<PAGE> 1
FORM 8-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: March 11, 1997
(Date of earliest event reported)
NATIONAL CITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
INDIANA 0-13585 35-1632155
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
227 Main Street, P.O. Box 868, Evansville, Indiana 47705-0868
(Address of principal executive offices)
Registrant's telephone number, including area code: 812-464-9677
Former name or former address, if changed since last report: N/A
Date of Report: March 11, 1997
<PAGE> 2
Pursuant to Section 13 or Section 15(b) of the Securities and Exchange Act of
1934, Registrant hereby makes current report regarding the following event:
Item 5. Other Events
On March 11, 1997, Registrant distributed its 1996 Annual Report to
Shareholders. The following sections of such report are hereby
incorporated by reference into this report: Financial Review (page 1);
Management's Discussion and Analysis of Financial Condition and Results of
Operations (pages 4-15 and 37); Report of Management's Responsibility for
Financial Statements (page 16); Independent Auditors Report (page 17); and
Consolidated Financial Statements and notes thereto (pages 18-33). Except
as expressly incorporated by reference herein, such report is furnished for
the information of the Commission and is not to be deemed "filed" for
purposes of the Securities Exchange Act of 1934, as amended.
Item 7. Financial Statements and Exhibits
Financial Statements
None
Exhibits
Exhibit No. Description
----------- -----------
13 1996 Annual Report
to Shareholders
27 Financial Data Schedule
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATIONAL CITY BANCSHARES, INC.
Date: March 11, 1997 /s/ HAROLD A. MANN
Harold A. Mann
Secretary/Treasurer
<PAGE> 4
Exhibit
No. Exhibit Description
- ------- -------------------
13 1996 Annual Report to Shareholders
27 Financial Data Schedule
<PAGE> 1
[FRONT COVER]
1996 ANNUAL REPORT
NATIONAL CITY BANCSHARES, INC.
Focused on Service, Security & Growth
<PAGE> 2
[INSIDE FRONT COVER]
CORPORATE PROFILE
National City Bancshares, Inc. (Nasdaq: NCBE), headquartered in Evansville,
Indiana, has been ranked as one of the most sound financial organizations in
the nation. In the June 1996 issue of USBanker magazine, National City was
ranked eleventh nationally among mid-sized banking companies. With assets of
nearly $1.1 billion, National City owns twelve full-service banks in twenty-six
communities and thirty-five offices throughout Southwestern Indiana, Western
Kentucky, and Southeastern Illinois. National City also owns NCBE Leasing
Corp., Twenty-One Southeast Third Corporation, and UniFed, Inc.
CONTENTS
<TABLE>
<S> <C>
1 Financial Review
2 Message to Shareholders
4 Management's Discussion
16 Management's Report
17 Independent Auditor's Report
18 Statements of Financial Position
19 Statements of Income
20 Statements of Cash Flows
22 Statements of Shareholders' Equity
23 Notes to Financial Statements
34 Official Organization
34 Subsidiaries
36 National City Bancshares, Inc.
Inside Back Cover Shareholder Information
</TABLE>
<PAGE> 3
FINANCIAL REVIEW
As Of And For The Year Ended December 31
(Dollar Amounts Other Than Share Data in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 44,141 $ 40,167 $ 36,008 $ 34,427 $ 34,513
Provision for loan
losses 2,491 294 18 581 1,327
Noninterest income 8,311 6,724 4,945 6,453 6,000
Noninterest expense 27,311 26,343 26,101 25,853 25,025
- ----------------------------------------------------------------------------------------
Income before income
taxes 22,650 20,254 14,834 14,446 14,161
Income taxes 7,404 7,139 5,155 4,519 4,395
- ----------------------------------------------------------------------------------------
Net income $ 15,246 $ 13,115 $ 9,679 $ 9,927 $ 9,766
========================================================================================
PER COMMON SHARE*
Net income $ 1.59 $ 1.34 $ 0.99 $ 1.01 $ 0.99
Book value 12.48 12.10 10.81 10.60 9.84
Cash dividends
declared by
National City
Bancshares, Inc. 0.58 0.42 0.42 0.40 0.38
TOTALS AT YEAR-END
Loans $723,308 $664,285 $575,018 $515,848 $500,084
Allowance for loan
losses 6,275 5,323 4,899 4,757 5,243
Securities 264,675 241,287 248,660 245,793 256,195
Total assets 1,069,086 979,440 906,506 897,831 913,964
Deposits 825,371 774,720 764,451 760,729 784,529
Shareholders' equity 117,711 119,311 104,635 104,458 97,503
SELECTED FINANCIAL RATIOS
Net income to average
assets 1.50% 1.41% 1.08% 1.11% 0.99%
Net income to average
equity 13.08 11.70 9.24 9.84 9.90
Cash dividend payout 36.48 31.34 42.42 40.00 38.38
Average equity to
average assets 11.49 12.06 11.74 11.30 10.01
Tangible equity to
tangible assets 10.35 11.94 11.43 11.49 10.51
Total capital to
risk-weighted assets 15.58 18.02 18.71 20.21 19.43
OTHER DATA
Number of shares* 9,435,432 9,864,116 9,681,342 9,855,911 9,908,546
Number of shareholders 2,265 2,106 2,104 2,040 2,025
Number of full-time
equivalent employees 444 445 446 466 473
Weighted average
number of common
shares outstanding* 9,569,810 9,809,640 9,758,011 9,858,368 9,909,484
</TABLE>
*Restated to reflect stock dividends and the two-for-one stock split
issued in April 1996.
<TABLE>
<CAPTION>
NET INCOME LOANS RETURN ON EQUITY
[THREE BAR GRAPHS]
<S> <C> <C> <C> <C> <C>
1992 $ 9,766 1992 $500,084 1992 9.90%
1993 $ 9,927 1993 $515,848 1993 9.84%
1994 $ 9,679 1994 $575,018 1994 9.24%
1995 $13,115 1995 $664,285 1995 11.70%
1996 $15,246 1996 $723,308 1996 13.08%
</TABLE>
1
<PAGE> 4
MESSAGE TO SHAREHOLDERS
March 10, 1997
I am pleased to report that National City Bancshares, Inc. completed its most
profitable year since the corporation was formed twelve years ago. Per share
income was $1.59, compared to $1.34 in 1995, an increase of 19%. Net income
for the corporation was $15,246,000, up from $13,115,000 a year earlier. Per
share and net income were reduced by $.04 and $354,000 after tax, respectively,
due to a one-time Savings Association Insurance Fund assessment.
[PHOTO]
John D. Lippert
Chairman and Chief Executive Officer
During 1996, total corporate assets exceeded one billion dollars. As of
December 31, total assets were $1,069,086,000, compared to $979,440,000 at year
end 1995. Also, the corporate loan portfolio increased from $664,285,000 to
$723,308,000 for the same periods.
Our plan to improve shareholder value continues. Return on shareholder equity
has improved from 11.70% in 1995 to 13.08% in 1996. Return on average assets
increased to 1.50%, up from 1.41% at year end 1995. Management is pleased with
these ratios; however, we believe we can improve both measurements.
Our corporation's stock continues to be well received by the market. During
1996, almost one million shares were traded on The Nasdaq Stock Market. Our
stock began the year selling for $22.62 per share and ended the year at $29.25,
a 29% increase. Further evidence of the acceptability of our stock is that
nearly 55% of our 2,265 shareholders participate in the corporation's dividend
reinvestment plan.
- ------------------------------------------------------------------------------
"It must be remembered that the bank stockholder is not wedded to banking as a
business. His sole concern is with the value of his investment."
Morris A. Schapiro, 1903-1996
The captioned quote was made during a speech by Morris A. Schapiro in 1949.
Mr. Schapiro, a highly respected investment banker, was a pioneer in bank
mergers.
- ------------------------------------------------------------------------------
During the year, we completed the purchase of The First National Bank of Wayne
City, Illinois, adding approximately $55 million in assets to the corporation's
balance sheet. At the end of February 1997, we acquired First Federal Savings
Bank of Leitchfield, Kentucky, increasing corporate assets by approximately
$43 million. Both transactions were treated as purchases on the corporation's
books. Management is continuously seeking willing banks to join our corporate
family. Each transaction must fit with the corporation's long range strategic
plan and must be in the best interests of the corporation and the institution
that is acquired.
2
<PAGE> 5
In January 1997, we announced concurrent restructuring of two of our banks;
more specifically, United Federal Savings Bank of Vincennes, Indiana, will be
merged into The State Bank of Washington, Indiana, and become "Alliance Bank".
Also, The Farmers and Merchants Bank of Fort Branch, Indiana, will be merged
into The National City Bank of Evansville, Indiana. Both changes were
necessary to better serve the rapidly growing economy in southwestern Indiana.
We expect completion of these changes by mid-year 1997.
As many of you may know, I have announced plans to retire at the end of 1997.
I strongly believe our current shareholders and potential shareholders need to
know the corporation has depth in leadership with our current management. The
Board of Directors is aware of its responsibility to provide successor
management for the corporation and has sufficient time to fill certain key
corporate positions that will become available due to planned retirements.
Late last year, Stephen C. Byelick, Jr., joined our officer group as Senior
Vice President, Assistant Treasurer, and Assistant Secretary to fill one of
these positions. Steve is an experienced Certified Public Accountant with an
MBA in Accounting and over twenty years of SEC reporting and banking
experience.
[PHOTO]
EXECUTIVE OFFICERS
Michael F. Elliott, Executive Vice President; Benjamin W. Bloodworth, Executive
Vice President; and Robert A. Keil, President
- -------------------------------------------------------------------------------
Shown in the background is National City's new nine-story business complex in
downtown Evansville, which is currently under construction. The new
headquarters for National City Bancshares, Inc. and The National City Bank of
Evansville is expected to be completed in late 1997.
- -------------------------------------------------------------------------------
I am truly grateful to have been associated with National City Bancshares, Inc.
and its lead bank, The National City Bank of Evansville, for the past eighteen
years. I am proud of what has been accomplished as a corporation and what will
be accomplished after I have retired. Our corporate course has been clear and
steady these past five years, and be assured management will not deviate from
our basic beliefs of good banking practices -- always with an eye toward
shareholder enhancement.
Again, we solicit your banking business and your continued support.
/s/ JOHN D. LIPPERT
John D. Lippert
Chairman of the Board and
Chief Executive Officer
3
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollar Amounts Other Than Share Data in Thousands)
INTRODUCTION
The discussion and analysis which follows is presented to assist in the
understanding and evaluation of the financial condition and results of
operations of National City Bancshares, Inc. and its subsidiaries as presented
in the following consolidated financial statements and related notes. The text
of this review is supplemented with various financial data and statistics. All
information has been retroactively restated to include bank acquisitions
accounted for using the pooling of interests method and to give effect to stock
dividends and the two-for-one stock split issued in April 1996.
BUSINESS DESCRIPTION
National City Bancshares, Inc. (Corporation) is an Indiana corporation
established in 1985 to engage in the business of a bank holding company. Based
in Evansville, Indiana, the Corporation has fifteen wholly owned subsidiaries,
including ten commercial banks and two savings banks serving twenty-six
communities with a total of thirty-five banking centers, a leasing corporation,
a property management company, and a financial services company (which is a
subsidiary of a subsidiary bank). These subsidiaries include First Federal
Savings Bank of Leitchfield, which was acquired on February 28, 1997, for
$6,750 in a transaction accounted for as a purchase. Each subsidiary, its
location, number of offices, year founded, date acquired by the Corporation,
and size in assets and equity is shown below.
The Corporation's subsidiary banks provide a wide range of financial services
to the communities they serve in Southwestern Indiana, Western Kentucky, and
Southeastern Illinois. These
SUBSIDIARY
<TABLE>
<CAPTION>
12/31/96 (millions)
Number of Year -------------------
Principal and Other Cities Offices Founded Date Acquired Assets Equity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THE NATIONAL CITY BANK OF EVANSVILLE 9 1850 May 6, 1985 $423 $35
Evansville and Newburgh, Indiana
THE PEOPLES NATIONAL BANK OF GRAYVILLE 1 1937 May 16, 1988 38 3
Grayville, Illinois
THE FARMERS AND MERCHANTS BANK 1 1896 January 30, 1989 41 4
Fort Branch, Indiana
FIRST KENTUCKY BANK 4 1916 November 30, 1990 90 8
Sturgis, Morganfield, and Poole, Kentucky
LINCOLNLAND BANK 5 1904 December 17, 1993 117 11
Dale, Chrisney, Grandview, Hatfield,
and Rockport, Indiana
THE BANK OF MITCHELL 4 1882 December 17, 1993 64 7
Mitchell, Bedford, and Paoli, Indiana
PIKE COUNTY BANK 3 1900 December 17, 1993 53 4
Petersburg, Arthur, and Spurgeon, Indiana
THE STATE BANK OF WASHINGTON 2 1910 December 17, 1993 45 4
Washington and Odon, Indiana
WHITE COUNTY BANK 1 1904 June 30, 1995 61 5
Carmi, Illinois
UNITED FEDERAL SAVINGS BANK 2 1890 August 31, 1995 99 8
Vincennes and Princeton, Indiana
THE FIRST NATIONAL BANK OF WAYNE CITY 1 1902 September 1, 1996 59 12
Wayne City, Illinois
FIRST FEDERAL SAVINGS BANK OF LEITCHFIELD 2 1961 February 28, 1997 43 4
Leitchfield and Hardinsburg, Kentucky
NCBE LEASING CORP. 1 1994 November 1, 1994 9 -
Evansville, Indiana
TWENTY-ONE SOUTHEAST THIRD CORPORATION 1 1996 May 22, 1996 17 2
Evansville, Indiana
UNIFED, INC. 1 1980 August 31, 1995 1 -
Vincennes, Indiana
</TABLE>
4
<PAGE> 7
services include various types of deposit accounts; safe deposit boxes;
safekeeping of securities; automated teller machines; consumer, mortgage, and
commercial loans; mortgage loan sales and servicing; letters of credit;
accounts receivable management (financing, accounting, billing, and
collecting); and complete personal and corporate trust services. All deposits
are insured by the Federal Deposit Insurance Corporation.
FINANCIAL CONDITION
Highlights for 1992 through 1996 are presented in the financial review on page
1. An average balance sheet and analysis of net interest income is provided on
page 15. Earnings per share for 1996 were $1.59, representing a 19% increase
over the 1995 results. The increase in earnings per share was the result of a
combination of an increased net interest margin, improved non-interest income,
and continued cost control. Sixty-four percent of 1996 earnings were retained,
increasing the book value per share $.38 to $12.48 and resulting in a strong
ratio of average equity capital to average assets of 11.49%. In July 1997, new
regulations permitting interstate branching will become effective. Management
does not plan to alter its operating strategies as a result of this regulatory
change and does not anticipate that the new law will have a significant impact
on the competitive environment in its market area. Management is not aware of
other current or proposed legislation which, if they were to be implemented,
would have a materially adverse effect on the Corporation's operations, capital
resources, or liquidity.
[ATM/CHECK CARD ADVERTISEMENT]
ATM/CHECK CARD
A popular consumer service, the ATM/Check Card, was tested and introduced in
September at National City Bank. Several other affiliates have since
successfully introduced it in their markets. With the ATM/Check Card, every
purchase comes directly from your checking account. It works everywhere
MasterCard(R) is accepted and also serves as your ATM card.
