<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from ____________________ to
___________________
Commission File Number: 33-96358
BOURBON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (606)987-1795
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ X ]
Aggregate market value of voting stock held by non-affiliates as of
March 18, 1997 was approximately $33.3 million. For purposes of this
calculation, it is assumed that directors, officers and beneficial owners
of more than 5% of the registrant's outstanding voting stock are
affiliates.
The Registrant's revenues for the year ended December 31, 1996 were
$21.7 million.
Number of shares of Common Stock outstanding as of March 18, 1997:
1,405,054.
<PAGE>
PART I
Item 1. Business
General
Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a Kentucky
corporation organized in 1981 and a bank and savings and loan holding
company registered under the Bank Holding Company Act of 1956, as
amended ("BHCA") and the Home Owners Loan Act of 1933, as
amended ("HOLA").
The Company conducts business through one banking subsidiary,
Kentucky Bank. Kentucky Bank is a commercial bank and trust
company organized under the laws of Kentucky. Kentucky Bank has its
main office in Paris (Bourbon County), Kentucky, additional offices in
Paris, North Middletown (Bourbon County), Winchester (Clark
County), Georgetown (Scott County), Versailles (Woodford County),
Nicholasville (Jessamine County), Kentucky and a loan production
office in Cynthiana (Harrison County), Kentucky. The deposits of
Kentucky Bank are insured up to prescribed limits by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation
("FDIC"). Kentucky Bank is engaged in general full-service commercial
and consumer banking. Kentucky Bank makes commercial, agricultural
and real estate loans to its commercial customers, with emphasis on
small-to-medium-sized industrial, service and agricultural businesses.
Kentucky Bank makes residential mortgage, installment and other loans
to its individual and other non-commercial customers. Kentucky Bank
also offers its customers the opportunity to obtain a VISA or
MasterCard credit card. Kentucky Bank offers its customers a variety of
other services, including checking, savings, club and money market
accounts, certificates of deposits, safe deposit facilities and other
consumer-oriented financial services. Through its trust department,
Kentucky Bank provides primarily personal trust and agency services
(including management agency services) and, to a lesser extent,
corporate trust services (including the management of corporate
pension and profits sharing plans). During 1996, Kentucky Savings
Bank, F.S.B. ("Kentucky Savings") and Jessamine First Federal Savings
and Loan Association ("Jessamine") were converted to branches of
Kentucky Bank.
Competition
The Company and its subsidiary face vigorous competition from a
number of sources, including other bank holding companies and
commercial banks, consumer finance companies, thrift institutions,
other financial institutions and financial intermediaries. In addition to
commercial banks, savings and loan associations, savings banks and
credit unions actively compete to provide a wide variety of banking
services. Mortgage banking firms, finance companies, insurance
companies, brokerage companies, financial affiliates of industrial
companies and government agencies provide additional competition for
loans and for many other financial services. The subsidiaries also
currently compete for interest-bearing funds with a number of other
financial intermediaries, including brokerage firms and mutual funds,
which offer a diverse range of investment alternatives.
<PAGE>
Supervision and Regulation
As a bank holding company, the Company is subject to the regulation
and supervision of the Federal Reserve Board. The Company's
subsidiary is subject to supervision and regulation by applicable state
and federal banking agencies, including the Federal Reserve Board, the
Federal Deposit Insurance Corporation and the Kentucky Department
of Financial Institutions. The subsidiary is also subject to various
requirements and restrictions under federal and state law, including
requirements to maintain reserves against deposits, restrictions on the
types and amounts of loans that may be granted and the interest that
may be charged thereon, and limitations on the types of investments
that may be made and the types of services that may be offered.
Various consumer laws and regulations also affect the operations of the
subsidiary. In addition to the impact of regulation, the subsidiary is
affected significantly by the actions of the Federal Reserve Board as it
attempts to control the money supply and credit availability in order to
influence the economy.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by
federal law and regulatory policy that are designed to reduce potential
loss exposure to the depositors of such depository institutions and to
the FDIC insurance funds in the event the depository institution
becomes in danger of default or is in default. For example, under a
policy of the Federal Reserve Board with respect to bank holding
company operations, a bank holding company is required to serve as a
source of financial strength to its subsidiary depository institutions and
commit resources to support such institutions in circumstances where it
might not do so absent such policy. In addition, the "cross-guarantee"
provisions of federal law require insured depository institutions under
common control to reimburse the FDIC for any loss suffered or
reasonably anticipated as a result of the default of a commonly
controlled insured depository institution or for any assistance provided
by the FDIC to a commonly controlled insured depository institution in
danger of default.
The federal banking agencies have broad powers under current federal
law to take prompt corrective action to resolve problems of insured
depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized" or
"critically undercapitalized", as such terms are defined under uniform
regulation defining such capital levels issued by each of the federal
banking agencies.
There are various legal and regulatory limits on the extent to which the
Company's subsidiary bank may pay dividends or otherwise supply
funds to the Company. In addition, federal and state regulatory
agencies also have the authority to prevent a bank or bank holding
company from paying a dividend or engaging in any other activity that,
in the opinion of the agency, would constitute an unsafe or unsound
practice.
<PAGE>
There have been a number of legislative and regulatory proposals that
would have an impact on the operation of bank holding companies and
their banks. It is impossible to predict whether or in what form these
proposals may be adopted in the future and, if adopted, what their
effect will be on the Company.
At December 31, 1996, the number of full time equivalent employees of
the Company was 137.
Item 2. Properties
As of December 31, 1996 the Company owned properties in Bourbon,
Clark, Harrison and Jessamine Counties with over 48 thousand square
feet and leased offices with nearly 5 thousand square feet with rental
payments in 1996 totaling nearly $38 thousand. Construction was under
way for a new facility in Woodford County during 1996 and the new
facility opened for service on March 3, 1997. The new bank will have
over 2 thousand square feet. The Company will save nearly $2
thousand per month in lease payments in 1997 after the construction of
the Woodford County facility is completed.
Item 3. Legal Proceedings
The Company and its subsidiaries are from time to time involved in
routine legal proceedings occurring in the ordinary course of business
that, in the aggregate, management believes to be immaterial to the
financial condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is not listed on any national securities
exchange nor is quoted on the NASDAQ system. However, it is listed
on the OTC Bulletin Board under the symbol "BBON". Trading in the
Common Stock has been infrequent, with two regional retail brokerage
firms making the market. The following table sets forth the high and
low sales prices of the Common Stock and the dividends declared
thereon, for the periods indicated below:
<TABLE>
<CAPTION>
High Low Dividend
<S> <C> <C> <C>
1996 Quarter 1 27.00 24.00 $.16
Quarter 2 25.00 24.00 $.16
Quarter 3 25.00 24.75 $.16
Quarter 4 25.00 24.00 $.16
1995 Quarter 1 25.00 25.00 $.15
Quarter 2 26.00 25.00 $.15
Quarter 3 27.00 26.00 $.15
Quarter 4 27.00 27.00 $.15
</TABLE>
As of December 31, 1996 the Company had 1,412,829 shares of Common
Stock outstanding and approximately 431 holders of record of its
Common Stock.
<PAGE>
Item 6. Management's Discussion and Analysis
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the Consolidated
Financial Statements and accompanying notes included as Exhibit 13.
When necessary, reclassifications have been made to prior years' data
throughout the following discussion and analysis for purposes of
comparability with 1996 data.
Summary
Bourbon Bancshares, Inc. net income for the year ended December 31,
1996 was $2.9 million, or $2.00 per common share on a primary basis
compared to $2.5 million, or $1.72 for 1995 and $2.2 million, or $1.54 for
1994. Net income increasing nearly $400 thousand (over 16%) is mainly
attributable to improved net interest income and other income, while
holding the loan loss provision and other expenses to below modest
increases. The 12.9% improvement in 1995 net income compared to
1994 reflects increased net interest income, higher loan loss provision,
increased other income and other expenses, and an increased income
tax provision.
Return on average equity was 12.2% in 1996 compared to 11.4 in 1995
and 10.6% in 1994. Return on average assets was 1.10% in 1996
compared to 0.94% in 1995 and 0.95% in 1994.
Non-performing loans were 0.43%, 0.31% and 0.25% as of December 31,
1996, 1995 and 1994 , respectively. The ratio of allowance to non-
performing loans was 353% in 1996 compared to 385% in 1995 and 447%
in 1994. These ratios reflect a concerted effort by management to
improve the quality of loans over the last several years.
In September, 1994, Kentucky Bank acquired the Clark County branches
of Bank One, Lexington, resulting in over $52 million in deposits and
over $20 million in loans as of acquisition date.
On December 19, 1995, Jessamine became a wholly-owned subsidiary of
the Company through the pooling of interests. Financial statements
have been adjusted to reflect this change.
<PAGE>
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the largest source of revenue, on a tax equivalent
basis increased from $8.5 million in 1994 to $9.7 million in 1995 to $9.9
million in 1996. The taxable equivalent adjustment (which is net of the
effect of the non-deductible portion of interest expense) is based on a
Federal income tax rate of 34%. A decrease in earning assets and
interest bearing liabilities were both factors on 1996 net interest income.
There was a positive effect on the rate changes for assets, whereas the
rate on liabilities was relatively flat. This resulted in the net interest
margin increasing form 3.80% in 1995 to 4.02% in 1996. In 1995, the
increase was primarily attributable to a higher level of earning assets
and a small increase in net interest margin from 3.76% to 3.80%.
Investment securities matured and repriced at lower rates as well as
investments from the proceeds from the Clark County Branch
acquisition at rates lower than the average yield of the existing
portfolio. The increase in rates on interest bearing liabilities was due to
liabilities repricing at higher rates in a rising rate environment as well as
the influx of deposits acquired in the Clark County Branch acquisition
which were at rates slightly higher than the existing Company's
portfolio.
Average earning assets grew $27.7 million in 1995, but dropped $6.4
million in 1996 to $248 million. Average loans increased $2.6 million in
1996 to $155.7 million and increased $27.5 million in 1995, from $125.6
million in 1994
Average interest bearing liabilities decreased $1.4 million in 1996 to
$190.6 million. In 1995, interest bearing liabilities increased 13%, or
$25.7 million from $193.6 to $219.3. Interest bearing deposits accounted
for over $21 million of this growth in 1995. Long-Term debt decreased
$9.4 million dollars from $23.6 million to $14.2 million in 1996, but
increased $4 million in 1995.
The accompanying analysis of changes in net interest income in the
following table shows the relationships of the volume and rate portions
of these increases in 1996 and 1995. Changes in interest income and
expenses due to both rate and volume are allocated pro rata
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Loans 231 131 362 2,368 757 3,125
Investment Securities (526) (41) (567) (79) 602 523
Federal Funds Sold and Securities
Purchased under Agreements
to Resell 42 (18) 24 136 48 184
Deposits with Banks (156) 104 (52) - - -
Total Interest Income (409) 176 (233) 2,425 1,407 3,832
Interest Expense
Deposits
Demand (56) (13) (69) (203) (67) (270)
Savings - - - 76 (3) 73
Negotiable Certificates of Deposit
and Other Time Deposits 110 - 110 1,218 1,239 2,457
Short-Term Borrowings 4 - 4 27 41 68
Long-Term Borrowings (632) - (632) 239 113 352
Total Interest Expense (574) (13) (587) 1,357 1,323 2,680
Net Interest Income 165 189 354 1,067 85 1,152
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Consolidated Balance Sheets and Net Interest Analysis
(In thousands)
1996 1995 1994
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Securities Held to Maturity
U.S. Treasury and Federal Agency Securities - - - 3,746 203 5.42% 5,227 296 5.66%
State and Municipal obligations 16,377 1,009 6.16% 20,476 1,247 6.09% 20,014 1,242 6.21%
Other Securities - - - 2,073 134 6.46% 1,926 93 4.83%
Total Securities Held to Maturity 16,377 1,009 6.16% 26,295 1,584 6.02% 27,167 1,631 6.00%
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 60,890 3,778 6.20% 61,929 3,894 6.29% 61,902 3,168 5.12%
State and Municipal obligations 3,944 199 5.05% - - - -
Other Securities 4,066 281 6.91% 5,563 356 6.40% 6,044 344 5.69%
Total Securities Available for Sale 68,900 4,258 6.18% 67,492 4,250 6.30% 67,946 3,512 5.17%
Total Investment Securities 85,277 5,267 6.18% 93,787 5,834 6.22% 95,113 5,143 5.41%
Tax Equivalent Adjustment 362 0.42% 431 0.46% 599 0.63%
Tax Equivalent Total 5,629 6.60% 6,265 6.68% 5,742 6.04%
Federal Funds Sold and Agreements to Repurchase 5,579 297 5.32% 4,736 273 5.76% 2,187 89 4.07%
Interest-Bearing Deposits with Banks 1,143 87 7.61% 2,478 139 5.61% 3,431 139 4.05%
Loans, Net of Unearned Income (2)
Commercial 19,192 1,749 9.11% 19,634 1,888 9.62% 15,981 1,347 8.43%
Real Estate Mortgage 123,145 10,674 8.67% 122,811 10,429 8.49% 102,430 8,250 8.05%
Installment 13,398 1,351 10.08% 10,664 1,095 10.27% 7,232 690 9.54%
Total Loans 155,735 13,774 8.84% 153,109 13,412 8.76% 125,643 10,287 8.19%
Total Interest-Earning Assets 247,734 19,787 7.99% 254,110 20,089 7.91% 226,374 16,257 7.18%
Allowance for Loan Losses (1,988) (1,772) (1,505)
Cash and Due From Banks 6,839 5,645 4,485
Premises and Equipment 4,591 4,158 2,718
Other Assets 5,617 6,023 3,817
Total Assets 262,793 268,164 235,889
<PAGE>
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW") and
SuperNow, Money Market Investment Accounts 43,918 1,294 2.95% 46,965 1,363 2.90% 53,867 1,633 3.03%
Savings 13,850 365 2.64% 13,829 365 2.64% 10,962 292 2.66%
Certificates of Deposit and Other Deposits 132,835 7,147 5.38% 131,243 7,037 5.36% 106,050 4,580 4.32%
Total Interest-Bearing Deposits 190,603 8,806 4.62% 192,037 8,765 4.56% 170,879 6,505 3.81%
Short-Term Borrowings 3,899 202 5.18% 3,702 198 5.35% 3,116 130 4.17%
Long-Term Debt 14,158 831 5.87% 23,552 1,463 6.21% 19,598 1,111 5.67%
Total Interest-Bearing Liabilities 208,660 9,839 4.72% 219,291 10,426 4.75% 193,593 7,746 4.00%
Noninterest-Bearing Earning Demand Deposits 27,930 24,593 20,246
Other Liabilities 2,262 2,347 1,844
Total Liabilities 238,852 246,231 215,683
SHAREHOLDERS' EQUITY 23,941 21,933 20,206
Total Liabilities and Shareholders' Equity 262,793 268,164 235,889
Average Equity to Average Total Assets 9.11% 8.18% 8.57%
Net Interest Spread 3.27% 3.15% 3.18%
Net Interest Margin 4.02% 3.80% 3.76%
</TABLE>
[FN]
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccruing status.
