<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-13585
NATIONAL CITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1632155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
227 Main Street, P.O. Box 868, Evansville, Indiana 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 812-464-9677
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 STATED VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
<PAGE>
The Registrant's Annual Report on Form 10-K for the year ended December
31, 1997 is being amended to make corrections in Items 6 and 7. No other
parts of the Annual Report on Form 10-K are being amended.
<PAGE>
PART II
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL REVIEW
<TABLE>
<CAPTION>
As Of And For The Year Ended December 31
(Dollar Amounts Other Than
Share Data in Thousands) 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 51,995 $ 48,606 $ 44,433 $ 39,933 $ 38,010
Provision for loan losses 1,891 2,704 399 78 736
Noninterest income 10,088 8,606 7,117 5,209 6,707
Noninterest expense 34,390 29,966 28,968 28,644 28,343
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 25,802 24,542 22,183 16,420 15,638
Income taxes 7,451 8,046 7,784 5,668 4,861
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 18,351 $ 16,496 $14,399 $10,752 $ 10,777
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE*
Earnings - Basic $ 1.72 $ 1.52 $ 1.30 $ 0.97 $ 0.97
Earnings - Diluted 1.69 1.52 1.30 0.97 0.97
Book value 13.69 12.12 11.71 10.47 10.23
Cash dividends declared by
National City Bancshares,Inc. 0.64 0.55 0.40 0.40 0.38
TOTALS AT YEAR-END
Loans $ 916,356 $ 800,622 $ 736,997 $ 645,235 $ 579,556
Allowance for loan losses 7,969 7,189 6,176 5,750 5,528
Securities 279,328 282,894 258,895 268,103 269,098
Total assets 1,298,260 1,172,057 1,081,921 1,004,160 993,468
Deposits 964,046 913,350 864,136 849,306 844,808
Shareholders' equity 146,803 129,694 130,606 114,750 113,975
SELECTED FINANCIAL RATIOS
Net income to average assets 1.47% 1.48% 1.40% 1.09% 1.09%
Net income to average equity 13.42 12.89 11.74 9.39 9.79
Cash dividend payout 36.74 37.05 30.05 36.77 31.65
Average equity to average assets 10.98 11.48 11.93 11.59 11.14
Tangible equity to tangible assets 9.95 10.46 11.85 11.32 11.35
Total capital to risk-weighted assets 14.25 15.84 17.99 17.92 19.09
OTHER DATA
Number of shares* 10,727,247 10,702,198 11,152,316 10,960,405 11,143,701
Number of shareholders 2,541 2,396 2,239 2,238 2,174
Number of full-time equivalent employees 510 490 490 489 511
Weighted average number of common
shares outstanding:*
Basic 10,679,448 10,843,295 11,095,116 11,040,906 11,146,280
Diluted 10,832,943 10,843,295 11,095,116 11,040,906 11,146,280
</TABLE>
*RESTATED TO REFLECT ALL STOCK DIVIDENDS AND THE TWO-FOR-ONE STOCK SPLIT ISSUED
IN 1996.
1
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
(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 restated to include bank
acquisitions accounted for using the pooling of interests method and to give
effect to all stock dividends and the two-for-one stock split issued in 1996.
BUSINESS DESCRIPTION
National City Bancshares, Inc. (Corporation) is an Indiana corporation based
in Evansville, Indiana, which was established in 1985 to engage in the
business of a bank holding company. As of March 9, 1998, the Corporation had
fifteen wholly-owned subsidiaries, including twelve commercial banks and one
savings bank with a total of forty-four banking centers serving thirty-three
communities, a leasing corporation, a property management company, and a
financial services company (which is a subsidiary of a subsidiary bank). Each
subsidiary, its location, number of offices, year founded, date of
affiliation with the Corporation, and size in assets and equity is shown
below. On June 17, 1997, The Farmers and Merchants Bank, which was acquired
by the Corporation January 30, 1989, was merged into The National City Bank
of Evansville. On June 30, 1997, United
<TABLE>
<CAPTION>
SUBSIDIARY
12/31/97 (millions)
Number of Year Date of Affiliation ------------------
Home Office and Other Cities Offices Founded with the Corporation Assets Equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THE NATIONAL CITY BANK OF EVANSVILLE 11 1850 May 6, 1985 $487 $43
EVANSVILLE, NEWBURGH, FORT BRANCH,
PRINCETON, AND MOUNT VERNON, IN
THE PEOPLES NATIONAL BANK OF GRAYVILLE 1 1937 May 16, 1988 38 3
GRAYVILLE, IL
FIRST KENTUCKY BANK 6 1916 November 30, 1990 99 9
STURGIS, MORGANFIELD, POOLE, MAYFIELD, AND
UNIONTOWN, KY
LINCOLNLAND BANK 5 1904 December 17, 1993 128 11
DALE, CHRISNEY, GRANDVIEW, HATFIELD,
AND ROCKPORT, IN
THE BANK OF MITCHELL 4 1882 December 17, 1993 66 7
MITCHELL, BEDFORD, AND PAOLI, IN
PIKE COUNTY BANK 3 1900 December 17, 1993 54 5
PETERSBURG, ARTHUR, AND SPURGEON, IN
ALLIANCE BANK 3 1910 December 17, 1993 126 11
VINCENNES, WASHINGTON, AND ODON, IN
WHITE COUNTY BANK 1 1904 June 30, 1995 59 5
CARMI, IL
THE FIRST NATIONAL BANK OF WAYNE CITY 1 1902 August 31, 1996 50 10
WAYNE CITY, IL
FIRST FEDERAL SAVINGS BANK OF LEITCHFIELD 2 1961 March 1, 1997 49 7
LEITCHFIELD AND HARDINSBURG, KY
FIRST NATIONAL BANK OF BRIDGEPORT 1 1906 August 1, 1997 48 15
BRIDGEPORT,IL
FIRST BANK OF HUNTINGBURG 3 1907 December 31, 1997 108 13
HUNTINGBURG AND FERDINAND,IN
BANK OF ILLINOIS IN MT.VERNON 3 1965 March 6, 1998 163 13
MT. VERNON, IL
NCBE LEASING CORP. 1 1994 November 1, 1994 15 1
EVANSVILLE, IN
TWENTY-ONE SOUTHEAST THIRD CORPORATION 1 1996 May 22, 1996 16 2
EVANSVILLE, IN
UNIFED, INC. 1 1980 August 31, 1995 - -
VINCENNES, IN
</TABLE>
6
<PAGE>
Federal Savings Bank, which was acquired by the Corporation August 31, 1995,
was merged into The State Bank of Washington with the name changed to
Alliance Bank.
