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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
(x) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED).
For the transition period from __________ to __________.
Commission file number 0-26032.
AREA BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-0902343
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
230 Frederica Street
Owensboro, KY 42301
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code: (502) 926-3232
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
No Par Value Common Stock
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
The Registrant estimates that the aggregate market value of the Registrant's
common stock held by nonaffiliates on March 10, 2000 was $185,007,000, (based
upon affiliates' reports of beneficial ownership that 9,488,000 or approximately
58.0% of the shares are owned by nonaffiliates).
The number of shares outstanding of the Registrant's common stock as of March
10, 2000: 16,354,380 Shares Common Stock, No Par Value
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TABLE OF CONTENTS
PART I
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Page
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ITEM 1. BUSINESS
(A) General Description 4
(B) Affiliated Banks 5
(C) Bank-Related Subsidiaries and Affiliates 6
(D) Executive Officers of the Registrant 6
(E) Employees 7
(F) Supervision and Regulation 7
(G) Governmental Monetary Policy 11
(H) Economic Conditions 11
(I) Competition 11
(J) Statistical Disclosure 13
ITEM 2. PROPERTIES 14
ITEM 3. LEGAL PROCEEDINGS 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 15
ITEM 6. SELECTED FINANCIAL DATA 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16
ITEM 7a. MARKET RISK 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 16
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ITEM 11. EXECUTIVE COMPENSATION 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 17
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PART I
Item 1. BUSINESS
(A) GENERAL DESCRIPTION
Area Bancshares Corporation ("Area" or the "Corporation"), a multi-bank
holding company, was incorporated in Kentucky in 1976 and is registered under
the Bank Holding Company Act of 1956, as amended. On December 31, 1999, Area
owned 13 financial institutions, all located in Kentucky. Four are national
banks and nine are state banks (collectively referred to as "banks" or
"affiliated banks").
The affiliated banks provide a wide range of financial services: such
as accepting demand and time deposits: providing checking and money market
accounts: making commercial, consumer and mortgage loans: issuing and servicing
credit cards: leasing; issuing credit life, accident and health, and property
and casualty insurance: providing trust services for personal and corporate
customers; providing safe deposit facilities: and providing alternative
investments and brokerage services. Area also has six active non-bank affiliates
that provide services incidental to Area's operations.
The parent company furnishes specialized services to its affiliated
banks and subsidiaries including: supervision, administration and review of loan
portfolios: administration of investment portfolios, insurance programs and
employee benefit plans: and assistance with respect to accounting and operating
systems and procedures, personnel, marketing, cash management services and
equipment management.
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 restated to reflect this
combination.
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 January 31, 2000, total assets of the four
banking companies were $384,000,000, total loans were $223,878,000 and total
capital was $44,016,000. The transaction, which will be accounted for as a
purchase transaction and was consummated during January 2000.
On October 4, 1999 Area and The Eifler Group announced the signing of
definitive agreements providing for the cash purchase of the investment business
operated by Thomas Eifler, Sr. and Thomas Eifler, Jr. in Louisville, Kentucky.
Under terms of the agreements, the Eiflers will become associated with Area
Services, Inc., a wholly owned subsidiary of Area and will manage the company's
non-deposit investment product line under the name Area Investment Services.
This transaction closed during the fourth quarter of 1999.
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(B) AFFILIATED BANKS
The thirteen affiliated banks had 65 banking locations at December 31,
1999. These banks serve both agricultural and metropolitan areas. The location
and certain other information about the affiliated banks are given below:
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December 31, 1999
Affiliated Banks Total Assets (000)
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Alliance Bank, FSB $ 195,095
124 N. Main Street
Somerset, Kentucky 42501
Bowling Green Bank and Trust Company, N.A. 200,216
1820 Scottsville Road
Bowling Green, Kentucky 42103
Broadway Bank & Trust 14,802
1601 Broadway
Paducah, Kentucky 42001
Citizens Deposit Bank 44,861
100 Main Street
Calhoun, Kentucky 42327
First City Bank and Trust Company 404,716
1002 South Virginia Street
Hopkinsville, Kentucky 42240
First & Peoples Bank 57,785
110 E. Main Street
Springfield, Kentucky 40069
HNB Bank, N.A. 186,546
101 N. Main Street
Harlan, Kentucky 40831
Jefferson Banking Company 89,797
4201 Shelbyville Road
Louisville, Kentucky 40207
The New Farmers National Bank of Glasgow 167,868
301 West Main
Glasgow, Kentucky 42142
The Owensboro National Bank 509,584
230 Frederica Street
Owensboro, Kentucky 42301
Peoples Commercial Bank 143,369
Maple & Broadway
Winchester, Kentucky 40391
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December 31, 1999
Affiliated Banks Total Assets (000)
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Southern Deposit Bank $ 80,652
102 West Park Square, Box 130
Russellville, Kentucky 42276
The Vine Street Trust Company 236,963
360 E. Vine Street
Lexington, Kentucky 40507
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(C) BANK-RELATED SUBSIDIARIES AND AFFILIATES
On May 12, 1986, ONB Bank Services, Inc. was formed as a nonbank
subsidiary of The Owensboro National Bank. ONB Bank Services, Inc. is a
contractual subscriber for U.S. Clearing Corporation Brokerage programs, and
furnishes brokerage services, investment advisory services and related
investment services for the affiliated banks under the name of Audubon
Securities.
Area Services, Inc. was formed on July 8, 1991 as a wholly owned
nonbank subsidiary of the Corporation. Area Services is engaged in the purchase
of nonperforming loans secured by real estate and investment activities.
During April 1992, VST Financial Services, Inc. was formed as a
wholly-owned subsidiary of The Vine Street Trust Company for the purpose of
originating and facilitating the processing of loans guaranteed by the Small
Business Administration.
On April 20, 1994, ABC Credit Corporation was formed as a nonbank
subsidiary of First City Bank and Trust Company. Substantially all of the assets
of ABC Credit were sold during the second quarter of 1998. ABC Credit operated
as a consumer finance company under the Kentucky Consumer Loan Company Act,
K.R.S. 288.410 et seq. ABC Credit was liquidated in January 2000.
ONB Investment Services, Inc. (formally known as Ixtlan Holdings, Inc.)
was formed on August 26, 1994 as a nonbank subsidiary of The Owensboro National
Bank. This company is no longer active.
(D) EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Corporation as of
March 15, 2000, their positions with the Corporation on that date, the period
during which the executive officers have served and the other positions held by
them with the Corporation's affiliated banks and subsidiaries during at least
the past five years are set forth below:
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Parent Company Position
Name and Address Age Position Commenced Other Positions
- ---------------- --- -------- --------- ---------------
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Thomas R. 61 President, Chief Executive 1990 President and CEO of The
Brumley Officer Director-19996 Owensboro National Bank
Owensboro, Kentucky from 1983 to 1990
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Parent Company Position
Name and Address Age Position Commenced Other Positions
- ---------------- --- -------- --------- ---------------
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John A. Ray 44 Executive Vice President- 1999 Executive Vice President-Chief
Owensboro, Kentucky Chief Operating Officer Financial Officer from 1998
President and CEO of The
Owensboro National Bank from
1997 to 1998. First Senior
Vice President of Finance
of The Owensboro National
Bank from 1993 to 1994.
Cynthia W. Carlton 50 Senior Vice President-Retail 1999 Vice President-Director of
Owensboro, Kentucky Administration Retail Administration from
1998 to 1999.
Kevin M. Gallagher 46 Senior Vice 2000 None
President-Operations
Brian R. Griesbach 49 Senior Vice President-Loan 1999 None
Administration
Edward F. Johnson 64 Senior Vice 1987 First Senior Vice
Owensboro, Kentucky President-Administration President of The Owensboro
National Bank
Timothy O. Shelburne 43 Senior Vice 1995 Vice President and
Owensboro, Kentucky President-General Counsel Compliance Officer for The
Owensboro National Bank
from 1993 to 1994
Edward J. Vega 52 Senior Vice President-Chief 1999 None
Owensboro, Kentucky Financial Officer
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(E) EMPLOYEES
On December 31, 1999, the Corporation had 846 full-time employees and
182 part-time employees. The employees of the Corporation are not represented by
unions. The relationship between management and employees of the Corporation is
considered good.
(F) SUPERVISION AND REGULATION
Company Regulation
The Corporation is a registered holding company under the Bank Holding
Company Act of 1956, as amended (the "Federal Bank Holding Company Act") and is
regulated by the Board of Governors of the Federal Reserve System (the "Federal
Reserve"). In addition, the Corporation is subject to the provisions of
Kentucky's banking laws regulating bank acquisitions and various activities of
controlling bank shareholders. The regulatory provisions discussed below are
intended and designed for the protection of depositors in the Corporation's
subsidiary banks, and are not for the protection of shareholders.
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As a bank holding company, the Corporation is required to file an
annual report with the Federal Reserve and any additional information as the
Federal Reserve may require. The Federal Reserve and the Kentucky Department of
Financial Institutions may also conduct examinations of the Corporation to
determine whether it is in compliance with applicable Federal and Kentucky
banking laws and regulations.
The Federal Bank Holding Company Act also requires every bank holding
company to obtain prior approval from the Federal Reserve before acquiring
direct or indirect ownership or control of more than 5% of the voting shares of
any bank which is not already majority owned or controlled by that bank holding
company. Acquisition of any additional banks would require prior approval from
both the Federal Reserve and the Kentucky Department of Financial Institutions.
Under Kentucky law, a holding company may not acquire a bank located in
Kentucky, if the acquisition would cause the Kentucky deposits controlled by the
acquiring holding company to exceed 15% of the total deposits of all banks in
Kentucky. This limitation does not currently restrict the ability of the
Corporation to pursue acquisitions of financial institutions in Kentucky.
Area and any other bank holding company located in Kentucky may now
acquire a bank located in another state, and any bank holding company located
outside of Kentucky may acquire a Kentucky-based bank, regardless of state laws
to the contrary. In either case, deposit-percentage limits, aging requirements,
and other restrictions apply. National and state-chartered banks may branch
across state lines by acquiring banks in other states.
The Federal Bank Holding Company Act further provides that the Federal
Reserve will not approve any acquisition, merger or consolidation which would
result in a monopoly, substantially lessen competition, or otherwise function as
a restraint of trade, unless the anti-competitive effects of the proposed
transaction are clearly outweighed by the public interests in meeting the
convenience and needs of the community to be served.
In addition to having the right to acquire ownership or control of
other banks, the Corporation is authorized to acquire ownership or control of
nonbanking companies, provided the activities of the non-banking companies are
so closely related to banking or managing or controlling banks that the Federal
Reserve considers the activities to be proper to the operation and control of
banks. Regulation Y, promulgated by the Federal Reserve, sets forth those
activities which are regarded as closely related to banking or managing or
controlling banks and, thus, are permissible activities for bank holding
companies, subject to approval by the Federal Reserve in individual cases.
In 1999 Congress enacted the Graham-Leach-Bliley Act of 1999 (the "GLB
Act") which repeals sections 20 and 32 of the Banking Act of 1933. The GLB Act
provides new opportunities for banks, other depository institutions, insurance
companies and securities firms to enter into combinations that permit a single
financial services organization to offer customers a more complete array of
financial products and services. To further this goal, the Act amends section 4
of the Federal Bank Holding Company Act provide a new framework for regulation
through the financial holding company will have as its umbrella regulator the
Federal Reserve Board. Pursuant to the Act, bank holding companies, subsidiary
depository institutions thereof and foreign banks electing to qualify as a
financial holding company must be well managed, well capitalized and rated at
least satisfactory under the Community Reinvestment Act in order for them to
engage in new financial activities. Presently, we have no plans to become a
financial holding company.
Federal Securities Laws
The Corporation is subject to various federal securities laws,
including the Securities Act of 1933 and the Securities Exchange Act of 1934.
The Securities 1933 Act regulates the distribution or public offering of
securities, while the Securities Exchange Act regulates trading in securities
that are already issued and outstanding. Both Acts provide civil and criminal
penalties for misrepresentations and omissions in connection with the sale of
securities, and the Securities Exchange Act also prohibits market manipulation
and insider trading.
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Under the Securities Act, the Corporation files annual, quarterly and
current reports with the Securities and Exchange Commission. In addition, the
Corporation and its directors, executive officers and 5% shareholders are
subject to additional reporting requirements, including requirements governing
the submission of proxy statements and reports of beneficial ownership of the
Corporation's securities.
Bank Regulation
The national banks are subject to regulation and examination by the
Office of the Comptroller of the Currency (the "OCC") and by the Federal Deposit
Insurance Corporation (the "FDIC"). The Kentucky state banks are subject to
regulation and examination by the Kentucky Department of Financial Institutions
and by the FDIC.
Restrictions on Payment of Dividends
The principal source of the Corporation's income consists of dividends
from its subsidiary banks, and there are limitations on the payment of dividends
by the subsidiary banks.
The prior approval of the OCC or the Kentucky Department of Financial
Institutions, as applicable, is required if the total of all dividends declared
by the subsidiary bank in any calendar year exceeds the bank's net profits, as
defined, for that year combined with its retained net profits for the preceding
two calendar years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. In addition, both federal and state law may
impose capital limitations on the ability of the Corporation to pay dividends.
Capital Adequacy
The Corporation and its subsidiary banks are required to comply with
the capital adequacy standards established by the Federal Reserve and the
appropriate federal banking regulator in the case of its banking subsidiaries.
There are two basic measures of capital adequacy for bank holding companies that
have been promulgated by the Federal Reserve: a risk-based measure and a
leverage measure. All applicable capital standards must be satisfied for a bank
holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory
capital requirements more sensitive to differences in the risk profile among
banks and bank holding companies, to account for off-balance-sheet exposure, and
to minimize disincentives for holding liquid assets. Assets and
off-balance-sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratios represent capital as a
percentage of total risk-weighted assets and off-balance-sheet items.
The minimum guideline for the ratio of total capital to risk-weighted
assets (including certain off-balance-sheet items, such as standby letters of
credit) is 8%. At least half of total capital must consist of common stock,
minority interests in the equity accounts of consolidated subsidiaries,
noncumulative perpetual preferred stock, and a limited amount of cumulative
perpetual preferred stock, less goodwill and certain other intangible assets
("Tier 1 Capital"). The remainder may consist of subordinated debt, other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").
At December 31, 1999, the Corporation's consolidated total risk-based capital
ratio and its Tier 1 risk-based capital ratio (i.e., the ratio of Tier 1 capital
to risk-weighted assets) were 13.86% and 12.60%, respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier 1 capital to average assets, less goodwill and other
specified intangible assets, of 3% for bank holding companies that meet
specified criteria, including having the highest regulatory rating. All other
bank holding companies generally are required to maintain a leverage ratio of at
least 3%, plus an additional cushion of 1.00% to 2.00%. The Corporation's
leverage ratio at December 31, 1999 was 9.32%. The guidelines also provide that
bank holding companies experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the Federal Reserve has indicated that it will consider a tangible
Tier 1 capital leverage ratio (deducting all intangibles) and other indicia of
capital strength in evaluating proposals for expansion or new activities.
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Support of Subsidiary Institutions
Under Federal Reserve policy, the Corporation is expected to act as a
source of financial strength for, and to commit resources to support, each of
its banking subsidiaries. This support may be required at times when, absent
this Federal Reserve policy, the Corporation may not be inclined to provide it.
In addition, any capital loans by a bank holding company to any of its banking
subsidiaries will be repaid after deposits and other indebtedness of the banking
subsidiaries are repaid. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a banking subsidiary will be assumed by the
bankruptcy trustee and entitled to a priority of payment.
A depository institution insured by the FDIC can be held liable for any
loss incurred by, or reasonably expected to be incurred by, the FDIC, in
connection with:
- The default of a commonly controlled FDIC-insured depository
institution;
- Any assistance provided by the FDIC to any commonly controlled
FDIC-insured depository institution "in danger of default."
"Default" is defined generally as the appointment of a conservator or receiver,
and "in danger of default" is defined generally as the existence of conditions
indicating that a default is likely to occur in the absence of regulatory
assistance. The FDIC's claim for damages is superior to claims of shareholders
of the insured depository institution or its holding company, but is subordinate
to claims of depositors, secured creditors, and holders of subordinated debt
(other than affiliates) of the commonly controlled insured depository
institution. The subsidiary depository institutions of the Corporation are
subject to these cross-guarantee provisions. As a result, any loss suffered by
the FDIC in respect of these subsidiaries would likely result in assertion of
the cross-guarantee provisions, the assessment of estimated losses against the
depository institution's banking affiliates, and a potential loss of the
Corporation's investment in its other subsidiary depository institutions.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act of 1991
established a system of prompt corrective action to resolve the problems of
undercapitalized institutions. Under this system, the federal banking regulators
have established five capital categories (well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized) and are required to take mandatory supervisory actions, and
are authorized to take other discretionary actions, relating to institutions in
the three undercapitalized categories, the severity of which will depend upon
the capital category in which the institution is placed. Generally, subject to a
narrow exception, the banking regulator must appoint a receiver or conservator
for an institution that is critically undercapitalized. The federal banking
agencies have specified by regulation the relevant capital level for each
category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
obligation of a controlling holding company to fund a capital restoration plan
is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the
amount required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except in accordance with an accepted capital restoration plan
or with FDIC approval. In addition, the appropriate federal banking agency may
treat an undercapitalized depository institution in the same manner as it treats
a significantly undercapitalized institution, if it determines that those
actions are necessary.
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FDIC Insurance Assessments
The FDIC has adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: well capitalized;
adequately capitalized; and undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. The FDIC also assigns an
institution to one of three supervisory subgroups based on a supervisory
evaluation that the institution's primary federal regulator provides to the FDIC
and information that the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds.
Assessments range from 0 to 27 cents per $100 of deposits, depending on the
institution's capital group and supervisory subgroup.
Based on the affiliated banks' risk classifications, they were not
required to pay assessments for deposit insurance in 1999, nor will they be
required to pay deposit insurance assessments in 2000. The affiliated banks were
required to pay the special interim Bank Insurance Fund Financing Corporation
assessment in 1999 and will also be required to pay this assessment in 2000.
During the fourth quarter of 1999, the rate for this assessment was 1.184 cents
per $100 of bank deposits.
The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC.
Community Reinvestment Act
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their respective jurisdictions,
the Federal Reserve, the FDIC, or the Office of the Comptroller of the Currency,
will evaluate the record of each financial institution in meeting the credit
needs of its local community, including low and moderate income neighborhoods.
These facts are also considered in evaluating mergers, acquisitions, and
applications to open a branch or facility. Failure to adequately meet these
criteria could impose additional requirements and limitations on the affiliated
banks. Under the Gramm-Leach-Bliley Act, banks with aggregate assets of not more
than $250 million will be subject to a Community Reinvestment Act examination
only once every 60 months if the bank receives an outstanding rating, once every
48 months if it receives a satisfactory rating and as needed if the rating is
less than satisfactory. Additionally, banks will be required to publicly
disclose the terms of various Community Reinvestment Act-related agreements.
Other Regulations
Interest and other charges collected or contracted for by the
affiliated banks are subject to state usury laws and federal laws concerning
interest rates. The affiliated banks' loan operations are also subject to
federal laws applicable to credit transactions, such as:
- - The federal Truth-In-Lending Act, governing disclosures of credit terms
to consumer borrowers;
- - The Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling
its obligation to help meet the housing needs of the community it serves;
- - The Equal Credit Opportunity Act, prohibiting discrimination on the
basis of race, creed or other prohibited factors in extending credit;
- - The Fair Credit Reporting Act of 1978, governing the use and provision
of information to credit reporting agencies;
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- - The Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
- - The rules and regulations of the various federal agencies charged with
the responsibility of implementing these federal laws.
The deposit operations of the affiliated banks are subject to:
- - The Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records; and
- - The Electronic Funds Transfer Act and Regulation E issued by the
Federal Reserve to implement that act, which govern automatic deposits
to and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
Restrictions on Transactions with Affiliates
The Corporation and the affiliated banks are subject to the provisions
of Section 23A of the Federal Reserve Act. Section 23A places limits on the
amount of:
- A bank's loans or extensions of credit to affiliates;
- A bank's investment in affiliates;
- Assets a bank may purchase from affiliates, except for real and
personal property exempted by the Federal Reserve;
- The amount of loans or extensions of credit to third parties
collateralized by the securities or obligations of affiliates;
and
- A bank's guarantee, acceptance or letter of credit issued on
behalf of an affiliate.
The total amount of the above transactions is limited in amount, as to
any one affiliate, to 10% of the bank's capital and surplus and, as to all
affiliates combined, to 20% of the bank's capital and surplus. In addition to
the limitation on the amount of these transactions, each of the above
transactions must also meet specified collateral requirements. The affiliated
banks must also comply with other provisions designed to avoid the taking of
low-quality assets.
The Corporation and the affiliated banks are also subject to the
provisions of Section 23B of the Federal Reserve Act which, among other things,
prohibit an institution from engaging in the above transactions with affiliates
unless the transactions are on terms substantially the same, or at least as
favorable to the institution or its subsidiaries, as those prevailing at the
time for comparable transactions with nonaffiliated companies.
Privacy
Financial institutions are required to disclose their policies for
collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing personal financial information with
nonaffiliated third parties except for third parties that market the
institutions' own products and services. Additionally, financial institutions
generally may not disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing or other marketing through
electronic mail to consumers.
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(G) GOVERNMENTAL MONETARY POLICY
The Corporation's earnings are affected by the policies of regulatory
authorities, including the Federal Reserve. Federal Reserve monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future. Because of
changing conditions in the economy and in the money markets, as a result of
actions by monetary and fiscal authorities, interest rates, credit availability
and deposit levels may change due to circumstances beyond the control of the
Corporation. The Corporation cannot predict what the future policies of the
Federal Reserve will be, nor their effect on its future earnings.
(H) ECONOMIC CONDITIONS
At December 31, 1999 thirteen affiliated banks operated in seven
separate western Kentucky counties and six separate eastern Kentucky counties.
During 1999 the local economies that each of the banks operate in expanded and
the unemployment rate in the markets served by the affiliated banks has fallen.
The local agricultural economies have been strong; however, lower agricultural
prices in 1999 may prove stressful. The manufacturing economies are expanded
with several manufacturing plants in each market expanding and adding employees.
The housing market was strong in all the banking areas with demand out-stripping
supply in several markets.
(I) COMPETITION
The banking business in Kentucky is highly competitive and the
affiliated banks compete not only with banks and thrifts, but with finance and
personal loan companies, credit unions, and other financial institutions which
are active in the affiliated banks' markets. In addition, the affiliated banks
compete for customer funds with other investment alternatives available through
investment brokers, insurance companies, finance companies and other
institutions.
Listed below is each affiliated bank, its county of operations, the
total deposits of that county, the deposits of the affiliated bank, and the
percentage of the county's deposits that each affiliated bank controls. The
total deposits within the county include all FDIC insured institutions. The
information is for June 30, 1999 and was provided by the Federal Deposit
Insurance Corporation.
<TABLE>
<CAPTION>
Affiliated
Affiliated Total Affiliated Bank Percent
Bank County County Deposits (000) Bank Deposits (000) of Total
---- ------ --------------------- ------------------- --------
<S> <C> <C> <C> <C>
Alliance Bank, FSB Pulaski $ 682,470 $ 162,416 23.80%
124 N. Main Street
Somerset, KY 42501
Bowling Green Bank Warren 840,382 154,397 18.37%
and Trust Company, N.A.
