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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to
___________________
Commission File Number: 33-96358
BOURBON BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0993464
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 157, Paris, Kentucky 40362-0157
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(606)987-1795
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
X No _____
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Aggregate market value of voting stock held by non-
affiliates as of March 29, 1999 was approximately $48.0
million. For purposes of this calculation, it is assumed
that directors, officers and beneficial owners of more than
5% of the registrant's outstanding voting stock are
affiliates.
Number of shares of Common Stock outstanding as of March 29, 1999:
1,402,588.
PART I
Item 1. Business
General
Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a
Kentucky corporation organized in 1981 and a bank and
savings and loan holding company registered under the Bank
Holding Company Act of 1956, as amended ("BHCA") and the
Home Owners Loan Act of 1933, as amended ("HOLA").
The Company conducts business through one banking
subsidiary, Kentucky Bank. Kentucky Bank is a commercial
bank and trust company organized under the laws of Kentucky.
Kentucky Bank has its main office in Paris (Bourbon County),
Kentucky, additional offices in Paris, North Middletown
(Bourbon County), Winchester (Clark County), Georgetown
(Scott County), Versailles (Woodford County), Nicholasville
(Jessamine County), Kentucky and a loan production office in
Cynthiana (Harrison County), Kentucky. The deposits of
Kentucky Bank are insured up to prescribed limits by the
Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"), both of the Federal Deposit
Insurance Corporation ("FDIC"). Kentucky Bank is engaged in
general full-service commercial and consumer banking.
Kentucky Bank makes commercial, agricultural and real estate
loans to its commercial customers, with emphasis on small-to-
medium-sized industrial, service and agricultural
businesses. Kentucky Bank makes residential mortgage,
installment and other loans to its individual and other non-
commercial customers. Kentucky Bank also offers its
customers the opportunity to obtain a credit card. Kentucky
Bank offers its customers a variety of other services,
including checking, savings, club and money market accounts,
certificates of deposits, safe deposit facilities and other
consumer-oriented financial services. Through its trust
department, Kentucky Bank provides primarily personal trust
and agency services (including management agency services)
and, to a lesser extent, corporate trust services (including
the management of corporate pension and profits sharing
plans).
Competition
The Company and its subsidiary face vigorous competition
from a number of sources, including other bank holding
companies and commercial banks, consumer finance companies,
thrift institutions, other financial institutions and
financial intermediaries. In addition to commercial banks,
savings and loan associations, savings banks and credit
unions actively compete to provide a wide variety of banking
services. Mortgage banking firms, finance companies,
insurance companies, brokerage companies, financial
affiliates of industrial companies and government agencies
provide additional competition for loans and for many other
financial services. The subsidiary also currently competes
for interest-bearing funds with a number of other financial
intermediaries, including brokerage firms and mutual funds,
which offer a diverse range of investment alternatives.
Supervision and Regulation
As a bank holding company, the Company is subject to the
regulation and supervision of the Federal Reserve Board.
The Company's subsidiary is subject to supervision and
regulation by applicable state and federal banking agencies,
including the Federal Reserve Board, the Federal Deposit
Insurance Corporation and the Kentucky Department of
Financial Institutions. The subsidiary is also subject to
various requirements and restrictions under federal and
state law, including requirements to maintain reserves
against deposits, restrictions on the types and amounts of
loans that may be granted and the interest that may be
charged thereon, and limitations on the types of investments
that may be made and the types of services that may be
offered. Various consumer laws and regulations also affect
the operations of the subsidiary. In addition to the impact
of regulation, the subsidiary is affected significantly by
the actions of the Federal Reserve Board as it attempts to
control the money supply and credit availability in order to
influence the economy.
There are a number of obligations and restrictions imposed
on bank holding companies and their depository institution
subsidiaries by federal law and regulatory policy that are
designed to reduce potential loss exposure to the depositors
of such depository institutions and to the FDIC insurance
funds in the event the depository institution becomes in
danger of default or is in default. For example, under a
policy of the Federal Reserve Board with respect to bank
holding company operations, a bank holding company is
required to serve as a source of financial strength to its
subsidiary depository institutions and commit resources to
support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-
guarantee" provisions of federal law require insured
depository institutions under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated as
a result of the default of a commonly controlled insured
depository institution or for any assistance provided by the
FDIC to a commonly controlled insured depository institution
in danger of default.
The federal banking agencies have broad powers under current
federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of
these powers depends upon whether the institutions in
question are "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized" or
"critically undercapitalized", as such terms are defined
under uniform regulation defining such capital levels issued
by each of the federal banking agencies.
There are various legal and regulatory limits on the extent
to which the Company's subsidiary bank may pay dividends or
otherwise supply funds to the Company. In addition, federal
and state regulatory agencies also have the authority to
prevent a bank or bank holding company from paying a
dividend or engaging in any other activity that, in the
opinion of the agency, would constitute an unsafe or unsound
practice.
There have been a number of legislative and regulatory
proposals that would have an impact on the operation of bank
holding companies and their banks. It is impossible to
predict whether or in what form these proposals may be
adopted in the future and, if adopted, what their effect
will be on the Company.
Business Segments
The Financial Accounting Standards Board (FASB) has issued
SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", which requires segmenting assets,
profit and loss and certain specific revenue and expense
items. Although management monitors revenue streams from
various products and services, operations are managed and
financial performance is evaluated on a company-wide basis.
Therefore, all operations are considered by management to be
aggregated into one reportable operating segment.
Employees
At December 31, 1998, the number of full time equivalent
employees of the Company was 144.
Item 2. Properties
The main banking office of Kentucky Bank, which also serves
as the principal office of Kentucky Bank, is located at
Fourth and Main Streets, Paris, Kentucky 40361. In addition,
Kentucky Bank serves customer needs at 9 other locations.
All locations, except for the Cynthiana office (which is a
loan production office), offer a full range of banking
services. Kentucky Bank owns all of the properties at which
it conducts its business, except the location in Scott
County at Paris Pike, which is leased. The Company owns
approximately 59,000 square feet of office space and leases
approximately 2,000 square feet of office space, with
aggregate annual lease payments of approximately $16
thousand in 1998.
Note 5 to the Company's consolidated financial statements
included in this report contain additional information
relating to amounts invested in premises and equipment.
Item 3. Legal Proceedings
The Company and its subsidiary are from time to time
involved in routine legal proceedings occurring in the
ordinary course of business that, in the aggregate,
management believes will not have a material impact on the
Company's financial condition and results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters
The Company's Common Stock is not listed on any national
securities exchange nor is it quoted on the NASDAQ system.
However, it is listed on the OTC Bulletin Board under the
symbol "BBON". Trading in the Common Stock has been
infrequent, with two regional retail brokerage firms making
the market. The following table sets forth the high and low
sales prices of the Common Stock and the dividends declared
thereon, for the periods indicated below:
High Low Dividend
1998 Quarter 1 $ 36.50 $31.00 $.20
Quarter 2 40.00 36.50 $.20
Quarter 3 42.00 40.00 $.20
Quarter 4 41.25 41.00 $.20
1997 Quarter 1 27.00 24.50 $.18
Quarter 2 30.00 26.00 $.18
Quarter 3 30.50 27.00 $.18
Quarter 4 31.00 28.00 $.18
As of December 31, 1998 the Company had 1,404,628
shares of Common Stock outstanding and approximately 437
holders of record of its Common Stock.
During 1998, 10,066 shares of unregistered stock were issued
to employees and directors. This stock was issued through
the exercise of stock options or employee gifts. In
accordance with Rule 701 promulgated under the Securities
Act of 1933, all shares of Common Stock were issued upon the
exercise of stock options issued prior to the Company
becoming subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934. The
following shares were issued during 1998:
Aggregate
Date Issued Shares Consideration
January 30, 1998 1,000 $ 8,500
February 24, 1998 400 7,750
March 9, 1998 3,640 65,030
March 10, 1998 1 gift
March 24, 1998 400 4,800
August 26, 1998 3,000 27,700
September 3, 1998 800 13,800
September 14, 1998 800 13,800
September 30, 1998 25 gift
Total 10,066
Item 6. Selected Financial Data
The following selected financial data should be read in
conjunction with the Company's Consolidated Financial
Statements and the accompanying notes presented elsewhere
herein.
At or For the Year Ended December 31
(dollars in thousands, except per share amounts)
1998 1997 1996 1995 1994
CONDENSED STATEMENT OF INCOME:
Total Interest Income $21,983 $20,962 $19,425 $19,658 $15,657
Total Interest Expense 10,666 10,415 9,839 10,426 7,746
Net Interest Income 11,317 10,547 9,586 9,232 7,911
Provision for Losses 700 493 402 396 145
Net Interest Income After
Provision for Losses 10,617 10,054 9,184 8,836 7,766
Noninterest Income 3,073 2,390 2,284 2,053 992
Noninterest Expense 8,514 7,888 7,715 7,684 6,067
Income Before Income
Tax Expense 5,176 4,556 3,753 3,205 2,691
Income Tax Expense 1,372 1,148 866 717 488
Net Income $ 3,804 $ 3,408 $ 2,887 $ 2,488 $ 2,203
SHARE DATA:
Net Income-Earnings
per Share (EPS) $ 2.72 $ 2.44 $ 2.03 $ 1.74 $ 1.54
Net Income-EPS assuming dilution 2.66 2.40 2.00 1.71 1.52
Cash Dividends Declared 0.80 0.72 0.64 0.60 0.54
Book Value 20.91 19.16 17.44 16.16 14.00
Average Shares and Share
Equivalents Outstanding 1,431 1,422 1,443 1,448 1,432
SELECTED BALANCE SHEET DATA:
Loans, net including
held for sale $210,108 $182,839 $157,564 $153,201 $145,817
Investment Securities 72,353 81,703 92,540 92,639 99,345
Total Assets 308,705 290,655 272,453 269,431 274,497
Deposits 258,740 241,325 231,071 213,348 223,810
Short-Term Borrowings 11,248 9,458 4,160 11,791 7,635
Long-Term Debt 6,954 10,236 10,534 19,071 20,606
Stockholders' Equity 29,372 26,716 24,633 23,167 19,955
PERFORMANCE RATIOS:
(Average Balances)
Return on Assets 1.31% 1.23% 1.10% 0.94% 0.95%
Return on Stockholders' Equity 13.57 13.43 12.06 11.36 10.61
Net Interest Margin (1) 4.27 4.18 4.02 3.80 3.76
Equity to Assets (at period end) 9.51 9.19 9.04 8.60 7.27
SELECTED STATISTICAL DATA:
Dividend Payout Ratio 29.49% 29.49% 31.57% 32.93% 31.25%
Number of Employees
(at period end) 144 145 137 125 128
ALLOWANCE COVERAGE RATIOS:
Allowance to Total Loans 1.28% 1.25% 1.32% 1.20% 1.12%
Net Charge-offs as a
Percentage of Average Loans 0.15 0.16 0.10 0.12 0.13
(1) Tax equivalent
Item 7. Management's Discussion and Analysis
The following discussion and analysis of financial condition
and results of operations should be read in conjunction with
the Consolidated Financial Statements and accompanying notes
included as Exhibit 13. When necessary, reclassifications
have been made to prior years' data throughout the following
discussion and analysis for purposes of comparability with
1998 data.
