UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by non-
affiliates as of March 29, 1999 was approximately $48.0
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.
Number of shares of Common Stock outstanding as of March 29, 1999:
1,402,588.
<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") and the Savings Association
Insurance Fund ("SAIF"), both 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 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).
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 subsidiary also currently competes
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.
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.
<PAGE>
Business Segments
The Financial Accounting Standards Board (FASB) has issued
SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which requires segmenting assets,
profit and loss and certain specific revenue and expense
items. Although management monitors revenue streams from
various products and services, operations are managed and
financial performance is evaluated on a company-wide basis.
Therefore, all operations are considered by management to be
aggregated into one reportable operating segment.
Employees
At December 31, 1998, the number of full time equivalent
employees of the Company was 144.
Item 2. Properties
The main banking office of Kentucky Bank, which also serves
as the principal office of Kentucky Bank, is located at
Fourth and Main Streets, Paris, Kentucky 40361. In addition,
Kentucky Bank serves customer needs at 9 other locations.
All locations, except for the Cynthiana office (which is a
loan production office), offer a full range of banking
services. Kentucky Bank owns all of the properties at which
it conducts its business, except the location in Scott
County at Paris Pike, which is leased. The Company owns
approximately 59,000 square feet of office space and leases
approximately 2,000 square feet of office space, with
aggregate annual lease payments of approximately $16
thousand in 1998.
Note 5 to the Company's consolidated financial statements
included in this report contain additional information
relating to amounts invested in premises and equipment.
Item 3. Legal Proceedings
The Company and its subsidiary are from time to time
involved in routine legal proceedings occurring in the
ordinary course of business that, in the aggregate,
management believes will not have a material impact on the
Company's financial condition and results of operation.
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 it 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:
High Low Dividend
1998 Quarter 1 $ 36.50 $31.00 $.20
Quarter 2 40.00 36.50 $.20
Quarter 3 42.00 40.00 $.20
Quarter 4 41.25 41.00 $.20
1997 Quarter 1 27.00 24.50 $.18
Quarter 2 30.00 26.00 $.18
Quarter 3 30.50 27.00 $.18
Quarter 4 31.00 28.00 $.18
As of December 31, 1998 the Company had 1,404,628
shares of Common Stock outstanding and approximately 437
holders of record of its Common Stock.
During 1998, 10,066 shares of unregistered stock were issued
to employees and directors. This stock was issued through
the exercise of stock options or employee gifts. In
accordance with Rule 701 promulgated under the Securities
Act of 1933, all shares of Common Stock were issued upon the
exercise of stock options issued prior to the Company
becoming subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934. The
following shares were issued during 1998:
Aggregate
Date Issued Shares Consideration
January 30, 1998 1,000 $ 8,500
February 24, 1998 400 7,750
March 9, 1998 3,640 65,030
March 10, 1998 1 gift
March 24, 1998 400 4,800
August 26, 1998 3,000 27,700
September 3, 1998 800 13,800
September 14, 1998 800 13,800
September 30, 1998 25 gift
Total 10,066
<PAGE>
Item 6. Selected Financial Data
The following selected financial data should be read in
conjunction with the Company's Consolidated Financial
Statements and the accompanying notes presented elsewhere
herein.
At or For the Year Ended December 31
(dollars in thousands, except per share amounts)
1998 1997 1996 1995 1994
CONDENSED STATEMENT OF INCOME:
Total Interest Income $21,983 $20,962 $19,425 $19,658 $15,657
Total Interest Expense 10,666 10,415 9,839 10,426 7,746
Net Interest Income 11,317 10,547 9,586 9,232 7,911
Provision for Losses 700 493 402 396 145
Net Interest Income After
Provision for Losses 10,617 10,054 9,184 8,836 7,766
Noninterest Income 3,073 2,390 2,284 2,053 992
Noninterest Expense 8,514 7,888 7,715 7,684 6,067
Income Before Income
Tax Expense 5,176 4,556 3,753 3,205 2,691
Income Tax Expense 1,372 1,148 866 717 488
Net Income $ 3,804 $ 3,408 $ 2,887 $ 2,488 $ 2,203
SHARE DATA:
Net Income-Earnings
per Share (EPS) $ 2.72 $ 2.44 $ 2.03 $ 1.74 $ 1.54
Net Income-EPS assuming dilution 2.66 2.40 2.00 1.71 1.52
Cash Dividends Declared 0.80 0.72 0.64 0.60 0.54
Book Value 20.91 19.16 17.44 16.16 14.00
Average Shares and Share
Equivalents Outstanding 1,431 1,422 1,443 1,448 1,432
SELECTED BALANCE SHEET DATA:
Loans, net including
held for sale $210,108 $182,839 $157,564 $153,201 $145,817
Investment Securities 72,353 81,703 92,540 92,639 99,345
Total Assets 308,705 290,655 272,453 269,431 274,497
Deposits 258,740 241,325 231,071 213,348 223,810
Short-Term Borrowings 11,248 9,458 4,160 11,791 7,635
Long-Term Debt 6,954 10,236 10,534 19,071 20,606
Stockholders' Equity 29,372 26,716 24,633 23,167 19,955
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.31% 1.23% 1.10% 0.94% 0.95%
Return on Stockholders' Equity 13.57 13.43 12.06 11.36 10.61
Net Interest Margin (1) 4.27 4.18 4.02 3.80 3.76
Equity to Assets (at period end) 9.51 9.19 9.04 8.60 7.27
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 29.49% 29.49% 31.57% 32.93% 31.25%
Number of Employees
(at period end) 144 145 137 125 128
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.28% 1.25% 1.32% 1.20% 1.12%
Net Charge-offs as a
Percentage of Average Loans 0.15 0.16 0.10 0.12 0.13
(1) Tax equivalent
<PAGE>
Item 7. 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
1998 data.
Summary
Net income for the year ended December 31, 1998 was $3.8
million, or $2.72 per common share compared to $3.4 million,
or $2.44 for 1997 and $2.9 million, or $2.03 for 1996.
Earnings per share assuming dilution were $2.66, $2.40 and
$2.00 for 1998, 1997 and 1996, respectively. For 1998, net
income increased over $395 thousand, nearly 12%. Increases
in net interest income of over 7% and other income of 28%
were offset by increases in other expenses of over 7% and
the provision for loan losses of 42%. The increase in the
loan loss provision was mainly attributable to the 15%
growth in loans. In 1997, net income increasing over $520
thousand (over 18%) is mainly attributable to increased net
interest income and other income, offset by an increase in
the loan loss provision, while maintaining other expenses to
below modest increases.
Return on average equity was 13.6% in 1998 compared to 13.4%
in 1997 and 12.1% in 1996. Return on average assets was
1.31% in 1998 compared to 1.23% in 1997 and 1.10% in 1996.
Non-performing loans as of a percentage of net loans were
0.50%, 0.26% and 0.49% as of December 31, 1998, 1997 and
1996, respectively. Through management's concerted effort
on loan quality, these ratios have remained well below peer
groups over the last three years.
During 1996, the federal thrift charters of Kentucky Savings
Bank, FSB and Jessamine were terminated and both entities
became branches of Kentucky Bank. 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 $9.9 million in 1996 to
$10.9 million in 1997 to $11.7 million in 1998. 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%. For 1998, average earning
assets and interest bearing liabilities increased. The $12
million increase in average earning assets, and maintenance
of the same tax equivalent yield resulted in tax equivalent
interest income increasing over $1 million. Average loans
increasing over $22 million with a 14 basis point decline in
yield along with an over $10 million decline in investment
securities and an 8 basis point decline allowed the yield on
earning assets to remain constant. The increase of $10
million in deposits along with an 8 basis point decline in
yield accounted for the change in liabilities.
An increase in earning assets and interest bearing
liabilities were both positive factors on 1997 net interest
income. Loan growth on an average basis for 1997 increased
10%, while being funded by over 5% growth in interest
bearing deposits. There was a positive effect on the rate
changes for assets, whereas the rate on liabilities was
relatively constant. The 10% increase in loans from 1996 to
1997 and a 5% increase in deposits for the same time period
have resulted in the net interest margin increasing from
4.02% in 1996 to 4.18% in 1997. Loan volume accounted for
over $1.3 million of the increase in total interest income,
while loan rates accounted for $0.3 million of the total
interest income increase. Deposit volume accounted for $0.5
million of the $0.6 million increase in total interest
expense.
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 1998 and 1997.
Changes in interest income and expenses due to both rate and
volume are allocated on a pro rata basis.
<PAGE>
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
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 $1,961 $ (233) $1,728 $1,387 $ 322 $1,709
Investment (647) (118) (765) 34 (8) 26
Securities
Federal Funds Sold and
Securities Purchased
under Agreements to
Resell 75 1 76 (140) 3 (137)
Deposits with Banks (18) 1 (17) (38) (24) (62)
Total Interest Income 1,371 (349) 1,022 1,243 293 1,536
Interest Expense
Deposits
Demand 305 (18) 287 349 269 618
Savings (3) (13) (16) (28) (6) (34)
Negotiable Certificates
of Deposit and Other
Time Deposits 75 (38) 37 36 54 90
Short-Term Borrowings 6 0 6 62 1 63
Long-Term Borrowings (71) 8 (63) (173) 12 (161)
Total Interest Expense 312 (61) 251 246 330 576
Net Interest Income $1,059 $ (288) $ 771 $ 997 $ (37) $ 960
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
1998 1997 1996
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
State and Municipal obligations $ 16,371 $ 971 5.93% $ 16,027 $ 976 6.09% $ 16,377 $ 1,009 6.16%
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 50,902 3,108 6.11 63,057 3,919 6.22 60,890 3,778 6.20
State and Municipal obligations 3,917 197 5.03 3,943 198 5.02 3,944 199 5.05
Other Securities 3,931 252 6.41 2,803 200 7.14 4,066 281 6.91
Total Securities Available for Sale 58,750 3,557 6.05 69,803 4,317 6.18 68,900 4,258 6.18
Total Investment Securities 75,121 4,528 6.03 85,830 5,293 6.17 85,277 5,267 6.18
Tax Equivalent Adjustment 345 0.46 345 0.40 362 0.42
Tax Equivalent Total 4,873 6.49 5,638 6.57 5,629 6.60
Federal Funds Sold and Agreements to Repurchase 4,372 236 5.40 2,979 160 5.37 5,579 297 5.37
Interest-Bearing Deposits with Banks 152 8 5.26 500 25 5.00 1,143 87 7.61
Loans, Net of Deferred Loan Fees (2)
Commercial 23,150 2,093 9.04 20,035 1,828 9.12 19,192 1,749 9.11
Real Estate Mortgage 154,764 13,525 8.74 137,079 12,194 8.90 123,145 10,674 8.67
Installment 15,268 1,593 10.43 14,014 1,461 10.43 13,398 1,351 10.08
Total Loans 193,182 17,211 8.91 171,128 15,483 9.05 155,735 13,774 8.84
Total Interest-Earning Assets 272,827 22,328 8.18 260,437 21,306 8.18 247,734 19,787 7.99
Allowance for Loan Losses (2,550) (2,261) (1,988)
Cash and Due From Banks 9,225 7,510 6,839
Premises and Equipment 6,187 5,475 4,591
Other Assets 5,793 5,565 5,617
Total Assets $291,482 $276,726 $262,793
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW) and
and Money Market Investment Accounts $ 63,413 $ 2,199 3.47% $ 54,626 $ 1,912 3.50% $ 43,918 $ 1,294 2.95%
Savings 12,679 315 2.48 12,786 331 2.59 13,850 365 2.64
Certificates of Deposit and Other Deposits 134,893 7,274 5.39 133,509 7,237 5.42 132,835 7,147 5.38
Total Interest-Bearing Deposits 210,985 9,788 4.64 200,921 9,480 4.72 190,603 8,806 4.62
Short-Term Borrowings 5,222 271 5.19 5,100 265 5.20 3,899 202 5.18
Long-Term Debt 10,067 607 6.03 11,247 670 5.96 14,158 831 5.87
Total Interest-Bearing Liabilities 226,274 10,666 4.71 217,268 10,415 4.79 208,660 9,839 4.72
Noninterest Bearing Demand Deposits 34,487 31,566 27,930
Other Liabilities 2,693 2,513 2,262
Total Liabilities 263,454 251,347 238,852
STOCKHOLDERS' EQUITY 28,028 25,379 23,941
Total Liabilities and Stockholders' Equity $291,482 $276,726 $262,793
Average Equity to Average Total Assets 9.62% 9.17% 9.11%
Net Interest Income 11,317 10,546 9,586
Net Interest Income (tax equivalent) (3) $11,662 $10,891 $ 9,948
Net Interest Spread (tax equivalent) (3) 3.47% 3.39% 3.27%
Net Interest Margin (tax equivalent) (3) 4.27 4.18 4.02
</TABLE>
[FN]
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccrual status.
(3) Tax equivalent difference represents the tax equivalent
adjustment detailed above.
<PAGE>
Noninterest Income and Expenses
Noninterest income was $3.1 million in 1998 compared to $2.4
million in 1997 and $2.3 million in 1996. In 1998
securities gains were $41 thousand compared to $14 thousand
gains in 1997 and $13 thousand losses in 1996. Typically,
U. S. Treasury securities are sold before maturity when
additional interest yields can be realized. Other types of
investment securities are generally not sold. In addition,
gains on loans sold were $440 thousand, $72 thousand and
$200 thousand in 1998, 1997 and 1996, respectively. In
1998, management increased its focus on mortgage banking and
this along with the increased volume of loans sold in a
declining rate environment have resulted in the increased
gain on loans sold. Loans held for sale are generally sold
at closing to Federal Home Loan Mortgage Corporation. The
sales of loans were $35 million, $18 million and $21 million
in 1998, 1997 and 1996, respectively. Other noninterest
income excluding security and loans net gains was $2.6
million in 1998, $2.3 million in 1997 and $2.1 million in
1996.
Noninterest expense increased $626 thousand in 1998 to $8.5
million and a modest $173 thousand from $7.7 million in 1996
to $7.9 million in 1997. The increases in salaries and
benefits from $4.0 million in 1996 to $4.3 million in 1997
and $4.5 million in 1998 are mainly attributable to normal
salary and benefit increases. Occupancy expense increased
$162 thousand in 1998 to $1.2 million and 8% in 1997, from
$932 thousand in 1996 to $1.0 million in 1997. In August
1998 the Company added a new branch in Georgetown and in
March 1997, the Company opened its new branch in Versailles
resulting in higher operating cost attributable to these
facilities. The Company has also placed more emphasis on
maintaining its existing facilities in 1997 and 1998, which
are reflected in increases in occupancy expenses. Other
noninterest expense decreased from $2.8 million in 1996 to
$2.6 million in 1997. However, in 1998 other noninterest
expenses increased modestly to $2.8 million. In December
1995, the FDIC set the 1996 premium for BIF-insured deposits
at zero. In September 1996, Congress declared a special, one-
time assessment on SAIF-insured deposits. The cost of this
assessment was nearly $200 thousand net of income taxes.
For 1997, the BIF-insured deposit rate was 1.3 cents per
$100 and the SAIF-insured rate was 6.5 cents per $100. Due
to the conversion of the savings institutions to branches of
Kentucky Bank, the Company has deposits of over $53 million
that will be assessed at the SAIF rate. The resulting
decrease in FDIC assessment was $358 thousand from 1996 to
1997; there was little change from 1997 to 1998. Excluding
this special FDIC assessment, other noninterest expense only
increased $200 thousand in both 1998 and 1997.
