<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 March 31, 2000
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 April 30, 2000: 16,362,548
<PAGE> 2
AREA BANCSHARES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NUMBER
<S> <C>
Item 1. Financial Statements 3
Unaudited consolidated balance sheets, March 31, 2000, 3
December 31, 1999 and March 31, 1999
Unaudited consolidated statements of income, three months
ended March 31, 2000 and 1999 4
Unaudited consolidated statements of comprehensive income,
three months ended March 31, 2000 and 1999 5
Unaudited consolidated statements of shareholders' equity,
year ended December 31, 1999 and three months ended
March 31, 2000 6
Unaudited consolidated statements of cash flows three
months ended March 31, 2000 and 1999 7
Notes to unaudited consolidated financial statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Results of operations 14
Financial position 22
Liquidity 25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Changes in Securities 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 27
</TABLE>
2
<PAGE> 3
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31 MARCH 31
2000 1999 1999
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 76,107 $ 98,598 $ 91,567
Interest bearing deposits with banks 7,249 6,010 7,608
Federal funds sold -- -- 11,728
Securities:
Available for sale (amortized cost of $402,402,
$325,884 and $360,464) 434,334 363,627 428,939
Held to maturity (fair value of $129,910, $129,028,
and $127,337) 129,463 129,089 121,262
----------- ----------- -----------
TOTAL SECURITIES 563,797 492,716 550,201
----------- ----------- -----------
Mortgage loans held for sale 8,350 8,682 12,329
Loans, net of unearned discount 1,883,588 1,631,396 1,455,798
Less allowance for loan losses 27,540 23,055 23,616
----------- ----------- -----------
NET LOANS 1,856,048 1,608,341 1,432,182
----------- ----------- -----------
Premises and equipment, net 51,787 44,986 44,142
Goodwill and other intangible assets 65,164 32,969 35,849
Other assets 53,394 48,219 53,577
=========== =========== ===========
TOTAL ASSETS $ 2,681,896 $ 2,340,521 $ 2,239,183
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 303,142 $ 264,951 $ 236,764
Interest-bearing 1,749,462 1,446,831 1,520,051
----------- ----------- -----------
TOTAL DEPOSITS 2,052,604 1,711,782 1,756,815
----------- ----------- -----------
Federal funds purchased 39,350 74,362 25,739
Securities sold under agreements to repurchase 115,993 118,408 99,803
Notes payable to the U.S. Treasury 27,004 14,934 1,929
Advances from the Federal Home Loan Bank 85,838 130,210 40,335
Other borrowings 60,725 135 5,087
Accrued expenses and other liabilities 29,189 23,726 37,073
----------- ----------- -----------
TOTAL LIABILITIES 2,410,703 2,073,557 1,966,781
----------- ----------- -----------
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 March 31, 2000,
16,355,348 December 31, 1999, 16,512,809 and March
31, 1999, 16,972,908 28,176 28,449 29,250
Paid-in capital 35,632 35,632 35,632
Retained earnings 187,582 178,911 163,803
Deferred compensation on restricted stock (424) (455) (587)
ESOP and MRP loan obligations (95) (95) (216)
Accumulated other comprehensive income 20,322 24,522 44,520
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 271,193 266,964 272,402
----------- ----------- -----------
Commitments and contingent liabilities
=========== =========== ===========
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,681,896 $ 2,340,521 $ 2,239,183
=========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999
<S> <C> <C>
Interest Income:
Loans, including fees $38,569 $31,246
Interest bearing deposits with banks 92 103
Federal funds sold 417 725
Taxable securities 5,357 4,736
Tax exempt securities 2,256 1,958
------- -------
TOTAL INTEREST INCOME 46,691 38,768
------- -------
Interest expense:
Interest on deposits 16,849 15,696
Interest on borrowings 5,158 2,337
------- -------
TOTAL INTEREST EXPENSE 22,007 18,033
------- -------
Net interest income 24,684 20,735
Provision for loan losses 322 164
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,362 20,571
------- -------
Non-interest income:
Commissions and fees on fiduciary activities 1,356 1,339
Service charges on deposit accounts 2,781 2,166
Other service charges, commissions and fees 1,941 1,324
Security gains (losses), net 8,208 2,597
Gains on sales of loans, net 122 425
Other non-interest income 965 1,124
------- -------
TOTAL NON-INTEREST INCOME 15,373 8,975
------- -------
Non-interest expenses:
Salaries and employee benefits 9,899 9,090
Net occupancy expense 1,371 1,283
Furniture and equipment expense 1,647 1,490
Federal deposit insurance 78 68
Data processing expense 1,498 1,504
Other non-interest expenses 7,237 4,856
------- -------
TOTAL NON-INTEREST EXPENSES 21,730 18,291
------- -------
Income before income tax expense 18,005 11,255
Income tax expense 5,123 2,977
======= =======
NET INCOME $12,882 $ 8,278
======= =======
Per common share:
Net income-basic $ 0.78 $ 0.49
-diluted $ 0.78 $ 0.48
Cash dividends $ 0.055 $ 0.045
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE> 5
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
2000 1999
<S> <C> <C>
Net income $ 12,882 $ 8,278
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available
for sale:
Unrealized holding gains (losses) arising
during the period 542 14,670
Less reclassification adjustment for gains
(losses) included in net income (4,742) (1,688)
-------- --------
Other comprehensive income (4,200) 12,982
-------- --------
COMPREHENSIVE INCOME $ 8,682 $ 21,260
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE> 6
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND THREE MONTHS ENDED MARCH 31, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED DEFERRED ESOP AND ACCUMULATED TOTAL
STOCK- STOCK- CAPITAL EARNINGS COMPENSATION MRP LOAN OTHER
SHARES AMOUNT ON RESTRICTED OBLIGATIONS COMPREHENSIVE
STOCK INCOME
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 15,669,729 $ 24,397 $ 35,632 $ 147,474 $ (612) $ (216) $ 31,538 $ 238,213
Net income 38,259 38,259
Common Stock Issued 1,299,969 4,845 8,784 13,629
Cash dividends declared ($0.20
per share) (3,355) (3,355)
Repurchase of common stock (564,994) (979) (13,468) (14,447)
Stock options exercised,
including tax benefits 110,832 190 1,270 1,460
Amortization of deferred
compensation on restricted
stock 100 100
Net restricted stock forfeited (2,727) (4) (53) 57 --
Repayment of ESOP loan
obligations 121 121
Change in other comprehensive
income (loss), net of tax (7,016) (7,016)
----------- -------- -------- --------- ------- -------- --------- ---------
Balance, December 31, 1999 16,512,809 28,449 35,632 178,911 (455) (95) 24,522 266,964
Net income 12,882 12,882
Cash dividends declared ($0.055
per share) (899) (899)
Repurchase of common stock (159,929) (277) (3,335) (3,612)
Stock options exercised,
including tax benefits 2,468 4 23 27
Amortization of deferred
compensation on restricted
stock 31 31
Change in other comprehensive
income (loss), net of tax (4,200) (4,200)
----------- -------- -------- --------- ------- -------- --------- ---------
Balance, March 31, 2000 16,355,348 $ 28,176 $ 35,632 $ 187,582 ($424) ($95) $ 20,322 $ 271,193
=========== ======== ======== ========= ======= ======== ========= =========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net income $ 12,882 $ 8,278
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 322 164
Depreciation, amortization and accretion, net 1,680 1,369
Gain on sales of securities and loans, net (8,330) (3,022)
Loss (gain) on sales of other real estate owned -- 11
Loss (gain) on disposals of equipment (143) (40)