Average earning assets increased $75,575, or 8.6% and $37,578, or 4.5%, in l996
and 1995, respectively. Growth in average assets in 1996 was $84,938, or 9.1%
compared to $37,591, or 4.2% in 1995. During 1996, average interest bearing
deposits in banks decreased $5,432, or 65.5%; average short-term money market
investments decreased $1,317, or 100%; and average federal funds sold decreased
$8,633, or 72.8%. Average securities increased $11,911, or 5.1%, with the
largest increase being in tax-exempt municipals which increased by $40,597, or
97.5%. Taxable municipals increased $198, or 7.1%. U.S. Government and
agencies decreased $26,931, or 16.5%, and all other types of securities
decreased $3,225, or 11.4%. The average market value adjustment on securities
available for sale increased $1,272, or 78.3%. Average loans increased
$79,046, or 12.8%. All types of loans increased during the year. Average
commercial loans increased $38,177, or 17.2%; average consumer loans increased
$27,879, or 23.5%; and average mortgage loans increased $12,063, or 4.5%. All
other types of loans increased $927, or 9.1%. A strong loan demand contributed
to the growth of the loan portfolio. The change in the earning asset mix,
which was started in 1995, was intended to and resulted in improved earnings in
1995 and 1996.
A decrease of $8,934, or 4.4%, in average savings and interest bearing checking
accounts was more than offset by an increase of $26,933, or 6.6%, in average
certificates of deposit and other time deposits. Money market accounts also
increased $4,378, or 6.3%. Average federal funds purchased and securities sold
under agreements to repurchase increased $22,130, or 102.5%. Average other
borrowings increased $26,288, or 176.3%, to fund loans and construction of an
addition to the main office of The National City Bank of Evansville. Average
noninterest-bearing deposits increased $7,114, or 8.1%. It is the
Corporation's philosophy to only increase deposits if they are needed to fund
loan growth.
SECURITY PORTFOLIO
Average securities comprised 25.9% of the 1996 average earning assets compared
to 26.8% and 30.9% in 1995 and 1994, respectively. They represent the second
largest component after loans. The Corporation holds various types of
securities, including mortgage-backed securities. Inherent in mortgage-backed
securities is prepayment risk, which occurs when borrowers prepay their
obligations due to market fluctuations and rates. In an effort to reduce this
risk, management closely monitors the amount of mortgage-backed securities
contained in the portfolio. The Corporation has no securities by any issuer,
with the exception of the U. S. Government, exceeding 10% of shareholders'
equity. The Corporation manages the quality and risk of securities through its
Asset/Liability Committee, which recommends and monitors the overall security
portfolio approved by the Corporation's Board of Directors. Among other things,
the investment policy establishes guidelines for the level, type, quality, and
mix of securities appropriate for the portfolio. The security portfolio at
December 31, 1996, included $4,894 in structured notes, which were comprised of
$611 in multi-coupon step-up notes that have a price volatility comparable to a
callable
5
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
SECURITY PORTFOLIO, CONTINUED
U.S. Government agency of like maturity; $2,001 in capped floating rate notes;
$698 in ratchet capped floating rate notes; $984 in indexed amortizing notes;
and $600 in delevered floating notes. These securities have risk
characteristics which are well within the constraints of the non-structured
securities held in the security portfolio.
Securities classified as held to maturity are carried at amortized cost, and
those classified as available for sale are carried at fair value. The
available-for-sale securities included unrealized losses of approximately
$632 and unrealized gains of $691 at December 31, 1996. The fair value of
held-to-maturity securities was $160,128, reflecting unrealized losses of
$783 and unrealized gains of $2,616. At December 31, 1996, the Corporation's
available-for-sale securities included $56,082 in mortgage-backed securities,
or 55.4% of the available-for-sale portfolio. The held-to-maturity portfolio
contained $7,765 in mortgage-backed securities or 4.9% of the held-to-maturity
portfolio. The weighted average maturity of the available-for-sale
and held-to-
SECURITY PORTFOLIO
<TABLE>
<CAPTION>
Carrying Value at December 31
------------------------------------------------------------------
1996 1995 1994
------------------- -------------------- --------------------
HELD TO AVAILABLE Held to Available Held to Available
MATURITY FOR SALE Maturity for Sale Maturity for Sale
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury securities $ - $ 10,579 $ 500 $ 33,880 $7,577 $ 38,392
U.S. Government agencies 21,877 30,096 5,448 51,300 23,829 55,640
Taxable municipals 2,775 - 3,120 - 2,530 -
Tax-exempt municipals 114,805 - 57,897 - 42,308 -
Corporate securities 11,073 3,056 16,882 4,638 18,544 6,721
Mortgage-backed securities 7,765 56,082 6,071 56,096 17,512 32,144
- ------------------------------------------------------------------------------------------------
Total debt securities 158,295 99,813 89,918 145,914 112,300 132,897
Equity securities - 1,402 - 1,500 - 1,169
- ------------------------------------------------------------------------------------------------
Total securities $158,295 $101,215 $89,918 $147,414 $112,300 $134,066
================================================================================================
<CAPTION>
MATURITY ANALYSIS
DECEMBER 31, 1996 After 1 Year After 5 Year
but but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
--------------- --------------- --------------- --------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES CLASSIFIED AS
HELD TO MATURITY:
U.S. Treasury securities $ - - $ - - $ - - $ - - $ - -
U.S. Government agencies 6,196 6.75% 15,356 6.48% - - 325 9.13% 21,877 6.60%
Taxable municipals 245 6.70% 1,315 6.08% 1,215 7.17% - - 2,775 6.61%
Tax-exempt municipals 5,032 6.58% 22,707 8.21% 38,836 8.29% 48,230 8.43% 114,805 8.26%
Corporate securities 5,078 6.04% 5,995 6.97% - - - - 11,073 6.54%
- ------------------------------------------------------------------------------------------------------------------
Total maturing securities $ 16,551 6.48% $45,373 7.40% $40,051 8.26% $48,555 8.43% 150,530 7.86%
================================================================================================
Mortgage-backed securities 7,765 7.74%
----------------
Total securities $158,295 7.85%
================
SECURITIES CLASSIFIED AS
AVAILABLE FOR SALE:
U.S. Treasury securities $ 4,835 6.34% $ 5,744 7.23% $ - - $ - - $ 10,579 6.82%
U.S. Government agencies 18,966 6.61% 10,330 5.99% 800 7.48% - - 30,096 6.42%
Corporate securities 3,056 6.06% - - - - - - 3,056 6.06%
- ------------------------------------------------------------------------------------------------------------------
Total maturing securities $ 26,857 6.50% $16,074 6.43% $ 800 7.48% $ - - 43,731 6.49%
================================================================================================
Mortgage-backed securities 56,082 6.34%
Equity securities 1,402 5.68%
---------------
Total securities $101,215 6.40%
===============
</TABLE>
6
<PAGE> 9
maturity portfolios at December 31, 1996, was 7.4 years and 7.9 years,
respectively. The weighted average maturity of the available-for-sale and the
held-to-maturity portfolios at December 31, 1995, was 5.9 years and 6.3 years,
respectively. A three-year analysis of the year-end balances in the security
portfolio and an analysis of the maturities and weighted average yields as of
December 31, 1996, is provided on page 6. The weighted average yields on
municipal securities that are tax-exempt have been computed on a
federal-tax-equivalent basis using a 35.0% tax rate.
LOANS
Each subsidiary bank has competent lending officers who follow loan policies
approved by their boards of directors. These policies are compatible with the
Corporation's loan policy approved by its Board of Directors. The lending
policies address risks associated with each type of lending, collateralization,
loan-to-value ratios, loan concentrations, insider lending, and other pertinent
matters. These functions are monitored by subsidiary and corporate loan review
personnel and by the loan committees of the boards of directors for compliance
and loan quality. Careful loan administration and high credit standards
minimize credit risk, as evidenced by the ratio of underperforming loans to
total loans. Speculative loans are prohibited, and the normal loan-to-value
ratio is a maximum of 80% for real estate loans. The loan portfolio contains
no foreign loans. All real estate loans, and more than 85% of commercial and
consumer loans, are secured.
The Corporation's loan portfolio is well diversified by type of loan and
industry, and, within its market area, by geographic location, which minimizes
economic risk. The loan portfolio contained 30% commercial loans, 51% real
estate loans (primarily
The following is a five-year summary of the loan portfolio and an analysis of
the loan maturities and rate sensitivities at December 31, 1996.
LOAN PORTFOLIO AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans $367,872 $339,880 $316,742 $296,869 $289,651
Loans to financial institutions - - - 50 50
Loans for purchasing/carrying securities - - - - 350
Agricultural loans 30,136 29,152 28,299 26,757 24,067
Commercial and industrial loans 165,035 153,561 116,937 99,491 96,067
Economic development loans and
other obligations of state and
political subdivisions 11,214 9,887 12,833 9,916 9,478
Consumer loans 136,392 124,864 99,683 83,609 83,585
Direct lease financing 12,331 6,960 518 503 975
All other loans 546 291 275 845 848
- ------------------------------------------------------------------------------------------
Total loans - gross 723,526 664,595 575,287 518,040 505,071
Less: unearned income 218 310 269 2,192 4,987
- ------------------------------------------------------------------------------------------
Total loans - net of unearned income 723,308 664,285 575,018 515,848 500,084
Less: allowance for loan losses 6,275 5,323 4,899 4,757 5,243
- ------------------------------------------------------------------------------------------
Total loans - net $717,033 $658,962 $570,119 $511,091 $494,841
==========================================================================================
</TABLE>
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 1996 ON AGRICULTURAL,
COMMERCIAL, AND TAX-EXEMPT LOANS
<TABLE>
<CAPTION>
After
1 Year But
Within Within Over
Rate sensitivities: 1 Year 5 Years 5 Years Total
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed rate loans $ 32,260 $38,656 $13,291 $ 84,207
Variable rate loans 121,179 753 - 121,932
- -----------------------------------------------------------------------------------
Subtotal $153,439 $39,409 $13,291 206,139
=======================================================================
Percent of subtotal 74.43% 19.12% 6.45%
Nonaccrual loans 246
--------
Total loans net of unearned income $206,385
========
</TABLE>
7
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
LOANS, CONTINUED
residential), and 19% consumer loans at December 31, 1996. The Corporation's
subsidiary banks lend to customers in various industries including
manufacturing, agricultural, health and other services, transportation, mining,
wholesale, and retail.
Commercial loans increased dramatically in 1996 and 1995 due to a general
increase in business among the communities the Corporation's banks serve.
Management feels little risk is associated with this growth because most of the
borrowers are long-standing customers who increased their lines of credit for
expansion and inventory purposes. Consumer loans also grew appreciably as a
direct result of increased automobile sales. Prudent underwriting standards
are maintained for the granting of consumer credit.
Agriculture in our trade area was profitable for the fourth straight year,
allowing the Corporation to increase outstandings while maintaining prudent
underwriting standards. The Corporation's banks do not make loans for land
speculation or other high credit risk farm ventures. The increase in real
estate lending was a direct result of strong loan demand during most of 1996.
This portfolio is mostly comprised of single-family, owner-occupied housing.
Guidelines for residential mortgage lending were followed, advances normally
did not exceed 80% of appraised value, and the customer's ability to repay was
closely scrutinized.
At December 31, 1996, there was no concentration of credit risk from borrowers
engaged in the same or similar industries exceeding 10% of total loans.
Geographic diversification is provided by the Corporation's policy to extend
credit to customers in its geographic market areas in and around the subsidiary
banks' twenty-four cities located in Southwestern Indiana, Southeastern
Illinois, and Western Kentucky.
[PHONE BANK
ADVERTISEMENT]
PHONE BANK
National City Bank introduced PHONE BANK in August 1996, giving customers free
access to their banking information 24 hours every day. It was an immediate
success with several affiliates preparing to introduce it in 1997. In early
1997, National City will introduce a fee-generating feature of the PHONE BANK
called EXPRESS BILL PAYER. This service will allow customers to pay bills from
the convenience of their telephone.
UNDERPERFORMING ASSETS
Underperforming assets consist of nonaccrual securities and loans, restructured
loans, 90 days past due loans, and other real estate held. Nonaccrual
securities are those which have defaulted on interest payments. Nonaccrual
loans are loans on which interest recognition has been suspended because of
doubts as to the borrower's ability to repay principal or interest. Loans are
generally placed on nonaccrual status after becoming 90 days past due if the
ultimate collectibility of the loan is in question. Loans which are current,
but for which serious doubt exists about repayment ability, may also be placed
on nonaccrual status. Restructured loans are loans where the terms have been
changed to provide a reduction or deferral of principal or interest because of
the borrower's financial position. Past-due loans are loans that are
continuing to accrue interest but are contractually past due ninety days or
more as to interest or principal payments. Other real estate owned represents
properties obtained for debts previously contracted. Management is not aware of
any loans which have not been disclosed as underperforming assets that
represent or result from unfavorable trends or uncertainties which management
reasonably believes will materially adversely affect future operating results,
liquidity or capital resources, or represent material credits as to which
management has serious doubt as to the ability of such borrower to comply with
loan repayment terms.
The following is a five-year summary of the underperforming assets as of
December 31:
UNDERPERFORMING ASSETS AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Underperforming loans:
Nonaccrual $2,116 $1,037 $1,025 $2,187 $ 3,356
Restructured 114 143 223 222 2,147
90 days past due 1,067 906 594 279 1,735
- -----------------------------------------------------------------------------
Total underperforming loans 3,297 2,086 1,842 2,688 7,238
Nonaccrual municipal securities 31 - - 81 182
Other real estate owned 66 383 636 1,059 3,512
- -----------------------------------------------------------------------------
Total $3,394 $2,469 $2,478 $3,828 $10,932
=============================================================================
</TABLE>
8
<PAGE> 11
Past due 90 days or more, nonaccrual, and restructured loans were 0.5% and 0.3%
of total loans at the end of 1996 and 1995, respectively. Of the loans in
these categories, $1,618, or 49.1%, were secured by real estate at the end of
1996, compared to $929, or 44.5%, at the end of 1995. Additional interest
income that would have been recorded, if nonaccrual and restructured loans had
been current and in accordance with their original terms, was $186, $133, and
$107 in 1996, 1995, and 1994, respectively. The interest recognized on
nonaccrual loans was approximately $21, $58, and $84 in 1996, 1995, and 1994,
respectively. Other real estate held at the end of 1992 included properties
valued at $2,011 which were sold with The National City Bank of Evansville
holding the mortgages.
In addition to those loans classified as underperforming, management was
closely monitoring loans of approximately $40,021 and $26,560 as of the end of
1996 and 1995, respectively, for the borrowers' abilities to comply with
present loan repayment terms. All impaired loans discussed in Note 5 to the
financial statements in this report are included in underperforming or closely
monitored loans.