1820 Scottsville Road
Bowling Green, KY 42103
Broadway Bank & Trust McCraken 1,017,744 7,215 0.71%
1601 Broadway
Paducah, Ky 42001
Citizens Deposit Bank McLean 123,325 30,825 24.99%
100 Main Street
Calhoun, KY 42327
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Affiliated
Affiliated Total Affiliated Bank Percent
Bank County County Deposits (000) Bank Deposits (000) of Total
---- ------ --------------------- ------------------- --------
<S> <C> <C> <C> <C>
First City Bank and Christian 568,208 287,625 50.62%
Trust Company
1002 E. Main Street
Hopkinsville, KY 42240
First & Peoples Bank Washington 170,910 46,688 27.32%
110 E. Main Street
Springfield, KY 40069
HNB Bank, N.A. Harlan 288,523 171,318 59.38%
101 N. Main Street
Harlan, KY 40831
Jefferson Banking Company Jefferson 12,544,973 81,510 0.65%
4201 Shelbyville Rd.
Louisville, KY 40207
The New Farmers Barren 426,525 127,325 29.85%
National Bank of Glasgow
301 West Main
Glasgow, KY 42142
The Owensboro National Bank Daviess 1,115,078 323,222 28.99%
230 Frederica St.
Owensboro, KY 42301
Peoples Commercial Bank Clark 446,364 134,662 30.17%
Maple & Broadway
Winchester, Kentucky 40391
Southern Deposit Bank Logan 328,802 63,454 19.30%
102 West Park Square
Box 130
Russellville, KY 42276
The Vine Street Trust Company Fayette 3,204,682 163,726 5.11%
360 E. Vine Street ------------ ------------ ------
Lexington, KY 40507
Total $ 48,237,299 $ 1,754,383 3.64%
============ ============ ======
</TABLE>
14
<PAGE> 15
(J) Statistical Disclosure
Specific financial information required to be included under Item I of
this Form 10-K is incorporated herein by reference to the Annual Report to
Shareholders for the fiscal year ended December 31, 1999, and listed below along
with a page reference where the information can be found in the Annual Report to
Shareholders.
<TABLE>
<CAPTION>
Description of Financial Information Required Reference
<S> <C>
Summary of average balance sheets, net interest
income and interest rates Table 1, Page 23
Summary of changes in net interest income Table 2, Page 24
Interest rate sensitivity Management's Discussion
and Analysis, Pages 19 and 20
Allocation of the allowance for loan losses Table 5, Page 27
Summary of loan loss experience Table 4, Page 26
Carrying amounts of securities Management's Discussion
and Analysis, Page 12
Maturities and average yields of securities Table 3, Page 25
Other borrowing information Table 7, Page 29
Underperforming assets Management's Discussion
and Analysis, Page 15
Average deposits and rates paid Table 6, Page 28
Loan portfolio information Management's Discussion
and Analysis, Pages 12 and 13
</TABLE>
ITEM 2. PROPERTIES
The corporate offices of Area Bancshares Corporation are located at 230
Frederica Street, Owensboro, Kentucky 42301. Information as of December 31, 1999
about the properties of the affiliated banks follows:
<TABLE>
<CAPTION>
Number of Number of
Affiliated Banks Leased Facilities (1) Owned Facilities (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
Alliance Bank, FSB 1 7
124 N. Main Street
Somerset, KY 42501
Bowling Green Bank & 5 3
Trust Company, N. A.
1820 Scottsville Road
Bowling Green, KY 421
</TABLE>
(1) Does not include ATM locations.
15
<PAGE> 16
<TABLE>
<CAPTION>
Number of Number of
Affiliated Banks Leased Facilities (1) Owned Facilities (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
Broadway Bank & Trust 1 0
1601 Broadway
Paducah, KY 42001
Citizens Deposit Bank 0 1
100 Main Street
Calhoun, KY 42327
First City Bank and 3 5
Trust Company
1002 E. Main Street
Hopkinsville, KY 42240
First & Peoples Bank 0 2
110 E. Main Street
Springfield, KY 40069
HNB Bank, N.A. 3 5
101 N. Main Street
Harlan, KY 40831
Jefferson Banking Company 2 1
4201 Shelbyville Rd.
Louisville, KY 40207
The New Farmers 0 5
National Bank of Glasgow
701 Columbia, Box 248
Glasgow, KY 42142
The Owensboro National Bank 4 9
230 Frederica St.
Owensboro, KY 42301
Peoples Commercial Bank 0 2
Maple & Broadway
Winchester, KY 40391
Southern Deposit Bank 0 3
102 West Park Square
Box 130
Russellville, KY 42276
The Vine Street Trust Company 3 0
60 E. Vine Street ----- -----
Lexington, KY 40507
Total 22 43
===== =====
</TABLE>
(1) Does not include ATM locations.
16
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Corporation's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
the solicitation of proxies or otherwise
PART II
ITEM 5. MARKET FOR THE REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The required information is incorporated herein by reference to page 61
of the Area Bancshares Corporation 1999 Annual Report.
During 1997 and 1998, the Corporation issued shares of restricted stock
to various key employees for their past and future service to the Corporation,
as described in the following table:
<TABLE>
<CAPTION>
Date Granted Number of Shares Granted Vesting Period
------------ ------------------------ --------------
<S> <C> <C>
January 1997 18,180 20% annually beginning 01/02/98
May 1998 3,575 20% annually beginning 02/01/01
</TABLE>
Since the Corporation issued the restricted stock to a limited number
of employees, no public offering was involved, and accordingly the transactions
were exempt from registration under Section 4(2) of the Securities Act of 1933.
During 1999, the Corporation did not have any sales of unregistered
securities.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data are incorporated herein by reference to page 2
of the Area Bancshares Corporation 1999 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information relating to the Corporation's financial condition, results
of operations, liquidity, and capital resources is incorporated herein by
reference to pages 3 through 30 of the Area Bancshares Corporation 1999 Annual
Report.
ITEM 7a. MARKET RISK
Market risk information is incorporated herein by reference to pages
19 and 20 of Area Bancshares Corporation 1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements of Area Bancshares Corporation and
Subsidiaries are incorporated herein by reference to pages 32 through 59 of the
Area Bancshares Corporation 1998 Annual Report. Also, unaudited quarterly
financial information for the Corporation and its subsidiaries is incorporated
by reference to page 10 of the Area Bancshares Corporation 1999 Annual Report.
17
<PAGE> 18
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in the Corporation's independent auditors,
nor any disagreements between the management of Area Bancshares Corporation and
its independent auditors relating to accounting or financial disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required for this item is incorporated herein by reference
to Area Bancshares Corporation's Proxy Statement for its 2000 Annual meeting of
shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required for this item is incorporated herein by reference
to Area Bancshares Corporation's Proxy Statement for its 2000 Annual meeting of
shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required for this item is incorporated herein by reference
to Area Bancshares Corporation's Proxy Statement for its 2000 Annual meeting of
shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required for this item is incorporated herein by reference
to Area Bancshares Corporation's Proxy Statement for its 2000 Annual meeting of
shareholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of Area
Bancshares Corporation and its subsidiaries are incorporated by
reference to Item 8.
Consolidated financial statements of Area Bancshares Corporation
and Subsidiaries:
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Income - Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December
31, 1999, 1998 and 1997
Unaudited quarterly financial information of Area Bancshares
and its subsidiaries.
Independent Auditors' Report - page 31.
18
<PAGE> 19
2. Supplemental Schedule
Schedules are omitted because they are not required or not
applicable, or the required information is shown in the financial
statements or in notes thereto.
3. Exhibits:
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant, as
amended (Incorporated by reference to the exhibit
filed with the Registrant's Registration Statement on
Form S-8, File No. 333-38037.)
3.2 Bylaws of the Registrant, as amended (Incorporated by
reference to the exhibit filed with the Registrant's
Form 10/A1, filed with the Commission on June 30,
1995, File No. 0-26032.)
10.1* Form of Area Bancshares Corporation Restricted Stock
Plan Agreement (Incorporated by reference to the
exhibit filed with the Registrant's Form 10/A1, filed
with the Commission on June 30, 1995, File No. 0-26032.)
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.)
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
------- ----------------------
<S> <C>
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.)
13.1 1999 Annual Report to Shareholders
21.1 Subsidiaries of Registrant
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule (EDGAR version only)
</TABLE>
- --------------------
*The indicated exhibit is a compensatory plan or arrangement.
(b) Reports on Form 8-K.
The Registrant filed 2 Reports on Form 8-K on October 8, 1999 and
November 9, 1999. The items reported were Item 5 Other Events.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Area Bancshares Corporation
Date: March 20, 2000 By: /s/ Thomas R. Brumley
------------------------ ---------------------------------
Thomas R. Brumley, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<S> <C>
Date: March 20, 2000 /s/ C. M. Gatton
------------------------- ------------------------------------
C. M. Gatton
Chairman of the Board
Date: March 20, 2000 /s/ Raymond C. McKinney
------------------------ ------------------------------------
Raymond C. McKinney
Vice Chairman of the Board
Date: March 20, 2000 /s/ Anthony G. Bittel
------------------------ ------------------------------------
Anthony G. Bittel, Director
Date: March 20, 2000 /s/ Samual A. B. Boone
------------------------ -----------------------------------
Samual A. B. Boone, Director
Date: March 20, 2000 /s/ Thomas R. Brumley
------------------------ ------------------------------------
Thomas R. Brumley
President and Chief Executive
Officer, Director
Date: March 20, 2000 /s/ Cecile W. Garmon
------------------------ -------------------------------------
Cecile W. Garmon, Director
Date: March 20, 2000 /s/ Gary H. Latham
------------------------ -------------------------------------
Gary H. Latham, Director
Date: March 20, 2000 /s/ Ralph L. Oliver
------------------------ -------------------------------------
Ralph L. Oliver, Director
</TABLE>
21
<PAGE> 22
SIGNATURES (continued)
<TABLE>
<S> <C>
Date: March 20, 2000 /s/ Allan R. Rhodes
------------------------ -------------------------------------
Allan R. Rhodes, Director
Date: March 20, 2000 /s/ Jim R. Shelby
------------------------ -------------------------------------
Jim R. Shelby, Director
Date: March 20, 2000 /s/ David W. Smith, Jr.
------------------------ -------------------------------------
David W. Smith, Jr., Director
Date: March 20, 2000 /s/ Thomas N. Thompson
------------------------ -------------------------------------
Thomas N. Thompson, Director
Date: March 20, 2000 /s/ Don Vitale
------------------------ -------------------------------------
Don Vitale, Director
Date: March 20, 2000 /s/ Pollard White
------------------------ -------------------------------------
Pollard White, Director
Date: March 20, 2000 /s/ Edward J. Vega
------------------------ -------------------------------------
Edward J. Vega, Senior Vice President-
Chief Financial Officer
(Principal Financial Officer)
Date: March 20, 2000 /s/ Gary R. White
------------------------ -------------------------------------
Gary R. White, Controller
(Principal Accounting Officer)
</TABLE>
22
<PAGE> 1
EXHIBIT 13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONTENTS
Letter to Shareholders
1
Consolidated Five Year Selected Financial Data
2
Financial Review
3-30
Independent Auditors'Report
31
Consolidated Balance Sheets
32
Consolidated Statements of Income
33
Consolidated Statements of Comprehensive Income
34
Consolidated Statements of Shareholders' Equity
35
Consolidated Statements of Cash Flows
36-37
Notes to Consolidated Financial Statements
38-59
Corporate Information
60
Market for Common Stock and Related Shareholder Matters
61
Area Bancshares Corporation - Officers and Directors
62
Alliance Bank - Officers and Directors
63
Bank of Livingston County - Officers and Directors
63
Bank of Lyon County - Officers and Directors
63
Bowling Green Bank and Trust Company, N.A. - Officers and Directors
64
Broadway Bank and Trust - Officers and Directors
64
Citizens Deposit Bank - Officers and Directors
64
Dees Bank of Hazel - Officers and Directors
65
First City Bank and Trust Company - Officers and Directors
65
First & Peoples Bank - Officers and Directors
66
HNB Bank, N.A. - Officers and Directors
66
Jefferson Banking Company - Officers and Directors
66
Peoples Bank of Murray - Officers and Directors
67
Peoples Commercial Bank - Officers and Directors
67
The New Farmers National Bank of Glasgow - Officers and Directors
68
The Owensboro National Bank - Officers and Directors
69
Southern Deposit Bank - Officers and Directors
70
The Vine Street Trust Company - Officers and Directors
71
Vine Street Financial, Inc. - Officers and Directors
71
<PAGE> 2
Dear Shareholder:
The past year was one of many challenges: Y2K preparation, technology
enhancements, acquisitions, and volatile interest rates. Despite these
challenges, Area produced the highest core operating earnings in its history.
Net income for 1999 totaled $25.58 million, representing a 17.2% increase over
the $21.82 million in l998. These earnings were augmented by security gains, an
insurance settlement and gains on sale of assets, net of merger-related charges,
to total reported earnings of $38.26 million. Also important to recognize are
cash-based earnings, which include the amortization of intangible assets,
because this type of earnings is more indicative of cash flows and thus Area's
ability to support growth. In 1999, cash-based core operating net income was
$28.49 million.
Area's growth in 1999, both internally and through acquisitions, has made it the
largest bank-holding company headquartered in Kentucky. This growth continues in
2000. On January 31, Area welcomed Peoples Bank, Murray; Dees Bank, Hazel; Bank
of Livingston County; and Bank of Lyon County; adding $376 million in assets.
For 2000 and beyond, Area has launched a strategic initiative that will allow us
to better serve the changing needs of our customers, and will clearly identify
our company to customers across the state. Affiliate banks - with the exception
of Vine Street Trust, Lexington, which will maintain its charter as a
"private-banking company" - will combine into a single, recognizable name: "Area
Bank." Though the signage will change, the high quality of services, employees,
and locations will remain the same. Decisions by local presidents, loan officers
and directors will also continue, as in the past. Most importantly, this
strategic initiative reinforces our unwavering commitment to deliver exceptional
and innovative customer benefits tempered by a credit quality culture - the
outgrowth of which is Area's future success and added value to shareholders,
employees and communities.
This new millennium offers many opportunities, especially with the passage of
Financial Modernization Legislation, which allows banks to offer a broader array
of products and services. It is with great confidence and optimism that we go
forward.
Sincerely,
Thomas R. Brumley
President and Chief Executive Officer
Area Bancshares Corporation
<PAGE> 3
2
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In Thousands, Except Ratios
and Per Share Data) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR-END TOTALS
Assets $ 2,340,521 $ 2,132,365 1,901,449 $ 1,796,290 $ 1,778,559
Securities available for sale 363,627 340,874 342,513 320,413 355,217
Securities held to maturity 129,089 117,869 116,811 97,120 94,015
Loans, net of unearned discount 1,631,396 1,412,567 1,227,307 1,147,060 1,091,867
Deposits 1,711,782 1,691,864 1,433,132 1,394,399 1,223,556
Long-term debt and other borrowings 338,049 170,726 252,866 213,916 232,756
Shareholders' equity 266,964 238,213 196,549 169,383 149,724
- ----------------------------------------------------------------------------------------------------------------------------
EARNINGS
Total interest income $ 159,245 $ 143,576 139,249 $ 136,835 $ 132,088
Total interest expense 70,338 67,890 63,643 64,410 64,330
Provision for loan losses 736 1,628 3,271 4,849 4,824
Non-interest income 46,045 22,605 18,322 28,238 18,413
Non-interest expenses 79,128 64,741 61,357 65,912 64,414
Income taxes 16,829 9,296 8,491 10,016 4,487
Net income 38,259 22,626 20,809 19,886 12,446
PER SHARE DATA (1)
Net income-basic $ 2.28 $ 1.45 1.35 $ 1.28 $ .81
Net income-diluted 2.24 1.42 1.33 1.26 .79
Core operating net income-basic (2) 1.52 1.40 1.35 1.09 1.08
Core operating net income-diluted (2) 1.50 1.37 1.33 1.07 1.06
Cash dividends .20 .155 .125 .107 .09
Book value as of December 31 16.17 15.20 12.62 10.92 9.68
PERFORMANCE AND CAPITAL MEASURES
Return on average assets 1.69% 1.18% 1.18% 1.15% .75%
Core operating return on average assets (2) 1.13% 1.14% 1.18% .98% 1.00%
Return on average equity 14.40% 10.62% 11.32% 12.38% 9.04%
Core operating return on average equity (2) 9.62% 10.24% 11.31% 10.55% 12.10%
Percentage of average shareholders'
equity to average assets 11.77% 11.14% 10.39% 9.28% 8.26%
Dividend payout ratio 8.77% 10.69% 9.26% 7.79% 8.88%
CASH BASIS CORE OPERATING FINANCIAL DATA (3)
Cash-based core operating net income-basic $ 1.69 $ 1.55 1.48 $ 1.23 $ 1.24
Cash-based core operating net income-diluted 1.67 1.53 1.45 1.21 1.22
Cash-based return on tangible assets 1.28% 1.29% 1.30% 1.12% 1.15%
Cash-based return on tangible equity 12.32% 12.75% 13.57% 13.48% 16.03%
</TABLE>
(1) Restated for all stock dividends and stock splits.
(2) Net income excluding certain non-recurring income and expense items. (See
summary on page 4.)
(3) Cash basis calculations exclude certain non-recurring income and expense
items in addition to intangible assets and the related amortization expense.
<PAGE> 4
3
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CORPORATE OVERVIEW
Area Bancshares Corporation ("Area") is a multi-bank holding company
headquartered in Owensboro, Kentucky. As of December 31, 1999, Area was
comprised of thirteen banks ("banking affiliates") conducting business in
offices throughout Kentucky. During January 2000 Area acquired four additional
banks as discussed in "Mergers and Acquisitions" below. The banking affiliates
provide a wide range of financial services, such as accepting demand and time
deposits; providing checking and money market accounts; making commercial,
consumer and mortgage loans; issuing and servicing credit cards; leasing;
issuing credit life, accident and health, and property and casualty insurance;
providing trust services for personal and corporate customers; providing safe
deposit facilities; and providing alternative investments and brokerage
services. Area has six active non-bank affiliates which provide services
incidental to Area's operations.
The following information is management's analysis of the operations of Area for
the years 1997 through 1999 and its financial condition as of December 31, 1999
and 1998. It provides information that is not otherwise apparent from the
consolidated financial statements and related footnotes and is intended to
assist the reader in evaluating Area's performance. This analysis should be read
in conjunction with the accompanying Consolidated Financial Statements and notes
thereto beginning on page 32, which include the acquisition of NationsBank of
Kentucky, N.A. since August 1998, the merger with Peoples Bancorp of Winchester
since January 1999 and the acquisition of The Eifler Group since October 1999
(see "Mergers and Acquisitions" below for details). Where considered
significant, the impact of these transactions on Area's results of operations
and financial condition is discussed.
MERGERS AND 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. Total assets on December 31,
1999 of these banks were approximately $384.00 million. In January 2000 Area
paid a total of $77.75 million in conjunction with these acquisitions. These
acquisitions are not reflected in the accompanying financial statements since
the transaction closed in January 2000. These transactions will be accounted for
under the purchase method of accounting and will result in the recording of
approximately $33.39 million of intangible assets.
During October 1999, Area acquired the investment business of The Eifler Group
of Louisville, Kentucky. This group is managing Area's non-deposit investment
product line under the name of Area Investment Services.
In January 1999, Area merged with Peoples Bancorp of Winchester ("Peoples")
which is headquartered in Winchester, Kentucky. Peoples was a one-bank holding
company for Peoples Commercial Bank. Total assets of Peoples were approximately
$165.00 million on the date of merger. Area issued 1.30 million shares of its
common stock in conjunction with this merger. The Peoples' merger was accounted
for as pooling-of-interests. However, the accompanying financial statements were
not restated as a result of Peoples' relative size to that of Area.
In August 1998, Area acquired NationsBank of Kentucky, N.A. ("NationsBank"), a
wholly-owned subsidiary of NationsBank Corporation (now known as Bank America
Corporation). NationsBank had assets totaling $133.00 million, net of certain
deposits that were retained by NationsBank, loans of $84.00 million and deposits
amounting to $113.00 million. The acquisition was accounted for under the
purchase method of accounting and, accordingly, the results of NationsBank have
been included in Area's consolidated statements since the date of acquisition.
In conjunction with the acquisition, approximately $22.03 million of intangibles
were recorded.
In 1997 Area and Cardinal Bancshares, Inc. merged in a transaction accounted for
as a pooling-of-interests. The financial information in this Annual Report has
been restated to reflect this merger for all periods presented.
<PAGE> 5
4
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
SUMMARY
Management believes that the most meaningful comparison of financial performance
for Area is its core operating net income which excludes security gains and
certain non-recurring income and expense items from the results of operations
for the years of 1999, 1998 and 1997. During 1999, Area recorded several
non-recurring items that enhanced its reported net income. These include
after-tax gains totaling $13.83 million on the sale of available for sale
securities as a result of Area's ongoing strategy to improve the performance of
the investment portfolio through repositioning portions of the portfolio as
market conditions change, a favorable insurance settlement related to a loss
occurring in 1994 which amounted to $615 thousand after-taxes and a gain
totaling $710 thousand after-taxes on the sale of other real estate owned. The
positive impact of these items was partially off-set by after-tax merger and
acquisition charges of $2.48 million in 1999. The years of 1998 and 1997 also
included after-tax gains on the sale of securities available for sale totaling
$70 thousand and $14 thousand, respectively, while 1998 included $604 thousand
of after-tax merger and acquisition charges in addition to an after-tax gain of
$1.34 million on the sale of a subsidiary's loan portfolio.
The following table summarizes net income as reported and "core operating" or
recurring net income, which excludes the non-recurring items discussed above.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
CORE OPERATING NET INCOME
Year Ended Year Ended Year Ended
(In thousands, except percentages December 31, 1999 December 31, 1998 December 31, 1997
and per share data) Diluted Diluted Diluted
Net Earnings Net Earnings Net Earnings
Income per Share Income per Share Income per Share
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income as reported $ 38,259 $ 2.24 $ 22,626 $ 1.42 $ 20,809 $ 1.33
Add or (deduct) net of taxes:
Security gains (13,834) (0.81) (70) (0.01) (14) --
Insurance settlement (615) (0.04) -- -- -- --
Gain on sale of assets (710) (0.04) (1,344) (0.08) -- --
Merger and acquisition charges 2,478 0.15 604 0.04 -- --
- -----------------------------------------------------------------------------------------------------------------------------
CORE OPERATING NET INCOME $ 25,578 $ 1.50 $ 21,816 $ 1.37 $ 20,795 $ 1.33
=============================================================================================================================
Performance ratios:
Reported return on assets 1.69% 1.18% 1.18%
Core operating return on assets 1.13% 1.14% 1.18%
Reported return on equity 14.40% 10.62% 11.32%
Core operating return on equity 9.62% 10.24% 11.31%
</TABLE>
After eliminating the non-recurring items, core operating net income for 1999
was the highest in Area's history, totaling $25.58 million. This represents a
17.2% increase over the $21.82 million earned in 1998, which in turn was up 4.9%
from 1997. Core operating diluted earnings per share, also the highest in Area's
history, were $1.50 in 1999, 9.5% higher than the $1.37 reported in 1998. Core
operating earnings per share in 1998 were 3.0% above 1997 which totaled $1.33.
The improvement in core operating net income between 1999 and 1998 was
attributable to three factors: (1) an increase totaling $13.48 million to $93.33
million in net interest income (on a taxable equivalent basis) primarily as a
result of loan growth; (2) a decrease in the provision for loan losses from
$1.63 million during 1998 to $736 thousand in 1999 due to improvement in the
quality of the loan portfolio; and (3) an increase in continuing non-interest
income (see the Noninterest Income Table on page 8 for details) from $20.43
million in 1998 to $21.99 million in 1999 as a result of growth in deposit and
trust fees.
Area's 1998 core operating net income increased $1.02 million or 4.9% from 1997.