Deferred income taxes (1,333) 1,788
Purchases of mortgage loans held for sale (1,469) (34,020)
Proceeds from sales of mortgage loans held for sale 11,937 35,899
Other, net 14,024 4,103
-------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 29,570 14,530
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in interest bearing deposits with banks (1,239) 826
Proceeds from sales of securities available for sale 5,068 1,867
Proceeds from sales of securities held to maturity -- --
Proceeds from maturities of securities available for sale 39,227 58,312
Proceeds from maturities of securities held to maturity 1,623 18,693
Calls of securities available for sale -- 2,200
Calls of securities held to maturity 300 1,435
Purchases of securities available for sale (15,747) (130,169)
Purchases of securities held to maturity (2,240) (1,028)
Decrease in federal funds sold and securities
purchased under agreements to resell 27,250 24,400
Loans sold (originated), net of principal collected on loans (43,182) 56,218
Purchases of premises and equipment, net (1,407) (2,156)
Cash and cash equivalents from acquisitions -- 7,249
Purchase of banks, net of cash and due from banks (52,563) --
Proceeds from sale of ABC Credit loans -- 136
Proceeds from sale of property, plant and equipment 273 40
Proceeds from sales of other real estate owned 46 41
-------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (42,591) 38,064
-------- ---------
</TABLE>
CONTINUED
7
<PAGE> 8
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
CASH FLOWS FROM FINANCING ACTIVITIES: (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Increase (decrease) in deposits $ 12,853 $ (81,248)
Increase (decrease) in federal funds purchased (35,982) 24,632
Decrease in securities sold under agreements to repurchase (2,415) (13,688)
Increase in notes payable to the U.S. Treasury 12,070 875
Decrease in advances from the Federal Home Loan Bank (52,102) (2,800)
Increase (decrease) in other borrowings 60,590 (10,728)
Proceeds from issuance of common stock and stock options exercised 27 39
Repurchase of common stock (3,612) --
Cash dividends paid (899) (763)
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES (9,470) (83,681)
-------- ---------
DECREASE IN CASH AND DUE FROM BANKS (22,491) (31,087)
CASH AND DUE FROM BANKS, JANUARY 1 98,598 122,654
-------- ---------
CASH AND DUE FROM BANKS, MARCH 31 $ 76,107 $ 91,567
======== =========
Cash flow information:
Income tax payments -- --
Interest payments 20,823 18,730
Non-cash transactions:
Loans transferred to other assets 128 875
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE> 9
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
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 1999 annual report to shareholders.
As noted in the footnotes to its annual report on 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. BUSINESS COMBINATIONS (COMPLETED MERGERS AND ACQUISITIONS)
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 were not been restated to reflect this
combination.
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 became part of Area Services, Inc., a wholly owned subsidiary of
Area. The Eifler Group manages Area's non-deposit investment product
line under the name Area Investment Services.
On January 31, 2000 Area acquired 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
("Western Kentucky Group"). Area paid $77,750,000 in cash for these
banking companies. On January 31, 2000, total assets of these four
affiliated banking companies were $383,692,000, total loans were
$220,030,000, total deposits were $327,969,000 and total capital was
$44,314,000. The transaction was accounted for as a purchase
transaction, accordingly, the results of operations of these banks have
been included in the unaudited financial statements since the date of
acquisition. In conjunction with the acquisition, approximately
$33,436,000 of intangibles were recorded and will be amortized over the
appropriate period.
9
<PAGE> 10
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NOTE 2. BUSINESS COMBINATIONS (COMPLETED MERGERS AND ACQUISITIONS) CONTINUED
The following is a summary unaudited balance sheet as of January 31,
2000, the date of acquisition, for the Western Kentucky Group:
WESTERN KENTUCKY GROUP (1)
SUMMARY BALANCE SHEET
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31
2000
<S> <C>
ASSETS
Cash and due from banks $ 25,237
Federal funds sold 27,250
Investment securities 101,144
Loans, net of unearned discount 220,030
Less allowance for loan losses 4,368
---------
Net loans 215,661
Other assets 14,400
---------
TOTAL ASSETS $ 383,692
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 55,790
Interest-bearing deposits 272,179
---------
Total deposits 327,969
Borrowed funds 8,700
Other liabilities 2,709
---------
Total liabilities 339,378
Shareholders' equity 44,314
---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 383,692
</TABLE>
(1) Includes Peoples Bank of Murray, Dees Bank of Hazel,
Bank of Lyon County and Bank of Livingston County.
10
<PAGE> 11
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NOTE 3. 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 give 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
ENDED MARCH 31
2000 1999
---- ----
<S> <C> <C>
(Amounts in thousands, except per share data)
NET INCOME, BASIC AND DILUTED $ 12,882 $ 8,278
======== ========
Average shares outstanding 16,414 16,915
Effect of dilutive securities 185 251
-------- --------
Average shares outstanding including dilutive
securities 16,599 17,166
======== ========
NET INCOME PER SHARE, BASIC $ 0.78 $ 0.49
======== ========
NET INCOME PER SHARE, DILUTIVE $ 0.78 $ 0.48
======== ========
</TABLE>
NOTE 4. SECURITIES
The amortized cost and approximate market values of securities as of
March 31, 2000 and December 31, 1999 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 $ 275,075 $ 45 $ 4,015 $ 253,105
Mortgage-backed securities 77,220 198 1,702 75,716
Obligations of state and political subdivisions 48,557 167 605 48,119
Equity and other securities 19,550 38,467 623 57,394
--------- -------- -------- ---------
BALANCE AT MARCH 31, 2000 $ 402,402 $ 38,877 $ 6,945 $ 434,334
========= ======== ======== =========
</TABLE>
During the first three months of 2000, the after-tax net unrealized
gain reported as a separate component of equity (accumulated other
comprehensive income) decreased from $24,522,000 on December 31, 1999
to $20,322,000 on March 31, 2000, thus decreasing shareholders' equity.
The decrease was largely the result of the sale of securities.
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $ 206,729 $ 43 $ 2,325 $ 204,447
Mortgage-backed securities 72,941 221 1,026 72,136
Obligations of state and political subdivisions 24,083 115 379 23,819
Equity and other securities 22,131 41,435 341 63,225
--------- -------- ------- ---------
BALANCE AT DECEMBER 31, 1999 $ 325,884 $ 41,814 $ 4,071 $ 363,627
========= ======== ======= =========
</TABLE>
11
<PAGE> 12
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NOTE 4. SECURITIES (CONTINUED)
The increases from December 31, 1999 to March 31, 2000 in amortized cost
from $325,884,000 to $402,402,000 and market value from $363,627,000 to
$434,334,000 for securities available for sale were the result of
securities added as a result of the acquisition on January 31, 2000 of
Bank of Livingston County, Bank of Lyon County, Dees Bank of Hazel and
Peoples Bank of Murray (see Note 2 above). Excluding this acquisition,
amortized cost total would have declined $20,757,000 from December 31,
1999 to March 31, 2000 while the market value total would have declined
$25,011,000 during this period.
