Item 1. Business
General
Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a Kentucky corporation organized in 1981 and a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA") and the Home Owners Loan Act of 1933, as amended ("HOLA").
The Company conducts business through one banking subsidiary, Kentucky Bank. Kentucky Bank is a commercial bank and trust company organized under the laws of Kentucky. Kentucky Bank has its main office in Paris (Bourbon County), Kentucky, additional offices in Paris, North Middletown (Bourbon County), Winchester (Clark County), Georgetown (Scott County), Versailles (Woodford County), Nicholasville (Jessamine County), Kentucky and a loan production office in Cynthiana (Harrison County), Kentucky. The deposits of Kentucky Bank are insured up to prescribed limits by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general full-service commercial and consumer banking. Kentucky Bank makes commercial, agricultural and real estate loans to its commercial customers, with emphasis on small-to-medium-sized industrial, service and agricultural businesses. Kentucky Bank makes residential mortgage, installment and other loans to its individual and other non-commercial customers. Kentucky Bank also offers its customers the opportunity to obtain a VISA or MasterCard credit card. Kentucky Bank offers its customers a variety of other services, including checking, savings, club and money market accounts, certificates of deposits, safe deposit facilities and other consumer-oriented financial services. Through its trust department, Kentucky Bank provides primarily personal trust and agency services (including management agency services) and, to a lesser extent, corporate trust services (including the management of corporate pension and profits sharing plans).
Competition
The Company and its subsidiary face vigorous competition from a number of sources, including other bank holding companies and commercial banks, consumer finance companies, thrift institutions, other financial institutions and financial intermediaries. In addition to commercial banks, savings and loan associations, savings banks and credit unions actively compete to provide a wide variety of banking services. Mortgage banking firms, finance companies, insurance companies, brokerage companies, financial affiliates of industrial companies and government agencies provide additional competition for loans and for many other financial services. The subsidiary also currently competes for interest-bearing funds with a number of other financial intermediaries, including brokerage firms and mutual funds, which offer a diverse range of investment alternatives.
Supervision and Regulation
As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Company's subsidiary is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The subsidiary is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the subsidiary. In addition to the impact of regulation, the subsidiary is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy.
There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross- guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default.
The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", as such terms are defined under uniform regulation defining such capital levels issued by each of the federal banking agencies.
There are various legal and regulatory limits on the extent to which the Company's subsidiary bank may pay dividends or otherwise supply funds to the Company. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice.
There have been a number of legislative and regulatory proposals that would have an impact on the operation of bank holding companies and their banks. It is impossible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on the Company.
Business Segments
The FASB has issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires segmenting assets, profit and loss and certain specific revenue and expense items. The Company has determined there are currently no reportable segments.
At December 31, 1997, the number of full time equivalent employees of the Company was 141.
Item 2.
Item 2. Properties
As of December 31, 1997 the Company owned properties in Bourbon, Clark, Harrison, Jessamine and Woodford Counties with over 56 thousand square feet and leased offices with over 2 thousand square feet with rental payments in 1997 totaling nearly $14 thousand. Plans for construction of a new facility in Scott County are in progress and the new facility is expected to open for service in the third quarter of 1998. The new Company-owned bank will have about 3 thousand square feet. There are no known environmental problems affecting Company owned or leased property.
Item 3.
Item 3. Legal Proceedings
The Company and its subsidiary are from time to time involved in routine legal proceedings occurring in the ordinary course of business that, in the aggregate, management believes will not have a material impact on the Company's financial condition and results of operation.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
PART II
Item 5.
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is not listed on any national securities exchange nor is it quoted on the NASDAQ system. However, it is listed on the OTC Bulletin Board under the symbol "BBON". Trading in the Common Stock has been infrequent, with two regional retail brokerage firms making the market. The following table sets forth the high and low sales prices of the Common Stock and the dividends declared thereon, for the periods indicated below:
High Low Dividend
1997 Quarter 1 27.00 24.50 $.18 Quarter 2 30.00 26.00 $.18 Quarter 3 30.50 27.00 $.18 Quarter 4 31.00 28.00 $.18
1996 Quarter 1 27.00 24.00 $.16 Quarter 2 25.00 24.00 $.16 Quarter 3 25.00 24.75 $.16 Quarter 4 25.00 24.00 $.16
As of December 31, 1997 the Company had 1,394,562 shares of Common Stock outstanding and approximately 429 holders of record of its Common Stock.
During 1997, 6,080 shares of unregistered stock were issued to employees and directors. This stock was issued through the exercise of stock options. In accordance with Rule 701 promulgated under the Securities Act of 1933, all shares of Common Stock were issued upon the exercise of stock options issued prior to the Company becoming subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. The following shares were issued during 1997:
Aggregate Date Issued Shares Consideration
February 26, 1997 3,600 $28,188 March 26, 1997 20 240 June 13, 1997 20 240 September 12, 1997 400 4,800 September 15, 1997 20 240 November 6, 1997 2,000 17,000 December 15, 1997 20 240
Item 6.
Item 6. Selected Financial Data
The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented elsewhere herein.
At or For the Year Ended December 31 1997 1996 1995 1994 1993 (dollars in thousands, except per share amounts) CONDENSED STATEMENT OF CONDITION: Total Interest Income 20,962 19,425 19,658 15,657 14,233 Total Interest Expense 10,415 9,839 10,426 7,746 6,578 Net Interest Income 10,547 9,586 9,232 7,911 7,655 Provision of Losses 493 402 396 145 419 Net Interest Income After Provision for Losses 10,054 9,184 8,836 7,766 7,236 Noninterest Income 2,390 2,284 2,053 992 1,612 Noninterest Expense 7,888 7,715 7,684 6,067 5,380 Income Before Income Tax Expense 4,556 3,753 3,205 2,691 3,468 Income Tax Expense 1,148 866 717 488 832 Net Income 3,408 2,887 2,488 2,203 2,636
SHARE DATA: Net Income-Earnings per Share 2.44 2.03 1.74 1.54 1.86 Net Income Earnings per Share assuming dilution 2.40 1.52 1.82 2.00 1.71 Cash Dividends Declared 0.72 0.64 0.60 0.54 0.50 Book Value 19.16 17.44 16.16 14.00 14.17 Average Shares and Share Equivalents Outstanding 1,422 1,443 1,474 1,454 1,451
SELECTED BALANCE SHEET DATA: Loans, net including held sale 182,839 157,564 153,201 145,817 114,701 Investment Securiies 81,703 92,540 92,639 99,345 92,655 Total Assets 290,655 272,453 269,431 274,497 220,321 Deposits 241,325 231,071 213,348 223,810 175,870 Long-Term Debt 10,986 11,284 20,421 23,056 18,978 Shareholders' Equity 26,716 24,633 23,167 19,955 20,044
PERFORMANCE RATIOS: (Average Balances) Return on Assets 1.23% 1.10% 0.94% 0.95% 0.93% Return on Shareholders' Equity 13.43% 12.17% 11.36% 10.61% 14.37% Net Interest Margin 4.18% 4.02% 3.80% 3.76% 4.13% Equity to Assets Ratio (at period end) 9.19% 9.04% 8.60% 7.27% 9.10%
SELECTED STATISTICAL DATA: Dividend Payout Ratio 29.49% 31.57% 32.93% 31.25% 23.45% Number of Employees (at period end) 141 137 125 128 94
ALLOWANCE COVERAGE RATIOS: Allowance to Total Loans 1.25% 1.32% 1.20% 1.12% 1.19% Allowance to Non-Accruing Loans 1342.20% 6366.67% 4227.27% 1938.82% 443.75% Allowance to Non-Performing Loans 710.09% 353.11% 385.89% 447.83% 230.52%
Item 7.
Item 7. Management's Discussion and Analysis
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and accompanying notes included as Exhibit 13. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 1997 data.
Summary
Bourbon Bancshares, Inc. net income for the year ended December 31, 1997 was $3.4 million, or $2.44 per common share compared to $2.9 million, or $2.03 for 1996 and $2.5 million, or $1.74 for 1995. Earnings per share assuming dilution were $2.40, $2.00 and $1.71 for 1997, 1996 and 1995, respectively. Net income increasing over $520 thousand (over 18%) is mainly attributable to increased net interest income and other income, offset by an increase in the loan loss provision, while maintaining other expenses to below modest increases. The 16% increase in 1996 net income compared to 1995 reflects increased net interest income and increased other income while holding the loan loss provision and other expenses to modest increases.
Return on average equity was 13.4% in 1997 compared to 12.2% in 1996 and 11.4% in 1995. Return on average assets was 1.23% in 1997 compared to 1.10% in 1996 and 0.94% in 1995.
Non-performing loans as of a percentage of net loans were 0.18%, 0.43% and 0.31% as of December 31, 1997, 1996 and 1995, respectively. The ratio of allowance to non- performing loans was 710% in 1997 compared to 353% in 1996 and 385% in 1995. These ratios reflect a concerted effort by management to increase the quality of loans over the last several years.
On December 19, 1995, Jessamine First Federal Savings and Loan Association (Jessamine) became a wholly owned subsidiary of the Company through the pooling of interests. During 1996, the federal thrift charters of Kentucky Savings Bank, FSB and Jessamine were terminated and both entities became branches of Kentucky Bank. Financial statements have been adjusted to reflect this change.
RESULTS OF OPERATIONS
Net Interest Income
Net interest income, the largest source of revenue, on a tax equivalent basis increased from $9.7 million in 1995 to $9.9 million in 1996 to $10.9 million in 1997. The taxable equivalent adjustment (which is net of the effect of the non- deductible portion of interest expense) is based on a Federal income tax rate of 34%. An increase in earning assets and interest bearing liabilities were both positive factors on 1997 net interest income. Loan growth on an average basis for 1997 increased 10%, while being funded by over 5% growth in interest bearing deposits. There was a positive effect on the rate changes for assets, whereas the rate on liabilities was relatively flat. The 10% increase in loans from 1996 to 1997 and a 5% increase in deposits for the same time period have resulted in the net interest margin increasing from 4.02% in 1996 to 4.18% in 1997. Loan volume accounted for over $1.3 million of the increase in total interest income, while loan rates accounted for $0.3 million of the total interest income increase. On the liability side, deposit volume accounted for $0.5 million of the $0.6 million increase in total interest expense. In 1996, the increase was primarily attributable to higher rates on earning assets and an improvement in net interest margin from 3.80% to 4.02%. A reduction of investment securities volume accounted for $0.5 million decrease in total interest income, offset somewhat by loan volume increase accounting for $0.2 million reduction in interest income. On the liability side, a reduction in long-term borrowings accounted for a reduction in total interest expense of $0.6 million.
Average earning assets dropped $6.4 million in 1996, but increased $12.7 million in 1997 to $260 million. Average loans increased $15.4 million in 1997 to $171.1 million and increased $2.6 million in 1996, from $153.1 million in 1995.