Summary
Net income for the year ended December 31, 1998 was $3.8
million, or $2.72 per common share compared to $3.4 million,
or $2.44 for 1997 and $2.9 million, or $2.03 for 1996.
Earnings per share assuming dilution were $2.66, $2.40 and
$2.00 for 1998, 1997 and 1996, respectively. For 1998, net
income increased over $395 thousand, nearly 12%. Increases
in net interest income of over 7% and other income of 28%
were offset by increases in other expenses of over 7% and
the provision for loan losses of 42%. The increase in the
loan loss provision was mainly attributable to the 15%
growth in loans. In 1997, net income increasing over $520
thousand (over 18%) is mainly attributable to increased net
interest income and other income, offset by an increase in
the loan loss provision, while maintaining other expenses to
below modest increases.
Return on average equity was 13.6% in 1998 compared to 13.4%
in 1997 and 12.1% in 1996. Return on average assets was
1.31% in 1998 compared to 1.23% in 1997 and 1.10% in 1996.
Non-performing loans as of a percentage of net loans were
0.50%, 0.26% and 0.49% as of December 31, 1998, 1997 and
1996, respectively. Through management's concerted effort
on loan quality, these ratios have remained well below peer
groups over the last three years.
During 1996, the federal thrift charters of Kentucky Savings
Bank, FSB and Jessamine were terminated and both entities
became branches of Kentucky Bank. Financial statements have
been adjusted to reflect this change.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the largest source of revenue, on a tax
equivalent basis increased from $9.9 million in 1996 to
$10.9 million in 1997 to $11.7 million in 1998. The taxable
equivalent adjustment (which is net of the effect of the non-
deductible portion of interest expense) is based on a
Federal income tax rate of 34%. For 1998, average earning
assets and interest bearing liabilities increased. The $12
million increase in average earning assets, and maintenance
of the same tax equivalent yield resulted in tax equivalent
interest income increasing over $1 million. Average loans
increasing over $22 million with a 14 basis point decline in
yield along with an over $10 million decline in investment
securities and an 8 basis point decline allowed the yield on
earning assets to remain constant. The increase of $10
million in deposits along with an 8 basis point decline in
yield accounted for the change in liabilities.
An increase in earning assets and interest bearing
liabilities were both positive factors on 1997 net interest
income. Loan growth on an average basis for 1997 increased
10%, while being funded by over 5% growth in interest
bearing deposits. There was a positive effect on the rate
changes for assets, whereas the rate on liabilities was
relatively constant. The 10% increase in loans from 1996 to
1997 and a 5% increase in deposits for the same time period
have resulted in the net interest margin increasing from
4.02% in 1996 to 4.18% in 1997. Loan volume accounted for
over $1.3 million of the increase in total interest income,
while loan rates accounted for $0.3 million of the total
interest income increase. Deposit volume accounted for $0.5
million of the $0.6 million increase in total interest
expense.
The accompanying analysis of changes in net interest income
in the following table shows the relationships of the volume
and rate portions of these increases in 1998 and 1997.
Changes in interest income and expenses due to both rate and
volume are allocated on a pro rata basis.
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in
Volume Rate Net Change Volume Rate Net Change
Interest Income
Loans $1,961 $ (233) $1,728 $1,387 $ 322 $1,709
Investment (647) (118) (765) 34 (8) 26
Securities
Federal Funds Sold and
Securities Purchased
under Agreements to
Resell 75 1 76 (140) 3 (137)
Deposits with Banks (18) 1 (17) (38) (24) (62)
Total Interest Income 1,371 (349) 1,022 1,243 293 1,536
Interest Expense
Deposits
Demand 305 (18) 287 349 269 618
Savings (3) (13) (16) (28) (6) (34)
Negotiable Certificates
of Deposit and Other
Time Deposits 75 (38) 37 36 54 90
Short-Term Borrowings 6 0 6 62 1 63
Long-Term Borrowings (71) 8 (63) (173) 12 (161)
Total Interest Expense 312 (61) 251 246 330 576
Net Interest Income $1,059 $ (288) $ 771 $ 997 $ (37) $ 960
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands)
1998 1997 1996
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
ASSETS
Interest-Earning Assets
Securities Held to Maturity
State and Municipal obligations $ 16,371 $ 971 5.93% $ 16,027 $ 976 6.09% $ 16,377 $ 1,009 6.16%
Securities Available for Sale (1)
U.S. Treasury and Federal Agency Securities 50,902 3,108 6.11 63,057 3,919 6.22 60,890 3,778 6.20
State and Municipal obligations 3,917 197 5.03 3,943 198 5.02 3,944 199 5.05
Other Securities 3,931 252 6.41 2,803 200 7.14 4,066 281 6.91
Total Securities Available for Sale 58,750 3,557 6.05 69,803 4,317 6.18 68,900 4,258 6.18
Total Investment Securities 75,121 4,528 6.03 85,830 5,293 6.17 85,277 5,267 6.18
Tax Equivalent Adjustment 345 0.46 345 0.40 362 0.42
Tax Equivalent Total 4,873 6.49 5,638 6.57 5,629 6.60
Federal Funds Sold and Agreements to Repurchase 4,372 236 5.40 2,979 160 5.37 5,579 297 5.37
Interest-Bearing Deposits with Banks 152 8 5.26 500 25 5.00 1,143 87 7.61
Loans, Net of Deferred Loan Fees (2)
Commercial 23,150 2,093 9.04 20,035 1,828 9.12 19,192 1,749 9.11
Real Estate Mortgage 154,764 13,525 8.74 137,079 12,194 8.90 123,145 10,674 8.67
Installment 15,268 1,593 10.43 14,014 1,461 10.43 13,398 1,351 10.08
Total Loans 193,182 17,211 8.91 171,128 15,483 9.05 155,735 13,774 8.84
Total Interest-Earning Assets 272,827 22,328 8.18 260,437 21,306 8.18 247,734 19,787 7.99
Allowance for Loan Losses (2,550) (2,261) (1,988)
Cash and Due From Banks 9,225 7,510 6,839
Premises and Equipment 6,187 5,475 4,591
Other Assets 5,793 5,565 5,617
Total Assets $291,482 $276,726 $262,793
LIABILITIES
Interest-Bearing Deposits
Negotiable Order of Withdrawal ("NOW) and
and Money Market Investment Accounts $ 63,413 $ 2,199 3.47% $ 54,626 $ 1,912 3.50% $ 43,918 $ 1,294 2.95%
Savings 12,679 315 2.48 12,786 331 2.59 13,850 365 2.64
Certificates of Deposit and Other Deposits 134,893 7,274 5.39 133,509 7,237 5.42 132,835 7,147 5.38
Total Interest-Bearing Deposits 210,985 9,788 4.64 200,921 9,480 4.72 190,603 8,806 4.62
Short-Term Borrowings 5,222 271 5.19 5,100 265 5.20 3,899 202 5.18
Long-Term Debt 10,067 607 6.03 11,247 670 5.96 14,158 831 5.87
Total Interest-Bearing Liabilities 226,274 10,666 4.71 217,268 10,415 4.79 208,660 9,839 4.72
Noninterest Bearing Demand Deposits 34,487 31,566 27,930
Other Liabilities 2,693 2,513 2,262
Total Liabilities 263,454 251,347 238,852
STOCKHOLDERS' EQUITY 28,028 25,379 23,941
Total Liabilities and Stockholders' Equity $291,482 $276,726 $262,793
Average Equity to Average Total Assets 9.62% 9.17% 9.11%
Net Interest Income 11,317 10,546 9,586
Net Interest Income (tax equivalent) (3) $11,662 $10,891 $ 9,948
Net Interest Spread (tax equivalent) (3) 3.47% 3.39% 3.27%
Net Interest Margin (tax equivalent) (3) 4.27 4.18 4.02
[FN]
(1) Averages computed at amortized cost.
(2) Includes loans on a nonaccrual status.
(3) Tax equivalent difference represents the tax equivalent
adjustment detailed above.
Noninterest Income and Expenses
Noninterest income was $3.1 million in 1998 compared to $2.4
million in 1997 and $2.3 million in 1996. In 1998
securities gains were $41 thousand compared to $14 thousand
gains in 1997 and $13 thousand losses in 1996. Typically,
U. S. Treasury securities are sold before maturity when
additional interest yields can be realized. Other types of
investment securities are generally not sold. In addition,
gains on loans sold were $440 thousand, $72 thousand and
$200 thousand in 1998, 1997 and 1996, respectively. In
1998, management increased its focus on mortgage banking and
this along with the increased volume of loans sold in a
declining rate environment have resulted in the increased
gain on loans sold. Loans held for sale are generally sold
at closing to Federal Home Loan Mortgage Corporation. The
sales of loans were $35 million, $18 million and $21 million
in 1998, 1997 and 1996, respectively. Other noninterest
income excluding security and loans net gains was $2.6
million in 1998, $2.3 million in 1997 and $2.1 million in
1996.
