<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 9, 1998
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
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (812) 464-9677
NOT APPLICABLE
- ----------------------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 5. OTHER EVENTS
As previously announced, during the period from January 1, 1998, through
August 31, 1998 National City Bancshares, Inc. (the "Registrant") consummated
the following acquisitions which have been accounted for using the poolings
of interests method of accounting: (a) on May 31, 1998, the Registrant
acquired Illinois One Bancorp, Inc. ("IOBI"), the holding company for
Illinois One Bank, National Association, Shawneetown, Illinois; (b) on August
31, 1998, the Registrant acquired Trigg Bancorp, Inc. ("TBI"), the holding
company for Trigg County Farmers Bank, Cadiz, Kentucky; and (c) on August 31,
1998, the Registrant acquired Community First Financial, Inc. ("CFF"), the
holding company for Community First Bank of Kentucky, Warsaw, Kentucky, and
Community First Bank, National Association, Maysville, Kentucky. The
acquisitions of IOBI, TBI and CFF, in the aggregate, represent a significant
business combination.
The Consolidated Financial Statements of the Registrant included as Exhibit
99.1 restate the Registrant's comparative historical financial statements to
reflect the acquisition of IOBI.
The Supplemental Consolidated Financial Statements of the Registrant
included as exhibit 99.4 restate the Registrant's historical financial
statements to reflect the acquisitions of IOBI, TBI and CFF. The Supplemental
Consolidated Financial Statements will become the Registrant's historical
financial statements once third quarter 1998 operating results are released in
November 1998.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired - not applicable
(b) Pro forma financial information - not applicable
(c) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description of Exhibit
--------------- -----------------------
<S> <C>
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of McGladrey & Pullen, LLP
23.3 Consent of KPMG Peat Marwick LLP
23.4 Consent of Crowe Chizek & Company, LLP
23.5 Consent of Robb, Dixon, Francis, Davis, Oneson
& Company
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
99.1 Consolidated Financial Statements of National City
Bancshares, Inc. for the years ended December 31,
1997, 1996 and 1995
99.2 Management's Discussion and Analysis of Financial
Condition and Results of Operations of National
City Bancshares, Inc.
99.3 Financial Statements of Illinois One Bank, N. A.,
for the year ended June 30, 1995
99.4 Supplemental Consolidated Financial Statements of
National City Bancshares, Inc. for the years ended
December 31, 1997, 1996 and 1995
99.5 Supplemental Management's Discussion and Analysis
of Financial Condition and Results of Operations
of National City Bancshares, Inc.
99.6 Financial Statements of Trigg Bancorp, Inc. for
the year ended September 30, 1995
99.7 Financial Statements of Community First Bank,
N.A., for the two years ended June 30, 1995
99.8 Financial Statements of Community First Bank of
Kentucky for the two years ended September 30,
1995
99.9 Financial Statements for Community First Bank, Mt.
Olivet, Kentucky, for the two years ended June 30,
1995
</TABLE>
-3-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: October 9, 1998
NATIONAL CITY BANCSHARES, INC.
By: /s/ Stephen C. Byelick, Jr.
-----------------------------
Stephen C. Byelick, Jr.
-4-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the
previously filed Registration Statements of National City Bancshares, Inc.
(Nos. 333-10739 and 333-56295) of our report dated September 25, 1998, on our
audits of the Consolidated Financial Statements and Supplemental Consolidated
Financial Statements of National City Bancshares, Inc. as of December 31,
1997 and 1996, and for the two years ended December 31, 1997, which appears
in the Current Report on Form 8-K of National City Bancshares, Inc. dated
October 9, 1998.
PricewaterhouseCoopers LLP
Lexington, Kentucky
October 9, 1998
-5-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the previously
filed Registration Statements of National City Bancshares, Inc. (Nos. 333-10739
and 333-56295) of our report dated February 5, 1998 (except for Note 21 as to
which the date is March 9, 1998), on our audit of the Consolidated Financial
Statements and Supplemental Consolidated Financial Statements of National City
Bancshares, Inc. and for the year ended December 31, 1995, which appear in the
Current Report on Form 8-K of National City Bancshares, Inc. dated October 9,
1998.
McGladrey & Pullen, LLP
Champaign, Illinois
October 8, 1998
-6-
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the
previously filed Registration Statements of National City Bancshares, Inc.
(Nos. 333-10739 and 333-56295) of our report dated August 4, 1995, on our
audit of the statements of income, changes in stockholder's equity, and cash
flows of Illinois One Bank, N. A. a wholly owned subsidiary of Illinois One
Bancorp, Inc., for the year ended June 30, 1995, which appears in the Current
Report on Form 8-K of National City Bancshares, Inc. dated October 9, 1998.
KPMG Peat Marwick, LLP
St. Louis, Missouri
October 8, 1998
-7-
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the
previously filed Registration Statements of National City Bancshares, Inc.
(Nos. 333-10739 and 333-56295) of our report dated September 3, 1998, on our
audit of the Financial Statements of Trigg Bancorp, Inc. as of September 30,
1995, and for the year ended September 30, 1995, which appears in the Current
Report on Form 8-K of National City Bancshares, Inc. dated October 9, 1998.
Crowe Chizek & Company LLP
Lexington, Kentucky
October 8, 1998
-8-
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the
previously filed Registration Statements of National City Bancshares, Inc.
(Nos. 333-10739 and 333-56295) of our report dated July 28, 1995, on our
audit of the Financial Statements of Community First Bank, N.A., as of June 30,
1995 and 1994 and for the two years then ended, our report dated November 17,
1995 on our audit of Community First Bank of Kentucky as of September 30,
1995 and 1994 and for the years then ended and our report dated August 18,
1995 on our audit of Community First Bank, Mt. Olivet, Kentucky as of June
30, 1995 and 1994 and for the two years then ended, which appear in the
Current Report on Form 8-K of National City Bancshares, Inc. dated October 9,
1998.
Robb, Dixon, Francis, Davis, Oneson & Company
Granville, Ohio
October 8, 1998
-9-
<PAGE>
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
To the Board of Directors and
Shareholders of National City Bancshares, Inc.
In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of income, shareholders'
equity and cash flows present fairly in all material respects the financial
position of National City Bancshares, Inc. and its subsidiaries (the Company)
at December 31, 1997 and 1996 and the results of their operations and their
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management and evaluating the overall financial
statements presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
Lexington, Kentucky
September 25, 1998
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
National City Bancshares, Inc.
Evansville, Indiana
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows for National City Bancshares, Inc. and
subsidiaries for the year ended December 31, 1995. 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 audit. We did not audit the financial statements of Illinois One
Bancorp, Inc., consolidated subsidiary, as of and for the year then ended
December 31, 1995, which statements reflect total revenue constituting 6% of
the related consolidated total. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion for 1995,
insofar as it relates to the amounts included for Illinois One Bancorp, Inc.,
is based solely on the report of the other auditors.
We conducted our audit 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 audit and the reports
of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of their operations and their cash flows of
National City Bancshares, Inc. and subsidiaries for the year ended December
31, 1995, in conformity with generally accepted accounting principles.
Champaign, Illinois
February 5, 1998, except for the
paragraph entitled Restatement
in Note 1 as to which the date
is September 25, 1998
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 39,486 $ 43,965
Time deposits in banks 2,485 2,983
Federal funds sold 11,047 2,668
Securities held to maturity (fair value: $166,745 in 1996) - 164,603
Securities available for sale 290,535 135,534
Nonmarketable equity securities 11,710 5,825
Loans - net of allowance for loan losses of $8,511 in 1997 and $7,626 in 1996 956,752 840,457
Premises and equipment 32,450 25,202
Intangible assets 20,752 9,118
Other assets 21,112 20,935
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,386,329 $1,251,290
- ----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand $ 138,671 $ 135,222
Interest-bearing:
Savings, daily interest checking, and money market accounts 341,573 321,347
Time deposits of $100,000 or more 136,629 135,264
Other time 423,561 389,674
- ----------------------------------------------------------------------------------------------------------
Total deposits 1,040,434 981,507
Short-term borrowings 76,917 67,615
Other borrowings 96,201 51,960
Dividends payable 1,931 1,698
Deferred income taxes 4,517 1,251
Other liabilities 9,654 8,750
- ----------------------------------------------------------------------------------------------------------
Total liabilities 1,229,654 1,112,781
- ----------------------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
SHAREHOLDERS' EQUITY
Common Stock - $1.00 stated value:
1997 1996
---------- ----------
Shares authorized 20,000,000 20,000,000
Shares outstanding 11,299,984 10,803,163 11,300 10,803
Capital surplus 80,715 58,621
Retained earnings 60,997 69,054
Unrealized gain on securities available for sale 3,663 31
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 156,675 138,509
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,386,329 1,251,290
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) YEAR ENDED DECEMBER 31
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $ 81,666 $73,374 $64,818
Tax-exempt 924 695 693
Interest and dividends on securities:
Taxable 9,659 12,127 13,640
Tax-exempt 8,710 5,370 3,388
Interest on federal funds sold 500 433 931
Interest on other investments 214 278 600
- ------------------------------------------------------------------------------------------------------------
Total interest income 101,673 92,277 84,070
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 38,621 35,381 34,348
Interest on short-term borrowings 3,165 2,277 1,218
Interest on other borrowings 4,464 2,784 902
- ------------------------------------------------------------------------------------------------------------
Total interest expense 46,250 40,442 36,468
- ------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 55,423 51,835 47,602
Provision for loan losses 2,071 2,852 275
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 53,352 48,983 47,327
- ------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 1,927 1,748 1,503
Service charges on deposit accounts 4,308 3,958 3,246
Other service charges and fees 2,631 2,358 1,814
Securities gains 795 57 20
Other 872 902 922
- ------------------------------------------------------------------------------------------------------------
Total noninterest income 10,533 9,023 7,505
- ------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 20,563 17,728 17,524
Occupancy expense 2,473 2,354 2,381
Furniture and equipment expense 2,497 2,345 2,082
Assessments of the Federal Deposit Insurance Corporation 250 867 1,329
Other 10,961 8,805 7,881
- ------------------------------------------------------------------------------------------------------------
Total noninterest expense 36,744 32,099 31,197
- ------------------------------------------------------------------------------------------------------------
Income before income taxes 27,141 25,907 23,635
Income taxes 7,839 8,312 8,161
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,302 $17,595 $15,474
- ------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC $ 1.72 $ 1.54 $ 1.33
EARNINGS PER SHARE - DILUTED $ 1.69 $ 1.54 $ 1.33
- ------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) YEAR ENDED DECEMBER 31
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $19,302 $17,595 $15,474
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization 732 560 1,311
Depreciation 2,295 2,125 2,057
Provision for loan losses 2,071 2,852 275
Write-down of other real estate owned 99 61 69
Securities (gains) losses (795) (57) (20)
Originations of loans held for sale (31,691) (26,346) (15,489)
Proceeds from sales of loans held for sale 32,139 26,580 15,604
Gain on sale of loans held for sale (448) (234) (115)
(Gain) loss on sale of premises and equipment 20 (21) (15)
Loss on sale of other real estate owned -- 31 39
Gain on sale of subsidiary -- -- (206)
Increase in deferred taxes 994 479 82
Changes in assets and liabilities:
(Increase) decrease in other assets 25 (2,010) (686)
Increase (decrease) in other liabilities 149 (651) 1,648
- ------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 24,892 20,964 20,028
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in banks 1,892 5,625 7,882
Proceeds from maturities of securities held to maturity 6,990 15,097 27,160
Proceeds from maturities of securities available for sale 68,444 65,543 48,276
Proceeds from sales of securities held to maturity 3,509 -- --
Proceeds from sales of securities available for sale 22,806 10,779 520
Proceeds from sales of nonmarketable equity securities 804 -- --
Purchases of securities held to maturity (26,321) (61,180) (34,585)
Purchases of securities available for sale (43,632) (26,684) (19,506)
Purchases of nonmarketable equity securities (5,910) (1,162) (1,661)
(Increase) decrease in federal funds sold (5,279) 7,487 (420)
Increase in loans made to customers (59,553) (49,847) (84,305)
Capital expenditures (10,564) (8,662) (4,012)
Proceeds from sale of premises and equipment 2,024 26 63
Proceeds from sale of other real estate owned 338 260 577
Purchase of subsidiaries, net of cash and due from banks acquired (5,191) (10,808) (309)
Cash transferred to buyer in sale of subsidiary -- -- (10,370)
- ------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (49,643) (53,526) (70,690)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (8,459) 7,188 6,573
Net proceeds on short-term borrowings 9,352 11,254 26,895
Proceeds from other borrowings 164,733 31,184 17,434
Payments on other borrowings (124,870) (2,041) (509)
Dividends paid (6,556) (5,619) (3,969)
Repurchase of common stock (16,198) (12,890) (863)
Sale of common stock 1,705 1,653 1,036
Proceeds from exercise of stock options 565 213 --
- ------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 20,272 30,942 46,597
- ------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,479) (1,620) (4,065)
Cash and cash equivalents at beginning of year 43,965 45,585 49,650
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $39,486 $43,965 $45,585
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS ARE CONTINUED ON THE FOLLOWING PAGE.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for: $ 46,292 $39,949 $32,330
Interest 7,159 8,549 6,783
Income taxes
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized gain (loss) on securities available for sale $ (765) $ 5,727
Change in deferred taxes attributable to securities available for sale $ 5,952 306 (2,291)
Transfer of securities held to maturity to available for sale (2,320) -- 34,987
Other real estate acquired in settlement of loans 180,696 35 377
Transfer from other real estate owned to other assets 425 -- 7
Transfer from premises and equipment to other real estate owned -- -- 41
Purchase of subsidiaries:
Purchase price $ 6,797 $12,038 $ 896
- --------------------------------------------------------------------------------------------------------------------
Assets acquired:
Cash and cash equivalents $ 1,606 $ 1,230 $ 587
Interest-bearing deposits in banks 1,394 1,488 399
Securities 16,066 22,187 3,753
Federal funds sold 3,100 100 1,975
Loans 59,300 24,214 11,069
Premises and equipment 930 364 355
Deferred taxes 81 -- --
Other assets 12,801 6,331 2,108
Liabilities assumed:
Deposits (67,411) (43,279) (16,742)
Short-term borrowings (200) -- --
Other borrowings (4,127) -- --
Deferred taxes payable -- -- (25)
Other liabilities (794) (597) (141)
Common stock issued (15,949) -- (2,442)
- --------------------------------------------------------------------------------------------------------------------
$ 6,797 $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
Other liabilities -- -- 43
Gain on sale of branch -- -- (206)
- --------------------------------------------------------------------------------------------------------------------
-- -- 10,244
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
For the Years Ended Unrealized
December 31, 1997, 1996, and 1995 Gain (Loss)
on Securities
Common Common Capital Retained Available
Shares Stock Surplus Earnings For Sale
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994,
as previously reported 8,781,264 $ 8,781 $42,815 $55,633 $(2,594)
Adjusted for pooling of interests 1,367,731 1,368 2,164 13,524 (352)
- -------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 10,148,995 10,149 44,979 69,157 (2,946)
- -------------------------------------------------------------------------------------------------------------
Net income -- -- -- 15,474 --
Cash dividends declared ($0.37 per share) -- -- -- (4,339) --
Repurchase of outstanding shares (39,000) (39) (824) -- --
Shares issued in Dividend
Reinvestment Program 37,684 37 766 -- --
Change in unrealized gain (loss) on securities -- -- -- -- 3,436
Issuance of common stock related to
acquisition of subsidiary 111,018 111 2,331 -- --
Payment for fractional shares for merger -- -- (9) -- --
Stock dividend 447,722 448 9,514 (9,962) --
Payment for fractional shares for stock dividend (1,052) (1) (24) -- --
Issuance of stock under United Financial
Bancorp, Inc. Stock Option Plan 56,760 57 210 -- --
Amortization of stock award program -- -- 14 -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 10,762,127 10,762 56,957 70,330 490
- -------------------------------------------------------------------------------------------------------------
Net income -- -- -- 17,595 --
Cash dividends declared ($0.57 per share) -- -- -- (6,142) --
Repurchase of outstanding shares (480,207) (480) (12,410) -- --
Shares issued in Dividend
Reinvestment Program 60,404 60 1,606 -- --
Change in unrealized gain (loss) on securities -- -- -- -- (459)
Stock dividend 450,656 450 12,279 (12,729) --
Payment of fractional shares for stock dividend (450) -- (13) -- --
Exercise of stock options 10,633 11 202 -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 10,803,163 10,803 58,621 69,054 31
- -------------------------------------------------------------------------------------------------------------
Net income -- -- -- 19,302 --
Cash dividends declared ($0.60 per share) -- -- -- (6,789) --
Repurchase of outstanding shares (426,508) (427) (15,768) -- --
Shares issued in Dividend
Reinvestment Program 47,781 48 1,678 -- --
Change in unrealized gain (loss) on securities -- -- -- -- 3,632
Issuance of common stock related to
acquisition of subsidiary 375,000 375 15,574 -- --
Payment for fractional shares for merger (84) -- (3) -- --
Stock dividend 472,866 473 20,097 (20,570) --
Payment of fractional shares for stock dividend (458) -- (21) -- --
Exercise of stock options 28,224 28 537 -- --
- -------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 11,299,984 $11,300 $80,715 $60,997 $ 3,663
- -------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
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 wholly-owned bank subsidiaries located in
Southwestern Indiana, Southeastern Illinois, and 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, First Kentucky Bank,
Lincolnland Bank, The Bank of Mitchell, Pike County Bank, White County Bank,
Alliance Bank, The First National Bank of Wayne City, First Federal Savings
Bank of Leitchfield, First National Bank of Bridgeport, First Bank of
Huntingburg, NCBE Leasing Corp., Twenty-One Southeast Third Corporation, and
Illinois One Bank. All significant intercompany transactions and balances
have been eliminated.
As further described below, the Corporation acquired Illinois One Bancorp,
Inc. (Illinois One) on May 29, 1998, in a transaction accounted for as a
pooling of interests. The consolidated financial statements present the
combined operations of the Corporation and Illinois One.
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.
The consolidated financial statements give retroactive effect to the Illinois
One transaction and, as a result, the consolidated statements of financial
position, income, and cash flows are presented as if the combining companies
had been consolidated for all periods presented. As required by generally
accepted accounting principles, the consolidated statements of changes in
stockholders' equity reflect the accounts of the Company as if the
appropriate amount of common stock issued in the Illinois One acquisition was
outstanding effective January 1, 1995, the earliest date reported upon in the
consolidated financial statements.
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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. Upon discontinuance of
interest accrual, unpaid accrued interest is reversed. 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. 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.
INTANGIBLE ASSETS
Costs in excess of fair value of net assets acquired consist primarily of
goodwill and core deposit intangibles. Goodwill is amortized to expense over
varying periods up to 25 years using the straight-line method. Core deposit
intangibles are amortized over 7 years using the straight-line method.
Amortization for the years ended December 31, 1997, 1996, and 1995, was $974,
$452, and $334, respectively. Intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying
basis of the assets.
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.
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.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (FAS 130), was issued in June 1997 by the Financial Accounting
Standards Board. The standard establishes reporting of comprehensive income
for general purpose financial statements. Comprehensive income is defined as
the change in equity of a business enterprise during a period and all other
events and circumstances from nonowner sources. The Standard is effective
for financial statement periods beginning after December 15, 1997. The
Corporation does not believe the adoption of the Standard will have a
material impact on the consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (FAS 131), was issued in
June 1997 by the Financial Accounting Standards Board. The standard requires
the Corporation to disclose the factors used to identify reportable segments
including the basis of organization, differences in products and services,
geographic areas, and regulatory environments. FAS 131 additionally requires
financial results to be reported in the financial statements for each
reportable segment. The Standard is effective for financial statement
periods beginning after December 15, 1997. The Corporation does not believe
the adoption of the Standard will have a material impact on the consolidated
financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 15, 1998, the FASB issued FAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." FAS 133 established a new model for
accounting for derivatives and
<PAGE>
hedging activities and supersedes and amends a number of existing standards.
FAS 133 is effective for fiscal years beginning after June 15, 1999, but
earlier application is permitted as of the beginning of any fiscal quarters
subsequent to June 15, 1998. Upon the statement's initial application, all
derivatives are required to be recognized in the statement of financial
position as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of FAS 133. Adoption of FAS 133 is not
expected to have a material financial statement impact on the Corporation.
RECLASSIFICATIONS
Certain reclassifications have been made to the balances as of and for the
years ended December 31, 1996 and 1995, to be consistent with classifications
adopted for 1997.
NOTE 2. BUSINESS COMBINATIONS
On March 1, 1997, the Corporation acquired First Federal Savings Bank of
Leitchfield, a $43,000 savings bank located in Leitchfield, Kentucky. This
acquisition was accounted for as a purchase, and results of operations of
First Federal Savings Bank of Leitchfield since the acquisition have been
included in the financial statements. The excess of the acquisition cost
over the fair value of net assets acquired in the amount of $2,807 will be
amortized over 25 years using the straight-line method.
On August 1, 1997, the Corporation acquired Bridgeport Bancorp, Inc., the
parent company of First National Bank of Bridgeport, with total assets of
$39,382 located in Bridgeport, Illinois. This acquisition was accounted for
as a purchase, and the results of operations since the acquisition have been
included in the financial statements. The excess of the acquisition cost
over fair value of net assets acquired in the amount of $9,377 will be
amortized over 25 years using the straight-line method.
The table below presents pro forma combined results of operations for the
Corporation, First Federal Savings Bank of Leitchfield, and First National
Bank of Bridgeport, for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------
<S> <C> <C>
Net interest income $101,286 $96,019
Net income 19,468 17,833
Earnings per share - Basic 1.73 1.56
Earnings per share - Diluted 1.71 1.56
</TABLE>
On December 31, 1997, the Corporation issued 794,994 shares of common stock
for all of the common stock of First Fourth Bancorp, the parent company of
First Bank of Huntingburg, Huntingburg, Indiana, with total assets of
$108,077 and total equity of $12,917. The combination was accounted for as a
pooling of interests. Accordingly, the Corporation's financial statements
have been retroactively restated to include the accounts and operations of
First Fourth Bancorp for all periods presented. Certain reclassifications
have been made to First Fourth Bancorp's historical financial statements to
conform to the Corporation's presentation.
On May 29, 1998, the Corporation issued 572,737 shares of common stock for
all of the common stock of Illinois One Bancorp, Inc., the parent company of
Illinois One Bank, National Association, Shawneetown, Illinois. As of
December 31, 1997, Illinois One Bank had assets of $88,069 and equity of
$9,872. The combination was accounted for as a pooling of interests.
Accordingly, the Corporations financial statements have been retroactively
restated to include the accounts and operations of Illinois One Bank for all
periods presented. Certain reclassifications have been made to Illinois
One's historical financial statements to conform to the Corporation's
presentation.
Assets, loans, deposits, interest income, net interest income, and net income
of the Corporation (NCBE), First Fourth Bancorp (FFB), and Illinois One
Bancorp (IOB) for the periods prior to the acquisition are shown in the table
below. Due to elimination of intercompany transactions, the historical data
may not aggregate to the consolidated amounts.
<TABLE>
<CAPTION>
NCBE
NCBE FFB IOB Consolidated
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
LOANS, NET OF UNEARNED
INCOME $ 832,701 $ 83,655 $ 48,907 $ 965,263
DEPOSITS 870,825 93,485 76,388 1,040,434
ASSETS 1,193,697 108,109 88,069 1,386,329
December 31, 1996:
Loans, net of
income $ 723,308 $ 77,314 $ 47,461 $ 848,083
Deposits 825,371 87,995 68,157 981,507
Assets 1,069,086 103,239 79,233 1,251,290
YEAR ENDED DECEMBER 31, 1997:
INTEREST INCOME $ 87,253 $ 8,392 $ 6,045 $ 101,673
INTEREST EXPENSE 39,977 3,673 2,617 46,250
NET INTEREST INCOME 47,276 4,719 3,428 55,423
PROVISION FOR LOAN LOSSES 1,711 180 180 2,071
NET INCOME 17,119 1,232 951 19,302
EARNINGS PER SHARE-BASIC 1.73 1.55 1.66 1.72
EARNINGS PER SHARE-DILUTED 1.71 1.55 1.66 1.69
Year ended December 31, 1996:
Interest income $ 78,640 $ 7,909 $ 5,728 $ 92,277
Interest expense 24,499 3,444 2,499 40,442
Net interest income 44,141 4,465 3,229 51,835
Provision for loan losses 2,491 213 148 2,852
Net income 15,246 1,250 1,099 17,595
Earnings per share-Basic 1.59 1.57 1.92 1.54
Earnings per share-Diluted 1.59 1.57 1.92 1.54
Year ended December 31, 1995:
Interest income $ 71,215 $ 7,629 $ 5,226 $ 84,070
Interest expense 31,048 3,363 2,057 36,468
Net interest income 40,167 4,266 3,169 47,602
Provision for loan losses 294 105 (124) 275
Net income 13,115 1,284 1,075 15,474
Earnings per share-Basic 1.34 1.62 1.88 1.33
Earnings per share-Diluted 1.34 1.62 1.88 1.33
</TABLE>
<PAGE>
NOTE 3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
Basic earnings per share is computed by dividing net income for the year by
the weighted average number of shares outstanding.
Diluted earnings per share is determined by dividing net income for the year
by the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents assume exercise of stock
options and use of proceeds to purchase treasury stock at the average market
price for the period.
The following provides a reconciliation of basic and diluted earnings per
share.
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $19,302 $17,595 $15,474
Weighted average shares outstanding
Basic 11,252,185 11,416,032 11,667,853
Diluted 11,405,680 11,416,032 11,667,853
Earnings per share - Basic $ 1.72 $ 1.54 $ 1.33
Effect of stock options (0.03) - -
- ----------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED $ 1.69 $ 1.54 $ 1.33
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
NOTE 4. CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $10,401 and $8,677 as of
December 31, 1997 and 1996, respectively, were maintained in satisfaction of
statutory reserve requirements of the Federal Reserve Bank of St. Louis.
NOTE 5. 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 120,805 2,387 751 122,441
Corporate securities 11,161 87 13 11,235
Mortgage-backed securities 7,985 192 20 8,157
- ------------------------------------------------------------------------------
Total $164,603 $2,943 $801 $166,745
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 5. SECURITIES, CONTINUED
Amortized cost and fair value of securities classified as available for sale
are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES $ 46,684 $ 263 $ 58 $ 46,889
TAXABLE MUNICIPALS 3,411 63 1 3,473
TAX-EXEMPT MUNICIPALS 172,517 5,887 123 178,281
CORPORATE SECURITIES 5,975 13 2 5,986
MORTGAGE-BACKED SECURITIES 54,512 300 261 54,551
- ------------------------------------------------------------------------------
SUBTOTAL 283,099 6,526 445 289,180
EQUITY SECURITIES 1,436 66 147 1,355
- ------------------------------------------------------------------------------
Total $284,535 $6,592 $592 $290,535
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
<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 $ 59,499 $ 409 $347 $ 59,561
Taxable municipals - - - -
Tax-exempt municipals 8,101 230 - 8,331
Corporate securities 3,049 7 - 3,056
Mortgage-backed securities 63,212 382 410 63.194
- ------------------------------------------------------------------------------
Subtotal 133,861 1,028 757 134,132
Equity Securities 1,625 1 224 1,402
- ------------------------------------------------------------------------------
Total $135,486 $1.029 $981 $135,534
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of the securities as of December 31, 1997,
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:
MATURITY SCHEDULE OF DEBT SECURITIES AVAILABLE FOR SALE:
<TABLE>
<CAPTION>
December 31, 1997 Amortized Cost Fair Value
- ---------------------------------------------------------------------
<S> <C> <C>
Less than 1 year $ 39,542 $ 39,613
1 year to 5 years 56,597 57,679
5 years to 10 years 48,225 49,980
Over 10 years 84,223 87,357
Mortgage-backed securities 54,512 54,551
- ---------------------------------------------------------------------
Total $283,099 $289,180
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
Securities gains and (losses) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $839 $134 $34
Gross realized losses (44) (77) (14)
- ---------------------------------------------------------
Total $795 $ 57 $20
- ---------------------------------------------------------
- ---------------------------------------------------------
</TABLE>
As of December 31, 1997 and 1996, the carrying value of securities pledged as
collateral for public deposits and for other purposes as required or
permitted by law were $86,283 and $64,335, 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.
On March 31, 1997, the Corporation transferred $180,696 of securities
classified as held to maturity to the available for sale category and
recorded, as a component of equity, an unrealized gain of $71, net of $38 of
deferred taxes. In accordance with the requirements of Statement of
Financial Accounting Standards No. 115, these securities are now accounted
for at fair value, and any unrealized gain or loss net of deferred tax effect
is reflected as a separate component of shareholders' equity.