HELD TO MATURITY
(Amounts in thousands)
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
MARCH 31, 2000
Obligations of state and political subdivisions $ 129,463 $ 1,952 $ 1,505 $ 129,910
========= ======== ======= =========
DECEMBER 31, 1999
Obligations of state and political subdivisions $ 129,089 $ 2,015 $ 2,076 $ 129,028
========= ======== ======= =========
</TABLE>
NOTE 5. 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.
12
<PAGE> 13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NOTE 6. INTANGIBLES
As of March 31, 2000, intangibles totaled $65,164,000 compared to
$32,969,000 on December 31, 1999. The increase was the result of
$33,436,000 of intangibles added as a result of the Peoples Bank of
Murray; Dees Bank of Hazel; Bank of Lyon County; and Bank of Livingston
County ("Western Kentucky Group") acquisition (see Note 2 above).
Excluding the $33,436,000 of newly added intangibles, which are being
amortized but have not been fully allocated as of March 31, 2000, the
excess cost over fair value of net assets acquired in purchase business
combinations (goodwill) of $29,159,000 and $30,007,000 net of
accumulated amortization as of March 31, 2000 and December 31, 1999,
respectively, is being amortized over a 10-20 year period on a
straight-line basis. Other intangible assets consist of the value of
core deposits purchased of approximately $2,084,000 and $2,249,000, net
of accumulated amortization, as of March 31, 2000 and December 31, 1999,
respectively, which is being amortized by an accelerated method over ten
years and a purchased bank charter of $675,000 and $713,000 as of March
31, 2000 and December 31, 1999, respectively, which is being amortized
over a 10-year period on a straight-line basis. Amortization expense for
the three-month period ended March 31, 2000 and 1999 was $1,238,000 and
$876,000, respectively.
NOTE 7. SEGMENT INFORMATION
Area provides a broad range of financial services to individuals,
corporations and others through its seventeen 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 March 31, 2000, Area directly controlled sixteen affiliated
commercial banks and indirectly controlled one additional commercial
bank through the ownership of a holding company, all of which are
located in Kentucky. Of the banks controlled by Area, four are national
banks and thirteen 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.
On January 20, 2000, Area announced that it will undertake a
consolidation of its operations during 2000. Area expects to consolidate
the operations and charters of its affiliate banks (other than Vine
Street Trust, Lexington, Ky) to gain operating efficiencies and raise
brand awareness by adopting the common name of "Area Bank." Preliminary
estimates of the annual savings from the consolidation are approximately
$4,000,000 pre-tax. Preliminary estimates of the one-time costs
associated with the consolidation are approximately $3,100,000 pre-tax.
These costs will be incurred starting in the second quarter of 2000 and
will be completed by the end of the second quarter of 2001. The expected
annual savings of approximately $4,000,000 will not begin to be fully
realized until the third quarter of 2001.
The discussion that follows is intended to provide additional insight
into Area's financial condition and results of operations which includes
the merger with Peoples Bancorp of Winchester since January 4, 1999, the
acquisition of the Eifler Group since October 4, 1999 and the
acquisition of the Western Kentucky Group since February 1, 2000 (see
Note 2 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 Form 10-Q.
13
<PAGE> 14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
FORWARD LOOKING STATEMENTS
Various 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, various
statements in 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 March 31, 2000 was $12,882,000 versus
$8,278,000 in the same period of 1999. Diluted earnings per share were
$0.78 compared to $0.48 for the same period in 1999. The increase during
the current quarter compared to the first quarter of 1999 was $4,604,000
or 55.6% for net income and $0.30 or 62.5% per diluted share. Area's net
income for the first quarter of 2000 produced an annualized return on
average assets of 2.05% and an annualized return on average equity of
20.33% compared to prior year ratios of 1.49% (annualized) and 13.13%
(annualized), respectively. The improved earnings during the quarter
compared to the first quarter of 1999 were largely the result of an
increase in security gains from $2,597,000 in the first quarter of 1999 to
$8,208,000, an increase in net interest income on a taxable equivalent
basis totaling $4,122,000 and an increase in non-interest income excluding
security gains of $787,000 or 12.3%. These increases in net income were
partially off-set by a $3,439,000 increase in non-interest expenses. The
gains on the sale of securities during the first quarter of both 2000 and
1999 reflect Area's ongoing strategy to improve the performance of its
investment portfolio through repositioning portions of the portfolio as
market conditions change.
14
<PAGE> 15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
A. RESULTS OF OPERATIONS (CONTINUED)
The current quarter includes the results of operations of the Western
Kentucky Group (see Note 2) from February 1, 2000 as a result of the
acquisition having been accounted for as a purchase transaction. The table
that follows provides a summary income statement for Area and the Western
Kentucky Group for the quarter ended March 31, 2000:
<TABLE>
<CAPTION>
(Amounts in thousands, except per share data) THREE MONTHS ENDED MARCH 31, 2000
WESTERN KY
AREA GROUP TOTAL
---- ----- -----
<S> <C> <C> <C>
Interest income $42,219 $ 4,472 $46,691
Interest expense 19,802 2,205 22,007
------- ------- -------
Net interest income 22,417 2,267 24,684
Provision for loan losses 283 39 322
------- ------- -------
Net interest income after provision for loan losses 22,134 2,228 24,362
Non-interest income 14,887 486 15,373
Non-interest expenses 19,654 2,076 21,730
------- ------- -------
Income before income tax expense 17,367 638 18,005
Income tax expense 6,092 (969) 5,123
------- ------- -------
NET INCOME $11,275 $ 1,607 $12,882
======= ======= =======
Per common share:
Net income-basic $ 0.68 $ 0.10 $ 0.78
Net income-diluted $ 0.68 $ 0.10 $ 0.78
</TABLE>
Area believes that a meaningful comparison of the results of operations
excludes nonrecurring items. As shown in the following table, during the
current quarter security gains in the amount of $4,742,000 after-tax
($8,208,000 pre-tax) were recorded, a gain totaling $93,000 after-tax
($143,000 pre-tax) on the sale of fixed assets was recognized and
merger-related adjustments were made which enhanced income by $1,031,000
after-tax ($897,000 pre-tax) were made in connection with the acquisition
of the Western Kentucky Group (see Note 2 in the accompanying unaudited
financial statements). The favorable merger-related adjustments were the
result of a book tax benefit totaling $1,279,000 as a result of converting
these banks from "S" corporation status to "C" corporation status which
were partially offset by after-tax merger-related expenses of $248,000.
During the first quarter of 1999 security gains totaling $1,688,000
after-tax ($2,597,000 pre-tax) were recorded, merger-related adjustments
of $122,000 after-tax which enhanced net income and a favorable insurance
settlement of $615,000 after-tax ($945,000 pre-tax) was recognized. Core
operating income during the first quarter of 2000 and 1999, which is net
income adjusted for these items, totaled $7,016,000 or $0.42 per diluted
share and $5,854,000 or $0.34 per diluted share, respectively. Core
operating net income increased $1,162,000 or 19.9% to $7,016,000 while
core operating diluted earnings per share increased $0.08 or 23.5% to
$0.42 from the first quarter of 1999.