Average interest bearing liabilities increased $8.6 million in 1997 to $217.3 million. In 1996, interest-bearing liabilities decreased $10.6 million from $219.3 to $208.7. Interest bearing deposits accounted for over $10 million of this growth in 1997. During 1996, interest-bearing deposits dropped $1.4 million. Long-term debt decreased $3.0 million in 1997 to $11.2 million and decreased $9.4 million dollars from $23.6 million to $14.2 million in 1996.
The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these increases in 1997 and 1996. Changes in interest income and expenses due to both rate and volume are allocated pro rata.
[FN] (1) Averages computed at amortized cost. (2) Includes loans on a nonaccrual status. (3) Tax equivalent difference represents the tax equivalent adjustment detailed above.
Noninterest Income and Expenses
Noninterest income was $2.4 million in 1997 compared to $2.3 million in 1996 and $2.1 million in 1995. In 1997 securities gains were $14 thousand compared to $13 thousand losses in 1996 and $56 thousand in losses in 1995. Typically, U. S. Treasury securities are sold before maturity when additional interest yields can be realized. Other types of investment securities are generally not sold. In addition, gains on loans sold were $72 thousand, $200 thousand and $65 thousand in 1997, 1996 and 1995, respectively. The increase in loan gains in 1996 were primarily attributable to the Company's adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" on January 1, 1996. Loans available to be sold to Federal Home Loan Mortgage Corporation are generally sold as the loans are closed. The sales of loans were $18 million, $21 million and $21 million in 1997, 1996 and 1995, respectively. Other noninterest income excluding security and loans gains (losses) was $2.3 million in 1997, $2.1 million in 1996 and $2.0 million in 1995.
Noninterest expense increased a modest $173 thousand from $7,715 thousand in 1996 to $7,888 thousand in 1996. From 1995 to 1996, noninterest expense increased $31 thousand. The increases in salaries and benefits from $4.0 million in 1996 to $4.3 million in 1997 and the increase from 1995 to 1996 of nearly $0.2 million is mainly attributable to normal salary increases and related benefits. Occupancy expense also increased 8% in 1997, from $932 thousand in 1996 to $1,002 thousand in 1997. In March 1997, the Company opened its new branch in Versailles resulting in higher operating cost attributable to this facility. The Company also placed more emphasis on maintaining its existing facilities. The 1996 increase was $71 thousand. Other noninterest expense decreased from $3.0 million in 1995 to $2.8 million in 1996, and to $2.6 million in 1997. In September 1995, the FDIC lowered the federal deposit insurance premium from 23 cents to 4 cents per $100 for deposits insured by the Bank Insurance Fund (BIF). In December 1995, the FDIC set the 1996 premium for BIF-insured deposits at zero. In September 1996, Congress declared a special, one-time assessment on SAIF-insured deposits. The cost of this assessment was nearly $200 thousand after income taxes. For 1997, the BIF- insured deposit rate will be 1.3 cents per $100 and the SAIF- insured rate will be 6.5 cents per $100. Due to the conversion of the savings institutions to branches of Kentucky Bank, the Company has deposits of over $53 million that will be assessed at the SAIF rate. The resulting decrease in FDIC assessment was $358 thousand from 1996 to 1997. Outside these savings, other noninterest expense increased $0.2 million in 1997, which is mainly attributable to increased inflationary costs.
The following table is a summary of noninterest income and expense for the three-year period indicated.
Year Ended December 31 (in thousands) 1997 1996 1995 Non-interest Income Service Charges 1,674 1,508 1,354 Loan Servicing Income 258 255 236 Trust Income 237 206 236 Investment Securities Gains (Losses) 14 (13) (56) Gains (Losses) on Sale of Loans 72 200 65 Other 135 128 218 Total Non-interest Income 2,390 2,284 2,053
Non-interest Expense Salaries and Employee Benefits 4,274 4,005 3,819 Occupancy 1,002 932 861 Other 2,612 2,778 3,004 Total Non-interest Expense 7,888 7,715 7,684
Income Taxes
The Company had income tax expense of $1,148 thousand in 1997 compared to $866 thousand in 1996 and $717 thousand in 1995. This represents an effective income tax rate of 25.2% in 1997, 23.1% in 1996 and 22.4% in 1995. The difference between the effective tax rate and the statutory federal rate of 34% is due to tax exempt income on certain loans and investment securities. The higher effective rate for 1997 is a result of tax free income remaining virtually unchanged from 1996 while income before taxes increased over $800 thousand.
Balance Sheet Review
Assets at year-end 1997 totaled $291 million compared to $272 million in 1996 and $269 million in 1995. The increase in size from 1996 to 1997 is mainly attributable to total loans increasing $25.5 million and investment securities decreasing $10.8 million, while being funded by an increase in deposits of $10.3 million and short term borrowing of $5.3 million. Changes from 1995 to 1996 are mainly a result of an increase in deposits of $17.7 million offset by a decrease in short term borrowing of over $7 million.
Loans
Total loans, net of unearned income were $185 million at December 31, 1997 compared to $160 million at the end of 1996 and $155 million in 1995. During 1997, real estate construction loans increased $3.5 million, real estate mortgages increased $14.2 million and agricultural loans increased $7.0 million. Management developed regional loan goals for each type of loan and this emphasis has resulted in improved sales efforts by the lending personnel. Agricultural loans and installment loans experienced an increase of nearly $4 million each, while commercial and real estate mortgage saw declines during 1996. Since 1994, Bourbon has placed more emphasis on the growth as well as the quality of the loan portfolio.
As of December 31, 1997, the real estate mortgage portfolio comprises over 61% of total loans. Of this, nearly $87 million or 78% represent 1-4 family residential property. Agricultural loans of nearly $38 million comprise nearly 20% of the loan portfolio. Nearly $28 million of the agricultural loans are secured by real estate. The remainder of the portfolio is used to purchase livestock, equipment and other capital improvements and for general operation of the farm. Generally, a secured interest is obtained in the capital assets, equipment, livestock or crops. Automobile loans account for over $7 million of the installment loan portfolio of $15 million, while the purpose of the remainder of this portfolio is for purchasing retail goods, home improvement or other personal reasons. Secured interest is generally obtained on these loans after analyzing the repayment ability of borrower. Commercial loan's $11 million portfolio is mainly for capital outlays and business operation. Collateral is requested depending on the creditworthiness of the borrower. Unsecured loans are made to individuals or companies mainly based on the creditworthiness of the customer. Approximately 5% of the loan portfolio is unsecured. Management is not aware of any significant concentrations that may cause future material risks resulting in significant problems with income and capital.
The following table represents a summary of the Company's loan portfolio by category for each of the last five years. There is no concentration of loans (greater than 5% of the loan portfolio) in any industry. Bourbon has no foreign loans or highly leveraged transactions in its loan portfolio.
Loans Outstanding
December 31 (in thousands) 1997 1996 1995 1994 1993 Commercial 10,644 10,216 11,167 7,502 4,451 Real Estate Construction 7,657 4,200 3,497 3,156 3,578 Real Estate Mortgage 113,467 99,293 102,077 101,361 79,290 Agricultural 37,924 30,947 27,019 23,407 24,610 Installment 15,239 14,789 11,029 11,391 7,101 Other 287 374 397 807 158 Total Loans 185,218 159,819 155,186 147,624 119,188 Less Unearned Income 57 154 125 159 124 Total Loans Net of Unearned Income 185,161 159,665 155,061 147,465 119,064 Less loans held for sale 5,418 863 1,364 1,553 3,436 Less Allowance For Loan Losses 2,322 2,101 1,860 1,648 1,420 Net Loans 177,421 156,701 151,837 144,264 114,208
The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 1997. Maturities are based upon contractual term. The total loans in this report represents loans net of unearned income, including loans held for sale but excluding the allowance for loan losses. In addition, unearned income on the above schedule is netted with real estate mortgage loans on the following schedule.
Loan Maturities and Interest Sensitivity December 31, 1997 (in thousands) One Year One Through Over Total or Less Five Years Five Year Loans
Commercial 4,466 5,002 1,176 10,644 Real Estate 6,188 1,396 73 7,657 Construction Real Estate Mortgage 9,309 45,754 58,347 113,410 Agricultural 10,071 24,165 3,687 37,923 Installment 5,065 10,070 105 15,240 Other 287 0 0 287 Total Loans 35,386 86,387 63,388 185,161 Fixed Rate Loans 18,689 77,486 17,633 113,808 Floating Rate Loans 16,697 8,901 45,755 71,353 Total 35,386 86,387 63,388 185,161
Deposits
During 1997, total deposits increased $10 million to $241 million from $231 million in 1996. The Company increased its marketing efforts for newer interest bearing checking accounts. In addition, management placed more emphasis on deposits and monitored deposits generated by type on a monthly basis. The increase was mainly a result of interest bearing checking accounts increasing over $11 million during 1997. Public deposits accounted for $22 million, with $21 million of this being interest bearing deposits. Total deposits increased to $231 million in 1996, up $17.7 million or 8.3% from 1995. Over $13 million were in the form of public deposits, mostly in interest bearing accounts. Non- interest bearing deposits increased $5.8 million to $32.5 million in 1996.
The tables below provide information on the maturities of time deposits of $100,000 or more at December 31, 1997 and detail of short-term borrowing for the past three years.
Maturity of Time Deposits of $100,000 of More December 31, 1997 (in thousands) Maturing 3 Months or Less 6,251 Maturing over 3 Months through 6 Months 4,030 Maturing over 6 Months through 12 Months 7,507 Maturing over 12 Months 4,467
Borrowing
The Company utilizes both long and short term borrowing. Long term borrowing is mainly from the Federal Home Loan Bank (FHLB). As of December 31, 1997, over $10.2 million was borrowed from FHLB, a decrease of $300 thousand from 1996. Advances are either paid monthly or at maturity. This borrowing is mainly used to fund long term, fixed rate mortgages and to assist in asset/liability management. Over $7.2 million of FHLB borrowing matures in 1998. The following table depicts relevant information concerning our short term borrowings.
Short Term Borrowings December 31 (in thousands) 1997 1996 1995 Federal Funds Purchased: Balance at Year end 2,375 0 5,700 Average Balance During the Year 488 142 591 Maximum Month End Balance 2,375 1,075 5,700 Repurchase Agreements: Balance at Year end 4,615 2,836 4,660 Average Balance During the Year 4,103 3,342 2,589 Maximum Month End Balance 4,895 4,668 6,202 Other Borrowed Funds: Balance at Year end 1,718 574 81 Average Balance During the Year 509 475 505 Maximum Month End Balance 1,718 1,123 1,168
Asset Quality
With respect to asset quality, management considers three categories of assets to merit constant scrutiny. These categories include: loans that are currently nonperforming, other real estate, and loans that are currently performing but which management believes require special attention.
