and September 30, 1998, respectively.
During the third quarter of 1999, Area repurchased 368,470 shares of its common
stock in the open market at an average price of $25.44 per share. Of this total,
337,970 shares were repurchased under the 5% repurchase plan announced on August
26, 1999.
A summary of the regulatory capital ratios is shown below:
<TABLE>
<CAPTION>
REGULATORY CAPITAL REQUIREMENTS
SEPTEMBER 30 DECEMBER 31 WELL MINIMUM
1999 1998 CAPITALIZED REQUIRED
---- ---- ----------- --------
<S> <C> <C> <C> <C>
Leverage Ratio 9.44% 8.29% 5.00% 4.00%
Tier I Risk Based Capital Ratio 12.78% 11.82% 6.00% 4.00%
Total Risk Based Capital Ratio 14.03% 13.08% 10.00% 8.00%
</TABLE>
ASSET QUALITY
At September 30, 1999, the allowance for loan losses was $23,499,000 or 1.48% of
period-end loans, as compared to $21,651,000 or 1.53% of loans at December 31,
1998. The ratio of the allowance for loan losses to non-performing assets
decreased slightly to 501.6% at September 30,1999, compared with 513.2% at
December 31, 1998. Non-performing assets consist of non-accrual loans, loans
past due ninety days or more that are still accruing interest, restructured
loans, and other real estate owned. Currently, year-to-date net charge-offs
(loan charge-offs less recoveries) are at 0.05% (annualized) of average
year-to-date loans compared to 0.08% (annualized) during the same period in
1998. This ratio is at an historical low level and there can be no assurance
that net charge-offs will not increase in the future.
Management maintains the allowance for loan losses at a level that is sufficient
to absorb the estimated losses that, in the opinion and judgment of management,
are inherent in the loan portfolio. Management's evaluation includes an analysis
of the overall quality of the loan portfolio, historical loan loss experience,
loan delinquency trends and the economic conditions within Area's markets. Area
also bases allocations of the allowance on specifically identified probable loss
situations.
The allocation of the allowance for loan losses is an estimate of the portion
which will be used to cover future charge-offs in each loan category, but does
not preclude any portion of the allowance allocated to one type of loan from
being used to cushion losses of another loan type. This allocation is determined
by the estimated loss within each loan pool as well as any specific allocations
that may be assigned to specific loans within the same portfolio section with
the remainder being assigned to the unallocated category.
26
<PAGE> 27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 1999 AND 1998
ASSET QUALITY (CONTINUED)
A continuous and comprehensive loan review program is maintained by Area for
each affiliate bank. The purpose of this program is to provide periodic review
and inspection of loans to ensure the safety, liquidity and profitability of the
loan portfolio. Area's loan review department is entrusted with the
responsibility to identify foreseeable problems, measure compliance with
established loan and operating policies and provide objective loan portfolio
appraisals to the Board of Directors and management.
The following schedule shows the dollar amount of assets at September 30, 1999,
December 31, 1998 and September 30, 1998, which were nonaccrual loans, loans
contractually past due ninety days or more as to interest or principal payments
and still accruing and other real estate owned:
<TABLE>
<CAPTION>
(In thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
1999 1998 1998
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans $1,016 $1,787 $1,664
Loans contractually past due 90 days or more as to
interest or principal and still accruing 2,347 757 956
------ ------ ------
TOTAL NONPERFORMING AND RESTRUCTURED LOANS 3,363 2,544 2,620
Other real estate owned 1,322 1,675 1,805
------ ------ ------
TOTAL NONPERFORMING ASSETS $4,685 $4,219 $4,425
====== ====== ======
</TABLE>
C. LIQUIDITY
The purpose of liquidity management is to match the sources of funds with
anticipated customer borrowings as well as withdrawals and other obligations.
This is accomplished by balancing changes in demand for funds with changes in
the supply of funds. Liquidity to meet demand is provided by maturing assets,
the ability to attract deposits and borrowings from third parties such as the
Federal Home Loan Bank.
Deposits have historically provided Area with a major source of stable and
relatively low-cost funding. Secondary sources of liquidity include federal
funds purchased, securities sold under agreements to repurchase, notes payable
to the U.S. Treasury, advances from the Federal Home Loan Bank and other
borrowings.
