<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2000
Commission File Number 0-26032
AREA BANCSHARES CORPORATION
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
INCORPORATED IN KENTUCKY IRS EMPLOYER ID NUMBER
NO. 61-0902343
230 FREDERICA STREET
OWENSBORO, KENTUCKY 42301
--------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (270) 926-3232
--------------
Former name, former address and former fiscal year,
if changed since last report: N/A
---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Class: Common stock
No Par Value
Shares Outstanding: As of October 31, 2000: 16,210,343
1
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AREA BANCSHARES CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NUMBER
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Unaudited consolidated balance sheets, September 30, 2000, December 31, 1999 3
and September 30, 1999
Unaudited consolidated statements of income, three and nine months ended 4
September 30, 2000 and 1999
Unaudited consolidated statements of comprehensive income, three and nine months ended
September 30, 2000 and 1999 5
Unaudited consolidated statements of shareholders' equity, year ended December 31,
1999 and nine months ended September 30, 2000 6
Unaudited consolidated statements of cash flows for the nine months ended
September 30, 2000 and 1999 7
Notes to unaudited consolidated financial statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Results of operations 15
Financial position 25
Liquidity 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Changes in Securities 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
</TABLE>
2
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2000 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and due from banks $ 109,691 $ 98,598 $ 73,589
Interest bearing deposits with banks 5,002 6,010 5,384
Federal funds sold 778 -- --
Securities:
Available for sale (amortized cost of $373,546, $325,884 and $317,869) 393,626 363,627 352,943
Held to maturity (fair value of $155,202, $129,028, and $130,341) 153,219 129,089 129,155
----------- ----------- -----------
TOTAL SECURITIES 546,845 492,716 482,098
----------- ----------- -----------
Mortgage loans held for sale 7,338 8,682 8,871
Loans, net of unearned discount 1,929,777 1,631,396 1,588,399
Less allowance for loan losses 27,706 23,055 23,499
----------- ----------- -----------
NET LOANS 1,902,071 1,608,341 1,564,900
----------- ----------- -----------
Premises and equipment, net 50,398 44,986 44,496
Goodwill and other intangible assets 65,700 32,969 33,929
Other assets 58,878 48,219 48,200
----------- ----------- -----------
TOTAL ASSETS $ 2,746,701 $ 2,340,521 $ 2,261,467
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing $ 308,537 $ 264,951 $ 241,440
Interest-bearing 1,767,814 1,446,831 1,435,802
----------- ----------- -----------
TOTAL DEPOSITS 2,076,351 1,711,782 1,677,242
----------- ----------- -----------
Federal funds purchased 34,038 74,362 78,001
Securities sold under agreements to repurchase 115,230 118,408 117,920
Notes payable to the U.S. Treasury 15,005 14,934 22,878
Advances from the Federal Home Loan Bank 132,976 130,210 78,883
Other borrowings 70,109 135 257
Accrued expenses and other liabilities 25,287 23,726 23,010
----------- ----------- -----------
TOTAL LIABILITIES 2,468,996 2,073,557 1,998,191
----------- ----------- -----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 500,000 shares; none issued -- --
Common stock, no par value; authorized 50,000,000 shares; issued and
outstanding September 30, 2000, 16,320,712 December 31, 1999,
16,512,809 and September 30, 1999, 16,586,474 28,113 28,449 28,460
Paid-in capital 35,632 35,632 36,687
Retained earnings 201,430 178,911 176,100
Deferred compensation on restricted stock (330) (455) (538)
ESOP and MRP loan obligations (95) (95) (216)
Accumulated other comprehensive income 12,955 24,522 22,783
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 277,705 266,964 263,276
Commitments and contingent liabilities
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,746,701 $ 2,340,521 $ 2,261,467
=========== =========== ===========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
3
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Interest Income:
Loans, including fees $44,723 $33,273 $126,428 $ 96,146
Interest bearing deposits with banks 60 84 245 276
Federal funds sold 27 21 43 986
Taxable securities 6,032 4,792 17,975 14,327
Tax exempt securities 2,421 1,997 7,070 5,921
------- ------- -------- --------
TOTAL INTEREST INCOME 53,263 40,167 151,761 117,656
------- ------- -------- --------
Interest expense:
Interest on deposits 20,447 14,274 56,476 44,838
Interest on borrowings 5,384 3,081 16,249 7,647
------- ------- -------- --------
TOTAL INTEREST EXPENSE 25,831 17,355 72,725 52,485
------- ------- -------- --------
NET INTEREST INCOME 27,432 22,812 79,036 65,171
Provision for loan losses 588 145 1,224 501
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 26,844 22,667 77,812 64,670
------- ------- -------- --------
Non-interest income:
Commissions and fees on fiduciary activities 1,511 1,377 4,374 4,083
Service charges on deposit accounts 3,457 2,467 9,454 6,838
Other service charges, commissions and fees 1,843 1,524 5,973 4,358
Security gains (losses), net -- 896 15,604 21,279
Gains on sales of loans, net 204 256 477 1,015
Other non-interest income 283 193 1,917 1,428
------- ------- -------- --------
TOTAL NON-INTEREST INCOME 7,298 6,713 37,799 39,001
------- ------- -------- --------
Non-interest expenses:
Salaries and employee benefits 10,599 8,621 30,626 26,257
Net occupancy expense 1,634 1,416 4,518 4,021
Furniture and equipment expense 1,771 1,504 5,239 4,561
Federal deposit insurance 109 83 291 220
Data processing expense 1,890 1,176 4,837 4,046
Other non-interest expenses 8,763 5,472 24,517 15,859
------- ------- -------- --------
TOTAL NON-INTEREST EXPENSES 24,766 18,272 70,028 54,964
------- ------- -------- --------
Income before income tax expense 9,376 11,108 45,583 48,707
Income tax expense 2,703 3,354 15,604 15,177
======= ======= ======== ========
NET INCOME $ 6,673 $ 7,754 $ 29,979 $ 33,530
======= ======= ======== ========
Per common share:
Net income-basic $ 0.41 $ 0.46 $ 1.83 $ 1.98
-diluted $ 0.41 $ 0.45 $ 1.82 $ 1.96
Cash dividends $ 0.06 $ 0.05 $ 0.175 $ 0.145
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
4
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30
2000 1999
-------- --------
<S> <C> <C>
Net income $ 6,673 $ 7,754
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period 1,773 (3,669)
Less reclassification adjustment for gains included in net income -- 582
-------- --------
Other comprehensive income (loss) 1,773 (4,251)
-------- --------
COMPREHENSIVE INCOME $ 8,446 $ 3,503
======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
2000 1999
-------- --------
<S> <C> <C>
Net income $ 29,979 $ 33,530
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains (losses) arising during the period (2,594) 5,076
Less reclassification adjustment for gains included in net income 8,973 13,831
-------- --------
Other comprehensive income (loss) (11,567) (8,755)
-------- --------
COMPREHENSIVE INCOME $ 18,412 $ 24,775
======== ========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
5
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND NINE MONTHS ENDED SEPTEMBER 30, 2000
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON COMMON PAID-IN RETAINED DEFERRED ESOP AND ACCUMULATED TOTAL
STOCK- STOCK- CAPITAL EARNINGS COMPENSATION MRP LOAN OTHER
SHARES AMOUNT ON OBLIGATIONS COMPREHENSIVE
RESTRICTED INCOME
STOCK
---------- -------- ------- --------- ------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 15,669,729 $ 24,397 $35,632 $ 147,474 $ (612) $(216) $31,538 $ 238,213
Net income 38,259 38,259
Common stock issued in merger 1,299,969 4,845 8,784 13,629
Cash dividends declared ($0.20
per share) (3,355) (3,355)
Repurchase of common stock (564,994) (979) (13,468) (14,447)
Stock options exercised,
including tax benefits 110,832 190 1,270 1,460
Amortization of deferred
compensation on restricted stock 100 100
Net restricted stock forfeited (2,727) (4) (53) 57 --
Repayment of ESOP loan obligations 121 121
Change in other comprehensive
income (loss), net of tax (7,016) (7,016)
---------- -------- ------- --------- ------ ----- ------- ---------
Balance, December 31, 1999 16,512,809 28,449 35,632 178,911 (455) (95) 24,522 266,964
Net income 29,979 29,979
Cash dividends declared ($0.175
per share) (2,857) (2,857)
Repurchase of common stock (392,237) (677) (7,580) (8,257)
Stock options exercised,
including tax benefits 201,490 344 2,996 3,340
Amortization of deferred
compensation on restricted stock 103 103
Restricted stock forfeitures (1,350) (3) (19) 22 --
Change in other comprehensive
income (loss), net of tax (11,567) (11,567)
---------- -------- ------- --------- ------ ----- ------- ---------
Balance, September 30, 2000 16,320,712 $ 28,113 $35,632 $ 201,430 $ (330) $ (95) $12,955 $ 277,705
========== ======== ======= ========= ====== ===== ======= =========
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
6
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
---------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,979 $ 33,530
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Provision for loan losses 1,224 501
Depreciation, amortization and accretion, net 10,682 5,240
Gain on sales of securities and loans, net (16,081) (22,294)
Gain on sales of other real estate owned (36) (14)
Gain on disposals of equipment (148) (45)
Deferred income taxes 1,155 (3,717)
Purchases of mortgage loans held for sale (3,701) (89,487)
Proceeds from sales of mortgage loans held for sale 36,169 95,391
Other, net (3,722) 3,700
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,521 22,805
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest bearing deposits with banks 1,008 3,050
Proceeds from sales of securities available for sale 102,545 403
Proceeds from sales of securities held to maturity -- --
Proceeds from maturities of securities available for sale 102,677 281,589
Proceeds from maturities of securities held to maturity 8,067 29,556
Calls of securities available for sale -- 4,788
Calls of securities held to maturity 581 339
Purchases of securities available for sale (160,594) (287,286)
Purchases of securities held to maturity (8,193) (14,345)
Decrease in federal funds sold and securities
purchased under agreements to resell 26,472 36,128
Loans originated, net of principal collected on loans (110,857) (76,621)
Purchases of premises and equipment, net (3,576) (5,652)
Cash and cash equivalents from acquisitions -- 7,249
Purchase of banks, net of cash and due from banks (52,563) --
Proceeds from sale of property, plant and equipment 294 --
Proceeds from sales of other real estate owned 276 885
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (93,863) (19,917)
--------- ---------
</TABLE>
CONTINUED
7
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
2000 1999
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ 36,600 $(160,821)
Increase (decrease) in federal funds purchased (41,294) 76,894
Increase (decrease) in securities sold under agreements to repurchase (3,178) 4,429
Increase in notes payable to the U.S. Treasury 71 21,824
Increase (decrease) in advances from the Federal Home Loan Bank (4,964) 35,748
Increase (decrease) in other borrowings 69,974 (15,558)
Proceeds from issuance of common stock and stock options exercised 3,340 398
Repurchase of common stock (8,257) (12,421)
Cash dividends paid (2,857) (2,446)
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 49,435 (51,953)
--------- ---------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS 11,093 (49,065)
CASH AND DUE FROM BANKS, JANUARY 1 98,598 122,654
--------- ---------
CASH AND DUE FROM BANKS, SEPTEMBER 30 $ 109,691 $ 73,589
========= =========
Cash flow information:
Income tax payments $ 13,300 $ 13,300
Interest payments 70,253 52,758
Non-cash transactions:
Loans transferred to other assets 473 1,132
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
8
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying interim unaudited consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q
and, therefore, do not include all information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair
presentation have been reflected in the accompanying consolidated
financial statements. Results of interim periods are not necessarily
indicative of results to be expected for the full year.
