-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CUcmAUIYDGUIRq8qenbL5zluqJD6O8+OKn1Bfk6BNDPrjQ9XyOxIejd9h2v16l76 wTOE8gSBWxaqTwHWpWQn6g== 0001000232-99-000001.txt : 19990402 0001000232-99-000001.hdr.sgml : 19990402 ACCESSION NUMBER: 0001000232-99-000001 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOURBON BANCSHARES INC /KY/ CENTRAL INDEX KEY: 0001000232 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] STATE OF INCORPORATION: KY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 033-96358 FILM NUMBER: 99581418 BUSINESS ADDRESS: STREET 1: 4TH & MAIN ST STREET 2: P O BOX 157 CITY: PARIS STATE: KY ZIP: 40362-0157 MAIL ADDRESS: STREET 1: 4TH & MAIN ST STREET 2: PO BOX 157 CITY: PARIS STATE: KY ZIP: 40362-0157 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ___________________ Commission File Number: 33-96358 BOURBON BANCSHARES, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0993464 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) P.O. Box 157, Paris, Kentucky 40362-0157 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (606)987-1795 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Aggregate market value of voting stock held by non- affiliates as of March 29, 1999 was approximately $48.0 million. For purposes of this calculation, it is assumed that directors, officers and beneficial owners of more than 5% of the registrant's outstanding voting stock are affiliates. Number of shares of Common Stock outstanding as of March 29, 1999: 1,402,588. PART I Item 1. Business General Bourbon Bancshares, Inc. ("Company" or "Bourbon") is a Kentucky corporation organized in 1981 and a bank and savings and loan holding company registered under the Bank Holding Company Act of 1956, as amended ("BHCA") and the Home Owners Loan Act of 1933, as amended ("HOLA"). The Company conducts business through one banking subsidiary, Kentucky Bank. Kentucky Bank is a commercial bank and trust company organized under the laws of Kentucky. Kentucky Bank has its main office in Paris (Bourbon County), Kentucky, additional offices in Paris, North Middletown (Bourbon County), Winchester (Clark County), Georgetown (Scott County), Versailles (Woodford County), Nicholasville (Jessamine County), Kentucky and a loan production office in Cynthiana (Harrison County), Kentucky. The deposits of Kentucky Bank are insured up to prescribed limits by the Bank Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF"), both of the Federal Deposit Insurance Corporation ("FDIC"). Kentucky Bank is engaged in general full-service commercial and consumer banking. Kentucky Bank makes commercial, agricultural and real estate loans to its commercial customers, with emphasis on small-to- medium-sized industrial, service and agricultural businesses. Kentucky Bank makes residential mortgage, installment and other loans to its individual and other non- commercial customers. Kentucky Bank also offers its customers the opportunity to obtain a credit card. Kentucky Bank offers its customers a variety of other services, including checking, savings, club and money market accounts, certificates of deposits, safe deposit facilities and other consumer-oriented financial services. Through its trust department, Kentucky Bank provides primarily personal trust and agency services (including management agency services) and, to a lesser extent, corporate trust services (including the management of corporate pension and profits sharing plans). Competition The Company and its subsidiary face vigorous competition from a number of sources, including other bank holding companies and commercial banks, consumer finance companies, thrift institutions, other financial institutions and financial intermediaries. In addition to commercial banks, savings and loan associations, savings banks and credit unions actively compete to provide a wide variety of banking services. Mortgage banking firms, finance companies, insurance companies, brokerage companies, financial affiliates of industrial companies and government agencies provide additional competition for loans and for many other financial services. The subsidiary also currently competes for interest-bearing funds with a number of other financial intermediaries, including brokerage firms and mutual funds, which offer a diverse range of investment alternatives. Supervision and Regulation As a bank holding company, the Company is subject to the regulation and supervision of the Federal Reserve Board. The Company's subsidiary is subject to supervision and regulation by applicable state and federal banking agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Kentucky Department of Financial Institutions. The subsidiary is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the subsidiary. In addition to the impact of regulation, the subsidiary is affected significantly by the actions of the Federal Reserve Board as it attempts to control the money supply and credit availability in order to influence the economy. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event the depository institution becomes in danger of default or is in default. For example, under a policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and commit resources to support such institutions in circumstances where it might not do so absent such policy. In addition, the "cross- guarantee" provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The federal banking agencies have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institutions in question are "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized" or "critically undercapitalized", as such terms are defined under uniform regulation defining such capital levels issued by each of the federal banking agencies. There are various legal and regulatory limits on the extent to which the Company's subsidiary bank may pay dividends or otherwise supply funds to the Company. In addition, federal and state regulatory agencies also have the authority to prevent a bank or bank holding company from paying a dividend or engaging in any other activity that, in the opinion of the agency, would constitute an unsafe or unsound practice. There have been a number of legislative and regulatory proposals that would have an impact on the operation of bank holding companies and their banks. It is impossible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what their effect will be on the Company. Business Segments The Financial Accounting Standards Board (FASB) has issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires segmenting assets, profit and loss and certain specific revenue and expense items. Although management monitors revenue streams from various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Therefore, all operations are considered by management to be aggregated into one reportable operating segment. Employees At December 31, 1998, the number of full time equivalent employees of the Company was 144. Item 2. Properties The main banking office of Kentucky Bank, which also serves as the principal office of Kentucky Bank, is located at Fourth and Main Streets, Paris, Kentucky 40361. In addition, Kentucky Bank serves customer needs at 9 other locations. All locations, except for the Cynthiana office (which is a loan production office), offer a full range of banking services. Kentucky Bank owns all of the properties at which it conducts its business, except the location in Scott County at Paris Pike, which is leased. The Company owns approximately 59,000 square feet of office space and leases approximately 2,000 square feet of office space, with aggregate annual lease payments of approximately $16 thousand in 1998. Note 5 to the Company's consolidated financial statements included in this report contain additional information relating to amounts invested in premises and equipment. Item 3. Legal Proceedings The Company and its subsidiary are from time to time involved in routine legal proceedings occurring in the ordinary course of business that, in the aggregate, management believes will not have a material impact on the Company's financial condition and results of operation. Item 4. Submission of Matters to a Vote of Security Holders Not Applicable. PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's Common Stock is not listed on any national securities exchange nor is it quoted on the NASDAQ system. However, it is listed on the OTC Bulletin Board under the symbol "BBON". Trading in the Common Stock has been infrequent, with two regional retail brokerage firms making the market. The following table sets forth the high and low sales prices of the Common Stock and the dividends declared thereon, for the periods indicated below: High Low Dividend 1998 Quarter 1 $ 36.50 $31.00 $.20 Quarter 2 40.00 36.50 $.20 Quarter 3 42.00 40.00 $.20 Quarter 4 41.25 41.00 $.20 1997 Quarter 1 27.00 24.50 $.18 Quarter 2 30.00 26.00 $.18 Quarter 3 30.50 27.00 $.18 Quarter 4 31.00 28.00 $.18 As of December 31, 1998 the Company had 1,404,628 shares of Common Stock outstanding and approximately 437 holders of record of its Common Stock. During 1998, 10,066 shares of unregistered stock were issued to employees and directors. This stock was issued through the exercise of stock options or employee gifts. In accordance with Rule 701 promulgated under the Securities Act of 1933, all shares of Common Stock were issued upon the exercise of stock options issued prior to the Company becoming subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. The following shares were issued during 1998: Aggregate Date Issued Shares Consideration January 30, 1998 1,000 $ 8,500 February 24, 1998 400 7,750 March 9, 1998 3,640 65,030 March 10, 1998 1 gift March 24, 1998 400 4,800 August 26, 1998 3,000 27,700 September 3, 1998 800 13,800 September 14, 1998 800 13,800 September 30, 1998 25 gift Total 10,066 Item 6. Selected Financial Data The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying notes presented elsewhere herein. At or For the Year Ended December 31 (dollars in thousands, except per share amounts) 1998 1997 1996 1995 1994 CONDENSED STATEMENT OF INCOME: Total Interest Income $21,983 $20,962 $19,425 $19,658 $15,657 Total Interest Expense 10,666 10,415 9,839 10,426 7,746 Net Interest Income 11,317 10,547 9,586 9,232 7,911 Provision for Losses 700 493 402 396 145 Net Interest Income After Provision for Losses 10,617 10,054 9,184 8,836 7,766 Noninterest Income 3,073 2,390 2,284 2,053 992 Noninterest Expense 8,514 7,888 7,715 7,684 6,067 Income Before Income Tax Expense 5,176 4,556 3,753 3,205 2,691 Income Tax Expense 1,372 1,148 866 717 488 Net Income $ 3,804 $ 3,408 $ 2,887 $ 2,488 $ 2,203 SHARE DATA: Net Income-Earnings per Share (EPS) $ 2.72 $ 2.44 $ 2.03 $ 1.74 $ 1.54 Net Income-EPS assuming dilution 2.66 2.40 2.00 1.71 1.52 Cash Dividends Declared 0.80 0.72 0.64 0.60 0.54 Book Value 20.91 19.16 17.44 16.16 14.00 Average Shares and Share Equivalents Outstanding 1,431 1,422 1,443 1,448 1,432 SELECTED BALANCE SHEET DATA: Loans, net including held for sale $210,108 $182,839 $157,564 $153,201 $145,817 Investment Securities 72,353 81,703 92,540 92,639 99,345 Total Assets 308,705 290,655 272,453 269,431 274,497 Deposits 258,740 241,325 231,071 213,348 223,810 Short-Term Borrowings 11,248 9,458 4,160 11,791 7,635 Long-Term Debt 6,954 10,236 10,534 19,071 20,606 Stockholders' Equity 29,372 26,716 24,633 23,167 19,955 PERFORMANCE RATIOS: (Average Balances) Return on Assets 1.31% 1.23% 1.10% 0.94% 0.95% Return on Stockholders' Equity 13.57 13.43 12.06 11.36 10.61 Net Interest Margin (1) 4.27 4.18 4.02 3.80 3.76 Equity to Assets (at period end) 9.51 9.19 9.04 8.60 7.27 SELECTED STATISTICAL DATA: Dividend Payout Ratio 29.49% 29.49% 31.57% 32.93% 31.25% Number of Employees (at period end) 144 145 137 125 128 ALLOWANCE COVERAGE RATIOS: Allowance to Total Loans 1.28% 1.25% 1.32% 1.20% 1.12% Net Charge-offs as a Percentage of Average Loans 0.15 0.16 0.10 0.12 0.13 (1) Tax equivalent Item 7. Management's Discussion and Analysis The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and accompanying notes included as Exhibit 13. When necessary, reclassifications have been made to prior years' data throughout the following discussion and analysis for purposes of comparability with 1998 data. Summary Net income for the year ended December 31, 1998 was $3.8 million, or $2.72 per common share compared to $3.4 million, or $2.44 for 1997 and $2.9 million, or $2.03 for 1996. Earnings per share assuming dilution were $2.66, $2.40 and $2.00 for 1998, 1997 and 1996, respectively. For 1998, net income increased over $395 thousand, nearly 12%. Increases in net interest income of over 7% and other income of 28% were offset by increases in other expenses of over 7% and the provision for loan losses of 42%. The increase in the loan loss provision was mainly attributable to the 15% growth in loans. In 1997, net income increasing over $520 thousand (over 18%) is mainly attributable to increased net interest income and other income, offset by an increase in the loan loss provision, while maintaining other expenses to below modest increases. Return on average equity was 13.6% in 1998 compared to 13.4% in 1997 and 12.1% in 1996. Return on average assets was 1.31% in 1998 compared to 1.23% in 1997 and 1.10% in 1996. Non-performing loans as of a percentage of net loans were 0.50%, 0.26% and 0.49% as of December 31, 1998, 1997 and 1996, respectively. Through management's concerted effort on loan quality, these ratios have remained well below peer groups over the last three years. During 1996, the federal thrift charters of Kentucky Savings Bank, FSB and Jessamine were terminated and both entities became branches of Kentucky Bank. Financial statements have been adjusted to reflect this change. RESULTS OF OPERATIONS Net Interest Income Net interest income, the largest source of revenue, on a tax equivalent basis increased from $9.9 million in 1996 to $10.9 million in 1997 to $11.7 million in 1998. The taxable equivalent adjustment (which is net of the effect of the non- deductible portion of interest expense) is based on a Federal income tax rate of 34%. For 1998, average earning assets and interest bearing liabilities increased. The $12 million increase in average earning assets, and maintenance of the same tax equivalent yield resulted in tax equivalent interest income increasing over $1 million. Average loans increasing over $22 million with a 14 basis point decline in yield along with an over $10 million decline in investment securities and an 8 basis point decline allowed the yield on earning assets to remain constant. The increase of $10 million in deposits along with an 8 basis point decline in yield accounted for the change in liabilities. An increase in earning assets and interest bearing liabilities were both positive factors on 1997 net interest income. Loan growth on an average basis for 1997 increased 10%, while being funded by over 5% growth in interest bearing deposits. There was a positive effect on the rate changes for assets, whereas the rate on liabilities was relatively constant. The 10% increase in loans from 1996 to 1997 and a 5% increase in deposits for the same time period have resulted in the net interest margin increasing from 4.02% in 1996 to 4.18% in 1997. Loan volume accounted for over $1.3 million of the increase in total interest income, while loan rates accounted for $0.3 million of the total interest income increase. Deposit volume accounted for $0.5 million of the $0.6 million increase in total interest expense. The accompanying analysis of changes in net interest income in the following table shows the relationships of the volume and rate portions of these increases in 1998 and 1997. Changes in interest income and expenses due to both rate and volume are allocated on a pro rata basis.