The improvement in core operating net income between 1998 and 1997 was largely
attributable to a reduction totaling $1.64 million in the provision for loan
losses
<PAGE> 6
5
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
arising from an improvement in the quality of the loan portfolio and an increase
in continuing non-interest income which was driven principally by increases in
deposit and trust fees.
Area's reported net income, which includes the non-recurring items detailed
above, totaled $38.26 million for 1999 compared to $22.63 million in 1998 and
$20.81 million for 1997. Diluted earnings per share totaled $2.24 in 1999,
compared to $1.42 in 1998 and $1.33 in 1997. The increase in reported net income
from 1998 to 1999 was $15.63 million or 69.1% while reported diluted earnings
per share increased $0.82 or 57.7%. Reported net income grew $1.82 million or
8.7% from 1997 to 1998 and reported diluted earnings per share rose $0.09 or
6.8%.
It is also important to review cash-based earnings, which exclude intangible
asset amortization, since it is more indicative of cash flows and thus Area's
ability to support growth. In 1999 cash-based core operating net income was
$28.49 million, compared to $24.31 in 1998 and $22.71 million in 1997. The
increase from 1998 to 1999 was $4.18 million or 17.2% while the increase from
1997 to 1998 was $1.60 million or 7.1%. Cash-based core operating diluted
earnings per share were $1.67 in 1999, $1.53 in 1998 and $1.45 in 1997.
The following table presents Area's cash-based core operating net income along
with other cash-based performance ratios:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
CASH-BASED CORE OPERATING NET INCOME
(In thousands, except percentages YEAR ENDING DECEMBER 31
and per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Core operating net income $ 25,578 $ 21,816 $ 20,795
Add back (net of taxes):
Intangible amortization 2,916 2,498 1,917
- --------------------------------------------------------------------------------------------------------
CASH-BASED CORE OPERATING NET INCOME $ 28,494 $ 24,314 $ 22,712
========================================================================================================
Cash-based performance ratios:
Cash-based core operating diluted earnings per share $ 1.67 $ 1.53 $ 1.45
Cash-based return on tangible assets 1.28% 1.29% 1.30%
Cash-based return on tangible equity 12.32% 12.75% 13.57%
</TABLE>
NET INTEREST INCOME
The largest source of Area's revenue is net interest income which is the
difference between interest income and interest expense. Sources of interest
income include interest on loans and investments while interest expense includes
interest paid on deposits and borrowings. The amount of net interest income is
the result of a number of factors, including the volume of interest-earning
assets and interest-bearing liabilities and the interest rates earned and paid.
In addition, the amount of interest-bearing assets funded by interest-free
sources (largely shareholders' equity and non-interest bearing deposits) impacts
net interest income.
Changes in net interest income are frequently measured by two percentages: net
interest margin and net interest spread. Net interest margin is expressed as net
interest income (on a tax equivalent basis) divided by average earning assets.
Net interest spread is the difference between the average yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. Both of these percentages are reported on a taxable equivalent
basis. Net interest margin is greater than net interest spread as a result of
interest income earned on interest-earning assets and funded by
non-interest-bearing funds such as demand deposits and shareholders' equity.
Net interest income increased $13.22 million or 17.5% to $88.91 million in 1999
from $75.69 million in 1998 (excluding Peoples, the increase would have been
$7.17 million or 9.6%). On a taxable equivalent basis (all tax-free interest
income restated on a taxable basis), net interest income rose to $93.33 million
from $79.84 million in 1998, an increase of $13.49 million or 16.9% (excluding
Peoples, the increase would have been $7.34 million or 9.2%). The net interest
margin during 1999 remained unchanged from 1998 at 4.46%. The average rate on
earning assets declined from 8.26% in 1998 to 7.83% in 1999. This decrease was
largely the result of competitive pressures on loan pricing and a relatively
flat yield curve. The
<PAGE> 7
6
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
cost of interest bearing deposits decreased 51 basis points (a basis point is
equal to one hundredth of a percent) in 1999 to 3.95% from 4.46% in 1998
primarily as a result of the maturity of higher-priced certificates of deposits
issued three-to-five years ago. The cost of borrowed funds decreased 31 basis
points to 5.01% from 5.32% in 1998 primarily as a result of a general decline in
rates during the first half of 1999. The impact of non-interest bearing funds
was at 0.75% in 1998 and 0.72% in 1999.
Average interest-earning assets increased $302.13 million or 16.9% to $2.09
billion in 1999 from $1.79 billion in 1998, while the largest component, average
loans, increased to $1.54 billion from $1.26 billion during 1998.
Average interest-bearing liabilities grew $229.91 million or 15.4% in 1999 to
$1.72 billion from $1.49 billion. Increases in borrowings accounted for $60.53
million while increases in interest bearing deposits totaled $169.38 million.
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.
Net interest income increased 0.1% to $75.69 million in 1998 from $75.61 million
in 1997. On a taxable equivalent basis, net interest income rose to $79.84
million in 1998 from $79.11 million in 1997, an increase of $73 thousand or
0.9%. The net interest margin declined 31 basis points to 4.46% in 1998 from
4.77% in 1997. The average rate on earning assets declined from 8.62% in 1997 to
8.26% in 1998. This decrease was largely the result of a reduction in the yield
of the loan portfolio caused by loan refinancings, strong competition for
quality loans and a relatively flat yield curve. The cost of interest bearing
deposits totaled 4.46% in 1998 compared to 4.47% in 1997. The cost of borrowed
funds decreased 17 basis points to 5.32% from 5.49% in 1997, primarily as a
result of a decrease in the average rate paid on Federal funds purchased and
securities sold under agreements to repurchase from 5.14% in 1997 to 4.81% in
1998. The impact of non-interest bearing funds was constant at .75% in both 1998
and 1997.
<TABLE>
<CAPTION>
NET INTEREST SPREAD AND MARGIN
(Taxable-equivalent basis) 1999 1998 1997
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Yield on interest earning assets 7.83% 8.26% 8.62%
Rate on interest bearing liabilities 4.09% 4.55% 4.60%
--------------------------------------------------------------------------------------
NET INTEREST SPREAD 3.74% 3.71% 4.02%
Non-interest bearing funds contribution 0.72% .75% .75%
--------------------------------------------------------------------------------------
NET INTEREST MARGIN 4.46% 4.46% 4.77%
======================================================================================
</TABLE>
Table 1 on page 23 contains a summary of average balance sheets, net interest
income and margins for 1999, 1998 and 1997. Table 2 on page 24 provides the
components of the change in net interest income for 1999 and 1998 when compared
to 1998 and 1997, respectively.
<PAGE> 8
7
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NON-INTEREST INCOME
Continuing non-interest income, which excludes gains on the sales of securities,
non-recurring items and non-interest income attributable to Peoples increased
$1.56 million or 7.6% in 1999 to $21.99 million from $20.43 million in 1998.
Area's diverse sources of non-interest income generated largely from traditional
banking activities were responsible for this growth. Significant growth occurred
in commissions and fees on fiduciary activities and service charges on deposit
accounts during 1999.
Commissions and fees on fiduciary activities were $5.32 million in 1999, an
increase of $467 thousand, or 9.6%, over $4.85 million earned in 1998.
Successful new business development efforts along with strong equity markets led
to this revenue growth. The increase in 1998's commissions and fees on fiduciary
activities over 1997, which totaled $588 thousand or 13.8%, was due largely to
strong equity markets and new business.
Service charges on deposit accounts reached $8.94 million in 1999, compared to
$7.55 million in 1998, an increase of $1.39 million or 18.4%. The growth in 1999
was due to added efforts to collect a greater percentage of fees assessed and
higher activity fees. The increase in 1998 compared to 1997, which totaled $873
thousand or 13.1%, was due largely to growth in deposits subject to service
charges.
Other service charges, commissions and fees totaled $5.66 million in 1999, a
decrease of $621 thousand or 9.9% from 1998. This decrease was the result of
changes in the method of reporting income and expenses by Area's credit card
service provider. Excluding this change, commission income on security brokerage
activity increased and loan servicing fees grew as a result of increases in
loans serviced. During 1998 other service charges, commissions and fees
increased $1.25 million or 24.8% to $6.28 million when compared to 1997. The
increase during 1998 was the result of growth in loan servicing fees and
increases in credit card interchange fees.
Gains on the sales of loans were $1.22 million in 1999 compared to $1.34 million
in 1998. The decrease from 1998 to 1999 was the result of slightly less activity
due to rising rates in the second half of 1999. Gains on the sales of loans
remained virtually unchanged from 1997 to 1998, totaling $1.34 million in 1998
and $1.37 million in 1997.
Security gains totaled $21.28 million in 1999 compared to $108 thousand in 1998.
The increase in security gains in 1999 reflect Area's ongoing strategy to
improve the performance of its investment portfolio through repositioning
portions of the portfolio as market conditions change.
Non-recurring non-interest income items totaled $2.04 million in 1999 compared
to $2.07 million in 1998. During 1999 Area recorded a gain of $1.09 million on
the sale of other real estate owned and received an insurance settlement of $945
thousand from a loss occurring in 1994. During 1998 a subsidiary sold its loan
portfolio for a gain of $2.07 million.
<PAGE> 9
8
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
The table that follows shows the components of non-interest income for 1999,
1998 and 1997:
- -------------------------------------------------------------------------------------------------------------------
NON-INTEREST INCOME (1) DOLLAR CHANGE
(IN THOUSANDS) 1999 (1) 1998 1997 1999 VS 1998 VS
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commissions and fees on
fiduciary activities $ 5,319 $ 4,852 $ 4,264 $ 467 $ 588
Service charges on deposit
accounts 8,938 7,548 6,675 1,390 873
Other service charges,
commissions and fees 5,662 6,283 5,036 (621) 1,247
Gains on the sales of loans, net 1,221 1,336 1,374 (115) (38)
Other income 847 410 952 437 (542)
- ------------------------------------------------------------------------------------------------------------------
CONTINUING NON-INTEREST INCOME 21,987 20,429 18,301 1,558 2,128
Securities gains, net 21,280 108 21 21,172 87
Non-recurring items (2) 2,038 2,068 -- (30) 2,068
Non-interest income attributable to Peoples (1) 740 -- -- 740 --
- ------------------------------------------------------------------------------------------------------------------
TOTAL $46,045 $22,605 $18,322 $ 23,440 $ 4,283
==================================================================================================================
(1) See Table 8 on page 30 for details
(2) Non-recurring items in 1999 include a gain on the sale of OREO totaling
$1,093 and an insurance settlement of $945. In 1998 the non-recurring item
was a gain on the sale of a subsidiary's loan portfolio.
</TABLE>
NON-INTEREST EXPENSE
Non-interest expense, adjusted for non-recurring items and non-interest expenses
attributable to Peoples, increased 11.4% to $71.09 million in 1999, compared to
$63.81 million in 1998 and $61.36 million in 1997. The increase in non-interest
expenses in 1999 was primarily the result of increased salary and employee
benefits, furniture and equipment expenses and net occupancy expenses. The
increase in non-interest expenses in 1998 compared to 1997 was due in part to
increased salary and employee benefits as well as enhancements to Area's data
processing capabilities.
Salaries and employee benefits, which is the largest component of non-interest
expenses, comprised 47.1% of adjusted non-interest expenses in both 1999 and
1998. Salaries and employee benefits increased 11.5% in 1999, following a 3.1%
increase in 1998. Salaries and employee benefits increased in both 1999 and 1998
due to higher staff levels and normal salary increases.
Net occupancy expense increased $1.13 million or 27.1% to $5.25 million after
increasing 1.1% to $4.12 million in 1998. Net occupancy expense grew in 1999
largely as a result of the addition of new facilities and the modernization of
existing facilities. The increase in 1998 was due to increases in lease expense
as a result of new branch offices.
Furniture and equipment expense increased $1.48 million or 34.7% to $5.76
million in 1999, following a 4.8% decrease in 1998. Furniture and equipment
expense increased in 1999 due largely to increases in depreciation of equipment
acquired to become Year 2000 ready, while the decrease in 1998 was the result of
reduced maintenance and repair costs.
Data processing expense grew $735 thousand or 18.1% to $4.79 million in 1999
following an increase of $839 thousand or 26.1% in 1998. The increases in both
1999 and 1998 were primarily the result of enhancements in Area's data
processing capabilities to meet internal and customer needs as well as Year 2000
expenditures.
Advertising and community relations increased $152 thousand in 1999 to $3.17
million after an increase of $229 thousand
<PAGE> 10
9
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
in 1998. The rise in 1999 was primarily the result of increases in radio
advertising while the increase in 1998 was related to new marketing programs and
training expenses.
Professional fees were up in both 1999 and 1998, increasing $251 thousand or
7.4% in 1999 and $315 thousand or 10.2% during 1998 compared to 1997. The
increases in both years were primarily the result of consulting fees to outside
third parties incurred to become Year 2000 ready and professional fees incurred
in connection with merger and acquisition activity.
Amortization of intangibles increased $702 thousand or 24.5% to $3.56 million
and increased $342 thousand or 13.6% in 1998. The increases in both 1999 and
1998 were the result of the acquisition of NationsBank of Kentucky, N.A. which
was accounted for using the purchase method of accounting. See "Mergers and
Acquisitions" on page 3 for details of this transaction.
Other non-interest expenses decreased $580 thousand or 6.2% to $8.73 million,
following a decrease of $57 thousand or 0.6% in 1998. The decrease during 1999
was largely the result of changes in the method of reporting income and expenses
by Area's credit card service provider.
Non-recurring non-interest expense items totaled $4.32 million in 1999 and $929
thousand in 1998. Merger and acquisition costs accounted for all of these
amounts in both years.
The following table provides a summary of changes in non-interest expenses for
the past three years:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Non-Interest Expense (1) DOLLAR CHANGE
(In thousands) 1999 (1) 1998 1997 1999 vs 1998 vs
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $33,482 $30,032 $29,133 $ 3,450 $ 899
Net occupancy expense 5,248 4,117 4,074 1,131 43
Furniture and equipment expense 5,756 4,273 4,488 1,483 (215)
Federal deposit insurance 303 253 238 50 15
Data processing expense 4,789 4,054 3,215 735 839
Advertising and community relations 3,165 3,013 2,784 152 229
Insurance and taxes 2,404 2,497 2,452 (93) 45
Professional fees 3,657 3,406 3,091 251 315
Amortization of intangibles 3,562 2,860 2,518 702 342
Other 8,727 9,307 9,364 (580) (57)
- -------------------------------------------------------------------------------------------------------------------
ADJUSTED NON-INTEREST EXPENSE 71,093 63,812 61,357 7,281 2,455
Merger and acquisition costs 4,320 929 -- 3,391 929
Non-interest expense attributable to
Peoples (1) 3,715 -- -- 3,715 --
- -------------------------------------------------------------------------------------------------------------------
TOTAL $79,128 $64,741 $61,357 $ 14,387 $ 3,384
(1) See Table 9 on page 30 for details
</TABLE>
INCOME TAXES
Income tax expense was $16.83 million in 1999 and $9.30 million in 1998. The
increase during 1999 reflects a higher level of taxable income. The effective
tax rate during 1999 was 30.5% compared to 29.1% in 1998. The effective tax rate
differs from the marginal tax rate of 35.0% in both 1999 and 1998, primarily as
a result of tax-exempt income and amortization of goodwill. Income tax expense
increased $805 thousand from 1997 to 1998. The effective tax rate was 29.0%
during 1997.
<PAGE> 11
10
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
INTERIM FINANCIAL DATA
The following table provides unaudited quarterly summary financial results of
operations for the years ended December 31, 1999 and 1998. These results of
operations contain all normal and recurring adjustments necessary for a fair and
consistent presentation.
<TABLE>
<CAPTION>
UNAUDITED QUARTERLY SUMMARY FINANCIAL INFORMATION
(In thousands, except per share data)
1999 QUARTER ENDED 1998 QUARTER ENDED
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $38,768 $38,721 $40,167 $41,589 $35,395 $35,275 $35,622 $37,284
Interest expense 18,033 17,097 17,355 17,853 16,493 16,821 16,944 17,632
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 20,735 21,624 22,812 23,736 18,902 18,454 18,678 19,652
Provision for loan losses 164 192 145 235 612 101 534 381
Non-interest income 8,975 23,313 6,713 7,044 4,951 7,254 4,805 5,595
Non-interest expenses 18,291 18,401 18,272 24,164 14,926 15,700 16,699 17,416
Income tax expense 2,977 8,846 3,354 1,652 2,444 3,020 1,730 2,102
============================================================================================================
NET INCOME $ 8,278 $17,498 $ 7,754 $ 4,729 $ 5,871 $ 6,887 $ 4,520 $ 5,348
============================================================================================================
Net income per common share:
Basic $ 0.50 $ 1.03 $ 0.46 $ 0.29 $ 0.38 $ 0.44 $ 0.29 $ 0.34
Diluted 0.49 1.02 0.45 0.28 0.37 0.43 0.28 0.34
Dividends per share 0.045 0.05 0.05 0.055 0.035 0.035 0.04 0.045
- ------------------------------------------------------------------------------------------------------------
</TABLE>
FOURTH QUARTER RESULTS
Area's fourth quarter core operating earnings, net income less securities gains
and certain nonrecurring items, were $6.62 million or $0.39 per diluted share
compared to $5.60 million and $0.35 per diluted share during the fourth quarter
of 1998. This is an increase of $1.02 million or 18.2% and a per share increase
of $0.04 or 11.4%. Cash-based core operating earnings, core earnings adjusted
for amortization of intangibles, during the fourth quarter of 1999 grew $1.12
million or 17.9% to $7.39 million and $0.05 or 12.8% to $0.44 per diluted share
compared to the fourth quarter of 1998 amounts of $6.27 million or $0.39 per
diluted share.
Net income for the fourth quarter was $4.73 million, a decrease of $620 thousand
or 11.6% from the $5.35 million reported in the fourth quarter of 1998. On a per
diluted share basis net income was $0.28, compared to $0.34, a reduction of
$0.06 or 17.6%, from the same quarter of 1998.
Net interest income, on a tax equivalent basis, was $24.89 million during the
current quarter compared to $20.68 million during the fourth quarter of 1998.
The increase was $4.21 million or 20.4%. Strong average loan growth generated
both internally and as a result of the acquisitions discussed earlier and a
decrease in the average rate on interest bearing liabilities compared to the
same period in 1998 were the primary factors for the improvement in net interest
income.
Recurring non-interest income during the fourth quarter of 1999 was $5.95
million, an increase of $352 thousand over 1998. Recurring non-interest expenses
totaled $20.16 million during the fourth quarter of 1999, an increase of $2.75
million from the same period in 1998.
<PAGE> 12
11
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
BALANCE SHEET ANALYSIS
The financial condition of Area as of December 31, 1999 and 1998, is presented
in the comparative balance sheets of the Consolidated Financial Statements which
include the acquisition of NationsBank since August 1998 and the merger with
Peoples since January 1999 (see "Mergers and Acquisitions" on page 3 for details
of these transactions). Where appropriate, the impact of these transactions on
Area's financial condition will be discussed, otherwise it can be assumed they
were not significant. The following discussion addresses securities, loans,
deposits, borrowings, capital resources, liquidity and interest rate risk and is
provided to assist the reader in evaluating Area's financial condition.
[GRAPH]
Total Assets
At December 31
(Amounts in Millions)
SECURITIES
Average total securities available for sale and held to maturity represented
24.9%, 26.1% and 26.7% of average earning assets during 1999, 1998 and 1997,
respectively. The portfolio continues to be weighted heavily towards U.S.
Treasury and Federal agency securities as the table below indicates. During 1999
the securities portfolio increased $33.97 million or 7.4% to $492.72 million.
Excluding $31.18 million of securities acquired in the Peoples merger, the
securities portfolio increased $2.79 million or 0.6%. Table 3 on page 25
provides the carrying amounts, maturities and average yields as of December 31,
1999, of the securities portfolio.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
SECURITIES (PERCENT OF TOTAL CARRYING AMOUNTS)
DECEMBER 31
1999 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and Federal Agencies 41.5% 41.3% 50.8%
Mortgage-backed securities 14.6% 15.0% 12.3%
Obligations of states and political subdivisions 31.0% 30.0% 29.1%
Equity and other securities 12.9% 13.7% 7.8%
----------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
==================================================================================
</TABLE>
As of December 31, 1999, Area's securities portfolio included $363.63 million of
securities classified as available for sale and $129.09 million of securities
classified as held to maturity. Net unrealized gains on December 31, 1999
related to securities available for sale (which is reported in accumulated other
comprehensive income in the shareholders' equity section of the Consolidated
Balance Sheet) were $24.52 million (net of taxes), compared to $31.54 million
(net of taxes) on December 31, 1998 and $11.51 million (net of taxes) on
December 31, 1997. The decrease from December 31, 1998 to December 31, 1999 was
largely the result of the sale of securities. The increase from December 31,
1997 to December 31,
<PAGE> 13
12
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
1998 can primarily be attributed to increases in the market value of equity
securities. The equity and other securities portfolio is comprised primarily of
the common stock of bank holding companies which operate within the Commonwealth
of Kentucky.
The carrying amounts of the securities portfolio at the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Available for sale securities December 31
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury and Federal agencies $204,447 $189,464 $233,353
Mortgage-backed securities 72,136 68,859 56,568
Obligations of states and political subdivisions 23,819 19,756 16,867
Equity and other securities 63,225 62,795 35,725
- ------------------------------------------------------------------------------------------
TOTAL $363,627 $340,874 $342,513
==========================================================================================
HELD TO MATURITY SECURITIES
Obligations of states and political subdivisions $129,089 $117,869 $116,811
- ------------------------------------------------------------------------------------------
TOTAL $129,089 $117,869 $116,811
==========================================================================================
TOTAL SECURITIES $492,716 $458,743 $459,324
==========================================================================================
</TABLE>
LOANS
Total loans, excluding loans held for sale, increased $218.83 million or 15.5%
to $1.63 billion in 1999 and $185.26 million or 15.1% to $1.41 billion in 1998.
Excluding loans acquired as a result of the merger with Peoples, loans grew
$119.61 million in 1999, or 8.5%. In both 1999 and 1998, the growth in loans was
significantly impacted by the sale of fixed-rate long-term loans which were
originated largely as a result of the refinancing boom experienced during these
years. The servicing of these fixed-rate loans has been retained, thus providing
Area with a stable and significant source of non-interest income. Loans
comprised the largest portion of Area's earning assets, representing 73.8% and
70.2% of average earning assets in 1999 and 1998, respectively.
Each of Area's affiliated banks lend to customers within their geographic
markets. In addition to loans made to individuals for personal needs, the
affiliated banks lend funds to commercial customers in various businesses
including agribusiness, manufacturing, retailing and wholesaling. The loans
originated by the affiliated banks are reviewed by Area. The review process
ensures loan administration, credit quality and loan documentation are in
compliance with corporate loan standards and policies.
<PAGE> 14
13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
The composition of the loan portfolio as of December 31 is presented in the
table below:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
LOAN PORTFOLIO
(In thousands, except percentages) December 31
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 580,521 $ 503,173 $ 357,133 $ 313,104 $ 311,309
Real estate-construction 64,798 43,055 49,979 39,484 20,467
Real estate-mortgage 747,515 674,357 610,846 577,266 503,168
Consumer installment and other loans 238,562 191,982 209,349 217,206 256,923
- --------------------------------------------------------------------------------------------------------------------
TOTAL LOANS $1,631,396 $1,412,567 $1,227,307 $1,147,060 $1,091,867
====================================================================================================================
Percentage of loans by category to
total loans: December 31
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
Commercial 35.58% 35.62% 29.10% 27.30% 28.51%
Real estate-construction 3.97% 3.05% 4.07% 3.44% 1.88%
Real estate-mortgage 45.83% 47.74% 49.77% 50.32% 46.08%
Consumer installment and other loans 14.62% 13.59% 17.06% 18.94% 23.53%
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LOANS 100.00% 100.00% 100.00% 100.00% 100.00%
=====================================================================================================================
</TABLE>
Commercial loans increased $77.35 million or 15.4% to $580.52 million during
1999 and $146.04 million or 40.9% in 1998 to $503.17 million. In addition to
$11.09 million of commercial loans added through the merger with Peoples, the
growth in 1999 was the result of Area's effort to attract small to medium-sized
businesses in various industries within its primary market area. The loan mix
within the commercial loan portfolio is diverse and covers a broad range of
borrowers. The portfolio includes loans secured by real estate as well as other
business assets. As a matter of policy, loan concentrations within a particular
industry or borrower are continuously monitored and controlled.