RISK MANAGEMENT
As of December 31, 1996, management considered the allowance for loan losses
adequate to provide for potential losses in the loan portfolio. Management
reviews delinquent and problem loans weekly. Loans which are judged
uncollectible are charged off on a timely basis. The allowance for loan losses
is reviewed quarterly in order to evaluate and maintain its adequacy based on a
thorough analysis of the entire loan portfolio. Some of the factors used in
this review include current economic conditions
The following is a five-year analysis of loan loss experience and allocation of
allowance for loan losses:
SUMMARY OF LOAN LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $ 5,323 $ 4,899 $ 4,757 $ 5,243 $ 5,511
Changes due to purchase acquisition 379 140 - - -
Loans charged off:
Commercial 874 182 237 1,251 1,628
Real estate mortgage 333 65 267 204 687
Consumer 1,140 361 201 296 427
Direct lease financing 67 - - - -
- ------------------------------------------------------------------------------------------------------
Total 2,414 608 705 1,751 2,742
- ------------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 114 319 211 383 650
Real estate mortgage 229 173 189 186 267
Consumer 148 106 429 115 230
Direct lease financing 5 - - - -
- ------------------------------------------------------------------------------------------------------
Total 496 598 829 684 1,147
- ------------------------------------------------------------------------------------------------------
Net charge-offs 1,918 10 (124) 1,067 1,595
Provision for loan losses 2,491 294 18 581 1,327
- ------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 6,275 $ 5,323 $ 4,899 $ 4,757 $ 5,243
======================================================================================================
Total loans at year end $723,308 $664,285 $575,018 $515,848 $500,084
Average loans $697,575 $618,529 $539,750 $509,031 $506,261
As a percent of year-end loans:
Net charge-offs 0.27% 0.00% -0.02% 0.21% 0.32%
Provision for loan losses 0.34% 0.04% 0.00% 0.11% 0.27%
Year-end allowance balance 0.87% 0.80% 0.85% 0.92% 1.05%
As a percent of average loans:
Net charge-offs 0.27% 0.00% -0.02% 0.21% 0.32%
Provision for loan losses 0.36% 0.05% 0.00% 0.11% 0.26%
Year-end allowance balance 0.90% 0.86% 0.91% 0.93% 1.04%
Allowance for loan losses as a percent
of underperforming loans 190.33% 255.18% 265.96% 176.97% 72.44%
</TABLE>
9
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
RISK MANAGEMENT, CONTINUED
and forecasts, risk by type of loan, previous loan loss experience, and
evaluation of specific borrowers and collateral. The Corporation and its banks
closely monitor loan portfolios using models designed in part by regulatory
agencies.
Total loans charged off during 1996 increased $1,806, or 297.0%, and recoveries
were $102, or 17.1%, lower than in 1995. The provision for loan losses for
1996 was increased $2,197 as a result of the increase in net charge-offs and
growth of the loan portfolio. In 1995, the provision for loan losses was
increased due to increased loan volume. In 1994, the provision for loan losses
was decreased as a result of significant reductions in underperforming loans
and net charge-offs.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31
<TABLE>
<CAPTION>
Allowance Applicable to
- --------------------------------------------------------------------
Loan Type 1996 1995 1994 1993 1992
- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $2,040 $2,244 $1,862 $1,521 $1,901
Real estate mortgage 941 947 946 957 1,320
Consumer 1,360 908 561 600 571
- --------------------------------------------------------------------
Allocated 4,341 4,099 3,369 3,078 3,792
Unallocated 1,934 1,224 1,530 1,679 1,451
- --------------------------------------------------------------------
Total $6,275 $5,323 $4,899 $4,757 $5,243
====================================================================
<CAPTION>
Percent of Loans to Total Gross Loans
- --------------------------------------------------------------
Loan Type 1996 1995 1994 1993 1992
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial 30% 30% 28% 27% 26%
Real estate mortgage 51% 51% 55% 57% 57%
Consumer 19% 19% 17% 16% 17%
- --------------------------------------------------------------
Allocated 100% 100% 100% 100% 100%
==============================================================
</TABLE>
DEPOSITS
The Corporation's Asset/Liability Committee manages the deposits of its banks
to best utilize short-term and long-term benefits of deposit growth. Average
deposits increased $29,491, or 3.8%, during 1996, compared to $16,310, or 2.2%
in 1995. Average time deposits of $100,000 or more increased $24,674, or 26.6%,
compared to $28,159, or 43.5%. The increase in time deposits of $100,000 in
1996 includes the addition of $13,000 in brokered deposits. Management plans
to use brokered deposits to supplement local deposits under strict guidelines
and limits established by the Corporation's Asset/Liability Committee. Time
deposits of $100,000 or more, including brokered deposits in 1996, are not
considered to present an undue risk, and their averages have remained under 15%
of total deposits during the past three years.
The following is a three-year summary of average deposit balances and rates.
Also presented is a comparative analysis of time deposits of $100,000 or more.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1996 1995 1994
------------------ ------------------ ------------------
AMOUNT RATE Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $ 95,125 - $ 88,011 - $ 87,856 -
Money market accounts 73,736 3.45% 69,358 3.72% 67,677 2.66%
Interest-bearing demand 127,788 1.80% 131,987 2.26% 138,018 2.40%
Savings 68,546 2.48% 73,281 2.67% 82,239 2.55%
Time deposits of $100,000 or more 117,601 5.36% 92,927 5.68% 64,768 4.92%
Other time deposits 317,588 5.29% 315,329 5.14% 314,025 4.22%
- -----------------------------------------------------------------------------------------------
Total $800,384 $770,893 $754,583
===============================================================================================
</TABLE>
TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
Maturing:
3 months or less $ 57,358 $31,735 $37,075
Over 3 to 6 months 27,709 27,920 23,723
Over 6 to 12 months 18,999 16,397 10,826
Over 12 months 16,149 16,537 14,112
- -------------------------------------------------------------
Total $120,215 $92,589 $85,736
=============================================================
</TABLE>
10
<PAGE> 13
CAPITAL RESOURCES
At the end of 1996, shareholders' equity totaled $117,711, a decrease of
$1,600, or 1.34%, from 1995. The equity to asset ratio on an average basis was
11.49% and 12.06% for 1996 and 1995, respectively. The decrease is
attributable to the Corporation's repurchase of 346,307 shares of its common
stock for approximately $12,900. The dividend payout ratio for 1996 was
36.48%, compared to 31.34% in 1995. In 1995, The National City Bank of
Evansville committed to build an addition to its main office to be completed in
the third quarter of 1997. The approximate cost of the nine story building
will be $15,000. The National City Bank of Evansville and the Corporation will
occupy three floors of the facility with the other six floors being sold as
condominiums. The National City Bank of Evansville's and the Corporation's
share of the building cost will total approximately $6,000. The Corporation,
through its subsidiary, Twenty-One Southeast Third Corporation, is funding the
project with the proceeds of a $15,000 term loan. The loan will be repaid by
the proceeds of the sale of condominiums and lease payments from The National
City Bank of Evansville and the Corporation. There are no other material
commitments for capital expenditures.
Guidelines for minimum capital levels have been established for the Corporation
by the Federal Reserve Board. Tier I (core) capital consists of shareholders'
equity less goodwill, other identifiable intangible assets, and unrealized
losses on marketable equity securities. Total capital consists of Tier I
capital plus allowance for loan losses. Minimum capital levels are 3% for the
leverage ratio which is defined as Tier I capital as a percentage of total
assets less goodwill and other identifiable intangible assets; 4% for Tier I
capital to risk-weighted assets; and 8% for total capital to risk-weighted
assets. The Corporation has exceeded each of these levels. Its leverage ratio
was 10.39% and 12.08%; Tier I capital to risk-weighted assets was 14.74% and
17.23%; and total capital to risk-weighted assets was 15.58% and 18.02% at the
end of 1996 and 1995, respectively. In addition, each of its subsidiary banks
has exceeded minimum regulatory capital guidelines.
SHORT-TERM BORROWINGS
Federal funds purchased are borrowings from other financial institutions
maturing daily. Securities sold under agreements to repurchase are secured
transactions with customers. Securities sold under agreements to repurchase
generally mature within six months. Notes payable U.S. Treasury are demand
notes created by treasury tax and loan account funds transfers. Short-term
borrowings increased $10,417, or 18.7%, during 1996. At December 31, 1996,
federal funds purchased were $52,825, reflecting an $18,325, or 53.1% increase
over 1995. Securities sold under agreements to repurchase and notes payable
U.S. Treasury decreased during 1996 by $6,860, or 37.4%, and $1,048, or 37.8%,
respectively. A detailed analysis of these three types of borrowings follows:
SHORT-TERM BORROWINGS AT DECEMBER 31
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased $52,825 $34,500 $10,575
Securities sold under
agreements to repurchase 11,469 18,329 14,553
Notes payable U.S. Treasury 1,721 2,769 2,675
- -----------------------------------------------------------
Total $66,015 $55,598 $27,803
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Securities Notes
Federal Sold Under Payable
Funds Agreements U.S.
Purchased to Repurchase Treasury
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
1996
AVERAGE AMOUNT OUTSTANDING $26,282 $17,448 $1,378
MAXIMUM AMOUNT AT ANY MONTH END 53,825 28,153 3,270
WEIGHTED AVERAGE INTEREST RATE:
DURING YEAR 5.50% 4.35% 5.17%
END OF YEAR 6.68% 3.66% 5.15%
1995
Average amount outstanding $ 4,536 $17,064 $2,655
Maximum amount at any month end 34,500 20,649 6,647
Weighted average interest rate:
During year 5.89% 4.64% 5.67%
End of year 5.90% 4.10% 5.15%
1994
Average amount outstanding $ 5,300 $14,557 $2,096
Maximum amount at any month end 19,450 18,235 4,783
Weighted average interest rate:
During year 4.81% 3.69% 3.81%
End of year 5.64% 4.62% 5.20%
</TABLE>
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
LIQUIDITY
The liquidity of a banking institution reflects the ability to provide funds to
meet loan requests, to accommodate possible outflows in deposits, and to take
advantage of interest rate market opportunities. Funding loan requests,
providing for liability outflows, and managing interest rate fluctuations
require continuous analysis in order to match maturities of specific categories
of short-term and long-term loans and investments with specific types of
deposits and borrowings. Bank liquidity is thus normally considered in terms of
the nature of mix of the banking institution's sources and uses of funds.
[WEB SITE ADVERTISEMENT]
INTERNET HOME PAGE
In 1996, National City Bank reserved NATIONALCITY.COM for use on the world wide
web. Their home page site will be available in 1997 with many points of
interest. National City Bancshares, Inc. will also be on the web at NCBE.COM
to keep you informed of important events and stock information.
For National City Bancshares, Inc., the primary sources of short-term liquidity
have been federal funds sold, interest-bearing deposits in banks, and U.S.
Government and agency securities available for sale. In addition to these
sources, short-term liquidity is provided by maturing loans and securities. The
balance between these sources and needs to fund loan demand and deposit
withdrawals is closely monitored by the Corporation's asset/liability
management program and by each subsidiary bank to provide liquidity without
penalizing earnings. The increased loan demand throughout the year was funded
by primary assets, federal funds sold, and U.S. Government and agency
securities available for sale. However, management remains comfortable with
the shift in earning assets, due to the deposits generated by loans and a
continued shortening of loan maturities. Additionally, the Corporation's
underwriting standards for its mortgage loan portfolio are in accordance with
standards established by government housing agencies; as a result, a portion of
the mortgage loan portfolio could be sold to provide additional liquidity. At
December 31, 1996 and 1995, respectively, federal funds sold were $600 and
$1,420, interest-bearing deposits in banks were $1,784 and $5,023, and U.S.
Government and agency securities available for sale were $40,675 and $85,180.
These sources and other liquid assets also provide long-term liquidity needs.
Long-term liquidity is managed in the same way, only with longer maturities, to
provide for future needs while maintaining interest margins. In excess of
$2,082 was available to the Corporation at December 31, 1996, from dividends by
subsidiaries without prior regulatory approval. Note 19 to the financial
statements in this report provides more detail about restrictions on dividends
from subsidiaries. These dividends provide liquidity for the Corporation. The
Corporation has no material long-term commitments.
INTEREST RATE SENSITIVITY
Management of liquidity must be coordinated with interest rate management. The
following "Interest Rate Sensitivity Analysis" schedule shows assets and
liabilities which mature at various periods in time and will be subject to
repricing. Money market accounts are shown in the shortest period, and savings
accounts are shown in the longest period presented. Interest-bearing demand
accounts are divided between the shortest and longest periods based on the
historical pattern of the interest rate sensitivity of the account. Variable
rate interest-earning assets and interest-bearing liabilities are distributed
based on repricing opportunities while fixed rate interest-earning assets and
interest-bearing liabilities are distributed based on contractual maturity. No
adjustments were made for projected prepayment assumptions or for projected
responses to changes in market interest rates. Liabilities to be repriced in
three months or less and on a cumulative basis through one year exceed assets
to be repriced in the same time periods. In times of rising interest rates,
this will reduce net interest margin and earnings, as liabilities will be
repriced at higher rates while matching assets remain at lower rates until
maturity. In times of falling interest rates, this will increase net interest
margin and earnings. Interest rate levels cannot be predicted at any future
point in time; therefore, it is in our best interest to match maturities of
assets and liabilities so that the gap will be as close to zero as possible.
This can be accomplished by shortening maturities of investment purchases
and/or purchasing investments where the rates adjust every thirty to ninety
days. While more liabilities than assets are subject to repricing within three
months, we believe our asset/liability management program allows adequate
reaction time for changes in rates as they occur, maximizing the potential
positive effect of an increase in interest rates.
Corporate asset liability gap positions are targeted at plus or minus 10% at
the six-month and one-year horizons. At December 31, 1996, all subsidiary
banks were within, or close to, their targeted spreads. The cumulative gap
position through
12
<PAGE> 15
one year of negative $75,845 at the end of 1996 was 7.1% of total assets, a
relatively balanced position in the opinion of management. Management believes
that changes in interest-bearing liabilities are driven by changes in the
Corporation's assets.