1998 vs. 1997 1997 vs. 1996 Increase (Decrease) Due to Change in Increase (Decrease) Due to Change in Volume Rate Net Change Volume Rate Net Change Interest Income Loans $1,961 $ (233) $1,728 $1,387 $ 322 $1,709 Investment (647) (118) (765) 34 (8) 26 Securities Federal Funds Sold and Securities Purchased under Agreements to Resell 75 1 76 (140) 3 (137) Deposits with Banks (18) 1 (17) (38) (24) (62) Total Interest Income 1,371 (349) 1,022 1,243 293 1,536 Interest Expense Deposits Demand 305 (18) 287 349 269 618 Savings (3) (13) (16) (28) (6) (34) Negotiable Certificates of Deposit and Other Time Deposits 75 (38) 37 36 54 90 Short-Term Borrowings 6 0 6 62 1 63 Long-Term Borrowings (71) 8 (63) (173) 12 (161) Total Interest Expense 312 (61) 251 246 330 576 Net Interest Income $1,059 $ (288) $ 771 $ 997 $ (37) $ 960
Average Consolidated Balance Sheets and Net Interest Analysis (dollars in thousands) 1998 1997 1996 Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate ASSETS Interest-Earning Assets Securities Held to Maturity State and Municipal obligations $ 16,371 $ 971 5.93% $ 16,027 $ 976 6.09% $ 16,377 $ 1,009 6.16% Securities Available for Sale (1) U.S. Treasury and Federal Agency Securities 50,902 3,108 6.11 63,057 3,919 6.22 60,890 3,778 6.20 State and Municipal obligations 3,917 197 5.03 3,943 198 5.02 3,944 199 5.05 Other Securities 3,931 252 6.41 2,803 200 7.14 4,066 281 6.91 Total Securities Available for Sale 58,750 3,557 6.05 69,803 4,317 6.18 68,900 4,258 6.18 Total Investment Securities 75,121 4,528 6.03 85,830 5,293 6.17 85,277 5,267 6.18 Tax Equivalent Adjustment 345 0.46 345 0.40 362 0.42 Tax Equivalent Total 4,873 6.49 5,638 6.57 5,629 6.60 Federal Funds Sold and Agreements to Repurchase 4,372 236 5.40 2,979 160 5.37 5,579 297 5.37 Interest-Bearing Deposits with Banks 152 8 5.26 500 25 5.00 1,143 87 7.61 Loans, Net of Deferred Loan Fees (2) Commercial 23,150 2,093 9.04 20,035 1,828 9.12 19,192 1,749 9.11 Real Estate Mortgage 154,764 13,525 8.74 137,079 12,194 8.90 123,145 10,674 8.67 Installment 15,268 1,593 10.43 14,014 1,461 10.43 13,398 1,351 10.08 Total Loans 193,182 17,211 8.91 171,128 15,483 9.05 155,735 13,774 8.84 Total Interest-Earning Assets 272,827 22,328 8.18 260,437 21,306 8.18 247,734 19,787 7.99 Allowance for Loan Losses (2,550) (2,261) (1,988) Cash and Due From Banks 9,225 7,510 6,839 Premises and Equipment 6,187 5,475 4,591 Other Assets 5,793 5,565 5,617 Total Assets $291,482 $276,726 $262,793 LIABILITIES Interest-Bearing Deposits Negotiable Order of Withdrawal ("NOW) and and Money Market Investment Accounts $ 63,413 $ 2,199 3.47% $ 54,626 $ 1,912 3.50% $ 43,918 $ 1,294 2.95% Savings 12,679 315 2.48 12,786 331 2.59 13,850 365 2.64 Certificates of Deposit and Other Deposits 134,893 7,274 5.39 133,509 7,237 5.42 132,835 7,147 5.38 Total Interest-Bearing Deposits 210,985 9,788 4.64 200,921 9,480 4.72 190,603 8,806 4.62 Short-Term Borrowings 5,222 271 5.19 5,100 265 5.20 3,899 202 5.18 Long-Term Debt 10,067 607 6.03 11,247 670 5.96 14,158 831 5.87 Total Interest-Bearing Liabilities 226,274 10,666 4.71 217,268 10,415 4.79 208,660 9,839 4.72 Noninterest Bearing Demand Deposits 34,487 31,566 27,930 Other Liabilities 2,693 2,513 2,262 Total Liabilities 263,454 251,347 238,852 STOCKHOLDERS' EQUITY 28,028 25,379 23,941 Total Liabilities and Stockholders' Equity $291,482 $276,726 $262,793 Average Equity to Average Total Assets 9.62% 9.17% 9.11% Net Interest Income 11,317 10,546 9,586 Net Interest Income (tax equivalent) (3) $11,662 $10,891 $ 9,948 Net Interest Spread (tax equivalent) (3) 3.47% 3.39% 3.27% Net Interest Margin (tax equivalent) (3) 4.27 4.18 4.02
[FN] (1) Averages computed at amortized cost. (2) Includes loans on a nonaccrual status. (3) Tax equivalent difference represents the tax equivalent adjustment detailed above. Noninterest Income and Expenses Noninterest income was $3.1 million in 1998 compared to $2.4 million in 1997 and $2.3 million in 1996. In 1998 securities gains were $41 thousand compared to $14 thousand gains in 1997 and $13 thousand losses in 1996. Typically, U. S. Treasury securities are sold before maturity when additional interest yields can be realized. Other types of investment securities are generally not sold. In addition, gains on loans sold were $440 thousand, $72 thousand and $200 thousand in 1998, 1997 and 1996, respectively. In 1998, management increased its focus on mortgage banking and this along with the increased volume of loans sold in a declining rate environment have resulted in the increased gain on loans sold. Loans held for sale are generally sold at closing to Federal Home Loan Mortgage Corporation. The sales of loans were $35 million, $18 million and $21 million in 1998, 1997 and 1996, respectively. Other noninterest income excluding security and loans net gains was $2.6 million in 1998, $2.3 million in 1997 and $2.1 million in 1996. Noninterest expense increased $626 thousand in 1998 to $8.5 million and a modest $173 thousand from $7.7 million in 1996 to $7.9 million in 1997. The increases in salaries and benefits from $4.0 million in 1996 to $4.3 million in 1997 and $4.5 million in 1998 are mainly attributable to normal salary and benefit increases. Occupancy expense increased $162 thousand in 1998 to $1.2 million and 8% in 1997, from $932 thousand in 1996 to $1.0 million in 1997. In August 1998 the Company added a new branch in Georgetown and in March 1997, the Company opened its new branch in Versailles resulting in higher operating cost attributable to these facilities. The Company has also placed more emphasis on maintaining its existing facilities in 1997 and 1998, which are reflected in increases in occupancy expenses. Other noninterest expense decreased from $2.8 million in 1996 to $2.6 million in 1997. However, in 1998 other noninterest expenses increased modestly to $2.8 million. In December 1995, the FDIC set the 1996 premium for BIF-insured deposits at zero. In September 1996, Congress declared a special, one- time assessment on SAIF-insured deposits. The cost of this assessment was nearly $200 thousand net of income taxes. For 1997, the BIF-insured deposit rate was 1.3 cents per $100 and the SAIF-insured rate was 6.5 cents per $100. Due to the conversion of the savings institutions to branches of Kentucky Bank, the Company has deposits of over $53 million that will be assessed at the SAIF rate. The resulting decrease in FDIC assessment was $358 thousand from 1996 to 1997; there was little change from 1997 to 1998. Excluding this special FDIC assessment, other noninterest expense only increased $200 thousand in both 1998 and 1997. The following table is a summary of noninterest income and expense for the three-year period indicated. Year Ended December 31 (in thousands) 1998 1997 1996 Non-interest Income Service Charges $1,811 $1,674 $1,508 Loan Service Fee Income 283 258 255 Trust Department Income 300 237 206 Investment Securities Gains 41 14 (13) (Losses),net Gains on Sale of Mortgage Loans 440 72 200 Other 198 135 128 Total Non-interest Income $3,073 $2,390 $2,284 Non-interest Expense Salaries and Employee Benefits $4,527 $4,274 $4,005 Occupancy Expenses 1,164 1,002 932 Other 2,823 2,612 2,778 Total Non-interest Expense $8,514 $7,888 $7,715 Net Non-interest Expense as a Percentage of Average Assets 1.87% 1.99% 2.07% Income Taxes The Company had income tax expense of $1.4 million in 1998 compared to $1.1 million in 1997 and $866 thousand in 1996. This represents an effective income tax rate of 26.5% in 1998, 25.2% in 1997 and 23.1% in 1996. The difference between the effective tax rate and the statutory federal rate of 34% is due to tax exempt income on certain loans and investment securities. The higher effective rate for 1998 and 1997 is a result of tax free income remaining virtually unchanged for these two years while income before taxes increased over $600 thousand in 1998 and $800 thousand in 1997. Balance Sheet Review Assets at year-end 1998 totaled $309 million compared to $291 million in 1997 and $272 million in 1996. Changes in 1998 are a result of loans increasing $27.7 million and investment securities decreasing $9.3 million. Assets were funded by an increase in deposits of $17.4 million. Federal Home Loan Bank Advances declined by $3.3 million. The increase in size from 1996 to 1997 is mainly attributable to total loans increasing $25.5 million and investment securities decreasing $10.8 million, while being funded by an increase in deposits of $10.3 million and short term borrowing of $5.3 million. Loans Total loans, net of deferred loan fees were $213 million at December 31, 1998 compared to $185 million at the end of 1997 and $160 million in 1996. In 1998, commercial loans increased $4.5 million, real estate construction loans increased $3.4 million, real estate mortgages increased $11.2 million and agricultural loans increased $6.3 million. During 1997, real estate construction loans increased $3.5 million, real estate mortgages increased $14.2 million and agricultural loans increased $7.0 million. Management developed regional loan goals for each type of loan and this emphasis has resulted in improved sales efforts by the lending personnel. Management continues to place more emphasis on the growth without sacrificing the quality of the loan portfolio. As of December 31, 1998, the real estate mortgage portfolio comprised 59% of total loans compared to 61% in 1997. Of this, 1-4 family residential property represented 79% in 1998 and 78% in 1997. Agricultural loans comprised 21% in 1998 and nearly 20% in 1997 of the loan portfolio. Approximately 73% of the agricultural loans for both years are secured by real estate. The remainder of the agricultural portfolio is used to purchase livestock, equipment and other capital improvements and for general operation of the farm. Generally, a secured interest is obtained in the capital assets, equipment, livestock or crops. Automobile loans account for 47% of the installment loan portfolio, while the purpose of the remainder of this portfolio is used by customers for purchasing retail goods, home improvement or other personal reasons. Collateral is generally obtained on these loans after analyzing the repayment ability of borrower. Commercial loan's portfolio is mainly for capital outlays and business operation. Collateral is requested depending on the creditworthiness of the borrower. Unsecured loans are made to individuals or companies mainly based on the creditworthiness of the customer. Approximately 5% of the loan portfolio is unsecured. Management is not aware of any significant concentrations that may cause future material risks which may result in significant problems with future income and capital requirements. The following table represents a summary of the Company's loan portfolio by category for each of the last five years. There is no concentration of loans (greater than 5% of the loan portfolio) in any industry. Bourbon has no foreign loans or highly leveraged transactions in its loan portfolio. Loans Outstanding December 31 (in thousands) 1998 1997 1996 1995 1994 Commercial $ 15,177 $ 10,644 $ 10,216 $ 11,167 $ 7,502 Real Estate Construction 11,055 7,657 4,200 3,497 3,156 Real Estate Mortgage 124,721 113,524 99,293 102,077 101,361 Agricultural 44,199 37,924 30,947 27,019 23,407 Installment 17,608 15,182 14,789 11,029 11,391 Other 159 287 374 397 807 Total Loans 212,919 185,218 159,819 155,186 147,624 Less Deferred Loan Fees 76 57 154 125 159 Loans Net of Deferred Loan Fees 212,843 185,161 159,665 155,061 147,465 Less loans held for sale 5,909 5,418 863 1,364 1,553 Less Allowance For Loan Losses 2,734 2,322 2,101 1,860 1,648 Net Loans $204,200 $177,421 $156,701 $151,837 $144,264 The following table sets forth the maturity distribution and interest sensitivity of selected loan categories at December 31, 1998. Maturities are based upon contractual term. The total loans in this report represents loans net of deferred loan fees, including loans held for sale but excluding the allowance for loan losses. In addition, deferred loan fees on the above schedule is netted with real estate mortgage loans on the following schedule. Loan Maturities and Interest Sensitivity December 31, 1998 (in thousands) One Year One Through Over Total or Less Five Years Five Years Loans Commercial $ 7,390 $ 6,448 $ 1,339 $ 15,177 Real Estate 8,593 2,291 171 11,055 Construction Real Estate Mortgage 8,220 64,363 52,063 124,646 Agricultural 14,878 27,566 1,755 44,199 Installment 5,327 12,091 189 17,607 Other 159 0 0 159 Total Loans 44,567 112,759 55,517 212,843 Fixed Rate Loans 25,848 103,495 15,858 145,201 Floating Rate Loans 18,719 9,264 39,659 67,642 Total $44,567 $112,759 $55,517 $212,843 Deposits Total deposits increased $17 million in 1998 to $259 million. Noninterest bearing deposits increased $7 million to $40 million, while $100,000 and over time deposits and other interest bearing deposits both increased $5 million. Public funds composed $35 million, with $34 million of this being interest bearing. During 1997, total deposits increased $10 million to $241 million from $231 million in 1996. The increase was mainly a result of interest bearing checking accounts increasing over $11 million during 1997. Public deposits accounted for $22 million, with $21 million of this being interest bearing deposits. The Company increased its focus on attracting more interest bearing checking accounts. In addition, management placed more emphasis on deposits and monitored deposits generated by type on a monthly basis. The tables below provide information on the maturities of time deposits of $100,000 or more at December 31, 1998 and detail of short-term borrowing for the past three years. Maturity of Time Deposits of $100,000 or More December 31, 1998 (in thousands) Maturing 3 Months or Less $ 7,409 Maturing over 3 Months through 6 Months 7,827 Maturing over 6 Months through 12 Months 10,707 Maturing over 12 Months 2,225 Total $28,168 Borrowing The Company utilizes both long and short term borrowing. Long term borrowing is mainly from the Federal Home Loan Bank (FHLB). As of December 31, 1998, $7.0 million was borrowed from FHLB, a decrease of $3.3 million from 1997. Advances are either paid monthly or at maturity. This borrowing is mainly used to fund long term, fixed rate mortgages and to assist in asset/liability management. Nearly $7.3 million of FHLB borrowing was paid in 1998, and advances were made for an additional $4 million. The following table depicts relevant information concerning our short term borrowings. Short Term Borrowings December 31 (in thousands) 1998 1997 1996 Federal Funds Purchased: Balance at Year end $3,750 $2,375 $ 0 Average Balance During the Year 446 488 142 Maximum Month End Balance 4,550 2,375 1,075 Repurchase Agreements: Balance at Year end 6,713 4,615 2,836 Average Balance During the Year 4,329 4,103 3,342 Maximum Month End Balance 6,713 4,895 4,668 Other Borrowed Funds: Balance at Year end 785 2,468 1,324 Average Balance During the Year 1,198 1,259 1,225 Maximum Month End Balance 1,761 2,468 1,873 Asset Quality With respect to asset quality, management considers three categories of assets to merit close scrutiny. These categories include: loans that are currently nonperforming, other real estate, and loans that are currently performing but which management believes require special attention. The Company discontinues the accrual of interest on loans that become 90 days past due as to principal or interest unless extreme justifiable reasons are documented such as the loan being in the process of collection. Uncollected interest generally remains in earned income until collected and removed from earnings if the loan is charged-off. A loan remains in a non-accrual status until factors indicating doubtful collection no longer exist. A loan is classified as a restructured loan when the interest rate is materially reduced or the term is extended beyond the original maturity date because of the inability of the borrower to service the interest payments at market rates. Other real estate is recorded at the lower of cost or fair market value less estimated costs to sell. A summary of the components of nonperforming assets, including several rates using period-end data, is shown below. Nonperforming Assets December 31 (in thousands) 1998 1997 1996 1995 1994 Non-accrual Loans $ 136 $173 $ 33 $ 44 $ 85 Accruing Loans which are Contractually past due 90 days or more 790 154 562 438 283 Restructured Loans 147 160 180 201 357 Total Nonperforming and Restructured Loans 1,073 487 775 683 725 Other Real Estate 70 0 79 57 306 Total Nonperforming and Restructured Loans and Other Real Estate 1,143 487 854 740 1,031 Nonperforming and Restructured Loans as a Percentage of Net Loans (1) 0.50% 0.26% 0.49% 0.44% 0.49% Nonperforming and Restructured Loans and Other Real Estate as a Percentage of Total Assets 0.37 0.17 0.31 0.27 0.38 (1) Net of deferred loan fees Nonperforming and restructured loans at December 31, 1998 were $1.1 million compared to $487 thousand at December 31, 1997 and $775 thousand at December 31, 1996. Total nonperforming assets were $1.1 million, $487 thousand and $854 thousand at December 31, 1998, 1997 and 1996, respectively. The amount of lost interest on non-accrual loans is considered immaterial. At December 31, 1998, loans currently performing but which management believes require special attention were not significant. The Company continues to follow its long-standing policy of not engaging in international lending and not concentrating lending activity in any one industry. Impaired loans as of December 31, 1998 were $286 thousand compared to $333 thousand in 1997 and $251 thousand in 1996. These amounts are included in the total nonperforming and restructured loans presented in the table above. See Note 4 in the notes to consolidated financial statements included as Exhibit 13. A loan is considered impaired when it is probable that all principal and interest amounts will not be collected according to the loan contract. The allowance for loan losses on impaired loans is determined using the present value of estimated future cash flows of the loan, discounted at the loan's effective interest rate or the fair value of the underlying collateral. The entire change in present value of expected cash flows is reported as a provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the amount of provision for loan losses that otherwise would be reported. The total allowance for loan losses related to these loans was $85 thousand, $57 thousand and $28 thousand on December 31, 1998, 1997 and 1996, respectively. Loan Losses The following table is a summary of the Company's loan loss experience for each of the past five years. Year Ended December 31 (in thousands) 1998 1997 1996 1995 1994 Balance at Beginning of Year $ 2,322 $ 2,101 $ 1,860 $ 1,648 $ 1,420 Balance of Allowance for Loan Losses of Acquired Branch at Acquisition Date 252 Amounts Charged-off: Commercial 13 5 55 14 123 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 36 25 4 41 53 Agricultural 19 52 12 36 3 Consumer 300 273 142 139 56 Total Charged-off Loans 368 355 213 230 235 Recoveries on Amounts Previously Charged-off: Commercial 4 3 12 15 22 Real Estate Construction 0 0 0 0 0 Real Estate Mortgage 9 1 8 21 1 Agricultural 2 25 1 0 0 Consumer 66 54 31 11 43 Total Recoveries 81 83 52 47 66 Net Charge-offs 287 272 161 183 169 Provision for Loan Losses 700 493 402 395 145 Balance at End of Year 2,735 2,322 2,101 1,860 1,648 Total Loans, Net of Unearned Income Average 193,182 171,128 155,735 153,109 125,643 At December 31 $212,843 $185,161 $159,665 $155,061 $147,465 As a Percentage of Average Loans: Net Charge-offs 0.15% 0.16% 0.10% 0.12% 0.13% Provision for Loan Losses 0.36 0.29 0.26 0.26 0.12 Allowance as a Percentage of Year-end Net Loans (1) 1.28 1.25 1.32 1.20 1.128 Beginning Allowance as a Multiple Of Net Charge-offs 8.1 7.7 11.6 9.0 8.4 (1) Net of deferred loan fees Loans are typically charged-off after being 120 days delinquent. Limited exceptions for not charging-off a loan would be well documented and approved by the appropriate responsible party or committee. The provision for loan losses for 1998 was $700 thousand compared to $493 thousand in 1997 and $402 thousand in 1996. Net charge-offs were $287 thousand in 1998, $272 thousand in 1997 and $161 thousand in 1996. Net chargeoffs to average loans were 0.15%, 0.16% and 0.10% in 1998, 1997 and 1996, respectively. The trend in the loan loss provisions increasing for 1998 and 1997 is a result of considering our historical loan loss trends, risk analysis of our loan portfolio and the increase in loan outstandings. In evaluating the allowance for loan losses, management considers the composition of the loan portfolio, historical loan loss experience, the overall quality of the loans and an assessment of current economic conditions. At December 31, 1998, the allowance for loan losses was 1.28% of loans outstanding compared to 1.25% at year-end 1997 and 1.32% in 1996. Management believes the allowance for loan losses at the end of 1998 is adequate to cover inherent credit losses within the portfolio. The following tables set forth an allocation for the allowance for loan losses and loans by category and a percentage distribution of the allowance allocation. In making the allocation, management evaluates the risk in each category, current economic conditions and charge-off experience. An allocation for the allowance for loans losses is an estimate of the portion of the allowance that will be used to cover future charge-offs in each loan category, but it does not preclude any portion of the allowance allocated to one type of loan being used to absorb losses of another loan type.