The real estate loan portfolio consists largely of loans secured by residential
real estate. As of December 31, 1999 and 1998 the real estate portfolio totaled
$812.31 million or 49.8% of total loans and $717.41 million or 50.8% of total
loans, respectively. Excluding $76.23 million of real estate loans added through
the merger with Peoples, total real estate loans grew $18.67 million, or 2.6%,
from year-end 1998 to 1999, largely as a result of Area's effort to attract
high-quality real estate loans. During both 1999 and 1998 Area experienced a
significant increase in refinancings as a result of the desire of residential
real estate customers to obtain long-term fixed rate loans. Area was able to
meet this demand by selling these fixed rate loans and retaining the servicing,
thus providing a stable source of non-interest income.
Consumer loans increased $46.58 million or 24.3% to $238.56 million in 1999
after decreasing $17.37 million or 8.3% in 1998 to $191.98 million. Excluding
$11.90 million of consumer loans added through the merger with Peoples, consumer
loans increased $34.68 million, or 18.1%. Consumer loans represented 14.6% of
total loans on December 31, 1999 and 13.6% as of December 31, 1998. The increase
during 1999 was the result of Area's effort to expand its consumer lending into
markets within the Commonwealth of Kentucky that had not previously been
serviced by one of the affiliated banks. The consumer loan portfolio consists of
loans made to individuals for automobiles, personal needs and second mortgages.
In addition to the loan portfolio discussed above, Area serviced loans for
others of approximately $318.55 million, $247.93 million and $149.20 million at
December 31, 1999, 1998 and 1997, respectively.
<PAGE> 15
14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
[CHART]
Loans by Type
(At December 31, 1999)
ALLOWANCE FOR LOAN LOSSES AND PROVISION FOR LOAN LOSSES
Each of Area's affiliate banks provide an amount for expected loan losses as an
expense. This amount is called the provision for loan losses and increases the
allowance for loan losses. Actual losses on loans are charged against the
allowance for loan losses. The allowance for loan losses at December 31, 1999,
was $23.06 million or 1.41% of loans outstanding compared to $21.65 million and
1.53% of loans outstanding at the end of 1998. The allowance for loan losses
equaled 1,114.8% and 851.1% of nonperforming loans as of December 31, 1999 and
1998, respectively. As a percentage of under performing assets (defined and
discussed in the following section), the allowance for loan losses totaled
1,015.2% on December 31, 1999 and 513.2% as of December 31, 1998. This increase
was largely the result of $1.86 million added to Area's allowance for loan
losses as a result of the merger with Peoples and a reduction in underperforming
assets from $4.22 million on December 31, 1998 to $2.27 million on December 31,
1999. The adequacy of the allowance for loan losses is monitored on a quarterly
basis and is based on management's evaluation of several key factors, including:
the quality of the current portfolio, current national and local economic
conditions, concentrations in loan types, evaluation of problem loans, and a
review of historical charge-off and recovery experience.
The provision for loan losses during 1999 was $736 thousand compared to $1.63
million in 1998 and $3.27 million in 1997. The decrease in the provision over
the past three years reflects the improvement in the loan portfolio, as
indicated by the reduction in total underperforming assets shown in the table
included with the discussion of underperforming assets in the following section.
Charge-offs, net of recoveries, increased slightly to $1.19 million during 1999
from $1.00 million in 1998. Net charge-offs as a percent of average loans
outstanding were 0.08%, 0.08% and 0.17% during 1999, 1998 and 1997,
respectively. This ratio during 1999 was at an historically low level and may
increase in the future.
<PAGE> 16
15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
The table below presents a summary analysis of loan loss experience for the most
recent five years with details found in Table 4 on page 26. Additionally, Table
5 on page 27 shows the allocation of the allowance for loan losses.
<TABLE>
<CAPTION>
LOAN LOSS EXPERIENCE
(In thousands, except percentages) Year Ended December 31
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Beginning allowance for loan
losses $ 21,651 $ 19,887 $ 18,663 $ 17,814 $ 16,370
Additions through acquisitions 1,857 1,137 -- -- 554
Reduction through divestiture -- -- -- (1,334) --
Losses charged off (2,509) (2,679) (3,647) (4,611) (5,396)
Recoveries of losses charged off 1,320 1,678 1,600 1,945 1,462
Provision for loan losses 736 1,628 3,271 4,849 4,824
- ----------------------------------------------------------------------------------------------------------------
ENDING ALLOWANCE FOR LOAN LOSSES $ 23,055 $ 21,651 $ 19,887 $ 18,663 $ 17,814
================================================================================================================
Loans outstanding at
December 31 $ 1,631,396 $ 1,412,567 $ 1,227,307 $ 1,147,060 $ 1,091,867
Average loans for the year 1,543,221 1,256,499 $ 1,189,975 $ 1,123,900 $ 1,048,093
Allowance as a percentage of
year-end loans 1.41% 1.53% 1.62% 1.63% 1.63%
Allowance as a percentage of
average loans 1.49% 1.72% 1.67% 1.66% 1.70%
Net charge-offs as a percentage
of average loans 0.08% 0.08% 0.17% 0.24% 0.38%
Provision as a percentage
of average loans 0.05% 0.13% 0.27% 0.43% 0.46%
Allowance as a percentage of
underperforming assets 1,015.2% 513.2% 371.9% 364.9% 315.7%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
UNDERPERFORMING ASSETS
Underperforming assets consist of: 1) nonaccrual loans on which the ultimate
collectibility of the full amount of interest is uncertain, 2) loans past due 90
days or more as to principal or interest, and 3) other real estate owned.
A summary of underperforming assets at December 31 follows:
<TABLE>
<CAPTION>
Underperforming Assets
(In thousands) December 31
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $1,078 $1,787 $2,173 $2,727 $3,559
Loans contractually past due 90
days or more as to interest or
principal payments and still
accruing 990 757 1,789 1,217 899
- ----------------------------------------------------------------------------------------------
Total nonperforming loans 2,068 2,544 3,962 3,944 4,458
Other real estate owned 203 1,675 1,386 1,171 1,185
- ----------------------------------------------------------------------------------------------
Total underperforming assets $2,271 $4,219 $5,348 $5,115 $5,643
==============================================================================================
</TABLE>
Underperforming assets as a percentage of total loans and other real estate
owned were 0.14% on December 31, 1999, a decrease from 0.30% on December 31,
1998. The decrease in underperforming assets during 1999 reflects the strong
local economies of the affiliated banks. The ratio of underperforming assets to
total loans was at an historically low level on December 31, 1999 and may
increase in the future.
<PAGE> 17
16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Other real estate owned, which is carried at the lower of cost or fair market
value, represents real estate which Area or one of its affiliated banks has
acquired in partial or total satisfaction of loans. Other real estate owned
decreased to $203 thousand on December 31, 1999 from $1.68 million as of
December 31, 1998.
Management is not aware of any material amounts of loans outstanding where there
is significant uncertainty as to the ability of the borrower to comply with the
terms of the loan that have not been included in the table above. In addition,
as of December 31, 1999, there were no significant other interest-earning assets
classified as nonperforming or past due 90 days or more.
DEPOSITS
Total deposits increased $19.92 million to $1.71 billion at December 31, 1999,
compared to $1.69 billion a year earlier. Excluding deposits added as a result
of the merger with Peoples, deposits declined $126.28 million or 7.5%.
Non-interest-bearing deposits, excluding deposits acquired through the merger
with Peoples, declined $2.94 million or 1.2% to $264.95 million during the year.
The desire by Area's customers to receive interest on excess
non-interest-bearing deposits has resulted in funds being moved into alternative
investments. Interest-bearing deposits, excluding deposits acquired through the
merger with Peoples, declined $123.34 million or 8.6% to $1.45 billion during
1999. Area chose not to aggressively bid for interest-bearing deposits as rates
moved up in the second half of 1999. This strategy had a positive impact on
Area's net interest margin, but resulted in interest-bearing deposit outflows.
In 1998, total deposits increased $258.73 million to $1.69 billion compared to
$1.43 billion at year-end 1997. Excluding deposits acquired as a result of the
acquisition of NationsBank, deposits grew $146.14 million or 10.2%. The increase
in 1998 was the result of increases totaling $203.56 million in interest-bearing
and $55.17 million increase in non-interest-bearing deposits.
Interest-earning assets are funded primarily by core deposits which serve as the
principal source of funds available for lending and investing activities. Total
deposits averaged $1.74 billion in 1999 and represented 83.1% of average earning
assets compared to $1.51 billion and 84.4% in 1998.
The average amount and average rate paid on deposits classified as
non-interest-bearing demand, interest-bearing demand, savings and time deposits
is presented on table 6 on page 28.
[CHART] Deposits by Type
<PAGE> 18
17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
OTHER BORROWINGS
Area's primary source of funding for earning assets is customers' deposits;
however outside sources are also used. These outside sources include: federal
funds purchased and securities sold under agreements to repurchase which include
short-term borrowings from commercial customers as part of a cash management
service, notes payable to the U.S. Treasury that are short-term borrowings in
connection with treasury, tax and loan deposits, Federal Home Loan Bank advances
which generally include intermediate-term borrowings by Area's affiliate banks
that are members of the Federal Home Loan Bank, and other borrowings. These
other borrowings totaled $338.05 million on December 31, 1999 and $170.72
million on December 31, 1998, an increase of $167.33 million or 98.0%. Average
other borrowings as a percentage of average earning assets increased from 9.24%
in 1998 to 10.8% in 1999. Management does not rely on any one source of
liquidity and has managed other borrowings in response to different factors such
as cost, term and conditions of the loan. The table below presents the average
borrowings for 1999 and 1998. Table 7 on page 29 provides additional information
for 1999 and 1998 relative to year-end balances, average balances, maximum
amount outstanding and weighted average interest rates paid on other borrowings.
<TABLE>
<CAPTION>
AVERAGE OTHER BORROWINGS
(In thousands) 1999 1998 CHANGE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased and securities sold
under agreements to repurchase $ 150,639 $ 96,310 $ 54,329
Advances from the Federal Home Loan Bank 63,833 53,998 9,835
Notes payable to U.S. Treasury 6,875 7,002 (127)
Other borrowings 4,384 7,895 (3,511)
- --------------------------------------------------------------------------------------------
TOTAL $ 225,731 $ 165,205 $ 60,526
============================================================================================
</TABLE>
CAPITAL RESOURCES
Area maintains a level of capital that provides a solid foundation for
anticipated future asset growth while promoting depositor and investor
confidence. Capital management is a continuous process. This process has enabled
Area to profitably expand its balance sheet while maintaining capital ratios
that exceed minimum requirements.
Area's total shareholders' equity increased $28.75 million or 12.1% to $266.96
million at December 31, 1999, compared to $238.21 million at December 31, 1998.
The growth was due largely to the retention of $34.90 million of net income
after paying dividends totaling $3.36 million and the issuance of 1.30 million
shares of common stock in conjunction with the merger with Peoples which
increased shareholders' equity by $13.63 million. As an offset, accumulated
other comprehensive income declined $7.02 million during 1999 primarily as a
result of the sale of available for sale securities.
During 1999, Area repurchased 565 thousand shares of its common stock at an
average price of $25.57 per share in the open market and through unsolicited
negotiated transactions. These shares represent the total shares repurchased
under the 100 thousand-share and the 5% repurchase programs approved by the
Board of Directors in 1998 and 1999, respectively.
<PAGE> 19
18
Area Bancshares Corporation and Subsidiaries
Banking industry regulators have defined capital requirements for banks and bank
holding companies. Area's tier 1 and total risk-based capital ratios as of
December 31, 1999 totaled 12.60% and 13.86%, respectively, which were well above
the minimum requirements of 4.00% for tier 1 and 8.00% for total risk-based
capital. Comparative percentages for tier 1 and total risk-based capital ratios
as of December 31, 1998 were 11.82%. and 13.08% Regulatory authorities have also
established a minimum "leverage" ratio of 4.00%, which has been defined as tier
1 equity to average quarterly assets. At December 31, 1999, Area's leverage
ratio was 9.32%, compared to 8.29% a year earlier.
Note 14 to the Consolidated Financial Statements provides information concerning
the capital ratios of Area's most significant subsidiary.
The following table provides Area's capital ratios and regulatory requirements
as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CAPITAL RATIOS DECEMBER 31 REGULATORY
1999 1998 CAPITAL REQUIREMENTS
- ----------------------------------------------------------------------------------------------------
Well Minimum
Capitalized Requirements
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Leverage ratio 9.32% 8.29% 5.00% 4.00%
Tier 1 risk-based capital ratio 12.60% 11.82% 6.00% 4.00%
Total risk-based capital ratio 13.86% 13.08% 10.00% 8.00%
- ----------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1999 Area's book value per share was $16.17, an increase of
$0.97 or 6.4% from $15.20 at December 31, 1998. The increase was primarily the
result of the retention of 1999 earnings less dividends paid which was partially
off-set by a decrease in accumulated other comprehensive income. Net unrealized
gains on securities available for sale comprised all of the accumulated other
comprehensive income as of December 31, 1999 and 1998 which decreased largely as
a result of the sale of securities in 1999.
During January 1999, Area completed its merger with Peoples Bancorp of
Winchester by exchanging 1.30 million common shares for all 75 thousand shares
of Peoples. The transaction was accounted for using the pooling-of-interests
method of accounting.
[GRAPH]
<PAGE> 20
19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
ASSET-LIABILITY MANAGEMENT
Asset-liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate risk. The goal of liquidity
management is to provide adequate funds to meet loan demand and any potential
unexpected deposit withdrawals. This goal is accomplished by consistent core
deposit growth, holding adequate liquid assets in the form of securities, and
maintaining unused capacity to borrow funds. The objective of interest rate risk
management is to provide the optimal level of net interest income, while
managing exposure to risks associated with interest rate movements. This
objective is accomplished through management of Area's balance sheet during
changing interest rate environments.
LIQUIDITY
At December 31, 1999, Area had approximately $182.00 million of cash and due
from banks, securities and other short-term investments maturing or repricing
within one year compared to $244.99 million as of a year earlier.
Core deposits have historically provided Area with a major source of stable and
relatively low-cost funding. Secondary sources include federal funds purchased,
securities sold under agreements to repurchase, notes payable to the U.S.
Treasury, advances from the Federal Home Loan Bank and other borrowings. Average
core deposits funded 83.1% of average earning assets during 1999 and 84.4%
during 1998. When average shareholders' equity is added to core deposits, the
percentage of average earning assets funded with stable sources totaled 95.8%
during 1999 and 96.3% in 1998.
In the normal course of business, the affiliated banks as well as Area establish
lines of credit for short-term borrowings for the management of daily liquidity
needs. At December 31, 1999, the unused lines of credit aggregated $325.00
million.
INTEREST RATE RISK
For financial institutions, interest rate movements can have a critical impact
on net interest income, and hence net income. The primary objective of interest
rate risk management is to control and monitor the effects of those fluctuations
and their impact on net income. Management considers interest rate risk to be
the most significant market risk.
Management views computer simulations as a more relevant measurement of the
impact of changes in interest rates on net interest income, 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
interest income or exactly predict the impact of fluctuations in interest rates
on net interest income. Actual results will differ from simulated results due to
timing and amount of interest rate changes as well as changes in market
conditions and management strategies. Management uses the model to simulate the
effect of immediate and sustained parallel shifts upward and downward in the
yield curve of 100 basis points (1.00%) and 200 basis points (2.00%).
<PAGE> 21
20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Area's interest rate risk management focuses on maintaining consistent growth
in net interest income within Board-approved policy limits. Area's management
monitors and manages interest rate risk to maintain an acceptable level of
change 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.
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(In thousands, except per share data)
<TABLE>
<CAPTION>
MOVEMENTS IN INTEREST RATES FROM
DECEMBER 31, 1999 RATES
INCREASE DECREASE
Simulated impact in the next 12 months -------- --------
compared with December 31, 1999 +200 bp +100 bp -100 bp -200 bp
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income increase (decrease) $ 4,611 $ 2,633 $ (2,970) $ (6,089)
Net income per share-basic increase (decrease) $ 0.27 $ 0.16 $ (0.18) $ (0.36)
Net income per share-diluted increase (decrease) $ 0.27 $ 0.15 $ (0.17) $ (0.36)
</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 Area's net
income would increase by $4.61 million or 12.1% over the next year. Estimated
earnings per share would increase by $0.27 or 12.1% 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 $6.09 million or 8.1% over one year
while decreasing earnings per share $0.36 or 16.1%. 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 it originates. 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. As of December 31, 1999, Area had entered into interest rate
swap contracts with notional amounts outstanding of $53.46 million. Note 19 to
the Consolidated Financial Statements provides additional details of
off-balance sheet financial instruments.
<PAGE> 22
21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
IMPACT OF NEW ACCOUNTING STANDARDS
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 designated and qualifies as part of a hedging relationship and if so, on
the reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge against exposure to changes in
fair values, cash flows or foreign currencies. If the hedged exposure is a fair
value exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk hedged. If the hedged exposure is a
cash flow exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive income
and subsequently reclassified into earnings when the forecasted transaction
affects earnings. Any amounts excluded from the assessment of hedge
effectiveness as well as the ineffective portion of the gain or loss is
reported in earnings immediately. Accounting for foreign currency hedges is
similar to the accounting for fair value and cash flow hedges. If the
derivative instrument is not designated as a hedge, the gain or loss is
recognized in earnings in the period of change.
Area must adopt SFAS No. 133 (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.
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report and the exhibits hereto which are
not statements of historical fact constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act (the "Act"). In
addition, statements in future filings by Area with the Securities and Exchange
Commission, in press releases, and in oral and written statements made by or
with the approval of Area which are not statements of historical fact
constitute forward-looking statements within the meaning of the Act. Examples
of forward-looking statements include, but are not limited to: (1) projections
of revenues, income or loss, earnings or loss per share, the payment or
non-payment of dividends, capital structure and other financial items; (2)
statements of plans and objectives of Area or its management or Board of
Directors, including those relating to products or services; (3) statements of
future economic performance; and (4) statements of assumptions underlying such
statements. Words such as "believes," "anticipates," "expects," "intends,"
"targeted," and similar expressions are intended to identify forward-looking
statements but are not the exclusive means of identifying such statements.
<PAGE> 23
22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Facts that
could cause actual results to differ from those discussed in the
forward-looking statements include, but are not limited to: (1) the strength of
the U.S. economy in general and the strength of the local economies in which
operations are conducted; (2) the effects of and changes in trade, monetary and
fiscal policies and laws, including interest rate policies of the Board of
Governors of the Federal Reserve System; (3) inflation, interest rate, market
and monetary fluctuations; (4) the timely development of and acceptance of new
products and services and perceived overall value of these products and
services by users; (5) changes in consumer spending, borrowing and saving
habits; (6) technological changes; (7) acquisitions; (8) the ability to
increase market share and control expenses; (9) the effect of changes in laws
and regulations (including laws and regulations concerning taxes, banking,
securities and insurance) with which Area and its subsidiaries must comply;
(10) the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies as well as the Financial Accounting
Standards Board; (11) changes in Area's organization, compensation and benefit
plans; (12) the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; and (13) the success of Area at managing the risks
involved in the foregoing. Such forward-looking statements speak only as of
the date on which such statements are made, and Area undertakes no obligation
to update any forward-looking statement to reflect events or circumstances
after the date on which such statement is made to reflect the occurrence of
unanticipated events.
<PAGE> 24
23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 1
SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME, AND INTEREST RATES
The following summarizes the average consolidated balance sheets by major
type of account, the interest earned and interest paid, and the average yields
and average rates paid for each of the three years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
INTEREST INTEREST INTEREST
(IN THOUSANDS, EXCEPT AVERAGE INCOME YIELD/ AVERAGE INCOME YIELD/ AVERAGE INCOME YIELD/
PERCENTAGES) BALANCE OR EXPENSE RATE BALANCE OR EXPENSE RATE BALANCE OR EXPENSE RATE
------- ---------- ----- ------- ---------- ----- ------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets:
Interest-bearing
deposits with banks $ 6,878 $ 363 5.28% $ 7,441 $ 398 5.35% $ 5,296 $ 293 5.53%
Federal funds sold 20,858 980 4.70% 58,258 3,070 5.27% 19,296 1,034 5.36%
Securities (1)
Taxable 373,905 19,221 5.14% 333,951 18,652 5.59% 321,888 19,533 6.07%
Tax exempt 145,922 12,418 8.51% 132,508 11,757 8.87% 120,524 10,407 8.63%
Loans (2) and (3) 1,543,221 130,683 8.47% 1,256,499 113,857 9.06% 1,189,975 111,486 9.37%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 2,090,784 163,665 7.83% 1,788,657 147,734 8.26% 1,656,979 142,753 8.62%
- ----------------------------------------------------------------------------------------------------------------------------------
Non-earning assets
net of allowance for
loan losses 167,636 -- -- 123,329 -- -- 112,384 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,258,420 $163,665 -- $1,911,986 $147,734 -- $1,769,363 $142,753 --
==================================================================================================================================
Interest-bearing liabilities:
Interest-bearing demand
deposits $296,464 $7,886 2.66% $237,753 $7,424 3.12% $ 241,637 $ 6,817 2.82%
Savings deposits 402,240 11,374 2.83% 327,687 9,908 3.02% 258,859 8,383 3.24%
Time deposits 795,624 39,775 5.00% 759,503 41,767 5.50% 708,155 38,862 5.49%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
DEPOSITS 1,494,328 59,035 3.95% 1,324,943 59,099 4.46% 1,208,651 54,062 4.47%
- ----------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased
and securities sold under
agreements to repurchase 150,639 6,632 4.40% 96,310 4,637 4.81% 107,324 5,520 5.14%
Notes payable to the U.S.
Treasury 6,875 329 4.79% 7,002 390 5.57% 10,990 607 5.52%
Advances from the Federal
Home Loan Bank and
other borrowings 68,217 4,342 6.36% 61,893 3,764 6.08% 56,137 3,454 6.15%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING
LIABILITIES 1,720,059 70,338 4.09% 1,490,148 67,890 4.55% 1,383,102 63,643 4.60%
- ----------------------------------------------------------------------------------------------------------------------------------
Non-Interest-bearing
liabilities:
Demand deposits 243,277 -- -- 185,391 -- -- 176,438 -- --
Other liabilities 29,315 -- -- 23,410 -- -- 26,039 -- --
Shareholders' equity 265,769 -- -- 213,037 -- -- 183,784 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY $2,258,420 -- -- $1,911,986 -- -- $1,769,363 -- --
==================================================================================================================================
Net interest spread (4) -- 3.74% -- 3.71% -- 4.02%
Impact of non-interest
bearing sources and other
changes in balance sheet
composition -- 0.72% -- 0.75% -- 0.75%
NET INTEREST INCOME AND
MARGIN (5) $93,327 4.46% $79,844 4.46% $ 79,110 4.77%
==================================================================================================================================
</TABLE>
(1) Yields on municipal securities have been computed on a tax equivalent
basis. The federal income tax rate used was 35% for all years.