The following table is a summary of noninterest income and
expense for the three-year period indicated.
Year Ended December 31
(in thousands)
1998 1997 1996
Non-interest Income
Service Charges $1,811 $1,674 $1,508
Loan Service Fee Income 283 258 255
Trust Department Income 300 237 206
Investment Securities Gains 41 14 (13)
(Losses),net
Gains on Sale of Mortgage Loans 440 72 200
Other 198 135 128
Total Non-interest Income $3,073 $2,390 $2,284
Non-interest Expense
Salaries and Employee Benefits $4,527 $4,274 $4,005
Occupancy Expenses 1,164 1,002 932
Other 2,823 2,612 2,778
Total Non-interest Expense $8,514 $7,888 $7,715
Net Non-interest Expense as a
Percentage of Average Assets 1.87% 1.99% 2.07%
<PAGE>
Income Taxes
The Company had income tax expense of $1.4 million in 1998
compared to $1.1 million in 1997 and $866 thousand in 1996.
This represents an effective income tax rate of 26.5% in
1998, 25.2% in 1997 and 23.1% in 1996. 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. The higher effective rate for 1998
and 1997 is a result of tax free income remaining virtually
unchanged for these two years while income before taxes
increased over $600 thousand in 1998 and $800 thousand in
1997.
Balance Sheet Review
Assets at year-end 1998 totaled $309 million compared to
$291 million in 1997 and $272 million in 1996. Changes in
1998 are a result of loans increasing $27.7 million and
investment securities decreasing $9.3 million. Assets were
funded by an increase in deposits of $17.4 million. Federal
Home Loan Bank Advances declined by $3.3 million. The
increase in size from 1996 to 1997 is mainly attributable to
total loans increasing $25.5 million and investment
securities decreasing $10.8 million, while being funded by
an increase in deposits of $10.3 million and short term
borrowing of $5.3 million.
Loans
Total loans, net of deferred loan fees were $213 million at
December 31, 1998 compared to $185 million at the end of
1997 and $160 million in 1996. In 1998, commercial loans
increased $4.5 million, real estate construction loans
increased $3.4 million, real estate mortgages increased
$11.2 million and agricultural loans increased $6.3 million.
During 1997, real estate construction loans increased $3.5
million, real estate mortgages increased $14.2 million and
agricultural loans increased $7.0 million. Management
developed regional loan goals for each type of loan and this
emphasis has resulted in improved sales efforts by the
lending personnel. Management continues to place more
emphasis on the growth without sacrificing the quality of
the loan portfolio.
As of December 31, 1998, the real estate mortgage portfolio
comprised 59% of total loans compared to 61% in 1997. Of
this, 1-4 family residential property represented 79% in
1998 and 78% in 1997. Agricultural loans comprised 21% in
1998 and nearly 20% in 1997 of the loan portfolio.
Approximately 73% of the agricultural loans for both years
are secured by real estate. The remainder of the
agricultural portfolio is used to purchase livestock,
equipment and other capital improvements and for general
operation of the farm. Generally, a secured interest is
obtained in the capital assets, equipment, livestock or
crops. Automobile loans account for 47% of the installment
loan portfolio, while the purpose of the remainder of this
portfolio is used by customers for purchasing retail goods,
home improvement or other personal reasons. Collateral is
generally obtained on these loans after analyzing the
repayment ability of borrower. Commercial loan's portfolio
is mainly for capital outlays and business operation.
Collateral is requested depending on the creditworthiness of
the borrower. Unsecured loans are made to individuals or
companies mainly based on the creditworthiness of the
customer. Approximately 5% of the loan portfolio is
unsecured. Management is not aware of any significant
concentrations that may cause future material risks which
may result in significant problems with future income and
capital requirements.
<PAGE>
The following table represents a summary of the Company's
loan portfolio by category for each of the last five years.
There is no concentration of loans (greater than 5% of the
loan portfolio) in any industry. Bourbon has no foreign
loans or highly leveraged transactions in its loan
portfolio.
Loans Outstanding
December 31 (in thousands)
1998 1997 1996 1995 1994
Commercial $ 15,177 $ 10,644 $ 10,216 $ 11,167 $ 7,502
Real Estate Construction 11,055 7,657 4,200 3,497 3,156
Real Estate Mortgage 124,721 113,524 99,293 102,077 101,361
Agricultural 44,199 37,924 30,947 27,019 23,407
Installment 17,608 15,182 14,789 11,029 11,391
Other 159 287 374 397 807
Total Loans 212,919 185,218 159,819 155,186 147,624
Less Deferred Loan Fees 76 57 154 125 159
Loans Net of Deferred Loan Fees 212,843 185,161 159,665 155,061 147,465
Less loans held for sale 5,909 5,418 863 1,364 1,553
Less Allowance For Loan Losses 2,734 2,322 2,101 1,860 1,648
Net Loans $204,200 $177,421 $156,701 $151,837 $144,264
The following table sets forth the maturity distribution and
interest sensitivity of selected loan categories at December
31, 1998. Maturities are based upon contractual term. The
total loans in this report represents loans net of deferred
loan fees, including loans held for sale but excluding the
allowance for loan losses. In addition, deferred loan fees
on the above schedule is netted with real estate mortgage
loans on the following schedule.
Loan Maturities and Interest Sensitivity
December 31, 1998 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 7,390 $ 6,448 $ 1,339 $ 15,177
Real Estate 8,593 2,291 171 11,055
Construction
Real Estate Mortgage 8,220 64,363 52,063 124,646
Agricultural 14,878 27,566 1,755 44,199
Installment 5,327 12,091 189 17,607
Other 159 0 0 159
Total Loans 44,567 112,759 55,517 212,843
Fixed Rate Loans 25,848 103,495 15,858 145,201
Floating Rate Loans 18,719 9,264 39,659 67,642
Total $44,567 $112,759 $55,517 $212,843
<PAGE>
Deposits
Total deposits increased $17 million in 1998 to $259
million. Noninterest bearing deposits increased $7 million
to $40 million, while $100,000 and over time deposits and
other interest bearing deposits both increased $5 million.
Public funds composed $35 million, with $34 million of this
being interest bearing. During 1997, total deposits
increased $10 million to $241 million from $231 million in
1996. The increase was mainly a result of interest bearing
checking accounts increasing over $11 million during 1997.
Public deposits accounted for $22 million, with $21 million
of this being interest bearing deposits. The Company
increased its focus on attracting more interest bearing
checking accounts. In addition, management placed more
emphasis on deposits and monitored deposits generated by
type on a monthly basis.
The tables below provide information on the maturities of
time deposits of $100,000 or more at December 31, 1998 and
detail of short-term borrowing for the past three years.
Maturity of Time Deposits of $100,000 or More
December 31, 1998
(in thousands)
Maturing 3 Months or Less $ 7,409
Maturing over 3 Months through 6 Months 7,827
Maturing over 6 Months through 12 Months 10,707
Maturing over 12 Months 2,225
Total $28,168
Borrowing
The Company utilizes both long and short term borrowing.
Long term borrowing is mainly from the Federal Home Loan
Bank (FHLB). As of December 31, 1998, $7.0 million was
borrowed from FHLB, a decrease of $3.3 million from 1997.
Advances are either paid monthly or at maturity. This
borrowing is mainly used to fund long term, fixed rate
mortgages and to assist in asset/liability management.
Nearly $7.3 million of FHLB borrowing was paid in 1998, and
advances were made for an additional $4 million. The
following table depicts relevant information concerning our
short term borrowings.
Short Term Borrowings
December 31 (in thousands)
1998 1997 1996
Federal Funds Purchased:
Balance at Year end $3,750 $2,375 $ 0
Average Balance During the Year 446 488 142
Maximum Month End Balance 4,550 2,375 1,075
Repurchase Agreements:
Balance at Year end 6,713 4,615 2,836
Average Balance During the Year 4,329 4,103 3,342
Maximum Month End Balance 6,713 4,895 4,668
Other Borrowed Funds:
Balance at Year end 785 2,468 1,324
Average Balance During the Year 1,198 1,259 1,225
Maximum Month End Balance 1,761 2,468 1,873
<PAGE>
Asset Quality
With respect to asset quality, management considers three
categories of assets to merit close 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 extreme justifiable reasons are documented such as
the loan being in the process of collection. Uncollected
interest generally remains in earned income until collected
and removed from earnings if the loan is charged-off. 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.
Nonperforming Assets
December 31 (in thousands)
1998 1997 1996 1995 1994
Non-accrual Loans $ 136 $173 $ 33 $ 44 $ 85
Accruing Loans which are
Contractually past due
90 days or more 790 154 562 438 283
Restructured Loans 147 160 180 201 357
Total Nonperforming and
Restructured Loans 1,073 487 775 683 725
Other Real Estate 70 0 79 57 306
Total Nonperforming and
Restructured Loans and
Other Real Estate 1,143 487 854 740 1,031
Nonperforming and Restructured
Loans as a Percentage
of Net Loans (1) 0.50% 0.26% 0.49% 0.44% 0.49%
Nonperforming and Restructured
Loans and Other Real Estate
as a Percentage of Total Assets 0.37 0.17 0.31 0.27 0.38
(1) Net of deferred loan fees
<PAGE>
Nonperforming and restructured loans at December 31, 1998
were $1.1 million compared to $487 thousand at December 31,
1997 and $775 thousand at December 31, 1996. Total
nonperforming assets were $1.1 million, $487 thousand and
$854 thousand at December 31, 1998, 1997 and 1996,
respectively. The amount of lost interest on non-accrual
loans is considered immaterial. At December 31, 1998, 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.
Impaired loans as of December 31, 1998 were $286 thousand
compared to $333 thousand in 1997 and $251 thousand in 1996.
These amounts are included in the total nonperforming and
restructured loans presented in the table above. See Note 4
in the notes to consolidated financial statements included
as Exhibit 13.
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 $85
thousand, $57 thousand and $28 thousand on December 31,
1998, 1997 and 1996, respectively.
<PAGE>
Loan Losses
The following table is a summary of the Company's loan loss
experience for each of the past five years.
Year Ended December 31 (in thousands)
1998 1997 1996 1995 1994
Balance at Beginning of Year $ 2,322 $ 2,101 $ 1,860 $ 1,648 $ 1,420
Balance of Allowance for Loan
Losses of Acquired Branch
at Acquisition Date 252
Amounts Charged-off:
Commercial 13 5 55 14 123
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 36 25 4 41 53
Agricultural 19 52 12 36 3
Consumer 300 273 142 139 56
Total Charged-off Loans 368 355 213 230 235
Recoveries on Amounts
Previously Charged-off:
Commercial 4 3 12 15 22
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 9 1 8 21 1
Agricultural 2 25 1 0 0
Consumer 66 54 31 11 43
Total Recoveries 81 83 52 47 66
Net Charge-offs 287 272 161 183 169
Provision for Loan Losses 700 493 402 395 145
Balance at End of Year 2,735 2,322 2,101 1,860 1,648
Total Loans, Net of Unearned
Income
Average 193,182 171,128 155,735 153,109 125,643
At December 31 $212,843 $185,161 $159,665 $155,061 $147,465
As a Percentage of Average Loans:
Net Charge-offs 0.15% 0.16% 0.10% 0.12% 0.13%
Provision for Loan Losses 0.36 0.29 0.26 0.26 0.12
Allowance as a Percentage of
Year-end Net Loans (1) 1.28 1.25 1.32 1.20 1.128
Beginning Allowance as a
Multiple Of Net Charge-offs 8.1 7.7 11.6 9.0 8.4
(1) Net of deferred loan fees
<PAGE>
Loans are typically charged-off after being 120 days
delinquent. Limited exceptions for not charging-off a loan
would be well documented and approved by the appropriate
responsible party or committee. The provision for loan
losses for 1998 was $700 thousand compared to $493 thousand
in 1997 and $402 thousand in 1996. Net charge-offs were
$287 thousand in 1998, $272 thousand in 1997 and $161
thousand in 1996. Net chargeoffs to average loans were
0.15%, 0.16% and 0.10% in 1998, 1997 and 1996, respectively.
The trend in the loan loss provisions increasing for 1998
and 1997 is a result of considering our historical loan loss
trends, risk analysis of our loan portfolio and the increase
in loan outstandings. 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, 1998, the allowance for loan
losses was 1.28% of loans outstanding compared to 1.25% at
year-end 1997 and 1.32% in 1996. Management believes the
allowance for loan losses at the end of 1998 is adequate to
cover inherent credit losses within the portfolio.
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.
<PAGE>
<TABLE>
<CAPTION>
Allowance for Loan Losses
December 31 (in thousands)
1998 1997 1996 1995 1994
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
>s> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 262 9.58% $ 191 8.23% $ 168 8.00% $ 132 7.10% $ 94 5.70%
Real Estate Construction 168 6.14 118 5.08 77 3.66% 38 2.04 27 1.64
Real Estate Mortgage 1,480 54.11 1,327 57.15 1,252 59.59% 1,192 64.09 1,105 67.05
Agricultural 473 17.29 393 16.93 353 16.80% 327 17.58 269 16.32
Consumer 352 12.87 293 12.62 251 11.95% 171 9.19 153 9.28
Total $ 2,735 100.00% $ 2,322 100.00% $ 2,101 100.00% $ 1,860 100.00% $ 1,648 100.00%
Loans
December 31 (in thousands)
1998 1997 1996 1995 1994
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Commercial $ 15,177 7.13% $ 10,644 5.75% $ 10,216 6.40% $ 11,167 7.20% $ 7,502 5.09%
Real Estate Construction 11,055 5.19 7,657 4.14 4,200 2.63 3,497 2.26 3,156 2.14
Real Estate Mortgage 124,645 58.56 113,467 61.28 99,139 62.09 102,077 65.83 101,361 68.74
Agricultural 44,199 20.77 37,924 20.48 30,947 19.38 27,019 17.42 23,407 15.87
Consumer 17,608 8.27 15,182 8.20 14,789 9.26 10,904 7.03 11,232 7.62
Other 159 0.07 287 0.16 374 0.23 397 0.26 807 0.55
Total, net (1) $212,843 100.00% $185,161 100.00% $159,665 100.00% $155,061 100.00% $147,465 100.00%
</TABLE>
[FN]
(1) Net of deferred loan fees
<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, 1998
increased $3.0 million to $27.7 million. Total capital was
$29.3 million at December 31, 1998. 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.
December 31 (in thousands)
1998 1997 Change
Stockholders' Equity (1) $ 29,306 $ 26,483 $ 2,823
Less Disallowed Amount of Goodwill 1,574 1,789 (215)
Tier I Capital 27,732 24,694 3,038
Allowance for Loan Losses 2,601 2,272 329
Tier II Capital 2,601 2,272 329
Total Capital 30,333 26,966 3,367
Total Risk Weighted Assets $207,970 $181,702 $26,268
Ratios:
Tier I Capital to Risk-weighted Assets 13.33% 13.59% -0.26%
Total Capital to Risk-weighted Assets 14.59 14.84 -0.25
Leverage 9.56 8.77 0.79
(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 from "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 ratio 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, 1998, the bank 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.
Securities and Federal Funds Sold
Securities, including those classified as held to maturity
and available for sale, decreased from $81.7 million at
December 31, 1997 to $72.4 million at December 31, 1998.
The decrease is attributable to the increased loan demand.
Federal funds sold totaled $75 thousand at December 31,
1996.
<PAGE>
Per Company policy, fixed rate asset backed securities will
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 $15.7
million of adjustable asset backed securities held on
December 31, 1998, $3.4 million are repriceable monthly and
the remaining $12.3 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, 1998.