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 services include various types of deposit
accounts; safe deposit boxes; safe keeping 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.
The Corporation continues to grow rapidly by acquiring community banks. The
financial results of the acquisitions can best be assessed from the
Corporation's financial statements on a quarterly, as-reported basis. After
each acquisition accounted for as a pooling of interests, the Corporation's
financial statements are restated to include the results of the acquiree.
From the beginning of 1995 to the end of 1997, the Corporation acquired
assets of $278,209 (measured at the time of each acquisition) in 3
transactions accounted for as poolings of interests.
Since the beginning of 1995, the Corporation has also acquired $171,438
(measured at the time of each acquisition) in assets through transactions
accounted for as purchases. Financial statements are not restated following a
transaction accounted for as a purchase; instead, the Corporation's financial
statements include the results of each acquiree following acquisition.
Transactions accounted for as purchases typically result in the Corporation's
recording intangible assets, including goodwill, which the Corporation
amortizes on a straight-line basis. The Corporation has recorded $19,716
(measured at the time of each acquisition) in intangible assets as the direct
result of purchases consummated between the beginning of 1995 and the end of
1997.
In 1997, First Federal Savings Bank of Leitchfield and First National Bank of
Bridgeport became subsidiaries of the Corporation in transactions accounted
for as purchases. As a result of the purchases, the Corporation's assets
increased $95,278 and it recorded intangible assets of $12,142. First Bank of
Huntingburg also became a subsidiary of the Corporation in 1997. This
acquisition was accounted for as a pooling of interests; accordingly,
financial results for periods prior to the acquisition reported in the
following sections and in the financial statements have been restated to
include the results of First Bank of Huntingburg, including $108,109 in
assets. Footnote 2 to the financial statements includes additional
information about each transaction.
Since the end of 1997, the Corporation has acquired Bank of Illinois in Mt.
Vernon and a subsidiary of the Corporation has acquired a branch office in
Mayfield, Kentucky. Both transactions were accounted for as purchases. Bank
of Illinois in Mt. Vernon had assets at December 31, 1997 of $163,450. The
branch purchase increased the Corporation's deposits by $65,639. The
Corporation will record approximately $19,601 in intangible assets as a
result of both transactions.
As of March 9, 1998, the Corporation had entered into definitive merger
agreements with Illinois One Bancorp, Inc., Trigg Bancorp,Inc., and Community
First Financial, Inc. Together, the potential acquirees have assets of
approximately $315,000. The acquisitions remain subject, among other things,
to regulatory approval, shareholder approval of the acquirees, and other
customary conditions. The Corporation intends to account for these
transactions as poolings of interests; however, any or all may be accounted
for as purchases if they fail to qualify for pooling treatment. Footnote 21
to the financial statements provides additional information about these
pending acquisitions.
Management expects to continue to pursue acquisition opportunities as they
arise. Management believes other community banks located in the Corporation's
general geographic area (which may extend beyond the tri-state region
currently served) will find the Corporation an attractive partner because the
Corporation shares a commitment to local communities and provides the
opportunity to retain much of the operational decision making in those
communities while recognizing the efficiencies of affiliation with a larger
organization.
FINANCIAL CONDITION
Basic earnings per share for 1997 were $1.72, representing a 13% increase over
the 1996 results. The increase in earnings per share was the result of a
combination of increased net interest income, improved non-interest income, and
continued cost control. During 1997, book value per share increased by $1.57 to
$13.69 and resulted in a ratio of average equity capital to average assets of
10.98%.
Average earning assets increased $112,207, or 10.7%, and $78,141, or 8.1%, in
l997 and 1996, respectively. Growth in average assets in 1997 was $130,254,
or 11.7%, compared to $87,238, or 8.5%, in 1996. During 1997, average
interest bearing deposits in banks decreased $925, or 19.7%, and average
federal funds sold decreased $1,401, or 26.0%. Average securities increased
$24,124, or 9.1%, with the largest
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
FINANCIAL CONDITION, CONTINUED
increase being in tax-exempt municipals which increased by $63,042, or 71.4%.
Taxable municipals increased $355, or 11.8%. U.S. Government and agencies
decreased $33,674, or 22.8%, and all other types of securities decreased
$7,249, or 28.3%. The average market value adjustment on securities available
for sale increased to an unrealized gain of $1,227 from an unrealized loss of
$423 in 1996. Average loans increased $90,409, or 11.7%. All types of loans
increased during the year. Average commercial loans increased $36,820, or
13.5%; average consumer loans increased $4,879, or 3.2%; and average mortgage
loans increased $45,253, or 13.5%. All other types of loans increased $3,457,
or 31.2%. The growth in the loan portfolio was due mainly to purchase
acquisitions in which average loans increased by $41,784. The remaining
growth in the loan portfolio was attributable to a strong loan demand. The
change in the earning asset mix was intended to and did result in improved
earnings in 1995, 1996, and 1997.