The accounting and reporting policies of Area Bancshares Corporation
("Area") and its subsidiaries conform to generally accepted accounting
principles and general practices within the banking industry. The
consolidated financial statements include the accounts of Area and its
wholly-owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated in consolidation. A full description
of significant accounting policies as well as a complete set of
footnotes is presented in the 1999 annual report to shareholders.
As noted in the footnotes to its annual report on Form 10-K, Area
utilizes interest rate swaps, which are derivative financial
instruments, for hedging purposes to reduce exposure to adverse changes
in interest rates. All of the interest rate swaps are accounted for as
"hedges" and relate to specific assets or liabilities or groups of
assets or liabilities.
NOTE 2. BUSINESS COMBINATIONS (COMPLETED MERGERS AND ACQUISITIONS)
On January 4, 1999, Area merged with Peoples Bancorp of Winchester,
which is headquartered in Winchester, Kentucky. Peoples Bancorp of
Winchester had total assets of $165.00 million, loans of $99.22 million
and deposits of $146.20 million. Peoples Bancorp of Winchester was a
one-bank holding company for Peoples Commercial Bank. Area issued
approximately 1.30 million 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 those of Area, the historical financial statements of Area have not
been restated to reflect this combination.
On October 4, 1999 Area and The Eifler Group announced the signing of
definitive agreements providing for the cash purchase of The Eifler
Group's investment business. Under terms of the agreements, The Eifler
Group became part of Area Services, Inc., a wholly owned subsidiary of
Area during the fourth quarter of 1999. The Eifler Group manages Area's
non-deposit investment product line under the name Area Investment
Services.
On January 31, 2000 Area acquired Peoples Bank of Murray, Murray,
Kentucky; Dees Bank of Hazel, Hazel, Kentucky; Bank of Lyon County,
Eddyville, Kentucky; and Bank of Livingston County, Tiline, Kentucky
("Western Kentucky Group"). Area paid $77.75 million in cash for these
banking companies. On January 31, 2000, total assets of these four
affiliated banking companies were $383.35 million, total loans were
$220.03 million, total deposits were $327.97 million and total capital
was $43.97 million. The transaction was accounted for as a purchase
transaction; accordingly, the results of operations of these banks have
been included in the unaudited consolidated financial statements since
the date of acquisition. In conjunction with the acquisition,
approximately $32.95 million of intangibles were recorded and are being
amortized over a 10 to 20-year period.
9
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 2. BUSINESS COMBINATIONS (COMPLETED MERGERS AND ACQUISITIONS) CONTINUED
The following is a summary unaudited balance sheet as of January 31,
2000, the date of acquisition, for the Western Kentucky Group:
WESTERN KENTUCKY GROUP (1)
SUMMARY BALANCE SHEET
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JANUARY 31
2000
<S> <C>
ASSETS
Cash and due from banks $ 25,237
Federal funds sold 27,250
Investment securities 101,144
Loans, net of unearned discount 220,030
Less allowance for loan losses 4,368
--------
Net loans 215,661
Other assets 14,057
--------
TOTAL ASSETS $383,349
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest bearing deposits $ 55,790
Interest-bearing deposits 272,179
--------
Total deposits 327,969
Borrowed funds 8,700
Other liabilities 2,709
--------
Total liabilities 339,378
Shareholders' equity 43,971
--------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $383,349
========
</TABLE>
(1) Includes Peoples Bank of Murray, Dees Bank of Hazel, Bank of
Lyon County and Bank of Livingston County.
10
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 3. NET INCOME PER COMMON SHARE
Basic earnings per share are calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share give effect to the increase in the average
shares outstanding that would have resulted from the exercise of
dilutive stock options.
The components of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
2000 1999 2000 1999
------- ------- ------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
NET INCOME, BASIC AND DILUTED $ 6,673 $ 7,754 $29,979 $33,530
======= ======= ======= =======
Average shares outstanding 16,320 16,874 16,362 16,901
Effect of dilutive securities 84 195 122 231
------- ------- ------- -------
Average shares outstanding including dilutive securities 16,404 17,069 16,484 17,132
======= ======= ======= =======
NET INCOME PER SHARE, BASIC $ 0.41 $ 0.46 $ 1.83 $ 1.98
======= ======= ======= =======
NET INCOME PER SHARE, DILUTIVE $ 0.41 $ 0.45 $ 1.82 $ 1.96
======= ======= ======= =======
</TABLE>
NOTE 4. SECURITIES
The amortized cost and approximate fair values of securities as of
September 30, 2000 and December 31, 1999 are as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
(Amounts in thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------ --------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $159,042 $ 712 $1,198 $158,556
Mortgage-backed securities 171,291 2,782 2,413 171,660
Obligations of state and political subdivisions 26,254 474 396 26,332
Equity and other securities 16,959 20,753 634 37,078
-------- ------- ------ --------
BALANCE AT SEPTEMBER 30, 2000 $373,546 $24,721 $4,641 $393,626
======== ======= ====== ========
</TABLE>
During the first nine months of 2000, the after-tax net unrealized gain
reported as a separate component of equity (accumulated other
comprehensive income) decreased from $24.52 million on December 31,
1999 to $12.96 million on September 30, 2000, thus decreasing
shareholders' equity. The decrease was primarily the result of the sale
of securities and the decrease in market value of Area's equity
securities.
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
(Amounts in thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------ --------
<S> <C> <C> <C> <C>
U.S. Treasury and federal agencies $206,729 $ 43 $2,325 $204,447
Mortgage-backed securities 72,941 221 1,026 72,136
Obligations of state and political subdivisions 24,083 115 379 23,819
Equity and other securities 22,131 41,435 341 63,225
======== ======= ====== ========
BALANCE AT DECEMBER 31, 1999 $325,884 $41,814 $4,071 $363,627
======== ======= ====== ========
</TABLE>
11
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AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 4. SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
HELD TO MATURITY
(Amounts in thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------ --------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 2000
Obligations of state and political subdivisions $153,219 $ 2,847 $ 864 $155,202
======== ======= ====== ========
DECEMBER 31, 1999
Obligations of state and political subdivisions $129,089 $ 2,015 $2,076 $129,028
======== ======= ====== ========
</TABLE>
NOTE 5. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was
issued in June 1998. SFAS No. 133 standardizes the accounting for
derivative instruments, including certain derivative instruments
embedded in other contracts. Under the standard, entities are required
to carry all derivative instruments in the statement of financial
position at fair value. The accounting for changes in the fair value
(i.e., gains or losses) of a derivative instrument depends on whether
it has been designed and qualifies as part of a hedging relationship
and if so, the reason for holding it. If specified 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 does not believe the
implementation of this statement will have a material impact on its
financial position, results of operations and cash flows, as a result
of the type of derivative instruments used and Area's limited activity
covered by the statement.
In June 2000 the Financial Accounting Standards Board issued SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment to SFAS No. 133" which provides guidance with
respect to certain implementation issues to SFAS No. 133.
In September, 2000, the Financial Accounting Standards Board issued
Statement No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities" that replaces Statement No.
125. This statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are
secured borrowings. The standards are based on the consistent
application of the financial components approach, where upon after a
transfer, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred and derecognizes financial
liabilities when extinguished.
This statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31,
2001. This statement is effective for recognition and reclassification
of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15,
2000.
12
<PAGE> 13
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 5. NEW ACCOUNTING STANDARDS (CONTINUED)
A transfer of financial assets in which the transferor surrenders
control is accounted for as a sale to the extent that consideration
other than beneficial interests in the transferred assets is received
in exchange. This statement requires that liabilities and derivatives
transferred be initially measured at fair value, if practicable.
Servicing assets and other retained interests in the transferred assets
are to be measured by allocating the previous carrying amount between
the assets and retained interest sold, if any, based on their relative
fair values are the date of the transfer.
This statement requires the servicing assets and liabilities be
subsequently measured by amortization in proportion to and over the
period of estimated net servicing income or loss and assessment for
asset impairment or increased obligation based on their fair values.
This statement requires that a liability be derecognized if the debtor
pays the creditor and is relieved of its obligation for the liability
or the debtor is legally released from being the primary obligor under
the liability either judicially or by the creditor. Area believes the
adoption will not have a material impact on the consolidated financial
statements.
NOTE 6. SEGMENT INFORMATION
Area provides a broad range of financial services to individuals,
corporations and others through its twelve banks located throughout
Kentucky. These services include receiving deposits, making various
types of loans, providing trust and brokerage services and safe deposit
facilities. Management considers all of Area's banking activities to
comprise only one operating segment.
NOTE 7. INTANGIBLES
As of September 30, 2000, intangibles totaled $65.70 million compared
to $32.97 million on December 31, 1999. The increase was the result of
$32.95 million of intangibles added as a result of the Western Kentucky
Group acquisition (see Note 2 above). The excess cost over fair value
of net assets acquired in purchase business combinations (goodwill) of
$54.66 million and $30.01 million net of accumulated amortization as of
September 30, 2000 and December 31, 1999, respectively, is being
amortized over a 10-20 year period on a straight-line basis. Other
intangible assets consist of the book value of core deposits purchased
of approximately $11.04 million and $2.25 million, net of accumulated
amortization, as of September 30, 2000 and December 31, 1999,
respectively, which is being amortized by an accelerated method over
ten years and the book value of a purchased bank charter of $600
thousand and $713 thousand as of September 30, 2000 and December 31,
1999, respectively, which is being amortized over a 10-year period on a
straight-line basis. Amortization expense for the three-month period
ended September 30, 2000 and 1999 was $1.57 million and $868 thousand,
respectively. Amortization expense for the nine-month period ended
September 30, 2000 and 1999 was $5.05 million and $2.61 million,
respectively.