NOTE 6. LOANS
A summary of loans as of December 31 follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------
<S> <C> <C>
Real estate loans $527,266 $447,648
Agricultural loans 39,300 39,003
Commercial and industrial loans 210,816 186,738
Economic development loans and
other obligations of state and
political subdivisions 13,997 11,214
Consumer loans 155,287 149,815
Direct lease financing 13,146 12,331
Leveraged leases 4,661 -
All other loans 1,281 1,593
- -----------------------------------------------------------------
Total loans - gross 965,754 848,342
Unearned income on loans (491) (259)
- -----------------------------------------------------------------
Total loans - net of
unearned income 965,263 848,083
Allowance for loan losses (8,511) (7,626)
- -----------------------------------------------------------------
Total loans - net $956,752 $840,457
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The following table presents data on impaired loans at December 31, 1997,
1996, and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans for which there is a
related allowance for loan losses $3,018 $3,337 $3,471
Impaired loans for which there is no
related allowance for loan losses 1,035 988 404
- -------------------------------------------------------------------------
Total impaired loans $4,053 $4,325 $3,875
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Allowance for loan losses for
impaired loans included in the
allowance for loan losses $ 810 $ 487 $ 610
Average recorded investment in
impaired loans 4,237 5,348 3,717
Interest income recognized from
impaired loans 177 323 150
Cash basis interest income
recognized from impaired loans 62 7 8
</TABLE>
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
$113,907 and $97,990 as of December 31, 1997 and 1996, respectively.
<PAGE>
The Corporation has granted a blanket collateral agreement on qualified
mortgage loans to secure advances from Federal Home Loan Banks.
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 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance as of January 1, 1997 $25,791
New loans 48,355
Repayments (46,019)
- --------------------------------------------------------------------
Balance as of December 31, 1997 $28,127
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
NOTE 7. LEASE FINANCING
The Corporation's leasing operations include both direct financing and
leveraged leasing. The direct financing leasing activity involves the
leasing of various types of office, data processing, and transportation
equipment. These 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.
The composition of the net investment in direct lease financing at December
31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Total minimum lease payments to be received $16,050
Less: estimated executory costs (property taxes, insurance,
and maintenance), including profit thereon, included in
the total minimum lease payments -
- ---------------------------------------------------------------------------
Minimum lease payments receivable 16,050
Add estimated residual values of leased equipment 2,800
Add initial direct costs 63
(Deduct) unearned lease income (5,767)
- ----------------------------------------------------------------------------
Net investment in direct lease financing $13,146
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the minimum future lease payments due under the direct
financing leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 2,661
1998 2,413
1999 1,961
2000 1,597
2001 1,315
Thereafter 6,103
- ----------------------------------------------------------------------------
Total minimum future lease payments $16,050
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
In 1997, the Corporation's leasing subsidiary, entered into two leveraged
leases with a regional air carrier for aircraft, which have an estimated
economic life of 23 years, were leased for a term of 16.5 years. The equity
investment in the aircraft represented 22% of the purchase price; the
remaining 88% was furnished by third-party financing in the form of long-term
debt with no recourse against the lessor and is secured by a first lien on
the aircraft. At the end of the lease term, the aircraft will be turned back
to the lessor. The residual value at that time is estimated to be 32% of the
cost. For federal income tax purposes, the lessor receives the benefit of
tax deductions for depreciation on the entire leased asset and for the
interest on the long-term debt. Since during the early years of the lease
those deductions exceed the lease rental income, excess deductions are
available to offset other taxable income. In the later years of the lease,
rental income will exceed the deductions which will increase taxable income.
Deferred taxes are provided to reflect this reversal of tax deductions. The
net investment in leveraged leases at December 31, 1997, are composed of the
following elements:
<TABLE>
<CAPTION>
<S> <C>
Rentals receivable (net of principal and interest
on nonrecourse debt) $1,841
Estimated residual value of leased assets 5,722
Less: unearned and deferred income 2,902
- ---------------------------------------------------------------------------
Investment in leveraged lease 4,661
Less: deferred taxes arising from leveraged leases 1,011
- ---------------------------------------------------------------------------
Net investment in leveraged leases $3,650
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
NOTE 8. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the three
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $7,626 $6,544 $6,248
Allowance associated with
acquisitions 516 379 140
Provision charged to operations 2,071 2,852 275
Recoveries credited to allowance 869 554 739
Loans charged to allowance (2,571) (2,703) (858)
- ----------------------------------------------------------------------
Balance at end of year $8,511 $7,626 $6,544
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
NOTE 9. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 2,602 $ 2,468
Buildings 23,923 20,822
Equipment 16,649 15,214
Leasehold improvements 2,081 1,216
Construction in progress 8,169 5,372
- ---------------------------------------------------------------------
Total cost 53,424 45,092
Less accumulated depreciation 20,974 19,890
- ---------------------------------------------------------------------
Net premises and equipment $32,450 $25,202
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
Construction in progress included capitalized interest of $371 and $105 as of
December 31, 1997 and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 10. DEPOSITS
As of December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $414,452
1999 84,353
2000 34,470
2001 7,855
2002 and thereafter 19,060
- -------------------------------------------------------------------------
Total $560,190
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
NOTE 11. INCOME TAXES
The components of income tax expense for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $5,285 $6,288 $6,412
Deferred 734 228 53
- ----------------------------------------------------------------------
Total 6,019 6,516 6,465
- ----------------------------------------------------------------------
State:
Current 1,564 1,657 1,665
Deferred 256 139 31
- ----------------------------------------------------------------------
Total 1,820 1,796 1,696
- ----------------------------------------------------------------------
Total income taxes $7,839 $8,312 $8,161
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
The portion of the tax provision relating to realized security gains and
losses amounted to $270, $19, and $7 for 1997, 1996, and 1995, 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>
1997 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax computed
at the statutory rates $9,487 $9,054 $8,258
Adjusted for effect of:
Nontaxable municipal interest (2,989) (2,126) (1,424)
Nondeductible expenses 321 397 280
State income taxes, net of
federal tax benefit 1,178 1,152 1,105
Benefit of income taxed at
lower rates (100) (100) (100)
Change in deferred tax asset
valuation allowance (80) 52 (25)
Other differences 22 (117) 67
- -----------------------------------------------------------------------
Total income taxes $7,839 $8,312 $8,161
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
</TABLE>
The net deferred tax asset (liability) in the accompanying balance sheet
includes the following amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Deferred tax liability $(7,635) $(3,601)
Deferred tax asset 3,566 2,878
Valuation allowance for deferred
tax assets (448) (528)
- ---------------------------------------------------------------------
Net deferred tax asset (liability) $(4,517) $(1,251)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
The tax effects of principal temporary differences are shown in the following
table:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $2,637 $2,138
Property acquired in settlement of loans - 35
Direct financing and leveraged leases 364 55
Prepaid pension costs (892) (1,375)
Premises and equipment (4,342) (2,167)
Unrealized gain (loss) on securities
available for sale (2,362) (18)
State net operating loss carryforwards 448 528
Other 78 81
- ---------------------------------------------------------------------
Net temporary differences (4,069) (723)
Valuation allowance (448) (528)
- ---------------------------------------------------------------------
Net deferred tax asset (liability) $(4,517) $(1,251)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
NOTE 12. SHORT-TERM BORROWINGS
Information concerning short-term borrowings as of the years ended December
31 were as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased:
Average amount outstanding $42,588 $26,329
Maximum amount at any month end 69,400 54,175
Weighted average interest rate:
During year 5.67% 5.50%
End of year 6.74% 6.65%
Securities sold under agreements
to repurchase:
Average amount outstanding $15,924 $17,448
Maximum amount at any month end 26,146 28,153
Weighted average interest rate:
During year 4.00% 4.35%
End of year 3.48% 3.66%
Notes payable U.S. Treasury:
Average amount outstanding $ 2,064 $ 1,378
Maximum amount at any month end 5,916 3,270
Weighted average interest rate:
During year 5.36% 5.17%
End of year 5.25% 5.15%
</TABLE>
<PAGE>
NOTE 13. OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank advances:
Due January 2, 1997, 7.15% $ - $ 1,500
Due May 25, 1997, 6.33% - 3,000
Due January 2, 1998, 6.37% 21,200 -
Due January 7, 1998, 5.76% 5,000 -
Due January 20, 1998, 5.16% 5,000 5,000
Due February 20, 1998, 5.80% 250 -
Due June 1, 1998, 6.02% 10,000 10,000
Due February 1, 1999, 5.23% 5,000 5,000
Due August 6, 1999, 6.03% 4,000 -
Due November 1, 1999, 5.96% 6,000 -
Due July 25, 2000, 7.64% 3,000 -
Due February 4, 2002, 7.64% 2,000 2,000
Due October 30, 2002, 6.14% 6,000 -
Fixed and amortizing advances at various
rates with final maturities ranging from
July 2003 to March 2012. 1,866 988
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%. 14,417 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. 3,457 3,500
Cole-Taylor Bank, quarterly principal and
interest payments of $63 through June 30,
1999, final balloon payment due June 30,
1999, 8.50% and 8.25%, respectively,
collateralized by bank stock. 1,016 1,266
Norlease, Inc., monthly principal and
interest payments of $16 through
June 30, 2003, final balloon payment
due June 30, 2003, 8.61%,
collateralized by equipment. 1,196 1,285
Norlease, Inc., installment notes maturing
on various dates through 2003 at
interest rates ranging from 6.29% to
8.16%, collateralized by equipment. 3,171 3,184
Norlease, Inc., quarterly principal and
interest beginning June 30, 1997,
payments through March 30, 2003,
7.87%, collateralized by an investment
in a leveraged lease. 1,756 -
Norlease, Inc., monthly principal
payments beginning January 30, 1997
through January 30, 2003, 7.94%,
collateralized by an investment
in a leveraged lease. 1,722 -
Other 150 237
- -------------------------------------------------------------------------------------
$96,201 $51,960
- -------------------------------------------------------------------------------------
</TABLE>
The Federal Home Loan Bank advances are collateralized by a blanket
collateral agreement on qualified mortgage loans.
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 covenants of this loan agreement.
Aggregate maturities required on other borrowings at December 31, 1997 are
due in future years as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $45,228
1999 19,060
2000 5,757
2001 2,127
2002 12,581
Later years 11,448
- ----------------------------------
$96,201
</TABLE>
Note 14. 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, 1997, that the Corporation and its subsidiary banks met all
capital adequacy requirements to which they were subject.
As of December 31, 1997, 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:
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 14. CAPITAL RATIOS, CONTINUED
<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, 1997:
Total Capital (to Risk Weighted Assets)
Consolidated $141,666 14.58% $77,745 8.0% $97,181 10.0%
National City Bank 41,916 11.28% 29,720 8.0% 37,150 10.0%
Tier I Capital (to Risk Weighted Assets)
Consolidated $131,155 13.70% $38,873 4.0% $58,309 6.0%
National City Bank 40,244 10.83% 14,860 4.0% 22,290 6.0%
Tier I Capital (to Average Assets)
Consolidated $133,155 9.83% $54,199 4.0% $67,749 5.0%
National City Bank 40,244 8.22% 19,590 4.0% 24,489 5.0%
TO BE WELL
MINIMUM RATIOS CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------------------------------------------------
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated $138,344 16.12% $68,677 8.0% $85,846 10.0%
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 $130,718 15.23% $34,339 4.0% $51,508 6.0%
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 $130,718 10.59% $49.379 4.0% $61,724 5.0%
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 15. Incentive Stock Option Plan
In 1995, the Corporation's board of directors approved a fixed Incentive
Stock Option Plan (Plan) which was approved by shareholders in 1996. The
Plan currently reserves 554,523 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 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. Compensation expense of $234, $54, and
$0 was recognized for tax purposes in 1997, 1996, and 1995, respectively.
Had compensation cost for the 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>
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $19,302 $17,595 $15,474
Pro forma 18,285 16,835 15,353
Earnings per share:
Basic
As reported $1.72 $1.54 $1.33
Pro forma 1.63 1.47 1.33
Diluted
As reported $1.69 $1.54 $1.33
Pro forma 1.60 1.47 1.32
</TABLE>
<PAGE>
<PAGE>
A summary of the status of the Plan, adjusted for all stock dividends and the
stock split in 1996, as of December 31, 1997 and 1996, and changes during the
years ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE Weighted Average Weighted Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of the year 375,261 $20.79 289,406 $19.11 - -
Options granted 112,350 41.90 97,020 25.62 289,406 $19.11
Options exercised 29,635 19.11 11,165 19.11 - -
Option forfeited 6,615 25.62 - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 451,361 $26.09 375,261 $20.79 289,406 $19.11
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Options exercisable 285,005 $21.17 170,229 $19.11 - -
Weighted-average fair value of options granted
during the year $14.72 $7.94 $5.65
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
- --------------------------------------------------------------------
<S> <C> <C> <C>
$19.11 248,606 7.8 194,600
25.62 90,405 8.8 90,405
41.90 112,350 9.8 -
- --------------------------------------------------------------------
451,361 8.5 285,005
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Generally accepted accounting principles provide for the use of the
Black-Scholes option pricing model to estimate the fair value of options
which have no vesting restrictions. This model requires the use of
subjective assumptions, including expected stock price volatility. As a
result, management believes the Black-Scholes valuation model may not
necessarily provide the best single measure of option value.
The fair value of the stock options granted under the Plan has been estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions.
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of options granted 112,350 97,020 289,406
Risk-free interest rate 5.86% 6.42% 6.08%
Expected life, in years 10 10 10
Expected volatility 21.50% 16.41% 14.65%
Expected dividend yield 1.71% 2.10% 1.99%
Estimated fair value per option $14.72 $7.94 $5.65
</TABLE>
Note 16. 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>
1997 1996
- -----------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term
investments $ 53,018 $ 53,018 $ 49,616 $ 49,616
Securities 302,245 302,245 305,962 308,104
Loans - net of
allowance 938,945 961,086 828,126 837,827
Accrued interest
receivable 14,179 14,179 13,459 13,459
Liabilities:
Deposits 1,040,434 1,047,798 981,507 981,390
Short-term borrowings 76,917 76,917 67,615 67,615
Other borrowings 96,201 94,179 51,960 49,651
Accrued interest
payable 5,114 5,114 4,799 4,799
</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 leases receivable of $17,807 and $12,331 in 1997 and
1996, 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
estimated using quoted market prices for similar securities. Fair values for
nonmarketable equity securities are equal to cost as there is no readily
determinable fair value. Carrying amount of accrued interest receivable
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 accrued interest receivable
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 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 17. 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 are comprised of Southwestern Indiana, Kentucky, and
Southeastern Illinois. The Corporation maintains a diversified loan
portfolio which contains no concentration of credit risk from borrowers
engaged in the same or similar industries exceeding 10% of total loans.
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 materially 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, 1997 follows:
<TABLE>
<CAPTION>
RANGE OF RATES
VARIABLE RATE FIXED RATE TOTAL ON FIXED RATE
COMMITMENT COMMITMENT COMMITMENT COMMITMENTS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments
to extend credit $109,802 $57,385 $167,187 5.40%-20.00%
Standby letters
of credit - - 13,518 -
</TABLE>
<PAGE>
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 18. DIVIDEND REINVESTMENT PLAN
The Corporation established a Dividend Reinvestment Plan for its shareholders
in 1989. The plan provides participating shareholders a method of investing
their cash dividends in the Corporation's common stock without payment of any
brokerage commission, service charge, or other expense. In addition,
participating shareholders may also invest up to $10,000 per calendar quarter
in the Corporation's common stock through the optional cash payment feature
of the plan.
The plan permits the issuance of previously authorized and unissued shares or
the repurchase of outstanding shares for reissuance. As of December 31,
1997, 48,925 shares of authorized but unissued common stock were reserved for
plan requirements.
NOTE 19. EMPLOYEE RETIREMENT PLANS
The Corporation maintained a noncontributory pension plan in which
substantially all full-time employees were 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.
The plan was curtailed effective December 31, 1997.
In establishing the amounts reflected in the financial statements, the
following significant assumption rates were used:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
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>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation
including vested benefits of
$5,309, $3,899, and $11,350
in 1997, 1996, and 1995 $(11,350) $(6,005) $(4,420)
Effects of projected future
compensation levels N/A (2,647) (2,000)
- --------------------------------------------------------------------------------------------------------
Projected benefit obligation
for service rendered to date (11,350) (8,652) (6,420)
Plan assets at fair value 13,550 12,400 10,856
- --------------------------------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 2,200 3,748 4,436
Unrecognized net loss (gain)
from past experience
different from that assumed
and effects of changes in
assumptions - 170 (494)
Prior service cost not yet
recognized in net periodic
pension cost - (261) (108)
Unrecognized net asset at
January 1, 1987, being
recognized over 11.11
years from that date - (259) (347)
- --------------------------------------------------------------------------------------------------------
Prepaid pension cost
included in other assets $ 2,200 $ 3,398 $ 3,487
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost (credit) included the following components for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period $ 836 $ 812 $ 618
Interest cost on projected
benefit obligation 633 590 456
Return on assets (1,911) (1,300) (2,789)
Net amortization and deferral 574 (13) 1,758
Curtailment effect 1,066 - -
- ------------------------------------------------------------------------------------------------
Net periodic pension
cost (credit) $1,198 $ 89 $ 43
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
The Corporation also maintains a savings and profit-sharing plan for
substantially all full-time 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 $1,563, $1,441, and $1,414 during 1997, 1996, and 1995,
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 19. EMPLOYEE RETIREMENT PLANS, CONTINUED
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 20. UNAUDITED INTERIM FINANCIAL DATA
The following table reflects summarized quarterly data for the periods
described (unaudited):
<TABLE>
<CAPTION>
1997
- ------------------------------------------------------------------------------------------------------
December September June March
31 30 30 31
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $26,324 $26,204 $25,181 $23,971
Interest expense 12,148 12,114 11,420 10,566
- ------------------------------------------------------------------------------------------------------
Net interest income 14,176 14,090 13,761 13,405
Provision for loan losses 656 731 273 411
Noninterest income 2,793 2,640 2,500 2,592
Noninterest expense 10,758 8,834 8,657 8,497
- ------------------------------------------------------------------------------------------------------
Income before income taxes 5,555 7,165 7,331 7,089
Provision for income taxes 1,264 2,176 2,199 2,199
- ------------------------------------------------------------------------------------------------------
Net income $ 4,291 $ 4,989 $ 5,132 $ 4,890
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Earnings per share - Basic $ 0.38 $ 0.44 $ 0.46 $ 0.44
Earnings per share - Diluted 0.38 0.43 0.45 0.43
1996
- ------------------------------------------------------------------------------------------------------
December September June March
31 30 30 31
- ------------------------------------------------------------------------------------------------------
Interest income $23,997 $23,357 $22,622 $22,475
Interest expense 10,514 10,137 9,928 9,866
- ------------------------------------------------------------------------------------------------------
Net interest income 13,483 13,220 12,694 12,609
Provision for loan losses 1,822 386 266 378
Noninterest income 2,705 2,208 2,060 1,880
Noninterest expense 8,340 8,548 7,617 7,595
- ------------------------------------------------------------------------------------------------------
Income before income taxes 6,026 6,494 6,871 6,516
Provision for income taxes 1,717 2,119 2,262 2,214
- ------------------------------------------------------------------------------------------------------
Net income $ 4,309 $ 4,375 $ 4,609 $ 4,302
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Earnings per share - Basic $ 0.38 $ 0.38 $ 0.40 $ 0.38
Earnings per share - Diluted 0.38 0.38 0.40 0.38
</TABLE>
NOTE 21. SUBSEQUENT EVENTS
The Corporation's subsidiary, First Kentucky Bank, purchased the former
Mayfield, Kentucky, Branch Office of Republic Bank & Trust Company on January
8, 1998. First Kentucky assumed $65,639 in deposit liabilities in
consideration of a deposit premium of $4,601. First Kentucky also purchased
the office facility and certain loans of the Branch.
On December 1, 1997, the Corporation entered into a definitive agreement to
purchase 100% of the common stock of Vernois Bancshares, Inc. in a cash
transaction. As of December 31, 1997, Vernois Bancshares, Inc.'s
wholly-owned subsidiary, Bank of Illinois in Mt. Vernon, had assets of
$163,450 and equity of $13,040. The transaction will be accounted for as a
purchase, and the excess of cost over the fair value of net assets acquired
of approximately $15,000 will be amortized over 25 years using the
straight-line method. The transaction was consummated in March 1998.
On February 12, 1998, the Corporation entered into a definitive agreement to
acquire Trigg Bancorp, Inc. in a transaction to be accounted for as a pooling
of interests. The Corporation issued 736,278 shares of its common stock for
all outstanding shares of Trigg Bancorp. Trigg Bancorp is the parent of the
Trigg County Farmers Bank, Cadiz, Kentucky. As of December 31, 1997, Trigg
County Farmers Bank had assets of $96,371, deposits of $72,296, and equity of
$8,122. The transaction was consummated on August 31, 1998.
On March 9, 1998, the Corporation entered into a definitive agreement to
acquire Community First Financial, Inc., Maysville, Kentucky, in a
transaction to be accounted for as a pooling of interests. The Corporation
issued 1,441,762 shares of its common stock for all outstanding shares of
Community First Financial, Inc. Community First Financial, Inc., is the
parent of Community First Bank, N.A., Maysville, Kentucky, and Community
First Bank of Kentucky, Warsaw, Kentucky. As of December 31, 1997, the two
banks had total assets of $130,226, total deposits of $114,420, and total
equity of $12,781. The transaction was consummated on August 31, 1998.
On May 21, 1998, the Corporation entered into a definitive agreement to
acquire 1st Bancorp Vienna, Inc., in a transaction to be accounted for as a
pooling of interests. The Corporation will issue approximately 289,000
shares of its common stock for all of the outstanding shares of 1st Bancorp
Vienna. 1st Bancorp Vienna is the parent of First State Bank of Vienna,
Vienna, Illinois. As of December 31, 1997, First State Bank had total assets
of $38,670, deposits of $33,377, and equity of $4,833. The transaction,
which is subject to shareholder and regulatory approval, is anticipated to
close during the third or fourth quarter of 1998.
On May 22, 1998, the Corporation entered into a definitive agreement to
acquire Princeton Federal Bank, fsb, in a transaction to be accounted for as
a pooling of interests. The Corporation will issue approximately 201,000
shares of its common stock for all of the outstanding shares of Princeton
Federal. Princeton Federal Bank, fsb, is the parent of Princeton Federal
Bank, Princeton, Kentucky. As of September 30, 1997, Princeton Federal had
total assets of $31,711, deposits of $22,373, and equity of $4,232. The
transaction, which is subject to shareholder and regulatory approval, is
anticipated to close during the third or fourth quarter of 1998.
On June 30, 1998, the Corporation entered into a definitive agreement to
acquire Commonwealth Commercial Corporation, in a transaction to be accounted
for as a pooling of interests.
<PAGE>
The Corporation will issue approximately 209,000 shares of its common stock
for all of the outstanding shares of Commonwealth Commercial Corporation.
Commonwealth Commercial Corporation is the parent of Bank of Crittenden,
Crittenden, Kentucky. As of December 31, 1997, Bank of Crittenden had total
assets of $25,286, deposits of $21,437, and equity of $2,528. The
transaction, which is subject to shareholder and regulatory approval, is
anticipated to close during the fourth quarter of 1998.
On July 9, 1998, the Corporation entered into a definitive agreement to
acquire Downstate Banking Co., in a transaction to be accounted for as a
pooling of interests. The Corporation will issue approximately 113,100
shares of its common stock for all of the outstanding shares of Downstate
Banking Co. Downstate Banking Co. is the parent of the Downstate National
Bank, Brookport, Illinois. As of December 31, 1997, the Downstate National
Bank had total assets of $21,983, deposits of $19,773, and equity of $2,049.
The transaction, which is subject to shareholder and regulatory approval, is
anticipated to close during the fourth quarter of 1998.
On July 14, 1998, the Corporation entered into a definitive agreement to
acquire Progressive Bancshares, Inc., in a transaction to be accounted for as
a pooling of interests. The Corporation will issue approximately 975,700
shares of its common stock for all of the outstanding shares of Progressive
Bancshares, Inc. Progressive Bancshares, Inc., is the parent of The
Progressive Bank, National Association, which has four offices in Lexington,
Lawrenceburg and Owingsville, Kentucky. As of December 31, 1997, the
Progressive Bank had total assets of $144,203, deposits of $123,296, and
equity of $11,104. The transaction, which is subject to shareholder and
regulatory approval, is anticipated to close during the fourth quarter of
1998.
On April 21, 1998, the Corporation entered into a definitive agreement to
acquire Hoosier Hills Financial Corporation ("HHFC"), the holding company for
The Ripley County Bank ("RCB), an Indiana banking corporation, which has
offices in Milan, Osgood and Versailles, Indiana. The agreement relates to
the acquisition of HHFC in a merger transaction in which approximately
730,000 shares of the Corporation's common stock (subject to increase under
certain circumstances, at the Corporation's election) would be issued. As of
December 31, 1997, RCB had total assets of $109 million, net loans of $86.4
million, total deposits of $85.7 million and total shareholders' equity of
$7.0 million. The acquisition is subject to the approval of the shareholders
of HHFC and the Federal Reserve. The acquisition is expected to qualify for
the pooling of interests method of accounting. The parties expect to close
the merger in the fourth quarter of 1998.
<PAGE>
NOTE 22. FINANCIAL INFORMATION OF PARENT COMPANY
The principal source of income for National City Bancshares, Inc. 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.
Condensed financial data for National City Bancshares, Inc. (parent company
only) follows:
CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,947 $ 13,260
Investment in subsidiaries 149,747 123,514
Securities available for sale 151 281
Nonmarketable equity securities 388 548
Note receivable 243 300
Property and equipment 1,021 955
Deferred income taxes - 37
Other assets 3,923 2,200
- ------------------------------------------------------------------------------
TOTAL ASSETS $160,420 $141,095
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
LIABILITIES
Other borrowings $ 136 $ 215
Dividends payable 1,931 1,698
Deferred income taxes 859 -
Other liabilities 819 673
- ------------------------------------------------------------------------------
Total liabilities 3,745 2,586
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 11,300 10,803
Capital surplus 80,715 58,621
Retained earnings 60,997 69,054
Unrealized gain (loss) on securities
available for sale 3,663 31
- ------------------------------------------------------------------------------
Total shareholders' equity 156,675 138,509
- ------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $160,420 $141,095
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $20,560 $32,900 $12,496
Other income 5,380 3,456 2,662
- ------------------------------------------------------------------------------
Total income 25,940 36,356 15,158
- ------------------------------------------------------------------------------
Interest expense 10 6 -
Other expenses 6,776 3,710 3,258
- ------------------------------------------------------------------------------
Total expenses 6,786 3,716 3,258
- ------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries 19,154 32,640 11,900
Income tax benefit (503) (20) (274)
- -------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 19,657 32,660 12,174
Equity in undistributed earnings
of subsidiaries (355) (15,065) 3,300
- ------------------------------------------------------------------------------
Net income $19,302 $17,595 $15,474
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $19,302 $17,595 $15,474
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 517 482 451
Undistributed earnings of
subsidiaries 355 15,065 (3,300)
Securities losses (gains) (479) 1 (18)
Increase (decrease) in deferred
taxes 847 (38) (64)
Changes in assets and liabilities:
(Increase) decrease in other assets (2,045) (113) (207)
Increase (decrease) in other
liabilities 146 (3) 191
- ------------------------------------------------------------------------------
Net cash flows provided by
operating activities 18,643 32,989 12,527
- ------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from maturities of
securities available for sale - 434 250
Proceeds from sales of securities
available for sale 923 - 118
Proceeds from sales of
nonmarketable equity securities 804 - -
Purchase of securities
available for sale (650) - (340)
Purchase of nonmarketable
equity securities (185) (11) (537)
(Disbursements) and repayments
on notes receivable 57 381 (381)
Capital expenditures (459) (555) (446)
Proceeds from sale of premises
and equipment 17 - -
Investment in subsidiaries (6,947) (13,817) (1,002)
(Increase) decrease in securities
purchased under agreements to resell - 10,000 (6,900)
- ------------------------------------------------------------------------------
Net cash flows provided by
(used in) investing activities (6,440) (3,568) (9,238)
- ------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends paid (6,509) (5,589) (3,957)
Proceeds from other borrowings - 244 -
Payments on other borrowings (79) (29) -
Repurchase of common stock (16,198) (12,890) (863)
Sale of common stock 1,705 1,653 1,036
Proceeds from exercise of stock options 565 213 -
- ------------------------------------------------------------------------------
Net cash flows (used in)
financing activities (20,516) (16,398) (3,784)
- ------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (8,313) 13,023 (495)
Cash and cash equivalents
at beginning of year 13,260 237 732
- ------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 4,947 $13,260 $ 237
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
ACTIVITIES
Change in unrealized gain (loss) on
securities available for sale, net $ 3,632 $ (459) $ 3,436
Common stock issued in
acquisition of subsidiary 15,949 - 2,442
</TABLE>
<PAGE>
EXHIBIT 99.2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF NATIONAL CITY BANCSHARES, INC.
National City Bancshares, Inc. (the "Registrant") hereby incorporates by
reference "Management's Discussion and Analysis of Financial Condition and
Results of Operations" which is contained in the Registrant's Annual Report
as Form 10-K, as amended, for the year ended December 31, 1997 (the "1997
MD&A"). The Registrant has not restated the 1997 MD&A to reflect the
acquisition of Illinois One Bancorp, Inc. ("IOBI") because the acquisition of
IOBI itself was not a significant business combination. For a restatement of
the 1997 MD&A to reflect the acquisition of IOBI, Trigg Bancorp, Inc. and
Community First Financial, Inc., see Exhibit 99.5.
