<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-13585
NATIONAL CITY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1632155
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
227 Main Street, P.O. Box 868, Evansville, Indiana 47705-0868
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 812-464-9677
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $1.00 STATED VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
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Based on the closing sales price of February 26, 1999, the aggregate market
value of the voting stock held by non-affiliates of the registrant was
$452,894,500.
The number of shares outstanding of the registrant's common stock was 16,842,456
at February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1998. (Part I, Part II and Part IV).
(2) Portions of the registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders. (Part III)
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NATIONAL CITY BANCSHARES, INC.
1998 FORM 10-K ANNUAL REPORT
Table of contents
<TABLE>
<CAPTION>
PAGE
NUMBER
PART I
<S> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . 12
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk . . . . . . . . . . . . . . . . . . . . . 12
Item 8. Financial Statements and Supplementary Data . . . . . 12
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure . . . . . . . . . 13
PART III
Item 10. Directors and Executive Officers of the Registrant . . 14
Item 11. Executive Compensation . . . . . . . . . . . . . . . . 14
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . 14
Item 13. Certain Relationships and Related Transactions . . . . 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
3
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FORM 10-K
NATIONAL CITY BANCSHARES, INC.
December 31, 1998
PART I
ITEM 1. BUSINESS
National City Bancshares, Inc. (the "Corporation"), was organized in 1985 as an
Indiana corporation to engage in the business of a bank holding company. Based
in Evansville, Indiana, as of December 31,1998, the Corporation owned 100% of
six national banks, seven state chartered banks, and two federal savings bank
(each, a "Bank" and, collectively, the "Banks") operating from a total of
sixty-eight banking centers; a leasing company; and a property management
company. The Corporation also has a controlling interest in NCBE Capital Trust
I, a trust securities affiliate.
The Banks provide a wide range of financial services to the communities they
serve in Indiana, Kentucky, Illinois and Southwestern Ohio. 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 ("FDIC").
NCBE Leasing Corp., operates as a full service equipment and real property
leasing company offering its services to all commercial clients of the Banks.
Twenty-One Southeast Third Corporation ("TSTC") is the Corporation's real estate
property management subsidiary. TSTC is the entity through which the Corporation
constructed a nine story addition to the main office of The National City Bank
of Evansville ("NCB"). NCB and the Corporation occupy three and one half floors
of the building with the remaining floors sold as condominiums. TSTC serves in a
property management capacity for this facility.
At December 31, 1998, the Corporation and its subsidiaries had 751 full-time
equivalent employees. The subsidiaries provide a wide range of employee benefits
and management considers employee relations to be excellent.
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COMPETITION
The Corporation has active competition in all areas in which it presently
engages in business. Each Bank competes for commercial and individual deposits
and loans with commercial banks, thrift institutions, credit unions connected
with local businesses, and other non-banking institutions. The Corporation's
leasing company competes with bank and nonbank leasing companies as well as
finance subsidiaries of major equipment vendors.
FOREIGN OPERATIONS
The Corporation and its subsidiaries have no foreign branches or significant
business with foreign obligors or depositors.
REGULATION AND SUPERVISION
General
The Corporation is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended ("BHCA"), and as such is subject to regulation
by the Board of Governors of the Federal Reserve Board ("FRB"). The Corporation
files periodic reports with the FRB regarding the business operations of the
Corporation and its subsidiaries, and is subject to examination by the FRB.
The Corporation's national bank subsidiaries are supervised and regulated
primarily by the Comptroller of the Currency ("OCC"). They are also members
of the Federal Reserve System and subject to the applicable provisions of the
Federal Reserve Act. The Corporation's federal thrift subsidiaries are
supervised and regulated by the Office of Thrift Supervision ("OTS"). The
Corporation's remaining depository institution subsidiaries are supervised
and regulated primarily by their state banking supervisor and the FDIC or, in
the case of state member banks, the FRB. All of the Banks' deposits are
federally insured; accordingly, the Banks are subject to the provisions of
the Federal Deposit Insurance Act.
The federal banking agencies have broad enforcement powers, including the power
to terminate deposit insurance, impose substantial fines and other civil and
criminal penalties, and appoint a conservator or receiver. Failure to comply
with applicable laws, regulations, and supervisory agreements could subject the
Corporation, the Banks, as well as their officers, directors, and other
institution-affiliated parties, to administrative sanctions and potentially
substantial civil money penalties. In addition to the measures discussed under
"Deposit Insurance", the appropriate federal banking agency may appoint the FDIC
as conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized, it fails to become adequately capitalized when required
to do so, it fails to submit a timely and acceptable capital restoration plan,
or it materially fails to implement an accepted capital restoration plan.
5
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Supervision and regulation of bank holding companies and their subsidiaries is
intended primarily for the protection of depositors, the deposit insurance funds
of the FDIC, and the banking system as a whole, not for the protection of bank
holding company shareholders or creditors.
Acquisitions and Changes in Control
Under the BHCA, without the prior approval of the FRB, the Corporation may not
acquire direct or indirect control of more than 5% of the voting stock or
substantially all of the assets of any company, including a bank, and may not
merge or consolidate with another bank holding company. In addition, the BHCA
generally prohibits the Corporation from engaging in any nonbanking business
unless such business is determined by the FRB to be so closely related to
banking as to be a proper incident thereto. Under the BHCA, the FRB has the
authority to require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a
bank) upon the FRB's determination that such activity or control constitutes a
serious risk to the financial soundness and stability of any bank subsidiary of
the bank holding company.
Federal and state laws and regulations limit geographic expansion by the
Corporation and the Banks. Under the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994, subject to certain conditions, (i) bank
holding companies may acquire banks located in states outside their home state,
(ii) the interstate merger of banks is allowed, subject to the right of
individual states to "opt out" of this authority, and (iii) banks may establish
new branches on an interstate basis, provided that such action is specifically
authorized by the law of the host state.
The Change in Bank Control Act (the "CBCA") prohibits a person or group of
persons from acquiring "control" of a bank holding company unless the FRB has
been notified and has not objected to the transaction. Under a rebuttable
presumption established by the FRB, the acquisition of 10% or more of a class of
voting stock of a bank holding company with a class of securities registered
under Section 12 of the Securities Exchange Act of 1934, as amended, such as the
Corporation, would, under the circumstances set forth in the presumption,
constitute acquisition of control of the Corporation. In addition, any company
is required to obtain the approval of the FRB under the BHCA before acquiring
25% (5% in the case of an acquiror that is a bank holding company) or more of
the outstanding common stock of the Corporation, or otherwise obtaining control
or a "controlling influence" over the Corporation.
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Dividends and Other Relationships with Affiliates
The Corporation is a legal entity separate and distinct from its subsidiaries.
The source of the Corporation's cash flow, including cash flow to pay dividends
on the Corporation's Common Stock, is the payment of dividends to the
Corporation by the Banks. Generally, such dividends are limited to the lesser of
(i) undivided profits (less bad debts in excess of the allowance for credit
losses) and (ii) absent regulatory approval, the net profits for the current
year combined with retained net profits for the preceding two years. Further, a
depository institution may not pay a dividend if (i) it would thereafter be
"undercapitalized" as determined by federal banking regulatory agencies or (ii)
if, in the opinion of the appropriate banking regulator, the payment of
dividends would constitute an unsafe or unsound practice.
The Banks are subject to additional restrictions on their transactions with
affiliates, including the Corporation. State and federal statutes limit credit
transactions with affiliates, prescribing forms and conditions deemed consistent
with sound banking practices, and imposing limits on permitted collateral for
credit extended.
Under FRB policy, the Corporation is expected to serve as a source of financial
and managerial strength to the Banks. The FRB requires the Corporation to stand
ready to use its resources to provide adequate capital funds during periods of
financial stress or adversity. This support may be required by the FRB at times
when the Corporation may not have the resources to provide it or, for other
reasons, would not be inclined to provide it. Additionally, under the Federal
Deposit Insurance Corporation Improvements Act of 1991 ("FDICIA"), the
Corporation may be required to provide limited guarantee of compliance of any
insured depository institution subsidiary that may become "undercapitalized" (as
defined in the statute) with the terms of any capital restoration plan filed by
such subsidiary with its appropriate federal banking agency.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") imposes additional "cross guarantee" obligations. FIRREA provides
generally that, upon the default of any bank of a multi-unit holding company,
the FDIC may assess an affiliated insured depository institution for the
estimated losses incurred by the FDIC, even if this renders the affiliate
insolvent. Any obligation of a subsidiary to its holding company is subordinate
to cross-guarantee liabilities and the rights of depositors.
Regulatory Capital Requirements
The Corporation and the Banks are subject to risk-based and leverage capital
requirements imposed by the appropriate primary bank regulator. All complied
with applicable minimums as of December 31, 1998, and each Bank qualified as
well capitalized under the regulatory framework for prompt corrective action.
See footnote 14 to the consolidated financial statements.
7
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Failure to meet capital requirements could result in a variety of enforcement
remedies, including the termination of deposit insurance or measures by banking
regulators to correct the deficiency in the manner least costly to the deposit
insurance fund.
Deposit Insurance
The Banks are subject to federal deposit insurance assessments for the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"). The
assessment rate is based on classification of a depository institution into a
risk assessment category. Such classification is based upon the institution's
capital level and certain supervisory evaluations of the institution by its
primary regulator. Each of the Banks is currently assessed at the lowest premium
rate charged.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution has
engaged or is engaging in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during
the hearing process for a permanent termination of insurance if the institution
has no tangible capital. Management of the Corporation is not aware of any
activity or condition that could result in termination of the deposit insurance
of any of the Banks.
Community Reinvestment Act
The Community Reinvestment Act of 1977 ("CRA") requires financial institutions
to meet the credit needs of their entire communities, including low-income and
moderate-income areas. CRA regulations impose a performance-based evaluation
system, which bases the CRA rating on an institution's actual lending, service,
and investment performance. Federal banking agencies may take CRA compliance
into account when regulating a bank or bank holding company's activities; for
example, CRA performance may be considered in approving proposed bank
acquisitions.
Additional Regulation, Government Policies, and Legislation
In addition to the restrictions discussed above, the activities and operations
of the Corporation and the Banks are subject to a number of additional detailed,
complex, and sometimes overlapping laws and regulations. These include state
usury and consumer credit laws, state laws relating to fiduciaries, the Federal
Truth-in-Lending Act, the Federal Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Truth in Savings Act, anti-redlining legislation, and
antitrust laws.
The actions and policies of banking regulatory authorities have had a
significant effect on the operating results of the Corporation and the Banks in
the past and are expected to do so in the future.
Legislation to modernize the bank regulatory system, expand the powers
8
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of banking institutions and bank holding companies and limit the investments
that a depository institution may make with insured funds, is introduced from
time to time in Congress. Such legislation may change banking statutes and the
operating environment for the Corporation and the Banks in substantial and
unpredictable ways. The Corporation cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations would have upon
the financial condition or results of operations of the Corporation or its
subsidiaries.
Finally, the earnings of the Banks are strongly affected by the attempts of the
FRB to regulate aggregate national credit and the money supply through such
means as open market dealings in securities, establishment of the discount rate
on member bank borrowings, and changes in reserve requirements against member
bank deposits. The FRB's policies may be influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the international
trade balance and fiscal policies of the United States government. The effects
of various FRB actions on future performance cannot be predicted.
STATISTICAL DISCLOSURE
The statistical disclosure on the Corporation and the Banks, on a consolidated
basis, included in response to Item 7 of this report is hereby incorporated by
reference herein.
9
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EXECUTIVE OFFICERS OF THE CORPORATION
Certain information concerning the Executive Officers of the Corporation as of
March 1, 1999, is set forth in the following table.
<TABLE>
<CAPTION>
NAME AGE OFFICE AND BUSINESS EXPERIENCE
<S> <C> <C>
Robert D. Vance 58 Chairman of the Board and Chief Executive Officer of
the Corporation (February 1999 to Present); Director of the
Corporation (September 1998 to Present); Senior Vice
President,(September 1998 to February 1999); Chairman, Community
First Financial, Inc. (1987 to August 1998); Chairman, Community
First Bank, N.A. (1987 to Present); and Chairman, Community First
Bank of Kentucky (1989 to Present)
Robert A. Keil 55 President and Director of the Corporation since 1993.
Executive Vice President of the Corporation from 1991 to 1993. Assistant
Secretary and Assistant Treasurer of the Corporation from 1985 to 1993.
Executive Vice President of NCB from 1991 to 1993.
Curtis D. Ritterling 42 Executive Vice President since 1997. Chairman of the
Board, President, and Chief Executive Officer of Boatman's Bank of South
Central Illinois from 1995 to 1997. Chairman of the Board, President, and
Chief Executive Officer of Boatmen's Bank of Marshall, Missouri, from 1990
to 1995.
Stephen C. Byelick, Jr. 50 Secretary-Treasurer of the Corporation since 1998;
Senior Vice-President of the Corporation 1996 to 1997; Executive Vice-
President and Chief Financial Officer of MidAmerica Bank, 1995 to 1996;
Senior Vice-President and Chief Financial Officer of Rocky Mountain Bank,
fsb, 1989 to 1994.
</TABLE>
10
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ITEM 2. PROPERTIES
The net investment of the Corporation and its subsidiaries in real estate and
equipment at December 31, 1998, was $46,399,000. The Corporation's offices are
located at 227 Main Street in downtown Evansville, Indiana, in a building owned
in fee by NCB. The Banks, all branches, the leasing company, and the insurance
company are located on premises either owned or leased. None of the property is
subject to any major encumbrance.
A nine story addition to NCB's main office was completed in 1998 at a total cost
of approximately $18,000,000. NCB and the Corporation occupy three and one half
floors of the building with the other floors offered for sale as condominiums.
Four of these other floors have been sold to third parties. The Corporation's
share of the building cost is approximately $10,000,000. The Corporation,
through its subsidiary, TSTC, funded the project, including financing for the
purchasers of the condominiums, with the proceeds of a $15,000,000 term loan
with the excess being funded internally. Payments from the purchasers will be
used to repay the term loan. There are no other material commitments for capital
expenditures.
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are involved in legal proceedings from time
to time arising in the ordinary course of business. None of such legal
proceedings are, in the opinion of management, expected to have a materially
adverse effect on the Corporation's consolidated financial position or results
of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS
Pages 1 and inside back cover of the Corporation's Annual Report to Shareholders
for the fiscal year ended December 31, 1998, are incorporated by reference
herein.
The Corporation pays quarterly cash dividends and annual stock dividends. The
Corporation depends upon the dividends from the Banks to pay cash dividends to
its shareholders. The ability of the Banks to pay such dividends is limited by
banking laws and regulations.
As of February 26, 1999, there were approximately 2,600 holders of record of
Common Stock.
The Corporation issued an aggregate of 307,276 shares of Common Stock to the
former shareholders of Downstate Banking Co. and Commonwealth Commercial Corp.
on October 31, 1998 in transactions that were exempt from registration under the
Securities Act of 1933, as amended, in reliance upon the exemption provided by
Section 4(2) thereof.
ITEM 6. SELECTED FINANCIAL DATA
Page 1 of the Corporation's Annual Report to Shareholders for the fiscal year
ended December 31, 1998, is incorporated by reference herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Pages 1, 6 through 17, and inside back cover of the Corporation's Annual Report
to Shareholders for the fiscal year ended December 31, 1998, are incorporated by
reference herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Page 14 of the Corporation's Annual Report to Shareholders for the fiscal year
ended December 31, 1998, are incorporated by reference herein.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 18 through 38 of the Corporation's Annual Report to Shareholders for the
fiscal year ended December 31, 1998, are incorporated by reference herein.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not Applicable.
13
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information under the heading "Election of Directors and Information with
Respect to Directors and Officers" and also the information under the heading
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Corporation's
Proxy Statement for its 1999 Annual Meeting of Shareholders, is hereby
incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The information under the heading "Compensation of Executive Officers" in the
Corporation's Proxy Statement for its 1999 Annual Meeting of Shareholders, is
hereby incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information under the heading "Voting Securities" in the Corporation's Proxy
Statement for its 1999 Annual Meeting of Shareholders, is hereby incorporated by
reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the heading "Transactions with Management" in the
Corporation's Proxy Statement for its 1999 Annual Meeting of Shareholders, is
hereby incorporated by reference herein.
14
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following consolidated financial statements of the Corporation and its
subsidiaries, included on pages 18 through 38 of the Corporation's Annual Report
to Shareholders for the fiscal year ended December 31, 1998, are hereby
incorporated by reference:
Independent Auditor's Report
Consolidated Statements of Financial Position, at
December 31, 1998 and 1997
Consolidated Statements of Income, for years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows, for years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity,
for years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES
The following reports of accountants on financial statements of certain entities
acquired by the Corporation are included as pages 23 through 26 of this report:
Report of Eskew & Gresham PSC dated February 25, 1998, on their audit of
the consolidated balance sheets of Progressive Bancshares, Inc. as of
December 31, 1997 and 1996 and the related consolidated statements of
income, stockholders' equity, and cash flows for the years then ended.
Report of Sherman, Barber & Mullikin dated February 24, 1998, on their
audit of the statements of financial condition of Hoosier Hills Financial
Corporation and subsidiary, as of December 31, 1997 and 1996 and the
related consolidated statements of income, stockholders' equity, and cash
flows for the years then ended.
Report of Thurman Campbell & Co. dated October 24, 1997 on their audit of
the statements of financial condition of Princeton Federal Bank, fsb as of
September 30, 1997 and 1996 and the related consolidated statements of
income, stockholders' equity, and cash flows for the years ended September
30, 1997, 1996 and 1995.
15
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Report of Gray Hunter Stenn LLP dated June 8, 1998, on their audit of
the consolidated balance sheets of 1st Bancorp Vienna, Inc. and
subsidiary as of December 31, 1997 and the related consolidated
statements of income, stockholders' equity, and cash flows for the two
years ended December 31, 1997 and 1996.
All other schedules are omitted because they are not applicable or not required
or because the required information is included in the consolidated financial
statements or related notes.
EXHIBITS
The exhibits listed on the Exhibit Index on pages 21 and 22 are incorporated by
reference.
16
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REPORTS ON FORM 8-K
A CURRENT REPORT dated October 9, 1998 reporting consummation of the
acquisitions of Illinois One Bancorp, Inc., Trigg Bancorp, Inc. and Community
First Financial, Inc. which were accounted for using the pooling of interest
method and in aggregate represented a significant business combination. The
Supplemental Consolidated Financial Statements restating the Registrant's
historical financial statements to reflect the acquisitions were filed as
exhibits under Item 7.
A CURRENT REPORT dated October 27, 1998 for events of October 21, 1998 and
October 26, 1998 were filed under Item 5 reporting the declaration
of a five percent (5%) stock dividend and a news release reporting earnings.
17
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the dates indicated.
NATIONAL CITY BANCSHARES, INC.