In addition to the intangibles described above, which were the result
of acquisitions accounted for using the purchase method of accounting,
Area also had $1.87 million as of September 30, 2000 and $2.14 million
as of December 31, 1999 of originated and purchased mortgage servicing
rights which are being amortized over the lives of the related
mortgages.
NOTE 8. CONSOLIDATION CHARGE
On January 20, 2000, Area announced that it would undertake a
consolidation of its operations during 2000. Area expects to
consolidate the operations and charters of its seventeen affiliate
banks (other than Vine Street Trust, Lexington, Kentucky) to gain
operating efficiencies and raise brand awareness by adopting the common
name of "AREA Bank." Revised estimates of the annual pre-tax savings
from the consolidation are approximately $5.04 million. Revised
estimates of the one-time costs associated with the consolidation are
approximately $4.46 million. These one-time costs represent the pre-tax
consolidation charges of $2.29 million taken in the third quarter of
2000 (see below) and $2.16 million of capitalized infrastructure and
equipment costs that will be depreciated and amortized over the next
3-to-10 years. The expected annual savings of approximately $5.04
million will not begin to be fully realized until the third quarter of
2001.
13
<PAGE> 14
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NOTE 8. CONSOLIDATION CHARGE (CONTINUED)
As of September 30, 2000, five banks had been consolidated into AREA
Bank. All remaining banks, excluding Vine Street Trust, will be
consolidated in October 2000 with the operations of those banks
centralized in stages through the first quarter of 2001.
During the third quarter of 2000, a consolidation charge of $2.29
million pre-tax ($1.49 million, or $0.09 per diluted share after-tax)
was recorded in conjunction with the consolidation of operations and
charters. The consolidation charge was salaries and benefits totaling
$150 thousand, data processing expenses of $586 thousand, advertising
and community relations expenses of $661 thousand, professional fees of
$621 thousand and other expenses totaling $276 thosand.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Area is a multi-bank holding company incorporated in Kentucky in 1976
and registered under the Bank Holding Company Act of 1956, as amended.
On September 30, 2000, Area directly controlled twelve affiliated
commercial banks, all of which are located in Kentucky. Of the banks
controlled by Area, three are national banks and nine are state banks.
During the quarter ended September 30, 2000, Area consolidated five of
its banks into AREA Bank to gain operating efficiencies and raise brand
awareness. On October 1, 2000, ten of the remaining banks (excluding
Vine Street Trust, which will not be consolidated) were consolidated
into AREA Bank (see Note 8 above for additional details). Area and its
subsidiaries engage in retail and commercial banking. In connection
with these services, Area provides the usual products and services of
retail and commercial banking such as deposits, commercial loans,
personal loans and trust services. The principal business of Area
consists of making loans. The principal markets for these loans are
businesses and individuals. These loans are made at the offices of the
affiliated banks and subsidiaries, and some are sold on the secondary
market.
The discussion that follows is intended to provide additional insight
into Area's financial condition and results of operations which
includes the merger with Peoples Bancorp of Winchester on January 4,
1999, the acquisition of the Eifler Group on October 4, 1999 and the
acquisition of the Western Kentucky Group on January 31, 2000 (see Note
2 in the accompanying unaudited consolidated financial statements for
details of these transactions). Where considered significant, the
impact of these transactions on Area's results of operations and
financial condition is discussed. This discussion should be read with
the consolidated financial statements and accompanying notes presented
in Item 1 of Part I of this Form 10-Q.
FORWARD LOOKING STATEMENTS
Various statements contained in this Quarterly Report on Form 10-Q and
the exhibits to this quarterly report that are not statements of
historical fact constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act (the "Act"). In
addition, various statements in filings by Area with the Securities and
Exchange Commission, in press releases, and in oral and written
statements made by or with the approval of Area that are not statements
of historical fact constitute forward-looking statements within the
meaning of the Act. Examples of forward-looking statements include, but
are not limited to: (1) projections of revenues, income or loss,
earnings or loss per share, the payment or non-payment of dividends,
capital structure and other financial items; (2) statements of Area's
plans and objectives, including those relating to products or services;
(3) statements of future economic performance; and (4) statements of
assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar
expressions are intended to identify forward-looking statements but are
not the exclusive means of identifying such statements.
14
<PAGE> 15
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
FORWARD LOOKING STATEMENTS (CONTINUED)
Forward-looking statements involve risks and uncertainties that may
cause actual results to differ materially from those in such
statements. Factors that could cause actual results to differ from
those discussed in the forward-looking statements include, but are not
limited to: (1) the strength of the U.S. economy in general and the
strength of the local economies in which operations are conducted; (2)
the effects of and changes in trade, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and
monetary fluctuations; (4) the timely development and acceptance of new
products and services and perceived overall value of these products and
services by users; (5) changes in consumer spending, borrowing and
saving habits; (6) technological changes; (7) acquisitions; (8) the
ability to increase market share and control expenses; (9) the effect
of changes in laws and regulations (including laws and regulations
concerning taxes, banking, securities and insurance) with which Area
and its subsidiaries must comply; (10) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory
agencies as well as the Financial Accounting Standards Board; (11)
changes in Area's organization, compensation and benefit plans; (12)
the costs and effects of litigation and of unexpected or adverse
outcomes in such litigation; and (13) Area's success managing the risks
involved in the foregoing. Such forward-looking statements speak only
as of the date on which the statements are made, and Area undertakes no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which a statement is made to reflect
the occurrence of unanticipated events.
A. RESULTS OF OPERATIONS
Net income for the quarter ended September 30, 2000 was $6.67 million
versus $7.75 million in the same period of 1999. Diluted earnings per
share for the third quarter of 2000 were $0.41 compared to $0.45 for
the same period in 1999. The decrease during the current quarter
compared to the third quarter of 1999 was $1.08 million or 13.9% for
net income and $0.04 or 8.9% per diluted share. The reduction in
earnings during the current quarter compared to the third quarter of
1999 was largely the result of an increase in net interest income on a
taxable equivalent basis totaling $4.86 million or 20.3% and an
increase in non-interest income (excluding security gains) of $1.48
million or 25.5% off-set by a $6.49 million or 35.5% increase in
non-interest expenses (including $2.29 million of consolidation charges
in the current quarter) and a decrease in security gains of $896
thousand. The gains on the sale of securities reflect Area's ongoing
strategy to improve the performance of its investment portfolio through
repositioning portions of the portfolio as market conditions change.
The current quarter includes the results of operations of the Western
Kentucky Group (see Note 2 in the accompanying unaudited consolidated
financial statements) for the entire quarter. Identification of the
various components of income and expense for the current quarter for
the Western Kentucky group is not possible as a result of the
consolidation of operations of the Western Kentucky Group into Area
Bank (see Note 8 in the accompanying unaudited conslidated financial
statements).
Year-to-date earnings were $29.98 million compared to $33.53 million
during the first three quarters of 1999. Diluted earnings per share
totaled $1.82 for the first nine months of 2000 compared to $1.96
during the same period in 1999. The year-to-date decreases were $3.55
million or 10.6% for net income and $0.14 or 7.1% per diluted share.
Earnings for the nine months ended September 30, 2000 reflected an
increase in net interest income on a taxable equivalent basis of $14.52
million or 21.2% and an increase of $4.47 million or 25.2% in
non-interest income (excluding security gains). An increase of $15.06
million or 27.4% in non-interest expenses (including $2.29 million of
consolidation charges and $382 thousand of merger and acquisition
expenses in the current year-to-date period as well as $320 thousand of
merger and acquisition expenses in the nine-months ended September
30, 1999) and a decrease in security gains from $21.28 million in the
first nine months of 1999 to $15.60 million in the first three quarters
of 2000 partially offset these increases in earnings.
The year-to-date period includes the results of operations of the
Western Kentucky Group (see Note 2) from February 1, 2000 as a result
of the acquisition having been accounted for as a purchase transaction.
Identification of the various components of income and expense for the
year-to-date period for the Western Kentucky group is not possible as a
result of the consolidation of operations of the Western Kentucky Group
into Area Bank (see Note 8 in the accompanying unaudited consolidated
financial statements).
15
<PAGE> 16
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
A. RESULTS OF OPERATIONS (CONTINUED)
Area believes that a meaningful comparison of the results of operations
excludes nonrecurring items. As shown in the following table, during
the third quarter of 2000 consolidation charges were incurred $1.49
million after tax ($2.29 million pre-tax) for the consolidation of
operations (see Note 8 in the accompanying unaudited consilidated
financial statements). In the third quarter of 1999 security gains
totaling $582 thousand after-tax ($896 thousand pre-tax) were recorded.
Core operating income during the third quarter of 2000 and 1999, which
is net income adjusted for these items, totaled $8.16 million or $0.50
per diluted share and $7.17 million or $0.42 per diluted share,
respectively. Core operating net income increased $992 thousand or
13.8% while core operating diluted earnings per share increased $0.08
or 19.0% from the third quarter of 1999.
During the first nine months of 2000, security gains in the amount of
$8.97 million after-tax ($15.60 million pre-tax) were recorded, a gain
totaling $93 thousand after-tax ($143 thousand pre-tax) on the sale of
fixed assets was recognized, merger-related adjustments were made which
totaled $248 thousand after-tax ($382 thousand pre-tax) in connection
with the acquisition of the Western Kentucky Group (see Note 2 in the
accompanying unaudited consolidated financial statements) and
consolidation charges incurred in the amount of $1.49 million after-tax
($2.29 million pre-tax). During the first nine months of 1999 security
gains totaling $13.83 million after-tax ($21.28 million pre-tax) were
recorded, a favorable insurance settlement of $615 thousand after-tax
($945 thousand pre-tax) was recognized and merger-related adjustments
of $122 thousand after-tax which enhanced net income were recorded.
Core operating income during the first nine months of 2000 and 1999
totaled $22.65 million or $1.37 per diluted share and $18.96 million or
$1.11 per diluted share, respectively. Core operating net income
increased $3.69 million or 19.5% while core operating diluted earnings
per share rose $0.26 or 23.4% from the first nine months of 1999.