Investment Securities (Held to maturity at amortized cost,
available for sale at market value)
December 31
1998 1997 1996
(in thousands)
U.S. Treasury Securities
Available for Sale $16,087 $19,072 $24,571
U.S. Federal Agency Securities
Available for Sale 5,979 10,485 8,984
State and Municipal Obligations
Available for Sale 3,804 4,077 4,012
Held to Maturity 16,933 15,603 16,313
Asset-Backed Securities
Available for Sale
Fixed -
GNMA, FNMA, FHLMC Passthroughs 2,352 4,924 10,899
GNMA, FNMA, FHLMC CMO's 7,570 9,970 10,482
Total 9,922 14,894 21,381
Variable -
GNMA, FNMA, FHLMC Passthroughs 12,529 14,306 13,907
GNMA, FNMA, FHLMC CMO's 3,173 3,266 3,372
Total 15,702 17,572 17,279
Other Securities
Available for Sale 3,926 0 0
Total Securities
Available for Sale 55,420 66,100 76,227
Held to Maturity 16,933 15,603 16,313
Total $72,353 $81,703 $92,540
<PAGE>
<TABLE>
<CAPTION>
Maturity Distribution of Securities
December 31, 1998 (in thousands)
Over One Year Over Five Years Asset Backed
One Year Through Through Over Ten 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 $14,070 $ 2,017 $ 0 $ 0 $ 0 $16,087 $16,087
U.S. Federal Agency Securities
Available for Sale 3,986 1,993 0 0 0 5,979 5,979
State and Municipal Obligations
Available for Sale 0 2,378 1,426 0 0 3,804 3,804
Held to Maturity 1,093 5,757 6,857 3,226 0 16,933 17,855
Asset-Backed Securities
Available for Sale 25,624 25,624 25,624
Other Securities
Available for Sale 534 955 1,460 977 3,926 3,926
Total Securities
Available for Sale 18,056 6,922 2,381 1,460 26,601 55,420 55,420
Held to Maturity 1,093 5,757 6,857 3,226 0 16,933 17,855
Total $19,149 $12,679 $ 9,238 $ 4,686 $26,601 $72,353 $73,275
Percent of Total 26.47% 17.52% 12.77% 6.48% 36.77% 100.00%
Weighted Average Yield (1) 5.25 7.66 8.36 7.15 6.13 6.52
</TABLE>
[FN]
(1) Tax Equivalent Yield
<PAGE>
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.
Other Accounting Issues
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income. Comprehensive income consists of net
income and comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities available
for sale which are also recognized as a separate component
of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior
information restated to be comparable.
Year 2000
Management has assessed the operational and financial
implications of its Year 2000 needs and developed a plan to
address its data processing systems and their ability to
handle the change. Management has determined that if a
business interruption as a result of the Year 2000 issue
occurred, such an interruption could be material. The
primary effort required to prevent a potential business
interruption is the installation of the most current
software release from the Company's third party provider and
replacement of certain system hardware. The third party
software provider has warranted that Year 2000 remediation
and testing efforts to become compliant have been
successfully completed. Testing of mission critical systems
was be completed the first quarter 1999. Non-
mission critical systems will continue to be evaluated and,
if necessary, will be upgraded or replaced. Current cost
estimates for this project are under $150 thousand, with the
majority of this expenditure being for equipment and
software to be capitalized over 3-5 years. In addition,
over $400 thousand was spent on a new mainframe computer
system to enhance our overall computer technology. Year 2000
expenses are subject to change and could vary from current
estimates if the final requirements for Year 2000 readiness
exceed management's expectations.
The Company must also rely to some extent on the Year 2000
readiness of other third party entities such as public
utilities and governmental units. These and other like
entities provide important ongoing services to the Company.
Management is therefore developing and implementing
contingency plans that are scheduled to be in place by the
end of the second quarter, 1999.
The Company's credit customers are also subject to potential
losses as a result of Year 2000 exposure in their own
computer systems as well as the computer systems of their
suppliers and customers. The Company is working with those
customers that the Company believes may be significantly
affected to assess each customer's Year 2000 exposure and
the extent to which the customer has addressed the problem.
Any exposure which, in the opinion of management, is not
adequately addressed will be taken into account in assessing
the loss potential, if any, associated with that credit
relationship.
<PAGE>
Forward-Looking Statements
This discussion contains forward-looking statements under
the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties. Although the Company
believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be
no assurance that the forward-looking statements included
herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the
forward-looking statements include, but are not limited to:
economic conditions (both generally and more specifically in
the markets in which the Company and its bank operate);
competition for the Company's customers from other providers
of financial and mortgage services; government legislation
and regulation (which changes from time to time and over
which the Company has no control); changes in interest rates
(both generally and more specifically mortgage interest
rates); material unforeseen changes in the liquidity,
results of operations, or financial condition of the
Company's customers; material unforeseen complications
related to addressing the Year 2000 problem experienced by
the Company, its suppliers, customers and governmental
agencies; and other risks detailed in the Company's filings
with the Securities and Exchange Commission, all of which
are difficult to predict and many of which are beyond the
control of the Company. The Company undertakes no
obligation to republish revised forward-looking statements
to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
<PAGE>
Item 7A. Asset/Liability Management, Interest Rate
Sensitivity, Market Risk and Liquidity
Asset/Liability management control is designed to ensure
safety and soundness, maintain liquidity and regulatory
capital standards, and achieve acceptable net interest
income. Management considers interest rate risk to be the
most significant market risk. The Company's exposure to
market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate
changes. These economic losses can be reflected as a loss
of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on
net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent and
that the goal is to identify and minimize the risks. Tools
used by management include the standard GAP model and an
interest rate shock simulation model. The Bank has no
market risk sensitive instruments held for trading purposes.
The following table depicts the change in net interest
income resulting from 100 and 300 basis point changes in
rates. The projections are based on balance sheet growth
assumptions and repricing opportunities for new, maturing
and adjustable rate amounts. In addition, the projected
percentage changes from level rates are outlined below
within the Board of Directors specified limits. As of
December 31, 1998 the projected percentage changes are
within the Board limits and the Company's interest rate risk
is also with Board limits. The projected net interest
income report summarizing the Company's interest rate
sensitivity as of December 31, 1998 is as follows:
Projected Net Interest Income
Level
Rate Change: - 300 - 100 Rates + 100 + 300
Year One (1/1/99 - 12/31/99)
Interest Income $19,989 $22,127 $23,210 $24,295 $26,463
Interest Expense 7,317 9,281 10,264 11,246 13,210
Net Interest Income 12,672 12,846 12,946 13,049 13,253
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (1/1/99 - 12/31/99)
Interest Income $(3,221) $(1,083) N/A $ 1,085 $ 3,253
Interest Expense (2,947) (983) N/A 982 2,946
Net Interest Income (274) (100) 103 307
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (1/1/99 - 12/31/99)
Interest Income -13.9% -4.7% N/A 4.7% 14.0%
Interest Expense -28.7 -9.6 N/A 9.6 28.7
Net Interest Income -2.1% -0.8% N/A 0.8% 2.4%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
<PAGE>
These numbers are comparable to 1997. In 1997, year one
reflected a decline in net interest income of 2.6% with a
300 basis point decline compared to the 2.1% decline in
1998. The 300 basis point increase in rates reflected a
2.8% increase in net interest income in 1997 compared to
2.4% in 1998.
Management measures the Company's interest rate risk by
computing estimated changes in net interest income in the
event of a range of assumed changes in market interest
rates. The Company's exposure to interest rates is reviewed
on a monthly basis by senior management and quarterly with
the Board of Directors. Exposure to interest rate risk is
measured with the use of interest rate sensitivity analysis
to determine the change in net interest income in the event
of hypothetical changes in interest rates, while interest
rate sensitivity gap analysis is used to determine the
repricing characteristics of the Company's assets and
liabilities. If estimated changes to net interest income
are not within the limits established by the Board, the
Board may direct management to adjust the Company's asset
and liability mix to bring interest rate risk within Board
approved limits.
In addition, the Company uses interest rate sensitivity gap
analysis to monitor the relationship between the maturity
and repricing of its interest-earning assets and interest-
bearing liabilities, while maintaining an acceptable
interest rate spread. Interest rate sensitivity gap is
defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is
considered positive when the amount of interest-rate-
sensitive assets exceeds the amount of interest-sensitive-
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period
of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would
result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a
positive gap would negatively affect net interest income.
The Company's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings.
The interest rate sensitivity analysis as of December 31,
1998 shown below depicts amounts based on the earliest
period in which they can normally be expected to reprice.
The chart reveals that assets and liabilities are fairly
well matched for the early periods specified below. The
decay rates used for Demand deposits, NOW's, Savings and
Money Market Savings are 5%, 30%, 20% and 30%, respectively.
<PAGE>
<TABLE>
<CAPTION>
Interest Rate Sensitivity Analysis
December 31, 1998 (in thousands)
Total 1 Year 2 Years 3 Years 4 Years 5 Years >5 Years
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash & Due From Banks $ 10,619 $ - $ - $ - $ - $ - $ 10,619
Fed Funds & Int-Earning Due From Banks 137 137 - - - - -
Variable Rate Investment (1) 19,849 19,849 - - - - -
Fixed Rate Investment (1) 52,504 24,131 6,254 4,143 2,071 4,265 11,640
Variable Rate Loans 67,681 61,065 2,546 1,234 1,220 1,616
Fixed Rate Loans 145,162 44,267 21,636 23,888 26,010 26,560 2,801
Others Assets 12,753 3,120 - - - - 9,633
Total Assets / Repricing Assets 308,705 152,569 30,436 29,265 29,301 32,441 34,693
Repricing Assets - Accumulated 152,569 183,005 212,270 241,571 274,012 308,705
% of Current Balance 49.4% 9.9% 9.5% 9.5% 10.5% 11.2%
% of Current Balance - Accumulated 49.4 59.3 68.8 78.3 88.8 100.0
LIABILITIES
Demand Deposit Accounts $ 40,336 $ 2,017 $ 1,916 $ 2,017 $ 1,916 $ 1,624 $ 30,846
NOW Accounts 63,467 19,040 13,328 9,330 6,530 4,572 10,667
Savings Accounts 12,572 2,517 2,011 1,609 1,287 1,030 4,118
Money Market Savings 9,477 2,843 1,990 1,393 975 683 1,593
Subtotal Deposit Accounts 125,852 26,417 19,245 14,349 10,708 7,909 47,224
Other Variable Deposits 5,959 5,959 - - - - -
Fixed Rate Deposits 126,929 112,999 9,977 1,320 689 963 981
Variable Rate Other Liabilities 10,498 10,248 250 - - - -
Fixed Rate Other Liabilities 7,704 299 1,237 234 248 5,576 110
Other Liabilities 2,391 - - - - - 2,391
Total Capital 29,372 - - - - - 29,372
Total Liabilities / Repricing Liab 308,705 155,922 30,709 15,903 11,645 14,448 80,078
Repricing Liabilities - Accumulated 155,922 186,631 202,534 214,179 228,627 308,705
% of Current Balance 50.5% 9.9% 5.2% 3.8% 4.7% 25.9%
% of Current Balance - Accum 50.5 60.5 65.6 69.4 74.1 100.0
SUMMARY
Total Repricing Assets 152,569 30,436 29,265 29,301 32,441 34,693
Total Repricing Liabilities 155,922 30,709 15,903 11,645 14,448 80,078
Total Repricing Gap (by Bucket) (3,353) (273) 13,362 17,656 17,993 (45,385)
Total Repricing Assets - Cumulative 152,569 183,005 212,270 241,571 274,012 308,705
Total Repricing Liabilities - Cumul 155,922 186,631 202,534 214,179 228,627 308,705
Gap/Total Assets (by Bucket) -1.09% -0.09% 4.33% 5.72% 5.83% -14.70%
Cumulative Gap/Total Assets -1.09 -1.17 3.15 8.87 14.70 0.00
</TABLE>
[FN]
(1) Held to maturity at amortized cost, available for sale at market value
<PAGE>
Little change in the above numbers has occurred since 1997.
For the first three years in 1997 and 1998, the cumulative
gap percentage is less than 4%. There was a slight increase
in the cumulative gap for the three year period from 1.86%
in 1997 to 3.15% in 1998. There has been a trend in the 3
to 5 year periods of being more positive. The cumulative
gap at December 31, 1997 for the 5 year period was 10.36%.
This increased to 14.7% as of December 31, 1998. These
percentages remain below the Board established guidelines.
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 meeting 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 $29.9 million at December 31, 1998.
Additionally, securities available-for-sale with maturities
greater than one year totaled $37.4 million at December 31,
1998. 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, 1998 these balances totaled over $28 million,
approximately 10.9% 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 $3.3 million in
1998 to $7.0 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 loan
originations. Management believes there is sufficient
liquidity to meet all reasonable borrower, depositor and
creditor needs in the present economic environment.
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 1998, 1997 and 1996 follows.
Net cash provided by operating activities was $3.5 million,
$5.2 million and $5.1 million for the years ended December
31, 1998, 1997 and 1996, respectively. The changes in 1998
and 1997 were mainly a result of the increase in net income
from $2.9 million to $3.4 million to $3.8 million in 1996,
1997 and 1998, respectively.
<PAGE>
Net cash flow used in investing activities was $20.0
million, $15.8 million, and $7.1 million and for the years
ended December 31, 1998, 1997 and 1996, 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.
During 1998, funds used for loan growth were $28 million,
partly offset by a decline in investments of $9 million. In
1997, the loan growth resulted in a use of funds of nearly
$26 million, being offset by a decline in investment
securities of $11 million. This was funded mainly by
deposits increasing $10 million and short term borrowing
increasing $5 million. In addition, $1.3 million was used
for purchases of bank premises and equipment. During 1996
and 1997, over $1 million was expended for land, building
and equipment for the new branch location in Versailles. In
1997 and 1998, over $1.1 million was invested in the new
Georgetown branch that opened in August 1998. In addition,
over $400 thousand investment was made to upgrade the
existing hardware and software. 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.
Net cash flow from financing activities was $14.9 million,
$13.7 million and $0.1 million for the years ended December
31, 1998, 1997 and 1996, 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.
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.
Liquidity Ratios
December 31
1998 1997 1996
Total Loans/Total Deposits 78.7% 73.6% 71.3%
Net Short-term Borrowings/Total 1.8 1.8 1.5
<PAGE>
Assets
This chart shows that the loan to deposit ratio increased in
1998 and 1997. Loan growth of 15% and deposit growth of 7%
have both been contributing factors to the greater change in
this ratio from 1997 to 1998 compared to the previous year.
Item 8. Financial Statements
The consolidated financial statements of the Company
together with the notes thereto and report of independent
auditors are contained in the Company's 1998 Annual Report
to Stockholders included as Exhibit 13, and are incorporated
herein by reference.
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
<PAGE>
PART III
Item 10. 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.
Terms expiring in 1999:
Henry Hinkle, age 47, is President of Hinkle Construction
Company. He has been a director of the Company since 1989.
Theodore Kuster, age 55, is a farmer and thoroughbred horse
breeder. He has been a director of the Company since 1979.
Robert G. Thompson, age 49, is Executive Director of the
Paris Bourbon County YMCA, a farmer and thoroughbred horse
breeder. He has been a director of the Company since 1991.
Terms expiring in 2000:
William R. Stamler, age 64, is Chairman of Signal
Investments, Inc. He has been a director of the Company
since 1988.