Noninterest expense increased $626 thousand in 1998 to $8.5
million and a modest $173 thousand from $7.7 million in 1996
to $7.9 million in 1997. The increases in salaries and
benefits from $4.0 million in 1996 to $4.3 million in 1997
and $4.5 million in 1998 are mainly attributable to normal
salary and benefit increases. Occupancy expense increased
$162 thousand in 1998 to $1.2 million and 8% in 1997, from
$932 thousand in 1996 to $1.0 million in 1997. In August
1998 the Company added a new branch in Georgetown and in
March 1997, the Company opened its new branch in Versailles
resulting in higher operating cost attributable to these
facilities. The Company has also placed more emphasis on
maintaining its existing facilities in 1997 and 1998, which
are reflected in increases in occupancy expenses. Other
noninterest expense decreased from $2.8 million in 1996 to
$2.6 million in 1997. However, in 1998 other noninterest
expenses increased modestly to $2.8 million. In December
1995, the FDIC set the 1996 premium for BIF-insured deposits
at zero. In September 1996, Congress declared a special, one-
time assessment on SAIF-insured deposits. The cost of this
assessment was nearly $200 thousand net of income taxes.
For 1997, the BIF-insured deposit rate was 1.3 cents per
$100 and the SAIF-insured rate was 6.5 cents per $100. Due
to the conversion of the savings institutions to branches of
Kentucky Bank, the Company has deposits of over $53 million
that will be assessed at the SAIF rate. The resulting
decrease in FDIC assessment was $358 thousand from 1996 to
1997; there was little change from 1997 to 1998. Excluding
this special FDIC assessment, other noninterest expense only
increased $200 thousand in both 1998 and 1997.
The following table is a summary of noninterest income and
expense for the three-year period indicated.
Year Ended December 31
(in thousands)
1998 1997 1996
Non-interest Income
Service Charges $1,811 $1,674 $1,508
Loan Service Fee Income 283 258 255
Trust Department Income 300 237 206
Investment Securities Gains 41 14 (13)
(Losses),net
Gains on Sale of Mortgage Loans 440 72 200
Other 198 135 128
Total Non-interest Income $3,073 $2,390 $2,284
Non-interest Expense
Salaries and Employee Benefits $4,527 $4,274 $4,005
Occupancy Expenses 1,164 1,002 932
Other 2,823 2,612 2,778
Total Non-interest Expense $8,514 $7,888 $7,715
Net Non-interest Expense as a
Percentage of Average Assets 1.87% 1.99% 2.07%
Income Taxes
The Company had income tax expense of $1.4 million in 1998
compared to $1.1 million in 1997 and $866 thousand in 1996.
This represents an effective income tax rate of 26.5% in
1998, 25.2% in 1997 and 23.1% in 1996. The difference
between the effective tax rate and the statutory federal
rate of 34% is due to tax exempt income on certain loans and
investment securities. The higher effective rate for 1998
and 1997 is a result of tax free income remaining virtually
unchanged for these two years while income before taxes
increased over $600 thousand in 1998 and $800 thousand in
1997.
Balance Sheet Review
Assets at year-end 1998 totaled $309 million compared to
$291 million in 1997 and $272 million in 1996. Changes in
1998 are a result of loans increasing $27.7 million and
investment securities decreasing $9.3 million. Assets were
funded by an increase in deposits of $17.4 million. Federal
Home Loan Bank Advances declined by $3.3 million. The
increase in size from 1996 to 1997 is mainly attributable to
total loans increasing $25.5 million and investment
securities decreasing $10.8 million, while being funded by
an increase in deposits of $10.3 million and short term
borrowing of $5.3 million.
Loans
Total loans, net of deferred loan fees were $213 million at
December 31, 1998 compared to $185 million at the end of
1997 and $160 million in 1996. In 1998, commercial loans
increased $4.5 million, real estate construction loans
increased $3.4 million, real estate mortgages increased
$11.2 million and agricultural loans increased $6.3 million.
During 1997, real estate construction loans increased $3.5
million, real estate mortgages increased $14.2 million and
agricultural loans increased $7.0 million. Management
developed regional loan goals for each type of loan and this
emphasis has resulted in improved sales efforts by the
lending personnel. Management continues to place more
emphasis on the growth without sacrificing the quality of
the loan portfolio.
As of December 31, 1998, the real estate mortgage portfolio
comprised 59% of total loans compared to 61% in 1997. Of
this, 1-4 family residential property represented 79% in
1998 and 78% in 1997. Agricultural loans comprised 21% in
1998 and nearly 20% in 1997 of the loan portfolio.
Approximately 73% of the agricultural loans for both years
are secured by real estate. The remainder of the
agricultural portfolio is used to purchase livestock,
equipment and other capital improvements and for general
operation of the farm. Generally, a secured interest is
obtained in the capital assets, equipment, livestock or
crops. Automobile loans account for 47% of the installment
loan portfolio, while the purpose of the remainder of this
portfolio is used by customers for purchasing retail goods,
home improvement or other personal reasons. Collateral is
generally obtained on these loans after analyzing the
repayment ability of borrower. Commercial loan's portfolio
is mainly for capital outlays and business operation.
Collateral is requested depending on the creditworthiness of
the borrower. Unsecured loans are made to individuals or
companies mainly based on the creditworthiness of the
customer. Approximately 5% of the loan portfolio is
unsecured. Management is not aware of any significant
concentrations that may cause future material risks which
may result in significant problems with future income and
capital requirements.
The following table represents a summary of the Company's
loan portfolio by category for each of the last five years.
There is no concentration of loans (greater than 5% of the
loan portfolio) in any industry. Bourbon has no foreign
loans or highly leveraged transactions in its loan
portfolio.
Loans Outstanding
December 31 (in thousands)
1998 1997 1996 1995 1994
Commercial $ 15,177 $ 10,644 $ 10,216 $ 11,167 $ 7,502
Real Estate Construction 11,055 7,657 4,200 3,497 3,156
Real Estate Mortgage 124,721 113,524 99,293 102,077 101,361
Agricultural 44,199 37,924 30,947 27,019 23,407
Installment 17,608 15,182 14,789 11,029 11,391
Other 159 287 374 397 807
Total Loans 212,919 185,218 159,819 155,186 147,624
Less Deferred Loan Fees 76 57 154 125 159
Loans Net of Deferred Loan Fees 212,843 185,161 159,665 155,061 147,465
Less loans held for sale 5,909 5,418 863 1,364 1,553
Less Allowance For Loan Losses 2,734 2,322 2,101 1,860 1,648
Net Loans $204,200 $177,421 $156,701 $151,837 $144,264
The following table sets forth the maturity distribution and
interest sensitivity of selected loan categories at December
31, 1998. Maturities are based upon contractual term. The
total loans in this report represents loans net of deferred
loan fees, including loans held for sale but excluding the
allowance for loan losses. In addition, deferred loan fees
on the above schedule is netted with real estate mortgage
loans on the following schedule.
Loan Maturities and Interest Sensitivity
December 31, 1998 (in thousands)
One Year One Through Over Total
or Less Five Years Five Years Loans
Commercial $ 7,390 $ 6,448 $ 1,339 $ 15,177
Real Estate 8,593 2,291 171 11,055
Construction
Real Estate Mortgage 8,220 64,363 52,063 124,646
Agricultural 14,878 27,566 1,755 44,199
Installment 5,327 12,091 189 17,607
Other 159 0 0 159
Total Loans 44,567 112,759 55,517 212,843
Fixed Rate Loans 25,848 103,495 15,858 145,201
Floating Rate Loans 18,719 9,264 39,659 67,642
Total $44,567 $112,759 $55,517 $212,843
Deposits
Total deposits increased $17 million in 1998 to $259
million. Noninterest bearing deposits increased $7 million
to $40 million, while $100,000 and over time deposits and
other interest bearing deposits both increased $5 million.
Public funds composed $35 million, with $34 million of this
being interest bearing. During 1997, total deposits
increased $10 million to $241 million from $231 million in
1996. The increase was mainly a result of interest bearing
checking accounts increasing over $11 million during 1997.
Public deposits accounted for $22 million, with $21 million
of this being interest bearing deposits. The Company
increased its focus on attracting more interest bearing
checking accounts. In addition, management placed more
emphasis on deposits and monitored deposits generated by
type on a monthly basis.
The tables below provide information on the maturities of
time deposits of $100,000 or more at December 31, 1998 and
detail of short-term borrowing for the past three years.
Maturity of Time Deposits of $100,000 or More
December 31, 1998
(in thousands)
Maturing 3 Months or Less $ 7,409
Maturing over 3 Months through 6 Months 7,827
Maturing over 6 Months through 12 Months 10,707
Maturing over 12 Months 2,225
Total $28,168
Borrowing
The Company utilizes both long and short term borrowing.
Long term borrowing is mainly from the Federal Home Loan
Bank (FHLB). As of December 31, 1998, $7.0 million was
borrowed from FHLB, a decrease of $3.3 million from 1997.
Advances are either paid monthly or at maturity. This
borrowing is mainly used to fund long term, fixed rate
mortgages and to assist in asset/liability management.
Nearly $7.3 million of FHLB borrowing was paid in 1998, and
advances were made for an additional $4 million. The
following table depicts relevant information concerning our
short term borrowings.
Short Term Borrowings
December 31 (in thousands)
1998 1997 1996
Federal Funds Purchased:
Balance at Year end $3,750 $2,375 $ 0
Average Balance During the Year 446 488 142
Maximum Month End Balance 4,550 2,375 1,075
Repurchase Agreements:
Balance at Year end 6,713 4,615 2,836
Average Balance During the Year 4,329 4,103 3,342
Maximum Month End Balance 6,713 4,895 4,668
Other Borrowed Funds:
Balance at Year end 785 2,468 1,324
Average Balance During the Year 1,198 1,259 1,225
Maximum Month End Balance 1,761 2,468 1,873
Asset Quality
With respect to asset quality, management considers three
categories of assets to merit close scrutiny. These
categories include: loans that are currently nonperforming,
other real estate, and loans that are currently performing
but which management believes require special attention.
The Company discontinues the accrual of interest on loans
that become 90 days past due as to principal or interest
unless extreme justifiable reasons are documented such as
the loan being in the process of collection. Uncollected
interest generally remains in earned income until collected
and removed from earnings if the loan is charged-off. A
loan remains in a non-accrual status until factors
indicating doubtful collection no longer exist. A loan is
classified as a restructured loan when the interest rate is
materially reduced or the term is extended beyond the
original maturity date because of the inability of the
borrower to service the interest payments at market rates.
Other real estate is recorded at the lower of cost or fair
market value less estimated costs to sell. A summary of the
components of nonperforming assets, including several rates
using period-end data, is shown below.