INTEREST RATE SENSITIVITY ANALYSIS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Over Over
3 Months 1 Year
3 Months through through Over
EARNING ASSETS: or Less 1 Year 5 Years 5 Years Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans - net of unearned income
(excluding nonaccrual) $214,194 $130,383 $212,893 $163,722 $721,192
Securities (excluding nonaccrual) 26,476 35,862 84,488 117,818 264,644
Time deposits in banks 297 597 890 - 1,784
Federal funds sold 600 - - - 600
- ---------------------------------------------------------------------------------------------------------------
Total earning assets 241,567 166,842 298,271 281,540 988,220
- ---------------------------------------------------------------------------------------------------------------
RATE-SENSITIVE LIABILITIES:
Interest-bearing liabilities:
Interest-bearing demand 20,235 - - 110,952 131,187
Money market and other savings 64,977 - - 68,986 133,963
Time deposits of $100,000 or more 58,356 46,172 13,595 2,092 120,215
Other time 99,537 124,462 90,653 12,645 327,297
Borrowed funds 67,515 3,000 26,921 18,285 115,721
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 310,620 173,634 131,169 212,960 828,383
Noninterest-bearing demand - - - 112,709 112,709
- ---------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 310,620 173,634 131,169 325,669 941,092
- ---------------------------------------------------------------------------------------------------------------
Interest sensitivity gap (69,053) (6,792) 167,102 (44,129)
Cumulative gap (69,053) (75,845) 91,257 47,128
</TABLE>
CHANGES IN NET INTEREST INCOME
(INTEREST ON A FEDERAL-
TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 Compared to 1994
------------------------------- ---------------------------
CHANGE DUE TO Change Due to
A CHANGE IN a Change in
--------------------- TOTAL ---------------- Total
VOLUME RATE CHANGE Volume Rate Change
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income increase (decrease)
Loans $7,230 $ 265 $7,495 $7,171 $3,741 $10,912
Securities 734 1,059 1,793 (1,552) 1,397 (155)
Other short-term investments (762) (148) (910) (938) 634 (304)
- -------------------------------------------------------------------------------------------------------
Total interest income 7,202 1,176 8,378 4,681 5,772 10,453
- -------------------------------------------------------------------------------------------------------
Interest expense increase (decrease)
Deposits 941 (288) 653 686 4,669 5,355
Borrowings 2,760 38 2,798 646 287 933
- -------------------------------------------------------------------------------------------------------
Total interest expense 3,701 (250) 3,451 1,332 4,956 6,288
- -------------------------------------------------------------------------------------------------------
Net interest income increase (decrease) $3,501 $1,426 $4,927 $3,349 $ 816 $ 4,165
=======================================================================================================
</TABLE>
RESULTS OF OPERATIONS
Net income for 1996 was $15,246 reflecting a $2,131, or 16.2%, increase over
1995. Net income for 1995 increased $3,436, or 35.5%, over the 1994 results.
On a per share basis, net income in 1996 was $1.59, compared to $1.34 in 1995,
and $0.99 in 1994. Increases in both rates and volumes of earning assets
resulted in growth in net interest income of $3,974, or 9.9%, in 1996 and
$4,159, or 11.6%, in 1995. Noninterest income increased $1,587, or 23.6%, in
1996 and $1,779, or 36.0%, in 1995. Noninterest expense increased $968, or
3.7%, in 1996 and $242, or 0.9%, in 1995. The provision for loan losses
increased $2,197 in 1996 due to higher net charge-offs and loan growth, and
$276 in 1995 due to increased loan volume.
Changes in net interest income for the last two years are presented in the
preceding schedule with dollar changes allocated to rate and volume variances.
The combined rate-volume variances are included in the total volume variances.
In addition to this schedule, on page 15 is a three-year balance sheet analysis
on an average basis and an analysis of net interest income, setting forth
(i) average assets, liabilities, and shareholders' equity; (ii) interest income
earned on interest-earning assets and interest expense incurred on interest-
bearing liabilities; (iii) average yields earned on interest-earning assets and
average rates incurred on interest-bearing liabilities; (iv) the net interest
margin (i.e. the average yield earned on interest-earning assets less the
average rate incurred on interest-bearing
13
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
RESULTS OF OPERATIONS, CONTINUED
liabilities); and (v) the net yield on interest-earning assets (i.e. net
interest income divided by average interest-earning assets). Nonaccrual loans
are included in the average balances shown on the three-year balance sheet
analysis and in the average balances used to compute the volume variances in
the changes in net interest income.
[CREDIT CARD
ADVERTISEMENT]
GOLD AND STANDARD MASTERCARD(R)
Most affiliate banks of National City Bancshares, Inc. now offer a variety of
new credit cards, which include the Standard and Gold MasterCard. They offer
both fixed and variable rate options, and some are available with no annual
fee. In January 1997, National City Bank introduced a travel award program
called ScoreCard(TM) to enhance card awareness and usage. This makes National
City the only local bank in the Evansville market to offer such a product.
A summary analysis of operations and return on equity and assets is provided in
a five-year financial review on page 1. The following discussion of results of
operations is on a federal-tax-equivalent basis. Average loans increased 12.8%
during 1996, compared to an increase of 14.6% during 1995. Loan income
increased 13.3% in 1996 and 24.0% in 1995. The average yield on loans
increased from 9.10% in 1995 to 9.15% in 1996, a direct result of higher
interest rates. Average securities before market value adjustments increased
4.5% in 1996 and decreased 9.3% in 1995. Securities income increased 11.8%
during 1996 and decreased 1.0% during 1995. The yield on securities increased
from 6.45% in 1995 to 6.90% in 1996. Average earning assets increased $75,575,
or 8.6%, in 1996 and $37,578, or 4.5%, in 1995. Interest income increased
$8,378, or 11.5%, in 1996 and $10,453, or 16.8%, in 1995. The average yield on
total earning assets increased from 8.32% in 1995 to 8.54% in 1996. Interest
income in 1996 increased principally as a result of volume increases, while in
1995, 55% of the increase in interest income was due to rate changes and 45%
due to volumes.
Average total interest-bearing deposits increased 3.3% during 1996 and 2.4%
during 1995. The average cost of interest-bearing deposits increased from
3.55% to 4.25% in 1995 and decreased from 4.25% to 4.21% during 1996. In 1995,
rate was responsible for approximately 87% of the increase in interest expense
on interest-bearing deposits; while in 1996, volume increases partially offset
by rate decreases accounted for the change in interest expense on
interest-bearing deposits. Interest on federal funds sold, securities sold
under agreements and other borrowings increased $2,798 during 1996 and $933 in
1995. The increases are principally attributable to increased volumes.
In 1996 and 1995 the increase in net interest income due to volume was stronger
than the changes due to rate, resulting in a $4,927 and $4,165 increase in net
interest income in 1996 and 1995, respectively.
NONINTEREST INCOME
Noninterest income increased $1,587, or 23.6%, during 1996 and $1,779, or
36.0%, during 1995. Service charges on deposit accounts, the largest item in
this category, increased $676, or 24.4%, during 1996 and $578, or 26.3%, during
1995. Other service charges and fees increased $535, or 30.4%, in 1996 and
$353, or 25.1%, in 1995. Trust fees increased $245, or 16.4%, during 1996 and
$241, or 19.2%, during 1995. Trust fees fluctuate with changes in the number of
estates managed each year and with changes in the market value of assets under
management. Security gains increased $14, or 53.8%, during 1996 and $496, or
105.5%, during 1995. Other types of noninterest income increased $117, or
17.4%, during 1996 and $111, or 19.8%, during 1995.
NONINTEREST EXPENSE
Noninterest expense increased $968, or 3.7%, during 1996 and $242, or 0.9%, in
1995. Salaries and other employee benefits increased $67, or 0.4%, during 1996
and $967, or 6.9%, in 1995. Occupancy expense of bank premises increased $19,
or 1.1%, during 1996 and decreased $246, or 12.0%, during 1995. Furniture and
equipment expense increased $250, or 13.3%, during 1996 and $92, or 5.1%, in
1995. The FDIC assessment decreased $195, or 19.7%, during 1996 and $738, or
42.7%, during 1995 due to lower premium requirements. The 1996 FDIC expense
includes $595 representing the cost of a special assessment on Savings
Association Insurance Fund (SAIF) insured deposits to recapitalize the SAIF.
Other types of noninterest expense increased $827, or 12.5%, during 1996 and
$167, or 2.6%, during 1995.
14
<PAGE> 17
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
1996 1995
------------------------------------- ------------------------------
AVERAGE INTEREST YIELD/ Average Interest Yield/
BALANCES & FEES COST Balances & Fees Cost
------------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits in banks $ 2,865 $ 167 5.83% $ 8,297 $ 437 5.27%
Short-term money market investments - - - 1,317 87 6.61%
Federal funds sold 3,230 135 4.18% 11,863 688 5.80%
Securities:
U.S. Government and agency 136,225 8,606 6.32% 163,156 9,714 5.95%
Taxable municipals 3,004 203 6.76% 2,806 182 6.49%
Tax-exempt municipals 82,249 6,644 8.08% 41,652 3,639 8.74%
Other 25,148 1,553 6.18% 28,373 1,678 5.91%
- --------------------------------------------------------------------------------------------------------------------
Securities before market value
adjustment 246,626 17,006 6.90% 235,987 15,213 6.45%
Market value adjustment on
securities available for sale (353) (1,625)
- --------------------------------------------------------------------------------------------------------------------
Total securities 246,273 234,362
Loans:
Commercial 259,589 24,211 9.33% 221,412 20,643 9.32%
Consumer 146,321 14,457 9.88% 118,442 11,741 9.91%
Real estate mortgage 280,583 24,093 8.59% 268,520 22,896 8.53%
Economic development and
other municipal loans 11,082 1,040 9.38% 10,155 1,026 10.10%
- --------------------------------------------------------------------------------------------------------------------
Total loans 697,575 63,801 9.15% 618,529 56,306 9.10%
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 949,943 $81,109 8.54% 874,368 $72,731 8.32%
======= =======
NON-EARNING ASSETS:
Allowance for loan losses (5,582) (5,082)
Cash and due from banks 29,635 27,783
Premises and equipment 17,237 13,564
Other assets 23,389 19,051
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,014,622 $929,684
====================================================================================================================
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 196,334 $ 4,003 2.04% $205,268 $ 4,940 2.41%
Money market accounts 73,736 2,543 3.45% 69,358 2,582 3.72%
Certificates of deposit and other time 435,189 23,112 5.31% 408,256 21,483 5.26%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 705,259 29,658 4.21% 682,882 29,005 4.25%
Federal funds purchased and securities
sold under agreements to repurchase 43,730 2,204 5.04% 21,600 1,059 4.90%
Other borrowings 41,196 2,637 6.40% 14,908 984 6.60%
- --------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 790,185 $34,499 4.37% 719,390 $31,048 4.32%
======= =======
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 95,125 88,011
Other liabilities 12,756 10,169
Shareholders' equity 116,556 112,114
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,014,622 $929,684
====================================================================================================================
Interest income/earning assets $81,109 8.54% $72,731 8.32%
Interest expense/earning assets 34,499 3.63% 31,048 3.55%
- --------------------------------------------------------------------------------------------------------------------
Net interest income/earning assets $46,610 4.91% $41,683 4.77%
====================================================================================================================
<CAPTION>
1994
-------------------------------------
Average Interest Yield/
Balances & Fees Cost
-------------------------------------
<S> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits in banks $ 21,529 $ 897 4.17%
Short-term money market investments 2,601 96 3.69%
Federal funds sold 13,964 523 3.75%
Securities:
U.S. Government and agency 188,319 10,081 5.35%
Taxable municipals 2,426 150 6.18%
Tax-exempt municipals 41,850 3,706 8.86%
Other 27,474 1,431 5.21%
- ------------------------------------------------------------------------------------
Securities before market value
adjustment 260,069 15,368 5.91%
Market value adjustment on
securities available for sale (1,123)
- ------------------------------------------------------------------------------------
Total securities 258,946
Loans:
Commercial 189,343 15,759 8.32%
Consumer 92,834 8,542 9.20%
Real estate mortgage 246,871 20,132 8.15%
Economic development and
other municipal loans 10,702 961 8.98%
- ------------------------------------------------------------------------------------
Total loans 539,750 45,394 8.41%
- ------------------------------------------------------------------------------------
Total earning assets 836,790 $62,278 7.44%
=======
NON-EARNING ASSETS:
Allowance for loan losses (4,887)
Cash and due from banks 31,173
Premises and equipment 12,112
Other assets 16,905
- ------------------------------------------------------------------------------------
TOTAL ASSETS $892,093
====================================================================================
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $220,257 $ 5,411 2.46%
Money market accounts 67,677 1,802 2.66%
Certificates of deposit and other time 378,793 16,437 4.34%
- ------------------------------------------------------------------------------------
Total interest-bearing deposits 666,727 23,650 3.55%
Federal funds purchased and securities
sold under agreements to repurchase 19,857 792 3.99%
Other borrowings 5,102 318 6.23%
- ------------------------------------------------------------------------------------
Total interest-bearing liabilities 691,686 $24,760 3.58%
=======
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 87,856
Other liabilities 7,789
Shareholders' equity 104,762
- ------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $892,093
====================================================================================
Interest income/earning assets $62,278 7.44%
Interest expense/earning assets 24,760 2.96%
- ------------------------------------------------------------------------------------
Net interest income/earning assets $37,518 4.48%
====================================================================================
</TABLE>
Note: Income is on a federal-tax-equivalent basis using a 35% tax rate for 1996
and 1995, and 34.3% for 1994. Average volume includes nonaccrual loans.
Loans are classified by department.
15
<PAGE> 18
REPORT ON MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
[LOGO]
[NATIONAL CITY BANCSHARES, INC. LETTERHEAD]
March 10, 1997
The management of National City Bancshares, Inc. is responsible for the
preparation, integrity, and objectivity of the consolidated financial
statements and other financial information presented in this Annual Report. The
financial reports have been prepared in accordance with generally accepted
accounting principles and properly reflect the effects of amounts that are
based on the best judgments and estimates made by management.
The Corporation maintains a system of internal controls which, in the opinion
of management, provides reasonable assurance that its financial records can be
relied on in the preparation of financial statements and that its assets are
safeguarded against loss or unauthorized use. The careful selection and
training of qualified personnel, the use of written policies and procedures,
and an audit program carried out by a professional staff of internal auditors
contribute to the effectiveness of this system.
The consolidated financial statements of the Corporation have been audited by
McGladrey & Pullen, LLP, independent certified public accountants. These audits
were conducted in accordance with generally accepted auditing standards and
included a review of the financial controls and such other procedures and tests
of the accounting records as they considered necessary under the circumstances.
The Audit Committee of the Board of Directors, composed solely of directors who
are not officers or employees of the Corporation, meets regularly with the
internal auditor and with the independent certified public accountants, and
management, when appropriate, to review auditing, accounting, reporting, and
internal control matters. Both the internal and external auditors have direct
and private access to the Audit Committee.
/s/ JOHN D. LIPPERT /s/ ROBERT A. KEIL
John D. Lippert Robert A Keil
Chairman of the Board President, Chief Financial Officer,
and Chief Executive Officer and Chief Administrative Officer
16
<PAGE> 19
INDEPENDENT AUDITOR'S REPORT
[TRADEMARKED LOGO]
[MCGLADREY & PULLEN, LLP LETTERHEAD]
To the Shareholders and Board of Directors
National City Bancshares, Inc.
