Back to GetFilings.com
1
UNITED STATES
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, 1999
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 number)
227 Main Street, P.O. Box 868, Evansville, IN 47705-0868
(Address of principal executive officers) (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. [ ]
Based on the closing sales price of March 1, 2000, the aggregate market value of
the voting stock held by non-affiliates of the registrant was approximately
$368,703,000.
The number of shares outstanding of the registrant's common stock was 17,480,117
at March 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2000 Annual Meeting of
Shareholders. (Part III)
2
NATIONAL CITY BANCSHARES, INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
PAGE
NUMBER
PART I
Item 1. Business 3
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 11
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30
Item 8. Financial Statements and Supplementary Data 31
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures 67
PART III
Item 10. Directors and Executive Officers of the Registrant 67
Item 11. Executive Compensation 67
Item 12. Security Ownership of Certain Beneficial Owners and Management 67
Item 13. Certain Relationships and Related Transactions 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 68
Signatures
2
3
FORM 10-K
NATIONAL CITY BANCSHARES, INC.
December 31, 1999
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, the Corporation owns 100% of six national banks, and six
state chartered banks (each, a "Bank" and, collectively, the "Banks") operating
from a total of sixty-six 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. The Federal Deposit Insurance Corporation
("FDIC") insures all depositors individually up to $100,000.
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 four floors of the
building and the remaining floors have been sold or leased as condominiums. TSTC
serves in a property management capacity for this facility.
At December 31, 1999, the Corporation and its subsidiaries had 833 full-time
equivalent employees. The subsidiaries provide a wide range of employee benefits
and management considers employee relations to be excellent.
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 non-bank 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 System ("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 Office of 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 other depository
institution subsidiaries are supervised and regulated primarily by their state
banking supervisor and the Federal Deposit Insurance Corporation ("FDIC") or, in
the case of state member banks, the FRB. 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
3
4
circumstances) if any one or more of a number of circumstances exist, including,
without limitation, the banking institution becoming undercapitalized and having
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.
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 non-bank 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.
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.
4
5
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, 1999, and each Bank qualified as
well capitalized under the regulatory framework for prompt corrective action.
See Item 8, footnote 15.
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"). 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 subsidiary bank is currently
assessed at the most favorable 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.
Gramm-Leach-Bliley Act
On November 12, 1999, the Gramm-Leach-Bliley Act ("Act") was signed into law,
breaking down the last remaining barriers to full convergence of the banking,
securities, and insurance industries. The major provisions of the Act took
effect on March 12, 2000.
The Act enables a broad-scale consolidation among banks, securities firms, and
insurance companies by creating a new type of financial services company called
a "financial holding company," a bank holding company with dramatically expanded
powers. Financial holding companies can offer virtually any type of financial
service, including banking, securities underwriting, insurance (both agency and
underwriting), and merchant banking. Activities that U. S. banking organizations
are currently permitted to conduct both domestically and overseas can be
conducted by financial holding companies domestically (they include a broad
range of financial activities, including operating a travel agency). In
addition, the Act permits the Federal Reserve and the Treasury Department to
authorize additional activities for financial holding companies, but only if
they jointly determine that such activities are "financial in nature" or
"complementary to financial activities."
The FRB serves as the primary "umbrella" regulator of financial holding
companies, with jurisdiction over the parent company and more limited oversight
over its subsidiaries. The primary regulator of each subsidiary of a financial
holding company depends on the activities conducted by the subsidiary. A
financial holding company need not obtain FRB approval prior to engaging, either
de novo or through acquisitions, in financial activities previously determined
to be permissible by the FRB. Instead, a financial holding company need only
provide notice to the FRB within 30 days after commencing the new activity or
consummating the acquisition.
The Corporation is currently contemplating whether to become a financial holding
company.
5
6
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.
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.
6
7
EXECUTIVE OFFICERS OF THE CORPORATION
Certain information concerning the Executive Officers of the Corporation as of
March 1, 2000, is set forth in the following table.
NAME AGE OFFICE AND BUSINESS EXPERIENCE
- ------------------------- ------- ------------------------------------------------------------------
Michael T. Vea 41 Chairman of the Board, President, and Chief Executive Officer of
the Corporation (January 2000 to present); Chairman of the Board
and Chief Executive Officer of the Corporation (September 1999
to January 2000); President and Chief Executive Officer, Bank
One, Cincinnati, Inc. (1995-1999).
James E. Adams 55 Executive Vice President, Chief Financial Officer, and Secretary
of the Corporation (December 1999 to present); Executive Vice
President and Chief Financial Officer, Mainstreet Financial
Corporation (1994-1999).
John A. Crumrine 53 Executive Vice President, Retail Manager of the Corporation
(December 1999 to present); Retail Market Manager, Bank One,
Lexington, Inc. (1996-1999); Executive Vice President - Retail
Manager, Bank One, Cincinnati, Inc. (1991-1996).
D. Michael Kramer 41 Executive Vice President, Chief Technology and Operations
Manager of the Corporation (December 1999 to Present); President
and Chief Operating Officer, Target Media (1996 to 1999); Senior
Vice President and Manager of Financial Institutions Division,
Star Bank, N.A. (1990-1996).
Curtis D. Ritterling 43 Executive Vice President - Credit Risk Manager of the
Corporation (September 1999 to present); Executive Vice
President of the Corporation (1997 to 1999); Agriculture Task
Force (Missouri), Nations Bank, (1996 to 1997); Chairman,
President, and Chief Executive Officer, Boatmen's Bank of
Marshall (1990 to 1995).
7
8
ITEM 2. PROPERTIES
The net investment of the Corporation and its subsidiaries in real estate and
equipment at December 31, 1999, was $45.4 million. The Corporation's offices are
located at 227 Main Street in downtown Evansville, Indiana, in a building owned
by TSTC. The Banks, all branches, the leasing company, and the real estate
property management 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 $18.0 million. NCB and the Corporation occupy four floors of
the building and the other floors have been sold or leased to third parties. The
Corporation's share of the building cost was approximately $10.0 million. 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.
8
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Corporation's common stock is traded on the Nasdaq Stock Market 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.
RANGE OF STOCK PRICE
-------------------- DIVIDENDS
QUARTER LOW HIGH DECLARED
- -------------------------------------------------------------
1998
- -------------------------------------------------------------
1st $34.92 $41.27 $0.1633
2nd 33.56 40.82 0.1633
3rd 29.71 36.85 0.1633
4th 32.43 37.26 0.1905
1999
- -------------------------------------------------------------
1st $22.86 $36.19 $0.1905
2nd 23.10 33.33 0.1905
3rd 22.80 32.26 0.1905
4th 23.33 29.88 0.2100
The Corporation has historically paid 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 March 1, 2000, there were approximately 2,918 holders of record of common
stock.
9
10
ITEM 6. SELECTED FINANCIAL DATA
As Of And For The Year Ended December 31,
(Dollar Amounts Other Than Share Data in Thousands) 1999 1998 1997 1996 1995
FOR THE YEAR
Net interest income $ 89,817 $ 87,897 $ 81,338 $ 75,618 $ 69,203
Provision for loan losses 12,497 7,143 2,703 3,705 780
Noninterest income 13,639 16,621 14,102 12,437 10,472
Noninterest expense 60,406 67,289 53,498 48,096 45,953
- ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 30,553 30,086 39,239 36,254 32,942
Income taxes 7,909 7,970 11,071 11,541 11,047
Net income 22,644 22,116 28,168 24,713 21,895
Proforma C Corp. provision for income taxes 7,909 8,632 11,765 11,541 11,047
- ------------------------------------------------------------------------------------------------------------------------------------
Proforma net income $ 22,644 $ 21,454 $ 27,474 $ 24,713 $21,895
PER COMMON SHARE*
Proforma net income per share
Basic $ 1.28 $ 1.22 $ 1.57 $ 1.41 $ 1.23
Diluted 1.27 1.21 1.56 1.41 1.23
Book Value 12.73 12.34 12.02 10.99 10.78
Cash dividends declared by
National City Bancshares, Inc. 0.78 0.68 0.58 0.50 0.36
TOTAL AT YEAR-END
Total assets $ 2,203,477 $ 2,195,224 $ 1,985,178 $ 1,816,935 $ 1,689,120
Securities** 332,359 365,841 424,963 413,604 402,215
Loans, net 1,675,678 1,629,853 1,387,105 1,242,152 1,128,056
Deposits 1,694,661 1,734,585 1,532,804 1,455,356 1,375,318
Shareholders' equity 223,088 218,280 211,237 188,003 183,885
SELECTED FINANCIAL RATIOS
Proforma net income to average assets 1.05% 0.99% 1.44% 1.42% 1.36%
Proforma net income to average equity 9.90 9.86 13.95 13.11 12.43
Cash dividends payout 60.94 55.73 36.94 35.46 29.27
Average equity to average assets 10.62 10.08 10.30 10.82 10.94
OTHER DATA
Weighted average shares - basic* 17,701,235 17,602,440 17,458,199 17,558,356 17,759,073
Weighted average shares - diluted* 17,794,188 17,719,649 17,602,483 17,576,201 17,773,138
Shares outstanding at year-end* 17,518,117 17,687,818 17,581,723 17,102,790 17,064,683
Average assets $ 2,154,168 $ 2,158,314 $ 1,911,525 $ 1,741,476 $ 1,611,084
Average equity 228,740 217,524 196,909 188,490 176,179
Dividends 13,807 12,813 10,074 8,488 6,017
* Restated to reflect all stock dividends and the two-for-one stock split in
1996.
** 1996 and 1995 do not include nonmarketable equity securities.
10
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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.
Unless otherwise noted all dollar amounts other than per share data are in
thousands (000's).
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
effectively implement the Corporation's strategic plan; 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; and competition.
11
12
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. The Corporation has twelve wholly-owned banking
subsidiaries, including six national banks and six state chartered banks, with a
total of sixty-six banking centers serving fifty-three communities. The
Corporation also has a leasing corporation, a real estate 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:
BANKING SUBSIDIARIES
Number of Year Date of Affiliation 12/31/99 (millions)
Home Office and Other Cities Offices Founded with the Corporation Assets Equity
- ----------------------------------------------------------------------------------------------------------------------------
The National City Bank of Evansville 22 1850 May 6, 1985 $933 $ 78
Evansville, Newburgh, Ft. Branch, Princeton,
Mt. Vernon, Dale, Chrisney, Grandview, Rockport,
Hatfield, Petersburg, Arthur, Vincennes,
Washington, and Odon, IN and Grayville, IL
First Kentucky Bank 9 1916 November 30, 1990 228 26
Sturgis, Morganfield, Poole, Mayfield, Uniontown,
Leitchfield, Hardinsburg, and Princeton, KY
The Bank of Mitchell 4 1882 December 17, 1993 64 7
Mitchell, Bedford, and Paoli, IN
White County Bank 1 1904 June 30, 1995 58 5
Carmi, IL
Bank of Illinois, National Association 3 1902 August 31, 1996 190 35
Mt. Vernon, and Wayne City, IL
First National Bank of Bridgeport 1 1906 August 1, 1997 39 11
Bridgeport, IL
First Bank of Huntingburg 3 1907 December 31, 1997 104 10
Huntingburg and Ferdinand, IN
Illinois One Bank, National Association 5 1934 May 31, 1998 129 13
Shawneetown, Elizabethtown, Golconda,
Vienna, and Brookport, IL
Trigg County Farmers Bank 3 1890 August 31, 1998 93 8
Cadiz, KY
Community First Bank, National Association 8 1847 August 31, 1998 163 16
Maysville, Mays Lick, Mt. Olivet,
Warsaw, Dry Ridge, and Crittenden, KY
and Ripley and Aberdeen, OH
Ripley County Bank 3 1887 October 1, 1998 105 10
Osgood, Versailles, and Milan, IN
The Progressive Bank, National Association 4 1866 December 1, 1998 154 14
Lexington, Lawrenceburg, and Owingsville, KY
In 1998, 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 1999, Princeton Federal Savings Bank and First Federal Savings Bank of
Leitchfield were merged into First Kentucky Bank and Community First Bank of
Kentucky was merged into Community First Bank, N.A.
During 1999 the Corporation's Board of Directors approved a new strategic plan.
Part of this plan is to combine the existing twelve subsidiary banks into one
bank. Regulatory approval is expected in the second quarter of 2000 and the
costs associated with this are discussed further in the Financial Review section
in Management's Discussion and Analysis.
12
13
BUSINESS DESCRIPTION (continued)
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 depositors are insured
up to $100,000 by the Federal Deposit Insurance Corporation.
The Corporation has not made any acquisitions during 1999; however management
evaluates acquisition opportunities as they arise. The Corporation has devoted
significant resources in 1999 to integrating recently acquired institutions and
completing consolidation of back office operations.
The following table summarizes acquisitions made by the Corporation during 1998
and 1997. Assets acquired are measured as of the date of each acquisition.