Average certificate of deposit and other time deposit balances increased by
$62,192, or 12.9%, in 1997. Average balances of money market accounts
decreased $361, or 0.5%. Savings and interest bearing checking accounts
increased $3,540, or 1.6%. Average federal funds purchased and securities
sold under agreements to repurchase increased $14,735, or 33.7%. Average
other borrowings increased $32,510, or 76.9%. Average noninterest-bearing
deposits increased $7,548, or 7.1%.
SECURITIES PORTFOLIO
Securities comprised 24.9% of the 1997 average earning assets compared to
25.2% and 26.1% in 1996 and 1995, respectively. They represent the second
largest earning asset 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 monitors the amount of mortgage-backed
securities contained in the portfolio. The Corporation has no securities of
any single
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Carrying Value at December 31
-----------------------------------------------------------------------------------------
1997 1996 1995
------------- ------------------------------- ---------------------------------
AVAILABLE Held to Available Held to Available
FOR SALE Maturity For Sale Maturity For Sale
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury securities $ 9,915 $ - $13,598 $ 500 $ 33,880
U.S. Government agencies 29,067 21,877 38,662 5,448 61,568
Taxable municipals 3,473 2,775 - 3,120 -
Tax-exempt municipals 170,301 120,805 - 64,250 -
Corporate securities 5,986 11,161 3,056 17,165 4,638
Mortgage-backed securities 47,860 7,985 56,082 6,459 56,096
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 266,602 164,603 111,398 96,942 156,182
Equity securities 1,355 - 1,402 - 1,500
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities $ 267,957 $ 164,603 $112,800 $ 96,942 $ 157,682
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
MATURITY ANALYSIS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
After 1 Year After 5 Years
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
AVAILABLE FOR SALE:
U.S. Treasury securities $ 5,314 6.60% $ 4,601 6.84% $ - - $ - - $ 9,915 6.71%
U.S. Government agencies 14,078 5.88% 11,272 6.32% 3,455 8.09% 262 9.38% 29,067 6.34%
Taxable municipals 970 5.60% 2,098 6.93% 405 7.80% - - 3,473 6.66%
Tax-exempt municipals 9,725 7.43% 28,406 8.17% 45,075 8.30% 87,095 8.62% 170,301 8.39%
Corporate securities 5,687 7.42% 299 5.76% - - - - 5,986 7.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Total maturing securities $ 35,774 6.64% $ 46,676 7.52% $ 48,935 8.28% $ 87,357 8.62% 218,742 7.99%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 47,860 6.32%
Equity securities 1,355 6.69%
--------- -------
Total securities $267,957 7.69%
--------- -------
--------- -------
</TABLE>
8
<PAGE>
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 composition of the overall security portfolio as 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 securities portfolio at December 31, 1997,
included $1,748 in structured notes, which were comprised of $1,000 in an
indexed amortizing note, $500 in a delevered floating note, and $248 in a
capped floating rate note. These securities have risk characteristics which
are well within the constraints of the non-structured securities held in the
securities 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 gains of approximately
$6,283 and unrealized losses of $540 at December 31, 1997. At December
31, 1997, available-for-sale securities included $47,860 in
mortgage-backed securities, or 17.9% of the available-for-sale portfolio. The
weighted average maturity of the available-for-sale portfolio at December 31,
1997, was 9.3 years. The weighted average maturity of the available-for-sale
and the held-to-maturity portfolios at December 31, 1996 was 7.3 years and
7.9 years, respectively. 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 follows loan policies approved by its board 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 subsidiaries' boards of directors
for compliance and loan quality. Management believes that 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 loan portfolio contains no foreign loans.
The Corporation's loan portfolio is diversified by type of loan and industry,
and, within its market area, by geographic location, which minimizes economic
risk. The loan portfolio contained 29% commercial loans, 55% real estate
loans (primarily residential), and 16% consumer loans at December 31, 1997.
The Corporation's subsidiary banks lend to customers in various industries
including manufacturing, agricultural, health and other services,
transportation, mining, wholesale, and retail.
Commercial and industrial loans increased $24,830, of which approximately 27%
was due to acquisitions accounted for under the purchase method. The
remaining increase was due to a general increase in business among the
communities the Corporation's banks serve. Growth in consumer lending was
primarily due to acquisitions accounted for under the purchase method.