The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless they are adequately secured and in the process of collection. A loan remains in a non-accrual status until factors indicating doubtful collection no longer exist. A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at market rates. Other real estate is recorded at the lower of cost or fair market value less estimated costs to sell. A summary of the components of nonperforming assets, including several rates using period-end data, is shown below.
Nonperforming Assets December 31 (in thousands) 1997 1996 1995 1994 1993 Non-accrual Loans 173 33 44 85 320 Accruing Loans which are Contractually past due 90 days or more 154 562 438 283 296 Restructured Loans 0 0 0 0 0 Total Nonperforming and Restructured Loans 327 595 482 368 616 Other Real Estate 0 79 57 306 903 Total Nonperforming and Restructured Loans and Other Real Estate 327 674 539 674 1,519 Loans as a Percentage of Net Loans 0.18% 0.43% 0.31% 0.25% 0.52% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.12% 0.25% 0.20% 0.25% 0.56%
Nonperforming and restructured loans at December 31, 1997 were $327 thousand compared to $595 thousand at December 31, 1996 and $482 thousand at December 31, 1995. Total nonperforming assets were $327 thousand, $674 thousand and $539 thousand at December 31, 1997, 1996 and 1995, respectively. Management has placed a concerted effort on the quality of loans and the chart depicts the improved trends in the quality of the loan portfolio. The amount of lost interest on non-accrual loans is considered immaterial. At December 31, 1997, loans currently performing but which management believes require special attention were not significant. The Company continues to follow its long- standing policy of not engaging in international lending and not concentrating lending activity in any one industry.
Impaired loans as of December 31, 1997 were $333 thousand compared to $251 thousand in 1996 and $345 thousand in 1995. These amounts are included in the total nonperforming and restructured loans presented in the table above. Interest income of $23 thousand, $55 thousand and $34 thousand was recognized on impaired loans for cash payments received in 1997, 1996 and 1995, respectively. At December 31, 1997 nonaccrual loans amounted to $173 thousand compared to $33 thousand in 1996 and $44 thousand in 1995. See Note 5 - Loans in the notes to consolidated financial statements included as Exhibit 13.
A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. The entire change in present value of expected cash flows is reported as a provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported. The total allowance for loan losses related to these loans was $57 thousand, $28 thousand and $70 thousand on December 31, 1997, 1996 and 1995, respectively.
Loan Losses
The following table is a summary of the Company's loan loss experience for each of the past five years.
Loan Losses Year Ended December 31 (in thousands) 1997 1996 1995 1994 1993 Balance at Beginning of Year 2,101 1,860 1,648 1,420 1,234 Balance of Allowance for Loan Losses of Acquired Brance At Acquisition Date 252 Amounts Charged Off: Commercial 5 55 14 123 31 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 25 4 41 53 111 Agricultural 52 12 36 3 221 Consumer 273 142 139 56 73 Total Charged-off Loans 355 213 230 235 436 Recoveries on Amounts Previously Charged-off: Commercial 3 12 15 22 7 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 1 8 21 1 25 Agricultural 25 1 0 0 147 Consumer 54 31 11 43 24 Total Recoveries 83 52 47 66 203 Net Charge-offs 272 161 183 169 233 Provision for Loan Losses 493 402 395 145 419 Balance at End of Year 2,322 2,101 1,860 1,648 1,420 Total Loans, Net of Unearned Income Average 171,128 155,735 153,109 125,643 108,043 At December 31 185,161 159,665 155,061 147,465 119,064 As a Percentage of Average Loans: Net Charge-offs 0.16% 0.10% 0.12% 0.13% 0.22% Provision for Loan Losses 0.29% 0.26% 0.26% 0.12% 0.39% Allowance as a Percentage of Year-end Net Loans 1.25% 1.32% 1.20% 1.12% 1.19% Allowance as a Multiple of Net Charge-offs 8.5 13.0 10.2 9.8 6.1
The provision for loan losses for 1997 was $493 thousand compared to $402 thousand in 1996 and $396 thousand in 1995. Net chargeoffs were $272 thousand in 1997, $161 thousand in 1996 and $183 thousand in 1995. Net chargeoffs to average loans were 0.16%, 0.10% and 0.12% in 1997, 1996 and 1995, respectively. The 1997 loan loss provision increased considering our historical loan loss trends, risk analysis of our loan portfolio and the increase in loan outstandings. The 1996 provision was more comparable to the 1995 provision. In evaluating the allowance for loan losses, management considers the composition of the loan portfolio, historical loan loss experience, the overall quality of the loans and an assessment of current economic conditions. At December 31, 1997, the allowance for loan losses was 1.25% of loans outstanding compared to 1.32 at year-end 1996 and 1.20% in 1995. Management believes the allowance for loan losses at the end of 1997 is adequate to cover inherent credit losses within the portfolio.
The following tables set forth an allocation for the allowance for loan losses and loans by category and a percentage distribution of the allowance allocation. In making the allocation, management evaluates the risk in each category, current economic conditions and charge-off experience. An allocation for the allowance for loans losses is an estimate of the portion of the allowance that will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan being used to absorb losses of another loan type.
Capital
As displayed by the following table, the Company's Tier I capital (as defined by the Federal Reserve Board under the Board's risk-based guidelines) at December 31, 1997 increased $2.1 million to $24.7 million. Total capital was $26.5 million at December 31, 1997. The Company's risk- based capital and leverage ratios, as shown in the following table, exceeded the levels required to be considered "well capitalized". The leverage ratio compares Tier I capital to total average assets less disallowed amounts of goodwill.
Capital December 31 (in thousands) 1997 1996 Change Shareholders' Equity (1) 26,483 24,632 1,851 Less Disallowed Amount of Goodwill 1,789 2,077 (288) Tier I Capital 24,694 22,555 1,661 Allowance for Loan Losses 2,272 1,995 277 Tier II Capital 2,272 1,995 135 Total Capital 26,966 24,550 1,796 Total Risk Weighted Assets 181,702 159,508 22,194 Ratios: Tier I Capital to Risk-weighted 13.59% 14.14% 1.24% Assets Total Capital to Risk-weighted Assets 14.84% 15.39% 1.34% Leverage 8.77% 8.66% 0.11%
(1) Excluding net unrealized gains and losses on securities available for sale.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for insured depository institutions under its Prompt Corrective Action Provisions. The bank regulatory agencies adopted regulations, which became effective in 1992, defining these five capital categories for banks they regulate. The categories vary from "well capitalized" to "critically undercapitalized". A "well capitalized" bank is defined as one with a total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio of 6% or more, a leverage ratio of 5% or more, and one not subject to any order, written agreement, capital directive, or prompt corrective action directive to meet or maintain a specific capital level. At December 31, 1997, the subsidiary had ratios that exceeded the minimum requirements established for the "well capitalized" category.
In management's opinion, there are no known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations.
Securities and Federal Funds Sold
Securities, including those classified as held to maturity and available for sale, decreased from $92.5 million at December 31, 1996 to $81.7 million at December 31, 1997. The decrease is attributable to the increased loan demand. At December 31, 1995 securities totaled $92.6 million. Federal funds sold totaled $75 thousand and $2.8 million at December 31, 1996 and 1995, respectively. During December 1995, Bourbon made a one-time transfer of investment securities from held to maturity to available for sale of over $14 million providing added flexibility for future interest rate and liquidity management.
Per Company policy, fixed rate asset backed securities will not have an average life exceeding seven years, but final maturity may be longer. Adjustable rate securities shall adjust within three years per Company policy. Of the $17.6 million of adjustable asset backed securities held on December 31, 1997, $3.9 million are repriceable monthly and the remaining $13.7 million is repriceable annually. In addition, all applicable securities have passed the appropriate stress tests. The following tables present the investment securities for each of the past three years and the maturity and yield characteristics of securities as of December 31, 1997.
Investment Securities (Held to maturity at amortized cost, available for sale at market value) December 31 1997 1996 1995 (in thousands) U.S. Treasury Securities Available for Sale 19,072 24,571 21,139 U.S. Federal Agency Securities Available for Sale 10,485 8,984 17,991 Held to Maturity 0 0 0 State and Municipal Obligations Available for Sale 4,077 4,012 3,951 Held to Maturity 15,603 16,313 16,455 Asset-Backed Securities Available for Sale 32,466 38,660 31,651 Fixed - GNMA, FNMA, FHLMC 4,924 10,899 6,126 Passthroughs GNMA, FNMA, FHLMC CMO's 9,970 10,482 7,506 Other Securities 0 0 0 Total 14,894 21,381 13,632 Variable - GNMA, FNMA, FHLMC 14,306 13,907 14,485 Passthroughs GNMA, FNMA, FHLMC CMO's 3,266 3,372 3,534 Total 17,572 17,279 18,019 Other Securities Available for Sale 0 0 1,452 Total Securities Available for Sale 66,100 76,227 76,184 Held to Maturity 15,603 16,313 16,455 Total 81,703 92,540 92,639
Impact of Inflation and Changing Prices
The majority of Bourbon's assets and liabilities are monetary in nature. Therefore, Bourbon differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets and inventories. However, inflation does have an important impact on the growing of assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of inflation.
Other Accounting Issues
The Company adopted FASB's Statement on Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" on January 1, 1997. The effect of adopting the new guidance was not material to the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income. The new guidance is effective for fiscal years beginning after December 15, 1997 and its implementation will have no impact on the Company's financial condition or results of operations.
In the last quarter of 1997, the Company adopted SFAS No. 128, "Earnings per Share", under which basic and diluted earnings per share are computed. Prior amounts have been restated to be comparable.
Year 2000
Management is currently reviewing the Year 2000 situation in order to address potential problems that may occur in time to take corrective action. The Bank's Electronic Data Processing Steering Committee is working diligently to address Year 2000 problems that may exist with the Bank's hardware and software, vendors, larger commercial borrowers, and the Federal Government and other participants in the economy. At this time, management believes that the transition into the next century can be conducted smoothly and with minimum additional costs.
Item 7A.
Item 7A. Asset/Liability Management, Interest Rate Sensitivity, Market Risk and Liquidity
Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP report and an interest rate shock simulation report. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 to 300 basis point changes in rates. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. In addition, the projected percentage changes from level rates are outlined below with the Board of Directors specified limits. As of December 31, 1997 the projected percentage changes are within the Board limits and the Company's interest rate risk appears reasonable. The projected net interest income report summarizing the Bank's interest rate sensitivity as of December 31, 1997 is as follows:
Management measures the Bank's interest rate risk by computing estimated changes in net interest income in the event of a range of assumed changes in market interest rates. The Company's exposure to interest rates is reviewed on a monthly basis by senior management and quarterly with the Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in net interest income in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Bank's assets and liabilities. If estimated changes to net interest income are not within the limits established by the Board, the Board may direct management to adjust the Bank's asset and liability mix to bring interest rate risk within Board approved limits.