Date Accounting Assets Resulting
Entity Acquired Method Acquired Intangible Assets
- ----------------------------------------------------------------------------------------------------------------------------
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 -
13
14
FINANCIAL CONDITION
Total assets at December 31, 1999, were $2,203,477, compared to $2,195,224 at
December 31, 1998. Deposits decreased $39,924 from $1,734,585 at December 31,
1998 to $1,694,661 at December 31, 1999. Shareholders' equity increased from
$218,280 at December 31, 1998, to $223,088 at December 31, 1999. During 1999,
book value per share increased by $0.39 to $12.73 and resulted in a ratio of
average equity capital to average assets of 10.62%.
Average earning assets for 1999 remained relatively flat. During 1999 average
total securities decreased $77,822, or 18.4%; average loans increased $91,097,
or 5.9%; average federal funds sold decreased $11,741, or 48.0%; and time
deposits in banks decreased $3,663 or 76.6%.
Average certificate of deposit and other time deposit balances decreased by
$39,643, or 4.2%, in 1999. During 1999, average balances of money market
accounts increased $4,296, or 3.8%; savings and interest bearing checking
accounts increased $21,543, or 5.2%; and average federal funds purchased and
securities sold under agreements to repurchase increased $6,120, or 10.6%. Also
during 1999, average other borrowings increased $12,393, or 8.0%, and average
noninterest-bearing deposits decreased $14,485, or 6.8%.
SECURITIES PORTFOLIO
Total average securities comprised 17.2% of the 1999 average earning assets
compared to 21.1% and 24.0% in 1998 and 1997, respectively. They represent the
second largest earning asset component after loans. The Corporation holds
various types of securities, including mortgage-backed securities. Inherent in
mortgage-backed securities is prepayment risk, which occurs when borrowers
prepay their obligations due to market fluctuations and rates. In an effort to
reduce this risk, management monitors the amount of mortgage-backed securities
contained in the portfolio.
SECURITIES PORTFOLIO Carrying Value at December 31,
---------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Debt Securities:
U.S. Treasury securities $ 5,966 $ 15,200 $ 27,991
U.S. Government agencies 67,410 53,167 67,977
Taxable municipals 2,607 3,158 3,727
Tax-exempt municipals 181,998 196,322 203,183
Corporate securities 8,682 8,871 10,569
Mortgage-backed securities 45,283 65,737 93,449
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 311,946 342,455 406,896
Equity securities 1,853 4,059 2,173
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 313,799 $ 346,514 $ 409,069
==================================================================================================================================
MATURITY ANALYSIS After 1 Year After 5 Years
December 31, 1999 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
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 5,031 5.99% $ 834 7.10% $ 101 7.12% $ - - $ 5,966 6.17%
U.S. Government agencies 15,695 5.71% 49,342 6.12% 2,373 6.73% - - 67,410 6.05%
Taxable municipals 374 8.08% 1,987 6.72% 85 7.75% 161 8.25% 2,607 7.04%
Tax-exempt municipals 18,152 7.69% 62,614 7.44% 37,623 7.53% 63,609 8.19% 181,998 7.75%
Corporate securities - - 8,109 6.32% 573 12.01% - - 8,682 6.70%
- ------------------------------------------------------------------------------------------------------------------------------------
Total maturing securities $39,252 6.68% $122,886 6.82% $40,755 7.55% $63,770 8.19% 266,663 7.24%
===============================================================================================================
Mortgage-backed securities 45,283 6.16%
Equity securities 1,853 6.80%
--------------------
Total securities $313,799 7.08%
====================
14
15
LOANS
Each subsidiary bank follows centralized credit administration and loan policies
ratified 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 23.2% commercial loans, 66.0% loans secured
by real estate, and 10.8% consumer loans at December 31, 1999.
The Corporation's subsidiary banks lend to customers in various industries
including manufacturing, agricultural, health and other services,
transportation, mining, wholesale, and retail.
During 1999 total net loans increased $52,537, or 3.2%, with commercial and
industrial loans decreasing $58,653, or 12.9%, loans secured by real estate
increasing $157,905, or 16.4%, and consumer loans decreasing $58,131, or 26.0%.
Moderate loan demand drove the increase in total loans. The change in categories
resulted from the Corporation re-coding loan types to reflect their proper
security classification. The Corporation's guidelines for residential mortgage
lending were followed and advances normally did not exceed 80% of appraised
value.
LOAN PORTFOLIO AT YEAR END, FIVE-YEAR SUMMARY
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Real estate loans $1,122,398 $ 964,493 $ 801,611 $ 710,250 $ 686,513
Commercial, industrial, and
agricultural loans 355,485 415,579 363,727 325,691 254,206
Economic development loans and
other obligations of state and
political subdivisions 22,331 19,780 15,492 12,260 10,618
Consumer loans 165,246 223,377 198,615 192,475 180,921
Direct lease financing 11,598 12,988 13,146 12,336 6,975
Leveraged leases 5,382 5,102 4,661 -- --
All other loans 18,937 7,606 5,017 3,154 1,625
- --------------------------------------------------------------------------------------------------------------------------
Total loans 1,701,377 1,648,925 1,402,269 1,256,166 1,140,858
Less: unearned income 544 629 1,310 1,475 1,865
- --------------------------------------------------------------------------------------------------------------------------
Loans - net of unearned income $1,700,833 $1,648,296 $1,400,959 $1,254,691 $1,138,993
==========================================================================================================================
Allowance for loan losses $ 25,155 $ 18,443 $ 13,854 $ 12,539 $ 10,937
==========================================================================================================================
At December 31, 1999, there was no concentration of credit risk from borrowers
engaged in the same or similar industries exceeding 10% of total loans. However,
agriculture loans were 8.1% of total loans outstanding at year end. 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.
15
16
LOANS
(continued)
LOAN MATURITIES AND RATE SENSITIVITIES AT DECEMBER 31, 1999
ON AGRICULTURAL, COMMERCIAL, AND TAX-EXEMPT LOANS
After 1 Year
Within But Within Over
Rate sensitivities: 1 Year 5 Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------
Fixed rate loans $ 30,805 $ 94,028 $ 21,702 $146,535
Variable rate loans 220,909 1,922 90 222,921
- --------------------------------------------------------------------------------------------------------------
Subtotal $251,714 $ 95,950 $ 21,792 369,456
=====================================================================================
Percent of total 68.13% 25.97% 5.90%
Nonaccrual loans 8,360
--------
Total loans $377,816
========
NON-PERFORMING ASSETS
Non-performing assets consist of defaulted municipal securities, nonaccrual
loans, restructured loans, loans past due 90 days or more, and other real estate
owned. Defaulted municipal 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 non-performing 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.
Nonaccrual, restructured and past due loans were 2.1% and 0.7% of total loans at
the end of 1999 and 1998, respectively. Additional interest income that would
have been recorded, if nonaccrual and restructured loans had been current in
accordance with their original terms, was $1,093, $646, and $390 in 1999, 1998,
and 1997, respectively. The interest recognized on nonaccrual loans was
approximately $31, $130, and $83 in 1999, 1998, and 1997, respectively.
In addition to those loans classified as non-performing, management was
monitoring loans of approximately $73,460 and $56,309 as of the end of 1999 and
1998, respectively, for the borrowers' abilities to comply with present loan
repayment terms. All impaired loans discussed in Note 6 to the financial
statements in this report are included in non-performing or closely monitored
loans.
NON-PERFORMING ASSETS AT YEAR END, FIVE-YEAR SUMMARY
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
Non-performing loans:
Nonaccrual $32,025 $ 9,782 $ 6,184 $ 3,717 $ 2,520
Restructured 1,275 374 293 481 220
90 days past due 1,629 1,610 2,011 2,264 2,125
- ----------------------------------------------------------------------------------------------------------
Total non-performing loans 34,929 11,766 8,488 6,462 4,865
Defaulted municipal securities - - 61 31 -
Other real estate owned 936 715 180 215 597
- ----------------------------------------------------------------------------------------------------------
Total non-performing assets $35,865 $12,481 $ 8,729 $ 6,708 $ 5,462
==========================================================================================================
16
17
NON-PERFORMING ASSETS (continued)
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.
CREDIT MANAGEMENT
The allowance for loan losses is that amount which, in management's opinion, is
adequate to absorb estimated loan losses as determined by management's periodic
evaluation of the loan portfolio. The evaluation by management is based upon
consideration of various factors including growth of the portfolio, an analysis
of individual credits, adverse situations that could affect a borrower's ability
to repay, prior and current loss experience, the results of recent regulatory
examinations and economic conditions. Loans that are deemed to be uncollectible
are charged to the allowance, while recoveries of previously charged off amounts
are credited to the allowance. A provision for loan losses is charged to
operations based on management's periodic evaluation of the factors previously
mentioned as well as any other pertinent factors.
The allowance is based on ongoing quarterly assessments of the probable
estimated losses inherent in the loan and lease portfolios. The Corporation's
methodology for assessing the appropriate reserve level consists of several key
elements.
Larger commercial loans that exhibit potential or observed weaknesses are
subject to individual review. Where appropriate, an allocation is made to the
allowance for individual loans based on management's estimate of the borrowers'
ability to repay the loan given the availability of collateral, other sources of
cash flow and legal options available to the Corporation.
Included in the review of individual loans are those that are impaired as
provided in Statement of Financial Accounting Standards No. 114. 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
allowance established for impaired loans is determined based on the fair value
of the investment measured using either the present value of expected cash flows
based on the initial effective interest rate on the loan or the fair value of
the collateral if the loan is collateral dependent.
Historical loss ratios are applied to other commercial loans not subject to
specific allowance allocations.
Homogeneous loans, such as consumer installment and residential real estate
loans, are not individually risk graded. An allowance is established for each
pool of loans based upon historical loss ratios. Loss rates are based on the
average net charge-off history by loan category.
The unallocated portion of the allowance is determined based on management's
assessment of economic conditions and specific economic factors in the
individual markets in which the Corporation operates. The unallocated portion of
the allowance is maintained to recognize the imprecision in estimating and
measuring loss when evaluating the allowance for pools of loans.
The provision for loan losses is the amount necessary to adjust the allowance
for loan losses to an amount that is adequate to absorb estimated loan losses as
determined by management's periodic evaluations of the loan portfolio. This
evaluation by management is based upon consideration of actual loss experience,
changes in composition of the loan portfolio, evaluation of specific borrowers
and collateral, current economic conditions, trends in past-due and non-accrual
loan balances and the results of recent regulatory examinations.
The provision for loan losses totaled $12.5 million in 1999, an increase of $5.4
million over the $7.1 million provided in 1998. During the fourth quarter of
1999, management centralized the process for evaluating the adequacy of the
allowance for loan losses. As part of this process, and also in response to
unfavorable trends in delinquencies and non-performing assets, the Corporation
performed an extensive credit risk assessment of the Corporation's loan
portfolio. The results of this assessment revealed the need to increase the
allowance for loan losses. Accordingly, the Corporation recorded a provision for
loan losses of $9.2 million in the fourth quarter. At the end of 1999 the
allowance for loan losses as a percentage of loans was 1.48% compared to 1.12%
in 1998. During 1999 the Corporation's ratio of net charge-offs to average loans
was 35 basis points compared to 23 basis points in 1998. The allowance for loan
losses to non-performing loans at December 31 was 72.0% in 1999 and 156.8% in
1998.