<PAGE>
EXHIBIT 99.3
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Illinois One Bank, N.A.
Shawneetown, Illinois:
We have audited the accompanying statements of income, changes in
stockholder's equity, and cash flows of Illinois One Bank, N.A. (the Bank), a
wholly owned subsidiary of Illinois One Bancorp, Inc., for the year ended
June 30, 1995. These financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Illinois
One Bank, N.A. for the year ended June 30, 1995 in conformity with generally
accepted accounting principles.
St. Louis, Missouri
August 4, 1995
1
<PAGE>
ILLINOIS ONE BANK, N.A.
(A Wholly Owned Subsidiary of Illinois One Bancorp, Inc.)
Statement of Income
Year ended June 30, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
<S> <C>
Interest income:
Interest and fees on loans $3,202,541
Interest on interest-bearing deposits in other
financial institutions 3,687
Interest and dividends on debt and
equity securities:
Taxable 1,414,386
Exempt from federal income tax 529,018
Interest on federal funds sold 76,764
- --------------------------------------------------------------------------------------
Total interest income 5,226,396
- --------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 2,057,004
Interest on federal funds purchased 105
- --------------------------------------------------------------------------------------
Total interest expense 2,057,109
- --------------------------------------------------------------------------------------
Net interest income 3,169,287
Reversal of prior years' provision for loan losses (124,000)
- --------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 3,293,287
- --------------------------------------------------------------------------------------
Noninterest income:
Service charges on deposits 287,226
Loss on sale of debt and equity
securities, net (6,294)
Other income 106,179
- --------------------------------------------------------------------------------------
Total noninterest income 387,111
- --------------------------------------------------------------------------------------
Noninterest expense:
Salaries 746,396
Employee benefits 200,438
Occupancy and equipment expense 401,223
Professional fees 180,200
FDIC and other insurance 247,456
Postage, printing, and supplies 140,959
Director and committee fees 70,535
Other expenses 241,333
- --------------------------------------------------------------------------------------
Total noninterest expense 2,228,540
- --------------------------------------------------------------------------------------
Income before income tax expense 1,451,858
Income tax expense 377,160
- --------------------------------------------------------------------------------------
Net income $1,074,698
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
ILLINOIS ONE BANK, N.A.
(A Wholly Owned Subsidiary of Illinois One Bancorp, Inc.)
Statement of Changes in Stockholder's Equity
Year ended June 30, 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Net
unrealized
gain (loss) Total
on securities stock-
Common Undivided available- holder's
stock Surplus Profits for-sale equity
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1994 $550,000 2,810,529 5,612,654 (248,657) 8,724,526
Net income - - 1,074,698 - 1,074,698
Cash dividends - - (630,000) - (630,000)
Change in unrealized loss on
securities available-for-sale - - - 171,114 171,114
- ------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 $550,000 2,810,529 6,057,352 (77,543) 9,340,338
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
ILLINOIS ONE BANK, N.A.
(A Wholly Owned Subsidiary of Illinois One Bancorp, Inc.)
Statement of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net income $ 1,074,698
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 279,576
Provision for loan losses (124,000)
Deferred tax expense 115,130
Loss on sale of investments in debt
and equity securities, net 6,294
Increase in accrued interest
receivable and other assets (35,392)
Decrease in accrued interest
payable and other liabilities 119,529
- ------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,435,835
- ------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Decrease in interest-bearing deposits in other
financial institutions 297,463
Activity in debt and equity securities available-for-sale:
Proceeds from sales 402,476
Proceeds from principal repayments and maturities 2,644,879
Purchases (398,019)
Activity in debt and equity securities held-to-maturity:
Proceeds from principal repayments and maturities 775,531
Proceeds from calls 702,453
Purchases (978,013)
Net increase in loans (3,251,169)
Purchases of premises and equipment (257,033)
- ------------------------------------------------------------------------------------------------------
Net cash used in investing activities (61,432)
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net decrease in deposits (2,067,122)
Cash dividends paid (630,000)
- ------------------------------------------------------------------------------------------------------
Net cash provided by financing activities (2,697,122)
- ------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,322,719)
Cash and cash equivalents at beginning of year 4,059,289
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,736,570
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Supplemental information:
Cash payments for interest $ 2,035,531
Cash payments for income taxes 142,521
Noncash transfers to other real estate in settlement
of loans 13,714
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
ILLINOIS ONE BANK, N.A.
(A Wholly Owned Subsidiary of Illinois One Bancorp, Inc.)
Notes to Financial Statements
Year Ended June 30, 1995
- ------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Illinois One Bank, N.A. (the Bank), a wholly owned subsidiary of Illinois
One Bancorp, Inc. (Bancorp), is subject to competition from other financial
institutions and the regulations of certain regulatory agencies, and
undergoes periodic examinations by those regulatory agencies. The following
is a description of the more significant accounting policies:
BASIS OF PRESENTATION
The financial statements of the Bank have been prepared in conformity with
generally accepted accounting principles and conform to predominant
practices within the banking industry. The preparation of the financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions, including the
determination of the allowance for loan losses, that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, cash and cash equivalents
include cash and due from banks, and federal funds sold.
DEBT AND EQUITY SECURITIES
At the time of purchase, securities are classified in one of two
categories: available-for-sale or held-to-maturity. Held-to-maturity
securities are those securities which the Bank has the ability and intent
to hold until maturity. All securities not classified as held-to-maturity
are classified as available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost, adjusted for the amortization or
accretion of premiums or discounts. Unrealized gains and losses, net of the
related tax effect, on available-for-sale securities are excluded from
earnings and reported as a separate component of stockholder's equity until
realized.
A decline in the market value of any available-for-sale or held-to-maturity
security below cost that is deemed other than temporary results in a charge
to earnings and the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the lives of the
respective securities, with consideration of historical and estimated
prepayment rates for mortgage-backed securities, as an adjustment to yield
using the interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale are included in earnings based on the specific
identification method for determining the cost of securities sold.
LOANS
Unearned discount on certain installment loans is recognized as income
principally on the sum-of-the-digits method over the term of the loan,
which approximates the level yield method. Interest on all other loans is
recognized based upon the principal amount outstanding using the
simple-interest method. The recognition of interest income is discontinued
when, in management's judgment, the interest will not be collectible in the
normal course of business. Subsequent interest income is recognized only
upon receipt. Loans are returned to accrual status only when management
believes full collectibility of principal and interest is expected.
(Continued)
5
<PAGE>
ILLINOIS ONE BANK, N.A.
Notes to Financial Statements
- ------------------------------------------------------------------------------
During May 1993, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 114, ACCOUNTING BY CREDITORS
FOR IMPAIRMENT OF A LOAN (SFAS 114). During October 1994, the FASB issued
SFAS No. 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN - INCOME
RECOGNITION AND DISCLOSURES (SFAS 118), which amends SFAS 114.
SFAS 114 (as amended by SFAS 118) defines the recognition criteria for loan
impairment and the measurement methods for certain impaired loans and loans
whose terms have been modified in troubled-debt restructurings. Impairment
of a restructured loan may be measured by either discounting the total
expected future cash flows at the loan's effective rate of interest as
stated in the original loan agreement or the fair value of the collateral
for a collateral-dependent loan.
Regardless of the historical measurement used, SFAS 114 requires a creditor
to measure impairment based on the fair value of the collateral when the
creditor has determined foreclosure is probable. SFAS 118 allows a creditor
to use its existing nonaccrual methods for recognizing interest income on
an impaired loan.
The Bank adopted the provisions of SFAS 114 and SFAS 118 on January 1, 1995
(the first day of the Bank's fiscal year beginning after December 15,
1994). The initial adoption of SFAS 114 and SFAS 118 did not have a
material effect on the Bank's financial position or results of operations.
The Bank has elected to continue to use its existing methods for
recognizing interest income on impaired loans. The Bank continues to apply
all payments received on impaired loans to the outstanding balance of the
loan until such time as the loan balance is reduced to zero. Interest
income is recognized after all principal has been repaid or an improvement
in the condition of the loan has occurred which would warrant resumption of
interest accruals.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is available to absorb loan charge-offs. The
allowance is increased by provisions charged to expense and is reduced by
loan charge-offs, net of recoveries. The provision charged to expense each
year is that amount which management believes is sufficient to bring the
balance of the allowance to a level adequate to absorb potential loan
losses, based on knowledge and evaluation of the current loan portfolio and
the current economic environment.
Management believes the allowance for loan losses is adequate to absorb
loan losses in the portfolio. While management uses available information
to recognize loan losses, future additions to the allowance may be
necessary based on changes in economic conditions. In addition, regulatory
agencies, as an integral part of the examination process, periodically
review the adequacy of the allowance for loan losses. Such agencies may
require the Bank to increase the allowance for loan losses based on their
judgments about information available to them at the time of their
examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using straight-line and accelerated methods over
the estimated useful lives of the applicable assets. Property additions and
betterments are capitalized while maintenance and repairs which do not
extend the useful lives of the assets are expensed as incurred.
(Continued)
6
<PAGE>
ILLINOIS ONE BANK, N.A.
Notes to Financial Statements
- ------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure or
deeded to the Bank in lieu of foreclosure. Other real estate is initially
recorded on an individual asset basis at fair value minus estimated selling
costs. If, subsequent to foreclosure, the fair value declines below the
recorded value, the deficiency is recorded in a valuation allowance through
a provision charged to expense. Subsequent increases in the fair value
minus estimated costs are recorded through a reversal of the valuation
allowance, but not below zero.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
Excess of cost over fair value of net assets acquired (goodwill) is
amortized on a straight-line basis over a period of 40 years. Management
evaluates the period of amortization continually to determine whether later
events warrant a revised estimate.
INCOME TAXES
The Bank's parent, Bancorp, and the Bank file a consolidated income tax
return. Tax expense is allocated to the Bank by Bancorp as if the Bank was
filing a separate return. Provisions for income taxes are based on tax
effects of transactions which are included in the determination of pretax
accounting income.
(2) CASH AND DUE FROM BANKS AND CAPITAL REQUIREMENTS
The Bank is a wholly owned subsidiary of Bancorp. Bancorp relies on
dividend payments from the Bank to meet its debt service payments and
operating expenses. Bancorp's debt agreement with an unaffiliated bank is
secured by 100% of the common stock of the Bank and requires maintenance of
minimum stated capital-to-asset ratios and minimum total stockholder's
equity balances. Such requirements have been met at June 30, 1995.
The Bank is subject to various regulatory capital requirements administered
by the federal 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
direct material effect on the Bank. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Bank's capital
amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios 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 June 30, 1995, the Bank meets all
capital adequacy requirements to which it is subject.
The most recent notification from the Office of the Comptroller of the
Currency categorized the Bank as WELL CAPITALIZED under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
(Continued)
7
<PAGE>
ILLINOIS ONE BANK, N.A.
Notes to Financial Statements
- ------------------------------------------------------------------------------
(3) DEBT AND EQUITY SECURITIES
Proceeds from sales of debt and equity securities for the year ended June
30, 1995 were $402,476. Gross gains of $175 and gross losses of $6,469 were
realized on those sales for 1995.
(4) LOANS
Transactions in the allowance for loan losses for the year ended June 30,
1995 are as follows:
- ------------------------------------------------------------------------------
Balance at beginning of year $ 552,306
Reversal of prior years' provision for loan losses (124,000)
Loans charged off (145,091)
Recoveries of loans previously charged off 106,333
- ------------------------------------------------------------------------------
Net charge-offs (38,758)
- ------------------------------------------------------------------------------
Balance at end of year $ 389,548
- ------------------------------------------------------------------------------
The Bank grants commercial and agricultural, real estate mortgage, and
installment loans to customers in the Bank's immediate geographic lending
area. Although the Bank has a diversified loan portfolio, a substantial
portion of its borrowers' abilities to honor their contractual obligations
is dependent upon the agribusiness economic sector in this geographic
lending area. Direct and indirect agricultural loans totaled approximately
$8,861,000 at June 30, 1995. Generally, such loans are secured by farm
assets and are expected to be repaid from cash flows of the farm
operations. The Bank's policy for requiring collateral and access to that
collateral is essentially the same as in extending credit to the Bank's
other customers.
A summary of impaired loans at June 30, 1995 follows:
- -------------------------------------------------------------------------------
Nonaccrual loans $326,000
Impaired loans continuing to
accrue interest -
- -------------------------------------------------------------------------------
Total impaired loans $326,000
- -------------------------------------------------------------------------------
Allowance for loan losses on
impaired loans $ 70,600
- -------------------------------------------------------------------------------
Impaired loans with no related
allowance for loan losses $255,400
- -------------------------------------------------------------------------------
Average balance of impaired loans
since adoption of SFAS 114 and
SFAS 118 at January 1, 1995 $354,000
- -------------------------------------------------------------------------------
(Continued)
8
<PAGE>
ILLINOIS ONE BANK, N.A.
Notes to Financial Statements
- ------------------------------------------------------------------------------
(5) PREMISES AND EQUIPMENT
Depreciation charged to occupancy and equipment expense was $149,878 for
the year ended June 30, 1995
At June 30, 1995, the Bank had certain operating leases for equipment which
expire at various dates through 1999. Rent expense of $24,795 was incurred
for the year ended June 30, 1995. Minimum future lease payments required
are as follows:
- -------------------------------------------------------------------------------
Year ending June 30:
1996 $ 13,680
1997 11,940
1998 11,175
1999 7,830
- -------------------------------------------------------------------------------
$ 44,625
- -------------------------------------------------------------------------------
(6) INTEREST-BEARING DEPOSITS
Interest expense on deposits for the year ended June 30, 1995 consists of
the following:
- -------------------------------------------------------------------------------
NOW and money market demand accounts $ 535,538
Savings 396,136
Time deposits $100,000 and over 84,299
Other time deposits 1,041,031
- -------------------------------------------------------------------------------
$ 2,057,004
- -------------------------------------------------------------------------------
(7) INCOME TAXES
The composition of income tax expense for the year ended June 30, 1995 is
as follows:
- -------------------------------------------------------------------------------
Current - federal $ 190,530
Current - state 71,500
Deferred taxes 115,130
- -------------------------------------------------------------------------------
Income tax expense $ 377,160
- -------------------------------------------------------------------------------
(Continued)
9
<PAGE>
ILLINOIS ONE BANK, N.A.
Notes to Financial Statements
- ------------------------------------------------------------------------------
Expected income tax expense, computed by applying the effective federal
statutory income tax rate of 34% to income before income tax expense, is
reconciled to actual income tax expense as follows:
- -------------------------------------------------------------------------------
Computed "expected" income tax expense $ 493,631
Increase (decrease) in taxes resulting from:
Tax-exempt interest income (179,543)
State tax, net of federal benefit 47,190
Goodwill amortization 14,289
Other, net 1,593
- -------------------------------------------------------------------------------
Income tax expense $ 377,160
- -------------------------------------------------------------------------------
(8) EMPLOYEE BENEFIT PLAN
The Bank maintains a defined contribution 401(k) employee benefit plan
covering substantially all employees. The Bank makes contributions to the
plan equal to 4% of covered employees' annual salaries. Employees are
allowed to make additional contributions up to 15% of their annual salary.
Employer contributions to the plan were $26,420 for the year ended June 30,
1995.
Postretirement benefits other than the 401(k) plan are generally not
provided for the Bank's employees.
(9) COMMITMENTS AND CONTINGENT LIABILITIES
The Bank 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 financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheet.
The Bank'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 amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for financial
instruments included on the balance sheet. The contractual amount of
off-balance-sheet financial instruments which represents credit risk as of
June 30, 1995 is as follows:
- -------------------------------------------------------------------------------
Commitments to extend credit $ 2,499,034
Standby letters of credit 65,000
- -------------------------------------------------------------------------------
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.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Commitments and
standby letters of credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since certain of the
commitments and letters of credit are expected to expire without being
drawn upon, the total commitment and letter of credit amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained,
(Continued)
10
<PAGE>
ILLINOIS ONE BANK, N.A.
Notes to Financial Statements
- ------------------------------------------------------------------------------
if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but
may include accounts receivable; inventory; property, plant, and equipment;
investments in debt securities; deposits with financial institutions;
residential real estate; and income-producing commercial properties.
Various legal claims have arisen during the normal course of business
which, in the opinion of management after discussion with legal counsel,
will not result in any material liability to the Bank.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Exhibit 99.4
PRICEWATERHOUSECOOPERS LLP
To the Board of Directors and
Shareholders of National City Bancshares, Inc.
In our opinion, the accompanying supplemental consolidated statements of
financial position and the related supplemental consolidated statements of
income, shareholders' equity and cash flows present fairly in all material
respects the supplemental financial position of National City Bancshares, Inc.
and its subsidiaries (the Company) at December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles. These supplemental financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these supplemental statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the supplemental financial
statements are free of material misstatement. An audit includes examining on
a test basis, evidence supporting the amounts and disclosures in the
supplemental financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
supplemental financial statements presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
The supplemental financial statements give retroactive effect to the merger
of National City Bancshares, Inc. and Subsidiaries with Trigg Bancorp, Inc.
and Community First Financial, Inc. on August 31, 1998, which has been
accounted for as a pooling of interests as described in note 1 and 2 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interest methods in financial statements that
do not include the date of consummation. These financial statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of National City Bancshares,
Inc. and Subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
Lexington, Kentucky
September 25, 1998
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
National City Bancshares, Inc.
Evansville, Indiana
We have audited the accompanying supplemental consolidated statements of
income, shareholders' equity, and cash flows for National City Bancshares,
Inc. and subsidiaries for the year ended December 31, 1995. These
supplemental financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these
supplemental financial statements based on our audit. We did not audit the
financial statements of Trigg Bancorp, Inc. and Community First Financial,
Inc., consolidated subsidiaries, as of and for the year then ended December
31, 1995, which statements reflect total revenue constituting 7% and 8%,
respectively, of the related consolidated total. Those statements were
audited by other auditors whose reports have been furnished to us, and our
opinion for 1995, insofar as it relates to the amounts included for Trigg
Bancorp, Inc. and Community First Financial, Inc., is based solely on the
report of the other auditors.
We conducted our audit 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 audit and the reports
of the other auditors provide a reasonable basis for our opinion.
The supplemental consolidated financial statements give retroactive effect to
the merger of National City Bancshares, Inc. and Trigg Bancorp, Inc. on
August 31, 1998 and Community First Financial, Inc. on August 31, 1998, which
has been accounted for as a pooling of interests as described in Note 1 to
the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of National City
Bancshares, Inc. and subsidiaries when financial statements for periods
ending on or after the date of consummation of the business combination are
issued.
In our opinion, based on our audit and the report of the other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the results of their operations and their
cash flows of National City Bancshares, Inc. and subsidiaries for the year
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Champaign, Illinois
February 5, 1998, except for the
paragraph entitled Restatement
in Note 1 as to which the date
is September 25, 1998
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) DECEMBER 31
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 47,636 $ 51,917
Time deposits in banks 3,269 3,151
Federal funds sold 13,939 6,749
Securities held to maturity (fair value: $177,576 in 1996) - 175,332
Securities available for sale 342,726 169,033
Nonmarketable equity securities 13,854 7,601
Loans - net of allowance for loan losses of $10,625 in 1997 and $9,679 in 1996 1,110,770 992,627
Premises and equipment 35,404 27,925
Intangible assets 22,073 10,572
Other assets 23,745 23,519
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,613,416 $1,468,426
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand $ 166,372 $ 161,892
Interest-bearing:
Savings, daily interest checking, and money market accounts 403,237 382,231
Time deposits of $100,000 or more 160,190 152,846
Other time 496,324 462,670
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 1,226,123 1,159,639
Short-term borrowings 77,241 68,207
Other borrowings 112,537 69,599
Dividends payable 1,931 1,698
Deferred income taxes 4,751 1,221
Other liabilities 11,402 10,545
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,433,985 1,310,909
- -----------------------------------------------------------------------------------------------------------------------------------
COMMITMENTS, CONTINGENCIES, AND CREDIT RISK
SHAREHOLDERS' EQUITY
Common Stock - $1.00 stated value:
1997 1996
------------ -----------
Shares authorized 20,000,000 20,000,000
Shares outstanding 13,453,911 12,947,854 13,454 12,948
Capital surplus 83,295 61,125
Retained earnings 78,550 83,434
Unrealized gain (loss) on securities available for sale 4,132 10
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 179,431 157,517
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,613,416 $1,468,426
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) YEAR ENDED DECEMBER 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $ 97,099 $ 88,156 $76,879
Tax-exempt 990 749 693
Interest and dividends on securities:
Taxable 12,079 14,371 15,586
Tax-exempt 9,266 5,778 3,660
Interest on federal funds sold 751 737 1,159
Interest on other investments 214 364 697
- -------------------------------------------------------------------------------------------------------------
Total interest income 120,399 110,155 98,674
- -------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 45,418 41,980 39,574
Interest on short-term borrowings 3,370 2,459 1,671
Interest on other borrowings 5,528 3,800 1,011
- -------------------------------------------------------------------------------------------------------------
Total interest expense 54,316 48,239 42,256
- -------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 66,083 61,916 56,418
Provision for loan losses 2,185 3,234 335
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 63,898 58,682 56,083
- -------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 1,956 1,818 1,599
Service charges on deposit accounts 5,476 5,143 4,171
Other service charges and fees 2,677 2,407 1,814
Securities gains (losses) 798 69 (72)
Other 1,307 1,293 1,449
- -------------------------------------------------------------------------------------------------------------
Total noninterest income 12,214 10,730 8,961
- -------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 24,085 21,185 20,466
Occupancy expense 2,857 2,855 2,844
Furniture and equipment expense 2,847 2,681 2,409
Assessments of the Federal Deposit Insurance Corporation 294 887 1,474
Other 12,676 10,615 9,443
- -------------------------------------------------------------------------------------------------------------
Total noninterest expense 42,759 38,223 36,636
- -------------------------------------------------------------------------------------------------------------
Income before income taxes 33,353 31,189 28,408
Income taxes 9,770 9,960 9,668
- -------------------------------------------------------------------------------------------------------------
NET INCOME $ 23,583 $21,229 $18,740
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC $ 1.76 $ 1.57 $ 1.36
EARNINGS PER SHARE - DILUTED $ 1.74 $ 1.56 $ 1.36
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) YEAR ENDED DECEMBER 31
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 23,583 $ 21,229 $ 18,740
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization 932 707 1,348
Depreciation 2,629 2,459 2,416
Provision for loan losses 2,185 3,234 335
Write-down of other real estate owned 99 61 69
Securities (gains) losses (798) (69) 72
Originations of loans held for sale (31,691) (26,346) (15,489)
Proceeds from sales of loans held for sale 32,139 26,580 15,604
Gain on sale of loans held for sale (448) (234) (115)
(Gain) loss on sale of premises and equipment 20 (21) (15)
Loss on sale of other real estate owned - 31 39
Gain on sale of subsidiary - - (206)
Increase (decrease) in deferred taxes 1,009 479 167
Changes in assets and liabilities:
(Increase) decrease in other assets (297) (1,752) (1,050)
Increase (decrease) in other liabilities 348 (575) 2,136
- --------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 29,710 25,783 24,051
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest-bearing deposits in banks 1,276 5,499 8,174
Proceeds from maturities of securities held to maturity 10,799 16,931 34,817
Proceeds from maturities of securities available for sale 80,463 83,539 49,528
Proceeds from sales of securities held to maturity 3,509 3,635 789
Proceeds from sales of securities available for sale 26,247 10,779 8,878
Proceeds from sales of nonmarketable equity securities 804 - -
Purchases of securities held to maturity (32,687) (63,150) (35,541)
Purchases of securities available for sale (63,806) (48,955) (33,370)
Purchases of nonmarketable equity securities (6,244) (1,162) (1,799)
(Increase) decrease in federal funds sold (4,090) 6,691 (635)
(Increase) decrease in loans made to customers (61,477) (60,075) (100,814)
Capital expenditures (11,202) (8,761) (5,266)
Proceeds from sale of premises and equipment 2,036 26 63
Proceeds from sale of other real estate owned 338 260 577
Purchase of subsidiaries, net of cash and due from banks acquired (5,191) (10,808) 2,661
Cash transferred to buyer in sale of subsidiary - - (10,370)
- --------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (59,225) (65,551) (82,308)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (903) 15,181 10,348
Net proceeds (payments) on short-term borrowings 9,084 6,063 26,895
Proceeds from other borrowings 167,849 35,425 23,240
Payments on other borrowings (129,289) (2,041) (1,068)
Dividends paid (7,664) (6,592) (4,458)
Repurchase of common stock (16,232) (12,895) (999)
Sale of common stock 1,824 1,664 1,036
Proceeds from exercise of stock options 565 213 -
- --------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by financing activities 25,234 37,018 54,994
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,281) (2,750) (3,263)
Cash and cash equivalents at beginning of year 51,917 54,667 57,930
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 47,636 $ 51,917 $ 54,667
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS ARE CONTINUED ON THE
FOLLOWING PAGE.
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 54,285 $ 47,715 $ 37,804
Income taxes 9,058 10,182 8,083
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized gain (loss) on securities available for sale $ 6,769 $ (1,145) $ 5,784
Change in deferred taxes attributable to securities available for sale (2,647) 458 (2,314)
Transfer of securities held to maturity to available for sale 193,480 - 34,987
Other real estate acquired in settlement of loans 425 35 958
Transfer from other real estate owned to other assets - - 7
Transfer from premises and equipment to other real estate owned - - 82
Purchase of subsidiaries:
Purchase price $ 6,797 $ 12,038 $ 3,697
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Assets acquired:
Cash and cash equivalents $ 1,606 $ 1,230 $ 3,557
Interest-bearing deposits in banks 1,394 1,488 949
Securities 16,066 22,187 11,403
Federal funds sold 3,100 100 1,975
Loans 59,300 24,214 23,341
Premises and equipment 930 364 756
Deferred taxes 81 - -
Other assets 12,801 6,331 2,955
Liabilities assumed:
Deposits (67,411) (43,279) (38,454)
Short-term borrowings (200) - -
Other borrowings (4,127) - -
Deferred taxes payable - - (55)
Other liabilities (794) (597) (288)
Common stock issued (15,949) - (2,442)
- ------------------------------------------------------------------------------------------------------------------------------
$ 6,797 $ 12,038 $ 3,697
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
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
Other liabilities - - 43
Gain on sale of branch - - (206)
- ------------------------------------------------------------------------------------------------------------------------------
- - $ 10,244
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended
December 31, 1997, 1996, and 1995 Unrealized
Gain (Loss)
on Securities
Common Common Capital Retained Available
Shares Stock Surplus Earnings For Sale
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1994,
as previously reported 8,781,264 $ 8,781 $ 42,815 $ 55,633 $ (2,594)
Adjusted for pooling of interests 3,510,819 3,511 4,664 22,446 (179)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 12,292,083 12,292 47,479 78,079 (2,773)
- -----------------------------------------------------------------------------------------------------------------------------
Net income - - - 18,740 -
Cash dividends declared ($0.35 per share) - - - (4,828) -
Repurchase of outstanding shares (39,000) (39) (824) - -
Shares issued in Dividend
Reinvestment Program 37,684 37 766 - -
Change in unrealized gain (loss) on securities - - - - 3,470
Issuance of common stock related to
acquisition of subsidiary 111,018 111 2,331 - -
Payment for fractional shares for merger - - (9) - -
Stock dividend 447,722 448 9,514 (9,962) -
Payment for fractional shares for stock dividend (1,052) (1) (24) - -
Issuance of stock under United Financial
Bancorp, Inc. Stock Option Plan 56,760 57 210 - -
Amortization of stock award program - - 14 - -
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 12,905,215 12,905 59,457 82,029 697
- -----------------------------------------------------------------------------------------------------------------------------
Net income - - - 21,229 -
Cash dividends declared ($0.55 per share) - - - (7,095) -
Repurchase of outstanding shares (480,207) (480) (12,410) - -
Shares issued in Dividend
Reinvestment Program 60,404 60 1,606 - -
Change in unrealized gain (loss) on securities - - - - (687)
Issuance of common stock 1,603 2 4 - -
Stock dividend 450,656 450 12,279 (12,729) -
Payment of fractional shares for stock dividend (450) - (13) - -
Exercise of stock options 10,633 11 202 - -
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 12,947,854 12,948 61,125 83,434 10
- -----------------------------------------------------------------------------------------------------------------------------
Net income - - - 23,583 -
Cash dividends declared ($0.59 per share) - - - (7,897) -
Repurchase of outstanding shares (426,508) (427) (15,768) - -
Shares issued in Dividend
Reinvestment Program 47,781 48 1,678 - -
Change in unrealized gain (loss) on securities - - - - 4,122
Issuance of common stock related to
acquisition of subsidiary 375,000 375 15,574 - -
Issuance of common stock 9,236 9 76 - -
Payment for fractional shares for merger (84) - (3) - -
Stock dividend 472,866 473 20,097 (20,570) -
Payment of fractional shares for stock dividend (458) - (21) - -
Exercise of stock options 28,224 28 537 - -
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 13,453,911 $ 13,454 $ 83,295 $ 78,550 $ 4,132
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO SUPPLEMENTAL 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 wholly-owned bank subsidiaries located in
Southwestern Indiana, Southeastern Illinois, and 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 supplemental 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 supplemental 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, First Kentucky Bank,
Lincolnland Bank, The Bank of Mitchell, Pike County Bank, White County Bank,
Alliance Bank, The First National Bank of Wayne City, First Federal Savings Bank
of Leitchfield, First National Bank of Bridgeport, First Bank of Huntingburg,
Illinois One Bank, Trigg County Farmers Bank, Community First Bank, N.A.,
Community First Bank of Kentucky, 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.