In addition, the Bank uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest- bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate- sensitive assets exceeds the amount of interest-sensitive- liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. The Bank's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings.
The interest rate sensitivity analysis as of December 31, 1997 shown below depicts amounts based on the earliest period in which they can normally be expected to reprice.
[FN] (1) Held to maturity at amortized cost, available for sale at market value
Liquidity risk is the possibility that Bourbon may not be able to meet its cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and meeting the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings resulting from the lower yields on short- term assets.
In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities maturing within one year along with cash and cash equivalents totaled $33.4 million at December 31, 1997. Additionally, securities available-for-sale with maturities greater than one year totaled $45.3 million at December 31, 1997. These securities are available to meet liquidity needs on a continuing basis.
Bourbon maintains a relatively stable base of customer deposits and its steady growth is expected to be adequate to meet its funding demands. In addition, management believes the majority of its $100,000 or more certificates of deposit are no more volatile than its core deposits. At December 31, 1997 these balances totaled over $22 million, about 9.2% of total deposits.
The Company also relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. FHLB advances decreased $0.3 million in 1997 to $10.2 million.
Generally, Bourbon relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt. The Company's primary investing activities include purchasing investment securities and loan originations. Management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment.
The cash flow statements for the periods presented provide an indication of Bourbon's sources and uses of cash as well as an indication of the ability of Bourbon to maintain an adequate level of liquidity. A discussion of cash flow statements for 1997, 1996 and 1995 follows.
Net cash provided by operating activities was $5.3 million, $4.8 million and $3.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. The increases in 1997 and 1996 were mainly a result of the increase in net income from $2.5 million to $2.9 million to $3.4 million in 1995, 1996 and 1997, respectively.
Net cash flow provided by (used in) investing activities was ($15.9 million), ($6.7 million), and $0.8 million and for the years ended December 31, 1997, 1996 and 1995, respectively. The changes in net cash from investing activities included the result of normal maturities and reinvestment of investment securities as well as funding related to increases in loans. In 1997, the loan demand resulted in a use of funds of nearly $26 million, being offset by a decline in investment securities of $11 million. This was funded mainly by deposits increasing $10 million and short term borrowing increasing $5 million. In addition, $1.3 million was used for purchases of bank premises and equipment. During 1996 and 1997, over $1 million was expended for land, building and equipment for the new branch location in Versailles. In 1997, $376 thousand has been spent for the new Georgetown branch to be opened later in 1998. Increase in loans of nearly $6 million and $1.3 million for purchases of bank premises and equipment account for the majority of the change in 1996. In 1995 the $8 million increase in loans was offset by the net proceeds from investment securities. During these periods no investment securities held-to-maturity were sold.
Net cash flow provided by (used in) financing activities was $13.7 million, $0.1 million and ($8.6 million) for the years ended December 31, 1997, 1996 and 1995, respectively. The net cash increases and decreases were primarily attributable to changes in total deposits, securities sold under agreements to repurchase and federal funds purchased, and net changes in advances from the Federal Home Loan Bank and other borrowings.
A number of other techniques are used to measure the liquidity position, including the ratios presented below. These ratios are calculated based on annual averages for each year.
Liquidity Ratios December 31 1997 1996 1995 Total Loans/Total Deposits 73.6% 71.3% 70.7% Net Short-term Borrowings/Total Assets 1.8% 1.5% 1.4%
This chart shows that the loan to deposit ratio increased in 1997 and 1996. The changes in 1997 and 1996 are relatively small with increases in both loan and deposits being a factor.
Item 8.
Item 8. Financial Statements
The consolidated financial statements of the Company for the years ended December 31, 1997, 1996 and 1995, together with the notes thereto and related auditor's report are contained in the Company's 1997 Annual Report to Shareholders included as Exhibit 13, and are incorporated herein by reference.
Item 9.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Not Applicable
PART III
Item 10.
Item 10. Directors, Executive Officers, Promoters and Control Persons, Compliance With Section 16(a) of the Exchange Act
Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes, each to serve, subject to the provisions of the Articles of Incorporation and Bylaws for a three year term and until his successor is duly elected and qualified. The names of the directors and their terms are set forth below.
Term expires in 1998:
William Arvin, age 57, is an attorney. He has been a director of the Company since December 19, 1995.
James L. Ferrell, M.D., age 63, is a Physician. He has been a director of the Company since 1980.
Joseph B. McClain, age 69, is President of Hopewell Co. (insurance agency). He has been a director of the Company since 1971.
Term expires in 1999:
Russell M. Brooks, age 46, is Financial Analyst of Kentucky Bank. He has been a director of the Company since December 19, 1995.
Henry Hinkle, age 46, is President of Hinkle Construction Company. He has been a director of the Company since 1979.
Theodore Kuster, age 54, is a farmer and thoroughbred horse breeder. He has been a director of the Company since 1979.
Robert G. Thompson, age 48, is a farmer and thoroughbred horse breeder. He has been a director of the Company since 1991.
Term expires in 2000:
William R. Stamler, age 63, is Chairman of Signal Investments, Inc. He has been a director of the Company since 1988.
Buckner Woodford, age 53, is President and Chief Executive Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He has been a director of the Company since 1971.
Item 11.
Item 11. Executive Compensation
The following table sets forth information with respect to the compensation of the President and Chief Executive Officer of the Company. No other executive officer earned total salary and bonus in excess of $100,000.
Annual Compensation Other Options Name Year Salary Bonus Compensation Granted Buckner Woodford 1997 $150,000 $ 4,879 (1) 1,600 Buckner Woodford 1996 $136,500 $ 1,505 (1) 3,000 Buckner Woodford 1995 $125,000 $ 6,250 (1) 0 Buckner Woodford 1994 $120,000 $ 5,990 (1) 2,000
(1) Less than the lesser of $50,000 or 10% of annual salary and bonuses.
The following table contains information regarding the grant of stock options under the Company's stock option plan to the Chief Executive Officer during the year ended December 31, 1997. In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model.
Option Grants in the Last Fiscal Year
% of Total Options Grant Shares Granted to Exercise Date Granted Employees Price Expiration Present Name (#) in 1997 ($/Sh) Date Value($)
Buckner Woodford 1,600 15.4% $25.00 1/6/07 $12,192
The following table sets forth certain information regarding options exercised by the Chief Executive Officer during calendar year 1997 and unexercised stock options held by him as of December 31, 1997.
Compensation of Directors
Directors are paid $300 for each board meeting attended and $100 for each committee meeting attended.
Pension Plan Table
The following table sets forth the annual benefits which an eligible employee would receive under the Company's qualified defined benefit pension plan based on remuneration that is covered under the plan and years of service with the Company and its subsidiaries.
Years of Service
Remuneration 15 20 25 30 35
25,000 3,750 5,000 6,250 7,500 8,750 50,000 7,500 10,000 12,500 15,000 17,500 75,000 11,250 15,000 18,750 22,500 26,250 100,000 15,000 20,000 25,000 30,000 35,000 125,000 18,750 25,000 31,250 37,500 43,750 150,000 22,500 30,000 37,500 45,000 52,500 175,000 26,250 35,000 43,750 52,500 61,250 200,000 30,000 40,000 50,000 60,000 70,000
In general, a participant's remuneration covered by the Company's pension plan is his or her average annual cash compensation (W-2 earnings) for the last 5 years. The years of service for Mr. Woodford are 26 years.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Set forth below are the number of shares of the Company's common stock beneficially owned by each director and executive officer, and all current directors and executive officers as a group as of December 31, 1997.
Name Shares Beneficially Owned(1) Number Percentage
William Arvin (2) 15,616 1.1%
Russell M. Brooks (3) 12,597 *
Gregory J. Dawson (4) 6,880 *
James L. Ferrell, M.D. (5) 15,470 1.1%
Henry Hinkle (6) 10,775 *
Theodore Kuster (7) 8,885 *
Joseph B. McClain (8) 21,568 1.5%
William R. Stamler (9) 15,380 1.1%
Robert G. Thompson (10) 3,220 *
Buckner Woodford (11) 128,351 8.9%
All directors and officers (10 persons) as a group (consisting of those persons named above) 238,742 16.5%
* Less than 1%
1) Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 under the Exchange Act. Unless otherwise indicated, beneficial ownership includes both sole or shared voting and sole or shared investment power. 2) Includes 5,929 shares held in a retirement account, 5,984 shares held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims beneficial ownership and 3,638 held jointly with his wife. 3) Includes 7,797 share held in a retirement account and 4,700 shares held jointly with his wife. 4) Includes 2,500 shares held jointly with his wife and 4,380 shares that Mr. Dawson may acquire upon exercise of outstanding stock options. 5) Includes 2,500 shares held in a retirement account and 520 shares that Mr. Ferrell may acquire upon exercise of outstanding stock options. Also, includes 1,500 shares held by Dr. Ferrell's wife, as to which Dr. Ferrell disclaims beneficial ownership.
6) Includes 500 shares held by his wife and 320 shares held by three sons, as to which Mr. Hinkle disclaims beneficial ownership. Includes 8,835 shares held of record by Hinkle Contracting Company, as to which Mr. Hinkle, as president, has shared voting power. Also includes 520 shares that Mr. Hinkle may acquire upon exercise of outstanding stock options. 7) Includes 3,135 share held of record by Mr. Kuster's wife, as to which Mr. Kuster disclaims beneficial ownership. Also includes 2,500 shares held in a retirement account and 520 shares that Mr. Kuster may acquire upon exercise of outstanding stock options. 8) Includes 520 shares that Mr. McClain may acquire upon exercise of outstanding stock options. Also includes 9,400 shares held of record by Mr. McClain's wife, as to which Mr. McClain disclaims beneficial ownership. 9) Includes 2,000 shares held by Signal Investments Corporation, as to which Mr. Stamler, as the chief executive officer and majority shareholder of such corporation, has sole voting and investment power. Also includes 520 shares that Mr. Stamler may acquire upon exercise of outstanding stock options. 10) Includes 520 shares that Mr. Thompson may acquire upon exercise of outstanding stock options. 11) Includes 4,000 shares held by his wife and 5,180 shares held by two sons, as to which Mr. Woodford disclaims beneficial ownership. Also includes 1,104 shares held in a retirement account and 2,872 shares that Mr. Woodford may acquire upon exercise of outstanding stock options.
The following table sets forth as of December 31, 1997 the persons known by the Company to own beneficially (as determined in accordance with the rules and regulations of the Commission) more than 5% of the outstanding common stock.
Name and Address Shares Beneficially of Beneficial Owner Owned Percentage
Buckner Woodford 128,351 8.9% 340 Stoner Avenue Paris, Kentucky 40361
Item 13.