<TABLE>
<CAPTION>
CORE OPERATING NET INCOME 3 MONTHS ENDED
(Amounts in thousands, except percentages) MARCH 31
2000 1999
---- ----
<S> <C> <C>
Net income as reported $ 12,882 $ 8,279
Add or (deduct) net of taxes:
Security transactions (4,742) (1,688)
Insurance settlement -- (615)
Gain on the sale of fixed assets (93) --
Merger/acquisition-related adjustments (1,031) (122)
-------- -------
CORE OPERATING NET INCOME $ 7,016 $ 5,854
======== =======
CORE OPERATING BASIC EARNINGS PER SHARE $ 0.43 $ 0.35
CORE OPERATING DILUTED EARNINGS PER SHARE $ 0.42 $ 0.34
</TABLE>
15
<PAGE> 16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
A. RESULTS OF OPERATIONS (CONTINUED)
As shown in the following table, return on average assets was 2.05%
(annualized) in the first quarter of 2000 compared to 1.49% (annualized)
during the same period of 1999. Core operating return on average assets
(excluding the items discussed above) totaled 1.12% (annualized) during
the quarter ended March 31, 2000 compared to 1.05% (annualized) for the
same period in 1999. Return on average equity was 20.33% (annualized)
during the quarter ended March 31, 2000 compared to 13.13% (annualized)
during the first quarter of 1999. Core operating return on average equity
(excluding the items discussed above) was 11.07% (annualized) for the
quarter ended March 31, 2000 and 9.29% (annualized) for the first quarter
of 1999.
The following table provides selected operating data, per share data,
selected ratios and average balances for the three month periods ended
March 31, 2000 and 1999:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages and per share data)
THREE MONTHS ENDED
MARCH 31
2000 1999 CHANGE
----------- ----------- ---------
<S> <C> <C> <C>
OPERATING DATA
Net income $ 12,882 $ 8,278 $ 4,604
Core operating net income (1) 7,016 5,854 1,162
PER SHARE DATA
Basic earnings per share 0.78 0.49 0.29
Core operating basic earnings per share (1) 0.43 0.35 0.08
Diluted earnings per share 0.78 0.48 0.30
Core operating diluted earnings per share (1) 0.42 0.34 0.08
Cash dividends per share 0.055 0.045 0.01
Book value at March 31 16.58 16.05 0.53
Market price at March 31 19.88 23.38 (3.50)
SELECTED RATIOS AND DATA
Return on average assets (2) 2.05% 1.49% 0.56%
Core operating return on average assets (1)(2) 1.12% 1.05% 0.07%
Return on average equity (2) 20.33% 13.13% 7.20%
Core operating return on average equity (1)(2) 11.07% 9.29% 1.78%
Efficiency ratio 52.60% 59.44% (6.84%)
Efficiency ratio (1) 64.78% 65.97% (1.19%)
Net interest margin (2) 4.46% 4.22% 0.24%
Equity-to-assets 9.97% 12.17% (2.20%)
Allowance for loan losses to loans 1.46% 1.62% (0.16%)
Allowance for loan losses to
nonperforming loans 403.9% 954.2% (550.3)
Nonperforming loans to total loans 0.36% 0.17% 0.19%
AVERAGE BALANCES
Total assets $ 2,523,234 $ 2,251,909 $ 271,325
Earning assets 2,339,522 2,094,743 244,779
Shareholders' equity 254,796 255,633 (837)
</TABLE>
(1) Excludes items presented in the Core Operating Net Income table
above.
(2) Percentages annualized.
16
<PAGE> 17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
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:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages and per share data)
THREE MONTHS ENDED MARCH 31
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Core operating net income (1) $ 7,016 $ 5,854 $ 1,162
Add back:
Goodwill and other intangible amortization 1,238 876 362
Less: tax effect 185 154 31
------- ------- -------
CASH BASED CORE OPERATING NET INCOME $ 8,069 $ 6,576 $ 1,493
======= ======= =======
</TABLE>
(1) Excludes items presented in the Core Operating Net Income table above.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Per share data
Cash based core operating basic earnings per share $ 0.49 $ 0.39 $ 0.10
Cash based core operating diluted earnings per share $ 0.49 0.38 0.11
Performance ratios (annualized)
Cash based core operating return on tangible assets 1.31% 1.20% 0.11%
Cash based core operating return on tangible equity 15.41% 12.08% 3.33%
Cash based core operating efficiency ratio 61.02% 62.74% (1.72%)
</TABLE>
NET INTEREST INCOME
The largest component of Area's operating income is net interest income.
Net interest income is the difference between interest earned on earning
assets and interest expense on interest bearing liabilities. For purposes
of this discussion, interest income earned on tax-exempt securities and
loans is adjusted to a fully taxable equivalent basis to facilitate
comparison with interest earned which is subject to statutory taxation.
Changes in net interest income generally occur due to fluctuations in the
balance and/or mix of interest-earning assets and interest-bearing
liabilities, and changes in their corresponding interest yields and costs.
Net interest income, on a tax equivalent basis, increased $4,122,000 or
18.9% to $25,935,000 during the quarter ended March 31, 2000. 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
4.22% during the quarter ended March 31, 1999 to 4.46% during the current
quarter. The average rate on interest earning assets increased from 7.71%
during the first quarter of 1999 to 8.24% in the current quarter. In
addition to the effect that rising national interest rates have had on
adjustable rate earning assets, the increase in the average rate on
earning assets was largely the result of a shift in the composition of
average earning assets towards loans (average loans increased $280,147,000
from the first quarter of 1999). As an offset, the average rate on
interest bearing liabilities increased from 4.23% to 4.48% largely as a
result of rising interest rates since mid-1999. These changes resulted in
an increase of 0.28% to 3.76% in the net interest spread for the current
quarter versus the same period in 1999.
17
<PAGE> 18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NET INTEREST INCOME (CONTINUED)
The following presents the components of net income on a taxable
equivalent basis:
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED MARCH 31
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Interest income $46,691 $38,768 $7,923
Taxable-equivalent adjustment 1,251 1,078 173
------- ------- ------
Interest income-taxable equivalent 47,942 39,846 8,096
Interest expense 22,007 18,033 3,974
------- ------- ------
Net interest income-taxable equivalent 25,935 21,813 4,122
Provision for loan losses 322 164 158
Non-interest income 15,373 8,975 6,398
Non-interest expenses 21,730 18,291 3,436
------- ------- ------
Income before income taxes 19,256 12,333 6,923
Income taxes 5,123 2,977 2,146
Taxable-equivalent adjustment 1,251 1,078 173
------- ------- ------
NET INCOME $12,882 $ 8,278 $4,604
======= ======= ======
</TABLE>
The following table summarizes the fully-taxable equivalent interest
spread, which is the difference between the average yield on earning
assets and the average rate on interest bearing liabilities as well as the
net interest margin, which is the fully-taxable equivalent net interest
income divided by the average earning assets for the three-months ended
March 31, 2000 and 1999.
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
THREE MONTHS ENDED MARCH 31
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Average rate on earning assets (1) 8.24% 7.71% 0.53%
Average rate on interest
bearing liabilities (1) 4.48% 4.23% 0.25%
Net interest spread (1) 3.76% 3.48% 0.28%
Net interest margin (1) 4.46% 4.22% 0.24%
Average earning assets $ 2,339,522 $ 2,094,743 $ 244,779
Average interest bearing liabilities 1,974,306 1,729,337 244,969
</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 as well
as 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.