RESTATEMENT
The supplemental consolidated financial statements give retroactive effect to
the Trigg and Community First transactions on August 31, 1998. Generally
accepted accounting principles proscribe giving effect to consummated business
combinations accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Corporation after
financial statements covering the date of consummation of the business
combination are issued. The supplemental consolidated statements of financial
condition, income, shareholders' equity, and cash flows are presented as if the
combining companies had been consolidated for all periods presented. As required
by generally accepted accounting principles, the consolidated statements of
shareholders' equity reflect the accounts of the Company as if the appropriate
amount of common stock issued in the Trigg and Community First acquisitions was
outstanding effective January 1, 1995, the earliest date reported upon in the
Consolidated Financial Statements.
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.
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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. Upon discontinuance of interest
accrual, unpaid accrued interest is reversed. 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.
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.
INTANGIBLE ASSETS
Costs in excess of fair value of net assets acquired consist primarily of
goodwill and core deposit intangibles. Goodwill is amortized to expense over
varying periods up to 25 years using the straight-line method. Core deposit
intangibles are amortized over 7 years using the straight-line method.
Amortization for the years ended December 31, 1997, 1996, and 1995, was $1,106,
$584, and $466, respectively. Intangible assets are reviewed for possible
impairment when events or changed circumstances may affect the underlying basis
of the assets.
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.
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.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (FAS 130), was issued in June 1997 by the Financial Accounting Standards
Board. The standard establishes reporting of comprehensive income for general
purpose financial statements. Comprehensive income is defined as the change in
equity of a business enterprise during a period and all other events and
circumstances from nonowner sources. The Standard is effective for financial
statement periods beginning after December 15, 1997. The Corporation does not
believe the adoption of the Standard will have a material impact on the
consolidated financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" (FAS 131), was issued in June 1997 by
the Financial Accounting Standards Board. The standard requires the Corporation
to disclose the factors used to identify reportable segments including the basis
of organization, differences in products and services, geographic areas, and
regulatory environments. FAS 131 additionally requires financial results to be
reported in the financial statements for each reportable segment. The Standard
is effective for financial statement periods beginning after December 15, 1997.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
The Corporation does not believe the adoption of the Standard will have a
material impact on the consolidated financial statements.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 15, 1998, the FASB issued FAS No. 133 (FAS 133), "Accounting for
Derivative Instruments and Hedging Activities." FAS 133 established a new
model for accounting for derivatives and hedging activities and supersedes
and amends a number of existing standards. FAS 133 is effective for fiscal
years beginning after June 15, 1999, but earlier application is permitted as
of the beginning of any fiscal quarters subsequent to June 15, 1998. Upon the
statement's initial application, all derivatives are required to be
recognized in the statement of financial position as either assets or
liabilities and measured at fair value. In addition, all hedging
relationships must be designated, reassessed, and documented pursuant to the
provisions of FAS 133. Adoption of FAS 133 is not expected to have a material
financial statement impact on the Corporation.
RECLASSIFICATIONS
Certain reclassifications have been made to the balances as of and for the years
ended December 31, 1996 and 1995, to be consistent with classifications adopted
for 1997.
NOTE 2. BUSINESS COMBINATIONS
On March 1, 1997, the Corporation acquired First Federal Savings Bank of
Leitchfield, a $43,000 savings bank located in Leitchfield, Kentucky. This
acquisition was accounted for as a purchase, and results of operations of First
Federal Savings Bank of Leitchfield since the acquisition have been included in
the financial statements. The excess of the acquisition cost over the fair value
of net assets acquired in the amount of $2,807 will be amortized over 25 years
using the straight-line method.
On August 1, 1997, the Corporation acquired Bridgeport Bancorp, Inc., the parent
company of First National Bank of Bridgeport, with total assets of $39,382
located in Bridgeport, Illinois. This acquisition was accounted for as a
purchase, and the results of operations since the acquisition have been included
in the financial statements. The excess of the acquisition cost over fair value
of net assets acquired in the amount of $9,377 will be amortized over 25 years
using the straight-line method.
The table below presents pro forma combined results of operations for the
Corporation, First Federal Savings Bank of Leitchfield, and First National
Bank of Bridgeport, for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Net interest income $ 111,946 $ 106,100
Net income 23,749 21,467
Earnings per share - Basic 1.77 1.58
Earnings per share - Diluted 1.75 1.58
</TABLE>
On December 31, 1997, the Corporation issued 794,994 shares of common stock for
all of the common stock of First Fourth Bancorp, the parent company of First
Bank of Huntingburg, Huntingburg, Indiana, with total assets of $108,077 and
total equity of $12,917. The combination was accounted for as a pooling of
interests. Accordingly, the Corporation's financial statements have been
retroactively restated to include the accounts and operations of First Fourth
Bancorp for all periods presented. Certain reclassifications have been made to
First Fourth Bancorp's historical financial statements to conform to the
Corporation's presentation.
On May 29, 1998, the Corporation issued 572,737 shares of common stock for all
of the common stock of Illinois One Bancorp, Inc., the parent company of
Illinois One Bank, National Association, Shawneetown, Illinois. As of December
31, 1997, Illinois One Bank had assets of $88,069 and equity of $9,872. The
combination was accounted for as a pooling of interests. Accordingly, the
Corporation's financial statements have been retroactively restated to include
the accounts and operations of Illinois One Bank for all periods presented.
Certain reclassifications have been made to Illinois One's historical financial
statements to conform to the Corporation's presentation.
On August 31, 1998, the Corporation issued 736,278 shares of common stock for
all of the common stock of Trigg Bancorp, the parent company of Trigg County
Farmers Bank, Cadiz, Kentucky. As of December 31, 1997, Trigg County Farmers
Bank had assets of $96,379 and equity of $8,532. The combination was accounted
for as a pooling of interests. Accordingly, the Corporation's financial
statements have been retroactively restated to include the accounts and
operations of Trigg Bancorp for all periods presented. Certain reclassifications
have been made to Trigg Bancorp's historical financial statements to conform to
the Corporation's presentation.
On August 31, 1998, the Corporation issued 1,432,202 shares of common stock for
all of the common stock of Community First Financial, Inc., the parent company
of Community First Bank, N.A., Maysville, Kentucky and Community First Bank of
Kentucky, Warsaw, Kentucky. As of December 31, 1997, the two banks had assets of
$130,559 and equity of $14,135. The combination was accounted for as a pooling
of interests. Accordingly, the Corporation's financial statements have been
retroactively restated to include the accounts and operations of Community First
Financial, Inc. Certain reclassifications have been made to Community First's
historical financial statements to conform to the Corporation's presentation.
Assets, loans, deposits, interest income, net interest income, and net income of
the Corporation (NCBE), First Fourth Bancorp (FFB), Illinois One Bancorp (IOB),
Trigg Bancorp (Trigg), and Community First Financial, Inc. (CFF) for the periods
prior to
<PAGE>
NOTE 2. BUSINESS COMBINATIONS, CONTINUED
the acquisition are shown in the table below. Due to elimination of
intercompany transactions, the historical data may not aggregate to the
consolidated amounts.
<TABLE>
<CAPTION>
NCBE
NCBE FFB IOB Trigg CCF Consolidated
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997:
Loans, net of unearned income $ 832,701 $ 83,655 $ 48,907 $ 52,960 $ 103,172 $1,121,395
Deposits 870,825 93,485 76,388 72,452 113,237 1,226,123
Assets 1,193,697 108,109 88,069 96,379 130,708 1,613,416
December 31, 1996:
Loans, net of unearned income $ 723,308 $ 77,314 $ 47,461 $ 56,137 $ 98,086 $1,002,306
Deposits 825,371 87,995 68,157 70,023 108,109 1,159,639
Assets 1,069,086 103,239 79,233 91,946 125,190 1,468,426
YEAR ENDED DECEMBER 31, 1997:
Interest income $ 87,253 $ 8,392 $ 6,045 $ 7,593 $ 11,133 $ 120,399
Interest expense 39,977 3,673 2,617 3,807 4,259 54,316
Net interest income 47,276 4,719 3,428 3,786 6,874 66,083
Provision for loan losses 1,711 180 180 112 2 2,185
Net income 17,119 1,232 951 1,395 2,886 23,583
Earnings per share-Basic 1.73 1.55 1.66 1.89 2.02 1.76
Earnings per share-Diluted 1.71 1.55 1.66 1.89 2.00 1.74
Year ended December 31, 1996:
Interest income $ 78,640 $ 7,909 $ 5,728 $ 7,517 $ 10,361 $ 110,155
Interest expense 24,499 3,444 2,499 3,641 4,156 48,239
Net interest income 44,141 4,465 3,229 3,876 6,205 61,916
Provision for loan losses 2,491 213 148 231 151 3,234
Net income 15,246 1,250 1,099 1,260 2,374 21,229
Earnings per share-Basic 1.59 1.57 1.92 1.71 1.66 1.57
Earnings per share-Diluted 1.59 1.57 1.92 1.71 1.65 1.56
Year ended December 31, 1995:
Interest income $ 71,215 $ 7,629 $ 5,226 $ 6,497 $ 8,107 $ 98,674
Interest expense 31,048 3,363 2,057 2,892 2,896 42,256
Net interest income 40,167 4,266 3,169 3,605 5,211 56,418
Provision for loan losses 294 105 (124) 15 45 335
Net income 13,115 1,284 1075 1,104 2,162 18,740
Earnings per share-Basic 1.34 1.62 1.88 1.50 1.51 1.36
Earnings per share-Diluted 1.34 1.62 1.88 1.50 1.50 1.36
</TABLE>
<PAGE>
NOTE 3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements.
Basic earnings per share is computed by dividing net income for the year by the
weighted average number of shares outstanding.
Diluted earnings per share is determined by dividing net income for the year by
the weighted average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents assume exercise of stock
options and use of proceeds to purchase treasury stock at the average market
price for the period.
The following provides a reconciliation of basic and diluted earnings per share.
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $ 23,583 $ 21,229 $ 18,740
Weighted average shares outstanding
Basic 13,393,573 13,561,441 13,818,720
Diluted 13,556,688 13,573,403 13,826,513
EARNINGS PER SHARE-BASIC $ 1.76 $ 1.57 $ 1.36
Effect of stock options (0.02) (0.01) -
- ---------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED $ 1.74 $ 1.56 $ 1.36
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
NOTE 4. CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $11,032 and $9,178 as of December
31, 1997 and 1996, respectively, were maintained in satisfaction of statutory
reserve requirements of the Federal Reserve Bank of St. Louis.
NOTE 5. 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 $ 29,468 $ 241 $ 8 $ 29,701
Taxable municipals 2,775 56 17 2,814
Tax-exempt municipals 123,830 2,494 770 125,554
Corporate securities 11,161 87 13 11,235
Mortgage-backed securities 8,098 194 20 8,272
- ----------------------------------------------------------------------------------
Total $175,332 $3,072 $828 $177,576
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 5. SECURITIES, CONTINUED
Amortized cost and fair value of securities classified as available for sale
are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
- ------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES $ 71,161 $ 329 $ 99 $ 71,391
TAXABLE MUNICIPALS 3,663 65 1 3,727
TAX-EXEMPT MUNICIPALS 184,000 6,571 127 190,444
CORPORATE SECURITIES 9,213 16 17 9,212
MORTGAGE-BACKED SECURITIES 66,497 359 288 66,568
- ------------------------------------------------------------------------
SUBTOTAL 334,534 7,340 532 341,342
EQUITY SECURITIES 1,465 66 147 1,384
- ------------------------------------------------------------------------
TOTAL $335,999 $7,406 $679 $342,726
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
<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 $ 77,739 $ 471 $ 472 $ 77,738
Taxable municipals -- -- -- --
Tax-exempt municipals 13,916 343 24 14,235
Corporate securities 5,421 7 45 5,383
Mortgage-backed securities 70,287 428 469 70,246
- ------------------------------------------------------------------------
Subtotal 167,363 1,249 1,010 167,602
Equity Securities 1,654 1 224 1,431
- ------------------------------------------------------------------------
Total $169,017 $1,250 $1,234 $169,033
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of the securities as of December 31, 1997, 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:
MATURITY SCHEDULE OF DEBT SECURITIES AVAILABLE FOR SALE:
<TABLE>
<CAPTION>
December 31, 1997 Amortized Cost Fair Value
- -----------------------------------------------------------
<S> <C> <C>
Less than 1 year $ 55,137 $ 55,228
1 year to 5 years 66,576 67,707
5 years to 10 years 54,965 56,797
Over 10 years 91,359 95,042
Mortgage-backed securities 66,497 66,568
- -----------------------------------------------------------
Total $334,534 $341,342
- -----------------------------------------------------------
- -----------------------------------------------------------
</TABLE>
Securities gains and (losses) are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $860 $163 $ 39
Gross realized losses (62) (94) (111)
- -------------------------------------------------------
Total $798 $ 69 $ (72)
- -------------------------------------------------------
- -------------------------------------------------------
</TABLE>
As of December 31, 1997 and 1996, the carrying value of securities pledged as
collateral for public deposits and for other purposes as required or permitted
by law were $107,906 and $80,275, 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.
On March 31, 1997, the Corporation transferred $193,480 of securities
classified as held to maturity to the available for sale category and recorded,
as a component of equity, an unrealized gain of $160, net of $98 of deferred
taxes. In accordance with the requirements of Statement of Financial Accounting
Standards No. 115, these securities are now accounted for at fair value, and
any unrealized gain or loss net of deferred tax effect is reflected as a
separate component of shareholders' equity.
NOTE 6. LOANS
A summary of loans as of December 31 follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Real estate loans $ 645,580 $ 564,858
Agricultural loans 43,748 43,241
Commercial and industrial loans 230,814 206,679
Economic development loans and
other obligations of state and
political subdivisions 15,492 11,946
Consumer loans 166,818 161,782
Direct lease financing 13,146 12,336
Leveraged leases 4,661 --
All other loans 1,959 2,245
- -------------------------------------------------------------
Total loans - gross 1,122,218 1,003,087
Unearned income on loans (823) (781)
- -------------------------------------------------------------
Total loans - net of
unearned income 1,121,395 1,002,306
Allowance for loan losses (10,625) (9,679)
- -------------------------------------------------------------
Total loans - net $1,110,770 $ 992,627
- -------------------------------------------------------------
- -------------------------------------------------------------
</TABLE>
The following table presents data on impaired loans at December 31, 1997, 1996,
and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans for which there is a
related allowance for loan losses $3,671 $4,053 $4,235
Impaired loans for which there is no
related allowance for loan losses 2,550 1,523 874
- -----------------------------------------------------------------
Total impaired loans $6,221 $5,576 $5,109
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Allowance for loan losses for
impaired loans included in the
allowance for loan losses $1,054 $ 741 $ 900
Average recorded investment in
impaired loans 5,719 6,594 5,087
Interest income recognized from
impaired loans 256 376 204
Cash basis interest income
recognized from impaired loans 138 52 62
</TABLE>
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 $114,035 and
$98,118 as of December 31, 1997 and 1996, respectively.
<PAGE>
NOTE 6. LOANS, CONTINUED
The Corporation has granted a blanket collateral agreement on qualified
mortgage loans to secure advances from Federal Home Loan Banks.
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 1997 is
as follows:
<TABLE>
<S> <C>
Balance as of January 1, 1997 $ 29,019
New loans 49,305
Repayments (47,215)
- ----------------------------------------------
Balance as of December 31, 1997 $ 31,109
- ----------------------------------------------
- ----------------------------------------------
</TABLE>
NOTE 7. LEASE FINANCING
The Corporation's leasing operations include both direct financing and
leveraged leasing. The direct financing leasing activity involves the leasing
of various types of office, data processing, and transportation equipment.
These 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.
The composition of the net investment in direct lease financing at December 31,
1997 is as follows:
<TABLE>
<S> <C>
Total minimum lease payments to be received $16,050
Less: estimated executory costs (property taxes, insurance,
and maintenance), including profit thereon, included in
the total minimum lease payments -
- --------------------------------------------------------------------
Minimum lease payments receivable 16,050
Add estimated residual values of leased equipment 2,800
Add initial direct costs 63
(Deduct) unearned lease income (5,767)
- --------------------------------------------------------------------
Net investment in direct lease financing $13,146
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
At December 31, 1997, the minimum future lease payments due under the direct
financing leases are as follows:
<TABLE>
<S> <C>
1997 $ 2,661
1998 2,413
1999 1,961
2000 1,597
2001 1,315
Thereafter 6,103
- -----------------------------------------------
Total minimum future lease payments $16,050
- -----------------------------------------------
- -----------------------------------------------
</TABLE>
In 1997, the Corporation's leasing subsidiary, entered into two leveraged
leases with a regional air carrier for aircraft, which have an estimated
economic life of 23 years, were leased for a term of 16.5 years. The equity
investment in the aircraft represented 22% of the purchase price; the remaining
88% was furnished by third-party financing in the form of long-term debt with
no recourse against the lessor and is secured by a first lien on the aircraft.
At the end of the lease term, the aircraft will be turned back to the lessor.
The residual value at that time is estimated to be 32% of the cost. For federal
income tax purposes, the lessor receives the benefit of tax deductions for
depreciation on the entire leased asset and for the interest on the long-term
debt. Since during the early years of the lease those deductions exceed the
lease rental income, excess deductions are available to offset other taxable
income. In the later years of the lease, rental income will exceed the
deductions which will increase taxable income. Deferred taxes are provided to
reflect this reversal of tax deductions. The net investment in leveraged leases
at December 31, 1997, are composed of the following elements:
<TABLE>
<S> <C>
Rentals receivable (net of principal and interest
on nonrecourse debt) $1,841
Estimated residual value of leased assets 5,722
Less: unearned and deferred income 2,902
- --------------------------------------------------------------
Investment in leveraged lease 4,661
Less: deferred taxes arising from leveraged leases 1,011
- --------------------------------------------------------------
Net investment in leveraged leases $3,650
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
NOTE 8. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows during the three years
ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 9,679 $ 8,400 $ 8,074
Allowance associated with
acquisitions 516 379 140
Provision charged to operations 2,185 3,234 335
Recoveries credited to allowance 1,072 736 909
Loans charged to allowance (2,827) (3,070) (1,058)
- -------------------------------------------------------------------
Balance at end of year $10,625 $ 9,679 $ 8,400
- -------------------------------------------------------------------
- -------------------------------------------------------------------
</TABLE>
NOTE 9. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------
<S> <C> <C>
Land $ 3,098 $ 2,964
Buildings 27,123 23,845
Equipment 19,803 18,331
Leasehold improvements 2,081 1,216
Construction in progress 8,169 5,372
- -------------------------------------------------------
Total cost 60,274 51,728
Less accumulated depreciation 24,870 23,803
- -------------------------------------------------------
Net premises and equipment $35,404 $27,925
- -------------------------------------------------------
- -------------------------------------------------------
</TABLE>
Construction in progress included capitalized interest of $371 and $105 as of
December 31, 1997 and 1996, respectively.
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 10. DEPOSITS
As of December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1998 $481,494
1999 101,127
2000 40,711
2001 9,943
2002 and thereafter 23,239
- ------------------------------------------
Total $656,514
- ------------------------------------------
- ------------------------------------------
</TABLE>
NOTE 11. INCOME TAXES
The components of income tax expense for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $7,227 $7,954 $7,850
Deferred 723 210 122
- ---------------------------------------------------------------
Total 7,950 8,164 7,972
- ---------------------------------------------------------------
State:
Current 1,564 1,657 1,665
Deferred 256 139 31
- ---------------------------------------------------------------
Total 1,820 1,796 1,696
- ---------------------------------------------------------------
Total income taxes $9,770 $9,960 $9,668
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
The portion of the tax provision relating to realized security gains and losses
amounted to $271, $23, and $(24) for 1997, 1996, and 1995, 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>
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax computed
at the statutory rates $11,642 $10,885 $ 9,886
Adjusted for effect of:
Nontaxable municipal interest (3,211) (2,309) (1,542)
Nondeductible expenses 436 525 365
State income taxes, net of
federal tax benefit 1,178 1,152 1,105
Benefit of income taxed at
lower rates (143) (136) (131)
Change in deferred tax asset
valuation allowance (80) 52 (25)
Other differences (52) (209) 10
- ----------------------------------------------------------------
Total income taxes $ 9,770 $ 9,960 $ 9,668
- ----------------------------------------------------------------
- ----------------------------------------------------------------
</TABLE>
The net deferred tax asset (liability) in the accompanying balance sheet
includes the following amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax liability $(7,978) $(3,688)
Deferred tax asset 3,675 2,995
Valuation allowance for deferred
tax assets (448) (528)
- -----------------------------------------------------------------
Net deferred tax asset (liability) $(4,751) $(1,221)
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The tax effects of principal temporary differences are shown in the following
table:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 2,855 $ 2,355
Property acquired in settlement of loans -- 35
Direct financing and leveraged leases 364 55
Prepaid pension costs (892) (1,375)
Premises and equipment (4,388) (2,222)
Unrealized gain (loss) on securities
available for sale (2,626) (6)
State net operating loss carryforwards 448 528
Other (64) (63)
- ------------------------------------------------------------------
Net temporary differences (4,303) (693)
Valuation allowance (448) (528)
- ------------------------------------------------------------------
Net deferred tax asset (liability) $(4,751) $(1,221)
- ------------------------------------------------------------------
- ------------------------------------------------------------------
</TABLE>
NOTE 12. SHORT-TERM BORROWINGS
Information concerning short-term borrowings as of the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------
<S> <C> <C>
Federal funds purchased:
Average amount outstanding $43,058 $27,167
Maximum amount at any month end 71,775 58,155
Weighted average interest rate:
During year 5.66% 5.46%
End of year 6.74% 6.65%
Securities sold under agreements
to repurchase:
Average amount outstanding $16,292 $18,059
Maximum amount at any month end 26,726 28,871
Weighted average interest rate:
During year 4.04% 4.37%
End of year 3.51% 3.72%
Notes payable U.S. Treasury:
Average amount outstanding $ 2,064 $ 1,378
Maximum amount at any month end 5,916 3,270
Weighted average interest rate:
During year 5.36% 5.17%
End of year 5.25% 5.15%
</TABLE>
<PAGE>
NOTE 13. OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank advances:
Due January 2, 1997, 7.15% $ -- $ 1,500
Due May 25, 1997, 6.33% $ -- 3,000
Due December 1, 1997, 5.30% $ -- 76
Due January 2, 1998, 6.37% 21,200 --
Due January 7, 1998, 5.76% 5,000 --
Due January 20, 1998, 5.16% 5,000 5,000
Due February 20, 1998, 5.80% 250 --
Due June 1, 1998, 6.02% 10,000 10,000
Due February 1, 1999, 5.23% 5,000 5,000
Due August 6, 1999, 6.03% 4,000 --
Due November 1, 1999, 5.95% 6,000 --
Due July 25, 2000, 7.64% 3,000 --
Due November 1, 2000, 6.80% 411 431
Due February 4, 2002, 7.64% 2,000 2,000
Due June 1, 2002, 7.15% 224 298
Due October 30, 2002, 6.14% 6,000 --
Due June 1, 2003, 5.30% 7 8
Due June 1, 2003, 5.40% 40 46
Due June 1, 2003, 5.55% 69 80
Due September 1, 2003, 5.40% 489 561
Due September 1, 2003, 5.30% 473 543
Due February 1, 2004, 5.50% 336 381
Due March 1, 2004, 5.95% 343 387
Due March 1, 2004, 5.85% 342 387
Due April 1, 2004, 6.45% 349 393
Due August 1, 2004, 6.05% 362 374
Due September 1, 2004, 6.60% 109 116
Due October 1, 2004, 6.55% 17 19
Due June 1, 2005, 7.35% 735 886
Due August 1, 2005, 6.90% 744 897
Due September 1, 2005, 7.05% 939 1,130
Due January 1, 2006, 6.35% 636 694
Due September 1, 2006, 7.10% 4,113 4,884
Due February 1, 2007, 120-MO. LIBOR 2,400 --
Due May 1, 2007, 120-MO. LIBOR 600 --
Due June 1, 2007, 7.25% 635 760
Due November 1, 2007, 6.70% 317 339
Due December 1, 2007, 6.65% 16 17
Due December 1, 2007, 6.75% 211 226
Due January 1, 2008, 6.20% 116 --
Due April 1, 2008, 6.30% 184 197
Due July 1, 2009, 6.25% -- 268
Due September 1, 2009, 6.25% 85 90
Due October 1, 2009, 6.25% -- 502
Due March 1, 2010, 6.25% 39 42
Due October 1, 2009, 8.20% 70 73
Due September 1, 2010, 7.25% 619 711
Due April 1, 2011, 6.40% 63 73
Due May 1, 2015, 8.00% 35 36
Due August 1, 2015, 8.20% 185 190
Due August 1, 2015, 8.45% 23 24
Fixed and amortizing advances at various rates with final
maturities ranging from July 2003 to March 2012. 1,866 988
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%. 14,417 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. 3,457 3,500
Norlease, Inc., monthly principal and interest payments of
$16 through June 30, 2003, final balloon payment due
June 30, 2003, 8.61%, collateralized by equipment. 1,196 1,285
Norlease, Inc., installment notes maturing on various
dates through 2003 at interest rates ranging from 6.29%
to 8.16%, collateralized by equipment. 3,171 3,184
Norlease, Inc., quarterly principal and interest beginning
June 30, 1997, payments through March 30, 2003, 7.87%,
collateralized by an investment in a leveraged lease. 1,756 --
Norlease, Inc., monthly principal payments beginning
January 30, 1997 through January 30, 2003, 7.94%,
collateralized by an investment in a leveraged lease. 1,722 --
Cole-Taylor Bank, quarterly principal payments of $63
through 2001, 8.50% and 8.25% at December 31, 1997 and
1996, respectively collateralized by bank stock 1,016 1,266
Fifth Third Bank, semi-annual interest payments due
December 31, 1997, 8.25% -- 1,500
Other 150 237
- -------------------------------------------------------------------------------
$112,537 $69,599
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The Federal Home Loan Bank advances are collateralized by a blanket collateral
agreement on qualified mortgage loans.
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 covenants of this loan agreement.
Aggregate maturities required on other borrowings at December 31, 1997 are due
in future years as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 46,434
1999 20,348
2000 7,494
2001 3,597
2002 14,116
Later years 20,548
- --------------------------------------------------------------------------------
$112,537
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NOTE 14. 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
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 14. CAPITAL RATIOS, CONTINUED
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,
1997, that the Corporation and its subsidiary banks met all capital adequacy
requirements to which they were subject.
As of December 31, 1997, 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:
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 14. CAPITAL RATIOS, CONTINUED
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
MINIMUM RATIOS PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES: PROVISIONS:
- ----------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
Consolidated $163,939 14.55% $90,129 8.0% $112,661 10.0%
National City Bank 41,916 11.28% 29,720 8.0% 37,150 10.0%
Tier I Capital (to Risk
Weighted Assets)
Consolidated $153,352 13.61% $45,064 4.0% $ 67,597 6.0%
National City Bank 40,244 10.83% 14,860 4.0% 22,290 6.0%
Tier I Capital (to Average
Assets)
Consolidated $153,352 9.71% $63,157 4.0% $ 78,947 5.0%
National City Bank 40,244 8.22% 19,590 4.0% 24,489 5.0%
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER
MINIMUM RATIOS PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
ACTUAL PURPOSES: PROVISION:
- -----------------------------------------------------------------------------------
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 $158,500 15.77% $80,386 8.0% $100,483 10.0%
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 $148,952 14.82% $40,193 4.0% $ 60,290 6.0%
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 $148,952 10.59% $57,937 4.0% $ 72,422 5.0%
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 15. INCENTIVE STOCK OPTION PLAN
In 1995, the Corporation's board of directors approved a fixed Incentive
Stock Option Plan (Plan) which was approved by shareholders in 1996. The Plan
currently reserves 554,523 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 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. Compensation expense of $234, $54, and $0 was recognized
for tax purposes in 1997, 1996, and 1995, respectively. Had compensation cost
for the 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>
1997 1996 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $23,583 $21,229 $18,740
Pro forma 22,566 20,469 18,619
Earnings per share:
Basic
As reported $ 1.76 $ 1.57 $ 1.36
Pro forma 1.68 1.51 1.35
Diluted
As reported $ 1.74 $ 1.56 $ 1.36
Pro forma 1.66 1.51 1.35
</TABLE>
<PAGE>
NOTE 15. INCENTIVE STOCK OPTION PLAN, CONTINUED
A summary of the status of the Plan, adjusted for all stock dividends and the
stock split in 1996, as of December 31, 1997 and 1996, and changes during the
year ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE Weighted Average Weighted Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of the year 413,103 $19.40 328,851 $17.48 39,445 $ 5.51
Options granted 118,764 40.14 97,020 25.62 289,406 19.11
Options exercised 49,678 13.81 12,768 17.28 - -
Options forfeited 6,615 25.62 - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 475,574 $25.08 413,103 $19.40 328,851 $ 17.48
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Options exercisable 309,218 $20.00 208,071 $17.65 - -
Weighted-average fair value of
options granted during the year $14.72 $7.94 $5.65
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
- --------------------------------------------------------------------
<S> <C> <C> <C>
$19.11 248,606 7.8 194,600
25.62 90,405 8.8 90,405
41.90 112,350 9.8 -
4.52 9,621 1.0 9,621
5.43 1,764 1.0 1,764
5.83 6,414 1.0 6,414
9.34 6,414 1.0 6,414
- --------------------------------------------------------------------
475,574 8.1 309,218
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Generally accepted accounting principles provide for the use of the
Black-Scholes option pricing model to estimate the fair value of options
which have no vesting restrictions. This model requires the use of
subjective assumptions, including expected stock price volatility. As a
result, management believes the Black-Scholes valuation model may not
necessarily provide the best single measure of option value.