<PAGE>
Provision for Loan Losses
The provision for loans losses for 1996 was $402 thousand compared to
$396 thousand in 1995 and $145 thousand in 1994. Net chargeoffs were
$161 thousand in 1996, $183 thousand in 1995 and $169 thousand in
1994. Net chargeoffs to average loans were 0.10%, 0.12% and 0.13% in
1996, 1995 and 1994, respectively. The decrease in the 1994 loan loss
provision is primarily attributable to a decline in the level of non-
performing assets resulting from improved economic conditions and
increased emphasis by the Company on asset quality. The 1996
provision was more comparable to the 1995 provision. In evaluating the
allowance for loan losses, management considers the composition of the
loan portfolio, historical loan loss experience, the overall quality of the
loans and an assessment of current economic conditions. At December
31, 1996, the allowance for loan losses was 1.32% of loans outstanding
compared to 1.20% at year end 1995 and 1.12% in 1994. Management
believes the allowance for loan losses at the end of 1996 is adequate to
cover inherent credit losses within the portfolio.
Noninterest Income and Expenses
Noninterest income was $2.3 million in 1996 compared to $2.1 million in
1995 and $1.0 million in 1994. In 1996 securities losses were $13
thousand compared to $56 thousand in 1995 and $273 thousand in 1994.
In addition, gains (losses) on loans sold were $200 thousand, $65
thousand and ($120 thousand) in 1996, 1995 and 1994, respectively. The
increase in loan gains in 1996 were primarily attributable to the
Company's adoption of Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" on January 1,
1996. Other noninterest income excluding security and loans gains
(losses) was $2.1 million in 1996, $2.0 million in 1995 and $1.4 million in
1994. The increases from 1994 to 1995 were mainly attributable to
increased service charges from deposits acquired in the Clark County
branches acquisition.
<PAGE>
Noninterest expense increased a modest $31 thousand from $7,684
million in 1995 to $7,715 thousand in 1996. From 1994 to 1995,
noninterest expense increased $1.6 million. The increases in salaries and
benefits from $3.8 million in 1995 to $4.0 million in 1996 is mainly
attributable to normal salary increases. The increase from 1994 to 1995
of nearly $0.8 million is a direct effect of the Clark County acquisition,
which has added approximately 23 full time equivalent employees.
Occupancy expense also increased 8% in 1996, from $861 thousand in
1995 to $932 thousand in 1996. The 1995 increase was $167 thousand.
These increases are mainly associated with the Clark County premises
in 1995 and to premises improvements in 1996. Other noninterest
expense increased from $2.3 million in 1994 to $3.0 million in 1995, but
dropped to $2.8 million in 1996. In September 1995, the FDIC lowered
the federal deposit insurance premium from 23 cents to 4 cents per $100
for deposits insured by the Bank Insurance Fund (BIF). In December
1995, the FDIC set the 1996 premium for BIF-insured deposits at zero.
Approximately 25% of the Company's deposits are insured by the
Savings Association Insurance Fund (SAIF) and continue to be assessed
at 23 cents. In September 1996, Congress declared a special, one-time
assessment on SAIF-insured deposits. The cost of this assessment was
nearly $200 thousand after income taxes. For 1997, the BIF-insured
deposit rate will be 1.3 cents per $100 and the SAIF-insured rate will be
6.5 cents per $100. Due to the conversion of the savings institutions to
branches of Kentucky Bank, the Company has OAKAR deposits of just
under $51 million that will be assessed at the SAIF rate. Outside these
savings, other noninterest expense increase $0.7 million, which is mainly
attributable to increased inflationary costs and operating the Clark
County branches for the full year 1995.
The following table is a summary of noninterest income and expense for
the three year period indicated.
<TABLE>
<CAPTION>
Year Ended December 31 (in thousands)
1996 1995 1994
<S> <C> <C> <C>
Non-interest Income
Service Charges 1,508 1,354 887
Loan Servicing Income 255 236 214
Trust Income 206 236 164
Investment Securties Gains (Losses) (13) (56) (273)
Gains (Losses) on Sale of Loans 200 65 (120)
Other 128 218 120
Total Non-interest Income 2,284 2,053 992
Non-interest Expense
Salaries and Employee Benefits 4,005 3,819 3,034
Occupancy 932 861 694
Other 2,778 3,004 2,339
Total Non-interest Expense 7,715 7,684 6,067
Net Non-interest Expense as a
Percentage of Average Assets 2.88% 2.87% 2.57%
</TABLE>
<PAGE>
Income Taxes
The Company had income tax expense of $866 thousand in 1996
compared to $717 in 1995 and $488 thousand in 1994. This represents
an effective income tax rate of 23.1% in 1996, 22.4% in 1995 and 19.4% in
1994. The difference between the effective tax rate and the statutory
federal rate of 34% is due to tax exempt income on certain loans and
investment securities.
Balance Sheet Review
Assets at year-end 1996 totaled $272 million compared to $269 million in
1995 and $ 274 million in 1994. Changes from 1995 to 1996 are mainly a
result of an increase in deposits of $17.7 million offset by a decrease in
short term borrowing of over $7 million. The modest decrease in 1995
was attributable to the drop in deposits from $224 million to $213
million. Bourbon was less aggressive than its competitors on deposit
pricing in 1995.
Loans
Total loans, net of unearned income were $160 million at December 31,
1996 compared to $155 million at the end of 1995 and $147 million in
1994. Agricultural loans and installment loans experienced increase of
nearly $4 million each, while commercial and real estate mortgage saw
declines during 1996. The increase in 1995 is mainly a result of
commercial and agricultural loans both increasing about $3.6 million.
Purchased participation loans assisted in the growth of commercial
loans. Since 1994, Bourbon has placed more emphasis on the growth as
well as the quality of the loan portfolio.
As of December 31, 1996, the real estate mortgage portfolio comprises
over 62% of total loans. Of this, nearly $81 million or 81% represent 1-4
family residential property. Agricultural loans of nearly $31 million
compose nearly 20% of the loan portfolio. Over $22 million of the
agricultural loans are secured by real estate, while the remaining dollars
are mainly for operational purposes. Automobile loans account for over
$6 million of the installment loan portfolio of nearly $15 million, while
the remainder of this portfolio is for other consumer purposes.
Commercial loan's $10 million portfolio is mainly for capital and
operational purposes. Management is not aware of any significant
concentrations that may cause future material risks resulting in
significant problems with income and capital.
<PAGE>
The following table represents a summary of the Company's loan
portfolio by category for each of the last five years. Other than the
categories noted, there is no concentration of loan in any industry
greater than 5% in the portfolio. Bourbon has no foreign loans or highly
leveraged transactions in its loan portfolio.
<TABLE>
<CAPTION>
Loans Outstanding
December 31 (in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Commercial 10,216 11,167 7,502 4,451 5,996
Real Estate Construction 4,200 3,497 3,156 3,578 3,593
Real Estate Mortgage 99,293 102,077 101,361 79,290 68,839
Agricultural 30,947 27,019 23,407 24,610 21,562
Installment 14,789 11,029 11,391 7,101 7,248
Other 374 397 807 158 30
Total Loans 159,819 155,186 147,624 119,188 107,268
Less Unearned Income 154 125 159 124 93
Total Loans Net of Unearned Income 159,665 155,061 147,465 119,064 107,175
Less loans held for sale 863 1,364 1,553 3,436 -
Less Allowance For Loan Losses 2,101 1,860 1,648 1,420 1,234
Net Loans 156,701 151,837 144,264 114,208 105,941
</TABLE>
The following table sets forth the maturity distribution and interest
sensitivity of selected loan categories at December 31, 1996. Maturities
are based upon contractual term. The total loans is this report
represents loans net of unearned income, including loans held for sale
but excluding the allowance for loan losses. In addition, unearned
income on the above schedule is netted with real estate mortgage loans
on the following schedule.
<TABLE>
<CAPTION>
Loan Maturities and Interest Sensitivity
December 31, 1996 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
<S> <C> <C> <C> <C>
Commercial 3,925 5,720 571 10,216
Real Estate Construction 1,435 1,965 800 4,200
Real Estate Mortgage 5,461 30,644 63,034 99,139
Agricultural 6,562 20,633 3,752 30,947
Installment 4,923 9,613 253 14,789
Other 374 - - 374
Total Loans 22,680 68,575 68,410 159,665
Fixed Rate Loans 11,162 59,726 20,796 91,684
Floating Rate Loans 11,518 8,849 47,614 67,981
Total 22,680 68,575 68,410 159,665
</TABLE>
<PAGE>
Deposits
Total deposits improved to $231 million in 1996, up $17.7 million or
8.3% from 1995. Over $13 million were in the form of public deposits,
mostly in interest bearing accounts. Non-interest bearing deposits
improved $5.8 million to $32.5 million in 1996. This will increase the
cost of deposits, but cause an improvement in net income. Deposits
declined in 1995 from $224 million to $213 million in 1995, or $9 million.
The drop was mainly due to the heightened price competition of
deposits in Bourbon's market, and Bourbon choosing not to meet the
market pricing
The tables below provide information on the maturities of time deposits
of $100,000 or more at December 31, 1996 and detail of short-term
borrowing for the past three years.
Maturity of Time Deposits of $100,000 of More
December 31, 1996
(in thousands)
Maturing 3 Months or Less 6,394
Maturing over 3 Months through 6 Months 3,089
Maturing over 6 Months through 12 Months 5,989
Maturing over 12 Months 4,632
20,104
<PAGE>
Short Term Borrowings
December 31 (in thousands)
1996 1995 1994
Federal Funds Purchased:
Balance at Year end - 5,700 1,675
Average Balance During the Year 142 591 1,644
Maximum Month End Balance 1,075 5,700 3,525
Repurchase Agreements:
Balance at Year end 2,836 4,660 3,271
Average Balance During the Year 3,342 2,589 1,027
Maximum Month End Balance 4,668 6,202 3,271
Other Borrowed Funds:
Balance at Year end 574 81 238
Average Balance During the Year 475 505 390
Maximum Month End Balance 1,123 1,168 780
Liquidity and Interest Rate Sensitivity
Liquidity risk is the possibility that Bourbon may not be able to meet its
cash requirements. Management of liquidity risk includes maintenance
of adequate cash and sources of cash to fund operations and meet the
needs of borrowers, depositors and creditors. Excess liquidity has a
negative impact on earnings resulting from the lower yields on short-
term assets.
In addition to cash and cash equivalents, the securities portfolio
provides an important source of liquidity. Total securities maturing
within one year along with cash and cash equivalents totaled $27.2
million at December 31, 1996. Additionally, securities available-for-sale
with maturities greater than one year totaled $59.2 million at December
31, 1996. These securities are available to meet liquidity needs on a
continuing basis.
Bourbon maintains a relatively stable base of customer deposits and its
steady growth is expected to be adequate to meet its funding demands.
In addition, management believes the majority of its $100,000 or more
certificates of deposit are no more volatile than its core deposits. At
December 31, 1996 these balances totaled over $20 million, about 8.7%
of total deposits.
The Company also relies on FHLB advances for both liquidity and
asset/liability management purposes. These advances are used
primarily to fund long-term fixed rate residential mortgage loans.
FHLB advances decreased $8.5 million in 1996 to $10.5 million.
Generally, Bourbon relies upon net cash inflows from financing
activities, supplemented by net cash inflows from operating activities, to
provide cash used in its investing activities. As is typical of many
financial institutions, significant financing activities include deposit
gathering, and the use of short-term borrowings, such as federal funds
purchased and securities sold under repurchase agreements along with
long-term debt. The Company's primary investing activities include
purchasing investment securities and loans originations. Management
believes there is sufficient liquidity to meet all reasonable borrower,
depositor and creditor needs in the present economic environment.
<PAGE>
The cash flow statements for the periods presented provide an
indication of Bourbon's sources and uses of cash as well as an indication
of the ability of Bourbon to maintain an adequate level of liquidity. A
discussion of cash flow statements for 1996, 1995 and 1994 follows.
Net cash provided by operating activities was $4.8 million, $3.4 million
and $5.3 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The increase in 1996 and the decrease in 1995 were mainly
a result of changes in the net proceeds from loans held for sale
originated and sold.