By /S/ ROBERT D. VANCE 3/23/99
---------------------------- --------
Robert D. Vance Date
Interim Chairman of the Board and
Interim Chief Executive Officer
By /S/ ROBERT A. KEIL 3/23/99
--------------------------- -------
Robert A. Keil Date
President and
Chief Financial Officer
By /S/ STEPHEN C. BYELICK 3/23/99
---------------------------- -------
Stephen C. Byelick, Jr. Date
Secretary and Treasurer and
Chief Accounting Officer
18
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/S/ JANICE L. BEESLEY 3/23/99
------------------------ -------
Janice L. Beesley Date
Director
/S/ BEN L. CUNDIFF 3/23/99
------------------------ -------
Ben L. Cundiff Date
Director
/S/ SUSANNE R. EMGE 3/23/99
------------------------ -------
Susanne R. Emge Date
Director
/S/ DONALD G. HARRIS 3/23/99
------------------------ -------
Donald G. Harris Date
Director
/S/ H. RAY HOOPS 3/23/99
------------------------ -------
Dr. H. Ray Hoops Date
Director
/S/ ROBERT A. KEIL 3/23/99
------------------------ -------
Robert A. Keil Date
Director
/S/ JOHN D. LIPPERT 3/23/99
------------------------ -------
John D. Lippert Date
Director
19
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/S/ GEORGE D. MARTIN 3/23/99
------------------------ -------
George D. Martin Date
Director
/S/ RONALD G. REHERMAN 3/23/99
------------------------ -------
Ronald G. Reherman Date
Director
/S/ LAURENCE R. STEENBERG 3/23/99
------------------------ -------
Laurence R. Steenberg Date
Director
/S/ ROBERT D. VANCE 3/23/99
------------------------ -------
Robert D. Vance Date
Director
/S/ RICHARD F. WELP 3/23/99
------------------------ -------
Richard F. Welp Date
Director
20
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
3(i) Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
the Form 8-A/A dated June 12, 1998)
3(ii) By-Laws (incorporated by reference to Exhibit 3 (ii) to the Annual
Report on Form 10-K for the year ended December 31, 1997)
10(a) Term Loan Agreement, dated as of June 26, 1996 between Twenty-One
Southeast Third Corporation, National City Bancshares, Inc. and The
Northern Trust Company (incorporated by reference to Exhibit 10 (a) to
Quarterly Report on Form 10-Q for the period ending June 30, 1996)
10(b)* Incentive Stock Option Plan (incorporated by reference to Exhibit 10
(b) to Quarterly Report on Form 10-Q for the period ending June 30,
1996)
10(c)* Incentive Stock Option Plan, First Amendment, dated as of December 18,
1996 (incorporated by reference to Exhibit 10 (c) to Annual Report on
Form 10-K for the year ended December 31, 1996)
10(d)* Incentive Stock Option Plan, Second Amendment, dated as of March 19,
1997 (incorporated by reference to Exhibit 10 (d) to Annual Report on
Form 10-K for the year ended December 31, 1996)
10(e)* Supplemental Retirement Benefit Agreement between John D. Lippert
and National City Bancshares, Inc. (incorporated by reference to
Exhibit 10 (e) to Annual Report on Form 10-K for the year ended
December 31, 1996)
10(f) Term Loan Agreement, First Amendment, dated as of January 31, 1997
(incorporated by reference to Exhibit 10 (f) to Annual Report on Form
10-K for the year ended December 31, 1996)
10(g) Credit Agreement dated December 22, 1997 between National City
Bancshares, Inc. and NBD Bank (incorporated by reference to Exhibit
10 (g) to Annual Report on Form 10-K for the year ended December
31, 1997)
10(h) Amendment to Credit Agreement dated January 22, 1998 (incorporated
by reference to Exhibit 10 (h) to Annual Report on Form 10-K for
the year ended December 31, 1997)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10(i)* Termination Benefits Agreements, dated as of September 16, 1998
between National City Bancshares, Inc. and Michael F. Elliott
(incorporated by reference to Exhibit 10.1 to Quarterly Report on Form
10-Q for the period ending September 30, 1998)
10(j)* Termination Benefits Agreement, dated as of September 16, 1998 between
National City Bancshares, Inc. and Robert A. Keil (incorporated by
reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the
period ending September 30, 1998)
10(k)* Termination Benefits Agreement, dated as of September 16, 1998 between
National City Bancshares, Inc. and Curtis D. Ritterling (incorporated
by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the
period ending September 30, 1998)
10(l)* Termination Benefits Agreement, dated as of September 16, 1998 between
National City Bancshares, Inc. and Stephen C. Byelick, Jr.
(incorporated by reference to Exhibit 10.4 to Quarterly Report on Form
10-Q for the period ending September 30, 1998)
10(m)* Deferred Excess Benefit Agreement, dated as of January 8, 1999 between
National City Bancshares, Inc. and Robert A. Keil
13 1998 Annual Report to Shareholders (except as expressly incorporated
by reference herein, such report is furnished for the information of
the Commission only)
21 Subsidiaries of the Registrant
23(a) Consent of PricewaterhouseCoopers, LLP
23(b) Consent of Crowe, Chizek & Company, LLP
23(c) Consent of Sherman, Barber, & Mullikin
23(d) Consent of Thurman, Campbell & Co.
23(e) Consent of Gray Hunter Stenn LLP
27 Financial Data Schedule (Electronic Filing Only)
27.1 FDS 1996 Restated
27.2 FDS 1997 Restated
27.3 FDS 1998
27.4 FDS 1997 Quarters Restated
27.5 FDS 1998 Quarters Restated
</TABLE>
* The indicated exhibit is a management contract, compensatory plan, or
arrangement required to be filed by Item 601 of Regulation S-K.
22
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Progressive Bancshares, Inc.
Lexington, Kentucky
We have audited the consolidated balance sheets of Progressive Bancshares,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of income, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Progressive
Bancshares, Inc. at December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/S/ ESKEW & GRESHAM PSC
- -------------------------------
Lexington, Kentucky
February 25, 1998
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hoosier Hills Financial Corporation
Osgood, Indiana
We have audited the accompanying Consolidated Statements of Financial
Condition of Hoosier Hills Financial Corporation and its subsidiary, The Ripley
County Bank, as of December 31, 1997 and December 31, 1996 and the related
Consolidated Statements of Income, Changes in Equity and Cash Flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these statements based on our audit.
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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated 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 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
Hoosier Hills Financial Corporation and subsidiary at December 31, 1997 and
December 31, 1996 and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
/S/ SHERMAN, BARBER & MULLIKIN
- ------------------------------
Certified Public Accountants
February 24, 1998
-24-
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Princeton Federal Bank
and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Princeton Federal Bank and Subsidiary as of September 30, 1997 and
1996, and the related statements of income, changes in stockholders' equity, and
cash flows for each of the three years in the three year period ended September
30, 1997. These consolidated financial statements are the responsibility of
Princeton Federal Bank's management. Our responsibility is to express an opinion
on these consolidated 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Princeton Federal Bank and Subsidiary as of September 30, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the three-year period ended September 30, 1997, in conformity
with generally accepted accounting principles.
/S/ THURMAN, CAMPBELL & CO.
- ---------------------------
Princeton, Kentucky
October 24, 1997
-25-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
1st Bancorp Vienna, Inc.
Vienna, Illinois
We have audited the accompanying consolidated balance sheet of 1st Bancorp
Vienna, Inc. and Subsidiary as of December 31, 1997 and the related consolidated
statements of income, changes in stockholders' equity, and cash flows for the
two years ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 1st Bancorp Vienna, Inc. and
Subsidiary at December 31, 1997, and the results of their operations and their
cash flows for the two years ended December 31, 1997 and 1996 in conformity with
generally accepted accounting principles.
/S/ GRAY HUNTER STENN LLP
- ---------------------------
Marion, Illinois
June 8, 1998
26
<PAGE>
EXHIBIT 10(m)
DEFERRED EXCESS BENEFIT
AGREEMENT BETWEEN NATIONAL CITY
BANCSHARES, INC. AND ROBERT A. KEIL
-----------------------------------
This Deferred Excess Benefit Agreement ("Agreement") is entered into by and
between National City Bancshares, Inc. ("Company") and Robert A. Keil ("Keil"),
effective as of the date of its execution by both parties.
BACKGROUND
----------
Keil is a valuable management employee of the Company. In recognition of
his substantial contributions to the Company, the Company believes it is
necessary and appropriate upon his termination of employment with the Company to
restore benefits that were not available to Keil under the Pension Plan because
of certain legal limits imposed by the Code and the termination of the Pension
Plan.
AGREEMENT
---------
In consideration of the premises and the covenants and conditions contained
in this Agreement, the Company and Keil agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the terms listed below
shall have the meaning stated.
(a) AGE 60. "Age 60" means the first day of the calendar month on or
immediately after Keil's 60th birthday.
(b) BENEFICIARY. "Beneficiary" means the person or persons, including a
trustee, designated by Keil in a writing to the Company to receive the
payment of benefits provided under this Agreement following Keil's death.
In the absence of such a designation, the Beneficiary shall be Keil's
spouse, if she survives him, or if she does not survive him, Keil's estate.
(c) COMPANY. "Company" means National City Bancshares, Inc. and any
successor corporation.
(d) CODE. "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and interpretive rulings and regulations.
(e) PENSION PLAN. "Pension Plan" means the Plan for Pensions of National
City Bancshares, Inc., as amended (which was terminated effective October
1, 1998, subject to Internal Revenue Service approval).
1
<PAGE>
(f) RESTORED BENEFIT. "Restored Benefit" means the lump sum equivalent of
the benefit that would have been paid to Keil under the Pension Plan if
Keil's benefit were determined without regard to the Pension Plan's
termination and the limitations imposed under Code section 415, reduced by
the amount of the lump sum benefit actually received by Keil upon
termination of the Pension Plan; provided, however, the Restored Benefit,
as determined under this subparagraph, may not exceed the amount that would
have been payable to Keil under this Agreement upon Termination of
Employment at Age 60.
(g) TERMINATION OF EMPLOYMENT. "Termination of Employment" means the
voluntary or involuntary cessation of the relationship of employer and
employee between the Company and all of its related employers (within the
meaning of Code section 414) and Keil by reason of death, disability,
resignation, retirement, or discharge.
2. BENEFIT. Upon Keil's Termination of Employment, he shall be entitled to
his Restored Benefit.
3. PAYMENT OF RESTORED BENEFIT. Keil's Restored Benefit shall be paid in
four substantially equal annual installments. The first annual installment shall
be paid as soon as administratively feasible after Keil's Termination of
Employment. Subsequent installments shall be paid as of each succeeding
anniversary date of the first installment.
4. BENEFICIARY'S BENEFIT. Upon Keil's death, his Restored Benefit (or the
remainder of his Restored Benefit if Keil has received one or more annual
installments pursuant to Section 3 prior to his death) shall be paid to his
Beneficiary in a single lump sum cash payment as soon as administratively
feasible after Keil's death.
5. FUNDING POLICY. The Restored Benefit provided under this Agreement shall
be totally unfunded and shall be paid out of the Company's general assets.
6. RELATIONSHIP. Notwithstanding any other provision of this Agreement,
this Agreement and any action taken pursuant to it shall not be deemed or
construed to establish a trust or fiduciary relationship of any kind between or
among the Company, Keil, his Beneficiary, or any other persons. The right of
Keil and his Beneficiary to receive payment of the Restored Benefit is strictly
a contractual right to payment, and this Agreement does not grant nor shall it
be deemed to grant Keil, his Beneficiary, or any other person any interest in or
right to any of the funds, property, or assets of the Company other than as a
general creditor of the Company.
2
<PAGE>
7. OTHER BENEFITS AND PLANS. Nothing in this Agreement shall
be deemed to prevent Keil from receiving, in addition to the Restored Benefit
provided under this Agreement, any funds that may be distributable to him at any
time under any other present or future retirement, termination, or incentive
plan of the Company.
8. ANTICIPATION OF BENEFITS. Neither Keil nor his Beneficiary
shall have the power to transfer, assign, anticipate, pledge, alienate, or
otherwise encumber in advance any of the payments that may become due under this
Agreement, and any attempt to do so shall be void. Any payments that become due
under this Agreement shall not be subject to attachment, garnishment, or
execution or be transferrable by operation of law in the event of bankruptcy,
insolvency, or otherwise.
9. MISCELLANEOUS. This Agreement shall be binding upon and
inure to the benefit of the Company and its successors and assigns, and Keil and
his heirs and legal representatives. This Agreement shall be construed in
accordance with the internal laws of the State of Indiana to the extent that
those laws are not preempted by federal law.
3
<PAGE>
10. AMENDMENT. This Agreement may be amended only by a written agreement
signed by both the Company and Keil.
IN WITNESS WHEREOF, the Company has caused this Agreement to be signed by
its duly authorized officer, and Keil has signed the same.
NATIONAL CITY BANCSHARES, INC.
Date: JANUARY 8, 1999 By: /S/ MICHAEL F. ELLIOTT
--------------------- ----------------------------
Signature
MICHAEL F. ELLIOTT
----------------------------
Printed
CHAIRMAN AND CEO
----------------------------
Title
ATTEST: /S/ SHARON K. BARNHILL
-----------------------
Signature
SHARON K. BARNHILL
-----------------------
Printed
Date: JANUARY 8, 1999 /S/ ROBERT A. KEIL
----------------- ----------------------------
Robert A. Keil
4
<PAGE>
DESIGNATION OF BENEFICIARY
I, Robert A. Keil, and National City Bancshares, Inc. have entered into a
Deferred Excess Benefit Agreement dated January 8, 1999. Pursuant to Section
1(b) of the Agreement, I hereby designate the following Beneficiary(ies):
Primary Beneficiar(ies)
If more than one Primary Beneficiary is named, those surviving me shall
receive equal shares unless otherwise noted.
NAME ADDRESS SSN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Contingent Beneficiary(ies)
If more than one Contingent Beneficiary is named, those surviving me and
the Primary Beneficiary(ies) designated above shall receive equal shares unless
otherwise noted. This designation shall apply if no Primary Beneficiary is
living at the time of my death.
NAME ADDRESS SSN
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
EXHIBIT 13
1998 ANNUAL REPORT
[GRAPHIC - PHOTOS IN THE SHAPE OF NATIONAL CITY BANCSHARES, INC. LOGO]
A YEAR OF GROWING
[NATIONAL CITY BANCSHARES, INC. LOGO]
NATIONAL CITY BANCSHARES, INC.
<PAGE>
BUILDING ON A SOLID FOUNDATION
CORPORATE PROFILE
National City Bancshares, Inc.
(Nasdaq: NCBE) is a multi-bank
holding company headquartered in
Evansville, Indiana. As of
December 31, 1998, National
City Bancshares, Inc. had
assets of approximately $2.2
billion and owned fifteen
full-service financial
institutions serving
fifty-four communities from
sixty-eight locations
throughout Indiana, Kentucky,
Illinois, and Southwestern
Ohio.
CONTENTS
<TABLE>
<S> <C>
Financial Review 1
Message to Shareholders 2
Year in Review 4
Management's Discussion 6
Independent Auditor's Report 18
Statements of Financial Position 19
Statements of Income and
Comprehensive Income 20
Statements of Cash Flows 21
Statement of Shareholders' Equity 23
Notes to Financial Statements 24
Official Organization 39
Subsidiaries 39
National City Bancshares, Inc. 40
</TABLE>
Shareholder Information INSIDE BACK COVER
<PAGE>
1998 ANNUAL REPORT
[GRAPHIC - PHOTO OF TREE IN THE SHAPE OF NATIONAL CITY BANCSHARES, INC. LOGO]
A YEAR OF GROWING
<PAGE>
FINANCIAL REVIEW
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
(Dollar Amounts Other Than Share Data Thousands) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR
Net interest income $ 87,897 $ 81,338 $ 75,618 $ 69,203 $ 62,480
Provision for loan losses 7,143 2,703 3,705 780 669
Noninterest income 16,621 14,102 12,437 10,472 7,984
Noninterest expense 67,289 53,498 48,096 45,953 44,892
Income before income taxes 30,086 39,239 36,254 32,942 24,903
Income taxes 7,970 11,071 11,541 11,047 8,123
Net income 22,116 28,168 24,713 21,895 16,780
Proforma C Corp. provision for income taxes 8,632 11,765 11,541 11,047 8,123
Proforma net income $ 21,454 $ 27,474 $ 24,713 $ 21,895 $ 16,780
PER COMMON SHARE*
Proforma net income per share
Basic $ 1.28 $ 1.65 $ 1.48 $ 1.29 $ 1.00
Diluted 1.27 1.64 1.48 1.29 0.99
Book value 12.96 12.62 11.56 11.34 9.34
Cash dividends declared by
National City Bancshares, Inc. 0.74 0.61 0.52 0.38 0.38
TOTALS AT YEAR-END
Total assets $2,195,224 $1,985,178 $1,816,935 $1,689,120 $1,548,905
Securities 346,514 409,069 413,604 402,215 414,990
Loans, net 1,629,853 1,387,105 1,242,152 1,128,056 980,728
Deposits 1,734,585 1,532,804 1,455,356 1,375,318 1,321,752
Shareholders' equity 218,280 211,237 188,003 183,885 158,992
SELECTED FINANCIAL RATIOS
Proforma net income to average assets 0.99% 1.44% 1.42% 1.36% 1.11%
Proforma net income to average equity 9.86 13.95 13.11 12.43 10.73
Cash dividends payout 59.72 36.67 34.35 27.48 27.29
Average equity to average assets 10.08 10.30 10.82 10.94 10.33
OTHER DATA
Weighted average shares--basic* 16,757,078 16,612,837 16,712,994 16,913,711 16,856,878
Weighted average shares--diluted* 16,874,287 16,757,121 16,730,839 16,927,776 16,870,944
Shares outstanding at year-end* 16,842,456 16,736,361 16,257,428 16,219,321 17,021,534
Average assets $2,158,314 $1,911,525 $1,741,476 $1,611,084 $1,513,850
Average equity 217,524 196,909 188,490 176,179 156,330
Dividends 12,813 10,074 8,488 6,017 4,579
</TABLE>
*RESTATED TO REFLECT ALL STOCK DIVIDENDS AND THE TWO-FOR-ONE STOCK SPLIT ISSUED
IN 1996.
<TABLE>
<CAPTION>
TOTAL ASSETS LOANS DEPOSITS
<S> <C> <C>
[GRAPH OF TOTAL ASSETS] [GRAPH OF NET LOANS] [GRAPH OF DEPOSITS]
</TABLE>
<PAGE>
FORGING A FIRM FUTURE
TO OUR SHAREHOLDERS
[PHOTO OF ROBERT A. KEIL (PRESIDENT),
ROBERT D. VANCE (CHAIRMAN AND CEO),
AND CURTIS D. RITTERLING (EXECUTIVE VICE PRESIDENT)
"AS ALWAYS, OUR EFFORTS ARE GUIDED BY OUR COMMITMENT TO PRODUCE SUPERIOR
SHAREHOLDER VALUE OVER THE LONG TERM."
MARCH 24, 1999
National City Bancshares, Inc. focused on long-term goals during 1998 by growing
your company to a size which will enable it to better compete in the rapidly
changing financial industry. In addition, the Corporation began consolidating
certain operational functions to increase efficiency and provide improved
customer service.
The assets of your company increased, before restatement for pooling
transactions, 69 percent from $1.3 billion on December 31, 1997, to $2.2
billion on December 31, 1998. The assets added by acquisition were as
follows: a branch in Mayfield, Kentucky ($66 million) was purchased in a cash
transaction January 8, 1998, and transferred to First Kentucky Bank (Sturgis,
Kentucky); Bank of Illinois in Mt. Vernon ($179 million - Mt. Vernon,
Illinois) was purchased in a cash transaction March 6, 1998; Illinois One
Bank, N.A. ($86 million - Shawneetown, Illinois) was acquired May 31, 1998,
in a stock transaction; Trigg County Farmers Bank ($95 million - Cadiz,
Kentucky), Community First Bank, N.A. ($75 million - Maysville, Kentucky),
and Community First Bank of Kentucky ($58 million - Warsaw, Kentucky) were
acquired in stock transactions on August 31, 1998; Ripley County Bank ($117
million - Osgood, Indiana) and The First State Bank of Vienna ($38 million -
Vienna, Illinois) were acquired in stock transactions on October 1, 1998;
Bank of Crittenden ($25 million - Crittenden, Kentucky) and Downstate
National Bank ($22 million -Brookport, Illinois) were acquired in stock
transactions on October 31, 1998; Princeton Federal Bank, fsb, ($32 million -
Princeton, Kentucky) was acquired in a stock transaction on November 30,
1998; and The Progressive Bank, National Association, ($145 million -
Lexington, Kentucky) was acquired in a stock transaction on December 1, 1998.
2
<PAGE>
[PHOTO OF ROBERT
D. VANCE FOCUSED ON GROWTH
(CHAIRMAN AND
CHIEF EXECUTIVE
OFFICER
This growth was not without additional cost. In 1998 merger and acquisition
expenses plus operational consolidation after-tax expenses were $4.8 million.
Even though the expenses related to our rapid growth and consolidation
negatively impacted 1998 earnings, we are much better positioned now for
sustained long-term earnings growth. By the end of July 1999, our data
processing operations and certain other back-office operational functions will
be combined into our Evansville location. By the third quarter of 1999, we
should realize the efficiencies of our consolidation.
We will be less aggressive in acquiring banks during 1999. We will be seeking
banks which will benefit by joining our company and add to our shareholder
value.
During 1998 we merged The Peoples National Bank of Grayville (Grayville,
Illinois), Lincolnland Bank (Dale, Indiana), Alliance Bank (Vincennes, Indiana),
and Pike County Bank (Petersburg, Indiana) into The National City Bank of
Evansville (Evansville, Indiana). We also merged The First State Bank of Vienna
and Downstate National Bank into Illinois One Bank, National Association. Bank
of Crittenden was merged into Community First Bank of Kentucky, and The First
National Bank of Wayne City (Wayne City, Illinois) merged with Bank of Illinois
in Mt. Vernon as Bank of Illinois, National Association. During the first half
of 1999, we plan to merge Princeton Federal Bank, fsb, and First Federal Savings
Bank of Leitchfield (Leitchfield, Kentucky) into First Kentucky Bank and to
merge Community First Bank of Kentucky into Community First Bank, National
Association.
We increased our year-end allowance for loan losses by $4.5 million during 1998,
increasing our allowance from 1.00 percent of gross loans to 1.12 percent.
Michael F. Elliott resigned February 16, 1999. Your Board of Directors appointed
me to serve as interim Chairman and Chief Executive Officer until a new CEO is
named. Your Board of Directors has contracted with a leading executive search
firm to find the best qualified individual to lead your company.