Allowance for Loan Losses December 31 (in thousands) 1998 1997 1996 1995 1994 Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage >s> Commercial $ 262 9.58% $ 191 8.23% $ 168 8.00% $ 132 7.10% $ 94 5.70% Real Estate Construction 168 6.14 118 5.08 77 3.66% 38 2.04 27 1.64 Real Estate Mortgage 1,480 54.11 1,327 57.15 1,252 59.59% 1,192 64.09 1,105 67.05 Agricultural 473 17.29 393 16.93 353 16.80% 327 17.58 269 16.32 Consumer 352 12.87 293 12.62 251 11.95% 171 9.19 153 9.28 Total $ 2,735 100.00% $ 2,322 100.00% $ 2,101 100.00% $ 1,860 100.00% $ 1,648 100.00% Loans December 31 (in thousands) 1998 1997 1996 1995 1994 Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Dollars Percentage Commercial $ 15,177 7.13% $ 10,644 5.75% $ 10,216 6.40% $ 11,167 7.20% $ 7,502 5.09% Real Estate Construction 11,055 5.19 7,657 4.14 4,200 2.63 3,497 2.26 3,156 2.14 Real Estate Mortgage 124,645 58.56 113,467 61.28 99,139 62.09 102,077 65.83 101,361 68.74 Agricultural 44,199 20.77 37,924 20.48 30,947 19.38 27,019 17.42 23,407 15.87 Consumer 17,608 8.27 15,182 8.20 14,789 9.26 10,904 7.03 11,232 7.62 Other 159 0.07 287 0.16 374 0.23 397 0.26 807 0.55 Total, net (1) $212,843 100.00% $185,161 100.00% $159,665 100.00% $155,061 100.00% $147,465 100.00%
[FN] (1) Net of deferred loan fees Capital As displayed by the following table, the Company's Tier I capital (as defined by the Federal Reserve Board under the Board's risk-based guidelines) at December 31, 1998 increased $3.0 million to $27.7 million. Total capital was $29.3 million at December 31, 1998. The Company's risk- based capital and leverage ratios, as shown in the following table, exceeded the levels required to be considered "well capitalized". The leverage ratio compares Tier I capital to total average assets less disallowed amounts of goodwill. December 31 (in thousands) 1998 1997 Change Stockholders' Equity (1) $ 29,306 $ 26,483 $ 2,823 Less Disallowed Amount of Goodwill 1,574 1,789 (215) Tier I Capital 27,732 24,694 3,038 Allowance for Loan Losses 2,601 2,272 329 Tier II Capital 2,601 2,272 329 Total Capital 30,333 26,966 3,367 Total Risk Weighted Assets $207,970 $181,702 $26,268 Ratios: Tier I Capital to Risk-weighted Assets 13.33% 13.59% -0.26% Total Capital to Risk-weighted Assets 14.59 14.84 -0.25 Leverage 9.56 8.77 0.79 (1) Excluding net unrealized gains and losses on securities available for sale. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital categories for insured depository institutions under its Prompt Corrective Action Provisions. The bank regulatory agencies adopted regulations, which became effective in 1992, defining these five capital categories for banks they regulate. The categories vary from "well capitalized" to "critically undercapitalized". A "well capitalized" bank is defined as one with a total risk-based capital ratio of 10% or more, a Tier I risk-based capital ratio of 6% or more, a leverage ratio of 5% or more, and one not subject to any order, written agreement, capital directive, or prompt corrective action directive to meet or maintain a specific capital level. At December 31, 1998, the bank had ratios that exceeded the minimum requirements established for the "well capitalized" category. In management's opinion, there are no known trends, events or uncertainties that will have or that are reasonably likely to have a material effect on the Company's liquidity, capital resources or operations. Securities and Federal Funds Sold Securities, including those classified as held to maturity and available for sale, decreased from $81.7 million at December 31, 1997 to $72.4 million at December 31, 1998. The decrease is attributable to the increased loan demand. Federal funds sold totaled $75 thousand at December 31, 1996. Per Company policy, fixed rate asset backed securities will not have an average life exceeding seven years, but final maturity may be longer. Adjustable rate securities shall adjust within three years per Company policy. Of the $15.7 million of adjustable asset backed securities held on December 31, 1998, $3.4 million are repriceable monthly and the remaining $12.3 million is repriceable annually. In addition, all applicable securities have passed the appropriate stress tests. The following tables present the investment securities for each of the past three years and the maturity and yield characteristics of securities as of December 31, 1998. Investment Securities (Held to maturity at amortized cost, available for sale at market value) December 31 1998 1997 1996 (in thousands) U.S. Treasury Securities Available for Sale $16,087 $19,072 $24,571 U.S. Federal Agency Securities Available for Sale 5,979 10,485 8,984 State and Municipal Obligations Available for Sale 3,804 4,077 4,012 Held to Maturity 16,933 15,603 16,313 Asset-Backed Securities Available for Sale Fixed - GNMA, FNMA, FHLMC Passthroughs 2,352 4,924 10,899 GNMA, FNMA, FHLMC CMO's 7,570 9,970 10,482 Total 9,922 14,894 21,381 Variable - GNMA, FNMA, FHLMC Passthroughs 12,529 14,306 13,907 GNMA, FNMA, FHLMC CMO's 3,173 3,266 3,372 Total 15,702 17,572 17,279 Other Securities Available for Sale 3,926 0 0 Total Securities Available for Sale 55,420 66,100 76,227 Held to Maturity 16,933 15,603 16,313 Total $72,353 $81,703 $92,540
Maturity Distribution of Securities December 31, 1998 (in thousands) Over One Year Over Five Years Asset Backed One Year Through Through Over Ten and Equity Market or Less Five Years Ten Years Years Securities Total Value U.S. Treasury Securities Available for Sale $14,070 $ 2,017 $ 0 $ 0 $ 0 $16,087 $16,087 U.S. Federal Agency Securities Available for Sale 3,986 1,993 0 0 0 5,979 5,979 State and Municipal Obligations Available for Sale 0 2,378 1,426 0 0 3,804 3,804 Held to Maturity 1,093 5,757 6,857 3,226 0 16,933 17,855 Asset-Backed Securities Available for Sale 25,624 25,624 25,624 Other Securities Available for Sale 534 955 1,460 977 3,926 3,926 Total Securities Available for Sale 18,056 6,922 2,381 1,460 26,601 55,420 55,420 Held to Maturity 1,093 5,757 6,857 3,226 0 16,933 17,855 Total $19,149 $12,679 $ 9,238 $ 4,686 $26,601 $72,353 $73,275 Percent of Total 26.47% 17.52% 12.77% 6.48% 36.77% 100.00% Weighted Average Yield (1) 5.25 7.66 8.36 7.15 6.13 6.52
[FN] (1) Tax Equivalent Yield Impact of Inflation and Changing Prices The majority of Bourbon's assets and liabilities are monetary in nature. Therefore, Bourbon differs greatly from most commercial and industrial companies that have significant investments in nonmonetary assets and inventories. However, inflation does have an important impact on the growing of assets in the banking industry and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Inflation also affects other expenses, which tend to rise during periods of inflation. Other Accounting Issues In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income. Comprehensive income consists of net income and comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity. The accounting standard that requires reporting comprehensive income first applies for 1998, with prior information restated to be comparable. Year 2000 Management has assessed the operational and financial implications of its Year 2000 needs and developed a plan to address its data processing systems and their ability to handle the change. Management has determined that if a business interruption as a result of the Year 2000 issue occurred, such an interruption could be material. The primary effort required to prevent a potential business interruption is the installation of the most current software release from the Company's third party provider and replacement of certain system hardware. The third party software provider has warranted that Year 2000 remediation and testing efforts to become compliant have been successfully completed. Testing of mission critical systems was be completed the first quarter 1999. Non- mission critical systems will continue to be evaluated and, if necessary, will be upgraded or replaced. Current cost estimates for this project are under $150 thousand, with the majority of this expenditure being for equipment and software to be capitalized over 3-5 years. In addition, over $400 thousand was spent on a new mainframe computer system to enhance our overall computer technology. Year 2000 expenses are subject to change and could vary from current estimates if the final requirements for Year 2000 readiness exceed management's expectations. The Company must also rely to some extent on the Year 2000 readiness of other third party entities such as public utilities and governmental units. These and other like entities provide important ongoing services to the Company. Management is therefore developing and implementing contingency plans that are scheduled to be in place by the end of the second quarter, 1999. The Company's credit customers are also subject to potential losses as a result of Year 2000 exposure in their own computer systems as well as the computer systems of their suppliers and customers. The Company is working with those customers that the Company believes may be significantly affected to assess each customer's Year 2000 exposure and the extent to which the customer has addressed the problem. Any exposure which, in the opinion of management, is not adequately addressed will be taken into account in assessing the loss potential, if any, associated with that credit relationship. Forward-Looking Statements This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included herein will prove to be accurate. Factors that could cause actual results to differ from the results discussed in the forward-looking statements include, but are not limited to: economic conditions (both generally and more specifically in the markets in which the Company and its bank operate); competition for the Company's customers from other providers of financial and mortgage services; government legislation and regulation (which changes from time to time and over which the Company has no control); changes in interest rates (both generally and more specifically mortgage interest rates); material unforeseen changes in the liquidity, results of operations, or financial condition of the Company's customers; material unforeseen complications related to addressing the Year 2000 problem experienced by the Company, its suppliers, customers and governmental agencies; and other risks detailed in the Company's filings with the Securities and Exchange Commission, all of which are difficult to predict and many of which are beyond the control of the Company. The Company undertakes no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Item 7A. Asset/Liability Management, Interest Rate Sensitivity, Market Risk and Liquidity Asset/Liability management control is designed to ensure safety and soundness, maintain liquidity and regulatory capital standards, and achieve acceptable net interest income. Management considers interest rate risk to be the most significant market risk. The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximize income. Management realizes certain risks are inherent and that the goal is to identify and minimize the risks. Tools used by management include the standard GAP model and an interest rate shock simulation model. The Bank has no market risk sensitive instruments held for trading purposes. The following table depicts the change in net interest income resulting from 100 and 300 basis point changes in rates. The projections are based on balance sheet growth assumptions and repricing opportunities for new, maturing and adjustable rate amounts. In addition, the projected percentage changes from level rates are outlined below within the Board of Directors specified limits. As of December 31, 1998 the projected percentage changes are within the Board limits and the Company's interest rate risk is also with Board limits. The projected net interest income report summarizing the Company's interest rate sensitivity as of December 31, 1998 is as follows: Projected Net Interest Income Level Rate Change: - 300 - 100 Rates + 100 + 300 Year One (1/1/99 - 12/31/99) Interest Income $19,989 $22,127 $23,210 $24,295 $26,463 Interest Expense 7,317 9,281 10,264 11,246 13,210 Net Interest Income 12,672 12,846 12,946 13,049 13,253 PROJECTED DOLLAR INCREASE (DECREASE) FROM "LEVEL RATES" Year One (1/1/99 - 12/31/99) Interest Income $(3,221) $(1,083) N/A $ 1,085 $ 3,253 Interest Expense (2,947) (983) N/A 982 2,946 Net Interest Income (274) (100) 103 307 PROJECTED PERCENTAGE INCREASE (DECREASE) FROM "LEVEL RATES" Year One (1/1/99 - 12/31/99) Interest Income -13.9% -4.7% N/A 4.7% 14.0% Interest Expense -28.7 -9.6 N/A 9.6 28.7 Net Interest Income -2.1% -0.8% N/A 0.8% 2.4% Limitation on % Change >-10.0% >-4.0% N/A >-4.0% >-10.0% These numbers are comparable to 1997. In 1997, year one reflected a decline in net interest income of 2.6% with a 300 basis point decline compared to the 2.1% decline in 1998. The 300 basis point increase in rates reflected a 2.8% increase in net interest income in 1997 compared to 2.4% in 1998. Management measures the Company's interest rate risk by computing estimated changes in net interest income in the event of a range of assumed changes in market interest rates. The Company's exposure to interest rates is reviewed on a monthly basis by senior management and quarterly with the Board of Directors. Exposure to interest rate risk is measured with the use of interest rate sensitivity analysis to determine the change in net interest income in the event of hypothetical changes in interest rates, while interest rate sensitivity gap analysis is used to determine the repricing characteristics of the Company's assets and liabilities. If estimated changes to net interest income are not within the limits established by the Board, the Board may direct management to adjust the Company's asset and liability mix to bring interest rate risk within Board approved limits. In addition, the Company uses interest rate sensitivity gap analysis to monitor the relationship between the maturity and repricing of its interest-earning assets and interest- bearing liabilities, while maintaining an acceptable interest rate spread. Interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest-rate- sensitive assets exceeds the amount of interest-sensitive- liabilities, and is considered negative when the amount of interest-rate-sensitive liabilities exceeds the amount of interest-rate-sensitive assets. Generally, during a period of rising interest rates, a negative gap would adversely affect net interest income, while a positive gap would result in an increase in net interest income. Conversely, during a period of falling interest rates, a negative gap would result in an increase in net interest income, while a positive gap would negatively affect net interest income. The Company's goal is to maintain a reasonable balance between exposure to interest rate fluctuations and earnings. The interest rate sensitivity analysis as of December 31, 1998 shown below depicts amounts based on the earliest period in which they can normally be expected to reprice. The chart reveals that assets and liabilities are fairly well matched for the early periods specified below. The decay rates used for Demand deposits, NOW's, Savings and Money Market Savings are 5%, 30%, 20% and 30%, respectively.