(2) Nonaccrual loan balances are included. Loan interest income computed
on a tax equivalent basis using 35% for all years. (3) Includes loan
fees which are not material. (4) Net interest spread is the difference
between the average rate of interest earned on interest-earning assets
and the average rate of interest expense on interest-bearing
liabilities. (5) Net interest margin is net interest income divided by
interest-earning assets.
<PAGE> 25
24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
Table 2
SUMMARY OF CHANGES IN NET INTEREST INCOME
The following table shows the changes in interest income and interest
expense due to changes in volume and changes in rate for each of the two years
ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 vs 1998 1998 vs 1997
------------------------------------- ------------------------------------
TOTAL VARIANCE DUE TO: TOTAL VARIANCE DUE TO:
(In thousands) CHANGE VOLUME RATE* CHANGE VOLUME RATE*
-------- -------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans (1) $ 16,827 $ 24,658 $(7,831) $ 2,371 $ 6,106 $(3,735)
Investment securities (1) 1,229 3,281 (2,052) 469 1,769 (1,300)
Federal funds sold (2,090) (2,154) 64 2,036 2,053 (17)
Interest-bearing deposits with banks (35) (30) (5) 105 115 (10)
-------- -------- ------- ------- -------- -------
TOTAL INTEREST INCOME 15,931 25,755 (9,824) 4,981 10,043 (5,062)
-------- -------- ------- ------- -------- -------
Interest Expense:
Interest-bearing demand deposits 462 2,003 (1,541) 607 (111) 718
Savings deposits 1,466 2,140 (674) 1,525 2,111 (586)
Time deposits (1,995) 1,924 (3,916) 2,905 2,824 81
Federal funds purchased and securities
sold under an agreement to repurchase 1,992 2,641 (646) (880) (456) (424)
Notes payable to the U.S. Treasury (61) (7) (54) (217) (222) 5
Advances from the Federal Home
Loan Bank and other borrowings 578 513 65 307 249 58
-------- -------- ------- ------- -------- -------
TOTAL INTEREST EXPENSE 2,448 9,214 (6,766) 4,247 4,395 (148)
-------- -------- ------- ------- -------- -------
NET INTEREST INCOME $ 13,483 $ 16,541 $(3,058) $ 734 $ 5,648 $(4,914)
======== ======== ======= ======= ======== =======
</TABLE>
(1) Taxable equivalent basis.
*Changes in interest income and interest expense not arising solely
from rate or volume variances are allocated to change due to volume
and change due to rate in proportion to the relationship of the
absolute dollar amounts of the change in each.
<PAGE> 26
25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 3
MATURITIES AND AVERAGE YIELDS OF SECURITIES AS OF DECEMBER 31, 1999
The carrying amount, maturities, and average yields are summarized as
follows:
AVAILABLE FOR SALE SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
(In thousands, WITHIN ONE YEAR THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
except percentages) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 9,511 6.08% $ 4,956 5.71% $ -- -- $ -- -- $ 14,467 5.95%
U.S. Government
agencies 57,108 5.54% 127,879 5.82% 4,993 7.12% -- -- 189,980 5.77%
Obligations of states
and political
subdivisions (1) -- -- 895 6.62% 4,389 7.56% 18,536 7.73% 23,820 7.66%
Mortgage-backed
securities 2,031 6.06% 8,944 6.39% 53,458 6.38% 7,703 5.49% 72,136 6.28%
Other securities 5,045 5.01% -- -- -- -- -- -- 5,045 5.01%
Equity securities -- -- -- -- -- -- 58,179 0.91% 58,179 0.91%
- ----------------------------------------------------------------------------------------------------------------------------------
Total $73,695 5.59% $142,674 5.86% $62,840 6.52% $84,418 2.83% $363,627 5.22%
==================================================================================================================================
HELD TO MATURITY SECURITIES
DECEMBER 31, 1999
-------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
(In thousands, WITHIN ONE YEAR THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
except percentages) AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Obligations of
states and
political
subdivisions (1) $3,701 9.75% $19,045 9.47% $38,743 8.77% $67,600 8.03% $129,089 8.51%
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL $3,701 9.75% $19,045 9.47% $38,743 8.77% $67,600 8.03% $129,089 8.51%
===============================================================================================================================
</TABLE>
(1) Yield on tax-exempt securities is computed on a fully
taxable-equivalent basis using a marginal income tax rate of 35%.
<PAGE> 27
26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 4
SUMMARY OF LOAN LOSS EXPERIENCE
The following is an analysis of the allowance for loan losses for the
years ended December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
(In thousands, except
percentages) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Beginning allowance
for loan losses $ 21,651 $ 19,887 $ 18,663 $ 17,814 $ 16,370
Additions through
acquisitions 1,857 1,137 -- -- 554
Reduction through
divestiture -- -- -- (1,334) --
Charge-offs:
Commercial 635 589 909 1,124 2,452
Real estate 314 132 210 72 385
Consumer 1,560 1,958 2,528 3,415 2,559
- ----------------------------------------------------------------------------------------------------------------
TOTAL CHARGE-OFFS 2,509 2,679 3,647 4,611 5,396
================================================================================================================
Recoveries:
Commercial 387 804 721 1,017 937
Real estate 204 174 182 117 104
Consumer 729 700 697 811 421
- ----------------------------------------------------------------------------------------------------------------
TOTAL RECOVERIES 1,320 1,678 1,600 1,945 1,462
================================================================================================================
Net charge-offs (recoveries):
Commercial 248 (215) 188 107 1,515
Real estate 110 (42) 28 (45) 281
Consumer 831 1,258 1,831 2,604 2,138
- ----------------------------------------------------------------------------------------------------------------
TOTAL NET CHARGE-OFFS 1,189 1,001 2,047 2,666 3,934
================================================================================================================
PROVISION FORLOAN LOSSES 736 1,628 3,271 4,849 4,824
================================================================================================================
ENDING ALLOWANCE FOR
LOAN LOSSES $ 23,055 $ 21,651 $ 19,887 $ 18,663 $ 17,814
================================================================================================================
Average loans for the
year $1,543,221 $ 1,256,499 $1,189,975 $ 1,123,900 $1,048,093
Allowance as a percentage
of year-end loans 1.41% 1.53% 1.62% 1.63% 1.63%
Allowance as a percentage
of average loans 1.49% 1.72% 1.67% 1.66% 1.70%
Net charge-offs as a
percentage of average
loans 0.08% 0.08% 0.17% 0.24% 0.38%
Allowance as a percentage
of underperforming assets 1,015.2% 513.2% 371.9% 364.9% 315.7%
</TABLE>
<PAGE> 28
27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 5
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
In the following summary, the allowance for loan losses has been
allocated according to the amount deemed to be reasonably necessary to provide
for losses within each category of loans. While this is an allocation, the
allowance for loan losses can be used to absorb losses in any category. The
amount of the allowance applicable to each category and the percentage of loans
in each category to total loans follows:
<TABLE>
<CAPTION>
(In thousands, except percentages) YEAR ENDED DECEMBER 31
-----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------- --------------------- ---------------------- ---------------------- --------------------
ALLOWANCE PERCENT ALLOWANCE PERCENT ALLOWANCE PERCENT ALLOWANCE PERCENT ALLOWANCE PERCENT
FOR LOAN OF LOANS TO FOR LOAN OF LOANS TO FOR LOAN OF LOANS TO FOR LOAN OF LOANS TO FOR LOAN OF LOANS TO
LOSSES TOTAL LOANS LOSSES TOTAL LOANS LOSSES TOTAL LOANS LOSSES TOTAL LOANS LOSSES TOTAL LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,567 35.58% $ 6,553 35.62% $ 6,226 29.10% $ 4,212 27.30% $ 4,461 28.51%
Real estate 6,716 49.80% 6,459 50.79 5,460 53.84 5,160 53.76 3,134 47.96
Consumer 3,126 14.62% 3,850 13.59 5,873 17.06 5,546 18.94 6,088 23.53
Unallocated 6,646 N/A 4,789 N/A 2,328 N/A 3,745 N/A 4,131 N/A
- ---------------------------------------------------------------------------------------------------------------------------------
ENDING ALLOWANCE
FOR LOAN LOSSES $23,055 100.00% $21,651 100.00% $19,887 100.00% $18,663 100.00% $17,814 100.00%
=================================================================================================================================
</TABLE>
<PAGE> 29
28
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 6
DEPOSIT INFORMATION
Information relative to the average balances, average rates, year-end
balances, and the changes from 1998 to 1999 are presented below:
<TABLE>
<CAPTION>
AMOUNT/RATE
(In thousands, except percentages) 1999 1998 CHANGE
---------- ---------- -------------
<S> <C> <C> <C>
Non-Interest-Bearing Demand
Average Balance $ 243,277 $ 185,391 $ 57,886
Average Rate -- -- --
Year-End Balance 264,951 251,950 13,001
Interest-Bearing Demand
Average Balance 296,464 237,753 58,711
Average Rate 2.66% 3.12% (0.46)%
Year-End Balance 294,705 285,102 9,603
Savings Deposits
Average Balance 402,240 327,687 74,553
Average Rate 2.83% 3.02% (0.19)%
Year-End Balance 397,927 358,511 39,416
Time Deposits
Average Balance 795,624 759,503 36,121
Average Rate 5.00% 5.50% (0.50)%
Year-End Balance 754,199 796,301 (42,102)
Total Deposits
Average Balance 1,737,605 1,510,334 227,271
Average Rate 3.40% 3.91% (0.51)%
Year-End Balance 1,711,782 1,691,864 19,918
</TABLE>
The maturity of time deposits of $100,000 or more issued by Area at
December 31, 1999 is summarized in the following table:
<TABLE>
<CAPTION>
TIME DEPOSITS OF $100,000
OR MORE
DECEMBER 31, 1999
-------------------------
(IN THOUSANDS)
<S> <C>
Three months or less $ 78,169
Over three through twelve months 74,236
Over twelve months 28,559
--------
TOTAL $180,964
========
</TABLE>
<PAGE> 30
29
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 7
OTHER BORROWING INFORMATION
Information relative to federal funds purchased and securities sold
under agreements to repurchase, notes payable to the U.S. Treasury, advances
from the Federal Home Loan Bank, and other borrowings is presented below:
(In thousands, except percentages)
<TABLE>
<CAPTION>
AMOUNT/RATE
1999 1998 CHANGE
<S> <C> <C> <C>
Federal Funds Purchased and Securities
Sold Under Agreements to Repurchase
Amount outstanding at December 31 $192,770 $112,548 $ 80,222
Maximum amount outstanding at any month-end 195,921 142,847 53,074
Average amount outstanding during the year 150,639 96,310 54,329
Weighted average interest rate during the year 4.40% 4.81% (0.41)%
Notes Payable to the U.S. Treasury
Amount outstanding at December 31 14,934 1,054 13,880
Maximum amount outstanding at any month-end 22,878 22,497 381
Average amount outstanding during the year 6,875 7,002 (127)
Weighted average interest rate during the year 4.79% 5.57% (0.78)%
Advances from the Federal Home Loan Bank
and Other Borrowings
Amount outstanding at December 31 130,345 57,124 73,221
Maximum amount outstanding at any month-end 130,345 93,346 36,999
Average amount outstanding during the year 68,217 61,893 6,324
Weighted average interest rate during the year 6.36% 6.08% 0.28%
</TABLE>
<PAGE> 31
30
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
TABLE 8
NON-INTEREST INCOME
Non-interest income as reported, adjusted for non-recurring items and
non-interest income attributable to Peoples Bancorp of Winchester.
<TABLE>
<CAPTION>
NON-INTEREST INCOME TOTAL EXCLUDING
(In Thousands) TOTAL PEOPLES PEOPLES
1999 1999 (2) 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions and fees on
fiduciary activities $ 5,322 $ 3 $ 5,319
Service charges on deposit
accounts 9,374 436 8,938
Other service charges,
commissions and fees 5,916 254 5,662
Gains on the sales of loans, net 1,266 45 1,221
Other income 846 (1) 847
- ---------------------------------------------------------------------------------------------------------------
CONTINUING NON-INTEREST INCOME 22,724 737 21,987
Securities gains, net 21,283 3 21,280
Non-recurring items (1) 2,038 -- 2,038
- ---------------------------------------------------------------------------------------------------------------
TOTAL $46,045 $ 740 $45,305
===============================================================================================================
</TABLE>
(1) Non-recurring items include a gain on the sale of OREO totaling $1,093
and an insurance settlement of $945.
(2) Includes Peoples which merged with Area in January 1999. See "Mergers
and Acquisitions" on page 3 for details
TABLE 9
NON-INTEREST EXPENSE
Non-interest income as reported, adjusted for non-recurring items and
non-interest expense attributable to Peoples Bancorp of Winchester.
<TABLE>
<CAPTION>
NON-INTEREST EXPENSE TOTAL EXCLUDING
(In thousands) TOTAL PEOPLES PEOPLES
1999 1999 (2) 1999
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits (1) $35,276 $1,794 $33,482
Net occupancy expense 5,390 142 5,248
Furniture and equipment expense 6,162 406 5,756
Federal deposit insurance 303 303
Data processing expense (1) 5,037 248 4,789
Advertising and community relations 3,269 104 3,165
Insurance and taxes 2,578 174 2,404
Professional fees 3,771 114 3,657
Amortization of intangibles 3,562 3,562
Other 9,460 733 8,727
- -------------------------------------------------------------------------------------------------------------
SUB-TOTAL 74,808 3,715 71,093
Non-recurring items (1) 4,320 4,320
- -------------------------------------------------------------------------------------------------------------
TOTAL $79,128 $3,715 $75,413
=============================================================================================================
</TABLE>
(1) Non-recurring items include merger and acquisition costs.
(2) Includes Peoples which merged with Area in January 1999. See "Mergers
and Acquisitions" on page 3 for details.
<PAGE> 32
31
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Area Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of Area Bancshares
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, comprehensive income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
1999. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Area Bancshares
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
----------------------
KPMG LLP
Louisville, Kentucky
February 22, 2000
<PAGE> 33
32
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(AMOUNT IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Cash and due from banks $ 98,598 $ 122,654
Interest bearing deposits with banks 6,010 8,434
Federal funds sold -- 14,000
Securities:
Available for sale (amortized cost $325,884 and $292,394, respectively) 363,627 340,874
Held to maturity (fair value $129,028 and $124,553, respectively) 129,089 117,869
----------- -----------
TOTAL SECURITIES 492,716 458,743
----------- -----------
Mortgage loans held for sale 8,682 14,208
Loans, net of unearned discount 1,631,396 1,412,567
Less allowance for loan losses 23,055 21,651
----------- -----------
NET LOANS 1,608,341 1,390,916
=========== ===========
Premises and equipment, net 44,986 41,267
Goodwill and other intangible assets 32,969 34,342
Other assets 48,219 47,801
----------- -----------
TOTAL ASSETS $ 2,340,521 $ 2,132,365
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing demand $ 264,951 $ 251,950
Interest-bearing demand 294,705 285,102
Savings 397,927 358,511
Certificates of deposit of $100,000 or more 180,964 154,965
Other time 573,235 641,336
----------- -----------
TOTAL DEPOSITS 1,711,782 1,691,864
=========== ===========
Federal funds purchased 74,362 1,107
Securities sold under agreements to repurchase 118,408 111,441
Notes payable to the U.S. Treasury 14,934 1,054
Advances from the Federal Home Loan Bank 130,210 41,309
Other borrowings 135 15,815
Accrued expenses and other liabilities 23,726 31,562
----------- -----------
TOTAL LIABILITIES 2,073,557 1,894,152
=========== ===========
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: 1999, 16,512,809; 1998, 15,669,729 28,449 24,397
Paid-in capital 35,632 35,632
Retained earnings 178,911 147,474
Deferred compensation on restricted stock (455) (612)
ESOP and MRP loan obligations (95) (216)
Accumulated other comprehensive income 24,522 31,538
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 266,964 238,213
Commitments and contingent liabilities
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,340,521 $ 2,132,365
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 34
33
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PERSHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $130,682 $113,857 $111,486
Interest bearing deposits with banks 363 398 293
Federal funds sold 980 3,070 1,034
Taxable securities 19,221 18,652 19,533
Tax exempt securities 7,999 7,599 6,903
-------- -------- --------
TOTAL INTEREST INCOME 159,245 143,576 139,249
======== ======== ========
INTEREST EXPENSE:
Deposits 59,035 59,099 54,062
Federal funds purchased and securities sold under
agreements to repurchase 6,632 4,640 5,520
Advances from the Federal Home Loan Bank 3,927 3,517 3,090
Other borrowings 744 634 971
-------- -------- --------
TOTAL INTEREST EXPENSE 70,338 67,890 63,643
======== ======== ========
NET INTEREST INCOME 88,907 75,686 75,606
Provision for loan losses 736 1,628 3,271
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 88,171 74,058 72,335
======== ======== ========
NON-INTEREST INCOME:
Commissions and fees on fiduciary activities 5,322 4,852 4,264
Service charges on deposit accounts 9,374 7,548 6,675
Other service charges, commissions and fees 5,916 6,283 5,036
Securities gains (losses), net 21,283 108 21
Gains on sales of loans, net 1,266 3,404 1,374
Other income 2,884 410 952
-------- -------- --------
TOTAL NON-INTEREST INCOME 46,045 22,605 18,322
======== ======== ========
NON-INTEREST EXPENSES:
Salaries and employee benefits 35,340 30,935 29,133
Net occupancy expense 5,390 4,117 4,074
Furniture and equipment expense 6,162 4,273 4,488
Federal deposit insurance 303 253 238
Data processing expense 5,293 4,062 3,215
Other 26,640 21,101 20,209
-------- -------- --------
TOTAL NON-INTEREST EXPENSES 79,128 64,741 61,357
======== ======== ========
Income before income tax expense 55,088 31,922 29,300
Income tax expense 16,829 9,296 8,491
-------- -------- --------
NET INCOME $ 38,259 $ 22,626 $ 20,809
======== ======== ========
NET INCOME PER COMMON SHARE:
BASIC $ 2.28 $ 1.45 $ 1.35
======== ======== ========
DILUTED $ 2.24 $ 1.42 $ 1.33
======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 35
34
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income $38,259 $22,626 $20,809
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities
available for sale:
Unrealized holding gains (losses) arising
during the period 6,818 20,100 7,962
Less reclassification adjustment for
gains included in net income 13,834 70 14
------- ------- -------
Other comprehensive income (7,016) 20,030 7,948
------- ------- -------
COMPREHENSIVE INCOME $31,243 $42,656 $28,757
======= ======= =======
</TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PERSHARE DATA)
<TABLE>
<CAPTION>
DEFERRED ESOP
COMPENSATION AND ACCUMULATED
ON MRP OTHER
COMMON STOCK PAID-IN RETAINED RESTRICTED LOAN COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS STOCK OBLIGATIONS INCOME TOTAL
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 15,514,222 $24,197 $ 35,142 $ 107,581 $ (469) $(628) $ 3,560 $ 169,383
Net income 20,809 20,809
Cash dividends declared
($.125 per share) (2,523) (2,523)
Repurchase of common stock (24,674) (39) (483) (522)
Stock options exercised,
including tax benefits 81,938 87 490 503 1,080
Net restricted stock issued 5,430 9 217 (226) --
Amortization of deferred
compensation on
restricted stock 83 83
Repayment of ESOP and
MRP loan obligations 291 291
Change in accumulated
other comprehensive
income 7,948 7,948
---------- ------- ------ ------- ---- ---- ------ --------
Balance, December 31,
1997 15,576,916 24,254 35,632 126,104 (612) (337) 11,508 196,549
Net income 22,626 22,626
Cash dividends declared
($.155 per share) (2,420) (2,420)
Repurchase of common
stock (3,000) (5) (76) (81)
Stock options exercised,
including tax benefits 92,238 143 1,145 1,288
Net restricted stock issued 3,575 5 95 (100) --
Amortization of deferred
compensation on
restricted stock 100 100
Repayment of ESOP and
MRP loan obligations 121 121
Change in accumulated
other comprehensive
income 20,030 20,030
Balance, December 31,
1998 ---------- ------ ------ ------- ---- ---- ------ -------
15,669,729 24,397 35,632 147,474 (612) (216) 31,538 238,213
Net income 38,259 38,259
Cash dividends declared
($0.20 per share) (3,355) (3,355)
Common stock issued
in acquisition of
Peoples Bancorp 1,299,969 4,845 8,784 13,629
Repurchase of common
stock (564,994) (979) (13,468) (14,447)
Stock options exercised,
including tax benefits 110,832 190 1,270 1,460
Net restricted stock
forfeited (2,727) (4) (53) 57 --
Amortization of deferred
compensation on
restricted stock 100 100
Repayment of ESOP and
MRP loan obligations 121 121
Change in accumulated
other comprehensive
income (7,016) (7,016)
---------- -------- -------- --------- ------- ------ ------- ---------
Balance, December 31,
1999 16,512,809 $ 28,449 $ 35,632 $ 178,911 $ (455) $ (95) $24,522 $ 266,964
==== ========== ======== ======== ========= ======= ====== ======= =========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 36
35
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 38,259 $ 22,626 $ 20,809
Adjustments to reconcile net income to net cash provided
by operating activities:
Provision for loan losses 736 1,628 3,271
Depreciation, amortization and accretion, net 6,345 6,921 4,826
Gain on sales of securities, net (21,273) (108) (21)
Gain on sales of loans, net (1,266) (3,404) (1,374)
Deferred income taxes (1,737) 225 (160)
Proceeds from sales of trading account securities -- 19,760 39,510
Proceeds from maturities of trading account securities -- 99,994 157,000
Purchases of trading account securities -- (73,870) (198,461)
Purchase and origination of mortgage loans held for sale (6,983) (172,047) (110,268)
Proceeds from sales of mortgage loans held for sale 113,038 168,473 123,037
Other, net 3,505 (1,559) (2,123)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 130,624 68,639 36,046
========= ========= =========
Cash flows from investing activities:
Net (increase) decrease in interest bearing deposits with banks 2,424 (2,630) 80
Net (increase) decrease in federal funds sold 36,128 27,780 13,647
Proceeds from sales of securities available for sale 14,371 15,934 37,068
Proceeds from maturities and calls of securities available for sale 301,958 296,322 114,642
Proceeds from maturities and calls of securities held to maturity 9,983 9,439 6,019
Purchases of securities available for sale (301,031) (275,905) (160,893)
Purchases of securities held to maturity (16,782) (8,475) (25,414)
Loans originated, net of principal collected (223,553) (114,765) (85,674)
Purchases of premises and equipment (8,967) (14,648) (4,767)
Proceeds from sales of other real estate owned 3,119 905 841
Proceeds from sales of premises and equipment 531 79 123
Proceeds from sales of loans -- 13,568 --
Purchase of Nations Bank of Kentucky, N.A., net of cash and
due from banks -- (32,663) --
Purchase of Peoples Bancorp of Winchester 7,249 -- --
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (174,570) (85,059) (104,328)
========= ========= =========
Cash flows from financing activities:
Increase (decrease) in deposits $(126,281) $ 146,138 $ 38,733
Increase (decrease) in federal funds purchased 73,255 (37,584) (10,795)
Increase (decrease) in securities sold under agreements to repurchase 4,917 (6,630) 9,951
Increase (decrease) in notes payable to the U.S. Treasury 13,880 (18,527) 10,698
Increase (decrease) in advances from the Federal Home Loan Bank 87,075 (43,027) 35,023
Increase (decrease) in other borrowings (15,559) 15,539 (5,636)
Proceeds from stock options exercised and issuance of common stock 405 1,288 808
Repurchase of common stock (14,447) (81) (522)
Cash dividends paid (3,355) (2,420) (2,523)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,890 54,696 75,737
========= ========= =========
Increase in cash and due from banks (24,056) 38,276 7,455
Cash and due from banks, beginning of year 122,654 84,378 76,923
--------- --------- ---------
CASH AND DUE FROM BANKS, END OF YEAR $ 98,598 $ 122,654 $ 84,378
========= ========= =========
Supplemental cash flow information:
Income tax payments $ 17,779 $ 9,900 $ 6,050
Interest payments $ 70,384 $ 68,838 $ 63,213
Non-cash transactions:
Loans transferred to other assets $ 1,563 $ 483 $ 2,029
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 37
36
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Area
Bancshares Corporation (the "Corporation") and its wholly owned
subsidiaries, The Owensboro National Bank and subsidiary, First City
Bank and Trust Company and subsidiary, ABC Credit Corporation,
Broadway Bank and Trust, Peoples Commercial Bank, Southern Deposit
Bank, Commonwealth Bancorp of Glasgow and subsidiaries, a wholly owned
bank holding company which includes Bowling Green Bank and Trust
Company, N.A., and The New Farmers National Bank of Glasgow, Citizens
Deposit Bancshares and subsidiary, a wholly owned bank holding company
which includes Citizens Deposit Bank, and Area Services, Inc., a
wholly owned non-bank subsidiary. Also included is Cardinal
Bancshares, Inc., a bank and thrift holding company whose subsidiaries
include: The Vine Street Trust Company and its principal subsidiary,
Vine Street Financial; HNB Bank, N.A., Alliance Bank, FSB, First &
Peoples Bank, Jefferson Banking Company and Cardinal Data Services
Corporation. The Corporation and its subsidiaries are primarily
engaged in commercial and personal banking services and the consumer
finance business throughout the Commonwealth of Kentucky. Significant
intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the dates of the consolidated balance sheets and revenues and
expenses for the periods. Actual results could differ from those
estimates. Generally accepted accounting principles also require
disclosure of contingent assets and liabilities at the date of the
financial statements. Material estimates that are particularly
susceptible to significant change in the near-term are related to the
determination of the allowance for loan losses.