18
<PAGE> 19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
PROVISION FOR LOAN LOSSES (CONTINUED)
An analysis of the changes in the allowance for loan losses and selected
ratios follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) THREE MONTHS ENDED MARCH 31
2000 1999 CHANGE
---- ---- ------
<S> <C> <C> <C>
Beginning balance $ 23,055 $ 21,651 $ 1,404
Additions through acquisitions 4,323 1,857 2,466
Provision for loan losses 322 164 158
Loan loss recoveries 316 492 (176)
Loans charged off (476) (548) (72)
----------- ----------- ---------
BALANCE, MARCH 31 $ 27,540 $ 23,616 $ 3,924
=========== =========== =========
Average loans, net of unearned income $ 1,764,978 $ 1,484,831 $ 280,147
Provision for loan losses to average loans (1) 0.07% 0.04% 0.03%
Net loan charge-offs to average loans (1) 0.04% 0.02% 0.02%
Allowance for loan losses to end of period loans 1.46% 1.62% (0.16%)
Allowance for loan losses to under-performing loans 403.9% 954.2% (550.3%)
</TABLE>
(1) Amounts annualized
The provision for loan losses totaled $322,000 during the quarter ended
March 31, 2000 compared to $164,000 during the same period last year. This
represents an increase of $158,000, however the amounts for both quarters
are very low compared to Area's historical levels and there is no
assurance that these levels will not increase in the future.
The provision for loan losses as a percentage of average loans totaled
0.07% (annualized) during the quarter ended March 31, 2000 compared to
0.04% (annualized) for the quarter ended March 31, 1999. Even though the
percentage increased during the current quarter compared to the same
quarter in 1999, both percentages are low compared to Area's historical
levels and there is no assurance that these levels will not increase in
the future
Net loan charge-offs (loan charge-offs less recoveries) to average loans
increased slightly to 0.04% (annualized) from 0.02% (annualized) during
the quarter ended March 31, 2000 as a result of a reduction in recoveries
in the quarter. These percentages are low compared to Area's historical
levels and there is no assurance that these levels will not increase in
the future.
The allowance for loan losses was 1.46% of total loans on March 31, 2000,
as compared to the December 31, 1999 level of 1.41% and the March 31, 1999
level of 1.62%. The percentage of allowance for loan losses to total loans
has decreased since March 31, 1999 largely as a result of loan growth.
19
<PAGE> 20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NON-INTEREST INCOME
The table that follows sets forth the components of non-interest income
for the three months ended March 31, 2000 and 1999. The amounts listed
below for the three-month periods include adjustments for the Western
Kentucky Group (see Note 2 in the accompanying unaudited financial
statements) and for non-recurring non-interest income for comparability
purposes.
<TABLE>
<CAPTION>
NON-INTEREST INCOME THREE MONTHS ENDED MARCH 31
(Amounts in thousands) WESTERN
TOTAL AREA KY GROUP AREA 2000,
2000 2000 NET (1) 1999 CHANGE
---- ---- ------- ---- ------
<S> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 1,356 -- $ 1,356 $1,339 $ 17
Service charges on deposit accounts 2,781 $340 2,441 2,166 275
Other service charges, commissions and fees 1,941 110 1,831 1,324 507
Gains on sales of loans (net) 122 -- 122 425 (303)
Other income 822 30 792 179 613
------- ---- ------- ------ -------
ADJUSTED NON-INTEREST INCOME 7,022 480 6,542 5,433 1,109
Non-recurring items:
Security gains (losses), net 8,208 6 8,202 2,597 5,605
Insurance settlement -- -- -- 945 (945)
Gain on sale of fixed assets 143 -- 143 -- 143
------- ---- ------- ------ -------
TOTAL $15,373 $486 $14,887 $8,975 $ 5,912
======= ==== ======= ====== =======
</TABLE>
(1) Excludes Western Kentucky Group. See Note 2 in the accompanying
unaudited financial statements.
During the quarter ended March 31, 2000 non-interest income totaled
$15,373,000 compared to $8,975,000 in the first quarter of 1999. The
increase during the current quarter was $6,398,000 or 71.3%. Included in
the non-interest income totals for the current quarter is $486,000 from
the Western Kentucky Group (see Note 2 in the accompanying unaudited
financial statements), which Area acquired on January 31, 2000. For
comparative purposes, non-interest income from the Western Kentucky Group
is excluded in the following analysis as a result of the acquisition
having been accounted for as a purchase transaction in which the
historical financial statements of Area were not restated. Also excluded
in the following analysis is $8,351,000 of non-recurring non-interest
income in 2000 and $3,542,000 in 1999. Excluding all of these items,
adjusted non-interest income increased $1,109,000 or 20.4% to $6,542,000
from $5,433,000 in the first quarter of 1999. The following analysis
compares adjusted non-interest income which excludes the Western Kentucky
Group from the first quarter of 2000 as well as non-recurring non-interest
income in both the first quarter of 2000 and 1999. Commissions and fees on
fiduciary activities increased $17,000 or 1.3% to $1,356,000 in the first
quarter of 2000. Service charges on deposit accounts increased $275,000 or
12.7% to $2,441,000 during the three ended March 31, 2000, when compared
to similar period totals in 1999, due primarily to increases in fees
charged. Other service charges, commissions and fees totaled $1,831,000 in
the first quarter of 2000 compared to $1,324,000 in the first quarter of
1999. The increase was $507,000 or 38.3%. The increase for the current
period was largely the result of an increase of $272,000 or 125.7% in
security brokerage commissions earned through the Eifler Group (see Note 2
in the accompanying unaudited financial statements) and $95,000 or a 65.0%
increase in credit card interchange fees due to increased cards
outstanding and higher activity levels. Security gains (net) totaled
$8,202,000 in the current quarter compared to $2,597,000 in the same
period of 1999. 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 $303,000 or 71.3% to
$122,000 in the first quarter of 2000 compared to the same period in 1999.
Gains on the sales of loans were favorably impacted in the first three
months of 1999 by lower interest rates and a strong refinancing market.
Other income totaled $792,000 during the three months ended March 31, 2000
compared to $179,000 in the first quarter of 1999. This amount represents
an increase of $613,000 or 342.5%. The increase during the current period
was primarily the result of income earned from the sale of call options
related to Area's equity investment portfolio.
20
<PAGE> 21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
NON-INTEREST EXPENSES
The table that follows sets forth the components of non-interest expenses
for the three months ended March 31, 2000, and 1999. The amounts listed
below for the three-month period includes adjustments for the Western
Kentucky Group (see Note 2 in the accompanying unaudited financial
statements) and non-recurring non-interest expenses for comparability
purposes.