17
18
CREDIT MANAGEMENT (continued)
SUMMARY OF LOAN AND LEASE LOSS EXPERIENCE (ANALYSIS OF THE ALLOWANCE FOR LOAN
AND LEASE LOSSES)
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, January 1 $ 18,443 $ 13,854 $ 12,539 $ 10,937 $ 10,404
Allowance associated with purchase acquisitions - 1,086 516 379 140
Loans charged-off:
Commercial 1,859 875 763 1,129 619
Real estate mortgage 2,539 687 505 634 136
Consumer 3,256 3,411 1,867 1,536 723
Direct lease financing 10 42 8 74 11
- -----------------------------------------------------------------------------------------------------------------------------------
Total 7,664 5,015 3,143 3,373 1,489
Recoveries on charged-off loans:
Commercial 534 307 367 172 549
Real estate mortgage 251 541 424 302 249
Consumer 1,094 516 448 412 304
Direct lease financing - 11 - 5 -
- -----------------------------------------------------------------------------------------------------------------------------------
Total 1,879 1,375 1,239 891 1,102
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 5,785 3,640 1,904 2,482 387
Provision for loan losses 12,497 7,143 2,703 3,705 780
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses, December 31 $ 25,155 $ 18,443 $ 13,854 $ 12,539 $ 10,937
===================================================================================================================================
Total loans at year end $ 1,700,833 $ 1,648,296 $ 1,400,959 $ 1,254,691 $ 1,138,993
Average loans 1,647,210 1,556,113 1,338,131 1,207,403 1,071,206
As a percent of year-end loans:
Net charge-offs 0.34 % 0.22 % 0.14 % 0.20 % 0.03 %
Provision for loan and lease losses 0.73 0.43 0.19 0.30 0.07
Year-end allowance balance 1.48 1.12 0.99 1.00 0.96
As a percent of average loans:
Net charge-offs 0.35 % 0.23 % 0.14 % 0.21 % 0.04 %
Provision for loan and lease losses 0.76 0.46 0.20 0.31 0.07
Year-end allowance balance 1.53 1.19 1.04 1.04 1.02
Allowance for loan and lease losses as a percent
of underperforming loans 72.02 % 156.75 % 163.22 % 194.04 % 224.81 %
Total underperforming loans $ 34,929 $ 11,766 $ 8,488 $ 6,462 $ 4,865
ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES AT DECEMBER 31
Allowance Applicable to Percent of Loans to Total Gross Loans
- ------------------------------------------------------------------------------------------------------------------------------------
Loan Type 1999 1998 1997 1996 1995 1999 1998 1997 1996 1995
Commercial $ 7,252 $ 6,037 $ 4,861 $ 4,137 $ 4,044 22% 27% 28% 27% 23%
Real estate mortgage 9,291 3,656 3,689 3,632 3,300 66% 58% 57% 57% 60%
Leases 3,230 97 21 - - 1% 1% 1% 1% 1%
Consumer 3,217 5,461 2,842 2,321 1,792 11% 14% 14% 15% 16%
- ---------------------------------------------------------------------------------- ------------------------------------------------
Allocated 22,990 15,251 11,413 10,090 9,136 100% 100% 100% 100% 100%
================================================
Unallocated 2,165 3,192 2,441 2,449 1,801
- ----------------------------------------------------------------------------------
Total $25,155 $18,443 $13,854 $12,539 $10,937
==================================================================================
18
19
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
decreased $28,289, or 1.7%, during 1999, compared to an increase of $181,385, or
12.0%, during 1998. Of the increase in 1998, $136,628, or 75.3%, was due to
purchase acquisitions. Average time deposits of $100,000 or more increased
$6,512, or 2.9%, in 1999, compared to $23,851, or 11.9%, in 1998. The
Corporation had $198 in brokered deposits as of December 31, 1999 and 1998. Time
deposits of $100,000 or more are not considered to present an undue risk.
AVERAGE DEPOSITS
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing demand $ 212,906 - $ 227,391 - $ 184,211 -
Money market accounts 116,681 3.81% 112,385 3.91% 117,758 3.46%
Interest-bearing demand 266,991 1.97% 252,201 2.31% 216,365 2.26%
Savings 171,769 2.87% 165,016 2.83% 144,211 2.62%
Time deposits of $100,000 or more 231,110 5.31% 224,598 5.58% 200,747 5.28%
Other time deposits 670,152 5.01% 716,307 5.37% 653,221 5.39%
- ------------------------------------------------------------------------------------------------------------------------------------
Total average deposits $ 1,669,609 $ 1,697,898 $ 1,516,513
====================================================================================================================================
TIME DEPOSITS OF $100,000 OR MORE AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Maturing:
3 months or less $ 110,801
Over 3 to 6 months 82,723
Over 6 to 12 months 62,294
Over 12 months 34,453
- --------------------------------------------------------------------------------
Total $ 290,271
================================================================================
CAPITAL RESOURCES
At the end of 1999, shareholders' equity totaled $223,088, an increase of
$4,808, or 2.2%, from 1998. The average equity to average asset ratio was 10.6%
and 10.1% for 1999 and 1998, respectively. The dividend payout ratio for 1999
was 60.9%, compared to 55.7% in 1998.
As of December 31, 1999, there were no material commitments for capital
expenditures.
Guidelines for minimum capital levels have been established for the Corporation
by the FRB. 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 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 10.47% and 10.12%; Tier 1
capital to risk-weighted assets was 13.78% and 13.51%; and total capital to
risk-weighted assets was 15.04% and 14.65% at the end of 1999 and 1998,
respectively. In addition, each subsidiary bank exceeded minimum regulatory
capital guidelines during 1999 and 1998.
19
20
SHORT-TERM BORROWINGS
Federal funds purchased are borrowings from other financial institutions that
mature daily. Securities sold under agreements to repurchase are secured
transactions with customers. Securities sold under agreements to repurchase
generally mature within six months. Notes payable U.S. Treasury are demand notes
created by treasury tax and loan account funds transfers. Short-term borrowings
increased $56,607, or 169.6%, during 1999. At December 31, 1999, the Corporation
had federal funds purchased of $59,000 and had no federal funds purchased at
December 31, 1998.
Securities sold under agreements to repurchase and notes payable U.S. Treasury
decreased during 1999 by $2,393, or 7.2%, and increased by $7,343, or 28.2%, in
1998. 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,
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased $ 59,000 $ - $ 56,000
Securities sold under agreements to repurchase 30,984 33,382 20,123
Notes payable U.S. Treasury 5 - 5,916
- -------------------------------------------------------------------------------------------------------------------------------
Total $ 89,989 $ 33,382 $ 82,039
===============================================================================================================================
Securities
Sold Under Notes
Federal Agreements Payable
Funds to U.S.
Purchased Repurchase Treasury
- -------------------------------------------------------------------------------------------------------------------------
1999
Average amount outstanding $ 32,296 $ 31,446 $ 1
Maximum amount at any month end 82,500 30,984 5
Weighted average interest rate:
During the year 5.01% 4.07% -
End of year 6.09% 4.18% -
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 the 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 the year 5.57% 4.18% 5.36%
End of year 6.77% 4.79% 5.25%
20
21
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. 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, 1999 and 1998,
respectively, federal funds sold were $748 and $10,431, interest-bearing
deposits in banks were $-0- and $142, and U.S. Government and agency securities
available for sale were $73,376 and $68,367.
These sources and other liquid assets also satisfy long-term liquidity needs.
Long-term liquidity is managed in the same way, only with longer maturities, to
provide for future needs while maintaining interest margins. In 1998, 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, 1999, the
Corporation had $290,607 in unused Federal Funds and Federal Home Loan Bank
lines. The Corporation's trust securities affiliate issued $34,500 in Trust
Preferred Securities in 1998, primarily, to fund the purchase of a subsidiary
bank and a branch.
The Corporation has guaranteed debt of non-banking subsidiaries totaling $20,027
to Northern Trust Company and Norlease, Inc. At December 31, 1999, the
Corporation was in default of a financial covenant to Northern Trust Company and
Norlease, Inc. requiring that the Corporation maintain, on a consolidated basis,
a ratio of the allowance for loan losses to non-performing loans of not less
than 100%. The Corporation received a waiver, dated March 28, 2000, of this
covenant until June 30, 2000. The corporation intends to seek additional waivers
of the covenant and/or use additional sources of cash and/or debt financing to
refinance the debt if additional waivers cannot be obtained.
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. Conversely, 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 cause fluctuations in the current fair market 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, 1999, 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.
21
22
INTEREST RATE SENSITIVITY (Continued)
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.
Estimated Increase Estimated Increase
(Decrease) in EVE (Decrease) in NII
Changes in Estimated ----------------------------- Estimated ------------------------
Interest Rates EVE Amount Amount Percent NII Amount Amount Percent
- ------------------------------------------------------------------------ --------------------------------------------
(Basis Points)
+200 $ 257,254 $(27,446) (9.6)% $97,920 $3,665 3.9%
- 284,700 - - 94,255 - -
-200 315,925 31,225 11.0 90,530 (3,725) (4.0)
22
23
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 currently 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,
1999 are discussed more thoroughly in Note 18 of the consolidated financial
statements.
Net income for 1999 was $22,644, reflecting a $1,190, or 5.5%, increase from
1998. Net income for 1998 decreased $6,020, or 21.9%, from 1997. Basic earnings
per share in 1999 were $1.28, compared to $1.22 in 1998 and $1.57 in 1997.
Increases in the mix of earning assets resulted in growth of net interest income
of $1,920, or 2.2%, in 1999 and $6,559, or 8.1%, in 1998. Noninterest income,
excluding securities gains, decreased $400, or 2.6% in 1999, compared to an
increase of $2,162, or 16.3%, in 1998. Noninterest expenses decreased $6,883, or
10.2%, in 1999 and increased $13,791, or 25.8% in 1998. Decreases in noninterest
expenses in 1999 were primarily due to expenses associated with consolidation of
the Corporation's back office operations and acquisition activity during 1998.
The provision for loan losses increased $5,354, or 75.0%, in 1999 and $4,440, or
164.3%, in 1998.
During the fourth quarter of 1999, the Corporation incurred the following
charges related to a new strategic plan and credit risk assessment of the loan
portfolio; $7,800 additional provision for loan and lease losses; $350 of
severance pay; $469 of service contract buyout fees; and $699 of impairment
losses on the equity security portfolio written down to market.
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.
23
24
FINANCIAL REVIEW (Continued)
CHANGES IN NET INTEREST INCOME (INTEREST ON A FEDERAL-TAX-EQUIVALENT BASIS)
1999 Compared to 1998 1998 Compared to 1997
--------------------------------------------- ----------------------------------------------
Change Due to Change Due to
a Change in a Change in
----------------------------------- -----------------------------------
Rate/ Total Rate/ Total
Interest income increase (decrease) Volume Rate Volume Change Volume Rate Volume Change
--------------------------------------------- ----------------------------------------------
Loans $ 8,344 $ (5,542) $ (324) $ 2,478 $ 20,071 $ (650) $ (105) $ 19,316
Securities (5,496) 845 (156) (4,807) (891) 60 (3) (834)
Other short-term investments (706) (266) 140 (832) 232 (182) (32) 18
====================================================================================================================================
Total interest income 2,142 (4,963) (340) (3,161) 19,412 (772) (140) 18,500
Interest expense increase (decrease)
Deposits (619) (4,830) 46 (5,403) 6,063 1,252 130 7,445
Borrowings 1,133 (49) (4) 1,080 2,397 333 79 2,809
====================================================================================================================================
Total interest expense 514 (4,879) 42 (4,323) 8,460 1,585 209 10,254
====================================================================================================================================
Net interest income increase (decrease) $ 1,628 $ (84) $ (382) $ 1,162 $ 10,952 $ (2,357) $ (349) $ 8,246
====================================================================================================================================
The following discussion of results of operations is on a federal-tax-equivalent
basis. Average loans increased $91,097, or 5.9%, during 1999 compared to an
increase of $217,982, or 16.3%, during 1998. Approximately 37.7% of the growth
in average loans in 1998 was attributable to acquisitions accounted for as
purchases. Loan income increased 1.7% in 1999 and 15.7% in 1998, principally due
to increased loan volumes. The average yield on loans was 8.80% in 1999 and
9.16% in 1998.
24
25
Average securities before market value adjustments decreased by $73,928 in 1999
and decreased by $12,443 in 1998. Securities income decreased $4,806, or 16.1%,
in 1999 and decreased $834, or 2.7%, in 1998. The yield on securities increased
from 7.18% in 1998 to 7.33% in 1999. During 1999, volumes decreased on
securities. This decrease was the result of the use of proceeds from securities
maturities and sales to fund loan growth. Average earning assets decreased
$2,099, or 0.1%, in 1999 and increased $216,270, or 12.1%, in 1998. Purchase
acquisitions accounted for 46.9% of the increase in 1998. The average yield on
total earning assets for 1999 was 8.50%, compared to 8.65% in 1998.
Average total interest-bearing deposits decreased 0.9% during 1999 and increased
10.4% during 1998. Purchase acquisitions accounted for all of the growth in
interest bearing deposits in 1998. The average cost of interest bearing deposits
was 4.15% in 1999 and 4.48% in 1998. Interest expense on federal funds purchased
and other borrowings increased $1,080 in 1999 and $2,809 in 1998. 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 1999 and 1998, net interest income increased $1,162 and $8,246, respectively.
Increases in volumes accounted for substantially all of the increase in 1999 and
1998.
The change in the mix of earning assets and a lower cost of funds in 1999 was
principally responsible for the increase in net interest income in 1999. The
principal reason for the increase in net interest income in 1998 was the
acquisitions made under the purchase method of accounting during that calendar
year.
NONINTEREST INCOME
Noninterest income, excluding gains or losses on securities transactions,
totaled $15.1 million in 1999 and $15.5 million in 1998.
Service charges, fees and other income decreased almost 4% from $13.3 million in
1998 to $12.8 million in 1999. Gains on sale of mortgage loans decreased
approximately $500 thousand or 69% compared to 1998 due to a decrease in the
volume of loans originated for sale in the secondary market. Trust income for
1999 was $2.3 million, an increase of 3% over 1998. Total trust assets under
management decreased $15 million from $439 million in 1998 to $424 million in
1999.
25
26
NONINTEREST INCOME (Continued)
Securities transactions resulted in losses of $1.4 million in 1999 versus gains
of $1.2 million in 1998. During the second quarter of 1999, a portion of the
portfolio of equity securities was sold at a loss of approximately $600,000. In
the fourth quarter of 1999, management changed its strategy concerning investing
in equity securities of other financial institutions and decided to divest its
holding of these securities. An additional $100,000 loss on sale was recognized
in the fourth quarter and the remainder of the portfolio was written down
approximately $699,000 due to its decline in value and management's intent to
sell the portfolio.