The fair value of the stock options granted under the Plan has been estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions.
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of options granted 118,764 97,020 289,406
Risk-free interest rate 5.86% 6.42% 6.08%
Expected life, in years 10 10 10
Expected volatility 21.50% 16.41% 14.65%
Expected dividend yield 1.71% 2.10% 1.99%
Estimated fair value per option $14.72 $7.94 $5.65
</TABLE>
NOTE 16. 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>
1997 1996
- --------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term
investments $ 64,844 $ 64,844 $ 61,817 $ 61,817
Securities 356,431 356,580 351,966 354,260
Loans - net of
allowance 1,092,963 1,115,206 980,296 989,823
Accrued interest
receivable 16,105 16,105 15,258 15,258
Liabilities:
Deposits 1,226,123 1,233,555 1,159,639 1,159,587
Short-term borrowings 77,241 77,241 68,207 68,207
Other borrowings 112,537 110,498 69,599 67,053
Accrued interest
payable 6,272 6,272 5,883 5,883
</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 leases receivable of $17,807 and $12,331 in 1997 and
1996, 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
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
CONTINUED
estimated using quoted market prices for similar securities. Fair values for
nonmarketable equity securities are equal to cost as there is no readily
determinable fair value. Carrying amount of accrued interest receivable
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 accrued interest receivable
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 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 17. 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 are comprised of Southwestern Indiana, Western
Kentucky, and Southeastern Illinois. The Corporation maintains a diversified
loan portfolio which contains no concentration of credit risk from borrowers
engaged in the same or similar industries exceeding 10% of total loans.
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 materially 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, 1997 follows:
<TABLE>
<CAPTION>
Range of Rates
Variable Rate Fixed Rate Total on Fixed Rate
Commitment Commitment Commitment Commitments
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commitments
to extend credit $118,645 $59,619 $178,264 5.40%-20.00%
Standby letters
of credit - - 14,217
</TABLE>
<PAGE>
NOTE 17. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK, CONTINUED
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 18. DIVIDEND REINVESTMENT PLAN
The Corporation established a Dividend Reinvestment Plan for its shareholders
in 1989. The plan provides participating shareholders a method of investing
their cash dividends in the Corporation's common stock without payment of any
brokerage commission, service charge, or other expense. In addition,
participating shareholders may also invest up to $10,000 per calendar quarter
in the Corporation's common stock through the optional cash payment feature
of the plan.
The plan permits the issuance of previously authorized and unissued shares or
the repurchase of outstanding shares for reissuance. As of December 31,
1997, 48,925 shares of authorized but unissued common stock were reserved for
plan requirements.
NOTE 19. EMPLOYEE RETIREMENT PLANS
The Corporation maintained a noncontributory pension plan in which
substantially all full-time employees were 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.
The plan was curtailed effective December 31, 1997.
In establishing the amounts reflected in the financial statements, the
following significant assumption rates were used:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.5% 7.5%
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 enefit obligations at December 31 are:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Accumulated benefit obligation
including vested benefits of
$5,309, $3,899, and $11,350
in 1997, 1996, and 1995 $(11,350) $(6,005) $(4,420)
Effects of projected future
compensation levels N/A (2,647) (2,000)
- ----------------------------------------------------------------------------------
Projected benefit obligation
for service rendered to date (11,350) (8,652) (6,420)
Plan assets at fair value 13,550 12,400 10,856
- ----------------------------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 2,200 3,748 4,436
Unrecognized net loss (gain)
from past experience
different from that assumed
and effects of changes in
assumptions - 170 (494)
Prior service cost not yet
recognized in net periodic
pension cost - (261) (108)
Unrecognized net asset at
January 1, 1987, being
recognized over 11.11
years from that date - (259) (347)
- ----------------------------------------------------------------------------------
Prepaid pension cost
included in other assets $ 2,200 $ 3,398 $ 3,487
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
Net periodic pension cost (credit) included the following comnponents for the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits
earned during the period $ 836 $ 812 $ 618
Interest cost on projected
benefit obligation 633 590 456
Return on assets (1,911) (1,300) (2,789)
Net amortization and deferral 574 (13) 1,758
Curtailment effect 1,066 - -
- ----------------------------------------------------------------------------------
Net periodic pension
cost (credit) $ 1,198 $ 89 $ 43
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
The Corporation also maintains a savings and profit-sharing plan for
substantially all full-time 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 $1,675, $1,531, and $1,461during 1997, 1996, and 1995,
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.
<PAGE>
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS,
CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
NOTE 19. EMPLOYEE RETIREMENT PLANS, CONTINUED
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 20. UNAUDITED INTERIM FINANCIAL DATA
The following table reflects summarized quarterly data for the periods described
(unaudited):
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 31,137 $ 30,935 $29,888 $ 28,439
Interest expense 14,199 14,170 13,433 12,514
- -------------------------------------------------------------------------------
Net interest income 16,938 16,765 16,455 15,925
Provision for loan losses 658 757 266 504
Noninterest income 3,145 3,110 2,924 3,035
Noninterest expense 12,119 10,479 10,264 9,897
- -------------------------------------------------------------------------------
Income before income taxes 7,306 8,639 8,849 8,559
Provision for income taxes 1,754 2,652 2,686 2,678
- -------------------------------------------------------------------------------
Net income $ 5,552 $ 5,987 $ 6,163 $ 5,881
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Earnings per share - Basic $ 0.41 $ 0.45 $ 0.46 $ 0.44
Earnings per share - Diluted $ 0.41 $ 0.44 $ 0.46 $ 0.43
</TABLE>
<TABLE>
<CAPTION>
1996
- -------------------------------------------------------------------------------
December September June March
31 30 30 31
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 28,543 $ 27,905 $ 27,000 $ 26,707
Interest expense 12,522 12,104 11,812 11,801
- -------------------------------------------------------------------------------
Net interest income 16,021 15,801 15,188 14,906
Provision for loan losses 1,905 546 332 451
Noninterest income 3,099 2,622 2,539 2,470
Noninterest expense 9,856 10,028 9,231 9,108
- -------------------------------------------------------------------------------
Income before income taxes 7,359 7,849 8,164 7,817
Provision for income taxes 2,058 2,592 2,684 2,626
- -------------------------------------------------------------------------------
Net income $ 5,301 $ 5,257 $ 5,480 $ 5,191
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Earnings per share - Basic $ 0.39 $ 0.39 $ 0.41 $ 0.38
Earnings per share - Diluted $ 0.39 $ 0.39 $ 0.40 $ 0.38
</TABLE>
NOTE 21. SUBSEQUENT EVENTS
The Corporation's subsidiary, First Kentucky Bank, purchased the former
Mayfield, Kentucky, Branch Office of Republic Bank & Trust Company on January
8, 1998. First Kentucky assumed $65,639 in deposit liabilities in
consideration of a deposit premium of $4,601. First Kentucky also purchased
the office facility and certain loans of the Branch.
On December 1, 1997, the Corporation entered into a definitive agreement to
purchase 100% of the common stock of Vernois Bancshares, Inc. in a cash
transaction. As of December 31, 1997, Vernois Bancshares, Inc.'s
wholly-owned subsidiary, Bank of Illinois in Mt. Vernon, had assets of
$163,450 and equity of $13,040. The transaction will be accounted for as a
purchase, and the excess of cost over the fair value of net assets acquired
will be amortized over 25 years using the straight-line method. The
transaction was consummated on March 6, 1998.
On February 12, 1998, the Corporation entered into a definitive agreement to
acquire Trigg Bancorp, Inc. in a transaction to be accounted for as a pooling
of interests. The Corporation issued 736,278 shares of its common stock for
all outstanding shares of Trigg Bancorp. Trigg Bancorp is the parent of the
Trigg County Farmers Bank, Cadiz, Kentucky. As of December 31, 1997, Trigg
County Farmers Bank had assets of $96,371, deposits of $72,296, and equity of
$8,122. The transaction was consummated on August 31, 1998.
On March 9, 1998, the Corporation entered into a definitive agreement to
acquire Community First Financial, Inc., Maysville, Kentucky, in a
transaction to be accounted for as a pooling of interests. The Corporation
issued 1,441,762 shares of its common stock for all outstanding shares of
Community First Financial, Inc. Community First Financial, Inc., is the
parent of Community First Bank, N.A., Maysville, Kentucky, and Community
First Bank of Kentucky, Warsaw, Kentucky. As of December 31, 1997, the two
banks had total assets of $130,226, total deposits of $114,420, and total
equity of $12,781. The transaction was consummated on August 31, 1998.
On May 21, 1998, the Corporation entered into a definitive agreement to
acquire 1st Bancorp Vienna, Inc., in a transaction to be accounted for as a
pooling of interests. The Corporation will issue approximately 289,000
shares of its common stock for all of the outstanding shares of 1st Bancorp
Vienna. 1st Bancorp Vienna is the parent of First State Bank of Vienna,
Vienna, Illinois. As of December 31, 1997, First State Bank had total assets
of $38,670, deposits of $33,377, and equity of $4,833. The transaction,
which is subject to shareholder and regulatory approval, is anticipated to
close during the third or fourth quarter of 1998.
On May 22, 1998, the Corporation entered into a definitive agreement to
acquire Princeton Federal Bank, fsb, in a transaction to be accounted for as
a pooling of interests. The Corporation will issue approximately 201,000
shares of its common stock for all of the outstanding shares of Princeton
Federal. Princeton Federal Bank, fsb, is the parent of Princeton Federal
Bank, Princeton, Kentucky. As of September 30, 1997, Princeton Federal had
total assets of $31,711, deposits of $22,373, and equity of $4,232. The
transaction, which is subject to shareholder and regulatory approval, is
anticipated to close during the third or fourth quarter of 1998.
On June 30, 1998, the Corporation entered into a definitive agreement to
acquire Commonwealth Commercial Corporation, in a transaction to be accounted
for as a pooling of interests. The Corporation will issue approximately
209,000 shares of its common stock for all of the outstanding shares of
Commonwealth Commercial Corporation. Commonwealth Commercial Corporation is
the parent of Bank of Crittenden, Crittenden, Kentucky. As of December 31,
1997, Bank of Crittenden had total assets of $25,286, deposits of $21,437,
and equity of $2,528. The transaction, which is subject to shareholder and
regulatory approval, is anticipated to close during the fourth quarter of
1998.
On July 9, 1998, the Corporation entered into a definitive agreement to
acquire Downstate Banking Co., in a transaction to be accounted for as a
pooling of interests. The Corporation will issue approximately 101,250
shares of its common stock for all of the outstanding shares of Downstate
Banking Co. Downstate Banking Co. is the parent of the Downstate National
Bank, Brookport, Illinois. As of December 31, 1997, the Downstate National
Bank had total assets of $21,983, deposits of $19,773, and equity of $2,049.
The transaction, which is subject to shareholder and regulatory approval, is
anticipated to close during the fourth quarter of 1998.
On July 14, 1998, the Corporation entered into a definitive agreement to
acquire Progressive Bancshares, Inc., in a
<PAGE>
NOTE 21. SUBSEQUENT EVENTS, CONTINUED
transaction to be accounted for as a pooling of interests. The Corporation
will issue approximately 975,700 shares of its common stock for all of the
outstanding shares of Progressive Bancshares, Inc. Progressive Bancshares,
Inc., is the parent of The Progressive Bank, National Association, which has
four offices in Lexington, Lawrenceburg and Owingsville, Kentucky. As of
December 31, 1997, the Progressive Bank had total assets of $144,203,
deposits of $123,296, and equity of $11,104. The transaction, which is
subject to shareholder and regulatory approval, is anticipated to close
during the fourth quarter of 1998.
On April 21, 1998, the Corporation entered into a definitive agreement to
acquire Hoosier Hills Financial Corporation ("HHFC"), the holding company for
The Ripley County Bank ("RCB"), an Indiana banking corporation, which has
offices in Milan, Osgood, and Versailles, Indiana. The agreement relates to
the acquisition of HHFC in a merger transaction in which approximately
730,000 shares of the Corporation's common stock would be issued. As of
December 31, 1997, RCB had total assets of $109 million, net loans of $86.4
million, total deposits of $85.7 million and total shareholders' equity of
$7.0 million. The acquisition is subject to the approval of the shareholders
of HHFC and the Federal Reserve. The acquisition is expected to qualify for
the pooling of interests method of accounting. The parties expect to close
the merger in the fourth quarter of 1998.
NOTE 22. FINANCIAL INFORMATION OF PARENT COMPANY
The principal source of income for National City Bancshares, Inc. 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.
Condensed financial data for National City Bancshares, Inc. (parent company
only) follows:
CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 4,947 $ 13,260
Investment in subsidiaries 172,503 142,522
Securities available for sale 151 281
Nonmarketable equity securities 388 548
Note receivable 243 300
Property and equipment 1,021 955
Deferred income taxes - 37
Other assets 3,923 2,200
- --------------------------------------------------------------------------
TOTAL ASSETS $ 183,176 $ 160,103
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
LIABILITIES
Other borrowings $ 136 $ 215
Dividends payable 1,931 1,698
Deferred income taxes 859 -
Other liabilities 819 673
- --------------------------------------------------------------------------
Total liabilities 3,745 2,586
- --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Common stock 13,454 12,957
Capital surplus 83,295 61,116
Retained earnings 78,550 83,434
Unrealized gain (loss) on securities
available for sale 4,132 10
Total shareholders' equity 179,431 157,517
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 183,176 $ 160,103
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $20,560 $32,900 $12,496
Other income 5,380 3,456 2,662
- -------------------------------------------------------------------------------
Total income 25,940 36,356 15,158
- -------------------------------------------------------------------------------
Interest expense 10 6 -
Other expenses 6,776 3,710 3,258
- -------------------------------------------------------------------------------
Total expenses 6,786 3,716 3,258
- -------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries 19,154 32,640 11,900
Income tax benefit (503) (20) (274)
- -------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 19,657 32,660 12,174
Equity in undistributed earnings
of subsidiaries 3,926 (11,431) 6,566
- -------------------------------------------------------------------------------
Net income $23,583 $21,229 $18,740
- -------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $23,583 $21,229 $18,740
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 517 482 451
Undistributed earnings of
subsidiaries (3,926) 11,431 (6,566)
Securities losses (gains) (479) 1 (18)
Increase (decrease) in deferred taxes 847 (38) (64)
Changes in assets and liabilities:
(Increase) decrease in other assets (2,045) (113) (207)
Increase (decrease) in other liabilities 146 (3) 191
- ------------------------------------------------------------------------------------------------------
Net cash flows provided by
operating activities 18,643 32,989 12,527
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from maturities of
securities available for sale - 434 250
Proceeds from sales of securities
available for sale 923 - 118
Proceeds from sales of
nonmarketable equity securities 804 - -
Purchase of securities
available for sale (650) - (340)
Purchase of nonmarketable
equity securities (185) (11) (537)
(Disbursements) and repayments
on notes receivable 57 381 (381)
Capital expenditures (459) (555) (446)
Proceeds from sale of premises
and equipment 17 - -
Investment in subsidiaries (6,947) (13,817) (1,002)
(Increase) decrease in securities
purchased under agreements to resell - 10,000 (6,900)
- ------------------------------------------------------------------------------------------------------
Net cash flows provided by
(used in) investing activities (6,440) (3,568) (9,238)
- ------------------------------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends paid (6,509) (5,589) (3,957)
Proceeds from other borrowings - 244 -
Payments on other borrowings (79) (29) -
Repurchase of common stock (16,198) (12,890) (863)
Sale of common stock 1,705 1,653 1,036
Proceeds from exercise of stock options 565 213
- ------------------------------------------------------------------------------------------------------
Net cash flows (used in)
financing activities (20,516) (16,398) (3,784)
- ------------------------------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents (8,313) 13,023 (495)
Cash and cash equivalents
at beginning of year 13,260 237 732
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 4,947 $13,260 $ 237
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
ACTIVITIES
Change in unrealized gain (loss) on
securities available for sale, net $ 4,122 $ (687) $ 3,470
Common stock issued in
acquisition of subsidiary 15,949 - 2,442
</TABLE>
<PAGE>
EXHIBIT 99.5
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 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 August 31, 1998, the Corporation
had eighteen wholly-owned
Subsidiary
<TABLE>
<CAPTION>
Number of Year Date of Affiliation 12/31/97 (millions)
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
ILLINOIS ONE BANK, N.A. 3 1934 May 29, 1998 88 10
SHAWNEETOWN, ELIZABETHTOWN, AND GOLCONDA, IL
TRIGG COUNTY FARMERS BANK 3 1890 August 31, 1998 96 9
CADIZ, KY
COMMUNITY FIRST BANK, N.A. 6 1847 August 31, 1998 74 7
MAYSVILLE, MAYS LICK, AND MT. OLIVET, KY,
AND RIPLEY AND ABERDEEN, OH 2 1922 August 31, 1998 55 5
COMMUNITY FIRST BANK OF KENTUCKY
WARSAW AND DRY RIDGE, KY 1 1994 November 1, 1994 15 1
NCBE LEASING CORP.
EVANSVILLE, IN 1 1996 May 22, 1996 16 2
TWENTY-ONE SOUTHEAST THIRD CORPORATION
EVANSVILLE, IN 1 1980 August 31, 1995 - -
UNIFED, INC.
VINCENNES, IN
</TABLE>
<PAGE>
subsidiaries, including fifteen 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 on the previous page. 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 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, Kentucky, and
Southeastern Illinois. These 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.
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 through August 31, 1998, the Corporation acquired
assets of $594,507 (measured at the time of each acquisition) in 9
transactions accounted for as poolings of interests.
Since the beginning of 1995, the Corporation has also acquired $172,581
(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 $97,335 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.
Through August 31, 1998, the Corporation has acquired Bank of Illinois in
Mount 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 Mount 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.
The Corporation acquired Illinois One Bancorp, Inc. on May 29, 1998, and
Trigg Bancorp, Inc., and Community First Financial, Inc. on August 31, 1998.
Together, the acquirees have assets of approximately $315,000. The
Corporation accounted for these transactions as poolings of interests.
Footnote 2 to the financial statements provides additional information about
these acquisitions. Footnote 21 to the financial statements provides
additional information about 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 $1.76, representing a 12% 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
$2.24 to $13.69 and resulted in a ratio of average equity capital to average
assets of 10.98%.
Average earning assets increased $124,521, or 9.4%, and $102,497, or 8.4%, in
l997 and 1996, respectively. Growth in average assets in 1997 was $142,365, or
10.1%, compared to $111,026, or 8.6%, in 1996. During 1997, average interest
bearing deposits in banks decreased $1,267, or 24.4%, and average federal funds
sold decreased $1,159, or 7.7%. Average securities increased $27,492, or 8.3%,
with the largest
<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 $65,392, or 62.9%.
Taxable municipals increased $607, or 20.2%. U.S. Government and agencies
decreased $39,655, or 19.7%, and all other types of securities decreased
$6,785, or 22.7%. The average market value adjustment on securities
available for sale increased to an unrealized gain of $1,496 from an
unrealized loss of $6,437 in 1996. Average loans increased $99,455, or
10.3%. All types of loans increased during the year. Average commercial
loans increased $37,168, or 11.3%; average consumer loans increased $3,519,
or 2.1%; and average mortgage loans increased $55,184, or 12.0%. All other
types of loans increased $3,584, or 30.4%. 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 $67,909, or 11.3%, in 1997. Average balances of money market accounts
declined $5. Savings and interest bearing checking accounts increased
$1,788, or 0.6%. Average federal funds purchased and securities sold under
agreements to repurchase increased $14,475, or 32.2%. Average other
borrowings increased $36,919, or 66.8%, principally due to increased use of
Federal Home Bank advance lines. Average noninterest-bearing deposits
increased $9,750, or 6.8%.
SECURITIES PORTFOLIO
Securities comprised 24.9% of the 1997 average earning assets compared to
25.2% and 26.4% 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
<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 $ 23,129 $ - $ 16,020 6,894 $ 42,666
U.S. Government agencies 48,262 29,701 61,718 7,539 80,606
Taxable municipals 3,727 2,814 - 3,120 -
Tax-exempt municipals 190,444 125,554 14,235 67,652 12,299
Corporate securities 9,212 11,235 5,383 17,175 7,334
Mortgage-backed securities 66,568 8,272 70,246 6,635 72,947
- -----------------------------------------------------------------------------------------------------
Total debt securities 341,342 177,576 167,602 109,015 215,852
- -----------------------------------------------------------------------------------------------------
Equity securities 1,384 - 1,431 - 2,894
- -----------------------------------------------------------------------------------------------------
Total securities $342,726 $177,576 $169,033 $109,015 $218,746
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITY ANALYSIS
DECEMBER 31, 1997
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 $14,075 6.06% $ 8,446 6.40% $ 608 5.96% $ - - $ 23,129 6.18%
U.S. Government agencies 22,450 5.80% 17,301 6.19% 7,320 7.00% 1,191 6.95% 48,262 6.15%
Taxable municipals 970 5.60% 2,352 6.87% 405 7.80% - - 3,727 6.64%
Tax-exempt municipals 12,045 7.09% 36,641 7.53% 47,907 8.14% 93,851 8.39% 190,444 8.08%
Corporate securities 5,688 7.42% 2,967 6.10% 557 6.14% - - 9,212 6.99%
- -----------------------------------------------------------------------------------------------------------------------------
Total maturing securities $55,228 6.31% $67,707 6.96% $56,797 7.95% $95,042 8.37% 274,774 7.20%
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Mortgage-backed securities 66,568 6.32%
Equity securities 1,384 6.66%
---------------
Total securities $342,726 7.03%
---------------
---------------
</TABLE>
<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
$7,406 and unrealized losses of $679 at December 31, 1997. At December 31,
1997, available-for-sale securities included $66,568 in mortgage-backed
securities, or 19.4% 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 20.6% commercial loans, 57.5% real estate
loans (primarily residential), and 14.8% 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 $24,135, of which approximately 30%
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 $ 645,580 $ 564,858 $516,647 $471,339 $423,789
Agricultural loans 43,748 43,241 41,917 40,117 36,603
Commercial and industrial loans 230,814 206,679 192,349 145,128 122,364
Economic development loans and
other obligations of state and
political subdivisions 15,492 11,946 10,523 13,733 10,907
Consumer loans 166,818 161,782 151,539 123,468 102,428
Direct lease financing 13,146 12,336 6,975 527 529
Leveraged leases 4,661 - - - -
All other loans 1,959 2,245 1,241 951 2,304
- ---------------------------------------------------------------------------------------------------------
Total loans - gross 1,122,218 1,003,087 921,191 795,263 698,924
Less: unearned income 823 781 1,081 895 2,964
- ---------------------------------------------------------------------------------------------------------
Total loans - net of unearned income 1,121,395 1,002,306 920,110 794,368 695,960
Less: allowance for loan losses 10,625 9,679 8,400 7,864 7,354
- ---------------------------------------------------------------------------------------------------------
Total loans - net $1,110,770 $ 992,627 $911,710 $786,504 $688,606
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
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
Rate sensitivities: 1 Year 5 Years 5 Years Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed rate loans $ 49,807 $47,179 $23,118 $120,104
Variable rate loans 162,107 5,394 1,001 168,502
- -------------------------------------------------------------------------------------------------------------
Subtotal $211,914 $52,573 $24,119 288,606
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Percent of subtotal 73.43% 18.22% 8.35%
Nonaccrual loans 1,448
------------
Total loans net of unearned income $290,054
------------
------------
</TABLE>
Real estate loans increased $80,722, of which approximately 38% 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, Kentucky, and Northeastern 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 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 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 0.7% and
0.5% of total loans at the end of 1997 and 1996, respectively. Of the loans
in these categories, $2,102, or 28.5%, were secured by real estate at the end
of 1997, compared to $1,977, or 37.4%, at the end of 1996. Additional
interest income that would have been recorded, if nonaccrual and
UNDERPERFORMING ASSETS AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Underperforming loans:
Nonaccrual $5,947 $3,517 $2,284 $2,516 $3,793
Restructured 146 188 220 302 222
90 days past due 1,281 1,584 1,358 1,232 708
- --------------------------------------------------------------------------------------------------------
Total underperforming loans 7,374 5,289 3,862 4,050 4,723
Nonaccrual municipal securities 61 31 - - 81
Other real estate owned 180 215 597 686 1,167
- --------------------------------------------------------------------------------------------------------
Total $7,615 $5,535 $4,459 $4,736 $5,971
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
restructured loans had been current in accordance with their original terms,
was $390, $261, and $172 in 1997, 1996, and 1995, respectively. The interest
recognized on nonaccrual loans was approximately $83, $44, and $84 in 1997,
1996, and 1995, respectively.
In addition to those loans classified as underperforming, management was
monitoring loans of approximately $41,360 and $49,094 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 $243, or 7.9%,
SUMMARY OF LOAN LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $ 9,679 $ 8,400 $ 8,074 $ 7,564 $ 7,523
Allowance associated with purchase acquisitions 516 379 140 259 347
Loans charged off:
Commercial 714 1,051 439 317 1,559
Real estate mortgage 492 587 102 303 273
Consumer 1,621 1,365 517 389 458
Direct lease financing - 67 - - -
- ----------------------------------------------------------------------------------------------------------------------
Total 2,827 3,070 1,058 1,009 2,290
- ----------------------------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 323 111 441 297 481
Real estate mortgage 384 288 238 227 209
Consumer 365 332 230 500 179
Direct lease financing - 5 - - -
- ----------------------------------------------------------------------------------------------------------------------
Total 1,072 736 909 1,024 869
- ----------------------------------------------------------------------------------------------------------------------
Net charge-offs 1,755 2,334 149 (15) 1,421
Provision for loan losses 2,185 3,234 335 236 1,115
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 10,625 $ 9,679 $ 8,400 $ 8,074 $ 7,564
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Total loans at year end $1,110,770 $992,627 $911,710 $786,504 $688,606
Average loans 1,066,113 966,658 862,627 753,225 683,891
As a percent of year-end loans:
Net charge-offs 0.16% 0.24% 0.02% 0.00% 0.21%
Provision for loan losses 0.20 0.33 0.04 0.03 0.15
Year-end allowance balance 0.96 0.98 0.92 1.03 1.10
As a percent of average loans:
Net charge-offs 0.16% 0.24% 0.02% 0.00% 0.21%
Provision for loan losses 0.20 0.33 0.04 0.03 0.15
Year-end allowance balance 1.00 1.00 0.97 1.07 1.11
Allowance for loan losses as a percent
of underperforming loans 144.05% 183.00% 217.39% 199.36% 155.71%
</TABLE>
<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 $336, or 45.7%, higher than in 1996. The provision for
loan losses for 1997 was decreased based on the Corporation's periodic
analysis of the subsidiary bank's 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
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Type 1997 1996 1995 1994 1993 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------- --------------------------------------------------
Commercial $ 3,558 $3,058 $3,115 $2,879 $2,384 27% 28% 27% 25% 24%
Real estate mortgage 2,631 2,692 2,520 2,369 2,259 58% 56% 56% 59% 61%
Consumer 2,270 1,795 1,319 915 907 15% 16% 17% 16% 15%
- -------------------------------------------------------------------------- --------------------------------------------------
Allocated 8,459 7,545 6,954 6,163 5,550 100% 100% 100% 100% 100%
Unallocated 2,166 2,134 1,446 1,911 2,014 --------------------------------------------------
- -------------------------------------------------------------------------- --------------------------------------------------
Total $10,625 $9,679 $8,400 $8,074 $7,564
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</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 $69,692, or 7.0%, during 1997, compared to $37,754, or
4.0%, in 1996. Of the increase in 1997, $43,549 was due to purchase
acquisitions. Average time deposits of $100,000 or more increased $24,078,
or 16.0%, compared to $30,260, or 25.2%, 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 $ 152,346 - $ 142,596 3.49% $ 131,494 3.70%
Money market accounts 90,641 3.56% 90,646 2.06% 84,929 2.43%
Interest-bearing demand 189,579 1.90% 188,582 2.69% 193,804 2.84%
Savings 109,974 2.56% 109,183 5.24% 114,293 5.58%
Time deposits of $100,000 or more 174,329 5.11% 150,251 5.33% 119,991 5.19%
Other time deposits 495,170 5.43% 451,339 439,230
- ---------------------------------------------------------------------------------------------------------- -----
Total $1,212,039 $1,132,597 $1,083,741
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</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 $ 72,561 $ 69,105 $ 42,068
Over 3 to 6 months 35,496 34,584 49,157
Over 6 to 12 months 26,662 26,601 19,594
Over 12 months 25,471 22,556 9,513
- ----------------------------------------------------------- ----------
Total $160,190 $152,846 $120,332
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
At the end of 1997, shareholders' equity totaled $179,431, an increase of
$21,914, or 13.9%, from 1996. The average equity to average asset ratio was
10.8% and 11.1% 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
33.49%, compared to 33.42% in 1996.