Buckner Woodford, age 54, is President and Chief Executive
Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He
has been a director of the Company since 1971.
Terms expiring in 2001:
William Arvin, age 58, is an attorney. He has been a
director of the Company since December 19, 1995.
James L. Ferrell, M.D., age 64, is a Physician. He has been
a director of the Company since 1980.
Joseph B. McClain, age 70, is President of Hopewell Co.
(insurance agency). He has been a director of the Company
since 1971.
The Company's other executive officer is Gregory J. Dawson,
age 38. He is the Chief Financial Officer and has been with
the Company since 1985 and serves at the pleasure of the
Board of Directors.
<PAGE>
Item 11. Executive Compensation
The following table sets forth information with respect to
the compensation of the President and Chief Executive
Officer of the Company. No other executive officer earned
total salary and bonus in excess of $100,000.
Summary Compensation Table
Annual Compensation
Other Annual Options
Name Year Salary Bonus Compensation Granted
Buckner Woodford 1998 $156,000 $ 3,161 (1) 1,900
Buckner Woodford 1997 $150,000 $ 4,879 (1) 1,600
Buckner Woodford 1996 $136,500 $ 1,505 (1) 3,000
(1) Less than the lesser of $50,000 or 10% of annual salary
and bonuses.
The following table contains information regarding the grant
of stock options under the Company's stock option plan to
the Chief Executive Officer during the year ended December
31, 1998. In addition, in accordance with rules of the
Securities and Exchange Commission, the following table sets
forth the hypothetical grant date present value with respect
to the referenced options, using the Black-Scholes Option
Pricing Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 1998 ($/Sh) Date Value($)
Buckner Woodford 1,900 14.6% $31.00 1/7/08 $16,568
The following table sets forth certain information regarding
options exercised by the Chief Executive Officer during
calendar year 1998 and unexercised stock options held by him
as of December 31, 1998.
<TABLE>
Aggregated Option Exercises in Calendar 1998
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options at 12/31/98 Options at 12/31/98
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
Buckner Woodford None N/A 4,460/5,380 $85,412/$74,413
</TABLE>
The Company did not have any Stock Appreciation Rights (SAR's) at
December 31, 1998.
<PAGE>
Compensation of Directors
Directors are paid $300 for each board meeting attended and
$100 for each committee meeting attended. Directors are
also granted a 10-year option to purchase 50 shares of the
Company's common stock following each year in which Kentucky
Bank has an return on assets of 1 percent or greater. The
option's exercise price is the fair market value per share
on the date of grant.
Pension Plan
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 subsidiaries.
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 are 27 years.
<PAGE>
Item 12. 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 as of December 31, 1998.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 15,626 1.1%
Gregory J. Dawson (3) 5,250 *
James L. Ferrell, M.D. (4) 15,120 1.1
Henry Hinkle (5) 13,925 *
Theodore Kuster (6) 8,885 *
Joseph B. McClain (7) 21,618 1.5
William R. Stamler (8) 15,430 1.1
Robert G. Thompson (9) 3,270 *
Buckner Woodford (10) 128,939 9.1
All directors and officers
(9 persons) as a group
(consisting of those
persons named above)(11) 228,063 16.1%
* Less than 1%
<PAGE>
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
3,638 held jointly with his wife.
3) Includes 4,900 shares that Mr. Dawson
may acquire upon exercise of outstanding
stock options.
4) Includes 2,500 shares held in a
retirement account and 570 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.
5) Includes 500 shares held by his wife and 320 shares held by
three sons, as to which Mr. Hinkle disclaims beneficial
ownership. Includes 12,000 shares held of record by
Hinkle Contracting Company, as to which Mr. Hinkle, as
president, has shared voting power. Also includes 170
shares that Mr. Hinkle may acquire upon exercise of
outstanding stock options.
6) Includes 3,135 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 570 shares that Mr. Kuster may
acquire upon exercise of outstanding stock
options.
7) Includes 570 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.
8) Includes 2,000 shares held by Signal
Investments Corporation, as to which Mr.
Stamler, as the chief executive officer and
majority Stockholder of such corporation, has
sole voting and investment power. Also
includes 570 shares that Mr. Stamler may
acquire upon exercise of outstanding stock
options.
9) Includes 570 shares that Mr. Thompson
may acquire upon exercise of outstanding
stock options.
10) Includes 4,000 shares held by his wife
and 5,666 shares held by two sons, as to
which Mr. Woodford disclaims beneficial
ownership. Also includes 104 shares held in
a retirement account and 4,460 shares that
Mr. Woodford may acquire upon exercise of
outstanding stock options.
11) Includes 12,380 shares that may be
acquired upon exercise of outstanding stock
options.
<PAGE>
The following table sets forth as of December 31, 1998 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 128,939 9.1%
340 Stoner Avenue
Paris, Kentucky 40361
Item 13. 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 bank in the ordinary course of business during
the year ended December 31, 1998. Similar transactions may
be expected to take place with the Company's subsidiary bank
in the future. Outstanding loans and commitments made by
such subsidiary bank 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 Kentucky Bank and
outstanding loans were $1.2 million and $1.8 million as of
December 31, 1998 and 1997, respectively. See Note 4 in the
notes to consolidated financial statements included as
Exhibit 13.
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules 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 - See Note 10 in the
notes to consolidated financial statements included as
Exhibit 13.
13 Financial Statements:
Consolidated Balance Sheets - December 31, 1998
and 1997
Consolidated Statements of Income and
Comprehensive Income - Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe, Chizek and Company LLP
(b) Current Reports on Form 8-K during the quarter ended
December 31, 1998
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: __/s/Buckner Woodford__
Buckner Woodford, President and Chief Executive Officer,
Director
March 29, 1999
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.
__/s/Buckner Woodford________ March 29, 1999
Buckner Woodford, President and Chief Executive Officer,
Director
__/s/Gregory J. Dawson_______ March 29, 1999
Gregory J. Dawson, Chief Financial and Accounting Officer
__/s/James L. Ferrell________ March 29, 1999
James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 29, 1999
William Arvin, Director
_____________________________ March 29, 1999
Henry Hinkle, Director
__/s/Theodore Kuster_________ March 29, 1999
Theodore Kuster, Director
__/s/Joseph B. McClain_______ March 29, 1999
Joseph B. McClain, Director
_____________________________ March 29, 1999
William R. Stamler, Director
__/s/Robert G. Thompson______ March 29, 1999
Robert G. Thompson, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE
ACT.
The Registrant refers to Exhibits 13 and 99.1 to the Form 10-
K.
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Document
3.1 Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-4 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by
reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form S-4 (File No. 33-96358).
10.1 Bourbon's 1993 Employee Stock Ownership Incentive
Plan is incorporated by reference to Exhibit 10.2 of the
Registrant's Registration Statement on Form S-4 (File No.
33-96358).*
10.2 Bourbon's 1993 Non-Employee Directors Stock
Ownership Incentive Plan is incorporated by reference to
Exhibit 10.3 of the Registrant's Registration Statement on
Form S-4 (File No. 33-96358).*
13 Bourbon Bancshares, Inc. 1998 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Crowe, Chizek and Company LLP
27 Financial Data Schedule (for SEC use only)
99.1 Proxy statement dated March 25, 1999, sent to the
Registrant's security holders in connection with the 1999
Annual Meeting of Shareholders and supplementally furnished
to the Commission for its information as required by Form 10-
K for registrants which have not registered securities
pursuant to Section 12 of the Securities Exchange Act of
1934. This material is not otherwise to be deemed filed
with the Commission.
* Denotes a management contract or compensatory plan or
arrangement of the Registrant required to be filed as an
exhibit pursuant to Item 601(10) (iii) of Regulation S-K.
<PAGE>
Exhibit 13
BOURBON BANCSHARES, INC.
ANNUAL REPORT 1998
<PAGE>
To Our Shareholders,
The economy in central Kentucky continues to enjoy
healthy expansion. This includes a high level of
residential and industrial building as well as strong demand
for thoroughbred horses and horse farms. All of this
activity is beneficial to the financial institutions here.
Bourbon Bancshares had very good financial results in
1998. Earnings per share after dilution were $2.66 compared
with $2.40 last year and $2.00 in 1996. This has resulted
from a combination of growth in our balance sheet with
attention to expense control.
Total assets rose to $308 million, exceeding $300
million for the first time. Loan demand was strong for a
second consecutive year. Our loan portfolio grew by 15%
last year following 16% the prior year. Deposits also
showed a very nice 7% growth. We believe we have these
growth opportunities because our subsidiary, Kentucky Bank,
is firmly established in all segments of a very healthy
economy.
We continue to make investments that we believe will
keep our future bright as well. In 1998 we opened a second
branch facility in Georgetown. This is the fastest growing
community in central Kentucky.
Like virtually all banks we devoted considerable effort
last year to preparing our computer systems for the year
2000. Our extensive testing program is nearly complete.
The largest expenditure made was over $400,000 for a new
mainframe computer which was installed in the fall of 1998.
We believe we are very well prepared for the new century.
Two of our bank directors retired at the end of 1998.
Betty Jo Denton Heick and Alex Miller devoted many years of
loyal and faithful service to this institution. Their
advice was always helpful. We will miss them both.
One possible concern about the future is the bleak
outlook for tobacco. This crop has made a made a major
contribution to the local economy for decades. Over time,
every community must respond to the economic changes that
arise. Central Kentucky has diversified its economy enough
that overall growth should continue.
Buckner Woodford
<PAGE>
FINANCIAL HIGHLIGHTS
BOURBON BANCSHARES, INC. 1998 1997 1996 1995
Assets ($ millions) $ 309 $ 291 $ 272 $ 269
Net Income ($ thousands) $ 3,804 $ 3,408 $ 2,887 $ 2,488
Per Share Results
Earnings
(assuming dilution) $ 2.66 $ 2.40 $ 2.00 $ 1.71
Dividends $ .80 $ .72 $ .64 $ .60
Stockholder Information
CORPORATE HEADQUARTERS
Bourbon Bancshares, Inc.
4th and Main Street
Paris, Kentucky 40361
606-987-1795
ANNUAL MEETING
The annual meeting of Stockholders of Bourbon Bancshares,
Inc. Will be held Monday, May 3, 1999 at 9:00 a.m. in the
corporate headquarters.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Kentucky Bank
Trust Department
606-987-1795, ext. 316
MARKET MAKERS
Morgan Keegan & Co.
489 East Main Street
Lexington, Kentucky 40507
1-800-937-0161
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
1-800-944-2663
OTC Bulletin Board
Symbol: BBON
INVESTOR INFORMATION
Any individual requesting general information or a copy of
the Corporation's 1998 Form 10-K Report may obtain these by
writing Investor Relations at the Corporate Headquarters.
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Bourbon Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated
balance sheets of Bourbon Bancshares, Inc. as
of December 31, 1998 and 1997, and the
related consolidated statements of income and
comprehensive income, changes in
stockholders' equity and cash flows for each
of the years in the three year period ended
December 31, 1998. 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.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform
the audit to obtain reasonable assurance
about whether the financial statements are
free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as
well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly,
in all material respects, the financial
position of Bourbon Bancshares, Inc. as of
December 31, 1998 and 1997, and the results
of its operations and its cash flows for each
of the years in the three year period ended
December 31, 1998, in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Lexington, Kentucky
January 15, 1999
<PAGE>
BOURBON BANCSHARES, INC.
Paris, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
<PAGE>
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
ASSETS
Cash and due from banks $ 10,756,213 $ 12,274,875
Investment securities:
Available for sale 55,419,734 66,100,663
Held to maturity (fair value 1998 - $17,854,550
and 1997 - $16,410,523) 16,933,755 15,602,778
Mortgage loans held for sale 5,908,676 5,418,297
Loans 206,934,127 179,742,143
Allowance for loan losses (2,734,589) (2,321,536)
Net loans 204,199,538 177,420,607
Federal Home Loan Bank stock 3,119,500 2,905,200
Bank premises and equipment, net 6,793,998 5,765,310
Interest receivable 3,165,110 2,855,565
Intangible assets 2,034,441 2,103,688
Other assets 374,272 207,806
Total assets $308,705,237 $290,654,789
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 40,336,201 $ 33,481,215
Time deposits, $100,000 and over 28,168,022 22,573,181
Other interest bearing 190,235,493 185,270,925
Total deposits 258,739,716 241,325,321
Securities sold under agreements to repurchase
and other borrowings 11,248,277 9,457,606
Federal Home Loan Bank advances 6,953,502 10,236,291
Interest payable 1,778,984 1,900,824
Other liabilities 612,453 1,018,629
Total liabilities 279,332,932 263,938,671
Stockholders' equity
Preferred stock, 300,000 shares authorized and
unissued - -
Common stock, no par value; 3,000,000 shares
authorized; 1,404,628 and 1,394,562 shares
issued and outstanding in 1998 and 1997,
respectively 6,474,241 6,332,861
Retained earnings 22,832,043 20,150,369
Accumulated other comprehensive income 66,021 232,888
Total stockholders' equity 29,372,305 26,716,118
Total liabilities and stockholders' equity $308,705,237 $290,654,789
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Interest income
Loans, including fees $17,211,687 $15,483,271 $13,774,234
Investment securities
Taxable 3,141,285 3,918,974 3,777,906
Tax exempt 1,168,049 1,174,113 1,208,098
Other 462,117 385,106 664,515
21,983,138 20,961,464 19,424,753
Interest expense
Deposits 9,787,511 9,480,440 8,806,069
Securities sold under agreements to
repurchase and other short-term
borrowings 269,135 234,521 175,745
Federal Home Loan Bank advances 517,105 569,927 701,091
Other 92,717 129,827 155,942
10,666,468 10,414,715 9,838,847
Net interest income 11,316,670 10,546,749 9,585,906
Provision for loan losses 700,400 492,800 401,965
Net interest income after provision for
loan losses 10,616,270 10,053,949 9,183,941
Other income
Service charges 1,810,756 1,674,348 1,507,506
Loan service fee income 282,879 257,953 255,426
Trust department income 300,342 237,254 205,740
Investment securities gains (losses), net 40,955 13,686 (12,839)
Gain on sale of mortgage loans 439,927 72,236 200,366
Other 198,116 134,510 127,850
3,072,975 2,389,987 2,284,049
Other expenses
Salaries and employee benefits 4,526,735 4,274,022 4,005,122
Occupancy expenses 1,163,872 1,002,137 931,434
FDIC assessment 54,344 54,281 412,483
Amortization 400,147 346,891 314,553
Taxes other than payroll, property
and income 307,146 287,718 255,055
Advertising 340,664 276,430 261,929
Other 1,721,219 1,646,499 1,534,013
8,514,127 7,887,978 7,714,589
Income before income taxes 5,175,118 4,555,958 3,753,401
Provision for income taxes 1,371,602 1,147,924 866,295
Net income $ 3,803,516 $ 3,408,034 $ 2,887,106
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (continued)
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities arising during the period (125,912) 245,108 (22,335)
Reclassification of realized amount (40,955) (13,686) 12,839
Net change in unrealized gain (loss)
on securities (166,867) 231,422 (9,496)
Comprehensive income $3,636,649 $3,639,456 $ 2,877,610
Earnings per share:
Basic $ 2.72 $ 2.44 $ 2.03
Diluted $ 2.66 $ 2.40 $ 2.00
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1996 1,432,700 $6,481,769 $16,673,906 $ 10,962 $23,166,637
Common stock issued (including
employee gifts of 49 shares) 129 960 - - 960
Common stock purchased (20,000) (90,400) (409,764) - (500,164)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - (9,496) (9,496)
Net income - - 2,887,106 - 2,887,106
Dividends declared - $.64 per share - - (911,564) - (911,564)
Balances, December 31, 1996 1,412,829 6,392,329 18,239,684 1,466 24,633,479
Common stock issued (including
employee gifts of 50 shares) 6,130 50,948 - - 50,948
Common stock purchased (24,397) (110,416) (492,196) - (602,612)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - 231,422 231,422
Net income - - 3,408,034 - 3,408,034
Dividends declared - $.72 per share - - (1,005,153) - (1,005,153)
Balances, December 31, 1997 1,394,562 6,332,861 20,150,369 232,888 26,716,118
Common stock issued (including
employee gifts of 26 shares) 10,066 141,380 - - 141,380
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - (166,867) (166,867)
Net income - - 3,803,516 - 3,803,516
Dividends declared - $.80 per share - - (1,121,842) - (1,121,842)
Balances, December 31, 1998 1,404,628 $6,474,241 $22,832,043 $ 66,021 $29,372,305
</TABLE>
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 3,803,516 $ 3,408,034 $ 2,887,106
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 1,007,948 946,973 870,092
Provision for loan losses 700,400 492,800 401,965
Investment securities amortization
(accretion), net (42,854) 23,081 149,205
Investment securities (gains) losses, net (40,955) (13,686) 12,839
Originations of loans held for sale (35,798,502) (18,497,646) (21,292,899)
Proceeds from sale of loans 35,417,148 18,428,256 21,778,522
Gain on sale of mortgage loans (439,927) (72,236) (200,366)
Federal Home Loan Bank stock dividends (214,300) (199,600) (185,600)
Changes in:
Interest receivable (309,545) (117,665) (26,485)
Other assets (10,827) (82,785) 688,313
Interest payable (121,840) 537,251 110,322
Other liabilities (406,176) 327,241 (108,589)
Net cash from operating activities 3,544,086 5,180,018 5,084,425
Cash flows from investing activities
Purchases of securities available for sale (29,252,389) (26,674,021) (46,990,894)
Proceeds from sales of securities
available for sale 6,548,219 17,343,034 13,512,387
Proceeds from principal payments and maturities
of securities available for sale 33,189,842 19,982,850 33,441,384
Purchases of investment securities held to maturity (2,374,891) (785,000) (1,375,000)
Proceeds from maturities of investment securities
held to maturity 1,070,150 1,510,950 1,520,000
Net change in loans (27,549,007) (25,886,674) (5,883,441)
Purchases of bank premises and equipment, net (1,636,487) (1,284,947) (1,307,597)
Net cash from investing activities (20,004,563) (15,793,808) (7,083,161)
Cash flows from financing activities
Net change in deposits 17,414,395 10,254,610 17,722,380
Net change in securities sold under agreements
to repurchase and other borrowings 1,790,671 5,298,109 (7,031,807)
Advances from Federal Home Loan Bank 4,000,000 - 400,000
Payments on Federal Home Loan Bank advances (7,282,789) (297,740) (8,937,095)
Proceeds from notes payable - 450,000 330,000
Payments on notes payable - (450,000) (930,000)
Proceeds from issuance of common stock 141,380 50,948 960
Purchase of common stock - (602,612) (500,164)
Dividends paid (1,121,842) (1,005,153) (911,564)
Net cash from financing activities 14,941,815 13,698,162 142,710
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Net change in cash and cash equivalents (1,518,662) 3,084,372 (1,856,026)
Cash and cash equivalents at beginning of year 12,274,875 9,190,503 11,046,529
Cash and cash equivalents at end of year $10,756,213 $12,274,875 $ 9,190,503
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest expense $10,788,308 $ 9,877,464 $ 9,728,525
Income taxes 1,370,000 1,100,000 787,008
Supplemental schedules of non-cash investing and
financing activities:
Real estate acquired through foreclosure $ 69,676 $ - $ 541,377
Transfer of loans to loans held for sale - 4,597,849 -
</TABLE>
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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).