NONINTEREST EXPENSE
Noninterest expense for 1999 totaled $60.4 million, a decrease of $6.9 million
or 10% compared to the prior year.
Salaries and employee benefits for 1999 were $29.5 million down $2.4 million or
7% from the 1998 total of $31.9. Salary expense in 1998 included approximately
$1.6 million in severance and merger related employment expenses. During 1999,
the Corporation incurred additional employment related expenses of approximately
$1.2 million related to personnel changes associated with changes to the
organizational structure. In addition, in 1999 the Corporation realized a gain
of $877,000 on the termination of its defined benefit pension plan, which
reduced employment expenses. Excluding the additional employment expenses in
1999 and the pension settlement gain in 1999, salaries and employee benefit
costs decreased approximately 8%.
Equipment costs totaled $4.0 million in 1999, decreasing 15% from the 1998
level. The decrease in equipment costs was primarily attributable to the
consolidation of back office operations in 1998 and 1999, which resulted in the
elimination of duplicate equipment used in data processing and operational
functions.
Other noninterest expenses were $23.3 million in 1999, increasing $2.8 million,
or 14%, from the prior year. Included in other expense for 1999 was
approximately $1.0 million in pre-tax operating losses related to the
Corporation's investment in low-income housing projects (LIHPs). Income tax
expense includes the related income tax benefit and tax credits from the LIHPs
totaling $1.6 million. Other expenses for 1999 also included $800,000 in
expenses associated with organizational restructuring. Excluding the LIHP and
organizational restructuring expenses in 1999 and the acquisition and
consolidation expenses in 1998, other expenses would have increased 5%.
26
27
In 1998, the Corporation incurred expenses associated with acquisitions and
consolidation of its back-office operations functions totaling $6.6 million. It
is anticipated that the Corporation, as part of the new strategic plan, will
incur additional costs of approximately $1.8 million during the year 2000
relating to costs associated with the name change to Integra and the combination
of the twelve banking subsidiaries. In addition, during the first quarter of
2000, the Corporation, as part of a new strategic plan, anticipates closing the
sale of the servicing rights on certain non-portfolio mortgages. The estimated
gain on the servicing rights sales will be approximately $1.3 million.
27
28
YEAR 2000
During 1999, management completed the process of preparing for the year 2000
date change. This process involved identifying and remediating date recognition
problems in computer system, software, and other operating equipment, working
with third parties to address their Year 2000 issues, and developing contingency
plans to address potential risks in the event of Year 2000 failure. To date, the
Corporation has successfully managed the transition.
Although considered unlikely, unanticipated problems in the Corporation's core
business processes, including problems associated with non-compliant third
parties and disruptions to the economy in general, could still occur despite
efforts to date to remediate affected systems and develop contingency plans.
Management will continue to monitor all business processes, including
interaction with the Corporation's customers, vendors, and other third parties,
throughout 2000 to address any issues and ensure all processes continue to
function properly.
Management expected total additional out-of-pocket expenditures incurred in year
2000 compliance to be approximately $500. This included fees to outside
consulting firms, costs to upgrade equipment specifically for the purpose of
year 2000 compliance, and certain administrative expenditures. Amounts were
expensed as incurred and are not considered material to the Corporation's
financial condition or results of operations. Since implementation of the year
2000 project, the Corporation has spent $382.
28
29
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
1999 1998
--------------------------------------- -------------------------------------
Average Interest Yield/ Average Interest Yield/
EARNING ASSETS: Balances & Fees Cost Balances & Fees Cost
--------------------------------------- -------------------------------------
Interest-bearing deposits in banks $ 1,112 $ 49 4.41% $ 4,745 $ 304 6.41%
Federal funds sold 12,725 460 3.61% 24,466 1,037 4.24%
Securities:
Taxable 154,195 9,677 6.28% 222,716 13,619 6.11%
Tax-exempt 187,620 15,377 8.20% 193,027 16,241 8.41%
- --------------------------------------------------------------------------------------------------------------------------
Securities before market value
adjustment 341,815 25,054 7.33% 415,743 29,860 7.18%
Market value adjustment on
securities available for sale 3,184 7,078
Total securities 344,999 422,821
Loans 1,647,210 145,006 8.80% 1,556,113 142,529 9.16%
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 2,006,046 $ 170,569 8.50% 2,008,145 $173,730 8.65%
=========== ==========
Non-earning assets 148,122 150,169
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,154,168 $ 2,158,314
==========================================================================================================================
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 438,760 $ 10,200 2.32% $ 417,217 $ 10,495 2.52%
Money market accounts 116,681 4,451 3.81% 112,385 4,391 3.91%
Certificates of deposit and other time 901,262 45,835 5.09% 940,905 51,003 5.42%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 1,456,703 60,486 4.15% 1,470,507 65,889 4.48%
Federal funds purchased and securities
sold under agreements to repurchase 63,743 2,898 4.55% 57,623 2,613 4.53%
Other borrowings 166,998 11,173 6.69% 154,605 10,378 6.71%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,687,444 $ 74,557 4.42% 1,682,735 $ 78,880 4.69%
=========== ==========
Noninterest-bearing liabilities and
shareholders' equity 466,724 475,579
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 2,154,168 $ 2,158,314
==========================================================================================================================
Interest income/earning assets $ 170,569 8.50% $173,730 8.65%
Interest expense/earning assets 74,557 3.71% 78,880 3.93%
==========================================================================================================================
Net interest income/earning assets $ 96,012 4.79% $ 94,850 4.72%
==========================================================================================================================
1997
--------------------------------------
Average Interest Yield/
EARNING ASSETS: Balances & Fees Cost
--------------------------------------
Interest-bearing deposits in banks $ 4,759 $ 231 4.85%
Federal funds sold 19,303 1,092 5.66%
Securities:
Taxable 245,590 15,838 6.45%
Tax-exempt 182,596 14,856 8.14%
- -----------------------------------------------------------------------------------
Securities before market value
adjustment 428,186 30,694 7.17%
Market value adjustment on
securities available for sale 1,496
Total securities 429,682
Loans 1,338,131 123,213 9.21%
- -----------------------------------------------------------------------------------
Total earning assets 1,791,875 $ 155,230 8.66%
===========
Non-earning assets 119,650
- -----------------------------------------------------------------------------------
TOTAL ASSETS $ 1,911,525
===================================================================================
INTEREST-BEARING LIABILITIES:
Savings and interest-bearing demand $ 360,576 $ 8,639 2.40%
Money market accounts 117,758 4,074 3.46%
Certificates of deposit and other time 853,968 45,731 5.36%
- -----------------------------------------------------------------------------------
Total interest-bearing deposits 1,332,302 58,444 4.39%
Federal funds purchased and securities
sold under agreements to repurchase 65,829 3,370 5.12%
Other borrowings 105,956 6,812 6.43%
- -----------------------------------------------------------------------------------
Total interest-bearing liabilities 1,504,087 $ 68,626 4.56%
===========
Noninterest-bearing liabilities and
shareholders' equity 407,438
- -----------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,911,525
===================================================================================
Interest income/earning assets $ 155,230 8.66%
Interest expense/earning assets 68,626 3.83%
===================================================================================
Net interest income/earning assets $ 86,604 4.83%
===================================================================================
Note: Income is on a federal-tax-equivalent basis using a 35% tax rate.
Average volume includes nonaccrual loans.
29
30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the discussion of Interest Rate Sensitivity in Item 7.
30
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
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, 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,
1999 and 1998, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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 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
$323,489,000 at December 31, 1997 and net income of $3,333,000. for the year
ended December 31, 1997. 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
auditing standards generally accepted in the United States, 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.
/s/ PricewaterhouseCoopers LLP
Lexington, KY
March 28, 2000
31
32
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
Consolidated Statements of Financial Position
(Dollar Amounts Other Than Share Data in Thousands)
December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 72,935 $ 67,389
Time deposits in banks - 142
Federal funds sold 748 10,431
Securities available for sale 313,799 346,514
Nonmarketable equity securities 18,560 19,327
Loans, net of unearned income 1,700,833 1,648,296
Less: Allowance for loan and lease losses (25,155) (18,443)
- --------------------------------------------------------------------------------------------------------------
Loans-net 1,675,678 1,629,853
Premises and equipment, net 45,393 46,399
Intangible assets 36,522 40,185
Other assets 39,842 34,984
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 2,203,477 $ 2,195,224
==============================================================================================================
LIABILITIES
Deposits:
Noninterest-bearing demand $ 207,782 $ 231,623
Interest-bearing:
Savings, daily interest checking, and money market accounts 546,846 567,112
Time deposits of $100,000 or more 290,271 237,138
Other time 649,762 698,712
- --------------------------------------------------------------------------------------------------------------
Total deposits 1,694,661 1,734,585
Short-term borrowings 89,989 33,382
Other borrowings 138,371 139,545
Guaranteed preferred beneficial interests
in the Corporation's subordinated debenture 34,500 34,500
Dividends payable 3,679 3,368
Other liabilities 16,409 21,521
- --------------------------------------------------------------------------------------------------------------
Total liabilities 1,977,609 1,966,901
COMMON STOCK OWNED BY ESOP(subject to put option) 2,780 10,043
SHAREHOLDERS' EQUITY
Preferred stock-1,000,000 shares authorized
None outstanding Common stock - $1.00 stated value:
12/31/99 12/31/98
---------- ----------
Shares authorized 29,000,000 29,000,000
Shares outstanding 17,518,117 16,842,456 17,518 16,842
Capital surplus 138,893 123,561
Retained earnings 71,299 83,536
Accumulated other comprehensive income (loss) (1,842) 4,436
Unearned employee stock ownership plan shares - (52)
Common stock owned by ESOP(subject to put option) (2,780) (10,043)
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 223,088 218,280
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,203,477 $ 2,195,224
==============================================================================================================
See Accompanying Notes to Consolidated Financial Statements.
32
33
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
Consolidated Statements of Income
(Dollar Amounts Other Than Share Data in Thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans:
Taxable $ 142,729 $ 139,832 $ 121,774
Tax-exempt 1,464 1,895 990
Interest and dividends on securities:
Taxable 9,677 13,619 15,838
Tax-exempt 9,995 10,090 10,039
Interest on federal funds sold 460 1,037 1,092
Interest on other investments 49 304 231
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 164,374 166,777 149,964
INTEREST EXPENSE
Interest on deposits 60,486 65,889 58,444
Interest on short-term borrowings 2,898 2,613 3,370
Interest on other borrowings 11,173 10,378 6,812
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 74,557 78,880 68,626
NET INTEREST INCOME 89,817 87,897 81,338
Provision for loan and lease losses 12,497 7,143 2,703
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 77,320 80,754 78,635
- --------------------------------------------------------------------------------------------------------------------------
NONINTEREST INCOME
Trust income 2,274 2,209 1,956
Service charges on deposit accounts 7,713 7,946 6,420
Other service charges and fees 4,168 3,859 2,841
Securities gains (losses) (1,422) 1,160 803
Other 906 1,447 2,082
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest income 13,639 16,621 14,102
NONINTEREST EXPENSE
Salaries, wages and other employee benefits 29,501 31,862 30,371
Occupancy expense 3,689 3,723 3,997
Furniture and equipment expense 3,960 4,637 2,992
Acquisition and consolidation expense - 6,649 344
Other 23,256 20,418 15,794
- --------------------------------------------------------------------------------------------------------------------------
Total noninterest expense 60,406 67,289 53,498
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 30,553 30,086 39,239
Income taxes 7,909 7,970 11,071
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 22,644 $ 22,116 $ 28,168
==========================================================================================================================
Proforma C Corporation provision for income taxes 7,909 8,632 11,765
- --------------------------------------------------------------------------------------------------------------------------
PROFORMA NET INCOME $ 22,644 $ 21,454 $ 27,474
==========================================================================================================================
Earnings per share:
Basic $ 1.28 $ 1.22 $ 1.57
Diluted 1.27 1.21 1.56
Weighted average shares outstanding:
Basic 17,701,235 17,602,440 17,458,199
Diluted 17,794,188 17,719,649 17,602,483
See Accompanying Notes to Consolidated Financial Statements.
33
34
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollar Amounts Other Than Share Data in Thousands)
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
Proforma net income $ 22,644 $ 21,454 $ 27,474
Other comprehensive income, net of tax:
Unrealized gain (loss) arising in period (7,124) 597 4,824
Reclassification of realized amounts 846 (696) (493)
- -------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss), recognized in other comprehensive income (6,278) (99) 4,331
- -------------------------------------------------------------------------------------------------------------------
Proforma comprehensive income $ 16,366 $ 21,355 $ 31,805
===================================================================================================================
Consolidated Statements of Cash Flows are continued on the following page.
See Accompanying Notes to Consolidated Financial Statements.