<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 four floors of the facility, at a
cost of approximately $11,500, with the other five 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 9.71% and 10.59%; Tier I capital to risk-weighted
assets was 13.61% and 14.82%; and total capital to risk-weighted assets was
14.55% and 15.77% 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 $9,034, or 13.2%, 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 $8,209, or 58.5%, and decreased by
$7,066, or 33.4%, in 1996.
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 16,325 12,311 18,329
Notes payable U.S. Treasury 5,916 1,721 2,769
- ---------------------------------------------------------------------
Total $77,241 $68,207 $55,598
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Securities
Sold Under Notes
Federal Agreements Payable
Funds to U.S.
Purchased Repurchase Treasury
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
AVERAGE AMOUNT OUTSTANDING $43,058 $16,292 $2,064
MAXIMUM AMOUNT AT ANY
MONTH END 71,775 26,726 5,916
WEIGHTED AVERAGE INTEREST RATE:
DURING YEAR 5.66% 4.04% 5.36%
END OF YEAR 6.74% 3.51% 5.25%
1996
Average amount outstanding $27,167 $18,059 $1,378
Maximum amount at any
month end 58,155 28,871 3,270
Weighted average interest rate:
During year 5.46% 4.37% 5.17%
End of year 6.65% 3.72% 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 5.90% 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, CONTINUED
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
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 $13,939 and $6,749,
interest-bearing deposits in banks were $3,269 and $3,151, and U.S.
Government and agency securities available for sale were $71,391 and $77,738.
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
- -----------------------------------------------------------------------
(Basis Points)
<S> <C> <C> <C>
+200 $208,518 $(7,784) (3.60)%
- 216,302 - -
-200 212,010 4,292 1.98
</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
<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 Supplemental Consolidated 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 $23,583, reflecting a $2,354, or 11.9, increase over
1996. Net income for 1996 increased $2,489, or 13.3%, over 1995. Basic
earnings per share in 1997 were $1.76, compared to $1.57 in 1996 and $1.36 in
1995. Increases in both rates and volumes of earning assets resulted in
growth in net interest income of $4,167, or 6.7%, in 1997 and $5,498, or
9.7%, in 1996. Noninterest income increased $1,484, or 13.8%, in 1997 and
$1,769, or 19.7%, in 1996. Noninterest expense increased $4,536, or 11.9%,
in 1997 and $1,587, or 4.3%, in 1996. The provision for loan losses
decreased $1,049 in 1997 due to lower net charge-offs, and increased $2,899
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 10.3% during 1997
compared to an increase of 12.1% during 1996. Approximately 42% of the
growth in average loan balances was attributable to acquisitions accounted
for as purchases. Loan income increased 10.4% in 1997 and 14.6% in 1996,
principally due to increased loan volumes. The average yield on loans was
9.24% in 1997 and 9.23% in 1996.
Average securities before market value adjustments increased 5.8% in 1997 and
4.9% in 1996. Approximately 38% of the increase in average securities
balances in 1997 was due to two purchase acquisitions. Securities income
increased 12.4% and 8.4% in 1997 and 1996, respectively. The yield on
securities increased from 6.76% in 1996 to 7.18% in 1997. During 1997, 67.0%
of the increase in interest income on securities was due to volume increases
and 33.0% was attributable to rate increases, while in 1996, 55.8% of the
increase was due to rate and 44.2% was due to volume. Average earning assets
increased $124,521, or 9.4%, in 1997 and $102,497, or 8.4%, in 1996.
Purchase acquisitions accounted for 40.0% of the increase in 1997 and 15.9%
in 1996. The average yield on total earning assets increased from 8.58% in
1996 to 8.68% in 1997, due principally to increased in yields on securities
in 1997. Increase in volumes of earning assets accounted for 90.9% and 78.6%
of the growth in interest income in 1997 and 1996, respectively.
Average total interest-bearing deposits increased 7.0% during 1997 and 3.9%
during 1996. Internal growth of average deposits accounted for 39.9% of the
increase, while 60.1% was due to purchase acquisitions. The average cost of
interest bearing deposits increased from 4.16% to 4.24% in 1996 and increased
from 4.24% to 4.29% in 1997. Interest expense on deposits increased $3,438,
or 8.2%, in 1997 and $2,406, or 6.1%, in 1996. In 1997, 86.9% of the
increase in interest expense on deposits was due to volume increases. In
1996, 66.5% of the increase in interest expense was due to volume increases
and 33.5% due to rate increases. Interest expense on federal
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 $ 9,194 $ 101 $ 9,295 $9,606 $1,752 $11,358
Securities 1,900 935 2,835 787 994 1,781
Other short-term investments (132) 60 (72) (665) (95) (760)
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 10,962 1,096 12,058 9,728 2,651 12,379
- ---------------------------------------------------------------------------------------------------------------------
Interest expense increase (decrease)
Deposits 2,987 451 3,438 1,601 805 2,406
Borrowings 3,015 (376) 2,639 3,277 300 3,577
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 6,002 75 6,077 4,878 1,105 5,983
- ---------------------------------------------------------------------------------------------------------------------
Net interest income increase (decrease) $ 4,960 $1,021 $5,981 $4,850 $1,546 $6,396
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<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
funds purchased and other borrowings increased $2,639 in 1997 and $3,577 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 $5,981 and $6,396,
respectively. Increases in volumes accounted for 82.9% of the increase in
1997 and 75.8% in 1996. The net interest income of purchase acquisitions
accounted for $2,137, or 39.0%, of the increase in net interest income in
1997 and $693, or 11.8%, in 1996.
NONINTEREST INCOME
Noninterest income increased $1,484, or 13.8%, during 1997 and $1,769, or
19.7%, during 1996. Service charges on deposit accounts, the largest item in
this category, increased $333, or 6.5%, during 1997 and $972, or 23.3%,
during 1996. Other service charges and fees increased $270, or 11.2%, in
1997 and $593, or 32.7%, in 1996. Trust fees increased $138, or 7.6%, during
1997 and $219, or 13.7%, 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 $69 in 1996 to
$798 in 1997. Other types of noninterest income increased $14, or 1.1%,
during 1997 and decreased $156, or 10.8%, during 1996.
NONINTEREST EXPENSE
Noninterest expense increased $4,536, or 11.9%, during 1997 and $1,587, or
4.3%, in 1996. Salaries and other employee benefits increased $2,900, or
13.7%, during 1997 and $719, or 3.5%, in 1996. Occupancy expense of bank
premises increased $2 during 1997 and decreased $11, or 0.3%, during 1996.
Furniture and equipment expense increased $166, or 6.2%, during 1997 and
$272, or 11.3%, in 1996. The FDIC assessment decreased $593, or 66.9%,
during 1997 and $587, or 39.8%, 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 $2,061, or 19.4%, during 1997 and $1,172, or 12.4%, 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 organization has a effective corporate year 2000
compliance program in place and that additional expenditures required to
bring its systems into compliance will not have a materially adverse effect
on the Corporation's operations, cash flow, or financial condition.
Management expects total additional out-of-pocket expenditures to be
approximately $500,000. This includes fees to outside consulting firms,
costs to upgrade equipment specifically for the purpose of year 2000
compliance, and certain administrative expenditures. 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.
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
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 $ 3,915 $ 214 5.47% $ 5,182 $ 300 5.79% $ 10,052 $ 551 5.48%
Short-term money market investments - - - - - - 1,317 87 6.61%
Federal funds sold 13,866 751 5.42% 15,025 737 4.91% 21,793 1,159 5.32%
Securities:
U.S. Government and agency 162,021 10,380 6.41% 201,676 12,253 6.08% 227,159 13,641 6.01%
Taxable municipals 3,611 235 6.51% 3,004 203 6.76% 2,806 182 6.49%
Tax-exempt municipals 169,387 13,687 7.77% 103,995 8,570 8.24% 61,954 5,467 8.82%
Other 23,144 1,426 6.16% 29,929 1,867 6.24% 30,774 1,822 5.92%
- -----------------------------------------------------------------------------------------------------------------------------------
Securities before market value
adjustment 358,163 25,728 7.18% 338,604 22,893 6.76% 322,693 21,112 6.54%
Market value adjustment on
securities available for sale 1,496 (6,437) (1,947)
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities 359,659 332,167 320,746
Loans:
Commercial 366,487 35,452 9.67% 329,319 32,209 9.78% 286,107 27,285 9.54%
Consumer 169,908 17,612 10.37% 166,389 16,619 9.99% 136,912 13,605 9.94%
Real estate mortgage 514,363 44,035 8.56% 459,179 39,328 8.56% 428,701 35,989 8.39%
Economic development and
other municipal loans 15,355 1,459 9.50% 11,771 1,107 9.40% 10,907 1,026 9.41%
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans 1,066,113 98,558 9.24% 966,658 89,263 9.23% 862,627 77,905 9.03%
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,443,553 $125,251 8.68% 1,319,032 $113,193 8.58% 1,216,535 $100,814 8.29%
-------- -------- --------
NON-EARNING ASSETS:
Allowance for loan losses (10,229) (8,834) (8,125)
Cash and due from banks 42,686 43,110 41,408
Premises and equipment 32,770 23,563 20,005
Other assets 40,303 29,847 25,872
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,549,083 $1,406,718 $1,295,695
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 299,553 $ 6,413 2.14% $ 297,765 $ 6,830 2.29% $ 308,097 $ 7,790 2.53%
Money market accounts 90,641 3,223 3.56% 90,646 3,180 3.51% 84,929 3,084 3.63%
Certificates of deposit and other time 669,499 35,782 5.35% 601,590 31,970 5.31% 559,221 28,700 5.13%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,059,693 45,418 4.29% 990,001 41,980 4.24% 952,247 39,574 4.16%
Federal funds purchased and securities
sold under agreements to repurchase 59,493 3,370 5.66% 45,018 2,459 5.46% 23,023 1,671 7.26%
Other borrowings 92,133 5,528 6.00% 55,214 3,800 6.88% 24,724 1,011 4.09%
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,211,319 $ 54,316 4.48% 1,090,233 $ 48,239 4.42% 999,994 $ 42,256 4.23%
--------- -------- --------
NONINTEREST-BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Noninterest-bearing demand deposits 152,346 142,596 131,494
Other liabilities 18,342 17,232 14,828
Shareholders' equity 167,076 156,657 149,379
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,549,083 $1,406,718 $1,295,695
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Interest income/earning assets $125,251 8.68% $113,193 8.58% $100,814 8.29%
Interest expense/earning assets 54,316 4.48% 48,239 4.42% 42,256 4.23%
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income/earning assets $ 70,935 4.19% $ 64,954 4.16% $ 58,558 4.06%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
<PAGE>
EXHIBIT 99.6
INDEPENDENT AUDITORS' REPORT
Board of Directors
Trigg Bancorp, Inc.
Cadiz, Kentucky
We have audited the accompanying consolidated balance sheet of Trigg Bancorp,
Inc. and Subsidiary as of September 30, 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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 audit provides 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 Trigg
Bancorp, Inc. at September 30, 1995, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
/s/Crowe, Chizek and Company LLP
Lexington, Kentucky
September 3, 1998
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 2,832,714
Federal funds sold 2,250,000
------------
Total cash and cash equivalents $ 5,082,714
Investment securities:
Held to maturity (fair value of $8,843,963) 8,800,390
Available for sale 13,379,532
FHLB stock 812,400
Loans, net 53,360,387
Bank premises and equipment, net 567,942
Interest receivable 1,073,315
Deferred income taxes 2,688
Other assets 54,200
------------
TOTAL ASSETS $83,133,568
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 9,255,532
NOW and money market accounts 17,328,568
Savings 6,606,662
Time, $100,000 and over 4,825,438
Other time 28,086,186
------------
Total deposits $66,102,386
Advances from Federal Home Loan Bank 9,320,669
Interest payable 328,708
Income taxes payable 6,556
Other liabilities 388,012
------------
Total liabilities $76,146,331
STOCKHOLDERS' EQUITY:
Common stock, 25,000 shares authorized;
10,081 shares issued and outstanding $ 2,523,115
Retained earnings 4,367,097
Net unrealized gain on securities available
for sale, net of tax expense of $49,983 97,025
------------
Total stockholders' equity $ 6,987,237
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $83,133,568
</TABLE>
See notes to consolidated financial statements.
Page 2
<PAGE>
<TABLE>
<CAPTION>
TRIGG BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1995
<S> <C>
INTEREST INCOME:
Loans, including fees $5,001,052
Investment securities -
U. S. Treasury securities 498,822
Obligations of U.S. government agencies 780,803
Obligations of states and political subdivisions 66,740
Other securities 68,949
Federal funds sold 80,828
----------
$6,497,194
INTEREST EXPENSE:
Deposits $2,462,802
Borrowed funds 428,929
----------
$2,891,731
Net interest income $3,605,463
Provision for loan losses 15,000
----------
Net interest income after provision
for loan losses $3,590,463
NON-INTEREST INCOME:
Service charges 239,295
Trust department income 95,848
Investment securities gains (losses), net (97,370)
Gain on sale of real estate acquired through
foreclosure 11,979
Other 273,744
----------
$523,496
NON-INTEREST EXPENSES:
Salaries $1,111,678
Employee benefits 318,943
Occupancy 133,534
Equipment 167,172
FDIC assessment and other insurance 102,848
Other 665,980
----------
$2,500,155
Income before income taxes $1,613,804
Provision for income taxes 509,319
----------
NET INCOME $1,104,485
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss)
on Securities
Common Retained Available
Stock Earnings for Sale Total
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Balance, October 1, 1994 $2,523,115 $3,413,827 $(57,305) $5,879,637
Net income 0 1,104,485 0 1,104,485
Dividends paid 0 (151,215) 0 (151,215)
Net change in unrealized gain (loss)
on securities available for sale 0 0 154,330 154,330
---------- ---------- ------------- ----------
BALANCES, SEPTEMBER 30, 1995 $2,523,115 $4,367,097 $97,025 $6,987,237
</TABLE>
See notes to consolidated financial statements.
Page 4
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,104,485
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 130,410
Provision for loan losses 15,000
Net premium amortization or discount
accretion on investment securities 16,225
Deferred income taxes 93,020
Loss on sale of securities available for sale 97,370
FHLB stock dividends (46,800)
Changes in:
Interest receivable (183,718)
Other assets 69,225
Interest payable 85,917
Income taxes payable 119,616
Other liabilities 122,465
------------
Net cash provided by operating
activities $1,623,215
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale $(13,167,525)
Proceeds from sales of securities available
for sale 7,866,337
Proceeds from maturities of securities held to maturity 3,524,908
Purchase of FHLB stock (137,800)
Net change in loans (4,522,166)
Purchases of premises and equipment (100,121)
------------
Net cash used in investing activities $ (6,536,367)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits $ 3,305,930
Payments on note payable (500,000)
Dividends paid (151,215)
Net change in Federal Home Loan Bank advances 3,458,017
------------
Net cash provided by financing activities $6,112,732
Net increase in cash and cash equivalents $ 1,199,580
Cash and cash equivalents at beginning of year 3,883,134
------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 5,082,714
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for -
Interest expense $ 2,805,814
Income taxes 394,528
</TABLE>
See notes to consolidated financial statements.
Page 5
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated balance sheet includes
the accounts of Trigg Bancorp, Inc. (the Company) and its wholly-owned
subsidiary, Trigg County Farmers Bank (the Bank). All material intercompany
accounts have been eliminated in consolidation.
B. Cash and Cash Equivalents - Cash and cash equivalents include cash
on hand, amounts due from banks, and federal funds sold. Generally, federal
funds are sold for one-day periods.
C. Investment Securities - The Bank classifies its investment
securities portfolio into three categories: trading securities, securities
available for sale and securities held to maturity. Fair value adjustments are
made to the securities based on their classification with the exception of the
held to maturity category. The Bank has no investments classified as trading
securities.
Investment securities available for sale are carried at fair value.
Adjustments from amortized cost to fair value are recorded in stockholders'
equity, net of related income tax, under net unrealized gain (loss) on
securities available for sale. The adjustment is computed on the difference
between fair value and amortized cost, adjusted for amortization of premiums and
accretion of discounts which are recorded as adjustments to interest income on a
constant yield method.
Investment securities held to maturity are stated at cost, adjusted
for amortization of premiums and accretion of discounts which are recorded as
adjustments to interest income on a constant yield method.
Gains or losses on dispositions are determined using the specific
identification method.
D. Loans - Loans are stated at the amount of unpaid principal,
reduced by unearned interest and an allowance for loan losses. Unearned
interest is recognized as income using a method which approximates the interest
method. Interest income on other loans is recognized on the accrual basis
except for those loans in a nonaccrual income status. Loans are placed in a
nonaccrual income status when management believes, after consideration of
economic and business conditions and collection efforts, that the borrowers'
financial condition is such that collection of interest is doubtful.
Page 6
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for loan losses is established through a provision
for loan losses charged to expense. The allowance is an amount that management
believes will be adequate to absorb possible losses on existing loans that may
become uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions that may affect the borrowers' ability to pay. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely.
In May 1993, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 114, "Accounting By Creditors For
Impairment of a Loan" which requires that allowances for loan losses on impaired
loans be determined using the present value of estimated future cash flows of
the loan, discounted at the loan's effective interest rate or the fair value of
the underlying collateral. A loan is considered to be impaired when it is
probable that all principal and interest amounts will not be collected according
to the loan contract. The Company adopted the Statement, as required, on January
1, 1995. The adoption did not have a material effect on the Company's financial
position or results of operations.
E. Bank Premises and Equipment - Bank premises and equipment are
stated at cost less accumulated depreciation. Depreciation is recorded
principally by the straight-line method over the estimated useful lives of the
premises and equipment.
F. Income Taxes - The Company and the Bank file a consolidated
federal income tax return. The Bank is charged or credited an amount equal to
the tax that would have been applicable on a separate return basis.
The Company uses the liability method for computing deferred
income taxes. Under the liability method, deferred income taxes are based on
the change in the deferred tax liability or asset established for the expected
future tax consequences of differences in the financial reporting and tax bases
of assets and liabilities. The differences relate principally to the allowance
for loan losses, deferred compensation, pension obligations, bank premises and
equipment, FHLB dividends and unrealized gain (loss) on investment securities.
Page 7
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 2 - INVESTMENT SECURITIES
Amortized cost and fair value of investment securities, by category,
at September 30, 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity:
U. S. Treasury securities $ 2,249,256 $ 16,080 $ (174) $ 2,265,162
Obligations of U. S.
government agencies 1,088,480 1,700 (51,250) 1,038,930
Obligations of states and
political subdivisions 902,557 32,663 (406) 934,814
Asset-backed securities 3,583,475 54,005 (19,781) 3,617,699
Other securities 976,622 10,808 (72) 987,358
------------ ----------- -------- ------------
Total held to maturity $ 8,800,390 $115,256 $(71,683) $ 8,843,963
Available for sale:
U. S. Treasury securities $ 1,726,602 $ 36,178 $ 0 $ 1,762,780
Obligations of U. S.
government agencies 10,169,277 127,533 (11,493) 10,285,317
Obligations of states and
political subdivisions 65,000 207 0 65,207
Asset-backed securities 1,271,646 5,741 (11,159) 1,266,228
------------ ----------- -------- ------------
Total available for sale $13,232,525 $169,659 $(22,652) $13,379,532
</TABLE>
The amortized cost and fair value of investment securities by
category at September 30, 1995, by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Page 8
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Held to maturity:
Due in one year or less $ 1,998,070 $ 2,007,818
Due after one year through five years 2,242,223 2,231,088
------------ ------------
$ 4,240,293 $ 4,238,906
Asset-backed securities 3,583,475 3,617,699
Other securities 976,622 987,358
------------ ------------
$ 8,800,390 $ 8,843,963
Available for sale:
Due in one year or less $ 858,912 $ 862,793
Due after one year through five years 9,604,001 9,736,020
Due after five years through ten years 1,000,000 1,021,444
Due after ten years 497,966 493,047
------------ ------------
$ 11,960,879 $ 12,113,304
Asset-backed securities 1,271,646 1,266,228
------------ ------------
$ 13,232,525 $13,379,532
</TABLE>
Proceeds from sales and calls of investment securities during 1995
were $7,866,337. Losses of $97,370 were realized on sales and calls in 1995.
Investment securities which have an approximate carrying value of
$5,395,000 at September 30, 1995 were pledged to secure public deposits, trust
deposits, and for other purposes as required or permitted by law.
NOTE 3 - LOANS
Major classifications of loans are summarized as follows:
<TABLE>
<CAPTION>
September 30
1995
<S> <C>
Commercial and real estate mortgage $49,368,426
Installment 5,311,708
------------
$54,680,134
Unearned interest (695,372)
Allowance for loan losses (624,375)
------------
$53,360,387
Changes in the allowance for loan losses were as follows:
Balance, beginning of year $ 716,946
Recoveries 129,973
Loans charged off (237,544)
Provision for loan losses 15,000
------------
Balance, end of year $ 624,375
</TABLE>
Page 9
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 3 - LOANS (CONTINUED)
The amount of loans in a nonaccrual income status was approximately $0
at September 30, 1995. The average recorded investment in impaired loans during
1995 was $609,970. Impaired loans at September 30, 1995 had a carrying value of
$599,903. The total allowance for credit losses related to these loans was
$114,222. Interest income recognized on impaired loans totaled approximately
$53,000 for the year ended September 30, 1995, which represented actual cash
payments received on impaired loans.
Certain directors and executive officers of the Bank and companies in
which they have beneficiary ownership were loan customers of the Bank during
1995. Total loans to these persons were approximately $1,288,000 at September
30, 1995.
NOTE 4 - BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
September 30
1995
<S> <C>
Land $ 128,061
Buildings 911,865
Furniture and equipment 1,016,663
------------
$ 2,056,589
Accumulated depreciation (1,488,647)
------------
$ 567,942
</TABLE>
NOTE 5 - INCOME TAXES
The provision for income taxes for the year ended September 30, 1995
is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Current $ 416,299
Deferred 93,020
------------
$ 509,319
</TABLE>
The tax provision is less than that obtained by using the statutory
rates primarily because of tax-exempt interest income of approximately $67,000,
and nondeductible interest expense of approximately $10,000.
The Company's deferred tax assets and liabilities at September 30,
1995 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets $ 133,534
Deferred tax liabilities (130,846)
------------
Net deferred tax asset $ 2,688
</TABLE>
No valuation allowance for the realization of deferred tax assets is
considered necessary.
Page 10
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 6 - PENSION AND PROFIT-SHARING PLANS
The Bank had a defined benefit pension plan covering
substantially all of its employees. The Bank's funding policy is to
contribute annually not less than the minimum required by applicable law nor
more than the maximum amount that can be deducted for federal income tax
purposes. Benefits are based on years of service and employee's compensation.
The Bank has filed for termination of the plan according to
regulations proscribed by the Pension Benefit Guaranty Corporation. Final
approval is anticipated during 1996, at which time the plan's assets will be
disbursed according to the plan document. Plan benefits have been frozen
since June 30, 1992 in contemplation of termination.
The following table sets forth the plan's funded status and
amounts recognized in the accompanying consolidated balance sheet at
September 30, 1995:
<TABLE>
<CAPTION>
1995
<S> <C>
Actuarial present value of benefit
obligation:
Accumulated benefit obligation -
Vested $ 620,999
Nonvested 0
-----------
$ 620,999
Projected benefit obligation for
services rendered to date $ (620,999)
Plan assets at fair value, pri-
marily in group annuity contracts 697,754
-----------
Plan assets in excess of projected
benefit obligation $ 76,755
Unrecognized net loss 40,238
-----------
Total prepaid pension cost (offset against
other liabilities) $ 116,993
</TABLE>
Page 11
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 6 - PENSION AND PROFIT-SHARING PLANS (CONTINUED)
A discount rate of 8% was used in 1995 and 1994 to compute the
actuarial present value of the accumulated and projected benefit obligations.
The assumed rate of return on plan assets is 8%.
During 1993, the Company established a defined contribution 401(k)
profit-sharing plan for substantially all employees. Employees are allowed
to contribute a percentage of compensation up to the maximum allowed by law.
Company contributions are made for 50% of the participants' contributions up
to 6%. Additional contributions are at the discretion of the Board of
Directors. Accrued contributions are included in other liabilities in the
consolidated balance sheet.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
The Bank owns stock of the Federal Home Loan Bank (FHLB) of
Cincinnati, Ohio which allows the Bank to borrow long-term advances from FHLB
which the Bank uses to fund long-term fixed rate mortgages.
At September 30, 1995, $9,320,669 represented the balance due on
the above advances from the FHLB. All advances are repaid on a monthly basis
over terms of five to fifteen years with interest rates ranging from 5.30% to
7.35%. Advances are secured by the FHLB stock and all single family first
mortgage loans. Scheduled principal payments due on advances during the five
years subsequent to September 30, 1995 are as follows: 1996 - $791,956; 1997
- -$843,663; 1998 - $826,086; 1999 - $866,011; 2000 - $923,754; years
thereafter -$5,069,199.
NOTE 8 - DEFERRED COMPENSATION
The Bank has deferred compensation plan agreements for certain
directors providing for payments upon retirement, death or disability. The
accrued liability at September 30, 1995 of $74,957 is included in other
liabilities.
NOTE 9 - LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends received from
the Bank. Banking regulations limit the amount of dividends that may be paid
without prior approval of regulatory agencies. Under these regulations, the
amount of dividends that may be paid in any calendar year are limited to the
current year's net profits, as defined, combined with the retained net
profits of the preceding two years. As of September 30 , 1995 the Bank
could, without prior approval, declare dividends of approximately $945,000.
Page 12
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 10 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include standby letters
of credit and commitments to extend credit in the form of unused lines of
credit. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
At September 30, 1995 the Bank had the following financial
instruments whose contract amounts represent credit risk:
1995
Standby letter of credit $ 85,000
Commitments to extend credit $ 2,965,000
Standby letters of credit represent conditional commitments issued
by the Bank to guarantee the performance of a third party. The credit risk
involved in issuing these letters of credit is essentially the same as the
risk involved in extending loans to customers. The Bank holds primarily
certificates of deposit and real estate as collateral to support these
commitments in whole or in part.
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Collateral held varies but primarily includes real estate.
NOTE 11 - CONCENTRATION OF CREDIT RISK
The Bank grants residential, commercial and consumer related loans
to customers primarily located in Trigg County and adjoining counties in
Kentucky. Although the Bank has a diverse loan portfolio, a substantial
portion of its debtors' ability to perform on the contracts is somewhat
dependent upon the agricultural and tourism industries which have a
significant impact on the local economy.
Page 13
<PAGE>
TRIGG BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(CONTINUED)
NOTE 12 - CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal
business activities. Management believes these actions are without merit or
that the ultimate liability, if any, resulting from them will not materially
affect the Company's consolidated financial position.
The U. S. Department of Housing and Urban Development (HUD) has
conducted an investigation of a land development project undertaken by
Frontier Village, Inc. for which the Bank provided financing. By virtue of a
deed in lieu of foreclosure, the Bank became an owner of the land being
developed. The Bank has been advised that HUD believes that the developer
failed to comply with certain requirements of the Interstate Land Sales Full
Disclosure Act, and that HUD contends that the Bank is a co-developer with
Frontier Village, Inc. HUD also contends that all lot sales made by the
developers are voidable at the option of the purchasers.
The Bank's management, based upon advice of its legal counsel,
rejects HUD's assertion that it is a co-developer of this project and will
vigorously defend its position. The Bank has offered a settlement to HUD and
the developer involving a new loan by the Bank, secured by real estate, to
allow completion of improvements on the property and cover any lot
repurchases resulting from recission by the buyers of lots. The Bank has had
no additional correspondence with HUD since November 1990. If a final
settlement is not effected, the Bank intends to litigate the matter and to
reserve amounts against estimated losses as they are determinable.
Page 14
<PAGE>
EXHIBIT 99.7
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Community First Bank, N.A.