We are confident that our accomplishments in 1998 will provide a foundation for
continuing growth in the future. We remain focused on maximizing returns on our
acquisitions, controlling costs, and positioning our company for continued
success. At the same time, we will continue to pursue creative strategies to
enhance our ability to exceed customer expectations and achieve profitable
growth. As always, our efforts are guided by our commitment to produce superior
shareholder value over the long term.
We thank our employees, customers, and shareholders for their continued
confidence and support.
Respectfully,
/S/ Robert D. Vance
Robert D. Vance
Chairman and Chief Executive Officer
WE REMAIN FOCUSED ON MAXIMIZING
RETURNS ON OUR ACQUISITIONS,
CONTROLLING COSTS, AND POSITIONING OUR
COMPANY FOR CONTINUED SUCCESS.
[PHOTO OF CURTIS D.
RITTERLING,
EXECUTIVE VICE
PRESIDENT]
[PHOTO OF
ROBERT A. KEIL,
PRESIDENT]
3
<PAGE>
1998 REVIEW (ALL NUMBERS ARE PRESENTED AS ORIGINALLY STATED.)
JANUARY 8
NCBE's subsidiary, First Kentucky Bank, purchased the former Mayfield, Kentucky,
Branch Office of Republic Bank & Trust Company. The purchase increased First
Kentucky Bank's assets by approximately $66 million.
FEBRUARY 12
NCBE announced that a definitive agreement has been executed with Trigg Bancorp,
Inc. Trigg Bancorp, Inc. is a one-bank holding company for Trigg County Farmers
Bank with three offices in Cadiz, Kentucky.
MARCH 6
NCBE completed the acquisition of Vernois Bancshares, Inc., a one-bank holding
company for Bank of Illinois in Mt. Vernon adding approximately $179 million in
assets.
MARCH 10
NCBE announced its plans to expand into Northern Kentucky and Southwestern Ohio
with the execution of a definitive agreement with Community First Financial,
Inc. of Maysville, Kentucky. Community First Financial, Inc. is a two-bank
holding company for Community First Bank, National Association, and Community
First Bank of Kentucky. Together, the two banks operate eight banking offices.
MARCH 31
NCBE subsidiaries The Peoples National Bank of Grayville and The National City
Bank of Evansville announced plans to merge. Peoples National Bank will merge
its one office in Grayville, Illinois, into National City Bank.
APRIL 20
Record first quarter diluted earnings of $0.47 per share was reported by NCBE.
Net income for the first quarter was $5.11 million, a 9.4% improvement over the
previous year.
APRIL 21
NCBE announced that a definitive agreement has been executed with Hoosier Hills
Financial Corporation, a one-bank holding company for Ripley County Bank. Ripley
County Bank has three offices in Osgood, Versailles, and Milan, Indiana.
MAY 20
NCBE declared a quarterly cash dividend of $0.18 per share.
MAY 20
Bank of Illinois in Mt. Vernon and First National Bank of Wayne City announced
the agreement to merge to form Bank of Illinois, National Association. Both
institutions are subsidiaries of NCBE.
MAY 22
NCBE announced the execution of a definitive agreement with Princeton Federal
Bank, fsb. Princeton Federal has one office in Caldwell County, Kentucky.
MAY 22
NCBE and 1st Bancorp Vienna, Inc., a one-bank holding company for The First
State Bank of Vienna, have reached an agreement to merge. It is expected that
The First State Bank of Vienna will be combined with Illinois One Bank, National
Association, upon completion of the merger.
May 31
NCBE completes the acquisition of Illinois One Bank, National Association, which
has three offices in Shawneetown, Elizabethtown, and Golconda, Illinois.
JULY 1
NCBE announced the execution of a definitive agreement with Commonwealth
Commercial Corp., a one-bank holding company for Bank of Crittenden in
Crittenden, Kentucky. It is expected that Bank of Crittenden will be combined
with Community First Bank of Kentucky upon completion of the merger.
JULY 10
Downstate Banking Co., a one-bank holding company for Downstate National Bank in
Brookport, Illinois, has agreed to join NCBE. Upon completion of the merger,
Downstate National Bank will be combined with NCBE subsidiary, Illinois One
Bank, National Association.
JULY 14
Expansion into the Lexington, Kentucky market was announced by NCBE with the
execution of a definitive agreement with Progressive Bancshares, Inc., a
one-bank holding company for The Progressive Bank, National Association. The
Progressive Bank has four offices in Lexington, Lawrenceburg, and Owingsville,
Kentucky.
4
<PAGE>
JULY 15
It was announced that Alliance Bank, Pike County Bank, and Lincolnland Bank,
three subsidiaries of NCBE, would be combined with The National City Bank of
Evansville. The consolidation would increase National City Bank's assets from
approximately $514 million to $854 million.
JULY 29
NCBE reported net income for the first six months of 1998 of $10.24 million, or
$0.89 per share on a diluted basis, up from $10.05 million, or $0.89 per share
on a diluted basis in 1997.
AUGUST 6
NCBE announced the implementation of back office restructuring and product
standardization plans with an estimated annual pretax earnings improvement of
approximately $5.1 million when completed.
AUGUST 10
It was announced that the merger between The Peoples National Bank of Grayville
and The National City Bank of Evansville has been completed.
AUGUST 19
A quarterly cash dividend of $0.18 per share was declared by NCBE.
AUGUST 22
The merger between Bank of Illinois in Mt. Vernon and First National Bank of
Wayne City to form Bank of Illinois, N.A. has been completed.
AUGUST 31
NCBE completed its mergers with Community First Financial, Inc. and Trigg
Bancorp, Inc. adding approximately $230 million in assets.
OCTOBER 1
NCBE announced the completion of its mergers with Hoosier Hills Financial
Corporation and 1st Bancorp Vienna, Inc. adding approximately $155 million in
assets.
OCTOBER 17
The merger of Lincolnland Bank into The National City Bank of Evansville was
completed.
OCTOBER 21
NCBE declared a five percent stock dividend and a quarterly cash dividend of
$0.20 per share.
OCTOBER 26
Net income, after merger-related and consolidation costs, was reported at $16.89
million, or $1.27 per share on a diluted basis, for the first three quarters of
1998. Third quarter net income was $4.39 million, or $0.32 per share on a
diluted basis.
OCTOBER 31
NCBE completed its mergers with Commonwealth Commercial Corp. and Downstate
Banking Co. adding approximately $44 million in assets.
NOVEMBER 7
The merger of Pike County Bank into The National City Bank of Evansville was
completed.
NOVEMBER 14
The merger of Alliance Bank into The National City Bank of Evansville was
completed.
NOVEMBER 30
NCBE completed its merger with Princeton Federal Bank, fsb, adding approximately
$32 million in assets.
DECEMBER 1
NCBE completed its merger with Progressive Bancshares, Inc. adding approximately
$145 million in assets.
DECEMBER 14
Community First Bank of Kentucky announced it has completed its merger with Bank
of Crittenden. Both institutions are subsidiaries of NCBE.
5
<PAGE>
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 December 31, 1998, the Corporation had fifteen
wholly-owned banking subsidiaries, including six national banks, seven state
chartered banks, and two federal savings banks with a total of sixty-eight
banking centers serving fifty-four communities. The Corporation also has a
leasing corporation, a property management company, and a trust securities
affiliate. Each bank subsidiary, its location, number of offices, year founded,
date of affiliation with the Corporation, and size in assets and equity is shown
below. During 1998, The Peoples National Bank of Grayville, Lincolnland Bank,
Alliance Bank, and Pike County Bank were merged into The National City Bank of
Evansville;
BANKING SUBSIDIARIES
<TABLE>
<CAPTION>
12/31/98 (million)
Number of Year Date of Affiliation ------------------
Home Office and Other Cities Offices Founded with the Corporation Assets Equity
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
THE NATIONAL CITY BANK OF EVANSVILLE 23 1850 May 6, 1985 $853 $75
EVANSVILLE, NEWBURGH, FT. BRANCH, PRINCETON,
MT. VERNON, DALE, CHRISNEY, GRANDVIEW,
ROCKPORT, HATFIELD, PETERSBURG, SPURGEON,
ARTHUR, VINCENNES, WASHINGTON, AND
ODON, IN AND GRAYVILLE, IL
FIRST KENTUCKY BANK 6 1916 November 30, 1990 151 15
STURGIS, MORGANFIELD, POOLE, MAYFIELD, AND
UNIONTOWN, KY
THE BANK OF MITCHELL 4 1882 December 17, 1993 72 8
MITCHELL, BEDFORD, AND PAOLI, IN
WHITE COUNTY BANK 1 1904 June 30, 1995 58 6
CARMI, IL
BANK OF ILLINOIS, NATIONAL ASSOCIATION 4 1902 August 31, 1996 193 36
MT. VERNON AND WAYNE CITY, IL
FIRST FEDERAL SAVINGS BANK OF LEITCHFIELD 2 1961 March 1, 1997 48 7
LEITCHFIELD AND HARDINSBURG, KY
FIRST NATIONAL BANK OF BRIDGEPORT 1 1906 August 1, 1997 43 12
BRIDGEPORT, IL
FIRST BANK OF HUNTINGBURG 3 1907 December 31, 1997 107 10
HUNTINGBURG AND FERDINAND, IN
ILLINOIS ONE BANK, NATIONAL ASSOCIATION 5 1934 May 31, 1998 136 13
SHAWNEETOWN, ELIZABETHTOWN, GOLCONDA,
VIENNA, AND BROOKPORT, IL
TRIGG COUNTY FARMERS BANK 3 1890 August 31, 1998 95 9
CADIZ, KY
COMMUNITY FIRST BANK, NATIONAL ASSOCIATION 5 1847 August 31, 1998 77 7
MAYSVILLE, MAYS LICK, AND MT. OLIVET, KY,
AND RIPLEY AND ABERDEEN, OH
COMMUNITY FIRST BANK OF KENTUCKY 3 1922 August 31, 1998 83 8
WARSAW, DRY RIDGE, AND CRITTENDEN, KY
RIPLEY COUNTY BANK 3 1887 October 1, 1998 111 10
OSGOOD, VERSAILLES, AND MILAN, IN
PRINCETON FEDERAL BANK, fsb 1 1922 November 30, 1998 31 4
PRINCETON, KY
THE PROGRESSIVE BANK, NATIONAL ASSOCIATION 4 1866 December 1, 1998 143 12
LEXINGTON, LAWRENCEBURG, AND OWINGSVILLE, KY
</TABLE>
6
<PAGE>
The First State Bank of Vienna and Downstate National Bank were merged into
Illinois One Bank, National Association; First National Bank of Wayne City was
merged with Bank of Illinois in Mt. Vernon to form Bank of Illinois, National
Association; and Bank of Crittenden was merged into Community First Bank of
Kentucky. During 1997, The Farmers and Merchants Bank was merged into The
National City Bank of Evansville; and United Federal Savings Bank 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 Indiana, Kentucky, Illinois, and Southwestern
Ohio. 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 has grown 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 1996
through December 31, 1998, the Corporation acquired assets of $800,977 (measured
at the time of each acquisition) in 10 transactions accounted for as poolings of
interests.
Since the beginning of 1996, the Corporation has also acquired $382,177
(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 $38,861 (measured at the
time of each acquisition) in intangible assets as the direct result of purchases
consummated between the beginning of 1996 and the end of 1998.
Management evaluates acquisition opportunities as they arise. However,
management anticipates the pace of acquisition activity to decline significantly
in 1999. The Corporation plans to devote significant resources to integrating
recently acquired institutions and completing consolidation of back office
operations.
The following table summarizes acquisitions made by the Corporation during 1998,
1997, and 1996. Assets acquired are measured as of the date of each acquisition.
Note 2 to the consolidated financial statements includes additional information
about each transaction.
<TABLE>
<CAPTION>
Date Accounting Assets Resulting
Institution Acquired Method Acquired Intangible Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
The First National Bank of Wayne City August 31, 1996 Purchase 55,000 $ 5,605
First Federal Savings Bank of Leitchfield March 1, 1997 Purchase 43,000 2,807
Bridgeport Bancorp, Inc. August 1, 1997 Purchase 39,382 9,377
Fourth First Bancorp, Inc. December 31, 1997 Pooling 108,077 -
Mayfield Branch of Republic Bank and Trust January 8, 1998 Purchase 65,639 4,521
Vernois Bancshares, Inc. March 6, 1998 Purchase 179,156 16,551
Illinois One Bancorp, Inc. May 31, 1998 Pooling 86,100 --
Community First Financial, Inc. August 31, 1998 Pooling 134,800 --
Trigg Bancorp, Inc. August 31, 1998 Pooling 95,000 --
1st Bancorp Vienna, Inc. October 1, 1998 Pooling 38,200 --
Hoosier Hills Financial Corporation October 1, 1998 Pooling 117,100 --
Commonwealth Commercial Corporation October 31, 1998 Pooling 23,000 --
Downstate Banking Co. October 31, 1998 Pooling 21,600 --
Princeton Federal Savings Bank, fsb November 30, 1998 Pooling 32,300 --
Progressive Bancshares, Inc. December 1, 1998 Pooling 144,800 --
</TABLE>
FINANCIAL CONDITION
Total assets at December 31, 1998, were $2,195,224, compared to $1,985,178 at
December 31, 1997. Deposits increased $201,781 from $1,532,804 at December 31,
1997 to $1,734,585 at December 31 , 1998. Shareholders' equity increased from
$211,237 at December 31, 1997, to $218,280 at December 31, 1998. During 1998,
book value per share increased by $0.34 to $12.96 and resulted in a ratio of
average equity capital to average assets of 10.08%.
Average earning assets increased $216,270, or 12.1%, and
7
<PAGE>
Management' Discussion and Analysis of Financial Condition
and Results of Operations
(Dollar Amounts Other Than Share Data in Thousands)
FINANCIAL CONDITION, CONTINUED
$152,503, or 9.3%, in l998 and 1997, respectively. Growth in average assets in
1998 was $246,789, or 12.9%, compared to $170,049, or 9.8%, in 1997. During
1998, average interest bearing deposits in banks decreased $14, or 0.3%, and
average federal funds sold increased $5,163, or 26.7%; average securities
decreased $6,861, or 1.6%; taxable total securities decreased $22,874, or 9.3%;
and tax-exempt securities increased $10,431, or 5.7%. The average unrealized
gain on securities available for sale increased from $1,496 to $7,078 in 1998.
Average loans increased $217,982, or 16.3% during 1998. All types of loans
increased during the year. Average loans as a percentage of earning assets
increased from 74.7% in 1997 to 77.5% in 1998. The growth in the loan portfolio
was due to purchase acquisitions in which average loans increased by $84,873 and
due to a strong loan demand in the Corporation's market area.
Average certificate of deposit and other time deposit balances increased by
$86,937, or 10.2%, in 1998. During 1998, average balances of money market
accounts decreased $5,373, or 4.6%; savings and interest bearing checking
accounts increased $56,641, or 15.7%; and average federal funds purchased and
securities sold under agreements to repurchase decreased $8,206, or 12.5%. Also
during 1998, average other borrowings increased $48,649, or 45.9%, due to
issuance of $34,500 in Trust Preferred Securities and increased use of Federal
Home Loan Bank lines, and average noninterest-bearing deposits increased
$43,180, or 23.4%.
SECURITIES PORTFOLIO
Total securities comprised 21.1% of the 1998 average earning assets compared to
24.0% and 24.7% in 1997 and 1996, 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
SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
Carrying Value at December 31
-----------------------------------------------------------
1998 1997 1996
----------- ------------- ---------------------------
AVAILABLE Available Held to Available
FOR SALE For Sale Maturity For Sale
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities:
U.S. Treasury securities $ 15,200 $ 27,991 $ 1,000 $ 22,401
U.S. Government agencies 53,167 67,977 31,449 79,228
Taxable municipals 3,158 3,727 2,775 -
Tax-exempt municipals 196,322 203,183 128,445 27,788
Corporate securities 8,871 10,569 11,161 6,704
Mortgage-backed securities 65,737 93,449 12,546 87,755
- ---------------------------------------------------------------------------------------------
Total debt securities 342,455 406,896 187,376 223,876
Equity securities 4,059 2,173 305 2,047
- ---------------------------------------------------------------------------------------------
Total securities $346,514 $409,069 $187,681 $225,923
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
MATURITY ANALYSIS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
After 1 Year After 5 Years
but but
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
---------------- ----------------- ----------------- ------------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES CLASSIFIED AS
AVAILABLE FOR SALE:
U.S. Treasury securities $ 9,077 6.21% $ 6,012 6.23% $ 111 7.12% $ -- -- $ 15,200 6.22%
U.S. Government agencies 36,350 5.78% 12,624 6.07% 4,192 5.91% -- -- 53,166 5.86%
Taxable municipals 924 6.36% 1,971 7.33% 93 7.75% 170 8.25% 3,158 7.11%
Tax-exempt municipals 13,714 7.83% 63,583 7.58% 47,792 7.61% 71,234 8.31% 196,323 7.87%
Corporate securities 1,827 6.20% 5,956 6.11% 1,039 9.02% 49 3.07% 8,871 6.45%
- ------------------------------------------------------------------------------------------------------------------------------------
Total maturing securities $61,892 6.32% $90,146 7.18% $53,227 7.50% $71,453 8.31% 276,718 7.34%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 65,737 5.76%
Equity securities 4,059 3.12%
-----------------
Total securities $346,514 6.99%
-----------------
-----------------
</TABLE>
8
<PAGE>
amount of mortgage-backed securities contained in the portfolio. The
Corporation has no securities of any single 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 securities 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, 1998, included $2,179 in structured notes. These securities have
risk characteristics which are well within the constraints of the non-structured
securities held in the securities portfolio. All securities are classified as
available for sale and are carried at fair value. The available-for-sale
securities included unrealized gains of approximately $9,606 and unrealized
losses of $2,410 at December 31, 1998. At December 31, 1998, available-for-sale
securities included $65,737 in mortgage-backed securities, or 19.0% of the
available-for-sale portfolio. The weighted average maturity of the
available-for-sale portfolio at December 31, 1998, was 5.4 years. 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. 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 27.5% commercial loans, 58.5% real estate
loans (primarily residential), and 14.0% consumer loans at December 31, 1998.
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 $51,852, of which approximately 28%
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.
Real estate loans increased $162,882, of which approximately 32% was due to
purchase acquisitions. The remaining increase was a result of strong loan demand
in the markets served by the Corporation's banks supported by a favorable
interest rate environment. Approximately 59.6% consists of 1-4 family housing.
The Corporation's guidelines for residential mortgage
LOAN PORTFOLIO AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate loans $ 964,493 $ 801,611 $ 710,250 $ 686,513 $ 562,705
Commercial, industrial, and
agricultural loans 415,579 363,727 325,691 254,206 265,511
Economic development loans and
other obligations of state and
political subdivisions 19,780 15,492 12,260 10,618 13,733
Consumer loans 223,377 198,615 192,475 180,921 149,514
Direct lease financing 12,988 13,146 12,336 6,975 527
Leveraged leases 5,102 4,661 -- -- --
All other loans 7,606 5,017 3,154 1,625 1,346
- --------------------------------------------------------------------------------------------------------
Total loans - gross 1,648,925 1,402,269 1,256,166 1,140,858 993,336
Less: unearned income 629 1,310 1,475 1,865 2,204
- --------------------------------------------------------------------------------------------------------
Total loans - net of unearned income 1,648,296 1,400,959 1,254,691 1,138,993 991,132
Less: allowance for loan losses 18,443 13,854 12,539 10,937 10,404
- --------------------------------------------------------------------------------------------------------
Total loans - net $1,629,853 $1,387,105 $1,242,152 $1,128,056 $ 980,728
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar Amounts Other Than Share Data in Thousands)
LOANS, CONTINUED
lending were followed and advances normally did not exceed 80% of appraised
value.
At December 31, 1998, 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 Indiana, Illinois, Kentucky, and Southwestern Ohio.
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 1998 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 $ 63,730 $ 95,398 $ 41,995 $201,123
Variable rate loans 223,832 8,167 397 232,396
- --------------------------------------------------------------------------
Subtotal $287,562 $103,565 $ 42,392 433,519
- --------------------------------------------------------------------------
Percent of subtotal 66.33% 23.89% 9.78%
Nonaccrual loans 1,840
--------
Total loans net of unearned income $435,359
--------
--------
</TABLE>
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 0.6%
of total loans at the end of 1998 and 1997, respectively. Additional interest
income that would have been recorded, if nonaccrual and restructured loans had
been current in accordance with their original terms, was $646, $390, and $261
in 1998, 1997, and 1996, respectively. The interest recognized on nonaccrual
loans was approximately $130, $83, and $44 in 1998, 1997, and 1996,
respectively.