34
35
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollar Amounts Other Than Per Share Data in Thousands)
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,644 $ 22,116 $ 28,168
Adjustments to reconcile net income to
Net cash provided by operating activities:
Federal Home Loan Bank stock dividends (293) (122) (82)
Amortization and depreciation 8,094 7,259 4,161
Employee benefit expenses 482 2,017 744
Provision for loan losses 12,497 7,143 2,703
Write-down of other real estate owned 60 51 99
Securities (gains) losses 1,422 (1,160) (803)
Originations of loans held for sale (50,665) (81,687) (31,691)
Proceeds from sales of loans held for sale 50,897 82,429 32,139
Gain on sale of loans held for sale (232) (742) (448)
Loss on low-income housing investments 1,013 - -
(Gain) loss on sale of premises and equipment (95) (54) 29
(Gain) loss on sale of other real estate owned 117 34 (14)
Increase in deferred taxes 1,103 1,003 1,172
(Increase) decrease in interest receivable and other assets, net of amortization (5,249) (788) 991
(Decrease) increase in interest payable and other liabilities (2,677) (640) 218
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 39,118 36,859 37,386
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net decrease in interest-bearing time deposits in banks 142 3,551 1,090
Proceeds from maturities of securities held to maturity - - 12,092
Proceeds from maturities of securities available for sale 116,781 139,001 88,926
Proceeds from sales of securities held to maturity - - 3,509
Proceeds from sales of securities available for sale 3,888 41,253 42,733
Proceeds from sales of nonmarketable equity securities 204 145 804
Purchases of securities held to maturity - - (34,985)
Purchases of securities available for sale (97,963) (79,191) (84,543)
Purchases of nonmarketable equity securities (744) (1,865) (6,348)
(Increase) decrease in federal funds sold 9,683 18,663 (6,104)
Increase in loans made to customers (58,321) (143,355) (88,822)
(Increase) decrease in cash surrender value of life insurance (95) 245 (102)
Increase in other investments (2,386) (2,340) (1,443)
Capital expenditures (8,659) (7,140) (11,855)
Proceeds from sale of premises and equipment 5,967 222 2,112
Proceeds from sale of other real estate owned 1,380 400 338
Purchase of subsidiaries, net of cash and due from banks acquired - 36,952 (5,191)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities (30,123) 6,541 (87,789)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits (39,924) 8,395 10,067
Net proceeds (payments) on short-term borrowings 56,607 (59,167) 12,141
Net proceeds (payments) on other borrowings (1,174) (5,482) 44,742
Trust preferred securities, net of executory costs - 32,992 -
Dividends paid (13,496) (11,470) (9,840)
Repurchase of common stock (6,690) (1,385) (16,673)
Sale of common stock - 1,185 1,705
Proceeds from exercise of stock options 1,228 1,726 685
- --------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities (3,449) (33,206) 42,827
- --------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 5,546 10,194 (7,576)
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 67,389 57,195 64,771
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 72,935 $ 67,389 $ 57,195
================================================================================================================================
35
36
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Dollar Amounts Other Than Per Share Data in Thousands)
Year Ended December 31,
- -------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during year:
Interest $ 75,447 $ 78,667 $ 67,553
Income taxes 6,601 7,971 10,180
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
Change in allowance for unrealized loss on securities
available for sale $ (10,042) $ (148) $ 978
Change in deferred taxes attributable to securities
available for sale 3,764 49 (2,647)
Transfer of securities held to maturity to available
for sale - - 193,480
Other real estate acquired in settlement of loans 1,973 792 425
Transfer from premises and equipment to other real
estate owned - - 1
Purchase of subsidiaries:
Purchase price $ (32,354) $ 6,797
===========================================================================================
Assets acquired:
Cash and cash equivalents $ 4,598 $ 1,606
Interest-bearing deposits in bank - 1,394
Securities 39,223 16,066
Federal funds sold 8,080 3,100
Loans 106,536 59,300
Premises and equipment 2,856 930
Deferred taxes - 81
Other assets 23,700 12,801
Liabilities assumed:
Deposits (193,386) (67,411)
Short-term borrowings (10,510) (200)
Other borrowings (11,100) (4,127)
Deferred taxes payable (71) -
Other liabilities (2,280) (794)
Common stock issued - (15,949)
- ------------------------------------------------------------------------------------------
$ (32,354) $ 6,797
==========================================================================================
See Accompanying Notes to Consolidated Financial Statements.
36
37
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
Consolidated Statements of Changes In Shareholders' Equity
(Dollar Amounts Other Than Per Share Data in Thousands)
For the Years Ended Accumulated
December 31, 1999, 1998, and 1997 Other
Common Common Capital Retained Comprehensive
Shares Stock Surplus Earnings Income
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 15,515,893 $15,516 $ 70,335 $105,577 $ 204
- -------------------------------------------------------------------------------------------------------------------------
Net Income - - - 28,168 -
Cash dividend 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 - -
Market value adjustment - - - - -
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 15,994,826 15,995 92,432 103,101 4,535
- -------------------------------------------------------------------------------------------------------------------------
Net Income - - - 22,116 -
Cash dividend 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 - -
Market value adjustment - - - - -
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
- -------------------------------------------------------------------------------------------------------------------------
Net Income - - - 22,644 -
Cash dividend declared - - - (13,807) -
Repurchase of outstanding shares (235,011) (235) (6,455) - -
Change in unrealized gain (loss) on securities - - - - (6,278)
Stock dividend 840,714 841 20,200 (21,074) -
Exercise of stock options 69,958 70 1,474 - -
Employee Stock Ownership Plan (ESOP) - - 113 - -
Market value and shares issued adjustment - - - - -
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 17,518,117 $17,518 $138,893 $ 71,299 $ (1,842)
- -------------------------------------------------------------------------------------------------------------------------
For the Years Ended Common
December 31, 1999, 1998, and 1997 Unearned Stock
ESOP Owned
Shares By ESOP
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ (891) $ (2,738)
- ---------------------------------------------------------------------------
Net Income - -
Cash dividend declared - -
Repurchase of outstanding shares - -
Shares issued in Dividend Reinvestment Program - -
Change in unrealized gain (loss) on securities - -
Issuance of common stock related to
acquisition of subsidiary - -
Payment for fractional shares for merger - -
Stock dividend - -
Payment of fractional shares for stock dividend - -
Exercise of stock options - -
Employee Stock Ownership Plan (ESOP) 404 (404)
Market value adjustment - (1,197)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 (487) (4,339)
- ---------------------------------------------------------------------------
Net Income - -
Cash dividend declared - -
Repurchase of outstanding shares - -
Shares issued in Dividend Reinvestment Program - -
Change in unrealized gain (loss) on securities - -
Stock dividend - -
Exercise of stock options - -
Employee Stock Ownership Plan (ESOP) 435 (435)
Market value adjustment - (5,269)
Add for change in fiscal year of pooling companies - -
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 (52) (10,043)
- ---------------------------------------------------------------------------
Net Income - -
Cash dividend declared - -
Repurchase of outstanding shares - -
Change in unrealized gain (loss) on securities - -
Stock dividend - -
Exercise of stock options - -
Employee Stock Ownership Plan (ESOP) 52 (52)
Market value and shares issued adjustment - 7,315
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 $ - $ (2,780)
- ---------------------------------------------------------------------------
See Accompanying Notes to Consolidated Financial Statements.
37
38
NATIONAL CITY BANCSHARES, INC. and Subsidiaries
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
National Bank of Bridgeport, First Bank of Huntingburg, Illinois One Bank,
National Association, Trigg County Farmers Bank, Community First Bank, National
Association., Bank of Illinois, National Association, 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.
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.
38
39
Nonmarketable equity securities are primarily the banks' investment in capital
stock of Federal Home Loan Banks. The carrying value is estimated to be fair
value since, if a bank withdraws membership in a 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 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 AND LEASE LOSSES
The allowance for loan losses is that amount which, in management's opinion is
adequate to absorb estimated loan losses as determined by management's periodic
evaluation of the loan portfolio. The evaluation by management is based upon
consideration of various factors including growth of the portfolio, an analysis
of individual credits, adverse situations that could affect a borrower's ability
to repay, prior and current loss experience, the results of recent regulatory
examinations and economic conditions. Loans that are deemed to be uncollectible
are charged to the allowance, while recoveries of previously charged off amounts
are credited to the allowance. A provision for loan losses is charged to
operations based management's periodic evaluation of the factors previously
mentioned as well as any other pertinent factors.
The allowance is based on ongoing quarterly assessments of the probable
estimated losses inherent in the loan and lease portfolios. The Corporation's
methodology for assessing the appropriate reserve level consists of several key
elements.
Larger commercial loans that exhibit potential or observed weaknesses are
subject to individual review. Where appropriate, an allocation is made to the
allowance for individual loans based management's estimate of the borrowers
ability to repay the loan given the availability of collateral, other sources of
cash flow and legal options available to the Corporation.
Included in the review of individual loans are those that are impaired as
provided in Statement of Financial Accounting Standards No. 114. 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
allowance established for impaired loans is determined based on the fair value
of the investment measured using either the present value of expected cash flows
based on the initial effective interest rate on the loan or the fair value of
the collateral if the loan is collateral dependent.
Historical loss ratios are applied to other commercial loans not subject to
specific allowance allocations.
Homogeneous loans, such as consumer installment and residential real estate
loans are not individually risk graded. An allowance is established for each
pool of loans based upon historical loss ratios. Loss rates are based on the
average net charge-off history by loan category.
The unallocated portion of the allowance is determined based on management's
assessment of economic conditions and specific economic factors in the
individual markets in which the Corporation operates. The unallocated portion of
the allowance is maintained to recognize the imprecision in estimating and
measuring loss when evaluating the allowance for pools of loans.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost less accumulated depreciation.
Provisions for depreciation are charged to operating expense over the useful
lives of the assets, computed principally by the straight-line method.
INTANGIBLE ASSETS
Costs in excess of fair value of net assets acquired consist primarily of
goodwill and core deposit intangibles. Goodwill is amortized to expense over
varying periods up to 25 years using the straight-line method. Core deposit
intangibles are amortized over 7 years using the straight-line method.
Amortization for the years ended December 31, 1999, 1998, and 1997, was $3,657,
$3,073, and $1,106, respectively. Management periodically evaluates the carrying
value of intangibles based upon facts and circumstances surrounding the
associated assets. In the event that facts and circumstances indicate that the
carrying value of intangibles may be impaired, an evaluation of recoverability
would be performed, using the estimated future undiscounted cash flows
associated with the asset as compared to the carrying value.
39
40
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 basis of assets and
liabilities that will result in taxable or deductible amounts in the future. The
deferred tax assets and liabilities are computed based on enacted tax laws and
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to an amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
ACCOUNTING FOR 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, 2000, but earlier application is permitted as of the beginning of
any fiscal quarters subsequent to June 15, 1998. Upon the statement's initial
application, all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed, and
documented pursuant to the provisions of 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.
40
41
NOTE 2. BUSINESS COMBINATIONS
Consideration
----------------------------
Common
Date Accounting Shares
Entity Location Completed Method Cash Issued
- ------------------------------------------------------------------------------------------------------------------------------------
First Federal Savings Bank of Leitchfield Leitchfield, KY 03/01/97 Purchase $ 6,797 -
Bridgeport Bancorp, Inc. Bridgeport, IL 08/01/97 Purchase - 375,000
Fourth First Bancorp, Inc. Huntingburg, IN 12/31/97 Pooling - 794,994
Mayfield Branch of Republic Bank and Trust Mayfield, KY 01/08/98 Purchase 4,854 -
Vernois Bancshares, Inc. Mt. Vernon, IL 03/06/98 Purchase 27,500 -
Illinois One Bancorp, Inc. Shawneetown, IL 05/31/98 Pooling - 572,737
Community First Financial, Inc. Maysville, KY 08/31/98 Pooling - 1,432,202
Trigg Bancorp, Inc. Cadiz, KY 08/31/98 Pooling - 736,278
1st Bancorp Vienna, Inc. Vienna, IL 10/01/98 Pooling - 289,134
Hoosier Hills Financial Corporation Osgood, IN 10/01/98 Pooling - 729,936
Commonwealth Commercial Corporation Crittenden, KY 10/31/98 Pooling - 190,000
Downstate Banking Co. Brookport, IL 10/31/98 Pooling - 102,648
Princeton Federal Savings Bank, fsb Princeton, KY 11/30/98 Pooling - 223,211
Progressive Bancshares, Inc. Lawrenceburg, KY 12/01/98 Pooling - 1,025,572
The assets, liabilities, and shareholders' equity of the pooled entities were
recorded on the books of the Corporation at their values as reported on the
books of the pooled entities immediately prior to the consummation of the merger
with the Corporation. This presentation required the restatements of prior
periods as if the companies had been combined for all years presented.
The table below represents unaudited 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 year ended
December 31:
1998 1997
- --------------------------------------------------------------
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
NOTE 3. EARNINGS PER SHARE
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.