LOAN PORTFOLIO AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans $501,882 $425,507 $393,082 $368,989 $342,616
Agricultural loans 31,788 31,154 30,345 29,297 28,112
Commercial and industrial loans 201,402 176,572 165,217 127,389 109,880
Economic development loans and
other obligations of state and
political subdivisions 13,997 11,214 9,887 13,138 10,011
Consumer loans 149,505 143,485 131,477 105,812 89,387
Direct lease financing 13,146 12,331 6,960 518 503
Leveraged leases 4,661 - - - -
All other loans 415 582 344 396 1,398
- -------------------------------------------------------------------------------------------------------------------------------
Total loans - gross 916,796 800,845 737,312 645,539 581,907
Less: unearned income 440 223 315 304 2,351
- -------------------------------------------------------------------------------------------------------------------------------
Total loans - net of unearned income 916,356 800,622 736,997 645,235 579,556
Less: allowance for loan losses 7,969 7,189 6,176 5,750 5,528
- -------------------------------------------------------------------------------------------------------------------------------
Total loans - net $908,387 $793,433 $730,821 $639,485 $574,028
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
LOANS, CONTINUED
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 1997 ON AGRICULTURAL,
COMMERCIAL, AND TAX-EXEMPT LOANS
<TABLE>
<CAPTION>
After
1 Year But
Within Within Over
1 Year 5 Years 5 Years Total
<S> <C> <C> <C> <C>
Rate sensitivities:
- ---------------------------------------------------------------------------------------------------------
Fixed rate loans $ 38,128 $41,572 $20,596 $100,296
Variable rate loans 141,161 4,090 770 146,021
- ---------------------------------------------------------------------------------------------------------
Subtotal $179,289 $45,662 $21,366 246,317
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Percent of subtotal 72.79% 18.54% 8.67%
Nonaccrual loans 870
--------
Total loans net of unearned income $247,187
--------
--------
</TABLE>
Real estate loans increased $76,375, of which approximately 64% was due to
purchase acquisitions. The remaining increase was a direct result of strong
loan demand in the markets served by the Corporation's banks supported by a
favorable interest rate environment. This portfolio primarily consists of
single-family, owner-occupied housing. The Corporation's guidelines for
residential mortgage lending were followed and advances normally did not
exceed 80% of appraised value.
At December 31, 1997, 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' banking offices in Southwestern Indiana, Southeastern
Illinois, and Western Kentucky.
UNDERPERFORMING ASSETS
Underperforming assets consist of nonaccrual securities and loans,
restructured loans, loans past due 90 days or more, 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 place on nonaccrual status after becoming 90
days past due if the ultimate collectibility of the loan is in question.
Loans which are current, but as to 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.
Past due 90 days or more, nonaccrual, and restructured loans were 0.5% of
total loans at the end of 1997 and 1996. Of the loans in these categories,
$2,102, or 46.3%, were secured by real estate at the end of 1997, compared to
$1,977, or 53.3%, at the end of 1996. Additional interest income that would
have been recorded, if nonaccrual and restructured loans had been
UNDERPERFORMING ASSETS AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Underperforming loans:
Nonaccrual $3,672 $2,438 $1,049 $1,274 $2,441
Restructured 75 114 143 223 222
90 days past due 794 1,155 1,001 783 340
- ----------------------------------------------------------------------------------------------------------------------------
Total underperforming loans 4,541 3,707 2,193 2,280 3,003
Nonaccrual municipal securities 61 31 - - 81
Other real estate owned 79 66 383 671 1,148
- ----------------------------------------------------------------------------------------------------------------------------
Total $4,681 $3,804 $2,576 $2,951 $4,232
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
current in accordance with their original terms, was $324, $218, and $134 in
1997, 1996, and 1995, respectively. The interest recognized on nonaccrual
loans was approximately $56, $23, and $58 in 1997, 1996, and 1995,
respectively.
In addition to those loans classified as underperforming, management was
monitoring loans of approximately $38,460 and $46,386 as of the end of 1997
and 1996, respectively, for the borrowers' abilities to comply with present
loan repayment terms. All impaired loans discussed in Note 6 to the financial
statements in this report are included in underperforming or closely monitored
loans.
The Corporation monitors credit quality through a periodic review and
analysis of each subsidiary bank's loan portfolio. On a quarterly basis, each
subsidiary bank performs an evaluation of the adequacy of its allowance for
loan losses. The evaluation includes an analysis of past due loans, loans
criticized during regulatory examinations, internally classified loans,
delinquency trends, and other relevant factors. The results of these
evaluations are used by the Corporation to determine the adequacy of the
consolidated allowance for loan losses.
RISK MANAGEMENT
As of December 31, 1997, 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 an analysis of the entire loan portfolio. Some of the factors used
in this review include current economic conditions and forecasts, risk by
type of loan, previous loan loss experience, and evaluation of specific
borrowers and collateral. The Corporation and its banks monitor loan
portfolios using models designed in part by regulatory agencies.