Nonperforming Assets
December 31 (in thousands)
1998 1997 1996 1995 1994
Non-accrual Loans $ 136 $173 $ 33 $ 44 $ 85
Accruing Loans which are
Contractually past due
90 days or more 790 154 562 438 283
Restructured Loans 147 160 180 201 357
Total Nonperforming and
Restructured Loans 1,073 487 775 683 725
Other Real Estate 70 0 79 57 306
Total Nonperforming and
Restructured Loans and
Other Real Estate 1,143 487 854 740 1,031
Nonperforming and Restructured
Loans as a Percentage
of Net Loans (1) 0.50% 0.26% 0.49% 0.44% 0.49%
Nonperforming and Restructured
Loans and Other Real Estate
as a Percentage of Total Assets 0.37 0.17 0.31 0.27 0.38
(1) Net of deferred loan fees
Nonperforming and restructured loans at December 31, 1998
were $1.1 million compared to $487 thousand at December 31,
1997 and $775 thousand at December 31, 1996. Total
nonperforming assets were $1.1 million, $487 thousand and
$854 thousand at December 31, 1998, 1997 and 1996,
respectively. The amount of lost interest on non-accrual
loans is considered immaterial. At December 31, 1998, loans
currently performing but which management believes require
special attention were not significant. The Company
continues to follow its long-standing policy of not engaging
in international lending and not concentrating lending
activity in any one industry.
Impaired loans as of December 31, 1998 were $286 thousand
compared to $333 thousand in 1997 and $251 thousand in 1996.
These amounts are included in the total nonperforming and
restructured loans presented in the table above. See Note 4
in the notes to consolidated financial statements included
as Exhibit 13.
A loan is considered impaired when it is probable that all
principal and interest amounts will not be collected
according to the loan contract. The allowance for loan
losses on impaired loans is determined using the present
value of estimated future cash flows of the loan, discounted
at the loan's effective interest rate or the fair value of
the underlying collateral. The entire change in present
value of expected cash flows is reported as a provision for
loan losses in the same manner in which impairment initially
was recognized or as a reduction in the amount of provision
for loan losses that otherwise would be reported. The total
allowance for loan losses related to these loans was $85
thousand, $57 thousand and $28 thousand on December 31,
1998, 1997 and 1996, respectively.
Loan Losses
The following table is a summary of the Company's loan loss
experience for each of the past five years.
Year Ended December 31 (in thousands)
1998 1997 1996 1995 1994
Balance at Beginning of Year $ 2,322 $ 2,101 $ 1,860 $ 1,648 $ 1,420
Balance of Allowance for Loan
Losses of Acquired Branch
at Acquisition Date 252
Amounts Charged-off:
Commercial 13 5 55 14 123
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 36 25 4 41 53
Agricultural 19 52 12 36 3
Consumer 300 273 142 139 56
Total Charged-off Loans 368 355 213 230 235
Recoveries on Amounts
Previously Charged-off:
Commercial 4 3 12 15 22
Real Estate Construction 0 0 0 0 0
Real Estate Mortgage 9 1 8 21 1
Agricultural 2 25 1 0 0
Consumer 66 54 31 11 43
Total Recoveries 81 83 52 47 66
Net Charge-offs 287 272 161 183 169
Provision for Loan Losses 700 493 402 395 145
Balance at End of Year 2,735 2,322 2,101 1,860 1,648
Total Loans, Net of Unearned
Income
Average 193,182 171,128 155,735 153,109 125,643
At December 31 $212,843 $185,161 $159,665 $155,061 $147,465
As a Percentage of Average Loans:
Net Charge-offs 0.15% 0.16% 0.10% 0.12% 0.13%
Provision for Loan Losses 0.36 0.29 0.26 0.26 0.12
Allowance as a Percentage of
Year-end Net Loans (1) 1.28 1.25 1.32 1.20 1.128
Beginning Allowance as a
Multiple Of Net Charge-offs 8.1 7.7 11.6 9.0 8.4
(1) Net of deferred loan fees
Loans are typically charged-off after being 120 days
delinquent. Limited exceptions for not charging-off a loan
would be well documented and approved by the appropriate
responsible party or committee. The provision for loan
losses for 1998 was $700 thousand compared to $493 thousand
in 1997 and $402 thousand in 1996. Net charge-offs were
$287 thousand in 1998, $272 thousand in 1997 and $161
thousand in 1996. Net chargeoffs to average loans were
0.15%, 0.16% and 0.10% in 1998, 1997 and 1996, respectively.
The trend in the loan loss provisions increasing for 1998
and 1997 is a result of considering our historical loan loss
trends, risk analysis of our loan portfolio and the increase
in loan outstandings. In evaluating the allowance for loan
losses, management considers the composition of the loan
portfolio, historical loan loss experience, the overall
quality of the loans and an assessment of current economic
conditions. At December 31, 1998, the allowance for loan
losses was 1.28% of loans outstanding compared to 1.25% at
year-end 1997 and 1.32% in 1996. Management believes the
allowance for loan losses at the end of 1998 is adequate to
cover inherent credit losses within the portfolio.
The following tables set forth an allocation for the
allowance for loan losses and loans by category and a
percentage distribution of the allowance allocation. In
making the allocation, management evaluates the risk in each
category, current economic conditions and charge-off
experience. An allocation for the allowance for loans
losses is an estimate of the portion of the allowance that
will be used to cover future charge-offs in each loan
category, but it does not preclude any portion of the
allowance allocated to one type of loan being used to absorb
losses of another loan type.
Allowance for Loan Losses
December 31 (in thousands)
1998 1997 1996 1995 1994
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
>s>
Commercial $ 262 9.58% $ 191 8.23% $ 168 8.00% $ 132 7.10% $ 94 5.70%
Real Estate Construction 168 6.14 118 5.08 77 3.66% 38 2.04 27 1.64
Real Estate Mortgage 1,480 54.11 1,327 57.15 1,252 59.59% 1,192 64.09 1,105 67.05
Agricultural 473 17.29 393 16.93 353 16.80% 327 17.58 269 16.32
Consumer 352 12.87 293 12.62 251 11.95% 171 9.19 153 9.28
Total $ 2,735 100.00% $ 2,322 100.00% $ 2,101 100.00% $ 1,860 100.00% $ 1,648 100.00%
Loans
December 31 (in thousands)
1998 1997 1996 1995 1994
Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage
Commercial $ 15,177 7.13% $ 10,644 5.75% $ 10,216 6.40% $ 11,167 7.20% $ 7,502 5.09%
Real Estate Construction 11,055 5.19 7,657 4.14 4,200 2.63 3,497 2.26 3,156 2.14
Real Estate Mortgage 124,645 58.56 113,467 61.28 99,139 62.09 102,077 65.83 101,361 68.74
Agricultural 44,199 20.77 37,924 20.48 30,947 19.38 27,019 17.42 23,407 15.87
Consumer 17,608 8.27 15,182 8.20 14,789 9.26 10,904 7.03 11,232 7.62
Other 159 0.07 287 0.16 374 0.23 397 0.26 807 0.55
Total, net (1) $212,843 100.00% $185,161 100.00% $159,665 100.00% $155,061 100.00% $147,465 100.00%
[FN]
(1) Net of deferred loan fees
Capital
As displayed by the following table, the Company's Tier I
capital (as defined by the Federal Reserve Board under the
Board's risk-based guidelines) at December 31, 1998
increased $3.0 million to $27.7 million. Total capital was
$29.3 million at December 31, 1998. The Company's risk-
based capital and leverage ratios, as shown in the following
table, exceeded the levels required to be considered "well
capitalized". The leverage ratio compares Tier I capital to
total average assets less disallowed amounts of goodwill.
December 31 (in thousands)
1998 1997 Change
Stockholders' Equity (1) $ 29,306 $ 26,483 $ 2,823
Less Disallowed Amount of Goodwill 1,574 1,789 (215)
Tier I Capital 27,732 24,694 3,038
Allowance for Loan Losses 2,601 2,272 329
Tier II Capital 2,601 2,272 329
Total Capital 30,333 26,966 3,367
Total Risk Weighted Assets $207,970 $181,702 $26,268
Ratios:
Tier I Capital to Risk-weighted Assets 13.33% 13.59% -0.26%
Total Capital to Risk-weighted Assets 14.59 14.84 -0.25
Leverage 9.56 8.77 0.79
(1) Excluding net unrealized gains and losses on
securities available for sale.
The Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA") established five capital categories for
insured depository institutions under its Prompt Corrective
Action Provisions. The bank regulatory agencies adopted
regulations, which became effective in 1992, defining these
five capital categories for banks they regulate. The
categories vary from "well capitalized" to "critically
undercapitalized". A "well capitalized" bank is defined as
one with a total risk-based capital ratio of 10% or more, a
Tier I risk-based capital ratio of 6% or more, a leverage
ratio of 5% or more, and one not subject to any order,
written agreement, capital directive, or prompt corrective
action directive to meet or maintain a specific capital
level. At December 31, 1998, the bank had ratios that
exceeded the minimum requirements established for the "well
capitalized" category.
In management's opinion, there are no known trends, events
or uncertainties that will have or that are reasonably
likely to have a material effect on the Company's liquidity,
capital resources or operations.
Securities and Federal Funds Sold
Securities, including those classified as held to maturity
and available for sale, decreased from $81.7 million at
December 31, 1997 to $72.4 million at December 31, 1998.
The decrease is attributable to the increased loan demand.
Federal funds sold totaled $75 thousand at December 31,
1996.
Per Company policy, fixed rate asset backed securities will
not have an average life exceeding seven years, but final
maturity may be longer. Adjustable rate securities shall
adjust within three years per Company policy. Of the $15.7
million of adjustable asset backed securities held on
December 31, 1998, $3.4 million are repriceable monthly and
the remaining $12.3 million is repriceable annually. In
addition, all applicable securities have passed the
appropriate stress tests. The following tables present the
investment securities for each of the past three years and
the maturity and yield characteristics of securities as of
December 31, 1998.