In addition to those loans classified as underperforming, management was
monitoring loans of approximately $56,309 and $41,360 as of the end of 1998 and
1997, respectively, for the borrowers' abilities to comply with present loan
repayment terms. All impaired loans discussed in Note 6 to the financial
statements
UNDERPERFORMING ASSETS AT YEAR END, FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Underperforming loans:
Nonaccrual $ 9,782 $ 6,184 $ 3,717 $ 2,520 $ 2,609
Restructured 374 293 481 220 302
90 days past due 1,610 2,011 2,264 2,125 2,153
- ----------------------------------------------------------------------------------
Total underperforming loans 11,766 8,488 6,462 4,865 5,064
Nonaccrual municipal securities -- 61 31 -- --
Other real estate owned 715 180 215 597 686
- ----------------------------------------------------------------------------------
Total $12,481 $ 8,729 $ 6,708 $ 5,462 $ 5,750
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
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, 1998, 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 1998 increased $1,872, or 59.6%, and recoveries
increased $136, or 11.0%, from 1997. The provision for loan losses for 1998 was
increased based on the increase in net charge-offs, underperforming loans, the
increase in loan volume, and the Corporation's periodic analysis of the
subsidiary banks' loan portfolios. In the fourth quarter of 1998, the
Corporation made additional provisions for loan losses due to
SUMMARY OF LOAN LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, January 1 $ 13,854 $ 12,539 $ 10,937 $ 10,404 $ 9,744
Allowance associated with purchase acquisitions 1,086 516 379 140 259
Loans charged off:
Commercial 875 763 1,129 619 448
Real estate mortgage 687 505 634 136 406
Consumer 3,411 1,867 1,536 723 632
Direct lease financing 42 8 74 11 --
- --------------------------------------------------------------------------------------------------------------------
Total 5,015 3,143 3,373 1,489 1,486
- --------------------------------------------------------------------------------------------------------------------
Recoveries on charged-off loans:
Commercial 307 367 172 549 332
Real estate mortgage 541 424 302 249 270
Consumer 516 448 412 304 616
Direct lease financing 11 -- 5 -- --
- --------------------------------------------------------------------------------------------------------------------
Total 1,375 1,239 891 1,102 1,218
- --------------------------------------------------------------------------------------------------------------------
Net charge-offs 3,640 1,904 2,482 387 268
Provision for loan losses 7,143 2,703 3,705 780 669
- --------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, December 31 $ 18,443 $ 13,854 $ 12,539 $ 10,937 $ 10,404
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
Total loans at year end $1,648,296 $1,400,959 $1,254,691 $1,138,993 $ 991,132
Average loans 1,556,113 1,338,131 1,207,403 1,071,206 942,877
As a percent of year-end loans:
Net charge-offs 0.22% 0.14% 0.20% 0.03% 0.03%
Provision for loan losses 0.43 0.19 0.30 0.07 0.07
Year-end allowance balance 1.12 0.99 1.00 0.96 1.05
As a percent of average loans:
Net charge-offs 0.23% 0.14% 0.21% 0.04% 0.03%
Provision for loan losses 0.46 0.20 0.31 0.07 0.07
Year-end allowance balance 1.19 1.04 1.04 1.02 1.10
Allowance for loan losses as a percent
of underperforming loans 156.75% 163.22% 194.04% 224.81% 205.45%
Total underperforming loans $ 11,766 $ 8,488 $ 6,462 $ 4,865 $ 5,064
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar Amounts Other Than Share Data in Thousands)
RISK MANAGEMENT, CONTINUED
increased charge-offs and non-performing loans at one subsidiary. The provision
for loan losses for 1997 was decreased as a result of the decrease in net
charge-offs. In 1996, the provision for loan losses was increased due to
increased net charge-offs and non-performing loans.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES AT DECEMBER 31
<TABLE>
<CAPTION>
Allowance Applicable to Percent of Loans to Total Gross Loans
- -----------------------------------------------------------------------------------------------------------------------------
Loan Type 1998 1997 1996 1995 1994 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 6,134 $ 4,882 $ 4,137 $ 4,044 $ 3,724 28% 29% 28% 24% 28%
Real estate mortgage 3,656 3,689 3,632 3,300 3,088 58% 57% 57% 60% 57%
Consumer 5,461 2,842 2,321 1,792 1,336 14% 14% 15% 16% 15%
- ---------------------------------------------------------------------- ------------------------------------------------
Allocated 15,251 11,413 10,090 9,136 8,148 100% 100% 100% 100% 100%
Unallocated 3,192 2,441 2,449 1,801 2,256 ------------------------------------------------
- ---------------------------------------------------------------------- ------------------------------------------------
Total $18,443 $13,854 $12539 $10,937 $10,404
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
</TABLE>
DEPOSITS
The Corporation's Asset/Liability Committee manages the deposits of its banks to
achieve a balance between deposit growth and the cost of funds. Average deposits
increased $181,385, or 12.0%, during 1998, compared to $99,388, or 7.0%, in
1997. Of the increase in 1998, $136,628, or 75.3%, was due to purchase
acquisitions. Average time deposits of $100,000 or more increased $23,851, or
11.9%, compared to $29,016, or 16.9%, in 1997. The Corporation had $198 in
brokered deposits as of December 31, 1998 and no brokered deposits in 1997. Time
deposits of $100,000 or more are not considered to present an undue risk.
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ----------------- ------------------
AMOUNT RATE Amount Rate Amount Rate
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Noninterest-bearing demand $ 227,391 -- $ 184,211 -- $ 173,118 --
Money market accounts 112,385 3.91% 117,758 3.46% 117,142 3.42%
Interest-bearing demand 252,201 2.31% 216,365 2.26% 209,920 2.37%
Savings 165,016 2.83% 144,211 2.62% 147,291 2.72%
Time deposits of $100,000 or more 224,598 5.58% 200,747 5.28% 171,731 5.26%
Other time deposits 716,307 5.37% 653,221 5.39% 597,923 5.32%
- --------------------------------------------------------------------------------------------------------------------
Total $1,697,898 $1,516,513 $1,417,125
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
Maturing:
3 months or less $107,059
Over 3 to 6 months 56,120
Over 6 to 12 months 41,020
Over 12 months 32,939
- -----------------------------------------
Total $237,138
- -----------------------------------------
- -----------------------------------------
</TABLE>
CAPITAL RESOURCES
At the end of 1998, shareholders' equity totaled $218,280, an increase of
$7,043, or 3.3%, from 1997. The average equity to average asset ratio was 10.1%
and 10.3% for 1998 and 1997, respectively. The dividend payout ratio for 1998
was 59.7%, compared to 36.7% in 1997.
As of December 31, 1998, there were no material commitments for capital
expenditures.
Guidelines for minimum capital levels have been established for the Corporation
by the Federal Reserve Board. Tier 1 (core) capital consists of shareholders'
equity less goodwill, other identifiable intangible assets, and unrealized
losses on marketable equity securities. Total capital consists of Tier 1 capital
plus allowance for
12
<PAGE>
loan losses. Minimum capital levels are 4% for the leverage ratio which is
defined as Tier 1 capital as a percentage of total assets less goodwill and
other identifiable intangible assets; 4% for Tier 1 capital to risk-weighted
assets; and 8% for total capital to risk-weighted assets. The Corporation has
exceeded each of these levels. Its leverage ratio was 10.08% and 9.69%; Tier 1
capital to risk-weighted assets was 13.47% and 13.72%; and total capital to
risk-weighted assets was 14.14% and 14.78% at the end of 1998 and 1997,
respectively. In addition, each subsidiary bank exceeded minimum regulatory
capital guidelines during 1998 and 1997.
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
decreased $48,657, or 59.3%, during 1998. At December 31, 1998, the Corporation
had no federal funds purchased, compared to $56,000 at December 31, 1997.
Securities sold under agreements to repurchase and notes payable U.S. Treasury
increased during 1998 by $7,343, or 28.2%, and increased by $10,592, or 68.6%,
in 1997. The decrease in consolidated short-term borrowing during 1998 was due
to increased use of Federal Home Loan Bank advance lines, the purchase of a
branch office, and the issuance of Trust Preferred Securities.
SHORT-TERM BORROWINGS AT DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased $ -- $56,000 $54,500
Securities sold under
agreements to repurchase 33,382 20,123 13,726
Notes payable U.S. Treasury -- 5,916 1,721
- ---------------------------------------------------------
Total $33,382 $82,039 $69,947
- ---------------------------------------------------------
- ---------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Securities
Sold Under Notes
Federal Agreements Payable
Funds to U.S.
Purchased Repurchase Treasury
- ---------------------------------------------------------------------
<S> <C> <C> <C>
1998
AVERAGE AMOUNT OUTSTANDING $20,853 $36,770 $1,397
MAXIMUM AMOUNT AT ANY
MONTH END 50,950 52,615 5,360
WEIGHTED AVERAGE INTEREST RATE:
DURING YEAR 4.65% 4.47% 4.94%
END OF YEAR -- 3.31% --
1997
Average amount outstanding $44,576 $19,322 $2,064
Maximum amount at any
month end 75,035 31,103 5,916
Weighted average interest rate:
During year 5.57% 4.18% 5.36%
End of year 6.77% 4.79% 5.25%
1996
Average amount outstanding $29,181 $20,077 $1,378
Maximum amount at any
month end 63,355 31,985 3,270
Weighted average interest rate:
During year 5.08% 4.35% 5.17%
End of year 6.65% 4.20% 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. 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
under the Corporation's asset/liability management program and by each
subsidiary bank providing liquidity without penalizing earnings. When these
sources are not adequate, the Corporation may use 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, 1998 and 1997, respectively, federal funds sold were $10,431 and
$21,014, interest-bearing deposits in banks were $142 and $3,693 and U.S.
Government and agency securities available for sale were $68,367 and $95,968.
These sources and other liquid assets also satisfy long-term
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar Amounts Other Than Share Data in Thousands)
LIQUIDITY, CONTINUED
liquidity needs. Long-term liquidity is managed in the same way, only
with longer maturities, to provide for future needs while maintaining interest
margins. In 1998 and 1997, the Corporation increased its use of its Federal Home
Loan Bank lines to reduce its dependence on short-term federal funds borrowings.
At December 31, 1998, the Corporation had $203,225 in unused Federal Funds and
Federal Home Loan Bank lines. The Corporation (parent company) issued $34,500 in
Trust Preferred Securities in 1998, primarily, to fund the purchase of a
subsidiary bank and a branch.
The ability of the Corporation to pay cash dividends to its shareholders is
dependent on the receipt of 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.
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 tables set forth,
at December 31, 1998, an analysis of the Corporation's interest rate risk as
measured by the estimated change in economic value of equity (EVE) and net
interest income (NII) following parallel shifts in the yield curve.
Certain assumptions were employed in preparing data in the following tables.
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.
<TABLE>
<CAPTION>
Estimated Increase
(Decrease) in EVE
Change in Estimated ---------------------
Interest Rates EVE Amount Amount Percent
- -------------------------------------------------------
(Basis Points)
<S> <C> <C> <C> <C>
+200 $226,607 $(20,799) (8.41)%
-- 247,406 -- --
-200 264,758 17,348 7.01%
</TABLE>
<TABLE>
<CAPTION>
Estimated Increase
(Decrease) in NII
Change in Estimated ---------------------
Interest Rates NII Amount Amount Percent
- -------------------------------------------------------
(Basis Points)
<S> <C> <C> <C> <C>
+200 $107,865 $5,212 4.78%
-- 102,947 -- --
-200 97,706 (5,537) (5.09)%
</TABLE>
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 or NII 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 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, 1998 are
discussed more throughly in Note 18 of the consolidated financial statements.
14
<PAGE>
RESULTS OF OPERATIONS
Net income for 1998 was $21,454, reflecting a $6,020, or 21.9, decrease from
1997. Net income for 1997 increased $2,761, or 11.2%, over 1996. Basic earnings
per share in 1998 were $1.28, compared to $1.65 in 1997 and $1.48 in 1996.
Increases in volumes of earning assets resulted in growth of net interest income
of $6,559, or 8.1%, in 1998 and $5,720, or 7.6%, in 1997. Noninterest income,
excluding securities gains, increased $2,162, or 16.3% in 1998, compared to
$883, or 7.1%, in 1997. Noninterest expenses increased $13,791, or 25.8%, in
1998 and $5,402, or 11.2% in 1997. Increases in noninterest expenses in 1998
were primarily due to expenses associated with consolidation of the
Corporation's back office operations and acquisition activity. The provision for
loan losses increased $4,440, or 164.3%, in 1998 and decreased $1,002, or 27.0%,
in 1997.
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 $217,982, or 16.3%, during 1998 compared to an
increase of $130,728, or 10.8%, during 1997. Approximately 37.7% of the growth
in average loans in 1998 and 33.6% in 1997 was attributable to acquisitions
accounted for as purchases. Loan income increased 15.7% in 1998 and 11.2% in
1997, principally due to increased loan volumes. The average yield on loans was
9.16% in 1998 and 9.21% in 1997.
Average securities before market value adjustments decreased by $12,443 in 1998
and increased by $16,338 in 1997. Securities income decreased $834, or 2.7%, in
1998 and increased $2,600, or 9.3%, in 1997. The yield on securities increased
from 7.17% in 1997 to 7.18% in 1998. During 1998, volumes decreased on
securities. This decrease was the result of the use of proceeds from securities
maturities and sales to fund loan growth. In 1997, both rates and volumes on
securities increased as the Corporation increased volumes of securities and
shifted the portfolio mix toward higher yielding tax-exempt securities. Average
earning assets increased $216,270, or 12.1%, in 1998 and $152,503, or 9.3%, in
1997. Purchase acquisitions accounted for 46.9% of the increase in 1998 and
34.2% in 1997 The average yield on total earning assets for 1998 was 8.65%,
compared to 8.66% in 1997.
Average total interest-bearing deposits increased 10.4% during 1998 and 7.1%
during 1997. Purchase acquisitions accounted for all of the growth in interest
bearing deposits in 1998 and 28.9% in 1997. The average cost of interest bearing
deposits was 4.48% in 1998 and 4.39% in 1997. Increases in interest expense on
deposits in 1998 and 1997 were primarily due to volume increases. Interest
expense on federal funds purchased and other borrowings increased $2,809 in 1998
and $2,944 in 1997. 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 1998 and 1997, net interest income increased $8,246 and $7,411, respectively.
Increases in volumes accounted for substantially all of the increase in 1998 and
74.7% in 1997.
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
CHANGES IN NET INTEREST INCOME -------------------------- --------------------------------------
(INTEREST ON A FEDERAL-TAX-EQUIVALENT BASIS) CHANGE DUE TO Change Due to
A CHANGE IN a Change in
-------------------------- --------------------------
RATE/ TOTAL Rate/ Total
VOLUME RATE VOLUME CHANGE Volume Rate Volume Change
------------------------------------ ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income increase (decrease)
Loans $20,071 $ (650) $(105) $19,316 $11,996 $ 379 $ 41 $12,416
Securities (891) 60 (3) (834) 1,114 1,429 57 2,600
Other 232 (182) (32) 18 (132) 51 (5) (86)
------------------------------------------------------------------------------
Total interest income 19,412 (772) (140) 18,500 12,978 1,859 93 14,930
------------------------------------------------------------------------------
Interest expense increase (decrease)
Deposits 6,063 1,252 130 7,445 3,823 702 50 4,575
Borrowings 2,397 333 79 2,809 3,621 (451) (226) 2,944
------------------------------------------------------------------------------
Total interest expense 8,460 1,585 209 10,254 7,444 251 (176) 7,519
------------------------------------------------------------------------------
Net interest income increase (decrease) $10,952 $(2,357) $(349) $ 8,246 $5,534 $ 1,608 $ 269 $7,411
------------------------------------------------------------------------------
------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar Amounts Other Than Share Data in Thousands)
NONINTEREST INCOME
Noninterest income increased $2,519, or 17.9%, during 1998 and $1,665, or 13.4%,
during 1997. Service charges on deposit accounts increased $1,526, or 23.8%,
during 1998 and $404, or 6.7%, during 1997. Other service charges and fees
increased $1,018, or 35.8%, in 1998 and $213, or 8.1%, in 1997. Trust income
which fluctuates with changes in the number of accounts managed and with changes
in market value of assets under management increased $253, or 12.9%, in 1998 and
$138, or 7.6%, in 1997. Other types of noninterest income decreased $635, or
30.5%, in 1998 and increased $128, or 6.6%, in 1997.
NONINTEREST EXPENSE
Noninterest expense increased $13,791, or 25.8%, during 1998 and $5,402, or
11.2%, in 1997. Expenses associated with acquisitions and consolidation of the
Corporation's back office operations accounted for $6,649, or 48.2%, of the
increase in 1998. Expenses associated with acquisitions and consolidation in
1998 consisted of $1,605 in severance and merger-related employment expenses,
$200 in equipment write-downs, $631 in data processing contract termination
costs, $1,566 in consulting fees related to consolidation, and $2,647 in
acquisition-related professional fees. Salaries and other employee benefits
increased $1,491, or 4.9%, during 1998 and $3,433, or 12.7%, in 1997. Occupancy
expense of bank premises decreased $274 during 1998 and increased $120 in 1997.
Furniture and equipment expense increased $1,645, or 55.0%, during 1998 and
$198, or 7.1%, in 1997. Other noninterest expense increased $4,624, or 29.3%,
during 1998 compared to $1,307, or 9.0%, during 1997.
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.
To address the potential adverse year 2000-related consequences, the banking
regulatory authorities, working cooperatively through the Federal Financial
Institutions Examination Council (FFIEC), have issued a number of specific
guidelines designed to guide financial institutions in their year 2000
compliance efforts. The Corporation has developed a year 2000 compliance program
that it believes is consistent with these guidelines.
The Corporation and its banking subsidiaries are subject to examination with
respect to their year 2000 compliance by various state and federal agencies,
including the Federal Reserve Board, the Comptroller of the Currency, the Office
of Thrift Supervision, the Federal Deposit Insurance Corporation, and state
banking agencies. If a regulatory agency issues a rating of less than
satisfactory with respect to an organization's year 2000 compliance efforts,
the organization's ability to obtain regulatory approval of certain actions,
such as proposed acquisitions, may be adversely affected.
The Corporation has established a year 2000 team to monitor progress with
achieving year 2000 compliance. The team reports its progress to the
Corporation's Board of Directors on a monthly basis. In addition, the
Corporation is utilizing an external consulting firm to assist with its year
2000 compliance.
The Corporation's year 2000 project involves five phases: 1. Awareness; 2.
Assessment; 3. Renovation; 4. Validation; and 5. Implementation. The Corporation
has completed the awareness, assessment, and validation phases. Major aspects of
the renovation phase have been completed and the Corporation expects to complete
the remainder of this phase by March 31, 1999. The implementation phase is
expected to be substantially complete by June 30, 1999.
The Corporation prepared its contingency and business resumption plans following
FFIEC guidelines. The Corporation completed contingency planning before the
FFIEC deadline of December 31, 1998.
Management expects total additional out-of-pocket expenditures incurred in year
2000 compliance to be approximately $500. This includes fees to outside
consulting firms, costs to upgrade equipment specifically for the purpose of
year 2000 compliance, and certain administrative expenditures. Some amounts are
being expensed as incurred and are not expected to be material to the
Corporation's financial condition or results of operations.
Management believes that the organization has an 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. However, the year
2000 problem is pervasive and complex and can potentially affect any computer
process. The Corporation is dependent upon certain key suppliers to achieve year
2000 compliance. Accordingly, no assurance can be given that year 2000
compliance can be achieved without additional unanticipated expenditures and
uncertainties that might affect future financial results.