Total loans charged off during 1997 decreased $119, or 4.6%,
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES)
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $7,189 $6,176 $5,750 $5,528 $5,986
Allowance associated with purchase acquisitions 516 379 140 - -
Loans charged off:
Commercial 624 879 263 239 1,345
Real estate mortgage 355 483 88 267 248
Consumer 1,486 1,155 393 222 308
Direct lease financing - 67 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 2,465 2,584 744 728 1,901
- ------------------------------------------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 255 115 320 215 393
Real estate mortgage 327 229 197 227 188
Consumer 256 165 114 430 126
Direct lease financing - 5 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total 838 514 631 872 707
- ------------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,627 2,070 113 (144) 1,194
Provision for loan losses 1,891 2,704 399 78 736
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $7,969 $7,189 $6,176 $5,750 $5,528
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans at year end $916,356 $800,622 $736,997 $645,235 $579,556
Average loans 861,778 771,369 689,514 606,206 569,313
As a percent of year-end loans:
Net charge-offs 0.18% 0.26% 0.02% -0.02% 0.21%
Provision for loan losses 0.21 0.34 0.05 0.01 0.13
Year-end allowance balance 0.87 0.90 0.84 0.89 0.95
As a percent of average loans:
Net charge-offs 0.19% 0.27% 0.02% -0.02% 0.21%
Provision for loan losses 0.22 0.35 0.06 0.01 0.13
Year-end allowance balance 0.92 0.93 0.90 0.95 0.97
Allowance for loan losses as a percent
of underperforming loans 175.49% 193.93% 281.62% 252.19% 184.08%
</TABLE>
11
<PAGE>
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 recoveries were $324, or 63.0%, higher than in 1996. The provision for
loan losses for 1997 was decreased based on the Corporation's periodic
analysis of the subsidiary banks' loan portfolios. The provision for loan
losses for 1996 was increased 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 Percent of Loans to Total Gross Loans
- ------------------------------------------------------------------------------------------------------------------------------
Loan Type 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- ------------------------------------------------------------------ ----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $2,599 $2,189 $2,395 $2,006 $1,670 29% 29% 29% 27% 26%
Real estate mortgage 1,576 1,622 1,571 1,579 1,511 55% 53% 53% 57% 59%
Consumer 1,887 1,444 986 635 668 16% 18% 18% 16% 15%
- ------------------------------------------------------------------ ----------------------------------------------------
Allocated 6,062 5,255 4,952 4,220 3,849 100% 100% 100% 100% 100%
Unallocated 1,907 1,934 1,224 1,530 1,679 ----------------------------------------------------
- ------------------------------------------------------------------ ----------------------------------------------------
Total $7,969 $7,189 $6,176 $5,750 $5,528
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
DEPOSITS
The Corporation's Asset/Liability Committee manages the deposits of its banks
to achieve short-term and long-term benefits of deposit growth. Average
deposits increased $72,919, or 8.2%, during 1997, compared to $31,129, or
3.6%, in 1996. Of the increase in 1997, $43,549 was due to purchase
acquisitions. Average time deposits of $100,000 or more increased $20,683, or
16.3%, compared to $24,653, or 24.2%, in 1996. The increase in time deposits
of $100,000 or more in 1996 included $13,000 in brokered deposits. As of
December 31, 1997, the Corporation had no brokered deposits. Management uses
brokered deposits to supplement local deposits under guidelines and limits
established by the Corporation's Asset/Liability Committee. Time deposits of
$100,000 or more are not considered to present an undue risk.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1997 1996 1995
---------------- ---------------- -----------------
AMOUNT RATE Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand $113,616 - $106,068 - $ 98,109 -
Money market accounts 79,397 3.62% 79,758 3.55% 74,079 3.79%
Interest-bearing demand 142,063 1.65% 140,183 1.86% 145,107 2.30%
Savings 80,119 2.29% 78,459 2.45% 83,525 2.61%
Time deposits of $100,000 or more 148,224 5.11% 126,474 5.39% 102,003 5.71%
Other time deposits 396,942 5.41% 356,500 5.29% 353,490 5.13%
- ------------------------------------------------------------------------------------------------------
Total $960,361 $887,442 $856,313
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Maturing:
3 months or less $60,652 $60,705 $34,892
Over 3 to 6 months 29,239 29,358 29,571
Over 6 to 12 months 20,029 20,599 17,692
Over 12 months 19,469 18,872 18,972
- ------------------------------------------------------------------------------------------
Total $129,389 $129,534 $101,127
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
At the end of 1997, shareholders' equity totaled $146,803, an increase of
$17,109, or 13.2%, from 1996. The average equity to average asset ratio was
10.98% and 11.48% for 1997 and 1996, respectively. The decrease is
attributable to the Corporation's repurchase of 426,508 shares of its common
stock for approximately $16,200, during 1997. The dividend payout ratio for
1997 was 36.74%, compared to 37.05% in 1996.
12
<PAGE>
In 1995, The National City Bank of Evansville committed to build an addition
to its main office to be completed in the second quarter of 1998. The
approximate cost of the addition and renovation of the main office of The
National City Bank of Evansville is $18,000. The National City Bank of
Evansville and the Corporation will occupy three floors of the facility, at a
cost of approximately $10,000, with the other six floors being sold as
condominiums. Four of these six floors have been sold to non-affiliated
entities. The Corporation, through its subsidiary Twenty-One Southeast Third
Corporation, funded the project, including financing for the purchasers of
the condominiums, through the proceeds of a $15,000 term loan. Payments from
the purchasers will be used to repay the term loan. As of December 31, 1997,
there were 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 4%
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 9.74% and 10.52%; Tier I capital to risk-weighted assets
was 13.39% and 14.96%; and total capital to risk-weighted assets was 14.25%
and 15.84% at the end of 1997 and 1996, respectively. In addition, each
subsidiary bank 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 $9,552, or 14.2%, during 1997. At December 31, 1997,
federal funds purchased were $55,000, reflecting an $825, or 1.5%, increase
over 1996. Securities sold under agreements to repurchase and notes payable
U.S. Treasury increased during 1997 by $4,532, or 39.5%, and $4,195, or
243.8%, respectively.
SHORT-TERM BORROWINGS AT DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased $55,000 $54,175 $34,500
Securities sold under agreements to repurchase 16,001 11,469 18,329
Notes payable U.S. Treasury 5,916 1,721 2,769
- --------------------------------------------------------------------------------------------------
Total $76,917 $67,365 $55,598
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
<CAPTION>
Securities
Sold Under Notes
Federal Agreements Payable
Funds to U.S.
Purchased Repurchase Treasury
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Average amount outstanding $42,588 $15,924 $2,064
Maximum amount at any month end 69,400 26,146 5,916
Weighted average interest rate:
During year 5.67% 4.00% 5.36%
End of year 6.74% 3.48% 5.25%
1996
Average amount outstanding $26,329 $17,448 $1,378
Maximum amount at any month end 54,175 28,153 3,270
Weighted average interest rate:
During year 5.50% 4.35% 5.17%
End of year 6.65% 3.66% 5.15%
1995
Average amount outstanding $ 4,665 $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%
</TABLE>
LIQUIDITY
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.