<TABLE>
<CAPTION>
CORE OPERATING NET INCOME THREE MONTHS ENDED NINE MONTHS ENDED
(Amounts in thousands, except percentages) SEPTEMBER 30 SEPTEMBER 30
2000 1999 2000 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net income as reported $ 6,673 $ 7,754 $ 29,979 $ 33,530
Add or (deduct) net of taxes:
Security transactions -- (582) (8,973) (13,831)
Insurance settlement -- -- -- (615)
Gain on the sale of fixed assets -- -- (93) --
Consolidation charges 1,491 -- 1,491 --
Merger/acquisition-related adjustments -- -- 248 (122)
--------- --------- -------- --------
CORE OPERATING NET INCOME $ 8,164 $ 7,172 $ 22,652 $ 18,962
========= ========= ======== ========
CORE OPERATING BASIC EARNINGS PER SHARE $ 0.50 $ 0.43 $ 1.38 $ 1.12
CORE OPERATING DILUTED EARNINGS PER SHARE $ 0.50 $ 0.42 $ 1.37 $ 1.11
CORE OPERATING RETURN ON AVERAGE ASSETS (ANNUALIZED) 1.19% 1.27% 1.12% 1.13%
CORE OPERATING RETURN ON AVERAGE EQUITY (ANNUALIZED) 11.87% 10.62% 11.04% 9.54%
</TABLE>
16
<PAGE> 17
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTERMBER 30, 2000 AND 1999
A. RESULTS OF OPERATIONS (CONTINUED)
The following table provides selected operating data, per share data,
selected ratios and average balances for the three-and nine-month
periods ended September 30, 2000 and 1999:
(Amounts in thousands, except percentages and per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 CHANGE 2000 1999 CHANGE
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Net income $ 6,673 $ 7,754 $ (1,081) $ 29,979 $ 33,530 $ (3,551)
Core operating net income (1) 8,164 7,172 992 22,652 18,962 3,690
PER SHARE DATA
Basic earnings per share 0.41 0.46 (0.05) 1.83 1.98 (0.15)
Core operating basic earnings
per share (1) 0.50 0.43 0.07 1.38 1.12 0.26
Diluted earnings per share 0.41 0.45 (0.04) 1.82 1.96 (0.14)
Core operating diluted earnings
per share (1) 0.50 0.42 0.08 1.37 1.11 0.26
Cash dividends per share 0.06 0.05 0.01 0.175 0.145 0.03
Book value at September 30 17.09 15.87 1.22 17.09 15.87 1.22
Market price at September 30 22.19 28.81 (6.62) 22.19 28.81 (6.62)
SELECTED RATIOS AND DATA
Return on average assets (2) 0.97% 1.37% (0.40%) 1.48% 2.00% (0.52%)
Core operating return on average
assets (1)(2) 1.19% 1.27% (0.08%) 1.12% 1.13% (0.01%)
Return on average equity (2) 9.71% 11.49% (1.78%) 14.62% 16.87% (2.25%)
Core operating return on average
equity (1)(2) 11.87% 10.62% 1.25% 11.04% 9.54% 1.50%
Efficiency ratio 68.46% 59.65% 8.81% 57.92% 51.16% 6.76%
Efficiency ratio (1) 62.07% 61.45% 0.62% 64.06% 64.12% (0.06%)
Net interest margin (2) 4.56% 4.55% 0.01% 4.43% 4.40% 0.03%
Equity-to-assets 10.11% 11.64% (1.53%) 10.11% 11.64% (1.53%)
Allowance for loan losses to loans 1.44% 1.48% (0.04%) 1.44% 1.48% (0.04%)
Allowance for loan losses to
under-performing assets 440.1% 698.8% (258.7%) 440.1% 698.8% (258.7%)
Nonperforming loans to total loans 0.28% 0.21% 0.07% 0.28% 0.21% 0.07%
AVERAGE BALANCES
Total assets $2,723,738 $2,245,352 $478,386 $2,701,906 $2,246,619 $455,287
Earning assets 2,510,651 2,085,291 425,360 2,499,552 2,078,568 420,984
Shareholders' equity 273,504 267,837 5,667 273,957 265,796 8,161
</TABLE>
(1) Excludes items presented in the Core Operating Net Income
table above.
(2) Percentages annualized.
CORE OPERATING CASH BASED EARNINGS
Area believes it is important to also disclose cash based core
operating net income, which excludes nonrecurring items and intangible
asset amortization from core operating net income. Although these
calculations are helpful in understanding the performance of Area, cash
based core operating net income should not be considered a substitute
for net income or cash flow as indicators of Area's financial
performance or its ability to generate liquidity.
17
<PAGE> 18
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
CORE OPERATING CASH BASED EARNINGS (CONTINUED)
The following table presents the cash based core operating net income
and various cash based performance ratios:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 CHANGE 2000 1999 CHANGE
------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Core operating net income (1) $8,164 $7,172 $ 992 $22,652 $18,962 $3,690
Add back:
Goodwill and other intangible amortization 1,574 868 706 5,048 2,605 2,443
Less: tax effect 351 153 198 999 461 538
------ ------ ------ ------- ------- ------
1,223 715 508 4,049 2,144 1,905
------ ------ ------ ------- ------- ------
CASH BASED CORE OPERATING NET INCOME $9,387 $7,887 $1,500 $26,701 $21,106 $5,595
====== ====== ====== ======= ======= ======
Per share data
Cash based core operating basic earnings per share $ 0.57 $ 0.47 $ 0.10 $ 1.63 $ 1.25 $ 0.38
Cash based core operating diluted earnings per share 0.57 0.46 0.11 1.62 1.23 0.39
Performance ratios (annualized)
Cash based core operating return on tangible assets 1.41% 1.41% -- 1.35% 1.28% 0.07%
Cash based core operating return on tangible equity 18.07% 13.37% 4.70% 16.56% 12.22% 4.34%
Cash based core operating efficiency ratio 57.68% 58.53% (0.85%) 59.25% 61.07% (1.82%)
</TABLE>
(1) Excludes items presented in the Core Operating Net Income
table above.
NET INTEREST INCOME
The largest component of Area's operating income is net interest
income. Net interest income is the difference between interest earned
on earning assets and interest expense on interest bearing liabilities.
For purposes of this discussion, interest income earned on tax-exempt
securities and loans is adjusted to a fully taxable equivalent basis to
facilitate comparison with interest earned which is subject to
statutory taxation.
Changes in net interest income generally occur due to fluctuations in
the balance and/or mix of interest-earning assets and interest-bearing
liabilities, and changes in their corresponding interest yields and
costs.
Net interest income, on a tax equivalent basis, increased $4.86 million
or 20.3% to $28.78 million during the quarter ended September 30, 2000
compared to the same quarter in 1999. In addition to net interest
income generated from the banks in the Western Kentucky Group, which
were acquired on January 31, 2000 in a transaction accounted for as a
purchase (see Note 2 in the accompanying unaudited consolidated
financial statements), strong internal loan growth and control of
interest expense were the primary reasons for the increase in net
interest income. Area's net interest margin (which is computed by
dividing net interest income on a fully taxable equivalent basis by
average earning assets) increased slightly from 4.55% during the
quarter ended September 30, 1999 to 4.56% during the current quarter.
The average rate on interest earning assets increased from 7.85% during
the third quarter of 1999 to 8.65% in the current quarter. The increase
in the average rate on earning assets was largely the result of a shift
in the composition of average earning assets towards loans and the
effect that rising national interest rates have had on adjustable rate
earning assets. As an offset, the average rate on interest bearing
liabilities increased from 4.03% to 4.84% largely as a result of rising
national interest rates since mid-1999 and a slight shift in funding
sources towards higher priced interest bearing liabilities. These
changes resulted in a slight decrease from 3.82% to 3.81% in the net
interest spread during the current quarter versus the same period in
1999.
18
<PAGE> 19
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NET INTEREST INCOME (CONTINUED)
For the nine months ended September 30, 2000, net interest income, on a
tax equivalent basis, increased $14.52 million or 21.2% to $82.96
million over the first three quarter of 1999. Net interest income
generated from the banks in the Western Kentucky Group, which were
acquired on January 31, 2000 in a transaction accounted for as a
purchase (see Note 2 in the accompanying unaudited consolidated
financial statements), strong internal loan growth and control of
interest expense were the primary reasons for the increase in net
interest income during the current year-to-date period compared to the
first nine months of 1999. The net interest margin was 4.43% for the
year-to-date period, an increase from 4.40% recorded during the first
nine months of 1999. The increase in the net interest margin was the
result of loan growth generated both internally as well as through the
acquisitions discussed in Note 2 and rising rates which impacted
earning assets more positively than interest paying liabilities.
The following table presents the components of net income on a taxable
equivalent basis:
<TABLE>
<CAPTION>
(Amounts in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 CHANGE 2000 1999 CHANGE
------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest income $53,263 $40,167 $ 13,096 $151,761 $117,656 $ 34,105
Taxable-equivalent adjustment 1,345 1,106 239 3,923 3,270 653
------- ------- -------- -------- -------- --------
Interest income-taxable equivalent 54,608 41,273 13,335 155,684 120,926 34,758
Interest expense 25,831 17,355 8,476 72,725 52,485 20,240
------- ------- -------- -------- -------- --------
Net interest income-taxable equivalent 28,777 23,918 4,859 82,959 68,441 14,518
Provision for loan losses 588 145 443 1,224 501 723
Non-interest income 7,084 6,713 371 37,585 39,001 (1,416)
Non-interest expenses 24,552 18,272 6,280 69,814 54,964 14,850
------- ------- -------- -------- -------- --------
Income before income tax expense 10,721 12,214 (1,493) 49,506 51,977 (2,471)
Income tax expense 2,703 3,354 (651) 15,604 15,177 (427)
Taxable-equivalent adjustment 1,345 1,106 239 3,923 3,270 653
------- ------- -------- -------- -------- --------
NET INCOME $ 6,673 $ 7,754 $ (1,081) $ 29,979 $ 33,530 $ (3,551)
======= ======= ======== ======== ======== ========
</TABLE>
The following table summarizes the fully-taxable equivalent interest
spread, which is the difference between the average yield on earning
assets and the average rate on interest bearing liabilities as well as
the net interest margin, which is the fully-taxable equivalent net
interest income divided by the average earning assets for the three and
nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 CHANGE 2000 1999 CHANGE
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Average rate on earning assets (1) 8.65% 7.85% 0.80% 8.32% 7.78% 0.54%
Average rate on interest
bearing liabilities (1) 4.84% 4.03% 0.81% 4.63% 4.09% 0.54%
Net interest spread (1) 3.81% 3.82% (0.01%) 3.69% 3.69% --
Net interest margin (1) 4.56% 4.55% 0.01% 4.43% 4.40% 0.03%
Average earning assets $2,510,651 $2,085,291 $425,360 $2,499,552 $2,078,568 $420,984
Average interest bearing liabilities 2,124,962 1,708,006 416,956 2,097,522 1,713,828 383,694
</TABLE>
(1) Amounts annualized
19
<PAGE> 20
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
PROVISION FOR LOAN LOSSES
The allowance for loan losses is maintained at a level management
believes is adequate to absorb estimated losses inherent in the
portfolio. Management determines the adequacy of the allowance based
upon reviews of individual loans, evaluation of the risk
characteristics of the loan portfolio, including the impact of current
economic conditions on the borrowers' ability to repay, past collection
and loss experience as well as other factors that in management's
judgment deserve current recognition. However, actual losses could
differ significantly from the amount estimated by management. The
allowance for loan losses is established by charges to operating
earnings.