Item 13. Certain Relationships and Related Transactions
Directors and officers of the Company and their associates were customers of and had transactions with the Company's subsidiary bank in the ordinary course of business during the year ended December 31, 1997. Similar transactions may be expected to take place with the Company's subsidiary bank in the future. Outstanding loans and commitments made by such subsidiary bank in transactions with the Company's directors and officers and their associates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Certain directors and executive officers were loan customers of the subsidiaries and outstanding loans were $1.8 million as of December 31, 1997 and 1996. See Note 5 - Loans in the notes to consolidated financial statements included as Exhibit 13.
Item 14.
Item 14. Exhibits and Reports on Form 8-K
(a) The following exhibits are incorporated by reference herein or made a part of this Form 10-K:
11 Computation of earnings per share
13 Financial Statements: Consolidated Balance Sheets - December 31, 1997 and 1996 Consolidated Statements of Income - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements Independent Auditor's Report
21 Subsidiaries of Registrant
23 Consent of Eskew & Gresham, P.S.C.
(b) Current Reports on Form 8-K during the quarter ended December 31, 1997 None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Bourbon Bancshares, Inc. By: __/S/ Buckner Woodford____ Buckner Woodford, President and Chief Executive Officer, Director March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
__/S/ Buckner Woodford_______ March 26, 1998 Buckner Woodford, President and Chief Executive Officer, Director
/S/ Gregory J. Dawson______ March 26, 1998 Gregory J. Dawson, Chief Financial and Accounting Officer
/S/ James L. Ferrell_______ March 26, 1998 James L. Ferrell, M.D., Chairman of the Board, Director
_____________________________ March 26, 1998 William Arvin, Director
/S/ Russell M. Brooks_____ March 26, 1998 Russell M. Brooks, Director
_____________________________ March 26, 1998 Henry Hinkle, Director
_____________________________ March 26, 1998 Theodore Kuster, Director
/S/ Joseph B. McClain_____ March 26, 1998 Joseph B. McClain, Director
_____________________________ March 26, 1998 William R. Stamler, Director
__/S/ Robert G. Thompson_____ March 26, 1998 Robert G. Thompson, Director
INDEX TO EXHIBITS
Exhibit Number Description of Document
11 Computation of earnings per share
13 Bourbon Bancshares, Inc. 1997 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Eskew & Gresham, P.S.C.
Exhibit 11 Computation of earnings per share
Primary earnings per share for 1997 are calculated by dividing the net income of $3.4 million by the sum of the average shares outstanding of 1,396 thousand shares and the dilutive effect of shares under option of 26 thousand shares for a total of 1,422 thousand average shares. The average fully diluted share are 1,422 thousand shares.
Exhibit 13
BOURBON BANCSHARES, INC.
ANNUAL REPORT 1997
Our Shareholders:
Our company enjoyed growth in both size and profitability this past year. After consolidating all operations under one charter in 1996, we concentrated on promoting the name of Kentucky Bank throughout central Kentucky in 1997. The strategy of locating in rapidly growing, smaller communities that surround Lexington is producing results.
The bank reached a new threshold in loan demand; our portfolio of outstanding loans grew by 16% during the year. Our deposit growth was not as strong, measuring a 4.4% increase. In today's economy most banks are seeing their loans outgrow deposits.
Earnings per share assuming dilution were $2.40, a 20% increase from the prior year. The combination of strong loan demand with good expense control helped produce these favorable results. Dividends per share were also increased in 1997, as they have each year since 1982.
A new branch office is being built in Georgetown. During this decade Scott County has been the fastest growing county in central Kentucky. Our new office should open around mid- year. We believe this will strengthen our market position.
In recent months competition by banks moving into the high growth communities we are located in has increased. The ever- increasing competitive challenges put pressure on our spreads. In spite of this, we feel we are well positioned to take advantage of the economic growth in our markets.
In conclusion, let me thank our shareholders for their support of Kentucky Bank. I hope to see at our annual shareholders meeting, May 4, 1998, held at Kentucky Bank in Paris. We expect 1998 to be another good year for our business.
Buckner Woodford
FINANCIAL HIGHLIGHTS
BOURBON BANCSHARES, INC. 1997 1996 1995
Assets ($ millions) $ 291 $ 272 $ 269
Net Income ($ thousands) $3,408 $2,887 $2,488
Per Share Results
Earnings (assuming dilution) $ 2.40 $ 2.00 $ 1.71
Dividends $ .72 $ .64 $ .60
Shareholder Information
CORPORATE HEADQUARTERS Bourbon Bancshares, Inc. 4th and Main Street Paris, Kentucky 40361 606-987-1795
ANNUAL MEETING The annual meeting of shareholders of Bourbon Bancshares, Inc. Will be held Monday, May 4, 1998 at 9:00 a.m. in the corporate headquarters.
MARKET MAKERS
Morgan Keegan & Co. 489 East Main Street Lexington, Kentucky 40507 1-800-937-0161
Hilliard Lyons West Vine Street, Suite 400 Lexington, Kentucky 40507 1-800-944-2663
OTC Bulletin Board Symbol: BBON
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Kentucky Bank Trust Department 606-987-1795, ext. 316
INVESTOR INFORMATION Any individual requesting general information or a copy of the Corporation's 1997 Form 10-K may obtain these by writing Investor Relations at the Corporate Headquarters.
BOURBON BANCSHARES, INC. AND SUBSIDIARY
AUDITED CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BOURBON BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31 ASSETS 1997 1996 Cash and cash equivalents: Cash and due from banks $ 12,274,875 $ 9,115,503 Federal funds sold 0 75,000 Total cash and cash equivalents $ 12,274,875 $ 9,190,503 Investment securities: Available for sale 66,100,663 76,226,956 Held to maturity (fair value of $16,410,523 and $16,990,060 for 1997 and 1996, respectively) 15,602,778 16,313,453 Federal Home Loan Bank stock 2,905,200 2,705,600 Loans held for sale 5,418,297 862,947
Loans $179,799,013 $158,956,446 Unearned income (56,870) (154,583) Allowance for loan losses (2,321,536) (2,101,081) Net loans $177,420,607 $156,700,782
Bank premises and equipment, net 5,765,310 5,004,245 Interest receivable 2,855,565 2,737,900 Deferred income taxes 27,696 136,061 Intangible assets 2,103,688 2,266,454 Other assets 180,110 307,778
TOTAL ASSETS $290,654,789 $272,452,679
LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Non-interest bearing $ 33,481,215 $ 32,489,556 Time deposits, $100,000 and over 22,573,181 20,103,668 Other interest bearing 185,270,925 178,477,487 Total deposits $241,325,321 $231,070,711 Federal funds purchased 2,375,000 0 Securities sold under agreements to repurchase 4,614,607 2,835,954 Federal Home Loan Bank advances 10,236,291 10,534,031 Notes payable 750,000 750,000 Treasury tax and loan note 1,717,999 573,543 Interest payable 1,900,824 1,363,573 Other liabilities 1,018,629 691,388 Total liabilities $263,938,671 $247,819,200
STOCKHOLDERS' EQUITY Preferred stock, 300,000 shares authorized and unissued $ 0 $ 0 Common stock, no par value; 3,000,000 shares authorized; 1,394,562 and 1,412,829 shares issued and outstanding in 1997 and 1996, respectively 6,332,861 6,392,329 Retained earnings 20,150,369 18,239,684 Net unrealized gains on investment securities 232,888 1,466 Total stockholders' equity $ 26,716,118 $ 24,633,479
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $290,654,789 $272,452,679
See notes to consolidated financial statements.
BOURBON BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1997 1996 1995 INTEREST INCOME: Loans, including fees $15,483,271 $13,774,234 $13,411,005 Investment securities - U. S. Treasury obligations 1,482,218 1,328,163 1,807,052 Obligations of U.S. government agencies 2,436,756 2,449,743 2,404,994 Obligations of states and political subdivisions 1,174,113 1,208,098 1,247,221 Other securities 221,179 280,524 375,916 Federal funds sold 159,833 297,418 272,640 Deposits in other bank 4,094 86,573 139,126 $20,961,464 $19,424,753 $19,657,954 INTEREST EXPENSE: Deposits $ 9,480,440 $ 8,806,069 $ 8,758,056 Federal funds purchased and securities sold under agreements to repurchase 234,521 175,745 174,616 Notes payable and other borrowed funds 699,754 857,033 1,493,373 $10,414,715 $ 9,838,847 $10,426,045
Net interest income $10,546,749 $ 9,585,906 $ 9,231,909 Provision for loan losses 492,800 401,965 395,794 Net interest income after provision for loan losses $10,053,949 $ 9,183,941 $ 8,836,115
OTHER INCOME: Service charges $ 1,674,348 $ 1,507,506 $ 1,353,839 Loan servicing income 257,953 255,426 236,488 Trust department income 237,254 205,740 235,412 Investment securities gains (losses), net 13,686 (12,839) (55,792) Gains on sale of loans 72,236 200,366 64,853 Other 134,510 127,850 218,345 $ 2,389,987 $ 2,284,049 $ 2,053,145 OTHER EXPENSES: Salaries and wages $ 3,478,238 $ 3,283,091 $ 3,084,993 Employee benefits 795,784 722,031 733,756 Occupancy expenses 1,002,137 931,434 860,526 FDIC assessment 54,281 412,483 324,673 Amortization 346,891 314,553 397,889 Taxes other than payroll, property and income 287,718 255,055 209,865 Advertising 276,430 261,929 221,310 Other 1,646,499 1,534,013 1,850,665 $ 7,887,978 $ 7,714,589 $ 7,683,677
Income before income taxes $ 4,555,958 $ 3,753,401 $ 3,205,583
Provision for income taxes 1,147,924 866,295 717,389
NET INCOME $ 3,408,034 $ 2,887,106 $ 2,488,194
Earnings per share $ 2.44 $ 2.03 $ 1.74 Earnings per share assuming dilution $ 2.40 $ 2.00 $ 1.71
See notes to consolidated financial statements.
BOURBON BANCSHARES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
See notes to consolidated financial statements.
See notes to consolidated financial statements.
See notes to consolidated financial statements.
BOURBON BANCSHARES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Presentation - The consolidated financial statements include the accounts of Bourbon Bancshares, Inc. (the Company) and its wholly owned subsidiary, Kentucky Bank (the Bank). All material intercompany transactions and balances have been eliminated.
In December 1995, the Company acquired Jessamine First Federal Savings and Loan Association (Jessamine) in a business combination accounted for as a pooling of interests. The accompanying consolidated financial statements for 1995 are based on the assumption that the companies were combined for the full year.
During 1996, the federal thrift charters of Kentucky Savings Bank, FSB and Jessamine were terminated and both entities became branches of the Bank. The dissolution of these entities and termination of their respective charters did not have a material effect on the consolidated financial statements.