Evansville, Indiana
We have audited the accompanying consolidated statements of financial position
of National City Bancshares, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996. These financial statements are the responsibility of the
Corporation'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 consolidated financial position of
National City Bancshares, Inc. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ MCGLADREY & PULLEN, LLP
Champaign, Illinois
January 31, 1997
17
<PAGE> 20
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar Amounts Other Than Share Data in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
- ------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 36,728 $ 38,944
Time deposits in banks 1,784 5,023
Securities held to maturity (fair value: 1996 - $160,128; 1995 - $92,236) 158,295 89,918
Securities available for sale 101,215 147,414
Nonmarketable equity securities 5,165 3,955
Federal funds sold 600 1,420
Loans - net of allowance for loan losses of $6,275 in 1996 and $5,323 in 1995 717,033 658,962
Premises and equipment 21,797 14,739
Other real estate owned 66 383
Income earned but not collected 11,407 10,242
Income taxes receivable 90 -
Other assets 14,906 8,440
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,069,086 $979,440
======================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 112,709 $101,409
Interest-bearing:
Savings, daily interest checking, and money market accounts 265,150 269,178
Time deposits of $100,000 or more 120,215 92,589
Other time 327,297 311,544
- ------------------------------------------------------------------------------------------------------
Total deposits 825,371 774,720
Federal funds purchased and securities sold under agreements to repurchase 64,294 52,829
Notes issued to the U.S. Treasury 1,721 2,769
Other borrowings 49,706 20,409
Dividends payable 1,512 1,175
Accrued interest payable 4,032 3,562
Income taxes payable 224 611
Deferred income taxes 1,218 1,005
Other liabilities 3,297 3,049
- ------------------------------------------------------------------------------------------------------
Total liabilities 951,375 860,129
- ------------------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
SHAREHOLDERS' EQUITY
Common Stock - $1.00 stated value:
1996 1995
---------- ----------
Shares authorized 20,000,000 10,000,000
Shares outstanding 9,435,432 4,697,198 9,435 4,697
Capital surplus 56,457 59,491
Retained earnings 51,780 54,818
Unrealized gain on securities available for sale 39 305
- ------------------------------------------------------------------------------------------------------
Total shareholders' equity 117,711 119,311
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,069,086 $979,440
======================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
18
<PAGE> 21
CONSOLIDATED STATEMENTS OF INCOME
(Dollar Amounts Other Than Share Data in Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $62,772 $55,280 $44,433
Tax-exempt 695 693 650
Interest and dividends on securities:
Taxable 10,361 11,574 11,662
Tax-exempt 4,510 2,456 2,507
Interest on federal funds sold 135 688 523
Interest on other investments 167 524 993
- ------------------------------------------------------------------------------------------
Total interest income 78,640 71,215 60,768
- ------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on time deposits of $100,000 or more 6,307 5,274 3,186
Interest on other deposits 23,351 23,731 20,464
Interest on federal funds purchased and
securities sold under agreements to repurchase 2,204 1,059 792
Interest on funds borrowed 2,637 984 318
- ------------------------------------------------------------------------------------------
Total interest expense 34,499 31,048 24,760
- ------------------------------------------------------------------------------------------
NET INTEREST INCOME 44,141 40,167 36,008
Provision for loan losses 2,491 294 18
- ------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 41,650 39,873 35,990
- ------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 1,739 1,494 1,253
Service charges on deposit accounts 3,451 2,775 2,197
Other service charges and fees 2,293 1,758 1,405
Securities gains (losses) 40 26 (470)
Other 788 671 560
- ------------------------------------------------------------------------------------------
Total noninterest income 8,311 6,724 4,945
- ------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 15,108 15,041 14,074
Occupancy expense 1,823 1,804 2,050
Furniture and equipment expense 2,131 1,881 1,789
Assessments of the Federal Deposit Insurance Corporation 795 990 1,728
Other 7,454 6,627 6,460
- ------------------------------------------------------------------------------------------
Total noninterest expense 27,311 26,343 26,101
- ------------------------------------------------------------------------------------------
Income before income taxes 22,650 20,254 14,834
Income taxes 7,404 7,139 5,155
- ------------------------------------------------------------------------------------------
NET INCOME $15,246 $13,115 $ 9,679
==========================================================================================
EARNINGS PER SHARE $ 1.59 $ 1.34 $ .99
==========================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
19
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar Amounts Other Than Share Data in Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 15,246 $ 13,115 $ 9,679
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization 486 1,316 2,657
Depreciation 1,771 1,609 1,636
Provision for loan losses 2,491 294 18
Write-down of securities and other assets 61 69 43
Securities (gains) losses (40) (26) 470
Originations of loans held for sale (26,346) (15,489) (16,471)
Proceeds from sales of loans held for sale 26,580 15,604 16,567
Gain (loss) on sale of loans held for sale (234) (115) (96)
(Gain) loss on sale of premises and equipment (21) (15) (148)
(Gain) loss on sale of other real estate owned 31 39 (26)
(Gain) loss on sale of subsidiary - (206) (8)
Increase (decrease) in deferred taxes 383 (27) (202)
Changes in assets and liabilities:
(Increase) decrease in income earned but not collected (477) (284) (1,002)
(Increase) decrease in other assets (1,292) (199) (605)
Increase (decrease) in accrued interest payable 164 701 128
Increase (decrease) in other liabilities (430) 611 1,213
- -----------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 18,373 16,997 13,853
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits in banks 4,727 8,384 14,176
Proceeds from maturities of securities held to maturity 15,097 25,681 39,652
Proceeds from maturities of securities available for sale 56,747 41,381 71,193
Proceeds from sales of securities available for sale 7,355 118 1,999
Purchases of securities held to maturity (61,180) (33,607) (40,945)
Purchases of securities available for sale (18,533) (17,084) (82,577)
Purchases of nonmarketable equity securities (1,162) (1,661) -
(Increase) decrease in federal funds sold 920 3,605 44,174
(Increase) decrease in loans made to customers (36,383) (78,456) (59,148)
Capital expenditures (8,498) (3,655) (1,924)
Proceeds from sale of premises and equipment 26 543 807
Proceeds from sale of other real estate owned 260 63 206
Purchase of subsidiary, net of cash and due from banks acquired (10,808) (309) -
Cash transferred to buyer in sale of subsidiary - (10,370) (68)
- -----------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities (51,432) (65,367) (12,455)
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits 7,372 4,383 3,722
Net increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 11,465 27,701 8,350
Net proceeds (payments) on notes issued to the U.S. Treasury (1,048) 94 (2,718)
Proceeds from other borrowings 31,184 17,434 -
Payments on other borrowings (1,887) (25) (210)
Dividends paid (5,218) (3,598) (3,772)
Repurchase of common stock (12,891) (863) (4,075)
Sale of common stock 1,653 1,036 820
Proceeds from exercise of stock options 213 - -
- -----------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities 30,843 46,162 2,117
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (2,216) (2,208) 3,515
Cash and cash equivalents at beginning of year 38,944 41,152 37,637
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 36,728 $ 38,944 $ 41,152
===============================================================================================
</TABLE>
Consolidated Statements of Cash Flows are continued on the following page.
20
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 34,335 $ 30,294 $24,632
Income taxes 7,498 6,640 5,379
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING & FINANCING ACTIVITIES
Change in allowance for unrealized gain (loss) on securities
available for sale $ (436) $ 4,704 $(4,988)
Change in deferred taxes attributable to securities available for sale 170 (1,804) 1,925
Employee Stock Ownership Plan obligations guaranty note payment - - 541
Other real estate acquired in settlement of loans 35 363 402
Transfer from other real estate owned to other assets - 7 -
Transfer from premises and equipment to other real estate owned - 41 -
Dividends declared not yet paid 1,512 1,175 805
Transfer of securities held to maturity to available for sale - 34,987 -
Sale of subsidiary:
Loan receivable $ 300
==========================================================================================================
Assets disposed of, principally intangible assets, premises and
equipment, and cash $ 333
Liabilities assumed by buyer, principally accounts payable (41)
Gain on sale of subsidiary 8
- ----------------------------------------------------------------------------------------------------------
$ 300
==========================================================================================================
Purchase of subsidiary:
Purchase price $ 12,038 $ 896
==========================================================================================================
Assets acquired:
Cash and due from banks $ 1,230 $ 587
Interest-bearing deposits in banks 1,488 399
Securities 22,187 3,753
Federal funds sold 100 1,975
Loans 24,214 11,069
Premises and equipment 364 355
Income earned but not collected 688 146
Other assets 5,643 1,962
Liabilities assumed:
Deposits (43,279) (16,742)
Accrued interest payable (306) (92)
Deferred taxes payable - (25)
Other liabilities (291) (49)
Common stock issued - (2,442)
- ----------------------------------------------------------------------------------------------------------
$ 12,038 $ 896
==========================================================================================================
Sale of branch:
Cash paid $ 10,244
==========================================================================================================
Assets disposed:
Cash $ (126)
Loans (25)
Premises and equipment (33)
Other assets (265)
Liabilities assumed by buyer:
Deposits 10,856
Accrued interest payable 39
Other liabilities 4
Gain on sale of branch (206)
- ----------------------------------------------------------------------------------------------------------
$ 10,244
==========================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
21
<PAGE> 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollar Amounts Other Than Share Data in Thousands)
<TABLE>
<CAPTION>
Employee
Unrealized Stock
Gain (Loss) Ownership
on Securities Plan
For the Years Ended Common Common Capital Retained Available Obligation
December 31, 1996, 1995, and 1994 Shares Stock Surplus Earnings For Sale Guaranty
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993 4,469,801 $14,899 $39,925 $49,707 $ 468 $(541)
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - - - 9,679 - -
Cash dividends declared - - - (3,753) - -
Repurchase of outstanding shares (102,343) (341) (3,734) - - -
Shares issued in Dividend
Reinvestment Program 19,228 64 681 - - -
Change in unrealized gain (loss) on securities - - - - (3,063) -
Issuance of stock under United Financial
Bancorp, Inc. Stock Option Plan 3,946 13 62 - - -
Amortization of stock award program - - 28 - - -
Employee Stock Ownership Plan note payment - - - - - 541
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 4,390,632 14,635 36,962 55,633 (2,595) -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - - - 13,115 - -
Cash dividends declared - - - (3,968) - -
Repurchase of outstanding shares (19,500) (30) (833) - - -
Shares issued in Dividend
Reinvestment Program 18,842 51 752 - - -
Change in unrealized gain (loss) on securities - - - - 2,900 -
Issuance of common stock related to
acquisition of subsidiary 55,509 185 2,257 - - -
Payment for fractional shares for merger - - (9) - - -
Reflect change to $1.00 stated value - (10,395) 10,395 - - -
Stock dividend 223,861 224 9,738 (9,962)
Payment for fractional shares for stock dividend (526) (1) (24) - - -
Issuance of stock under United Financial
Bancorp, Inc. Stock Option Plan 28,380 28 239 - - -
Amortization of stock award program - - 14 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 4,697,198 4,697 59,491 54,818 305 -
- -----------------------------------------------------------------------------------------------------------------------------------
Net income - - - 15,246 - -
Cash dividends declared - - - (5,555) - -
Repurchase of outstanding shares (346,307) (346) (12,545) - - -
Shares issued in Dividend
Reinvestment Program 48,839 49 1,617 - - -
Change in unrealized gain (loss) on securities - - - - (266) -
Stock split 4,574,863 4,575 (4,575) - - -
Stock dividend 450,656 450 12,279 (12,729) - -
Payment of fractional shares for stock dividend (450) - (13) - - -
Exercise of stock options 10,633 10 203 - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 9,435,432 $ 9,435 $56,457 $51,780 $ 39 $ -
===================================================================================================================================
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
National City Bancshares, Inc. (Corporation) is a bank holding company whose
subsidiaries provide a full range of banking services to individual and
corporate customers through its thirteen wholly owned subsidiaries located in
Southwestern Indiana, Southeastern Illinois, and Western Kentucky. The
subsidiary banks are subject to competition from other financial institutions
and nonfinancial institutions providing financial products. Additionally, the
Corporation and its subsidiaries are subject to the regulations of certain
regulatory agencies and undergo periodic examinations by those regulatory
agencies.
The consolidated financial statements of the Corporation have been prepared in
conformity with generally accepted accounting principles and conform to
predominate practice within the banking industry.
Following is a description of the more significant of these policies.
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiaries: The National City Bank of
Evansville, The Peoples National Bank of Grayville, The Farmers and Merchants
Bank, First Kentucky Bank, Lincolnland Bank, The Bank of Mitchell, Pike County
Bank (and its wholly-owned subsidiary: UniFed, Inc.), The State Bank of
Washington, White County Bank, United Federal Savings Bank, The First National
Bank of Wayne City, NCBE Leasing Corp., and Twenty-One Southeast Third
Corporation. All significant intercompany transactions and balances have been
eliminated.
The Corporation and its subsidiaries utilize the accrual basis of accounting
for major items.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions which significantly affect the amounts reported
in the consolidated financial statements. Significant estimates which are
particularly susceptible to change in a short period of time include the
determination of the allowance for loan losses and valuation of real estate and
other properties acquired in connection with foreclosures or in satisfaction of
amounts due from borrowers on loans. Actual results could differ from those
estimates.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents includes cash
on hand, amounts due from banks, and short-term money market investments.
Interest-bearing deposits in banks, regardless of maturity, are considered
short-term investments.
TRUST ASSETS
Property held for customers in fiduciary or agency capacities, other than trust
cash on deposit at the banks, is not included in the accompanying consolidated
financial statements since such items are not assets of the Corporation or its
subsidiaries.
SECURITIES
Securities classified as held to maturity are those securities the Corporation
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs, or changes in general economic conditions.
These securities are carried at cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their contractual
lives.
Securities classified as available for sale are those debt securities that the
Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity, and marketable equity securities. Any decision to sell
a security classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity mix
of assets and liabilities, liquidity needs, regulatory capital considerations,
and other similar factors. Securities available for sale are carried at fair
value. Unrealized gains or losses are reported as increases or decreases in
shareholders' equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities sold, are
included as a component of net income.
Nonmarketable equity securities are carried at cost as there is no readily
determinable fair value.
LOANS
Loans are stated at the principal amount outstanding, less unearned interest
income and an allowance for loan losses. Unearned income on installment loans
is recognized as income based on the sum-of-the-months digits method which
approximates the interest method. Interest income on substantially all other
loans is credited to income based on the principal balances of loans
outstanding.
The Corporation's policy is to discontinue the accrual of interest income on
any loan when, in the opinion of management, there is reasonable doubt as to
the timely collectibility of interest or principal. Interest income on these
loans is recognized to the extent interest payments are received, and the
principal is considered fully collectible. Nonaccrual loans are returned to
accrual status when, in the opinion of management, the financial position of
the borrower indicates there is no longer any reasonable doubt as to the timely
collectibility of interest and principal.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate by
management to provide for known and inherent risks in the loan portfolio. The
allowance is based upon a continuing evaluation of the risk characteristics of
the loan portfolios, past loan loss experience, and current economic
conditions. The continuing review considers such factors as the financial
condition of the borrower, fair market value of the collateral, and other
considerations which, in management's opinion, deserve current recognition in
estimating loan losses.
23
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Loans which are deemed to be uncollectible are charged to the allowance. The
provision for loan losses and recoveries are credited to the allowance.
Loans are considered impaired when, based on current information and events, it
is probable the Corporation will not be able to collect all amounts due. The
portion of the allowance for loan losses applicable to impaired loans has been
computed based on the present value of the estimated future cash flows of
interest and principal discounted at the loan's effective interest rate or on
the fair value of the collateral for collateral dependent loans. The entire
change in present value of expected cash flows of impaired loans or of
collateral value is reported as bad debt expense in the same manner in which
impairment initially was recognized or as a reduction in the amount of bad debt
expense that otherwise would be reported.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Provisions for depreciation are charged to operating expense over the useful
lives of the assets, computed principally by the straight-line method.
OTHER REAL ESTATE OWNED
Property acquired in settlement of loans is recorded at the lower of the
current estimated fair value less estimated costs to sell or the fair value at
the time of foreclosure. Management periodically reviews each property for
changes in market conditions or other developments which may result in a
reduction of the carrying value of the property. Reductions of the carrying
values and costs associated with holding the properties are charged to
operating expenses.