SECURITIES
Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading account
securities and valued at fair value with unrealized gains and losses
included in earnings.
Securities held to maturity are those securities which management has
the intent and ability to hold to maturity, and are stated at
amortized cost.
Securities classified as available for sale, which are reported at
fair value with unrealized gains and losses excluded from earnings and
reported, net of tax, as a separate component of shareholders' equity,
include all securities not classified as trading account securities or
securities held to maturity. These include securities used as part of
the Corporation's asset/liability strategy which may be sold in
response to changes in interest rates, repayment risk, the need or
desire to increase capital, and other similar factors. Gains or losses
on sales of securities available for sale are recognized at the time
of sale, based upon the specific identification of the security sold,
and are included in non-interest income in the consolidated statements
of income.
Amortization of premiums and discounts are recorded by a method which
approximates a level yield, unless there is a decline in value which
is considered to be other than temporary, in which case the cost basis
of such security is written down to fair value and the amount of the
write-down is included in earnings.
MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are stated at the lower of aggregate cost
or market value.
<PAGE> 38
37
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS
Loans are stated at unpaid principal, reduced by unearned discount.
Interest income on discount-basis loans is recognized using a method
which approximates the interest method. Interest on all other loans is
recognized using the interest method on principal amounts outstanding
during the period. The recognition of interest income on loans is
discontinued at the earlier of 90 days or when in the opinion of
management the collection of principal or interest is doubtful.
Interest received on non-accrual loans is either applied to principal
or recorded as interest income according to management's judgment as
to collectability of principal. A non-accrual loan may be restored to
an accruing status when principal and interest are no longer past due
and unpaid and future collection of principal and interest on a timely
basis is not in doubt.
Impaired loans are measured based on the present value of future cash
flows discounted at the loan's contractual interest rate or fair value
of the collateral if the loan is collateral dependent. The Corporation
does not apply the impairment criteria to individual loans which are
part of a large group of smaller-balance homogeneous loans, such as
residential mortgage and consumer loans. Such loans are collectively
evaluated for impairment.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level considered by
management to be adequate to provide for loan losses inherent in the
loan portfolio. Management determines the adequacy of the allowance
based upon reviews of individual credits, recent loss experience,
current economic conditions and such other factors, which in
management's judgment deserve current recognition in estimating loan
losses. The allowance is increased by the provision for loan losses
and reduced by net charge-offs.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated
depreciation and amortization, which are computed on either the
straight-line or declining-balance methods over the estimated useful
lives of the assets. Gains or losses on disposition are reflected in
current earnings. Maintenance and repairs are charged to expense as
incurred.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess cost over fair value of net assets acquired in purchase
business combinations (goodwill) of $30,007,000 and $30,564,000 net of
accumulated amortization as of December 31, 1999 and 1998,
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 $2,249,000 and $2,915,000,
net of accumulated amortization as of December 31, 1999 and 1998,
respectively, which is being amortized by an accelerated method over
ten years and a purchased bank charter of $713,000 and $863,000, net
of accumulated amortization as of December 31, 1999 and 1998,
respectively, which is being amortized over a ten-year period on a
straight-line basis. The Corporation assesses impairment of goodwill
and other intangible assets by comparing the carrying amounts with the
projected undiscounted future net cash flows. Based on this
assessment, the Corporation determined that there was no impairment of
intangible assets as of December 31, 1999 and 1998.
OTHER ASSETS
Included in other assets is real estate acquired in settlement of
loans, which is carried at the lower of cost or fair value, net of
selling costs. Fair value is the amount that the Corporation could
reasonably expect to receive for these assets in a sale between a
willing buyer and a willing seller. Any write-downs to fair value at
the date of acquisition are charged to the allowance for loan losses.
Costs relating to holding real estate acquired in settlement of loans
are charged to expense as incurred.
<PAGE> 39
38
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTEREST RATE SWAPS
The Corporation uses interest rate swaps to manage its sensitivity to
interest rate risk. These off-balance-sheet financial instruments are
employed to hedge the inherent interest rate risk of specific
on-balance-sheet assets or liabilities, rather than for speculative
trading. Interest income and expense for each interest rate swap
contract is accrued over the term of the agreement as an adjustment to
the yield of the related asset or liability. Similarly, transaction
fees are deferred and amortized through income and expense over the
lives of the agreements. The fair value of the interest rate swaps is
not included in the financial statements.
NET INCOME PER COMMON SHARE
Basic net income per common share is determined by dividing net income
by the weighted average number of shares of common stock outstanding.
Diluted net income per share is determined by dividing net income by
the weighted average number of shares of common stock outstanding plus
the weighted average number of shares that would be issued upon
exercise of dilutive options assuming proceeds are used to repurchase
shares pursuant to the treasury stock method.
STATEMENTS OF CASH FLOWS
For purposes of the consolidated statements of cash flows, the
Corporation considers all cash and non-interest bearing deposits with
banks to be cash equivalents.
SEGMENT INFORMATION
Area provides a broad range of financial services to individuals,
corporations and others through its thirteen banks located throughout
Kentucky. These services include receiving deposits, making various
types of loans, providing trust and brokerage services, and safe
deposit facilities. Operations are managed and financial performance
reviewed and evaluated by the President, Chief Executive Officer at
the subsidiary bank level. All subsidiary banks are considered by
management to comprise only one operating segment.
2. BUSINESS COMBINATIONS
On September 30, 1997, Area consummated a merger with Cardinal
Bancshares, Inc. of Lexington, Kentucky. Area exchanged 2.7391 shares
of its stock for each share of Cardinal for a total of 4,205,722
shares issued. This transaction was accounted for as a
pooling-of-interests.
The following table presents a restatement of net interest income, net
income, and net income per share to reflect this pooling-of-interests
transaction:
<TABLE>
<CAPTION>
AREA
BANCSHARES CARDINAL
CORPORATION BANCSHARES, INC. COMBINED
----------- ---------------- --------
<S> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
Nine months ended September 30, 1997
(unaudited)
Net interest income $34,884 $21,548 $56,432
Net income 11,169 4,392 15,561
Net income per share - basic 1.01
Net income per share - diluted .97
</TABLE>
<PAGE> 40
39
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. BUSINESS COMBINATIONS (CONTINUED)
On August 23, 1998, the Corporation acquired certain assets and
liabilities from NationsBank of Kentucky, N.A. for cash of
approximately $36,833,000. The acquisition was accounted for using the
purchase method of accounting and, accordingly, the results of
operations of the Corporation include the income and expense from
these assets and liabilities from the date of acquisition.
The aggregate fair value of net assets acquired from NationsBank of
Kentucky, N.A. included the following:
<TABLE>
<S> <C>
IN THOUSANDS
Cash and due from banks $ 4,170
Federal funds sold 41,780
Securities 1,627
Loans, net 83,932
Premises and equipment 1,382
Other assets 449
Deposits (112,594)
Other liabilities (8,638)
---------
NET ASSETS ACQUIRED $ 12,108
=========
</TABLE>
During April 1998, the Corporation completed the sale of substantially
all of the assets of ABC Credit Corporation, a wholly-owned consumer
finance company. The Corporation recorded a pre-tax gain of
approximately $2,068,000 in connection with this sale which is
included in gains on sales of loans in the accompanying Consolidated
Statements of Income.
On January 4, 1999, Area consummated a merger with Peoples Bancorp of
Winchester, Inc. of Winchester, Kentucky. This transaction was
accounted for as a pooling-of-interests, however prior years financial
statements were not restated as a result of Peoples' relative size to
that of Area.
The following table presents a restatement of net interest income, net
income, and net income per share to reflect this pooling-of-interests
transaction.
<TABLE>
<CAPTION>
AREA PEOPLES
BANCSHARES BANCORP OF
CORPORATION WINCHESTER COMBINED
----------- ---------- --------
<S> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
Year ended December 31, 1999
Net interest income $ 82,881 $ 6,026 $ 88,907
Net income 35,674 2,585 38,259
Net income per share - basic 2.28
Net income per share - diluted 2.24
</TABLE>
<PAGE> 41
40
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES
TRADING ACCOUNT SECURITIES
Gross realized losses on the sales of trading account securities were
approximately $15,000 in 1997. There were no realized gains on the
sales of trading account securities in 1997. No trading account
securities were owned in 1999 and 1998.
SECURITIES AVAILABLE FOR SALE
The amortized cost, gross unrealized gains and losses, and approximate
fair value of securities available for sale at December 31, 1998 and
1997, are shown as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 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 states and political subdivisions 24,083 115 379 23,819
Equity and other securities 22,131 41,435 341 63,225
-------- -------- -------- --------
TOTALS $325,884 $ 41,814 $ 4,071 $363,627
======== ======== ======== ========
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS LOSSES VALUE
---------------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
U.S. Treasury and Federal agencies $187,993 $ 1,697 $ 226 $189,464
Mortgage-backed securities 68,094 836 71 68,859
Obligations of states and political subdivisions 18,694 1,075 13 19,756
Equity and other securities 17,613 45,413 231 62,795
-------- -------- -------- --------
TOTALS $292,394 $ 49,021 $ 541 $340,874
======== ======== ======== ========
</TABLE>
Gross gains of approximately $21,306,000, $113,000, and $80,000 and
gross losses of approximately $23,000, $15,000 and $44,000 were
realized on sales of securities available for sale in 1999, 1998, and
1997, respectively.
SECURITIES HELD TO MATURITY
The amortized cost, gross unrealized gains and losses, and approximate
fair value of securities held to maturity at December 31, 1999 and
1998, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
----------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Obligations of states and political subdivisions $129,089 $ 2,015 $ 2,076 $129,028
======== ======== ======== ========
DECEMBER 31, 1998
Obligations of states and political subdivisions $117,869 $ 6,863 $ 179 $124,553
======== ======== ======== ========
</TABLE>
<PAGE> 42
41
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SECURITIES (CONTINUED)
CONTRACTUAL MATURITIES
The amortized cost and approximate fair value of securities at
December 31, 1999, by contractual maturity, are shown below. Actual
maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
SECURITIES SECURITIES
AVAILABLE FOR SALE HELD TO MATURITY
---------------------- ---------------------
AMORTIZED FAIR AMORTIZED FAIR
IN THOUSANDS COST VALUE COST VALUE
------------ --------- -------- ---------- --------
<S> <C> <C> <C> <C>
Due in one year or less $ 71,846 $ 71,664 $ 3,701 $ 3,748
Due after one year through five years 135,844 133,730 19,045 19,688
Due after five years through ten years 9,383 9,382 38,743 39,503
Due after ten years 18,783 18,536 67,600 66,089
Equity securities 17,086 58,179 -- --
-------- -------- -------- --------
252,942 291,491 129,089 129,028
Mortgage-backed securities 72,942 72,136 -- --
-------- -------- -------- --------
TOTALS $325,884 $363,627 $129,089 $129,028
======== ======== ======== ========
</TABLE>
Securities with a par value of approximately $244,627,000 and
$276,184,000 at December 31, 1999 and 1998, respectively, were pledged
to secure public and trust deposits, securities sold under agreements
to repurchase and Federal Home Loan Bank advances.
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS 1999 1998
------------ ----------- ----------
<S> <C> <C>
Commercial, financial and agricultural $ 580,521 $ 503,173
Real estate-construction 64,798 43,055
Real estate-mortgage 747,515 674,357
Installment and other, net of unearned discount 238,562 191,982
---------- ----------
TOTALS $1,631,396 $1,412,567
========== ==========
</TABLE>
The maturity dates of loans are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS
DUE AFTER ONE
DECEMBER 31, 1999 DUE IN ONE YEAR THROUGH DUE AFTER
---------------- YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial, financial and agricultural $ 459,142 $107,994 $13,385 $ 580,521
Real estate-construction 48,098 10,311 6,389 64,798
All other loans 566,350 383,353 36,374 986,077
---------- -------- ------- ----------
TOTALS $1,073,590 $501,658 $56,148 $1,631,396
========== ======== ======= ==========
</TABLE>
<PAGE> 43
42
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LOANS (CONTINUED)
Commercial, financial, real estate construction and agricultural loans
with maturities over one year at December 31, 1999 are summarized
below based on contractual rates of interest:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Maturities over one year with variable rates of interest $ 32,636
Maturities over one year with fixed rates of interest 106,232
--------
TOTAL $138,868
========
</TABLE>
The principal amount of loans serviced for the benefit of others at
December 31, 1999 and 1998 totaled approximately $318,548,000 and
$247,933,000, respectively.
The principal amount of nonaccrual loans at December 31, 1999, 1998
and 1997 totaled approximately $1,078,000, $1,787,000 and $2,173,000,
respectively. Interest that would have been recorded if all such loans
were current in accordance with their original terms was approximately
$103,000, $153,000 and $155,000 in 1999, 1998, and 1997, respectively.
The amount of interest income that was recorded for such loans was
approximately $22,000, $17,000 and $13,000 in 1999, 1998, and 1997,
respectively.
Information regarding impaired loans follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
------------ ---- ---- ----
<S> <C> <C> <C>
Recorded investment $3,794 $5,283 $6,248
Impaired loans with valuation allowance 3,039 3,368 5,133
Amount of valuation allowance 1,062 598 977
Amount of impaired loans without valuation allowance 755 1,914 1,115
Average recorded investment 4,211 5,765 6,176
Interest recognized during impairment 357 541 740
</TABLE>
The Corporation recognized interest income on impaired loans using two
methods of accounting. Interest received on non accrual loans is
either applied to principal or recorded as interest income according
to management's judgement as to collectability of principal while all
other impaired loans use the accrual basis method. Under the cash
basis method, cash interest payments are recorded as income, limited
to that amount that would have been recognized on the recorded
investment at the contractual interest rate.
5. ALLOWANCE FOR LOAN LOSSES
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
IN THOUSANDS 1999 1998 1997
------------ ------- ------- -------
<S> <C> <C> <C>
Balance at beginning of year $21,651 $19,887 $18,663
Effect of business combinations and asset dispositions 1,857 1,137 --
Provision for loan losses 736 1,628 3,271
Loans charged off 2,509 2,679 3,647
Recoveries of loans previously charged off 1,320 1,678 1,600
------- ------- -------
BALANCE AT END OF YEAR $23,055 $21,651 $19,887
======= ======= =======
</TABLE>
<PAGE> 44
43
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PREMISES AND EQUIPMENT
A summary of premises and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1999 1998
--------- ---------
<S> <C> <C>
IN THOUSANDS
Bank premises $ 41,090 $ 39,885
Furniture and equipment 38,522 32,456
Leasehold improvements 3,890 3,512
--------- ---------
83,502 75,853
Less accumulated depreciation and amortization 38,516 34,586
--------- ---------
TOTALS $ 44,986 $ 41,267
========= =========
</TABLE>
7. OTHER REAL ESTATE OWNED
Other real estate owned (OREO) includes properties that the
Corporation's subsidiaries have taken title in full or partial
satisfaction of repayment obligations. At December 31, 1999 and 1998,
OREO aggregated approximately $203,000 and $1,675,000, respectively.
During 1999 gains on the sale of OREO totaled $1,093,000 and losses of
$57,000 were recognized in 1998.
8. DEPOSITS
Interest expense on certificates of deposit of $100,000 or more was
approximately $8,605,000, $8,269,000, and $7,482,000 for 1999, 1998 and
1997, respectively.
At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows:
IN THOUSANDS
<TABLE>
<CAPTION>
Year of maturity
<S> <C>
2000 $ 563,849
2001 139,636
2002 25,955
2003 14,046
2004 6,147
---------
2005 and thereafter 4,566
=========
TOTAL $ 754,199
</TABLE>
<PAGE> 45
44
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Information pertaining to securities sold under agreements to
repurchase follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------
DOLLARS IN THOUSANDS 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Amount outstanding at December 31 $118,408 $ 111,441 $109,861
Average amount outstanding during the year 114,374 93,067 86,528
Maximum amount outstanding at any month-end 125,008 111,441 109,861
Weighted average interest rate:
As of year-end 2.89% 3.11% 4.99%
Paid during year 4.20% 4.80% 5.06%
</TABLE>
The Corporation has repurchase agreements where the collateral remains
under its control as well as agreements where the counterparty
maintains control of the collateral.
10. ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Banks are members of the Federal Home Loan Bank of Cincinnati
("FHLB") and, accordingly, are eligible to borrow from the FHLB. The
Banks pledge FHLB stock and certain first mortgage loans as collateral
for these advances. The aggregate balance of these mortgages must equal
150% of the outstanding advances. Certain information with respect to
the outstanding advances from the FHLB is summarized below:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PERCENTAGES DECEMBER 31, 1999 DECEMBER 31, 1998
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
YEAR OF MATURITY AMOUNT RATE AMOUNT RATE
-------- -------- ------- ---------
<S> <C> <C> <C> <C>
1999 $ -- -- $ 4,101 6.12%
2000 94,725 5.84% 10,124 6.71%
2001 12,323 6.44% 2,502 6.34%
2002 4,434 6.18% 4,695 6.19%
2003 2,765 6.31% 2,594 6.41%
2004-2008 6,132 6.61% 7,005 6.61%
2009-2013 8,662 7.73% 8,990 7.20%
2014 and thereafter 1,169 7.03% 1,298 7.11%
-------- ---- ------- ----
TOTALS $130,210 6.09% $41,309 6.76%
======== ==== ======= ====
</TABLE>
Scheduled principal repayments on advances from the FHLB at December
31, 1999 are approximately $95,938,000, $1,809,000, $2,711,000,
$4,810,000, $2,569,000 for 2000 through 2004, respectively, and
$22,373,000 thereafter.
<PAGE> 46
45
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. OTHER BORROWINGS
<TABLE>
<CAPTION>
Other borrowings consist of the following: DECEMBER 31
-----------
IN THOUSANDS 1999 1998
---- ----
<S> <C> <C>
Revolving credit $50,000,000 promissory note dated
April 1, 1993 at a varying rate of interest equal
to the lesser of prime or the adjusted LIBOR rate
plus .50% with a final maturity of June 30, 2000 $ -- $15,550
Promissory note, dated March 27, 1991, at a
varying rate of interest equal to The Owensboro
National Bank's one-year certificate of deposit
rate adjusted annually, payable in annual
installments of $10,269 plus interest with a final
maturity of April 1, 2003. The interest rate at
December 31, 1999 was 4.15% 40 50
Cardinal Bancshares, Inc. Affiliates' Employee Stock
Ownership Plan (ESOP) note payable to a bank in annual
principal installments of $26,015 through December
1999. Interest is payable quarterly at the prime rate -- 26
Cardinal Bancshares, Inc. Affiliates' Employee Stock
Ownership Plan (ESOP) note payable to a bank in annual
principal installments of $94,875 through December
2000. Interest is payable quarterly at the prime rate 95 189
------ -------
TOTALS $ 135 $15,815
====== =======
</TABLE>
Scheduled principal repayments on other borrowings at December 31, 1999
are approximately $105,000, $10,000, $10,000, $10,000, and $0 for 2000
through 2004, respectively, and $0 thereafter.
12. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
IN THOUSANDS 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income taxes applicable to operations:
Current $ 18,566 $ 9,071 $ 8,651
Deferred (1,737) 225 (160)
-------- ------- -------
Total applicable to operations 16,829 9,296 8,491
</TABLE>
<PAGE> 47
46
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Charged (credited) to components of shareholders' equity:
Accumulated other comprehensive income (3,778) 10,744 4,280
Income tax benefit of stock options and grants (639) -- (272)
-------- ------- --------
TOTAL INCOME TAXES $ 12,412 $20,040 $ 12,499
======== ======= ========
</TABLE>
The following table presents a reconciliation of the provision for
income taxes as shown in the consolidated statements of income with
that which would be computed by applying the statutory federal income
tax rate of 35% to income taxes.
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rates $ 19,281 $ 11,173 $ 10,257
Increase (decrease) in taxes resulting from:
Tax-exempt interest and dividends (net of
non-deductible interest) (2,842) (2,570) (2,366)
Amortization of intangibles 601 639 584
Other, net (211) 54 16
-------- -------- --------
TOTALS $ 16,829 $ 9,296 $ 8,491
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to the
significant portions of deferred tax assets and deferred tax
liabilities at December 31, 1999 and December 31, 1998, are as follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Allowance for loan losses $ 6,875 $ 6,429
Deferred compensation 2,308 1,111
Other 186 55
------- -------
Total gross deferred tax assets 9,369 7,595
======= =======
Deferred tax liabilities
Purchase accounting adjustments 1,716 2,209
Unrealized gain on securities available for sale 13,315 17,093
Pension expense 905 815
Depreciation 734 706
Accounting differences on securities 980 810
Leasing operations 363 589
FHLB stock dividends 1,962 1,518
Other 408 384
Total gross deferred tax liabilities 20,383 24,124
------- -------
NET DEFERRED TAX LIABILITY $11,014 $16,529
======= =======
</TABLE>
Based upon historical and projected levels of taxable income,
management believes it is more likely than not that the Corporation
will realize the income tax benefits of its deductible temporary
differences. Accordingly, no valuation allowance for deferred tax
assets was recorded at December 31, 1999 and 1998.
<PAGE> 48
47
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION AND RESTRICTED STOCK PLANS
The Corporation has stock option and restricted stock plans for key
employees. As of December 31, 1999, the Corporation had 91,591 shares
available for issuance under these plans.
Stock options granted under the option program are at the market price
on the date of grant except for certain limited stock options discussed
below. Each option is for one share of common stock. All options become
exercisable over five-to-ten-year periods from the date of grant.
During 1997 through 1999 the Corporation issued shares of restricted
common stock to certain key employees. The vesting periods range from
1998 to 2006. The amount recorded for the restricted stock issued is
based on the market value of the Corporation's common stock on the
award dates and the unearned portion is shown as deferred compensation
in the consolidated balance sheets in shareholders' equity.
The Corporation applies APB Opinion No. 25 and related interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized in the accompanying Consolidated Statements of Income.
Compensation cost related to the restricted stock plan was $100,000,
$100,000 and $83,000 during 1999, 1998, and 1997, respectively.