An analysis of the changes in the allowance for loan losses and
selected ratios follows:
<TABLE>
<CAPTION>
(Amounts in thousands, except percentages) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999 CHANGE 2000 1999 CHANGE
---------- ---------- -------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance $ 27,456 $ 23,553 $ 3,903 $ 23,055 $ 21,651 $ 1,404
Additions through acquisitions -- -- -- 4,323 1,857 2,466
Provision for loan losses 588 145 443 1,224 501 723
Loan loss recoveries 358 271 87 927 1,216 (289)
Loans charged off (696) (470) (226) (1,823) (1,726) (97)
---------- ---------- -------- ---------- ---------- --------
ENDING BALANCE $ 27,706 $ 23,499 $ 4,207 $ 27,706 $ 23,499 $ 4,207
========== ========== ======== ========== ========== ========
Average loans, net of unearned income $1,927,869 $1,531,922 $395,947 $1,909,117 $1,509,659 $399,458
Provision for loan losses to average loans (1) 0.12% 0.04% 0.08% 0.09% 0.04% 0.05%
Net loan charge-offs to average loans (1) 0.07% 0.05% 0.02% 0.06% 0.05% 0.01%
Allowance for loan losses to end of
period loans 1.44% 1.48% (0.04%) 1.44% 1.48% (0.04%)
Allowance for loan losses to under-
performing assets 440.1% 698.8% (258.7%) 440.1% 698.8% (258.7%)
</TABLE>
(1) Amounts annualized
The provision for loan losses totaled $588 thousand during the quarter
ended September 30, 2000 compared to $145 thousand during the same
period last year. During the nine months ended September 30, 2000, the
provision for loan losses increased $723 thousand or 144.3% to $1.22
million when compared to the first nine months of 1999 which totaled
$501 thousand. The increase in the provision for loan losses for both
the three-month and nine-month periods compared to year earlier amounts
was due mainly to growth in the loan portfolio. In spite of these
increases, the provision amounts for both the quarter and year-to-date
periods are low compared to Area's historical levels and there is no
assurance that these levels will not increase in the future.
The provision for loan losses as a percentage of average loans totaled
0.12% (annualized) during the quarter ended September 30, 2000 compared
to 0.04% (annualized) for the quarter ended September 30, 1999. For the
nine-month period ended September 30, 2000, the provision for loan
losses as a percentage of average loans increased to 0.09% (annualized)
from 0.04% (annualized) during the same period in 1999. Even though the
percentages increased during the current quarter and year-to-date
period compared to the same periods in 1999, both percentages are low
compared to Area's historical levels and there is no assurance that
these levels will not increase in the future.
Net loan charge-offs (loan charge-offs less recoveries) to average
loans during the current quarter increased slightly to 0.07%
(annualized) from 0.05% (annualized) during the quarter ended September
30, 2000 primarily as a result of a slight increase in loans
charged-off. Net loan charge-offs to average loans increased to 0.06%
during the nine months ended September 30, 2000 compared to 0.05% in
the same period in 1999. These percentages are low compared to Area's
historical levels and there is no assurance that these levels will not
increase in the future.
20
<PAGE> 21
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
PROVISION FOR LOAN LOSSES (CONTINUED)
The allowance for loan losses was 1.44% of total loans on September 30,
2000, as compared to the December 31, 1999 level of 1.41% and the
September 30, 1999 level of 1.48%. The percentage of allowance for loan
losses to total loans has decreased since September 30, 1999 largely as
a result of loan growth which occurred primarily as a result of
acquisitions (see Note 2 in the accompanying unaudited consolidated
financial statements).
NON-INTEREST INCOME
The tables that follow set forth the components of non-interest income
for the three and nine-month periods ended September 30, 2000 and 1999.
The amounts listed below for the three and nine-month periods include
adjustments for non-recurring non-interest income for comparability
purposes.
<TABLE>
<CAPTION>
NON-INTEREST INCOME THREE MONTHS ENDED SEPTEMBER 30
(Amounts in thousands) PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 1,511 $ 1,377 $ 134 9.7%
Service charges on deposit accounts 3,457 2,467 990 40.1%
Other service charges, commissions and fees 1,843 1,524 319 20.9%
Gains on sales of loans (net) 204 256 (52) 20.3%
Other income 283 193 90 46.6%
------- ------- ------- -------
RECURRING NON-INTEREST INCOME 7,298 5,817 1,481 25.5%
Non-recurring items:
Security gains (losses), net -- 896 (896) (100.0%)
------- ------- ------- -------
TOTAL $ 7,298 $ 6,713 $ 585 8.7%
======= ======= ======= =======
</TABLE>
<TABLE>
NINE MONTHS ENDED SEPTEMBER 30
PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Commissions and fees on fiduciary activities $ 4,374 $ 4,083 $ 291 7.1%
Service charges on deposit accounts 9,454 6,838 2,616 38.3%
Other service charges, commissions and fees 5,973 4,358 1,615 37.1%
Gains on sales of loans (net) 477 1,015 (538) (53.0%)
Other income 1,774 483 1,291 267.3%
------- ------- ------- -------
RECURRING NON-INTEREST INCOME 22,052 16,777 5,275 31.4%
Non-recurring items:
Security gains (losses), net 15,604 21,279 (5,675) (26.7%)
Insurance settlement -- 945 (945) (100.0%)
Gain on sale of fixed assets 143 -- 143 N/A
------- ------- ------- -------
TOTAL $37,799 $39,001 $(1,202) (3.1%)
======= ======= ======= =======
</TABLE>
Non-interest income totaled $7.08 million and $37.59 million for the
three and nine-month periods ended September 30, 2000. These amounts
represent an increase of $371 thousand or 5.5% during the three-month
period and a decrease of $1.42 million or 3.6% during the year-to-date
period. Included in the non-interest income amounts for the current
quarter and for the nine months ended September 30, 2000 are amounts
from the Western Kentucky Group (see Note 2 in the accompanying
unaudited consolidated financial statements), which Area acquired on
January 31, 2000 in a transaction accounted for using the purchase
method of accounting. In the discussion that follows, the amounts of
non-interest income from the Western Kentucky Group have not been
identified separately as a result of the consolidation of operations of
the Western Kentucky Group into AREA Bank (see Note 8 in the
accompanying unaudited consolidated financial statements).
21
<PAGE> 22
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NON-INTEREST INCOME (CONTINUED)
The following analysis excludes $15.75 million of non-recurring
non-interest income during the first three quarters of 2000, $896
thousand in the third quarter of 1999 and $22.22 million in the first
nine months of 1999. Excluding these non-recurring items, which include
security gains, an insurance settlement and a gain on the sale of fixed
assets (see the table above for details) recurring non-interest income
increased $1.48 million or 25.5% to $7.30 million from $5.82 million in
the third quarter of 1999 and increased $5.28 million or 31.4% to
$22.05 million from $16.78 million in the first nine months of 2000
compared to the same period in 1999. The following analysis compares
recurring non-interest income which excludes non-recurring non-interest
income in both the third quarter and first nine months of 2000 and
1999. Commissions and fees on fiduciary activities increased $134
thousand or 9.7% to $1.51 million in the third quarter of 2000 and $291
thousand or 7.1% to $4.37 million during the current nine-month period
from $1.38 million and $4.08 million during similar periods in 1999,
largely as a result of successful new business development efforts.
Service charges on deposit accounts increased $990 thousand or 40.1% to
$3.46 million and $2.62 million or 38.3% to $9.45 million for the three
and nine months ended September 30, 2000, respectively, when compared
to similar period totals in 1999. In addition to service charges on
deposits added as a result of the Western Kentucky acquisition, the
increase was due primarily to deposit growth in accounts subject to
service charges and increases in fees charged. Other service charges,
commissions and fees totaled $1.84 million and $5.97 million for the
third quarter of 2000 and year-to-date periods ended September 30, 2000
compared to $1.52 million and $4.36 million in the same periods of
1999. The increases were $319 thousand or 20.9% and $1.62 million or
37.1%, respectively, for the three and nine-month periods ended
September 30, 2000. The increases for the current and year-to-date
periods were largely the result of an increase of $340 thousand during
the current quarter and $985 thousand for the year-to-date period in
security brokerage commissions earned through the Eifler Group (see
Note 2 in the accompanying unaudited consolidated financial
statements). Gains on the sales of loans decreased $52 thousand or
20.3% to $204 thousand in the third quarter of 2000 compared to the
same period in 1999 and decreased $538 thousand or 53.0% to $477
thousand in the first three quarters of the year compared to the same
period in 1999. Gains on the sales of loans were favorably impacted
during the third quarter and first nine months of 1999 by lower
interest rates and a strong refinancing market compared to the current
three-month and year-to-date periods which have experienced a
significant slow-down in the refinancing market as a result of rising
interest rates. Other income totaled $283 thousand during the three
months ended September 30, 2000 compared to $193 thousand in the third
quarter of 1999 and $1.77 million during the first nine months of 2000
versus $483 thousand in the same period of 1999. These amounts
represent increases of $90 thousand or 46.6% and $1.29 million or
267.3% for the third quarter and year-to-date periods, respectively.
The increases during the current year-to-date period was primarily the
result of income earned from the sale of covered call options related
to Area's equity investment portfolio. Area recorded no income from
covered call options during the current quarter while the amount earned
on covered call options during the first nine months of 2000 was $713
thousand. The recurrence of this income in the future can not be
assured since it depends upon the market value of Area's equity
investment portfolio and the value third parties place on the ability
to purchase equity securities owned by Area at fixed prices in the
future. There were no security gains in the current quarter compared to
$896 thousand in the same period of 1999 and $15.60 million compared to
$21.28 million during the first nine months of 2000 and 1999,
respectively. These gains on the sale of securities reflect Area's
ongoing strategy to improve the performance of its investment portfolio
through repositioning portions of the portfolio as market conditions
change.
22
<PAGE> 23
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NON-INTEREST EXPENSES
The tables that follow set forth the components of non-interest
expenses for the three and nine-months ended September 30, 2000, and
1999. The amounts listed below for the three and nine-month periods
include adjustments for non-recurring non-interest expenses for
comparability purposes.