INCOME TAXES
The Corporation and its subsidiaries file a consolidated Federal income tax
return with each organization computing its taxes on a separate company basis.
The provision for income taxes is based on income as reported in the financial
statements. Deferred income tax assets and liabilities are computed annually
for differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
The deferred tax assets and liabilities are computed based on enacted tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to an amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the
change during the period in deferred tax assets and liabilities.
EARNINGS PER SHARE
Earnings per share is computed by dividing net income by the weighted average
number of shares outstanding giving effect to stock dividends, stock splits,
and common stock equivalents. Common stock equivalents are the number of
shares issuable upon exercise of stock options less shares assumed to have been
purchased by the Corporation with the proceeds received upon exercise. The
weighted average number of shares used in computing earnings per share are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C>
9,569,810 9,809,640 9,758,011
</TABLE>
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSION
The Corporation is recognizing the transition obligation using the
straight-line method over the plan participants' average future service period
of twenty years. Management does not expect this obligation to increase.
PENSION BENEFITS
The Corporation maintains a noncontributory pension plan in which substantially
all employees are eligible to participate upon the completion of one year of
service.
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS
On January 1, 1996, the Corporation adopted Financial Accounting Standards
Board Statement of Financial Accounting Standard No. 122 (FAS 122), "Accounting
for Mortgage Servicing Rights." FAS 122 requires the Corporation to recognize
as separate assets rights to service mortgage loans for others, however those
servicing rights are acquired. If the Corporation acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells
or securitizes those loans with servicing rights retained, the Corporation
should allocate the total cost of the mortgage loans to mortgage servicing
rights and the loans (without the mortgage servicing rights) based on their
relative fair values. The mortgage servicing rights are amortized in proportion
to and over the period of estimated net servicing income.
The adoption of FAS 122 did not have a material impact on the financial
statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION
On January 1, 1996, Financial Accounting Standards Board Statement of Financial
Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation" became
effective. FAS 123 establishes financial accounting and reporting standards
for stock-based employee compensation plans and also applies to transactions in
which an entity issues its equity instruments to acquire goods or services from
nonemployees. FAS 123 defines a fair value-based method of accounting for an
employee stock option or similar equity instruments and encourages all entities
to adopt that method of accounting. FAS 123 also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees".
24
<PAGE> 27
Proforma disclosures required for entities that elect to continue to measure
compensation cost using APB 25 must include the effect of all awards granted in
fiscal years beginning after December 31, 1994. The Corporation plans to
continue to measure compensation cost using APB 25.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS
OF LIABILITIES
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 125 (FAS 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". FAS 125
requires that an entity should only recognize those assets that it controls and
liabilities it has incurred. Assets should be recognized until control has
been surrendered, and liabilities should be recognized until they have been
extinguished. Recognition of financial assets and liabilities will not be
affected by the sequence of transactions unless the effect of the transactions
is to maintain effective control over a transferred financial asset.
FAS 125 is effective for transactions after December 31, 1996, except for
transactions relating to secured borrowings and collateral for which the
effective date is December 31, 1997.
The Corporation believes the adoption of FAS 125 will not have a material
impact on its consolidated financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the balances as of and for the
years ended December 31, 1995 and 1994, to be consistent with classifications
adopted for 1996.
NOTE 2. BUSINESS COMBINATIONS
On August 31, 1996, the Corporation acquired The First National Bank of Wayne
City, a $55,000 bank located in Wayne City, Illinois. This acquisition has
been accounted for as a purchase and the results of operations of The First
National Bank of Wayne City since the acquisition have been included in the
consolidated financial statements. The excess of the total acquisition cost
over the fair value of the net assets acquired of $5,605 is being amortized
over fifteen years using the straight-line method.
NOTE 3. CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $8,174 and $8,967 as of December
31, 1996 and 1995, respectively, were maintained in satisfaction of statutory
reserve requirements of the Federal Reserve Bank of St. Louis.
NOTE 4. SECURITIES
Amortized cost and fair value of debt securities classified as held to maturity
are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES $ 21,877 $ 221 $ - $ 22,098
TAXABLE MUNICIPALS 2,775 56 17 2,814
TAX-EXEMPT MUNICIPALS 114,805 2,076 733 116,148
CORPORATE SECURITIES 11,073 87 13 11,147
MORTGAGE-BACKED SECURITIES 7,765 176 20 7,921
- ------------------------------------------------------------------------
TOTAL $158,295 $2,616 $783 $160,128
========================================================================
<CAPTION>
As of December 31, 1995
- ------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 5,948 $ 147 $ 5 $ 6,090
Taxable municipals 3,120 109 10 3,219
Tax-exempt municipals 57,897 1,924 185 59,636
Corporate securities 16,882 194 43 17,033
Mortgage-backed securities 6,071 187 - 6,258
- ------------------------------------------------------------------------
Total $ 89,918 $2,561 $243 $ 92,236
========================================================================
</TABLE>
Amortized cost and fair value of securities classified as available for sale
are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
- ------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES $ 40,430 $339 $ 94 $ 40,675
CORPORATE SECURITIES 3,049 7 - 3,056
MORTGAGE-BACKED SECURITIES 56,052 344 314 56,082
- ------------------------------------------------------------------------
SUBTOTAL 99,531 690 408 99,813
EQUITY SECURITIES 1,625 1 224 1,402
- ------------------------------------------------------------------------
TOTAL $101,156 $691 $632 $101,215
========================================================================
<CAPTION>
As of December 31, 1995
- ------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 84,484 $ 865 $169 $ 85,180
Corporate securities 4,624 14 - 4,638
Mortgage-backed securities 56,185 267 356 56,096
- ------------------------------------------------------------------------
Subtotal 145,293 1,146 525 145,914
Equity securities 1,626 - 126 1,500
- ------------------------------------------------------------------------
Total $146,919 $1,146 $651 $147,414
========================================================================
</TABLE>
The amortized cost and fair value of the securities as of December 31, 1996, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities in mortgage backed securities, because certain mortgages
may be called or prepaid without penalties. Therefore, these securities are
not included in the maturity categories in the following maturity schedules:
25
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 4. SECURITIES, CONTINUED
MATURITY SCHEDULE OF SECURITIES HELD TO MATURITY:
<TABLE>
<CAPTION>
December 31, 1996 Amortized Cost Fair Value
-------------------------------------------------------------------
<S> <C> <C>
Less than 1 year $ 16,551 $ 16,639
1 year to 5 years 45,373 46,018
5 years to 10 years 40,051 40,878
Over 10 years 48,555 48,672
Mortgage-backed securities 7,765 7,921
-------------------------------------------------------------------
Total $158,295 $160,128
===================================================================
<CAPTION>
MATURITY SCHEDULE OF DEBT SECURITIES AVAILABLE FOR SALE:
December 31, 1996 Amortized Cost Fair Value
-------------------------------------------------------------------
<S> <C> <C>
Less than 1 year $26,703 $26,857
1 year to 5 years 15,976 16,074
5 years to 10 years 800 800
Mortgage-backed securities 56,052 56,082
-------------------------------------------------------------------
Total $99,531 $99,813
===================================================================
</TABLE>
Securities gains and (losses) are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $42 $31 $ 16
Gross realized losses (2) (5) (322)
Recognized losses
not yet realized - - (164)
-------------------------------------------------------------------
Total $40 $26 $(470)
===================================================================
</TABLE>
As of December 31, 1996 and 1995, the carrying value of securities pledged as
collateral for public deposits and for other purposes as required or permitted
by law were $54,290 and $64,434, respectively.
During 1995, the Financial Accounting Standards Board decided to allow all
enterprises to make a one-time reassessment of the classification of securities
made under FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Corporation transferred debt securities with an amortized
cost of $34,987 from held-to-maturity classification to the available-for-sale
classification and recorded, as a component of equity, an unrealized gain of
$205, net of $128 of deferred taxes.
NOTE 5. LOANS
A summary of loans as of December 31 follows:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Real estate loans $367,872 $339,880
Agricultural loans 30,136 29,152
Commercial and industrial loans 165,035 153,561
Economic development loans and
other obligations of state and
political subdivisions 11,214 9,887
Consumer loans 136,392 124,864
Direct lease financing 12,331 6,960
All other loans 546 291
- --------------------------------------------------------------
Total loans - gross 723,526 664,595
Unearned income on loans (218) (310)
- --------------------------------------------------------------
Total loans - net of
unearned income 723,308 664,285
Allowance for loan losses (6,275) (5,323)
- --------------------------------------------------------------
Total loans - net $717,033 $658,962
==============================================================
</TABLE>
The following table presents data on impaired loans at December 31, 1996 and
1995.
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Impaired loans for which there is a
related allowance for loan losses 2,139 2,772
Impaired loans for which there is no
related allowance for loan losses 141 20
- ------------------------------------------------------------------
Total impaired loans 2,280 2,792
==================================================================
Allowance for loan losses for impaired loans
included in the allowance for loan losses 437 584
Average recorded investment in impaired loans 3,303 2,634
Interest income recognized from impaired loans 323 150
Cash basis interest income recognized from
impaired loans 7 8
</TABLE>
As of December 31, 1994, the accrual of interest was discontinued or
renegotiated on loans in the amount of $1,184. If these loans had been current
according to original loan terms, additional gross income in the amount of $107
would have been recorded in 1994.
The amount of loans serviced by the Corporation for the benefit of others is
not included in the accompanying Consolidated Statements of Financial Position.
The amount of unpaid principal balances of these loans were $97,990 and
$85,744 as of December 31, 1996 and 1995, respectively.
In the normal course of business, the subsidiary banks make loans to their
executive officers and directors, and to companies and individuals affiliated
with officers and directors of the banks and the Corporation. In the opinion
of management, these loans were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated parties. The activity in these loans during 1996
is as follows:
<TABLE>
<S> <C>
Balance as of January 1, 1996 $16,815
New loans 28,835
Repayments (22,752)
- ----------------------------------------------
Balance as of December 31, 1996 $22,898
=============================================
</TABLE>
NOTE 6. DIRECT LEASE FINANCING
The Corporation's leasing operations consist principally of the leasing of
various types of office equipment, data processing equipment, and
transportation equipment. All of the Corporation's leases are classified as
direct financing leases. The equipment leases have lives of three to seven
years.
Under the direct financing method of accounting for leases, the total net
rentals receivable under the lease contracts, initial direct costs (net of
fees), and the estimated unguaranteed residual value of the leased equipment,
net of unearned income, are recorded as a net investment in direct financing
leases, and the unearned income on each lease is recognized each month at a
constant periodic rate of return on the unrecovered investment.
26
<PAGE> 29
The composition of the net investment in direct lease financing at December 31,
1996 is as follows:
<TABLE>
<S> <C>
Total minimum lease payments to be received $16,271
Less estimated executory costs (property taxes, insurance,
and maintenance), including profit thereon, included in
the total minimum lease payments -
- ----------------------------------------------------------------------------
Minimum lease payments receivable 16,271
Less allowance for estimated uncollectible lease payments -
- ----------------------------------------------------------------------------
Net minimum lease payments receivable 16,271
Add estimated residual values of leased equipment 2,414
Add initial direct costs 72
(Deduct) unearned lease income (6,426)
- ----------------------------------------------------------------------------
Net investment in direct lease financing $12,331
============================================================================
</TABLE>
At December 31, 1996, the minimum future lease payments due under the direct
financing leases are as follows:
<TABLE>
<S> <C>
1997 $ 1,939
1998 2,379
1999 2,123
2000 1,533
2001 1,146
Thereafter 7,151
- -------------------------------------------------
Total minimum future lease payments $16,271
=================================================
</TABLE>
NOTE 7. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the three years
ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 5,323 $4,899 $4,757
Allowance associated with
acquisition 379 140 -
Provision charged to operations 2,491 294 18
Recoveries credited to allowance 496 598 829
Loans charged to allowance (2,414) (608) (705)
- --------------------------------------------------------------------
Balance at end of year $ 6,275 $5,323 $4,899
====================================================================
</TABLE>
NOTE 8. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------
<S> <C> <C>
Land $ 2,253 $ 1,776
Buildings 17,021 15,002
Equipment 12,887 11,277
Leasehold improvements 1,216 1,213
Construction in progress 5,372 1,424
- ---------------------------------------------------------------
Total cost 38,749 30,692
Less accumulated depreciation 16,952 15,953
- ---------------------------------------------------------------
Net premises and equipment $21,797 $14,739
===============================================================
</TABLE>
The Corporation has a $9,825 commitment for construction of an office building
in Evansville, Indiana. Portions of the contracts not completed at year-end
are not reflected in the consolidated financial statements and total
approximately $6,032. It is scheduled for completion in 1997.
NOTE 9. DEPOSITS
As of December 31, 1996, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1997 $313,606
1998 84,658
1999 22,240
2000 7,695
2001 and thereafter 19,313
- -----------------------------------
Total $447,512
===================================
</TABLE>
The Corporation held $13,000 in brokered deposits, included in time deposits,
as of December 31, 1996. No brokered deposits were held as of December 31,
1995.
NOTE 10. INCOME TAXES
The components of income tax expense for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $5,607 $5,734 $4,406
Deferred 221 (58) (402)
- ---------------------------------------------------------------------------
Total 5,828 5,676 4,004
- ---------------------------------------------------------------------------
State:
Current 1,414 1,432 951
Deferred 162 31 200
- ---------------------------------------------------------------------------
Total 1,576 1,463 1,151
- ---------------------------------------------------------------------------
Total income taxes $7,404 $7,139 $5,155
===========================================================================
</TABLE>
The portion of the tax provision relating to realized security gains and losses
amounted to $14, $9, and ($164) for 1996, 1995, and 1994, respectively.