As of September 30, 1999, 74.2% of total assets were funded by core deposits
while 13.2% were funded with secondary sources of liquidity discussed above,
compared to 79.3% and 8.0%, respectively, as of December 31, 1998.
The net loan-to-deposit ratio increased from 82.2% on December 31, 1998 to 93.3%
on September 30, 1999 as a result of the increase in loans and a decrease in
deposits.
27
<PAGE> 28
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1999 AND 1998
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Area's September 30, 1999 analysis of the impact of changes in interest rates on
net income over the next 12 months is presented in the following table. The
table below illustrates the simulation analysis of the impact of a 100 (1.00%)
and 200 (2.00%) basis point upward and downward movement in interest rates. The
impact of the rate movement was simulated as if rates changed immediately from
September 30, 1999 levels, and remained constant at those levels thereafter:
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(In thousands, except per share data)
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES FROM SEPTEMBER 30, 1999 RATES
INCREASE DECREASE
+200BP +100BP -100BP -200BP
------ ------ ------ ------
<S> <C> <C> <C> <C>
SIMULATED IMPACT IN THE NEXT 12 MONTHS
Net income increase (decrease) $ 2,510 $ 4,288 $ (2,862) $ (6,088)
Net income per share-basic increase (decrease) 0.15 0.25 (0.17) (0.36)
Net income per share-diluted increase (decrease) 0.15 0.25 (0.17) (0.36)
</TABLE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Pursuant to Rule 14a-4(c)(1) promulgated under to Securities Exchange
Act of 1934, as amended, shareholders desiring to present a proposal for
consideration at the 2000 Annual Meeting of Shareholders must notify
Area in writing at its principal office at P.O. Box 786, Owensboro,
Kentucky 42302-0786 of the contents of such proposal no later than
November 1, 1999. Failure to timely submit such a proposal will enable
the proxies appointed by management to exercise their discretionary
voting authority when the proposal is raised at the Annual Meeting of
Shareholders without any discussion of the matter in the proxy
statement.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
- --------------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended (Incorporated
by reference to the exhibit filed with the Registrant's Registration
Statement on Form S-8, File No. 333-38037.)
3.2 Bylaws of the Registrant, as amended (Incorporated by reference to the
exhibit filed with the Registrant's Form 10/A1, filed with the
Commission on June 30, 1995, File No. 0-26032.)
10.1* Form of Area Bancshares Corporation Restricted Stock Plan Agreement
(Incorporated by reference to the exhibit filed with the Registrant's
Form 10/A1, filed with the Commission on June 30, 1995, File No.
0-26032.)
</TABLE>
28
<PAGE> 29
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1999 AND 1998
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
- --------------- ----------------------
<S> <C>
10.2* 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.)
10.13* Second Amendment, dated December 30, 1994, to Letter Agreement between
Cardinal Bancshares, Inc. and Michael S. Karlin dated December 13, 1993
(Incorporated by reference to the exhibit filed with Cardinal's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, File
No. 0-20494.)
10.14* Letter Agreement between Cardinal Bancshares, Inc. and Vincent D.
Dailey dated December 13, 1993 (Incorporated by reference to the
exhibit filed with Cardinal's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993, File No. 0-20494.)
</TABLE>
29
<PAGE> 30
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1999 AND 1998
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
- --------------- ----------------------
<S> <C>
10.15* Amendment, dated December 30, 1994, to Letter Agreement between
Cardinal Bancshares, Inc. and Vincent D. Dailey dated December 13, 1993
(Incorporated by reference to the exhibit filed with Cardinal's Annual
Report on Form 10-K for the fiscal year ended December 31, 1994, File
No. 0-20494.)
10.16* Stock Option Agreement dated December 13, 1993 between Cardinal
Bancshares, Inc. and Michael S. Karlin (Incorporated by reference to
the exhibit filed with Cardinal's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993, File No. 0-20494.)
10.17* Stock Option Agreement dated December 13, 1993 between Cardinal
Bancshares, Inc. and Vincent S. Dailey (Incorporated by reference to
the exhibit filed with Cardinal's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993, File No. 0-20494.)