Net cash flow provided by (used in) investing activities was ($6.7
million), $0.8 million, and $4.3 million and for the years ended
December 31, 1996, 1995 and 1994, respectively. The changes in net cash
from investing activities included the result of normal maturities and
reinvestment of investment securities as well as funding related to
increases in loans. Increase in loans of nearly $6 million and $1.3 million
for purchases of bank premises and equipment account for the majority
of the change in 1996. In 1995 the $8 million increase in loans was offset
by the net proceeds from investment securities. The change in 1994 was
significantly impacted by a cash payment of $27.3 million received in
connection with the Clark County Branch acquisition. During these
periods no investment securities held-to-maturity were sold.
Net cash flow provided by (used in) financing activities was $0.1
million, ($8.6 million) and $0.3 million and for the years ended
December 31, 1996, 1995 and 1994, respectively. The net cash increases
and decreases were primarily attributable to changes in total deposits,
securities sold under agreements to repurchase and federal funds
purchased, and net changes in advances from the Federal Home Loan
Bank and other borrowings.
The interest rate sensitivity analysis as of December 31, 1996 shown
below depicts amounts based on the earliest period in which they can
normally be expected to reprice.
As shown by the interest sensitivity analysis, the total amount of
maturities of the Company's interest-bearing liabilities exceed the total
amount of maturities of its interest-earning assets during the first year.
This position, which is normally termed a negative interest sensitivity
gap, generally allows for enhanced net interest income during periods
of decreasing interest rates. However, the Company is able to manage
its gap position in rising rate environments as well. The following table
provides an analysis of the interest rate sensitivity
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1996 (in thousands)
Non-interest
Over Sensitive
90 Days 1 Year 5 Years 5 Years Amounts Total
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans, Net of Unearned Income 43,805 22,235 69,707 23,768 150 159,665
Investment Securities (1) 23,778 11,503 26,405 30,854 - 92,540
Other Assets 3,397 - - - - 3,397
Total Interest-earning Assets 70,980 33,738 96,112 54,622 150 255,602
Sources of Funds
Interest-bearing Deposits 105,498 61,979 31,097 7 - 198,581
Short-term Borrowings 3,410 - - - - 3,410
Long-term Debt and FHLB
Advances 316 5,955 2,060 2,953 - 11,284
Total Interest-bearing Liabilities 109,224 67,934 33,157 2,960 - 213,275
Interest Sensitivity Gap (38,244) (34,196) 62,955 51,662 150 42,327
Cumulative Interest Sensitivity (38,244) (72,440) (9,485) 42,177 42,327 84,654
Cumulative Interest Sensitivity as a
Percentage of Total Assets -14.19% -26.89% -3.52% 15.65% 15.71% 31.42%
</TABLE>
[FN]
(1) Held to maturity at amortized cost, available for sale at market value
A number of other techniques are used to measure the liquidity
position, including the ratios presented below. These ratios are
calculated based on annual averages for each year.
<TABLE>
<CAPTION>
Liquidity Ratios
December 31
1996 1995 1994
<S> <C> <C> <C>
Total Loans/Total Deposits 71.3% 70.7% 65.7%
Net Short-term Borrowings/Total Assets 1.5% 1.4% 1.3%
</TABLE>
This chart shows that the loan to deposit ratio increased in 1996 and
1995. The change in 1996 from 1995 is very small with increase in both
loan and deposits being a factor. The increase in 1995 compared to 1994
is due to an increase in loan demand and a decrease in deposits.
<PAGE>
Asset Quality
With respect to asset quality, management consider three categories of
assets to merit constant scrutiny. These categories include: loans that
are currently nonperforming, other real estate, and loans that are
currently performing but which management believes require special
attention.
The Company discontinues the accrual of interest on loans that become
90 days past due as to principal or interest unless they are adequately
secured and in the process of collection. A loan remains in a non-
accrual status until factors indicating doubtful collection no longer exist.
A loan is classified as a restructured loan when the interest rate is
materially reduced or the term is extended beyond the original maturity
date because of the inability of the borrower to service the interest
payments at market rates. Other real estate is recorded at the lower of
cost or fair market value less estimated costs to sell. A summary of the
components of nonperforming assets, including several rates using
period-end data, is shown below.
<TABLE>
<CAPTION>
Nonperforming Assets
December 31 (in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Non-accrual Loans 33 44 85 320 316
Accruing Loans which are
Contractually past due
90 days or more 562 438 283 296 559
Restructured Loans - - - - -
Total Nonperforming and
Restructured Loans 595 482 368 616 875
Other Real Estate 79 57 306 903 579
Total Nonperforming and
Restructured Loans and
Other Real Estate 674 539 674 1,519 1,454
Nonperforming and Restructured
Loans as a Percentage
of Net Loans 0.43% 0.31% 0.25% 0.52% 0.82%
Nonperforming and Restructured
Loans and Other Real Estate
as a Percentage of Total Assets 0.25% 0.20% 0.25% 0.56% 0.54%
</TABLE>
Nonperforming and restructured loans at December 31, 1996 were $595
thousand compared to $482 thousand at December 31, 1995 and $368
thousand at December 31, 1994. Total nonperforming assets were $674
thousand, $539 thousand and $674 thousand at December 31, 1996, 1995
and 1994, respectively. At December 31, 1996, loans currently
performing but which management believes require special attention
were not significant. The Company continues to follow its long-
standing policy of not engaging in international lending and not
concentrating lending activity in any one industry.
<PAGE>
Impaired loans as of December 31, 1996 were $251 thousand compared
to $345 thousand in 1995. These amounts are included in the total
nonperforming and restructured loans presented in the table above.
Interest income of $55 thousand and $34 thousand was recognized on
impaired loans for cash payments received in 1996 and 1995,
respectively. At December 31, 1996 nonaccrual loans amounted to $33
thousand compared to $44 thousand in 1995 and $85 thousand in 1994.
See Note 5 - Loans in the notes to consolidated financial statements
included as Exhibit 13.
Loan Losses
The following table is a summary of the Company's loan loss experience
for each of the past five year.
<TABLE>
<CAPTION>
Loan Losses
Year Ended December 31 (in thousands)
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at Beginning of Year 1,860 1,648 1,420 1,234 1,112
Balance of Allowance for Loan
Losses of Acquired Branch
at Acquisition Date 252
Amounts Charged-off:
Commercial 55 14 123 31 126
Real Estate Construction - - - - 139
Real Estate Mortgage 4 41 53 111 417
Agricultural 12 36 3 221 -
Consumer 142 139 56 73 81
Total Charged-off Loans 213 230 235 436 763
Recoveries on Amounts
Previously Charged-off:
Commercial 12 15 22 7 9
Real Estate Construction - - - - 37
Real Estate Mortgage 8 21 1 25 -
Agricultural 1 - - 147 -
Consumer 31 11 43 24 31
Total Recoveries 52 47 66 203 77
Net Charge-offs 161 183 169 233 686
Provision for Loan Losses 402 395 145 419 808
Balance at End of Year 2,101 1,860 1,648 1,420 1,234
Total Loans, Net of Unearned
Income
Average 155,735 153,109 125,643 108,043 101,129
At December 31 159,665 155,061 147,465 119,064 107,175
As a Percentage of Average Loans:
Net Charge-offs 0.10% 0.12% 0.13% 0.22% 0.68%
Provision for Loan Losses 0.26% 0.26% 0.12% 0.39% 0.80%
Allowance as a Percentage of
Year-end Net Loans 1.32% 1.20% 1.12% 1.19% 1.15%
Allowance as a Multiple of
Net Charge-offs 13.0 10.2 9.8 6.1 1.8
</TABLE>
<PAGE>
Allowance for Loan Losses
The following tables set forth an allocation for the allowance for loan
losses and loans by category and a percentage distribution of the
allowance allocation. In making the allocation, management evaluates
the risk in each category, current economic conditions and charge-off
experience. An allocation for the allowance for loans losses is an
estimate of the portion of the allowance that will be used to cover future
charge-offs in each loan category, but it does not preclude any portion
of the allowance allocated to one type of loan being used to absorb
losses of another loan type.
A loan is considered impaired when it is probable that all principal and
interest amounts will not be collected according to the loan contract.
The allowance for loan losses on impaired loans is determined using the
present value of estimated future cash flows of the loan, discounted at
the loan's effective interest rate or the fair value of the underlying
collateral. The entire change in present value of expected cash flows is
reported as a provision for loan losses in the same manner in which
impairment initially was recognized or as a reduction in the amount of
provision for loan losses that otherwise would be reported. The total
allowance for loan losses related to these loans was $28 thousand and
$70 thousand on December 31, 1996 and 1995, respectively.
<PAGE>
<TABLE>
<CAPTION>
Allowance for Loan Losses
December 31 (in thousands)
1996 1995 1994 1993 1992
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 168 8.00% 132 7.10% 94 5.70% 94 6.62% 83 6.73%
Real Estate Construction 77 3.66% 38 2.04% 27 1.64% 35 2.46% 42 3.40%
Real Estate Mortgage 1,252 59.59% 1,192 64.09% 1,105 67.05% 895 63.03% 717 58.10%
Agricultural 353 16.80% 327 17.58% 269 16.32% 270 19.01% 281 22.77%
Consumer 251 11.95% 171 9.19% 153 9.28% 126 8.87% 111 9.00%
Total 2,101 100.00% 1,860 100.00% 1,648 100.00% 1,420 100.00% 1,234 100.00%
</TABLE>
<TABLE>
<CAPTION>
Loans
December 31 (in thousands)
1996 1995 1994 1993 1992
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial 10,216 6.40% 11,167 7.20% 7,502 5.09% 4,451 3.74% 5,996 5.59%
Real Estate Construction 4,200 2.63% 3,497 2.26% 3,156 2.14% 3,578 3.01% 3,593 3.35%
Real Estate Mortgage 99,139 62.09% 102,077 65.83% 101,361 68.74% 79,290 66.59% 68,839 64.23%
Agricultural 30,947 19.38% 27,019 17.42% 23,407 15.87% 24,610 20.67% 21,562 20.12%
Consumer 14,789 9.26% 10,904 7.03% 11,232 7.62% 6,977 5.86% 7,155 6.68%
Other 374 0.23% 397 0.26% 807 0.55% 158 0.13% 30 0.03%
Total, Net of
Unearned Income 159,665 100.00% 155,061 100.00% 147,465 100.00% 119,064 100.00% 107,175 100.00%
</TABLE>
<PAGE>
Capital
As displayed by the following table, the Company's Tier I
capital (as defined by the Federal Reserve Board under the
Board's risk-based guidelines) at December 31, 1996 increased
$1.7 million to $22.6 million. Total capital was $24.6 million at
December 31, 1996. The Company's risk-based capital and
leverage ratios, as shown in the following table, exceeded the
levels required to be considered "well capitalized". The
leverage ratio compares Tier I capital to total average assets less
disallowed amounts of goodwill.
<TABLE>
<CAPTION>
Capital
December 31 (in thousands)
1996 1995 Change
<S> <C> <C> <C>
Shareholders' Equity (1) 24,632 23,156 1,476
Less Disallowed Amount of
Goodwill 2,077 2,262 (185)
Tier I Capital 22,555 20,894 1,661
Allowance for Loan Losses 1,995 1,860 135
Tier II Capital 1,995 1,860 135
Total Capital 24,550 22,754 1,796
Total Risk Weighted Assets 159,508 161,923 (2,415)
Ratios:
Tier I Capital to Risk-weighted Assets 14.14% 12.90% 1.24%
Total Capital to Risk-weighted Assets 15.39% 14.05% 1.34%
Leverage 8.66% 7.79% 0.87%
</TABLE>
[FN]
(1) Excluding net unrealized gains and losses on securities available for
sale.
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") established five capital categories for insured
depository institutions under its Prompt Corrective Action
Provisions. The bank regulatory agencies adopted regulations,
which became effective in 1992, defining these five capital
categories for banks they regulate. The categories vary form
"well capitalized" to "critically undercapitalized". A "well
capitalized" bank is defined as one with a total risk-based
capital ratio of 10% or more, a Tier I risk-based capital ratios of
6% or more, a leverage ratio of 5% or more, and one not subject
to any order, written agreement, capital directive, or prompt
corrective action directive to meet or maintain a specific capital
level. At December 31, 1996, the subsidiary had ratios that
exceeded the minimum requirements established for the "well
capitalized" category.
In management's opinion, there are no known trends, events or
uncertainties that will have or that are reasonably likely to have a
material effect on the Company's liquidity, capital resources or
operations.
<PAGE>
Securities and Federal Funds Sold
Securities, including those classified as held to maturity and available
for sale, decreased from $92.6 million at December 31, 1995 to $92.5
million at December 31, 1996. At December 31, 1994 securities totaled
$99.3 million. Federal funds sold totaled $75 thousand, $2.8 million
and $6.5 million at December 31, 1996, 1995 and 1994, respectively.
During December 1995, Bourbon made a one time transfer of
investment securities from held to maturity to available for sale of over
$14 million providing added flexibility for future interest rate and
liquidity management.
Per Company policy, Fixed rate asset backed securities shall not have an
average life exceeding seven years, but final maturity may be longer.
Adjustable rate securities shall adjust within three years per Company
policy. Of the $17.3 million of adjustable asset backed securities held on
December 31, 1996, $5.7 million are repriceable monthly and the
remaining $11.6 million is repriceable annually. In addition, all
applicable securities have passed the appropriate stress tests. The
following tables present the investment securities for each of the past
three years and the maturity and yield characteristics of securities as of
December 31, 1996.