STOCK OPTION PLAN
Under the incentive stock option plan, the Corporation may grant
options to selected executive officers, other highly-compensated
employees, and directors of the Corporation. Under the plan the
exercise price of each option equals the market price of the
Corporation's stock on the date of grant except that for any owner of
10% or more of the total combined voting power of the Corporation the
option price is 110% of the market price on the date of grant. The
maximum term of an option is five to ten years. Options are granted at
the discretion of the Board of Directors and vest evenly over the
option period.
A summary of the status of the Corporation's stock option plans as of
December 31, 1999, 1998, 1997 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 440,460 $ 5.89 533,169 $ 6.86 588,668 $ 6.88
Granted 4,000 25.00 -- -- 41,223 16.19
Exercised (110,832) 3.65 (92,243) 11.22 (87,302) 10.60
Forfeited -- -- (466) 6.39 (9,420) 14.48
-------- ------ ------- ------ ------- ------
OUTSTANDING AT END
OF YEAR 333,628 7.30 440,460 $ 5.89 533,169 $ 6.86
======== ====== ======== ====== ======= ======
Options exercisable at
year-end 315,983 $ 6.56 408,691 $ 5.70 500,156 $ 6.70
Weighted-average fair value
of options granted during
the year $13.21 N/A $ 6.21
</TABLE>
<PAGE> 49
48
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
The following table summarizes information about stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE PRICE
--------------- ----------- ---------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.83 - $9.13 198,993 6.7 $ 2.35 198,993 $ 2.35
10.08 - 11.59 36,333 4.7 10.75 36,333 10.75
14.48 - 25.00 98,302 6.5 16.06 80,657 15.09
------- --- ------ ------- ------
333,628 6.4 $ 7.30 315,983 $ 6.56
======= === ====== ======= ======
</TABLE>
Had compensation cost for the Corporation's stock option plan been
determined consistent with the fair value method described in FASB
Statement No. 123, the Corporation's net income and earnings per share
would have been reduced to the proforma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
--- ---- ----
<S> <C> <C> <C>
Net income:
As reported $ 38,259 $ 22,626 $ 20,809
Proforma $ 38,254 $ 22,626 $ 20,145
Net income per share:
As reported - basic $ 2.28 $ 1.45 $ 1.35
- diluted 2.24 1.42 1.33
Proforma - basic 2.28 1.45 1.31
- diluted 2.24 1.42 1.29
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. 4,000 options were
granted in 1999. The following weighted-average assumptions used for
grants in 1999 and 1997 (no options were granted in 1998),
respectively: dividend yield of 0.90% in 1999 and 0.75% in 1997;
expected volatility of 39.52% in 1999 and 20.00% in 1997; a risk-free
interest rate of 5.11% for 1999 and 6.53% for 1997.
RESTRICTED STOCK AWARD PLAN
The Corporation has a restricted stock award plan. Under the plan, the
Corporation may grant restricted stock to selected executive officers,
other highly-compensated employees, and directors of the Corporation.
Under the plan the shares generally vest evenly over a five-year period
commencing approximately two to five years after the award is granted.
During the restriction period, the shares covered by the award that are
not vested are not transferable by the award recipient. Moreover, if
the award recipient terminates employment with the Corporation for any
reason during the restriction period, the restricted stock award, to
the extent not already vested, is forfeited as of the date of the
termination. Awards are granted at the discretion of the Board of
Directors.
<PAGE> 50
49
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. STOCK OPTION AND RESTRICTED STOCK PLANS (CONTINUED)
A summary of the status of the Corporation's restricted stock award
plan as of December 31, 1999, 1998, and 1997 and changes during the
years ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
SHARES SHARES SHARES
------ ------ ------
<S> <C> <C> <C>
Outstanding at beginning
of year 38,178 40,030 34,600
Granted -- 3,575 18,180
Vested 6,892 5,427 --
Forfeited 2,727 -- 12,750
----- ------ ------
OUTSTANDING AT END OF YEAR 34,013 38,178 40,030
====== ====== ======
</TABLE>
14. REGULATORY MATTERS
Bank regulations require depository institutions to maintain cash
reserves relating to customer deposits. At December 31, 1999 the Bank's
cash reserve requirements were approximately $27,151,000.
The Corporation's principal source of funds is dividends received from
the Banks. Payments of dividends by the Banks are restricted by
national and state banking laws and regulations. At December 31, 1999,
retained earnings of the Banks were approximately $47,986,000. At
January 1, 2000, approximately $9,887,000 of these retained earnings
were available for the payment of dividends without prior approval by
regulatory authorities.
The Corporation and the Banks are required to maintain minimum ratios
of capital to risk-weighted assets and a minimum leverage ratio, as
defined by banking regulators. At December 31, 1999, the Corporation's
Tier 1 and total risk-based capital ratios were 12.60% and 13.86%,
respectively. The leverage ratio was 9.32% at December 31, 1999. At
December 31, 1999, the Corporation and the Banks exceeded the minimum
regulatory capital requirements.
As of December 31, 1999 and 1998, the most recent notifications from
the Federal Reserve Bank categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Corporation must
maintain minimum leverage, Tier 1 risk-based capital, and total
risk-based capital ratios as set forth in the table on the following
page. There are no conditions or events since that notification that
management believes have changed the Corporation's category.
<PAGE> 51
50
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. REGULATORY MATTERS (CONTINUED)
The Corporation's and its most significant subsidiary's actual capital
amounts and ratios are presented in the following table:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
IN THOUSANDS, EXCEPT PERCENTAGES ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
LEVERAGE RATIO:
(Tier 1 Capital to Average Assets)
CONSOLIDATED $208,946 9.32% $ 89,652 4.00% $112,065 5.00%
The Owensboro National Bank 36,318 7.36% 19,740 4.00% 24,675 5.00%
TIER 1 RISK-BASED CAPITAL RATIO:
(Tier 1 Capital to Risk Weighted
Assets)
CONSOLIDATED $208,946 12.60% $ 66,308 4.00% $ 99,462 6.00%
The Owensboro National Bank 36,318 10.71% 13,570 4.00% 20,354 6.00%
TOTAL RISK-BASED CAPITAL RATIO:
(Risk Based Capital to Risk
Weighted Assets)
CONSOLIDATED $229,696 13.86% $132,616 8.00% $165,770 10.00%
The Owensboro National Bank 40,157 11.83% 27,139 8.00% 33,924 10.00%
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
IN THOUSANDS, EXCEPT PERCENTAGES ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
LEVERAGE RATIO:
(Tier 1 Capital to Average Assets)
CONSOLIDATED $171,088 8.29% $ 82,553 4.00% $103,192 5.00%
The Owensboro National Bank 38,198 7.29 20,970 4.00 26,213 5.00
TIER 1 RISK-BASED CAPITAL RATIO:
(Tier 1 Capital to Risk Weighted
Assets)
CONSOLIDATED $171,088 11.82% $ 57,874 4.00% $ 86,811 6.00%
The Owensboro National Bank 38,198 11.61 13,162 4.00 19,744 6.00
TOTAL RISK-BASED CAPITAL RATIO:
(Risk Based Capital to Risk
Weighted Assets)
CONSOLIDATED $189,218 13.08% $115,748 8.00% $144,685 10.00%
The Owensboro National Bank 42,188 12.83 26,325 8.00 32,906 10.00
</TABLE>
<PAGE> 52
51
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. NET INCOME PERCOMMON SHARE AND SHAREHOLDERS' EQUITY CHANGES
The following table presents the numerators (net income) and denominators
(average shares outstanding) for the basic and diluted net income per share
computations:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998 1997
<S> <C> <C> <C>
Net income, basic and diluted $38,259 $22,626 $20,809
======= ======= =======
Average shares outstanding 16,813 15,639 15,366
Effect of dilutive securities 231 276 282
------- ------- -------
Average shares outstanding including
dilutive securities 17,044 15,915 15,648
======= ======= =======
NET INCOME PER SHARE - BASIC $ 2.28 $ 1.45 $ 1.35
NET INCOME PER SHARE - DILUTED 2.24 $ 1.42 $ 1.33
</TABLE>
On September 30, 1997, the Corporation increased the authorized shares from
16,000,000 to 50,000,000.
16. RETIREMENT PLANS
The Corporation maintains a noncontributory defined benefit pension plan
covering substantially all employees who satisfy certain age and service
requirements. The benefits are generally based on years of service and
average compensation, which compensation is generally computed using the
five consecutive years prior to retirement that yield the highest average.
The Corporation's funding policy is to contribute annually at least the
minimum amount required by the Employee Retirement Income Security Act of
1974, but no more than is tax deductible.
The following tables set forth the aforementioned plan's change in benefit
obligation and change in plan assets for the years ended December 31, 1999
and 1998, the weighted-average assumptions as of December 31, 1998, 1997
and 1996, and the components of net periodic benefit cost for the years
ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998
CHANGE IN BENEFIT OBLIGATION
<S> <C> <C>
Benefit obligation at beginning of year $ 11,862 $ 10,707
Service cost 886 751
Interest cost 791 742
Actuarial (gain)/loss (2,030) 529
Benefits paid (645) (867)
-------- --------
Benefit obligation at end of year 10,864 11,862
-------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year 14,305 13,220
Actual return on plan assets 83 1,428
Employer contribution 679 524
Benefits paid (645) (867)
-------- --------
Fair value of plan assets at end of year 14,422 14,305
-------- --------
Funded status 3,558 2,443
Unrecognized net actuarial loss (531) (657)
Unrecognized prior service cost 361 425
Prepaid benefit cost (560) 349
-------- --------
$ 2,828 $ 2,560
======== ========
IN THOUSANDS, EXCEPT PERCENTAGES 1999 1998 1997
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.75% 6.75% 7.00%
Expected return on plan assets 8.50 8.50 8.42
Rate of compensation increases 5.00 5.00 5.00
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 886 $ 751 $ 629
Interest cost 791 742 728
Expected return on plan assets 1,204 1,114 976
Amortization of transition obligations/(asset) (126) (126) (126)
Amortization of prior service cost 64 64 64
Recognized net actuarial loss -- -- 2
-------- -------- -------
NET PERIODIC BENEFIT COST $ 411 $ 317 $ 321
======== ======== =======
</TABLE>
Assets in the plan consist primarily of common stocks, mutual funds, U.S.
Government obligations and municipal bonds.
The Corporation sponsors a savings plan under Section 401(k) of the
Internal Revenue Code, covering substantially all salaried employees. For
1999, 1998 and 1997 the Corporation's expense totaled approximately
$675,000, $504,000 and $533,000, respectively.
<PAGE> 53
52
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. OTHER OPERATING EXPENSES
Other operating expenses consist of the following:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
<S> <C> <C> <C>
Advertising and business development $ 3,269 $ 3,013 $ 2,784
Bank shares tax 1,952 1,885 1,669
Professional fees 3,771 3,424 3,091
Merger and acquisition expenses 4,320 929 --
Other 13,328 11,850 12,665
------- ------- -------
TOTALS $26,640 $21,101 $20,209
======= ======= =======
</TABLE>
<PAGE> 54
53
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. CONCENTRATIONS OF CREDIT RISK
The Banks actively engage in lending, primarily in their home counties
and adjacent areas, except for mortgage loans held for sale which are
widely dispersed across the United States. The credit exposure is
diversified with secured and unsecured loans to consumers, small
businesses, farmers and corporations. Collateral is received to support
these loans when collateral is deemed necessary. The most significant
categories of collateral include cash on deposit with the Banks,
marketable securities, income producing property, home mortgages, and
consumer durables. Although the Banks have diversified loan portfolios,
a customer's ability to honor loan contracts relies upon the economic
stability of the geographic region and/or industry in which he or she
does business. No single industry exceeds 10% of loans.
19. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rates swap contracts are entered into as an asset/liability
management strategy to reduce interest rate risk. Interest rate swap
contracts are exchanges of interest payments, such as fixed-rate
payments for floating-rate payments, based on a notional principal
amount, which is an agreed-upon amount upon which calculations of
interest payments to be exchanged are based, and is significantly
greater than the amount at risk. The primary risk associated with swaps
is the exposure to movements in interest rates and the ability of the
counterparties to meet the terms of the contract.
There were interest rate swap contracts with notional amounts
outstanding of $53,464,000 and $54,000,000 at December 31, 1999 and
1998, respectively. As of December 31, 1999, the Corporation paid
fixed-rates at a weighted average rate of 7.63% over the term of the
contracts, and received interest at certain variable rates, which
averaged 8.04%. The market value of these interest rate swap contracts
was $1,917,000 and ($764,000) at December 31, 1999 and 1998,
respectively.
20. COMMITMENTS AND CONTINGENCIES
The Banks are party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of
their customers. These financial instruments include commitments to
extend credit and standby letters of credit. These financial
instruments involve to varying degrees elements of credit and interest
rate risk in excess of the amount recognized in the consolidated
balance sheets.
The Banks' exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contract
amount of these instruments. The Banks use the same credit policies in
making commitments and conditional obligations as they do for
on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require the payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. Total commitments to extend credit, excluding letters of
credit, at December 31, 1999 and 1998 were approximately $421,007,000
and $355,234,000, respectively. The credit worthiness of the
banks' customers is evaluated on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Banks
upon extension of credit, is based on management's credit evaluation of
the counterparty. Collateral held varies, but may include accounts
receivable, marketable securities, inventory, property, plant and
equipment, residential real estate and income-producing commercial
properties.
Letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as
that related to extending credit to customers. The Banks had
approximately $16,915,000 and $14,250,000 in letters of credit
outstanding at December 31, 1999 and 1998, respectively.
<PAGE> 55
54
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
20. COMMITMENTS AND CONTINGENCIES (CONTINUED)
As of December 31, 1999, there were various pending legal actions and
proceedings in which claims for damages are asserted. Management, after
discussion with legal counsel, believes the ultimate result of these
legal actions and proceedings will not have a material adverse effect
upon the consolidated financial position or results of operations of
the Corporation.
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Corporation's financial instruments are
as follows:
<TABLE>
<CAPTION>
IN THOUSANDS DECEMBER 31, 1999 DECEMBER 31, 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments $ 104,608 $ 104,608 $ 145,088 $ 145,088
Securities available for sale 363,627 363,627 340,874 340,874
Securities held to maturity 129,089 129,028 117,869 124,553
Mortgage loans held for sale 8,682 8,682 14,208 14,208
Loans, net 1,608,341 1,602,236 1,390,916 1,385,070
Financial Liabilities:
Deposits 1,711,782 1,948,412 1,691,864 1,698,339
Federal funds purchased and securities
sold under agreements to repurchase 192,770 192,700 112,548 113,054
Notes payable to the U.S. Treasury 14,934 14,935 1,054 1,054
Advances from the Federal Home Loan
Bank 130,210 133,635 41,309 42,437
Other borrowings 135 135 15,815 15,826
Off-Balance sheet Financial Instruments:
Commitments -- -- -- --
Interest rate swaps -- 1,917 -- (764)
</TABLE>
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND SHORT-TERM INVESTMENTS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
For securities, fair value equals quoted market price, if available. If
a quoted market price is not available, fair value is estimated using
quoted market prices for similar investments or dealer quotes.
MORTGAGE LOANS HELD FOR SALE
The fair value of mortgage loans held for sale is estimated on an
aggregate basis considering market prices and yields sought by the
Banks' normal market outlets including the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association current
delivery prices. The Corporation believes the carrying amount is a
reasonable estimate of fair value.
<PAGE> 56
55
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
21. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
DEPOSITS
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-rate certificates of deposit is estimated by
discounting the future cash flows using the rates currently offered for
deposits of similar remaining maturities.
FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
The fair value of short-term Federal funds purchased and securities
sold under agreements to repurchase is the amount payable on demand at
the reporting date. The fair value of fixed-rate Federal funds
purchased and securities sold under agreements to repurchase is
estimated by discounting the future cash flows using the rates
currently offered for instruments of similar remaining maturities.
NOTES PAYABLE TO THE U.S. TREASURY
The fair value of the notes payable to the U.S. Treasury is the
carrying amount at the reporting date, due to variable interest rates.
ADVANCES FROM THE FEDERAL HOME LOAN BANK
The fair value of the advances from the Federal Home Loan Bank is
estimated by discounting the future cash flows using the rates
currently offered for instruments of similar remaining maturities.
OTHER BORROWINGS
The fair value of other borrowings is the carrying amount at the
reporting date, due to variable interest rates.
COMMITMENTS
The fair value of commitments to extend credit and stand-by letters of
credit is estimated using the fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The
fair value of letters of credit is based on fees currently charged for
similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties. At the
reporting date, no significant fair value differences exist on
commitments to extend credit and standby letters of credit.
INTEREST RATE SWAPS
The fair value of interest rate swaps used for hedging purposes is the
estimated amount that the Corporation would receive or pay to terminate
the swap agreements at the reporting date, taking into account current
interest rates and the current credit worthiness of the swap
counterparties.
LIMITATIONS
The fair value estimates are made at a specific point in time based on
relevant market information and information about the financial
instruments. Because no market exists for a significant portion of the
Corporation's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could
significantly affect the estimates. The fair value estimates are based
on financial instruments without attempting to estimate the value of
assets and liabilities that are not financial instruments, such as
premises and equipment and other assets and liabilities. Accordingly,
the fair value estimates are not intended to represent the
Corporation's underlying value.
<PAGE> 57
56
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information for Area Bancshares Corporation (Parent
Company) follows:
<TABLE>
<CAPTION>
DECEMBER 31
IN THOUSANDS 1999 1998
<S> <C> <C>
CONDENSED BALANCE SHEETS
ASSETS
Cash demand deposit with bank subsidiary $ 5,986 $ 277
Securities available for sale 63,154 62,744
Investments in:
Bank and bank holding company subsidiaries 208,309 201,169
Nonbank subsidiaries 5,014 1,870
Other assets 2,858 7,938
--------- ---------
TOTAL ASSETS $ 285,321 $ 273,998
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowings $ 95 $ 16,106
Other liabilities 18,262 19,679
Shareholders' equity 266,964 238,213
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 285,321 $ 273,998
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
IN THOUSANDS 1999 1998 1997
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME
INCOME
From bank and bank holding company subsidiaries:
Dividends $ 35,831 $ 14,686 $ 8,450
Interest -- 141 191
Management and service fees 6,727 6,044 3,618
Interest and dividends on securities available for sale 1,221 801 622
Securities gains, net 21,268 113 --
Other 326 56 48
--------- --------- --------
TOTAL INCOME 65,373 21,841 12,929
--------- --------- --------
EXPENSES
Interest on short-term borrowed funds 515 243 6
Salaries and employee benefits 2,693 5,624 3,290
Other 17,854 3,755 2,858
--------- --------- --------
TOTAL EXPENSES 21,062 9,622 6,154
--------- --------- --------
Income before income taxes and equity in undistributed
earnings of subsidiaries 44,311 12,219 6,775
Applicable income tax expense (benefit) 3,054 (1,022) (681)
--------- --------- --------
Income before equity in undistributed earnings of subsidiaries 41,257 13,241 7,456
Equity in undistributed earnings of subsidiaries (2,998) 9,385 13,353
--------- --------- --------
NET INCOME $ 38,259 $ 22,626 $ 20,809
========= ========= ========
</TABLE>
<PAGE> 58
57
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
22. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
IN THOUSANDS 1999 1998 1997
<S> <C> <C> <C>
CONDENSED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income $ 38,259 $ 22,626 $ 20,809
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries 2,998 (9,385) (13,353)
Gain on sales of securities, net (21,268) (113) --
Other, net 1,574 (5,062) (655)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,563 8,066 6,801
======== ======== ========
Cash flows from investing activities:
Purchases of securities (4,948) (268) (5,917)
Sales and maturities of securities 21,695 2,754 1,155
Net decrease (increase) in demand loans to nonbank
subsidiaries 1,386 636 --
Investment in subsidiaries (700) (26,500) 400
-------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 17,433 (23,378) (4,362)
======== ======== ========
Cash flows from financing activities:
Increase (decrease) in other borrowings (15,890) 15,891 --
Proceeds from stock options exercised 405 1,288 808
Repurchase of common stock (14,447) (81) (522)
Cash dividends paid (3,355) (2,420) (2,523)
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (33,287) 14,678 (2,237)
======== ======== ========
Increase (decrease) in cash 5,709 (634) 202
Cash at beginning of year 277 911 709
-------- -------- --------
CASH AT END OF YEAR $ 5,986 $ 277 $ 911
======== ======== ========
</TABLE>
23. RELATED PARTY TRANSACTIONS
Loans to officers and directors of the Corporation and the affiliated
banks and entities of which these individuals are principal owners were
approximately $96,418,000 and $80,035,000 at December 31, 1999 and
1998, respectively. During 1999, $65,366,000 of new loans or advances
on existing loans were made to these related parties. Repayments
totaled $49,983,000. These loans were made on substantially the same
terms, including interest rates and collateral, as those prevailing at
the time for other customers and do not in the opinion of management
involve more than normal credit risk.
<PAGE> 59
58
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CORPORATE INFORMATION
CORPORATION HEADQUARTERS
230 Frederica Street
Owensboro, Kentucky 42301
AFFILIATED COMPANIES
Alliance Bank HNB Bank, N.A.
124 N. Main Street 101 N. Main Street
Somerset, KY 42501 Harlan, KY 40831
Bank of Livingston County Jefferson Banking Company
900 U.S. Highway 62 4201 Shelbyville Road
Tiline, KY 42083 Louisville, KY 40207
Bank of Lyon County Peoples Bank of Murray
153 W. Main Street 500 Main Street
Eddyville, KY 42038 Murray, KY 42071
Bowling Green Bank and Trust Peoples Commercial Bank
Company, N.A Maple & Broadway
902 College Street Winchester, KY 40391
Bowling Green, KY 42102
The New Farmers National
Broadway Bank and Trust Bank of Glasgow
1601 Broadway 301 West Main
Paducah, KY 42001 Glasgow, KY 42142
Citizens Deposit Bank The Owensboro National Bank
100 Main Street 230 Frederica Street
Calhoun, KY 42327 Owensboro, KY 42301
Dees Bank of Hazel Southern Deposit Bank
405 Main Street 102 West Park Square, Box
Hazel, KY 42049 130
Russellville, KY 42276
First City Bank and
Trust Company The Vine Street Trust Company
1002 South Virginia Street 360 E. Vine Street
Hopkinsville, KY 42240 Lexington, KY 40507
First & Peoples Bank Vine Street Financial, Inc.
110 E. Main Street 5901-C Peachtree-Dunwoody
Springfield, KY 40069 Suite 420
Atlanta, GA 30328
STOCK TRANSFER AND
DIVIDEND PAYING AGENT
UMB Bank, N.A.
Securities Transfer Division
928 Grand Ave.
Kansas City, Missouri 64141
(816)-860-7761
INDEPENDENT AUDITORS
KPMG LLP
Suite 2600
400 West Market Street
Louisville, Kentucky 40202
FINANCIAL REPORTS
Additional copies of this 1999 Annual Report and copies of Area Bancshares'
Annual Report to the Securities and Exchange Commission on Form 10-K may be
obtained without charge by written request to Edward J. Vega, Chief Financial
Officer at the Corporate Headquarters.
ANNUAL MEETING
The annual meeting of shareholders of Area Bancshares Corporation will be held
at the main office of Area Bancshares, 230 Frederica Street, Owensboro,
Kentucky, at 11:00 a.m. Central Daylight Saving Time, on May 15, 2000.
NASDAQ STOCK MARKET INFORMATION
The NASDAQ Stock Market is a highly-regulated electronic securities market
comprised of competing market makers whose trading is supported by a
communications network linking them to quotation dissemination, trade reporting,
and order execution systems. This market also provides specialized automation
services for screen-based negotiations of transactions, on-line comparison of
transactions, and a range of informational services tailored to the needs of the
securities industry, investors and issuers. The NASDAQ Stock Market consists of
two distinct market tiers: The NASDAQ National Market and The NASDAQ Small-Cap
Market. The NASDAQ stock market is operated by The NASDAQ Stock Market, Inc., a
wholly-owned subsidiary of the National Association of Securities Dealers, Inc.