10.18* Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership Plan and
Trust Agreement (Incorporated by reference to the exhibit filed with
Cardinal's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, File No. 0-20494.)
10.19* Cardinal Bancshares, Inc. Management Retention Plan and Trust Agreement
for the Benefit of Alliance Savings Bank (Incorporated by reference to
the exhibit filed with Cardinal's Registration Statement on Form SB-2,
File No. 33-60796.)
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
*The indicated exhibit is a compensatory plan or arrangement.
(b) Three reports on Form 8-K dated August 30, 1999, August 31, 1999 and
October 8, 1999 were filed with the United States Securities and
Exchange Commission and reported the following under "Item 5-Other
Events":
On August 25, 1999, Area announced the signing of definitive agreements
providing for the cash purchase of Peoples Bank of Murray, Murray,
Kentucky; Dees Bank of Hazel, Hazel, Kentucky; Bank of Lyon County,
Eddyville, Kentucky; and Bank of Livingston County, Tiline, Kentucky.
Area will pay a total of $77,750,000 in cash for these banking
companies. The transaction, which will be accounted for as a purchase
transaction, is expected to be consummated during January of 2000,
pending shareholder approval, regulatory approval and other customary
conditions of closing.
On August 26, 1999 Area announced that its Board of Directors approved
the repurchase of up to 5% of its common stock on the open market,
through unsolicited negotiated transactions or other types of
repurchases. The total number of shares repurchased could total 842,830
based on 16,856,596 shares outstanding as of June 30, 1999.
On October 4, 1999, Area announced the signing of definitive agreements
providing for Area's purchase of the investment business currently
operated by Thomas Eifler, Sr. and Thomas Eifler, Jr. in Louisville,
Kentucky. Under the terms of the agreements, the Eiflers will become
associated with Area Services, Inc., a wholly owned subsidiary of Area
Bancshares Corporation, and will manage the company's non-deposit
investment product line under the name Area Investment Services.
30
<PAGE> 31
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1999 AND 1998
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AREA BANCSHARES CORPORATION
Date: November 12, 1999 By: /s/ Thomas R. Brumley
-------------------- -----------------------------------------
Thomas R. Brumley
President and Chief Executive
Officer (Principal Executive Officer)
Date: November 12, 1999 By: /s/ Edward J. Vega
-------------------- -----------------------------------------
Edward J. Vega
Senior Vice President-Chief Financial
Officer (Principal Financial Officer)
Date: November 12, 1999 By: /s/ Gary R. White
-------------------- -----------------------------------------
Gary R. White
Vice President, Controller
(Principal Accounting Officer)
31
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 73,589
<INT-BEARING-DEPOSITS> 5,384
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 352,943
<INVESTMENTS-CARRYING> 129,155
<INVESTMENTS-MARKET> 130,341
<LOANS> 1,588,399
<ALLOWANCE> 23,499
<TOTAL-ASSETS> 2,261,467
<DEPOSITS> 1,677,242
<SHORT-TERM> 219,056
<LIABILITIES-OTHER> 24,065
<LONG-TERM> 78,883
0
0
<COMMON> 28,460
<OTHER-SE> 233,761
<TOTAL-LIABILITIES-AND-EQUITY> 2,261,467
<INTEREST-LOAN> 96,146
<INTEREST-INVEST> 20,248
<INTEREST-OTHER> 1,262
<INTEREST-TOTAL> 117,656
<INTEREST-DEPOSIT> 44,838
<INTEREST-EXPENSE> 7,647
<INTEREST-INCOME-NET> 65,171
<LOAN-LOSSES> 501
<SECURITIES-GAINS> 21,279
<EXPENSE-OTHER> 54,964
<INCOME-PRETAX> 48,707
<INCOME-PRE-EXTRAORDINARY> 48,707
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,530
<EPS-BASIC> 1.98
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 7.78
<LOANS-NON> 1,016
<LOANS-PAST> 2,347
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 21,651
<CHARGE-OFFS> 1,726
<RECOVERIES> 1,216
<ALLOWANCE-CLOSE> 23,499
<ALLOWANCE-DOMESTIC> 23,499
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 4,341
</TABLE>