<TABLE>
<CAPTION>
NON-INTEREST INCOME THREE MONTHS ENDED SEPTEMBER 30
(Amounts in thousands) PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Salaries and employee benefits $10,449 $ 8,621 $ 1,828 21.2%
Net occupancy expenses 1,634 1,416 218 15.4%
Furniture and equipment expense 1,771 1,504 267 17.8%
Federal deposit insurance 109 83 26 31.3%
Data processing expense 1,304 1,176 128 10.9%
Advertising and community relations 874 763 111 14.5%
Insurance and taxes 1,008 531 477 89.8%
Professional fees 1,119 1,016 103 10.1%
Amortization of intangibles 1,574 868 706 81.3%
Other 2,630 2,294 336 14.6%
------- ------- ------- -------
RECURRING NON-INTEREST EXPENSES 22,472 18,272 4,200 23.0%
Non-recurring items:
Consolidation expenses (see following for details) 2,294 -- 2,294 N/A
------- ------- ------- -------
TOTAL $24,766 $18,272 $ 6,494 35.5%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NON-INTEREST INCOME NINE MONTHS ENDED SEPTEMBER 30
(Amounts in thousands) PERCENT
2000 1999 CHANGE CHANGE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Salaries and employee benefits $30,420 $26,193 $ 4,227 16.1%
Net occupancy expenses 4,518 4,021 497 12.4%
Furniture and equipment expense 5,239 4,561 678 14.9%
Federal deposit insurance 291 220 71 32.3%
Data processing expense 4,051 3,790 261 6.9%
Advertising and community relations 2,583 2,433 150 6.2%
Insurance and taxes 3,165 1,799 1,366 75.9%
Professional fees 3,929 2,237 1,692 75.6%
Amortization of intangibles 5,047 2,605 2,442 93.7%
Other 8,109 6,785 1,324 19.5%
------- ------- ------- -------
RECURRING NON-INTEREST EXPENSES 67,352 54,644 12,708 23.3%
Non-recurring items:
Consolidation expenses (see following for details) 2,294 -- 2,294 N/A
Merger and acquisition expense 382 320 62 19.4%
------- ------- ------- -------
TOTAL $70,028 $54,964 $15,064 27.4%
======= ======= ======= =======
</TABLE>
23
<PAGE> 24
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
NON-INTEREST EXPENSES (CONTINUED)
Non-interest expenses totaled $24.77 million and $70.03 million for the
three and nine-month periods ended September 30, 2000. These amounts
represent increases of $6.49 million or 35.5% and $15.06 million or
27.4%, respectively, when compared to 1999 period totals which totaled
$18.27 million and $54.96 million, respectively. Included in the
non-interest expense amounts for the current quarter and current
nine-month periods ended September 30, 2000 are amounts from the
Western Kentucky Group, which Area acquired on January 31, 2000 in a
transaction accounted for using the purchase method of accounting. In
the discussion that follows, the amounts from the Western Kentucky
Group have not been identified separately as a result of the
consolidation of operations of the Western Kentucky Group into AREA
Bank. Non-recurring non-interest expenses include consolidation charges
of $2.29 million in both the current quarter and the nine months ended
September 30, 2000 and merger and acquisition expenses of $382 thousand
and $320 thousand in the year-to-date periods ended September 30, 2000
and 1999, respectively. Excluding these items, adjusted non-interest
expenses increased $4.20 million or 23.0% to $22.47 million from $18.27
million in the third quarter of 1999 and increased $12.71 million or
23.3% to $67.35 million in the first nine months of 2000 compared to
$54.64 million during the same period in 1999. The following analysis
compares adjusted non-interest expenses which exclude non-recurring
items. Salaries and benefits increased $1.83 million or 21.2% to $10.45
million in the third quarter of 2000 from $8.62 million in the third
quarter of 1999 and increased $4.23 million or 16.1% to $30.42 million
during the current nine-month period from $26.19 million during the
first three quarters of 1999, as a result of staff added with the
Western Kentucky acquisition, merit increases and the addition of staff
that will be required to implement the consolidation of operations as
more fully discussed in Item 2 "General". Net occupancy expenses
increased $218 thousand or 15.4% to $1.63 million from $1.42 million
and grew $497 thousand or 12.4% to $4.52 million from $4.02 million,
respectively, for the three and nine-month periods ended September 30,
2000, due primarily to expenses related to the modernization of several
facilities. Furniture and equipment expenses totaled $1.77 million and
$5.24 million during the third quarter of 2000 and year-to-date periods
ended September 30, 2000 compared to $1.50 million during the third
quarter of 1999 and $4.56 million for the nine-month period ended
September 30, 1999. The current quarter reflected an increase of $267
thousand or 17.8% and the year-to-date period increased $678 thousand
or 14.9%. The increases for both the current quarter and the
year-to-date periods were the result of depreciation expense related to
furniture and equipment acquired to modernize several of Area's
existing branches. Data processing expenses totaled $1.30 million
during the current quarter compared to $1.18 million in the same period
in 1999 and totaled $4.05 million during the nine months ended
September 30, 2000 versus $3.79 million during the first nine months of
1999. The increases, $128 thousand or 10.9% and $261 thousand or 6.9%
for the quarter and year-to-date periods reflected the daily processing
costs of the additional loans and deposits added as a result of the
Western Kentucky acquisition. Advertising and community relations
expense grew $111 thousand or 14.5% to $874 thousand during the current
quarter from $763 thousand in the third quarter of 1999 and $150
thousand or 6.2% to $2.58 million during the nine months ended
September 30, 2000 from $2.43 million during the first three quarters
of 1999. These increases were the result of added marketing expenses
incurred to standardize products. Insurance and taxes totaled $1.01
million during the current quarter compared to $531 thousand during the
same period in 1999 and totaled $3.17 million in the current nine-month
period ended September 30, 2000 versus $1.80 million during the first
nine months of 1999. The increases were $477 thousand or 89.8% and
$1.37 million or 75.9% for the three-month and nine-month periods ended
September 30, 2000 compared to the similar periods in 1999. In addition
to increases related to the addition of the Western Kentucky Group, the
growth was primarily the result of increased state taxes related to
Area's banks. Professional fees increased $103 thousand or 10.1% and
$1.69 million or 75.6% during the current quarter and year-to-date
periods, respectively, compared to similar periods in 1999 in which the
totals were $1.02 million and $2.24 million, respectively. The
increases during both the current quarter and year-to-date periods were
the result of acquisition activities. Amortization of intangibles
totaled $1.57 million and $5.05 million in the quarter and year-to-date
periods ended September 30, 2000, respectively. The increase for the
quarter was $706 thousand or 81.3% while the increase for the
year-to-date period was $2.44 million or 93.7% These increases were the
result of the amortization of intangibles added as a result of the
acquisition of the Western Kentucky Group. Other non-interest expenses
totaled $2.63 million during the current quarter compared to $2.29
million for the same period in 1999 and totaled $8.11 million during
the nine-months ended September 30, 2000 compared to $6.79 million in
the same period in 1999. The current quarter reflected an increase of
$336 thousand or 14.6% and the year-to-date period reflected an
increase of $1.32 million or 19.5%. The year-to-date period increase
was largely the result of increases in correspondent bank charges,
Federal Reserve service charges, other miscellaneous losses and office
supplies.
24
<PAGE> 25
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
INCOME TAX EXPENSE
Income tax expense totaled $2.70 million and $15.60 million for the
three and nine-month periods ended September 30, 2000 compared to $3.35
million and $15.18 million during the same periods in 1999. The reduced
level of income tax expense for the current three-month period was the
result a lower level of pre-tax income. Income tax expense increased in
the year-to-date period even though pre-tax income declined primarily
as a result of the increased amortization of non-tax-deductible
intangibles and additional state income taxes related to gains from the
sale of securities. The effective tax rate was 28.8% and 34.2% during
the three and nine-month periods ended September 30, 2000 compared to
30.2% and 31.2% during the same periods of 1999. The effective tax rate
differs from the marginal income tax rate of 35% in both 2000 and 1999
due primarily to the effects of tax exempt interest and goodwill
amortization.
B. FINANCIAL POSITION
Total assets increased $406.18 million or 17.4% to $2.75 billion from
December 31, 1999. Excluding the acquisition of the Western Kentucky
Group, which added $383.35 million in assets, assets increased $22.83
million from year-end. Assets averaged $2.72 billion in the quarter
ended September 30, 2000 compared to $2.25 billion during the same
period in 1999. The growth in average assets from the quarter ended
September 30, 1999 to the quarter ended September 30, 2000 was $478.39
million or 21.3%. This growth was largely the result of the acquisition
of the Western Kentucky Group. Earning assets totaled $2.50 billion on
September 30, 2000, an increase of $350.94 million or 16.4% over
December 31, 1999 earning assets which totaled $2.14 billion. Excluding
earning assets acquired as a result of the acquisition of the Western
Kentucky Group, earning assets were flat from December 31, 1999 to
September 30, 2000.
SHORT-TERM INVESTMENTS AND SECURITIES
Short-term investments, which include interest-bearing deposits with
banks and federal funds sold, totaled $5.78 million on September 30,
2000, as compared to $6.01 million at year-end.
Securities represented 22.0% of earning assets on September 30, 2000
and totaled $546.85 million, an increase of $54.13 million or 11.0%
from $492.72 million on December 31, 1999. Excluding $101.14 million of
securities added as a result of the acquisition of the Western Kentucky
Group (see Note 2 to the accompanying unaudited consolidated financial
statements), the securities portfolio decreased $47.01 million or 9.5%
from December 31, 1999. The cash obtained as a result of the reduction
in the securities portfolio was used to fund loans. The
held-to-maturity and available-for-sale portfolios as of September 30,
2000 consisted of 29.0% in U.S. and other government agency securities,
30.4% in mortgage-backed securities, 33.8% in state and municipal
securities and 6.8% in equity and other securities. The comparable
distributions at December 31, 1999 were 41.5%, 14.6%, 31.0% and 12.9%,
respectively.
LOANS
Loans, including loans held for sale, increased $297.04 million or
18.1% to $1.94 billion during the nine months ended September 30, 2000
from $1.64 billion on December 31, 1999. Excluding the acquisition of
the Western Kentucky Group which added $220.03 million of loans, loans
increased $77.01 million during the first nine months of 2000. Loans,
including loans held for sale, represent the largest category of
earning assets, comprising 77.8% of earning assets as of September 30,
2000, 76.7% as of December 31, 1999 and 76.6% as of September 30, 1999.