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED MARCH 31
WESTERN
TOTAL AREA KY GROUP AREA 2000,
2000 2000 NET (1) 1999 CHANGE
---- ---- ------- ---- ------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 9,843 $ 649 $ 9,194 $ 9,026 $ 168
Net occupancy expenses 1,371 63 1,308 1,283 25
Furniture and equipment expense 1,647 128 1,519 1,490 29
Federal deposit insurance 78 13 65 68 (3)
Data processing expense 1,298 150 1,148 1,248 (100)
Advertising and community relations 750 58 692 767 (75)
Insurance and taxes 1,051 107 944 621 323
Professional fees 1,324 113 1,211 652 559
Amortization of intangibles 1,238 279 959 876 83
Other 2,748 134 2,614 1,940 674
------- ------ ------- ------- -------
ADJUSTED NON-INTEREST EXPENSES 21,348 1,694 19,654 17,971 1,683
Non-recurring items:
Merger and acquisition expense 382 382 -- 320 (320)
------- ------ ------- ------- -------
TOTAL $21,730 $2,076 $19,654 $18,291 $ 1,363
======= ====== ======= ======= =======
</TABLE>
(1) Excludes Western Kentucky Group. See Note 2 in the accompanying
unaudited financial statements.
During the quarter ended March 31, 2000, non-interest expenses totaled $
21,730,000 compared to $18,291,000 in the first quarter of 1999. The
increase during the current quarter was $3,439,000 or 18.8%. Included in
the non-interest expenses for the current quarter is $2,076,000 from the
Western Kentucky Group (see Note 2 in the accompanying unaudited financial
statements), which Area acquired on January 31, 2000 and is excluded for
comparative purposes as a result of the acquisition having been accounted
for as a purchase transaction in which the historical financials
statements of Area were not restated. In addition $382,000 of
merger-related expenses in 2000 and $320,000 in 1999 have been excluded.
Excluding these items, adjusted non-interest expenses increased $1,683,000
or 9.4% to $19,654,000 from $17,971,000 in the first quarter of 1999. The
following analysis compares adjusted non-interest expenses which excludes
the Western Kentucky Group from the first quarter of 2000 and
non-recurring non-interest expenses in both the first quarter of 2000 and
1999 (see the table above). Salaries and benefits increased $168,000 or
1.9% to $9,194,000 in the first quarter of 2000 from $9,026,000 in the
first quarter of 1999. This increase was largely the result of annual
salary adjustments. Net occupancy expenses increased $25,000 or 1.9% to
$1,308,000 from $1,283,000 during the first quarter of 1999. Expenses
related to the modernization of several facilities accounted for the
increase. Furniture and equipment expenses totaled $1,519,000 during the
first quarter of 2000 compared to $1,490,000 in the same period of 1999.
The increase was 29,000 or 1.9%. Data processing expenses totaled
$1,148,000 during the current quarter compared to $1,248,000 in the same
period in 1999. The decrease was $100,000 or 8.0% for the quarter and
reflected a reduced level of expenses associated with modifying computer
application systems for Year 2000. Advertising and community relations
decreased $75,000 or 9.8% to $692,000. Insurance and taxes totaled
$944,000 in the current quarter compared to $621,000 in the first quarter
of 1999. The increase was $323,000 or 52.0% and was the largely the result
of increased state license taxes. Professional fees increased $559,000 or
85.7% compared to $652,000 in the first quarter of 1999. The increase
during the current period was the result of acquisition activities as
discussed in Note 2 in the accompanying unaudited financial statements.
Other non-interest expenses totaled $2,614,000 during the current quarter
compared to $1,940,000 during the same period in 1999. The current quarter
reflected an increase of $674,000 or 34.7%. The increase was largely the
result of increases in correspondent bank charges, other miscellaneous
losses and office supplies.
21
<PAGE> 22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
INCOME TAX EXPENSE
Income tax expense totaled $5,123,000 for the three-month period ended
March 31, 2000 compared to $2,977,000 during the same period in 1999.
Included with income tax expense are book tax benefits totaling $1,279,000
in 2000 and $330,000 in 1999. These book tax benefits are the result of
converting acquired banks from "S" corporation tax status to "C"
corporation tax status. Income tax expense, excluding these benefitss,
totaled $6,402,000 in 2000 and $3,307,000 in 1999. The increased level of
income tax expense for the current three-month period was the result of
higher pre-tax income. The effective tax rate was 28.5% (35.6% excluding
the benefit discussed above) during the three-month period ended March 31,
2000 compared to 26.5% (29.4% excluding the benefit discussed above) for
the same period of 1999. The effective tax rate differs from the marginal
income tax rate of 35% in both 2000 and 1999 due to the effects of tax
exempt interest and goodwill amortization. The increase in the effective
income tax rate during 2000 is largely attributable to an increase in
goodwill amortization and an increase in the amount of state taxes on
security gains.
B. FINANCIAL POSITION
Total assets increased $341,375,000 or 14.6% to $2,681,896,000 from
December 31, 1999. Excluding the acquisition of the Western Kentucky
Group, which totaled $383,692,000 in assets (see Note 2 in the
accompanying unaudited financial statements), assets decreased
approximately $42,317,000 or 1.8% from year-end. Assets averaged
$2,523,234,000 in the quarter ended March 31, 2000 compared to
$2,251,909,000 during the same period in 1999. The growth in average
assets from the quarter ended March 31, 1999 to the quarter ended March
31, 2000 was $271,325,000 or 12.0%. This growth was largely the result of
the acquisition of the Western Kentucky Group (see Note 2 in the
accompanying unaudited financial statements). Earning assets totaled
$2,462,984,000 on March 31, 2000, an increase of $324,180,000 or 15.2%
over December 31, 1999 earning assets which totaled $2,138,804,000.
Excluding earning assets acquired as a result of the acquisition of the
Western Kentucky Group, earning assets declined $24,260,000 or 1.1% from
December 31, 1999 to March 31, 2000.
SHORT-TERM INVESTMENTS AND SECURITIES
Short-term investments, which include interest-bearing deposits with banks
and federal funds sold, totaled $7,249,000 on March 31, 2000, an increase
of $1,239,000 from year-end balances.
Securities represented 22.9% of earning assets on March 31, 2000 and
totaled $563,797,000 on March 31, 2000, an increase of $71,081,000 or
14.4% from $492,716,000 on December 31, 1999. Excluding $101,144,000 of
securities added as a result of the acquisition of the Western Kentucky
Group (see Note 2 to the accompanying unaudited financial statements), the
securities portfolio decreased $30,063,000 or 6.1% from December 31, 1999.
The cash obtained as a result of the reduction in the securities portfolio
was used to fund loans. The held-to-maturity and available-for-sale
portfolios as of March 31, 2000 consisted of 44.9% in U.S. and other
government agency securities, 13.4% in mortgage-backed securities, 31.5%
in state and municipal securities and 10.2% in equity and other
securities. The comparable distributions at December 31, 1999 were 41.5%,
14.6%, 31.0% and 12.9%, respectively.
LOANS
Loans, including loans held for sale increased $251,860,000 or 15.4% to
$1,891,938,000 during the three months ended March 31, 2000 from
$1,640,078,000 on December 31, 1999. Excluding the acquisition of the
Western Kentucky Group which added $220,030,000 of loans (see Note 2 to
the accompanying unaudited financial statements), loans increased
$31,830,000 or 1.9% during the first three months of 2000. Loans,
including loans held for sale, represent the largest category of earning
assets, comprising 76.8% of earning assets as of March 31, 2000, 76.7% as
of December 31, 1999 and 72.0% as of March 31, 1999.