For the Corporation, 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.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
LIQUIDITY, CONTINUED
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 monitored by the Corporation's
asset/liability management program and by each subsidiary bank to provide
liquidity without penalizing earnings. When these sources are not adequate,
the Corporation utilizes federal funds purchased, brokered deposits, and its
lines with Federal Home Loan Banks as alternative sources of liquidity. The
increased loan demand throughout the year was funded by an increase in
deposits and other borrowings. Additionally, the Corporation's underwriting
standards for its mortgage loan portfolio comply 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, 1997
and 1996, respectively, federal funds sold were $1,500 and $600,
interest-bearing deposits in banks were $2,485 and $2,983, and U.S.
Government and agency securities available for sale were $38,982 and $52,260.
These sources and other liquid assets also satisfy 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.
The Corporation (parent company) maintains credit lines to provide an
alternative source of liquidity. At December 31, 1997, the Corporation had a
$10,000, unsecured, revolving credit agreement with a bank. On January 22,
1998, the line was increased to $45,000. The Corporation intends to use the
line to provide short-term funding for acquisitions and other corporate
purposes.
The ability of the Corporation to pay cash dividends to its shareholders is
dependent on the receipt of cash 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.
INTEREST RATE SENSITIVITY
The Corporation's exposure to market risk is reviewed on a regular basis by
the Asset/Liability Committee. Interest rate risk is the most significant
market risk affecting the Corporation. Other types of market risk do not
arise in the normal course of the Corporation's business activities. Interest
rate risk is the potential economic loss due to future interest rate changes.
This economic loss can be reflected as a loss of future net interest income
and/or a loss of current fair market values.
The Corporation's net income is dependent, to a significant degree, on its
net interest income. Net interest income is susceptible to interest rate risk
to the degree that interest-bearing liabilities reprice or mature on a
different basis than interest-earning assets. When interest-bearing
liabilities reprice or mature more quickly than interest-earning assets, an
increase in market rates could adversely affect net interest income.
Similarly, if interest-earning assets reprice or mature more quickly than
interest-bearing liabilities, a decrease in market rates could adversely
affect net interest income. Changes in market rates can also cause losses in
the current fair values of financial instruments.
In order to manage its exposure to changes in interest rates, the Corporation
monitors interest rate risk through analysis of standard gap reports and
interest rate shock simulation reports on the effect of changes in interest
rates on net interest income and on the economic value of equity (the present
value of expected cash flows from existing assets minus the present value of
expected cash flows from existing liabilities). The following table sets
forth, at December 31, 1997, an analysis of the Corporation's interest rate
risk as measured by the estimated change in economic value of equity (EVE)
following parallel shifts in the yield curve.
<TABLE>
<CAPTION>
Estimated Increase
(Decrease) in EVE
Change in Estimated -------------------
Interest Rates EVE Amount Amount Percent
- -----------------------------------------------------------
<S> <C> <C> <C>
(Basis Points)
+200 $176,695 $(6,479) (3.54)%
- 183,174 - -
-200 186,814 3,640 1.99
</TABLE>
Certain assumptions were employed in preparing data in the preceding table.
These assumptions relate to interest rates, loan prepayment rates, deposit
decay rates, and the market values of certain assets under the various
interest rate scenarios. Even if interest rates change in the designated
amounts, there can be no assurance that the Corporation's assets and
liabilities would perform as set forth. In addition, a change in U.S.
Treasury rates in the designated amounts accompanied by a change in the shape
of the Treasury yield curve would cause significantly different changes to
the EVE than indicated above.
Derivative financial instruments include futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics. The Corporation does not enter into futures, forwards,
swaps, or options. In the normal course of business, however, the Corporation
is a party to financial instruments with off-balance-sheet risk to meet the
14
<PAGE>
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. Financial instruments with
off-balance-sheet risk at December 31, 1997 are discussed more throughly in
Note 17 of the Financial Statements.
Corporate asset liability gap positions are targeted at plus or minus 15% at
the six-month and one-year horizons. At December 31, 1997, all subsidiary
banks were within, or close to, their targeted spreads. The cumulative gap
position through one year of negative $133,852 at the end of 1997 was 10.3%
of total assets, which management believes is a relatively balanced position.
RESULTS OF OPERATIONS
Net income for 1997 was $18,351, reflecting a $1,855, or 11.2%, increase over
1996. Net income for 1996 increased $2,097, or 14.6%, over 1995. Basic
earnings per share in 1997 were $1.72, compared to $1.52 in 1996 and $1.30 in
1995. Increases in both rates and volumes of earning assets resulted in
growth in net interest income of $3,389, or 7.0%, in 1997 and $4,173, or
9.4%, in 1996. Noninterest income increased $1,482, or 17.2%, in 1997 and
$1,489, or 20.9%, in 1996. Noninterest expense increased $4,424, or 14.8%, in
1997 and $998, or 3.4%, in 1996. The provision for loan losses decreased $813
in 1997 due to lower net charge-offs, and increased $2,305 in 1996 due to
higher net charge-offs and loan growth.
Changes in net interest income for the last two years are presented in the
following 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, at the end of Management's
Discussion is a three-year balance sheet analysis on an average basis and an
analysis of net interest income.
The following discussion of results of operations is on a
federal-tax-equivalent basis. Average loans increased 11.7% during 1997
compared to an increase of 11.9% during 1996. Approximately 46% of the growth
in average loan balances was attributable to acquisitions accounted for as
purchases. Loan income increased 11.6% in 1997 and 12.4% in 1996, principally
due to increased loan volumes. The average yield on loans decreased slightly
from 9.13% in 1996 to 9.12% in 1997.