<TABLE>
<CAPTION>
Investment Securities (Held to maturity at amortized cost, available for sale at market value)
December 31
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
U.S. Treasury Securities
Available for Sale 24,571 21,139 38,108
U.S. Federal Agency Securities
Available for Sale 8,984 17 998
Held to Maturity - - 3,577
State and Municipal Obligations
Available for Sale 4,012 3,951 -
Held to Maturity 16,313 16,455 19,981
Asset-Backed Securities
Available for Sale 38,660 31,651 30,085
Fixed -
GNMA, FNMA, FHLMC Passthroughs 10,899 6,126 4,282
GNMA, FNMA, FHLMC CMO's 10,482 7,506 7,472
Other Securities - - -
Total 21,381 13,632 11,754
Variable -
GNMA, FNMA, FHLMC Passthroughs 13,907 14,485 14,694
GNMA, FNMA, FHLMC CMO's 3,372 3,534 3,637
Total 17,279 18,019 18,331
Held to Maturity
Fixed -
GNMA, FNMA, FHLMC Passthroughs - - 3,071
Other Securities
Available for Sale - 1,452 3,525
Total Securities
Available for Sale 76,227 76,184 72,716
Held to Maturity 16,313 16,455 26,629
Total 92,540 92,639 99,345
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Maturity Distribution of Securities
December 31, 1996 (in thousands)
Over Over Asset
One Year Five Years Backed
One Year Through Through Over T and Equity Market
or Less Five Years Ten Years Years Securities Total Value
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Securities
Available for Sale 10,517 14,054 - - - 24,571 24,571
Held to Maturity - - - - - - -
U.S. Federal Agency Securities
Available for Sale 6,500 496 1,988 - - 8,984 8,984
Held to Maturity - - - - - - -
State and Municipal Obligations
Available for Sale - 780 2,035 1,197 - 4,012 4,012
Held to Maturity 975 3,207 8,308 3,823 - 16,313 16,990
Asset-Backed Securities
Available for Sale 38,660 38,660 38,660
Held to Maturity
Other Securities
Available for Sale - - - - - - -
Held to Maturity - - - - - - -
Total Securities
Available for Sale 17,017 15,330 4,023 1,197 38,660 76,227 76,227
Held to Maturity 975 3,207 8,308 3,823 - 16,313 16,990
Total 17,992 18,537 12,331 5,020 38,660 92,540 93,217
Percent of Total 19.44% 20.03% 13.33% 5.42% 41.78% 100.00%
Weighted Average Yield (1) 5.98% 6.56% 8.20% 8.30% 6.55% 6.76%
</TABLE>
[FN]
(1) Tax Equivalent yield
Impact of Inflation and Changing Prices
The majority of Bourbon's assets and liabilities are monetary in
nature. Therefore, Bourbon differs greatly from most
commercial and industrial companies that have significant
investments in nonmonetary assets and inventories. However,
inflation does have an important impact on the growing of
assets in the banking industry and the resulting need to increase
equity capital at higher than normal rates in order to maintain
an appropriate equity to assets ratio. Inflation also affects other
expenses, which tend to rise during periods of inflation.
Item 7. Financial Statements
The consolidated financial statements of the Company for the
years ended December 31, 1996, 1995 and 1994, together with
the notes thereto and related auditor's report are contained in
the Company's 1996 Annual Report to Shareholders included as
Exhibit 13.
<PAGE>
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons, Compliance With Section 16(a) of the Exchange Act
Under the Company's Articles of Incorporation, the Board of
Directors consists of three different classes, each to serve,
subject to the provisions of the Articles of Incorporation and
Bylaws for a three year term and until his successor is duly
elected and qualified. The names of the directors and their
terms are set forth below.
Term expires in 1997:
William R. Stamler, age 62, is Chairman of Signal Investments,
Inc. He has been a director of the Company since 1988.
Buckner Woodford, age 52, is President and Chief Executive
Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He has
been a director of the Company since 1971.
Term expires in 1998:
William Arvin, age 56, is an attorney. He has been a director of
the Company since December 19, 1995.
James L. Ferrell, M.D., age 62, is a Physician. He has been a
director of the Company since 1980.
Joseph B. McClain, age 68, is President of Hopewell Co.
(insurance agency). He has been a director of the Company
since 1971.
C. Thomas Skeen, age 54, is Regional Vice President of
Kentucky Bank in Jessamine County. He has been a director of
the Company since 1994.
<PAGE>
Term expires in 1999:
Russell M. Brooks, age 46, is Financial Analyst of Kentucky
Bank. He has been a director of the Company since December
19, 1995.
Henry Hinkle, age 45, is President of Hinkle Construction
Company. He has been a director of the Company since 1979.
Theodore Kuster, age 53, is a farmer and thoroughbred horse
breeder. He has been a director of the Company since 1979.
Robert G. Thompson, age 47, is a farmer and thoroughbred
horse breeder. He has been a director of the Company since
1991.
Item 10. Executive Compensation
The following table sets forth information with respect to the
compensation of the President and Chief Executive Officer of
the Company.
<TABLE>
<CAPTION>
Annual Compensation
Other
Name Year Salary Bonus Compensation
<S> <C> <C> <C> <C>
Buckner Woodford 1996 $136,500 $ 1,505 (1)
Buckner Woodford 1995 $125,000 $ 6,250 (1)
Buckner Woodford 1994 $120,000 $ 5,990 (1)
Buckner Woodford 1993 $115,000 $ 11,092 (1)
</TABLE>
[FN]
(1) Less than the lesser of $50,000 or 10% of annual salary and
bonuses.
The following table contains information regarding the grant of
stock options under the Company's stock option plan to the
Chief Executive Officer during the year ended December 31,
1996. In addition, in accordance with rules of the Securities and
Exchange Commission, the following table sets forth the
hypothetical grant date present value with respect to the
referenced options, using the Black-Scholes Option Pricing
Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 1996 ($/Sh) Date Value ($)
Buckner Woodford 3,000 30.6% $26.50 1/10/06 $19,770
<PAGE>
The following table sets forth certain information regarding
options exercised by the Chief Executive Officer during
calendar year 1996 and unexercised stock options held by him
as of December 31, 1996.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Calendar 1996
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options/SARs at 12/31/96 Options/SARs at 12/31/96
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
Buckner Woodford None N/A 1,604/4,736 $8,407/$2,918
</TABLE>
Compensation of Directors
Directors are paid $250 for each board meeting attended and
$100 for each committee meeting attended.
Pension Plan Table
The following table sets forth the annual benefits which an
eligible employee would receive under the Company's qualified
defined benefit pension plan based on remuneration that is
covered under the plan and years of service with the Company
and its subsidiary.
Years of Service
Remuneration 15 20 25 30 35
25,000 3,750 5,000 6,250 7,500 8,750
50,000 7,500 10,000 12,500 15,000 17,500
75,000 11,250 15,000 18,750 22,500 26,250
100,000 15,000 20,000 25,000 30,000 35,000
125,000 18,750 25,000 31,250 37,500 43,750
150,000 22,500 30,000 37,500 45,000 52,500
175,000 26,250 35,000 43,750 52,500 61,250
200,000 30,000 40,000 50,000 60,000 70,000
In general, a participant's remuneration covered by the
Company's pension plan is his or her average annual cash
compensation (W-2 earnings) for the last 5 years. The years of
service for Mr. Woodford is 25 years.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and
Management
Set forth below are the number of shares of the Company's common
stock beneficially owned by each director and executive officer, and all
current directors and executive officers as a group.
Shares Beneficially Owned(1)
Name Number Percentage
William Arvin (2) 15,616 1.1%
Russell M. Brooks (3) 12,597 *
Gregory J. Dawson (4) 7,520 *
James L. Ferrell, M.D. (5) 14,930 1.0%
Henry Hinkle (6) 5,850 *
Theodore Kuster (7) 6,410 *
Joseph B. McClain (8) 21,528 1.5%
C. Thomas Skeen (9) 5,424 *
William R. Stamler (10) 15,340 1.1%
Robert G. Thompson (11) 3,180 *
Buckner Woodford (12) 125,883 8.7%
All directors and officers (11 persons)
as a group (consisting of those
persons named above) 234,278 16.6%
* Less than 1%
1) Beneficial ownership as reported in the above table has been
determined in accordance with Rule 13d-3 under the Exchange Act.
Unless otherwise indicated, beneficial ownership includes both sole
or shared voting and sole or shared investment power.
2) Includes 5,929 shares held in a retirement account, 5,984 shares held
of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims
beneficial ownership and 3,703 held jointly with his wife.
3) Includes 4,869 share held in a retirement account and 7,728 shares
held jointly with his wife.
4) Consists of shares that Mr. Dawson may acquire upon exercise of
outstanding stock options.
5) Includes 2,000 shares held in a retirement account and 480 shares
that Mr. Ferrell may acquire upon exercise of outstanding stock
options. Also, includes 1,500 shares held by Dr. Ferrell's wife, as to
which Dr. Ferrell disclaims beneficial ownership.
<PAGE>
6) Includes 500 shares held by his wife and 270 shares held by three
sons, as to which Mr. Hinkle disclaims beneficial ownership.
Includes 4,000 shares held of record by Hinkle Contracting
Company, as to which Mr. Hinkle, as president, has shared voting
power. Also includes 480 shares that Mr. Hinkle may acquire upon
exercise of outstanding stock options.
7) Includes 700 share held of record by Mr. Kuster's wife, as to which
Mr. Kuster disclaims beneficial ownership Also includes 2,500
shares held in a retirement account and 480 shares that Mr. Kuster
may acquire upon exercise of outstanding stock options.
8) Includes 480 shares that Mr. McClain may acquire upon exercise of
outstanding stock options. Also includes 9,400 shares held of
record by Mr. McClain's wife, as to which Mr. McClain disclaims
beneficial ownership.
9) Includes 2,180 shares that Mr. Skeen may acquire upon exercise of
outstanding stock options. All other shares are held jointly with his
wife.
10) Includes 2,000 shares held by Signal Investments Corporation, as to
which Mr. Stamler, as the chief executive officer and majority
shareholder of such corporation, has sole voting and investment
power. Also includes 480 shares that Mr. Stamler may acquire upon
exercise of outstanding stock options.
11) Includes 480 shares that Mr. Thompson may acquire upon exercise
of outstanding stock options.
12) Includes 4,000 shares held by his wife and 4,540 shares held by two
sons, as to which Mr. Woodford disclaims beneficial ownership.
Also includes 904 shares held in a retirement account and 1,604
shares that Mr. Woodford may acquire upon exercise of
outstanding stock options.
The following table sets forth as of December 31, 1996 the persons
known by the Company to own beneficially (as determined in
accordance with the rules and regulations of the Commission) more
than 5% of the outstanding common stock.
Name and Address Shares Beneficially
of Beneficial Owner Owned Percentage
Buckner Woodford 125,883 8.7%
340 Stoner Avenue
Paris, Kentucky 40361
<PAGE>
Item 12. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates were
customers of and had transactions with the Company's subsidiary
banks in the ordinary course of business during the year ended
December 31, 1996. Similar transactions may be expected to take place
with the Company's subsidiary banks in the future. Outstanding loans
and commitments made by such subsidiary banks in transactions with
the Company's directors and officers and their associates were made on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with other
persons and did not involve more than a normal risk of collectibility or
present other unfavorable features. Certain directors and executive
officers were loan customers of the subsidiaries and outstanding loans
were $1.8 million and $2.7 million as of December 31, 1996 and 1995
respectively. See Note 5 - Loans in the notes to consolidated financial
statements included as Exhibit 13.
Item 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein or
made a part of this Form 10-K:
11 Computation of earnings per share
13 Financial Statements:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
Independent Auditor's Report
21 Subsidiaries of Registrant
23 Consent of Eskew & Gresham, P.S.C.
(b) Current Reports on Form 8-K during the quarter ended December 31, 1996
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Bourbon Bancshares, Inc.
By: ________________________
Buckner Woodford, President and Chief Executive Officer, Director
March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
_____________________________ March 24, 1997
Buckner Woodford, President and Chief Executive Officer, Director
_____________________________ March 24, 1997
Gregory J. Dawson, Chief Financial and Accounting Officer
_____________________________ March 24, 1997
James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 24, 1997
William Arvin, Director
_____________________________ March 24, 1997
Russell M. Brooks, Director
_____________________________ March 24, 1997
Henry Hinkle, Director
_____________________________ March 24, 1997
Theodore Kuster, Director
_____________________________ March 24, 1997
Joseph B. McClain, Director
_____________________________ March 24, 1997
C. Thomas Skeen, Director
_____________________________ March 24, 1997
William R. Stamler, Director
_____________________________ March 24, 1997
Robert G. Thompson, Directo
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Document
11 Computation of earnings per share
13 Bourbon Bancshares, Inc. 1996 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Eskew & Gresham, P.S.C.
<PAGE>
Exhibit 11 Computation of earnings per share
Primary earnings per share for 1996 are calculated by dividing
the net income of $2.9 million by the sum of the average shares
outstanding of 1,424 thousand shares and the dilutive effect of
shares under option of 18 thousand shares for a total of 1,443
thousand average shares. The average fully diluted share are
1,443 thousand shares.
<PAGE>
Exhibit 13
BOURBON BANCSHARES, INC.
ANNUAL REPORT 1996
<PAGE>
Dear Shareholders:
During the first half of this decade we have built our franchise
through acquisitions and starting new financial institutions. Our
strategy is to serve the smaller communities around the perimeter of
Lexington. We have successfully established a presence in all those
communities - Winchester, Paris, Georgetown, Versailles and
Nicholasville. During 1996 we streamlined our business by
consolidating all operations under the Kentucky Bank charter. This
gives us both cost efficiencies and marketing advantages. We are now
actively promoting the name Kentucky Bank on television throughout
central Kentucky. We are already in some rapidly growing smaller
communities. As Lexington continues to expand we expect even more
business opportunities in the future around its perimeter.
We are building a new branch office in Versailles that is
expected to open in early March. This is a well located and modern full
service banking facility that should help us build market share in
Woodford County.