Investment Securities (Held to maturity at amortized cost,
available for sale at market value)
December 31
1998 1997 1996
(in thousands)
U.S. Treasury Securities
Available for Sale $16,087 $19,072 $24,571
U.S. Federal Agency Securities
Available for Sale 5,979 10,485 8,984
State and Municipal Obligations
Available for Sale 3,804 4,077 4,012
Held to Maturity 16,933 15,603 16,313
Asset-Backed Securities
Available for Sale
Fixed -
GNMA, FNMA, FHLMC Passthroughs 2,352 4,924 10,899
GNMA, FNMA, FHLMC CMO's 7,570 9,970 10,482
Total 9,922 14,894 21,381
Variable -
GNMA, FNMA, FHLMC Passthroughs 12,529 14,306 13,907
GNMA, FNMA, FHLMC CMO's 3,173 3,266 3,372
Total 15,702 17,572 17,279
Other Securities
Available for Sale 3,926 0 0
Total Securities
Available for Sale 55,420 66,100 76,227
Held to Maturity 16,933 15,603 16,313
Total $72,353 $81,703 $92,540
Maturity Distribution of Securities
December 31, 1998 (in thousands)
Over One Year Over Five Years Asset Backed
One Year Through Through Over Ten and Equity Market
or Less Five Years Ten Years Years Securities Total Value
U.S. Treasury Securities
Available for Sale $14,070 $ 2,017 $ 0 $ 0 $ 0 $16,087 $16,087
U.S. Federal Agency Securities
Available for Sale 3,986 1,993 0 0 0 5,979 5,979
State and Municipal Obligations
Available for Sale 0 2,378 1,426 0 0 3,804 3,804
Held to Maturity 1,093 5,757 6,857 3,226 0 16,933 17,855
Asset-Backed Securities
Available for Sale 25,624 25,624 25,624
Other Securities
Available for Sale 534 955 1,460 977 3,926 3,926
Total Securities
Available for Sale 18,056 6,922 2,381 1,460 26,601 55,420 55,420
Held to Maturity 1,093 5,757 6,857 3,226 0 16,933 17,855
Total $19,149 $12,679 $ 9,238 $ 4,686 $26,601 $72,353 $73,275
Percent of Total 26.47% 17.52% 12.77% 6.48% 36.77% 100.00%
Weighted Average Yield (1) 5.25 7.66 8.36 7.15 6.13 6.52
[FN]
(1) Tax Equivalent Yield
Impact of Inflation and Changing Prices
The majority of Bourbon's assets and liabilities are
monetary in nature. Therefore, Bourbon differs greatly from
most commercial and industrial companies that have
significant investments in nonmonetary assets and
inventories. However, inflation does have an important
impact on the growing of assets in the banking industry and
the resulting need to increase equity capital at higher than
normal rates in order to maintain an appropriate equity to
assets ratio. Inflation also affects other expenses, which
tend to rise during periods of inflation.
Other Accounting Issues
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income. Comprehensive income consists of net
income and comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities available
for sale which are also recognized as a separate component
of equity. The accounting standard that requires reporting
comprehensive income first applies for 1998, with prior
information restated to be comparable.
Year 2000
Management has assessed the operational and financial
implications of its Year 2000 needs and developed a plan to
address its data processing systems and their ability to
handle the change. Management has determined that if a
business interruption as a result of the Year 2000 issue
occurred, such an interruption could be material. The
primary effort required to prevent a potential business
interruption is the installation of the most current
software release from the Company's third party provider and
replacement of certain system hardware. The third party
software provider has warranted that Year 2000 remediation
and testing efforts to become compliant have been
successfully completed. Testing of mission critical systems
was be completed the first quarter 1999. Non-
mission critical systems will continue to be evaluated and,
if necessary, will be upgraded or replaced. Current cost
estimates for this project are under $150 thousand, with the
majority of this expenditure being for equipment and
software to be capitalized over 3-5 years. In addition,
over $400 thousand was spent on a new mainframe computer
system to enhance our overall computer technology. Year 2000
expenses are subject to change and could vary from current
estimates if the final requirements for Year 2000 readiness
exceed management's expectations.
The Company must also rely to some extent on the Year 2000
readiness of other third party entities such as public
utilities and governmental units. These and other like
entities provide important ongoing services to the Company.
Management is therefore developing and implementing
contingency plans that are scheduled to be in place by the
end of the second quarter, 1999.
The Company's credit customers are also subject to potential
losses as a result of Year 2000 exposure in their own
computer systems as well as the computer systems of their
suppliers and customers. The Company is working with those
customers that the Company believes may be significantly
affected to assess each customer's Year 2000 exposure and
the extent to which the customer has addressed the problem.
Any exposure which, in the opinion of management, is not
adequately addressed will be taken into account in assessing
the loss potential, if any, associated with that credit
relationship.
Forward-Looking Statements
This discussion contains forward-looking statements under
the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties. Although the Company
believes that the assumptions underlying the forward-looking
statements contained herein are reasonable, any of the
assumptions could be inaccurate, and therefore, there can be
no assurance that the forward-looking statements included
herein will prove to be accurate. Factors that could cause
actual results to differ from the results discussed in the
forward-looking statements include, but are not limited to:
economic conditions (both generally and more specifically in
the markets in which the Company and its bank operate);
competition for the Company's customers from other providers
of financial and mortgage services; government legislation
and regulation (which changes from time to time and over
which the Company has no control); changes in interest rates
(both generally and more specifically mortgage interest
rates); material unforeseen changes in the liquidity,
results of operations, or financial condition of the
Company's customers; material unforeseen complications
related to addressing the Year 2000 problem experienced by
the Company, its suppliers, customers and governmental
agencies; and other risks detailed in the Company's filings
with the Securities and Exchange Commission, all of which
are difficult to predict and many of which are beyond the
control of the Company. The Company undertakes no
obligation to republish revised forward-looking statements
to reflect events or circumstances after the date hereof or
to reflect the occurrence of unanticipated events.
Item 7A. Asset/Liability Management, Interest Rate
Sensitivity, Market Risk and Liquidity
Asset/Liability management control is designed to ensure
safety and soundness, maintain liquidity and regulatory
capital standards, and achieve acceptable net interest
income. Management considers interest rate risk to be the
most significant market risk. The Company's exposure to
market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the
potential of economic losses due to future interest rate
changes. These economic losses can be reflected as a loss
of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on
net interest income and to adjust the balance sheet to
minimize the inherent risk while at the same time maximize
income. Management realizes certain risks are inherent and
that the goal is to identify and minimize the risks. Tools
used by management include the standard GAP model and an
interest rate shock simulation model. The Bank has no
market risk sensitive instruments held for trading purposes.
The following table depicts the change in net interest
income resulting from 100 and 300 basis point changes in
rates. The projections are based on balance sheet growth
assumptions and repricing opportunities for new, maturing
and adjustable rate amounts. In addition, the projected
percentage changes from level rates are outlined below
within the Board of Directors specified limits. As of
December 31, 1998 the projected percentage changes are
within the Board limits and the Company's interest rate risk
is also with Board limits. The projected net interest
income report summarizing the Company's interest rate
sensitivity as of December 31, 1998 is as follows:
Projected Net Interest Income
Level
Rate Change: - 300 - 100 Rates + 100 + 300
Year One (1/1/99 - 12/31/99)
Interest Income $19,989 $22,127 $23,210 $24,295 $26,463
Interest Expense 7,317 9,281 10,264 11,246 13,210
Net Interest Income 12,672 12,846 12,946 13,049 13,253
PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (1/1/99 - 12/31/99)
Interest Income $(3,221) $(1,083) N/A $ 1,085 $ 3,253
Interest Expense (2,947) (983) N/A 982 2,946
Net Interest Income (274) (100) 103 307
PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES"
Year One (1/1/99 - 12/31/99)
Interest Income -13.9% -4.7% N/A 4.7% 14.0%
Interest Expense -28.7 -9.6 N/A 9.6 28.7
Net Interest Income -2.1% -0.8% N/A 0.8% 2.4%
Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0%
These numbers are comparable to 1997. In 1997, year one
reflected a decline in net interest income of 2.6% with a
300 basis point decline compared to the 2.1% decline in
1998. The 300 basis point increase in rates reflected a
2.8% increase in net interest income in 1997 compared to
2.4% in 1998.
Management measures the Company's interest rate risk by
computing estimated changes in net interest income in the
event of a range of assumed changes in market interest
rates. The Company's exposure to interest rates is reviewed
on a monthly basis by senior management and quarterly with
the Board of Directors. Exposure to interest rate risk is
measured with the use of interest rate sensitivity analysis
to determine the change in net interest income in the event
of hypothetical changes in interest rates, while interest
rate sensitivity gap analysis is used to determine the
repricing characteristics of the Company's assets and
liabilities. If estimated changes to net interest income
are not within the limits established by the Board, the
Board may direct management to adjust the Company's asset
and liability mix to bring interest rate risk within Board
approved limits.
In addition, the Company uses interest rate sensitivity gap
analysis to monitor the relationship between the maturity
and repricing of its interest-earning assets and interest-
bearing liabilities, while maintaining an acceptable
interest rate spread. Interest rate sensitivity gap is
defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time
period and the amount of interest-bearing liabilities
maturing or repricing within that time period. A gap is
considered positive when the amount of interest-rate-
sensitive assets exceeds the amount of interest-sensitive-
liabilities, and is considered negative when the amount of
interest-rate-sensitive liabilities exceeds the amount of
interest-rate-sensitive assets. Generally, during a period
of rising interest rates, a negative gap would adversely
affect net interest income, while a positive gap would
result in an increase in net interest income. Conversely,
during a period of falling interest rates, a negative gap
would result in an increase in net interest income, while a
positive gap would negatively affect net interest income.
The Company's goal is to maintain a reasonable balance
between exposure to interest rate fluctuations and earnings.
The interest rate sensitivity analysis as of December 31,
1998 shown below depicts amounts based on the earliest
period in which they can normally be expected to reprice.
The chart reveals that assets and liabilities are fairly
well matched for the early periods specified below. The
decay rates used for Demand deposits, NOW's, Savings and
Money Market Savings are 5%, 30%, 20% and 30%, respectively.