Intercompany transactions and balances have been eliminated in
consolidation.
Nature of Operations: The Bank operates under a state bank
charter and provides full banking services, including trust
services, to customers located in Bourbon, Clark, Scott,
Harrison, Woodford, Jessamine, and adjoining counties in
Kentucky. As a state bank, the Bank is subject to regulation by
the Kentucky Department of Financial Institutions and the Federal
Deposit Insurance Corporation (FDIC). The Company, a bank holding
company, is also regulated by the Federal Reserve.
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. The allowance for
loan losses and fair value of financial instruments are
particularly subject to change.
Cash Flows: 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. Net cash flows are reported for loan and deposit
transactions.
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. The difference between amortized cost and fair value is
recorded in stockholders' equity, net of related income tax,
under accumulated other comprehensive income. Changes in this
difference are recorded as a component of comprehensive income.
Amortization of premiums and accretion of discounts are recorded
as adjustments to interest income using the constant yield
method.
Investment securities for which the Company 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.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans Held for Sale: 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.
Loans: Loans are stated at the amount of unpaid principal,
reduced by an allowance for loan losses. Interest income on
loans is recognized on the accrual basis except for those loans
on a nonaccrual 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.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield on the
related loan.
Allowance for Loan Losses: 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 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.
Mortgage Servicing 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
servicing fee from the FHLMC on each loan sold. Servicing rights
are capitalized based on the relative fair value of the rights
and the loan and are included in intangible assets on the balance
sheet and expensed in proportion to, and over the period of,
estimated net servicing revenues.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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.
Repurchase Agreements: Substantially all repurchase agreement
liabilities represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not
covered by federal deposit insurance.
Income Taxes: Income tax expense is the total of the current
year income tax due or refundable and the change in deferred tax
assets and liabilities. 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 pension, premium
on loans and deposits purchased, unrealized gains (losses) on
investment securities available for sale, mortgage servicing
rights, FHLB stock, and the allowance for loan losses.
Intangible Assets: Intangible assets include a premium on
deposits paid in connection with the acquisition of a branch
which is being amortized on a straight-line basis over ten years
and capitalized mortgage servicing rights which are being
amortized over the life of the related loans.
Earnings Per Common Share: Basic earnings per common share is
net income divided by the weighted average number of common
shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential
common shares issuable under stock options. Earnings and
dividends per share are restated for all stock splits and
dividends through the date of issuance of the financial
statements.
Comprehensive Income: Comprehensive income consists of net
income and other comprehensive income. Other comprehensive
income includes unrealized gains and losses on securities
available for sale which are also recognized as a separate
component of equity. The accounting standard that requires
reporting comprehensive income first applies for 1998, with prior
information restated to be comparable.
<PAGE>
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
New Accounting Pronouncements: Beginning January 1, 2000, a new
accounting standard will require all derivatives to be recorded
at fair value. Unless designated as hedges, changes in these
fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is
not expected to have a material effect, but the effect will
depend on derivative holdings when this standard applies.
Industry Segments: While the Company's chief decision makers
monitor the revenue streams of the various Company products and
services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all of the
Company's operations are considered by management to be
aggregated into one reportable operating segment.
Reclassifications: Certain reclassifications have been made in
the 1997 and 1996 financial statements to conform to
classifications used in 1998.
NOTE 2 - 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 reserve requirement at December 31, 1998 was $5,988,000.
NOTE 3 - INVESTMENT SECURITIES
Amortized cost and fair value of investment securities, by
category, at December 31, 1998 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $16,013,161 $ 74,300 $ - $16,087,461
Obligations of U. S. government
agencies 5,979,883 406 (1,210) 5,979,079
Obligations of states and
political subdivisions 3,641,873 161,498 - 3,803,371
Mortgage-backed securities 25,725,143 71,089 (172,037) 25,624,195
Other securities 3,959,643 9,161 (43,176) 3,925,628
Total available for sale $55,319,703 $316,454 $(216,423) $55,419,734
Held to maturity
Obligations of states and
political subdivisions $16,933,755 $923,038 $ (2,243) $17,854,550
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
Amortized cost and fair value of investment securities, by
category, at December 31, 1997 are as follows:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
Available for sale
U. S. Treasury securities $18,983,175 $ 88,978 $ (278) $19,071,875
Obligations of U. S. government
agencies 10,487,431 - (1,931) 10,485,500
Obligations of states and
political subdivisions 3,942,551 134,644 - 4,077,195
Mortgage-backed securities 32,334,645 303,520 (172,072) 32,466,093
Total available for sale $65,747,802 $527,142 $(174,281) $66,100,663
Held to maturity
Obligations of states and
political subdivisions $15,602,778 $807,926 $ (181) $16,410,523
The amortized cost and fair value of investment securities at
December 31, 1998, 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.
Securities not due at a single maturity are shown separately.
Amortized Fair
Cost Value
Available for sale
Due in one year or less $17,999,966 $18,056,615
Due after one year through five years 6,794,401 6,921,685
Due after five years through ten years 1,376,336 1,425,428
Due after ten years 2,415,000 2,415,000
28,585,703 28,818,728
Mortgage-backed securities 25,725,143 25,624,195
Equity securities 1,008,857 976,811
Total available for sale $55,319,703 $55,419,734
<PAGE>
NOTE 3 - INVESTMENT SECURITIES (Continued)
Amortized Fair
Cost Value
Held to maturity
Due in one year or less $ 1,093,452 $ 1,138,863
Due after one year through five years 5,757,494 6,119,091
Due after five years through ten years 6,856,735 7,264,184
Due after ten years 3,226,074 3,332,412
Total held to maturity $16,933,755 $17,854,550
Proceeds from sales of investment securities during 1998, 1997
and 1996 were $6,548,219, $17,343,034 and $13,512,387. Gross
gains of $40,955, $31,347 and $30,211 and gross losses of $0,
$17,661 and $43,050, were realized on those sales.
Investment securities with an approximate carrying value of
$55,657,000 and $56,631,000 at December 31, 1998 and 1997, were
pledged to secure public deposits, trust funds, securities sold
under agreements to repurchase and for other purposes as required
or permitted by law.
NOTE 4 - LOANS
Major classifications of loans are summarized as follows:
1998 1997
Commercial $ 15,177,364 $ 10,643,958
Real estate construction 11,055,329 7,656,856
Real estate mortgage 118,735,789 108,048,265
Agricultural 44,198,784 37,924,098
Consumer 17,607,474 15,181,883
Other 159,387 287,083
$206,934,127 $179,742,143
<PAGE>
NOTE 4 - LOANS (Continued)
Changes in the allowance for loan losses were as follows:
1998 1997 1996
Beginning balance $2,321,536 $2,101,081 $1,860,093
Charge-offs (368,017) (355,123) (213,328)
Recoveries 80,670 82,778 52,351
Provision for loan losses 700,400 492,800 401,965
Ending balance $2,734,589 $2,321,536 $2,101,081
Impaired loans totaled $286,000 and $333,000 at December 31, 1998
and 1997. The average recorded investment in impaired loans
during 1998, 1997 and 1996 was $310,000, $192,000 and $298,000.
The total allowance for loan losses related to these loans was
$85,000 and $57,000 at December 31, 1998 and 1997. Interest
income on impaired loans of $22,000, $23,000 and $55,000 was
recognized for cash payments received in 1998, 1997 and 1996.
Loans over 90 days past due and still accruing interest totaled
$790,000 and $154,000 at December 31, 1998 and 1997.
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
$103,122,000 and $91,423,000 at December 31, 1998 and 1997.
Custodial escrow balances maintained in connection with the
foregoing loan servicing, and included in demand deposits, were
approximately $593,000 and $545,000 at December 31, 1998 and
1997.
Changes in mortgage servicing rights were as follows:
1998 1997 1996
Beginning balance $314,877 $189,451 $ -
Additions 330,902 184,125 215,812
Amortization (111,957) (58,699) (26,361)
Ending balance $533,822 $314,877 $189,451
<PAGE>
NOTE 4 - LOANS (Continued)
Certain directors and executive officers of the Company and
companies in which they have beneficiary ownership were loan
customers of the Bank during 1998 and 1997. Such loans were made
in the ordinary course of business at the Bank's normal credit
terms and interest rates. An analysis of the activity with
respect to all director and executive officer loans is as
follows:
1998 1997
Balance, beginning of year $1,824,000 $1,828,000
Additions, including loans now meeting
disclosure requirements 704,000 1,381,000
Amounts collected, including loans no
longer meeting disclosure requirements (1,312,000) (1,385,000)
Balance, end of year $1,216,000 $1,824,000
NOTE 5 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
1998 1997
Land and buildings $7,040,895 $6,371,645
Furniture and equipment 5,423,361 4,429,043
Construction in progress - 27,082
12,464,256 10,827,770
Less accumulated depreciation (5,670,258) (5,062,460)
$6,793,998 $5,765,310
Depreciation expense was $667,799, $523,892, and $523,888 in
1998, 1997, and 1996.
NOTE 6 - DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits
are as follows:
1999 $108,922,295
2000 9,858,070
2001 1,329,974
2002 688,935
2003 and thereafter 1,026,210
$121,825,484
<PAGE>
NOTE 6 - DEPOSITS (Continued)
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 $3,173,000 and $2,393,000 at December 31,
1998 and 1997.
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature
within one to four days from the transaction date. The securities
underlying the agreements are maintained in a third-party
custodian's account under a written custodial agreement.
Information concerning securities sold under agreements to
repurchase for 1998 and 1997 is summarized as follows:
1998 1997
Average daily balance during the year $4,329,000 $4,103,000
Average interest rate during the year 4.76% 5.03%
Maximum month-end balance during the year $6,713,000 $4,895,000
Carrying and fair value of U.S. Treasury
securities underlying the agreements $6,904,000 $6,895,000
NOTE 8 - 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 advances
from the FHLB which the Bank uses to fund fixed-rate mortgages.
At December 31, 1998 and 1997, $6,953,502 and $10,236,291
represented the balance due on advances from the FHLB. All
advances are paid either on a monthly basis or at maturity, over
remaining terms of one to eight years, with fixed 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 years subsequent to
December 31, 1998 are as follows: 1999 - $302,254; 2000 -
$1,240,674; 2001 - $237,970; 2002 - $251,637; 2003 - $4,825,652;
years thereafter - $95,315.
<PAGE>
NOTE 9 - INCOME TAXES
The components of the provision for income taxes are as follows:
1998 1997 1996
Current payable $1,306,758 $1,158,777 $697,751
Deferred 64,844 (10,853) 168,544
$1,371,602 $1,147,924 $866,295
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.
1998 1997
Deferred tax assets
Allowance for loan losses $736,526 $596,087
Premium on deposits purchased 127,144 97,641
Deferred loan fees 22,547 19,336
Other 46,597 28,119
Deferred tax liabilities
Bank premises and equipment (131,872) (129,217)
Unrealized gain on investment securities (55,802) (119,972)
FHLB stock (379,151) (306,289)
Mortgage servicing rights (181,499) (107,058)
Other (27,780) (50,951)
Net deferred tax asset $156,710 $ 27,696
An analysis of the differences between the effective tax rates
and the statutory U.S. federal income tax rate is as follows:
1998 1997 1996
U. S. federal income tax rate 34.0% 34.0% 34.0%
Changes from the statutory rate
Tax-exempt investment incom (8.7) (10.0) (12.4)
Non-deductible interest expense related to
carrying tax-exempt investments 1.1 1.3 1.5
Other .1 (0.1) -
26.5% 25.2% 23.1%
<PAGE>
NOTE 10 - EARNINGS PER SHARE
Basic and diluted earnings per common share for 1998, 1997 and
1996 are presented below.