Financial performance improved during 1996. Earnings were
nearly $2.9 million, up 16% from the prior year. This improvement was
made in spite of a one time expense of approximately $300 thousand for
a special assessment to the SAIF fund. This payment will help reduce
our company's future expense for FDIC insurance and therefore should
help future earnings. Earnings per share were $2.00 for 1996, up from
$1.72 a year earlier.
We are pleased to report deposit growth of 8.4% last year. Loan
demand was less robust with the portfolio registering a 3% increase.
Joe Allen reached retirement age for directors of Bourbon
Bancshares last year. His advice through the years has been very
valuable to us and he will be missed. He will continue as Executive
Vice President of Kentucky Bank and a member of that board.
Norman J. Fryman and James P. Shipp, Jr. have been named
Senior Vice Presidents of Kentucky Bank. Mr. Fryman is responsible for
lending, while Mr. Shipp oversees the network of branches. Both are an
important part of our senior management team.
We continue to believe that we serve some very attractive
markets. This should lead us to many good business opportunities.
Buckner Woodford
<PAGE>
FINANCIAL HIGHLIGHTS
BOURBON BANCSHARES, INC. 1996 1995 1994
Assets ($ millions) $ 272 $ 269 $ 274
Net Income ($ thousands) $ 2,887 $ 2,488 $ 2,203
Per Share Results
Primary Earnings $ 2.00 $ 1.72 $ 1.54
Dividends $ .64 $ .60 $ .54
Shareholder Information
CORPORATE HEADQUARTERS
Bourbon Bancshares, Inc.
4th and Main Street
Paris, Kentucky 40361
606-987-1795
ANNUAL MEETING
The annual meeting of shareholders of Bourbon Bancshares, Inc. Will be
held Monday, May 5, 1997 at 10:00 a.m. in the corporate headquarters.
MARKET MAKER
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
1-800-944-2663
OTC Bulletin Board
Symbol: BBON
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING
AGENT
Kentucky Bank
Trust Department
606-987-1795, ext. 316
INVESTOR INFORMATION
Any individual requesting general information or a copy of the
Corporation's 1996 Form 10-K may obtain these by writing Investor
Relations at the Corporate Headquarters.
<PAGE>
BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31
ASSETS 1996 1995
Cash and cash equivalents:
Cash and due from banks $ 9,115,503 $ 8,196,529
Federal funds sold 75,000 2,850,000
Total cash and cash equivalents $ 9,190,503 $ 11,046,529
Investment securities:
Available for sale 76,226,956 76,184,555
Held to maturity 16,313,453 16,454,562
Federal Home Loan Bank stock 2,705,600 2,740,700
Loans held for sale 862,947 1,364,016
Loans $ 158,956,446 $ 153,822,340
Unearned income (154,583) (125,364)
Allowance for loan losses (2,101,081) (1,860,093)
Net loans $ 156,700,782 $ 151,836,883
Bank premises and equipment, net 5,004,245 4,175,986
Interest receivable 2,737,900 2,711,415
Real estate acquired through foreclosure 79,006 57,000
Income taxes refundable 65,455 0
Deferred income taxes 136,061 299,714
Intangible assets 2,266,454 2,365,196
Other assets 163,317 194,070
TOTAL ASSETS $ 272,452,679 $ 269,430,626
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-interest bearing $ 32,489,556 $ 26,635,453
Time deposits, $100,000 and over 20,103,668 20,196,620
Other interest bearing 178,477,487 166,516,258
Total deposits $ 231,070,711 $ 213,348,331
Federal funds purchased 0 5,700,000
Securities sold under agreements to repurchase 2,835,954 4,660,173
Federal Home Loan Bank advances 10,534,031 19,071,126
Notes payable 750,000 1,350,000
Treasury tax and loan note 573,543 81,131
Interest payable 1,363,573 1,253,251
Income taxes payable 0 23,802
Other liabilities 691,388 776,175
Total liabilities $ 247,819,200 $ 246,263,989
STOCKHOLDERS' EQUITY
Preferred stock, 300,000 shares authorized
and unissued $ 0 $ 0
Common stock, no par value; 3,000,000 shares
authorized; 1,412,829 and 1,432,700 shares
issued and outstanding in 1996 and 1995,
respectively 6,392,329 6,481,769
Retained earnings 18,239,684 16,673,906
Net unrealized gains on investment securities 1,466 10,962
Total stockholders' equity $ 24,633,479 $ 23,166,637
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 272,452,679 $ 269,430,626
See notes to consolidated financial statements
<PAGE>
<TABLE>
<CAPTION>
BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Loans, including fees $ 13,774,234 $ 13,411,005 $ 10,286,160
Investment securities -
U. S. Treasury obligations 1,328,163 1,807,052 1,389,177
Obligations of U. S. government agencies 2,449,743 2,404,994 2,153,317
Obligations of states and political subdivisions 1,208,098 1,247,221 1,242,568
Other securities 280,524 375,916 357,930
Federal funds sold 297,418 272,640 89,238
Deposits in other bank 86,573 139,126 139,086
$ 19,424,753 $ 19,657,954 $ 15,657,476
INTEREST EXPENSE:
Deposits $ 8,806,069 $ 8,758,056 $ 6,497,778
Federal funds purchased and securities
sold under agreements to repurchase 175,745 174,616 118,292
Notes payable and other borrowed funds 857,033 1,493,373 1,129,876
$ 9,838,847 $ 10,426,045 $ 7,745,946
Net interest income $ 9,585,906 $ 9,231,909 $ 7,911,530
Provision for loan losses 401,965 395,794 145,385
Net interest income after provision for loan losses$ 9,183,941 $ 8,836,115 $ 7,766,145
OTHER INCOME:
Service charges $ 1,507,506 $ 1,353,839 $ 886,709
Loan servicing income 255,426 236,488 214,576
Trust department income 205,740 235,412 163,600
Investment securities losses, net (12,839) (55,792) (272,455)
Gains (losses) on sale of loans 200,366 64,853 (120,159)
Other 127,850 218,345 119,561
$ 2,284,049 $ 2,053,145 $ 991,832
OTHER EXPENSES:
Salaries and wages $ 3,283,091 $ 3,084,993 $ 2,518,211
Employee benefits 722,031 733,756 515,671
Occupancy expenses 931,434 860,526 693,959
FDIC assessment 412,483 324,673 430,790
Amortization 314,553 397,889 181,383
Taxes other than payroll, property and income 255,055 209,865 233,051
Advertising 261,929 221,310 193,895
Other 1,534,013 1,850,665 1,299,631
$ 7,714,589 $ 7,683,677 $ 6,066,591
Income before income taxes $ 3,753,401 $ 3,205,583 $ 2,691,386
Provision for income taxes 866,295 717,389 487,964
NET INCOME $ 2,887,106 $ 2,488,194 $ 2,203,422
Primary earnings per share $ 2.00 $ 1.72 $ 1.54
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net Total
Common Retained Unrealized Stockholders'
Stock Earnings Gain (Loss) Equity
<S> <C> <C> <C> <C>
Balances, January 1, 1994 $ 6,340,915 $ 13,435,450 $ 267,292 $ 20,043,657
Issuance of 10,443 shares of common stock
(including employee gifts of 43 shares) 68,768 0 0 68,768
Net change in unrealized gain (loss) 0 0 (1,671,890) (1,671,890)
Net income 0 2,203,422 0 2,203,422
Dividends paid - Company ($.54 per share) 0 (635,761) 0 (635,761)
Dividends paid - Jessamine ($.60 per share) 0 (52,803) 0 (52,803)
BALANCES, DECEMBER 31, 1994 $ 6,409,683 $ 14,950,308 $(1,404,598) $ 19,955,393
Issuance of 7,378 shares of common stock
(including employee gifts of 18 shares) 46,605 0 0 46,605
Exercise of stock options at Jessamine 25,481 0 0 25,481
Net change in unrealized gain (loss) 0 0 1,415,560 1,415,560
Net income 0 2,488,194 0 2,488,194
Dividends paid - Company ($.60 per share) 0 (749,540) 0 (749,540)
Dividends paid - Jessamine ($.60 per share) 0 (69,801) 0 (69,801)
Adjustment to conform pooled Company's
fiscal year end - Net income 0 54,745 0 54,745
BALANCES, DECEMBER 31, 1995 $ 6,481,769 $ 16,673,906 $ 10,962 $ 23,166,637
Issuance of 129 shares of common stock
(including employee gifts of 47 shares) 960 0 0 960
Purchase of 20,000 shares of common stock (90,400) (409,764) 0 (500,164)
Net change in unrealized gain (loss) 0 0 (9,496) (9,496)
Net income 0 2,887,106 0 2,887,106
Dividends paid - Company ($.64 per share) 0 (911,564) 0 (911,564)
BALANCES, DECEMBER 31, 1996 $ 6,392,329 $ 18,239,684 $ 1,466 $ 24,633,479
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
BOURBON BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,887,106 $ 2,488,194 $ 2,203,422
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 870,092 813,820 485,427
Investment securities amortization (accretion), net 149,205 (83,805) 271,159
Provision for loan losses 401,965 396,694 145,385
Deferred income taxes 168,544 (74,853) 6,949
Investment securities losses, net 12,839 55,792 272,455
Originations of loans held for sale (21,077,087) (20,868,849) (13,986,290)
Proceeds from sale of loans 21,778,522 21,126,209 16,241,483
Capitalization of mortgage servicing rights (215,812) 0 0
(Gains) losses on sale of loans (200,366) (68,015) 120,159
Losses (gains), including write-downs, on
real estate acquired through foreclosure, net 10,934 (95,961) 39,727
Adjustment to conform pooled Company's
fiscal year end - net income 0 54,745 0
Changes in:
Interest receivable (26,485) (43,918) (368,819)
Income taxes refundable (65,455) 224,767 (189,162)
Other assets 65,853 (135,173) (99,477)
Interest payable 110,322 252,595 118,813
Income taxes payable (23,802) 23,802 0
Other liabilities (84,787) (714,981) 60,468
Net cash provided by operating activities $ 4,761,588 $ 3,351,063 $ 5,321,699
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale $(47,176,494) $ (16,489,439) $(43,274,700)
Proceeds from sales and calls of securities available
for sale 13,512,387 22,545,152 26,621,358
Proceeds from principal payments and maturities
of securities available for sale 33,441,384 6,950,257 10,790,309
Purchases of investment securities held
to maturity (1,375,000) (7,495,437) (8,158,607)
Proceeds from principal payments and maturities
of investment securities held to maturity 1,520,000 3,348,173 3,963,831
Net change in loans (5,883,441) (8,151,059) (12,834,443)
Purchases of bank premises and equipment (1,307,597) (306,493) (609,318)
Proceeds from sales of real estate acquired
through foreclosure 508,437 447,500 632,580
Cash payment received in branch acquisition 0 0 27,334,743
Organization costs incurred 0 0 (136,176)
Net cash (used in) provided by investing
activities $ (6,760,324) $ 848,654 $ 4,329,577
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits $ 17,722,380 $ (10,461,498) $ (4,164,365)
Net change in securities sold under agreements
to repurchase and federal funds purchased (7,524,219) 5,413,919 2,655,610
Advances from Federal Home Loan Bank 400,000 400,000 5,500,000
Payments on Federal Home Loan Bank advances (8,937,095) (1,934,479) (3,872,773)
Net change in treasury tax and loan note 492,412 (157,268) (865,239)
Proceeds from note payable 330,000 0 2,000,000
Payments on notes payable (930,000) (1,100,000) (300,000)
Proceeds from issuance of common stock 960 72,086 68,768
Purchase of common stock (500,164) 0 0
Dividends paid (911,564) (819,341) (688,564)
Net cash provided by (used in) financing
activities $ 142,710 $ (8,586,581) $ 333,437
Net (decrease) increase in cash and cash
equivalents $ (1,856,026) $ (4,386,864) $ 9,984,713
Cash and cash equivalents at beginning of year 11,046,529 15,433,393 5,448,680
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,190,503 $ 11,046,529 $ 15,433,393
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for -
Interest expense $ 9,728,525 $ 10,576,530 $ 7,627,133
Income taxes $ 787,008 $ 571,127 $ 670,177
SUPPLEMENTAL SCHEDULES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment securities transferred from securities
held to maturity to securities available for sale $ 0 $ 14,303,320 $ 0
Real estate acquired through foreclosure $ 541,377 $ 102,712 $ 330,865
Non-cash increases related to branch acquisition:
Loans $ 0 $ 0 $ 20,902,226
Bank premises and equipment 0 0 2,000,000
Interest receivable 0 0 186,583
Intangible assets 0 0 2,605,200
Other assets 0 0 138,101
Deposits 0 0 52,103,992
Notes payable 0 0 750,000
Interest payable 0 0 291,290
Other liabilities 0 0 21,570
</TABLE>
See notes to consolidated financial statements.
<PAGE>
BOURBON BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial
statements include the accounts of Bourbon Bancshares, Inc. (the
Company) and its wholly-owned subsidiary, Kentucky Bank (the
Bank). All material intercompany transactions and balances have
been eliminated.
During 1996, the federal thrift charters of Kentucky Savings
Bank, FSB (the Savings Bank) and Jessamine First Federal Savings
and Loan Association (Jessamine) were terminated and both entities
became branches of the Bank. The dissolution of these entities and
termination of their respective charters did not have a material
effect on the consolidated financial statements.
On December 19, 1995, the Company acquired Jessamine in
a business combination accounted for as a pooling of interests. The
accompanying consolidated financial statements for 1995 are based
on the assumption that the companies were combined for the full
year, and the financial statements of the prior year have been
restated to give effect to the combination as if it occurred at the
beginning of the earliest year presented.