Interest Rate Sensitivity Analysis
December 31, 1998 (in thousands)
Total 1 Year 2 Years 3 Years 4 Years 5 Years >5 Years
ASSETS
Cash & Due From Banks $ 10,619 $ - $ - $ - $ - $ - $ 10,619
Fed Funds & Int-Earning Due From Banks 137 137 - - - - -
Variable Rate Investment (1) 19,849 19,849 - - - - -
Fixed Rate Investment (1) 52,504 24,131 6,254 4,143 2,071 4,265 11,640
Variable Rate Loans 67,681 61,065 2,546 1,234 1,220 1,616
Fixed Rate Loans 145,162 44,267 21,636 23,888 26,010 26,560 2,801
Others Assets 12,753 3,120 - - - - 9,633
Total Assets / Repricing Assets 308,705 152,569 30,436 29,265 29,301 32,441 34,693
Repricing Assets - Accumulated 152,569 183,005 212,270 241,571 274,012 308,705
% of Current Balance 49.4% 9.9% 9.5% 9.5% 10.5% 11.2%
% of Current Balance - Accumulated 49.4 59.3 68.8 78.3 88.8 100.0
LIABILITIES
Demand Deposit Accounts $ 40,336 $ 2,017 $ 1,916 $ 2,017 $ 1,916 $ 1,624 $ 30,846
NOW Accounts 63,467 19,040 13,328 9,330 6,530 4,572 10,667
Savings Accounts 12,572 2,517 2,011 1,609 1,287 1,030 4,118
Money Market Savings 9,477 2,843 1,990 1,393 975 683 1,593
Subtotal Deposit Accounts 125,852 26,417 19,245 14,349 10,708 7,909 47,224
Other Variable Deposits 5,959 5,959 - - - - -
Fixed Rate Deposits 126,929 112,999 9,977 1,320 689 963 981
Variable Rate Other Liabilities 10,498 10,248 250 - - - -
Fixed Rate Other Liabilities 7,704 299 1,237 234 248 5,576 110
Other Liabilities 2,391 - - - - - 2,391
Total Capital 29,372 - - - - - 29,372
Total Liabilities / Repricing Liab 308,705 155,922 30,709 15,903 11,645 14,448 80,078
Repricing Liabilities - Accumulated 155,922 186,631 202,534 214,179 228,627 308,705
% of Current Balance 50.5% 9.9% 5.2% 3.8% 4.7% 25.9%
% of Current Balance - Accum 50.5 60.5 65.6 69.4 74.1 100.0
SUMMARY
Total Repricing Assets 152,569 30,436 29,265 29,301 32,441 34,693
Total Repricing Liabilities 155,922 30,709 15,903 11,645 14,448 80,078
Total Repricing Gap (by Bucket) (3,353) (273) 13,362 17,656 17,993 (45,385)
Total Repricing Assets - Cumulative 152,569 183,005 212,270 241,571 274,012 308,705
Total Repricing Liabilities - Cumul 155,922 186,631 202,534 214,179 228,627 308,705
Gap/Total Assets (by Bucket) -1.09% -0.09% 4.33% 5.72% 5.83% -14.70%
Cumulative Gap/Total Assets -1.09 -1.17 3.15 8.87 14.70 0.00
[FN]
(1) Held to maturity at amortized cost, available for sale at market value
Little change in the above numbers has occurred since 1997.
For the first three years in 1997 and 1998, the cumulative
gap percentage is less than 4%. There was a slight increase
in the cumulative gap for the three year period from 1.86%
in 1997 to 3.15% in 1998. There has been a trend in the 3
to 5 year periods of being more positive. The cumulative
gap at December 31, 1997 for the 5 year period was 10.36%.
This increased to 14.7% as of December 31, 1998. These
percentages remain below the Board established guidelines.
Liquidity risk is the possibility that Bourbon may not be
able to meet its cash requirements. Management of liquidity
risk includes maintenance of adequate cash and sources of
cash to fund operations and meeting the needs of borrowers,
depositors and creditors. Excess liquidity has a negative
impact on earnings resulting from the lower yields on short-
term assets.
In addition to cash and cash equivalents, the securities
portfolio provides an important source of liquidity. Total
securities maturing within one year along with cash and cash
equivalents totaled $29.9 million at December 31, 1998.
Additionally, securities available-for-sale with maturities
greater than one year totaled $37.4 million at December 31,
1998. These securities are available to meet liquidity
needs on a continuing basis.
Bourbon maintains a relatively stable base of customer
deposits and its steady growth is expected to be adequate to
meet its funding demands. In addition, management believes
the majority of its $100,000 or more certificates of deposit
are no more volatile than its core deposits. At December
31, 1998 these balances totaled over $28 million,
approximately 10.9% of total deposits.
The Company also relies on FHLB advances for both liquidity
and asset/liability management purposes. These advances are
used primarily to fund long-term fixed rate residential
mortgage loans. FHLB advances decreased $3.3 million in
1998 to $7.0 million.
Generally, Bourbon relies upon net cash inflows from
financing activities, supplemented by net cash inflows from
operating activities, to provide cash used in its investing
activities. As is typical of many financial institutions,
significant financing activities include deposit gathering,
and the use of short-term borrowings, such as federal funds
purchased and securities sold under repurchase agreements
along with long-term debt. The Company's primary investing
activities include purchasing investment securities and loan
originations. Management believes there is sufficient
liquidity to meet all reasonable borrower, depositor and
creditor needs in the present economic environment.
The cash flow statements for the periods presented provide
an indication of Bourbon's sources and uses of cash as well
as an indication of the ability of Bourbon to maintain an
adequate level of liquidity. A discussion of cash flow
statements for 1998, 1997 and 1996 follows.
Net cash provided by operating activities was $3.5 million,
$5.2 million and $5.1 million for the years ended December
31, 1998, 1997 and 1996, respectively. The changes in 1998
and 1997 were mainly a result of the increase in net income
from $2.9 million to $3.4 million to $3.8 million in 1996,
1997 and 1998, respectively.
Net cash flow used in investing activities was $20.0
million, $15.8 million, and $7.1 million and for the years
ended December 31, 1998, 1997 and 1996, respectively. The
changes in net cash from investing activities included the
result of normal maturities and reinvestment of investment
securities as well as funding related to increases in loans.
During 1998, funds used for loan growth were $28 million,
partly offset by a decline in investments of $9 million. In
1997, the loan growth resulted in a use of funds of nearly
$26 million, being offset by a decline in investment
securities of $11 million. This was funded mainly by
deposits increasing $10 million and short term borrowing
increasing $5 million. In addition, $1.3 million was used
for purchases of bank premises and equipment. During 1996
and 1997, over $1 million was expended for land, building
and equipment for the new branch location in Versailles. In
1997 and 1998, over $1.1 million was invested in the new
Georgetown branch that opened in August 1998. In addition,
over $400 thousand investment was made to upgrade the
existing hardware and software. Increase in loans of nearly
$6 million and $1.3 million for purchases of bank premises
and equipment account for the majority of the change in
1996.
Net cash flow from financing activities was $14.9 million,
$13.7 million and $0.1 million for the years ended December
31, 1998, 1997 and 1996, respectively. The net cash
increases and decreases were primarily attributable to
changes in total deposits, securities sold under agreements
to repurchase and federal funds purchased, and net changes
in advances from the Federal Home Loan Bank and other
borrowings.
A number of other techniques are used to measure the
liquidity position, including the ratios presented below.
These ratios are calculated based on annual averages for
each year.
Liquidity Ratios
December 31
1998 1997 1996
Total Loans/Total Deposits 78.7% 73.6% 71.3%
Net Short-term Borrowings/Total 1.8 1.8 1.5
Assets
This chart shows that the loan to deposit ratio increased in
1998 and 1997. Loan growth of 15% and deposit growth of 7%
have both been contributing factors to the greater change in
this ratio from 1997 to 1998 compared to the previous year.
Item 8. Financial Statements
The consolidated financial statements of the Company
together with the notes thereto and report of independent
auditors are contained in the Company's 1998 Annual Report
to Stockholders included as Exhibit 13, and are incorporated
herein by reference.
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
Not Applicable
PART III
Item 10. Directors, Executive Officers, Promoters and
Control Persons, Compliance With Section 16(a) of the
Exchange Act
Under the Company's Articles of Incorporation, the Board of
Directors consists of three different classes, each to
serve, subject to the provisions of the Articles of
Incorporation and Bylaws for a three year term and until his
successor is duly elected and qualified. The names of the
directors and their terms are set forth below.
Terms expiring in 1999:
Henry Hinkle, age 47, is President of Hinkle Construction
Company. He has been a director of the Company since 1989.
Theodore Kuster, age 55, is a farmer and thoroughbred horse
breeder. He has been a director of the Company since 1979.
Robert G. Thompson, age 49, is Executive Director of the
Paris Bourbon County YMCA, a farmer and thoroughbred horse
breeder. He has been a director of the Company since 1991.
Terms expiring in 2000:
William R. Stamler, age 64, is Chairman of Signal
Investments, Inc. He has been a director of the Company
since 1988.
Buckner Woodford, age 54, is President and Chief Executive
Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He
has been a director of the Company since 1971.
Terms expiring in 2001:
William Arvin, age 58, is an attorney. He has been a
director of the Company since December 19, 1995.
James L. Ferrell, M.D., age 64, is a Physician. He has been
a director of the Company since 1980.
Joseph B. McClain, age 70, is President of Hopewell Co.
(insurance agency). He has been a director of the Company
since 1971.
The Company's other executive officer is Gregory J. Dawson,
age 38. He is the Chief Financial Officer and has been with
the Company since 1985 and serves at the pleasure of the
Board of Directors.
Item 11. Executive Compensation
The following table sets forth information with respect to
the compensation of the President and Chief Executive
Officer of the Company. No other executive officer earned
total salary and bonus in excess of $100,000.
Summary Compensation Table
Annual Compensation
Other Annual Options
Name Year Salary Bonus Compensation Granted
Buckner Woodford 1998 $156,000 $ 3,161 (1) 1,900
Buckner Woodford 1997 $150,000 $ 4,879 (1) 1,600
Buckner Woodford 1996 $136,500 $ 1,505 (1) 3,000
(1) Less than the lesser of $50,000 or 10% of annual salary
and bonuses.
The following table contains information regarding the grant
of stock options under the Company's stock option plan to
the Chief Executive Officer during the year ended December
31, 1998. In addition, in accordance with rules of the
Securities and Exchange Commission, the following table sets
forth the hypothetical grant date present value with respect
to the referenced options, using the Black-Scholes Option
Pricing Model.
Option Grants in the Last Fiscal Year
% of Total
Options Grant
Shares Granted to Exercise Date
Granted Employees Price Expiration Present
Name (#) in 1998 ($/Sh) Date Value($)
Buckner Woodford 1,900 14.6% $31.00 1/7/08 $16,568
The following table sets forth certain information regarding
options exercised by the Chief Executive Officer during
calendar year 1998 and unexercised stock options held by him
as of December 31, 1998.