Ripley, Ohio
We have audited the accompanying balance sheets of Community First Bank,
N.A. as of June 30, 1995 and 1994, and the related statements of income,
changes in shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the Bank'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 financial statements referred to above present
fairly, in all material respects, the financial position of Community First
Bank, N.A. as of June 30, 1995 and 1994 and the results of its operations and
its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
ROBB, DIXON,
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
July 28, 1995
<PAGE>
COMMUNITY FIRST BANK, N.A.
Ripley, Ohio
BALANCE SHEETS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,
1995 1994
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,226 $ 1,488
Federal funds sold 725 1,245
Securities being held to maturity (fair
value of $1,672 and $2,449) 1,636 2,432
Securities available for sale 841 1,041
Loans, net 19,823 17,650
Properties and equipment 424 446
Accrued income receivable 257 210
Other real estate owned 214 0
Other assets 62 43
-------- --------
Total assets 25,208 24,555
-------- --------
-------- --------
LIABILITIES
Demand deposits $ 3,034 $ 3,532
NOW Accounts 5,887 6,479
Savings 2,548 2,526
Time deposits, $100,000 and over 1,300 1,200
Other time deposits 9,353 8,359
-------- --------
Total deposits 22,122 22,096
Federal funds purchased 445 0
Deferred income taxes 6 3
Accrued expenses and other liabilities 438 364
-------- --------
Total liabilities 23,011 22,463
-------- --------
SHAREHOLDERS' EQUITY
Common stock--$100 par value
Authorized--2,000 shares
Issued and outstanding--2,000 shares 200 200
Surplus 450 450
Retained earnings 1,549 1,455
Unrealized gain (loss) on securities
available for sale (2) (13)
-------- --------
Total shareholders' equity 2,197 2,092
-------- --------
Total liabilities and shareholders' equity $ 25,208 $ 24,555
-------- --------
-------- --------
</TABLE>
- -------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-2-
<PAGE>
COMMUNITY FIRST BANK, N.A.
Ripley, Ohio
STATEMENTS OF INCOME
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands,
except per share data)
Years ended June 30,
1995 1994
---- ----
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,946 $ 1,620
Interest on investment securities:
Taxable 120 113
Exempt from federal income tax 19 19
Interest on federal funds sold 29 48
Interest on deposits with banks 1 8
------- -------
Total interest income 2,115 1,808
INTEREST EXPENSE
Interest on deposits 671 597
Interest on borrowed funds 24 3
------- -------
Total interest expense 695 600
------- -------
Net interest income 1,420 1,208
Provision for loan losses 0 0
------- -------
Net interest income after provision
for loan losses 1,420 1,208
OTHER INCOME
Service charges on deposit accounts 215 187
Other income 63 33
------- -------
Total other income 278 220
------- -------
OTHER EXPENSE
Salaries and employee benefits 385 396
Occupancy expense 45 50
Equipment expense 105 95
Other expense 288 251
------- -------
Total other expense 823 792
------- -------
Income before income tax 875 636
Income tax expense 287 217
------- -------
Net income $ 588 $ 419
------- -------
------- -------
Per share data:
Net income $294.22 $209.62
------- -------
------- -------
</TABLE>
- -------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-3-
<PAGE>
COMMUNITY FIRST BANK, N.A.
Ripley, Ohio
STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
UNREALIZED
GAIN (LOSS)
ON
SECURITIES TOTAL
COMMON RETAINED AVAILABLE SHAREHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
----- ------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
Balances June 30, 1993 $ 200 $ 450 $ 1,416 $ 0 $ 2,066
Net income 419 419
Cash dividends declared
($247.00 per share) (380) (380)
Change in unrealized gain
(loss) account (13) (13)
------ ------ ------- ------- -------
Balances June 30, 1994 $ 200 $ 450 $ 1,455 $ (13) $ 2,092
Net income 588 588
Cash dividends declared
($190.00 per share) (494) (494)
Change in unrealized gain
(loss) account 11 11
------ ------ ------- ------- -------
Balances June 30, 1995 $ 200 $ 450 $ 1,549 $ (2) $ 2,197
------ ------ ------- ------- -------
------ ------ ------- ------- -------
</TABLE>
- ------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-4-
<PAGE>
COMMUNITY FIRST BANK, N.A.
Ripley, Ohio
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended June 30,
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 588 $ 419
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 89 68
Deferred income taxes 5 (11)
Net gains on sale of fixed assets 0 32
Premium amortization and discount accretion (3) 21
Change in accrued income and other assets (66) (27)
Change in accrued expenses and other liabilities 28 115
------- -------
Total adjustments 53 198
------- -------
Net cash provided by operating activities 641 617
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in time deposits 0 100
Net change in federal funds sold 520 (565)
Securities held to maturity:
Proceeds from maturities 1,048 1,635
Purchases (252) (1,799)
Securities available for sale:
Proceeds from maturities 252 0
Purchases (40) (496)
Net change in loans (2,386) (88)
Purchases of properties and equipment (67) (160)
------- -------
Net cash used in investing activities (925) (1,373)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in non-interest-bearing demand,
savings and NOW deposit accounts (1,067) 1,149
Net change in time deposits 1,094 4
Net change in borrowed funds 445 0
Dividends paid (450) (380)
------- -------
Net cash provided by financing activities 22 773
------- -------
Net change in cash and cash equivalents (262) 17
Cash and cash equivalents at beginning of year 1,488 1,471
------- -------
Cash and cash equivalents at end of year $ 1,226 $ 1,488
------- -------
------- -------
SUPPLEMENTAL INFORMATION:
Interest paid $ 647 $ 594
Net income taxes paid (refunded) 302 200
Transfer from loans to other real estate owned 214 0
</TABLE>
- -------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
-5-
<PAGE>
COMMUNITY FIRST BANK, N.A.
RIPLEY, OHIO
Years Ended June 30, 1995 and 1994
- -------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES HELD TO MATURITY
Securities classified as held to maturity are those debt securities the
Bank 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 AVAILABLE FOR SALE
Securities classified as available for sale are those debt securities
that the Bank intends to hold for an indefinite period of time, but not
necessarily to maturity. 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 the Bank's
assets and liabilities, liquidity needs, regulatory capital considerations,
and other similar factors. Securities available for sale are carried at
fair value. Realized gains or losses, determined on the basis of the cost
of specific securities sold, are included in earnings.
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb probable
losses. Management determines the adequacy of the allowance based upon
reviews of individual credits, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans and
other pertinent factors. Credits deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously
charged off are added to the allowance.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost, less accumulated
depreciation. The provision for depreciation is computed principally by
the straight-line method.
OTHER REAL ESTATE OWNED
Other real estate owned includes property acquired through foreclosure
or forgiveness of debt. These properties are carried at the lower of cost
or current appraisal. Losses from the acquisition of property in full or
partial satisfaction of debt are treated as loan losses. Routine holding
costs, subsequent declines in value, and gains or losses on disposition are
included in other expense.
INTEREST INCOME ON LOANS
Interest on loans is accrued and credited to income based on the
principal amount outstanding. The accrual of interest on loans is
discontinued when, in the opinion of management, there is an indication
that the borrower may be unable to meet payments as they become due. Upon
such discontinuance, all unpaid accrued interest is reversed.
PENSION COSTS
Pension costs are charged to salaries and employee benefits expense and
are funded as accrued.
-6-
<PAGE>
POSTRETIREMENT BENEFITS
Postretirement health care and life insurance benefits are charged to
salaries and employee benefits expense when paid. In December, 1990 the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions. Under SFAS No. 106, beginning
in 1995, postretirement benefits other than pensions must be accounted for
in a manner similar to current standards for accounting for pensions. SFAS
No. 106 will require that the accumulated postretirement benefit obligation
be either charged in the income statement as a cumulative effect of a
change in accounting in the period of adoption or delayed and amortized
over future periods as part of future postretirement benefit costs. The
Bank does not pay any such benefits.
INCOME TAXES
Provisions for income taxes are based on amounts reported in the
statements of income (after exclusion of non-taxable income such as
interest on state and municipal securities) and include deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred taxes are computed using the asset
and liability approach as prescribed in SFAS No. 109, "Accounting for
Income Taxes."
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed by dividing net income
by the weighted average number of shares of common stock outstanding during
the period.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit
and standby letters of credit. Such financial instruments are recorded in
the financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the Statements of Cash Flows, cash
and cash equivalents are defined as those amounts included in the balance
sheet caption "Cash and Due from Banks."
ACCOUNTING CHANGES
On December 15, 1994, the bank adopted SFAS No. 114 to change it's
method of accounting for impaired loans, which had no financial statement
effect.
RECLASSIFICATION
Certain amounts in 1994 have been reclassified to conform with the 1995
presentation.
-7-
<PAGE>
NOTE 2: SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of securities being held to maturity and securities
available for sale are shown in the following schedules:
SECURITIES BEING HELD TO MATURITY
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
-------- ---------- ---------- -------
<S> <C> <C> <C> <C>
June 30, 1995:
U.S. Government and
Agency securities $ 1,284 $ 2 $ (2) $ 1,284
State and Municipal
securities 246 36 0 282
Other Debt Securities 106 0 0 106
-------- ---------- ---------- -------
$ 1,636 $ 38 $ (2) $ 1,672
-------- ---------- ---------- -------
-------- ---------- ---------- -------
June 30, 1994:
U.S. Government and
Agency securities $ 2,049 $ 1 $ (22) $ 2,028
State and Municipal
securities 246 38 0 284
Other Debt Securities 137 0 0 137
-------- ---------- ---------- -------
$ 2,432 $ 39 $ (22) $ 2,449
-------- ---------- ---------- -------
-------- ---------- ---------- -------
</TABLE>
The amortized cost and estimated market value of securities being held to
maturity at June 30, 1995 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
(In Thousands) Cost Value
------ ------
<S> <C> <C>
Due in one year or less $ 250 $ 249
Due from one to five years 1,014 1,015
Due from five to ten years 266 302
Other Debt Securities 106 106
------ ------
Total $1,636 $1,672
------ ------
------ ------
</TABLE>
Securities with an amortized cost of $1,007,000 and $1,261,000 at June 30,
1995 and 1994, respectively, were pledged as collateral on public deposits and
for other purposes as required by law.
-8-
<PAGE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
------- ------ ------- -----
<S> <C> <C> <C> <C>
June 30, 1995:
U.S. Government and
Agency securities $ 748 $ 0 $ (3) $ 745
Federal reserve stock 19 0 0 19
FHLB stock 77 0 0 77
------- ------ ----- ------
$ 844 $ 0 $ (3) $ 841
------- ------ ----- ------
------- ------ ----- ------
June 30, 1994:
U.S. Government and
Agency securities $ 997 $ 0 $ (13) $ 984
Federal reserve stock 20 0 0 20
FHLB stock 37 0 0 37
------- ------ ----- ------
$ 1,054 $ 0 $ (13) $1,041
------- ------ ----- ------
------- ------ ----- ------
</TABLE>
The amortized cost and estimated market value of securities available for
sale at June 30, 1995 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
(In Thousands) Cost Value
------ ------
<S> <C> <C>
Due in one year or less $ 748 $ 745
Federal Reserve Bank Stock 19 19
FHLB stock 77 77
------ ------
Total $ 841 $ 841
------ ------
------ ------
</TABLE>
-9-
<PAGE>
NOTE 3: LOANS
The components of loans in the balance sheets were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
---------- ----------
<S> <C> <C>
Commercial $ 3,299 $ 3,405
Real estate construction 1,115 377
Commercial real estate 5,930 5,297
Residential real estate 7,794 7,348
Consumer 1,673 1,185
Other 313 358
---------- ----------
Deduct: 20,124 17,970
Unearned discount 0 (1)
Allowance for loan losses (301) (319)
---------- ----------
Loans, net $ 19,823 $ 17,650
---------- ----------
---------- ----------
</TABLE>
Nonaccrual and renegotiated loans were $364,000 and $277,000 at June 30, 1995
and 1994, respectively, which had the effect of reducing income $44,000 and
$22,000 in the years ended June 30, 1995 and 1994, respectively.
NOTE 4: ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Balance at beginning of year $ 319 $ 308
Loans charged off (23) (4)
Recoveries 5 15
------ ------
Net loans charged off (18) 11
Provision for loan losses 0 0
------ ------
Balance at end of year $ 301 $ 319
------ ------
------ ------
</TABLE>
-10-
<PAGE>
NOTE 5: PROPERTIES AND EQUIPMENT
Components of properties and equipment included in the balance sheets at June
30, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
-------- --------
<S> <C> <C>
Cost:
Land $ 18 $ 18
Bank premises 457 434
Furniture and equipment 520 475
-------- --------
Total cost 995 927
Less accumulated depreciation (571) (481)
-------- --------
Net book value $ 424 $ 446
-------- --------
-------- --------
</TABLE>
NOTE 6: FEDERAL HOME LOAN BANK ADVANCES
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB, qualifying first mortgage
loans, and selected mortgage-backed securities. Advances at June 30, 1995,
have various maturity dates thru 2009 with monthly payments expected to be
made.
NOTE 7: EMPLOYEE BENEFITS
The Bank has a non-contributory defined benefit pension plan that covers all
employees who have reached the age of 21 and have 1000 hours of service during
their anniversary year. The Bank's funding policy is to make annual
contributions to the plan which at least equals the minimum required
contribution. The bank did not make a contribution to the plan in either of the
years ended June 30, 1995 or June 30, 1994.
-11-
<PAGE>
NOTE 8: INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Currently payable $ 282 $ 228
Deferred 5 (11)
------ ------
Total $ 287 $ 217
------ ------
------ ------
</TABLE>
Deferred tax assets and liabilities have been provided for temporary
deductible and taxable temporary differences related to accumulated
depreciation, security accretion, accrual to cash basis adjustments, allowance
for loan losses and unrealized losses on available-for-sale securities. The net
deferred tax liabilities in the accompanying balance sheets include the
following components:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Deferred tax assets $ 4 $ 13
Deferred tax liabilities (10) (16)
------ ------
Net deferred tax liability $ (6) $ (3)
------ ------
------ ------
</TABLE>
The provision for federal income taxes is less than that computed by applying
the federal statutory rate of 34% for the years ended June 30, 1995 and 1994, as
indicated in the following analysis:
<TABLE>
<CAPTION>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Tax based on statutory rate $ 298 $ 216
Tax-exempt income and nondeductible
expenses (11) 1
------ ------
Total $ 287 $ 217
------ ------
------ ------
</TABLE>
NOTE 9: RELATED PARTIES
The Bank has entered into transaction with its directors, significant
shareholders and their affiliates (related parties). Such transactions were
made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at
the same time for comparable transactions with other customers, and did not,
in the opinion of management, involve more than normal credit risk or present
other unfavorable features. The aggregate amount of loans to such related
parties at June 30, 1995 was $383,000. During the year new loans to such
related parties amounted to $122,000 and repayments amounted to $48,000.
-12-
<PAGE>
NOTE 10: CONTINGENT LIABILITIES AND COMMITMENTS
The Bank's financial statements do not reflect various commitments which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These are commitments to extend
credit. A summary of the Bank's commitments and contingent liabilities at June
30, 1995 is as follows:
<TABLE>
<CAPTION>
(In Thousands) Notional Amount
---------------
<S> <C>
Commitments to extend credit $ 872
-------
Total $ 872
-------
-------
</TABLE>
Commitments to extend credit have exposure to some credit loss in the event
of nonperformance of the customer. The Bank's credit policies and procedures
for credit commitments and financial guarantees are the same as those for
extension of credit that are recorded on the balance sheet. Because these
instruments have fixed maturity dates, and because many of them expire without
being drawn upon, they do not generally present any significant liquidity risk
to the Bank. The Bank's experience has been that most loan commitments are
drawn upon by customers. While few commercial letters of credit are utilized, a
significant portion of such utilization is on an immediate payment basis. The
remainder are secured by the goods acquired by the customer with the letter of
credit. The Bank has not been required to perform on any financial guarantees
during the past two years. The Bank has not incurred any losses on its
commitments in either of the years ended June 30, 1995 or 1994.
The Bank is party to litigation and claims arising in the normal course of
business. Management, after consultation with legal counsel, believes that
the liabilities, if any, arising from such litigation and claims will not be
material to the financial position.
NOTE 11: CONCENTRATIONS OF CREDIT
All of the Bank's loans and commitments have been granted to customers in the
Bank's market area. Most loan customers are depositors of the Bank. Investments
in state and municipal securities also involve governmental entities within the
Bank's market area. The concentrations of credit by type of loan are set forth
in Note 3. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. The Bank, as a matter of policy, does not
extend credit to any single borrower in excess of its legal lending limit.
NOTE 12: REGULATORY MATTERS
The Bank, as a National Bank is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank
may not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings (as
defined) plus the retained earnings (as defined) from the prior two years.
The dividends as of June 30, 1995, that the Bank could declare, without the
approval of the Comptroller of the Currency, amounted to approximately
$237,000. The Bank is also required to maintain minimum amounts of capital
to total "risk weighted" assets, as defined by the banking regulators. At
June 30, 1995, the Bank is required to have minimum Tier 1 and Total capital
ratios of 4.00% and 8.00%, respectively. The Bank's actual ratios at that
date were 11.71% and 12.96%, respectively. The Bank's leverage ratio at June
30, 1995, was 8.55%.
-13-
<PAGE>
NOTE 13: RESERVE BALANCE REQUIREMENTS
The Bank is required to maintain certain cash and due from bank reserve
balances daily in accordance with regulatory requirements. The balances
maintained under such requirements were $133,000 and $140,000
at June 30, 1995 and 1994, respectively.
------------------ o o 0 o o ------------------
-14-
<PAGE>
EXHIBIT 99.8
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Community Bank of Kentucky
We have audited the accompanying balance sheets of Community First Bank
Kentucky (Bank) as of September 30, 1995 and 1994, and the related statements
of income, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Bank'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 financial statements referred to above present
fairy, in all material respects, the financial position of Community First
Bank of Kentucky as of September 30, 1995 and 1994 and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
Robb, Dixon
Francis, Davis, Oneson & Company
ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
November 17, 1995
<PAGE>
COMMUNITY FIRST BANK OF KENTUCKY
WARSAW, KENTUCKY
BALANCE SHEETS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(Dollars in thousands)
September 30,
1995 1994
------- -------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents
Cash and amounts due from depository institutions $ 1,582 $ 1,347
Interest-bearing deposits in other banks 19 0
Federal funds sold 7 412
------- -------
Total Cash and Cash Equivalents 1,608 1,759
Time deposits 363 0
Investment securities
Securities held-to-maturity (fair value
of $7,366 in 1995 and $4,041 in 1994) 7,262 4,096
Securities available-for-sale, at fair value 1,452 554
Loans, net 36,718 17,981
Accrued interest receivable 503 238
Premises and equipment, net 726 318
Foreclosed real estate, net 171 0
Goodwill, net of applicable amortization 610 0
Deferred income taxes 0 4
Other assets 34 18
------- -------
TOTAL ASSETS $49,447 $24,968
------- -------
------- -------
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $42,929 $21,901
Borrowed Funds 689 748
Accrued interest payable 225 83
Accrued income taxes due holding company 45 61
Deferred income taxes 47 0
Other liabilities 420 51
------- -------
TOTAL LIABILITIES 44,355 22,844
SHAREHOLDERS' EQUITY
Common stock of $50 par value; 5,000 shares
authorized; 3,333 shares issued and outstanding 167 100
Additional paid-in capital 4,074 1,350
Retained earnings 836 677
Unrealized gain on securities available-for-sale,
net of applicable deferred income taxes 15 (3)
------- -------
TOTAL SHAREHOLDERS' EQUITY 5,092 2,124
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $49,447 $24,968
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
-3-
<PAGE>
COMMUNITY FIRST BANK OF KENTUCKY
WARSAW, KENTUCKY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(Dollars in thousands)
Years ended September 30,
1995 1994
------- -------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 2,634 $ 1,435
Interest on taxable investment securities 397 177
Interest on tax-free investment securities 48 17
Dividends on investment securities 4 0
Interest on federal funds sold 67 37
Other interest income 20 0
------- -------
TOTAL INTEREST INCOME 3,170 1,666
------- -------
INTEREST EXPENSE
Interest on interest-bearing checking accounts 203 118
Interest on passbook accounts 81 38
Interest on certificates of deposits 812 356
Interest on advances from Federal Home Loan Bank
and other borrowed funds 40 7
------- -------
TOTAL INTEREST EXPENSE 1,136 519
------- -------
NET INTEREST INCOME 2,034 1,147
Provision for loan losses 25 0
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,009 1,147
OTHER INCOME
Service charges 245 115
Gain from sales of investment securities, net 4 0
Other 102 57
------- -------
TOTAL OTHER INCOME 351 172
------- -------
OTHER EXPENSES
Salaries and employee benefits 578 324
Directors fees 25 24
Postage 32 20
Net occupancy expense 203 137
Federal insurance premiums 43 45
Sale of equipment 0 30
Amortization of goodwill 21 0
Other operating expenses 173 90
------- -------
TOTAL OTHER EXPENSES 1,075 670
------- -------
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
INCOME BEFORE INCOME FEDERAL
INCOME TAX EXPENSE $ 1,285 $ 649
Federal income tax expense 446 214
------- -------
NET INCOME $ 839 $ 435
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
-5-
<PAGE>
COMMUNITY FIRST BANK OF KENTUCKY
WARSAW, KENTUCKY
STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
(Dollars in thousands)
UNREALIZED
GAIN (Loss)
ON SECURITIES
AVAILABLE-
FOR-SALE,
NET OF TOTAL
COMMON STOCK ADDITIONAL APPLICABLE STOCK-
--------------- PAID-IN RETAINED DEFERRED HOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME TAXES EQUITY
------ ------ ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT
SEPTEMBER 30, 1993 2,000 $ 100 $ 1,350 $ 577 $ 0 $ 2,027
Net income 435 435
Cash Dividends
declared ($167.50
per share) (335) (335)
Change in unrealized
gain (loss) on
securities available-
for-sale, net of
applicable deferred
income taxes of
$1,000 (3) (3)
----- ----- ------- ------ ---- -------
BALANCES AT
SEPTEMBER 30, 1994 2,000 $ 100 $ 1,350 $ 677 $ (3) $ 2,124
Net income 839 839
Acquisition of
Citizens Bank 1,333 67 2,724 10 2,801
Cash dividends
declared ($236.00
per share) (690) (690)
Change in unrealized
gain (loss) on
securities available-
for-sale, net of
applicable deferred
income taxes of
$9,000 18 18
----- ----- ------- ------ ---- -------
BALANCES AT
SEPTEMBER 30, 1995 3,333 $ 167 $ 4,074 $ 836 $ 15 $ 5,092
----- ----- ------- ------ ---- -------
----- ----- ------- ------ ---- -------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
-6-
<PAGE>
COMMUNITY FIRST BANK OF KENTUCKY
WARSAW, KENTUCKY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(Dollars in thousands)
Years ended September 30,
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 839 $ 435
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill 21 0
Discount accretion net of premium amortization (3) 11
Provision for loan losses 25 0
Loss on sale of foreclosed real estate 0 15
Gain from sales of investment securities, net (4) 0
Loss on sale of equipment 0 15
Depreciation 80 49
Deferred income taxes 11 12
Changes in operating assets and liabilities:
(Increase) decrease in accrued interest receivable (75) (29)
(Increase) decrease in other assets 12 5
Increase (decrease) in accrued interest payable 53 (3)
Increase (decrease) in other liabilities (5) (40)
------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 954 470
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in time and certificates of deposit 192 0
Purchases of held-to-maturity securities (147) (4,129)
Proceeds from maturities of held-to-maturity securities 3,084 3,401
Purchases of available-for-sale securities (270) (58)
Proceeds from sales of available-for-sale securities 492 0
Proceeds from maturities of available-for-sale securities 500 250
Cash received in merger acquisition 2,970 0
Net increase in loans (6,677) (2,505)
Purchases of premises and equipment (87) (43)
Proceeds from sale of foreclosed real estate 0 75
------- -------
NET CASH USED IN INVESTING ACTIVITIES 57 (3,009)
------- -------
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (713) 1,917
Net increase (decrease) in borrowed funds (59) 748
Dividends paid (390) (335)
------- -------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES (1,162) 2,330
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (151) (209)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,759 1,968
------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,608 $ 1,759
------- -------
------- -------
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest $ 1,084 $ 521
------- -------
------- -------
Cash paid during the year for income taxes $ 420 $ 175
------- -------
------- -------
Loans transferred to foreclosed real estate
during the year $ 171 $ 0
------- -------
------- -------
Total increase in unrealized gain on securities
available-for-sale $ 28 $ (5)
------- -------
------- -------
Significant assets (liabilities) acquired in
business combination
Cash and cash equivalents $ 2,970 $ 0
Time deposits 550 0
Securities held-to-maturity 7,139 0
Securities available-for-sale 511 0
Loans 12,272 0
Accrued interest receivable 190 0
Premises and equipment 401 0
Other assets 28 0
Deposits (21,712) 0
Accrued interest payable (89) 0
Deferred income taxes (30) 0
Other liabilities (58) 0
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes.
-8-
<PAGE>
COMMUNITY FIRST BANK OF KENTUCKY
WARSAW, KENTUCKY
Notes to Financial Statements
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Bank provides a variety of financial services to individuals and
corporate customers, through its two branches in Warsaw and Dry Ridge, Kentucky,
which is primarily a rural agricultural area. The Bank's primary deposit
products are interest-bearing checking accounts and certificates of deposit.
Its primary lending products are single family residential loans and commercial
real estate loans.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management obtains
independent appraisals for significant properties.
A majority of the Bank's loan portfolio consists of commercial and
single-family residential loans in the Warsaw-Dry Ridge area. The regional
economy depends heavily on the agricultural industry. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed real
estate are susceptible to changes in local market conditions.
While management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination. Because of these factors, it is reasonably possible that the
allowances for losses on loans and foreclosed real estate may change materially
in the near term.
INVESTMENT SECURITIES
Debt securities that management has the ability and intent to hold to
maturity are classified as held-to-maturity and carried at cost, adjusted for
amortization of premium and accretion of discounts using methods approximating
the interest method. Other marketable securities are classified as available-
for-sale and are carried at fair value. Unrealized gains and losses on
securities available-for-sale are recognized as direct increases or decreases in
shareholders' equity. Cost of securities sold is recognized using the specific
identification method.
LOANS
Loans are stated at unpaid principal balances, less the allowance for loan
losses and unearned discounts.
Unearned discounts on installment loans are recognized as income over the
term of the loans using a method that approximates the interest method.
-9-
<PAGE>
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense, and reduced by charge-offs, net of recoveries.
PREMISES AND EQUIPMENT
Depreciation and amortization are provided over the estimated useful lives of
the respective assets. All premises and equipment are recorded at cost and are
depreciated on the straight-line method.
FORECLOSED REAL ESTATE
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are those
properties for which the institution has taken physical possession, regardless
of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the
lower of the Bank cost or the asset's fair value, less costs to sell, which
becomes the property's new basis. Any write-downs based on the asset's fair
value at date of acquisition are charged to the allowance for loan losses.
After foreclosure, these assets are carried at the lower of their new cost
basis or fair value less cost to sell. Costs incurred in maintaining
foreclosed real estate and subsequent write-downs to reflect declines in the
fair value of the property are included in income (loss) on foreclosed real
estate.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the basis of available-for-sale
securities, allowance for loan losses, accrued income and expenses, and
accumulated depreciation for financial and income tax reporting. The deferred
tax assets and liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. The bank and its parent file a
consolidated federal income tax return on a calendar year basis. Income tax
expense in the bank's income statement has be allocated on the basis of taxable
income for the bank by itself.
STATEMENTS OF CASH FLOWS The Bank considers all cash and amounts due from
depository institutions, interest-bearing deposits in other banks, and
federal funds sold to be cash equivalents for purposes of the statements of
cash flows.
RECLASSIFICATIONS
Certain amounts in 1994 have been reclassified to conform with the 1995
presentation.
-10-
<PAGE>
NOTE B - INVESTMENT SECURITIES
Securities held-to-maturity consist of the following:
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
---------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government
& federal
agencies $ 5,890 $ 90 $ (12) $5,968 $3,684 $ 1 $ (55) $3,630
State &
local
governments 1,339 38 (17) 1,360 412 6 (7) 411
Corporate
debt
securities 33 5 0 38 0 0 0 0
------- -------- ------- ------ ------ ------- ------- ------
$ 7,262 $ 133 $ (29) $7,366 $4,096 $ 7 $ (62) $4,041
------- -------- ------- ------ ------ ------- ------- ------
------- -------- ------- ------ ------ ------- ------- ------
</TABLE>
Securities available-for-sale consist of the following:
<TABLE>
<CAPTION>
September 30, 1995 September 30, 1994
---------------------------------------- ----------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
--------- ---------- ---------- ----- --------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government
& federal
agencies $ 1,339 $ 23 $ 0 $1,362 $ 501 $ 0 $ (5) $ 496
Equity
securities 90 0 0 90 58 0 0 58
------- -------- ------- ------ ------ ------- ------- ------
$ 1,429 $ 23 $ 0 $1,452 $ 559 $ 0 $ (5) $ 554
------- -------- ------- ------ ------ ------- ------- ------
------- -------- ------- ------ ------ ------- ------- ------
</TABLE>
-11-
<PAGE>
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of September 30, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
Securities held-to-maturity Securities available-for-sale
------------------------------------------------------------
AMOUNTS MATURING IN:
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------- ----------- -------
<S> <C> <C> <C> <C>
One year or less $4,974 $5,010 $ 760 $ 769
After one year 1,440 1,494 579 593
through five years
After five years 564 576 0 0
through ten years
After ten years 284 286 90 90
------ ------ ------ ------
$7,262 $7,366 $1,429 $1,452
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
During 1995, the Bank sold securities available-for-sale for total proceeds of
approximately $492,000 resulting in gross realized gains of approximately $4,000
and no gross realized losses. During 1994, the Bank sold no securities
available-for-sale.