22
<PAGE> 23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
LOANS (CONTINUED)
The following table presents the major categories of loans including loans
held for sale:
<TABLE>
<CAPTION>
(Amounts in thousands) MARCH 31 DECEMBER 31 MARCH 31
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Commercial $ 612,343 $ 580,521 $ 517,493
Real estate 1,021,060 820,995 753,351
Consumer installment and other loans 258,535 238,562 197,283
---------- ---------- ----------
TOTAL $1,891,938 $1,640,078 $1,468,127
========== ========== ==========
</TABLE>
DEPOSITS
Deposits totaled $2,052,604,000 on March 31, 2000, an increase of
$340,822,000 or 19.9% from $1,711,782,000 on December 31, 1999. Excluding
$327,969,000 of deposits acquired as a result of the acquisition of the
Western Kentucky Group (see Note 2 to the accompanying unaudited financial
statements) deposits grew $12,853,000 or 0.8% from December 31, 1999 to
March 31, 2000. Non-interest-bearing deposits (excluding $55,790,000 of
deposits acquired through the acquisition of the Western Kentucky Group)
declined $17,599,000 or 6.6%. The decrease in non-interest bearing
deposits from year-end totals was partially the result of customers'
desire to minimize their non-interest bearing deposits. Interest-bearing
deposits (excluding $272,179,000 deposits acquired through the acquisition
of the Western Kentucky Group) increased $30,452,000 or 2.1%. Area's
retail customers are continuing to seek higher yields for their interest
bearing accounts, thus moving funds into deposit products that pay a
higher rate of interest. Average deposits increased $105,898,000 or 5.6%
to $1,892,910,000 in the three months ended March 31, 2000 compared to the
same period in 1999. Average non-interest bearing deposits increased
$49,052,000 or 20.8% to $285,392,000 during the first three months
compared to the same period last year. These increases are largely the
result of the acquisition of the Western Kentucky Group.
The following table summarizes the composition of deposits as of March 31,
2000, December 31, 1999 and March 31, 1999:
<TABLE>
<CAPTION>
(Amounts in thousands) MARCH 31 DECEMBER 31 MARCH 31
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Non-interest bearing demand $ 303,142 $ 264,951 $ 236,764
Interest bearing deposits:
Interest bearing demand 329,510 294,705 293,835
Savings 457,926 397,927 389,726
Certificates of deposit of $100,000 or more 277,495 180,964 173,314
Other time 684,531 573,235 663,176
---------- ---------- ----------
Total interest bearing deposits 1,749,462 1,446,831 1,520,051
---------- ---------- ----------
TOTAL DEPOSITS $2,052,604 $1,711,782 $1,756,815
========== ========== ==========
</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 decreased by
$9,139,000 or 2.7% to $328,049,000 from $338,049,000 on December 31, 1999.
Excluding $8,700,000 of borrowed funds added as a result of the
acquisition of the Western Kentucky Group (see Note 2 in the accompanying
unaudited financial statements) borrowed funds declined $17,839,000 or
5.3%.
Other borrowings increased from $135,000 on December 31, 1999 to
$$60,725,000 on March 31, 2000. This increase was the result of funds
borrowed for the acquisition of the Western Kentucky Group. Area initially
borrowed $75,000,000 on January 31, 2000 (the date of acquisition) for the
acquisition.
23
<PAGE> 24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
CAPITAL RESOURCES
Shareholders' equity totaled $271,193,000 at March 31, 2000, an increase
of $4,229,000 or 1.6% from $266,964,000 on December 31, 1999. This
increase was partially offset by a decrease totaling $4,200,000 or 17.1%
to $20,322,000 in accumulated other comprehensive income primarily as a
result of the sale of available for sale securities.
The shareholders' equity-to-asset ratio was 10.11% at March 31, 2000
compared to 11.41% on December 31, 1999. The decrease was largely the
result of the acquisition of the Western Kentucky Group (see Note 2 to the
accompanying unaudited financial statements) which added approximately
$383,692,000 of assets.
Book value per share was $16.58, $16.17 and $16.05 at March 31, 2000,
December 31, 1999 and March 31, 1999, respectively.
During the first quarter of 2000, Area repurchased 159,929 shares of its
common stock in the open market at an average price of $22.59 per share.
All of these 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
MARCH 31 DECEMBER 31 WELL MINIMUM
2000 1999 CAPITALIZED REQUIRED
---- ---- ----------- --------
<S> <C> <C> <C> <C>
Leverage Ratio 7.11% 9.32% 5.00% 4.00%
Tier I Risk Based Capital Ratio 9.86% 12.60% 6.00% 4.00%
Total Risk Based Capital Ratio 11.11% 13.86% 10.00% 8.00%
</TABLE>
The decrease in the regulatory capital ratios from December 31, 1999 to
March 31,2000 was the result of the purchase of the Western Kentucky Group
which resulted in the addition of $33,436,000 of intangible assets.
ASSET QUALITY
At March 31, 2000, the allowance for loan losses was $27,540,000 or 1.46%
of period-end loans, as compared to $23,055,000 or 1.41% of loans at
December 31, 1999. The ratio of the allowance for loan losses to
under-performing assets decreased to 368.2% as of March 31, 2000 compared
with 1,015.2% at December 31, 1999 as a result of the increase in
under-performing assets. Under-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.
Under-performing assets totaled $7,479,000 on March 31, 2000 compared to
$2,271,000 on December 31, 1999. The increase was $5,208,000. Of this
increase, approximately $3,730,000 was added as a result of the
acquisition of the Western Kentucky Group (see Note 2 to the accompanying
unaudited financial statements). Currently, year-to-date net charge-offs
(loan charge-offs less recoveries) are at 0.4% (annualized) of average
year-to-date loans compared to 0.02% (annualized) during the same period
in 1999. 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.
24
<PAGE> 25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
MARCH 31, 2000 AND 1999
ASSET QUALITY (CONTINUED)
The allocation of the allowance for loan losses is an estimate of the
portion which will be used to cover future charge-offs in each loan
category, but does not preclude any portion of the allowance allocated to
one type of loan from being used to cushion losses of another loan type.
This allocation is determined by the estimated loss within each loan pool
as well as any specific allocations that may be assigned to specific loans
within the same portfolio section with the remainder being assigned to the
unallocated category.
A continuous and comprehensive loan review program is maintained by Area
for each affiliate bank. The purpose of this program is to provide
periodic review and inspection of loans to ensure the safety, liquidity
and profitability of the loan portfolio. Area's loan review department is
entrusted with the responsibility to identify foreseeable problems,
measure compliance with established loan and operating policies and
provide objective loan portfolio appraisals to the Board of Directors and
management.
The following schedule shows the dollar amount of assets at March 31,
2000, December 31, 1999 and March 31, 1999, 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) MARCH 31 DECEMBER 31 MARCH 31
2000 1999 1999
---- ---- ----
<S> <C> <C> <C>
Nonaccrual loans $3,406 $1,078 $1,418
Loans contractually past due 90 days or more as to
interest or principal and still accruing 3,412 990 1,057
------ ------ ------
TOTAL UNDER-PERFORMING AND RESTRUCTURED LOANS 6,818 2,068 2,475
Other real estate owned 661 203 1,667
------ ------ ------
TOTAL UNDER-PERFORMING ASSETS $7,479 $2,271 $4,142
====== ====== ======
</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 March 31, 2000, 76.5% of total assets were funded by core deposits
while 12.3% were funded with secondary sources of liquidity discussed
above, compared to 73.1% and 14.4%, respectively, as of December 31, 1998.