Interest Rate Sensitivity Analysis December 31, 1998 (in thousands) Total 1 Year 2 Years 3 Years 4 Years 5 Years >5 Years ASSETS Cash & Due From Banks $ 10,619 $ - $ - $ - $ - $ - $ 10,619 Fed Funds & Int-Earning Due From Banks 137 137 - - - - - Variable Rate Investment (1) 19,849 19,849 - - - - - Fixed Rate Investment (1) 52,504 24,131 6,254 4,143 2,071 4,265 11,640 Variable Rate Loans 67,681 61,065 2,546 1,234 1,220 1,616 Fixed Rate Loans 145,162 44,267 21,636 23,888 26,010 26,560 2,801 Others Assets 12,753 3,120 - - - - 9,633 Total Assets / Repricing Assets 308,705 152,569 30,436 29,265 29,301 32,441 34,693 Repricing Assets - Accumulated 152,569 183,005 212,270 241,571 274,012 308,705 % of Current Balance 49.4% 9.9% 9.5% 9.5% 10.5% 11.2% % of Current Balance - Accumulated 49.4 59.3 68.8 78.3 88.8 100.0 LIABILITIES Demand Deposit Accounts $ 40,336 $ 2,017 $ 1,916 $ 2,017 $ 1,916 $ 1,624 $ 30,846 NOW Accounts 63,467 19,040 13,328 9,330 6,530 4,572 10,667 Savings Accounts 12,572 2,517 2,011 1,609 1,287 1,030 4,118 Money Market Savings 9,477 2,843 1,990 1,393 975 683 1,593 Subtotal Deposit Accounts 125,852 26,417 19,245 14,349 10,708 7,909 47,224 Other Variable Deposits 5,959 5,959 - - - - - Fixed Rate Deposits 126,929 112,999 9,977 1,320 689 963 981 Variable Rate Other Liabilities 10,498 10,248 250 - - - - Fixed Rate Other Liabilities 7,704 299 1,237 234 248 5,576 110 Other Liabilities 2,391 - - - - - 2,391 Total Capital 29,372 - - - - - 29,372 Total Liabilities / Repricing Liab 308,705 155,922 30,709 15,903 11,645 14,448 80,078 Repricing Liabilities - Accumulated 155,922 186,631 202,534 214,179 228,627 308,705 % of Current Balance 50.5% 9.9% 5.2% 3.8% 4.7% 25.9% % of Current Balance - Accum 50.5 60.5 65.6 69.4 74.1 100.0 SUMMARY Total Repricing Assets 152,569 30,436 29,265 29,301 32,441 34,693 Total Repricing Liabilities 155,922 30,709 15,903 11,645 14,448 80,078 Total Repricing Gap (by Bucket) (3,353) (273) 13,362 17,656 17,993 (45,385) Total Repricing Assets - Cumulative 152,569 183,005 212,270 241,571 274,012 308,705 Total Repricing Liabilities - Cumul 155,922 186,631 202,534 214,179 228,627 308,705 Gap/Total Assets (by Bucket) -1.09% -0.09% 4.33% 5.72% 5.83% -14.70% Cumulative Gap/Total Assets -1.09 -1.17 3.15 8.87 14.70 0.00
[FN] (1) Held to maturity at amortized cost, available for sale at market value Little change in the above numbers has occurred since 1997. For the first three years in 1997 and 1998, the cumulative gap percentage is less than 4%. There was a slight increase in the cumulative gap for the three year period from 1.86% in 1997 to 3.15% in 1998. There has been a trend in the 3 to 5 year periods of being more positive. The cumulative gap at December 31, 1997 for the 5 year period was 10.36%. This increased to 14.7% as of December 31, 1998. These percentages remain below the Board established guidelines. Liquidity risk is the possibility that Bourbon may not be able to meet its cash requirements. Management of liquidity risk includes maintenance of adequate cash and sources of cash to fund operations and meeting the needs of borrowers, depositors and creditors. Excess liquidity has a negative impact on earnings resulting from the lower yields on short- term assets. In addition to cash and cash equivalents, the securities portfolio provides an important source of liquidity. Total securities maturing within one year along with cash and cash equivalents totaled $29.9 million at December 31, 1998. Additionally, securities available-for-sale with maturities greater than one year totaled $37.4 million at December 31, 1998. These securities are available to meet liquidity needs on a continuing basis. Bourbon maintains a relatively stable base of customer deposits and its steady growth is expected to be adequate to meet its funding demands. In addition, management believes the majority of its $100,000 or more certificates of deposit are no more volatile than its core deposits. At December 31, 1998 these balances totaled over $28 million, approximately 10.9% of total deposits. The Company also relies on FHLB advances for both liquidity and asset/liability management purposes. These advances are used primarily to fund long-term fixed rate residential mortgage loans. FHLB advances decreased $3.3 million in 1998 to $7.0 million. Generally, Bourbon relies upon net cash inflows from financing activities, supplemented by net cash inflows from operating activities, to provide cash used in its investing activities. As is typical of many financial institutions, significant financing activities include deposit gathering, and the use of short-term borrowings, such as federal funds purchased and securities sold under repurchase agreements along with long-term debt. The Company's primary investing activities include purchasing investment securities and loan originations. Management believes there is sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. The cash flow statements for the periods presented provide an indication of Bourbon's sources and uses of cash as well as an indication of the ability of Bourbon to maintain an adequate level of liquidity. A discussion of cash flow statements for 1998, 1997 and 1996 follows. Net cash provided by operating activities was $3.5 million, $5.2 million and $5.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. The changes in 1998 and 1997 were mainly a result of the increase in net income from $2.9 million to $3.4 million to $3.8 million in 1996, 1997 and 1998, respectively. Net cash flow used in investing activities was $20.0 million, $15.8 million, and $7.1 million and for the years ended December 31, 1998, 1997 and 1996, respectively. The changes in net cash from investing activities included the result of normal maturities and reinvestment of investment securities as well as funding related to increases in loans. During 1998, funds used for loan growth were $28 million, partly offset by a decline in investments of $9 million. In 1997, the loan growth resulted in a use of funds of nearly $26 million, being offset by a decline in investment securities of $11 million. This was funded mainly by deposits increasing $10 million and short term borrowing increasing $5 million. In addition, $1.3 million was used for purchases of bank premises and equipment. During 1996 and 1997, over $1 million was expended for land, building and equipment for the new branch location in Versailles. In 1997 and 1998, over $1.1 million was invested in the new Georgetown branch that opened in August 1998. In addition, over $400 thousand investment was made to upgrade the existing hardware and software. Increase in loans of nearly $6 million and $1.3 million for purchases of bank premises and equipment account for the majority of the change in 1996. Net cash flow from financing activities was $14.9 million, $13.7 million and $0.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. The net cash increases and decreases were primarily attributable to changes in total deposits, securities sold under agreements to repurchase and federal funds purchased, and net changes in advances from the Federal Home Loan Bank and other borrowings. A number of other techniques are used to measure the liquidity position, including the ratios presented below. These ratios are calculated based on annual averages for each year. Liquidity Ratios December 31 1998 1997 1996 Total Loans/Total Deposits 78.7% 73.6% 71.3% Net Short-term Borrowings/Total 1.8 1.8 1.5 Assets This chart shows that the loan to deposit ratio increased in 1998 and 1997. Loan growth of 15% and deposit growth of 7% have both been contributing factors to the greater change in this ratio from 1997 to 1998 compared to the previous year. Item 8. Financial Statements The consolidated financial statements of the Company together with the notes thereto and report of independent auditors are contained in the Company's 1998 Annual Report to Stockholders included as Exhibit 13, and are incorporated herein by reference. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable PART III Item 10. Directors, Executive Officers, Promoters and Control Persons, Compliance With Section 16(a) of the Exchange Act Under the Company's Articles of Incorporation, the Board of Directors consists of three different classes, each to serve, subject to the provisions of the Articles of Incorporation and Bylaws for a three year term and until his successor is duly elected and qualified. The names of the directors and their terms are set forth below. Terms expiring in 1999: Henry Hinkle, age 47, is President of Hinkle Construction Company. He has been a director of the Company since 1989. Theodore Kuster, age 55, is a farmer and thoroughbred horse breeder. He has been a director of the Company since 1979. Robert G. Thompson, age 49, is Executive Director of the Paris Bourbon County YMCA, a farmer and thoroughbred horse breeder. He has been a director of the Company since 1991. Terms expiring in 2000: William R. Stamler, age 64, is Chairman of Signal Investments, Inc. He has been a director of the Company since 1988. Buckner Woodford, age 54, is President and Chief Executive Officer of Bourbon Bancshares, Inc. and Kentucky Bank. He has been a director of the Company since 1971. Terms expiring in 2001: William Arvin, age 58, is an attorney. He has been a director of the Company since December 19, 1995. James L. Ferrell, M.D., age 64, is a Physician. He has been a director of the Company since 1980. Joseph B. McClain, age 70, is President of Hopewell Co. (insurance agency). He has been a director of the Company since 1971. The Company's other executive officer is Gregory J. Dawson, age 38. He is the Chief Financial Officer and has been with the Company since 1985 and serves at the pleasure of the Board of Directors. Item 11. Executive Compensation The following table sets forth information with respect to the compensation of the President and Chief Executive Officer of the Company. No other executive officer earned total salary and bonus in excess of $100,000. Summary Compensation Table Annual Compensation Other Annual Options Name Year Salary Bonus Compensation Granted Buckner Woodford 1998 $156,000 $ 3,161 (1) 1,900 Buckner Woodford 1997 $150,000 $ 4,879 (1) 1,600 Buckner Woodford 1996 $136,500 $ 1,505 (1) 3,000 (1) Less than the lesser of $50,000 or 10% of annual salary and bonuses. The following table contains information regarding the grant of stock options under the Company's stock option plan to the Chief Executive Officer during the year ended December 31, 1998. In addition, in accordance with rules of the Securities and Exchange Commission, the following table sets forth the hypothetical grant date present value with respect to the referenced options, using the Black-Scholes Option Pricing Model. Option Grants in the Last Fiscal Year % of Total Options Grant Shares Granted to Exercise Date Granted Employees Price Expiration Present Name (#) in 1998 ($/Sh) Date Value($) Buckner Woodford 1,900 14.6% $31.00 1/7/08 $16,568 The following table sets forth certain information regarding options exercised by the Chief Executive Officer during calendar year 1998 and unexercised stock options held by him as of December 31, 1998. Aggregated Option Exercises in Calendar 1998 and Year-end Stock Option Values Shares Number of Securities Value of Unexercised Acquired Value Underlying Unexercised In-the-Money on Exercise Realized Options at 12/31/98 Options at 12/31/98 Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable Buckner Woodford None N/A 4,460/5,380 $85,412/$74,413
The Company did not have any Stock Appreciation Rights (SAR's) at December 31, 1998. Compensation of Directors Directors are paid $300 for each board meeting attended and $100 for each committee meeting attended. Directors are also granted a 10-year option to purchase 50 shares of the Company's common stock following each year in which Kentucky Bank has an return on assets of 1 percent or greater. The option's exercise price is the fair market value per share on the date of grant. Pension Plan The following table sets forth the annual benefits which an eligible employee would receive under the Company's qualified defined benefit pension plan based on remuneration that is covered under the plan and years of service with the Company and its subsidiaries. Years of Service Remuneration 15 20 25 30 35 25,000 3,750 5,000 6,250 7,500 8,750 50,000 7,500 10,000 12,500 15,000 17,500 75,000 11,250 15,000 18,750 22,500 26,250 100,000 15,000 20,000 25,000 30,000 35,000 125,000 18,750 25,000 31,250 37,500 43,750 150,000 22,500 30,000 37,500 45,000 52,500 175,000 26,250 35,000 43,750 52,500 61,250 200,000 30,000 40,000 50,000 60,000 70,000 In general, a participant's remuneration covered by the Company's pension plan is his or her average annual cash compensation (W-2 earnings) for the last 5 years. The years of service for Mr. Woodford are 27 years. Item 12. Security Ownership of Certain Beneficial Owners and Management Set forth below are the number of shares of the Company's common stock beneficially owned by each director and executive officer, and all current directors and executive officers as a group as of December 31, 1998. Name Shares Beneficially Owned(1) Number Percentage William Arvin (2) 15,626 1.1% Gregory J. Dawson (3) 5,250 * James L. Ferrell, M.D. (4) 15,120 1.1 Henry Hinkle (5) 13,925 * Theodore Kuster (6) 8,885 * Joseph B. McClain (7) 21,618 1.5 William R. Stamler (8) 15,430 1.1 Robert G. Thompson (9) 3,270 * Buckner Woodford (10) 128,939 9.1 All directors and officers (9 persons) as a group (consisting of those persons named above)(11) 228,063 16.1% * Less than 1% 1) Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 under the Exchange Act. Unless otherwise indicated, beneficial ownership includes both sole or shared voting and sole or shared investment power. 2) Includes 5,929 shares held in a retirement account, 5,984 shares held of record by Mr. Arvin's wife, as to which Mr. Arvin disclaims beneficial ownership and 3,638 held jointly with his wife. 3) Includes 4,900 shares that Mr. Dawson may acquire upon exercise of outstanding stock options. 4) Includes 2,500 shares held in a retirement account and 570 shares that Mr. Ferrell may acquire upon exercise of outstanding stock options. Also, includes 1,500 shares held by Dr. Ferrell's wife, as to which Dr. Ferrell disclaims beneficial ownership. 5) Includes 500 shares held by his wife and 320 shares held by three sons, as to which Mr. Hinkle disclaims beneficial ownership. Includes 12,000 shares held of record by Hinkle Contracting Company, as to which Mr. Hinkle, as president, has shared voting power. Also includes 170 shares that Mr. Hinkle may acquire upon exercise of outstanding stock options. 6) Includes 3,135 share held of record by Mr. Kuster's wife, as to which Mr. Kuster disclaims beneficial ownership. Also includes 2,500 shares held in a retirement account and 570 shares that Mr. Kuster may acquire upon exercise of outstanding stock options. 7) Includes 570 shares that Mr. McClain may acquire upon exercise of outstanding stock options. Also includes 9,400 shares held of record by Mr. McClain's wife, as to which Mr. McClain disclaims beneficial ownership. 8) Includes 2,000 shares held by Signal Investments Corporation, as to which Mr. Stamler, as the chief executive officer and majority Stockholder of such corporation, has sole voting and investment power. Also includes 570 shares that Mr. Stamler may acquire upon exercise of outstanding stock options. 9) Includes 570 shares that Mr. Thompson may acquire upon exercise of outstanding stock options. 10) Includes 4,000 shares held by his wife and 5,666 shares held by two sons, as to which Mr. Woodford disclaims beneficial ownership. Also includes 104 shares held in a retirement account and 4,460 shares that Mr. Woodford may acquire upon exercise of outstanding stock options. 11) Includes 12,380 shares that may be acquired upon exercise of outstanding stock options. The following table sets forth as of December 31, 1998 the persons known by the Company to own beneficially (as determined in accordance with the rules and regulations of the Commission) more than 5% of the outstanding common stock. Name and Address Shares Beneficially of Beneficial Owner Owned Percentage Buckner Woodford 128,939 9.1% 340 Stoner Avenue Paris, Kentucky 40361 Item 13. Certain Relationships and Related Transactions Directors and officers of the Company and their associates were customers of and had transactions with the Company's subsidiary bank in the ordinary course of business during the year ended December 31, 1998. Similar transactions may be expected to take place with the Company's subsidiary bank in the future. Outstanding loans and commitments made by such subsidiary bank in transactions with the Company's directors and officers and their associates were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than a normal risk of collectibility or present other unfavorable features. Certain directors and executive officers were loan customers of Kentucky Bank and outstanding loans were $1.2 million and $1.8 million as of December 31, 1998 and 1997, respectively. See Note 4 in the notes to consolidated financial statements included as Exhibit 13. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) The following exhibits are incorporated by reference herein or made a part of this Form 10-K: 11 Computation of earnings per share - See Note 10 in the notes to consolidated financial statements included as Exhibit 13. 