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
Proforma net income $ 22,644 $ 21,454 $ 27,474
Weighted average shares outstanding:
Basic 17,701,235 17,602,440 17,458,199
Diluted 17,794,188 17,719,649 17,602,486
Earnings per share-Basic $ 1.28 $ 1.22 $ 1.57
Effect of stock options (0.01) (0.01) (0.01)
- -------------------------------------------------------------------------------------------------------------------------------
Earnings per share-Diluted $ 1.27 $ 1.21 $ 1.56
===============================================================================================================================
NOTE 4. CASH AND DUE FROM BANKS
Aggregate cash and due from bank balances of $17,283 and $17,015 as of December
31, 1999 and 1998, respectively, were maintained in satisfaction of statutory
reserve requirements of the Federal Reserve Bank of St. Louis.
41
42
NOTE 5. SECURITIES
Amortized cost and fair value of securities classified as available for sale are
as follows:
As of December 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Government and agency securities $ 74,106 $ 21 $ 751 $ 73,376
Taxable municipals 2,624 14 31 2,607
Tax-exempt municipals 183,465 1,394 2,861 181,998
Corporate securities 8,730 77 125 8,682
Mortgage-backed securities 45,867 149 733 45,283
- ---------------------------------------------------------------------------------------------------------------------------------
Subtotal 314,792 1,655 4,501 311,946
Equity securities 1,853 - - 1,853
- ---------------------------------------------------------------------------------------------------------------------------------
Total $316,645 $ 1,655 $4,501 $313,799
=================================================================================================================================
As of December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------------------------------------------
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
=================================================================================================================================
The amortized cost and fair value of the securities as of December 31, 1999, 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:
December 31, 1999 Amortized Cost Fair Value
- -------------------------------------------------------------------------------------------------------------------
Less than 1 year $ 39,272 $ 39,252
1 year to 5 years 123,267 122,886
5 years to 10 years 41,065 40,755
Over 10 years 65,321 63,770
Mortgage-backed securities 45,867 45,283
- -------------------------------------------------------------------------------------------------------------------
Total $314,792 $311,946
===================================================================================================================
42
43
NOTE 5. SECURITIES (continued)
Securities gain and (losses) are summarized as follows:
December 31, 1999 1999 1998 1997
- --------------------------------------------------------------------------
Gross realized gains $ 55 $ 1,192 $ 871
Gross realized losses (1,477) (32) (68)
- --------------------------------------------------------------------------
Total $ (1,422) $ 1,160 $ 803
==========================================================================
As of December 31, 1999 and 1998, the carrying value of securities pledged as
collateral for public deposits and for other purposes as required or permitted
by law were $133,818 and $150,480, respectively.
NOTE 6. LOANS
A summary of loans as of December 31 follows:
1999 1998
- -------------------------------------------------------------------------------------------
Real estate loans $ 1,122,398 $ 964,493
Commercial, industrial, and agricultural loans 355,485 415,579
Economic development loans and other
obligations of state and political subdivisions 22,331 19,780
Consumer loans 165,246 223,377
Direct lease financing 11,598 12,988
Leveraged leases 5,382 5,102
All other loans 18,937 7,606
- -------------------------------------------------------------------------------------------
Total loans - gross 1,701,377 1,648,925
Less: unearned income on loans 544 629
- -------------------------------------------------------------------------------------------
Loans - net of unearned income $ 1,700,833 $ 1,648,296
===========================================================================================
Allowance for loan and lease losses $ 25,155 $ 18,443
===========================================================================================
The following table presents data on impaired loans at December 31, 1999, 1998,
and 1997.
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
Impaired loans for which there is a related allowance for loan losses $ 24,201 $ 3,696 $ 5,424
Impaired loans for which there is no related allowance for loan losses 2,739 2,982 2,585
- ------------------------------------------------------------------------------------------------------------------------
Total impaired loans 26,940 6,678 8,009
Less: Government guaranteed portion of impaired loans 2,357 - -
========================================================================================================================
Net $ 24,583 $ 6,678 $ 8,009
========================================================================================================================
Allowance for loan losses for impaired loans
included in the allowance for loan losses $ 10,114 $ 990 $ 1,358
Average recorded investment in impaired loans 27,975 6,915 7,612
Interest income recognized from impaired loans 423 622 361
Cash basis interest income recognized from impaired loans 614 300 200
43
44
NOTE 6. LOANS (continued)
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 was $196,872 and $191,018 as
of December 31, 1999 and 1998, 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 1999 is as follows:
1999
- ----------------------------------------------------
Balance as of January 1, $ 53,063
New loans 32,330
Repayments (40,439)
- ----------------------------------------------------
Balance as of December 31, $ 44,954
====================================================
In 1995, NCBE Leasing Corp., the Corporation's leasing subsidiary ("NCBE
Leasing") entered into a transaction with a company for which Mr. Reherman, a
director of the Corporation, is an executive officer of the company and its
parent. NCBE Leasing acquired plant and equipment and leased the plant and
equipment to the company under a lease with a term of 15 years. Although the
company has made all payments required under the lease to date, management
concluded that uncertainties with respect to the company's ability to meet its
obligation under the lease required the lease to be placed on a non-accrual
basis. At December 31, 1999, the Corporation's net investment in this lease
was $4,187 and that amount is included in the impaired loan total as of
December 31, 1999 as set forth in the impaired loan table above.
NOTE 7. LEASE FINANCING
The Corporation's leasing operations include both direct financing and leveraged
leasing. The direct financing leasing activity involves the leasing of various
types of office, data processing, and transportation equipment. These equipment
leases have lives of three to seven years.
Under the direct financing method of accounting for leases, the total net
rentals receivable under the lease contracts, initial direct costs (net of
fees), and the estimated unguaranteed residual value of the leased equipment,
net of unearned income, are recorded as a net investment in direct financing
leases, and the unearned income on each lease is recognized each month at a
constant periodic rate of return on the unrecovered investment.
The composition of the net investment in direct lease financing at December 31
is as follows:
1999 1998
- ----------------------------------------------------------------------------------------
Minimum lease payments receivable $ 13,091 $ 15,010
Less: allowance for uncollectible leases 3,230 97
- ----------------------------------------------------------------------------------------
Net minimum lease payments receivable 9,861 14,913
Add estimated residual values of leased equipment 2,593 3,006
Add initial direct costs 111 65
(Deduct) unearned lease income (4,197) (5,093)
- ----------------------------------------------------------------------------------------
Net investment in direct lease financing $ 8,368 $ 12,891
========================================================================================
44
45
NOTE 7. LEASE FINANCING (Continued)
At December 31, 1999, the minimum future lease payments due under the direct
financing leases are as follows:
1999
- --------------------------------------------------------------
1999 $ 2,660
2000 2,247
2001 1,877
2002 1,442
2003 985
Thereafter 3,880
- --------------------------------------------------------------
Total minimum future lease payments $ 13,091
==============================================================
45
46
NOTE 7. LEASE FINANCING (continued)
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, and were leased for a term of 16.5 years. The equity investment in
the aircraft represented 22% of the purchase price; the remaining 78% 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:
1999 1998
- ----------------------------------------------------------------------------------------------------
Rentals receivable (net of principal an interest on nonrecourse debt) $ 1,841 $ 1,841
Estimated residual value of leased assets 5,722 5,722
Less: unearned and deferred income 2,181 2,461
- ----------------------------------------------------------------------------------------------------
Investment in leveraged leases 5,382 5,102
Less: deferred taxes arising from leveraged leases 3,915 2,731
- ----------------------------------------------------------------------------------------------------
Net investment in leveraged leases $ 1,467 $ 2,371
====================================================================================================
NOTE 8. ALLOWANCE FOR LOAN AND LEASE LOSSES
Changes in the allowance for loan losses were as follows during the three years
ended December 31:
1999 1998 1997
- -------------------------------------------------------------------------------------------
Balance at beginning of year $ 18,443 $ 13,854 $ 12,539
Allowance associated with acquisition - 1,086 516
Provision charged to operations 12,497 7,143 2,703
Recoveries credited to allowance 1,879 1,375 1,239
Loans charged to allowance (7,664) (5,015) (3,143)
- -------------------------------------------------------------------------------------------
Balance at end of year $ 25,155 $ 18,443 $ 13,854
===========================================================================================
46
47
NOTE 9. PREMISES AND EQUIPMENT
Premises and equipment as of December 31 consist of:
1999 1998
- ------------------------------------------------------------------------------
Land, buildings, and lease improvements $ 52,730 $ 50,806
Equipment 27,073 26,712
Construction in progress 1,117 2,310
- ------------------------------------------------------------------------------
Total cost 80,920 79,828
Less accumulated depreciation 35,527 33,429
- ------------------------------------------------------------------------------
Net premises and equipment $ 45,393 $ 46,399
==============================================================================
Depreciation expense for 1999, 1998, and 1997 was $3,794, $3,763, and $3,213,
respectively.
47
48
NOTE 10. DEPOSITS
As of December 31, 1999, the scheduled maturities of time deposits are as
follows:
1999
----------------------------------
2000 $ 708,763
2001 154,391
2002 36,981
2003 20,697
2004 and thereafter 19,201
==================================
Total $ 940,033
NOTE 11. INCOME TAXES
The components of income tax expense for the years ended December 31 follows:
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
Federal:
Current $ 7,661 $ 7,903 $ 8,273
Deferred (931) (1,286) 917
- -------------------------------------------------------------------------------------------------------------
Total 6,730 6,617 9,190
State:
Current 1,351 1,070 1,626
Deferred (172) 283 255
- -------------------------------------------------------------------------------------------------------------
Total 1,179 1,353 1,881
- -------------------------------------------------------------------------------------------------------------
Total income taxes 7,909 7,970 11,071
- -------------------------------------------------------------------------------------------------------------
Proforma taxes for acquired Subchapter S Corporation - 662 694
- -------------------------------------------------------------------------------------------------------------
Proforma C Corporation provision for income taxes $ 7,909 $ 8,632 $ 11,765
=============================================================================================================
The portion of the tax provision (benefit) relating to realized securities gains
and losses amounted to $(576), $464, and $321 for 1999, 1998, and 1997,
respectively.
48
49
NOTE 11. INCOME TAXES (Continued)
A reconciliation of income taxes in the statement of income, with the amount
computed by applying the statutory rate of 35%, is as follows:
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Federal income tax computed at the statutory rates $ 10,694 $ 10,530 $ 13,734
Elimination of S Corporation earnings - (929) (694)
Adjusted for effects of:
Nontaxable municipal interest (3,498) (3,658) (3,280)
Goodwill amortization 934 767 -
Nondeductible expenses 578 1,591 446
State income taxes, net of federal tax benefits 738 880 1,191
Benefit of income taxed at lower rates - (143) (143)
Change in deferred tax asset valuation allowance - - (80)
Low Income Housing Credit (998) - -
Other differences (539) (1,068) (103)
- ----------------------------------------------------------------------------------------------------------
Total income taxes $ 7,909 $ 7,970 $ 11,071
==========================================================================================================
49
50
The net deferred tax asset (liability) in the accompanying balance sheet
includes the following amounts of deferred tax assets and liabilities:
1999 1998
- -----------------------------------------------------------------------------------
Deferred tax liability $ (10,992) $ (11,187)
Deferred tax asset 12,073 7,737
Valuation allowance for deferred tax assets (113) (448)
- -----------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 968 $ (3,898)
===================================================================================
The tax effects of principal temporary differences are shown in the following
table:
1999 1998
- ------------------------------------------------------------------------------------------------
Allowance for loan losses $ 8,952 $ 6,095
Direct financing and leveraged leases 2,117 1,194
Prepaid pension costs (1,095) (739)
Premises and equipment (9,609) (7,292)
Unrealized (gain) loss on securities available for sale 1,004 (2,759)
State net operating loss carryforwards - 448
Other (288) (397)
- ------------------------------------------------------------------------------------------------
Net temporary differences 1,081 (3,450)
- ------------------------------------------------------------------------------------------------
Valuation allowances (113) (448)
- ------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 968 $ (3,898)
================================================================================================
50
51
NOTE 12. SHORT-TERM BORROWINGS
Information concerning short-term borrowings as of the years ended December 31
were as follows:
1999 1998
- ------------------------------------------------------------------------------------
Federal funds purchased:
Average amount outstanding $ 32,296 $ 20,853
Maximum amount at any month end 82,500 50,950
Weighted average interest rate:
During year 5.01% 4.65%
End of year 6.09% -
Securities sold under agreements to repurchase:
Average amount outstanding $ 31,446 $ 36,770
Maximum amount at any month end 30,984 52,615
Weighted average interest rate:
During year 4.07% 4.47%
End of year 4.18% 3.31%
Notes payable to U.S. Treasury:
Average amount outstanding $ 1 $ 1,397
Maximum amount at any month end 5 5,360
Weighted average interest rate:
During year - 4.94%
End of year - -
51
52
NOTE 13. OTHER BORROWINGS
Other borrowings at December 31 consist of the following:
1999 1998
- -----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances:
Due from January 5, 2000 through August 1, 2015, with
interest rates varying from 5.16% to 8.45%. $118,344 $116,269
Notes payable:
Northern Trust Co, monthly principal payments of $83
plus interest beginning June 30, 1997, with a final
balloon payment of $9,083 due May 30, 2003, 8.10%. 12,417 13,417
Norlease, Inc. interest and principal payments through January 31, 2004,
interest rates varying from 5.97% to 8.16%, collateralized by
equipment and an investment in a leveraged lease. 7,610 9,800
Other - 59
- -----------------------------------------------------------------------------------------------------------------------
$138,371 $139,545
=======================================================================================================================
The Federal Home Loan Bank advances are collateralized by a blanket collateral
agreement on qualified mortgage loans. The terms of the loan agreement with
Northern Trust Company require the Corporation to maintain certain financial
ratios and comply with certain restrictions. These include, maintenance of
minimum consolidated capital levels, limits on debt and guarantees of debt by
the Corporation, restrictions on the ratio of consolidated non-performing assets
to total loans and of the consolidated allowance for loan and lease losses to
total non-performing loans, and certain other restrictions. At December 31,
1999, the Corporation was in default of a financial covenant requiring that the
Corporation maintain, on a consolidated basis, a ratio of the allowance for loan
losses to non-performing loans of not less than 100%. The Corporation received a
waiver, dated March 28, 2000, of the covenent until June 30, 2000. The
Corporation intends to seek additional waivers of the covenant and/or use
additional sources of cash and/or debt financing to refinance the debt if
additional waivers cannot be obtained.