In 1995, debt securities with an amortized cost of $586,000 were transferred
from held-to-maturity to available-for-sale because of a merger acquisition.
The securities had an unrealized gain of approximately $14,000. There were no
securities transferred between classifications during 1994.
No investment securities at September 30, 1995 were pledged to secure
deposits as required or permitted by law.
NOTE C - LOANS
Loans at September 30, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------ ------
<S> <C> <C>
Loans secured by mortgages on real estate:
Residential $ 8,980 $ 3,583
Commercial 11,529 8,774
Farmland 3,291 1,041
Short-term loans for construction 2,360 1,025
Installment loans 2,909 878
Commercial 7,649 2,719
Other 522 212
------- -------
37,240 18,232
------- -------
Allowance for loan losses (466) (243)
Unearned discounts on installment loans (56) (8)
------- -------
Total $36,718 $17,981
------- -------
------- -------
</TABLE>
-12-
<PAGE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------ ------
<S> <C> <C>
Balance, beginning of year $ 243 $ 238
Provision for losses 25 0
Loans charged off, net (23) 5
Merger acquisition 221 0
------- ------
Balance, end of year $ 466 $ 243
------- ------
------- ------
</TABLE>
At September 30, 1995, the Bank had no loans, that were specifically
classified as impaired.
In addition at September 30, 1995 and 1994, the
Bank had other nonaccrual loans of approximately $259,000 and $238,000,
respectively, for which impairment had not been recognized. If interest on these
loans had been recognized at the original interest rates, interest income would
have increased approximately $15,000 and $21,000 in 1995 and 1994, respectively.
The Bank has no commitments to loan additional funds to the borrowers of
nonaccrual loans.
In the ordinary course of business, the Bank has and expects
to continue to have transactions, including borrowings, with its officers,
directors, and their affiliates. In the opinion of management, such
transactions were on substantially the same terms, including interest rates and
collateral, as those prevailing at the time of comparable transactions with
other persons and did not involve more than a normal risk of collectibility or
present any other unfavorable features to the Bank. Loans to such borrowers, at
September 30, 1995, are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Balance, beginning of year $ 699
New loans 363
Payments (372)
------
Balance, end of year $ 690
------
------
</TABLE>
At September 30, 1995, the Bank serviced loans for others with a principal
balance of $892,000.
NOTE D - PREMISES AND EQUIPMENT
A summary of premises and equipment at September 30, 1995 and 1994 follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------- ------
<S> <C> <C>
Land $ 134 $ 55
Buildings and improvements 984 306
Furniture, fixtures, and equipment 686 401
------- ------
Accumulated depreciation and amortization 1,804 762
(1,078) (444)
------- ------
Total $ 726 $ 318
------- ------
------- ------
</TABLE>
-13-
<PAGE>
NOTE E - DEPOSITS
Deposit account balances at September 30, 1995 and 1994, are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------- -------
<S> <C> <C>
Demand deposits $ 6,992 $ 3,872
Now accounts 7,268 4,855
Money market deposit accounts 2,730 824
Savings 4,437 1,839
Certificates of deposit 15,291 6,591
------- -------
Total $36,718 $17,981
------- -------
------- -------
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $3,050,000 and $1,312,000
at September 30, 1995 and 1994. Interest expense on certificates of deposit
exceeding $100,000 was approximately $82,000 and $52,000 in 1995 and 1994,
respectively.
The Bank held deposits of approximately $2,188,000 for related parties at
September 30, 1995.
NOTE F - BORROWED FUNDS
Borrowed funds at September 30, 1995 and 1994, are summarized as follows:
<TABLE>
<CAPTION>
September 30,
----------------------
<S> <C> <C>
1995 1994
Advances from Federal Home Loan Bank $ 388 $ 399
Securities sold under agreement to repurchase 301 349
------ ------
Total $ 689 $ 748
------ ------
------ ------
</TABLE>
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB and qualifying first mortgage
loans. Advances at September 30, 1995 have the following principal payment
requirements:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
10/1/95 to 9/30/96 $ 11
10/1/96 to 9/30/97 12
10/1/97 to 9/30/98 13
10/1/98 to 9/30/99 14
10/1/99 to 9/30/00 14
After 9/30/00 324
------
$ 388
------
------
</TABLE>
-14-
<PAGE>
Information concerning securities sold under agreements to repurchase are
summarized as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Average balance during the year $ 394 $ 25
Average interest rate during the year 4.31% 0.00%
Maximum monthly average 614 349
Maturity date 10/2/95 10/3/94
</TABLE>
NOTE G - FEDERAL INCOME TAXES
The provision for income taxes for 1995 and 1994 consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------ ------
<S> <C> <C>
Current federal tax expense $ 435 $ 202
Deferred federal tax expense 11 12
------ ------
$ 446 $ 214
------ ------
------ ------
</TABLE>
The provision for federal income taxes differs from that computed by
applying federal statutory rates to income before federal income tax expense,
as indicated in the following analysis:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------ ------
<S> <C> <C>
Expected tax provision at a 34% rate $ 437 $ 221
Effect of tax-exempt income (20) (6)
Goodwill amortization 7 0
Other 22 (1)
------ ------
$ 446 $ 214
------ ------
------ ------
</TABLE>
Deferred tax liabilities have been provided for taxable temporary differences
related to unrealized gains on available-for-sale securities and net accrued
income and expenses. Deferred tax assets have been provided for deductible
temporary differences related to the allowance for loan losses, and accumulated
depreciation. The net deferred tax assets in the accompanying balance sheets
include the following components:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------ ------
<S> <C> <C>
Deferred tax liabilities $ 62 $ 32
Deferred tax assets (15) (36)
------ ------
Net deferred tax liabilities (assets) $ 47 $ (4)
------ ------
------ ------
</TABLE>
-15-
<PAGE>
NOTE H - PROFIT SHARING PLAN
The Bank has a profit-sharing plan that covers substantially all employees.
Contributions to the plan are based on a formula and are contingent upon the
attainment of certain levels of earnings as defined in the agreement. During
the year ended September 30, 1995 and 1994, contributions to the plan
charged to operations were $14,000 and 4,000, respectively.
NOTE I - REGULATORY MATTERS
The Bank, as a State Bank is subject to the dividend restrictions set forth by
the Kentucky Department of Financial Institutions. Under such restrictions, the
Bank may not, without the prior approval of the Department of Financial
Institutions declare dividends in the excess of the sum of the current year's
earnings (as defined) plus the retained earnings (as defined) from the prior two
years. The dividends as of September 30, 1995, that the Bank could declare,
without the approval of the D.F.I., amounted to approximately $652,000. The
Bank is also required to maintain minimum amounts of capital to total "risk
weighted" assets, as defined by the banking regulators. At September 30, 1995,
the Bank is required to have minimum Tier 1 and Total capital ratios of 4.00%
and 8.00% respectively. The Bank's actual ratios at that date were 12.80% and
14.05% respectively. The Bank's leverage ratio at September 30, 1995, was
9.03%.
NOTE J - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. The principal commitments of the Bank are
as follows:
The Association had outstanding commitments to originate loans at
September 30, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1995 1994
------ ------
<S> <C> <C>
First-mortgage $2,020 $ 386
Consumer and other loans 250 217
------ ------
Total $2,270 $ 603
------ ------
------ ------
</TABLE>
There were no commitments under standby letters of credit.
In addition, the Bank is a defendant in various legal proceedings arising in
connection with its business. It is the best judgment of management that
neither the financial position nor results of operations of the Bank will be
materially affected by the final outcome of these legal proceedings.
-16-
<PAGE>
NOTE K - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank 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 financial instruments include commitments to extend credit. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit is
represented by the contractual notional amount of those instruments (see NOTE
J). The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
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. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained, if deemed necessary by the Bank upon extension of credit, varies and
is based on management's credit evaluation of the counterparty.
The bank had due from bank balances in excess of $100,000 with the following
financial institutions as of September 30, 1995:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1995
------
Fifth Third Bank $ 580
------
------
</TABLE>
NOTE L - BUSINESS COMBINATION
On April 6, 1995, the Bank acquired Citizens Bank in Dry Ridge, Kentucky
in a business combination accounted for as a purchase. Citizens Bank is also a
state chartered bank engaged in commercial banking. The results of operations of
Citizens Bank is included in the accompanying financial statements since the
date of acquisition. The total cost of the acquisition was $2,801,000, which
exceeded the fair value of the net assets of Citizens Bank by $631,000. The
excess is being amortized on the straight line method over 15 years. 1,333
shares of common stock were issued to complete the business combination.
-17-
<PAGE>
NOTE M - SUBSEQUENT EVENT
On October 14, 1995, the bank sold it's branch facility in Jonesville,
Kentucky, which contained the following net assets:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Loans $ 114,000
Premises & equipment 44,000
Deposits (1,973,000)
-----------
Total $(1,815,000)
-----------
-----------
</TABLE>
The transaction resulted in a gain of $108,000, which will be included in
operations during the fourth quarter of 1995.
NOTE N - RELATED PARTIES
The Bank is owned 60% by Community First Financial Inc., and 40% by Grant
Bancshares, Inc. Community First Financial, Inc. is a Multi-bank holding company
that also owns 100% of the common stock of: Grant Bancshares, Inc., Community
First Bank, N.A. in Ripley, Ohio and CommunityFirst Bank in Mt. Olivet,
Kentucky. Transactions between the subsidiary banks were limited to loan
servicing on participation loans, correspondent bank activity, and borrowed
funds.
------------------ o o 0 o o ------------------
-18-
<PAGE>
EXHIBIT 99.9
[LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Community First Bank
Mt. Olivet, KY
We have audited the accompanying balance sheets of Community First Bank,
Mt. Olivet, Kentucky as of June 30, 1995 and 1994, and the related statements
of income, changes in shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Bank'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 financial statements referred to above present
fairly, in all material respects, the financial position of Community First
Bank as of June 30, 1995 and 1994 and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
/s/ ROBB, DIXON
FRANCIS, DAVIS, ONESON
& COMPANY
ROBB, DIXON,
FRANCIS, DAVIS, ONESON
& COMPANY
Granville, Ohio
August 18, 1995
<PAGE>
COMMUNITY FIRST BANK
MT. OLIVET, KENTUCKY
BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
June 30,
1995 1994
------- -------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,112 $ 1,097
Interest bearing time deposits 0 100
Federal funds sold 925 190
Securities being held to maturity (fair value of
$3,248 and $3,468) 3,170 3,402
Securities available for sale 1,534 1,646
Loans, net 27,021 24,314
Properties and equipment 1,195 234
Accrued income receivable 410 338
Other real estate owned 196 19
Deferred income taxes 55 27
Other assets 24 23
------- -------
Total assets $35,642 $31,390
------- -------
------- -------
LIABILITIES
Demand deposits $ 3,721 $ 3,845
NOW accounts 5,792 6,581
Savings 2,388 2,332
Time deposits, $100,000 and over 4,649 1,637
Other time deposits 14,316 13,073
------- -------
Total deposits 30,866 27,468
Borrowings 400 400
Federal Home Loan Bank Advances 786 300
Accrued expenses and other liabilities 424 336
------- -------
Total liabilities 32,476 28,504
------- -------
SHAREHOLDERS' EQUITY
Common stock---- $53.66 par value 440 440
Authorized----8,200 shares
Issued and outstanding - 8,200 shares
Surplus 1,710 1,710
Retained earnings 1,023 748
Unrealized gain (loss) on securities
available for sale (7) (12)
------- -------
Total shareholders' equity 3,166 2,886
------- -------
Total liabilities and shareholders' equity $35,642 $31,390
------- -------
------- -------
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
<PAGE>
COMMUNITY FIRST BANK
MT. OLIVET, KENTUCKY
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands, except per share
amounts) Years ended June 30,
1995 1994
------ ------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans $2,480 $1,943
Interest on investment securities: 149 134
Taxable
Exempt from federal income tax 138 138
Interest on federal funds sold 51 48
Interest on deposits with banks 4 19
------ ------
Total interest income 2,822 2,282
------ ------
INTEREST EXPENSE
Interest on deposits 996 744
Interest on borrowings 24 13
Interest on other borrowed funds 45 4
------ ------
Total interest expense 1,065 761
------ ------
NET INTEREST INCOME 1,757 1,521
Provision for loan losses 20 0
------ ------
Net interest income after provision 1,737 1,521
for loan losses
OTHER INCOME
Service charges on deposit accounts 226 204
Net investment security profits or losses 1 5
Other income 77 54
------ ------
Total other income 304 263
------ ------
OTHER EXPENSE
Salaries and employee benefits 548 464
Occupancy expense 81 70
Equipment expense 55 65
Other expense 357 262
------ ------
Total other expense 1,041 861
------ ------
Income before income taxes 1,000 923
Income tax expense 265 251
------ ------
NET INCOME $ 735 $ 672
------ ------
------ ------
Per share data:
Net Income $89.63 $81.95
------ ------
------ ------
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
<PAGE>
COMMUNITY FIRST BANK
MT. OLIVET, KENTUCKY
STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
UNREALIZED
GAIN (LOSS)
ON
SECURITIES TOTAL
COMMON RETAINED AVAILABLE SHAREHOLDERS'
STOCK SURPLUS EARNINGS FOR SALE EQUITY
------ ------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances June 30, 1993 $ 440 $ 1,710 $ 531 $ 0 $ 2,681
Net income 672 672
Cash dividends declared
($55.48 per share) (455) (455)
To establish unrealized
gain (loss) account 9 9
Change in unrealized
gain (loss) account (21) (21)
------ ------- -------- ----------- -------------
Balances June 30, 1994 $ 440 $ 1,710 $ 748 $ (12) $ 2,886
Net income 735 735
Cash dividends declared
($56.10 per share) (460) (460)
Change in unrealized gain
(loss) account 5 5
------ ------- -------- ----------- -------------
Balances June 30, 1995 $ 440 $ 1,710 $ 1,023 $ (7) $ 3,166
------ ------- -------- ----------- -------------
------ ------- -------- ----------- -------------
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
4
<PAGE>
COMMUNITY FIRST BANK
MT. OLIVET, KENTUCKY
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended June 30,
1995 1994
------ ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 735 $ 672
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 60 60
Provision for loan losses 20 0
Deferred income taxes (24) (23)
Net investment security gains (1) (5)
Premium amortization and discount accretion 0 7
Change in accrued income and other assets (73) (46)
Change in accrued expenses and other liabilities 88 4
------ ------
Total adjustments 70 (3)
------ ------
Net cash provided by operating activities 805 669
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in time deposits 100 95
Net change in federal funds sold (735) 490
Securities held to maturity:
Proceeds from maturities 789 1,596
Purchases (557) (1,439)
Securities available for sale:
Proceeds from maturities 500 3,098
Purchases (386) (2,407)
Net change in loans (2,924) (2,972)
Purchases of properties and equipment (1,001) (90)
------ ------
Net cash used in investing activities (4,214) (1,629)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in non-interest-bearing demand, savings
and NOW deposit accounts (857) 527
Net change in time deposits 4,255 436
Net change in borrowed funds 486 300
Dividends paid (460) (455)
------ ------
Net cash provided by financing activities 3,424 808
Net change in cash and cash equivalents 15 (152)
Cash and cash equivalents at beginning of year 1,097 1,249
------ ------
Cash and cash equivalents at end of year $1,112 $1,097
------ ------
------ ------
SUPPLEMENTAL INFORMATION:
Interest paid $ 937 $ 754
Net income taxes paid (refunded) 189 254
Transfer from loans to other real estate owned 196 0
</TABLE>
- --------------------------------------------------------------------------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
5
<PAGE>
COMMUNITY FIRST BANK
MT. OLIVET, KENTUCKY
Years Ended June 30, 1995 and 1994
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SECURITIES HELD TO MATURITY
Securities classified as held to maturity are those debt securities the
Bank 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 AVAILABLE FOR SALE
Securities classified as available for sale are those debt securities that
the Bank intends to hold for an indefinite period of time, but not necessarily
to maturity. 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 the Bank's assets and liabilities,
liquidity needs, regulatory capital considerations, and other similar factors.
Securities available for sale are carried at fair value. Realized gains or
losses, determined on the basis of the cost of specific securities sold,
are included in earnings.
ALLOWANCE FOR LOAN LOSSES
The allowance is maintained at a level adequate to absorb probable losses.
Management determines the adequacy of the allowance based upon reviews of
individual credits, recent loss experience, current economic conditions, the
risk characteristics of the various categories of loans and other pertinent
factors. Credits deemed uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged off are added to the
allowance.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost, less accumulated depreciation.
The provision for depreciation is computed principally by the straight-line
method.
OTHER REAL ESTATE OWNED
Other real estate owned includes property acquired through foreclosure or
forgiveness of debt. These properties are carried at the lower of cost or
current appraisal. Losses from the acquisition of property in full or partial
satisfaction of debt are treated as loan losses. Routine holding costs,
subsequent declines in value, and gains or losses on disposition are included in
other expense.
INTEREST INCOME ON LOANS
Interest on loans is accrued and credited to income based on the principal
amount outstanding. The accrual of interest on loans is discontinued when, in
the opinion of management, there is an indication that the borrower may be
unable to meet payments as they become due. Upon such discontinuance, all
unpaid accrued interest is reversed.
PENSION COSTS
Pension costs are charged to salaries and employee benefits expense and are
funded as accrued.
-6-
<PAGE>
POSTRETIREMENT BENEFITS
Postretirement health care and life insurance benefits are charged to
salaries and employee benefits expense when paid. In December, 1990 the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits
Other Than Pensions. Under SFAS No. 106, beginning in 1995, postretirement
benefits other than pensions must be accounted for in a manner similar to
current standards for accounting for pensions. SFAS No. 106 will require that
the accumulated postretirement benefit obligation be either charged in the
income statement as a cumulative effect of a change in accounting in the period
of adoption or delayed and amortized over future periods as part of future
postretirement benefit costs. The Bank does not pay any such benefits. INCOME
TAXES Provisions for income taxes are based on amounts reported in the
statements of income (after exclusion of non-taxable income such as interest on
state and municipal securities) and include deferred taxes on temporary
differences in the recognition of income and expense for tax and financial
statement purposes. Deferred taxes are computed using the asset and liability
approach as prescribed in SFAS No. 109, "Accounting for Income Taxes."
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed by dividing net income by
the weighted average number of shares of common stock outstanding during the
period, after giving retroactive effect to stock dividends.
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
In the ordinary course of business the Bank has entered into off balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of credit and
standby letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the Statements of Cash Flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "Cash and Due from Banks."
ACCOUNTING CHANGES
On January 1, 1994, the Bank adopted SFAS No. 115 to change it's method of
accounting for investment securities. The effect of the changes was to increase
shareholders' equity on January 1, 1994 by $9,000.
On December 15, 1994, the bank adopted SFAS No. 114 to change it's method
of accounting for impaired loans, which had no financial statement effect.
RECLASSIFICATION
Certain amounts in 1994 have been reclassified to conform with the 1995
presentation.
-7-
<PAGE>
NOTE 2: SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of securities being held to maturity and securities
available for sale are shown in the following schedules:
<TABLE>
SECURITIES BEING HELD TO MATURITY
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
June 30, 1995:
U.S. Government and
Agency securities $ 1,091 $ 22 $ (1) $ 1,112
State and Municipal
securities 2,079 67 (10) 2,136
-------- -------- -------- -------
$ 3,170 $ 89 $ (11) $ 3,248
-------- -------- -------- -------
-------- -------- -------- -------
June 30, 1994:
U.S. Government and
Agency securities $ 1,107 $ 18 $ (6) $ 1,119
State and Municipal
securities 2,295 75 (21) 2,349
-------- -------- -------- -------
$ 3,402 $ 93 $ (27) $ 3,468
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
The amortized cost and estimated market value of securities being held to
maturity at June 30, 1995 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
Estimated
Amortized Market
(In Thousands) Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 1,320 $ 1,320
Due from one to five years 1,034 1,063
Due from five to ten years 428 445
Due after ten years 388 420
-------- --------
Total
$ 3,170 $ 3,248
-------- --------
-------- --------
</TABLE>
Securities with an amortized cost of $3,041,000 and $600,000 at June 30,
1995 and 1994, respectively, were pledged as collateral on public deposits and
for other purposes as required by law.
-8-
<PAGE>
SECURITIES AVAILABLE FOR SALE
<TABLE>
Gross Gross Estimated
Unrealized Unrealized Fair
(In Thousands) Cost Gains Losses Value
---- ---------- ---------- ---------
<S> <C> <C> <C> <C>
June 30, 1995:
U.S. Government and
Agency securities $ 1,349 $ 6 $ (17) $ 1,338
FHLB Stock 196 0 0 196
-------- -------- -------- -------
$ 1,545 $ 6 $ (17) $ 1,534
-------- -------- -------- -------
-------- -------- -------- -------
June 30, 1994:
U.S. Government and
Agency securities $ 1,548 $ 5 $ (17) $ 1,536
FHLB Stock 110 0 0 110
-------- -------- -------- -------
$ 1,658 $ 5 $ (17) $ 1,646
-------- -------- -------- -------
-------- -------- -------- -------
</TABLE>
The amortized cost and estimated market value of securities available for
sale at June 30, 1995 by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
Estimated
Amortized Market
(In Thousands) Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less $ 350 $ 349
Due from one to five years 899 891
Due from five to ten years 100 98
Federal Home Loan Bank stock 196 196
-------- --------
Total $ 1,545 $ 1,534
-------- --------
-------- --------
</TABLE>
Gross gains of $1,000 and $5,000 were realized on calls of securities in
the years ended June 30, 1995 and 1994, respectively.
-9-
<PAGE>
NOTE 3: LOANS
The components of loans in the balance sheets were as follows:
<TABLE>
(In Thousands) 1995 1994
-------- --------
<S> <C> <C>
Commercial $ 4,644 $ 7,983
Real estate construction 771 1,213
Commercial real estate 13,044 6,711
Residential real estate 7,147 7,078
Consumer 1,343 1,348
Other 415 332
-------- --------
Deduct: 27,364 24,665
Allowance for loan losses (343) (351)
-------- --------
Loans, net $ 27,021 $ 24,314
-------- --------
-------- --------
</TABLE>
Nonaccrual and renegotiated loans were $297,000 and $581,000 at June 30,
1995 and 1994, respectively, which had the effect of reducing income $45,000 and
$87,000 in the years ended June 30, 1995 and 1994, respectively.
NOTE 4: ALLOWANCE FOR LOAN LOSSES
An analysis of the change in the allowance for loan losses follows:
<TABLE>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Balance at beginning of year $ 351 $ 347
Loans charged off (35) (1)
Recoveries 7 5
------ ------
Net loans charged off (28) 4
Provision for loan losses 20 0
------ ------
Balance at end of year $ 343 $ 351
------ ------
------ ------
</TABLE>
-10-
<PAGE>
NOTE 5: PROPERTIES AND EQUIPMENT
Components of properties and equipment included in the balance sheets at
June 30, 1995 and 1994 were as follows:
<TABLE>
(In Thousands) 1995 1994
-------- --------
<S> <C> <C>
Cost:
Land $ 259 $ 0
Bank premises 810 235
Furniture and equipment 703 329
-------- --------
Total cost 1,772 564
Less accumulated depreciation (577) (330)
-------- --------
Net book value $ 1,195 $ 234
-------- --------
-------- --------
</TABLE>
NOTE 6: SHORT-TERM BORROWINGS
Securities sold under agreements to repurchase range in maturities from
October 1995 to July 1996. The underlying securities held in the bank's
investment portfolio and pledged to secure these repurchase agreements have a
carrying value of $382,000, a par value of $400,000, and a market value of
$401,000 at June 30, 1995.
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES
Pursuant to collateral agreements with the Federal Home Loan Bank (FHLB),
advances are secured by all stock in the FHLB, qualifying first mortgage loans,
and selected mortgage backed securities. Advances at June 30, 1995, have
various maturity dates thru 2015 with monthly payments expected to be made.
NOTE 8: EMPLOYEE BENEFITS
The Bank has a non-contributory defined benefit pension plan that covers
all employees who have reached the age of 21 and have 1000 hours of service
during their anniversary year. The Bank's funding policy is to make annual
contributions to the plan which at least equals the minimum required
contribution. The bank did not make a contribution to the plan in either of the
years ended June 30, 1995 or June 30, 1994.
-11-
<PAGE>
NOTE 9: INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Currently payable $ 289 $ 274
Deferred (24) (23)
------ ------
Total $ 265 $ 251
------ ------
------ ------
</TABLE>
Deferred tax assets and liabilities have been provided for temporary
deductible and taxable temporary differences related to accumulated
depreciation, security accretion, accrual to cash basis adjustments, allowance
for loan losses and unrealized losses on available-for-sale securities. The net
deferred tax assets in the accompanying balance sheets include the following
components:
<TABLE>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Deferred tax assets $ 88 $ 45
Deferred tax liabilities (33) (18)
------ ------
Net deferred tax asset $ 55 $ 27
------ ------
------ ------
</TABLE>
The provision for federal income taxes is less than that computed by the
federal statutory rate of 34% for the years ended June 30, 1995 and 1994, as
indicated in the following analysis:
<TABLE>
(In Thousands) 1995 1994
------ ------
<S> <C> <C>
Tax based on statutory rate $ 340 $ 314
Tax-exempt income and nondeductible expenses (62) (61)
Other, net (13) (2)
------ ------
Total $ 265 $ 251
------ ------
------ ------
</TABLE>
NOTE 10: RELATED PARTIES
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were
made in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related parties at
June 30, 1995 was $150,000. During the year ended June 30, 1995, new loans to
such related parties amounted to $0 and repayments amounted to $95,000.
-12-
<PAGE>
NOTE 11: CONTINGENT LIABILITIES AND COMMITMENTS
The Bank's financial statements do not reflect various commitments which
arise in the normal course of business and which involve elements of credit
risk, interest rate risk and liquidity risk. These are commitments to extend
credit and commercial letters of credit. A summary of the Bank's commitments at
June 30, 1995 is as follows:
<TABLE>
(In Thousands) Notional Amount
---------------
<S> <C>
Commitments to extend credit $ 1,956
Commercial letters of credit 1
--------
Total $ 1,957
--------
--------
</TABLE>
Commitments to extend credit, commercial letters of credit all include
exposure to some credit loss in the event of nonperformance of the customer.
The Bank's credit policies and procedures for credit commitments and financial
guarantees are the same as those for extension of credit that are recorded on
the balance sheet. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do not generally
present any significant liquidity risk to the Bank. The Bank's experience has
been that most loan commitments are drawn upon by customers. While few
commercial letters of credit are utilized, a significant portion of such
utilization is on an immediate payment basis. The remainder are secured by the
goods acquired by the customer with the letter of credit. The Bank has not been
required to perform on any financial guarantees during the past year. The Bank
has not incurred any losses on its commitments in either of the years ended June
30, 1995 or 1994.
NOTE 12: CONCENTRATIONS OF CREDIT
All of the Bank's loans, commitments, and commercial letters of credit have
been granted to customers in the Bank's market area. Most loan customers are
depositors of the Bank. Investments in state and municipal securities also
involve governmental entities within the Bank's market area. The concentrations
of credit by type of loan are set forth in Note 3. The distribution of
commitments to extend credit approximates the distribution of loans outstanding.
Commercial letters of credit were granted primarily to commercial borrowers.
The Bank, as a matter of policy, does not extend credit to any single borrower
in excess of $645,000.
NOTE 13: REGULATORY MATTERS
The Bank, as a State Bank is subject to the dividend restrictions set forth
by the Department of Financial Institutions, under such restrictions, the bank
may not, without the prior approval of the State Regulator, declare dividends in
excess of the sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years. The dividends as of June 30,
1995, that the Bank could declare, without the approval of the The Department of
Finanical Institutions, amounted to approximately $428,000. The Bank is also
required to maintain minimum amounts of capital to total "risk weighted" assets,
as defined by the banking regulators. At June 30, 1995, the Bank is required to
have minimum Tier 1 and Total capital ratios of 4.00% and 8.00%, respectively.
The Bank's actual ratios at that date were 11.75% and 13.00%, respectively. The
Bank's leverage ratio at June 30, 1995, was 8.86%.
-13-
<PAGE>
NOTE 14: MERGER
During the audit period The Bank of May's Lick and the Farmers and Traders
Bank of Mt. Olivet merged and are now owned 100% by Community First Financial,
Inc.
------------------ o o 0 o o ------------------
-14-