16
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
1998 1997
------------------------------- ---------------------------
AVERAGE INTEREST YIELD/ Average Interest Yield/
BALANCES & FEES COST Balances & Fees Cost
------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits in banks $ 4,745 $ 304 6.41% $ 4,759 $ 231 4.85%
Federal funds sold 24,466 1,037 4.24% 19,303 1,092 5.66%
Securities:
Taxable 222,716 13,619 6.11% 245,590 15,838 6.45%
Tax-exempt 193,027 16,241 8.41% 182,596 14,856 8.14%
- --------------------------------------------------------------------------------------------------------------
Securities before market value
adjustment 415,743 29,860 7.18% 428,186 30,694 7.17%
Market value adjustment on
securities available for sale 7,078 1,496
- --------------------------------------------------------------------------------------------------------------
Total securities 422,821 429,682
Loans 1,556,113 142,529 9.16% 1,338,131 123,213 9.21%
- --------------------------------------------------------------------------------------------------------------
Total earning assets 2,008,145 $173,730 8.65% 1,791,875 $ 155,230 8.66%
-------- ---------
-------- ---------
Non-earning assets 150,169 119,650
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,158,314 $ 1,911,525
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 417,217 $ 10,495 2.52% $ 360,576 $ 8,639 2.40%
Money market accounts 112,385 4,391 3.91% 117,758 4,074 3.46%
Certificates of deposit and other time 940,905 51,003 5.42% 853,968 45,731 5.36%
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,470,507 65,889 4.48% 1,332,302 58,444 4.39%
Federal funds purchased and securities
sold under agreements to repurchase 57,623 2,613 4.53% 65,829 3,370 5.12%
Other borrowings 154,605 10,378 6.71% 105,956 6,812 6.43%
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,682,735 $ 78,880 4.69% 1,504,087 $ 68,626 4.56%
--------- ---------
--------- ---------
Noninterest-bearing liabilities and
shareholders' equity 475,579 407,438
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,158,314 $ 1,911,525
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Interest income/earning assets $ 173,730 8.65% $ 155,230 8.66%
Interest expense/earning assets 78,880 3.93% 68,626 3.83%
- --------------------------------------------------------------------------------------------------------------
Net interest income/earning assets $ 94,850 4.72% $ 86,604 4.83%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
1996
-----------------------------
Average Interest Yield/
Balances & Fees Cost
-----------------------------
<S> <C> <C> <C>
EARNING ASSETS:
Interest-bearing deposits in banks $ 6,950 $ 394 5.67%
Federal funds sold 19,608 1,015 5.18%
Securities:
Taxable 294,132 18,280 6.21%
Tax-exempt 117,716 9,814 8.34%
- ---------------------------------------------------------------------------
Securities before market value
adjustment 411,848 28,094 6.82%
Market value adjustment on
securities available for sale (6,437)
- ---------------------------------------------------------------------------
Total securities 405,411
Loans 1,207,403 110,797 9.18%
- ---------------------------------------------------------------------------
Total earning assets 1,639,372 $140,300 8.56%
Non-earning assets 102,104
- ---------------------------------------------------------------------------
TOTAL ASSETS $ 1,741,476
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 357,211 $ 8,971 2.51%
Money market accounts 117,142 4,002 3.42%
Certificates of deposit and other time 769,654 40,896 5.31%
- ---------------------------------------------------------------------------
Total interest-bearing deposits 1,244,007 53,869 4.33%
Federal funds purchased and securities
sold under agreements to repurchase 51,601 2,459 4.77%
Other borrowings 62,898 4,779 7.60%
- ---------------------------------------------------------------------------
Total interest-bearing liabilities 1,358,506 $ 61,107 4.50%
--------
--------
Noninterest-bearing liabilities and
shareholders' equity 382,970
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,741,476
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Interest income/earning assets $140,300 8.56%
Interest expense/earning assets 61,107 3.73%
- ---------------------------------------------------------------------------
Net interest income/earning assets $ 79,193 4.83%
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
</TABLE>
Note: Income is on a federal-tax-equivalent basis using a 35% tax rate.
Average volume includes nonaccrual loans.
CERTAIN STATEMENTS MADE IN THIS REPORT MAY CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH
FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING: MANAGEMENT'S ABILITY TO IMPROVE
THE PROFITABILITY OF ACQUIRED INSTITUTIONS AND TO REALIZE EXPECTED OPERATIONAL
SYNERGIES FROM ACQUISITIONS; GENERAL, REGIONAL AND LOCAL ECONOMIC CONDITIONS
WHICH MAY AFFECT INTEREST RATES AND NET INTEREST INCOME; CREDIT RISKS AND RISKS
FROM CONCENTRATIONS (GEOGRAPHIC AND BY INDUSTRY) WITHIN THE LOAN PORTFOLIO;
CHANGES IN REGULATIONS AFFECTING FINANCIAL INSTITUTIONS; COMPETITION; AND RISKS
CREATED BY THE "YEAR 2000 PROBLEM".
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
To the Board of Directors and
Shareholders of National City Bancshares, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying consolidated statements of financial position and the related
consolidated statements of income and comprehensive income, cash flows, and
changes in shareholders' equity present fairly, in all material respects, the
financial position of National City Bancshares, Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, 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 did not audit the 1997 and 1996 financial statements of 1st
Bancorp Vienna, Inc., Hoosier Hills Financial Corporation, Princeton Federal
Bank, fsb, and Progressive Bancshares, Inc. which statements reflect total
assets of $323,489 at December 31, 1997 and net income of $3,333 and $3,010 for
the years ended December 31, 1997 and 1996 respectfully. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for 1st
Bancorp Vienna, Inc., Hoosier Hills Financial Corporation, Princeton Federal
Bank, fsb, and Progressive Bancshares, Inc., is based solely on the report of
the other auditors. 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 statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for the opinion expressed above.
Lexington, Kentucky
February 26, 1999
18
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 67,389 $ 57,195
Time deposits in banks 142 3,693
Federal funds sold 10,431 21,014
Securities available for sale 346,514 409,069
Nonmarketable equity securities 19,327 15,894
Loans - net 1,629,853 1,387,105
Premises and equipment 46,399 40,334
Intangible assets 40,185 22,235
Other assets 34,984 28,639
- ----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,195,224 $ 1,985,178
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing demand $ 231,623 $ 203,049
Interest-bearing:
Savings, daily interest checking, and money market accounts 567,112 485,818
Time deposits of $100,000 or more 237,138 190,373
Other time 698,712 653,564
- ----------------------------------------------------------------------------------------------------------
Total deposits 1,734,585 1,532,804
Short-term borrowings 33,382 82,039
Other borrowings 139,545 133,927
Guaranteed preferred beneficial interests in the
Corporation's subordinated debenture 34,500 --
Dividends payable 3,368 2,025
Deferred income taxes 3,898 4,812
Other liabilities 17,623 13,995
- ----------------------------------------------------------------------------------------------------------
Total liabilities 1,966,901 1,769,602
COMMON STOCK OWNED BY ESOP (SUBJECT TO PUT OPTION) 10,043 4,339
SHAREHOLDERS' EQUITY
Preferred Stock - 1,000,000 shares authorized
None outstanding
Common Stock - $1.00 stated value:
1998 1997
---------- ----------
Shares authorized 29,000,000 20,000,000
Shares outstanding 16,842,456 15,994,826 16,842 15,995
Capital surplus 123,561 92,432
Retained earnings 83,536 103,101
Accumulated other comprehensive income 4,436 4,535
Unearned employee stock ownership plan shares (52) (487)
Common stock owned by ESOP (subject to put option) (10,043) (4,339)
- ----------------------------------------------------------------------------------------------------------
Total shareholders' equity 218,280 211,237
- ----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,195,224 $ 1,985,178
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) YEAR ENDED DECEMBER 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans:
Taxable $ 139,832 $ 121,774 $ 109,690
Tax-exempt 1,895 990 749
Interest and dividends on securities:
Taxable 13,619 15,838 18,280
Tax-exempt 10,090 10,039 6,597
Interest on federal funds sold 1,037 1,092 1,015
Interest on other investments 304 231 394
- -----------------------------------------------------------------------------------------------------------------------
Total interest income 166,777 149,964 136,725
- -----------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 65,889 58,444 53,869
Interest on short-term borrowings 2,613 3,370 2,459
Interest on other borrowings 10,378 6,812 4,779
- -----------------------------------------------------------------------------------------------------------------------
Total interest expense 78,880 68,626 61,107
- -----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 87,897 81,338 75,618
Provision for loan losses 7,143 2,703 3,705
- -----------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 80,754 78,635 71,913
- -----------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 2,209 1,956 1,818
Service charges on deposit accounts 7,946 6,420 6,016
Other service charges and fees 3,859 2,841 2,628
Securities gains 1,160 803 21
Other 1,447 2,082 1,954
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest income 16,621 14,102 12,437
- -----------------------------------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Salaries, wages, and other employee benefits 31,862 30,371 26,938
Occupancy expense 3,723 3,997 3,877
Furniture and equipment expense 4,637 2,992 2,794
Acquisition and consolidation expense 6,649 344 --
Other 20,418 15,794 14,487
- -----------------------------------------------------------------------------------------------------------------------
Total noninterest expense 67,289 53,498 48,096
- -----------------------------------------------------------------------------------------------------------------------
Income before income taxes 30,086 39,239 36,254
Income taxes 7,970 11,071 11,541
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 22,116 $ 28,168 $ 24,713
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Proforma C Corporation provision for income taxes 8,632 11,765 11,541
- -----------------------------------------------------------------------------------------------------------------------
PROFORMA NET INCOME $ 21,454 $ 27,474 $ 24,713
- -----------------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of income taxes:
Unrealized gain (loss) arising in period $ 597 $ 4,824 $ (927)
Reclassification of realized amounts (696) (493) 7
- -----------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss), recognized in other comprehensive income (99) 4,331 (920)
- -----------------------------------------------------------------------------------------------------------------------
Proforma comprehensive income $ 21,355 $ 31,805 $ 23,793
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
PROFORMA EARNINGS PER SHARE - BASIC $ 1.28 $ 1.65 $ 1.48
PROFORMA EARNINGS PER SHARE - DILUTED $ 1.27 $ 1.64 $ 1.48
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 16,757,078 16,612,837 16,712,994
Diluted 16,874,287 16,757,121 16,730,839
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS) YEAR ENDED DECEMBER 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,116 $ 28,168 $ 24,713
Adjustments to reconcile net income to net cash provided
by operating activities:
Federal Home Loan Bank stock dividends (122) (82) (20)
Amortization 3,496 948 733
Depreciation 3,763 3,213 2,962
Employee benefit expenses 2,017 744 551
Provision for loan losses 7,143 2,703 3,685
Write-down of other real estate owned 51 99 61
Securities gains (1,160) (803) (21)
Originations of loans held for sale (81,687) (31,691) (26,346)
Proceeds from sales of loans held for sale 82,429 32,139 26,580
Gain on sale of loans held for sale (742) (448) (234)
(Gain) loss on sale of premises and equipment (54) 29 (10)
(Gain) loss on sale of other real estate owned 34 (14) 31
Increase in deferred taxes 1,003 1,172 418
Changes in assets and liabilities:
(Increase) decrease in other assets (788) 991 (1,572)
Increase (decrease) in other liabilities (640) 218 (415)
- ----------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 36,859 37,386 31,116
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing deposits in banks 3,551 1,090 5,263
Proceeds from maturities of securities held to maturity -- 12,092 19,192
Proceeds from maturities of securities available for sale 139,001 88,926 91,473
Proceeds from sales of securities held to maturity -- 3,509 3,635
Proceeds from sales of securities available for sale 41,253 42,733 25,408
Proceeds from sales of nonmarketable equity securities 145 804 --
Purchases of securities held to maturity -- (34,985) (63,640)
Purchases of securities available for sale (79,191) (84,543) (65,465)
Purchases of nonmarketable securities (1,865) (6,348) (2,211)
(Increase) decrease in federal funds sold 18,663 (6,104) 5,972
Increase in loans made to customers (143,355) (88,822) (93,664)
(Increase) decrease in cash surrender value of life insurance 245 (102) (43)
Increase in other investments (2,340) (1,443) --
Capital expenditures (7,140) (11,855) (9,519)
Proceeds from sale of premises and equipment 222 2,112 (84)
Proceeds from sale of other real estate owned 400 338 300
Purchase of subsidiaries, net of cash and due from banks acquired 36,952 (5,191) (10,808)
- ----------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities 6,541 (87,789) (94,191)
- ----------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,395 10,067 37,750
Net proceeds (payments) on short-term borrowings (59,167) 12,141 2,779
Proceeds from other borrowings 103,295 175,970 42,890
Payments on other borrowings (108,777) (131,228) (3,502)
Trust preferred securities, net of executory costs 32,992 -- --
Dividends paid (11,470) (9,840) (8,062)
Repurchase of common stock (1,385) (16,673) (12,951)
Sale of common stock 1,185 1,705 1,664
Proceeds from exercise of stock options 1,726 685 213
- ----------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities (33,206) 42,827 60,781
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 10,194 (7,576) (2,294)
Cash and cash equivalents at beginning of year 57,195 64,771 67,065
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 67,389 $ 57,195 $ 64,771
- ----------------------------------------------------------------------------------------------------------
</TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS ARE CONTINUED ON THE FOLLOWING PAGE.
21
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for:
Interest $ 78,667 $ 67,553 $ 59,683
Income taxes 7,971 10,180 11,887
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized gain (loss) on securities available for sale $ (148) $ 978 $ (1,378)
Change in deferred taxes attributable to securities available for sale 49 (2,647) 458
Transfer of securities held to maturity to available for sale -- 193,480 --
Other real estate acquired in settlement of loans 792 425 35
Transfer from premises and equipment to other real estate owned -- 1 --
Purchase of subsidiaries:
Purchase price $ (32,354) $ 6,797 $ 12,038
- -------------------------------------------------------------------------------------------------------------------------
Assets acquired:
Cash and cash equivalents $ 4,598 $ 1,606 $ 1,230
Interest-bearing deposits in banks -- 1,394 1,488
Securities 39,223 16,066 22,187
Federal funds sold 8,080 3,100 100
Loans 106,536 59,300 24,214
Premises and equipment 2,856 930 364
Deferred taxes -- 81 --
Other assets 23,700 12,801 6,331
Liabilities assumed:
Deposits (193,386) (67,411) (43,279)
Short-term borrowings (10,510) (200) --
Other borrowings (11,100) (4,127) --
Deferred taxes payable (71) -- --
Other liabilities (2,280) (794) (597)
Common stock issued -- (15,949) --
- -------------------------------------------------------------------------------------------------------------------------
$ (32,354) $ 6,797 $ 12,038
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DOLLAR AMOUNTS OTHER THAN SHARE DATA IN THOUSANDS)
For the Years Ended
December 31, 1998, 1997, and 1996
Accumulated Common
Other Unearned Stock
Common Common Capital Retained Comprehensive ESOP Owned
Shares Stock Surplus Earnings Income Shares By ESOP
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995,
as previously reported 12,905,215 $ 12,905 $ 59,457 $ 82,029 $ 697 $ -- $ --
Adjusted for pooling of interests 2,570,968 2,572 9,101 20,052 427 (1,282) (2,073)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 15,476,183 15,477 68,558 102,081 1,124 (1,282) (2,073)
- ------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 24,713 -- -- --
Cash dividends declared -- -- -- (8,488) -- -- --
Repurchase of outstanding
shares (484,739) (485) (12,461) -- -- -- --
Shares issued in Dividend
Reinvestment Program 60,404 60 1,606 -- -- -- --
Change in unrealized gain
(loss) on securities -- -- -- -- (920) -- --
Issuance of common stock 1,603 2 4 -- -- -- --
Stock dividend 450,656 450 12,279 (12,729) -- -- --
Payment for fractional shares
for stock dividend (450) -- (13) -- -- -- --
Exercise of stock options 12,236 12 202 -- -- -- --
Employee Stock Ownership Plan
(ESOP) -- -- 160 -- -- 391 (391)
Market value adjustment -- -- -- -- -- -- (274)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 15,515,893 15,516 70,335 105,577 204 (891) (2,738)
- ------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 28,168 -- -- --
Cash dividends declared -- -- -- (10,074) -- -- --
Repurchase of outstanding
shares (464,439) (464) (16,205) -- -- -- --
Shares issued in Dividend
Reinvestment Program 47,781 48 1,678 -- -- -- --
Change in unrealized gain
(loss) on securities -- -- -- -- 4,331 -- --
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) (1) (21) -- -- -- --
Exercise of stock options 48,267 48 637 -- -- -- --
Employee Stock Ownership
Plan (ESOP) -- -- 340 -- -- 404 (404)
Market value adjustment -- -- -- -- -- -- (1,197)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 15,994,826 15,995 92,432 103,101 4,535 (487) (4,339)
- ------------------------------------------------------------------------------------------------------------------------------
Net income -- -- -- 22,116 -- -- --
Cash dividends declared -- -- -- (12,813) -- -- --
Repurchase of outstanding
shares (33,376) (33) (1,352) -- -- -- --
Shares issued in Dividend
Reinvestment Program 26,552 26 1,082 -- -- -- --
Change in unrealized gain
(loss) on securities -- -- -- -- (99) -- --
Stock dividend 741,400 741 28,204 (28,945) -- -- --
Exercise of stock options 113,054 113 2,212 -- -- -- --
Employee Stock Ownership
Plan (ESOP) -- -- 983 -- -- 435 (435)
Market value adjustment -- -- -- -- -- -- (5,269)
Add for change in fiscal year
of pooling companies -- -- -- 77 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 16,842,456 $ 16,842 $ 123,561 $ 83,536 $ 4,436 $ (52) $ (10,043)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
23
<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
Indiana, Illinois, Kentucky, and Southwestern Ohio. 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, First Kentucky Bank, The Bank of Mitchell, White County Bank, First
Federal Savings Bank of Leitchfield, First National Bank of Bridgeport, First
Bank of Huntingburg, Illinois One Bank, National Association, Trigg County
Farmers Bank, Community First Bank, N.A., Community First Bank of Kentucky, Bank
of Illinois, National Association, Princeton Federal Bank, fsb, The Progressive
Bank, National Association, Ripley County Bank, NCBE Capital Trust I, 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 valuation
of the securities portfolio, 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 consolidated financial statements give retroactive effect to the pooling
transactions described in Note 2. The consolidated statements of financial
condition, income and comprehensive 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
Corporation as if the appropriate amount of common stock issued in the
acquisitions were outstanding effective January 1, 1996, 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 primarily the banks' investment in capital
stock of the Federal Home Loan Bank. The carrying value is estimated to be fair
value since, if a bank withdraws membership in the Federal Home Loan Bank, the
stock must be redeemed for face value. As a member of the Federal Home Loan Bank
System, a bank is required to maintain an investment in FHLB capital stock in an
amount equal to at least 1% of outstanding residential mortgages or 5% of
outstanding FHLB advances, whichever is greater.
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
24
<PAGE>
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 15 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, 1998, 1997, and 1996, was $3,073,
$1,106, and $584, 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.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income", was issued in June 1997 by the Financial Accounting
Standards Board (FASB). SFAS 130 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 Corporation adopted SFAS 130 by
disclosing changes in other comprehensive income for the years ended December
31, 1998, 1997, and 1996, respectively.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The provisions of this statement require
disclosure of financial and descriptive information about an enterprise's
operation segments in annual and interim financial reports issued to
shareholders. The statement defines an operating segment as a component of an
enterprise that engages in business activities that generate revenue and incur
expense, whose operating results are reviewed by the chief operating decision
maker in the determination of resource allocation and performance, and for which
discrete financial information is available. The Corporation adopted the
provisions of this statement for 1998 annual reporting. These disclosure
requirements had no impact on financial position or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On June 15, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 133 established a new model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing standards. SFAS 133 is effective for fiscal years beginning
after June 15, 1999, but earlier application is permitted as of the
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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 SFAS 133.
Adoption of SFAS 133 is not expected to have a material financial statement
impact on the Corporation's financial position or operating results.
ACCOUNTING FOR MORTGAGE BACKED SECURITIES RETAINED AFTER THE SECURIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A BANKING ENTERPRISE
In October, 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage
Backed Securities Retained After the Securization of Mortgage Loans Held For
Sale By a Banking Enterprise." SFAS 134 amends SFAS 65 and SFAS 115. SFAS
134 is effective for the first fiscal quarter beginning after December 15,
1998. Adoption of SFAS 133 is not expected to have a material financial
statement impact on the Corporation's financial position or operating results.
RECLASSIFICATIONS
Certain reclassifications have been made to the balances as of and for the years
ended December 31, 1997 and 1996, to be consistent with classifications adopted
for 1998.
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 is being amortized over 15 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 is being amortized over 15 years
using the straight-line method.
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 $4,521. First Kentucky also purchased the office facility
and certain loans of the branch.
On March 6, 1998, the Corporation purchased 100% of the common stock of Vernois
Bancshares, Inc. in a cash transaction. As of March 6, 1998, Vernois Bancshares,
Inc.'s wholly-owned subsidiary, Bank of Illinois in Mt. Vernon, had assets of
$179,156 and equity of $27,782. The transaction was accounted for as a purchase,
and the excess of cost over the fair value of net assets acquired totaling
$16,551 is being amortized over 15 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, First National Bank of
Bridgeport, and the Bank of Illinois in Mt. Vernon for the years ended December
31:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Net interest income $88,813 $88,567
Proforma net income 20,934 29,680
Proforma earnings per share - Basic 1.25 1.79
Proforma earnings per share - Diluted 1.24 1.77
</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. As of December 31, 1997, First Bank
of Huntingburg had 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 31, 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 May 31,
1998, Illinois One Bank had assets of $86,117 and equity of $11,111. 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 Bancorp for all periods presented.
Certain reclassifications have been made to Illinois One Bancorp'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, Inc. the parent company of Trigg
County Farmers Bank, Cadiz, Kentucky. As of December 31, 1998, Trigg County
Farmers Bank had assets of $96,665 and equity of $8,751. 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.