1998 1997 1996
Basic Earnings Per Share
Net income $3,803,516 $3,408,034 $2,887,106
Weighted average common shares
outstanding 1,400,660 1,396,201 1,424,704
Basic earnings per share $ 2.72 $ 2.44 $ 2.03
Diluted Earnings Per Share
Net income $3,803,516 $3,408,034 $2,887,106
Weighted average common shares
outstanding 1,400,660 1,396,201 1,424,704
Add dilutive effects of assumed
exercise of stock options 29,987 25,596 18,771
Weighted average common and
dilutive potential common shares
outstanding 1,430,647 1,421,797 1,443,475
Diluted earnings per share $ 2.66 $ 2.40 $ 2.00
Stock options for 600 and 12,400 shares of common stock were not considered in
computing earnings per share for 1997 and 1996 because they were antidilutive.
NOTE 11 - 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.
<PAGE>
NOTE 11 - RETIREMENT PLANS (Continued)
Information about the pension plan was as follows:
1998 1997
Change in benefit obligation:
Beginning benefit obligation $1,813,183 $1,597,843
Service cost 143,717 137,229
Interest cost 143,564 126,623
Actuarial gain - (3,240)
Benefits paid (67,547) (45,272)
Ending benefit obligation 2,032,917 1,813,183
Change in plan assets, at fair value:
Beginning plan assets 1,995,586 1,718,776
Actual return 348,607 322,082
Employer contribution 223,363 -
Benefits paid (67,547) (45,272)
Ending plan assets 2,500,009 1,995,586
Funded status 467,092 182,403
Unrecognized net actuarial gain (515,005) (346,338)
Unrecognized prior transition asset (3,717) (4,089)
Accrued benefit cost $ (51,630) $(168,024)
Net periodic pension cost include the following components:
1998 1997 1996
Service cost $143,717 $137,229 $118,339
Interest cost 143,564 126,623 112,826
Expected return on plan assets (172,099) (136,298) (125,632)
Amortization of transition asset (372) (372) (372)
Recognized net actuarial gain (7,841) - -
Net periodic cost $106,969 $127,182 $105,161
<PAGE>
NOTE 11 - RETIREMENT PLANS (Continued)
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 $181,743, $166,647 and
$157,162 in 1998, 1997 and 1996, respectively.
NOTE 12 - STOCK OPTION PLAN
The Company has 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. 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.
Summary of stock option transactions are as follows:
1998 1997 1996
Weighted Weighted Weighted
Option Option Option
Options Price Options Price Options Price
Outstanding,
beginning of year 62,820 $19.47 58,550 $17.20 49,160 $15.33
Granted during the year 13,600 31.76 11,000 25.24 10,350 26.36
Canceled during the year (1,000) 29.10 (650) 16.00 (880) 20.73
Exercised during the year (10,040) 14.08 (6,080) 8.38 (80) 12.00
Outstanding, end of year 65,380 $22.71 62,820 $19.47 58,550 $17.20
Weighted remaining contractual
life 81.6 months 69.3 months 66.4 months
<PAGE>
NOTE 12 - STOCK OPTION PLAN (Continued)
1998 1997 1996
Options Options Options
Options outstanding
From $7.83 to $12.75 per share 12,360 17,900 24,380
From $17.25 to $22.28 per share 16,320 20,320 20,420
From $24.00 to $30.00 per share 35,100 24,600 13,750
From $36.00 to $40.00 per share 1,600 - -
65,380 62,820 58,550
Eligible for exercise
From $7.83 to $12.75 per share 12,360 17,900 24,380
From $17.25 to $22.28 per share 14,680 18,240 10,332
From $24.00 to $26.50 per share 8,460 7,620 1,120
35,500 43,760 35,832
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:
1998 1997 1996
Net income
As reported $3,803,516 $3,408,034 $2,887,106
Pro forma 3,747,871 3,375,248 2,870,017
Basic earnings per share
As reported $ 2.72 $ 2.44 $ 2.03
Pro forma 2.68 2.42 2.01
Diluted earnings per share
As reported $ 2.66 $ 2.40 $ 2.00
Pro forma 2.63 2.38 1.98
Weighted averages
Fair value of options granted $ 9.05 $ 7.24 $ 7.77
Risk free interest rate 5.20% 6.50% 6.50%
Expected life 8 years 8 years 8 years
Expected volatility 23.40% 21.79% 19.66%
Expected dividend yield 2.53% 2.86% 2.43%
NOTE 13 - 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 1999 the Bank could, without
prior approval, declare dividends of approximately $2,815,000
plus any 1999 net profits retained to the date of the dividend
declaration.
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Carrying
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 10,756,213 $ 10,756,000 $ 12,274,875 $ 12,275,000
Investment securities 72,353,489 73,274,000 81,703,441 82,511,000
Federal Home Loan Bank stock 3,119,500 3,120,000 2,905,200 2,905,000
Mortgage loans held for sale 5,908,676 5,978,000 5,418,297 5,431,000
Loans, net 204,199,538 204,716,000 177,420,607 177,574,000
Financial liabilities
Deposits $(258,739,716) $(259,532,000) $(241,325,321) $(242,188,000)
Securities sold under
agreements to repurchase
and other borrowed funds (11,248,277) (11,248,000) (9,457,606) (9,458,000)
Federal Home Loan Bank
advances (6,953,502) (7,032,527) (10,236,291) (10,157,000)
</TABLE>
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 instruments, 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.
<PAGE>
NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
(Continued)
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.
Mortgage Loans Held for Sale: Fair value is based on current
quoted secondary market price for loans without regard to other
commitments to make and sell loans.
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.
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.
Securities Sold Under Agreements to Repurchase and Other Borrowed
Funds: 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.
Commitments to Extend Credit and Standby Letters of Credit:
Commitments to extend credit and standby letters of credit
represent agreements to lend to a customer at the market rate
when the loan is extended. The fair value of commitments and
letters of credit are not considered material.
Commitments to Sell Loans: The fair value of commitments to sell
loans is based on the difference between interest rates at which
the Company has committed to sell the loans and the current
quoted secondary market price for similar loans. The fair value
of commitments is not material.
NOTE 15 - OFF-BALANCE-SHEET ACTIVITIES
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued to
meet customer financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions
established in the contract are met, and usually have expiration
dates. Commitments may expire without being used. Off-balance-
sheet risk to credit loss exists up to the face amount of these
instruments, although material losses are not anticipated. The
same credit policies are used to make such commitments as are
used for loans, including obtaining collateral at exercise of the
commitment.
<PAGE>
NOTE 15 - OFF-BALANCE-SHEET ACTIVITIES (Continued)
Financial instruments with off-balance-sheet risk were as follows
at year-end:
1998 1997
Unused lines of credit $34,728,000 $28,879,000
Commitments to make loans 3,892,000 4,190,000
Letters of credit 586,000 643,000
Commitments to sell loans 4,000,000 -
Unused lines of credit are substantially all at variable rates.
Commitments to make loans are generally made for a period of 60
days or less and are primarily fixed at current market rates
ranging from 6.125% to 7% with maturities ranging from 15 to 30
years.
Commitments to sell loans are to the Federal Home Loan Mortgage
Corporation and have an underlying interest rate designed to
transfer risk associated with loans held for sale and commitments
to make loans that are intended to be sold. The notional amount
of commitments to sell loans represent amounts of loans that have
been committed for delivery on a specified date and within
certain interest rate ranges, not credit exposure. The
commitments outstanding at year end had delivery dates within 90
days and rates ranging from 6.25% to 7.25%.
NOTE 16 - CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal
business activities. Management believes these actions are
without merit or that the ultimate liability, if any, resulting
from them will not materially affect the Company's consolidated
financial position or results of operations.
NOTE 17 - 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
regulators about components, risk weightings, and other factors.
<PAGE>
NOTE 17 - REGULATORY MATTERS (Continued)
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, 1998 and 1997,
that the Company and the Bank meet all capital adequacy
requirements to which they are subject.
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
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated as of December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $30,333 14.6% $16,621 8% $20,776 10%
Tier I Capital
(to Risk-Weighted Assets) 27,732 13.3 8,340 4 12,511 6
Tier I Capital
(to Average Assets) 27,732 9.6 11,555 4 14,444 5
Bank Only as of December 31, 1998
Total Capital
(to Risk-Weighted Assets) $28,360 13.7% $16,561 8% $20,701 10%
Tier I Capital
(to Risk-Weighted Assets) 25,771 12.5 8,247 4 12,370 6
Tier I Capital
(to Average Assets) 25,771 8.9 11,582 4 14,478 5
Consolidated as of December 31, 1997
Total Capital
(to Risk-Weighted Assets) $26,966 14.8% $14,536 8% $18,170 10%
Tier I Capital
(to Risk-Weighted Assets) 24,694 13.6 7,268 4 10,902 6
Tier I Capital
(to Average Assets) 24,694 8.8 11,001 4 13,751 5
Bank Only as of December 31, 1997
Total Capital
(to Risk-Weighted Assets) $26,319 14.5% $14,535 8% $18,168 10%
Tier I Capital
(to Risk-Weighted Assets) 24,047 13.2 7,267 4 10,901 6
Tier I Capital
(to Average Assets) 24,047 8.7 11,000 4 13,750 5
</TABLE>
<PAGE>
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31, 1998 and 1997
(In thousands)
1998 1997
ASSETS
Cash on deposit with subsidiary $ 967 $ 616
Investment in subsidiary 27,411 26,070
Investment securities available for sale 977 -
Other assets 17 30
Total assets $29,372 $26,716
STOCKHOLDERS' EQUITY
Preferred stock $ - $ -
Common stock 6,474 6,333
Retained earnings 22,832 20,150
Accumulated other comprehensive income 66 233
Total stockholders' equity $29,372 $26,716
<PAGE>
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Income and Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
Income
Dividends from subsidiary $2,330 $2,100 $1,850
Interest income 5 - -
Other income - - 807
Total income 2,335 2,100 2,657
Expenses
Interest expense - 10 40
Other expenses 25 21 823
Total expenses 25 31 863
Income before income taxes and equity in
undistributed income of subsidiary 2,310 2,069 1,794
Applicable income tax benefits 7 11 18
Income before equity in undistributed
income of subsidiary 2,317 2,080 1,812
Equity in undistributed income of
subsidiary 1,487 1,328 1,075
Net income $3,804 $3,408 $2,887
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities
arising during the period $(126) $ 245 $(22)
Reclassification of realized amount (41) (14) 13
Net change in unrealized gain (loss)
on securities (167) 231 (9)
Comprehensive income $3,637 $3,639 $2,878
<PAGE>
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
1998 1997 1996
Cash flows from operating
activities
Net income $ 3,804 $ 3,408 $ 2,887
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of
subsidiary (1,487) (1,328) (1,075)
Change in other assets (8) 8 94
Change in other liabilities - (11) 10
Net cash from operating activities 2,309 2,077 1,916
Cash flows from investing activities
Purchase of investment securities available
for sale (977) - -
Cash flows from financing activities
Dividends paid (1,122) (1,005) (912)
Proceeds from issuance of common stock 141 51 1
Purchase of common stock - (603) (500)
Repayment of long-term debt - - (930)
Proceeds from long-term debt - - 330
Net cash from financing activities (981) (1,557) (2,011)
Net change in cash 351 520 (95)
Cash at beginning of year 616 96 191
Cash at end of year $ 967 $ 616 $ 96
<PAGE>
Bourbon Bancshares, Inc.
Board of Directors
Buckner Woodford
President and Chief Executive Officer;
Kentucky Bank and Bourbon Bancshares, Inc.
Class of 2000
William R. Stamler
Chairman, Signal Investments, Inc.
Class of 2000
Henry Hinkle
President; Hinkle Contracting Company
Class of 1999
Robert G. Thompson
Director, Paris/Bourbon County YMCA; Snow Hill Farm
Class of 1999
Theodore Kuster
Farmer and Thoroughbred Breeder; West View Farm
Class of 1999
James L. Ferrell, M.D.
Physician; Chairman, Bourbon Bancshares, Inc.
Class of 2001
William M. Arvin
Attorney
Class of 2001
Joseph B. McClain
President; Hopewell Insurance Company, Inc.
Class of 2001
<PAGE>
Kentucky Bank - Board of Directors
Buckner Woodford
President and Chief Executive Officer;
Bourbon Bancshares, Inc. and Kentucky Bank
Joe Allen
Executive Vice President, Kentucky Bank
William M. Arvin
Attorney, William M. Arvin and Associates
James L. Ferrell, M.D.
Physician
Betty Jo Denton Heick
Retired Bourbon County Court Clerk
Henry Hinkle
President; Hinkle Contracting Company
R.C. Johnson, Jr.
Owner & President
Johnson Funeral Home
James Kay
Businessman, Farmer
Theodore Kuster
Farmer and Thoroughbred Breeder; West View Farm
Joseph B. McClain
President; Hopewell Insurance Company, Inc.
Alex Miller
Retired President, Paris Stockyards, Inc.
Ed Saunier
President, Saunier North American Van Lines
William R. Stamler
Chairman, Signal Investments, Inc.
Robert G. Thompson
Director, Paris/Bourbon County YMCA
Gerald M. Whalen
President, Whalen and Co. Insurance and Real Estate
<PAGE>
REGIONAL BOARD OF DIRECTORS
CLARK
C. Richard Gamble
Investor
Donald Pace
Superintendent, Clark Co. Schools
Ed Saunier
President, Saunier North American Van Lines
Mary Beth Hendricks
Farmer
John G. Roche
Oprician
WOODFORD
Dr. William J. Graul
Physician
James Kay
Businessman, Farmer
Loren Carl
Director, KY Attorney General's Office
Tricia N. Kittinger
Woodford Circuit Clerk
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.
George Lusby
County Judge Executive
JESSAMINE
William M. Arvin
Attorney, William M. Arvin and Associates
Dan Brewer
Bluegrass RECC
Victor Comley
Retired, Kentucky Association of Highway Contractors
Bonnie Dean
Nicholasville City Clerk, Treasurer
Eva McDaniel
Jessamine County Clerk
<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 - Vice President, Chief Financial Officer
Hugh Crombie - Vice President, Operations
Bill Reynolds - Vice President, Trust Officer
Brenda Bragonier - Vice President, Director of Marketing and Human Resources
R.W. Collins, Jr. - Vice President, Loan Officer
Michael Lovell - Vice President, Loan Officer
George Wilder - Vice President, Loan Officer
Nicholas L. Carter - Assistant Vice President, Loan Officer
Cathy Hill - Assistant Vice President, Loan Officer
Brenda Berry - Accountant
Mary Lou Boyle - Human Resources
Wallis Brooks - Branch Manager
Patty Carpenter - Loan Operations Officer
Paul Clift - Systems Support
Janice Hash - Accountant and Purchasing Manager
Jean Patton - Compliance/CRA/Quality Control
Donald Roe - Data Processing
Lydia Sosby - Auditor
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
CLARK COUNTY
WINCHESTER
Tim Duncan - Regional Vice President
Becky Taulbee - Assistant Vice President, Loan Officer
Darryl Terry - Assistant Vice President, Loan Officer
Carolyn Wilkins - Calling Officer
Ron Burden, Vice President, Loan Officer
Colby Road Branch
Teresa Shimfessel - Branch Manager, Assistant Vice President, Loan
Officer
WOODFORD COUNTY
VERSAILLES
Duncan Gardner - Regional Vice President
A.J. Gullett - Assistant Vice President, Loan Officer
SCOTT COUNTY
PARIS PIKE BRANCH
Jennifer Roberts - Branch Manager, Loan Officer
GEORGETOWN
Mark Walls - Regional Vice President
Ben Sargent - Assistant Vice President, Loan Officer
JESSAMINE COUNTY
NICHOLASVILLE
Tom Buford - Regional Vice President
Earl Lewallen - Assistant Vice President, Loan Officer
Jeanie Thompson - Assistant Cashier & CSR
HARRISON COUNTY
CYNTHIANA LOAN PRODUCTION OFFICE
Ken DeVasher - Regional Manager, Assistant Vice President, 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 15, 1999 on the
consolidated financial statements of Bourbon Bancshares, Inc. as of December 31,
1998 and 1997 and for each of the three years in the period ended December 31,
1998 appearing in this Annual Report on Form 10-K of Bourbon Bancshares, Inc. as
Exhibit 13.