B. Nature of Operations - The Bank operates under a state
bank charter and provides full banking services, including trust
services. As a state bank, the Bank is subject to regulation of the
Kentucky Department of Financial Institutions and the Federal
Deposit Insurance Corporation (FDIC). The Company is also
regulated by the Federal Reserve.
C. Estimates in the Financial Statements - The preparation
of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE>
D. Cash and Cash Equivalents - For purposes of reporting
cash flows, cash and cash equivalents include cash on hand,
amounts due from banks, federal funds sold, and certain short-term
investments with maturities of less than three months. Generally,
federal funds are sold for one-day periods.
E. Investment Securities - The Company classifies its
investment securities portfolio into three categories; trading
securities, securities available for sale and securities held to
maturity. Fair value adjustments are made to the securities based on
their classification with the exception of the held to maturity
category. The Company has no investments classified as trading.
Investment securities available for sale are carried at fair
value. Adjustment from amortized cost to fair value is recorded in
stockholders' equity, net of related income tax, under net unrealized
gains on investment securities. The adjustment is computed on the
difference between fair value and cost adjusted for amortization of
premiums and accretion of discounts which are recorded as
adjustments to interest income using the constant yield method.
Investment securities for which the Bank has the positive
intent and ability to hold to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts which are
recorded as adjustments to interest income using the constant yield
method.
Gains or losses on dispositions are based on the net
proceeds and the adjusted carrying amount of the securities sold,
using the specific identification method.
F. Loans - Loans are stated at the amount of unpaid
principal, reduced by unearned income and an allowance for loan
losses. Interest income on loans is recognized on the accrual basis
except for those loans in a nonaccrual income status. The accrual of
interest on impaired loans is discontinued when management
believes, after consideration of economic and business conditions
and collection efforts, that the borrowers' financial condition is such
that collection of interest is doubtful. When interest accrual is
discontinued, interest income is subsequently recognized only to the
extent cash payments are received.
<PAGE>
The allowance for loan losses is established through a
provision for loan losses charged to expense. The allowance is an
amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible,
based on evaluations of the collectibility of loans and prior loan loss
experience. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current
economic conditions that may affect the borrowers' ability to pay.
Loans are charged against the allowance for loan losses when
management believes that the collectibility of the principal is
unlikely.
The allowance for loan losses on impaired loans is
determined using the present value of estimated future cash flows
of the loan, discounted at the loan's effective interest rate or the fair
value of the underlying collateral. A loan is considered to be
impaired when it is probable that all principal and interest amounts
will not be collected according to the loan contract. The entire
change in present value of expected cash flows is reported as
provision for loan losses in the same manner in which impairment
initially was recognized or as a reduction in the amount of provision
for loan losses that otherwise would be reported.
Loans held for sale are valued at the lower of cost or market
as determined by outstanding commitments from investors or
current investor yield requirements, calculated on the aggregate
loan basis.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan.
G. Loan Servicing - The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage-Servicing Rights" on January 1, 1996. This Statement
requires the capitalization of the value of mortgage-servicing rights
originated or acquired based on the fair value of the rights.
The Bank has sold various loans to the Federal Home Loan
Mortgage Corporation (FHLMC) while retaining the servicing
rights. Gains and losses on loan sales are recorded at the time of the
cash sale, which represents the premium or discount paid by the
FHLMC. The Bank receives a normal servicing fee from the
FHLMC on each loan sold.
<PAGE>
H. Bank Premises and Equipment - Bank premises and
equipment are stated at cost less accumulated depreciation.
Depreciation is recorded principally by the straight-line method
over the estimated useful lives of the bank premises and equipment.
I. Real Estate Acquired Through Foreclosure - Real estate
acquired through foreclosure is carried at the lower of the recorded
investment in the property or its fair value. The value of the
underlying loan is written down to the fair value of the real estate to
be acquired by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged to operating
expenses. Certain parcels of real estate are being leased to third
parties to offset holding period costs. Operating expenses of such
properties, net of related income, and gains and losses on their
disposition are included in other expenses.
J. Income Taxes - The Company and the Bank file a
consolidated federal income tax return. The Bank is charged or
credited an amount equal to the income tax that would have been
applicable on a separate return basis.
The Company uses the liability method for computing
deferred income taxes. Under the liability method, deferred income
taxes are based on the change during the year in the deferred tax
liability or asset established for the expected future tax
consequences of differences in the financial reporting and tax bases
of assets and liabilities. The differences relate principally to
premises and equipment, accrued interest payable, accrued pension,
premium on loans and deposits purchased, unrealized gains (losses)
on investment securities available for sale, tax credit carryforward,
FHLB stock, and the allowance for loan losses.
K. Intangible Assets - Intangible assets relate to the branch
acquisition and consist of a core deposit premium on deposits
which is being amortized on a straight-line basis over ten years and
organization costs which are being amortized on a straight-line
basis over five years.
L. Marketing Expense - The Company charges all
marketing expenses to operations when incurred. No amounts have
been established for any future benefits relative to these
expenditures.
<PAGE>
M. Effect of New Accounting Standards - The Financial
Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of", which requires the recognition of a loss on impaired
assets when the carrying value of an asset exceeds its fair value and
the carrying amount of the asset may not be recoverable. The
Statement was adopted by the Company, as required, on January 1,
1996. The effect of adopting the new guidance was not material to
the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", which defines the
methods of accounting available for employee stock compensation
plans. The Statement was adopted by the Company, as required, on
January 1, 1996. The effect of adopting the new guidance was not
material to the Company's consolidated financial statements.
The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", which provides accounting and
reporting guidance regarding various financial instruments and
related transactions. The Statement was effective for transactions
occurring after December 31, 1996 and was adopted by the
Company, as required, on January 1, 1997. The effect of adopting
the new guidance was not material to the Company's consolidated
financial statements.
N. Per Share Information - Primary earnings per share is
computed by dividing net income by weighted average number of
shares of common stock outstanding and the number of shares of
common stock which would be assumed outstanding under the
treasury-stock method upon the exercise of stock options.
O. Reclassifications - Certain reclassifications have been
made in the 1995 and 1994 financial statements to conform to
classifications used in 1996.
<PAGE>
2. BUSINESS COMBINATION
On December 19, 1995, Jessamine became a wholly-owned
subsidiary of the Company through the exchange of 244,439 shares
of the Company's common stock for all of the outstanding stock of
Jessamine. Summarized results of operations of the separate
companies for the years ended December 31, 1995 and September
30, 1995, the Company's and Jessamine's respective fiscal year-
ends are as follows:
Company Jessamine
Interest income $ 17,165,150 $ 2,492,804
Interest expense 9,010,818 1,415,227
Net interest income $ 8,154,332 $ 1,077,577
Provision for loan losses 390,504 5,290
Net interest income after
provision for loan losses $ 7,763,828 $ 1,072,287
Other income 2,002,929 50,216
Other expenses 6,899,450 784,227
Provision for income taxes 601,567 115,822
Net income $ 2,265,740 $ 222,454
The following is a reconciliation of net interest income and
net income previously reported for 1994 with restated amounts:
1994
Net interest income:
As previously reported $ 6,756,817
Jessamine 1,154,713
As restated $ 7,911,530
Net income:
As previously reported $ 1,793,516
Jessamine 409,906
As restated $ 2,203,422
<PAGE>
Prior to the pooling, Jessamine's fiscal year ended
September 30. Subsequent to the pooling, Jessamine changed its
year-end to December 31 to conform with that of the Company.
The Jessamine information included in the accompanying 1994
statement of income and cash flows and the related footnote
disclosures is as of and for Jessamine's fiscal year end. The 1995
statement of income includes Jessamine and the Company's results
of operations for their respective fiscal year ends. During the three
months ended December 31, 1995, Jessamine reported net interest
income of $237,587 and net income of $54,745. In order to reflect
this change in fiscal year-end, retained earnings has been increased
by Jessamine's reported net income for the three month period. The
1995 statement of cash flows includes Jessamine's fiscal year and
the activity for the three months ended December 31, 1995.
3. RESTRICTIONS ON CASH AND DUE FROM
BANKS
Included in cash and due from banks are certain non-interest
bearing deposits that are held at the Federal Reserve or maintained
in vault cash in accordance with average balance requirements
specified by the Federal Reserve Board of Governors. The average
requirement was $3,137,000 at December 31, 1996.
4. INVESTMENT SECURITIES
During December, 1995, the Company made a one time
transfer of investment securities from held to maturity to available
for sale of $14,303,320, as allowed under the Financial Accounting
Series Special Report, "A Guide to Implementation of Statement
115", issued in November 1995. The investments were transferred
at fair value at the date of transfer. The unrealized gain (loss) on
transfer is included in the net change in unrealized gain (loss) in the
consolidated statements of stockholders' equity.
<PAGE>
Amortized cost and fair value of investment securities, by
category, at December 31, 1996 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U. S. Treasury securities $ 24,513,413 $ 67,277 $ (9,284) $ 24,571,406
Obligations of U. S. govern-
ment agencies 8,984,521 3,697 (4,407) 8,983,811
Obligations of states and
political subdivisions 3,943,463 83,161 (15,044) 4,011,580
Asset-backed securities 38,783,338 198,191 (321,370) 38,660,159
Total available for sale $ 76,224,735 $ 352,326 $(350,105) $ 76,226,956
Held to maturity:
Obligations of states and
political subdivisions $ 16,313,453 $ 706,050 $ (29,443) $ 16,990,060
Amortized cost and fair value of investment securities, by
category, at December 31, 1995 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale:
U. S. Treasury securities $ 20,993,682 $ 149,519 $ (4,071) $ 21,139,130
Obligations of U. S. govern-
ment agencies 6,030,721 11,425 (8,697) 6,033,449
Obligations of states and
political subdivisions 3,944,335 53,441 (46,473) 3,951,303
Asset-backed securities 43,700,464 292,163 (383,717) 43,608,910
Equity securities 1,498,745 0 (46,982) 1,451,763
Total available for sale $ 76,167,947 $ 506,548 $(489,940) $ 76,184,555
Held to maturity:
Obligations of states and
political subdivisions $ 16,454,562 $ 832,666 $ (41,362) $ 17,245,866
<PAGE>
The amortized cost and fair value of investment securities at
December 31, 1996, by category and contractual maturity are
shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
Available for sale:
Due in one year or less $ 16,999,467 $ 17,017,401
Due after one year through five years 15,290,046 15,329,930
Due after five years through ten years 3,971,843 4,022,984
Due after ten years 1,180,041 1,196,482
$ 37,441,397 $ 37,566,797
Asset-backed securities 38,783,338 38,660,159
Total available for sale $ 76,224,735 $ 76,226,956
Held to maturity:
Due in one year or less $ 975,074 $ 977,794
Due after one year through five years 3,207,434 3,311,482
Due after five years through ten years 8,307,596 8,775,339
Due after ten years 3,823,349 3,925,445
Total held to maturity $ 16,313,453 $ 16,990,060
Proceeds from sales and calls of investment securities during
1996, 1995 and 1994 were $13,512,387, $22,545,152 and
$26,621,358, respectively. Gross gains of $30,211, $49,510 and
$62,516 and gross losses of $43,050, $105,302 and $334,971,
respectively, were realized on those sales and calls.
Investment securities with an approximate carrying value of
$37,378,000 and $27,991,000 at December 31, 1996 and 1995,
respectively, were pledged to secure public deposits, trust funds,
securities sold under agreements to repurchase and for other
purposes as required or permitted by law.
<PAGE>
5. LOANS
Major classifications of loans are summarized as follows:
1996 1995
Commercial $ 10,216,331 $ 11,167,387
Real estate construction 4,200,111 3,496,792
Real estate mortgage 98,429,977 100,713,319
Agricultural 30,947,231 27,019,148
Consumer 14,789,144 11,028,388
Other 373,652 397,306
$ 158,956,446 $ 153,822,340
Unearned income (154,583) (125,364)
Allowance for loan losses (2,101,081) (1,860,093)
$ 156,700,782 $ 151,836,883
Changes in the allowance for loan losses were as follows:
1996 1995 1994
Balance, beginning of year $ 1,860,093 $ 1,648,210 $ 1,420,385
Net charge-offs (160,977) (184,215) (169,070)
Provision for loan losses 401,965 395,794 145,385
Allowance from acquired branch 0 0 251,510
Adjustments to conform pooled
Company's fiscal year end 0 304 0
Balance, end of year $ 2,101,081 $ 1,860,093 $ 1,648,210
Impaired loans totaled $251,000 and $345,000 at December
31, 1996 and 1995, respectively. The average recorded investment
in impaired loans during 1996 and 1995 was $298,000 and
$428,000, respectively. The total allowance for loan losses related
to these loans was $28,000 and $70,000 on December 31, 1996 and
1995, respectively. Interest income on impaired loans of $55,000
and $34,000 was recognized for cash payments received in 1996
and 1995, respectively.
<PAGE>
Changes in the allowance for loan losses on impaired loans
were as follows:
1996 1995
Balance, beginning of year $ 70,000 $ 19,000
Charge-off of impaired loans (42,000) (14,000)
Additions to allowance 0 65,000
Balance, end of year $ 28,000 $ 70,000
Mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal
balances of mortgage loans serviced for others was approximately
$86,138,000 and $74,888,000 at December 31, 1996 and 1995,
respectively. Custodial escrow balances maintained in connection
with the foregoing loan servicing, and included in demand deposits,
were approximately $540,000 and $233,000 at December 31, 1996
and 1995, respectively.
Mortgage servicing rights of $215,812 were capitalized in
1996. Amortization of mortgage servicing rights was $26,361 in
1996.