52
53
NOTE 13. OTHER BORROWINGS (Continued)
Aggregate maturities required on other borrowings at December 31, 1999 are due
in future years as follows:
2000 $ 50,645
2001 13,569
2002 25,160
2003 26,016
2004 4,996
Thereafter 17,985
- ---------------------------------------------------------
Total principal payments $ 138,371
=========================================================
At December 31, 1999, the Corporation had $290,607 in unused federal funds and
Federal Home Loan Bank lines.
53
54
NOTE 14. TRUST PREFERRED SECURITIES
On March 30, 1998, NCBE Capital Trust I ("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.
54
55
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 Corporation's financial condition.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, a bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. Capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and subsidiary banks to maintain minimum amounts and
ratios (set forth in the 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, 1999, that the Corporation and its subsidiary banks met all capital
adequacy requirements to which they were subject.
As of December 31, 1999, 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, on a consolidated basis, and the only bank subsidiary, which has
assets in excess of ten percent of consolidated assets:
National City Bancshares, Inc. To Be Well Capitalized
Minimum Ratios For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1999
Total Capital (to Risk Weighted Assets)
Consolidated $ 246,214 15.04% $ 130,997 8.00% $ 163,746 10.00%
National City Bank 86,450 11.94% 57,913 8.00% 72,392 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 225,688 13.78% $ 65,498 4.00% $ 98,248 6.00%
National City Bank 77,882 10.76% 28,957 4.00% 43,435 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 225,688 10.47% $ 86,214 4.00% $ 107,768 5.00%
National City Bank 77,882 8.56% 36,405 4.00% 45,506 5.00%
National City Bancshares, Inc. To Be Well Capitalized
Minimum Ratios For Capital Under Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------------------
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 78,113 10.40% 54,793 8.00% 68,491 10.00%
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 218,350 13.51% $ 64,636 4.00% $ 94,954 6.00%
National City Bank 70,935 10.36% 27,396 4.00% 41,095 6.00%
Tier I Capital (to Average Assets)
Consolidated $ 218,350 10.12% $ 86,333 4.00% $ 107,916 5.00%
National City Bank 70,935 8.27% 34,320 4.00% 42,900 5.00%
55
56
NOTE 16. STOCK OPTION PLAN
The Corporation's stock option and incentive plan currently reserves 741,024
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.
The Corporation also granted non-qualified options to purchase 31,500 shares of
common stock at an exercise price of $25.83, outside of the Plan, in connection
with the employment of its new Chairman and CEO. Such options vest over a two
year period and must be exercised within ten years.
A summary of the status of the options granted by the Corporation, adjusted for
all stock dividends, as of December 31, 1999, 1998, and 1997, and changes during
the years ending on those dates is presented below:
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of
year 592,161 $ 34.14 533,237 $ 22.75 459,541 $ 17.60
Options granted 140,700 26.39 179,633 33.92 128,263 37.55
Options exercised 66,101 19.50 113,254 15.85 48,267 12.52
Options forfeited 90,738 36.71 7,455 36.85 6,300 23.24
- ------------------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 576,022 $ 26.38 592,161 $ 34.14 533,237 $ 22.75
====================================================================================================================================
Options exercisable 428,252 409,734 339,657
Weighted-average fair value of
options granted during the year $ 6.93 $ 12.03 $ 13.35
All options granted prior to 1999 vest one year from the grant date. 1999
options, except the special grant noted above, vest one-third in each year
following the date of the grant.
The following table summarizes information about stock options outstanding at
December 31, 1999.
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------
Weighted Average
Exercise Number Remaining Number
Price Outstanding Contractual Life Exercisable
- ------------------------------------------------------------------------------------------
$ 38.00 85,078 7.8 85,078
33.92 116,851 8.8 116,851
28.98 20,000 9.9 -
28.00 20,000 9.9 -
25.83 110,250 10.0 -
25.13 12,500 10.0 -
23.80 9,450 9.8 -
23.24 59,121 6.8 59,121
17.33 161,349 5.8 161,349
13.59 5,853 0.5 5,853
5.29 7,070 1.5 -
- ------------------------------------------------------------------------------------------
607,522 7.8 428,252
==========================================================================================
56
57
NOTE 16. STOCK OPTION PLAN (continued)
Stock options are accounted for following Accounting Principles Board Opinion
No. 25 and related Interpretations. Had compensation costs 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
proforma amounts shown below.
1999 1998 1997
- ---------------------------------------------------------------------------------------------
Net income:
As reported $ 22,644 $ 21,454 $ 27,474
Proforma 21,926 20,108 26,457
Earnings per share:
Basic
As reported $ 1.28 $ 1.22 $ 1.57
Proforma 1.24 1.14 1.51
Diluted
As reported $ 1.27 $ 1.21 $ 1.56
Proforma 1.23 1.13 1.50
The fair value of the stock options granted have been estimated using the
Black-Scholes option pricing model with the following weighted average
assumptions.
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Number of options granted 172,200 179,633 128,263
Risk-free interest rate 6.44% 4.97% 5.86%
Expected life, in years 10 10 10
Expected volatility 24.55% 25.25% 21.50%
Expected dividend yield 3.34% 2.14% 1.71%
Estimated fair value per option $ 6.93 $ 12.03 $ 13.35
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:
1999 1998
- --------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Cash and short-term investments $ 73,683 $ 73,683 $ 77,962 $ 77,962
Securities available for sale 313,799 313,799 346,514 346,514
Loans-net of allowance 1,661,947 1,653,880 1,611,763 1,649,185
Liabilities:
Deposits $ 1,694,661 $ 1,689,353 $ 1,734,585 $ 1,740,498
Short-term borrowings 89,989 89,989 33,382 33,382
Other borrowings 138,371 136,533 139,545 141,628
Guaranteed preferred beneficial interests in
the Corporation's subordinated debenture 34,500 32,775 34,500 32,602
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 net lease receivables of $13,731 and $18,090, in 1999 and 1998, respectively.
57
58
NOTE 17. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
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.
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 geographic 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.
58
59
NOTE 18. COMMITMENTS, CONTINGENCIES, AND CREDIT RISK (continued)
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, 1999, follows:
Ranges of Rates
Variable Rate Fixed Rate Total on Fixed Rate
1999 Commitment Commitment Commitment Commitments
- --------------------------------------------------------------------------------------------------------------
Commitments to extend credit $ 161,367 $ 119,707 $ 281,074 5.00%-17.98%
Standby letters of credit - - 15,156 -
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 currently does not engage in the use of interest rate swaps,
futures, forwards, or option contracts.
NOTE 19. EMPLOYEE RETIREMENT PLANS
The Corporation maintains a noncontributory cash balance plan in which
substantially all full-time employees are eligible to participate upon the
completion of one year of service. The Corporation also maintained a
noncontributory pension plan, which was curtailed during 1997 and was terminated
in 1999. The excess of plan assets over benefit obligations of the pension plan
were transferred to the cash balance plan.
In establishing the amounts reflected in the financial statements, the following
significant assumption rates were used:
1999 1998 1997
- ----------------------------------------------------------------------------------------------
Discount rate 5.25% 6.00% 7.50%
Increase in compensation rate 5.00% 5.00% 5.00%
Expected long-term rate of return 6.50% 7.00% 9.00%
59
60
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:
1999 1998
- -----------------------------------------------------------------------------
Change in Fair Value of Plan Assets:
Balance at beginning of measurement period $10,389 $13,550
Actual return on plan assets 284 339
Benefits paid (7,516) (3,500)
- -----------------------------------------------------------------------------
Balance at end of measurement period 3,157 10,389
- -----------------------------------------------------------------------------
Change in Benefit Obligation:
Balance at beginning of measurement period 7,676 11,350
Service cost 756 626
Interest costs 27 576
Actuarial (gains) losses 388 (1,289)
Termination settlement gain (877) -
Benefits paid (7,516) (3,500)
- -----------------------------------------------------------------------------
Balance at end of measurement period 454 7,763
- -----------------------------------------------------------------------------
Funded status 2,703 2,626
Unrecognized net actuarial loss (1) (802)
- -----------------------------------------------------------------------------
Prepaid benefit cost $ 2,702 $ 1,824
=============================================================================
Net periodic pension cost (credit) included the following components for the
years ended December 31:
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Service cost - benefits earned during the period $ 756 $ 626 $ 836
Interest cost on projected benefit obligation 27 576 633
Return on assets (284) (339) (1,911)
Net amortization and deferral - (574) 574
Termination settlement gain (877) - -
Curtailment effect - - 1,066
- --------------------------------------------------------------------------------------------------
Net periodic pension cost (credit) $ (378) $ 289 $ 1,198
==================================================================================================
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 $538, $377, and $1,675 during 1999, 1998, and 1997, 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.
60
61
NOTE 19. EMPLOYEE RETIREMENT PLANS (continued)
Contribution expense for the ESOP was $175, $1,418, and $744 for the years ended
December 31, 1999, 1998, and 1997. The ESOP shares were as follows as of
December 31:
1999 1998 1997
- ---------------------------------------------------------------------------------------
Allocated shares 263,745 224,466 185,136
Shares released for allocation 5,405 39,279 39,330
Unearned shares - 5,405 44,684
Less: Shares distributed to participants (158,492) - -
- ---------------------------------------------------------------------------------------
Total ESOP shares 110,658 269,150 269,150
=======================================================================================
Fair value of unearned shares at December 31, $ - $ 202 $ 812
=======================================================================================
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.
61
62
NOTE 20. UNAUDITED INTERIM FINANCIAL DATA
During the fourth quarter of 1999, the Corporation incurred the following
charges related to a new strategic plan and credit risk assessment of the loan
portfolio; $7,800 additional provision for loan and lease losses; $350 of
severance pay; $469 of service contract buyout fees; and $699 of impairment
losses on the equity security portfolio written down to market.