The following table presents the major categories of loans including
loans held for sale:
<TABLE>
<CAPTION>
(Amounts in thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
Commercial $ 774,431 $ 580,521 $ 562,596
Real estate 885,633 820,995 801,204
Consumer installment and other loans 277,051 238,562 233,470
---------- ---------- ----------
TOTAL $1,937,115 $1,640,078 $1,597,270
========== ========== ==========
</TABLE>
25
<PAGE> 26
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
DEPOSITS
Deposits totaled $2.08 billion on September 30, 2000, an increase of
$364.57 million or 21.3% from $1.71 billion on December 31, 1999.
Excluding $327.97 million of deposits acquired as a result of the
acquisition of the Western Kentucky Group deposits grew $36.60 million
or 2.1% from December 31, 1999 to September 30, 2000. Non-interest
bearing deposits (excluding $55.79 million of deposits acquired through
the acquisition of the Western Kentucky Group) declined $12.20 million
or 4.6% from December 31, 1999. The decrease in non-interest bearing
deposits from year-end totals was partially the result of customers'
desire to substitute their non-interest bearing deposits for
interest-bearing deposits. Interest-bearing deposits (excluding $272.18
million deposits acquired through the acquisition of the Western
Kentucky Group) increased $48.80 million or 3.4%. Average deposits
increased $361.12 million or 21.2% to $2.07 billion in the three months
ended September 30, 2000 compared to the same period in 1999 while
increasing $302.57 million or 17.3% to $2.05 billion in the first nine
months of 2000 compared to the same period of 1999. These increases
were largely the result of the acquisition of the Western Kentucky
Group.
The following table summarizes the composition of deposits:
<TABLE>
<CAPTION>
(Amounts in thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
Non-interest bearing demand $ 308,537 $ 264,951 $ 241,440
Interest bearing deposits:
Interest bearing demand 313,377 294,705 277,805
Savings 434,465 397,927 398,520
Certificates of deposit of $100 thousand or more 239,650 180,964 160,546
Other time 780,322 573,235 598,931
---------- ---------- ----------
Total interest bearing deposits 1,767,814 1,446,831 1,435,802
---------- ---------- ----------
TOTAL DEPOSITS $2,076,351 $1,711,782 $1,677,242
========== ========== ==========
</TABLE>
BORROWED FUNDS
Borrowed funds, which include federal funds purchased, securities sold
under agreements to repurchase, notes payable to the U.S. Treasury,
advances from the Federal Home Loan Bank and other borrowings increased
by $29.31 million or 8.7% to $367.36 million from $338.05 million on
December 31, 1999. Excluding $62.10 million of borrowed funds added as
a result of the acquisition of the Western Kentucky Group (see Note 2
in the accompanying unaudited consolidated financial statements)
borrowed funds declined $32.79 million or 9.7%.
Other borrowings increased from $135 thousand on December 31, 1999 to
$70.11 million on September 30, 2000. This increase was largely the
result of funds borrowed for the acquisition of the Western Kentucky
Group. Area initially borrowed $75.00 million on January 31, 2000 (the
date of acquisition) for the acquisition.
CAPITAL RESOURCES
Shareholders' equity totaled $277.71 million at September 30, 2000, an
increase of $10.75 million or 4.0% from $266.96 million on December 31,
1999. A decrease totaling $11.57 million or 47.2% to $12.96 million in
accumulated other comprehensive income negatively impacted
shareholders' equity. This decrease in accumulated other comprehensive
income occurred primarily as a result of the sale of available for sale
securities and a rise in interest rates during the nine months ended
September 30, 2000 which caused a decrease in the value of Area's fixed
income investment securities.
The shareholders' equity-to-asset ratio was 10.11% at September 30,
2000 compared to 11.41% on December 31, 1999. The decrease was largely
the result of the acquisition of the Western Kentucky Group (see Note 2
to the accompanying unaudited consolidated financial statements) which
added approximately $383.35 million of assets.
Book value per share was $17.02, $16.17 and $15.87 at September 30,
2000, December 31, 1999 and September 30, 1999, respectively.
26
<PAGE> 27
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
CAPITAL RESOURCES (CONTINUED)
During the third quarter of 2000, Area repurchased 232,300 shares of
its common stock in the open market and through unsolicited negotiated
transactions at an average price of $20.00 per share, bringing the
total for the first nine months of 2000 to 392,200 shares at an average
price of $21.05. All of these shares were repurchased under the 5%
repurchase plan announced on August 26, 1999.
A summary of the regulatory capital ratios is shown below:
<TABLE>
<CAPTION>
REGULATORY CAPITAL
REQUIREMENTS
SEPTEMBER 30 DECEMBER 31 WELL MINIMUM
2000 1999 CAPITALIZED REQUIRED
----- ----- ----------- -----
<S> <C> <C> <C> <C>
Leverage Ratio 7.44% 9.32% 5.00% 4.00%
Tier I Risk Based Capital Ratio 10.13% 12.60% 6.00% 4.00%
Total Risk Based Capital Ratio 11.39% 13.86% 10.00% 8.00%
</TABLE>
The decrease in the regulatory capital ratios from December 31, 1999 to
September 30, 2000 was the result of the purchase of the Western
Kentucky Group that resulted in the addition of $383.35 million of
assets and $32.95 million of intangible assets.
ASSET QUALITY
At September 30, 2000, the allowance for loan losses was $27.71 million
or 1.44% of period-end loans, as compared to $23.06 million or 1.41% of
loans at December 31, 1999. The ratio of the allowance for loan losses
to under-performing assets decreased to 440.1% as of September 30, 2000
compared with 1,015.2% at December 31, 1999 and 501.6% on September 30,
1999 as a result of an increase in under-performing assets.
Under-performing assets consist of non-accrual loans, loans past due
ninety days or more that are still accruing interest, restructured
loans, and other real estate owned. Under-performing assets totaled
$6.30 million on September 30, 2000 compared to $2.27 million on
December 31, 1999. The increase was $4.03 million. Of this increase,
approximately $3.27 million was added as a result of the acquisition of
the Western Kentucky Group (see note 2 to the accompanying unaudited
consolidated financial statements). Currently, year-to-date net
charge-offs (loan charge-offs less recoveries) are at 0.07%
(annualized) of average year-to-date loans compared to 0.05%
(annualized) during the same period in 1999. Even though this ratio
increased slightly, it is at a historically low level and there can be
no assurance that net charge-offs will not increase in the future.
Management maintains the allowance for loan losses at a level that is
sufficient to absorb the estimated losses that, in the opinion and
judgment of management, are inherent in the loan portfolio.
Management's evaluation includes an analysis of the overall quality of
the loan portfolio, historical loan loss experience, loan delinquency
trends and the economic conditions within Area's markets. Area also
bases allocations of the allowance on specifically identified probable
loss situations.
The allocation of the allowance for loan losses is an estimate of the
portion which will be used to cover future charge-offs in each loan
category, but does not preclude any portion of the allowance allocated
to one type of loan from being used to cushion losses of another loan
type. This allocation is determined by the estimated loss within each
loan pool as well as any specific allocations that may be assigned to
specific loans within the same portfolio section with the remainder
being assigned to the unallocated category.
A continuous and comprehensive loan review program is maintained by
Area. The purpose of this program is to provide periodic review and
inspection of loans to ensure the safety, liquidity and profitability
of the loan portfolio. Area's loan review department is entrusted with
the responsibility to identify foreseeable problems, measure compliance
with established loan and operating policies and provide objective loan
portfolio appraisals to the Board of Directors and management
27
<PAGE> 28
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
MANGEMENT'S DISCUSSION AND ANALYSIS
(UNAUDITED)
SEPTEMBER 30, 2000 AND 1999
ASSET QUALITY (CONTINUED)
The following schedule shows the dollar amount of assets at September
30, 2000, December 31, 1999 and September 30, 1999, represented by
nonaccrual loans, loans contractually past due ninety days or more as
to interest or principal payments and still accruing and other real
estate owned:
<TABLE>
<CAPTION>
(In thousands) SEPTEMBER 30 DECEMBER 31 SEPTEMBER 30
2000 1999 1999
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans $2,452 $1,078 $1,016
Loans contractually past due 90 days or more as to
interest or principal and still accruing 3,047 990 2,347
------ ------ ------
TOTAL UNDER-PERFORMING AND RESTRUCTURED LOANS 5,499 2,068 3,363
Other real estate owned 797 203 1,322
------ ------ ------
TOTAL UNDER-PERFORMING ASSETS $6,296 $2,271 $4,685
====== ====== ======
</TABLE>
C. LIQUIDITY
The purpose of liquidity management is to match the sources of funds
with anticipated customer borrowings as well as withdrawals and other
obligations. This is accomplished by balancing changes in demand for
funds with changes in the supply of funds. Liquidity to meet demand is
provided by maturing assets, the ability to attract deposits and
borrowings from third parties such as the Federal Home Loan Bank.
Deposits have historically provided Area with a major source of stable
and relatively low-cost funding. Secondary sources of liquidity include
federal funds purchased, securities sold under agreements to
repurchase, notes payable to the U.S. Treasury, advances from the
Federal Home Loan Bank and other borrowings.
As of September 30, 2000, 75.6% of total assets were funded by core
deposits while 13.4% were funded with secondary sources of liquidity
discussed above, compared to 73.1% and 14.4%, respectively, as of
December 31, 1999.
The net loan-to-deposit ratio decreased from 94.0% on December 31, 1999
to 91.6% on September 30, 2000 primarily as a result of the acquisition
of the Western Kentucky Group (see Note 2 to the accompanying
unadudited consolidated financial statements). The Western Kentucky
Group had a net loan-to-deposit ratio of 65.8% on the date of
acquisition.
28
<PAGE> 29
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000 AND 1999
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial institutions, interest rate movements can have a critical
impact on net interest income, and hence net income. The primary
objective of interest rate risk management is to control and monitor
the effects of those fluctuations and their impact on net income.
Management considers interest rate risk to be the most significant
market risk.
Management views computer simulations as a more relevant measurement of
the impact of changes in interest rates on net interest income, and
hence net income, than other techniques that use interest rate
sensitivity gap analysis. Area uses a net income simulation model to
measure near-term (next 12 months) risk due to changes in interest
rates. The model incorporates substantially all of Area's assets and
liabilities, together with forecasted changes in the balance sheet mix
and assumptions that reflect the current interest rate environment.
Balance sheet changes are based on forecasted changes in loans,
securities and deposits as well as historical pricing spreads. The
model is updated at least quarterly with the current balance sheet
structure and the current forecast of expected balance sheet changes.
These assumptions are inherently uncertain and, as a result, the model
cannot precisely measure net income or exactly predict the impact of
fluctuations in interest rates on net interest income. Actual results
will differ from simulated results due to timing and amount of interest
rate changes as well as changes in market conditions and management
strategies. Management uses the model to simulate the effect of
immediate and sustained parallel shifts upward and downward in the
yield curve of 100 basis points (1.00%) and 200 basis points (2.00%).