Certain directors and executive officers of the Company and
companies in which they have beneficiary ownership were loan
customers of the Bank during 1996 and 1995. Total loans to these
persons were approximately $1,828,000 and $2,663,000 at
December 31, 1996 and 1995, respectively. Such loans were made
in the ordinary course of business at the Banks' normal credit terms
and interest rates. An analysis of the activity with respect to all
director and executive officer loans is as follows:
1996 1995
Balance, beginning of year $ 2,663,000 $ 3,245,000
Additions, including loans now meeting
disclosure requirements 1,211,000 1,072,000
Amounts collected, including loans no
longer meeting disclosure requirements (2,046,000) (1,654,000)
Balance, end of year $ 1,828,000 $ 2,663,000
<PAGE>
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
1996 1995
Land and buildings $ 5,235,823 $ 4,629,255
Furniture and equipment 3,948,079 3,620,062
Construction in progress 358,920 0
$ 9,542,822 $ 8,249,317
Less accumulated depreciation (4,538,577) (4,073,331)
$ 5,004,245 $ 4,175,986
Depreciation expense was $479,338, $408,244 and
$338,323 in 1996, 1995 and 1994, respectively.
7. DEPOSITS
At December 31, 1996, the scheduled maturities of time
deposits are as follows:
1997 $ 99,065,466
1998 25,459,445
1999 4,876,245
2000 760,096
2001 and thereafter 1,088,011
$ 131,249,263
Certain directors and executive officers of the Company and
companies in which they have beneficiary ownership, are deposit
customers of the Bank. The amount of these deposits was
approximately $2,272,000 at December 31, 1996.
8. SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Securities sold under agreements to repurchase generally
mature within one to four days from the transaction date.
Information concerning securities sold under agreements to
repurchase for 1996 is summarized as follows:
1996 1995
Average balance during the year $ 3,342,000 $ 2,589,000
Average interest rate during the year 5.01% 5.09%
Maximum month-end balance during the year $ 4,668,000 $ 6,202,000
<PAGE>
U. S. Treasury securities underlying the agreements are as
follows:
1996 1995
Carrying value $ 10,036,000 $ 10,861,000
Estimated fair value 10,036,000 10,861,000
9. FEDERAL HOME LOAN BANK ADVANCES
The Bank owns stock of the Federal Home Loan Bank
(FHLB) of Cincinnati, Ohio. This stock allows the Bank to borrow
long-term advances from the FHLB which the Bank uses to fund
long-term fixed rate mortgages.
At December 31, 1996 and 1995, $10,534,031 and
$19,071,126, respectively, represented the balance due on the
above advances from the FHLB. All advances are paid either on a
monthly basis or at maturity, over remaining terms of one to twelve
years, with interest rates ranging from 5.05% to 6.80%. Advances
are secured by the FHLB stock and all single family first mortgage
loans. Scheduled principal payments due on advances during the
five years subsequent to December 31, 1996 are as follows: 1997 -
$271,213; 1998 - $7,286,309; 1999 - $302,254; 2000 - $1,239,979;
2001 - $237,970; years thereafter - $1,196,306.
10. NOTES PAYABLE
Notes payable are summarized as follows:
1996 1995
Promissory note, principal due at
November 1, 2003, interest payable
annually at 12%, secured by real estate $ 750,000 $ 750,000
Promissory note, principal due in four
quarterly payments of $150,000 from
March 31, 1996 to December 31, 1996,
interest payable quarterly at the prime
rate, secured by 100% of the common
stock of the Savings Bank. 0 600,000
Revolving $500,000 line of credit,
interest payable quarterly at the prime
rate, maturing June 30, 1997, secured
by 100% of the common stock of the Bank. 0 0
$ 750,000 $1,350,000
<PAGE>
11. INCOME TAXES
The components of the provision for income taxes are as follows:
1996 1995 1994
Current payable $ 697,751 $ 793,478 $ 481,015
Deferred 168,544 (76,089) 6,949
$ 866,295 $ 717,389 $ 487,964
Interest income on securities totaling $1,208,098,
$1,247,221 and $1,242,568 for 1996, 1995 and 1994, respectively,
is exempt from federal income taxes; accordingly, the tax provision
is less than that obtained by using the statutory federal income tax
rate.
The income tax benefit related to investment securities
losses was $4,365, $18,969 and $92,635 for 1996, 1995 and 1994,
respectively.
<PAGE>
The Company's deferred tax assets and liabilities at
December 31 are shown below. No valuation allowance for the
realization of deferred tax assets is considered necessary.
1996 1995
Deferred tax assets:
Allowance for loan losses $ 449,757 $ 381,708
Premium on deposits purchased 68,139 38,636
Accrued pension expense 13,886 0
Deferred loan fees 0 42,624
Accrued interest payable 0 95,975
Alternative minimum tax credit 0 29,335
Other 18,842 78,655
Deferred tax liabilities:
Bank premises and equipment (117,104) (100,017)
Unrealized gain on investment securities (755) (5,647)
FHLB stock (239,785) (176,561)
Accrued pension expense 0 (15,713)
Premium on loans purchased (47,887) (64,178)
Other (9,032) (5,103)
Net deferred tax asset $ 136,061 $ 299,714
An analysis of the differences between the effective tax rates
and the statutory U.S. federal income tax rate is as follows:
1996 1995 1994
U. S. federal income tax rate 34.00% 34.00% 34.00%
Changes from the statutory rate:
Tax-exempt investment income (12.42) (14.43) (15.52)
Non-deductible interest expense related
to carrying tax-exempt investments 1.53 1.45 1.02
Other (0.03) 1.35 (0.02)
23.08% 22.37% 19.48%
12. RETIREMENT PLANS
The Company has a defined benefit pension plan covering
substantially all of its employees. The Company's funding policy is
to contribute annually the maximum amount that can be deducted
for federal income tax purposes. Benefits are based on one percent
of employee average earnings for the previous five years times
years of credited service. Pension expense was $105,161, $99,110
and $44,798 for 1996, 1995 and 1994, respectively.
<PAGE>
The following table sets forth the plan's funded status and
amounts recognized in the accompanying consolidated financial
statements at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested
benefits of $1,044,491 and $914,221, respectively $ 1,060,869 $ 931,008
Projected benefit obligations for services rendered to
date $(1,623,500) $(1,456,344)
Plan assets at fair value, primarily U.S. Treasury and
agency securities and mutual funds 1,718,776 1,591,668
Plan assets in excess of projected benefit obligation $ 95,276 $ 135,324
Unrecognized net gain (131,657) (84,275)
Unrecognized net asset at January 1, 1989, being
recognized over 20 years (4,461) (4,833)
(Accrued) prepaid pension cost included in other
(liabilities) assets $ (40,842) $ 46,216
Net periodic pension cost for 1996 and 1995 include the
following components:
Service cost $ (118,339) $ (107,311)
Interest cost (112,826) (100,961)
Actual return on plan assets 84,108 92,349
Amortization of transition asset 372 372
Difference between actual and expected return on
plan assets 41,524 16,441
Net periodic cost $ (105,161) $ (99,110)
</TABLE>
A discount rate of 8% is used to compute the actuarial
present value of the accumulated and projected benefit obligations.
The assumed rate of return on plan assets is also 8%. The assumed
rate of salary increases is 5%.
The Company also has a qualified profit sharing plan which
covers substantially all employees and includes a 401(k) provision.
Profit sharing contributions, excluding the 401(k) provision, are at
the discretion of the Company's Board of Directors. Expense
recognized in connection with the plan was $157,162, $132,892
and $99,758 in 1996, 1995 and 1994, respectively.
<PAGE>
Prior to the acquisition, Jessamine established individual
retirement accounts for all employees with two years of continuous
service. Contributions were $10,494 and $12,168 in 1995 and
1994, respectively. Jessamine also contributed $57,600 in 1995 for
the purchase of an annuity to fund the retirement of a key
employee.
13. STOCK OPTION PLAN
The Company has two stock option plans, which are
accounted for in accordance with Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. Under the plans, the
Company grants certain directors, officers and key employees stock
option awards which vest and become fully exercisable at the end of
five years. During 1996, the Company authorized the grant of
options to purchase 10,350 shares of the Company's common
stock. The exercise price of each option, which has a ten year life,
was equal to the market price of the Company's stock on the date
of grant; therefore, no compensation expense was recognized.
Although the Company has elected to follow APB No. 25,
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", requires pro forma
disclosures of net income and earnings per share as if the Company
had accounted for its employee stock options under that Statement.
The fair value of each option grant was estimated on the grant date
using an option-pricing model.
<PAGE>
Summary of stock option transactions are as follows:
1996 1995
Outstanding, beginning of year 49,160 55,420
Granted during the year 10,350 1,100
Canceled during the year (880) 0
Exercised during the year (at prices ranging from
$5.83 to $17.25 per share) (80) (7,360)
Outstanding, end of year 58,550 49,160
Options outstanding
From $7.83 to $12.75 per share 24,380 24,620
From $17.25 to $22.28 per share 20,420 20,740
From $24.00 to $26.50 per share 13,750 3,800
58,550 49,160
Eligible for exercise
From $7.83 to $12.75 per share 24,380 23,140
From $17.25 to $22.28 per share 10,332 6,336
From $24.00 to $26.50 per share 1,120 420
35,832 29,896
Under SFAS No. 123, compensation cost is recognized in
the amount of the estimated fair value of the options and amortized
to expense over the options' vesting periods. The pro forma effect
on net income and earnings per share of this statement are as
follows:
Net income
As reported $ 2,887,106
Pro forma $ 2,885,212
Primary earnings per share
As reported $ 2.00
Pro forma $ 2.00
In 1995, prior to the acquisition of Jessamine, certain
directors, officers and key employees of Jessamine exercised stock
options totaling $25,481 under Jessamine's Stock Option and
Incentive Plan. Effective with the acquisition, all unexercised
options were canceled and the Plan was terminated.
<PAGE>
14. LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends
received from the Bank. Banking regulations limit the amount of
dividends that may be paid by the Bank without prior approval of
regulatory agencies. Under these regulations, the amount of
dividends that may be paid in any calendar year is limited to the
current year's net profits, as defined, combined with the retained net
profits of the preceding two years. During 1997 the Bank could,
without prior approval, declare dividends of approximately
$1,996,000 plus any 1997 net profits retained to the date of the
dividend declaration.
15. BRANCH ACQUISITION
On September 9, 1994, the Bank acquired the Clark County
offices of Bank One, Lexington, and assumed certain deposits,
borrowed funds and other branch related liabilities. Assets
purchased consist of land, bank premises and equipment, loans,
intangible assets, and other assets. The Bank was paid $27,334,743
in cash for the deposits, borrowed funds, and branch related
liabilities assumed, less assets purchased.
16. DISCLOSURES ABOUT FAIR VALUE OF
FINANCIAL INSTRUMENTS
The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for
which it is practicable to estimate that value:
Cash and Cash Equivalents - For those short-term instru-
ments, the carrying amount is a reasonable estimate of fair
value.
Investment Securities - For investment securities, fair values
are based on quoted market prices or dealer quotes.
Loans - Fair value is estimated by discounting the future
cash flows using the current rates at which similar loans
would be made to borrowers with similar credit ratings and
for the same remaining maturities.
Federal Home Loan Bank Stock - Federal Home Loan Bank
stock carrying value is equivalent to market since it can only
be purchased or sold with the FHLB at carrying value.
<PAGE>
Deposit Liabilities - The fair value of demand deposits,
savings accounts, and certain money market deposits is the
amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated
using the rates currently offered for deposits of similar
remaining maturities.
Federal Funds Purchased and Securities Sold Under
Agreements to Repurchase - For those short-term
instruments, the carrying amount is a reasonable estimate of
fair value.
Federal Home Loan Bank Advances - Rates currently
available to the Company for advances with similar terms
and remaining maturities are used to estimate fair value of
existing debt.
Other Borrowed Funds - The fair value of fixed rate
borrowings is estimated by discounting the future cash
flows using a rate which approximates market for
borrowings of a similar maturity. The carrying value of
variable rate borrowed funds is a reasonable estimate of fair
value.
Commitments to Extend Credit and Standby Letters of
Credit - Commitments to extent credit and standby letters of
credit represent agreements to lend to a customer at the
market rate when the loan is extended, thus the
commitments and letters of credit are not considered to
have a fair value.
<PAGE>
<TABLE>
<CAPTION>
The fair values of the Company's financial instruments at
December 31, 1996 and 1995 are as follows:
1996 1995
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,190,503 $ 9,191,000 $ 11,046,529 $ 11,047,000
Investment securities 92,540,409 93,217,000 92,639,117 93,430,000
Federal Home Loan Bank stock 2,705,600 2,706,000 2,740,700 2,741,000
Loans 159,664,810 159,541,000 155,060,992 155,042,000
Less: allowance for loan losses (2,101,081) (2,101,000) (1,860,093) (1,860,000)
$262,000,241 $262,554,000 $259,627,245 $260,400,000
Financial liabilities:
Deposits $231,070,711 $232,069,000 $213,348,331 $214,142,000
Federal funds purchased 0 0 5,700,000 5,700,000
Securities sold under
agreements to repurchase 2,835,954 2,836,000 4,660,173 4,660,000
Federal Home Loan Bank advances 10,534,031 10,390,000 19,071,126 19,069,000
Other borrowed funds 1,323,543 1,324,000 1,431,131 1,431,000
$245,764,239 $246,619,000 $244,210,761 $245,002,000
</TABLE>
17. FINANCIAL INSTRUMENTS WITH OFF BALANCE SHEET RISK
The Company is party to financial instruments with off
balance sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments
include standby letters of credit and commitments to extend credit
in the form of unused lines of credit. The Company uses the same
credit policies in making commitments and conditional obligations
as they do for on balance sheet instruments.