The following table reflects summarized quarterly data for the periods described
(unaudited):
1999
- ---------------------------------------------------------------------------------------------------------------------------------
December September June March
31 30 30 31
- ---------------------------------------------------------------------------------------------------------------------------------
Interest income $ 42,038 $ 40,993 $ 40,586 $ 40,757
Interest expense 19,422 18,351 18,159 18,625
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 22,616 22,642 22,427 22,132
Provision for loan losses 9,247 1,149 841 1,260
Noninterest income 2,558 4,048 3,220 3,813
Noninterest expense 16,119 15,667 13,760 14,860
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes (192) 9,874 11,046 9,825
Provision for income taxes (1,236) 2,456 3,569 3,120
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,044 $ 7,418 $ 7,477 $ 6,705
=================================================================================================================================
Proforma C Corporation provision for income taxes (1,236) 2,456 3,569 3,120
- ---------------------------------------------------------------------------------------------------------------------------------
Proforma net income $ 1,044 $ 7,418 $ 7,477 $ 6,705
=================================================================================================================================
Earnings per share - Basic $ 0.06 $ 0.42 $ 0.42 $ 0.38
Earnings per share - Diluted 0.06 0.42 0.42 0.37
Shares - Basic 17,643,367 17,745,481 17,733,154 17,682,413
Shares - Diluted 17,733,970 17,830,715 17,798,208 17,752,313
1998
- ---------------------------------------------------------------------------------------------------------------------------------
December September June March
31 30 30 31
- ---------------------------------------------------------------------------------------------------------------------------------
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 taxes 231 2,183 2,911 3,307
- ---------------------------------------------------------------------------------------------------------------------------------
Proforma net income $ 3,278 $ 4,920 $ 6,476 $ 6,780
=================================================================================================================================
Earnings per share - Basic $ 0.18 $ 0.28 $ 0.37 $ 0.39
Earnings per share - Diluted 0.18 0.28 0.37 0.38
Shares - Basic 17,661,218 17,612,805 17,580,769 17,554,068
Shares - Diluted 17,771,036 17,716,524 17,707,792 17,687,254
62
63
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:
Southwest Western Southern Northern
December 31, 1999 Indiana Kentucky Illinois Kentucky Total
- -----------------------------------------------------------------------------------------------------------
Interest income $ 78,964 $ 24,468 $ 28,167 $ 34,349 $ 165,948
Interest expense 36,051 11,725 12,463 14,317 74,556
- -----------------------------------------------------------------------------------------------------------
Net interest income 42,913 12,743 15,704 20,032 91,392
Provision for loan losses 5,605 866 1,466 1,416 9,353
Other income 8,377 1,834 2,478 2,603 15,292
Other expense 24,455 7,913 10,945 10,382 53,695
- -----------------------------------------------------------------------------------------------------------
Net income before tax 21,230 5,798 5,771 10,837 43,636
Income tax 5,993 1,548 1,757 3,659 12,957
- -----------------------------------------------------------------------------------------------------------
Net income $ 15,237 $ 4,250 $ 4,014 $ 7,178 $ 30,679
===========================================================================================================
Other segment information:
Depreciation and
amortization $ 2,003 $ 1,137 $ 2,773 $ 700 $ 6,613
Segment assets 1,099,969 321,088 416,592 421,485 2,259,134
Expenditures for
segment assets 7,066 448 561 180 8,255
Southwest Western Southern Northern
December 31, 1998 Indiana Kentucky Illinois Kentucky Total
- --------------------------------------------------------------------------------------------------------------
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
63
64
Note 21. SEGMENT INFORMATION (continued)
Southwest Western Southern Northern
December 31, 1997 Indiana Kentucky Illinois Kentucky Total
- -----------------------------------------------------------------------------------------------------------------
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
A reconciliation of revenues, net income, and assets of the reported segments to
the consolidated financial statements is as follows:
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Net interest income:
Total net interest income for reportable segments $ 91,392 $ 89,515 $ 80,842
Non-bank entities (1,575) (1,618) 498
Eliminations - - (2)
- --------------------------------------------------------------------------------------------------
Total consolidated net interest income $ 89,817 $ 87,897 $ 81,338
==================================================================================================
Net income:
Total net income for reportable segments $ 30,679 $ 30,002 $ 30,829
Non-bank entities (8,035) (7,886) (2,661)
Eliminations - - -
- --------------------------------------------------------------------------------------------------
Total consolidated net income $ 22,644 $ 22,116 $ 28,168
==================================================================================================
Assets:
Total assets for reportable segments $ 2,259,134 $ 2,230,525 $ 1,996,306
Non-bank entities 87,272 99,457 45,364
Eliminations (142,929) (134,758) (56,492)
- --------------------------------------------------------------------------------------------------
Total consolidated assets $ 2,203,477 $ 2,195,224 $ 1,985,178
==================================================================================================
64
65
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 CONDITION
1999 1998
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 15,199 $ 23,246
Investment in subsidiaries 238,151 232,909
Securities available for sale 1,473 3,966
Nonmarketable equity securities 205 322
Property and equipment 1,520 1,447
Other assets 11,205 8,381
- ----------------------------------------------------------------------------------------------
TOTAL ASSETS $267,753 $ 270,271
==============================================================================================
LIABILITIES
Other borrowings $ 35,567 $ 35,619
Dividends payable 3,679 3,368
Other liabilities 2,639 2,961
- ----------------------------------------------------------------------------------------------
Total liabilities 41,885 41,948
Common stock owned by ESOP (subject to put option) 2,780 10,043
SHAREHOLDERS' EQUITY
Common stock 17,518 16,842
Capital surplus 138,893 123,561
Retained earnings 71,299 83,536
Accumulated other comprehensive income (loss) (1,842) 4,436
Unearned employee stock ownership plan shares - (52)
Common stock owned by ESOP (subject to put option) (2,780) (10,043)
- ----------------------------------------------------------------------------------------------
Total shareholders' equity 223,088 218,280
- ----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $267,753 $ 270,271
==============================================================================================
CONDENSED STATEMENTS OF INCOME
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
Dividends from subsidiaries $ 19,850 $ 39,744 $ 24,503
Other income 6,300 5,854 5,554
- ----------------------------------------------------------------------------------------------------------------
Total income 26,150 45,598 30,057
Interest expense 2,847 2,433 174
Other expenses 13,444 15,286 8,197
- ----------------------------------------------------------------------------------------------------------------
Total expenses 16,291 17,719 8,371
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes and equity in
undistributed earnings of subsidiaries 9,859 27,879 21,686
Income tax benefit 3,789 4,008 709
- ----------------------------------------------------------------------------------------------------------------
Income before equity in undistributed earnings of subsidiaries 13,648 31,887 22,395
Equity in undistributed earnings of subsidiaries 8,996 (9,771) 5,773
- ----------------------------------------------------------------------------------------------------------------
Net income $ 22,644 $ 22,116 $ 28,168
================================================================================================================
65
66
NOTE 22. FINANCIAL INFORMATION OF PARENT COMPANY (continued)
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Proforma net income $22,644 $21,454 $27,474
Other comprehensive income, net of tax:
Unrealized gain (loss) arising in period (7,124) 597 4,824
Reclassification of realized amounts 846 (696) (493)
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gain (loss), recognized in other comprehensive income (6,278) (99) 4,331
- ----------------------------------------------------------------------------------------------------------------------------------
Proforma comprehensive income $16,366 $21,355 $31,805
==================================================================================================================================
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 22,644 $ 22,116 $ 28,168
Adjustments to reconcile net income to
Net cash provided by operating activities:
Amortization and depreciation 1,185 702 546
Employee benefit expenses 482 2,017 744
Undistributed earnings of subsidiaries (8,996) 9,771 (5,773)
Securities (gains) losses 1,240 (103) (479)
(Gain) loss on sale of premises and equipment - (16) -
(Decrease) increase in deferred taxes (92) (391) 847
(Increase) decrease in other assets (3,574) (2,502) (1,768)
(Decrease) increase in other liabilities (603) 1,246 467
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by operating activities 12,286 32,840 22,752
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 2,144 848 940
Proceeds from sales of nonmarketable equity securities 152 - 804
Purchases of securities available for sale (3) (5,484) (650)
Purchases of nonmarketable equity securities - - (185)
Payments on notes receivable - 243 57
Capital expenditures (542) (866) (459)
Proceeds from sale of premises and equipment - 70 17
Investment in subsidiaries (3,074) (33,359) (6,654)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) investing activities (1,323) (38,548) (6,130)
- -----------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (13,496) (11,470) (9,840)
Proceeds from other borrowings - 68,067 1,000
Payments on other borrowings (52) (35,322) (1,155)
Repurchase of common stock (6,690) (1,385) (16,673)
Sale of common stock - 1,185 1,705
Proceeds from exercise of stock options 1,228 1,726 685
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by (used in) financing activities (19,010) 22,801 (24,278)
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,047) 17,093 (7,656)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 23,246 6,153 13,809
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 15,199 $ 23,246 $ 6,153
===================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Change in unrealized gain (loss) on securities available for sale, net $ 924 $ (990) $ 4,122
Common stock issued in acquisition of subsidiary - - 15,949
66
67
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no changes in or disagreements with accountants on accounting and
financial disclosures.
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 2000 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 2000 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 2000 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 2000 Annual Meeting of Shareholders is
hereby incorporated by reference herein.
67
68
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Documents Filed as Part of Form 10-K
1. Financial Statements
Independent Auditor's Report
Consolidated Statements of Financial Position at December 31, 1999 and
1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997
Consolidated Statements of Changes in Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following reports of accountants on financial statements of certain
entities acquired by the Corporation are included as pages 73 through
76 of this report.
Report of Crowe, Chizek & Company LLP 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.
Report of Grey 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 for not
required information is included in the consolidated financial
statements or related notes.
3. Exhibits
The exhibits listed on the Exhibit Index on pages 71 and 72 are
incorporated by reference.
Reports on Form 8-K
The Corporation filed no reports on Form 8-K during the last quarter of
the year ended December 31, 1999.
68
69
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.
/s/ MICHAEL T. VEA 3/27/2000
----------------------------------------- ---------
Michael T. Vea Date
Chairman of the Board, Chief Executive
Officer and President
/s/ JAMES E. ADAMS 3/27/2000
----------------------------------------- ---------
James E. Adams Date
Executive Vice President, Chief
Financial Officer and Secretary
("Principal Financial and Accounting
Officer")
69
70
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 3/27/2000
------------------------------------------ ---------
Janice L. Beesley Date
Director
/s/ BEN L. CUNDIFF 3/27/2000
------------------------------------------ ---------
Ben L. Cundiff Date
Director
/s/ SUSANNE R. EMGE 3/27/2000
------------------------------------------ ---------
Susanne R. Emge Date
Director
/s/ DONALD G. HARRIS 3/27/2000
------------------------------------------ ---------
Donald G. Harris Date
Director
/s/ H. RAY HOOPS 3/27/2000
------------------------------------------ ---------
H. Ray Hoops Date
Director
/s/ ROBERT A. KEIL 3/27/2000
------------------------------------------ ---------
Robert A. Keil Date
Director
/s/ JOHN D. LIPPERT 3/27/2000
------------------------------------------ ---------
John D. Lippert Date
Director
/s/ GEORGE D. MARTIN 3/27/2000
------------------------------------------ ---------
George D. Martin Date
Director
/s/ RONALD G. REHERMAN 3/27/2000
------------------------------------------ ---------
Ronald G. Reherman Date
Director
/s/ LAURENCE R. STEENBERG 3/27/2000
------------------------------------------ ---------
Laurence R. Steenberg Date
Director
/s/ ROBERT D. VANCE 3/27/2000
------------------------------------------ ---------
Robert D. Vance Date
Director
/s/ MICHAEL T. VEA 3/27/2000
------------------------------------------ ---------
Michael T. Vea Date
Chairman, CEO, President and Director
/s/ RICHARD F. WELP 3/27/2000
------------------------------------------ ---------
Richard F. Welp Date
Director
70
71
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3 (i) Articles of Incorporation (incorporated by reference to Exhibit 3
(i) on Form 10-Q dated March 31, 1999)
3 (ii) By-Laws (incorporated by reference to Exhibit 3 (ii) on Form 10-Q
dated March 31, 1999)
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 fiscal 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 fiscal year ended December 31, 1996)
10 (e)* 1999 Stock Option and Incentive Plan (incorporated by reference to
Exhibit A to Definitive Proxy Materials filed April 24, 1999)
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 fiscal 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)
10 (i)* Termination Benefits Agreements 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 (j)* Termination Benefits Agreements dated as of September 16, 1998,
between National City Bancshares, Inc. and Curtis D. Ritterling.
(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 Agreements dated as of September 16, 1998,
between National City Bancshares, Inc. and Stephen C. Byelick, Jr.
(incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q for the period ending September 30, 1998)
10 (l)* Deferred Excess Benefit Agreement dated as of January 8, 1999,
between National City Bancshares, Inc. and Robert A. Keil
(incorporated by reference to Exhibit 10(l) to Annual Report on
Form 10-K for the fiscal year ended December 31, 1998)
10 (m)* Contract of Employment dated August 23, 1999, between National
City Bancshares, Inc. and Michael T. Vea (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
period ending September 30, 1999)
10 (n)* Nonqualified Stock Option Agreement dated September 7, 1999,
between National City Bancshares, Inc. and Michael T. Vea
(incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q for the period ending September 30, 1999)
10 (o)* Nonqualified Stock Option Agreement (Non Plan) dated September 7,
1999, between National City Bancshares, Inc. and Michael T. Vea
(incorporated by reference to Exhibit 10.3 to Quarterly Report on
Form 10-Q for the period ending September 30, 1999)
10 (p)* Termination Benefits Agreement dated December 15, 1999, between
National City Bancshares, Inc. and James E. Adams
10 (q)* Termination Benefits Agreement dated December 15, 1999, between
National City Bancshares, Inc. and John D. Crumrine
10 (r)* Consulting Agreement dated December 21, 1999, between National
City Bancshares, Inc and Robert A. Keil
10 (s)* Termination Benefits Agreement dated December 31, 1999, between
National City Bancshares, Inc. and D. Michael Kramer
72
EXHIBIT INDEX
(continued)
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
21 Subsidiaries of the Registrant
23 (a) Consent of PricewaterhouseCoopers LLP
23 (b) Consent of Crowe, Chizek and Company LLP
23 (c) Consent of Sherman, Barber, & Millikin
23 (d) Consent of Thurman, Campbell & Co.
23 (e) Consent of Gray Hunter Stenn LLP
27 Financial Data Schedule.
* The indicated exhibit is a management contract, compensatory plan,
or arrangement required to be filed by Item 601 of Regulation S-K.
73
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/ CROWE, CHIZEK & COMPANY LLP
- -------------------------------
Lexington, Kentucky
February 25, 1998
73
74
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
74
75
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
75
76
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 1sr 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
- ------------------------
Marion, Illinois
June 8, 1998
76