Area's interest rate risk management focuses on maintaining consistent
growth in net interest income within Board-approved policy limits.
Area's management monitors and manages interest rate risk to maintain
an acceptable level of change to net interest income as a result of
changes in interest rates.
The following table illustrates the simulation analysis, using the
methodology described above, of the impact of a 100 and 200 basis point
upward and downward movement in interest rates on net income and
earnings per share.
<TABLE>
<CAPTION>
INTEREST RATE SIMULATION SENSITIVITY ANALYSIS
(In thousands, except per share data)
CHANGE IN INTEREST RATES FROM
SEPTEMBER 30, 2000 RATES
INCREASE DECREASE
SIMULATED IMPACT IN THE NEXT 12 MONTHS +200BP +100BP -100BP -200BP
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net income increase (decrease) $4,042 $2,675 $(2,843) $(6,358)
Net income per share-basic increase (decrease) $ 0.25 $ 0.16 $ (0.17) $ (0.39)
Net income per share-diluted increase (decrease) $ 0.25 $ 0.16 $ (0.17) $ (0.39)
</TABLE>
Given an immediate and sustained parallel shift upward of 200 basis
points to the yield curve used in the simulation model, it is estimated
that net income for Area would increase by $4.04 million over the next
year. Estimated diluted earnings per share would increase by $0.25 over
the same period. A 200 basis point immediate and sustained parallel
shift downward in the yield curve would decrease net income by an
estimated $6.36 million over the next year while decreasing diluted
earnings per share $0.39. All of the above changes in net income are
within the policy guidelines established by the Board of Directors.
In order to assist in reducing the exposure to interest rate
fluctuations and manage liquidity, Area sells virtually all long-term
fixed-rate, single-family residential mortgages that are originated.
These loans are underwritten according to Federal Home Loan Mortgage
Corporation or Fannie Mae guidelines and are sold upon origination. In
addition to the use of core deposits, which fund the primary portion of
earning assets, Area's affiliate banks borrow from the Federal Home
Loan Bank to provide funds within time frames that are not available or
are only available at higher costs through retail sources. Finally,
management continually evaluates other interest rate risk management
opportunities, including the use of derivative financial instruments.
29
<PAGE> 30
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000 AND 1999
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Pursuant to Rule 14a-4(c)(1) promulgated under to Securities
Exchange Act of 1934, as amended, shareholders desiring to
present a proposal for consideration at the 2001 Annual
Meeting of Shareholders must notify Area in writing at its
principal office at P.O. Box 786, Owensboro, Kentucky
42302-0786 of the contents of such proposal no later than
November 1, 2000. Failure to timely submit such a proposal
will enable the proxies appointed by management to exercise
their discretionary voting authority when the proposal is
raised at the Annual Meeting of Shareholders without any
discussion of the matter in the proxy statement.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
---------- ----------------------
<S> <C>
3.1 Articles of Incorporation of the Registrant, as amended
(Incorporated by reference to the exhibit filed with the
Registrant's Registration Statement on Form S-8, File No.
333-38037.)
3.2 Bylaws of the Registrant, as amended (Incorporated by
reference to the exhibit filed with the Registrant's Form
10/A1, filed with the Commission on June 30, 1995, File No.
0-26032.)
10.1* Form of Area Bancshares Corporation Restricted Stock Plan
Agreement (Incorporated by reference to the exhibit filed with
the Registrant's Form 10/A1, filed with the Commission on June
30, 1995, File No. 0-26032.)
10.2* Area Bancshares Corporation 1994 Stock Option Plan
(Incorporated by reference to the exhibit filed with the
Registrant's Form 10/A1, filed with the Commission on June 30,
1995, File No. 0-26032.)
10.3* Memorandum dated September 18, 1996 regarding executive
officer compensation (Incorporated by reference to the exhibit
filed with the Registrant's Quarterly Report on Form 10-Q,
dated September 30, 1996, File No. 0-26032.)
10.4* Cardinal Bancshares, Inc. 1989 Restricted Stock Option Plan,
as amended April 16, 1992 (Incorporated by reference to the
exhibit filed with Cardinal's Registration Statement on Form
S-1, File No. 33-48129.)
10.5* Cardinal Bancshares, Inc. 1994 Restricted Stock Option Plan
(Incorporated by reference to the exhibit filed with
Cardinal's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, File No. 0-20494.)
10.6* Cardinal Bancshares, Inc. 1992 Limited Stock Option Plan
(Incorporated by reference to the exhibit filed with
Cardinal's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992, File No. 0-20494.)
</TABLE>
30
<PAGE> 31
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000 AND 1999
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
10.7* Cardinal Bancshares, Inc. 1992 First Federal Savings Bank
Restricted Stock Option Plan (Incorporated by reference to the
exhibit filed with Cardinal's Registration Statement on Form
S-1, File No. 33-48129.)
10.8* Cardinal Bancshares, Inc. 1993 Mutual Federal Savings Bank
Restricted Stock Option Plan (Incorporated by reference to the
exhibit filed with Cardinal's Registration Statement on Form
SB-2, File No. 33-60796.)
10.9* Amendment Number 1 to Cardinal Bancshares, Inc. 1992 Limited
Stock Option Plan (Incorporated by reference to the exhibit
filed with Cardinal's Registration Statement on Form SB-2,
File No. 33-60796.)
10.10* Cardinal Bancshares, Inc. VST Financial Services, Inc.
Restricted Stock Plan and Escrow Agreement (Incorporated by
reference to the exhibit filed with Cardinal's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1992,
File No. 0-20494.)
10.11* Letter Agreement between the Cardinal Bancshares, Inc. and
Michael Karlin dated December 13, 1993 (Incorporated by
reference to the exhibit filed with Cardinal's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1993,
File No. 0-20494.)
10.12* Amendment, dated October 26, 1994, to Letter Agreement between
Cardinal Bancshares, Inc. and Michael S. Karlin dated December
13, 1993 (Incorporated by reference to the exhibit filed with
Cardinal's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994, File No. 0-20494.)
10.13* Second Amendment, dated December 30, 1994, to Letter Agreement
between Cardinal Bancshares, Inc. and Michael S. Karlin dated
December 13, 1993 (Incorporated by reference to the exhibit
filed with Cardinal's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994, File No. 0-20494.)
10.14* Stock Option Agreement dated December 13, 1993 between
Cardinal Bancshares, Inc. and Michael S. Karlin (Incorporated
by reference to the exhibit filed with Cardinal's Annual
Report on Form 10-KSB for the fiscal year ended December 31,
1993, File No. 0-20494.)
10.15* Cardinal Bancshares, Inc. Affiliates' Employee Stock Ownership
Plan and Trust Agreement (Incorporated by reference to the
exhibit filed with Cardinal's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, File No. 0-20494.)
10.16* Cardinal Bancshares, Inc. Management Retention Plan and Trust
Agreement for the Benefit of Alliance Savings Bank
(Incorporated by reference to the exhibit filed with
Cardinal's Registration Statement on Form SB-2, File No.
33-60796.)
10.17* Area Bancshares Corporation 2000 Stock Option and Equity
Incentive Plan, dated March 20, 2000 (Incorporated by
reference to the exhibit filed with Area's Proxy Statement
(Schedule 14A) for the shareholders' meeting held on May 15,
2000.)
10.18* Form of Incentive Stock Option Award pursuant to the Area
Bancshares Corporation 2000 Stock Option and Equity Incentive
Plan. (Incorporated by reference to the exhibit filed with
Area's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000.)
</TABLE>
31
<PAGE> 32
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000 AND 1999
Item 6. Exhibits and Reports on Form 8-K (continued)
<TABLE>
<CAPTION>
(a) Exhibit No. Description of Exhibit
--------------- ----------------------
<S> <C>
10.19* Form of Non-Qualified Stock Option Award pursuant to the Area
Bancshares Corporation 2000 Stock Option and Equity Incentive
Plan. (Incorporated by reference to the exhibit filed with
Area's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000.)
10.20* Form of Area Bancshares Corporation Restricted Stock Agreement
(under the Area Bancshares Corporation 2000 Stock Option and
Equity Incentive Plan.) (Incorporated by reference to the
exhibit filed with Area's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.)
* The indicated exhibit is a compensatory plan or arrangement.
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
(b) Two reports on Form 8-K dated October 20, 2000 and October 23,
2000 were filed with the United States Securities and Exchange
Commission and reported the following under "Item 5 - Other
Events":
October 20, 2000 Form 8-K: On October 19, 2000 Area Bancshares
announced that its Board of Directors approved the repurchase
over the next twelve months of up to 5% of its common stock as
market conditions permit in the open market or through
non-solicited privately negotiated transactions. The total
number of shares repurchased could total 812,536 based on
16,250,712 shares outstanding as of October 16, 2000.
October 23, 2000 Form 8-K: On October 18, 2000 Area Bancshares
("Area") issued a press release announcing its results for the
three and nine-month periods ended September 30, 2000. In the
press release Area also announced that it was restating its
net income for the three-month period ended March 31, 2000.
The restatement is being done to correct the accounting for a
portion of the deferred taxes associated with the acquisition
that was completed on January 31, 2000. The restatement
resulted in an increase in income tax expense of $1.28 million
and a corresponding reduction in goodwill recorded in
accounting for the acquisition. The effects of the restatement
have been included in the results for the nine-months ended
September 30, 2000. For the three-month period ended March 31,
2000, the originally reported net income of $12.88 million or
$0.78 per diluted share has been restated to $11.60 million or
$0.70 per diluted share. For the six-month period ended June
30, 2000, the originally reported year-to-date net income of
$24.59 million or $1.48 per diluted share has been restated to
$23.31 million or $1.41 per diluted share.
Area intends to file amendments to its quarterly reports on
Form 10-Q for the periods ended March 31, 2000 and June 30,
2000 to reflect the restated results for the first quarter and
second quarter year-to-date periods.
32
<PAGE> 33
AREA BANCSHARES CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 2000 AND 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AREA BANCSHARES CORPORATION
Date: November 13, 2000 By: /s/ Thomas R. Brumley
----------------------- -------------------------------
Thomas R. Brumley
President and Chief Executive
Officer (Principal Executive
Officer)
Date: November 13, 2000 By: /s/ Edward J. Vega
----------------------- -------------------------------
Edward J. Vega
Senior Vice President-Chief
Financial Officer
(Principal Financial Officer)
Date: November 13, 2000 By: /s/ Gary R. White
----------------------- -------------------------------
Gary R. White
Vice President, Controller
(Principal Accounting Officer)
33