At December 31, 1996 and 1995, the Company had the
following financial instruments whose approximate contract
amounts represent credit risk:
1996 1995
Standby letters of credit $ 501,000 $ 534,000
Commitments to extend credit $19,274,000 $17,238,000
<PAGE>
Standby letters of credit represent conditional commitments
issued by the Company to guarantee the performance of a third
party. The credit risk involved in issuing these letters of credit is
essentially the same as the risk involved in extending loans to
customers.
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Since some of the
commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income
producing properties.
18. CONCENTRATION OF CREDIT RISK
The Company grants residential, commercial and consumer
related loans to customers primarily located in Bourbon, Clark,
Scott, Harrison, Woodford, Jessamine and adjoining counties in
Kentucky. Although they have diverse loan portfolios, a substantial
portion of their debtors' ability to perform is somewhat dependent
on the economic conditions of the counties in which they operate.
19. REGULATORY MATTERS
The Company and the Bank are subject to various
regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate
certain mandatory and possible additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on
the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the Company's and
the Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company
and Bank capital amounts and classifications are also subject to
qualitative judgments by the regulator about components, risk
weightings, and other factors.
<PAGE>
Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain
minimum amounts and ratios (set forth in the table below) of total
and Tier I capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier I capital to average assets (as
defined). Management believes, as of December 31, 1996, that the
Company and the Bank meet all capital adequacy requirements to
which they are subject.
As of December 31, 1996, the most recent notification from
the Federal Deposit Insurance Corporation categorized the Bank as
well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier
I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management
believes have changed the institution's category.
The Company's and the Bank's actual amounts and ratios
are presented in the table below:
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Consolidated as of December 31, 1996:
Total Capital (to Risk Weighted Assets) $24,759,000 15.50% $12,776,000 8.00% $15,970,000 10.00%
Tier I Capital (to Risk Weighted Assets) 22,555,000 14.12 6,388,000 4.00 9,582,000 6.00
Tier I Capital (to Average Assets) 22,555,000 8.66 10,423,000 4.00 13,029,000 5.00
Bank Only as of December 31, 1996:
Total Capital (to Risk Weighted Assets) $ 24,427,000 15.30% $12,769,000 8.00% $15,961,000 10.00%
Tier I Capital (to Risk Weighted Assets) 22,431,000 14.05 6,384,000 4.00 9,577,000 6.00
Tier I Capital (to Average Assets) 22,431,000 8.61 10,422,000 4.00 13,028,000 5.00
</TABLE>
<PAGE>
20. PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31
1996 1995
(In Thousands)
ASSETS
Cash on deposit with subsidiaries $ 96 $ 191
Investment in subsidiaries 24,510 23,444
Investment securities 20 20
Income taxes receivable 18 112
TOTAL ASSETS $ 24,644 $ 23,767
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt $ 0 $ 600
Other liabilities 11 0
Total liabilities $ 11 $ 600
Stockholders' equity:
Preferred stock $ 0 $ 0
Common stock 6,392 6,482
Retained earnings 18,240 16,674
Net unrealized gains on investment securities 1 11
Total stockholders' equity $ 24,633 $ 23,167
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,644 $ 23,767
<PAGE>
Condensed Statements of Income
Year Ended December 31
1996 1995 1994
(In Thousands)
Income:
Dividends from subsidiaries $ 1,850 $ 1,470 $ 983
Other income 807 359 51
Total income $ 2,657 $ 1,829 $ 1,034
Expenses:
Interest expense $ 40 $ 118 $ 52
Other expenses 823 573 56
Total expenses $ 863 $ 691 $ 108
Income before income taxes and
equity in undistributed income of
subsidiaries $ 1,794 $ 1,138 $ 926
Applicable income taxes (benefits) (18) (112) (18)
Income before equity in undistributed
income of subsidiaries $ 1,812 $ 1,250 $ 944
Equity in undistributed income of
subsidiaries 1,075 1,238 1,259
NET INCOME $ 2,887 $ 2,488 $ 2,203
<PAGE>
Condensed Statements of Cash Flows
Year Ended December 31
1996 1995 1994
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,887 $ 2,488 $ 2,203
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss (gain) on sale of securities 0 23 (10)
Equity in undistributed earnings of
subsidiaries (1,075) (1,293) (1,259)
Adjustment to conform pooled Company's
fiscal year end 0 55 0
Change in income taxes receivable 94 (93) (13)
Change in other liabilities 10 0 0
Net cash provided by operating activities $ 1,916 $ 1,180 $ 921
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities $ 0 $ 0 $ (88)
Proceeds from sale of investment securities 0 702 78
Net cash provided by (used in) investing
activities $ 0 $ 702 $ (10)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid $ (912) $ (750) $ (689)
Proceeds from issuance of common stock 1 47 69
Purchase of common stock (500) 0 0
Capital contribution to subsidiary 0 0 (2,000)
Repayment of long-term debt (930) (1,100) (300)
Proceeds from long-term debt 330 0 2,000
Net cash used in financing activities $(2,011) $(1,803) $ (920)
Net (decrease) increase in cash and cash
equivalents $ (95) $ 79 $ (9)
Cash and cash equivalents at beginning
of year 191 112 121
CASH AND CASH EQUIVALENTS AT END
OF YEAR $ 96 $ 191 $ 112
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bourbon Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated balance
sheets of Bourbon Bancshares, Inc. and Subsidiary as of December
31, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the years in
the three year period ended December 31, 1996. These financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
The consolidated financial statements for the year ended
December 31, 1994, have been restated to reflect the pooling of
interests with Jessamine First Federal Savings & Loan Association
as described in Note 2 to the consolidated financial statements. We
did not audit the financial statements of Jessamine First Federal
Savings & Loan Association, which statements reflect total assets
of $34,688,451 as of September 30, 1994 and total net interest
income of $1,154,713 for the year then ended. Those statements
were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for
Jessamine First Federal Savings & Loan Association as of
September 30, 1994 and for the year then ended, is based solely on
the report of the other auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Bourbon Bancshares, Inc. and Subsidiary at December
31, 1996 and 1995, the results of its operations and cash flows for
each of the years in the three year period ended December 31,
1996, in conformity with generally accepted accounting principles.
ESKEW & GRESHAM, PSC
January 31, 1997
<PAGE>
Bourbon Bancshares, Inc.
Board of Directors
Buckner Woodford
President and Chief Executive Officer;
Kentucky Bank and Bourbon Bancshares, Inc.
Class of 1997
William R. Stamler
Signal Investments, Inc.; Chairman
Class of 1997
C. Thomas Skeen
Regional Vice President, Jessamine
Class of 1998
James L. Ferrell, M.D.
Physician
Chairman of Bourbon Bancshares, Inc.
Class of 1998
Joseph B. McClain
President; Hopewell Insurance Company, Inc.
Class of 1998
William M. Arvin
Attorney
Class of 1998
Henry Hinkle
President; Hinkle Contracting Company
Class of 1999
Theodore Kuster
Farmer and Thoroughbred Breeder; West View Farm
Class of 1999
Robert G. Thompson
Farmer and Thoroughbred Breeder; Snow Hill Farm
Class of 1999
Russell Brooks
Financial Analyst; Kentucky Bank
Class of 1999
<PAGE>
Kentucky Bank
Board of Directors
Buckner Woodford
President and Chief Executive Officer;
Bourbon Bancshares and Kentucky Bank
Joe Allen
Executive Vice President, Kentucky Bank
William M. Arvin
Attorney, William M. Arvin and Associates
Russell Brooks
Financial Analyst; Kentucky Bank
James L. Ferrell, M.D.
Physician
Betty Jo Denton Heick
Retired Bourbon County Court Clerk
Henry Hinkle
President; Hinkle Contracting Company
Theodore Kuster
Farmer and Thoroughbred Breeder; West View Farm
Joseph B. McClain
President; Hopewell Insurance Company, Inc.
Alex Miller
President, Paris Stockyards, Inc.
Donald Pace
Superintendent, Clark Co. Schools
William R. Stamler
Retired Chairman and President; W.R. Stamler Corporation
Robert G. Thompson
Farmer and Thoroughbred Breeder; Snow Hill Farm
Gerald M. Whalen
President, Whalen and Co. Insurance and Real Estate
James B. Wooten, Jr.
Attorney and Partner; Bradley, Blanton and Wooten
<PAGE>
REGIONAL BOARD OF DIRECTORS
CLARK
C. Richard Gamble
Leggett and Platt, Marketing
Donald Pace
Superintendent, Clark Co. Schools
Ralph J. Palmer
Palmer Engineering Co., Inc.
Ed Saunier
North American Vanlines
Mary Beth Hendricks
Farmer
<PAGE>
REGIONAL BOARD OF DIRECTORS
SCOTT
James B. Wooten, Jr.
Attorney and Partner; Bradley, Blanton and Wooten
R.C. Johnson, Jr.
Owner and President; Johnson's Funeral Home
Dr. Gus A. Bynum
Physician
Mike Hockensmith
Owner and President, The Hockensmith Agency, Inc.
WOODFORD
Dr. William J. Graul
Physician
James Kay
Businessman, Farmer
JESSAMINE
William M. Arvin
Attorney, William M. Arvin and Associates
Marion E. Stratton
Retired, Owner Stratton Lumber Co.
J. R. Wilson, Jr.
Retired, U.S. Postmaster
Victor Comley
Retired, Kentucky Association of Highway Contractors
Earl Lewallen
Businessman, Farme
<PAGE>
OFFICERS
BOURBON COUNTY
PARIS
Buckner Woodford - President and CEO
James P. Shipp, Jr. - Sr. Vice President, Branch Administration
Norman J. Fryman - Sr. Vice President, Director of Lending
Joe Allen - Executive Vice President
Greg Dawson - Chief Financial Officer
Russell Brooks - Vice President, Financial Analyst
Hugh Crombie - Vice President, Operations
Bill Reynolds - Vice President, Trust Officer
Brenda Bragonier - Assistant Vice President, Director of Marketing
and Human Resources
R.W. Collins, Jr. - Vice President, Loan Officer
Nicholas L. Carter - Assistant Vice President, Loan Officer
Cathy Hill Assistant - Vice President, Loan Officer
Michael Lovell - Assistant Vice President, Loan Officer
George Wilder - Assistant Vice President, Loan Officer
Mary Lou Boyle - Human Resources
Ted Wiseman - Assistant Vice President, Wire Transfer
Brenda Berry - Accountant
Wallis Brooks - Branch Manager
Patty Carpenter - Operations Officer
Paul Clift - Automations Information Officer
Janice Hash - Accountant and Purchasing Manager
Donald Roe - Data Processing
Lydia Sosby - Auditing/Compliance/CRA
Martha Woodford - Corporate and Automated Products Officer
Jan Worth - Trust Officer
Lexington Road Branch
Rita Bugg - Assistant Vice President, Branch Manager, Loan
Officer
North Middletown Branch
Jerry Ann McFarland - Branch Manager
Pleasant Street Branch
Philip Hurst - Assistant Branch Manager
<PAGE>
CLARK COUNTY
WINCHESTER
Tim Duncan - Regional Vice President
Becky Taulbee - Assistant Vice President, Loan Officer
Darryl Terry - Assistant Vice President, Loan Officer
R.J. Palmer, II - Calling Officer
Colby Road Branch
Teresa Shimfessel - Branch Manager, Loan Officer
WOODFORD COUNTY
VERSAILLES
Duncan Gardner - Branch Manager, Loan Officer
A.J. Gullett - Loan Officer
SCOTT COUNTY
GEORGETOWN
Mark Walls - Regional Vice President
Jennifer Roberts - Loan Originator
Pam Slone - Office Manager
JESSAMINE COUNTY
NICHOLASVILLE
C. Thomas Skeen - Regional Vice President
Earl Lewallen - Loan Officer
Jeanie Thompson - Assistant Cashier & CSR
HARRISON COUNTY
CYNTHIANA LOAN PRODUCTION OFFICE
Bill Case - Manager, Loan Officer
<PAGE>
Exhibit 21 Subsidiaries of Registrant
Bourbon Bancshares, Inc.'s Subsidiary
Kentucky Bank
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 31, 1997
on the consolidated financial statements of Bourbon Bancshares,
Inc. and Subsidiary as of December 31, 1996 and 1995 and for the
three year period ended December 31, 1996 appearing in this
Annual Report on Form 10-K of Bourbon Bancshares, Inc. as
Exhibit 13.
ESKEW & GRESHAM, PSC
Lexington, KY
March 11, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 8500
<INT-BEARING-DEPOSITS> 616
<FED-FUNDS-SOLD> 75
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 76227
<INVESTMENTS-CARRYING> 16313
<INVESTMENTS-MARKET> 16990
<LOANS> 159665
<ALLOWANCE> 2101
<TOTAL-ASSETS> 272453
<DEPOSITS> 231071
<SHORT-TERM> 3409
<LIABILITIES-OTHER> 2055
<LONG-TERM> 11284
0
0
<COMMON> 6392
<OTHER-SE> 18242
<TOTAL-LIABILITIES-AND-EQUITY> 272453
<INTEREST-LOAN> 13774
<INTEREST-INVEST> 5267
<INTEREST-OTHER> 384
<INTEREST-TOTAL> 19425
<INTEREST-DEPOSIT> 8806
<INTEREST-EXPENSE> 9839
<INTEREST-INCOME-NET> 9586
<LOAN-LOSSES> 402
<SECURITIES-GAINS> (13)
<EXPENSE-OTHER> 7715
<INCOME-PRETAX> 3753
<INCOME-PRE-EXTRAORDINARY> 3753
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2887
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 2.00
<YIELD-ACTUAL> 3.87
<LOANS-NON> 33
<LOANS-PAST> 562
<LOANS-TROUBLED> 180
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1860
<CHARGE-OFFS> 213
<RECOVERIES> 52
<ALLOWANCE-CLOSE> 2101
<ALLOWANCE-DOMESTIC> 2101
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