Aggregated Option Exercises in Calendar 1998
and Year-end Stock Option Values
Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money
on Exercise Realized Options at 12/31/98 Options at 12/31/98
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
Buckner Woodford None N/A 4,460/5,380 $85,412/$74,413
The Company did not have any Stock Appreciation Rights (SAR's) at
December 31, 1998.
Compensation of Directors
Directors are paid $300 for each board meeting attended and
$100 for each committee meeting attended. Directors are
also granted a 10-year option to purchase 50 shares of the
Company's common stock following each year in which Kentucky
Bank has an return on assets of 1 percent or greater. The
option's exercise price is the fair market value per share
on the date of grant.
Pension Plan
The following table sets forth the annual benefits which an
eligible employee would receive under the Company's
qualified defined benefit pension plan based on remuneration
that is covered under the plan and years of service with the
Company and its subsidiaries.
Years of Service
Remuneration 15 20 25 30 35
25,000 3,750 5,000 6,250 7,500 8,750
50,000 7,500 10,000 12,500 15,000 17,500
75,000 11,250 15,000 18,750 22,500 26,250
100,000 15,000 20,000 25,000 30,000 35,000
125,000 18,750 25,000 31,250 37,500 43,750
150,000 22,500 30,000 37,500 45,000 52,500
175,000 26,250 35,000 43,750 52,500 61,250
200,000 30,000 40,000 50,000 60,000 70,000
In general, a participant's remuneration covered by the
Company's pension plan is his or her average annual cash
compensation (W-2 earnings) for the last 5 years. The years
of service for Mr. Woodford are 27 years.
Item 12. Security Ownership of Certain Beneficial Owners
and Management
Set forth below are the number of shares of the Company's
common stock beneficially owned by each director and
executive officer, and all current directors and executive
officers as a group as of December 31, 1998.
Name Shares Beneficially Owned(1)
Number Percentage
William Arvin (2) 15,626 1.1%
Gregory J. Dawson (3) 5,250 *
James L. Ferrell, M.D. (4) 15,120 1.1
Henry Hinkle (5) 13,925 *
Theodore Kuster (6) 8,885 *
Joseph B. McClain (7) 21,618 1.5
William R. Stamler (8) 15,430 1.1
Robert G. Thompson (9) 3,270 *
Buckner Woodford (10) 128,939 9.1
All directors and officers
(9 persons) as a group
(consisting of those
persons named above)(11) 228,063 16.1%
* Less than 1%
1) Beneficial ownership as reported in the
above table has been determined in accordance
with Rule 13d-3 under the Exchange Act.
Unless otherwise indicated, beneficial
ownership includes both sole or shared voting
and sole or shared investment power.
2) Includes 5,929 shares held in a
retirement account, 5,984 shares held of
record by Mr. Arvin's wife, as to which Mr.
Arvin disclaims beneficial ownership and
3,638 held jointly with his wife.
3) Includes 4,900 shares that Mr. Dawson
may acquire upon exercise of outstanding
stock options.
4) Includes 2,500 shares held in a
retirement account and 570 shares that Mr.
Ferrell may acquire upon exercise of
outstanding stock options. Also, includes
1,500 shares held by Dr. Ferrell's wife, as
to which Dr. Ferrell disclaims beneficial
ownership.
5) Includes 500 shares held by his wife and 320 shares held by
three sons, as to which Mr. Hinkle disclaims beneficial
ownership. Includes 12,000 shares held of record by
Hinkle Contracting Company, as to which Mr. Hinkle, as
president, has shared voting power. Also includes 170
shares that Mr. Hinkle may acquire upon exercise of
outstanding stock options.
6) Includes 3,135 share held of record by
Mr. Kuster's wife, as to which Mr. Kuster
disclaims beneficial ownership. Also
includes 2,500 shares held in a retirement
account and 570 shares that Mr. Kuster may
acquire upon exercise of outstanding stock
options.
7) Includes 570 shares that Mr. McClain may
acquire upon exercise of outstanding stock
options. Also includes 9,400 shares held of
record by Mr. McClain's wife, as to which Mr.
McClain disclaims beneficial ownership.
8) Includes 2,000 shares held by Signal
Investments Corporation, as to which Mr.
Stamler, as the chief executive officer and
majority Stockholder of such corporation, has
sole voting and investment power. Also
includes 570 shares that Mr. Stamler may
acquire upon exercise of outstanding stock
options.
9) Includes 570 shares that Mr. Thompson
may acquire upon exercise of outstanding
stock options.
10) Includes 4,000 shares held by his wife
and 5,666 shares held by two sons, as to
which Mr. Woodford disclaims beneficial
ownership. Also includes 104 shares held in
a retirement account and 4,460 shares that
Mr. Woodford may acquire upon exercise of
outstanding stock options.
11) Includes 12,380 shares that may be
acquired upon exercise of outstanding stock
options.
The following table sets forth as of December 31, 1998 the
persons known by the Company to own beneficially (as
determined in accordance with the rules and regulations of
the Commission) more than 5% of the outstanding common
stock.
Name and Address Shares Beneficially
of Beneficial Owner Owned Percentage
Buckner Woodford 128,939 9.1%
340 Stoner Avenue
Paris, Kentucky 40361
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates
were customers of and had transactions with the Company's
subsidiary bank in the ordinary course of business during
the year ended December 31, 1998. Similar transactions may
be expected to take place with the Company's subsidiary bank
in the future. Outstanding loans and commitments made by
such subsidiary bank in transactions with the Company's
directors and officers and their associates were made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with other persons and did not involve more
than a normal risk of collectibility or present other
unfavorable features. Certain directors and executive
officers were loan customers of Kentucky Bank and
outstanding loans were $1.2 million and $1.8 million as of
December 31, 1998 and 1997, respectively. See Note 4 in the
notes to consolidated financial statements included as
Exhibit 13.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) The following exhibits are incorporated by
reference herein or made a part of this Form 10-K:
11 Computation of earnings per share - See Note 10 in the
notes to consolidated financial statements included as
Exhibit 13.
13 Financial Statements:
Consolidated Balance Sheets - December 31, 1998
and 1997
Consolidated Statements of Income and
Comprehensive Income - Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Report of Independent Auditors
21 Subsidiaries of Registrant
23 Consent of Crowe, Chizek and Company LLP
(b) Current Reports on Form 8-K during the quarter ended
December 31, 1998
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bourbon Bancshares, Inc.
By: __/s/Buckner Woodford__
Buckner Woodford, President and Chief Executive Officer,
Director
March 29, 1999
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities
and on the dates indicated.
__/s/Buckner Woodford________ March 29, 1999
Buckner Woodford, President and Chief Executive Officer,
Director
__/s/Gregory J. Dawson_______ March 29, 1999
Gregory J. Dawson, Chief Financial and Accounting Officer
__/s/James L. Ferrell________ March 29, 1999
James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 29, 1999
William Arvin, Director
_____________________________ March 29, 1999
Henry Hinkle, Director
__/s/Theodore Kuster_________ March 29, 1999
Theodore Kuster, Director
__/s/Joseph B. McClain_______ March 29, 1999
Joseph B. McClain, Director
_____________________________ March 29, 1999
William R. Stamler, Director
__/s/Robert G. Thompson______ March 29, 1999
Robert G. Thompson, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED
PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH
HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE
ACT.
The Registrant refers to Exhibits 13 and 99.1 to the Form 10-
K.
INDEX TO EXHIBITS
Exhibit
Number Description of Document
3.1 Articles of Incorporation of the Registrant are
incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-4 (File No. 33-96358).
3.2 Bylaws of the Registrant are incorporated by
reference to Exhibit 3.2 of the Registrant's Registration
Statement on Form S-4 (File No. 33-96358).
10.1 Bourbon's 1993 Employee Stock Ownership Incentive
Plan is incorporated by reference to Exhibit 10.2 of the
Registrant's Registration Statement on Form S-4 (File No.
33-96358).*
10.2 Bourbon's 1993 Non-Employee Directors Stock
Ownership Incentive Plan is incorporated by reference to
Exhibit 10.3 of the Registrant's Registration Statement on
Form S-4 (File No. 33-96358).*
13 Bourbon Bancshares, Inc. 1998 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Crowe, Chizek and Company LLP
27 Financial Data Schedule (for SEC use only)
99.1 Proxy statement dated March 25, 1999, sent to the
Registrant's security holders in connection with the 1999
Annual Meeting of Shareholders and supplementally furnished
to the Commission for its information as required by Form 10-
K for registrants which have not registered securities
pursuant to Section 12 of the Securities Exchange Act of
1934. This material is not otherwise to be deemed filed
with the Commission.
* Denotes a management contract or compensatory plan or
arrangement of the Registrant required to be filed as an
exhibit pursuant to Item 601(10) (iii) of Regulation S-K.
Exhibit 13
BOURBON BANCSHARES, INC.
ANNUAL REPORT 1998
To Our Shareholders,
The economy in central Kentucky continues to enjoy
healthy expansion. This includes a high level of
residential and industrial building as well as strong demand
for thoroughbred horses and horse farms. All of this
activity is beneficial to the financial institutions here.
Bourbon Bancshares had very good financial results in
1998. Earnings per share after dilution were $2.66 compared
with $2.40 last year and $2.00 in 1996. This has resulted
from a combination of growth in our balance sheet with
attention to expense control.
Total assets rose to $308 million, exceeding $300
million for the first time. Loan demand was strong for a
second consecutive year. Our loan portfolio grew by 15%
last year following 16% the prior year. Deposits also
showed a very nice 7% growth. We believe we have these
growth opportunities because our subsidiary, Kentucky Bank,
is firmly established in all segments of a very healthy
economy.
We continue to make investments that we believe will
keep our future bright as well. In 1998 we opened a second
branch facility in Georgetown. This is the fastest growing
community in central Kentucky.
Like virtually all banks we devoted considerable effort
last year to preparing our computer systems for the year
2000. Our extensive testing program is nearly complete.
The largest expenditure made was over $400,000 for a new
mainframe computer which was installed in the fall of 1998.
We believe we are very well prepared for the new century.
Two of our bank directors retired at the end of 1998.