26
<PAGE>
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, 1998, the two banks had assets of
$163,544 and equity of $14,872. 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 Community First
Financial. Certain reclassifications have been made to Community First
Financial's historical financial statements to conform to the Corporation's
presentation.
On October 1, 1998, the Corporation issued 289,134 shares of common stock for
all of the outstanding shares of 1st Bancorp Vienna, Inc., the parent of First
State Bank of Vienna, Vienna, Illinois. First State Bank of Vienna, with total
assets of $38,160 and equity of $5,071 as of September 30, 1998, was merged into
the Corporation's subsidiary Illinois One Bank, National Association, on October
1, 1998. 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 1st Bancorp Vienna for all
periods presented. Certain reclassifications have been made to 1st Bancorp
Vienna's historical financial statements to conform to the Corporation's
presentation.
On October 1, 1998, the Corporation issued 729,936 shares of common stock for
all the outstanding shares of Hoosier Hills Financial Corporation, the parent of
Ripley County Bank, Osgood, Indiana. As of December 31, 1998, Ripley County Bank
had total assets of $114,666 and equity of $10,301. 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 Hoosier Hills Financial Corporation for all periods presented.
Certain reclassifications have been made to Hoosier Hills Financial
Corporation's historical financial statements to conform to the Corporation's
presentation.
On October 31, 1998, the Corporation issued 190,000 shares of common stock for
all of the outstanding shares of Commonwealth Commercial Corporation, the parent
of Bank of Crittenden, Crittenden, Kentucky. Bank of Crittenden, with total
assets of $26,523 and equity of $2,648 as of November 30, 1998, was merged into
the Corporation's subsidiary Community First Bank of Kentucky on December 10,
1998. 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 Commonwealth Commercial Corporation for
all periods presented. Certain reclassifications have been made to Commonwealth
Commercial Corporation's historical financial statements to conform to the
Corporation's presentation.
On October 31, 1998, the Corporation issued 102,648 shares of common stock for
all of the outstanding shares of Downstate Banking Co., the parent of the
Downstate National Bank, Brookport, Illinois. Downstate National Bank, with
total assets of $21,230 and equity of $2,014 as of October 31, 1998, was merged
into the Corporation's subsidiary Illinois One Bank, National Association, on
October 31, 1998. The combination was accounted for a pooling of interests.
Accordingly, the Corporation's financial statements have been retroactively
restated to include the accounts and operations of Downstate Banking Co. for all
periods presented. Certain reclassifications have been made to Downstate Banking
Co.'s historical financial statements to conform to the Corporation's
presentation.
On November 30, 1998, the Corporation issued 223,211 shares of common stock for
all of the outstanding shares of Princeton Federal Bank, fsb, Princeton,
Kentucky. As of December 31, 1998, Princeton Federal had total assets of $31,839
and equity of $4,433. The combination was accounted for a pooling of interests.
Accordingly, the Corporation's financial statements have been retroactively
restated to include the accounts and operations of Princeton Federal Bank, fsb,
for all periods presented. Certain reclassifications have been made to Princeton
Federal Bank's, fsb, historical financial statements to conform to the
Corporation's presentation.
On December 1, 1998, the Corporation issued 1,025,572 shares of common stock for
all of the outstanding shares of Progressive Bancshares, Inc., the parent of The
Progressive Bank, National Association, Lawrenceburg, Kentucky. As of December
31, 1998, the Progressive Bank had total assets of $145,906 and equity of
$11,711. 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 Progressive Bancshares, Inc.
for all periods presented. Certain reclassifications have been made to
Progressive Bancshares, Inc.'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, Inc.
(IOB), Trigg Bancorp, Inc. (Trigg), Community First Financial, Inc. (CFF), 1st
Bancorp Vienna, Inc. (1stBV), Commonwealth Commercial Corporation (CCC),
Downstate Banking Company (DBC), Hoosier Hills Financial Corporation (HHFC), and
Progressive Bancshares, Inc. (PBI) 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.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 2. BUSINESS COMBINATIONS, CONTINUED
<TABLE>
<CAPTION>
NCBE FFB IOB Trigg CCF 1st BV CCC
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997:
Loans, net of unearned interest $ 832,701 $ 83,655 $ 48,907 $ 52,960 $ 103,172 $ 20,937 $ 19,546
Deposits 870,825 93,485 76,388 72,452 113,237 33,377 21,159
Assets 1,193,697 108,109 88,069 96,379 130,708 38,670 25,291
Year ended December 31, 1997:
Interest income $ 87,253 $ 8,392 $ 6,045 $ 7,593 $ 11,133 $ 2,922 $ 2,248
Interest expense 39,977 3,673 2,617 3,807 4,259 1,369 965
Net interest income 47,276 4,719 3,428 3,786 6,874 1,553 1,283
Provision for loan losses 1,711 180 180 112 2 42 15
Net income 17,119 1,232 951 1,395 2,886 541 307
Earnings per share-Basic 1.65 1.48 1.58 1.80 1.92 1.78 1.54
Earnings per share-Diluted 1.63 1.48 1.58 1.80 1.90 1.78 1.54
Year ended December 31, 1996:
Interest income $ 78,640 $ 7,909 $ 5,728 $ 7,517 $ 10,361 $ 2,753 $ 2,070
Interest expense 34,499 3,444 2,499 3,641 4,156 1,251 911
Net interest income 44,141 4,465 3,229 3,876 6,205 1,502 1,159
Provision for loan losses 2,491 213 148 231 151 84 10
Net income 15,246 1,250 1,099 1,260 2,374 517 243
Earnings per share-Basic 1.51 1.50 1.83 1.63 1.58 1.56 1.22
Earnings per share-Diluted 1.51 1.50 1.83 1.63 1.57 1.56 1.22
<CAPTION>
NCBE
DBC HHFC PFB PBI Consolidated
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
December 31, 1997:
Loans, net of unearned interest $ 13,121 $ 87,289 $ 23,307 $ 115,364 $1,400,959
Deposits 20,778 85,698 22,373 123,296 1,532,804
Assets 22,982 108,905 31,711 144,203 1,985,178
Year ended December 31, 1997:
Interest income $ 1,726 $ 8,492 $ 2,460 $ 11,717 $ 149,964
Interest expense 835 4,226 1,281 5,634 68,626
Net interest income 891 4,266 1,179 6,083 81,338
Provision for loan losses -- 150 21 290 2,703
Net income 251 770 267 1,755 27,474
Earnings per share-Basic 2.33 1.09 1.32 1.71 1.65
Earnings per share-Diluted 2.33 1.09 1.26 1.71 1.64
Year ended December 31, 1996:
Interest income $ 1,662 $ 7,893 $ 2,310 $ 9,882 $ 136,725
Interest expense 799 3,962 1,200 4,745 61,107
Net interest income 863 3,931 1,110 5,137 75,618
Provision for loan losses -- 150 11 216 3,705
Net income 231 895 84 1,514 24,713
Earnings per share-Basic 2.14 1.34 0.43 1.55 1.48
Earnings per share-Diluted 2.14 1.34 0.41 1.55 1.48
</TABLE>
NOTE 3. EARNINGS PER SHARE
In 1997, the FASB issued SFAS 128, "Earnings per Share." SFAS 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 SFAS 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
on a proforma basis.
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proforma net income $ 21,454 $ 27,474 $ 24,713
Weighted average shares outstanding
Basic 16,757,078 16,612,837 16,712,994
Diluted 16,874,287 16,757,121 16,730,839
EARNINGS PER SHARE-BASIC $ 1.28 $ 1.65 $ 1.48
Effect of stock options (0.01) (0.01) --
- -------------------------------------------------------------------------------------
EARNINGS PER SHARE-DILUTED $ 1.27 $ 1.64 $ 1.48
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
NOTE 4. CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $17,015 and $11,032 as of December
31, 1998 and 1997, 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 securities classified as available for sale are
as follows:
<TABLE>
<CAPTION>
As of December 31, 1998
- --------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND
AGENCY SECURITIES $ 67,800 $ 602 $ 35 $ 68,367
TAXABLE MUNICIPALS 3,033 125 -- 3,158
TAX-EXEMPT MUNICIPALS 188,463 8,004 145 196,322
CORPORATE SECURITIES 9,224 125 478 8,871
MORTGAGE-BACKED SECURITIES 65,672 548 483 65,737
- --------------------------------------------------------------------------
SUBTOTAL 334,192 9,404 1,141 342,455
EQUITY SECURITIES 5,126 202 1,269 4,059
- --------------------------------------------------------------------------
TOTAL $339,318 $ 9,606 $ 2,410 $346,514
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
<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 $ 95,647 $ 427 $ 106 $ 95,968
Taxable municipals 3,663 65 1 3,727
Tax-exempt municipals 196,467 6,849 133 203,183
Corporate securities 10,498 88 17 10,569
Mortgage-backed securities 93,201 590 342 93,449
- --------------------------------------------------------------------------
Subtotal 399,476 8,019 599 406,896
Equity Securities 2,249 71 147 2,173
- --------------------------------------------------------------------------
Total $401,725 $ 8,090 $ 746 $409,069
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
</TABLE>
28
<PAGE>
The amortized cost and fair value of the securities as of December 31, 1998, 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, 1998 Amortized Cost Fair Value
- ----------------------------------------------------
<S> <C> <C>
Less than 1 year $ 62,039 $ 61,892
1 year to 5 years 87,748 90,146
5 years to 10 years 51,098 53,227
Over 10 years 67,635 71,453
Mortgage-backed securities 65,672 65,737
- ----------------------------------------------------
Total $334,192 $342,455
- ----------------------------------------------------
- ----------------------------------------------------
</TABLE>
Securities gains and (losses) are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Gross realized gains $1,192 $ 871 $ 166
Gross realized losses (32) (68) (145)
- -------------------------------------------------------
Total $1,160 $ 803 $ 21
- -------------------------------------------------------
- -------------------------------------------------------
</TABLE>
As of December 31, 1998 and 1997, the carrying value of securities pledged as
collateral for public deposits and for other purposes as required or permitted
by law were $150,480 and $158,930, respectively.
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 SFAS 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>
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Real estate loans $ 964,493 $ 801,611
Commercial, industrial, and
agricultural loans 415,579 363,727
Economic development loans and
other obligations of state and
political subdivisions 19,780 15,492
Consumer loans 223,377 198,615
Direct lease financing 12,988 13,146
Leveraged leases 5,102 4,661
All other loans 7,606 5,017
- -----------------------------------------------------------------
Total loans - gross 1,648,925 1,402,269
Unearned income on loans (629) (1,310)
- -----------------------------------------------------------------
Total loans - net of
unearned income 1,648,296 1,400,959
Allowance for loan losses (18,443) (13,854)
- -----------------------------------------------------------------
Total loans - net $ 1,629,853 $ 1,387,105
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The following table presents data on impaired loans at December 31, 1998, 1997,
and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans for which there is a
related allowance for loan losses $3,696 $5,424 $5,907
Impaired loans for which there is no
related allowance for loan losses 2,982 2,585 1,555
- ---------------------------------------------------------------------
Total impaired loans $6,678 $8,009 $7,462
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Allowance for loan losses for
impaired loans included in the
allowance for loan losses 990 $1,358 $1,080
Average recorded investment in
impaired loans 6,915 7,612 8,267
Interest income recognized from
impaired loans 622 361 385
Cash basis interest income
recognized from impaired loans 300 200 81
</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 $191,018 and $139,352 as
of December 31, 1998 and 1997, respectively.
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. The activity in
these loans during 1998 is as follows:
<TABLE>
<CAPTION>
1998
- ------------------------------------------
<S> <C>
Balance as of January 1, $ 32,360
New loans 46,026
Repayments (29,724)
- ------------------------------------------
Balance as of December 31, $ 48,662
- ------------------------------------------
- ------------------------------------------
</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.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 7. LEASE FINANCING, CONTINUED
The composition of the net investment in direct lease financing at December 31
is as follows:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Minimum lease payments receivable $ 15,010 $ 16,050
Less: allowance for uncollectable leases 97 --
- ----------------------------------------------------------------------------
Net minimum lease payments receivable 14,913 16,050
Add estimated residual values of leased equipment 3,006 2,800
Add initial direct costs 65 63
(Deduct) unearned lease income (5,093) (5,767)
- ----------------------------------------------------------------------------
Net investment in direct lease financing $ 12,891 $ 13,146
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the minimum future lease payments due under the direct
financing leases are as follows:
<TABLE>
<CAPTION>
1998
- ---------------------------------------------------
<S> <C>
1998 $2,839
1999 2,447
2000 2,104
2001 1,768
2002 1,339
Thereafter 4,513
- ---------------------------------------------------
Total minimum future lease payments $15,010
- ---------------------------------------------------
- ---------------------------------------------------
</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 are composed
of the following elements:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable (net of principal and interest
on nonrecourse debt) $1,841 $1,841
Estimated residual value of leased assets 5,722 5,722
Less: unearned and deferred income 2,461 2,902
- ------------------------------------------------------------------------
Investment in leveraged lease 5,102 4,661
Less: deferred taxes arising from leveraged leases 2,731 1,011
- ------------------------------------------------------------------------
Net investment in leveraged leases $2,371 $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>
1998 1997 1996
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 13,854 $ 12,539 $ 10,937
Allowance associated with
Acquisitions 1,086 516 379
Provision charged to operations 7,143 2,703 3,705
Recoveries credited to allowance 1,375 1,239 891
Loans charged to allowance (5,015) (3,143) (3,373)
- -------------------------------------------------------------------------
Balance at end of year $ 18,443 $ 13,854 $ 12,539
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
NOTE 9. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Land, Buildings, and
Lease Improvements $50,806 $38,147
Equipment 26,712 23,684
Construction in progress 2,310 8,169
- --------------------------------------------------------------------
Total cost 79,828 70,000
Less accumulated depreciation 33,429 29,666
- --------------------------------------------------------------------
Net premises and equipment $46,399 $40,334
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
Construction in progress included capitalized interest of $0 and $371 as of
December 31, 1998 and 1997, respectively.
NOTE 10. DEPOSITS
As of December 31, 1998, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 686,896
2000 159,951
2001 44,963
2002 16,925
2003 and thereafter 27,115
- ----------------------------------------------------
Total $ 935,850
- ----------------------------------------------------
- ----------------------------------------------------
</TABLE>
NOTE 11. INCOME TAXES
The components of income tax expense for the years ended December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current $ 7,903 $ 8,273 $ 9,430
Deferred (1,286) 917 285
- -----------------------------------------------------------------
Total 6,617 9,190 9,715
- -----------------------------------------------------------------
State:
Current 1,070 1,626 1,693
Deferred 283 255 133
- -----------------------------------------------------------------
Total 1,353 1,881 1,826
- -----------------------------------------------------------------
Total income taxes $ 7,970 $11,071 $11,541
- -----------------------------------------------------------------
Proforma taxes for acquired
Subchapter S Corporation 662 694 --
- -----------------------------------------------------------------
Proforma C Corporation
provision for income taxes $ 8,632 $11,765 $11,541
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
30
<PAGE>
The portion of the tax provision relating to realized securities gains and
losses amounted to $464, $321, and $7 for 1998, 1997, and 1996, 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>
1998 1997 1996
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal income tax computed
at the statutory rates $ 10,530 $ 13,734 $ 12,689
Elimination of S Corporation earnings (929) (694) --
Adjusted for effect of:
Nontaxable municipal interest (3,658) (3,280) (2,671)
Nondeductible expenses 68 446 565
State income taxes, net of
federal tax benefit 880 1,191 1,152
Benefit of income taxed at
lower rates 143 (143) (136)
Change in deferred tax asset
valuation allowance -- (80) 52
Other differences 936 (103) (110)
- ------------------------------------------------------------------------------
Total income taxes $ 7,970 $ 11,071 $ 11,541
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
</TABLE>
The net deferred tax asset (liability) in the accompanying balance sheet
includes the following amounts of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
1998 1997
- -----------------------------------------------------------------
<S> <C> <C>
Deferred tax liability $(11,187) $ (8,524)
Deferred tax asset 7,737 4,160
Valuation allowance for deferred
tax assets (448) (448)
- -----------------------------------------------------------------
Net deferred tax asset (liability) $ (3,898) $ (4,812)
- -----------------------------------------------------------------
- -----------------------------------------------------------------
</TABLE>
The tax effects of principal temporary differences are shown in the following
table:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Allowance for loan losses $ 6,095 $ 3,241
Direct financing and leveraged leases 1,194 364
Prepaid pension costs (739) (892)
Premises and equipment (7,292) (4,640)
Unrealized gain (loss) on securities
available for sale (2,759) (2,670)
State net operating loss carryforwards 448 448
Other (397) (215)
- ---------------------------------------------------------------
Net temporary differences (3,450) (4,364)
Valuation allowance (448) (448)
- ---------------------------------------------------------------
Net deferred tax asset (liability) $(3,898) $(4,812)
- ---------------------------------------------------------------
- ---------------------------------------------------------------
</TABLE>
NOTE 12. SHORT-TERM BORROWINGS
Information concerning short-term borrowings as of the years ended December 31
were as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Federal funds purchased:
Average amount outstanding $20,853 $44,576
Maximum amount at any month end 50,950 75,035
Weighted average interest rate:
During year 4.65% 5.65%
End of year -- 6.77%
Securities sold under agreements to repurchase:
Average amount outstanding $36,770 $19,322
Maximum amount at any month end 52,615 31,103
Weighted average interest rate:
During year 4.47% 4.18%
End of year 3.31% 4.79%
Notes payable U.S. Treasury:
Average amount outstanding $ 1,397 $ 2,064
Maximum amount at any month end 5,360 5,916
Weighted average interest rate:
During year 4.94% 5.36%
End of year -- 5.25%
</TABLE>
NOTE 13. OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank advances:
Due from January 2, 1997 through August 1, 2015 with interest rates
varying from 5.16% to 8.45% $116,269 $106,368
Notes payable:
Northern Trust Co., monthly interest payments through May 1999, 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% 13,417 14,417
Norlease, Inc., interest and principal payments through June 30, 2003,
interest rates varying from 6.29% to 8.61%, collateralized by equipment and
an investment in a leveraged lease 9,800 11,302
Cole-Taylor Bank, quarterly principal payments of $63 through 2001, 8.50% and
8.25% at December 31, 1997 collateralized by bank stock -- 1,016
ESOP loan payable, quarterly interest
payments at a rate of lender's prime plus
.75%, full repayment scheduled for April 1, 2002 -- 444
Other 59 380
- ----------------------------------------------------------------------------------------------------------
$139,545 $133,927
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</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
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 13. OTHER BORROWINGS, CONTINUED
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, 1998 are due
in future years as follows:
<TABLE>
<S> <C>
1999 $ 24,062
2000 31,988
2001 13,740
2002 19,181
2003 26,820
Thereafter 23,754
- ---------------------------------------------------
Total minimum future lease payments $139,545
- ---------------------------------------------------
- ---------------------------------------------------
</TABLE>
At December 31, 1998, the Corporation had $203,225 in unused federal funds and
Federal Home Loan Bank lines.
NOTE 14. TRUST PREFERRED SECURITIES
On March 30, 1998, NCBE Capital Trust I ("the Trust"), a Delaware statutory
business trust created by the Corporation, issued $34.5 million of 8.25%
Cumulative Trust Preferred Securities ("Securities") which will mature on March
31, 2028, subject to extension or earlier redemption in certain events. The
principal asset of the Trust is a $35.6 million subordinated debenture of the
Corporation. The subordinated debenture bears interest at the rate of 8.25% and
matures on March 31, 2028, subject to extension or earlier redemption in certain
events. The Corporation owns all of the common securities of the Trust.
The Securities, the assets of the Trust, and the common securities issued by the
Trust are redeemable in whole or in part on or after March 31, 2003, or at any
time in whole, but not in part, from the date of issuance upon the occurrence of
certain events. The Securities are included in Tier 1 capital for regulatory
capital adequacy determination purposes, subject to certain limitations.
The obligations of the Corporation with respect to the issuance of the
Securities constitute a full and unconditional guarantee by the Corporation of
the Trust's obligation with respect to the Securities.
Subject to certain exceptions and limitations, the Corporation may, from time to
time, defer subordinated debenture interest payments, which would result in a
deferral of distribution payments on the related Securities and, with certain
exceptions, prevent the Corporation from declaring or paying cash distributions
on the Corporation's common stock or debt securities that rank pari passu or
junior to the subordinated debenture.
NOTE 15. 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 CorporationOs 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 following table) of total and Tier 1 capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier
1 capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1998, that the Corporation and its subsidiary banks met
all capital adequacy requirements to which they were subject.