B. Nature of Operations - The Bank operates under a state bank charter and provides full banking services, including trust services. As a state bank, the Bank is subject to regulation by the Kentucky Department of Financial Institutions and the Federal Deposit Insurance Corporation (FDIC). The Company, a bank holding company, is also regulated by the Federal Reserve.
C. Estimates in the Financial Statements - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
D. Cash and Cash Equivalents - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold, and certain short-term investments with maturities of less than three months. Generally, federal funds are sold for one-day periods.
E. Investment Securities - The Company classifies its investment securities portfolio into three categories: trading securities, securities available for sale and securities held to maturity. Fair value adjustments are made to the securities based on their classification with the exception of the held to maturity category. The Company has no investments classified as trading.
Investment securities available for sale are carried at fair value. Adjustment from amortized cost to fair value is recorded in stockholders' equity, net of related income tax, under net unrealized gains on investment securities. The adjustment is computed on the difference between fair value and cost adjusted for amortization of premiums and accretion of discounts which are recorded as adjustments to interest income using the constant yield method.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment securities for which the Bank has the positive intent and ability to hold to maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts which are recorded as adjustments to interest income using the constant yield method.
Gains or losses on dispositions are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method.
F. Loans - Loans are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest income on loans is recognized on the accrual basis except for those loans in a nonaccrual income status. The accrual of interest on impaired loans is discontinued when management believes, after consideration of economic and business conditions and collection efforts, that the borrowers' financial condition is such that collection of interest is doubtful. When interest accrual is discontinued, interest income is subsequently recognized only to the extent cash payments are received.
The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely.
The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. A loan is considered to be impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The entire change in present value of expected cash flows is reported as provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported.
Loans held for sale are valued at the lower of cost or market as determined by outstanding commitments from investors or current investor yield requirements, calculated on the aggregate loan basis.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan.
G. Loan Servicing - The Bank has sold various loans to the Federal Home Loan Mortgage Corporation (FHLMC) while retaining the servicing rights. Gains and losses on loan sales are recorded at the time of the cash sale, which represents the premium or discount paid by the FHLMC. The Bank receives a normal servicing fee from the FHLMC on each loan sold. Servicing rights are capitalized based on fair value.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. Bank Premises and Equipment - Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is recorded principally by the straight-line method over the estimated useful lives of the bank premises and equipment.
I. Real Estate Acquired Through Foreclosure - Real estate acquired through foreclosure is carried at the lower of the recorded investment in the property or its fair value. The value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged to operating expenses. Certain parcels of real estate are being leased to third parties to offset holding period costs. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses.
J. Income Taxes - The Company and the Bank file a consolidated federal income tax return. The Bank is charged or credited an amount equal to the income tax that would have been applicable on a separate return basis.
The Company uses the liability method for computing deferred income taxes. Under the liability method, deferred income taxes are based on the change during the year in the deferred tax liability or asset established for the expected future tax consequences of differences in the financial reporting and tax bases of assets and liabilities. The differences relate principally to premises and equipment, accrued pension, premium on loans and deposits purchased, unrealized gains (losses) on investment securities available for sale, mortgage servicing rights, FHLB stock, and the allowance for loan losses.
K. Intangible Assets - Intangible assets include a premium on deposits paid in connection with the acquisition of a branch which is being amortized on a straight-line basis over ten years, capitalized mortgage servicing rights which are being amortized over the life of the related loans and organization costs which are being amortized on a straight-line basis over five years.
L. Marketing Expense - The Company charges all marketing expenses to operations when incurred. No amounts have been established for any future benefits relative to these expenditures.
M. Effect of New Accounting Standards - The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", which provides accounting and reporting guidance regarding various financial instruments and related transactions. The Statement was adopted by the Company, as required, on January 1, 1997. The effect of adopting the new guidance was not material to the Company's consolidated financial statements.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which requires that all items that are components of comprehensive income (defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners"), be reported in a financial statement that is displayed with the same prominence as other financial statements. Companies will be required to (a) classify items of other comprehensive income by its nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The new guidance is effective for fiscal years beginning after December 15, 1997 and requires reclassification of prior periods presented. The requirements are disclosure-related and its implementation will have no impact on the Company's financial condition or results of operations.
N. Per Share Information - In the last quarter of 1997, the Company adopted SFAS No. 128, "Earnings Per Share", under which basic and diluted earnings per share are computed. Prior amounts have been restated to be comparable. Basic earnings per share is based on net income divided by the weighted average number of shares outstanding during the period. Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock options.
O. Reclassifications - Certain reclassifications have been made in the 1996 and 1995 financial statements to conform to classifications used in 1997.
2. BUSINESS COMBINATION
In December 1995, Jessamine became a wholly owned subsidiary of the Company through the exchange of 244,439 shares of the Company's common stock for all of the outstanding stock of Jessamine. Summarized results of operations of the separate companies for the years ended December 31, 1995 and September 30, 1995, the Company's and Jessamine's respective fiscal year-ends are as follows:
Company Jessamine
Interest income $17,165,150 $2,492,804 Interest expense 9,010,818 1,415,227 Net interest income $ 8,154,332 $1,077,577 Provision for loan losses 390,504 5,290 Net interest income after provision for loan losses $ 7,763,828 $1,072,287 Other income 2,002,929 50,216 Other expenses 6,899,450 784,227 Provision for income taxes 601,567 115,822 Net income $ 2,265,740 $ 222,454
2. BUSINESS COMBINATION (CONTINUED)
Prior to the pooling, Jessamine's fiscal year ended September 30. Subsequent to the pooling, Jessamine changed its year-end to December 31 to conform with that of the Company. The 1995 statement of income includes Jessamine and the Company's results of operations for their respective fiscal year-ends. During the three months ended December 31, 1995, Jessamine reported net interest income of $237,587 and net income of $54,745. In order to reflect this change in fiscal year-end, retained earnings has been increased by Jessamine's reported net income for the three-month period. The 1995 statement of cash flows includes Jessamine's fiscal year and the activity for the three months ended December 31, 1995.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Included in cash and due from banks are certain non- interest bearing deposits that are held at the Federal Reserve or maintained in vault cash in accordance with average balance requirements specified by the Federal Reserve Board of Governors. The average requirement was $4,345,000 at December 31, 1997.
4. INVESTMENT SECURITIES
During December, 1995, the Company made a one time transfer of investment securities from held to maturity to available for sale of $14,303,320, as allowed under the Financial Accounting Series Special Report, "A Guide to Implementation of Statement 115", issued in November 1995. The investments were transferred at fair value at the date of transfer. The unrealized gain (loss) on transfer is included in the net change in unrealized gain (loss) in the consolidated statements of stockholders' equity.
Amortized cost and fair value of investment securities, by category, at December 31, 1997 are as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale: U.S. Treasury securities $18,983,175 $ 88,978 $ (278) $19,071,875 Obligations of U.S. government Agencies 10,487,431 0 (1,931) 10,485,500 Obligations of states and political Subdivisions 3,942,551 134,644 0 4,077,195 Asset-backed securities 32,334,645 303,520 (172,072) 32,466,093 Total available for sale $65,747,802 $527,142 $(174,281) $66,100,663
Held to maturity: Obligations of states and political Subdivisions $15,602,778 $807,926 $ (181) $16,410,523
4. INVESTMENT SECURITIES (CONTINUED)
Amortized cost and fair value of investment securities, by category, at December 31, 1996 are as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale: U. S. Treasury securities $24,513,413 $ 67,277 $ (9,284) $24,571,406 Obligations of U.S. government agencies 8,984,521 3,697 (4,407) 8,983,811 Obligations of states and political subdivisions 3,943,463 83,161 (15,044) 4,011,580 Asset-backed securities 38,783,338 198,191 (321,370) 38,660,159 Total available for sale $76,224,735 $352,326 $(350,105) $76,226,956
Held to maturity: Obligations of states and political subdivisions $16,313,453 $706,050 $ (29,443) $16,990,060
The amortized cost and fair value of investment securities at December 31, 1997, by category and contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value Available for sale: Due in one year or less $20,783,132 $20,811,096 Due after one year through five years 10,293,720 10,376,240 Due after five years through ten years 1,462,602 1,546,367 Due after ten years 873,703 900,867 $33,413,157 $33,634,570 Asset-backed securities 32,334,645 32,466,093 Total available for sale $65,747,802 $66,100,663
Held to maturity: Due in one year or less $ 344,190 $ 347,333 Due after one year through five years 3,809,838 3,978,232 Due after five years through ten years 9,002,344 9,531,675 Due after ten years 2,446,406 2,553,283 Total held to maturity $15,602,778 $16,410,523
4. INVESTMENT SECURITIES (CONTINUED)
Proceeds from sales and calls of investment securities during 1997, 1996 and 1995 were $17,343,034, $13,512,387 and $22,545,152, respectively. Gross gains of $31,347, $30,211 and $49,510 and gross losses of $17,661, $43,050 and $105,302, respectively, were realized on those sales and calls.
Investment securities with an approximate carrying value of $56,631,000 and $37,378,000 at December 31, 1997 and 1996, respectively, were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law.
5. LOANS
Major classifications of loans are summarized as follows:
1997 1996
Commercial $ 10,643,958 $ 10,216,331 Real estate construction 7,656,856 4,200,111 Real estate mortgage 108,048,265 98,429,977 Agricultural 37,924,098 30,947,231 Consumer 15,238,753 14,789,144 Other 287,083 373,652 $179,799,013 $158,956,446
Changes in the allowance for loan losses were as follows:
1997 1996 1995
Balance, beginning of year $2,101,081 $1,860,093 $1,648,210 Charge-offs (355,123) (213,328) (231,889) Recoveries 82,778 52,351 47,978 Provision for loan losses 492,800 401,965 395,794 Balance, end of year $2,321,536 $2,101,081 $1,860,093
Impaired loans totaled $333,000 and $251,000 at December 31, 1997 and 1996, respectively. The average recorded investment in impaired loans during 1997, 1996 and 1995 was $292,000, $298,000 and $428,000, respectively. The total allowance for loan losses related to these loans was $57,000 and $28,000 at December 31, 1997 and 1996, respectively. Interest income on impaired loans of $23,000, $55,000 and $34,000 was recognized for cash payments received in 1997, 1996 and 1995, respectively.
5. LOANS (CONTINUED)
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others was approximately $91,423,000 and $86,138,000 at December 31, 1997 and 1996, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $545,000 and $540,000 at December 31, 1997 and 1996, respectively.
Mortgage servicing rights of $184,125 and $215,812 were capitalized in 1997 and 1996, respectively. Amortization of mortgage servicing rights was $58,699 and $26,361 in 1997 and 1996, respectively.
Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 1997 and 1996. Total loans to these persons were approximately $1,824,000 and $1,828,000 at December 31, 1997 and 1996, respectively. Such loans were made in the ordinary course of business at the Bank's normal credit terms and interest rates. An analysis of the activity with respect to all director and executive officer loans is as follows:
1997 1996
Balance, beginning of year $ 1,828,000 $ 2,663,000 Additions, including loans now meeting disclosure requirements 1,381,000 1,211,000 Amounts collected, including loans no longer meeting disclosure requirements (1,385,000) (2,046,000) Balance, end of year $ 1,824,000 $ 1,828,000
6. BANK PREMISES AND EQUIPMENT
Bank premises and equipment are summarized as follows:
1997 1996
Land and buildings $ 6,371,645 $ 5,235,823 Furniture and equipment 4,429,043 3,948,079 Construction in progress 27,082 358,920 $10,827,770 $ 9,542,822 Less accumulated depreciation (5,062,460) (4,538,577) $ 5,765,310 $ 5,004,245
Depreciation expense was $523,882, $479,338 and $408,244 in 1997, 1996 and 1995, respectively.
7. DEPOSITS
At December 31, 1997, the scheduled maturities of time deposits are as follows:
1998 $ 94,485,845 1999 21,589,303 2000 2,779,409 2001 334,458 2002 and thereafter 695,460 $119,884,475
Certain directors and executive officers of the Company and companies in which they have beneficiary ownership, are deposit customers of the Bank. The amount of these deposits was approximately $2,393,000 and $2,272,000 at December 31, 1997 and 1996, respectively.
8. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase generally mature within one to four days from the transaction date. The securities underlying the agreements are maintained in a third-party custodian's account under a written custodial agreement. Information concerning securities sold under agreements to repurchase for 1997 and 1996 is summarized as follows:
1997 1996
Average daily balance during the year $4,103,000 $3,342,000 Average interest rate during the year 5.03% 5.01% Maximum month-end balance during the year $4,895,000 $4,668,000 Carrying and fair value of U.S. Treasury securities underlying the agreements $6,895,000 $8,815,000
9. FEDERAL HOME LOAN BANK ADVANCES
The Bank owns stock of the Federal Home Loan Bank (FHLB) of Cincinnati, Ohio. This stock allows the Bank to borrow advances from the FHLB which the Bank uses to fund fixed-rate mortgages.
At December 31, 1997 and 1996, $10,236,291 and $10,534,031, respectively, represented the balance due on the above advances from the FHLB. All advances are paid either on a monthly basis or at maturity, over remaining terms of one to six years, with interest rates ranging from 5.05% to 6.80%. Advances are secured by the FHLB stock and all single family first mortgage loans. Scheduled principal payments due on advances during the years subsequent to December 31, 1997 are as follows: 1998 - $7,286,309; 1999 - $302,254; 2000 - $1,240,318; 2001 - $237,970; 2002 - $251,637; years thereafter - $917,803.
10. NOTES PAYABLE
Notes payable are summarized as follows: 1997 1996 Promissory note, principal due at November 1, 2003, interest payable annually at 12%, secured by real estate $750,000 $750,000
Revolving $500,000 line of credit, interest payable quarterly at the prime rate, maturing June 30, 1998 secured by 100% of the common stock of the Bank 0 0 $750,000 $750,000
11. INCOME TAXES
The components of the provision for income taxes are as follows:
1997 1996 1995
Current payable $1,158,777 $ 697,751 $ 793,478 Deferred (10,853) 168,544 (76,089) $1,147,924 $ 866,295 $ 717,389
Interest income totaling $1,336,597, $1,371,098 and $1,380,869 for 1997, 1996 and 1995, respectively, is exempt from federal income taxes; accordingly, the tax provision is less than that obtained by using the statutory federal income tax rate.
The income tax expense (benefit) related to investment securities gains and losses was $4,653, $(4,365) and $(18,969) for 1997, 1996 and 1995, respectively.
The Company's deferred tax assets and liabilities at December 31 are shown below. No valuation allowance for the realization of deferred tax assets is considered necessary.
1997 1996 Deferred tax assets: Allowance for loan losses $ 596,087 $449,757 Premium on deposits purchased 97,641 68,139 Accrued pension expense 0 13,886 Deferred loan fees 19,336 0 Other 28,119 18,842
11. INCOME TAXES (CONTINUED) 1997 1996 Deferred tax liabilities: Bank premises and equipment (129,217) (117,104) Unrealized gain on investment securities (119,972) (755) FHLB stock (306,289) (239,785) Mortgage servicing rights (107,058) 0 Premium on loans purchased (31,596) (47,887) Other (19,355) (9,032) Net deferred tax asset $ 27,696 $ 136,061
An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows: 1996 1995
U. S. federal income tax rate 34.00% 34.00% 34.00% Changes from the statutory rate: Tax-exempt investment income (9.97) (12.42) (14.43) Non-deductible interest expense related to carrying tax-exempt investments 1.25 1.53 1.45 Other (0.08) (0.03) 1.35 25.20% 22.37% 23.08%
12. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the earnings per common share and earnings per common share assuming dilution computations for 1997, 1996 and 1995 is presented below.
Year Ended 1997 1996 1995 Earnings Per Share Net income available to common stockholders $3,408,034 $2,887,106 $2,488,194
Weighted average common shares outstanding 1,396,201 1,424,704 1,430,025
Earnings per share $ 2.44 $ 2.03 $ 1.74
Earnings Per Share Assuming Dilution Net income available to common stockholders $3,408,034 $2,887,106 $2,488,194
12. EARNINGS PER SHARE (CONTINUED)
Year Ended
1997 1996 1995 Weighted average common shares outstanding 1,396,201 1,424,704 1,430,025
Add dilutive effects of assumed exercise of stock options 25,596 18,771 27,884
Weighted average common and dilutive potential common shares outstanding 1,421,797 1,443,475 1,457,909
Earnings per share assuming dilution $ 2.40 $ 2.00 $ 1.71
Stock options for 12,400 shares of common stock were not considered in computing earnings per share for 1996 because they were antidilutive.
13. RETIREMENT PLANS
The Company has a defined benefit pension plan covering substantially all of its employees. The Company's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Benefits are based on one percent of employee average earnings for the previous five years times years of credited service. Pension expense was $127,182, $105,161 and $99,110 for 1997, 1996 and 1995, respectively.
The following table sets forth the plan's funded status and amounts recognized in the accompanying consolidated financial statements at December 31, 1997 and 1996:
1997 1996 Actuarial present value of benefit obligations:
Accumulated benefit obligations, including vested benefits of $1,191,449 and $1,044,494, respectively $ 1,213,751 $ 1,060,869
Projected benefit obligations for services rendered to date $(1,833,910) $(1,623,500) Plan assets at fair value, U.S. Treasury and agency securities and mutual funds 1,995,586 1,718,776 Plan assets in excess of projected benefit obligation $ 161,676 $ 95,276 Unrecognized net gain (137,428) (131,657) Unrecognized net asset at January 1, 1989, being recognized over 20 years (4,089) (4,461)
Prepaid (accrued) pension cost included in other assets (liabilities) $ 20,159 $ (40,842)
13. RETIREMENT PLANS (CONTINUED)
1997 1996 1995 Net periodic pension cost for 1997 and 1996 include the following components: Service cost $(137,229) $(118,339) $(107,311) Interest cost (126,623) (112,826) (100,961) Actual return on plan assets 110,322 84,108 92,349 Amortization of transition asset 372 372 372 Difference between actual and expected Return on plan assets 25,976 41,524 16,441
Net periodic cost $(127,182) $(105,161) $ (99,110)
A discount rate of 8% is used to compute the actuarial present value of the accumulated and projected benefit obligations. The assumed rate of return on plan assets is also 8%. The assumed rate of salary increases is 5%.
The Company also has a qualified profit sharing plan which covers substantially all employees and includes a 401(k) provision. Profit sharing contributions, excluding the 401(k) provision, are at the discretion of the Company's Board of Directors. Expense recognized in connection with the plan was $166,647, $157,162 and $132,892 in 1997, 1996 and 1995, respectively.
Prior to the acquisition, Jessamine established individual retirement accounts for all employees with two years of continuous service. Contributions were $10,494 in 1995. Jessamine also contributed $57,600 in 1995 for the purchase of an annuity to fund the retirement of a key employee.
14. STOCK OPTION PLAN
The Company has two stock option plans, which are accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees", and related interpretations. Under the plans, the Company grants certain directors, officers and key employees stock option awards which vest and become fully exercisable at the end of five years. During 1997 and 1996, the Company authorized the grant of options to purchase 11,000 and 10,350 shares of the Company's common stock. The exercise price of each option, which has a ten-year life, was equal to the market price of the Company's stock on the date of grant; therefore, no compensation expense was recognized.
14. STOCK OPTION PLAN (CONTINUED)
Although the Company has elected to follow APB No. 25, Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that Statement. The fair value of each option grant was estimated on the grant date using an option-pricing model.
Summary of stock option transactions are as follows:
14. STOCK OPTION PLAN (CONTINUED)
Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair value of the options and amortized to expense over the options' vesting periods. The pro forma effect on net income and earnings per share of this statement are as follows:
1997 1996 1995 Net income As reported $3,408,034 $ 2,887,106 $ 2,488,194 Pro forma $3,375,248 $ 2,870,017 $ 2,488,194
Earnings per share As reported $ 2.44 $ 2.03 $ 1.74 Pro forma $ 2.42 $ 2.01 $ 1.74
Earnings per share assuming dilution As reported $ 2.40 $ 2.00 $ 1.71 Proforma $ 2.38 $ 1.98 $ 1.71
Weighted averages: Fair value of options granted $ 7.24 $ 7.77 $ 7.89 Risk free interest rate 6.50% 6.50% 7.20% Expected life 8 years 8 years 8 years Expected volatility .2179 .1966 .1185 Expected dividend $ .72 $ .64 $ .60
In 1995, prior to the acquisition of Jessamine, certain directors, officers and key employees of Jessamine exercised stock options totaling $25,481 under Jessamine's Stock Option and Incentive Plan. Effective with the acquisition, all unexercised options were canceled and the Plan was terminated.
15. LIMITATION ON BANK DIVIDENDS
The Company's principal source of funds is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid by the Bank without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, as defined, combined with the retained net profits of the preceding two years. During 1998 the Bank could, without prior approval, declare dividends of approximately $2,243,000 plus any 1998 net profits retained to the date of the dividend declaration.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash and Cash Equivalents - For those short-term instru ments, the carrying amount is a reasonable estimate of fair value.
Investment Securities - For investment securities, fair values are based on quoted market prices or dealer quotes.
Loans - Fair value 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.
Federal Home Loan Bank Stock - Federal Home Loan Bank stock carrying value is equivalent to market since it can only be purchased or sold with the FHLB at carrying value.
Deposit Liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities.