A reconciliation of income taxes in the statement of income, with the amount
computed by applying the statutory rate of 35%, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax computed
at the statutory rates $ 7,927 $ 7,088 $ 5,192
Adjusted for effect of:
Nontaxable municipal interest (1,810) (1,107) (1,105)
Nondeductible expenses 362 280 343
State income taxes, net of
federal tax benefit 1,024 951 748
Benefit of income taxed at
lower rates (100) (100) (100)
Change in deferred tax asset
valuation allowance 52 (25) 48
Other differences (51) 52 29
- ---------------------------------------------------------------------------
Total income taxes $ 7,404 $ 7,139 $ 5,155
===========================================================================
</TABLE>
27
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 10. INCOME TAXES, CONTINUED
The net deferred tax asset (liability) in the accompanying balance sheet
includes the following amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Deferred tax liability $(3,337) $(2,612)
Deferred tax asset 2,647 2,083
Valuation allowance for deferred
tax assets (528) (476)
- ------------------------------------------------------------------
Net deferred tax asset (liability) $(1,218) $(1,005)
==================================================================
</TABLE>
The tax effects of principal temporary differences are shown in the following
table:
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 1,926 $ 1,373
Property acquired in settlement of loans 35 5
Direct financing and leveraged leases 55 55
Prepaid pension costs (1,375) (1,416)
Fixed assets (1,942) (1,006)
Unrealized gain (loss) on securities
available for sale (20) (190)
State net operating loss carryforwards 528 523
Other 103 127
- ------------------------------------------------------------------
Net temporary differences (690) (529)
Valuation allowance (528) (476)
- ------------------------------------------------------------------
Net deferred tax asset (liability) $(1,218) $(1,005)
==================================================================
</TABLE>
NOTE 11. SHORT-TERM BORROWINGS
Information concerning short-term borrowings as of the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------
<S> <C> <C>
Federal funds purchased:
Average amount outstanding $26,282 $ 4,536
Maximum amount at any month end 53,825 34,500
Weighted average interest rate:
During year 5.50% 5.89%
End of year 6.68% 5.90%
Securities sold under agreements
to repurchase:
Average amount outstanding $17,448 $17,064
Maximum amount at any month end 28,153 20,649
Weighted average interest rate:
During year 4.35% 4.64%
End of year 3.66% 4.10%
Notes payable U.S. Treasury:
Average amount outstanding $ 1,378 $ 2,655
Maximum amount at any month end 3,270 6,647
Weighted average interest rate:
During year 5.17% 5.67%
End of year 5.15% 5.15%
</TABLE>
NOTE 12. OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank advances:
Due June 5, 1998, 6.02% $10,000 $10,000
Due January 20, 1998, 5.16% 5,000 -
Due February 1, 1999, 5.23% 5,000 -
Due May 25, 1997, 6.33% 3,000 3,000
Due February 4, 2002, 7.64% 2,000 2,000
Due January 2, 1997, 7.15% 1,500 -
Due May 27, 1996, 8.50% - 1,000
Notes payable:
Northern Trust Co., monthly interest
payments through May, 1997, monthly
principal payments of $83 plus interest
beginning June 30, 1997 through
April 30, 2003 with a final balloon
payment of $9,083 due May 30, 2003,
8.10%. 15,000 -
Norlease, Inc., quarterly interest payments
of $68 through July 27, 1997, quarterly
principal and interest payments of $111
through July 27, 2002, final balloon
payment due July 27, 2002, 7.74%
collateralized by equipment. 3,500 3,500
Norlease, Inc., monthly principal and
interest payments of $16 through
June 30, 2003, final balloon payment
due June 30, 2003, 8.61% 1,285 -
collateralized by equipment.
Norlease, Inc., installment notes maturing
on various dates through 2,001 at
interest rates ranging from 6.29% to
7.83%, collateralized by equipment. 3,184 637
Other 237 272
- -----------------------------------------------------------------------------
$49,706 $20,409
=============================================================================
</TABLE>
The Federal Home Loan Bank advances are collateralized by a blanket collateral
agreement on qualified mortgage loans and securities.
The terms of the loan agreement with Northern Trust Company require the
Corporation to maintain certain financial ratios and comply with certain
restrictions. These include, maintenance of minimum consolidated capital
levels, limits on debt and guarantees of debt by the Corporation, restrictions
on the ratio of consolidated non-performing assets to total loans and of the
consolidated allowance for loan and lease losses to total non-performing loans
and certain other restrictions. Management believes the Corporation has
complied with all of the restrictive covenants under this loan agreement.
Aggregate maturities required on other borrowings at
December 31, 1996 are due in future years as follows:
<TABLE>
<S> <C>
1997 $ 5,904
1998 17,015
1999 7,164
2000 1,961
2001 1,572
Later years 16,090
- -------------------------------------------
$49,706
===========================================
</TABLE>
28
<PAGE> 31
NOTE 13. CAPITAL RATIOS
The Corporation and its subsidiary banks are subject to various regulatory
capital requirements administered by federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary, actions by regulators that, if
undertaken, could have a materially adverse effect on the Corporation's
financial condition. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, a bank must meet specific capital
guidelines that involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and subsidiary banks 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
(as defined) to average assets (as defined). Management believes, as of
December 31, 1996, that the Corporation and subsidiary banks meet all capital
adequacy requirements to which they are subject.
As of December 31, 1996, the most recent notification from the federal and
state regulatory agencies categorized each of the subsidiary banks as well
capitalized under the regulatory framework for prompt corrective action. The
Banks must maintain the minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the
categorization of any of the subsidiary banks.
The following table presents the actual capital amounts and ratios for the
Corporation and its bank subsidiaries which have assets in excess of ten
percent of consolidated assets:
<TABLE>
<CAPTION>
TO BE WELL
MINIMUM RATIOS CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
- --------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated $115,910 15.58% $59,511 8.0% N/A N/A
National City Bank 36,519 11.88% 24,597 8.0% $30,747 10.0%
Lincolnland Bank 11,836 13.33% 7,101 8.0% 8,876 10.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated $109,635 14.74% $29,755 4.0% N/A N/A
National City Bank 35,235 11.46% 12,299 4.0% $18,448 6.0%
Lincolnland Bank 10,726 12.08% 3,551 4.0% 5,326 6.0%
Tier I Capital (to Average Assets)
Consolidated $109,635 10.39% $42,193 4.0% N/A N/A
National City Bank 35,235 8.55% 16,484 4.0% $20,605 5.0%
Lincolnland Bank 10,726 8.98% 4,776 4.0% 5,970 5.0%
</TABLE>
NOTE 14. INCENTIVE STOCK OPTION PLAN
In 1995, the Corporation's board of directors approved an Incentive Stock
Option Plan which was approved by shareholders in 1996. The Plan currently
reserves 628,817 shares of common stock for issuance upon the exercise of
options granted as incentive awards to key employees of the Corporation.
Awards may be incentive stock options or non-qualified stock options. All
options granted under the plan are required to be exercised within ten years of
the date granted. The exercise price of options granted under the plan cannot
be less than 100% of the fair market value of the common stock on the date of
grant.
Grants under the plan are accounted for following APB Opinion No. 25 and
related Interpretations. Accordingly, no compensation cost has been recognized
for grants under the plan. Had compensation cost for the stock-based
compensation plan been determined based on the grant date fair values of awards
(the method described in FASB Statement No. 123), reported net income and
earnings per common share would have been reduced to the pro forma amounts
shown below.
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------
<S> <C> <C>
Net income:
As reported $15,246 $13,115
Pro forma 15,084 13,085
Earnings per share:
As reported $1.59 $1.34
Pro forma 1.58 1.33
</TABLE>
29
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 14. INCENTIVE STOCK OPTION PLAN, CONTINUED
A summary of the status of the Corporation's fixed stock option plan as of
December 31, 1996 and 1995 and changes during the years ending on those dates
is presented below:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------
WEIGHTED Weighted
AVERAGE Average
SHARES EXERCISE PRICE Shares Exercise Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of the year 275,625 $20.07 - $ -
Options granted 92,400 26.90 275,625 20.07
Options exercised 10,633 20.07 - -
- ---------------------------------------------------------------------------------------------------
Options outstanding,
end of year 357,392 $21.83 275,625 $20.07
===================================================================================================
Options exercisable 162,092 -
Weighted-average
fair value of
options granted
during the year $9.48 $7.39
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
- ---------------------------------------------------------
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
- ---------------------------------------------------------
<S> <C> <C> <C>
$20.07 264,992 8.8 162,092
26.90 92,400 9.8 -
- --------------------------------------------------------
357,392 9.1 162,092
========================================================
</TABLE>
NOTE 15. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table reflects a comparison of the carrying amounts and fair
values of financial instruments of the Corporation and its subsidiary banks at
December 31:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term
investments $ 39,112 $ 39,112 $ 45,387 $ 45,387
Securities 264,675 266,508 241,287 243,605
Loans - net of
allowance 704,702 714,519 652,002 666,321
Income earned but
not collected 11,407 11,407 10,242 10,242
Liabilities:
Deposits 825,371 824,950 774,720 776,165
Short-term debt 70,515 70,515 56,598 56,598
Long-term debt 45,206 42,950 19,409 18,535
Accrued interest
payable 4,032 4,032 3,562 3,562
</TABLE>
The above fair value information was derived using the information described
below for the groups of instruments listed. It should be noted the fair values
disclosed in this table do not represent market values of all assets and
liabilities of the Corporation and, thus, should not be interpreted to
represent a market or liquidation value for the Corporation. In addition, the
carrying value for loans above differs from that reported elsewhere due to the
exclusion of direct finance leases receivable of $12,331 and $6,960 in 1996 and
1995, respectively.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash and due from banks, short-term
money market investments, interest-bearing deposits in banks, and federal funds
sold. For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
For securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities. Carrying amount of income earned but not
collected approximates fair value.
LOANS
For certain homogeneous categories of loans, such as some residential
mortgages, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. Carrying amount of income earned but not collected
approximates fair value.
DEPOSITS
The fair value of demand deposits, savings accounts, money market deposits, and
variable rate certificates of deposit is the amount payable on demand at the
reporting date. The fair value of other time deposits is estimated using the
rates currently offered for deposits of similar remaining maturities. Carrying
amount of accrued interest payable approximates fair value.
SHORT-TERM DEBT
Rates currently available to the Corporation for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. These
instruments adjust on a periodic basis and thus the carrying amount represents
fair value. Carrying amount of accrued interest payable approximates fair
value.
LONG-TERM DEBT
Rates currently available for debt with similar terms and maturities are used
to estimate fair value of existing debt. Carrying amount of accrued interest
payable approximates fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair
30
<PAGE> 33
value of guarantees and letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date. Because
all commitments and standby letters of credit reflect current fees and interest
rates, no unrealized gains or losses are reflected in the summary of fair
values.
NOTE 16. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
Most of the business activity of the Corporation and its subsidiaries is
conducted with customers located in the immediate geographical area of their
offices. These areas, comprised of Southwestern Indiana, Western Kentucky, and
Southeastern Illinois, are dependent on the agribusiness, and to a lesser
degree, energy economic sectors. While the Corporation maintains a diversified
loan portfolio, approximately $60,377 and $59,029 of the Corporation's loans
were directly related to the agricultural sector as of December 31, 1996 and
1995, respectively.
The Corporation and its subsidiaries evaluate each credit request of their
customers in accordance with established lending policies. Based on these
evaluations and the underlying policies, the amount of required collateral (if
any) is established. Collateral held varies but may include negotiable
instruments, accounts receivable, inventory, property, plant and equipment,
income producing properties, residential real estate, and vehicles. The
lenders' access to these collateral items is generally established through the
maintenance of recorded liens or, in the case of negotiable instruments,
possession.
The Corporation and its subsidiaries are parties to legal actions which arise
in the normal course of their business activities. In the opinion of
management, the ultimate resolution of these matters is not expected to have a
material adverse effect on the financial position or on the results of
operations of the Corporation and its subsidiaries.
The Corporation is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance sheet. The
contractual or notional amounts of those instruments reflect the extent of
involvement the Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit, is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for other on-balance
sheet instruments. Financial instruments whose contract amounts represent
credit risk at December 31 follows:
<TABLE>
<CAPTION>
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
1996 Commitment Commitment Commitment Commitments
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments
to extend credit $82,476 $20,823 $103,299 6.34%-18.25%
Standby letters
of credit - - 14,776 -
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the
banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers.
The Corporation does not engage in the use of interest rate swaps, futures,
forwards, or option contracts.
NOTE 17. DIVIDEND REINVESTMENT PLAN
The Corporation established a Dividend Reinvestment Plan for its shareholders
in 1989. The Plan permits the issuance of previously authorized and unissued
shares or the repurchase of outstanding shares for reissuance. As of December
31, 1996, 94,402 shares of authorized but unissued common stock were reserved
for Plan requirements.
NOTE 18. STOCK REPURCHASE PROGRAM
The Corporation announced a stock repurchase program on January 3, 1996. The
program permitted the repurchase of up to 5% of the Corporation's outstanding
shares of common stock during 1996. As of December 31, 1996, 346,307 shares
of authorized common stock were repurchased in accordance with the program.
The repurchased stock was used for a stock dividend.
NOTE 19. RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES
The principal source of income for the Corporation is dividends from its
subsidiary banks. Banking regulations impose restrictions on the ability of
subsidiaries to pay dividends to the Corporation. The amount of dividends that
could be paid is further restricted by management to maintain prudent capital
levels.
31
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 20. GUARANTEED BANK LOAN OF EMPLOYEE STOCK OWNERSHIP PLAN
In accordance with the consensus reached on issue number 89-10 of the Financial
Accounting Standards Board's Emerging Issues Task Force, the Corporation
recorded the debt of the Employee Stock Ownership Plan as an increase in
liabilities and a reduction of shareholders' equity. This debt was guaranteed
by the Corporation and was paid in full during 1994.
NOTE 21. EMPLOYEE RETIREMENT PLANS
The Corporation maintains a noncontributory pension plan in which substantially
all employees are eligible to participate upon the completion of one year of
service. No contribution or funding by the Corporation was required in any of
the years reported here. The assets of the pension plan primarily consist of
corporate obligations and equity securities. The plan does not hold any equity
securities of the Corporation.
In establishing the amounts reflected in the financial statements, the
following significant assumption rates were used:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 8.0%
Increase in compensation rate 5.0% 5.0% 5.0%
Expected long-term rate of return 9.0% 9.0% 9.0%
</TABLE>
The following summary reflects the plan's funded status and the amounts
reflected on the Corporation's financial statements. Actuarial present values
of benefit obligations at December 31 are:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation
including vested benefits of
$5,309, $3,899 and $3,562
in 1996, 1995, and 1994 $(6,005) $(4,420) $(3,757)
Effects of projected future
compensation levels (2,647) (2,000) (1,795)
- ---------------------------------------------------------------------------
Projected benefit obligation
for service rendered to date (8,652) (6,420) (5,552)
Plan assets at fair value 12,400 10,856 9,669
- ---------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 3,748 4,436 4,117
Unrecognized net loss (gain)
from past experience
different from that assumed
and effects of changes in
assumptions 170 (494) 257
Prior service cost not yet
recognized in net periodic
pension cost (261) (108) (116)
Unrecognized net asset at
January 1, 1987, being
recognized over 11.11
years from that date (259) (347) (728)
- ---------------------------------------------------------------------------
Prepaid pension cost
included in other assets $ 3,398 $ 3,487 $ 3,530
===========================================================================
</TABLE>
Net periodic pension cost (credit) included the following components for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period $ 812 $ 618 $ 450
Interest cost on projected
benefit obligation 590 456 483
Return on assets (1,300) (2,789) (500)
Net amortization and deferral (13) 1,758 (809)
- -------------------------------------------------------------------------
Net periodic pension
cost (credit) $ 89 $ 43 $ (376)
=========================================================================
</TABLE>
The Corporation also maintains a savings and profit-sharing plan for
substantially all employees who have completed one year of service. Employees
may voluntarily contribute to the plan. The corporation's contribution to the
plan, which is subject to the discretion of the Board of Directors, cannot
exceed 7% of the net income before income taxes. Corporate contributions were
$1,409, $1,384, and $1,017 during 1996, 1995, and 1994, respectively.
United Financial Bancorp, Inc. had a Stock Option Plan and a Management
Recognition and Retention Plan for its directors and officers. The cost of the
shares awarded under the retention plan was amortized using an accelerated
method over vesting periods. These plans were terminated when the Corporation
acquired this subsidiary.
As the result of previous mergers and subsequent amendment of the Corporation's
pension and profit-sharing plans to include employees of the other
subsidiaries, retirement plans previously maintained by those subsidiaries have
been terminated or frozen.
The plans have been amended to comply with requirements of the Employee
Retirement Income Security Act of 1974 and the Tax Reform Act of 1986.