As of December 31, 1998, 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 1 risk-based, and Tier 1 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:
32
<PAGE>
<TABLE>
<CAPTION>
NATIONAL CITY BANCSHARES, INC. TO BE WELL CAPITALIZED
MINIMUM RATIOS FOR CAPITAL UNDER PROMPT CORRECTIVE
1998 ACTUAL ADEQUACY PURPOSES: ACTION PROVISIONS:
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED $236,793 14.65% $129,273 8.00% $161,591 10.00%
NATIONAL CITY BANK (1) 78,113 10.40% 54,793 8.00% 68,491 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS)
CONSOLIDATED $218,350 13.51% $ 64,636 4.00% $ 94,954 6.00%
NATIONAL CITY BANK (1) 70,935 10.36% 27,396 4.00% 41,095 6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS)
CONSOLIDATED $218,350 10.12% $ 86,333 4.00% $107,916 5.00%
NATIONAL CITY BANK (1) 70,935 8.27% 34,320 4.00% 42,900 5.00%
</TABLE>
(1) The Peoples National Bank of Grayville, Lincolnland Bank, Alliance Bank,
and Pike County Bank were merged into National City Bank during 1998.
<TABLE>
<CAPTION>
National City Bancshares, Inc. To be Well Capitalized
Minimum Ratios for Capital Under Prompt Corrective
1997 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) $202,402 14.78% $ 109,526 8.00% $ 136,907 10.00%
Consolidated 41,916 11.28% 29,720 8.00% 37,150 10.00%
National City Bank
Tier 1 Capital (to Risk Weighted Assets) $188,800 13.72% $ 54,763 4.00% $ 81,145 6.00%
Consolidated 40,244 10.83% 14,860 4.00% 22,290 6.00%
National City Bank
Tier 1 Capital (to Average Assets) $188,800 9.69% $ 77,190 4.00% $ 96,718 5.00%
Consolidated 40,244 8.22% 19,590 4.00% 24,489 5.00%
National City Ban
</TABLE>
NOTE 16. INCENTIVE STOCK OPTION PLAN
The Corporation's incentive stock option plan currently reserves 17,312
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 Accounting Principles Board
Opinion No. 25 and related Interpretations. Had compensation cost for the Plan
been determined based on the grant date fair values of awards (the method
described in SFAS 123), reported net income and earnings per common share would
have been reduced to the pro forma amounts shown below.
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
Net income:
<S> <C> <C> <C>
As reported $21,454 $27,474 $24,713
Pro forma 20,108 26,457 23,953
Earnings per share:
Basic
As reported $ 1.28 $ 1.65 $ 1.48
Pro forma 1.20 1.59 1.43
Diluted
As reported $ 1.27 $ 1.64 $ 1.48
Pro forma 1.19 1.58 1.43
</TABLE>
A summary of the status of the Plan, adjusted for all stock dividends and the
stock split in 1996, as of December 31, 1998, 1997, and 1996, and changes during
the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
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 517,987 $23.89 448,355 $18.48 360,257 $16.65
Options granted 173,458 35.62 124,199 39.43 100,334 24.40
Options exercised 113,054 16.64 48,267 13.15 12,236 16.46
Options forfeited 7,455 38.69 6,300 24.40 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 570,936 $35.85 517,987 $23.89 448,355 $18.48
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Options exercisable 390,223 $38.69 323,483 $19.05 202,968 $16.81
Weighted-average fair value of options granted
during the year $12.63 $14.02 $7.56
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 16. INCENTIVE STOCK OPTION PLAN, CONTINUED
The following table summarizes information about stock options outstanding at
December 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
$39.90 112,430 8.8 112,430
35.62 170,613 9.8 -
24.40 76,600 7.8 76,600
18.20 195,619 6.8 195,619
14.27 5,574 1.0 5,574
8.90 3,366 2.5 -
5.55 6,734 1.5 -
- -----------------------------------------------------------------------------
570,936 8.1 390,223
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</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>
1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of options granted 173,458 124,199 100,334
Risk-free interest rate 4.97% 5.86% 6.42%
Expected life, in years 10 10 10
Expected volatility Expected dividend yield 25.25% 21.50% 16.41%
Estimated fair value per option 2.14% 1.71% 2.10%
$12.63 $14.02 $7.56
</TABLE>
NOTE 17. 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>
1998 1997
- ----------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term
investments $ 77,962 $ 77,962 $ 81,902 $ 81,902
Securities 346,514 346,514 409,069 409,069
Loans - net of
allowance 1,611,763 1,649,185 1,369,298 1,374,441
Accrued interest
receivable 21,258 21,258 19,967 19,967
Liabilities:
Deposits 1,734,585 1,740,498 1,532,804 1,540,761
Short-term borrowings 33,382 33,382 82,039 82,039
Other borrowings 139,545 141,628 133,927 131,895
Accrued interest
payable 9,342 9,342 8,235 8,235
Guaranteed preferred
beneficial interests in
the Corporation's
subordinated
debenture 34,500 32,602
</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 $18,090 and $17,807 in 1998 and 1997, respectively.
CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments include cash and due from banks, short-term
money market investments, interest-bearing deposits in banks, and federal funds
sold. For cash and short-term investments, the carrying amount is a reasonable
estimate of fair value.
SECURITIES
For securities, fair value equals quoted market price, if available. If a quoted
market price is not available, fair value is estimated using quoted market
prices for similar securities. 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.
34
<PAGE>
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 18. 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 Indiana, Illinois, Kentucky, and
Southwestern Ohio. 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, 1998, follows:
<TABLE>
<CAPTION>
RANGE OF RATES
VARIABLE RATE FIXED RATE TOTAL ON FIXED RATE
1998 COMMITMENT COMMITMENT COMMITMENT COMMITMENTS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMITMENTS
TO EXTEND CREDIT $175,969 $109,839 $285,808 5.23%-24.00%
STANDBY LETTERS
OF CREDIT - - 18,011 -
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the
banks to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation does not engage in the use of interest rate swaps, futures,
forwards, or option contracts.
NOTE 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>
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 6.00% 7.50% 7.50%
Increase in compensation rate 5.00% 5.00% 5.00%
Expected long-term rate of return 7.00% 9.00% 9.00%
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
NOTE 19. EMPLOYEE RETIREMENT PLANS, CONTINUED
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>
1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
Change in Fair Value of Plan Assets:
Balance at beginning of
measurement period $13,550 $12,400
Actual return on plan assets 252 1,911
Benefits paid (3,500) (761)
- -------------------------------------------------------------------------
Balance at end of
measurement period 10,302 13,550
- -------------------------------------------------------------------------
Change in Benefit Obligation:
Balance at beginning of
measurement period 11,350 8,652
Service cost 626 836
Interest costs 576 633
Actuarial (gains) losses (1,376) 924
Curtailment - 1,066
Benefits paid (3,500) (761)
- -------------------------------------------------------------------------
Balance at end of
measurement period 7,676 11,350
- -------------------------------------------------------------------------
Funded status 2,626 2,200
Unrecognized net actuarial loss (802) -
- -------------------------------------------------------------------------
Prepaid benefit cost $ 1,824 $ 2,200
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
</TABLE>
Net periodic pension cost (credit) included the following components for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits
earned during the period $626 $ 836 $ 812
Interest cost on projected
benefit obligation 576 633 590
Return on assets (252) (1,911) (1,300)
Net amortization and deferral (574) 574 (13)
Curtailment effect -- 1,066 --
- -----------------------------------------------------------------------------
Net periodic pension
cost (credit) $376 $ 1,198 $ 89
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
Effective January 1, 1998, the Corporation adopted a cash balance formula to
replace the previous defined benefit plan covering substantially all full-time
employees with one or more years of service. Service costs for the cash balance
plan is included in the net periodic pension cost in the accompanying schedule.
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 $377, $1,675, and $1,531 during 1998, 1997, and 1996, respectively.
Certain of the Corporation's subsidiaries sponsor an employee stock ownership
plan (ESOP) that covers their employees. The subsidiaries make annual
contributions to the ESOP equal to the total debt service. The subsidiaries
account for its ESOP in accordance with Statement of Position 93-6. Accordingly,
the shares represented by outstanding debt are reported as unearned ESOP shares
in the statement of financial condition. As shares are earned, the subsidiaries
report compensation expense equal to the current market price of the shares, and
the shares become outstanding for earnings per share computations. Dividends on
allocated ESOP shares are recorded as a reduction of retained earnings;
dividends on unallocated ESOP shares are recorded as a reduction of debt and
accrued interest.
Contribution expense for the ESOP was $1,227, $744, and $551 for the years ended
December 31, 1998, 1997, and 1996. The ESOP shares were as follows as of
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Allocated shares 224,466 185,136 147,616
Shares released for allocation 39,279 39,330 37,520
Unearned shares 5,405 44,684 84,014
- -------------------------------------------------------------------------------
Total ESOP shares 269,150 269,150 269,150
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Fair value of unearned shares
at December 31 $201,688 $811,871 $1,132,352
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
In the case of a distribution of ESOP shares which are not readily tradeable on
an established securities market, the plan provides the participant with a put
option that complies with the requirements of Section 490(h) of the Internal
Revenue Code. The Corporation has classified outside of permanent equity the
fair value of earned and unearned ESOP shares (net of the debit balance
representing unearned ESOP shares) subject to the put option in accordance with
the Securities and Exchange Commission Accounting Series Release #268.
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>
1998
- -----------------------------------------------------------------------------------------------------------
DECEMBER SEPTEMBER JUNE MARCH
31 30 30 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME $ 41,344 $ 43,143 $ 42,677 $ 39,613
INTEREST EXPENSE 19,872 20,481 20,369 18,158
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 21,472 22,662 22,308 21,455
PROVISION FOR LOAN LOSSES 4,144 853 1,744 402
NONINTEREST INCOME 3,820 4,098 5,037 3,666
NONINTEREST EXPENSE 17,639 18,804 16,214 14,632
- -----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,509 7,103 9,387 10,087
PROVISION FOR INCOME TAXES 284 1,911 2,694 3,081
- -----------------------------------------------------------------------------------------------------------
NET INCOME $ 3,225 $ 5,192 $ 6,693 $ 7,006
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
PROFORMA C CORPORATION
PROVISION FOR INCOME TAX 231 2,183 2,911 3,307
- -----------------------------------------------------------------------------------------------------------
PROFORMA NET INCOME $ 3,278 $ 4,920 $ 6,476 $ 6,780
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE - BASIC $ 0.19 $ 0.29 $ 0.39 $ 0.41
EARNINGS PER SHARE - DILUTED $ 0.19 $ 0.29 $ 0.39 $ 0.40
SHARES - BASIC 16,815,856 16,767,443 16,735,407 16,708,706
SHARES - DILUTED 16,925,674 16,871,162 16,862,430 16,841,892
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
1997
- -----------------------------------------------------------------------------------------------------------
December September June March
31 30 30 31
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 38,816 $ 38,369 $ 37,276 $ 35,503
Interest expense 17,920 17,788 16,977 15,941
- -----------------------------------------------------------------------------------------------------------
Net interest income 20,896 20,581 20,299 19,562
Provision for loan losses 787 887 396 633
Noninterest income 3,676 3,605 3,369 3,452
Noninterest expense 14,944 13,120 12,983 12,451
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 8,841 10,179 10,289 9,930
Provision for income taxes 2,056 2,960 2,956 3,099
- -----------------------------------------------------------------------------------------------------------
Net income $ 6,785 $ 7,219 $ 7,333 $ 6,831
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Proforma C Corporation
provision for income tax 2,299 3,168 3,164 3,134
- -----------------------------------------------------------------------------------------------------------
Proforma net income $ 6,542 $ 7,011 $ 7,125 $ 6,796
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Earnings per share - Basic $ 0.39 $ 0.42 $ 0.43 $ 0.41
Earnings per share - Diluted $ 0.39 $ 0.42 $ 0.42 $ 0.41
Shares - Basic 16,628,439 16,618,121 16,607,506 16,597,281
Shares - Diluted 16,798,460 16,772,392 16,743,334 16,714,324
</TABLE>
Note 21. SEGMENT INFORMATION
The Corporation has identified its reportable segments, including the basis of
organization along geographic boundaries served by the Corporation. Banking
services offered are similar in each geographic area served. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Corporation evaluates performance based on
profit or loss from operations before income taxes not including nonrecurring
gains and losses. Operating statistics for each reporting segment is as follows:
A reconciliation of revenues, net income, and assets of the reported segments to
the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
SOUTHWEST WESTERN SOUTHERN NORTHERN
DECEMBER 31, 1998 INDIANA KENTUCKY ILLINOIS KENTUCKY TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INTEREST INCOME $ 78,111 $ 25,091 $ 29,187 $ 35,214 $ 167,603
INTEREST EXPENSE 36,068 13,158 13,492 15,370 78,088
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 42,043 11,933 15,695 19,844 89,515
PROVISION FOR LOAN LOSSES 5,647 430 261 696 7,034
OTHER INCOME 9,806 1,699 2,502 2,711 16,718
OTHER EXPENSE 24,619 8,753 11,982 11,846 57,200
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME BEFORE TAX 21,583 4,449 5,954 10,013 41,999
INCOME TAX 6,875 1,214 1,890 2,018 11,997
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 14,708 $ 3,235 $ 4,064 $ 7,995 $ 30,002
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
OTHER SEGMENT INFORMATION:
DEPRECIATION AND
AMORTIZATION $ 1,897 $ 1,152 $ 2,504 $ 764 $ 6,317
SEGMENT ASSETS 1,038,167 330,920 437,322 424,116 2,230,525
EXPENDITURES FOR
SEGMENT ASSETS 5,659 249 317 507 6,732
</TABLE>
<TABLE>
<CAPTION>
Southwest Western Southern Northern
December 31, 1997 Indiana Kentucky Illinois Kentucky Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 76,235 $ 20,065 $ 19,519 $ 33,663 $ 149,482
Interest expense 35,222 9,696 8,810 14,912 68,640
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 41,013 10,369 10,709 18,751 80,842
Provision for loan losses 1,959 155 108 457 2,679
Other income 8,329 1,422 1,452 2,505 13,708
Other expense 25,166 6,353 7,110 10,576 49,205
- ---------------------------------------------------------------------------------------------------------------------------
Net income before tax 22,217 5,283 4,943 10,223 42,666
Income tax 6,854 1,503 1,096 2,384 11,837
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 15,363 $ 3,780 $ 3,847 $ 7,839 $ 30,829
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Other segment information:
Depreciation and
amortization $ 1,695 $ 377 $ 780 $ 712 $ 3,564
Segment assets 1,006,442 275,952 305,925 407,987 1,996,306
Expenditures for
segment assets 11,273 419 365 1,070 13,127
</TABLE>
<TABLE>
<CAPTION>
Southwest Western Southern Northern
December 31, 1996 Indiana Kentucky Illinois Kentucky Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 74,386 $ 17,044 $ 15,721 $ 30,206 $ 137,357
Interest expense 33,584 7,858 6,865 13,774 62,081
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 40,802 9,186 8,856 16,432 75,276
Provision for loan losses 2,705 242 232 527 3,706
Other income 7,399 1,252 1,063 2,459 12,173
Other expense 24,915 5,889 5,438 10,175 46,417
- ---------------------------------------------------------------------------------------------------------------------------
Net income before tax 20,581 4,307 4,249 8,189 37,326
Income tax 6,857 1,252 1,162 2,386 11,657
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 13,724 $ 3,055 $ 3,087 $ 5,803 $ 25,669
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Other segment information:
Depreciation and
amortization $ 1,705 $ 238 $ 465 $ 790 $ 3,198
Segment assets 982,733 213,257 258,793 381,953 1,836,736
</TABLE>
A reconciliation of revenues, net income, and assets of the reported segments to
the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net interest income
Total net interest income
for reportable segments $ 89,515 $ 80,842 $ 75,276
Non-bank entities (1,618) 498 342
Eliminations - (2) --
- ---------------------------------------------------------------------------------------------------------
Total consolidated net interest income $ 87,897 $ 81,338 $ 75,618
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net income
Total net income
for reportable segments 30,002 30,829 25,669
Non-bank entities (7,886) (2,661) (956)
Eliminations - - --
- ---------------------------------------------------------------------------------------------------------
Net income $ 22,116 $ 28,168 $ 24,713
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Assets
Total assets for reportable
segments 2,230,525 1,996,306 1,836,736
Non-bank entities 99,457 45,364 45,535
Eliminations (134,758) (56,492) (65,315)
- ---------------------------------------------------------------------------------------------------------
Consolidated total $ 2,195,224 $ 1,985,178 $ 1,816,956
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(Dollar Amounts Other Than Share Data in Thousands)
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>
1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 23,246 $ 6,153
Investment in subsidiaries 232,909 208,430
Securities available for sale 3,966 217
Nonmarketable equity securities 322 322
Property and equipment 1,447 1,043
Other assets 8,381 4,908
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 270,271 $ 221,073
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
LIABILITIES
Other borrowings $ 35,619 $ 1,366
Dividends payable 3,368 2,024
Deferred income taxes 468 859
Other liabilities 2,493 1,248
- -------------------------------------------------------------------------------
Total liabilities 41,948 5,497
- -------------------------------------------------------------------------------
Common stock owned by ESOP (subject to put option) 10,043 4,339
SHAREHOLDERS' EQUITY
Common stock 16,842 15,995
Capital surplus 123,561 92,432
Retained earnings 83,536 103,101
Accumulated other comprehensive income 4,436 4,535
Unearned employee stock ownership plan shares (52) (487)
Common stock owned by ESOP (subject to put option) (10,043) (4,339)
- -------------------------------------------------------------------------------
Total shareholders' equity 218,280 211,237
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 270,271 $ 221,073
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dividends from subsidiaries $ 39,744 $ 24,503 $ 35,376
Other income 5,854 5,554 3,648
- ------------------------------------------------------------------------------------
Total income 45,598 30,057 39,024
- ------------------------------------------------------------------------------------
Interest expense 2,433 174 236
Other expenses 15,286 8,197 4,851
- ------------------------------------------------------------------------------------
Total expenses 17,719 8,371 5,087
- ------------------------------------------------------------------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries 27,879 21,686 33,937
Income tax benefit (4,008) (709) (385)
- ------------------------------------------------------------------------------------
Income before equity in undistributed
earnings of subsidiaries 31,887 22,395 34,322
Equity in undistributed earnings
of subsidiaries (9,771) 5,773 (9,609)
- ------------------------------------------------------------------------------------
NET INCOME 22,116 28,168 24,713
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
Proforma C Corporation
provision for income taxes 662 694 11,541
- ------------------------------------------------------------------------------------
PROFORMA NET INCOME $ 21,454 $ 27,474 $ 24,713
- ------------------------------------------------------------------------------------
Other comprehensive income, net of
income taxes:
Unrealized gain (loss) arising in period $ 597 $ 4,824 $ (927)
Reclassification of realized amounts (696) (493) 7
- ------------------------------------------------------------------------------------
Net unrealized gain (loss), recognized in
other comprehensive income (99) 4,331 (920)
- ------------------------------------------------------------------------------------
Proforma comprehensive income $ 21,355 $ 31,805 $ 23,793
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 22,116 $ 28,168 $ 24,713
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 702 546 509
Employee benefit expenses 2,017 744 551
Undistributed earnings of
subsidiaries 9,771 (5,773) 9,609
Securities losses (gains) (103) (479) 1
Gain on sale of premises
and equipment (16) -- --
Increase (decrease) in deferred taxes (391) 847 (38)
Changes in assets and liabilities:
Increase in other assets (2,502) (1,768) --
Increase in other liabilities 1,246 467 99
- ---------------------------------------------------------------------------------
Net cash flows provided by
operating activities 32,840 22,752 35,444
- ---------------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from maturities of
securities available for sale -- -- 434
Proceeds from sales of securities
available for sale 848 940 --
Proceeds from sales of
nonmarketable equity securities -- 804 --
Purchase of securities
available for sale (5,484) (650) (17)
Purchase of nonmarketable
equity securities -- (185) (11)
Payments on notes receivable 243 57 381
Capital expenditures (866) (459) (555)
Proceeds from sale of premises
and equipment 70 17 --
Investment in subsidiaries (33,359) (6,654) (13,241)
Decrease in securities purchased
under agreements to resell -- -- 10,000
- ---------------------------------------------------------------------------------
Net cash flows used in
investing activities (38,548) (6,130) (3,009)
- ---------------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Dividends paid (11,470) (9,840) (8,062)
Proceeds from other borrowings 68,067 1,000 344
Payments on other borrowings (35,322) (1,155) (669
Repurchase of common stock (1,385) (16,673) (12,951)
Sale of common stock 1,185 1,705 1,664
Proceeds from exercise of stock options 1,726 685 213
- ---------------------------------------------------------------------------------
Net cash flows provided by (used in)
financing activities 22,801 (24,278) (19,461)
- ---------------------------------------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 17,093 (7,656) 12,974
Cash and cash equivalents
at beginning of year 6,153 13,809 835
- ---------------------------------------------------------------------------------
Cash and cash equivalents
at end of year $ 23,246 $ 6,153 $ 13,809
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE
OF NONCASH INVESTING
ACTIVITIES
Change in unrealized gain (loss) on
securities available for sale, net $ (990) $ 4,122 $ (687)
Common stock issued in
acquisition of subsidiary -- 15,949 --
</TABLE>
38
<PAGE>
THE
CORNERSTONES
OF OUR CORPORATION
BANK OF ILLINOIS,
NATIONAL ASSOCIATION
MT. VERNON, ILLINOIS
Noel E. Edmison
Gino P. Federici
David D. Flota
Rodney L. Legg
Kenneth Martin, Jr.