13 Financial Statements: Consolidated Balance Sheets - December 31, 1998 and 1997 Consolidated Statements of Income and Comprehensive Income - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1998, 1997 and 1996 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 Notes to Consolidated Financial Statements Report of Independent Auditors 21 Subsidiaries of Registrant 23 Consent of Crowe, Chizek and Company LLP (b) Current Reports on Form 8-K during the quarter ended December 31, 1998 None SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bourbon Bancshares, Inc. By: __/s/Buckner Woodford__ Buckner Woodford, President and Chief Executive Officer, Director March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. __/s/Buckner Woodford________ March 29, 1999 Buckner Woodford, President and Chief Executive Officer, Director __/s/Gregory J. Dawson_______ March 29, 1999 Gregory J. Dawson, Chief Financial and Accounting Officer __/s/James L. Ferrell________ March 29, 1999 James L. Ferrell, M.D., Chairman of the Board, Director _____________________________ March 29, 1999 William Arvin, Director _____________________________ March 29, 1999 Henry Hinkle, Director __/s/Theodore Kuster_________ March 29, 1999 Theodore Kuster, Director __/s/Joseph B. McClain_______ March 29, 1999 Joseph B. McClain, Director _____________________________ March 29, 1999 William R. Stamler, Director __/s/Robert G. Thompson______ March 29, 1999 Robert G. Thompson, Director SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT. The Registrant refers to Exhibits 13 and 99.1 to the Form 10- K. INDEX TO EXHIBITS Exhibit Number Description of Document 3.1 Articles of Incorporation of the Registrant are incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358). 3.2 Bylaws of the Registrant are incorporated by reference to Exhibit 3.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358). 10.1 Bourbon's 1993 Employee Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).* 10.2 Bourbon's 1993 Non-Employee Directors Stock Ownership Incentive Plan is incorporated by reference to Exhibit 10.3 of the Registrant's Registration Statement on Form S-4 (File No. 33-96358).* 13 Bourbon Bancshares, Inc. 1998 Annual Report 21 Subsidiaries of the Registrant 23 Consent of Crowe, Chizek and Company LLP 27 Financial Data Schedule (for SEC use only) 99.1 Proxy statement dated March 25, 1999, sent to the Registrant's security holders in connection with the 1999 Annual Meeting of Shareholders and supplementally furnished to the Commission for its information as required by Form 10- K for registrants which have not registered securities pursuant to Section 12 of the Securities Exchange Act of 1934. This material is not otherwise to be deemed filed with the Commission. * Denotes a management contract or compensatory plan or arrangement of the Registrant required to be filed as an exhibit pursuant to Item 601(10) (iii) of Regulation S-K. Exhibit 13 BOURBON BANCSHARES, INC. ANNUAL REPORT 1998 To Our Shareholders, The economy in central Kentucky continues to enjoy healthy expansion. This includes a high level of residential and industrial building as well as strong demand for thoroughbred horses and horse farms. All of this activity is beneficial to the financial institutions here. Bourbon Bancshares had very good financial results in 1998. Earnings per share after dilution were $2.66 compared with $2.40 last year and $2.00 in 1996. This has resulted from a combination of growth in our balance sheet with attention to expense control. Total assets rose to $308 million, exceeding $300 million for the first time. Loan demand was strong for a second consecutive year. Our loan portfolio grew by 15% last year following 16% the prior year. Deposits also showed a very nice 7% growth. We believe we have these growth opportunities because our subsidiary, Kentucky Bank, is firmly established in all segments of a very healthy economy. We continue to make investments that we believe will keep our future bright as well. In 1998 we opened a second branch facility in Georgetown. This is the fastest growing community in central Kentucky. Like virtually all banks we devoted considerable effort last year to preparing our computer systems for the year 2000. Our extensive testing program is nearly complete. The largest expenditure made was over $400,000 for a new mainframe computer which was installed in the fall of 1998. We believe we are very well prepared for the new century. Two of our bank directors retired at the end of 1998. Betty Jo Denton Heick and Alex Miller devoted many years of loyal and faithful service to this institution. Their advice was always helpful. We will miss them both. One possible concern about the future is the bleak outlook for tobacco. This crop has made a made a major contribution to the local economy for decades. Over time, every community must respond to the economic changes that arise. Central Kentucky has diversified its economy enough that overall growth should continue. Buckner Woodford FINANCIAL HIGHLIGHTS BOURBON BANCSHARES, INC. 1998 1997 1996 1995 Assets ($ millions) $ 309 $ 291 $ 272 $ 269 Net Income ($ thousands) $ 3,804 $ 3,408 $ 2,887 $ 2,488 Per Share Results Earnings (assuming dilution) $ 2.66 $ 2.40 $ 2.00 $ 1.71 Dividends $ .80 $ .72 $ .64 $ .60 Stockholder Information CORPORATE HEADQUARTERS Bourbon Bancshares, Inc. 4th and Main Street Paris, Kentucky 40361 606-987-1795 ANNUAL MEETING The annual meeting of Stockholders of Bourbon Bancshares, Inc. Will be held Monday, May 3, 1999 at 9:00 a.m. in the corporate headquarters. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT Kentucky Bank Trust Department 606-987-1795, ext. 316 MARKET MAKERS Morgan Keegan & Co. 489 East Main Street Lexington, Kentucky 40507 1-800-937-0161 Hilliard Lyons West Vine Street, Suite 400 Lexington, Kentucky 40507 1-800-944-2663 OTC Bulletin Board Symbol: BBON INVESTOR INFORMATION Any individual requesting general information or a copy of the Corporation's 1998 Form 10-K Report may obtain these by writing Investor Relations at the Corporate Headquarters. REPORT OF INDEPENDENT AUDITORS Board of Directors Bourbon Bancshares, Inc. Paris, Kentucky We have audited the accompanying consolidated balance sheets of Bourbon Bancshares, Inc. as of December 31, 1998 and 1997, and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bourbon Bancshares, Inc. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 1998, in conformity with generally accepted accounting principles. Crowe, Chizek and Company LLP Lexington, Kentucky January 15, 1999 BOURBON BANCSHARES, INC. Paris, Kentucky CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998, 1997 and 1996 CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 1998 1997 ASSETS Cash and due from banks $ 10,756,213 $ 12,274,875 Investment securities: Available for sale 55,419,734 66,100,663 Held to maturity (fair value 1998 - $17,854,550 and 1997 - $16,410,523) 16,933,755 15,602,778 Mortgage loans held for sale 5,908,676 5,418,297 Loans 206,934,127 179,742,143 Allowance for loan losses (2,734,589) (2,321,536) Net loans 204,199,538 177,420,607 Federal Home Loan Bank stock 3,119,500 2,905,200 Bank premises and equipment, net 6,793,998 5,765,310 Interest receivable 3,165,110 2,855,565 Intangible assets 2,034,441 2,103,688 Other assets 374,272 207,806 Total assets $308,705,237 $290,654,789 LIABILITIES AND STOCKHOLDERS' EQUITY Deposits Non-interest bearing $ 40,336,201 $ 33,481,215 Time deposits, $100,000 and over 28,168,022 22,573,181 Other interest bearing 190,235,493 185,270,925 Total deposits 258,739,716 241,325,321 Securities sold under agreements to repurchase and other borrowings 11,248,277 9,457,606 Federal Home Loan Bank advances 6,953,502 10,236,291 Interest payable 1,778,984 1,900,824 Other liabilities 612,453 1,018,629 Total liabilities 279,332,932 263,938,671 Stockholders' equity Preferred stock, 300,000 shares authorized and unissued - - Common stock, no par value; 3,000,000 shares authorized; 1,404,628 and 1,394,562 shares issued and outstanding in 1998 and 1997, respectively 6,474,241 6,332,861 Retained earnings 22,832,043 20,150,369 Accumulated other comprehensive income 66,021 232,888 Total stockholders' equity 29,372,305 26,716,118 Total liabilities and stockholders' equity $308,705,237 $290,654,789 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Interest income Loans, including fees $17,211,687 $15,483,271 $13,774,234 Investment securities Taxable 3,141,285 3,918,974 3,777,906 Tax exempt 1,168,049 1,174,113 1,208,098 Other 462,117 385,106 664,515 21,983,138 20,961,464 19,424,753 Interest expense Deposits 9,787,511 9,480,440 8,806,069 Securities sold under agreements to repurchase and other short-term borrowings 269,135 234,521 175,745 Federal Home Loan Bank advances 517,105 569,927 701,091 Other 92,717 129,827 155,942 10,666,468 10,414,715 9,838,847 Net interest income 11,316,670 10,546,749 9,585,906 Provision for loan losses 700,400 492,800 401,965 Net interest income after provision for loan losses 10,616,270 10,053,949 9,183,941 Other income Service charges 1,810,756 1,674,348 1,507,506 Loan service fee income 282,879 257,953 255,426 Trust department income 300,342 237,254 205,740 Investment securities gains (losses), net 40,955 13,686 (12,839) Gain on sale of mortgage loans 439,927 72,236 200,366 Other 198,116 134,510 127,850 3,072,975 2,389,987 2,284,049 Other expenses Salaries and employee benefits 4,526,735 4,274,022 4,005,122 Occupancy expenses 1,163,872 1,002,137 931,434 FDIC assessment 54,344 54,281 412,483 Amortization 400,147 346,891 314,553 Taxes other than payroll, property and income 307,146 287,718 255,055 Advertising 340,664 276,430 261,929 Other 1,721,219 1,646,499 1,534,013 8,514,127 7,887,978 7,714,589 Income before income taxes 5,175,118 4,555,958 3,753,401 Provision for income taxes 1,371,602 1,147,924 866,295 Net income $ 3,803,516 $ 3,408,034 $ 2,887,106 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (continued) Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period (125,912) 245,108 (22,335) Reclassification of realized amount (40,955) (13,686) 12,839 Net change in unrealized gain (loss) on securities (166,867) 231,422 (9,496) Comprehensive income $3,636,649 $3,639,456 $ 2,877,610 Earnings per share: Basic $ 2.72 $ 2.44 $ 2.03 Diluted $ 2.66 $ 2.40 $ 2.00
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1998, 1997 and 1996 Accumulated Other Total Common Stock Retained Comprehensive Stockholders' Shares Amount Earnings Income Equity Balances, January 1, 1996 1,432,700 $6,481,769 $16,673,906 $ 10,962 $23,166,637 Common stock issued (including employee gifts of 49 shares) 129 960 - - 960 Common stock purchased (20,000) (90,400) (409,764) - (500,164) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (9,496) (9,496) Net income - - 2,887,106 - 2,887,106 Dividends declared - $.64 per share - - (911,564) - (911,564) Balances, December 31, 1996 1,412,829 6,392,329 18,239,684 1,466 24,633,479 Common stock issued (including employee gifts of 50 shares) 6,130 50,948 - - 50,948 Common stock purchased (24,397) (110,416) (492,196) - (602,612) Net change in unrealized gain (loss) on securities available for sale, net of tax - - - 231,422 231,422 Net income - - 3,408,034 - 3,408,034 Dividends declared - $.72 per share - - (1,005,153) - (1,005,153) Balances, December 31, 1997 1,394,562 6,332,861 20,150,369 232,888 26,716,118 Common stock issued (including employee gifts of 26 shares) 10,066 141,380 - - 141,380 Net change in unrealized gain (loss) on securities available for sale, net of tax - - - (166,867) (166,867) Net income - - 3,803,516 - 3,803,516 Dividends declared - $.80 per share - - (1,121,842) - (1,121,842) Balances, December 31, 1998 1,404,628 $6,474,241 $22,832,043 $ 66,021 $29,372,305
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Cash flows from operating activities Net income $ 3,803,516 $ 3,408,034 $ 2,887,106 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 1,007,948 946,973 870,092 Provision for loan losses 700,400 492,800 401,965 Investment securities amortization (accretion), net (42,854) 23,081 149,205 Investment securities (gains) losses, net (40,955) (13,686) 12,839 Originations of loans held for sale (35,798,502) (18,497,646) (21,292,899) Proceeds from sale of loans 35,417,148 18,428,256 21,778,522 Gain on sale of mortgage loans (439,927) (72,236) (200,366) Federal Home Loan Bank stock dividends (214,300) (199,600) (185,600) Changes in: Interest receivable (309,545) (117,665) (26,485) Other assets (10,827) (82,785) 688,313 Interest payable (121,840) 537,251 110,322 Other liabilities (406,176) 327,241 (108,589) Net cash from operating activities 3,544,086 5,180,018 5,084,425 Cash flows from investing activities Purchases of securities available for sale (29,252,389) (26,674,021) (46,990,894) Proceeds from sales of securities available for sale 6,548,219 17,343,034 13,512,387 Proceeds from principal payments and maturities of securities available for sale 33,189,842 19,982,850 33,441,384 Purchases of investment securities held to maturity (2,374,891) (785,000) (1,375,000) Proceeds from maturities of investment securities held to maturity 1,070,150 1,510,950 1,520,000 Net change in loans (27,549,007) (25,886,674) (5,883,441) Purchases of bank premises and equipment, net (1,636,487) (1,284,947) (1,307,597) Net cash from investing activities (20,004,563) (15,793,808) (7,083,161) Cash flows from financing activities Net change in deposits 17,414,395 10,254,610 17,722,380 Net change in securities sold under agreements to repurchase and other borrowings 1,790,671 5,298,109 (7,031,807) Advances from Federal Home Loan Bank 4,000,000 - 400,000 Payments on Federal Home Loan Bank advances (7,282,789) (297,740) (8,937,095) Proceeds from notes payable - 450,000 330,000 Payments on notes payable - (450,000) (930,000) Proceeds from issuance of common stock 141,380 50,948 960 Purchase of common stock - (602,612) (500,164) Dividends paid (1,121,842) (1,005,153) (911,564) Net cash from financing activities 14,941,815 13,698,162 142,710 CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Years Ended December 31, 1998, 1997 and 1996 1998 1997 1996 Net change in cash and cash equivalents (1,518,662) 3,084,372 (1,856,026) Cash and cash equivalents at beginning of year 12,274,875 9,190,503 11,046,529 Cash and cash equivalents at end of year $10,756,213 $12,274,875 $ 9,190,503 Supplemental disclosures of cash flow information Cash paid during the year for: Interest expense $10,788,308 $ 9,877,464 $ 9,728,525 Income taxes 1,370,000 1,100,000 787,008 Supplemental schedules of non-cash investing and financing activities: Real estate acquired through foreclosure $ 69,676 $ - $ 541,377 Transfer of loans to loans held for sale - 4,597,849 -
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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). Intercompany transactions and balances have been eliminated in consolidation. Nature of Operations: The Bank operates under a state bank charter and provides full banking services, including trust services, to customers located in Bourbon, Clark, Scott, Harrison, Woodford, Jessamine, and adjoining counties in Kentucky. 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. 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. The allowance for loan losses and fair value of financial instruments are particularly subject to change. Cash Flows: 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. Net cash flows are reported for loan and deposit transactions. 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. The difference between amortized cost and fair value is recorded in stockholders' equity, net of related income tax, under accumulated other comprehensive income. Changes in this difference are recorded as a component of comprehensive income. Amortization of premiums and accretion of discounts are recorded as adjustments to interest income using the constant yield method. Investment securities for which the Company 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. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans Held for Sale: 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. Loans: Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses. Interest income on loans is recognized on the accrual basis except for those loans on a nonaccrual 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. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. Allowance for Loan Losses: 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 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. Mortgage Servicing Rights: 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 servicing fee from the FHLMC on each loan sold. Servicing rights are capitalized based on the relative fair value of the rights and the loan and are included in intangible assets on the balance sheet and expensed in proportion to, and over the period of, estimated net servicing revenues. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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. 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. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. 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. 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 and capitalized mortgage servicing rights which are being amortized over the life of the related loans. Earnings Per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements. Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity. The accounting standard that requires reporting comprehensive income first applies for 1998, with prior information restated to be comparable. NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) New Accounting Pronouncements: Beginning January 1, 2000, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. This is not expected to have a material effect, but the effect will depend on derivative holdings when this standard applies. Industry Segments: While the Company's chief decision makers monitor the revenue streams of the various Company products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's operations are considered by management to be aggregated into one reportable operating segment. Reclassifications: Certain reclassifications have been made in the 1997 and 1996 financial statements to conform to classifications used in 1998. NOTE 2 - 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 reserve requirement at December 31, 1998 was $5,988,000. NOTE 3 - INVESTMENT SECURITIES Amortized cost and fair value of investment securities, by category, at December 31, 1998 are as follows: Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U. S. Treasury securities $16,013,161 $ 74,300 $ - $16,087,461 Obligations of U. S. government agencies 5,979,883 406 (1,210) 5,979,079 Obligations of states and political subdivisions 3,641,873 161,498 - 3,803,371 Mortgage-backed securities 25,725,143 71,089 (172,037) 25,624,195 Other securities 3,959,643 9,161 (43,176) 3,925,628 Total available for sale $55,319,703 $316,454 $(216,423) $55,419,734 Held to maturity Obligations of states and political subdivisions $16,933,755 $923,038 $ (2,243) $17,854,550 NOTE 3 - INVESTMENT SECURITIES (Continued) 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 - (1,931) 10,485,500 Obligations of states and political subdivisions 3,942,551 134,644 - 4,077,195 Mortgage-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 The amortized cost and fair value of investment securities at December 31, 1998, 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. Securities not due at a single maturity are shown separately. Amortized Fair Cost Value Available for sale Due in one year or less $17,999,966 $18,056,615 Due after one year through five years 6,794,401 6,921,685 Due after five years through ten years 1,376,336 1,425,428 Due after ten years 2,415,000 2,415,000 28,585,703 28,818,728 Mortgage-backed securities 25,725,143 25,624,195 Equity securities 1,008,857 976,811 Total available for sale $55,319,703 $55,419,734 NOTE 3 - INVESTMENT SECURITIES (Continued) Amortized Fair Cost Value Held to maturity Due in one year or less $ 1,093,452 $ 1,138,863 Due after one year through five years 5,757,494 6,119,091 Due after five years through ten years 6,856,735 7,264,184 Due after ten years 3,226,074 3,332,412 Total held to maturity $16,933,755 $17,854,550 Proceeds from sales of investment securities during 1998, 1997 and 1996 were $6,548,219, $17,343,034 and $13,512,387. Gross gains of $40,955, $31,347 and $30,211 and gross losses of $0, $17,661 and $43,050, were realized on those sales. Investment securities with an approximate carrying value of $55,657,000 and $56,631,000 at December 31, 1998 and 1997, were pledged to secure public deposits, trust funds, securities sold under agreements to repurchase and for other purposes as required or permitted by law. NOTE 4 - LOANS Major classifications of loans are summarized as follows: 1998 1997 Commercial $ 15,177,364 $ 10,643,958 Real estate construction 11,055,329 7,656,856 Real estate mortgage 118,735,789 108,048,265 Agricultural 44,198,784 37,924,098 Consumer 17,607,474 15,181,883 Other 159,387 287,083 $206,934,127 $179,742,143 NOTE 4 - LOANS (Continued) Changes in the allowance for loan losses were as follows: 1998 1997 1996 Beginning balance $2,321,536 $2,101,081 $1,860,093 Charge-offs (368,017) (355,123) (213,328) Recoveries 80,670 82,778 52,351 Provision for loan losses 700,400 492,800 401,965 Ending balance $2,734,589 $2,321,536 $2,101,081 Impaired loans totaled $286,000 and $333,000 at December 31, 1998 and 1997. The average recorded investment in impaired loans during 1998, 1997 and 1996 was $310,000, $192,000 and $298,000. The total allowance for loan losses related to these loans was $85,000 and $57,000 at December 31, 1998 and 1997. Interest income on impaired loans of $22,000, $23,000 and $55,000 was recognized for cash payments received in 1998, 1997 and 1996. Loans over 90 days past due and still accruing interest totaled $790,000 and $154,000 at December 31, 1998 and 1997. 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 $103,122,000 and $91,423,000 at December 31, 1998 and 1997. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were approximately $593,000 and $545,000 at December 31, 1998 and 1997. Changes in mortgage servicing rights were as follows: 1998 1997 1996 Beginning balance $314,877 $189,451 $ - Additions 330,902 184,125 215,812 Amortization (111,957) (58,699) (26,361) Ending balance $533,822 $314,877 $189,451 NOTE 4 - LOANS (Continued) Certain directors and executive officers of the Company and companies in which they have beneficiary ownership were loan customers of the Bank during 1998 and 1997. 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: 1998 1997 Balance, beginning of year $1,824,000 $1,828,000 Additions, including loans now meeting disclosure requirements 704,000 1,381,000 Amounts collected, including loans no longer meeting disclosure requirements (1,312,000) (1,385,000) Balance, end of year $1,216,000 $1,824,000 NOTE 5 - BANK PREMISES AND EQUIPMENT Bank premises and equipment are summarized as follows: 1998 1997 Land and buildings $7,040,895 $6,371,645 Furniture and equipment 5,423,361 4,429,043 Construction in progress - 27,082 12,464,256 10,827,770 Less accumulated depreciation (5,670,258) (5,062,460) $6,793,998 $5,765,310 Depreciation expense was $667,799, $523,892, and $523,888 in 1998, 1997, and 1996. NOTE 6 - DEPOSITS At December 31, 1998, the scheduled maturities of time deposits are as follows: 1999 $108,922,295 2000 9,858,070 2001 1,329,974 2002 688,935 2003 and thereafter 1,026,210 $121,825,484 NOTE 6 - DEPOSITS (Continued) 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 $3,173,000 and $2,393,000 at December 31, 1998 and 1997. NOTE 7 - 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 1998 and 1997 is summarized as follows: 1998 1997 Average daily balance during the year $4,329,000 $4,103,000 Average interest rate during the year 4.76% 5.03% Maximum month-end balance during the year $6,713,000 $4,895,000 Carrying and fair value of U.S. Treasury securities underlying the agreements $6,904,000 $6,895,000 NOTE 8 - 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, 1998 and 1997, $6,953,502 and $10,236,291 represented the balance due on advances from the FHLB. All advances are paid either on a monthly basis or at maturity, over remaining terms of one to eight years, with fixed 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, 1998 are as follows: 1999 - $302,254; 2000 - $1,240,674; 2001 - $237,970; 2002 - $251,637; 2003 - $4,825,652; years thereafter - $95,315. NOTE 9 - INCOME TAXES The components of the provision for income taxes are as follows: 1998 1997 1996 Current payable $1,306,758 $1,158,777 $697,751 Deferred 64,844 (10,853) 168,544 $1,371,602 $1,147,924 $866,295 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. 1998 1997 Deferred tax assets Allowance for loan losses $736,526 $596,087 Premium on deposits purchased 127,144 97,641 Deferred loan fees 22,547 19,336 Other 46,597 28,119 Deferred tax liabilities Bank premises and equipment (131,872) (129,217) Unrealized gain on investment securities (55,802) (119,972) FHLB stock (379,151) (306,289) Mortgage servicing rights (181,499) (107,058) Other (27,780) (50,951) Net deferred tax asset $156,710 $ 27,696 An analysis of the differences between the effective tax rates and the statutory U.S. federal income tax rate is as follows: 1998 1997 1996 U. S. federal income tax rate 34.0% 34.0% 34.0% Changes from the statutory rate Tax-exempt investment incom (8.7) (10.0) (12.4) Non-deductible interest expense related to carrying tax-exempt investments 1.1 1.3 1.5 Other .1 (0.1) - 26.5% 25.2% 23.1% NOTE 10 - EARNINGS PER SHARE Basic and diluted earnings per common share for 1998, 1997 and 1996 are presented below. 1998 1997 1996 Basic Earnings Per Share Net income $3,803,516 $3,408,034 $2,887,106 Weighted average common shares outstanding 1,400,660 1,396,201 1,424,704 Basic earnings per share $ 2.72 $ 2.44 $ 2.03 Diluted Earnings Per Share Net income $3,803,516 $3,408,034 $2,887,106 Weighted average common shares outstanding 1,400,660 1,396,201 1,424,704 Add dilutive effects of assumed exercise of stock options 29,987 25,596 18,771 Weighted average common and dilutive potential common shares outstanding 1,430,647 1,421,797 1,443,475 Diluted earnings per share $ 2.66 $ 2.40 $ 2.00 Stock options for 600 and 12,400 shares of common stock were not considered in computing earnings per share for 1997 and 1996 because they were antidilutive. NOTE 11 - 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. NOTE 11 - RETIREMENT PLANS (Continued) Information about the pension plan was as follows: 1998 1997 Change in benefit obligation: Beginning benefit obligation $1,813,183 $1,597,843 Service cost 143,717 137,229 Interest cost 143,564 126,623 Actuarial gain - (3,240) Benefits paid (67,547) (45,272) Ending benefit obligation 2,032,917 1,813,183 Change in plan assets, at fair value: Beginning plan assets 1,995,586 1,718,776 Actual return 348,607 322,082 Employer contribution 223,363 - Benefits paid (67,547) (45,272) Ending plan assets 2,500,009 1,995,586 Funded status 467,092 182,403 Unrecognized net actuarial gain (515,005) (346,338) Unrecognized prior transition asset (3,717) (4,089) Accrued benefit cost $ (51,630) $(168,024) Net periodic pension cost include the following components: 1998 1997 1996 Service cost $143,717 $137,229 $118,339 Interest cost 143,564 126,623 112,826 Expected return on plan assets (172,099) (136,298) (125,632) Amortization of transition asset (372) (372) (372) Recognized net actuarial gain (7,841) - - Net periodic cost $106,969 $127,182 $105,161 NOTE 11 - RETIREMENT PLANS (Continued) 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 $181,743, $166,647 and $157,162 in 1998, 1997 and 1996, respectively. NOTE 12 - STOCK OPTION PLAN The Company has 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. 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. 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: 1998 1997 1996 Weighted Weighted Weighted Option Option Option Options Price Options Price Options Price Outstanding, beginning of year 62,820 $19.47 58,550 $17.20 49,160 $15.33 Granted during the year 13,600 31.76 11,000 25.24 10,350 26.36 Canceled during the year (1,000) 29.10 (650) 16.00 (880) 20.73 Exercised during the year (10,040) 14.08 (6,080) 8.38 (80) 12.00 Outstanding, end of year 65,380 $22.71 62,820 $19.47 58,550 $17.20 Weighted remaining contractual life 81.6 months 69.3 months 66.4 months NOTE 12 - STOCK OPTION PLAN (Continued) 1998 1997 1996 Options Options Options Options outstanding From $7.83 to $12.75 per share 12,360 17,900 24,380 From $17.25 to $22.28 per share 16,320 20,320 20,420 From $24.00 to $30.00 per share 35,100 24,600 13,750 From $36.00 to $40.00 per share 1,600 - - 65,380 62,820 58,550 Eligible for exercise From $7.83 to $12.75 per share 12,360 17,900 24,380 From $17.25 to $22.28 per share 14,680 18,240 10,332 From $24.00 to $26.50 per share 8,460 7,620 1,120 35,500 43,760 35,832 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: 1998 1997 1996 Net income As reported $3,803,516 $3,408,034 $2,887,106 Pro forma 3,747,871 3,375,248 2,870,017 Basic earnings per share As reported $ 2.72 $ 2.44 $ 2.03 Pro forma 2.68 2.42 2.01 Diluted earnings per share As reported $ 2.66 $ 2.40 $ 2.00 Pro forma 2.63 2.38 1.98 Weighted averages Fair value of options granted $ 9.05 $ 7.24 $ 7.77 Risk free interest rate 5.20% 6.50% 6.50% Expected life 8 years 8 years 8 years Expected volatility 23.40% 21.79% 19.66% Expected dividend yield 2.53% 2.86% 2.43% NOTE 13 - 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 1999 the Bank could, without prior approval, declare dividends of approximately $2,815,000 plus any 1999 net profits retained to the date of the dividend declaration. NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
1998 1997 Carrying Carrying Amount Fair Value Amount Fair Value Financial assets Cash and cash equivalents $ 10,756,213 $ 10,756,000 $ 12,274,875 $ 12,275,000 Investment securities 72,353,489 73,274,000 81,703,441 82,511,000 Federal Home Loan Bank stock 3,119,500 3,120,000 2,905,200 2,905,000 Mortgage loans held for sale 5,908,676 5,978,000 5,418,297 5,431,000 Loans, net 204,199,538 204,716,000 177,420,607 177,574,000 Financial liabilities Deposits $(258,739,716) $(259,532,000) $(241,325,321) $(242,188,000) Securities sold under agreements to repurchase and other borrowed funds (11,248,277) (11,248,000) (9,457,606) (9,458,000) Federal Home Loan Bank advances (6,953,502) (7,032,527) (10,236,291) (10,157,000)
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 instruments, 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. NOTE 14 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) 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. Mortgage Loans Held for Sale: Fair value is based on current quoted secondary market price for loans without regard to other commitments to make and sell loans. 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. 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. Securities Sold Under Agreements to Repurchase and Other Borrowed Funds: 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. 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. The fair value of commitments and letters of credit are not considered material. Commitments to Sell Loans: The fair value of commitments to sell loans is based on the difference between interest rates at which the Company has committed to sell the loans and the current quoted secondary market price for similar loans. The fair value of commitments is not material. NOTE 15 - OFF-BALANCE-SHEET ACTIVITIES Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance- sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. NOTE 15 - OFF-BALANCE-SHEET ACTIVITIES (Continued) Financial instruments with off-balance-sheet risk were as follows at year-end: 1998 1997 Unused lines of credit $34,728,000 $28,879,000 Commitments to make loans 3,892,000 4,190,000 Letters of credit 586,000 643,000 Commitments to sell loans 4,000,000 - Unused lines of credit are substantially all at variable rates. Commitments to make loans are generally made for a period of 60 days or less and are primarily fixed at current market rates ranging from 6.125% to 7% with maturities ranging from 15 to 30 years. Commitments to sell loans are to the Federal Home Loan Mortgage Corporation and have an underlying interest rate designed to transfer risk associated with loans held for sale and commitments to make loans that are intended to be sold. The notional amount of commitments to sell loans represent amounts of loans that have been committed for delivery on a specified date and within certain interest rate ranges, not credit exposure. The commitments outstanding at year end had delivery dates within 90 days and rates ranging from 6.25% to 7.25%. NOTE 16 - 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. NOTE 17 - 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 regulators about components, risk weightings, and other factors. NOTE 17 - 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, 1998 and 1997, that the Company and the Bank meet all capital adequacy requirements to which they are subject. The most recent notification from the Federal Deposit Insurance Corporation 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:
To Be Well Capitalized Under Prompt For Capital Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) Consolidated as of December 31, 1998: Total Capital (to Risk-Weighted Assets) $30,333 14.6% $16,621 8% $20,776 10% Tier I Capital (to Risk-Weighted Assets) 27,732 13.3 8,340 4 12,511 6 Tier I Capital (to Average Assets) 27,732 9.6 11,555 4 14,444 5 Bank Only as of December 31, 1998 Total Capital (to Risk-Weighted Assets) $28,360 13.7% $16,561 8% $20,701 10% Tier I Capital (to Risk-Weighted Assets) 25,771 12.5 8,247 4 12,370 6 Tier I Capital (to Average Assets) 25,771 8.9 11,582 4 14,478 5 Consolidated as of December 31, 1997 Total Capital (to Risk-Weighted Assets) $26,966 14.8% $14,536 8% $18,170 10% Tier I Capital (to Risk-Weighted Assets) 24,694 13.6 7,268 4 10,902 6 Tier I Capital (to Average Assets) 24,694 8.8 11,001 4 13,751 5 Bank Only as of December 31, 1997 Total Capital (to Risk-Weighted Assets) $26,319 14.5% $14,535 8% $18,168 10% Tier I Capital (to Risk-Weighted Assets) 24,047 13.2 7,267 4 10,901 6 Tier I Capital (to Average Assets) 24,047 8.7 11,000 4 13,750 5
NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS Condensed Balance Sheets December 31, 1998 and 1997 (In thousands) 1998 1997 ASSETS Cash on deposit with subsidiary $ 967 $ 616 Investment in subsidiary 27,411 26,070 Investment securities available for sale 977 - Other assets 17 30 Total assets $29,372 $26,716 STOCKHOLDERS' EQUITY Preferred stock $ - $ - Common stock 6,474 6,333 Retained earnings 22,832 20,150 Accumulated other comprehensive income 66 233 Total stockholders' equity $29,372 $26,716 NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Income and Comprehensive Income Years Ended December 31, 1998, 1997 and 1996 (In thousands) 1998 1997 1996 Income Dividends from subsidiary $2,330 $2,100 $1,850 Interest income 5 - - Other income - - 807 Total income 2,335 2,100 2,657 Expenses Interest expense - 10 40 Other expenses 25 21 823 Total expenses 25 31 863 Income before income taxes and equity in undistributed income of subsidiary 2,310 2,069 1,794 Applicable income tax benefits 7 11 18 Income before equity in undistributed income of subsidiary 2,317 2,080 1,812 Equity in undistributed income of subsidiary 1,487 1,328 1,075 Net income $3,804 $3,408 $2,887 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities arising during the period $(126) $ 245 $(22) Reclassification of realized amount (41) (14) 13 Net change in unrealized gain (loss) on securities (167) 231 (9) Comprehensive income $3,637 $3,639 $2,878 NOTE 18 - PARENT COMPANY FINANCIAL STATEMENTS (Continued) Condensed Statements of Cash Flows Years Ended December 31, 1998, 1997 and 1996 (In thousands) 1998 1997 1996 Cash flows from operating activities Net income $ 3,804 $ 3,408 $ 2,887 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed earnings of subsidiary (1,487) (1,328) (1,075) Change in other assets (8) 8 94 Change in other liabilities - (11) 10 Net cash from operating activities 2,309 2,077 1,916 Cash flows from investing activities Purchase of investment securities available for sale (977) - - Cash flows from financing activities Dividends paid (1,122) (1,005) (912) Proceeds from issuance of common stock 141 51 1 Purchase of common stock - (603) (500) Repayment of long-term debt - - (930) Proceeds from long-term debt - - 330 Net cash from financing activities (981) (1,557) (2,011) Net change in cash 351 520 (95) Cash at beginning of year 616 96 191 Cash at end of year $ 967 $ 616 $ 96 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 Chairman, Signal Investments, Inc. Class of 2000 Henry Hinkle President; Hinkle Contracting Company Class of 1999 Robert G. Thompson Director, Paris/Bourbon County YMCA; Snow Hill Farm Class of 1999 Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm Class of 1999 James L. Ferrell, M.D. Physician; Chairman, Bourbon Bancshares, Inc. Class of 2001 William M. Arvin Attorney Class of 2001 Joseph B. McClain President; Hopewell Insurance Company, Inc. Class of 2001 Kentucky Bank - Board of Directors Buckner Woodford President and Chief Executive Officer; Bourbon Bancshares, Inc. and Kentucky Bank Joe Allen Executive Vice President, Kentucky Bank William M. Arvin Attorney, William M. Arvin and Associates James L. Ferrell, M.D. Physician Betty Jo Denton Heick Retired Bourbon County Court Clerk Henry Hinkle President; Hinkle Contracting Company R.C. Johnson, Jr. Owner & President Johnson Funeral Home James Kay Businessman, Farmer Theodore Kuster Farmer and Thoroughbred Breeder; West View Farm Joseph B. McClain President; Hopewell Insurance Company, Inc. Alex Miller Retired President, Paris Stockyards, Inc. Ed Saunier President, Saunier North American Van Lines 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 REGIONAL BOARD OF DIRECTORS CLARK C. Richard Gamble Investor Donald Pace Superintendent, Clark Co. Schools Ed Saunier President, Saunier North American Van Lines Mary Beth Hendricks Farmer John G. Roche Oprician WOODFORD Dr. William J. Graul Physician James Kay Businessman, Farmer Loren Carl Director, KY Attorney General's Office Tricia N. Kittinger Woodford Circuit Clerk 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 JESSAMINE William M. Arvin Attorney, William M. Arvin and Associates Dan Brewer Bluegrass RECC Victor Comley Retired, Kentucky Association of Highway Contractors Bonnie Dean Nicholasville City Clerk, Treasurer Eva McDaniel Jessamine County Clerk 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 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 Brenda Berry - Accountant Mary Lou Boyle - Human Resources Wallis Brooks - Branch Manager Patty Carpenter - Loan Operations Officer Paul Clift - Systems Support Janice Hash - Accountant and Purchasing Manager Jean Patton - Compliance/CRA/Quality Control Donald Roe - Data Processing Lydia Sosby - Auditor Martha Woodford - Corporate and Automated Products Officer Jan Worth - Trust Officer 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 Ron Burden, Vice President, Loan Officer Colby Road Branch Teresa Shimfessel - Branch Manager, Assistant Vice President, Loan Officer WOODFORD COUNTY VERSAILLES Duncan Gardner - Regional Vice President A.J. Gullett - Assistant Vice President, Loan Officer SCOTT COUNTY PARIS PIKE BRANCH Jennifer Roberts - Branch Manager, Loan Officer GEORGETOWN Mark Walls - Regional Vice President Ben Sargent - Assistant Vice President, Loan Officer JESSAMINE COUNTY NICHOLASVILLE Tom Buford - Regional Vice President Earl Lewallen - Assistant Vice President, Loan Officer Jeanie Thompson - Assistant Cashier & CSR HARRISON COUNTY CYNTHIANA LOAN PRODUCTION OFFICE Ken DeVasher - Regional 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 15, 1999 on the consolidated financial statements of Bourbon Bancshares, Inc. as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 appearing in this Annual Report on Form 10-K of Bourbon Bancshares, Inc. as Exhibit 13. Crowe, Chizek and Company LLP Lexington, KY March 26, 1999 EX-27 2
9 1000 12-MOS DEC-31-1998 DEC-31-1998 10619 137 0 0 55420 16933 17855 212843 2734 308705 258740 10498 2391 7704 0 0 6474 22898 308705 17212 4309 462 21983 9788 10667 11316 700 71 8514 5175 5175 0 0 3804 2.72 2.66 4.27 136 790 147 0 2322 368 81 2735 2735 0 0
EX-99 3 Exhibit 99.1 Proxy statement BOURBON BANCSHARES, INC. P.O. Box 157 Fourth and Main Street Paris, Kentucky 40362-0157 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 3, 1999 March 25, 1999 To our Shareholders: The Annual Meeting of Shareholders ("Annual Meeting") of Bourbon Bancshares, Inc. (the "Corporation") will be held at the Corporation's main office at Kentucky Bank, Fourth and Main Street, Paris, Kentucky, at 9:00 a.m. (Easter Daylight Time) on May 3, 1999, for the following purposes: 1. Election of Directors. To elect three Class III directors. 2. Amendments to Articles of Incorporation. To act upon proposals to amend the Corporation's Articles of Incorporation to (a) increase the number of authorized shares of common stock from 3,000,000 to 10,000,000, and (b) to change the number of members of the Corporation's Board of Directors from a minimum of nine (9) to a minimum of five (5). 3. 1999 Employee Stock Option Plan. To act upon a proposal to adopt the 1999 Employee Stock Option Plan. 4. Ratification of Independent Auditors. To act upon a proposal to ratify the appointment of Crowe, Chizek and Company LLP as the Corporation's independent auditors for the fiscal year ending December 31, 1999. 5. Other Business. To act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof. The Board of Directors does not know of any other matter to come before the Annual Meeting. Information regarding the matters to be acted upon at the Annual Meeting is contained in the Proxy Statement accompanying this Notice. Only those holders of record of the Corporation's common stock at the close of business on March 22, 1999, are entitled to notice of and to vote at the Annual Meeting and any adjournment thereof. All Shareholders are cordially invited to attend the Annual Meeting, but whether or not you expect to attend the Annual Meeting in person, please sign and date the enclosed Proxy and return it promptly so your stock may be voted. Thank you for your time and consideration. Please feel free to contact my office should you have any questions. BY ORDER OF THE BOARD OF DIRECTORS Buckner Woodford President, Bourbon Bancshares, Inc Paris, Kentucky March 25, 1999 YOUR VOTE IS IMPORTANT PLEASE MARK, SIGN, DATE AND RETURN THE ACCOMPANYING PROXY IMMEDI ATELY EVEN IF YOU PLAN TO ATTEND THE ANNUAL MEETING. PROXY STATEMENT FOR THE ANNUAL MEETING OF SHAREHOLDERS OF BOURBON BANCSHARES, INC. TO BE HELD ON MAY 3, 1999 The accompanying proxy form is solicited by the Board of Directors of Bourbon Bancshares, Inc. (the "Corporation") for use at the 1999 Annual Meeting of Shareholders (the "Annual Meeting") to be held at 9:00 a.m. (local time), on Monday, May 3, 1999, at the Corporation's main office at Kentucky Bank, Fourth and Main Streets, Paris, Kentucky. Only holders of record of the Corporation's Common Shares ("Common Shares") at the close of business on March 22, 1999 (the "Record Date"), are entitled to notice of and to vote at the Annual Meeting. There are 1,399,628 Common Shares issued and outstanding and entitled to vote at the Annual Meeting. On all matters coming before the Annual Meeting except the election of directors, each holder of Common Shares has one vote per share. In the election of directors, each shareholder may vote the number of shares held on the Record Date for each vacancy to be filled, or may cumulate his or her votes by casting the number of votes equal to the number of shares held multiplied by the total number of vacancies to be filled. Such cumulated votes may be cast for one nominee or distributed among as many nominees and in any manner that the shareholder chooses. The Board of Directors is soliciting discretionary authority to cumulate votes. A shareholder may revoke a proxy form by delivering written notice of revocation to the Secretary of the Corporation at any time before the taking of the vote at the Annual Meeting. The mailing address of the Corporation's principal offices is P.O. Box 157, Fourth and Main Street, Paris, Kentucky 40362. All expenses of preparing, printing, mailing and delivering the Proxy Statement and all materials used in the solicitation of proxy forms will be borne by the Corporation. In addition to the use of the mail, proxy forms may be solicited by personal inter view, telephone, and telegraph by directors, officers, and other employees of the Corporation, none of whom will receive additional compensation for such services. The Corporation will also request brokerage houses, custodians, and nominees to forward soliciting materials to the beneficial owners of the Common Shares held of record by them and will pay reasonable expenses of such persons for forwarding these materials. The approximate date on which this Proxy Statement and the accompanying proxy are first being sent or given to shareholders is March 25, 1999. ELECTION OF DIRECTORS Under the Corporation's Articles of Incorporation, the Board of Directors consists of three different classes, Class I, Class II and Class III, 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 Corporation will elect three Class III directors at the Annual Meeting. Henry Hinkle, Theodore Kuster and Robert G. Thompson have been nominated for election as Class III directors for terms expiring at the 2002 annual meeting of shareholders. The following information is furnished as of March 22, 1999, with respect to each person nominated for election as a Class III director at the Annual Meeting: Name, Age, Principal Director Occupation or Position, Since Other Directorships Henry Hinkle, 47 1989 President, Hinkle Construction Company Theodore Kuster, 55 1979 Farmer and thoroughbred horse breeder Robert G. Thompson, 49 1991 Farmer and thoroughbred horse breeder The Corporation's Articles of Incorporation provide that the number of its directors will be fixed from time to time by the Board of Directors. Between meetings of shareholders held for the election of directors, the Board of Directors may increase or decrease the number of directors last approved by the shareholders by thirty percent (30%) or less. Any vacant directorship, whether resulting from an increase in the number of directors or otherwise, may be filled by the affirmative vote of the majority of the directors then in office, whether or not a quorum of the Board of Directors exists at the time of the vote, for a term expiring at the annual meeting of shareholders at which the term of office of the class to which they were elected expires or, in the case of newly created directorships, until such time as determined by the directors electing such new director. A decrease in the number of directors, however, will not have the effect of shortening the term of any incumbent director. During 1998, two vacancies occurred in the Corporation's Board of Directors which the Board of Directors has declined to fill, pending consideration by the Corporation's shareholders of an amendment to the Corporation's Articles of Incorporation as described in this proxy statement to permit fewer than nine members of the Board of Directors. Assuming passage of the amendment to the Articles of Incorporation, the Board does not expect to take any action to fill these two vacancies. If any named nominee should refuse or be unable to serve, the Board of Directors believes the persons designated as proxies will vote the shares represented by the enclosed proxy form for the substitute nominee, if any, proposed by the Board of Directors. No circumstances are now known, however, that would prevent any of the nominees from serving. In the election of directors, the designated proxies may cumulatively cast the votes authorized by each proxy form received if such action is deemed by them to be appropriate. Proxy forms cannot be voted for a greater number of persons than the number of nominees named. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE ELECTION OF THE BOARD'S NOMINEES OF CLASS III DIRECTORS. PROPOSED AMENDMENTS TO ARTICLES OF INCORPORATION INCREASE IN AUTHORIZED SHARES The Board of Directors has unanimously adopted a proposed amendment to the first sentence of Article IV of the Corporation's Articles of Incorporation so that it will read in its entirety as follows: The total number of shares that the Corporation shall have the authority to issue is 10,300,000 shares, which shall be divided into two classes as follows: 10,000,000 Common Shares; and 300,000 Preferred Shares. The amendment would have the effect of increasing from 3,000,000 to 10,000,000 the number of authorized Common Shares. The Corporation's Board of Directors reserved a total of 70,000 Common Shares for issuance under the Corporation's 1993 Employee Stock Ownership Incentive Plan and 1993 Non-Employee Directors Stock Ownership Incentive Plan. In addition, if the proposed 1999 Employee Stock Option Plan (the "1999 Plan") is approved by the Corporation's shareholders at the Annual Meeting, the Corporation will reserve an additional 50,000 Common Shares for issuance under the 1999 Plan. See PROPOSED 1999 EMPLOYEE STOCK OPTION PLAN. Reasons For and Intended Effect of the Proposed Amendment The Board of Directors believes that the ability to issue additional Common Shares will provide the Corporation with valuable flexibility in connection with future acquisitions, combinations, equity financings, stock distributions, stock splits, stock dividends, employee benefit plans and other corporate purposes. Although the Board of Directors has not yet declared a stock split and there can be no assurance that one will be declared, the Board of Directors anticipates that it will declare a two-for- one stock split in the form of a stock dividend promptly following shareholder approval of the amendment to the Articles of Incorporation. Any future cash sales or other issuances of Common Shares would be made only on terms the Board believes to be in the best interest of the Corporation and its shareholders. The additional authorized Common Shares would be issuable by the Corporation without further authorization by shareholders on such terms as the Corporation's Board of Directors may lawfully determine. The effect of authorization and issuance of additional Common Shares (other than on a pro rata basis among holders of Common Shares) will be to dilute the present voting power of some or all holders of Common Shares. In some circumstances, issuance of additional Common Shares could result in the dilution of the net income per share, net book value per share, and voting rights of Common Shares currently outstanding. Holders of Common Shares have no preemptive rights. Effect of the Proposed Amendment as to Takeovers The Board of Directors considers that its evaluation of any takeover bid should be based primarily on a determination of what is in the best interests of the Corporation and all of its shareholders. Factors influencing that determination may include the resultant effect of the takeover upon the Corporation's then remaining minority shareholders, its employees, its customers, and the communities that it serves. The proposed amendment is not being recommended in response to any effort of which the Board of Directors is aware to obtain control of the Corporation, but rather is being recommended for the corporate reasons outlined above. The proposed amendment will not prevent a takeover that is approved by members of the Board of Directors unaffiliated with the shareholder attempting to acquire control of the Corporation. If adopted, the proposed amendment could have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Corporation, even though such an attempt might, in some cases, be beneficial to the Corporation and its shareholders. Issuance of additional Common Shares could serve to discourage the accumulation of substantial Common Shares positions as a prelude to an attempted takeover or significant corporate restructuring, proxy fights and partial tender offers with the use of "two- tiered pricing." This would serve to increase management's stability, and thereby give it the necessary security to make long range corporate plans, as well as to respond to attempted acquisitions. It could also serve to prevent acquisitions resulting in dissimilar and possibly unfair treatment of the Corporation's shareholders. Although the Board of Directors currently has no intention of doing so, shares of authorized, unissued and unreserved Common Shares could (within the limits imposed by applicable law) be issued to a holder who might thereby obtain sufficient voting power to ensure that any proposal to remove directors, or any alteration, amendment or repeal of certain provisions to the Articles of Incorporation, would not receive the shareholder vote required therefor. Accordingly, the power to issue new Common Shares could enable the Board of Directors to make it more difficult to replace incumbent directors or accomplish certain business combinations opposed by the incumbent Board of Directors. Vote Required Adoption of the proposed amendment requires that more votes be cast in favor of the amendment than against it at a duly called meeting of shareholders at which a quorum is represented. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" ADOPTION OF THE AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED COMMON SHARES. * * * * * CHANGE IN MINIMUM NUMBER OF MEMBERS OF THE BOARD OF DIRECTORS The Board of Directors has unanimously adopted a proposed amendment to Section A. of Article V of the Corporation's Articles of Incorporation so that it will read in its entirety as follows: A. Number. The business and affairs of the Corporation shall be managed and conducted by or under the direction of a Board of Directors. The number of directors (exclusive of directors to be elected by the holders of one or more series of Preferred Shares of the Corporation that may be outstanding, voting separately as a series or class) shall be fixed from time to time by the Board of Directors of the Corporation by resolution adopted by a majority of the entire Board of Directors, but in no event shall be less than five (5) nor more than fifteen (15). The amendment would have the effect of changing the number of members of the Board of Directors from a minimum of nine to a minimum of five. The Board of Directors currently consists of seven members and the Board does not believe that a minimum on nine members of the Board of Directors is necessary to manage the business and affairs of the Corporation. Vote Required Adoption of the proposed amendment requires the affirmative vote of no fewer than 67% of the Common Shares issued and outstanding. THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION AND RECOMMENDS A VOTE "FOR" THE DECREASE IN THE MINIMUM NUMBER OF MEMBERS OF THE BOARD OF DIRECTORS TO FIVE. PROPOSED 1999 EMPLOYEE STOCK OPTION PLAN On March 9, 1999, the Board of Directors adopted the 1999 Employee Stock Option Plan, subject to approval by holders of a majority of Common Shares. The following summary of the material provisions of the 1999 Plan does not purport to be complete and is qualified in its entirety by reference to the 1999 Plan. For purposes of this summary, any reference to the Corporation includes the Corporation and its Subsidiaries (as defined in the 1999 Plan). A copy of the 1999 Plan is attached as Annex A. Purpose of the 1999 Plan The purpose of the 1999 Plan is to advance the interest of the Corporation by encouraging employees who will largely be responsible for the long-term success and development of the Corporation to acquire and retain an ownership interest in the Corporation. The 1999 Plan is also intended to provide flexibility to the Corporation in attracting and retaining such employees and stimulating their efforts on behalf of the Corporation. Administration The 1999 Plan will be administered by a committee (the "Committee") appointed by the Board of Directors. The members of the Committee will serve at the discretion of the Board of Directors. Subject to the provisions of the 1999 Plan, the Committee will have full authority to administer the 1999 Plan, including without limitation, the authority to (i) select Participants (as defined below) to whom options ("Options") to purchase Common Shares of the Corporation ("Shares") are granted (each grant an "Award"); (ii) determine the size and frequency of Awards granted under the 1999 Plan; (iii) determine the terms and conditions of Awards, including any restrictions or conditions to the Award, which need not be identical; (v) cancel or modify, with the consent of the Participant, outstanding Awards and to grant new Awards in substitution; (vi) accelerate the exerciseability of, and accelerate or waive any or all the restrictions and conditions applicable to, any Award, for any reason; (vii) extend the duration of an Option exercise period or term of an Award; (viii) construe and interpret the 1999 Plan and any agreement or instrument entered into under the 1999 Plan; (ix) establish, amend and rescind rules and regulations for the 1999 Plan's administration; and (x) amend the terms and conditions of any outstanding Award to the extent such terms and conditions are within the discretion of the Committee as provided in the 1999 Plan. All determinations and decisions made by the Committee pursuant to the provisions of the 1999 Plan, and all related orders or resolutions of the Board of Directors, will be final, conclusive and binding on all persons. Number of Shares In general, the number of Shares reserved for issuance under the 1999 Plan is 50,000 Shares, with such number subject to adjustment in the event of certain events, including the possible stock split described above. If and to the extent Awards expire or terminate for any reason without having been exercised in full (including a cancellation and regrant of an Option), or are forfeited, without, in either case, the Participant having realized any of the economic benefits of a shareholder, the Shares associated with such Awards (to the extent not fully exercised, forfeited or as to which no economic benefit was realized) will again become available for Awards under the 1999 Plan. Adjustments in Authorized Shares and Outstanding Awards In the event of a merger, reorganization, consolidation, recapitalization, reclassification, split-up, spin-off, separation, liquidation, share dividend, stock split, reverse stock split, cash dividend, property dividend, share repurchase, share combination, share exchange, issuance of warrants, rights or debentures, or other change in the corporate structure of the Corporation affecting the Shares, the Committee may substitute or adjust the total number and class of Shares or other stock or securities that may be issued under the 1999 Plan, and the number, class and/or price of Shares or other stock or securities subject to outstanding Awards, as it determines to be appropriate and equitable to prevent dilution or enlargement of the rights of Participants and to preserve, without exceeding, the value of any outstanding Awards. Eligibility and Participation Individuals who are full-time employees of the Corporation ("Employees") are eligible to receive Awards under the 1999 Plan. In selecting Employees to receive Awards under the 1999 Plan, as well as in determining the number of Shares subject to and the other terms and conditions applicable to, each Award, the Committee will take into consideration such factors as it deems relevant in promoting the purposes of the 1999 Plan, including the duties of the Employees, their present and potential contribution to the success of the Corporation and their anticipated number of years of active service remaining with the Corporation. Stock Options Subject to the terms and provisions of the 1999 Plan, the Committee may grant Options to Participants at any time and from time to time in the form of options that are intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("ISOs"), Options that are not intended to so qualify ("NQSOs"), or a combination of the two. Option Agreements Each Award is required to be evidenced by an option agreement between the optionee and the Corporation (the "Option Agreement"). The Option Agreement must specify the purchase price per share subject to an Option (the "Option Exercise Price"), the duration of the Option, the number of Shares to which the Option relates and such other provisions as the Committee may determine or that are required by the 1999 Plan. The Option Agreement must also specify whether the Option is intended to be an ISO or a NQSO and must include such provisions applicable to the particular type of Option granted. Duration of Option In general, each Option will expire at such time as is determined by the Committee at the time of grant; provided, however, that no Option may be exercised later than the tenth (10th) anniversary of its grant. Exercise of Options Options must be exercisable at such times and be subject to such restrictions and conditions as the Committee approves at the time of grant, which need not be the same for each grant or for each Participant. Options must be exercised by delivery to the Corporation of a written notice of exercise, setting forth the number of Shares with respect to which the Option is to be exercised and accompanied by full payment of the Option Exercise Price and all applicable withholding taxes. Payment of Option Exercise Price The Option Exercise Price for Shares as to which an Option is exercised must be paid to the Corporation in full at the time of exercise, at the discretion of the Committee, either (a) in cash in the form of currency or other cash equivalent acceptable to the Corporation, (b) by tendering Shares having a fair market value at the time of exercise equal to the Option Exercise Price, (c) any other reasonable consideration that the Committee deems appropriate or (d) by a combination of the forms of consideration described in (a) , (b) and (c). The Committee may permit the cashless exercise of Options as described in Regulation T promulgated by the Federal Reserve Board, subject to applicable securities law restrictions, or by any other means that the Committee determines to be consistent with the 1999 Plan's purpose and applicable law; provided that for an ISO, the right to a cashless exercise must be granted at the time the Option is granted and may not be added in any modification of the Option Agreement. Vesting Upon Change in Control In the event of a "change in control" of the Corporation, all outstanding Options held by a Participant will become fully vested and immediately exercisable. In general, the 1999 Plan provides that a "change in control" occurs when: (a) a shareholder or group acquires 25% of the combined voting power of the Corporation's then outstanding voting securities, (b) there is a substantial turnover among the members of the Board of Directors, (c) the shareholders approve a merger, consolidation or reorganization of the Corporation, except in certain circumstances as set forth in the 1999 Plan, (d) the shareholders approve the complete dissolution of the Corporation, or (e) the shareholders approve an agreement for the sale or other disposition of all or substantially all of the assets of the Corporation. Effect of Termination of Employment, Death or Disability If the employment of a Participant is terminated for "cause" (as defined in the 1999 Plan), all then outstanding Options of such Participant, whether or not exercisable, will terminate immediately. If the employment of a Participant is terminated for any reason other than for "cause", death, disability or retirement, to the extent the outstanding Options of such Participant are exercisable, such options may be exercised by such Participant or his personal representative at any time prior to the earlier of the expiration date of the options or the date that is ninety (90) days after the date of such termination of employment. In the event of the death or disability of a Participant while employed by the Corporation, all then outstanding Options of such Participant will become fully vested and immediately exercisable, and may be exercised at any time within one (1) year after the date of death or determination of disability; provided, however, that no such options may be exercised on a date subsequent to their expiration. Termination Date The 1999 will terminate on the earlier to occur of (a) the date when all Shares available under the 1999 Plan have been acquired pursuant to the exercise of Awards or (b) such other date as the Board of Directors determines. In no event may any Awards be granted later than the tenth anniversary date of the day the 1999 Plan was adopted by the Corporation's Board of Directors. Amendment, Modification and Termination The Board of Directors may, at any time, amend, modify or terminate the 1999 Plan. However, without the approval of shareholders of the Corporation no such amendment, modification or termination may: (a) materially increase the benefits accruing to Participants under the 1999 Plan; (b) materially increase the total amount of Shares that may be issued under the 1999 Plan, except in the event of an adjustment in authorized shares pursuant to Section 4.2 of the 1999 Plan; or (c) materially modify the class of Employees eligible to participate in the 1999 Plan. The Committee may amend the terms of any Award, prospectively or retroactively, but no such amendment will impair the rights of any Participant without such Participant's consent. Awards Previously Granted No amendment, modification or termination of the 1999 Plan will in any manner adversely affect any outstanding Award without the written consent of the Participant holding such Award. Non-Transferability Except as may be determined by the Committee in its sole discretion with respect to NQSOs, a Participant's rights under the 1999 Plan may not be assigned, pledged or otherwise transferred other than by will or the laws of descent and distribution. No Granting of Employment Rights Neither the 1999 Plan, nor any action taken under the 1999 Plan, may be construed as giving any employee the right to become a Participant, nor may any Award under the 1999 Plan be construed as giving a Participant any right with respect to continuance of employment by the Corporation. The Corporation expressly reserves the right to terminate, whether by dismissal, discharge or otherwise, a Participant's employment at any time, with or without "cause", except as may otherwise be provided by any written agreement between the Corporation and the Participant. Tax Withholding A Participant must remit to the Corporation an amount sufficient to satisfy Federal and state taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant or exercise made under or as a result of the 1999 Plan. Shares Withholding With respect to withholding required upon the exercise of options or upon any other taxable event under the 1999 Plan pursuant to which Shares are to be received by the Participant, a Participant may, subject to the discretion of the Committee, make an election to satisfy the withholding requirement with respect to such Shares, in whole or in part, by having the Corporation withhold Shares having a fair market value on the date the withholding tax is to be determined equal to the amount required to be withheld under applicable law. Indemnification No member of the Board of Directors or the Committee, nor any officer or Employee acting on behalf of the Board of Directors or the Committee, will be personally liable for any action, determination or interpretation taken or made with respect to the 1999 Plan, and all members of the Board of Directors, the Committee and each and any officer or Employee of the Corporation acting on their behalf will, to the extent permitted by law, be fully indemnified and protected by the Corporation with respect to any such action, determination or interpretation. Vote Required Adoption of the proposed 1999 Plan requires that more votes be cast in favor of the 1999 Plan than against it at a duly called meeting of shareholders at which a quorum is represented. THE BOARD OF DIRECTORS HAS APPROVED THE PROPOSED 1999 PLAN AND RECOMMENDS A VOTE "FOR" THE PROPOSED 1999 PLAN. RATIFICATION OF INDEPENDENT AUDITORS The Board of Directors has selected, subject to ratification by the shareholders of the Corporation at the Annual Meeting, the firm of Crowe, Chizek and Company LLP as the independent accountants for the Corporation to audit the Corporation's financial statements for its year ending December 31, 1999. Eskew & Gresham, P.S.C. has served as the Corporation's independent auditors since 1982. In January 1998, Eskew & Gresham was merged into Crowe, Chizek and Company LLP. Ratification of the proposal to appoint Crowe, Chizek and Company LLP as the independent accountants for the Corporation requires that more votes be cast in favor of the proposal than against it at a duly called meeting of shareholders at which a quorum is represented. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF CROWE CHIZEK AND CO. LLP AS THE CORPORATION'S INDEPENDENT AUDITORS. OTHER MATTERS The directors and officers of the Corporation do not know of any matters to be presented for shareholder approval at the Annual Meeting other than those described in the Proxy Statement. If any other matters should come before the Annual Meeting, the Board of Directors intends that the persons designated on the enclosed proxy form, or their substitutes, will vote the shares represented by the proxy form in accordance with their best judgment on such matters. By Order of the Board of Directors Buckner Woodford President, Bourbon Bancshares, Inc. This Proxy Form is Solicited by the Board of Directors BOURBON BANCSHARES, INC. Paris, Kentucky The undersigned hereby appoints Buckner Woodford and William Reynolds, or either one of them (with full power to act alone), my proxy, each with the power to appoint his substitute, to represent me to vote all of the Corporation's Common Stock which I held of record or am otherwise entitled to vote, at the close of business on March 22, 1999, at the 1999 Annual Meeting of Shareholders to be held on May 3, 1999, at 9:00 a.m., and at any adjournments thereof, with all powers the undersigned would possess if personally present, as follows: I. ELECTION OF DIRECTORS. ___ FOR all nominees listed below (except as otherwise indicated below) ___ AGAINST all nominees listed below Henry Hinkle, Theodore Kuster, Robert G. Thompson (INSTRUCTION: To withhold authority to vote for any individual nominee, write the nominee's name on the line.) _____________________________________________________ ___ II. AMENDMENT TO ARTICLES OF INCORPORATION TO INCREASE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK. _____ FOR _____ AGAINST _____ ABSTAIN III. AMENDMENT TO ARTICLES OF INCORPORATION TO CHANGE NUMBER OF MEMBERS OF THE CORPORATION'S BOARD OF DIRECTORS. _____ FOR _____ AGAINST _____ ABSTAIN IV. ADOPTION OF 1999 EMPLOYEE STOCK OPTION PLAN. _____ FOR _____ AGAINST _____ ABSTAIN V. RATIFICATION OF CROWE CHIZEK AND CO. LLP AS INDEPENDENT AUDITORS. _____ FOR _____ AGAINST _____ ABSTAIN VI. OTHER BUSINESS. In their discretion, the Proxies are authorized to act upon such other matters as may properly be brought before the Annual Meeting or any adjournment thereof. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" ALL OF THE NOMINEES LISTED IN ITEM 1 AND "FOR" ITEMS 2, 3, 4 AND 5. [PLEASE DATE, MARK, SIGN AND RETURN IMMEDIATELY] This proxy form relates to ALL shares owned by the undersigned. This proxy form is solicited by the Board of Directors and will be voted as specified and in accordance with the accompanying proxy statement. If no instruction is indicated, this proxy form will be voted "FOR" all of the nominees listed in Item 1 and "FOR" Items 2, 3, 4 and 5. Please sign exactly as name appears. When shares are held by joint tenants, both should sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by President or other authorized officer. If a partnership, please sign partnership name by authorized person. Date _______________, 1999 _______________________________ Signature _______________________________ Signature if held jointly -----END PRIVACY-ENHANCED MESSAGE-----