Betty Jo Denton Heick and Alex Miller devoted many years of
loyal and faithful service to this institution. Their
advice was always helpful. We will miss them both.
One possible concern about the future is the bleak
outlook for tobacco. This crop has made a made a major
contribution to the local economy for decades. Over time,
every community must respond to the economic changes that
arise. Central Kentucky has diversified its economy enough
that overall growth should continue.
Buckner Woodford
FINANCIAL HIGHLIGHTS
BOURBON BANCSHARES, INC. 1998 1997 1996 1995
Assets ($ millions) $ 309 $ 291 $ 272 $ 269
Net Income ($ thousands) $ 3,804 $ 3,408 $ 2,887 $ 2,488
Per Share Results
Earnings
(assuming dilution) $ 2.66 $ 2.40 $ 2.00 $ 1.71
Dividends $ .80 $ .72 $ .64 $ .60
Stockholder Information
CORPORATE HEADQUARTERS
Bourbon Bancshares, Inc.
4th and Main Street
Paris, Kentucky 40361
606-987-1795
ANNUAL MEETING
The annual meeting of Stockholders of Bourbon Bancshares,
Inc. Will be held Monday, May 3, 1999 at 9:00 a.m. in the
corporate headquarters.
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
Kentucky Bank
Trust Department
606-987-1795, ext. 316
MARKET MAKERS
Morgan Keegan & Co.
489 East Main Street
Lexington, Kentucky 40507
1-800-937-0161
Hilliard Lyons
West Vine Street, Suite 400
Lexington, Kentucky 40507
1-800-944-2663
OTC Bulletin Board
Symbol: BBON
INVESTOR INFORMATION
Any individual requesting general information or a copy of
the Corporation's 1998 Form 10-K Report may obtain these by
writing Investor Relations at the Corporate Headquarters.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Bourbon Bancshares, Inc.
Paris, Kentucky
We have audited the accompanying consolidated
balance sheets of Bourbon Bancshares, Inc. as
of December 31, 1998 and 1997, and the
related consolidated statements of income and
comprehensive income, changes in
stockholders' equity and cash flows for each
of the years in the three year period ended
December 31, 1998. These financial statements
are the responsibility of the Company's
management. Our responsibility is to express
an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform
the audit to obtain reasonable assurance
about whether the financial statements are
free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes
assessing the accounting principles used and
significant estimates made by management, as
well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial
statements referred to above present fairly,
in all material respects, the financial
position of Bourbon Bancshares, Inc. as of
December 31, 1998 and 1997, and the results
of its operations and its cash flows for each
of the years in the three year period ended
December 31, 1998, in conformity with
generally accepted accounting principles.
Crowe, Chizek and Company LLP
Lexington, Kentucky
January 15, 1999
BOURBON BANCSHARES, INC.
Paris, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
1998 1997
ASSETS
Cash and due from banks $ 10,756,213 $ 12,274,875
Investment securities:
Available for sale 55,419,734 66,100,663
Held to maturity (fair value 1998 - $17,854,550
and 1997 - $16,410,523) 16,933,755 15,602,778
Mortgage loans held for sale 5,908,676 5,418,297
Loans 206,934,127 179,742,143
Allowance for loan losses (2,734,589) (2,321,536)
Net loans 204,199,538 177,420,607
Federal Home Loan Bank stock 3,119,500 2,905,200
Bank premises and equipment, net 6,793,998 5,765,310
Interest receivable 3,165,110 2,855,565
Intangible assets 2,034,441 2,103,688
Other assets 374,272 207,806
Total assets $308,705,237 $290,654,789
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing $ 40,336,201 $ 33,481,215
Time deposits, $100,000 and over 28,168,022 22,573,181
Other interest bearing 190,235,493 185,270,925
Total deposits 258,739,716 241,325,321
Securities sold under agreements to repurchase
and other borrowings 11,248,277 9,457,606
Federal Home Loan Bank advances 6,953,502 10,236,291
Interest payable 1,778,984 1,900,824
Other liabilities 612,453 1,018,629
Total liabilities 279,332,932 263,938,671
Stockholders' equity
Preferred stock, 300,000 shares authorized and
unissued - -
Common stock, no par value; 3,000,000 shares
authorized; 1,404,628 and 1,394,562 shares
issued and outstanding in 1998 and 1997,
respectively 6,474,241 6,332,861
Retained earnings 22,832,043 20,150,369
Accumulated other comprehensive income 66,021 232,888
Total stockholders' equity 29,372,305 26,716,118
Total liabilities and stockholders' equity $308,705,237 $290,654,789
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Interest income
Loans, including fees $17,211,687 $15,483,271 $13,774,234
Investment securities
Taxable 3,141,285 3,918,974 3,777,906
Tax exempt 1,168,049 1,174,113 1,208,098
Other 462,117 385,106 664,515
21,983,138 20,961,464 19,424,753
Interest expense
Deposits 9,787,511 9,480,440 8,806,069
Securities sold under agreements to
repurchase and other short-term
borrowings 269,135 234,521 175,745
Federal Home Loan Bank advances 517,105 569,927 701,091
Other 92,717 129,827 155,942
10,666,468 10,414,715 9,838,847
Net interest income 11,316,670 10,546,749 9,585,906
Provision for loan losses 700,400 492,800 401,965
Net interest income after provision for
loan losses 10,616,270 10,053,949 9,183,941
Other income
Service charges 1,810,756 1,674,348 1,507,506
Loan service fee income 282,879 257,953 255,426
Trust department income 300,342 237,254 205,740
Investment securities gains (losses), net 40,955 13,686 (12,839)
Gain on sale of mortgage loans 439,927 72,236 200,366
Other 198,116 134,510 127,850
3,072,975 2,389,987 2,284,049
Other expenses
Salaries and employee benefits 4,526,735 4,274,022 4,005,122
Occupancy expenses 1,163,872 1,002,137 931,434
FDIC assessment 54,344 54,281 412,483
Amortization 400,147 346,891 314,553
Taxes other than payroll, property
and income 307,146 287,718 255,055
Advertising 340,664 276,430 261,929
Other 1,721,219 1,646,499 1,534,013
8,514,127 7,887,978 7,714,589
Income before income taxes 5,175,118 4,555,958 3,753,401
Provision for income taxes 1,371,602 1,147,924 866,295
Net income $ 3,803,516 $ 3,408,034 $ 2,887,106
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (continued)
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Other comprehensive income (loss),
net of tax:
Unrealized gains (losses) on
securities arising during the period (125,912) 245,108 (22,335)
Reclassification of realized amount (40,955) (13,686) 12,839
Net change in unrealized gain (loss)
on securities (166,867) 231,422 (9,496)
Comprehensive income $3,636,649 $3,639,456 $ 2,877,610
Earnings per share:
Basic $ 2.72 $ 2.44 $ 2.03
Diluted $ 2.66 $ 2.40 $ 2.00
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
Accumulated
Other Total
Common Stock Retained Comprehensive Stockholders'
Shares Amount Earnings Income Equity
Balances, January 1, 1996 1,432,700 $6,481,769 $16,673,906 $ 10,962 $23,166,637
Common stock issued (including
employee gifts of 49 shares) 129 960 - - 960
Common stock purchased (20,000) (90,400) (409,764) - (500,164)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - (9,496) (9,496)
Net income - - 2,887,106 - 2,887,106
Dividends declared - $.64 per share - - (911,564) - (911,564)
Balances, December 31, 1996 1,412,829 6,392,329 18,239,684 1,466 24,633,479
Common stock issued (including
employee gifts of 50 shares) 6,130 50,948 - - 50,948
Common stock purchased (24,397) (110,416) (492,196) - (602,612)
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - 231,422 231,422
Net income - - 3,408,034 - 3,408,034
Dividends declared - $.72 per share - - (1,005,153) - (1,005,153)
Balances, December 31, 1997 1,394,562 6,332,861 20,150,369 232,888 26,716,118
Common stock issued (including
employee gifts of 26 shares) 10,066 141,380 - - 141,380
Net change in unrealized gain (loss)
on securities available for sale, net
of tax - - - (166,867) (166,867)
Net income - - 3,803,516 - 3,803,516
Dividends declared - $.80 per share - - (1,121,842) - (1,121,842)
Balances, December 31, 1998 1,404,628 $6,474,241 $22,832,043 $ 66,021 $29,372,305
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
Cash flows from operating activities
Net income $ 3,803,516 $ 3,408,034 $ 2,887,106
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 1,007,948 946,973 870,092
Provision for loan losses 700,400 492,800 401,965
Investment securities amortization
(accretion), net (42,854) 23,081 149,205
Investment securities (gains) losses, net (40,955) (13,686) 12,839
Originations of loans held for sale (35,798,502) (18,497,646) (21,292,899)
Proceeds from sale of loans 35,417,148 18,428,256 21,778,522
Gain on sale of mortgage loans (439,927) (72,236) (200,366)
Federal Home Loan Bank stock dividends (214,300) (199,600) (185,600)
Changes in:
Interest receivable (309,545) (117,665) (26,485)
Other assets (10,827) (82,785) 688,313
Interest payable (121,840) 537,251 110,322
Other liabilities (406,176) 327,241 (108,589)
Net cash from operating activities 3,544,086 5,180,018 5,084,425
Cash flows from investing activities
Purchases of securities available for sale (29,252,389) (26,674,021) (46,990,894)
Proceeds from sales of securities
available for sale 6,548,219 17,343,034 13,512,387
Proceeds from principal payments and maturities
of securities available for sale 33,189,842 19,982,850 33,441,384
Purchases of investment securities held to maturity (2,374,891) (785,000) (1,375,000)
Proceeds from maturities of investment securities
held to maturity 1,070,150 1,510,950 1,520,000
Net change in loans (27,549,007) (25,886,674) (5,883,441)
Purchases of bank premises and equipment, net (1,636,487) (1,284,947) (1,307,597)
Net cash from investing activities (20,004,563) (15,793,808) (7,083,161)
Cash flows from financing activities
Net change in deposits 17,414,395 10,254,610 17,722,380
Net change in securities sold under agreements
to repurchase and other borrowings 1,790,671 5,298,109 (7,031,807)
Advances from Federal Home Loan Bank 4,000,000 - 400,000
Payments on Federal Home Loan Bank advances (7,282,789) (297,740) (8,937,095)
Proceeds from notes payable - 450,000 330,000