Sam F. Mateer
Caroline G. Quinn
THE BANK OF MITCHELL
MITCHELL, INDIANA
Christopher W. Burton, Esq.
Dana J. Dunbar
E. Brooks Galloway
F. Wendell Gooch
James F. King, DDS
David L. Nolan
Randall L. Young
COMMUNITY FIRST BANK,
NATIONAL ASSOCIATION
MAYSVILLE, KENTUCKY
Holton Cartmell
David W. Clarke
Tom Fulton
Oney Gifford, Jr.
William E. Kinder
Norma J. Linville
James L. Pyles
James R. Trapp
Robert D. Vance
Thomas E. White
COMMUNITY FIRST BANK
OF KENTUCKY
WARSAW, KENTUCKY
Bruce C. Cotton
William G. Diuguid
Oscar Dixon
H. Rowe Hoffman
Larry H. Spears
C. A. Pete Turner
Robert D. Vance
Robert B. Weldon
Dean R. Wilson
FIRST BANK OF HUNTINGBURG
HUNTINGBURG, INDIANA
Ronald H. Cox
Randall N. Klem
Norbert E. Olinger
Glen L. Sakel
Richard F. Welp
FIRST FEDERAL SAVINGS BANK
OF LEITCHFIELD
LEITCHFIELD, KENTUCKY
Howard T. Allgood
Ellis Wendell Arms
Garland Certain
Thomas C. Glasscock
Frank Wallace
FIRST KENTUCKY BANK
STURGIS, KENTUCKY
Garland Certain
Charles Hamilton Floyd
Charles L. Pryor
Joseph W. Sprague
J. Slaton Sprague
William R. Sprague
B. Joe Woodring
FIRST NATIONAL BANK
OF BRIDGEPORT
BRIDGEPORT, ILLINOIS
Terrence A. Andrews
Clifford C. Gray
James M. Lannan
Daniel T. Wolfe
Jeffrey R. Wolfe
John R. Wolfe
R. Tony Wolfe
ILLINOIS ONE BANK,
NATIONAL ASSOCIATION
SHAWNEETOWN, ILLINOIS
Robert P. Downen
Patrick E. Felker
Steve J. Gait
Phillip P. Goines
Ralph Harmon
Gary W. Hise
James O. Hodges
Alan L. Robbs
Stephen J. Scates
Curtis E. Taylor
THE NATIONAL CITY BANK
OF EVANSVILLE
EVANSVILLE, INDIANA
Thomas L. Austerman
Eric K. Ayer
Roger M. Duncan
Max D. Elliott
Michael D. Gallagher
Eugene A. Hahn
Harvey J. Hirsch
Edward E. Peyronnin
Peter L. Stevenson, M.D.
Richard M. Stivers
Joseph J. Vezzoso, Jr.
Robert B. Wright
PRINCETON FEDERAL BANK, FSB
PRINCETON, KENTUCKY
Henry B. Asher
Robert L. Brown
Garland Certain
Larry R. Mansfield
Mary M. Parker
William E. Travis
William D. Wadlington
THE PROGRESSIVE BANK,
NATIONAL ASSOCIATION
LEXINGTON, KENTUCKY
Samuel T. Adams
Douglas J. Beck
Walter R. Byrne, Jr.
Ellis L. Hefner
George D. Martin
Thomas W. Miller
James M. Stevens
RIPLEY COUNTY BANK
OSGOOD, INDIANA
Larry Armbrecht
Fred R. Crum
Charles W. Gloyd
John H. McKittrick
Edgar L. Swinney
Douglas S. Thayer
W. Max Underwood
Dean C. Veatch
TRIGG COUNTY FARMERS BANK
CADIZ, KENTUCKY
Smith D. Broadbent III
Jimmie J. Carr
Ben L. Cundiff
Ted L. Hudson
David R. Kyler
William C. McAtee
John W. Randolph
John L. Street, Jr.
WHITE COUNTY BANK
CARMI, ILLINOIS
Dr. Frank Barbre
Donald D. Drone
Paul D. Hayse
R. Keith Hoskins
George H. Schanzle
TWENTY-ONE SOUTHEAST
THIRD CORPORATION
EVANSVILLE, INDIANA
Thomas L. Austerman
Stephen C. Byelick, Jr.
Roger M. Duncan
Robert A. Keil
Curtis D. Ritterling
NCBE LEASING CORP.
EVANSVILLE, INDIANA
Thomas L. Austerman
Michael D. Gallagher
Dr. H. Ray Hoops
Charles J. Kelly, Jr.
Richard M. Stivers
39
<PAGE>
OFFICIAL ORGANIZATION, NATIONAL CITY BANCSHARES, INC.
BOARD OF DIRECTORS
Janice L. Beesley
REGIONAL PRESIDENT,
THE NATIONAL CITY BANK OF EVANSVILLE
Ben L. Cundiff
CHAIRMAN,
TRIGG COUNTY FARMERS BANK
Susanne R. Emge
EXECUTIVE DIRECTOR,
ST. MARY'S MEDICAL CENTER FOUNDATION
Donald G. Harris
PRESIDENT AND TREASURER,
THE HARRIS DEVELOPMENT CORP.;
RETIRED PRESIDENT, MEAD JOHNSON
WORLDWIDE NUTRITIONAL GROUP
Dr. H. Ray Hoops
PRESIDENT,
UNIVERSITY OF SOUTHERN INDIANA
Robert A. Keil
PRESIDENT,
NATIONAL CITY BANCSHARES, INC.
John D. Lippert
RETIRED CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
NATIONAL CITY BANCSHARES, INC.
George D. Martin
MEMBER,
R. R. DAWSON BRIDGE CO., LLC
Ronald G. Reherman
CHAIRMAN, PRESIDENT, AND CHIEF EXECUTIVE OFFICER,
SIGCORP, INC.;
CHAIRMAN, SOUTHERN INDIANA GAS AND ELECTRIC COMPANY
Laurence R. Steenberg
PRESIDENT, BST INCORPORATED;
PRESIDENT, LOT RESOURCES;
CHIEF EXECUTIVE OFFICER, SERVICE TELECOM CORPORATION
Robert D. Vance
CHAIRMAN AND CHIEF EXECUTIVE OFFICER,
NATIONAL CITY BANCSHARES, INC.
Richard F. Welp
SOUTH REGION MANAGER,
LAND O'LAKES, INC.
STABILITY
AT THE HELM
[PHOTO OF THE FOLLOWING SENIOR OFFICERS: STEPHEN C. BYELICK,
JR., N. ANN CAVIS, NANCY G. EPPERSON, DAVID L. ORTEGA, AND
GREGORY A. PENCE.]
SENIOR MANAGEMENT
<TABLE>
<S> <C>
Robert D. Vance N. Ann Cavis
CHAIRMAN AND CHIEF EXECUTIVE OFFICER SENIOR VICE PRESIDENT
Robert A. Keil Nancy G. Epperson
PRESIDENT HUMAN RESOURCES DIRECTOR
Curtis D. Ritterling David L. Ortega
EXECUTIVE VICE PRESIDENT SENIOR VICE PRESIDENT
Stephen C. Byelick, Jr. Gregory A. Pence
SECRETARY AND TREASURER DIRECTOR OF MARKETING
</TABLE>
40
<PAGE>
[TRANSPARENT PAGE]
"WE WILL BE LESS AGGRESSIVE IN ACQUIRING BANKS DURING 1999.
WE WILL BE SEEKING BANKS WHICH WILL BENEFIT BY JOINING OUR COMPANY
AND ADD TO OUR SHAREHOLDER VALUE."
ROBERT D. VANCE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
WHERE YOU
CAN FIND US
[MAP OF SUBSIDIARY LOCATIONS]
<PAGE>
[INSIDE BACK COVER]
SHAREHOLDER INFORMATION
STOCK AND DIVIDEND INFORMATION
The Corporation's common stock trades on The Nasdaq Stock Market(SM) under the
symbol: NCBE.
The following table lists the stock price for the past two years and dividend
information for the Corporation's common stock. Stock prices and dividends have
been retroactively adjusted to reflect all stock dividends and the two-for-one
stock split issued in 1996.
<TABLE>
<CAPTION>
RANGE OF STOCK PRICE DIVIDEND
QUARTER LOW HIGH DECLARED
------- -------- --------- --------
<S> <C> <C> <C>
1997
1st $26.53 $30.73 $0.14 1/2
2nd 28.80 38.32 0.14 1/2
3rd 36.73 39.69 0.14 1/2
4th 38.10 48.75 0.17 1/8
1998
1ST $36.67 $43.33 $0.17 1/8
2ND 35.24 42.86 0.17 1/8
3RD 31.19 38.69 0.17 1/8
4TH 34.05 39.13 0.20
</TABLE>
DIVIDEND REINVESTMENT PLAN
As a service to its shareholders, the Corporation provides an easy way for a
shareholder to acquire additional shares of National City Bancshares, Inc.
common stock through its DIVIDEND REINVESTMENT PLAN. The plan allows a
shareholder to purchase this stock without brokerage fees using dividends and
additional voluntary cash investments. For information about this plan, a
shareholder can contact the Corporation's TRANSFER AGENT.
MARKET MAKERS
The following firms make a market in the common stock of National City
Bancshares, Inc.:
Herzog, Heine, Geduld, Inc.
J.J.B. Hilliard, W.L. Lyons, Inc.
Keefe, Bruyette & Woods, Inc.
Knight Securities L.P.
McConnell, Budd & Downes, Inc.
NatCity Investments, Inc.
FOR FURTHER INFORMATION
The Corporation's TRANSFER AGENT
and REGISTRAR is
Fifth Third Bank
Corporate Trust Services
38 Fountain Square Plaza
Cincinnati, OH 45263
Telephone 1-800-336-6782
The Corporation's HEADQUARTERS is located at
National City Bancshares, Inc.
227 Main Street
P.O. Box 868
Evansville, IN 47705-0868
Telephone (812) 464-9677
ALL SUBSIDIARY BANKS OF NATIONAL CITY BANCSHARES, INC. ARE MEMBERS OF THE
FEDERAL DEPOSIT INSURANCE CORPORATION.
<PAGE>
[BACK COVER]
YEAR 2000
We are actively pursuing year 2000
readiness of our corporate systems,
assessing the readiness of our
critical suppliers, and working
diligently to inform and educate
our customers. The project, begun
in 1997, is principally being
carried out by our year 2000 Team,
consisting of over 35
professionals, and receives
continual review by senior
management. The Team remains
focused on the completion of all
year 2000 related initiatives and
is receiving sufficient resources
to complete all year 2000
activities on a timely basis. Our
goal is to be able to deliver our
products and services to clients,
such as you, in the years to come
without disruption or
inconvenience.
[NATIONAL CITY BANCSHARES, INC. LOGO]
NATIONAL CITY BANCSHARES, INC.
227 MAIN STREET
EVANSVILLE, INDIANA 47708
www.ncbe.com
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
<S> <C>
The National City Bank United States
of Evansville
First Kentucky Bank Commonwealth of Kentucky
The Bank of Mitchell State of Indiana
NCBE Leasing Corp. State of Indiana
White County Bank State of Illinois
Twenty-One Southeast Third State of Indiana
Corporation
Bank of Illinois, United States
National Association
First Federal Savings Bank United States
of Leitchfield
First National Bank United States
of Bridgeport
First Bank of Huntingburg State of Indiana
NCBE Capital Trust I State of Delaware
Illinois One Bank, United States
National Association
Community First Bank, United States
National Association
Community First Bank of Kentucky Commonwealth of Kentucky
Trigg County Farmers Bank Commonwealth of Kentucky
Ripley County Bank State of Indiana
Princeton Federal Bank, fsb United States
The Progressive Bank, United States
National Association
</TABLE>
<PAGE>
EXHIBIT 23 (a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the previously filed
Registration Statements of National City Bancshares, Inc. (File No. 333-10739
and 333-56295) of our report dated February 26, 1999, on our audits of the
consolidated financial statements of National City Bancshares, Inc. and
subsidiaries as of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997 and 1996, which report is included in this Annual Report on Form
10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Lexington, Kentucky
March 25, 1999
<PAGE>
EXHIBIT 23 (b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the previously filed
Registration Statements of National City Bancshares, Inc. (File No. 333-10739
and 333-56295) of the report of Eskew & Gresham PSC dated February 25, 1998, on
their audit of the consolidated balance sheets of Progressive Bancshares, Inc.
as of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity, and cash flows for the years then ended, which
report is included in this Annual Report on Form 10-K.
/s/ CROWE, CHIZEK & COMPANY LLP
- -------------------------------
Lexington, Kentucky
March 24, 1999
<PAGE>
EXHIBIT 23 (c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the previously filed
Registration Statements of National City Bancshares, Inc. (File No. 333-10739
and 333-56295) of our report dated February 24, 1998, on our audit of the
consolidated statements of financial condition of Hoosier Hills Financial
Corporation and subsidiary, as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for the years then ended, which report is included in this Annual Report
on Form 10-K.
/s/ SHERMAN, BARBER & MULLIKIN
- ------------------------------
Madison, Indiana
March 24, 1999
<PAGE>
EXHIBIT 23 (d)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the previously filed
Registration Statements of National City Bancshares, Inc. (File No. 333-10739
and 333-56295) of our report dated October 24, 1997, on our audit of the
statements of financial condition of Princeton Federal Bank, fsb, as of
September 30, 1997 and 1996, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for the years ended September
30, 1997, 1996 and 1995, which report is included in this Annual Report on Form
10-K.
/S/ THURMAN CAMPBELL & CO.
- --------------------------
Princeton, Kentucky
March 24, 1999
<PAGE>
EXHIBIT 23 (e)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the previously filed
Registration Statements of National City Bancshares, Inc. (File No. 333-10739
and 333-56295) of our report dated June 8, 1998, on our audit of the
consolidated balance sheets of 1st Bancorp Vienna, Inc. and subsidiary, as of
December 31, 1997, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the two years ended December 31, 1997
and 1996, which report is included in this Annual Report on Form 10-K.
/s/ GRAY HUNTER STENN LLP
- -------------------------
Marion, Illinois
March 24, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 64,771
<INT-BEARING-DEPOSITS> 3,388
<FED-FUNDS-SOLD> 11,810
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 235,389
<INVESTMENTS-CARRYING> 187,681
<INVESTMENTS-MARKET> 189,925
<LOANS> 1,254,691
<ALLOWANCE> 12,539
<TOTAL-ASSETS> 1,816,935
<DEPOSITS> 1,455,356
<SHORT-TERM> 69,947
<LIABILITIES-OTHER> 16,146
<LONG-TERM> 84,745
2,738
0
<COMMON> 15,516
<OTHER-SE> 172,487
<TOTAL-LIABILITIES-AND-EQUITY> 1,816,935
<INTEREST-LOAN> 110,439
<INTEREST-INVEST> 24,877
<INTEREST-OTHER> 1,409
<INTEREST-TOTAL> 136,725
<INTEREST-DEPOSIT> 53,869
<INTEREST-EXPENSE> 7,238
<INTEREST-INCOME-NET> 75,618
<LOAN-LOSSES> 3,705
<SECURITIES-GAINS> 21
<EXPENSE-OTHER> 48,096
<INCOME-PRETAX> 36,254
<INCOME-PRE-EXTRAORDINARY> 36,254
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,713
<EPS-PRIMARY> 1.48
<EPS-DILUTED> 1.48
<YIELD-ACTUAL> 4.83
<LOANS-NON> 3,717
<LOANS-PAST> 2,264
<LOANS-TROUBLED> 481
<LOANS-PROBLEM> 49,094
<ALLOWANCE-OPEN> 10,937
<CHARGE-OFFS> 3,373
<RECOVERIES> 891
<ALLOWANCE-CLOSE> 12,539
<ALLOWANCE-DOMESTIC> 10,090
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,449
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 57,863 63,365 56,775
<INT-BEARING-DEPOSITS> 2,940 2,853 3,644
<FED-FUNDS-SOLD> 15,798 14,043 18,487
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 436,335 429,595 425,273
<LOANS> 1,301,585 1,343,041 1,380,999
<ALLOWANCE> 13,024 13,054 13,765
<TOTAL-ASSETS> 1,877,584 1,918,306 1,961,702
<DEPOSITS> 1,492,870 1,499,891 1,526,092
<SHORT-TERM> 81,649 75,907 79,582
<LIABILITIES-OTHER> 17,175 18,753 21,134
<LONG-TERM> 93,981 130,296 122,456
3,814 3,875 3,925
0 0 0
<COMMON> 15,453 15,330 15,607
<OTHER-SE> 172,642 174,254 192,906
<TOTAL-LIABILITIES-AND-EQUITY> 1,877,854 1,918,306 1,961,702
<INTEREST-LOAN> 28,660 59,008 90,555
<INTEREST-INVEST> 6,508 13,131 19,555
<INTEREST-OTHER> 335 640 1,038
<INTEREST-TOTAL> 35,503 72,779 111,148
<INTEREST-DEPOSIT> 13,836 28,261 43,183
<INTEREST-EXPENSE> 15,941 32,918 50,706
<INTEREST-INCOME-NET> 19,562 39,861 60,442
<LOAN-LOSSES> 3,099 6,055 9,015
<SECURITIES-GAINS> 472 623 686
<EXPENSE-OTHER> 12,451 25,434 38,554
<INCOME-PRETAX> 9,930 20,219 30,398
<INCOME-PRE-EXTRAORDINARY> 9,930 20,219 30,398
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,796 13,921 20,932
<EPS-PRIMARY> .41 .84 1.26
<EPS-DILUTED> .41 .83 1.25
<YIELD-ACTUAL> 0 0 0
<LOANS-NON> 0 0 0
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 0 0 0
<CHARGE-OFFS> 0 0 0
<RECOVERIES> 0 0 0
<ALLOWANCE-CLOSE> 0 0 0
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1998
<PERIOD-START> JAN-01-1998 JAN-01-1998 JAN-01-1998
<PERIOD-END> MAR-31-1998 JUN-30-1998 SEP-30-1998
<CASH> 64,807 75,206 63,481
<INT-BEARING-DEPOSITS> 4,051 1,600 1,211
<FED-FUNDS-SOLD> 20,617 13,486 11,079
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 0 0 0
<INVESTMENTS-MARKET> 473,676 436,750 399,885
<LOANS> 1,520,612 1,577,492 1,624,288
<ALLOWANCE> 14,932 16,237 16,637
<TOTAL-ASSETS> 2,187,184 2,207,293 2,204,465
<DEPOSITS> 1,734,279 1,731,770 1,707,614
<SHORT-TERM> 54,314 77,741 70,668
<LIABILITIES-OTHER> 22,332 21,022 24,596
<LONG-TERM> 156,029 152,424 172,159
4,111 10,103 9,285
0 0 0
<COMMON> 16,053 16,062 16,088
<OTHER-SE> 200,066 198,171 204,055
<TOTAL-LIABILITIES-AND-EQUITY> 2,187,184 2,207,293 2,204,465
<INTEREST-LOAN> 32,977 68,759 105,829
<INTEREST-INVEST> 6,232 12,802 18,595
<INTEREST-OTHER> 404 729 1,009
<INTEREST-TOTAL> 39,613 82,290 125,433
<INTEREST-DEPOSIT> 15,715 16,718 16,930
<INTEREST-EXPENSE> 18,158 38,527 59,008
<INTEREST-INCOME-NET> 21,455 41,763 64,425
<LOAN-LOSSES> 3,081 5,775 7,686
<SECURITIES-GAINS> 67 1,065 1,149
<EXPENSE-OTHER> 14,632 30,846 49,650
<INCOME-PRETAX> 10,087 19,474 26,577
<INCOME-PRE-EXTRAORDINARY> 10,087 19,474 26,577
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 6,780 13,256 18,176
<EPS-PRIMARY> .41 .80 1.09
<EPS-DILUTED> .40 .79 1.08
<YIELD-ACTUAL> 0 0 0
<LOANS-NON> 0 0 0
<LOANS-PAST> 0 0 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 0 0 0
<CHARGE-OFFS> 0 0 0
<RECOVERIES> 0 0 0
<ALLOWANCE-CLOSE> 0 0 0
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