Average securities before market value adjustments increased 8.5% in 1997 and
4.1% in 1996. Approximately 33% of the increase in average securities
balances in 1997 was due to two purchase acquisitions. Securities income
increased 14.7% and 11.0% in 1997 and 1996, respectively. The yield on
securities increased from 6.91% in 1996 to 7.30% in 1997. During 1997,61.2%
of the increase in interest income on securities was due to volume increases
and 38.8% was attributable to rate increases, while in 1996, 60.1% of the
increase was due to rate and 39.9% was due to volume. Average earning assets
increased $112,207, or 10.7%, in 1997 and $78,141, or 8.1%, in 1996. Purchase
acquisitions accounted for 44.4% of the increase in 1997 and 20.9% in 1996.
The average yield on total earning assets increased from 8.53% in 1996 to
8.63% in 1997, due principally to increased yields on securities in 1997.
Increase in volumes of earning assets accounted for 90.6% and 85.4% of the
growth in interest income in 1997 and 1996, respectively.
Average total interest-bearing deposits increased 8.4% during 1997 and 3.1%
during 1996. Internal growth of average interest-bearing deposits accounted
for 35.9% of the increase, while 64.1% was due to purchase acquisitions. The
average cost of interest bearing deposits decreased from 4.26% to 4.23% in
1996 and increased from 4.23% to 4.27% in 1997. Interest expense on deposits
increased $3,077, or 9.3%, in 1997 and $750, or 2.3%, in 1996. In 1997, 90.6%
of the increase in interest expense on deposits was due to volume increases.
In 1996, interest expense on deposits increased due to volume increases which
were partially offset by rate decreases. Interest expense on federal funds
purchased and
CHANGES IN NET INTEREST INCOME
(INTEREST ON A FEDERAL-TAX-EQUIVALENT BASIS)
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 Compared to 1995
-------------------------------- --------------------------------
CHANGE DUE TO Change Due to
A CHANGE IN a Change in
--------------- ---------------
VOLUME RATE TOTAL CHANGE Volume Rate Total Change
-------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income increase (decrease)
Loans $8,243 $ (66) $8,177 $7,470 $ 285 $7,755
Securities 1,641 1,040 2,681 721 1,086 1,807
Other short-term investments (129) 35 (94) (811) (114) (925)
- ----------------------------------------------------------------------------------------------------------------------
Total interest income 9,755 1,009 10,764 7,380 1,257 8,637
- ----------------------------------------------------------------------------------------------------------------------
Interest expense increase (decrease)
Deposits 2,788 289 3,077 980 (230) 750
Borrowings 2,663 (50) 2,613 2,744 38 2,782
- ----------------------------------------------------------------------------------------------------------------------
Total interest expense 5,451 239 5,690 3,724 (192) 3,532
- ----------------------------------------------------------------------------------------------------------------------
Net interest income increase (decrease) $4,304 $770 $5,074 $3,656 $1,449 $5,105
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
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
other borrowings increased $2,613 in 1997 and $2,782 in 1996. The increases
were principally due to increases in volumes. The Corporation uses federal
funds purchased and Federal Home Loan Bank advances, selectively, as
alternative funding sources to meet short and intermediate-term funding needs.
In 1997 and 1996, net interest income increased $5,074 and $5,105,
respectively. Increases in volumes accounted for 84.8% of the increase in
1997 and 71.6% in 1996. The net interest income of purchase acquisitions
accounted for $2,170, or 42.8%, of the increase in net interest income in
1997 and $684, or 13.4%, in 1996.
NONINTEREST INCOME
Noninterest income increased $1,482, or 17.2%, during 1997 and $1,489, or
20.9%, during 1996. Service charges on deposit accounts, the largest item in
this category, increased $331, or 9.1%, during 1997 and $691, or 23.4%,
during 1996. Other service charges and fees increased $273, or 11.6%, in 1997
and $544, or 30.0%, in 1996. Trust fees increased $179, or 10.2%, during 1997
and $245, or 16.3%, during 1996. 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 from $42 in 1996 to $794 in
1997. Other types of noninterest income decreased $53, or 6.6%, during 1997
and $7, or 0.9%, during 1996.
NONINTEREST EXPENSE
Noninterest expense increased $4,424, or 14.8%, during 1997 and $998, or
3.4%, in 1996. Salaries and other employee benefits increased $2,785, or
16.7%, during 1997 and $117, or 0.7%, in 1996. Occupancy expense of bank
premises increased $121, or 6.1%, during 1997 and $13, or 0.7%, during 1996.
Furniture and equipment expense increased $152, or 6.5%, during 1997 and
$263, or 12.6%, in 1996. The FDIC assessment decreased $623, or 78.1%, during
1997 and $284, or 26.2%, during 1996 due to lower premium requirements. The
1996 FDIC expense included $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 $1,989, or 24.4%,
during 1997 and $889, or 12.3%, during 1996.
YEAR 2000 COMPLIANCE
The year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be
unable to distinguish the year 2000 from the year 1900. If not effectively
addressed, this problem could result in the production of inaccurate data,
or, in the worst cases, the inability of the systems to continue to function
altogether. Financial institutions are particularly vulnerable due to the
industry's dependence on electronic data processing systems.
In 1996, the Corporation started the process of identifying the hardware and
software issues required to be addressed to assure year 2000 compliance. The
Corporation began by assessing the issues related to the year 2000 and the
potential for those issues to adversely affect the Corporation's own
operations and those of its subsidiaries.