The net loan-to-deposit ratio decreased from 94.0% on December 31, 1999 to
90.4% on March 31, 2000 primarily as a result of the acquisition of the
Western Kentucky Group (see Note 2 to the accompanying unadudited
financial statements). The Western Kentucky Group had a net
loan-to-deposit ratio of 65.8% on the date of acquisition.
25
<PAGE> 26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2000 AND 1999
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial institutions, interest rate movements can have a critical
impact on net interest income, and hence net income. The primary
objective of interest rate risk management is to control and monitor the
effects of those fluctuations and their impact on net income. Management
considers interest rate risk to be the most significant market risk.
Management views computer simulations as a more relevant measurement of
the impact of changes in interest rates on net interest income, and
hence net income, than other techniques that use interest rate
sensitivity gap analysis. Area uses a net income simulation model to
measure near-term (next 12 months) risk due to changes in interest
rates. The model incorporates substantially all of Area's assets and
liabilities, together with forecasted changes in the balance sheet mix
and assumptions that reflect the current interest rate environment.
Balance sheet changes are based on forecasted changes in loans,
securities and deposits as well as historical pricing spreads. The model
is updated at least quarterly with the current balance sheet structure
and the current forecast of expected balance sheet changes. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely measure net income or exactly predict the impact of
fluctuations in interest rates on net interest income. Actual results
will differ from simulated results due to timing and amount of interest
rate changes as well as changes in market conditions and management
strategies. Management uses the model to simulate the effect of
immediate and sustained parallel shifts upward and downward in the yield
curve of 100 basis points (1.00%) and 200 basis points (2.00%).
Area's interest rate risk management focuses on maintaining consistent
growth in net interest income within Board-approved policy limits.
Area's management monitors and manages interest rate risk to maintain an
acceptable level of change to net interest income as a result of changes
in interest rates.
The following table illustrates the simulation analysis, using the
methodology described above, of the impact of a 100 and 200 basis point
upward and downward movement in interest rates on net income and
earnings per share.
<TABLE>
<CAPTION>
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(In thousands, except per share data)
CHANGE IN INTEREST RATES FROM MARCH 31, 2000 RATES
INCREASE DECREASE
SIMULATED IMPACT IN THE NEXT 12 MONTHS +200BP +100BP -100BP -200BP
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net income increase (decrease) $5,211 $3,002 $(3,272) $(6,678)
Net income per share-basic increase (decrease) $ 0.32 $ 0.18 $ (0.20) $ (0.41)
Net income per share-diluted increase (decrease) $ 0.31 $ 0.18 $ (0.20) $ (0.41)
</TABLE>
Given an immediate and sustained parallel shift upward of 200 basis
points to the yield curve used in the simulation model, it is estimated
that net income for Area would increase by $5,211,000 over the next
year. Estimated diluted earnings per share would increase by $0.31 over
this same period. A 200 basis point immediate and sustained parallel
shift downward in the yield curve would decrease net income by an
estimated $6,678,000 over the next year while decreasing diluted
earnings per share $0.41. All of the above changes in net income are
within the policy guidelines established by the Board of Directors.
In order to assist in reducing the exposure to interest rate
fluctuations and manage liquidity, Area sells virtually all long-term
fixed-rate, single-family residential mortgages that are originated.
These loans are underwritten according to Federal Home Loan Mortgage
Corporation or Fannie Mae guidelines and are sold upon origination. In
addition to the use of core deposits, which fund the primary portion of
earning assets, Area's affiliate banks borrow from the Federal Home Loan
Bank to provide funds within time frames that are not available or are
only available at higher costs through retail sources. Finally,
management continually evaluates other interest rate risk management
opportunities, including the use of derivative financial instruments.
Management believes that hedging instruments currently available are not
cost effective, and therefore minimizes the use of derivatives except in
limited circumstances.
26
<PAGE> 27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2000 AND 1999
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 2001 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, 2000. Failure to timely submit such a proposal
will enable the proxies appointed by management to exercise
their discretionary voting authority when the proposal is
raised at the Annual Meeting of Shareholders without any
discussion of the matter in the proxy statement.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended
(Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-8, File No.
333-38037.)
3.2 Bylaws of the Registrant, as amended (Incorporated by
reference to the exhibit filed with the Registrant's
Form 10/A1, filed with the Commission on June 30, 1995,
File No. 0-26032.)
10.1* Form of Area Bancshares Corporation Restricted Stock
Plan Agreement (Incorporated by reference to the exhibit
filed with the Registrant's Form 10/A1, filed with the
Commission on June 30, 1995, File No. 0-26032.)
10.2* Area Bancshares Corporation 1994 Stock Option Plan
(Incorporated by reference to the exhibit filed with
the Registrant's Form 10/A1, filed with the Commission on
June 30, 1995, File No. 0-26032.)
10.3* Memorandum dated September 18, 1996 regarding executive
officer compensation (Incorporated by reference to the
exhibit filed with the Registrant's Quarterly Report on
Form 10-Q, dated September 30, 1996, File No. 0-26032.)
10.4* Cardinal Bancshares, Inc. 1989 Restricted Stock Option Plan,
as amended April 16, 1992 (Incorporated by reference to
the exhibit filed with Cardinal's Registration Statement
on Form S-1, File No. 33-48129.)
10.5* Cardinal Bancshares, Inc. 1994 Restricted Stock Option Plan
(Incorporated by reference to the exhibit filed with
Cardinal's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, File No. 0-20494.)
10.6* Cardinal Bancshares, Inc. 1992 Limited Stock Option Plan
(Incorporated by reference to the exhibit filed with
Cardinal's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992, File No. 0-20494.)
</TABLE>
27
<PAGE> 28
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2000 AND 1999
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
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.)
10.14* 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.)
10.15* 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.)
10.16* 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.)
*The indicated exhibit is a compensatory plan or arrangement.
</TABLE>
28
<PAGE> 29
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2000 AND 1999
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
27.1 Financial Data Schedule (for SEC use only)
(b) One report on Form 8-K dated February 3, 2000 was filed
with the United States Securities and Exchange Commission
and reported the following under "Item 5-Other Events":
On February 2, 2000 Area Bancshares Corporation ("Area")
announced that it completed on January 31, 2000 the
acquisition 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. Total assets of these four affiliated banks were
approximately $376 million.
The acquisition, which was originally announced on August
25, 1999, makes Area the largest Kentucky-based bank holding
company, with assets of approximately $2.7 billion.
Area paid a total of $77,750,000 in cash for these affiliated
banking companies. The transaction will be accounted for
using the purchase method of accounting.
</TABLE>
29
<PAGE> 30
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARCH 31, 2000 AND 1999
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: May 11, 2000 By: /s/ Thomas R. Brumley
-------------------- ----------------------------------
Thomas R. Brumley
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 11, 2000 By: /s/ Edward J. Vega
------------------- ------------------------------------------
Edward J. Vega
Senior Vice President-Chief Financial
Officer
(Principal Financial Officer)
Date: May 11, 2000 By: /s/ Gary R. White
------------------- ------------------------------------------
Gary R. White
Vice President, Controller
(Principal Accounting Officer)
30
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