Federal Funds Purchased and Securities Sold Under Agreements to Repurchase - For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Federal Home Loan Bank Advances - Rates currently available to the Company for advances with similar terms and remaining maturities are used to estimate fair value of existing debt.
Other Borrowed Funds - The fair value of fixed-rate borrowings is estimated by discounting the future cash flows using a rate which approximates market for borrowings of a similar maturity. The carrying value of variable-rate borrowed funds is a reasonable estimate of fair value.
Commitments to Extend Credit and Standby Letters of Credit - Commitments to extend credit and standby letters of credit represent agreements to lend to a customer at the market rate when the loan is extended, thus the commitments and letters of credit are not considered to have a fair value.
16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The fair values of the Company's financial instruments at December 31, 1997 and 1996 are as follows:
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off- balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include standby letters of credit and commitments to extend credit in the form of unused lines of credit. The Company uses the same credit policies in making commitments and conditional obligations as they do for on- balance sheet instruments.
At December 31, 1997 and 1996, the Company had the following financial instruments whose approximate contract amounts represent credit risk:
1997 1996
Standby letters of credit $ 643,000 $ 501,000
Commitments to extend credit $28,879,000 $22,493,000
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK (CONTINUED)
Standby letters of credit represent conditional commitments issued by the Company to guarantee the performance of a third party. The credit risk involved in issuing these letters of credit is essentially the same as the risk involved in extending loans to customers.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company evaluates each customer's creditworthiness on a case-by-case basis. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income producing properties.
18. CONCENTRATION OF CREDIT RISK
The Company grants residential, commercial and consumer related loans to customers primarily located in Bourbon, Clark, Scott, Harrison, Woodford, Jessamine and adjoining counties in Kentucky. Although they have a diverse loan portfolio, a substantial portion of their debtors' ability to perform is somewhat dependent on the economic conditions of the counties in which they operate.
19. CONTINGENT LIABILITIES
The Bank is a defendant in legal actions arising from normal business activities. Management believes these actions are without merit or that the ultimate liability, if any, resulting from them will not materially affect the Company's consolidated financial position or results of operations.
20. REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company and Bank capital amounts and classifications are also subject to qualitative judgments by the regulator about components, risk weightings, and other factors.
20. REGULATORY MATTERS (CONTINUED)
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 1997 and 1996, that the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the Federal Deposit Insurance Corporation dated November 30, 1997 categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category.
The Company's and the Bank's actual amounts and ratios are presented in the table below:
21. PARENT COMPANY FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31 1997 1996 (In Thousands) ASSETS Cash on deposit with subsidiary $ 616 $ 96 Investment in subsidiary 26,070 24,510 Income taxes receivable 10 18 Other assets 20 20
TOTAL ASSETS $26,716 $ 24,644
LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities $ 0 $ 11
Stockholders' equity: Preferred stock $ 0 $ 0 Common stock 6,333 6,392 Retained earnings 20,150 18,240 Net unrealized gains on investment securities 233 1 Total stockholders' equity $26,716 $24,633
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $26,716 $24,644
21. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Income
Year Ended December 31
1997 1996 1995 (In Thousands)
Income: Dividends from subsidiary $ 2,100 $1,850 $ 1,470 Other income 0 807 359 Total income $ 2,100 $2,657 $ 1,829
Expenses: Interest expense $ 10 $ 40 $ 118 Other expenses 21 823 573 Total expenses $ 31 $ 863 $ 691
Income before income taxes and equity in undistributed income of subsidiary $ 2,069 $1,794 $ 1,138
Applicable income tax benefits 11 18 112
Income before equity in undistributed income of subsidiary $ 2,080 $1,812 $ 1,250
Equity in undistributed income of subsidiary 1,328 1,075 1,238
NET INCOME $ 3,408 $2,887 $ 2,488
21. PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
Condensed Statements of Cash Flows
Year Ended December 31
1997 1996 1995 (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,408 $ 2,887 $ 2,488 Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of securities 0 0 23 Equity in undistributed earnings of subsidiary (1,328) (1,075) (1,293) Adjustment to conform pooled Company's fiscal year end 0 0 55 Change in income taxes receivable 8 94 (93) Change in other liabilities (11) 10 0 Net cash provided by operating activities $ 2,077 $ 1,916 $ 1,180
CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of investment securities $ 0 $ 0 $ 702
CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid $(1,005) $ (912) $ (750) Proceeds from issuance of common stock 51 1 47 Purchase of common stock (603) (500) 0 Repayment of long-term debt 0 (930) (1,100) Proceeds from long-term debt 0 330 0 Net cash used in financing activities $(1,557) $(2,011) $(1,803)
Net increase (decrease) in cash $ 520 $ (95) $ 79
Cash at beginning of year 96 191 112
CASH AT END OF YEAR $ 616 $ 96 $ 191
INDEPENDENT AUDITORS' REPORT
Board of Directors Bourbon Bancshares, Inc. Paris, Kentucky
We have audited the accompanying consolidated balance sheets of Bourbon Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bourbon Bancshares, Inc. and Subsidiary at December 31, 1997 and 1996, and the results of its operations and cash flows for each of the years in the three year period ended December 31, 1997, in conformity with generally accepted accounting principles.
Eskew & Gresham, PSC
January 28, 1998
Bourbon Bancshares, Inc. Board of Directors
Buckner Woodford President and Chief Executive Officer; Kentucky Bank and Bourbon Bancshares, Inc. Class of 2000
William R. Stamler Signal Investments, Inc.; Chairman Class of 2000
James L. Ferrell, M.D. Physician Class of 1998
Joseph B. McClain President; Hopewell Insurance Company, Inc. Class of 1998
William M. Arvin Attorney Class of 1998
Henry Hinkle President; Hinkle Contracting Company Class of 1999
Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm Class of 1999
Robert G. Thompson Farmer and Thoroughbred Breeder; Snow Hill Farm Class of 1999
Russell Brooks Vice President, Financial Analyst; Kentucky Bank Class of 1999
Kentucky Bank Board of Directors
Buckner Woodford President and Chief Executive Officer; Bourbon Bancshares and Kentucky Bank
Joe Allen Executive Vice President, Kentucky Bank
William M. Arvin Attorney, William M. Arvin and Associates
Russell Brooks Financial Analyst; Kentucky Bank
James L. Ferrell, M.D. Physician
Betty Jo Denton Heick Retired Bourbon County Court Clerk
Henry Hinkle President; Hinkle Contracting Company
Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm
Joseph B. McClain President; Hopewell Insurance Company, Inc.
Alex Miller President, Paris Stockyards, Inc.
C. Richard Gamble Retired, Leggett and Platt, Marketing
William R. Stamler Chairman, Signal Investments, Inc.
Robert G. Thompson Director, Paris/Bourbon County YMCA
Gerald M. Whalen President, Whalen and Co. Insurance and Real Estate
Michael S. Hockensmith The Hockensmith Agency
REGIONAL BOARD OF DIRECTORS CLARK
C. Richard Gamble Retired, Leggett and Platt, Marketing
Donald Pace Superintendent, Clark Co. Schools
Ed Saunier North American Vanlines
Mary Beth Hendricks Farmer
SCOTT
James B. Wooten, Jr. Attorney and Partner; Bradley, Blanton and Wooten
R.C. Johnson, Jr. Owner and President; Johnson's Funeral Home
Dr. Gus A. Bynum Physician
Mike Hockensmith Owner and President, The Hockensmith Agency, Inc.
George Lusby County Judge Executive
WOODFORD
Dr. William J. Graul Physician
James Kay Businessman, Farmer
Loren Carl Director, KY Attorney General's Office
Tricia N. Kittinger Woodford Circuit Clerk
JESSAMINE
William M. Arvin Attorney, William M. Arvin and Associates
J. R. Wilson, Jr. Retired, U.S. Postmaster
Victor Comley Retired, Kentucky Association of Highway Contractors
Bonnie Dean Nicholasville City Clerk, Treasurer
OFFICERS BOURBON COUNTY PARIS Buckner Woodford - President and CEO James P. Shipp, Jr. - Sr. Vice President, Branch Administration Norman J. Fryman - Sr. Vice President, Director of Lending Joe Allen - Executive Vice President Greg Dawson - Vice President, Chief Financial Officer Russell Brooks - Vice President, Financial Analyst Hugh Crombie - Vice President, Operations Bill Reynolds - Vice President, Trust Officer Brenda Bragonier - Vice President, Director of Marketing and Human Resources R.W. Collins, Jr. - Vice President, Loan Officer Michael Lovell - Vice President, Loan Officer George Wilder - Vice President, Loan Officer Nicholas L. Carter - Assistant Vice President, Loan Officer Cathy Hill - Assistant Vice President, Loan Officer Mary Lou Boyle - Human Resources Ted Wiseman - Assistant Vice President, Wire Transfer Brenda Berry - Accountant Wallis Brooks - Branch Manager Patty Carpenter - Loan Operations Officer Paul Clift - Automation Information Officer Janice Hash - Accountant and Purchasing Manager Donald Roe - Data Processing Lydia Sosby - Auditor Martha Woodford - Corporate and Automated Products Officer Jan Worth - Trust Officer Jean Patton - Compliance/CRA/Quality Control
Lexington Road Branch Rita Bugg - Assistant Vice President, Branch Manager, Loan Officer
North Middletown Branch Jerry Ann McFarland - Branch Manager
Pleasant Street Branch Philip Hurst - Assistant Branch Manager
CLARK COUNTY WINCHESTER Tim Duncan - Regional Vice President Becky Taulbee - Assistant Vice President, Loan Officer Darryl Terry - Assistant Vice President, Loan Officer Carolyn Wilkins - Calling Officer
Colby Road Branch Teresa Shimfessel - Branch Manager, Assistant Vice President, Loan Officer
WOODFORD COUNTY VERSAILLES Duncan Gardner - Regional Vice President A.J. Gullett - Loan Officer
SCOTT COUNTY GEORGETOWN Mark Walls - Regional Vice President Jennifer Roberts - Loan Originator
JESSAMINE COUNTY NICHOLASVILLE Tom Buford - Regional Vice President Earl Lewallen - Loan Officer Jeanie Thompson - Assistant Cashier & CSR
HARRISON COUNTY CYNTHIANA LOAN PRODUCTION OFFICE Ken DeVasher - Manager, Assistant Vice President, Loan Officer
Exhibit 21 Subsidiaries of Registrant
Bourbon Bancshares, Inc.'s Subsidiary
Kentucky Bank
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated January 28, 1998 on the consolidated financial statements of Bourbon Bancshares, Inc. and Subsidiary as of December 31, 1997 and 1996 and for the three year period ended December 31, 1997 appearing in this Annual Report on Form 10-K of Bourbon Bancshares, Inc. as Exhibit 13.
ESKEW & GRESHAM, PSC
Lexington, KY March 10, 1998