Crowe, Chizek and Company LLP
Lexington, KY
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10619
<INT-BEARING-DEPOSITS> 137
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 55420
<INVESTMENTS-CARRYING> 16933
<INVESTMENTS-MARKET> 17855
<LOANS> 212843
<ALLOWANCE> 2734
<TOTAL-ASSETS> 308705
<DEPOSITS> 258740
<SHORT-TERM> 10498
<LIABILITIES-OTHER> 2391
<LONG-TERM> 7704
0
0
<COMMON> 6474
<OTHER-SE> 22898
<TOTAL-LIABILITIES-AND-EQUITY> 308705
<INTEREST-LOAN> 17212
<INTEREST-INVEST> 4309
<INTEREST-OTHER> 462
<INTEREST-TOTAL> 21983
<INTEREST-DEPOSIT> 9788
<INTEREST-EXPENSE> 10667
<INTEREST-INCOME-NET> 11316
<LOAN-LOSSES> 700
<SECURITIES-GAINS> 71
<EXPENSE-OTHER> 8514
<INCOME-PRETAX> 5175
<INCOME-PRE-EXTRAORDINARY> 5175
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3804
<EPS-PRIMARY> 2.72
<EPS-DILUTED> 2.66
<YIELD-ACTUAL> 4.27
<LOANS-NON> 136
<LOANS-PAST> 790
<LOANS-TROUBLED> 147
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2322
<CHARGE-OFFS> 368
<RECOVERIES> 81
<ALLOWANCE-CLOSE> 2735
<ALLOWANCE-DOMESTIC> 2735
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99.1 Proxy statement
BOURBON BANCSHARES, INC.
P.O. Box 157
Fourth and Main Street
Paris, Kentucky 40362-0157
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 3, 1999
March 25, 1999
To our Shareholders:
The Annual Meeting of Shareholders ("Annual
Meeting") of Bourbon Bancshares, Inc. (the
"Corporation") will be held at the Corporation's
main office at Kentucky Bank, Fourth and Main
Street, Paris, Kentucky, at 9:00 a.m. (Easter
Daylight Time) on May 3, 1999, for the following
purposes:
1. Election of Directors. To elect three Class III directors.
2. Amendments to Articles of Incorporation.
To act upon proposals to amend the
Corporation's Articles of Incorporation
to (a) increase the number of authorized
shares of common stock from 3,000,000 to
10,000,000, and (b) to change the
number of members of the
Corporation's Board of Directors from a
minimum of nine (9) to a minimum of five
(5).
3. 1999 Employee Stock Option Plan. To
act upon a proposal to adopt the 1999
Employee Stock Option Plan.
4. Ratification of Independent Auditors. To
act upon a proposal to ratify the
appointment of Crowe, Chizek and Company LLP
as the Corporation's independent auditors
for the fiscal year ending December 31,
1999.
5. Other Business. To act upon such other
matters as may properly be brought before
the Annual Meeting or any adjournment
thereof. The Board of Directors does not
know of any other matter to come before
the Annual Meeting.
Information regarding the matters to be acted
upon at the Annual Meeting is contained in the
Proxy Statement accompanying this Notice. Only
those holders of record of the Corporation's common
stock at the close of business on March 22, 1999,
are entitled to notice of and to vote at the Annual
Meeting and any adjournment thereof.
All Shareholders are cordially invited to
attend the Annual Meeting, but whether or not you
expect to attend the Annual Meeting in person,
please sign and date the enclosed Proxy and return
it promptly so your stock may be voted.
<PAGE>
Thank you for your time and consideration.
Please feel free to contact my office should you have
any questions.
BY ORDER OF THE BOARD OF
DIRECTORS
Buckner Woodford
President, Bourbon
Bancshares, Inc
Paris, Kentucky
March 25, 1999
YOUR VOTE IS IMPORTANT
PLEASE MARK, SIGN, DATE AND RETURN THE ACCOMPANYING
PROXY IMMEDI ATELY EVEN IF YOU PLAN TO ATTEND THE
ANNUAL MEETING.
<PAGE>
PROXY STATEMENT
FOR THE ANNUAL MEETING OF SHAREHOLDERS OF
BOURBON BANCSHARES, INC.
TO BE HELD ON MAY 3, 1999
The accompanying proxy form is solicited by
the Board of Directors of Bourbon Bancshares, Inc.
(the "Corporation") for use at the 1999 Annual
Meeting of Shareholders (the "Annual Meeting") to be
held at 9:00 a.m. (local time), on Monday, May 3,
1999, at the Corporation's main office at Kentucky
Bank, Fourth and Main Streets, Paris, Kentucky.
Only holders of record of the Corporation's
Common Shares ("Common Shares") at the close of
business on March 22, 1999 (the "Record Date"), are
entitled to notice of and to vote at the Annual
Meeting. There are 1,399,628 Common Shares issued
and
outstanding and entitled to vote at the Annual
Meeting.
On all matters coming before the Annual Meeting
except the election of directors, each holder of
Common Shares has one vote per share. In the
election of directors, each shareholder may vote
the number of shares held on the Record Date for
each vacancy to be filled, or may cumulate his or her
votes by casting the number of votes equal to the
number of shares held multiplied by the total
number of vacancies to be filled. Such cumulated
votes may be cast for one nominee or distributed
among as many nominees and in any manner that the
shareholder chooses. The
Board of Directors is soliciting discretionary
authority to cumulate votes. A shareholder may
revoke a proxy form by
delivering written notice of revocation to the
Secretary of the Corporation at any time before
the taking of the vote at the Annual Meeting.
The mailing address of the Corporation's
principal offices is P.O. Box 157, Fourth and Main
Street, Paris, Kentucky 40362.
All expenses of preparing, printing, mailing
and delivering the Proxy Statement and all materials
used in the solicitation of proxy forms will be borne
by the Corporation. In addition to the use of the
mail, proxy forms may be solicited by personal inter
view, telephone, and telegraph by directors,
officers, and other employees of the Corporation,
none of whom will receive additional
compensation for such services. The Corporation
will also request brokerage houses, custodians,
and nominees to forward soliciting materials to
the beneficial owners of the Common Shares held
of record by them and will pay reasonable expenses
of such persons for forwarding these materials.
The approximate date on which this Proxy
Statement and the accompanying proxy are first
being sent or given to shareholders is March 25,
1999.
<PAGE>
ELECTION OF DIRECTORS
Under the Corporation's Articles of
Incorporation, the Board of Directors consists of
three different classes, Class I, Class II and Class
III, 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
Corporation will elect three Class III directors at
the Annual Meeting. Henry Hinkle, Theodore Kuster
and Robert G. Thompson have been nominated for
election as Class III directors for terms expiring
at the 2002 annual meeting of shareholders. The
following information is furnished as of March 22,
1999, with respect to each person nominated for
election as a Class III director at the Annual
Meeting:
Name, Age, Principal Director
Occupation or Position, Since
Other Directorships
Henry Hinkle, 47 1989
President, Hinkle Construction
Company
Theodore Kuster, 55 1979
Farmer and thoroughbred horse
breeder
Robert G. Thompson, 49 1991
Farmer and thoroughbred horse
breeder
The Corporation's Articles of Incorporation
provide that the number of its directors will be
fixed from time to time by the Board of
Directors. Between meetings of shareholders held
for the election of directors, the Board of Directors
may increase or decrease the number of
directors last approved by the
shareholders by thirty percent (30%) or less.
Any vacant directorship, whether resulting from an
increase in the number of directors or otherwise, may
be filled by the affirmative vote of the majority
of the directors then in office, whether or not a
quorum of the Board of Directors exists at the time
of the vote, for a term expiring at the annual
meeting of shareholders at which the term of
office of the class to which they were elected
expires or, in the case of newly created
directorships, until such time as determined by
the directors electing such new director. A
decrease in the number of directors, however, will
not have the effect of shortening the term of
any incumbent director. During 1998, two
vacancies occurred in the
Corporation's Board of Directors which the Board of
Directors has declined to fill, pending
consideration by the Corporation's shareholders of
an amendment to the Corporation's Articles of
Incorporation as described in this proxy statement
to permit fewer than nine members of the Board of
Directors. Assuming passage of the amendment to
the Articles of Incorporation, the Board does not
expect to take any action to fill these two
vacancies.
<PAGE>
If any named nominee should refuse or be
unable to serve, the Board of Directors believes the
persons designated as proxies will vote the shares
represented by the enclosed proxy form for the
substitute nominee, if any, proposed by the
Board of Directors. No circumstances are
now known, however, that would
prevent any of the nominees from serving. In the
election of
directors, the designated proxies may cumulatively
cast the votes authorized by each proxy form received
if such action is deemed by them to be
appropriate. Proxy forms cannot be voted for a
greater number of persons than the number of nominees
named.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" THE ELECTION OF THE BOARD'S
NOMINEES OF CLASS III DIRECTORS.
PROPOSED AMENDMENTS TO
ARTICLES OF INCORPORATION
INCREASE IN AUTHORIZED SHARES
The Board of Directors has unanimously adopted
a proposed amendment to the first sentence of
Article IV of the
Corporation's Articles of Incorporation so that it
will read in its entirety as follows:
The total number of shares that the
Corporation shall have the
authority to issue is 10,300,000
shares, which shall be divided into
two classes as follows: 10,000,000
Common Shares; and 300,000
Preferred Shares.
The amendment would have the effect of
increasing from 3,000,000 to 10,000,000 the number
of authorized Common Shares.
The Corporation's Board of Directors reserved
a total of 70,000 Common Shares for issuance
under the Corporation's 1993 Employee Stock
Ownership Incentive Plan and 1993 Non-Employee
Directors Stock Ownership Incentive Plan. In
addition, if the proposed 1999 Employee Stock
Option Plan (the "1999 Plan") is approved by the
Corporation's shareholders at the Annual Meeting, the
Corporation will reserve an additional 50,000 Common
Shares for issuance under the 1999 Plan. See
PROPOSED 1999 EMPLOYEE STOCK OPTION PLAN.
<PAGE>
Reasons For and Intended Effect of the Proposed
Amendment
The Board of Directors believes that the
ability to issue additional Common Shares will
provide the Corporation with valuable flexibility
in connection with future acquisitions,
combinations, equity financings, stock
distributions, stock splits, stock dividends,
employee benefit plans and other corporate
purposes. Although the Board of Directors has not
yet declared a stock split and there can be no
assurance that one will be declared, the Board of
Directors anticipates that it will declare a two-for-
one stock split in the form of a stock dividend
promptly following shareholder approval of the
amendment to the Articles of Incorporation. Any
future cash sales or other issuances of Common
Shares would be made only on terms the Board
believes to be in the best interest of the
Corporation and its shareholders.
The additional authorized Common Shares would be
issuable by the Corporation without further
authorization by shareholders on such terms as the
Corporation's Board of Directors may lawfully
determine. The effect of authorization and
issuance of additional Common Shares (other than
on a pro rata basis among holders of Common
Shares) will be to dilute the present voting power
of some or all holders of Common Shares. In some
circumstances, issuance of additional Common Shares
could result
in the dilution of the net income per share, net
book value per share, and voting rights of Common
Shares currently outstanding. Holders of Common
Shares have no preemptive rights.
Effect of the Proposed Amendment as to Takeovers
The Board of Directors considers that its
evaluation of any takeover bid should be based
primarily on a determination of what is in the
best interests of the Corporation and all of its
shareholders. Factors influencing that determination
may include the resultant effect of the takeover
upon the Corporation's then remaining minority
shareholders, its employees, its customers, and
the communities that it serves. The proposed
amendment is not being recommended in response to
any effort of which the Board of Directors is
aware to obtain control of the Corporation, but
rather is being recommended for the corporate
reasons outlined above. The proposed amendment
will not prevent a takeover that is approved by
members of the Board of Directors unaffiliated
with the shareholder attempting to acquire control
of the Corporation.
If adopted, the proposed amendment could have
the effect of discouraging a third party from
making a tender offer or otherwise attempting to
obtain control of the Corporation, even though such
an attempt might, in some cases, be beneficial to the
Corporation and its shareholders. Issuance of
additional Common Shares could serve to discourage
the accumulation of substantial Common Shares
positions as a prelude to an attempted takeover or
significant corporate restructuring, proxy fights
and partial tender offers with the use of "two-
tiered pricing." This would serve to increase
management's stability, and thereby give it the
necessary security to make long range corporate
plans, as well as to respond to attempted
acquisitions. It could also serve to prevent
acquisitions resulting in dissimilar and possibly
unfair treatment of the Corporation's shareholders.
<PAGE>
Although the Board of Directors currently has
no intention of doing so, shares of authorized,
unissued and unreserved Common Shares could (within
the limits imposed by applicable law) be issued to
a holder who might thereby obtain sufficient voting
power to ensure that any proposal to remove
directors, or any alteration, amendment or repeal
of certain provisions to the Articles of
Incorporation, would not receive the shareholder vote
required therefor. Accordingly, the power to issue
new Common Shares could enable the Board of
Directors to make it more difficult to replace
incumbent directors or accomplish certain business
combinations opposed by the incumbent Board of
Directors.
Vote Required
Adoption of the proposed amendment requires that
more votes be cast in favor of the amendment than
against it at a duly called meeting of
shareholders at which a quorum is represented.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT
SHAREHOLDERS VOTE "FOR" ADOPTION OF THE AMENDMENT TO
INCREASE THE NUMBER OF AUTHORIZED COMMON SHARES.
* * * * *
CHANGE IN MINIMUM NUMBER OF MEMBERS OF THE BOARD OF
DIRECTORS
The Board of Directors has unanimously adopted a
proposed
amendment to Section A. of Article V of the
Corporation's Articles of Incorporation so that it
will read in its entirety as follows:
A. Number. The business and affairs of the
Corporation shall
be managed and conducted by or under the direction of
a Board of Directors. The number of directors
(exclusive of directors to be elected by the holders
of one or more series of Preferred Shares of the
Corporation that may be outstanding, voting
separately as a series or class) shall be fixed from
time to time by the Board of Directors of the
Corporation by resolution adopted by a majority of
the entire Board of Directors, but in no event shall
be less than five (5) nor more than fifteen (15).
The amendment would have the effect of changing the number
of members of the Board of Directors from a minimum of nine to a
minimum of five. The Board of Directors currently
consists of seven members and the Board does not
believe that a minimum on nine members of the Board
of Directors is necessary to manage the business and
affairs of the Corporation.
<PAGE>
Vote Required
Adoption of the proposed amendment requires the
affirmative vote of no fewer than 67% of the
Common Shares issued and outstanding.