Since that time, the Corporation has established a Year 2000 Compliance Team
(the Team) composed of representatives from key areas throughout the
organization. It is the mission of this Team to identify areas subject to
complications related to the year 2000 and to initiate remedial measures
designed to eliminate any adverse effects on the Corporation's operations.
The Team has identified all mission-critical software and hardware that may
be adversely affected by the year 2000 and has required vendors to represent
that the systems and products provided are or will be year 2000 compliant.
The Corporation expects that all mission critical software will be upgraded
to achieve year 2000 compliance and tested by December 31, 1998. In addition,
the Team is developing contingency plans to address systems which do not
become year 2000 compliant by December 31, 1998.
The Corporation is committed to a plan for achieving compliance, focusing not
only on its own data processing systems, but also on its customers. The Team
has taken steps to educate and assist its customers with identifying their
year 2000 compliance problems. In addition, the Team has proposed policy and
procedure changes to help identify potential risks to the Corporation and to
gain an understanding of how customers are managing the risks associated with
the year 2000.
Management believes that the expenditures required to bring systems into
compliance will not have a materially adverse effect on the Corporation's
performance. However, the year 2000 problem is pervasive and complex and can
potentially affect any computer process. Accordingly, no assurance can be
given that year 2000 compliance can be achieved without additional
unanticipated expenditures and uncertainties that might affect future
financial results.
16
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
1997 1996 1995
---------------------------- --------------------------- ---------------------------
AVERAGE INTEREST YIELD/ Average Interest Yield/ Average Interest Yield/
BALANCES & FEES COST Balances & Fees Cost Balances & Fees Cost
---------------------------- --------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits in banks $ 3,780 $ 214 5.66% $ 4,705 $ 273 5.80% $ 9,533 $ 509 5.34%
Short-term money market investments - - - - - - 1,317 87 6.61%
Federal funds sold 3,985 218 5.47% 5,386 253 4.70% 14,807 855 5.77%
Securities:
U.S. Government and agency 113,748 7,267 6.39% 147,422 9,276 6.29% 173,960 10,312 5.93%
Taxable municipals 3,359 222 6.61% 3,004 203 6.76% 2,806 182 6.49%
Tax-exempt municipals 151,316 12,174 8.05% 88,274 7,199 8.16% 48,018 4,235 8.82%
Other 18,393 1,286 6.99% 25,642 1,590 6.20% 29,127 1,732 5.95%
- ---------------------------------------------------------------------------------------------------------------------------------
Securities before market value
adjustment 286,816 20,949 7.30% 264,342 18,268 6.91% 253,911 16,461 6.48%
Market value adjustment on
securities available for sale 1,227 (423) (1,844)
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities 288,043 263,919 252,067
Loans:
Commercial 308,803 28,341 9.18% 271,983 25,378 9.33% 234,167 21,864 9.34%
Consumer 157,924 16,251 10.29% 153,045 15,147 9.90% 124,877 12,392 9.92%
Real estate mortgage 380,512 32,623 8.57% 335,259 28,847 8.60% 320,315 27,359 8.54%
Economic development and
other municipal loans 14,539 1,358 9.34% 11,082 1,024 9.24% 10,155 1,026 10.10%
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans 861,778 78,573 9.12% 771,369 70,396 9.13% 689,514 62,641 9.08%
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,157,586 $99,954 8.63% 1,045,379 $89,190 8.53% 967,238 $80,553 8.33%
------- ------- -------
------- ------- -------
NON-EARNING ASSETS:
Allowance for loan losses (7,621) (6,516) (5,939)
Cash and due from banks 32,423 32,822 31,089
Premises and equipment 28,420 19,178 15,550
Other assets 34,469 24,160 19,847
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,245,277 $1,115,023 $1,027,785
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 222,182 $ 4,182 1.88% $ 218,642 $ 4,533 2.07% $ 228,632 $ 5,517 2.41%
Money market accounts 79,397 2,875 3.62% 79,758 2,831 3.55% 74,079 2,809 3.79%
Certificates of deposit and other time 545,166 29,061 5.33% 482,974 25,677 5.32% 455,493 23,965 5.26%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 846,745 36,118 4.27% 781,374 33,041 4.23% 758,204 32,291 4.26%
Federal funds purchased and securities
sold under agreements to repurchase 58,512 3,054 5.22% 43,777 2,206 5.04% 21,729 1,067 4.91%
Other borrowings 74,790 4,461 5.96% 42,280 2,696 6.38% 16,155 1,053 6.52%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 980,047 $43,633 4.45% 867,431 $37,943 4.37% 796,088 $34,411 4.32%
------- ------- -------
------- ------- -------
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 113,616 106,068 98,109
Other liabilities 14,866 13,508 10,971
Shareholders' equity 136,748 128,016 122,617
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,245,277 $1,115,023 $1,027,785
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets $99,954 8.63% $89,190 8.53% $80,553 8.33%
Interest expense/earning assets 43,633 3.77% 37,943 3.63% 34,411 3.56%
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Net interest income/earning assets $56,321 4.87% $51,247 4.90% $46,142 4.77%
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</TABLE>
Note: Income is on a federal-tax-equivalent basis using a 35% tax rate.
Average volume includes nonaccrual loans.
Loans are classified by department.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL CITY BANCSHARES, INC.
By /s/ STEPHEN C. BYELICK, JR. 3/25/98
--------------------------- -------
Stephen C. Byelick, Jr. Date
Secretary and Treasurer
(Chief Accounting Officer)