NOTE 22. UNAUDITED INTERIM FINANCIAL DATA
The following table reflects summarized quarterly data for the periods
described (unaudited):
<TABLE>
<CAPTION>
1996
- -----------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME $20,457 $19,856 $19,200 $19,127
INTEREST EXPENSE 9,007 8,643 8,458 8,391
- -----------------------------------------------------------------------
NET INTEREST INCOME 11,450 11,213 10,742 10,736
PROVISION FOR LOAN
LOSSES 1,690 280 205 316
NONINTEREST INCOME 2,569 2,082 1,909 1,751
NONINTEREST EXPENSE 7,164 7,299 6,462 6,386
- -----------------------------------------------------------------------
INCOME BEFORE
INCOME TAXES 5,165 5,716 5,984 5,785
INCOME TAXES 1,471 1,903 2,015 2,015
- -----------------------------------------------------------------------
NET INCOME $ 3,694 $ 3,813 $ 3,969 $ 3,770
=======================================================================
EARNINGS PER SHARE $ 0.39 $ 0.40 $ 0.41 $ 0.39
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
1995
- ------------------------------------------------------------------------------
December September June March
31 30 30 31
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 18,733 $ 18,437 $ 17,411 $ 16,634
Interest expense 8,333 8,153 7,562 7,000
- ------------------------------------------------------------------------------
Net interest income 10,400 10,284 9,849 9,634
Provision for loan losses 179 68 23 24
Noninterest income 1,695 1,779 1,771 1,479
Noninterest expense 6,653 6,327 6,709 6,654
- ------------------------------------------------------------------------------
Income before
income taxes 5,263 5,668 4,888 4,435
Income taxes 1,873 2,024 1,723 1,519
- ------------------------------------------------------------------------------
Net income $ 3,390 $ 3,644 $ 3,165 $ 2,916
==============================================================================
Earnings per share $ 0.35 $ 0.37 $ 0.32 $ 0.30
</TABLE>
NOTE 23. FINANCIAL INFORMATION OF PARENT COMPANY
Condensed financial data for National City Bancshares, Inc. (parent company
only) follows:
CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 13,252 $ 227
Investment in subsidiaries 102,834 106,299
Securities available for sale 281 767
Nonmarketable equity securities 548 537
Securities purchased under
agreements to resell - 10,000
Note receivable 300 681
Property and equipment 955 728
Income taxes receivable 547 400
Deferred income taxes 37 -
Other assets 1,357 1,545
- ---------------------------------------------------------------------
TOTAL ASSETS $ 120,111 $ 121,184
=====================================================================
LIABILITIES
Other borrowings $ 215 $ -
Dividends payable 1,512 1,175
Deferred income taxes - 22
Other liabilities 673 676
- ---------------------------------------------------------------------
Total liabilities 2,400 1,873
- ---------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 9,435 4,697
Capital surplus 56,457 59,491
Retained earnings 51,780 54,818
Unrealized gain (loss) on
securities available for sale 39 305
- ---------------------------------------------------------------------
Total shareholders' equity 117,711 119,311
- ---------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 120,111 $ 121,184
=====================================================================
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $32,900 $12,496 $9,989
Other income 3,456 2,662 872
- ---------------------------------------------------------------------------
Total income 36,356 15,158 10,861
- ---------------------------------------------------------------------------
Interest expense 6 - -
Other expenses 3,707 3,255 2,092
- ---------------------------------------------------------------------------
Total expenses 3,713 3,255 2,092
- ---------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries 32,643 11,903 8,769
Income tax benefit (20) (273) (178)
- ---------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 32,663 12,176 8,947
Equity in undistributed earnings
of subsidiaries (17,417) 939 732
- ---------------------------------------------------------------------------
Net income $15,246 $13,115 $9,679
===========================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $15,246 $13,115 $ 9,679
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 482 451 548
Undistributed earnings of
subsidiaries 17,417 (939) (732)
Securities losses (gains) 1 (18) -
(Gain) on sale of subsidiary - - (8)
Increase (decrease) in deferred
taxes (38) (64) 7
Changes in assets and liabilities:
(Increase) decrease in other assets (113) (209) (167)
Increase (decrease) in other liabilities (3) 191 446
- ---------------------------------------------------------------------------
Net cash flows provided by
operating activities 32,992 12,527 9,773
- ---------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from maturities of
securities available for sale 434 250 2,396
Proceeds from sales of securities
available for sale - 118 -
Purchase of securities
available for sale - (340) (2,328)
Purchase of nonmarketable
equity securities (11) (537) -
(Disbursements) and repayments
on notes receivable 381 (381) -
Capital expenditures (555) (446) (47)
Proceeds from sale of premises
and equipment - - 14
Investment in subsidiaries (14,188) (1,361) (52)
(Increase) decrease in securities
purchased under agreements to resell 10,000 (6,900) (3,100)
- ---------------------------------------------------------------------------
Net cash flows provided by
(used in) investing activities (3,939) (9,597) (3,117)
- ---------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends paid (5,218) (3,598) (3,772)
Proceeds from other borrowings 244
Payments on other borrowings (29) - (210)
Repurchase of common stock (12,891) (863) (4,075)
Sale of common stock 1,653 1,036 820
Proceeds from exercise of stock options 213 - -
- ---------------------------------------------------------------------------
Net cash flows (used in)
financing activities (16,028) (3,425) (7,237)
- ---------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 13,025 (495) (581)
Cash and cash equivalents
at beginning of year 227 722 1,303
- ---------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 13,252 $ 227 $ 722
===========================================================================
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
ACTIVITIES
Change in unrealized
gain (loss) on securities
available for sale, net $ (266) $ 2,900 $ (3,063)
Employee Stock Ownership Plan
obligation guaranty note payment - - 541
Sale of subsidiary:
Loan receivable - - 300
</TABLE>
33
<PAGE> 36
OFFICIAL ORGANIZATION
SUBSIDIARIES
[PHOTO]
Randall L. Young
President & CEO
THE BANK OF MITCHELL
Mitchell, Indiana
BOARD OF DIRECTORS
Christopher W. Burton, Esq.
Dana J. Dunbar
Brooks Galloway
James F. King, D.D.S.
Harvey W. Pinney
Randall L. Young
[PHOTO]
Garland Certain
President & CEO
FIRST KENTUCKY BANK
Sturgis, Kentucky
BOARD OF DIRECTORS
Garland Certain
Charles Hamilton Floyd
Charles L. Pryor
Joseph W. Sprague
Slaton Sprague
William R. Sprague
James B. Vaughn
Joe Woodring
[PHOTO]
Harvey W. Pinney
President & CEO
LINCOLNLAND BANK
Dale, Indiana
BOARD OF DIRECTORS
Eric K. Ayer, Esq.
Benjamin W. Bloodworth
Narl E. Conner
Harvey W. Pinney
M. Lon Youngblood
[PHOTO]
Barbara Wilson
President & CEO
THE FARMERS AND MERCHANTS BANK
Fort Branch, Indiana
BOARD OF DIRECTORS
Roger M. Duncan
Harvey J. Hirsch
Michael J. Hirsch
Marlene A. Obert
Barbara A. Wilson
[PHOTO]
Rick V. Huff
President & CEO
THE FIRST NATIONAL BANK
OF WAYNE CITY
Wayne City, Illinois
BOARD OF DIRECTORS
Robert C. Beehn
Noel E. Edmison
Rick V. Huff
Larry D. Keil
Donald E. Kirkland
Rodney L. Legg
Lee A. Rubenacker
[PHOTO]
Robert T. Crawford
President & CEO
FIRST FEDERAL SAVINGS BANK
OF LEITCHFIELD
Leitchfield, Kentucky
BOARD OF DIRECTORS
Terry Allgood
E. Wendell Armes
Otis Bryant
Robert T. Crawford
Thomas C. Glasscock
Sim Houchin
Frank Wallace
[PHOTO]
Thomas L. Austerman
President
[PHOTO]
Roger M. Duncan
Executive Vice President
THE NATIONAL CITY BANK
OF EVANSVILLE
Evansville, Indiana
BOARD OF DIRECTORS
Thomas L. Austerman
Donald B. Cox
Michael F. Elliott
Michael D. Gallagher
Eugene A. Hahn
R. Eugene Johnson, Esq.
John Lee Newman
Edward E. Peyronnin
Peter L. Stevenson, M.D.
Joseph J. Vezzoso, Jr.
George A. Wright
34
<PAGE> 37
[PHOTO]
Charles J. Kelly, Jr.
President & CEO
NCBE Leasing Corp.
Evansville, Indiana
BOARD OF DIRECTORS
Thomas L. Austerman
Michael D. Gallagher
Dr. H. Ray Hoops
Charles J. Kelly, Jr.
John Lee Newman
[PHOTO]
Max D. Elliott
President & CEO
PIKE COUNTY BANK
Petersburg, Indiana
BOARD OF DIRECTORS
Max D. Elliott
Denver Gladish
John L. Hayes
Karl O. Schafer
Anthony P. Uebelhor
John E. Yager, Jr.
[PHOTO]
Janice L. Beesley
President & CEO
UNITED FEDERAL SAVINGS BANK
Vincennes, Indiana
BOARD OF DIRECTORS
Janice L. Beesley
John H. Bobe
Horace A. Foncannon, Jr., Esq.
George D. Gardner
John H. Harrison
Ralph J. Jacqmain, M.D.
Joseph M. Vieck
Robert E. Vincent
UNIFED, INC.
Vincennes, Indiana
BOARD OF DIRECTORS
Janice L. Beesley
Horace A. Foncannon, Jr., Esq.
Patrick W. Lenahan
G. Jeffrey Palmer
[PHOTO]
Donald E. Kirkland
President & CEO
THE PEOPLES NATIONAL BANK
OF GRAYVILLE
Grayville, Illinois
BOARD OF DIRECTORS
Sam Broster
Richard L. Elliott
Victor R. Gallagher, Jr.
Donald E. Kirkland
William H. Mitchell
Joseph M. Siegert
Herbert W. Sutter
[PHOTO]
John N. Clauss
President & CEO
THE STATE BANK OF
WASHINGTON
Washington, Indiana
BOARD OF DIRECTORS
John P. Cavanaugh
John N. Clauss
Max D. Elliott
Harry W. Hanson, Esq.
John L. Hayes
E. Joseph Kremp
Jerry D. McClarren, D.D.S.
TWENTY-ONE SOUTHEAST
THIRD CORPORATION
Evansville, Indiana
BOARD OF DIRECTORS
Benjamin W. Bloodworth
Michael F. Elliott
Robert A. Keil
Harold A. Mann
George A. Wright
[PHOTO]
R. Keith Hoskins
President & CEO
WHITE COUNTY BANK
Carmi, Illinois
BOARD OF DIRECTORS
Dr. Frank Barbre
Benjamin W. Bloodworth
Donald D. Drone
Paul D. Hayse
R. Keith Hoskins
George H. Schanzle
35
<PAGE> 38
OFFICIAL ORGANIZATION, CONTINUED
NATIONAL CITY BANCSHARES, INC.
BOARD OF DIRECTORS
JANICE L. BEESLEY
President and Chief Executive Officer, United Federal Savings Bank
MICHAEL F. ELLIOTT
Chairman and Chief Executive Officer, The National City Bank of Evansville,
and Executive Vice President, National City Bancshares, Inc.
SUSANNE R. EMGE
Executive Director, St. Mary's Medical Center Foundation
DONALD G. HARRIS
Retired President, Mead Johnson Worldwide Nutritional Group
DR. H. RAY HOOPS
President, University of Southern Indiana
ROBERT A. KEIL
President, National City Bancshares, Inc
JOHN D. LIPPERT
Chairman and Chief Executive Officer, National City Bancshares, Inc.
RONALD G. REHERMAN
Chairman, President, and Chief Executive Officer, SIGCORP, Inc.
LAURENCE R. STEENBERG
Assistant Professor, University of Evansville
EXECUTIVE OFFICERS
BENJAMIN W. BLOODWORTH
Executive Vice President
MICHAEL F. ELLIOTT
Executive Vice President
ROBERT A. KEIL
President
JOHN D. LIPPERT
Chairman and Chief Executive Officer
SENIOR OFFICERS
STEPHEN C. BYELICK, JR.
Senior Vice President, Assistant Secretary, and Assistant Treasurer
N. ANN CAVIS
Senior Vice President
NANCY G. EPPERSON
Human Resources Director
BYRON W. JETT
Senior Vice President
HAROLD A. MANN
Secretary and Treasurer
GREGORY A. PENCE
Director of Marketing
[PHOTO]
SENIOR OFFICERS
Gregory A. Pence, Nancy G. Epperson, Harold A. Mann, Stephen C. Byelick, Jr.,
Byron W. Jett, and N. Ann Cavis,
36
<PAGE> 39
[INSIDE BACK COVER]
SHAREHOLDER INFORMATION
STOCK AND DIVIDEND INFORMATION
The Corporation's common stock trades on the Nasdaq National Market tier of The
Nasdaq Stock Market(sm) under the symbol: NCBE.
The following table lists the stock price for the past two years and dividend
information for the Corporation's common stock. Stock prices and dividends have
been retroactively adjusted to reflect stock dividends and the two-for-one
stock split issued in April 1996.
<TABLE>
<CAPTION>
RANGE OF STOCK PRICE DIVIDEND
QUARTER LOW HIGH DECLARED
------- ------ ------ --------
<S> <C> <C> <C>
1995
1st $19.16 $21.32 $0.10
2nd 18.14 19.27 0.10
3rd 17.91 19.39 0.10
4th 18.59 23.10 0.12
1996
1ST 22.62 $28.45 $0.12
2ND 26.43 28.10 0.15
3RD 26.43 27.74 0.15
4TH 26.67 30.00 0.16
</TABLE>
DIVIDEND REINVESTMENT PLAN
As a service to its shareholders, the Corporation provides an easy way for a
shareholder to acquire additional shares of National City Bancshares, Inc.
common stock through its DIVIDEND REINVESTMENT PLAN. The plan allows a
shareholder to purchase this stock without brokerage fees using dividends and
additional voluntary cash investments. For information about this plan, a
shareholder can contact the Corporation's TRANSFER AGENT.
MARKET MAKERS
The following firms make a market in the common stock of National City
Bancshares, Inc.:
Raymond James & Associates, Inc.
J.J.B. Hilliard, W.L. Lyons, Inc.
NatCity Investments, Inc.
M.A. Schapiro & Co., Inc.
Herzog, Heine, Geduld, Inc.
FOR FURTHER INFORMATION
The Corporation's TRANSFER AGENT
and REGISTRAR is
The National City Bank of Evansville
Trust Department
227 Main Street
P.O. Box 868
Evansville, IN 47705-0868
Telephone (812) 464-9665
The Corporation's HEADQUARTERS is located at
National City Bancshares, Inc.
227 Main Street
P.O. Box 868
Evansville, IN 47705-0868
Telephone (812) 464-9677
All subsidiary banks of National City Bancshares, Inc.
are members of the Federal Deposit Insurance Corporation.
<PAGE> 40
[BACK COVER]
[LOGO]
NATIONAL CITY BANCSHARES, INC.
227 MAIN STREET
EVANSVILLE, INDIANA 47708
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