COMMON STOCK LISTING
NASDAQ National Market
Trading Symbol: AREA
INFORMATION VIA THE INTERNET
The Securities and Exchange Commission maintains a web site which contains
reports, proxy and information statements, and other information pertaining to
registrants that file electronically with the Commission including Area
Bancshares Corporation. The web site address is: (http://www.sec.gov).
Area Bancshares maintains a web site which contains a message from the
president, the web site addresses for and information on Area affiliates, Area's
most recent annual report, company news and Area stock quotes. The web site
address is: (http://www.abcbank.com).
<PAGE> 60
59
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MARKET FOR COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The table below lists the NASDAQ price quotes and dividend data for
Area Bancshares Corporation over the past two years.
MARKET PRICES AND DIVIDENDS (1)
<TABLE>
<CAPTION>
High Low Per Share Dividends
---- --- -------------------
<S> <C> <C> <C>
1998:
1st quarter $30.50 $22.38 $0.035
2nd quarter 37.88 28.00 0.035
3rd quarter 33.88 24.50 0.04
4th quarter 29.50 22.75 0.045
1999:
1st quarter $28.75 $23.38 $0.045
2nd quarter 27.38 23.50 0.05
3rd quarter 28.81 23.75 0.05
4th quarter 28.06 24.50 0.055
</TABLE>
(1) Adjusted for all stock splits.
The future payment of dividends is solely at the discretion of the
Board of Directors of Area and depends upon legal and regulatory considerations
and upon the earnings and financial condition of Area and such other factors as
Area's Board of Directors may, from time to time, deem relevant. In particular,
the prior approval of the Office of the Comptroller of the Currency or the
Kentucky Department of Banking, as applicable, is required if the total of all
dividends declared by any subsidiary bank in any calendar year exceeds the
bank's net profits, as defined, for that year combined with its retained net
profits for the proceeding two calendar years, less any required transfers to
surplus or a fund for the retirement of any preferred stock. In addition, both
federal and state law impose capital limitations on the ability of Area and its
subsidiaries to pay dividends. Management does not believe that these
restrictions on the payment of dividends are likely to limit materially the
future payment of dividends on Area's common stock, and currently expects that
comparable cash dividends will continue to be paid in the future.
There are approximately 954 holders of record of Area's No Par Value
Common Stock as of December 31, 1999. The closing price on Area's common stock
was $20.38 on March 3, 2000.
<PAGE> 61
60
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
AREA BANCSHARES CORPORATION - OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C>
EXECUTIVE OFFICERS
C. M. Gatton Chairman of the Board
Raymond C. McKinney Vice Chairman
Thomas R. Brumley President & Chief Executive Officer
John A. Ray Executive Vice President & Chief Operating Officer
Cynthia W. Carlton Senior Vice President, Director of Retail Administration
Kevin M. Gallagher Senior Vice President, Operations
Brian R. Griesbach Senior Vice President, Loan Administration
Edward F. Johnson Senior Vice President, Administration
Timothy O. Shelburne Senior Vice President, General Counsel
Edward J. Vega Senior Vice President & Chief Financial Officer
PRESIDENTS COUNCIL
Larry D. Cheser President & Chief Executive Officer
First & Peoples Bank
Danny J. Coffey President & Chief Executive Officer
Southern Deposit Bank
Scott P. Cvengros President & Chief Executive Officer
Alliance Bank
Brent A. Gregory President & Chief Executive Officer
Broadway Bank & Trust
Charles E. Griffin President & Chief Executive Officer
Bank of Livingston County
Darrell L. Gustafson President & Chief Executive Officer
First City Bank & Trust Company
Dwayne E. Fulkerson President & Chief Executive Officer
Dees Bank of Hazel
Robert W. Hargrove President & Chief Executive Officer
Peoples Bank of Murray
Harold D. Henderson President & Chief Executive Officer
Bank of Lyon County
F. Lee Hess President & Chief Executive Officer
The Vine Street Trust Company
Darrell H. Higginbotham President & Chief Executive Officer
The Owensboro National Bank
William W. James President & Chief Executive Officer
The New Farmers National Bank
Charles Mann, Jr. President & Chief Executive Officer
Citizens Deposit Bank
William H. Pitt, Jr. President & Chief Executive Officer
Peoples Commercial Bank
James Clay Smith President & Chief Executive Officer
Jefferson Banking Company
Kenneth W. Thomas President & Chief Executive Officer
HNB Bank, N.A.
Richard N. Wilson President & Chief Executive Officer
Bowling Green Bank & Trust, N.A.
ADMINISTRATIVE OFFICERS
David T. Bowser Chief Internal Auditor
Steven R. Craig Vice President, Asset Liability Management
Janna L. DeMarsh Vice President, Human Resource Director
Mark R. duBarry Vice President, Director of Information Services
Sarona M. Grant Vice President, Loan Operations Manager
Tammy S. Jones Vice President, Accounting Manager
Douglas G. Pace M & I Administrator/Information Security Officer
Thomas H. Pope Vice President, E-Commerce
Frank V. Ramsey Vice President, Credit Review
Gary R. White Vice President, Controller
Judith R. Windle Corporate Secretary
DIRECTORS
C. M. Gatton, Chairman Cecile W. Garmon David W. Smith, Jr. *Emeritus
Raymond C. McKinney, Vice Chairman Gary H. Latham Thomas N. Thompson
Anthony G. Bittel Ralph L. Oliver Damon S. Vitale
Samuel A. B. Boone Allan R. Rhodes Pollard White
Thomas R. Brumley Jim R. Shelby Cy M. Williamson*
</TABLE>
<PAGE> 62
61
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
ALLIANCE BANK - OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C> <C>
OFFICERS
Scott P. Cvengros President, Chief Executive Officer
William E. Jasper Senior Lending Officer
DIRECTORS
Thomas M. Wilkerson, Chairman Bill James
Dan Coomer Brian K. Priddle
Scott P. Cvengros
BANK OF LIVINGSTON COUNTY - OFFICERS & DIRECTORS
OFFICERS
Charles Griffin President & Chief Executive Officer
J. L. DeWeese Vice President
David W. Reed Vice President
Carroll D. Walker Vice President & Cashier
DIRECTORS
Marilyn Reed Buchanon, Chairman J. L. DeWeese Robert W. (Bob) Hargrove
Thomas F. Edmonds, Vice Chairman C. M. Gatton David W. Reed
Thomas R. Brumley Charles Griffin Allan R. Rhodes** **Advisory
BANK OF LYON COUNTY - OFFICERS AND DIRECTORS
OFFICERS
Harold Henderson President, Chief Executive Officer
DIRECTORS
Thomas R. Brumley, Chairman Harold Henderson Allan R. Rhodes**
C. M. Gatton William G. McConnell
Robert W. (Bob) Hargrove David W. Reed **Advisory
</TABLE>
<PAGE> 63
62
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
BOWLING GREEN BANK AND TRUST COMPANY, N.A. - OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C> <C>
OFFICERS
EXECUTIVE OFFICERS
Damon S. Vitale Chairman of the Board
Richard N. Wilson President & Chief Executive Officer
Brad Howard Senior Vice President
OFFICERS
Peggy P. Clark Vice President
Sue Frericks Vice President
V. Scott Gary Vice President
Garry Hammer Vice President
Carol Kirkman Vice President
Treva Mitchell Vice President
Joy Rogers Vice President
Kevin D. Simpson Vice President
Patricia R. Smith Vice President
Scott M. Turner Vice President
Betty Wyatt Vice President
DIRECTORS
Damon S. Vitale, Chairman Thomas A. Donnelly Joe Meng* *Emeritus
Thomas R. Brumley Harold S. Evans* Dr. William T. Moore **Advisory
Louis Berman Bob R. Farley Allan R. Rhodes**
James W. Brite* Vernon L. Gary James P. Rogers
Henry Carlisle C. M. Gatton Richard N. Wilson
BROADWAY BANK & TRUST - OFFICERS AND DIRECTORS
OFFICERS
Brent Gregory President, Chief Executive Officer
Terry Little Senior Vice President
Michael W. Gish Vice President, Senior Trust Administrator
Dan Knowles Vice President, Asset Management
Mindi Whitworth Vice President, Trust Operations Manager
DIRECTORS
Allan R. Rhodes, Chairman Juliette Grumley
Carney Allen Jim Paxton
Brent Gregory Buddy Smith
CITIZENS DEPOSIT BANK - OFFICERS AND DIRECTORS
OFFICERS
William E. Quisenberry, Jr. Chairman of the Board
Charles Mann, Jr. President, Chief Executive Officer
DIRECTORS
William E. Quisenberry, Jr., Chairman Timothy O. Shelburne *Emeritus
Billy H. Brenner Joseph A. Stirsman*
Edward F. Johnson R. T. Tichenor, Jr.*
Charles Mann, Jr.
</TABLE>
<PAGE> 64
63
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
DEES BANK OF HAZEL - OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C> <C>
OFFICERS
Dwayne Fulkerson President, Chief Executive Officer
Larry T. Wyatt Vice President
DIRECTORS
Dwayne Fulkerson, Chairman Robert W. (Bob) Hargrove
Thomas R. Brumley Allan R. Rhodes**
C. M. Gatton Larry T. Wyatt **Advisory
FIRST CITY BANK AND TRUST COMPANY - OFFICERS AND DIRECTORS
OFFICERS
EXECUTIVE OFFICERS
Raymond C. McKinney, Jr. Chairman of the Board
Gary H. Latham Vice Chairman of the Board
Darrell L. Gustafson President and Chief Executive Officer
Janella Kisselbaugh Vice President, Compliance Officer
ADMINISTRATIVE DIVISION
Wendell A. Lynch Senior Vice President, Administration
Percy Belt Senior Vice President, Branch Operations
Roy Campbell Vice President, Business Development Officer
Carolyn A. Cobb Vice President, Marketing
Sandy Blake Vice President, Electronic Banking Officer
Sue Hill Vice President, Branch Manager
LENDING DIVISION
Kevin Atwood Senior Vice President, Senior Loan Officer
Judy C. Budias Vice President, Manager Loan Operations
Janet Calhoun Vice President, Manager Mortgage Loan
Daniel B. Mann Vice President, Commercial Loan Officer
Donald G. Marquess Vice President, Commercial Loan Officer
Tina Owen Vice President, Manager Consumer Loan
Bill Swinney Vice President, Senior Commercial Loan Officer
ASSET MANAGEMENT DIVISION
Scott Hancock Senior Vice President, Senior Trust Officer
Wanda P. Boyd Vice President, Senior Trust Officer
Ken Hatzakorzian Vice President, Audubon Financial Services, Trust Officer
Jeanette R. Settle Vice President, Trust Officer
Marjorie Thompson Vice President, Senior Trust Officer
DIRECTORS
Cy M. Williamson, Senior Chairman* Austin B. Carroll Edward L. Major Albert W. Sisk
Raymond C. McKinney, Chairman K.O. Cayce, Jr.* Bruce McInnis William T. Turner
Gary H. Latham, Vice Chairman Anna C. Guffey Sam Miles* Loran Wagoner
J. Glenn Babb* Darrell L. Gustafson William H. Nichol Lee T. White
Alan W. Beard Roger E. Jeffers Wynn L. Radford, III Pollard White*
Richard C. Brasher Jesse V. Keith* William T. Scheid *Emeritus
</TABLE>
<PAGE> 65
64
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
FIRST & PEOPLES BANK - OFFICERS AND DIRECTORS
<TABLE>
<S> <C> <C>
OFFICERS
Larry Cheser President, Chief Executive Officer
DIRECTORS
Fred Edelen, Chairman Edwin Hamilton
Joe Carpenter Hamilton Simms
Perry Carrico Susan M. Spalding
Larry Cheser
HNB BANK, N. A. - OFFICERS AND DIRECTORS
OFFICERS
Kenneth W. Thomas President, Chief Executive Officer
Johnny Shepherd Executive Vice President
DIRECTORS
W. Bruce Ayers, Chairman James W. Greene, Jr.* * Emeritus
Michael Allison Herbert Kelley ** Advisory
Donald Brandenburg** Terry Loving
Fred Brown** Donald Parsons
Vernon J. Cole* Paul Pratt
Wendell Combs** Kenneth W. Thomas
Edison Creech* Marvin Wilson, Jr.**
Robert Frazier*
JEFFERSON BANKING COMPANY - OFFICERS AND DIRECTORS
OFFICERS
James Clay Smith President, Chief Executive Officer
Phillip S. Poindexter Senior Lending Officer
William R. Precious Trust Manager
Arthur L. Turcotte, III Senior Private Banking Officer
Rebecca J. Millay Commercial Loan Officer
Matthew T. Holmes Commercial Loan Officer
Mary Ellen Powers Private Banking Officer
Elizabeth C. Poindexter Private Banking Officer
Terry L. Stratman Compliance Officer
DIRECTORS
Thomas O. Eifler, Sr., Chairman Frank L. Jones, Jr. **Advisory
Nolen C. Allen** Allan R. Rhodes**
John G. Beam, Jr. C. Barr Schuler
Thomas R. Brumley James Clay Smith
Joe G. Conley Walter C. Wagner, Jr.
C. M. Gatton
</TABLE>
<PAGE> 66
65
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
PEOPLES BANK OF MURRAY - OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
OFFICERS
<S> <C> <C> <C>
Robert W. (Bob) Hargrove President & Chief Executive Officer
Dennis O. Lane Executive Vice President
Anna S. Bailey Vice President & Cashier
Joe W. Gupton Vice President
Richard Price Vice President
Heidi K. Schultz Vice President
Howard Steely Vice President
Ross Wilder Assistant Vice President
<CAPTION>
DIRECTORS
H. Glenn Doran, Chairman Frank Doran Robert W. (Bob) Hargrove **Advisory
William M. Boyd Harold G. Doran, Jr. Conrad H. Jones
Thomas R. Brumley Harvey Ellis Lynwood Morris
Anne F. Doran C. M. Gatton Allan R. Rhodes**
</TABLE>
PEOPLES COMMERCIAL BANK - OFFICERS AND DIRECTORS
<TABLE>
EXECUTIVE OFFICERS
<S> <C>
Ralph L. Oliver Chairman of the Board
William H. Pitt, Jr President, Chief Executive Officer
William P. Shearer Executive Vice President, Chief Lending Officer
Randy L. Todd Executive Vice President, Chief Operating Officer
S. Dudley Taylor Senior Vice President, Commercial Loan Officer
OFFICERS
Phyllis Blanton Vice President, Mortgage Loan Officer
Gloria Branham Vice President, Mortgage Loan Officer
Crystal Branson Vice President, Operations Manager & Compliance
Brenda Eads Vice President, Human Resources Director & Retail Administration
Sarah Sledd Glenn Retail Loan Officer & Business Development
Celeste C. Shultz Assistant Vice President & Assistant Operation Manager
Debbie Tipton Retail Loan Officer, By Pass Branch
DIRECTORS
Ralph L. Oliver, Chairman Alvin Pasley, Jr.
John T. Bowser, IV William H. Pitt, Jr.
Eugene Culton, III B. Lynn Skaggs
David H. Ginter S. Dudley Taylor
Exie D. Minton Arthur M. Walson
Richard Monohan John R. Wheatley
David Oliver Eugene T. Woestman
Fred W. Pace
</TABLE>
<PAGE> 67
66
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
THE NEW FARMERS NATIONAL BANK OF GLASGOW - OFFICERS AND DIRECTORS
OFFICERS
<TABLE>
<CAPTION>
EXECUTIVE OFFICERS
<S> <C> <C>
Thomas R. Brumley Chairman of the Board
William W. James President, Chief Executive Officer
Tommy K. Ross Executive Vice President, Chief Lending Officer
Victoria F. Pennycuff Vice President, Branch Administrator
OFFICERS
Owen D. Lambert Vice President, Commercial Loan Manager
Debbie K. Livingston Vice President, Operations Manager
Sue H. Young Vice President, Real Estate Loan Manager
DIRECTORS
Freddie L. Travis, Chairman William W. James **Advisory
Thomas R. Brumley M. Mark Myers
A. Follis Crow, III Steven W. Newberry
Don R. Doty Allan R. Rhodes**
Cecile W. Garmon Bobby H. Richardson
C. M. Gatton
</TABLE>
<PAGE> 68
67
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
THE OWENSBORO NATIONAL BANK - OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
OFFICERS
<S> <C> <C>
EXECUTIVE
Thomas R. Brumley Chairman of the Board
C. M. Gatton Vice Chairman of the Board
Darrell W. Higginbotham President, Chief Executive Officer
Kelly O. Howard Secretary to the Board
COMMERCIAL SALES
Edward H. Schroeder First Senior Vice President
Randy Pauley Senior Vice President
David C. Scott, Jr. Senior Vice President
David D. Toler First Senior Vice President
Jay H. Bell Vice President
Scott H. McCain Vice President
John L. Oberst, III Vice President
RETAIL SALES
Noble E. Noel First Senior Vice President
Charles S. Brown Vice President, Retail Loan Manager
Edna C. Murphey Vice President, Audubon Investment Manager
B. Sue Johnson Vice President, Branch Manager
Paula K. McIntyre Vice President, Branch Manager
TRUST ADMINISTRATION AND EMPLOYEE BENEFITS
Ralph Barany First Senior Vice President, Trust Manager
Gerald W. Saunders Senior Vice President
A. Daniel Oderkirk Vice President, Senior Trust Officer
Patricia C. Drury Vice President, Senior Trust Officer
Brian A. Martin Vice President, Senior Trust Officer
Todd L. Rust Vice President, Trust Officer
Susan R. Culver Vice President, Senior Trust Officer
<CAPTION>
DIRECTORS
Thomas R. Brumley, Chairman William B. Kurtz **Advisory
Jack E. Darnell, Chairman, Emeritus Don Penn Moore, III
C. M. Gatton, Vice Chairman Helen W. Mountjoy
Anthony G. Bittel Allan R. Rhodes**
David E. Boswell David W. Smith, Jr.
Gary J. Braswell B. Dean Stanley
Jefferson B. Carpenter Mrs. Harry S. Sutton, Jr.
Jerry H. Haase Thomas N. Thompson
Darrell W. Higginbotham Robert E. Watson
James T. Hines, Jr. John A. Williams
John W. Jones W. Terry Woodward
Charles J. Kamuf Patrick E. (Glenn) Wright
William M. Kuegel, Jr.
</TABLE>
<PAGE> 69
68
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SOUTHERN DEPOSIT BANK - OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
OFFICERS
<S> <C> <C>
Executive Officers
Joe Gran Clark Chairman of the Board
R. L. Kirkpatrick, Jr. Chairman of the Board, Emeritus
Danny Coffey President, Chief Executive Officer
John Sheffield Executive Vice President
Officers
Allison Fuqua Vice President
Patsy Poore Vice President
Trent Spurlock Vice President
DIRECTORS
Joe Gran Clark, Jr., Chairman Bobbie Martin* *Emeritus
Danny Coffey William McGinnis
William G. Fuqua Fred Mudge
Darrell L. Gustafson Lee Robey III
Jean Kirkpatrick John Sheffield
R. L. Kirkpatrick, Jr.
</TABLE>
<PAGE> 70
69
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
THE VINE STREET TRUST COMPANY - OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
OFFICERS
<S> <C> <C>
F. Lee Hess President, Chief Executive Officer
Gregory M. Shewmaker Private Banking Manager
J. Barry Hickey Trust Division Manager
George E. Wallace Senior Lending Officer
<CAPTION>
DIRECTORS
John D. Stewart, II, Chairman Lennie G. House **Advisory
Robert M. Beck, Jr. Ardis Hoven
Thomas R. Brumley Ryan R. Mahan
Frank Cain Greg Milward
William Chapman Preston Nunnelley
Joe Coons Gerald Psimer
C. M. Gatton Allan R. Rhodes**
Ralph E. Hacker Joe Rosenberg
F. Lee Hess Ronald C. Switzer
Buckner Hinkle, Jr.
VINE STREET FINANCIAL, INC. - OFFICERS AND DIRECTORS
OFFICERS
Vincent C. Dailey President, Chief Executive Officer
DIRECTORS
F. Lee Hess
Vincent C. Dailey
</TABLE>
<PAGE> 1
Exhibit 21.1
<TABLE>
<CAPTION>
Subsidiaries of Registrant Jurisdiction of Incorporation
- -------------------------- -----------------------------
<S> <C>
Area Services, Inc. Kentucky
Commonwealth Bancorp of Glasgow Kentucky
Bowling Green Bank & Trust Company, N.A. United States
Broadway Bank & Trust Kentucky
The New Farmers National Bank United States
The Owensboro National Bank United States
First City Bank & Trust Company Kentucky
ABC Credit Corporation Kentucky
Southern Deposit Bank Kentucky
Citizens Deposit Bancshares, Inc. Kentucky
Citizens Deposit Bank Kentucky
Cardinal Bancshares, Inc. Kentucky
Jefferson Banking Company Kentucky
First & Peoples Bank Kentucky
Alliance Bank Kentucky
The Vine Street Trust Company Kentucky
Vine Street Financial, Inc. Kentucky
HNB Bank, N.A. United States
Cardinal Data Service Corporation Kentucky
Mutual Insurance Agency, Inc. Kentucky
Mutual Service Corporation Kentucky
Peoples Commercial Bank Kentucky
</TABLE>
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors
Area Bancshares Corporation
We consent to incorporation by reference in the registration statements (Nos.
333-38037, 333-38039, 333-44571, 333-44573 and 333-89567) on Form S-8 of Area
Bancshares Corporation of our report dated February 22, 2000, relating to the
consolidated balance sheets of Area Bancshares Corporation and subsidiaries as
of December 31, 1999, and 1998, and the related consolidated statements of
income, comprehensive income, shareholders' equity, and cash flows for each of
the years in the three-year period ended December 31, 1999, which report appears
in the December 31, 1999, annual report on Form 10-K of Area Bancshares
Corporation.
/s/ KPMG LLP
Louisville, Kentucky
March 20, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 98,598
<INT-BEARING-DEPOSITS> 6,010
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 363,627
<INVESTMENTS-CARRYING> 129,089
<INVESTMENTS-MARKET> 129,028
<LOANS> 1,631,396
<ALLOWANCE> 23,055
<TOTAL-ASSETS> 2,340,521
<DEPOSITS> 1,711,782
<SHORT-TERM> 207,704
<LIABILITIES-OTHER> 23,726
<LONG-TERM> 130,345
0
0
<COMMON> 28,449
<OTHER-SE> 238,515
<TOTAL-LIABILITIES-AND-EQUITY> 2,340,521
<INTEREST-LOAN> 130,682
<INTEREST-INVEST> 1,343
<INTEREST-OTHER> 27,220
<INTEREST-TOTAL> 159,245
<INTEREST-DEPOSIT> 59,035
<INTEREST-EXPENSE> 70,338
<INTEREST-INCOME-NET> 88,907
<LOAN-LOSSES> 736
<SECURITIES-GAINS> 21,283
<EXPENSE-OTHER> 79,128
<INCOME-PRETAX> 55,088
<INCOME-PRE-EXTRAORDINARY> 38,259
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,259
<EPS-BASIC> 2.28
<EPS-DILUTED> 2.24
<YIELD-ACTUAL> 7.83
<LOANS-NON> 1,078
<LOANS-PAST> 990
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 21,651
<CHARGE-OFFS> 1,189
<RECOVERIES> 1,320
<ALLOWANCE-CLOSE> 23,055
<ALLOWANCE-DOMESTIC> 23,055
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,645
</TABLE>