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED
AMENDMENT TO THE ARTICLES OF INCORPORATION AND
RECOMMENDS A VOTE "FOR" THE DECREASE IN THE
MINIMUM NUMBER OF MEMBERS OF THE BOARD OF
DIRECTORS TO FIVE.
PROPOSED 1999 EMPLOYEE STOCK OPTION PLAN
On March 9, 1999, the Board of Directors
adopted the 1999 Employee Stock Option Plan, subject
to approval by holders of a majority of Common
Shares. The following summary of the material
provisions of the 1999 Plan does not purport to be
complete and is qualified in its entirety by
reference to the 1999 Plan. For purposes of this
summary, any reference to the Corporation
includes the Corporation and its Subsidiaries (as
defined in the 1999 Plan). A copy of the 1999 Plan
is attached as Annex A.
Purpose of the 1999 Plan
The purpose of the 1999 Plan is to advance the
interest of the Corporation by encouraging
employees who will largely be responsible for
the long-term success and development of the
Corporation to acquire and retain an ownership
interest in the Corporation. The 1999 Plan is
also intended to provide
flexibility to the Corporation in attracting and
retaining such employees and stimulating their
efforts on behalf of the Corporation.
Administration
The 1999 Plan will be administered by a
committee (the "Committee") appointed by the Board
of Directors. The members of the Committee will
serve at the discretion of the Board of
Directors. Subject to the provisions of the 1999
Plan, the Committee will have full authority to
administer the 1999 Plan, including without
limitation, the authority to (i) select
Participants (as defined below) to whom options
("Options") to purchase Common Shares of the
Corporation ("Shares") are granted (each grant an
"Award"); (ii) determine the size and frequency of
Awards granted under the 1999 Plan; (iii) determine
the terms and conditions of Awards, including any
restrictions or conditions to the Award, which need
not be identical; (v) cancel or modify,
with the consent of the Participant, outstanding
Awards and to grant new Awards in
substitution; (vi) accelerate the
exerciseability of, and accelerate or waive any
or all the restrictions and conditions applicable
to, any Award, for any reason; (vii) extend the
duration of an Option exercise period or term of an
Award; (viii) construe and interpret the 1999 Plan
and any agreement or instrument entered into under
the 1999 Plan; (ix) establish, amend and rescind
rules and regulations for the 1999 Plan's
administration; and (x) amend the terms and
conditions of any outstanding Award to the extent
such terms and conditions are within the discretion
of the Committee as provided in the 1999 Plan. All
determinations and decisions made by the Committee
pursuant to the provisions of the 1999 Plan, and
all related orders or resolutions of the Board of
Directors, will be final, conclusive and binding on
all persons.
<PAGE>
Number of Shares
In general, the number of Shares reserved for
issuance under the 1999 Plan is 50,000 Shares,
with such number subject to adjustment in the event
of certain events, including the possible stock
split described above. If and to the extent Awards
expire or terminate for any reason without having
been exercised in full (including a cancellation
and regrant of an Option), or are forfeited,
without, in either case, the Participant having
realized any of the economic benefits of a
shareholder, the Shares associated with such
Awards (to the extent not fully exercised,
forfeited or as to which no economic benefit was
realized) will again become available for Awards
under the 1999 Plan.
Adjustments in Authorized Shares and Outstanding
Awards
In the event of a merger, reorganization,
consolidation, recapitalization, reclassification,
split-up, spin-off, separation, liquidation,
share dividend, stock split, reverse stock split,
cash dividend, property dividend, share repurchase,
share combination, share exchange, issuance of
warrants, rights or debentures, or other change in
the corporate structure of the Corporation affecting
the Shares, the Committee may substitute or adjust
the total number and class of Shares or other stock
or securities that may be issued under the 1999
Plan, and the number, class and/or price of Shares
or other stock or securities subject to outstanding
Awards, as it determines to be appropriate and
equitable to prevent dilution or enlargement of the
rights of Participants and to preserve, without
exceeding, the value of any outstanding Awards.
Eligibility and Participation
Individuals who are full-time employees of the
Corporation ("Employees") are eligible to receive
Awards under the 1999 Plan. In selecting Employees
to receive Awards under the 1999 Plan, as well as
in determining the number of Shares subject to and
the other terms and conditions applicable to,
each Award, the Committee will take into
consideration such factors as it deems relevant in
promoting the purposes of the 1999 Plan, including
the duties of the Employees, their present
and potential contribution to the success of
the Corporation and their anticipated number of
years of active service remaining with the
Corporation.
<PAGE>
Stock Options
Subject to the terms and provisions of the 1999
Plan, the Committee may grant Options to
Participants at any time and from
time to time in the form of options that are
intended to qualify as incentive stock options
within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended ("ISOs"), Options
that are not intended to so qualify ("NQSOs"), or a
combination of the two.
Option Agreements
Each Award is required to be evidenced by
an option agreement between the optionee and the
Corporation (the "Option Agreement"). The Option
Agreement must specify the purchase price per
share subject to an Option (the "Option Exercise
Price"), the duration of the Option, the number of
Shares to which the Option relates and such
other provisions as the Committee may determine
or that are required by the 1999 Plan. The Option
Agreement must also specify whether the Option is
intended to be an ISO or a NQSO and must include
such provisions applicable to the particular type of
Option granted.
Duration of Option
In general, each Option will expire at such
time as is determined by the Committee at the
time of grant; provided, however, that no Option
may be exercised later than the tenth (10th)
anniversary of its grant.
Exercise of Options
Options must be exercisable at such times and be
subject to such restrictions and conditions as the
Committee approves at the time of grant, which need
not be the same for each grant or for each
Participant. Options must be exercised by delivery
to the Corporation of a written notice of exercise,
setting forth the number of Shares with respect
to which the Option is to be exercised and
accompanied by full payment of the Option Exercise
Price and all applicable withholding taxes.
Payment of Option Exercise Price
The Option Exercise Price for Shares as to
which an Option is exercised must be paid to the
Corporation in full at the time of exercise, at the
discretion of the Committee, either (a) in cash in
the form of currency or other cash equivalent
acceptable to the Corporation, (b) by tendering
Shares having a fair market value at the time of
exercise equal to the Option Exercise Price, (c) any
other reasonable consideration that the Committee
deems appropriate or (d) by a combination of the
forms of consideration described in (a) , (b) and
(c). The Committee may permit the cashless
exercise of Options as described in Regulation
T promulgated by the Federal Reserve Board, subject
to applicable securities law restrictions, or by
any other means that the Committee determines
to be consistent with the 1999 Plan's purpose
and applicable law; provided that for an ISO, the
right to a cashless exercise must be granted at the
time the Option is granted and may not be added in
any modification of the Option Agreement.
<PAGE>
Vesting Upon Change in Control
In the event of a "change in control" of the
Corporation, all outstanding Options held by a
Participant will become fully vested and
immediately exercisable. In general, the 1999 Plan
provides that a "change in control" occurs
when: (a) a shareholder or group acquires 25% of
the combined voting power of the Corporation's then
outstanding voting securities, (b) there is a
substantial turnover among the members of the
Board of
Directors, (c) the shareholders approve a merger,
consolidation or reorganization of
the Corporation, except in certain
circumstances as set forth in the 1999 Plan, (d) the
shareholders approve the complete dissolution of the
Corporation, or (e) the shareholders approve an
agreement for the sale or other disposition
of all or substantially all of the assets of the
Corporation.
Effect of Termination of Employment, Death or
Disability
If the employment of a Participant is terminated
for "cause" (as defined in the 1999 Plan), all then
outstanding Options of such Participant, whether
or not exercisable, will terminate immediately.
If the employment of a Participant is terminated
for any reason other than for "cause", death,
disability or retirement, to the extent the
outstanding Options of such Participant are
exercisable, such options may be exercised by such
Participant or his personal representative at any
time prior to the earlier of the expiration date of
the options or the date that is ninety (90) days
after the date of such termination of employment.
In the event of the death or disability of a
Participant while employed by the Corporation, all
then outstanding Options of such Participant will
become fully vested and immediately exercisable,
and may be exercised at any time within one (1) year
after the date of death or determination of
disability; provided, however, that no such
options may be exercised on a date subsequent to
their expiration.
Termination Date
The 1999 will terminate on the earlier to occur
of (a) the date when all Shares available under
the 1999 Plan have been acquired pursuant to the
exercise of Awards or (b) such other date as the
Board of Directors determines. In no event may any
Awards be granted later than the tenth anniversary
date of the day the 1999 Plan was adopted by
the Corporation's Board of Directors.
<PAGE>
Amendment, Modification and Termination
The Board of Directors may, at any time,
amend, modify or terminate the 1999 Plan.
However, without the approval of shareholders of
the Corporation no such amendment, modification or
termination may:
(a) materially increase the benefits
accruing to Participants under the 1999 Plan;
(b) materially increase the total amount
of Shares that may be issued under the 1999 Plan,
except in the event of an adjustment in authorized
shares pursuant to Section 4.2 of the 1999 Plan; or
(c) materially modify the class of
Employees eligible to participate in the 1999 Plan.
The Committee may amend the terms of
any Award, prospectively or retroactively, but no
such amendment will impair the rights of any
Participant without such Participant's consent.
Awards Previously Granted
No amendment, modification or termination of
the 1999 Plan will in any manner adversely affect
any outstanding Award without
the written consent of the Participant holding such
Award.
Non-Transferability
Except as may be determined by the Committee
in its sole discretion with respect to NQSOs, a
Participant's rights under the 1999 Plan may
not be assigned, pledged or otherwise
transferred other than by will or the laws of
descent and distribution.
No Granting of Employment Rights
Neither the 1999 Plan, nor any action taken
under the 1999 Plan, may be construed as giving any
employee the right to become a Participant, nor may
any Award under the 1999 Plan be construed as giving
a Participant any right with respect to continuance
of employment by the Corporation. The
Corporation expressly
reserves the right to terminate, whether by
dismissal, discharge or otherwise, a Participant's
employment at any time, with or without "cause",
except as may otherwise be provided by any
written agreement between the Corporation and the
Participant.
Tax Withholding
A Participant must remit to the Corporation
an amount sufficient to satisfy Federal and state
taxes (including the Participant's FICA
obligation) required by law to be withheld with
respect to any grant or exercise made under or as a
result of the 1999 Plan.
Shares Withholding
With respect to withholding required upon the
exercise of options or upon any other taxable
event under the 1999 Plan pursuant to which Shares
are to be received by the Participant, a Participant
may, subject to the discretion of the Committee, make
an election to satisfy the withholding requirement
with respect to such Shares, in whole or in part,
by having the Corporation withhold Shares having a
fair market value on the date the withholding
tax is to be determined equal to the amount required
to be withheld under applicable law.
<PAGE>
Indemnification
No member of the Board of Directors or the
Committee, nor any officer or Employee acting on
behalf of the Board of Directors or the
Committee, will be personally liable for any
action, determination or interpretation taken or
made with respect to the 1999 Plan, and all
members of the Board of Directors, the Committee
and each and any officer or Employee of the
Corporation acting on their behalf will, to the
extent permitted by law, be fully indemnified and
protected by the Corporation with respect to any
such action, determination or interpretation.
Vote Required
Adoption of the proposed 1999 Plan requires that
more votes be cast in favor of the 1999 Plan than
against it at a duly called meeting of
shareholders at which a quorum is represented.
THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED
1999 PLAN AND RECOMMENDS A VOTE "FOR" THE PROPOSED
1999 PLAN.
RATIFICATION OF INDEPENDENT AUDITORS
The Board of Directors has selected, subject to
ratification by the shareholders of the Corporation
at the Annual Meeting, the firm of Crowe, Chizek and
Company LLP as the independent accountants for the
Corporation to audit the Corporation's financial
statements for its year ending December 31,
1999. Eskew & Gresham, P.S.C. has served as
the Corporation's independent auditors since 1982.
In January 1998, Eskew & Gresham was merged into
Crowe, Chizek and Company LLP.
Ratification of the proposal to appoint Crowe,
Chizek and Company LLP as the independent accountants
for the Corporation requires that more votes be cast
in favor of the proposal than against it at a duly
called meeting of shareholders at which a quorum is
represented.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS
VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF CROWE
CHIZEK AND CO. LLP AS THE CORPORATION'S
INDEPENDENT AUDITORS.
OTHER MATTERS
The directors and officers of the Corporation do
not know of any matters to be presented for
shareholder approval at the Annual Meeting other
than those described in the Proxy Statement. If any
other matters should come before the Annual Meeting,
the Board of Directors intends that the persons
designated on the enclosed proxy form, or their
substitutes, will vote the shares represented by
the proxy form in accordance with their best
judgment on such matters.
By Order of the Board of Directors
Buckner Woodford
President, Bourbon Bancshares, Inc.
<PAGE>
This Proxy Form is Solicited by the Board of
Directors
BOURBON BANCSHARES, INC.
Paris, Kentucky
The undersigned hereby appoints Buckner Woodford
and William Reynolds, or either one of them (with
full power to act alone), my proxy, each with the
power to appoint his substitute, to represent me
to vote all of the Corporation's Common Stock which
I held of record or am otherwise entitled to vote,
at the close of business on March 22, 1999, at
the 1999 Annual Meeting of Shareholders to be held
on May 3, 1999, at 9:00 a.m., and at any
adjournments thereof, with all powers the
undersigned would possess if personally present, as
follows:
I. ELECTION OF DIRECTORS.
___ FOR all nominees listed below (except
as otherwise indicated below)
___ AGAINST all nominees listed below
Henry Hinkle, Theodore Kuster, Robert G. Thompson
(INSTRUCTION: To withhold authority to vote for any
individual nominee, write the
nominee's name on the line.)
_____________________________________________________
___
II. AMENDMENT TO ARTICLES OF INCORPORATION TO
INCREASE NUMBER OF AUTHORIZED SHARES OF COMMON
STOCK.
_____ FOR _____ AGAINST _____ ABSTAIN
III. AMENDMENT TO ARTICLES OF INCORPORATION TO
CHANGE NUMBER OF MEMBERS OF THE CORPORATION'S
BOARD OF DIRECTORS.
_____ FOR _____ AGAINST _____ ABSTAIN
IV. ADOPTION OF 1999 EMPLOYEE STOCK OPTION PLAN.
_____ FOR _____ AGAINST _____ ABSTAIN
V. RATIFICATION OF CROWE CHIZEK AND CO. LLP AS
INDEPENDENT
AUDITORS.
_____ FOR _____ AGAINST _____ ABSTAIN
VI. OTHER BUSINESS. In their discretion, the
Proxies are authorized to act upon such other
matters as may properly be brought before the
Annual Meeting or any adjournment thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
ALL OF THE NOMINEES LISTED IN ITEM 1 AND "FOR"
ITEMS 2, 3, 4 AND 5.
<PAGE>
[PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY]
This proxy form relates to ALL shares
owned by the undersigned.
This proxy form is solicited by the Board of
Directors and will be voted as specified and
in accordance with the accompanying proxy
statement. If no instruction is indicated, this
proxy form will be voted "FOR" all of the nominees
listed in Item 1 and "FOR" Items 2, 3, 4 and 5.
Please sign exactly as name appears. When
shares are held by joint tenants, both should sign.
When signing as attorney, as executor,
administrator, trustee or guardian, please give
full title as such. If a corporation, please sign
full corporate name by President or other
authorized officer. If a partnership, please sign
partnership name by authorized person.
Date _______________, 1999
_______________________________
Signature
_______________________________
Signature if held jointly
